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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3209278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
144-51 Northern Boulevard, Flushing, New York 11354
(Address of principal executive offices)
(718) 961-5400
(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
$0.01 par value.
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 (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of January 31, 1997, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $131,934,000. This figure is based
on the closing price on the Nasdaq National Market for a share of the
registrant's Common Stock, $0.01 par value, on January 31, 1997, which was
$17.625 as reported in the Wall Street Journal on February 3, 1997.
The number of shares of the registrant's Common Stock outstanding as of
January 31, 1997 was 8,132,597 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the year ended
December 1996 are incorporated herein by reference in Part II, and portions of
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on April 29, 1997 are incorporated herein by reference in Part III.
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 45
Item 3. Legal Proceedings............................................... 46
Item 4. Submission of Matters to a Vote of Security Holders............. 46
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................. 46
Item 6. Selected Financial Data......................................... 47
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 47
Item 8. Financial Statements and Supplementary Data..................... 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 47
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 47
Item 11. Executive Compensation.......................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................... 47
Item 13. Certain Relationships and Related Transactions.................. 48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K........................................................ 48
2
PART I
Statements contained in this Annual Report on Form 10-K relating to
plans, strategies, economic performance and trends and other statements that are
not descriptions of historical facts may be forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward looking information is inherently
subject to risks and uncertainties, and actual results could differ materially
from those currently anticipated due to a number of factors, which include, but
are not limited to, factors discussed under the captions "Business--General",
"Business--Market Area and Competition" and "Risk Factors" below, and elsewhere
in this Form 10-K and in other documents filed by the Company with the
Securities and Exchange Commission from time to time. The Company has no
obligation to update these forward-looking statements
Item 1. Business.
General
Flushing Financial Corporation (the "Company") is a Delaware
corporation organized in May 1994, at the direction of the Board of Trustees of
Flushing Savings Bank, FSB (the "Bank") for the purpose of acquiring and holding
all of the outstanding capital stock of the Bank issued upon its conversion from
a federal mutual savings bank to a federal stock savings bank (the
"Conversion"). The Conversion was completed on November 21, 1995. In connection
with the Conversion, the Company issued 8,625,000 shares of common stock at a
price of $11.50 per share to the Bank's eligible depositors who subscribed for
shares, and to an employee benefit trust established by the Company for the
purpose of holding shares for allocation or distribution under certain employee
benefit plans of the Company and the Bank (the "Employee Benefit Trust"). The
Company realized net proceeds of $96.5 million from the sale of its common stock
and utilized approximately $48.3 million of such proceeds to purchase 100% of
the issued and outstanding shares of the Bank's common stock.
The primary business of the Company is the operation of its
wholly-owned subsidiary, the Bank. In addition to directing, planning and
coordinating the business activities of the Bank, the Company invests primarily
in U.S. government and federal agency securities, federal funds, mortgage-backed
securities, and investment grade corporate obligations. The Company also holds a
note evidencing a loan that it made to the Employee Benefit Trust to enable the
Employee Benefit Trust to acquire 690,000 shares, or 8% of the common stock
issued in the Conversion. The Company has in the past increased growth through
acquisition of branches of other financial institutions, and will pursue growth
through acquisitions that are accretive to earnings. The Company may also
organize or acquire, through merger or otherwise, other financial services
related companies. The activities of the Company are funded by that portion of
the proceeds of the sale of common stock in the Conversion that the Company was
permitted by the Office of Thrift Supervision ("OTS") to retain, and earnings
thereon, and by dividends, if any, received from the Bank.
The Company is a unitary savings and loan holding company, which, under
existing laws, is generally not restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender. Under regulations of the OTS the Bank is a qualified
thrift lender if its ratio of qualified thrift investments to portfolio assets
("QTL Ratio") is 65% or more, on a monthly average basis in nine of every 12
months. At December 31, 1996, the Bank's QTL Ratio was 72.57%, and the Bank had
maintained more than 65% of its "portfolio assets" in qualified thrift
investments in at least nine of the preceding 12 months. See
"Regulation--Qualified Thrift Lender Test" and "Regulation--Company Regulation."
The Company neither owns nor leases any property but instead uses the
premises and equipment of the Bank. At the present time, the Company does not
employ any persons other than certain officers of the Bank who do not receive
any extra compensation as officers of the Company. The Company utilizes the
support staff of the Bank from time to time, as needed. Additional employees may
be hired as deemed appropriate by the management of the Company.
3
Unless otherwise disclosed, the information presented in the financial
statements and this Form 10-K reflect the financial condition and results of
operations of the Company and the Bank on a consolidated basis. At December 31,
1996, the Company had total assets of $775.3 million.
The Company's principal business is attracting retail deposits from the
general public and investing those deposits together with funds generated from
operations, primarily in (i) originations and purchases of one-to-four-family
residential mortgage loans, multi-family income-producing property loans and
commercial real estate loans; (ii) mortgage loan surrogates such as
mortgage-backed securities; and (iii) U.S. government and federal agency
securities, corporate fixed-income securities and other marketable securities.
To a lesser extent, the Company originates co-operative apartment loans,
construction and consumer loans. At December 31, 1996, the Company had loans
receivable, net of allowance for loan losses and unearned income, of $382.8
million (approximately 49.38% of the Company's total assets). On a consolidated
basis, the Company held mortgage -backed securities with a carrying value of
$141.0 million (approximately 18.19% of the Company's total assets), including
$37.8 million of fixed-rate mortgage-backed securities that were acquired
through the securitization of Bank-originated fixed-rate mortgage loans in 1994.
The Company's revenues are derived principally from interest on its mortgage and
other loans and mortgage-backed securities portfolio and interest and dividends
on other investments in its securities portfolio. The Company's primary sources
of funds are deposits, principal and interest payments on loans, mortgage-backed
and other securities, proceeds from sales of securities and, to a lesser extent,
proceeds from sales of loans.
Market Area and Competition
The Bank has been, and intends to continue to be, a community oriented
savings institution offering a wide variety of financial services to meet the
needs of the communities it serves. The Bank is headquartered in Flushing, New
York, located in the Borough of Queens. It currently operates out of its main
office and six branch offices, located in the New York City Boroughs of Queens,
Brooklyn and Manhattan, and in Nassau County, New York. Substantially all of the
Bank's mortgage loans are secured by properties located in the New York City
metropolitan area. During the last three years, the unemployment and real estate
values in the New York City metropolitan area have been relatively stable, which
has favorably impacted the Bank's asset quality. See "--Asset Quality." There
can be no assurance that the stability of these economic factors will continue.
The Bank faces intense and increasing competition both in making loans
and in attracting deposits. The Bank's market area has a high density of
financial institutions, many of which have greater financial resources, name
recognition and market presence than the Bank, and all of which are competitors
of the Bank to varying degrees. Particularly intense competition exists for
deposits and in all of the lending activities emphasized by the Bank. The Bank's
competition for loans comes principally from commercial banks, other savings
banks, savings and loan associations, mortgage banking companies, insurance
companies, finance companies and credit unions. Management anticipates that
competition for one-to-four family residential mortgage loans, multi-family
loans and commercial real estate loans will continue to increase in the future.
Thus, no assurances can be given that the Bank will be able to maintain or
increase its current level of such loans, as contemplated by management's
current business strategy The Bank's most direct competition for deposits
historically has come from other savings banks, commercial banks, savings and
loan associations and credit unions. In addition, the Bank faces increasing
competition for deposits from products offered by brokerage firms, insurance
companies and other financial intermediaries, such as money market and other
mutual funds and annuities. Trends toward the consolidation of the banking
industry and the lifting of interstate banking and branching restrictions may
make it more difficult for smaller, community-oriented banks, such as the Bank,
to compete effectively with large, national, regional and super-regional banking
institutions. Notwithstanding the intense competition, the Bank has been
successful in maintaining its deposit base.
For a discussion of the Company's business strategies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management Strategy," included in the Annual Report of Stockholders
for the fiscal year ended December 31, 1996 (the "Annual Report"), incorporated
herein by reference.
4
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists
primarily of conventional fixed-rate residential mortgage loans and adjustable
rate mortgage ("ARM") loans secured by one-to-four family residences, mortgage
loans secured by multi-family income producing properties or commercial real
estate, co-operative apartment loans, construction loans and consumer loans. At
December 31, 1996, the Bank had gross loans outstanding of $389.8 million
(before reserves and unearned income), of which $223.3 million, or 57.28%, were
one-to-four family residential mortgage loans (including $17.7 million of
condominium loans, and $6.3 million of home equity loans). Of the one-to-four
family residential loans outstanding on that date, 73.40% were ARM loans and
26.60% were fixed-rate loans. At December 31, 1996, multi-family loans totaled
$104.9 million, or 26.91% of gross loans, commercial real estate loans totaled
$46.7 million, or 11.98% , co-operative apartment loans totaled $13.2 million,
or 3.40%, and consumer and other loans totaled $1.7 million, or 0.43% of gross
loans.
While management continues to place primary emphasis on the origination
of one-to-four family residential mortgage loans, management's strategy calls
for increased emphasis on multi-family and commercial real estate loans. From
December 31, 1995 to December 31, 1996, one-to-four-family residential mortgage
loans increased $66.4 million, or 39.06%, and multi-family loans increased $35.7
million, or 51.68%. Fully underwritten one-to-four family residential mortgage
loans are considered by the banking industry to have less risk than other types
of loans. Multi-family income-producing real estate loans and commercial real
estate loans generally have higher yields than one-to-four family loans and
shorter terms to maturity, but typically involve higher principal amounts and
generally expose the lender to greater risk of credit loss than fully
underwritten one-to-four family residential mortgage loans. The Company's
increased emphasis on multi-family and commercial real estate loans can be
expected to increase the overall level of credit risk inherent in the Company's
loan portfolio. The greater risk associated with multi-family and commercial
real estate loans may require the Company to increase its provisions for loan
losses and to maintain an allowance for loan losses as a percentage of total
loans in excess of the allowance currently maintained by the Company.
The Bank's lending activities are subject to federal and state laws and
regulations. Interest rates charged by the Bank on loans are affected primarily
by the demand for such loans, the supply of money available for lending
purposes, the rate offered by the Bank's competitors and, in the case of
corporate entities, the creditworthiness of the borrower. Many of those factors
are, in turn, affected by regional and national economic conditions, and the
fiscal, monetary and tax policies of the federal government.
5
The following table sets forth the composition of the Bank's loan
portfolio at the dates indicated.
At December 31,
---------------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
(Dollars in thousands)
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
Mortgage loans:
One-to-four family(1)(2) ............... $ 223,273 57.28% $ 155,435 54.20% $ 133,006 51.39%
Co-operative(3) ........................ 13,245 3.40 14,653 5.11 16,155 6.24
Multi-family ........................... 104,870 26.91 69,140 24.11 56,559 21.85
Commercial ............................. 46,698 11.98 45,215 15.77 49,512 19.13
Construction ........................... -- -- -- -- 364 0.14
--------- ----- --------- ----- --------- -----
Gross mortgage loans ................. 388,086 99.57 284,443 99.19 255,596 98.75
Other loans ............................... 1,680 0.43 2,328 0.81 3,231 1.25
--------- ----- --------- ----- --------- -----
Gross loans ............................ 389,766 100.00% 286,771 100.00% 258,827 100.00%
====== ====== ======
Less:
Unearned income, unamortized discounts,
and deferred loan fees, net .......... (1,548) (1,335) (1,341)
Allowance for loan losses .............. (5,437) (5,310) (5,370)
--------- --------- ---------
Loans, net ............................. $ 382,781 $ 280,126 $ 252,116
========= ========= =========
At December 31,
---------------------------------------------------
1993 1992
----------------------- -----------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in thousands)
Mortgage loans:
One-to-four family(1)(2) ............... $ 134,967 51.61% $ 168,762 56.10%
Co-operative(3) ........................ 17,098 6.54 19,497 6.48
Multi-family ........................... 49,459 18.91 54,481 18.11
Commercial ............................. 54,310 20.77 54,061 17.97
Construction ........................... 1,891 0.72 -- --
--------- ----- --------- -----
Gross mortgage loans ................. 257,725 98.55 296,801 98.66
Other loans ............................... 3,791 1.45 4,043 1.34
--------- ----- --------- -----
Gross loans ............................ 261,516 100.00% 300,844 100.00%
====== ======
Less:
Unearned income, unamortized discounts,
and deferred loan fees, net .......... (1,202) (1,009)
Allowance for loan losses .............. (5,723) (4,555)
--------- ---------
Loans, net ............................. $ 254,591 $ 295,280
========= =========
(1) One-to-four family residential loans also include home equity and
condominium loans. At December 31, 1996, gross home equity loans
totaled $6.3 million and condominium loans totaled $17.7 million.
(2) Excludes loans available for sale of $5.6 million at December 31, 1993.
(3) Consists of loans secured by shares representing interests in
individual co-operative units that are generally owner occupied.
6
The following table sets forth the Bank's loan originations (including
the net effect of refinancings) and the changes in the Bank's portfolio of
loans, including purchases, sales and principal reductions for the years
indicated:
For the Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
Mortgage loans:
At beginning of year .................... $ 284,443 $ 255,596 $ 263,329
Mortgage loans originated:
One-to-four family(1) .............. 51,309 19,298 31,715
Co-operative ....................... 76 140 188
Multi-family ....................... 43,184 19,162 11,822
Commercial ......................... 7,501 2,144 2,559
Construction ....................... -- -- 628
--------- --------- ---------
Total mortgage loans originated .... 102,070 40,744 46,912
Acquired loans(2) .................... 39,873 18,766 4,717
Less:
Principal reductions ................. 37,150 29,384 38,073
Mortgage loans sold(1) ............... -- 626 3,148
Loans securitized .................... -- -- 15,796
Mortgage loan foreclosures ........... 1,150 653 2,345
--------- --------- ---------
At end of year .......................... $ 388,086 $ 284,443 $ 255,596
========= ========= =========
Other loans:
At beginning of year .................... $ 2,328 $ 3,231 $ 3,791
Net activity ............................ (648) (903) (560)
--------- --------- ---------
At end of year .......................... $ 1,680 $ 2,328 $ 3,231
========= ========= =========
- ------------
(1) Includes mortgage loans originated for sale in the secondary market.
(2) For a description of the Bank's loan purchase activity, see
"--One-to-Four Family Mortgage Lending."
7
Loan Maturity and Repricing. The following table sets forth at December
31, 1996, the dollar amount of all loans held in the Bank's portfolio that is
due after December 31, 1997, and whether such loans have fixed or adjustable
interest rates. Non-performing loans are excluded. The Bank's loan portfolio
contained no outstanding construction loans as of the date specified and
therefore the following two tables exclude reference to any such loans.
Due after December 31, 1997
--------------------------------------
Fixed Adjustable Total
-------- ---------- --------
(In thousands)
Mortgage loans:
One-to-four family ............. $ 58,351 $107,382 $165,733
Co-operative ................... 2,903 4,311 7,214
Multi-family ................... 18,167 83,895 102,062
Commercial ..................... 8,269 30,862 39,131
Other loans ....................... 1,123 -- 1,123
-------- -------- --------
Total loans .................... $ 88,813 $226,450 $315,263
======== ======== ========
The following table shows the maturity or period to repricing of the
Bank's loan portfolio at December 31, 1996. Loans that have adjustable-rates are
shown as being due in the period during which the interest rates are next
subject to change. The table does not reflect prepayments or scheduled principal
amortization, which totaled $37.2 million for the year ended December 31, 1996.
Certain adjustable rate loans have features which limit changes in interest
rates on a short-term basis and over the life of the loan.
At December 31, 1996
---------------------------------------------------------------
One-to- Total
Four Multi- Other Loans
Family Co-operative Family Commercial Loans Receivable
------- ------------ ------ ---------- -------- ----------
(In thousands)
Amounts due(1):
Within one year $ 55,705 $ 5,999 $ 2,303 $ 7,567 $ 521 $ 72,095
-------- -------- -------- -------- -------- --------
After one year(1):
One to two years ....... 30,307 1,681 12,753 9,828 430 54,999
Two to three years ..... 21,707 2,067 9,830 9,538 429 43,571
Three to five years .... 38,303 713 61,140 11,522 250 111,928
Five to ten years ...... 32,670 1,430 11,780 7,928 14 53,822
Over ten years ......... 42,746 1,323 6,559 315 -- 50,943
-------- -------- -------- -------- -------- --------
Total due after one year 165,733 7,214 102,062 39,131 1,123 315,263
-------- -------- -------- -------- -------- --------
Total amounts due ... $221,438 $ 13,213 $104,365 $ 46,698 $ 1,644 $387,358
======== ======== ======== ======== ======== ========
============================================================================================
(1) Excludes $2.4 million in non-performing loans.
One-to-Four Family Mortgage Lending. The Bank offers mortgage loans
secured by one-to-four family residences, including townhouses and condominium
units, located in its primary lending area. For purposes of the description
contained in this section, one-to-four family residential mortgage loans and
co-operative apartment loans are collectively referred to herein as "residential
mortgage loans." The Bank offers both fixed-rate and ARM residential mortgage
loans with maturities of up to 30 years and a general maximum loan amount of
$500,000. Loan originations generally result from applications received from
existing or past customers, persons that respond to Bank advertising and other
marketing efforts and referrals from attorneys, real estate brokers, mortgage
brokers and mortgage bankers.
Partly in response to the intense competition for originations of
one-to-four family residential mortgage loans, in the second half of 1994, the
Bank commenced a program of correspondent relationships with several mortgage
bankers and brokers operating in the New York metropolitan area. Under this
program, the Bank purchases individual newly originated one-to-four family loans
originated by such correspondents. Typically, the
8
servicing is purchased as well. The loans are underwritten pursuant to the
Bank's credit underwriting standards and each loan is reviewed by Bank personnel
prior to purchase to ensure conformity with such standards. Generally, the Bank
does not receive loan origination fees on such loans. During 1996, through these
relationships, the Bank purchased $39.9 million in one-to-four family mortgage
loans, as compared to $11.6 million in 1995 and $4.7 million during 1994. In
addition, from time to time, the Bank will selectively purchase packages of
seasoned performing one-to-four family residential loans located within the New
York region. During 1995, the Bank purchased one package of such loans totaling
$7.2 million with an average yield of 7.97%. Servicing was not acquired. The
Bank did not purchase any seasoned loans in 1996.
The Bank generally originates residential mortgage loans in amounts up
to 80% of the appraised value or the sale price, whichever is less. The Bank may
make residential mortgage loans with loan-to-value ratios of up to 95% of the
appraised value of the mortgaged property; however, private mortgage insurance
is required whenever loan-to-value ratios exceed 80% of the appraised value of
the property securing the loan.
The majority of the residential mortgage loans originated by the Bank
are underwritten to FNMA and other agency guidelines to facilitate
securitization and sale in the secondary market. These guidelines require, among
other things, verification of the loan applicant's income. However, from time to
time, and increasingly in 1996, the Bank has originated residential mortgage
loans to self-employed individuals within the Bank's local community without
verification of the borrower's level of income, provided that the borrower's
stated income is considered reasonable for the borrower's type of business.
These loans involve a higher degree of risk as compared to the Bank's other
fully underwritten residential mortgage loans as there is a greater opportunity
for borrowers to falsify or overstate their level of income and ability to
service indebtedness. To mitigate this risk, the Bank typically limits the
amount of these loans to 70% of the appraised value of the property or the sale
price, whichever is less. These loans also are not as readily salable in the
secondary market as the Bank's other fully underwritten loans, either as whole
loans or when pooled or securitized. FNMA does not purchase such loans. The Bank
believes, however, that its willingness to make such loans is an aspect of its
commitment to be a community-oriented bank. Although there are a number of
purchasers for such loans, there can be no assurance that such purchasers will
continue to be active in the market or that the Bank will be able to sell such
loans in the future. During 1995, the Bank originated two ARM loans of this
type, totaling $538,000 and three fixed-rate 15-year loans of this type totaling
$245,000. During 1996, the Bank originated loans of this type totaling $12.3
million in ARM loans and $6.7 million in 15-year fixed-rate loans.
The Bank's fixed-rate residential mortgage loans typically are
originated for terms of 15 and 30 years and are competitively priced based on
market conditions and the Bank's cost of funds. The Bank charges origination
fees of up to 2%; loans with fees of less than 2% generally carry a higher
interest rate. The Bank's current policy is to securitize or sell all its newly
originated conforming fixed-rate 30-year residential mortgage loans in the
secondary market to FNMA and other secondary market purchasers, and to hold its
fixed-rate 15-year residential mortgage loans in its portfolio. The servicing
rights on loans sold ordinarily are retained by the Bank. There were no 30-year
fixed-rate residential mortgage loans originated in 1996.
The Bank offers ARM loans with adjustment periods of one, three, five
or ten years, and the Bank's current emphasis is on adjustment periods of one
year. Interest rates on ARM loans currently offered by the Bank are adjusted at
the beginning of each adjustment period based upon a fixed spread above the
average yield on United States treasury securities, adjusted to a constant
maturity which corresponds to the adjustment period of the loan (the "U.S.
Treasury constant maturity index") as published weekly by the Federal Reserve
Board. From time to time, the Bank may originate ARM loans at an initial rate
lower than the U.S. Treasury constant maturity index as a result of a discount
on the spread for the initial adjustment period. ARM loans generally are subject
to limitations on interest rate increases of 2% per adjustment period and an
aggregate adjustment of 6% over the life of the loan. Origination fees of up to
2% are charged for ARM loans; loans with fees of less than 2% generally carry a
higher interest rate. The Bank originated and purchased one-to-four family
residential ARM loans totaling $11.2 million and $18.4 million, respectively,
during 1995 and $34.0 million and $32.0 million, respectively, during 1996. At
December 31, 1996, $172.8 million, or 73.66%, of the Bank's residential mortgage
loans, consisted of ARM loans.
9
The volume and adjustment periods of ARM loans originated by the Bank
have been affected by such market factors as the level of interest rates, demand
for loans, competition, consumer preferences and the availability of funds. In
general, consumers show a preference for ARM loans in periods of high interest
rates and for fixed-rate loans when interest rates are low. In periods of
falling interest rates, the Bank may experience refinancing activity in ARM
loans, whose interest rates may be fully indexed, to fixed-rate loans. The
Bank's policy regarding this type of refinancing is to allow a maximum reduction
of 200 basis points in the interest rate on a fixed-rate basis and, if the loan
is a 30-year loan, to sell or securitize it in the secondary market.
The retention of ARM loans, as opposed to fixed-rate 30-year loans, in
the Bank's portfolio helps reduce the Bank's exposure to interest rate risks.
However, in an environment of rapidly increasing interest rates as was
experienced in the 1970's, it is possible for the interest rate increase to
exceed the maximum aggregate adjustment on ARM loans and negatively affect the
spread between the Bank's interest income and its cost of funds.
ARM loans generally involve credit risks different from those inherent
in fixed-rate loans, primarily because if interest rates rise, the underlying
payments of the borrower rise, thereby increasing the potential for default. At
the same time, the value and marketability of the property collateralizing the
loan may be adversely affected. In order to minimize risks, the borrowers of
one-year ARM loans are qualified at the higher of the maximum adjusted rate at
the first adjustment or the FNMA minimum qualifying rate. The Bank has not in
the past, nor does it currently originate ARM loans which provide for negative
amortization.
Home Equity Loans. Home equity loans are included in the Bank's
portfolio of one-to-four family residential mortgage loans. These loans are
offered as adjustable-rate "home equity lines of credit" for terms up to 20
years with monthly payments of principal and interest due from the borrower
commencing when the line of credit is accessed. These loans also may be offered
as fully amortizing closed-end fixed-rate loans for terms up to 15 years. All
home equity loans are made on one-to-four family residential and condominium
units, which are owner-occupied, and are subject to a 75% loan-to-value ratio
computed on the basis of the aggregate of the first mortgage loan amount
outstanding and the proposed home equity loan. They are granted in amounts up to
$100,000 for home equity lines of credit and $100,000 for fixed-rate fully
amortizing loans. The underwriting standards for home equity loans are
substantially the same as those for residential mortgage loans. At December 31,
1996, home equity loans totaled $6.3 million, or 1.62%, of gross loans.
Commercial Real Estate Lending. Loans secured by commercial real estate
constituted approximately $46.7 million, or 11.98%, of the Bank's gross loans at
December 31, 1996. The Bank's commercial real estate loans are secured by
improved properties such as offices, small business facilities, strip shopping
centers, warehouses, religious facilities and mixed-use properties. At December
31, 1996, substantially all of the Bank's commercial real estate loans were
secured by properties located within the Bank's market area. At that date, the
Bank's commercial real estate loans had an average principal balance of
$442,000, and the largest of such loans, which was secured by an office
building, had a principal balance of $1.9 million. Typically, commercial real
estate loans are originated at a range of $100,000 to $3.0 million. Commercial
real estate loans are generally offered at adjustable rates tied to a market
index for terms of five to 15 years, with adjustment periods from one to five
years. On a select and limited basis, commercial real estate loans may be made
at fixed interest rates for terms of seven, 10 or 15 years. An origination fee
of up to 2% is typically charged on all commercial real estate loans.
In underwriting commercial real estate loans, the Bank reviews the
expected net operating income generated by the real estate collateral securing
the loan, the age and condition of the collateral, the financial resources and
income level of the borrower and the borrower's experience in owning or managing
similar properties. The Bank typically requires a debt service coverage of at
least 125% of the monthly loan payment. Commercial real estate loans generally
are made up to 70% of the appraised value of the property securing the loan or
the sales price of the property, whichever is less. The Bank generally obtains
personal guarantees from commercial real estate borrowers and typically orders
an environmental report on the property securing the loan.
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
The increased credit risk is a result of several factors, including the
concentration of principal in a smaller number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty in evaluating and monitoring these types of loans.
10
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related property. If
the cash flow from the property is reduced, the borrower's ability to repay the
loan may be impaired. Loans secured by commercial real estate also may involve a
greater degree of environmental risk. The Bank seeks to protect against this
risk through obtaining an environmental report. See "--Asset Quality--REO."
Multi-Family Lending. Loans secured by multi-family income producing
properties (including mixed-use properties) constituted approximately $104.9
million, or 26.91%, of gross loans at December 31, 1996, all of which were
secured by properties located within the Bank's market area. The Bank's
multi-family loans had an average principal balance of $497,000 at December 31,
1996, and the largest multi-family loan held in the Bank's portfolio had a
principal balance of $2.6 million. Multi-family loans are generally offered at
adjustable rates tied to a market index for terms of five to 10 years with
adjustment periods from one to five years. On a select and limited basis,
multi-family loans may be made at fixed rates for terms of seven, 10 or 15
years. An origination fee of up to 2% is typically charged on multi-family
loans.
In underwriting multi-family loans, the Bank employs the same
underwriting standards and procedures as are employed in underwriting commercial
real estate loans.
Multi-family loans generally carry larger loan balances than
one-to-four family residential mortgage loans and involve a greater degree of
credit risk for the same reasons applicable to commercial real estate loans.
Construction Loans. The Bank's construction loans primarily have been
made to finance the construction of one-to-four family residential properties
and, to a lesser extent, multi-family residential real estate properties. The
Bank's policies provide that construction loans may be made in amounts up to 70%
of the estimated value of the developed property and only if the Bank obtains a
first lien position on the underlying real estate. In addition, the Bank
generally requires firm end-loan commitments and personal guarantees on all
construction loans. Construction loans are generally made with terms of two
years or less and with adjustable interest rates that are tied to a market
index. Advances are made as construction progresses and inspection warrants,
subject to continued title searches to ensure that the Bank still has a first
lien position. At December 31, 1996, the Bank had no construction loans
outstanding.
Construction loans involve a greater degree of risk than other loans
because, among other things, the underwriting of such loans is based on an
estimated value of the developed property, which can be difficult to ascertain
in light of uncertainties inherent in such estimations. In addition,
construction lending entails the risk that the project may not be completed due
to cost overruns or changes in market conditions.
Consumer and Other Lending. The Bank originates other loans primarily
for personal, family or household purposes, which generally consist of passbook
loans, overdraft lines of credit, student loans, automobile loans and other
personal loans. Total consumer and other loans outstanding at December 31, 1996
amounted to $1.7 million, or 0.43%, of gross loans. Generally, unsecured loans
in this category are limited to amounts of $5,000 or less for terms of up to
five years. Certain student loans may be made in amounts up to the maximum
amount permitted by the New York State Higher Education Services Corporation,
currently $138,500, for terms of up to 10 years. Since 1992, the Bank has sold
all student loans to EXPORT, a subsidiary of Sallie Mae (Student Loan Marketing
Association) which administers all such loans sold by the Bank. The Bank offers
credit cards to its customers through a third party financial institution and
receives an origination fee and transactional fees for processing such accounts,
but does not underwrite or finance any portion of the credit card receivables.
The underwriting standards employed by the Bank for consumer and other
loans include a determination of the applicant's payment history on other debts
and assessment of the applicant's ability to meet payments on all of his or her
obligations. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the security, if
any, to the proposed loan amount. Unsecured loans tend to have higher risk, and
therefore command a higher interest rate. With the exception of a portfolio of
consumer loans acquired by the Bank in 1991 at a discount in connection with the
acquisition of a failed savings and loan association, the level of delinquencies
in the Bank's consumer and other loan portfolio generally has been within
industry standards; however, there can be no assurance that delinquencies will
not increase in the future.
11
Loan Approval Procedures and Authority. The Bank's Board-approved
lending policies establish loan approval requirements for its various types of
loan products. Pursuant to the Bank's Residential Mortgage Lending Policy, all
residential mortgage loans require three signatures for approval, at least one
of which must be from the President, Executive Vice President or a Senior Vice
President (collectively, "Authorized Officers") and the other two may be from
the Bank's Senior Mortgage Officer, Loan Underwriting Manager or Senior
Underwriter. Residential mortgage loans in excess of $500,000 also must be
approved by the Loan Committee, the Executive Committee or the full Board of
Directors. Pursuant to the Bank's Commercial Real Estate Lending Policy, all
loans secured by commercial real estate properties and multi-family income
producing properties, must be approved by the President or the Executive Vice
President upon the recommendation of the Commercial Loan Department Manager.
Such loans in excess of $400,000 also require Loan or Executive Committee or
Board approval. In accordance with the Bank's Consumer Loan Policy, all consumer
loans require two signatures for approval, one of which must be from an
Authorized Officer. The Bank's Construction Loan Policy requires that all
construction loans must be approved by the Loan or Executive Committee or the
Board of Directors of the Bank. Any loan, regardless of type, that deviates from
the Bank's written loan policies must be approved by the Loan or Executive
Committee or the Bank's Board of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application, a credit report is ordered and certain other financial information
is obtained. An appraisal of the real estate intended to secure the proposed
loan is required. Such appraisals currently are performed by the Bank's staff
appraiser or an independent appraiser designated and approved by the Bank. The
Bank's Board of Directors annually approves the independent appraisers used by
the Bank and approves the Bank's appraisal policy. It is the Bank's policy to
require borrowers to obtain title insurance and hazard insurance on all real
estate first mortgage loans prior to closing. Borrowers generally are required
to advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which the Bank makes disbursements
for items such as real estate taxes and, in some cases, hazard insurance
premiums.
Loan Concentrations. The maximum amount of credit that the Bank can
extend to any single borrower or related group of borrowers generally is limited
to 15% of the Bank's unimpaired capital and surplus. Applicable law and
regulations permit an additional amount of credit to be extended, equal to 10%
of unimpaired capital and surplus, if the loan is secured by readily marketable
collateral, which generally does not include real estate. See "Regulation."
However, it is currently the Bank's policy not to extend such additional credit.
At December 31, 1996, the Bank had no loans in excess of the maximum dollar
amount of loans to one borrower that the Bank was authorized to make. At that
date, the three largest concentrations of loans to one borrower consisted of
loans secured by apartment buildings, with an aggregate principal balance of
$3.3 million, $2.7 million and $2.4 million for each of the three borrowers.
Loan Servicing. At December 31, 1996, loans aggregating $48.8 million
were being serviced for others by the Bank. The Bank's policy is to retain the
servicing rights to the mortgage loans that it sells in the secondary market. In
order to increase revenue, management intends to continue this policy.
Asset Quality
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of steps to induce the borrower to cure the
delinquency and restore the loan to current status. In the case of residential
mortgage loans and consumer loans, the Bank generally sends the borrower a
written notice of non-payment when the loan is first past due. In the event
payment is not then received, additional letters and phone calls generally are
made in order to encourage the borrower to meet with a representative of the
Bank to discuss the delinquency. If the loan still is not brought current and it
becomes necessary for the Bank to take legal action, which typically occurs
after a loan is delinquent 45 days or more, the Bank may commence foreclosure
proceedings against real property that secures the loan and attempt to repossess
personal property that secures a consumer loan or co-operative apartment loan.
If a foreclosure action is instituted and the loan is not brought current, paid
in full, or refinanced before the foreclosure sale, the real property securing
the loan generally is sold at foreclosure or by the Bank as soon thereafter as
practicable. Decisions as to when to commence foreclosure actions for
multi-family, commercial real estate and construction loans are made on a case
by case basis. Since foreclosure typically halts the sale of the collateral and
may be a lengthy procedure in the State of New York, the
12
Bank may consider loan work-out arrangements to work with multi-family or
commercial real estate borrowers in an effort to restructure the loan rather
than foreclose, particularly if the borrower is, in the opinion of management,
able to manage the project. In certain circumstances, on rental properties, the
Bank may institute proceedings to seize the rent.
On mortgage loans or loan participations purchased by the Bank, the
Bank receives monthly reports from its loan servicers with which it monitors the
loan portfolio. Based upon servicing agreements with the servicers of the loans,
the Bank relies upon the servicer to contact delinquent borrowers, collect
delinquent amounts and initiate foreclosure proceedings, when necessary, all in
accordance with applicable laws, regulations and the terms of the servicing
agreements between the Bank and its servicing agents.
13
Delinquent Loans and Non-performing Assets. The following table sets
forth delinquencies in the Bank's loan portfolio at the dates indicated:
At December 31,
-----------------------------------------------------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------------------------------------------------------------------------------------------------
Number Number Number Number Number Number
of Principal of Principal of Principal of Principal of Principal of Principal
Loans Balance Loans Balance Loans Balance Loans Balance Loans Balance Loans Balance
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
One-to-four family ...... 2 $ 705 15 $1,835 1 $ 149 25 $2,276 3 $ 198 24 $2,389
Co-operative ............ -- -- 2 32 1 53 2 109 4 245 3 153
Multi-family ............ -- -- 3 505 1 441 4 2,119 -- -- 3 890
Commercial .............. -- -- -- -- -- -- 3 427 1 88 5 1,452
Construction ............ -- -- -- -- -- -- -- -- -- -- 1 364
----- ------ ----- ------ ----- ------ ----- ------ ------ ------ ----- -------
Total mortgage loans .. 2 705 20 2,372 3 643 34 4,931 8 531 36 5,248
Other loans ............. 3 2 6 36 2 1 5 50 4 4 6 63
Total loans ----- ------- ----- ------ ----- ------ ----- ------ ----- ------- ----- -------
delinquent .......... 5 $ 707 26 $2,408 5 $ 644 39 $4,981 12 $ 535 42 $5,311
===== ======= ===== ======= ===== ======= ===== ====== ===== ======= ===== =======
Delinquent loans to
gross loans ........... 0.18% 0.62% 0.22% 1.74% 0.21% 2.05%
14
The Bank reviews the problem loans in its portfolio on a monthly basis
to determine whether any loans require classification in accordance with
internal policies and applicable regulatory guidelines. Generally, all
non-performing loans delinquent 90 days or more, commercial real estate loans
pending foreclosure and real estate owned ("REO") require classification. See
"--Classified and Special Mention Assets."
The Bank generally discontinues accruing interest on delinquent loans
when a loan is 90 days past due or foreclosure proceedings have been commenced,
whichever first occurs. Loans in default 90 days or more as to their maturity
date but not their payments, however, continue to accrue interest. With respect
to loans on non-accrual status, previously accrued but unpaid interest is
deducted from interest income six months after the date it becomes past due.
The following table sets forth information regarding all non-accrual
loans, loans which are 90 days or more delinquent, and REO at the dates
indicated. During the years ended December 31, 1996, 1995 and 1994, the amounts
of additional interest income that would have been recorded on non-accrual
loans, had they been current, totaled $145,000, $344,000 and $371,000,
respectively. These amounts were not included in the Bank's interest income for
the respective periods.
At December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in thousands)
Non-accrual mortgage loans ............... $ 2,372 $ 4,697 $ 5,234 $11,548 $21,615
Other non-accrual loans .................. 36 50 63 142 --
--------- --------- --------- --------- ---------
Total non-accrual loans ............. 2,408 4,747 5,297 11,690 21,615
--------- --------- --------- --------- ---------
Mortgage loans 90 days or more delinquent
and still accruing..................... -- 234 14 4 195
Other loans 90 days or more delinquent
and still accruing .................... -- -- -- 1 415
--------- --------- --------- --------- ---------
Total non-performing loans .......... 2,408 4,981 5,311 11,695 22,225
--------- --------- --------- --------- ---------
In-substance foreclosed real estate ...... -- -- 372 4,772 5,123
Foreclosed real estate ................... 1,218 1,869 3,096 2,990 3,409
--------- --------- --------- --------- ---------
Total REO ........................... 1,218 1,869 3,468 7,762 8,532
--------- --------- --------- --------- ---------
Total non-performing assets ......... $ 3,626 $ 6,850 $ 8,779 $19,457 $30,757
========= ========= ========= ========= =========
Troubled debt restructurings ............. -- -- $ 3,220 $ 6,029 $ 1,429
========= ========= ========= ========= =========
Non-performing loans to gross loans (1) .. 0.62% 1.74% 2.05% 4.47% 7.39%
Non-performing assets to total assets (1). 0.47% 0.97% 1.48% 3.16% 5.16%
- ----------
(1) Ratios do not include troubled debt restructurings where the loans are
performing in accordance with the agreement.
REO. The Bank has been aggressively marketing its REO properties. Total
REO, including in-substance foreclosed loans, had consistently decreased from
$8.5 million at December 31, 1992 to $1.2 million at December 31, 1996. To
facilitate the sale of REO, the Bank originated eight loans totaling $492,000
during 1995, and nine loans totaling $307,000 during 1996.
At December 31, 1996, the largest single REO property resulted from a
commercial real estate loan secured by an office building with a net book value
of $729,000. REO properties are carried at the lower of carrying amount or fair
value less estimated costs to sell. This determination is made on an individual
asset basis. "Carrying amount" represents the book value of the loan at the time
a property is foreclosed (after any charge-off against the allowance for loan
losses to reflect any difference between the book value of the loan and the fair
market value of the collateral), less any payments subsequently received in
respect of such loan such as payments from private mortgage insurance or court
appointed receivers. See "--Allowance for Loan Losses." If the subsequent fair
value is less than the carrying amount, the deficiency is recognized as an REO
valuation allowance and, accordingly, is charged against earnings through a
provision for losses on REO.
15
The following table sets forth the activity in the Bank's REO portfolio
for the three months ended on each of the indicated dates:
For the Three Months Ended
-------------------------------------------
March June September December
1996 1996 1996 1996
--------- --------- ----------- -----------
(Dollars in thousands)
Balance, beginning of period........ $1,869 $1,667 $1,764 $1,929
Foreclosures and other acquisitions. 207 415 364 --
Less: Sales......................... 466 313 190 756
Reductions(1)................. (57) 5 9 (45)
--------- --------- ----------- -----------
Balance, end of period.............. $1,667 $1,764 $1,929 $1,218
========= ========= =========== ===========
(1) Reductions include provisions for losses on REO and payments received
subsequent to foreclosure from private mortgage insurance and from
court appointed receivers.
The following table sets forth the approximate change in the allowance
for losses on REO for the three years ended December 31, 1996:
For the Years Ended December 31,
----------------------------------
1996 1995 1994
---------- -------- -----------
(Dollars in thousands)
----------------------------------
Balance, beginning of year ....... $ 388 $ 774 $1,028
Provision ........................ 219 311 575
Less: Reduction due to sale of ORE (326) 697 829
---------- -------- --------
Balance, end of year ............. $ 281 $ 388 $ 774
========== ======== ========
Although the Bank currently obtains environmental reports in connection
with the underwriting of commercial real estate loans, it obtains environmental
reports in connection with the underwriting of multi-family and other loans only
if the nature of the current or, to the extent known to the Bank, prior use of
the property securing the loan indicates a potential environmental risk.
However, the Bank may not be aware of such uses or risks in any particular case,
and, accordingly, there is no assurance that real estate acquired by the Bank in
foreclosure is free from environmental contamination or that, if any such
contamination or other violation exists, the Bank will not have any liability
therefor.
Classified and Special Mention Assets. Federal regulations and Bank
policy require the classification of loans and other assets, such as debt and
equity securities considered 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 institution will sustain
"some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses 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 "uncollectable" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the Bank to sufficient
risk to warrant classification in one of the aforementioned categories but
possess weaknesses are designated "special mention."
The Bank has a loan secured by a fully occupied one-story retail
building with six stores, located in Queens, that is listed as special mention.
The Bank has completed its foreclosure action and has been granted judgment on
foreclosure. The mortgagor has agreed to make full monthly payments plus
additional payments to be applied towards the arrears. At December 31, 1996, all
payments due under the borrower's agreement were current and the net book value
of the loan was $1.5 million. Since this loan is performing in accordance with
the terms of the borrower's agreement, it is recorded on an accrual basis. At
December 31, 1996, the Bank had no other classified asset (or group of assets)
listed as substandard or special mention with a net book value of
16
$1.0 million or more. Net book value of REO is the lower of carrying amount or
fair value less estimated selling costs.
Allowance for Loan Losses
The Bank has established and maintains on its books an allowance for
loan losses that is designed to provide reserves for estimated losses inherent
in the Bank's overall loan portfolio. The allowance is established through a
provision for loan losses based on management's evaluation of the risk inherent
in the various components of its loan portfolio and other factors, including
historical loan loss experience, changes in the composition and volume of the
portfolio, collection policies and experiences, trends in the volume of
non-accrual loans and regional and national economic conditions. The
determination of the amount of the allowance for loan losses includes estimates
that are susceptible to significant changes due to changes in appraisal values
of collateral, national and regional economic conditions and other factors. In
connection with the determination of the allowance, the market value of
collateral ordinarily is evaluated by the Bank's staff appraiser; however, the
Bank may from time to time obtain independent appraisals for significant
properties. Current year charge-offs, charge-off trends, new loan production and
current balance by particular loan categories also are taken into account in
determining the appropriate amount of the allowance.
In assessing the adequacy of the allowance, management reviews the
Bank's loan portfolio by separate categories which have similar risk and
collateral characteristics; e.g. commercial real estate, multi-family real
estate, one-to-four family loans, co-operative apartment loans and consumer
loans. General provisions are established against performing loans in the Bank's
portfolio in amounts deemed prudent from time to time based on the Bank's
qualitative analysis of the factors described above. The determination of the
amount of the allowance for loan losses also includes a review of loans on which
full collectability is not reasonably assured. The primary risk element
considered by management with respect to each consumer and one-to-four family
and cooperative apartment loan is any current delinquency on the loan. The
primary risk elements considered with respect to commercial real estate and
multi-family loans are the financial condition of the borrower, the sufficiency
of the collateral (including changes in the value of the collateral) and the
record of payment. When a judgment is made that a specific loan involves a risk
of default and loss that is greater than the norm for loans in the relevant
category, that loan or a portion thereof may be classified loss, doubtful or
substandard. In addition, loans that are judged not to require specific
classification at a particular time, but require close monitoring, are
categorized as "special mention" loans. See "--Classified Assets."
The Bank establishes two types of reserves: specific reserves and
general valuation reserves. Specific reserves are established to reflect an
actual loss or the best estimate of the risk of loss on a specific loan as of a
certain date. All specific reserves are equivalent to direct charge-offs and are
reflected as direct reductions to the allowance for loan losses and the related
loan balances. Specific reserves are established for 100% of the portion of
loans that are classified as loss.
General valuation reserves represent allowances that have been
established to recognize the inherent risk associated with lending activities.
With respect to loans classified by the Bank as substandard and the portion of
loans classified doubtful or categorized as special mention, the Bank will make
additional provision to its general valuation reserves in an amount equal to a
percentage of principal amount outstanding at the time, currently ranging from
1.5% to 15%, which is determined from time to time by the Bank according to loan
type and classification. Additional provisions may be made to the general
valuation allowance to cover loans which are deemed not to require
classification or categorization as special mention, but are performing loans
where the Bank has knowledge that the financial condition of the borrower has
deteriorated. Provisions to the Bank's general valuation allowance are charged
against net income.
In addition, when real estate loans are foreclosed, the loan balance is
compared to the fair value of the property. The Bank evaluates the fair market
value of properties on the basis of information readily available to the Bank at
the time the properties are classified as REO. If the carrying value of the loan
at the time of foreclosure exceeds the fair value of the property, the
difference is charged to the allowance for loan losses and the fair value of the
property becomes the book value of the REO. The REO is subsequently carried at
the lower of
17
the carrying value of the loan or the fair value of the property less estimated
costs of sale with any further adjustment reflected as a charge against
earnings. See "--Asset Quality--REO."
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS and the
Federal Deposit Insurance Corporation ("FDIC"), which can require the
establishment of additional general allowances or specific loss allowances or
require charge-offs. Such authorities may require the Bank to make additional
provisions to the allowance based on their judgments about information available
to them at the time of their examination. An OTS policy statement provides
guidance for OTS examiners in determining whether the levels of general
valuation allowances for savings institutions are adequate. The policy statement
requires that if a savings institution's general valuation allowance policies
and procedures are deemed to be inadequate, the general valuation allowance
would be compared to certain ranges of general valuation allowances deemed
acceptable by the OTS depending in part on the savings institution's level of
classified assets.
The Bank's provision for loan losses was $418,000, $496,000 and
$246,000 for the years ended December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996, the total allowance for loan losses was $5.4 million,
representing 225.79% of non-performing loans and 149.94% of non-performing
assets, an increase from the December 31, 1995 ratios of 106.61% and 77.52%
respectively. The Bank continues to monitor and modify the level of its
allowance for loan losses in order to maintain the allowance at a level which
management considers adequate to provide for potential loan losses based on
available information.
Management of the Bank believes that the current allowance for loan
losses is adequate in light of current economic conditions and the composition
of its loan portfolio and other available information and the Board of Directors
concurs in this belief. However, many factors may require additions to the
allowance for loan losses in future periods beyond those reasonably anticipated.
These factors include future adverse changes in economic conditions, changes in
interest rates and changes in the financial capacity of individual borrowers
(any of which may affect the ability of borrowers to make repayments on loans),
changes in the local real estate market and the value of collateral, or a review
and evaluation of the Bank's loan portfolio in the future. The determination of
the amount of the allowance for loan losses includes estimates that are
susceptible to significant changes due to changes in appraisal values of
collateral, national and regional economic conditions, interest rates and other
factors. In addition, the Bank's increased emphasis on commercial real estate
and multi-family loans can be expected to increase the overall level of credit
risk inherent in the Bank's loan portfolio. The greater risk associated with
commercial real estate and multi-family loans may require the Bank to increase
its provisions for loan losses and to maintain an allowance for loan losses as a
percentage of total loans that is in excess of the allowance currently
maintained by the Bank. Provisions for loan losses are charged against net
income. See "--Lending Activities" and "--Asset Quality."
The following table sets forth the Bank's allowance for loan losses at
and for the dates indicated.
For the Years Ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of year ............... $5,310 $5,370 $5,723 $4,555 $3,242
Provision for loan losses .................. 418 496 246 2,522 2,809
Loans charged-off:
One-to-four family .................... 220 312 341 287 494
Co-operative .......................... 162 183 71 33 120
Multi-family .......................... 41 251 14 344 389
Commercial ............................ 68 260 303 716 669
Construction .......................... -- -- -- -- --
Other ................................. 44 46 65 147 83
-------- -------- -------- -------- --------
Total loans charged-off ............... 535 1,052 794 1,527 1,755
-------- -------- -------- -------- --------
Recoveries:
Mortgage loans ........................ 244 496 195 173 --
Other ................................. -- -- -- -- 259
-------- -------- -------- -------- --------
Total recoveries ...................... 244 496 195 173 259
-------- -------- -------- -------- --------
Balance at end of year ..................... $5,437 $5,310 $5,370 $5,723 $4,555
======== ======== ======== ======== ========
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.09% 0.21% 0.24% 0.47% 0.47%
18
For the Years Ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in thousands)
Ratio of allowance for loan losses to
gross loans at end of year ................ 1.39% 1.85% 2.07% 2.19% 1.51%
Ratio of allowance for loan losses to
non-performing loans at the end of year.... 225.79% 106.61% 101.11% 48.94% 20.49%
Ratio of allowance for loan losses to
non-performing assets at the end of year... 149.94% 77.52% 61.17% 29.41% 14.81%
19
The following table sets forth the Bank's allocation of its allowance
for loan losses to the total amount of loans in each of the categories listed at
the dates indicated. The numbers contained in the "Amount" column indicate the
allowance for loan losses allocated for each particular loan category. The
numbers contained in the column entitled "Percentage of Loans in Category to
Total Loans" indicate the total amount of loans in each particular category as a
percentage of the Bank's total loan portfolio.
At December 31,
----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- -------------------- --------------------- ------------------ -------------------
Percentage Percentage Percentage Percentage Percentage
of of of of of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Loan Category Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------------- ------- -------- -------- -------- -------- -------- -------- -------- -------- ------
(Dollars in thousands)
Mortgage Loans:
One-to-four family ..... $223,273 57.28% $ 1,126 54.20% $ 1,132 51.39% $ 957 51.61% $ 866 56.10%
Co-operative ........... 13,245 3.40 407 5.11 125 6.24 38 6.54 68 6.48
Multi-family ........... 104,870 26.91 1,625 24.11 1,024 21.85 1,171 18.91 1,207 18.11
Commercial ............. 46,698 11.98 2,139 15.77 3,070 19.13 3,507 20.77 2,164 17.97
Construction ........... -- -- -- -- -- 0.14 -- 0.72 -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total mortgage loans . 388,086 99.57 5,297 99.19 5,351 98.75 5,673 98.55 4,305 98.66
Other loans ............ 1,680 0.43 13 0.81 19 1.25 50 1.45 250 1.34
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total ................ $389,766 100.00% $ 5,310 100.00% $ 5,370 100.00% $ 5,723 100.00% $ 4,555 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ======== -======
20
Investment Activities
General. The investment policy of the Company, which is approved by the
Board of Directors, is designed primarily to manage the interest rate
sensitivity of its overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement the
Bank's lending activities and to provide and maintain liquidity. In establishing
its investment strategies, the Company considers its business and growth
strategies, the economic environment, its interest rate sensitivity "gap"
position, the types of securities to be held, and other factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Management Strategy," included in the Annual Report and incorporated
herein by reference.
Federally chartered savings institutions have authority to invest in
various types of assets, including U.S. government obligations, securities of
various federal agencies, mortgage-backed and mortgage-related securities,
certain certificates of deposit of insured banks and savings institutions,
certain bankers acceptances, repurchase agreements, loans of federal funds, and,
subject to certain limits, corporate securities, commercial paper and mutual
funds. All mortgage-backed securities held by the Bank are directly or
indirectly insured or guaranteed by FNMA, FHLMC or the Government National
Mortgage Association ("GNMA").
The Investment Committee of the Bank and the Company meets quarterly to
monitor investment transactions and to establish investment strategy. The Board
of Directors reviews the investment policy on an annual basis and investment
activity on a monthly basis.
SFAS 115, which was adopted by the Company, effective December 31,
1993, requires that investments in equity securities that have readily
determinable fair values and all investments in debt securities are to be
classified in one of the following three categories and accounted for
accordingly: (1) trading securities; (2) securities available for sale; and (3)
securities held to maturity. Unrealized gains or losses on trading securities
would be included in the determination of net income; however, the Company does
not intend to trade securities. Unrealized gains and losses for
available-for-sale securities are excluded from earnings and reported as a net
amount in a separate component of equity, net of taxes. At December 31, 1996,
the Company had $331.9 million in securities available for sale which
represented 42.81% of total assets. These securities had an aggregate market
value at that date that was approximately 2.5 times the amount of the Company's
equity at that date. The cumulative balance of unrealized loss on securities
available for sale was $1.2 million, net of taxes, at December 31, 1996. As a
result of SFAS 115 and the magnitude of the Company's holdings of securities
available for sale, changes in interest rates could produce significant changes
in the value of such securities and could produce significant fluctuations in
the equity of the Company. See Note 7 of "Notes to Consolidated Financial
Statements," included in the Annual Report and incorporated herein by reference.
The Company may from time to time sell securities and realize a loss if the
proceeds of such sale may be reinvested in loans or other assets offering more
attractive yields.
In November 1995, the Financial Accounting Standards Board ("FASB")
issued a special report entitled "A Guide to Implementation of Statement #115 on
Accounting for Certain Investments in Debt and Equity Securities", which gave
the Company a one-time opportunity to reconsider its ability and intent to hold
securities to maturity, and allowed the Company to transfer securities from
held-to-maturity to other categories without tainting its remaining
held-to-maturity securities. Accordingly, on December 29, 1995, the Company
moved all securities classified as held-to-maturity to available-for-sale,
totaling $94.7 million, net of a $1.4 million unrealized gain.
At December 31, 1996, the Company had no investment in a particular
issuer's securities that either alone, or together with any investments in the
securities of any affiliate(s) of such issuer, exceeded 10% of the Company's
equity.
21
The table below sets forth certain information regarding the amortized
cost and market values of the Company's securities portfolio at the dates
indicated. Securities held for investment/to maturity are recorded at amortized
cost. Securities available for sale are recorded at market value. See Note 7 of
Notes to Consolidated Financial Statements, included in the Annual Report,
incorporated herein by reference.
At December 31,
-------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(In thousands)
Securities held for investment/to
maturity:
Bond and other debt securities: ...................... -- -- -- -- -- --
U.S. government and agencies ....................... -- -- -- -- -- --
Obligations of states &
political subdivisions .......................... -- -- -- -- $ 1,241 $ 1,243
Corporate debt ..................................... -- -- -- -- 876 876
Public utility ..................................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total bonds and other debt securities .............. -- -- -- -- 2,117 2,119
-------- -------- -------- -------- -------- --------
Equity securities:
Redeemable preferred stock(1) ...................... -- -- -- -- 5,736 5,641
-------- -------- -------- -------- -------- --------
Total equity securities: ........................... -- -- -- -- 5,736 5,641
-------- -------- -------- -------- -------- --------
Mortgage-backed securities:
FHLMC .............................................. -- -- -- -- 37,076 35,537
FNMA ............................................... -- -- -- -- 40,453 36,210
GNMA ............................................... -- -- -- -- 5,563 5,119
Collateralized mortgage ............................ -- -- -- -- -- --
obligations
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities ................... -- -- -- -- 83,092 76,866
-------- -------- -------- -------- -------- --------
Total debt and equity
securities held
for investment/to maturity ...................... -- -- -- -- 90,945 84,626
======== ======== ======== ======== ======== ========
Securities available for sale:
Bonds and other debt securities:
U.S. government and agencies ....................... $150,045 $148,141 $116,296 $116,728 50,776 46,949
Corporate debentures ............................... 37,656 38,171 77,227 78,662 54,620 52,995
Public utility ..................................... 4,305 4,294 6,389 6,501 3,979 3,975
-------- -------- -------- -------- -------- --------
Total bonds and other debt
securities ......................................... 192,006 190,606 199,912 201,891 109,375 103,919
-------- -------- -------- -------- -------- --------
Equity securities:
Perpetual preferred stock(1) ....................... 250 251 250 256 250 211
-------- -------- -------- -------- -------- --------
Total equity securities ............................ 250 251 250 256 250 211
-------- -------- -------- -------- -------- --------
Mortgage-backed securities:
FHLMC .............................................. 47,217 46,406 61,529 61,845 24,760 22,709
FNMA ............................................... 83,727 83,756 105,374 106,265 67,936 62,205
GNMA ............................................... 10,973 10,876 11,354 11,190 7,537 6,933
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities.................... 141,917 141,038 178,257 179,300 100,233 91,847
-------- -------- -------- -------- -------- --------
Total debt and equity securities
available for sale: ................................ 334,173 331,895 378,419 381,447 209,858 195,977
======== ======== ======== ======== ======== ========
Interest-bearing deposits and
federal funds sold ................................. 27,465 27,465 7,438 7,438 9,000 9,000
FHLB - New York stock ................................ 4,158 4,158 3,787 3,787 1,881 1,881
-------- -------- -------- -------- -------- --------
Total debt and equity securities ................... $365,796 $363,518 $389,644 $392,672 $311,684 $291,484
======== ======== ======== ======== ======== ========
- ----------------
(1) Acquired prior to the Bank's Conversion to federal mutual charter.
Generally, federal savings banks are not permitted to invest in equity
securities. In connection with the Bank's conversion to a federal charter,
the OTS has permitted the Bank to retain such securities up to May 10,
1997.
Mortgage-backed securities. All of the mortgage-backed securities
currently held by the Company are issued or guaranteed by FNMA, FHLMC or GNMA.
At December 31, 1996, the Company had $141 million invested in mortgage-backed
securities, of which $50.2 million was invested in adjustable-rate
mortgage-backed securities. The Company anticipates that investments in
mortgage-backed securities may continue to be used in the future to offset any
significant decrease in demand for mortgage loans.
22
The following table sets forth the Company's mortgage-backed securities
purchases, securitizations, sales and principal repayments for the years
indicated:
For the
Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
At beginning of year ..................................... $ 179,300 $ 174,939 $ 167,338
Purchases of mortgage-backed securities ............. 8,415 21,444 72,180
Loans securitized ................................... -- -- 15,792
Amortization of unearned premium, net of
accretion of unearned discount ................... (908) (849) (1,525)
Net change in unrealized gains (losses) on
mortgage-backed .......................................... (2,249) 9,427 (9,373)
securities available for sale
Less:
Sales of mortgage-backed securities ................. 4,742 -- 28,378
Principal repayments received on mortgage-backed
securities ....................................... 38,778 25,661 41,095
--------- --------- ---------
Net (decrease) increase in mortgage-backed securities (38,262) 4,361 7,601
--------- --------- ---------
At end of year ........................................... $ 141,038 $ 179,300 $ 174,939
========= ========= =========
Mortgage-backed securities are more liquid than individual mortgage
loans and may be used more easily to collateralize obligations of the Bank. In
general, mortgage-backed securities issued or guaranteed by FNMA, FHLMC and GNMA
are weighted at no more than 20% for risk-based capital purposes, compared to
the risk weighting assigned to non-securitized whole loans of 50%.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed
and value of such securities. At December 31, 1996, the Bank held one
collateralized mortgage obligation ("CMO") with a market value of $4.5 million.
The Bank does not have any derivative instruments, including CMO's, with market
values that are extremely sensitive to changes in interest rates.
23
The table below sets forth certain information regarding the carrying
value, annualized weighted average yields, and maturities of the Company's debt
and equity securities at December 31, 1996. The stratification of balances is
based on stated maturities. Assumptions for repayments and prepayments are not
reflected for mortgage-backed securities.
At December 31, 1996
----------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
------------------ ------------------- -------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
Securities available for
sale:
Bonds and other debt securities:
U.S. government agencies ..... $ 500 7.50% $ 21,018 6.30% $121,527 6.91%
Corporate debt ............... 5,677 8.87 26,151 7.72 1,666 7.80
Public Utility ............... -- -- 4,305 7.06 -- --
-------- ---- -------- ---- -------- ----
Total bonds and other
securities ................. 6,177 8.76 51,474 7.08 123,193 6.92
-------- ---- -------- ---- -------- ----
Equity securities:
Perpetual preferred stock .... -- -- -- -- -- --
-------- ---- -------- ---- -------- ----
Total equity securities ...... -- -- -- -- -- --
-------- ---- -------- ---- -------- ----
Mortgage-backed securities:
FHLMC ........................ -- -- 1,310 7.11 892 6.44
FNMA ......................... -- -- 3,462 6.13 730 7.50
GNMA ......................... -- -- -- -- 874 7.44
-------- ---- -------- ---- -------- ----
Total mortgage-backed
securities ................. -- -- 4,772 6.40 2,496 7.10
-------- ---- -------- ---- -------- ----
Federal funds sold ............. 27,465 6.26 -- -- -- --
FHLB - New York stock .......... -- -- -- -- -- --
-------- ---- -------- ---- -------- ----
Total securities ............... $ 33,642 6.72% $ 56,246 7.03% $125,689 6.93%
======== ==== ======== ==== ======== ====
At December 31, 1996
-----------------------------------------------------------
More than Ten Years Total Securities
------------------- --------------------------------------
Average
Weighted Remaining Estimated Weighted
Amortized Average Years to Amortized Market Average
Cost Yield Maturity Cost Value Yield
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
Securities available for
sale:
Bonds and other debt securities:
U.S. government agencies ..... $ 7,000 7.06% 8.09 $150,045 $148,141 6.83%
Corporate debt ............... 4,162 5.93 4.10 37,656 38,171 7.70
Public Utility ............... -- -- 3.69 4,305 4,294 7.06
------ ---- ---- ------- ------- ----
Total bonds and other ........
securities ................. 11,162 6.64 7.21 192,006 190,606 7.01
------ ---- ---- ------- ------- ----
Equity securities:
Perpetual preferred stock .... 250 6.72 -- 250 251 6.72
------ ---- ---- ------- ------- ----
Total equity securities ...... 250 6.72 -- 250 251 6.72
------ ---- ---- ------- ------- ----
Mortgage-backed securities:
FHLMC ........................ 45,015 7.14 19.25 47,217 46,406 7.13
FNMA ......................... 79,535 6.99 19.90 83,727 83,756 6.96
GNMA ......................... 10,099 7.10 21.80 10,973 10,876 7.13
------ ---- ---- ------- ------- ----
Total mortgage-backed ........
securities ................. 134,649 7.05 19.83 141,917 141,038 7.03
------ ---- ---- ------- ------- ----
Federal funds sold ............. -- -- -- 27,465 27,465 6.26
FHLB - New York stock .......... 4,158 6.61 -- 4,158 4,158 6.61
------ ---- ---- ------- ------- ----
Total securities ............... $150,219 7.01% 11.48 $365,796 $363,518 6.95%
------ ---- ---- ------- ------- ----
24
Sources of Funds
General. Deposits, principal and interest payments on loans,
mortgage-backed and other securities, proceeds from sales of loans and
securities and, to a lesser extent, Federal Home Loan Bank of New York
("FHLB-NY") borrowings, are the Company's primary sources of funds for lending,
investing and other general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank's deposits principally consist of passbook
accounts, money market accounts, demand accounts, NOW accounts and certificates
of deposit. The Company has a relatively stable retail deposit base drawn from
its market area through its seven full service offices. The Company seeks to
retain existing depositor relationships by offering quality service and
competitive interest rates, while keeping deposit growth within reasonable
limits. It is management's intention to balance its goal to remain competitive
in interest rates on deposits while seeking to manage its cost of funds to fund
its strategies
The Company's core deposits, consisting of passbook accounts, NOW
accounts, money market, and non-interest bearing demand accounts, are typically
more stable and lower cost than other sources of funding. However, the flow of
deposits into a particular type of account is influenced significantly by
general economic conditions, changes in money market and prevailing interest
rates and competition. During the low interest rate environment in 1995 and
1996, the Company experienced a shift by depositors from passbook accounts to
higher costing certificate of deposit accounts. Although the Company has not had
to raise interest rates on its passbook accounts to remain competitive, it has
had to increase the rates offered on its certificates of deposit. These trends
contributed to the increase in the Company's higher average cost of funds from
3.37% for 1994, to 4.15% for 1995 and to 4.39% for 1996. A continuation of these
trends could result in a further increase in the Company's cost of funds and a
narrowing of the Company's net interest margin.
At December 31, 1996, $22.0 million, or 3.77% of the Bank's total
deposits consisted of certificates of deposit accounts with a balance of
$100,000 or greater.
25
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposits presented.
At December 31,
-------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in thousands)
Passbook accounts(1) ................... $209,690 35.88% 2.86% $215,578 38.52% 2.86% $255,037 47.93% 2.86%
NOW accounts(1) ........................ 21,408 3.66 1.90 19,565 3.49 1.90 18,773 3.53 1.90
Demand accounts(1) ..................... 10,293 1.76 -- 10,372 1.85 -- 10,003 1.88 --
Mortgagors' escrow deposits(1) ......... 3,425 0.59 2.00 2,457 0.44 2.00 2,701 0.51 2.00
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total ............................. 244,816 41.89 2.64 247,972 44.30 2.66 286,514 53.85 2.69
-------- ------ ---- -------- ------ ---- -------- ------ ----
Money market accounts(1) ............... 25,180 4.31 2.81 27,590 4.93 2.81 36,293 6.82 2.81
-------- ------ ---- -------- ------ ---- -------- ------ ----
Certificate of deposit accounts:
$100,000 or more ..................... 22,047 3.77 5.86 16,819 3.00 5.93 10,345 1.94 5.00
CD's original maturity of:
6 months and less ................. 50,228 8.59 5.04 46,617 8.33 5.05 39,795 7.48 4.04
6 to 12 months .................... 74,063 12.67 5.15 71,235 12.72 5.70 45,075 8.47 4.19
12 to 30 months ................... 86,853 14.87 6.20 71,297 12.73 6.06 39,235 7.37 4.54
30 to 48 months ................... 15,307 2.62 6.10 10,340 1.85 5.86 7,348 1.38 5.21
48 to 72 months ................... 47,079 8.05 6.10 47,445 8.47 6.25 43,821 8.23 6.14
72 months or more ................. 901 0.15 5.90 929 0.17 5.90 1,940 0.37 5.99
IRA and Keogh accounts ................. 18,005 3.08 5.54 19,620 3.50 5.89 21,775 4.09 4.87
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total ............................. 314,483 53.80 5.69 284,302 50.77 5.81 209,334 39.33 4.80
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits ......................... $584,479 100.00% 4.29% $559,864 100.00% 4.27% $532,141 100.00% 3.53%
======== ====== ==== ======== ====== ==== ======== ====== ====
(1) Weighted average nominal rate as of the year end date equals the stated
rate offered.
26
The following table presents by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated and the years
to maturity of the certificate accounts outstanding at December 31, 1996.
At December 31, 1996
--------------------------------------
At December 31, Within One to
---------------------------- One Three There-
1996 1995 1994 Year Years after Total
---- ---- ---- ---- ----- ----- -----
(In thousands)
Certificate of deposit
accounts:
2.99 or less............... $ 37 $ 47 $ 125 $ 37 -- -- $ 37
3.00 to 3.99............... -- 2 57,886 -- -- -- --
4.00 to 4.99............... 28,283 21,338 64,476 27,647 $ 636 -- 28,283
5.00 to 5.99............... 192,557 150,410 53,040 133,944 50,321 $ 8,292 192,557
6.00 to 6.99............... 59,822 75,448 22,990 23,783 25,147 10,892 59,822
7.00 to 7.99............... 33,784 37,057 8,976 534 31,423 1,827 33,784
8.00 to 8.99............... 1,841 --
-------- -------- -------- -------- -------- ------- --------
Total.................... $314,483 $284,302 $209,334 $185,945 $107,527 $21,011 $314,483
======== ======== ======== ======== ======== ======= ========
The following table presents by various maturity categories the amount
of certificate of deposit accounts with balances of $100,000 or more at December
31, 1996 and their annualized weighted average interest rates.
Weighted
Average
Amount Rate
------- ----
(In thousands)
Maturity Period
Three months or less .................. $ 6,693 5.73%
Over three through six months ......... 3,286 5.39
Over six through 12 months ............ 3,818 5.57
Over 12 months ........................ 8,250 6.29
------- ----
Total ............................... $22,047 5.86%
======= ====
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Years Ended December 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
Deposits(1)(2) ...................... $ 626,121 $ 793,356 $ 773,835
Withdrawals(2) ...................... 625,668 787,980 822,453
--------- --------- ---------
Net deposits\(withdrawals) ....... 453 5,376 (48,618)
Interest credited on deposits ....... 24,162 22,347 19,303
--------- --------- ---------
Total increase in deposits ..... $ 24,615 $ 27,723 $ (29,315)
========= ========= =========
- ------------
(1) Includes mortgagors' escrow deposits.
(2) Reflects deposits attributable to subscription orders in the first
proposed stock conversion discontinued in 1994, in the amounts of
$162.9 million deposited and $163.8 million withdrawn, and in the
Conversion in 1995, in the amounts of $146.0 million deposited and
$162.4 million withdrawn.
27
The following table sets forth the distribution of the Bank's average
deposit accounts for the years indicated, the percentage of total deposit
portfolio, and the average interest cost of each deposit category presented.
Average balances for all years shown are derived from daily balances.
For The Years Ended December 31,
-------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
Average of Total Average Average of Total Average Average of Total Average
Balance Deposits Cost Balance Deposits Cost Balance Deposits Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
Passbook accounts ....................... $214,843 37.55% 2.86% $227,740 40.73% 2.84% $277,249 47.41% 2.85%
NOW accounts ............................ 19,483 3.41 1.90 18,520 3.31 1.88 19,163 3.28 1.89
Demand accounts ......................... 10,230 1.79 -- 12,865 2.30 -- 9,602 1.64 --
Mortgagors' escrow deposits ............. 4,292 0.75 1.47 4,136 0.74 1.38 4,008 0.69 1.25
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total ................................ 248,848 43.50 2.64 263,261 47.08 2.61 310,022 53.02 2.68
Money market accounts ................... 26,470 4.63 2.80 31,145 5.57 2.79 42,026 7.19 2.75
Subscription deposits ................... -- -- -- 4,261 0.76 2.77 28,265 4.83 3.05
Certificate of deposit
accounts ................................ 296,867 51.87 5.68 260,462 46.59 5.60 204,399 34.96 4.39
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits ....................... $572,185 100.00% 4.22% $559,129 100.00% 4.01% $584,712 100.00% 3.30%
======== ====== ==== ======== ====== ==== ======== ====== ====
28
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank has from time to time used borrowings as an alternative and cost
effective source of funds for the Bank's lending activities. Upon the Bank's
conversion from a New York State chartered mutual savings bank to a federally
chartered mutual savings bank on May 10, 1994, the Bank became a member of, and
became eligible to obtain advances from, the FHLB-NY. Such advances generally
are secured by a blanket lien against the Bank's mortgage portfolio and the
Bank's investment in the stock of the FHLB-NY. See "Regulations -- Federal Home
Loan Bank System". The maximum amount that the FHLB-NY will advance for purposes
other than for meeting withdrawals fluctuates from time to time in accordance
with the policies of the FHLB-NY.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated.
At or For the Years Ended December 31,
-------------------------------------
1996 1995 1994
------- ------- -------
(Dollars in Thousands)
Securities sold with the agreement to repurchase:
Average balance outstanding ................ -- $ 395 $ 260
Maximum amount outstanding at any month
end during the period .................... -- 5,000 5,000
Balance outstanding at the end of period ... -- -- 5,000
Weighted average interest rate during
the period ............................... -- 6.11% 6.10%
Weighted average interest rate at end
of period ................................ -- -- 5.99%
FHLB-NY advances:
Average balance outstanding ................ $36,396 $ 4,767 $ 247
Maximum amount outstanding at any month
end during the period .................... 51,000 10,000 10,000
Balance outstanding at the end of period ... 51,000 -- 10,000
Weighted average interest rate during
the period ............................... 5.77% 7.00% 7.00%
Weighted average interest rate at end
of period ................................ 5.85% -- 7.00%
Total borrowings:
Average balance outstanding ................ $36,396 $ 5,162 $ 507
Maximum amount outstanding at any month
end during the period .................... 51,000 15,000 15,000
Balance outstanding at the end of period ... 51,000 -- 15,000
Weighted average interest rate during
the period ............................... 5.77% 6.93% 6.54%
Weighted average interest rate at end
of period ................................ 5.85% -- 6.66%
Subsidiary Activities
The Bank has one wholly-owned subsidiary, which currently is inactive.
FSB Properties Inc. ("Properties") was formed by the Bank in 1976 under its New
York State leeway investment authority. The original purpose of Properties was
to engage in joint venture real estate equity investments. These activities were
discontinued by Properties and the Bank in 1986. The last joint venture in which
Properties was a partner was dissolved in 1989.
29
Personnel
At December 31, 1996, the Bank had 172 full-time employees and 64
part-time employees. None of the Bank's employees are represented by a
collective bargaining unit, and the Bank considers its relationship with its
employees to be good.
RISK FACTORS
In addition to the other information contained in this Annual Report on
Form 10-K, the following factors and other considerations should be considered
carefully in evaluating the Company, the Bank and their business.
Effect of Interest Rates
Like most financial institutions, the Company's results of operations
depends to a large degree on its net interest income. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets, a
significant increase in market interest rates could adversely affect net
interest income. Conversely, under such circumstances, a significant decrease in
market interest rates could result in increased net interest income. As a
general matter, the Company seeks to manage its business to limit its overall
exposure to interest rate fluctuations. However, fluctuations in market interest
rates are neither predictable nor controllable and may have a material adverse
impact on the operations and financial condition of the Company.
Prevailing interest rates also affect the extent to which borrowers
prepay and refinance loans. Declining interest rates tend to result in an
increased number of loan prepayments and loan refinancings to lower than
original interest rates, as well as prepayments of mortgage-backed securities.
Such prepayments adversely affect the average yield on the Company's loan and
mortgage-backed securities portfolio, the value of mortgage loans and
mortgage-backed securities in the Company's portfolio, the levels of such assets
that are retained by the Company, net interest income and loan servicing income.
However, the Bank may receive additional loan fees when existing loans are
refinanced, which may partially offset reduced yield on the Bank's loan
portfolio resulting from prepayments. In periods of low interest rates, the
Bank's level of core deposits also may decline if depositors seek higher
yielding instruments or other investments not offered by the Bank, which in turn
may increase the Bank's cost of funds and decrease its net interest margin to
the extent alternative funding sources are utilized.
Lending Activities
Multi-family and commercial real estate loans, the increased
origination of which is part of management's strategy, are generally viewed as
exposing the lender to a greater risk of loss than fully underwritten
one-to-four family residential loans and typically involve higher principal
amounts per loan. Repayment of multi-family and commercial real estate loans
generally is dependent, in large part, upon sufficient income from the property
to cover operating expenses and debt service. Economic events and government
regulations, which are outside the control of the borrower or lender, also could
affect the value of the security for the loan or the future cash flow of the
affected properties.
As a result of management's strategy to increase its originations of
one-to-four family mortgage loans through more aggressive marketing, and the
Bank's commitment to be a community-oriented bank, the Bank increased
substantially in 1996 the origination of residential mortgage loans to
self-employed individuals within the Bank's local community without verification
of the borrower's level of income. These loans involve a higher degree of risk
as compared to the Bank's other fully underwritten residential mortgage loans as
there is a greater opportunity for borrowers to falsify or overstate their level
of income and ability to service indebtedness. To mitigate this risk, the Bank
typically limits the amount of these loans to 70% of the appraised value or sale
price, whichever is less. These loans are not as readily salable in the
secondary market as the Bank's other fully underwritten loans, either as whole
loans or when pooled or securitized.
The future earnings prospects of the Bank will be affected by the
Bank's ability to compete effectively with other financial institutions and to
implement its business strategies. There can be no assurance that the Bank will
be able to successfully implement its business strategies. In assessing the
future earnings prospects of the
30
Bank, investors should consider, among other things, the Bank's level of
origination of one-to-four family loans, the Bank's proposed increased emphasis
on commercial real estate and multi-family loans and the greater risks
associated with such loans. See "Business -- Lending Activities".
Local Economic Conditions
Although general economic conditions in the New York City metropolitan
area have improved since the early 1990's, there can be no assurance that the
local economy will continue to improve or remain at current conditions.
A decline in the local economy, national economy or metropolitan area
real estate market could adversely affect the financial condition and results of
operations of the Company, including through decreased demand for loans or
increased competition for good loans, increased non-performing loans and loan
losses and resulting additional provisions for loan losses and for losses on
real estate owned. Although management of the Bank believes that the current
allowance for loan losses is adequate in light of current economic conditions,
many factors may require additions to the allowance for loan losses in future
periods above those reasonably anticipated. These factors include: (i) adverse
changes in economic conditions and changes in interest rates that may affect the
ability of borrowers to make payments on loans, (ii) changes in the financial
capacity of individual borrowers, (iii) changes in the local real estate market
and the value of the Bank's loan collateral, and (iv) future review and
evaluation of the Bank's loan portfolio, internally or by regulators. The amount
of the allowance for loan losses at any time represents good faith estimates
that are susceptible to significant changes due to changes in appraisal values
of collateral, national and regional economic conditions, prevailing interest
rates and other factors. See "Business Allowance for Loan Losses."
Pending Legislation
Legislation has been enacted that provides for a merger of the two
deposit insurance funds administered by the FDIC on January 1, 1999 if, by such
date, the charters of federal savings associations, such as the Bank, have been
unified with the charters of national banks. Many proposals for charter
unification have been advanced and the United States Treasury Department
currently is required to render a report as to its recommendations by March 31,
1997. Most proposals would abolish the OTS, but would permit former savings
associations to continue to engage in any activity that was permissible for such
institutions prior to their converting to a national bank or state charter for
some period of time. Such a required change in the Bank's charter would not be
expected to affect materially the Bank's principal lending and deposit
activities. However, charter unification legislation could substantially
restrict the ability of the Company in the future to expand and diversify
business activities. Efforts to unify the commercial bank and thrift charters
present many complex issues. As a result of these developments, it is possible
that the Bank, on or before January 1, 1999, will be required to convert to a
bank charter and the Holding Company would be required to convert to a bank
holding company. In such an event, the Bank will be regulated by the Office of
the Comptroller of the Currency and the Holding Company would be regulated by
the FRB. It is also possible that Congress could modify the thrift, unitary
holding company, and/or bank charters, and/or create one or more new unified
charters. Management currently does not believe that any such regulatory change
to the charters of the Bank or the Company would have a material, adverse effect
on the Bank or the Company, although there can be no assurance that this would
not be the case. See "Regulations -- Insurance of Accounts".
Certain Anti-Takeover Provisions
On September 17, 1996, the Company adopted a Stockholder Rights Plan
(the "Rights Plan") designed to preserve long-term values and protect
stockholders against stock accumulations and other abusive tactics to acquire
control of the Company. Under the Rights Plan, each stockholder of record at the
close of business on September 30, 1996 received a dividend distribution of one
right to purchase from the Company one one-hundredth of a share of a new series
of junior participating preferred stock at a price of $64, subject to certain
adjustments. The rights will become exercisable only if any person or group
acquires 15% or more of the Common Stock or commences a tender or exchange offer
which, if consummated, would result in that person or group owning at least 15%
of the Common Stock (the "acquiring person or group"). In such case, all
stockholders other than the acquiring person or
31
group will be entitled to purchase, by paying the $64 exercise price, Common
Stock (or a common stock equivalent) with a value of twice the exercise price.
In addition, at any time after such event, and prior to the acquisition by any
person or group of 50% or more of the Common Stock, the Board of Directors may,
at its option, require each outstanding right (other than rights held by the
acquiring person or group) to be exchanged for one share of Common Stock (or one
common stock equivalent). The rights expire on September 30, 2006.
The Rights Plan, as well as certain provisions of the Company's
Certificate of Incorporation and Bylaws, the Bank's federal Stock charter and
Bylaws, certain federal regulations and provisions of Delaware corporation law,
and certain provisions of remuneration plans and agreements applicable to
employees and officers of the Bank may have anti-takeover effects by
discouraging potential proxy contests and other takeover attempts, particularly
those which have not been negotiated with the Board of Directors. The Rights
Plan and these provisions, as well as applicable regulatory restrictions, may
also prevent or inhibit the acquisition of a controlling position in the Common
Stock and may prevent or inhibit takeover attempts that certain stockholders may
deem to be in their or other stockholders' interest or in the interest of the
Company or the Bank, or in which stockholders may receive a substantial premium
for their shares over then current market prices. The Rights Plan and these
provisions may also increase the cost of, and thus discourage, any such future
acquisition or attempt, and would render the removal of the current Board of
Directors or management of the Bank or the Holding Company more difficult.
FEDERAL, STATE AND LOCAL TAXATION
The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company.
Federal Taxation
General. The Company and the Bank will report their income using a
calendar year and the accrual method of accounting. The Company and the Bank are
both subject to the federal tax laws and regulations which apply to corporations
generally, including, since the recent enactment of the Small Business Job
Protection Act (the "Act"), those governing the Bank's deductions for bad debts,
described below.
Bad Debt Reserves. Prior to the enactment of the Act, which was signed
into law on August 20, 1996, savings institutions which met certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts"), such as the Bank, were allowed deductions for bad debts
under methods more favorable than those granted to other taxpayers. Qualifying
thrifts could compute deductions for bad debts using either the specific charge
off method of Section 166 of the Internal Revenue Code (the "Code") or the
reserve method of Section 593 of the Code.
Prior to its modification by the Act, Section 593 permitted a
qualifying thrift to establish a reserve for bad debts and to make annual
additions thereto, which, within specified formula limits, could be deducted in
arriving at its taxable income. A qualifying thrift could elect annually to
compute its allowable deduction to bad debt reserves for "qualifying real
property loans," generally loans secured by certain interests in real property,
under either (i) the "percentage of taxable income" method applicable only to
thrift institutions, or (ii) the "experience" method that also was available to
small banks. Under the "percentage of taxable income" method, subject to certain
limitations, a qualifying thrift generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income (determined
without regard to this deduction and with additional adjustments). Under the
experience method, a qualifying thrift was generally allowed a deduction for an
addition to its bad debt reserve equal to the greater of (i) an amount based on
its actual average experience for losses in the current and five preceding
taxable years, or (ii) an amount necessary to restore the reserve to its balance
as of the close of the base year, defined as the last taxable year beginning
before January 1, 1988. The Bank's deduction for additions to its bad debt
reserve with respect to non-qualifying loans had to be computed under the
experience method. Any deduction for the addition to the reserve for
non-qualifying loans reduced the maximum permissible addition to the reserve for
qualifying real property loans calculated under the percentage of taxable income
method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by qualifying thrifts, effective for taxable years
beginning after 1995. Qualifying thrifts that are treated as large
32
banks, such as the Bank, are required to use the specific charge off method,
pursuant to which the amount of any debt may be deducted only as it actually
becomes wholly or partially worthless.
A thrift institution required to change its method of computing
reserves for bad debt is required to treat such change as a change in the method
of accounting, initiated by the taxpayer and having been made with the consent
of the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amount of
the thrift institution's "applicable excess reserves" must be included in income
ratably over a six-taxable year period, beginning with the first taxable year
beginning after 1995, subject to suspension if the institution meets the
residential loan requirement described below. In the case of a thrift
institution that is treated as a large bank, such as the Bank, the amount of the
institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the balances of such reserves
as of the close of its last taxable year beginning before January 1, 1988 (i.e.,
the "pre-1988 reserves"). The Bank's applicable excess reserves as of December
31, 1995 were approximately $20,000. For the taxable year ending December 31,
1996, the repeal of the bad debt reserve deduction resulted in an increased
federal income tax liability of approximately $121,000.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders that are considered to result in distributions
from the pre-1988 reserves or the supplemental reserve for losses on loans
("excess distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and post-1951 accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock and distributions in partial or complete liquidation. The
amount of additional taxable income resulting from an excess distribution is an
amount that when reduced by the tax attributable to the income is equal to the
amount of the excess distribution. Thus, slightly more than one and one-half
times the amount of the excess distribution made would be includable in gross
income for federal income tax purposes, assuming a 35% federal corporate income
tax rate. See "Restrictions on Dividends and Capital Distributions" under
"Regulation" for limits on the payment of dividends by the Bank. The Bank does
not intend to pay dividends or make non-dividend distributions described above
that would result in a recapture of any portion of its pre-1988 bad debt
reserves.
Corporate Alternative Minimum Tax. The Code imposes an alternative
minimum tax (the "AMT") on corporations equal to the excess, if any, of 20% of
alternative minimum taxable income ("AMTI") over a corporation's regular federal
income tax liability. AMTI is equal to taxable income with certain adjustments.
Only 90% of AMTI can be offset by net operating loss carryforwards.
State and Local Taxation
New York State and New York City Taxation. The Bank is subject to the
New York State Franchise Tax on Banking Corporations in an annual amount equal
to the greater of (i) 9% of "entire net income" allocable to New York State
during the taxable year or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greater of (a) 0.01% of the value of
assets allocable to New York State with certain modifications, (b) 3% of
"alternative entire net income" allocable to New York State or (c) $250. Entire
net income is similar to federal taxable income, subject to certain
modifications (including that net operating losses cannot be carried back or
carried forward), and alternative entire net income is equal to entire net
income without certain deductions which are allowable in the calculation of
entire net income. The Bank also is subject to a similarly calculated New York
City tax of 9% on income allocated to New York City and similar alternative
taxes. In addition, the Bank was subject to a temporary tax surcharge on the New
York State Franchise Tax for tax years ending before July 1, 1997, at a rate of
2 1/2% for the tax year ending December 31, 1996, and to a temporary
Metropolitan Transportation Business Tax Surcharge for tax years ending before
December 31, 1997, at a rate of 17% of the New York State Franchise Tax.
Notwithstanding the repeal of the federal income tax provisions
permitting bad debt deductions under the reserve method, New York State has
enacted legislation maintaining the preferential treatment of loss reserves for
qualifying real property loans of qualifying thrifts for New York State tax
purposes. Similar measures to preserve
33
the deduction for New York City tax purposes have been passed by the New York
State legislature and is expected to be signed by the Governor in the coming
weeks.
For New York State and New York City tax purposes, the applicable
percentage to calculate the bad debt deduction under the percentage of taxable
income method is 32% of taxable income, subject to the following limitations:
(i) the amount of the addition to the reserve cannot exceed the amount necessary
to increase the balance of the reserve for losses on qualifying real property
loans at the close of the taxable year to 6% of the balance of the qualifying
real property loans outstanding at the end of the taxable year and (ii) the
reserves for losses on qualifying real property and non-qualifying loans cannot
exceed the amount by which 12% of the amount of the total deposits or
withdrawable accounts of depositors of the Bank at the close of the taxable year
exceeds the sum of the Bank's surplus, undivided profits and reserves at the
beginning of such year. The new legislation also allows an exclusion from entire
net income for New York State and New York City tax purposes for any amounts a
thrift is required to include in federal taxable income as a recapture of its
bad debt reserve as a consequence of the Act.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION
General
On May 10, 1994, the Bank converted from a New York State chartered
mutual savings bank to a federally chartered mutual savings bank pursuant to
Section 5(o) of the Home Owners' Loan Act, as amended ("HOLA"). On that date,
the OTS replaced the New York State Banking Department (the "Banking
Department") as the Bank's chartering authority and the FDIC as the Bank's
primary federal regulator. Although the FDIC is no longer the primary federal
regulator of the Bank, the Bank remains subject to regulation and examination by
the FDIC as its deposit insurer. The FDIC administered fund which insures the
Bank's deposits is the BIF. The Bank's deposits are insured up to the applicable
limits permitted by law. See "--Insurance of Accounts" and "Risk
Factors--Pending Legislation."
The Bank is also subject to certain regulations promulgated by the
Federal Reserve Board. Moreover, in connection with converting to a federal
charter, the Bank has become a member of the FHLB-NY.
The activities of federal savings institutions are governed by HOLA
and, in certain respects, the Federal Deposit Insurance Act ("FDIA"). Most
regulatory functions relating to deposit insurance and to conservatorships and
receiverships of insured institutions are exercised by the FDIC. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other
things, requires that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties, mandated the
establishment of a risk-based deposit insurance assessment system and required
imposition of numerous additional safety and soundness operational standards and
restrictions. FDICIA and the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") each contain provisions affecting numerous
aspects of the operations and regulations of federal savings banks and empowers
the OTS and the FDIC, among other agencies, to promulgate regulations
implementing its provisions.
The OTS has extensive authority over the operations of the Bank. As
part of this authority, the Bank is required to file periodic reports with the
OTS and is subject to periodic examinations by the OTS and back-up examinations
by the FDIC. The Company, as a savings and loan holding company, is required to
file certain reports with, and otherwise comply with the rules and regulations
of, the OTS. The Company also is subject to regulation under the federal
securities laws.
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Bank and the Company. The description does
not purport to be a comprehensive description of applicable laws, rules and
regulations and is qualified in its entirety by reference to applicable laws,
rules and regulations.
34
Investment Powers
The Bank is subject to comprehensive regulation governing its
investments and activities. Among other things, the Bank may invest in (i)
residential mortgage loans, education loans and credit card loans in an
unlimited amount, (ii) non-residential real estate loans up to 400% of total
capital, (iii) commercial business loans up to 20% of assets however, amounts
over 10% of total assets must be used only for small business loans) and (iv) in
general, consumer loans and highly rated commercial paper and corporate debt
securities in the aggregate up to 35% of assets. In addition, the Bank may
invest up to 3% of its assets in service corporations, an unlimited percentage
of its assets in operating subsidiaries (which may only engage in activities
permissible for the Bank itself) and under certain conditions may invest in
finance subsidiaries. Other than investments in service corporations, operating
subsidiaries, finance subsidiaries and stock of government-sponsored agencies,
such as FHLMC and FNMA, the Bank generally is not permitted to make equity
investments. The Bank continues to hold, pursuant to grandfathering authority
granted by the OTS, certain investments in preferred stock that it was
authorized to make as a New York-chartered savings bank. See
"Business--Investment Activities." A service corporation in which the Bank may
invest is permitted to engage in activities reasonably related to the activities
of a federal savings bank as the OTS may approve on a case by case basis and
certain activities preapproved by the OTS, which, among other things, include
providing certain support services for the institution; originating, investing
in, selling, purchasing, servicing or otherwise dealing with specified types of
loans and participations (principally loans that the parent institution could
make); specified real estate activities, including limited real estate
development, securities brokerage services; certain insurance brokerage
activities, and other specified investments and services.
Real Estate Lending Standards
FDICIA requires each federal banking agency to adopt uniform
regulations prescribing standards for extensions of credit (i) secured by real
estate, or (ii) made for the purpose of financing the construction of
improvements on real estate. In prescribing these standards, the banking
agencies must consider the risk posed to the deposit insurance funds by real
estate loans, the need for safe and sound operation of insured depository
institutions and the availability of credit. The OTS and the other federal
banking agencies adopted uniform regulations, effective March 19, 1993. The OTS
regulation requires each savings association to establish and maintain written
internal real estate lending standards consistent with safe and sound banking
practices and appropriate to the size of the institution and the nature and
scope of its real estate lending activities. The policy must also be consistent
with accompanying OTS guidelines, which include maximum loan-to-value ratios for
the following types of real estate loans: raw land (65%), land development
(75%), nonresidential construction (80%), improved property (85%) and
one-to-four family residential construction (85%). Owner-occupied one-to-four
family mortgage loans and home equity loans do not have maximum loan-to-value
ratio limits, but those with a loan-to-value ratio at origination of 90% or
greater are to be backed by private mortgage insurance or readily marketable
collateral. Institutions are also permitted to make a limited amount of loans
that do not conform to the proposed loan-to-value limitations so long as such
exceptions are appropriately reviewed and justified. The guidelines also list a
number of lending situations in which exceptions to the loan-to-value standard
are justified.
Loans-to-One Borrower Limits
The Bank generally is subject to the same loans-to-one borrower limits
that apply to national banks. With certain exceptions, loans and extensions of
credit outstanding at one time to one borrower (including certain related
entities of the borrower) may not exceed 15% of the Bank's unimpaired capital
and surplus, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by certain readily marketable collateral. At December 31, 1996,
the largest amount the Bank could lend to one borrower was approximately $13.8
million, and at that date the Bank had no lending relationships which exceeded
such loans-to-one borrower limitation. See "Business--Lending Activities."
Insurance of Accounts
The deposits of the Bank are insured up to $100,000 per depositor (as
defined by law and regulations) by the BIF, which is administered by the FDIC.
As insurer, the FDIC is authorized to conduct examinations of, and
35
to require reporting by, insured institutions. It also may prohibit any insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the BIF. The FDIC also has the authority to
initiate enforcement actions where the OTS has failed or declined to take such
action after receiving a request to do so from the FDIC.
For 1993, the annual deposit insurance premium was assessed at the rate
of $0.23 per $100 of deposits for all banks insured by the BIF. Effective
January 1, 1994, a risk-based deposit insurance assessment system was
implemented by the FDIC. Under the system as now in effect, the FDIC assigns
each institution to one of three capital categories consisting of (1) well
capitalized, (2) adequately capitalized, or (3) undercapitalized, and to one of
three supervisory subcategories. An institution's assessment rate depends on the
capital category and supervisory subcategory to which it is assigned.
Institutions are notified of their assessment risk classification on a
semi-annual basis. The capital and supervisory subgroup to which an institution
is assigned by the FDIC is confidential and may not be disclosed.
Assessment rates during 1994 and most of 1995 ranged from $0.23 per
$100 of deposits for an institution in the highest category to $0.31 per $100 of
deposits for an institution in the lowest category. On August 8, 1995, the FDIC
amended its regulation on assessments to establish a new assessment rate
schedule for the BIF ranging from $0.04 per $100 of deposits for an institution
in the highest category to $0.31 per $100 of deposits for an institution in the
lowest category. The FDIC's new rate schedule for the BIF was made effective
with the first day of the month following the month in which the BIF achieved
full capitalization to the statutory required 1.25% reserve ratio, which
occurred in the second half of 1995.
The Bank paid $1.3 million in federal deposit insurance premiums to the
BIF for the year ended December 31, 1994. As a result of the lowering of BIF
rates in August 1995, the Bank paid $824,000 in deposit insurance premiums for
the year ended December 31, 1995. Thereafter, the FDIC voted to reduce the BIF
assessment schedule even further so that most BIF members, including the Bank,
paid a statutory minimum semi-annual assessment of $2,000 for 1996. The FDIC has
advised the Bank that its annual assessment rate for 1997 will be $0.00 per $100
of deposits. However, as a result of recent legislation discussed below, the
Bank will be assessed for a portion of the interest due on the Finance
Corporation ("FICO") bonds issued in connection with the savings and loan
association crisis in the late 1980s.
The Bank's assessment rate in effect from time to time will depend upon
the capital category and supervisory subcategory to which the Bank is assigned
by the FDIC. In addition, the FDIC is authorized to increase federal deposit
insurance assessment rates for BIF members to the extent necessary to protect
the BIF and, under current law, would be required to increase such rates to
$0.23 per $100 of deposits if the BIF's reserve ratio again falls below the
required 1.25%. Any increase in deposit insurance assessment rates, as a result
of a change in the category or subcategory to which the Bank is assigned or the
exercise of the FDIC's authority to increase assessment rates generally, could
have an adverse effect on the earnings of the Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged 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. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
On September 30, 1996, as part of an omnibus appropriations bill, the
Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted. The Funds Act
eliminated the deposit insurance premium disparity that existed since the second
half of 1995 between banks insured by the BIF and thrifts insured by the Savings
Association Insurance Fund (the "SAIF"). The Act (i) required SAIF institutions
to pay a one-time special assessment to bring the SAIF's reserve ratio up to
1.25%, (ii) requires BIF institutions, beginning January 1, 1997, to pay a
portion of the interest due on the FICO bonds issued in connection with the
savings and loan association crisis in the late 1980s, and (iii) requires BIF
institutions to pay their full pro rata share of the FICO payments starting the
earlier of January 1, 2000 or the date at which no savings institution continues
to exist. Beginning January 1, 1997, the FICO assessment on SAIF institutions is
at the rate of $0.065 per $100 of deposits and the FICO assessment on BIF
institutions is at the rate of $0.013 per $100 of deposits. These rates are
subject to
36
change. The Bank anticipates that during 1997, it will pay $75,000 annually as a
FICO assessment for interest due on the FICO bonds.
The Funds Act also includes a provision that requires the U.S. Treasury
Department to conduct a study of all issues relevant to the development of a
common charter for all insured depository institutions and the elimination of
separate charters between thrifts and commercial banks. The Secretary of the
Treasury is to submit a report to Congress on the Treasury's findings and
conclusions in connection with the study on or before March 31, 1997. Another
provision in the Act states that the BIF and SAIF funds will merge on January 1,
1999 if no insured depository institution is a savings association on that date.
In light of these latter two provisions of the Funds Act, it is
possible that the Bank, on or before January 1, 1999, will be required to
convert to a bank charter and the Holding Company would be required to convert
to a bank holding company. In such an event, the Bank would be regulated by the
Office of the Comptroller of the Currency and the Holding Company would be
regulated by the FRB. It is also possible that Congress could modify the thrift,
unitary holding company, and/or bank charters, and/or create one or more new
unified charters. Management currently does not believe that any such regulatory
change to the charters of the Bank or the Company would have a material, adverse
effect on the Bank or the Company, although there can be no assurance that this
would not be the case. See "Risk Factors--Pending Legislation."
Liquidity Requirements
The Bank is subject to OTS regulations that require maintenance of an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified U.S. government, state and federal agency obligations,
shares of certain mutual funds and certain corporate debt securities and
commercial paper) equal to a percentage of the sum of the Bank's average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The liquidity requirement may be changed from time to time by the OTS
(between 4% and 10%) depending upon economic conditions and savings flows of all
institutions for which it is the primary federal regulator, and it is currently
5%. Short-term liquid assets currently must constitute at least 1% of an
institution's average daily balance of net withdrawable deposit accounts and
current borrowings. Monetary penalties may be imposed for violations of
liquidity requirements. The Bank's liquidity and short-term liquidity ratios at
December 31, 1996 were 10.91% and 3.91%, respectively, which exceeded the OTS
liquidity requirements in effect on that date. Accordingly, on that date, the
Bank was in compliance with OTS liquidity requirements.
Qualified Thrift Lender Test
Institutions regulated by the OTS are required to meet a qualified
thrift lender ("QTL") test to avoid certain restrictions on their operations.
FDICIA and applicable OTS regulations require such institutions to maintain at
least 65% of its portfolio assets (total assets less intangibles, properties
used to conduct the institution's business and liquid assets not exceeding 20%
of total assets) in "qualified thrift investments" on a monthly average basis in
nine of every 12 months. Qualified thrift investments constitute primarily
residential mortgage loans and related investments, including certain
mortgage-backed and mortgage-related securities. A savings institution that
fails the QTL test must either convert to a bank charter or, in general, it will
be prohibited from: (i) making an investment or engaging in any new activity not
permissible for a national bank, (ii) paying dividends not permissible under
national bank regulations, (iii) obtaining advances from any FHLB, and (iv)
establishing any new branch office in a location not permissible for a national
bank in the institution's home state. One year following the institution's
failure to meet the QTL test, any holding company parent of the institution must
register and be subject to supervision as a bank holding company. In addition,
beginning three years after the institution failed the QTL test, the institution
would be prohibited from refinancing any investment or engaging in any activity
not permissible for a national bank and would have to repay any outstanding
advances from an FHLB as promptly as possible. At December 31, 1996, the Bank
had maintained more than 65% of its "portfolio assets" in qualified thrift
investments in at least nine of the preceding 12 months. Accordingly, on that
date, the Bank had met the QTL test.
37
On September 30, 1996, as part of the omnibus appropriations bill,
Congress enacted the Economic Growth and Paperwork Reduction Act of 1996
("Regulatory Paperwork Reduction Act"), modifying and expanding investment
authority under the QTL test. Prior to the enactment of the Regulatory Paperwork
Reduction Act, commercial, corporate, business, or agricultural loans were
limited in the aggregate to 10% of a thrift's assets and education loans were
limited to 5% of a thrift's assets. Further, federal savings associations
meeting a different asset test under the Code (the "domestic building and loan
association test") were qualified for favorable tax treatment. The amendments
permit federal thrifts to invest in, sell, or otherwise deal in education and
credit card loans without limitation and raise from 10% to 20% of total assets
the aggregate amount of commercial, corporate, business, or agricultural loans
or investments that may be made by a thrift, subject to a requirement that
amounts in excess of 10% of total assets be used only for small business loans.
In addition, the legislation defines "qualified thrift investment" to include,
without limit, education, small business, and credit card loans; and removes the
10% limit on personal, family, or household loans for purposes of the QTL test.
The legislation also provides that a thrift meets the QTL test if it qualifies
as a domestic building and loan association under the Code.
Transactions with Affiliates
Transactions between the Bank and any related party or "affiliate" are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate is any
company or entity which controls, is controlled by or is under common control
with the Bank, including the Company, the Bank's subsidiary, Properties, and any
other subsidiary of the Bank or the Company that may be formed or acquired in
the future. Generally, Sections 23A and 23B (i) limit the extent to which the
Bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of the Bank's capital stock and surplus, and
impose an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus, and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable,
to the Bank or subsidiary as those provided to a non-affiliate. Each loan or
extension of credit to an affiliate by the Bank must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of credit extended. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition, the Bank may not (i) loan or
otherwise extend credit to an affiliate, except to any affiliate which engages
only in activities which are permissible for bank holding companies under
Section 4(c) of the Bank Company Act, or (ii) purchase or invest in any stocks,
bonds, debentures, notes or similar obligations of any affiliates, except
subsidiaries of the Bank.
In addition, the Bank is subject to Regulation O promulgated under
Sections 22(g) and 22(h) of the Federal Reserve Act. Regulation O requires that
loans by the Bank to a director, executive officer or to a holder of more than
10% of the Common Stock, and to certain affiliated interests of such insiders,
may not, in the aggregate, exceed the Bank's loans-to-one borrower limit. Loans
to insiders and their related interests must also be made on terms substantially
the same as offered, and follow credit underwriting procedures that are not less
stringent than those applied, in comparable transactions to other persons, with
prior Board approval required for certain loans. In addition, the aggregate
amount of extensions of credit by the Bank to all insiders cannot exceed the
institution's unimpaired capital and surplus. Section 22(g) places additional
restrictions on loans to executive officers of the Bank.
Restrictions on Dividends and Capital Distributions
The Bank is subject to OTS limitations on capital distributions, which
include cash dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other distributions charged to
the Bank's capital account. In general, the applicable regulation permits
specified levels of capital distributions by a savings institution that meets at
least its minimum capital requirements, so long as the OTS is provided with at
least 30 days' advance notice and has no objection to the distribution.
The OTS regulation establishes three tiers of institutions, based
primarily on their capital level. Generally, the Tier 1 group is composed of
institutions that before and after the proposed distribution meet or exceed all
applicable capital requirements and have not been informed by the OTS that they
are in need of more than normal supervision. A Tier 1 institution may make
capital distributions during any calendar year equal to the higher of (i)
38
100% of net income for the calendar year-to-date plus an amount that would
reduce by one-half its "surplus capital ratio" at the beginning of the calendar
year or (ii) 75% of net income over the previous four quarters. As applied to
the Bank, "surplus capital ratio" means the percentage by which the Bank's ratio
of total capital to assets exceeds the ratio of its capital requirement, as
modified to reflect any applicable individual minimum capital requirements
imposed upon the Bank. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its capital
requirement or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions would 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 FDICIA, the Bank would be prohibited from making
any capital distributions if, after the distribution, the Bank would have: (i) a
total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital
ratio of less than 4% or (iii) a leverage ratio of less than 4% (3% in the event
that the Bank is assigned a MACRO Rating of 1, the highest examination rating of
the OTS for savings institutions). At December 31, 1996, the Bank qualified as a
Tier 1 institution for purposes of this regulation. In June 1996, the Bank's
Board of Directors declared a dividend of $11.5 million, which was paid to the
Company in installment amounts from July to November 1996. The Bank's remaining
allowable capital distribution at December 31, 1996 was approximately $30.3
million.
Tier 2 institutions are those in compliance with their current, but not
their fully phased-in, capital requirements. Tier 2 institutions may make
distributions of up to 75% of their net income for the most recent four-quarter
period. Tier 1 and Tier 2 institutions may seek OTS approval to pay dividends
beyond these amounts.
Tier 3 institutions have capital levels below their current required
minimum levels and may not make any capital distributions without the prior
written approval of the OTS.
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 institutions must submit 30 days prior written notice to the OTS of a
proposed distribution. The OTS may object to the distribution during that 30-day
period based on safety and soundness concerns. In addition, a Tier 1 institution
deemed to be in need of more than normal supervision by the OTS may be treated
as a Tier 2 or Tier 3 institution as a result of such a determination.
Restrictions on Stock Repurchases
Pursuant to OTS regulations, the Company is prohibited from
repurchasing any shares of Common Stock from any person for three years from the
date of completion of the Conversion, except that such prohibition does not
apply to (i) a repurchase on a pro rata basis pursuant to an offer approved by
the OTS and made to all stockholders of the Company; (ii) a repurchase of
qualifying shares of a director or (iii) any other repurchase permissible under
OTS regulations. Notwithstanding the foregoing, pursuant to OTS regulations,
after one year following the Conversion, the Company may repurchase shares of
Common Stock so long as (i) the purchases are part of an open-market program not
involving more than 5% of the outstanding capital stock during a twelve month
period unless otherwise approved by the OTS; (ii) the repurchases do not cause
the Bank to become undercapitalized (see "--Prompt Corrective Action"); and
(iii) the Company provides to the OTS no later than ten days prior to the
commencement of a repurchase program written notice containing a full
description of the program to be undertaken, and such program is not disapproved
by the OTS.
Under current OTS policies, repurchases may be allowed in the period
beginning six months following the Conversion, and in amounts greater than 5% in
the second and third years following the Conversion, provided there are
circumstances that would justify such repurchases and the OTS does not object.
In June and again in December 1996, the Company announced its intention to
repurchase up to 1,126,038 shares in the aggregate, representing approximately
13% of the Company's outstanding shares of Common Stock, in open market
transactions. The requisite approvals for these repurchase programs were
obtained from the OTS. All stock repurchases are subject to market conditions,
the trading price of the stock, and the Company's financial performance. As of
December 31, 1996, the Company had repurchased 667,650 shares of Common Stock at
a cost of $12.2 million, leaving 458,388 shares to repurchased under the
repurchase programs. The Company's total shares of Common Stock outstanding at
December 31, 1996 were 8,250,497.
39
Federal Home Loan Bank System
In connection with converting to a federal charter, the Bank became a
member of the FHLB-NY, which is one of 12 regional FHLBs governed and regulated
by the Federal Housing Finance Board. Each FHLB serves as a source of liquidity
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by its Board of Directors.
As a member, the Bank is required to purchase and maintain stock in the
FHLB-NY in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. Pursuant to this
requirement, at December 31, 1996, the Bank was required to maintain $4.2
million of FHLB-NY stock. The Bank was in compliance with this requirement at
that time.
The FHLBs are required to provide funds for the resolution of the
savings and loan problem that occurred in the 1980's, and to contribute to
affordable housing programs through direct loans or interest subsidies on
advances targeted for community investment and low-income and moderate-income
housing projects. These contributions have adversely affected the level of FHLB
dividends paid and could continue to do so in the future. These contributions
also could have an adverse effect on the value of FHLB stock in the future.
Assessments
Savings institutions are required by OTS regulations to pay assessments
to the OTS to fund the operations of the OTS. The general assessment, paid on a
quarterly or semi-annual basis, as determined from time to time by the Director
of the OTS, is computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the institution's latest quarterly
thrift financial report. Based on the average balance of the Bank's total assets
for the year ended December 31, 1996, the Bank's OTS assessments were $143,000
for that period.
Branching
In April 1992, the OTS amended its rule on branching by federally
chartered savings associations to permit nationwide branching to the extent
allowed by federal statute. This permits federal savings associations to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings associations.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, the Bank has a continuing and affirmative obligation, consistent
with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by the institution. The CRA also
requires all institutions to make public disclosure of their CRA ratings. The
Bank received a CRA rating of "2" in its most recent CRA examination which was
conducted by the OTS in December 1994. Under OTS regulations, a CRA rating of
"2" is the second highest rating available on a scale from "1" to "4" with "1"
being assigned to institutions that have an outstanding record of meeting
community credit needs and "4" being assigned to institutions that are in
substantial noncompliance in meeting community credit needs. An institution that
receives a "2" is considered to have a satisfactory record of meeting community
credit needs. Institutions that receive unsatisfactory ratings (i.e., "3" or
"4") may face difficulties in securing approval for new activities or
acquisitions.
40
In April 1995, the OTS and the other federal banking agencies adopted
amendments to their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its service areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefiting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices.
Brokered Deposits
The FDIC has promulgated regulations implementing the FDICIA
limitations on brokered deposits. Under the regulations, well-capitalized
institutions are not subject to brokered deposit limitations, while adequately
capitalized institutions are able to accept, renew or roll over brokered
deposits only (i) with a waiver from the FDIC and (ii) subject to the limitation
that they do not pay an effective yield on any such deposit which exceeds by
more than (a) 75 basis points the effective yield paid on deposits of comparable
size and maturity in such institution's normal market area for deposits accepted
in its normal market area or (b) 120 basis points for retail deposits and 130
basis points for wholesale deposits accepted outside the institution's normal
market area, respectively, from the current yield on comparable maturity U.S.
Treasury obligations. Undercapitalized institutions are not permitted to accept
brokered deposits and may not solicit deposits by offering an effective yield
that exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in the institution's normal market area
or in the market area in which such deposits are being solicited. Pursuant to
the regulation, the Bank, as a well-capitalized institution, may accept brokered
deposits. The Bank did not have any brokered deposits outstanding as of December
31, 1996.
Capital Requirements
General. The Bank is required to maintain minimum levels of regulatory
capital. Since FIRREA, capital requirements established by the OTS generally
must be no less stringent than the capital requirements applicable to national
banks. The OTS also is authorized to impose capital requirements in excess of
these standards on a case-by-case basis.
Any institution that fails any of its applicable capital requirements
is subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions. See "--Prompt Corrective
Action."
The OTS' capital regulations create three capital requirements: a
tangible capital requirement, a leverage or core capital requirement and a
risk-based capital requirement. At December 31, 1996, the Bank's capital levels
exceeded applicable OTS capital requirements. The three OTS capital requirements
are described below.
Tangible Capital Requirement. Under current OTS regulations, each
savings institution must maintain tangible capital equal to at least 1.50% of
its adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At December 31, 1996, the Bank
had no intangible assets or purchased mortgage servicing rights. At that date,
to the Bank's tangible capital ratio was 12.67%.
In calculating adjusted total assets, adjustments are made to total
assets to give effect to the exclusion of certain assets from capital and to
appropriately account for the investments in and assets of both includable and
non-includable subsidiaries.
41
Core Capital Requirement. The current OTS core capital requirement
ranges between 3% and 5% of adjusted total assets. Savings institutions that
receive the highest supervisory rating for safety and soundness are required to
maintain a minimum core capital ratio of 3%, while the capital floor for all
other savings institutions generally ranges from 4% to 5%, as determined by the
OTS on a case by case basis. Core capital includes common stockholders' equity
(including retained income), non-cumulative perpetual preferred stock and
related surplus, minority interest in the equity accounts of fully consolidated
subsidiaries and (subject to phase-out) qualifying supervisory goodwill. The
Bank has no qualifying supervisory goodwill. At December 31, 1996, the Bank's
core capital was 12.67%.
In February, 1994, the OTS adopted a final rule which limits the amount
of purchased mortgage servicing rights, together with purchased credit card
receivables, includable in core capital to 50% of such capital. At December 31,
1996, the Bank had no purchased mortgage servicing rights or purchased credit
card receivables.
Risk-Based Requirement. The risk-based capital standard adopted by the
OTS requires savings institutions to maintain a minimum ratio of total capital
to risk-weighted assets of 8%. Total capital consists of core capital, defined
above, and supplementary capital but excludes the effect of recognizing deferred
taxes based upon future income after one year. Supplementary capital consists of
certain capital instruments that do not qualify as core capital, and general
valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only in an amount equal to the amount of core capital. In
determining the risk-based capital ratios, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the risks
inherent in the type of assets. The risk weights assigned by the OTS for
significant categories of assets are (i) 0% for cash and securities issued by
the federal government or unconditionally backed by the full faith and credit of
the federal government; (ii) 20% for securities (other than equity securities)
issued by federal government sponsored agencies and mortgage-backed securities
issued by, or fully guaranteed as to principal and interest by, the FNMA or the
FHLMC, except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent
one-to-four family first lien mortgage loans and certain qualifying multi-family
mortgage loans not more than 90 days delinquent and having a loan-to-value ratio
of not more than 80% at origination unless insured to such ratio by an insurer
approved by the FNMA or the FHLMC; and (iv) 100% for all other loans and
investments, including consumer loans, commercial loans, and one-to-four family
residential real estate loans more than 90 days delinquent, and all repossessed
assets or assets more than 90 days past due. At December 31, 1996, the Bank's
risk-based capital ratio was 27.43%. Risk-based capital excludes the effect of
recognizing deferred taxes based upon future income after one year.
In 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. As a result,
such an institution may be required to maintain additional capital in order to
comply with the risk-based capital requirement. An institution with a greater
than "normal" interest rate risk is defined as an institution that would suffer
a loss of net portfolio value exceeding 2% of the estimated market value of its
assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component will be
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2%, multiplied by the market value
of its assets. The rule establishes a "lag" time between the reporting date of
the data used to calculate an institution's interest rate risk and the effective
date of each quarter's interest rate risk component. The rule also authorizes
the director of the OTS, or his designee, to waive or defer an institution's
interest rate risk component on a case-by-case basis. At December 31, 1996, the
Bank did not have more than "normal" interest rate risk and was not subject to
any deduction from total capital under this rule.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW checking
accounts) and non-personal time deposits. At December 31, 1996, the Bank was in
compliance with these requirements.
42
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements imposed by
the OTS. Because required reserves must be maintained in the form of vault cash
or a non-interest-bearing account at a Federal Reserve Bank directly or through
another bank, the effect of this reserve requirement is to reduce an
institution's earning assets. The amount of funds necessary to satisfy this
requirement has not had a material effect on the Bank's operations.
The Bank is also subject to certain regulations regarding savings
account disclosure and funds availability disclosure promulgated by the Federal
Reserve Board to implement the requirements of the Truth in Savings Act
contained in the FDICIA and the Expedited Funds Availability Act, as amended,
respectively.
Financial Reporting
The Bank is required to submit independently audited annual reports to
the FDIC and the OTS. These publicly available reports must include (a) annual
financial statements prepared in accordance with GAAP and such other disclosure
requirements as required by the FDIC or the OTS and (b) a report, signed by the
Bank's chief executive officer and chief financial officer which contains
statements about the adequacy of internal controls and compliance with
designated laws and regulations, and attestations by independent auditors
related thereto. The Bank is required to monitor the foregoing activities
through an independent audit committee.
Standards for Safety and Soundness
The FDIA Act, as amended by FDICIA and the Riegle Community Development
and Regulatory Improvement Act of 1994 ("Community Development Act"), requires
each federal bank regulatory agency to establish safety and soundness standards
for institutions under its authority. On July 10, 1995, the federal banking
agencies, including the OTS, jointly released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines took effect August 9, 1995.
The guidelines, among other things, require savings institutions to maintain
internal controls, information systems and internal audit systems that are
appropriate to the size, nature and scope of the institution's business. The
guidelines also establish general standards relating to loan documentation,
credit underwriting, interest rate risk exposure, asset growth, and
compensation, fees and benefits. Savings institutions are required to maintain
safeguards to prevent the payment of excessive compensation to an executive
officer, employee, director or principal shareholder. The OTS may determine that
a savings institution is not in compliance with the safety and soundness
guidelines and, upon doing so, may require the institution to submit an
acceptable plan to achieve compliance with the guidelines. An institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt or
request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory actions. Management believes that the Bank
currently meets the standards adopted in the interagency guidelines and does not
believe that implementation of the regulatory standards will materially affect
the Bank's operations.
Additionally, under FDICIA, as amended by the Community Development
Act, federal banking agencies are required to establish standards relating to
asset quality and earnings that the agencies determine to be appropriate. On
August 27, 1996, the federal banking agencies, including the OTS, adopted
guidelines relating to asset quality and earnings, effective October 1, 1996,
which require a savings institution to maintain systems, consistent with its
size and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets as well as to evaluate and monitor
earnings and insure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings
guidelines, as adopted by the banking agencies, will not have a material effect
on the Bank's operations.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the FDICIA, each appropriate
agency and the FDIC is required to take prompt corrective action to resolve the
problems of insured depository institutions that do not meet minimum capital
ratios. Such action must be accomplished at the least possible long-term cost to
the appropriate deposit insurance fund.
43
Effective, December 19, 1992, the federal banking agencies, including
the OTS, adopted substantially similar regulations to implement Section 38 of
the FDIA. Under the regulations, an institution is deemed to be (i) "well
capitalized" if it has total risk-based capital of 10% or more, has a Tier 1
risk-based capital ratio of 6% or more, has a Tier 1 leverage capital ratio of
5% or more and is not subject to any order or final capital directive to meet
and maintain a specific capital level for any capital measure, (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier 1
risk-based capital ratio of 4% or more and a Tier 1 leverage capital ratio of 4%
or more (3% under certain circumstances) and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is
less than 4% or a Tier 1 leverage capital ratio that is less than 4% (3% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio
that is less than 3% or a Tier 1 leverage capital ratio that is less than 3%,
and (v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2%. Section 38 of the FDIA and the
regulations promulgated thereunder also specify circumstances under which a
federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized). At
December 31, 1996, the Bank met the criteria to be considered a "well
capitalized" institution.
Pending Legislation
For a discussion of pending legislation that could impact the Company's
business and operations, see "Risk Factors -- Pending Legislation."
Company Regulation
The Company is a non-diversified unitary savings and loan holding
company within the meaning of HOLA, is required to register with the OTS and is
subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and any non-savings institution subsidiaries it later forms or acquires. Among
other things, this authority permits the OTS to restrict or prohibit activities
that it determines pose a serious risk to the Bank. The Bank must notify the OTS
30 days before declaring any dividend to the Company.
HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by HOLA;
or acquiring or retaining control of a depository institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings institutions, the OTS will consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
As a unitary savings and loan holding company, the Company currently is
not restricted as to the types of business activities in which it may engage,
provided that the Bank continues to meet the QTL test. See "--Qualified Thrift
Lender Test" and "Risk Factors--Pending Legislation." Upon any non-supervisory
acquisition by the Company of another savings association or savings bank that
meets the QTL test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. HOLA limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Company
Act, subject to the prior approval of the OTS, and activities authorized by OTS
regulation.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval
44
of interstate supervisory acquisitions by savings and loan holding companies,
and (ii) the acquisition of a savings institution in another state if the laws
of the state of the target savings institution specifically permit such
acquisitions. Under New York law, reciprocal interstate acquisitions are
authorized for savings and loan holding companies and savings institutions.
Certain states do not authorize interstate acquisitions under any circumstances;
however, federal law authorizing acquisitions in supervisory cases preempts such
state law.
Federal law generally provides that no "person" acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
In addition, federal regulations governing conversions of mutual
savings institutions to the stock form of organization prohibit the direct or
indirect acquisition without prior OTS approval of more than 10% of any class of
equity security of a savings institution within three years of the savings
institution's conversion to stock form. This limitation applies to acquisitions
of equity securities of the Company. Such acquisition may be disapproved if it
is found, among other things, that the proposed acquisition (a) would frustrate
the purposes of the provisions of the regulations regarding conversions, (b)
would be manipulative or deceptive, (c) would subvert the fairness of the
Conversion, (d) would be likely to result in injury to the savings institution,
(e) would not be consistent with economical home financing, (f) would otherwise
violate law or regulation, or (g) would not contribute to the prudent deployment
of the savings institution's conversion proceeds.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information and reporting requirements,
regulations governing proxy solicitations, insider trading restrictions and
other requirements applicable to companies whose stock is registered under the
Exchange Act.
Item 2. Properties.
The Bank conducts its business through seven full-service offices. The
Bank's main office is located at 144-51 Northern Boulevard, Flushing, New York.
The Bank believes that its current facilities are adequate to meet the present
and immediately foreseeable needs of the Bank and the Company.
Leased or Date Leased Lease Expiration Net Book Value at
Office Owned or Acquired Date December 31, 1996
- --------------------------------- --------- ----------- ---------------- -----------------
Main Office
144-51 Northern Blvd. owned 1972 NA $1,145,000
Flushing, NY 11354..............
Broadway Branch
159-18 Northern Blvd. owned 1962 NA 569,000
Flushing, NY 11358..............
Auburndale Branch
188-08 Hollis Court Blvd. owned 1991 NA 807,295
Flushing, NY 11358..............
Springfield Branch
61-54 Springfield Blvd. leased 1991 11/30/2001 --
Bayside, NY 11364...............
45
Leased or Date Leased Lease Expiration Net Book Value at
Office Owned or Acquired Date December 31, 1996
- --------------------------------- --------- ----------- ---------------- -----------------
Bay Ridge Branch
7102 Third Avenue owned 1991 NA 326,575
Brooklyn, NY 11209..............
Irving Place Branch
33 Irving Place leased 1991 11/30/2001 67,306
New York, NY 10003..............
New Hyde Park Branch
661 Hillside Avenue leased 1971 12/31/2012 20,863
New Hyde Park, NY 11040.........
Item 3. Legal Proceedings.
The Bank is involved in various legal actions arising in the ordinary
course of its business which, in the aggregate, involve amounts which are
believed by management to be immaterial to the financial condition and results
of operations of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Flushing Financial Corporation common stock is traded on the Nasdaq
National Market and quoted under the symbol "FFIC".
Information regarding Flushing Financial Corporation common stock and
its price for the 1996 fiscal year appears on the back cover page of the Annual
Report under the caption "Market Price of Common Stock" and is incorporated
herein by this reference.
As of February 28, 1997, Flushing Financial Corporation had
approximately 1,072 stockholders of record, not including the number of persons
or entities holding stock in nominee or street name through various brokers and
banks.
In September 1996, the Board of Directors of the Company adopted a
dividend policy to pay an annual dividend of $0.16 per share of Common Stock,
payable in equal quarterly installments, should the earnings of the Company
warrant. In accordance with this policy, dividends were paid in 1996 as follows:
Declaration Date Record Date Payment Date
---------------- ----------- ------------
September 17, 1996 September 30, 1996 October 15, 1996
November 26, 1996 December 12, 1996 December 27, 1996
The Company's dividend policy may change from time to time. Changes in
the Company's dividend policy will depend upon a number of factors, including
the investment and business opportunities available to the Company and the Bank,
capital requirements of the Bank, regulatory requirements, the Bank's and the
Company's financial condition and results of operations, tax considerations and
general economic conditions. No assurance can be given that the declaration and
payment of dividends will continue.
In June and again in December 1996, the Company announced its intention
to repurchase up to 1,126,038 shares in the aggregate, representing
approximately 13% of the Company's outstanding shares of Common Stock, in open
market transactions. The requisite approvals for these repurchase programs were
obtained from the OTS.
46
As of December 31, 1996, the Company had repurchased 667,650 shares of Common
Stock at a cost of $12.2 million, leaving 458,388 shares to repurchased under
the repurchase programs. The Company's total shares of Common Stock outstanding
at December 31, 1996 were 8,250,497.
Item 6. Selected Financial Data.
Information regarding selected financial data appears on pages 5 and 6
of the Annual Report under the caption "Selected Financial Data" and is
incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 7 through 16 of the Annual
Report under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is incorporated herein by this
reference.
Item 8. Financial Statements and Supplementary Data.
Information regarding the financial statements and the Independent
Auditor's Report appears on pages 17 through 40 of the Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding the directors and executive officers of the
Company appears in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 29, 1997 under the captions "Board Nominees",
"Continuing Directors" and "Executive Officers Who Are Not Directors" and is
incorporated herein by this reference.
Item 11. Executive Compensation.
Information regarding executive compensation appears in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held April 29, 1997
under the caption "Executive Compensation" and is incorporated herein by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding security ownership of certain beneficial owners
appears in the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 29, 1997 under the caption "Stock Ownership of Certain
Beneficial Owners" and is incorporated herein by this reference.
Information regarding security ownership of management appears on in
the Company's Proxy Statement for the Annual Meeting of Shareholders to be held
April 29, 1997 under the caption "Stock Ownership of Management" and is
incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions
appears in the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on April 29, 1997 under the caption "Certain Transactions" and is
incorporated herein by this reference.
47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
The following financial statements are included in the Company's Annual
Report to Shareholders for the year ended December 31, 1996 and are incorporated
herein by this reference:
o Consolidated Statements of Condition at December 31, 1995 and
1996
o Consolidated Statements of Operations for each of the years in
the three-year period ended December 31, 1996
o Consolidated Statements of Changes in Stockholders' Equity for
each of the years in the three-year period ended December 31,
1996
o Consolidated Statements of Cash Flows for each of the years in
the three year period ended December 31, 1996
o Notes to Consolidated Financial Statements
o Report of Independent Accountants
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as a part of this report, except as
expressly provided herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of fiscal 1996
None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
- ------
3.1 Articles of Incorporation of Flushing Financial Corporation (1)
3.2 By-Laws of Flushing Financial Corporation (1)
10.1 Annual Incentive Plan for Selected Officers (1)
10.2 Employment Agreements between Flushing Savings Bank, FSB and Certain Officers (1)
10.3 Employment Agreements between Flushing Financial Corporation and Certain Officers (2)
10.3(a) Amendment No. 1 to Employment Agreement between Flushing Financial Corporation and Michael
J. Hegarty (3)
10.3(b) Amendment to Employment Agreement between Flushing Financial Corporation and Certain
Officers (including Michael J. Hegarty) (3)
10.3(c) Amendment No. 3 to Employment Agreement between Flushing Financial Corporation and Michael
J. Hegarty, and Amendemnt No. 2 to Employment Agreement between Flushing Savings Bank, FSB
and Michael J. Hegarty (4)
10.4 Special Termination Agreements (2)
10.5 Employee Severance Compensation Plan of Flushing Savings Bank, FSB (1)
10.6(a) Outside Director Retirement Plan (2)
48
Exhibit
Number
- ------
10.6(b) Flushing Savings Bank, FSB Outside Director Deferred Compensation Plan (2)
10.7 Flushing Savings Bank, FSB Supplemental Savings Incentive Plan (1)
10.8 Form of Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial
Corporation, and each Director (1)
10.8(a) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and
each Director (3)
10.8(b) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and
Certain Officers (3)
10.9 Employee Benefit Trust Agreement (1)
10.10 Loan Document for Employee Benefit Trust (1)
10.11 Guarantee by Flushing Financial Corporation (1)
10.12 Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial Corporation and
Gerard P. Tully, Sr.
13.1 1996 Annual Report to Shareholders
22.1 Subsidiaries information incorporated herein by reference to Part I - Subsidiary Activities
23.1 Consent of Independent Accountants
27 Financial Data Schedule
99.1 Proxy Statement for the Annual Meeting of Shareholders to be held on April 29, 1997,
portions of which are incorporated herein by reference.
(1) Incorporated by reference to Exhibits filed with the Registration
Statement on Form S-1, Registration No. 33-96488.
(2) Incorporated by reference to Exhibits filed with the Company's Report
on Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to Exhibits filed with the Company's Report
of Form 10-Q for the quarter ended September 30, 1996.
(4) These amendments are contained in a single document entitled "Amendment
Agreement No. 3", filed with this Report.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the Company has duly caused this report, or amendment
thereto, to be signed on its behalf by the undersigned, thereunto duly
authorized, in New York, New York, on March 28, 1997.
FLUSHING FINANCIAL CORPORATION
By /s/ JAMES F. MCCONNELL
-----------------------------
James F. McConnell
President
POWER OF ATTORNEY
We, the undersigned directors and officers of Flushing Financial
Corporation (the "Company") hereby severally constitute and appoint James F.
McConnell and Monica C. Passick as our true and lawful attorneys and agents,
each acting alone and with full power of substitution and re-substitution, to do
any and all things in our names in the capacities indicated below which said
James F. McConnell or Monica C. Passick may deem necessary or advisable to
enable the Company to comply with the Securities Exchange Act of 1934, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the report on Form 10K, or amendment thereto, including
specifically, but not limited to, power and authority to sign for us in our
names in the capacities indicated below the report on Form 10-K, or amendment
thereto; and we hereby approve, ratify and confirm all that said James F.
McConnell or Monica C. Passick shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K, or amendment thereto, has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ JAMES F. MCCONNELL Director, President (Principal Executive March 28, 1997
- ---------------------------------------- Officer)
James F. McConnell
/s/ GERARD P. TULLY, SR. Director, Chairman March 28, 1997
- ----------------------------------------
Gerard P. Tully, Sr.
/s/ MONICA C. PASSICK Treasurer (Principal Financial and March 28, 1997
- ------------------------------- Accounting Officer)
Monica C. Passick
/s/ ROBERT A. MARANI Director March 28, 1997
- -------------------------------
Robert A. Marani
/s/ JOHN O. MEAD Director March 28, 1997
- ----------------------------------------
John O. Mead
/s/ MICHAEL J. HEGARTY Director March 28, 1997
- ----------------------------------------
Michael J. Hegarty
/s/ FRANKLIN F. REGAN, JR. Director March 28, 1997
- ----------------------------------------
Franklin F. Regan, Jr.
/s/ JOE E. ROE, SR. Director March 28, 1997
- ----------------------------------------
Joe E. Roe, Sr.
/s/ MICHAEL J. RUSSO Director March 28, 1997
- -------------------------------
Michael J. Russo
/s/ JOHN M. GLEASON Director March 28, 1997
- ----------------------------------------
John M. Gleason
/s/ VINCENT F. NICOLOSI Director March 28, 1997
- ----------------------------------------
Vincent F. Nicolosi