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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, 1997
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. X Yes 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, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $165,089,000. 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 30 1998, the last trading date in
January 1998, which was $22.938.
The number of shares of the registrant's Common Stock outstanding as of
January 31, 1998 was 7,826,120 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1997 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 May 20, 1998 are incorporated herein by reference in
Part III.
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business....................................................... 1
General ....................................................... 1
Market Area and Competition.................................... 2
Lending Activities............................................. 3
Loan Portfolio Composition................................. 3
Loan Maturity and Repricing................................ 7
One-to-Four Family Mortgage Lending........................ 7
Home Equity Loans.......................................... 9
Multi-Family Lending....................................... 9
Commercial Real Estate Lending............................. 10
Construction Loans......................................... 10
Small Business Administration Lending...................... 11
Consumer and Other Lending................................. 11
Loan Approval Procedures and Authority..................... 11
Loan Concentrations........................................ 12
Loan Servicing............................................. 12
Asset Quality.................................................. 12
Loan Collection............................................ 12
Delinquent Loans and Non-performing Assets................. 14
REO........................................................ 15
Classified and Special Mention Assets...................... 16
Allowance for Loan Losses...................................... 17
Investment Activities.......................................... 21
General.................................................... 21
Mortgage-backed securities................................. 22
Sources of Funds............................................... 25
General.................................................... 25
Deposits................................................... 25
Borrowings................................................. 28
Subsidiary Activities.......................................... 29
Personnel...................................................... 30
RISK FACTORS
Effect of Interest Rates....................................... 31
Lending Activities............................................. 31
Local Economic Conditions...................................... 32
Pending Legislation............................................ 32
Legislation and Proposed Changes............................... 33
Certain Anti-Takeover Provisions............................... 33
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation............................................... 34
General.................................................... 34
(i)
TABLE OF CONTENTS
(CONTINUED)
PAGE
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Bad Debt Reserves.......................................... 34
Distributions.............................................. 35
Corporate Alternative Minimum Tax.......................... 35
State and Local Taxation....................................... 35
New York State and New York City Taxation.................. 35
REGULATION
General........................................................ 37
Investment Powers.............................................. 37
Real Estate Lending Standards.................................. 38
Loans-to-One Borrower Limits................................... 38
Insurance of Accounts.......................................... 38
Liquidity Requirements......................................... 40
Qualified Thrift Lender Test................................... 40
Transactions with Affiliates................................... 41
Restrictions on Dividends and Capital Distributions............ 41
Restrictions on Stock Repurchases.............................. 42
Federal Home Loan Bank System.................................. 43
Assessments.................................................... 43
Branching...................................................... 43
Community Reinvestment......................................... 43
Year 2000 Compliance........................................... 44
Brokered Deposits.............................................. 44
Capital Requirements........................................... 44
General.................................................... 44
Tangible Capital Requirement............................... 45
Core Capital Requirement................................... 45
Risk-Based Requirement..................................... 45
Federal Reserve System......................................... 46
Financial Reporting............................................ 46
Standards for Safety and Soundness............................. 46
Prompt Corrective Action....................................... 47
Pending Legislation............................................ 47
Company Regulation............................................. 48
Federal Securities Laws........................................ 49
Item 2. Properties..................................................... 50
Item 3. Legal Proceedings.............................................. 50
Item 4. Submission of Matters to a Vote of Security Holders............ 50
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................ 51
Item 6. Selected Financial Data........................................ 51
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 51
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.................................................... 52
Item 8. Financial Statements and Supplementary Data.................... 52
(ii)
TABLE OF CONTENTS
(CONTINUED)
PAGE
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Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant............. 53
Item 11. Executive Compensation......................................... 53
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................. 53
Item 13. Certain Relationships and Related Transactions................. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 54
(a) 1. Financial Statements.................................... 54
2. Financial Statement Schedules........................... 54
(b) Reports on Form 8-K filed during the last quarter
of fiscal 1997............................................. 54
(c) Exhibits Required by Securities and Exchange
Commission Regulation S-K.................................. 54
SIGNATURES
POWER OF ATTORNEY
(iii)
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. Flushing Financial
Corporation's common stock is traded on the Nasdaq National Market under the
symbol "FFIC".
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 financial institutions and branches of other financial
institutions, and will pursue growth through acquisitions that are, or are
expected to be within a reasonable time-frame, accretive to earnings, as
opportunities arise. 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, 1997, the Bank's QTL Ratio was 92.20%, 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."
1
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.
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,
1997 the Company had total assets of $1.1 billion.
The Bank'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 multi-family
income-producing property loans, commercial real estate loans and
one-to-four-family residential mortgage 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 Bank originates certain other loans, including
construction loans and Small Business Administration loans. At December 31,
1997, the Bank had loans receivable, net of allowance for loan losses and
unearned income, of $598.4 million, representing approximately 54.99% of the
Company's total assets, and held mortgage-backed securities with a carrying
value of $217.1 million, representing approximately 19.95% of the Company's
total assets. The Bank'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 Bank's
primary sources of funds are deposits, Federal Home Loan Bank-New York
("FHLB-NY") borrowings, 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.
On September 9, 1997, the Company acquired New York Federal Savings Bank
("New York Federal") and merged it with the Bank in a cash transaction valued at
approximately $13 million. This acquisition is immediately accretive to the
Company's earnings and is accounted for under the purchase method of accounting.
With this purchase, the Bank acquired $75.1 million in real estate loans, $2.0
million in Small Business Administration loans and $48.4 million in deposits.
In November of 1997, the Bank established a wholly owned real estate
investment trust subsidiary, Flushing Preferred Funding Corporation ("FPFC"),
and transferred $256.7 million in real estate loans from the Bank to FPFC. The
assets transferred to FPFC are viewed by regulators as part of the Bank's assets
in consolidation. However, the establishment of FPFC provides an additional
vehicle for access by the Company to the capital markets for future investment
opportunities. In addition, under current law, all income earned by FPFC
distributed to the Bank in the form of a dividend has the effect of reducing the
Company's New York State and New York City income tax expense.
During the first quarter of 1998, the Bank formed a service corporation to
market insurance products and mutual funds. The insurance products and mutual
funds sold are products of unrelated insurance and securities firms from which
the service corporation earns a commission. Management is currently reviewing
the profitability potential of various new products to further extend the
Bank's product lines and market.
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
2
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
multi-family loans, commercial real estate loans and one-to-four family
residential mortgage 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, 1997 (the "Annual Report"), incorporated
herein by reference.
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,
construction loans, Small Business Administration loans and consumer loans. At
December 31, 1997 the Bank had gross loans outstanding of $606.7 million (before
reserves and unearned income), of which $301.3 million, or 49.66%, were
one-to-four family residential mortgage loans (including $17.5 million of
condominium loans, and $6.2 million of home equity loans). Of the one-to-four
family residential loans outstanding on that date, 67.60% were ARM loans and
32.40% were fixed-rate loans. At December 31, 1997, multi-family loans totaled
$230.2 million, or 37.95% of gross loans, commercial real estate loans totaled
$68.2 million, or 11.24%, construction loans totaled $2.8 million, or 0.46%,
Small Business Administration loans totaled $2.8 million, or 0.46%, and consumer
loans totaled $1.4 million, or 0.23% of gross loans.
The Bank has traditionally emphasized the origination and acquisition of
one-to-four family residential mortgage loans, which include adjustable rate
mortgage ("ARM") loans, fixed rate mortgage loans and home equity loans.
However, in recent years, the Bank has also placed emphasis on multi-family and
commercial real estate loans. The Bank expects to continue its emphasis on
multi-family and commercial real estate loans as well as on one-to-four family
residential mortgage loans. From December 31, 1996 to December 31, 1997,
one-to-four-family residential mortgage loans increased $64.8 million, or
27.41%, multi-family loans increased $125.4 million, or 119.54%, and commercial
loans increased $21.5 million, or 46.01%. Fully underwritten one-to-four family
residential mortgage loans are considered by the banking
3
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 credit risk than fully underwritten one-to-four family residential
mortgage loans. The Bank's strategy to emphasize multi-family and commercial
real estate loans can be expected to increase the overall level of credit risk
inherent in the Bank's loan portfolio. The greater risk associated with
multi-family and commercial real estate 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 in excess of the allowance currently maintained by the
Bank.
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.
4
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated.
AT DECEMBER 31,
1997 1996 1995 1994 1993
----------------- ------------------ ------------------- ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
(DOLLARS IN THOUSANDS)
Mortgage loans:
One-to-four family...... $289,286 47.67% $223,273 57.28% $155,435 54.20% $133,006 51.39% $134,967 51.61%
Co-operative................ 12,065 1.99 13,245 3.40 14,653 5.11 16,155 6.24 17,098 6.54
Multi-family ................... 230,229 37.95 104,870 26.91 69,140 24.11 56,559 21.85 49,459 18.91
Commercial ..................... 68,182 11.24 46,698 11.98 45,215 15.77 49,512 19.13 54,310 20.77
Construction ................... 2,797 0.46 -- -- -- -- 364 0.14 1,891 0.72
---------------- ---------------- ------------------ ---------------- ----------------
Gross mortgage loans ........... 602,559 99.31 388,086 99.57 284,443 99.19 255,596 98.75 257,725 98.55
Small Business Administration.... 2,789 0.46 -- -- -- -- -- -- -- --
Other loans...................... 1,385 0.23 1,680 0.43 2,328 0.81 3,231 1.25 3,791 1.45
---------------- ---------------- ------------------ ---------------- ----------------
Gross loans..................... 606,733 100.00% 389,766 100.00% 286,771 100.00% 258,827 100.00% 261,516 100.00%
====== ====== ====== ====== ======
Less:
Unearned income, unamortized
discounts, and deferred
loan fees, net.................. (1,838) (1,548) (1,335) (1,341) (1,202)
Allowance for loan losses........ (6,474) (5,437) (5,310) (5,370) (5,723)
-------- -------- -------- -------- --------
Loans, net $598,421 $382,781 $280,126 $252,116 $254,591
======== ======== ======== ======== ========
One-to-four family residential loans also include home equity and
condominium loans. At December 31, 1997 gross home equity loans totaled
$6.2 million and condominium loans totaled $17.5 million.
Excludes loans available for sale of $5.6 million at December 31, 1993.
Consists of loans secured by shares representing interests in individual
co-operative units that are generally owner occupied.
5
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,
----------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
MORTGAGE LOANS:
At beginning of year............................ $388,086 $284,443 $255,596
Mortgage loans originated:
One-to-four family....................... 42,756 51,309 19,298
Co-operative................................. 475 76 140
Multi-family................................. 79,976 43,184 19,162
Commercial................................... 17,121 7,501 2,144
Construction................................. 3,016 -- --
-------- -------- --------
Total mortgage loans originated........... 143,344 102,070 40,744
-------- -------- --------
Acquired loans:
Loans purchased.......................... 49,965 39,873 18,766
Acquired NY Federal 1-4 family loans ........ 901 -- --
Acquired NY Federal multi-family loans ...... 62,405 -- --
Acquired NY Federal commercial loans ........ 11,717 -- --
-------- -------- --------
Total acquired loans...................... 124,988 39,873 18,766
-------- -------- --------
Less:
Principal reductions......................... 53,416 37,150 29,384
Mortgage loans sold...................... -- -- 626
Loans securitized............................ -- -- --
Mortgage loan foreclosures................... 443 1,150 653
-------- -------- --------
At end of year.................................. $602,559 $388,086 $284,443
-------- -------- --------
OTHER LOANS:
At beginning of year............................ $1,680 $2,328 $3,231
Acquired NY Federal Small Business 2,029 -- --
Administration loans.........................
Net bank activity............................... 466 (648) (903)
-------- -------- --------
At end of year.................................. $4,175 $1,680 $2,328
======== ======== ========
Includes mortgage loans originated for sale in the secondary market.
For a description of the Bank's loan purchase activity, see "--One-to-Four
Family Mortgage Lending."
6
LOAN MATURITY AND REPRICING. The following table sets forth at December 31,
1997, the dollar amount of all loans held in the Bank's portfolio that is due
after December 31, 1998, 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, 1998
---------------------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
Mortgage loans:
One-to-four family....................... $115,446 $115,619 $231,065
Co-operative............................. 5,154 3,769 8,923
Multi-family............................. 31,059 182,427 213,486
Commercial............................... 20,560 37,986 58,546
Small Business Administration loans......... -- 1,772 1,772
Other loans................................. 936 -- 936
-------- -------- --------
Total loans................................. $173,155 $341,573 $514,728
======== ======== ========
The following table shows the maturity or period to repricing of the Bank's
loan portfolio at December 31, 1997. 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 $53.4 million for the year ended December 31, 1997.
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, 1997
--------------------------------------------------------------------------------------------------
MORTGAGE LOANS OTHER LOANS
------------------------------------------------------- ---------------------
ONE-TO- MULTI- TOTAL LOANS
FOUR FAMILY CO-OPERATIVE FAMILY COMMERCIAL SBA CONSUMER RECEIVABLE
----------- ------------ -------- ---------- -------- -------- -----------
(IN THOUSANDS)
Amounts due:
Within one year $ 56,324 $ 3,142 $ 16,743 $11,921 $1,017 $ 401 $ 89,548
-------- ------- -------- ------- ------ ------ --------
After one year:
One to two years 39,725 2,652 30,920 10,491 703 402 84,893
Two to three years 44,771 2,126 24,414 10,349 702 351 82,713
Three to five years 85,585 674 6,755 16,202 293 102 109,611
Five to ten years 48,590 3,387 68,466 13,378 74 81 133,976
Over ten years 12,394 84 82,931 8,126 -- -- 103,535
-------- ------- -------- ------- ------ ------ --------
Total due after one year 231,065 8,923 213,486 58,546 1,772 936 514,728
-------- ------- -------- ------- ------ ------ --------
Total amounts due $287,389 $12,065 $230,229 $70,467 $2,789 $1,337 $604,276
======== ======= ======== ======= ====== ====== ========
Excludes $2.5 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
7
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
$650,000. 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, the Bank has 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. 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. During 1997, through these
relationships, the Bank purchased $50.0 million in one-to-four family mortgage
loans, as compared to $39.9 million in 1996 and $11.6 million during 1995. 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 1997 or 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.
Traditionally, residential mortgage loans originated by the Bank have been
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
with increasing frequency, the Bank originates 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
75% 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.
The Bank originated $26.6 million and $19.0 million in loans of this type during
1997 and 1996, respectively.
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.
Fixed rate 30-year residential mortgage loans will for the most part be granted
when they can be packaged and sold in the secondary market. However, a small
amount may be retained in portfolio to provide flexibility in the management of
the Company's interest rate sensitivity position. The Bank had originated $4.7
million 30-year fixed rate residential mortgage loans in 1997, and none in 1996.
The Bank offers ARM loans with adjustment periods of one, three, five,
seven or ten years. 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
8
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 $21.6 million and $29.8
million, respectively, during 1997 and $34.0 million and $32.0 million,
respectively, during 1996. At December 31, 1997, $203.7 million, or 67.60%, of
the Bank's residential mortgage loans, consisted of ARM loans.
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 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.
However, this potential risk is lessened by the Bank's policy of originating ARM
loans with annual and lifetime interest rate caps that limits the increase of a
borrower's monthly payment. 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" on which interest only is due for
an initial term of 10 years and thereafter principal and interest payments
sufficient to liquidate the loan are required for the remaining term, not to
exceed 20 years. 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 80% 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 from $25,000 to $100,000. The
underwriting standards for home equity loans are substantially the same as those
for residential mortgage loans. At December 31, 1997, home equity loans totaled
$6.2 million, or 1.03%, of gross loans.
MULTI-FAMILY LENDING. Loans secured by multi-family income producing
properties (including mixed-use properties) constituted approximately $230.2
million, or 37.95%, of gross loans at December 31, 1997, 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 $508,156 at December 31,
1997, and the largest multi-family loan held in the Bank's portfolio had a
principal balance of $6.0 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 1% is typically charged on multi-family
loans.
9
In underwriting multi-family 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. Multi-family 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 multi-family income producing property 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.
Furthermore, the repayment of loans secured by multi-family income producing
property 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 multi-family income
producing property 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."
COMMERCIAL REAL ESTATE LENDING. Loans secured by commercial real estate
constituted approximately $68.2 million, or 11.24%, of the Bank's gross loans at
December 31, 1997. 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, 1997, 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
$458,493, and the largest of such loans, which was secured by a shopping center,
had a principal balance of $3.5 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 1% is
typically charged on all commercial real estate loans.
In underwriting commercial real estate loans, the Bank employs the same
underwriting standards and procedures as are employed in underwriting
multi-family loans.
Commercial real estate 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 multi-family loans.
CONSTRUCTION LOANS. The Bank's construction loans primarily have been made
to finance the construction of one-to-four family residential properties and
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 maintains a first lien position. Construction
loans outstanding at December 31, 1997 totaled $2.8 million, or 0.46% of gross
loans. The Bank had no construction loans outstanding at December 31, 1996.
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
10
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.
SMALL BUSINESS ADMINISTRATION LENDING. With the purchase of New York
Federal on September 9, 1997, the Company entered into the Small Business
Administration lending ("SBA") market. These loans are extended to small
businesses and are guaranteed by the Small Business Administration at 80% of the
loan balance for loans with balances of $100,000 or less, and at 75% of the loan
balance for loans with balances greater than $100,000. All SBA loans are
underwritten in accordance with SBA Standard Operating Procedures and the Bank
generally obtains personal guarantees and collateral, where applicable, from SBA
borrowers. Typically, SBA loans are originated at a range of $50,000 to $1.0
million with terms ranging from five to 25 years. SBA loans are generally
offered at adjustable rates tied to the prime rate with adjustment periods of
one to three months. The Bank generally sells the guaranteed portion of the SBA
loan in the secondary market and retains servicing of at least 1% of the monthly
interest payment. At December 31, 1997, SBA loans totaled $2.8 million,
representing 0.46% of gross loans.
CONSUMER AND OTHER LENDING. From time to time the Bank may originate other
loans for personal, family or household purposes. These loans 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, 1997 amounted to $1.4 million, or 0.23%, 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. All student loans
are sold by the Bank 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 collateral,
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.
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 $600,000 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
11
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, 1997, 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
multi-family income producing properties with an aggregate principal balance of
$14.1 million, $6.5 million and $6.0 million for each of the three borrowers.
LOAN SERVICING. At December 31, 1997, loans aggregating $51.8 million were
being serviced for others by the Bank. The Bank's policy is to retain the
servicing rights to the mortgage and SBA 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 real estate loan and attempt
to repossess personal or business property that secures an SBA loan, 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 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
12
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,
-------------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ----------------------------------- -----------------------------------
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... 9 $683 19 $1,897 2 $705 15 $1,835 1 $149 25 $2,276
Co-operative......... -- -- -- -- -- -- 2 32 1 53 2 109
Multi-family......... -- -- -- -- -- -- 3 505 1 441 4 2,119
Commercial........... -- -- 2 512 -- -- -- -- -- -- 3 427
Construction......... -- -- -- -- -- -- -- -- -- -- -- --
----- --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
Total mortgage
loans........... 9 683 21 2,409 2 705 20 2,372 3 643 34 4,931
Other loans.......... 4 10 15 49 3 2 6 36 2 1 5 50
----- --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
Total loans....... 13 $693 36 $2,458 5 $707 26 $2,408 5 $644 39 $4,981
===== ========= ====== ========= ====== ========= ====== ========= ====== ========= ====== =========
Delinquent loans to
gross loans....... 0.11% 0.41% 0.18% 0.62% 0.22% 1.74%
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, 1997, 1996 and 1995, the amounts of
additional interest income that would have been recorded on non-accrual loans,
had they been current, totaled $180,000, $145,000 and $344,000, respectively.
These amounts were not included in the Bank's interest income for the respective
periods.
AT DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
Non-accrual mortgage loans....................... $2,409 $2,372 $4,697 $5,234 $11,548
Other non-accrual loans.......................... 49 36 50 63 142
---------------------------------------------------------------
Total non-accrual loans...................... 2,458 2,408 4,747 5,297 11,690
Mortgage loans 90 days or more delinquent
and still accruing............................. -- -- 234 14 4
Other loans 90 days or more delinquent
and still accruing............................. -- -- -- -- 1
---------------------------------------------------------------
Total non-performing loans................... 2,458 2,408 4,981 5,311 11,695
---------------------------------------------------------------
In-substance foreclosed real estate.............. -- -- -- 372 4,772
Foreclosed real estate........................... 433 1,218 1,869 3,096 2,990
---------------------------------------------------------------
Total REO.................................... 433 1,218 1,869 3,468 7,762
---------------------------------------------------------------
Total non-performing assets.................. $2,891 $3,626 $6,850 $8,779 $19,457
================================================================
Troubled debt restructurings..................... -- -- -- $3,220 $6,029
================================================================
Non-performing loans to gross loans ......... 0.41% 0.62% 1.74% 2.05% 4.47%
Non-performing assets to total assets ....... 0.27% 0.47% 0.97% 1.48% 3.16%
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
$7.8 million at December 31, 1993 to $0.4 million at December 31, 1997. To
facilitate the sale of REO, the Bank originated three loans totaling $637,000
during 1997, and nine loans totaling $307,000 during 1996.
15
At December 31, 1997, the largest single REO property resulted from a
one-to-four family residential property with a net book value of $141,000. 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.
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
1997 1997 1997 1997
------ ---- --------- --------
(DOLLARS IN THOUSANDS)
Balance, beginning of period $1,218 $280 $316 $287
Foreclosures and other acquisitions -- 141 87 146
Less: Sales 1,031 155 180 --
Reductions (93) (50) (64) --
------ ---- ---- ----
Balance, end of period $280 $316 $287 $433
====== ==== ==== ====
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,
------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
Balance, beginning of year $281 $388 $774
Provision 150 311
Less: Reduction due to sale of ORE 207 257 697
---- ---- ----
Balance, end of year $74 $281 $388
==== ==== ====
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
16
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
"uncollectible" 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, 1997, all
payments due under the borrower's agreement were current and the net book value
of the loan was $1.4 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, 1997, the Bank had no other classified asset (or group of assets)
listed as substandard or special mention with a net book value of $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, SBA 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 collectibility is not reasonably assured. The primary risk element
considered by management with respect to each one-to-four family loan,
co-operative apartment loan, SBA loan and consumer 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."
17
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 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 $104,000, $418,000 and $496,000
for the years ended December 31, 1997, 1996 and 1995, respectively. At December
31, 1997, the total allowance for loan losses was $6.5 million, representing
263.38% of non-performing loans and 223.94% of non-performing assets, an
increase from the December 31, 1996 ratios of 225.79% and 149.94% 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
18
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,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of year $5,437 $5,310 $5,370 $5,723 $4,555
Provision for loan losses 104 418 496 246 2,522
Provision acquired from NY Federal 979 -- -- -- --
Loans charged-off:
One-to-four family 85 220 312 341 287
Co-operative 44 162 183 71 33
Multi-family -- 41 251 14 344
Commercial -- 68 260 303 716
Construction -- -- -- -- --
Other 77 44 46 65 147
------ ------ ------ ------ ------
Total loans charged-off 206 535 1,052 794 1,527
------ ------ ------ ------ ------
Recoveries:
Mortgage loans 155 244 496 195 173
Other 5 -- -- -- --
------ ------ ------ ------ ------
Total recoveries 160 244 496 195 173
------ ------ ------ ------ ------
Balance at end of year $6,474 $5,437 $5,310 $5,370 $5,723
====== ====== ====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.01% 0.09% 0.21% 0.24% 0.47%
Ratio of allowance for loan losses to
gross loans at end of year 1.07% 1.39% 1.85% 2.07% 2.19%
Ratio of allowance for loan losses to
non-performing loans at the end of year 263.38% 225.79% 106.61% 101.11% 48.94%
Ratio of allowance for loan losses to
non-performing assets at the end of year 223.94% 149.94% 77.52% 61.17% 29.41%
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,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- -------------------- -------------------- -------------------
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....... $1,711 26.42% $1,065 53.84% $1,126 54.20% $1,132 51.39% $957 51.61%
Co-operative............. 510 7.88 458 4.76 407 5.11 125 6.24 38 6.54
Multi-family............. 1,021 15.77 1,456 25.74 1,625 24.11 1,024 21.85 1,171 18.91
Commercial............... 3,073 47.47 2,434 14.96 2,139 15.77 3,070 19.13 3,507 20.77
Construction............. 128 1.98 -- -- -- -- -- 0.14 -- 0.72
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans.... 6,443 99.52 5,413 99.30 5,297 99.19 5,351 98.75 5,673 98.55
SBA loans.................. 23 0.35 -- -- -- -- -- -- -- --
Other loans................ 8 0.13 24 0.70 13 0.81 19 1.25 50 1.45
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................... $6,474 100.00% $5,437 100.00% $5,310 100.00% $5,370 100.00% $5,723 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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, 1997, the Company had $356.7 million in
securities available for sale which represented 32.78% of total assets. These
securities had an aggregate market value at that date that was approximately 2.6
times the amount of the Company's equity at that date. The cumulative balance of
unrealized gain on securities available for sale was $1.5 million, net of taxes,
at December 31, 1997. 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, 1997, 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 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,
------------------------------------------------------------------------------
1997 1996 1995
---------------------- ----------------------- -----------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE:
Bonds and other debt securities:
U.S. government and agencies.......... $120,106 $120,123 $150,045 $148,141 $116,296 $116,728
Corporate debentures.................. 13,755 14,365 37,656 38,171 77,227 78,662
Public utility........................ 2,247 2,271 4,305 4,294 6,389 6,501
-------- -------- -------- -------- -------- --------
Total bonds and other debt
securities.......................... 136,108 136,759 192,006 190,606 199,912 201,891
-------- -------- -------- -------- -------- --------
Equity securities:
Perpetual preferred stock............. 2,768 2,843 250 251 250 256
-------- -------- -------- -------- -------- --------
Total equity securities.............. 2,768 2,843 250 251 250 256
-------- -------- -------- -------- -------- --------
Mortgage-backed securities:
FHLMC................................. 34,015 34,120 47,217 46,406 61,529 61,845
FNMA.................................. 55,559 56,068 83,727 83,756 105,374 106,265
GNMA.................................. 125,585 126,922 10,973 10,876 11,354 11,190
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities..... 215,159 217,110 141,917 141,038 178,257 179,300
-------- -------- -------- -------- -------- --------
Total debt and equity securities
available for sale:................. 354,035 356,712 334,173 331,895 378,419 381,447
======== ======== ======== ======== ======== ========
INTEREST-BEARING DEPOSITS AND FEDERAL
FUNDS SOLD 84,838 84,838 27,465 27,465 7,438 7,438
FHLB - NEW YORK STOCK 14,356 14,356 4,158 4,158 3,787 3,787
-------- -------- -------- -------- -------- --------
Total debt and equity securities...... $453,229 $455,906 $365,796 $363,518 $389,644 $392,672
======== ======== ======== ======== ======== ========
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, 1997, the Company had $217.1 million invested in mortgage-backed
securities, of which $37.2 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 supplement
mortgage lending activities.
22
The following table sets forth the Company's mortgage-backed securities
purchases, sales and principal repayments for the years indicated:
FOR THE
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(IN THOUSANDS)
At beginning of year $141,038 $179,300 $174,939
Purchases of mortgage-backed securities 136,063 8,415 21,444
Amortization of unearned premium, net of
accretion of unearned discount (473) (908) (849)
Net change in unrealized gains (losses) on
mortgage-backed securities available for sale 2,830 (2,249) 9,427
Less:
Sales of mortgage-backed securities 33,934 4,742 --
Principal repayments received on mortgage-backed securities 28,414 38,778 25,661
-----------------------------------------
Net (decrease) increase in mortgage-backed securities 76,072 (38,262) 4,361
-----------------------------------------
At end of year $217,110 $141,038 $179,300
=========================================
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 and FHLMC are
weighted at 20% for risk-based capital purposes and GNMA issues are
risk-weighted at 0%, 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. The Bank held one collateralized mortgage obligation ("CMO") with a
market value of $4.5 million at December 31, 1996 and none at December 31, 1997.
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, 1997. The stratification of balances is
based on stated maturities. Assumptions for repayments and prepayments are not
reflected for mortgage-backed securities.
AT DECEMBER 31, 1997
------------------------------------------------------------------------------------------------
ONE YEAR ONE TO FIVE TO MORE THAN
OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL SECURITIES
-------------- -------------- -------------- -------------- ------------------------------------
AVERAGE
AMOR- WEIGHTED AMOR- WEIGHTED AMOR- WEIGHTED AMOR- WEIGHTED REMAINING AMOR- ESTIMATED WEIGHTED
TIZED AVERAGE TIZED AVERAGE TIZED AVERAGE TIZED AVERAGE YEARS TO TIZED MARKET AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD MATURITY COST VALUE YIELD
------ ------ ------- ------ -------- ------ ------ ------- -------- ------- -------- --------
(Dollars in thousands)
Securities available for sale:
Bonds and other debt
securities:
U.S. government agencies.... $1,105 5.65% $18,802 6.49% $95,199 6.85% $5,000 6.68% 7.29 $120,106 $120,123 6.78%
Corporate debt.............. -- -- 12,049 6.45 198 8.80 1,508 7.73 3.32 13,755 14,365 6.62
Public Utility................ 149 5.50 1,094 6.46 1,004 7.38 -- -- 3.41 2,247 2,271 6.81
------ ------ ------- ------ ------- ----- ------ ----- ------- ------- -------- ------
Total bonds and other debt
securities.................. 1,254 5.63 31,945 6.47 96,401 6.86 6,508 6.92 6.81 136,108 136,759 6.76
------ ------ ------- ------ ------- ----- ------ ----- ------- ------- -------- ------
Equity securities:
Perpetual preferred stock... -- -- 2,201 8.10 309 7.48 258 6.72 -- 2,768 2,843 7.90
------ ------ ------- ------ ------- ----- ------ ----- ------- ------- -------- ------
Total equity securities... -- -- 2,201 8.10 309 7.48 258 6.72 -- 2,768 2,843 7.90
------ ------ ------- ------ ------- ----- ------ ----- ------- ------- -------- ------
Mortgage-backed securities:
FHLMC....................... -- -- 1,156 7.50 1,527 6.75 31,332 7.62 19.30 34,015 34,120 7.58
FNMA........................ -- -- 1,589 6.37 3,185 6.77 50,785 7.38 20.07 55,559 56,068 7.32
GNMA........................ -- -- -- -- 684 7.97 124,901 7.75 29.21 125,585 126,922 7.75
------ ------ ------- ------ ------- ----- ------- ----- ------- ------- -------- ------
Total mortgage-backed
securities................ -- -- 2,745 6.85 5,396 6.92 207,018 7.64 25.29 215,159 217,110 7.61
------ ------ ------- ------ ------- ----- ------- ----- ------- ------- -------- ------
Interest-bearing deposits
and Federal funds sold...... 84,838 6.36 -- -- -- -- -- -- -- 84,838 84,838 6.36
FHLB - New York stock......... -- -- -- -- -- -- 14,356 7.05 -- 14,356 14,356 7.05
------ ------ ------- ------ ------- ----- ------- ----- ------- ------- -------- ------
Total securities.......... $86,092 6.35% $36,891 6.60% $102,106 6.86% $228,140 7.58% 14.11 $453,229 $455,906 7.11%
====== ====== ======= ====== ======= ===== ======= ===== ======= ======= ======== ======
24
SOURCES OF FUNDS
GENERAL. Deposits, FHLB-NY borrowings, principal and interest payments on
loans, mortgage-backed and other securities, and proceeds from sales of loans
and securities 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 Bank has a relatively stable retail deposit base drawn from its
market area through its seven full service offices. The Bank 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 finance its
strategies.
The Bank'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 current low interest rate environment, the
Bank experienced a shift by depositors from passbook accounts to higher costing
certificate of deposit accounts. Although the Bank has not had to raise interest
rates on its deposit accounts to remain competitive, it has had to increase
borrowing activity. These trends contributed to the increase in the Company's
higher average cost of funds from 4.39% for 1996 to 4.74% for 1997. 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, 1997, $29.9 million, or 4.55% 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,
------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- ------------------------------
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 $201,668 30.74% 2.85% $209,690 35.88% 2.86% $215,578 38.52% 2.86%
NOW accounts 23,825 3.63 1.90 21,408 3.66 1.90 19,565 3.49 1.90
Demand accounts 22,089 3.37 -- 10,293 1.76 -- 10,372 1.85 --
Mortgagors' escrow deposits 2,074 0.32 1.17 3,425 0.59 2.00 2,457 0.44 2.00
----------------------------- ----------------------------- ------------------------------
Total........................ 249,656 38.06 2.49 244,816 41.89 2.64 247,972 44.30 2.66
----------------------------- ----------------------------- ------------------------------
Money market accounts 23,526 3.59 2.84 25,180 4.31 2.81 27,590 4.93 2.81
Certificate of deposit accounts:
$100,000 or more................. 29,855 4.55 5.89 22,047 3.77 5.86 16,819 3.00 5.93
CD's original maturity of:
6 months and less............ 47,747 7.28 5.25 50,228 8.59 5.04 46,617 8.33 5.05
6 to 12 months............... 60,528 9.23 5.53 74,063 12.67 5.15 71,235 12.72 5.70
12 to 30 months.............. 97,250 14.82 5.53 86,853 14.87 6.20 71,297 12.73 6.06
30 to 48 months.............. 18,977 2.89 6.08 15,307 2.62 6.10 10,340 1.85 5.86
48 to 72 months.............. 66,684 10.18 6.40 47,079 8.05 6.10 47,445 8.47 6.25
72 months or more............ 33,083 5.04 6.65 901 0.15 5.90 929 0.17 5.90
IRA and Keogh accounts 23,604 4.36 6.10 18,005 3.08 5.54 19,620 3.50 5.89
----------------------------- ----------------------------- ------------------------------
Total........................ 382,728 58.35 5.84 314,483 53.80 5.69 284,302 50.77 5.81
----------------------------- ----------------------------- ------------------------------
Total deposits $655,910 100.00% 4.46% $584,479 100.00% 4.29% $559,864 100.00% 4.27%
============================= ============================= ==============================
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, 1997.
AT DECEMBER 31, 1997