-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nm+uOdilrZK+L09gbXjKinrEnkOXVX1QXtW3nCtBBgyvFqqWzCYFQL/TawS9yDXL azoF/SL+BWHkWLFIpj7ZUw== 0000900741-96-000019.txt : 19961115 0000900741-96-000019.hdr.sgml : 19961115 ACCESSION NUMBER: 0000900741-96-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAVEN BANCORP INC CENTRAL INDEX KEY: 0000900741 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 113153802 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21628 FILM NUMBER: 96661834 BUSINESS ADDRESS: STREET 1: 93 22 JAMAICA AVE CITY: WOODHAVEN STATE: NY ZIP: 11421 BUSINESS PHONE: 7188477041 MAIL ADDRESS: STREET 1: 93 22 JAMAICA AVE CITY: WOODHAVEN STATE: NY ZIP: 11421 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File Number: 000-21628 HAVEN BANCORP INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 11-3153802 (I.R.S. Employer Identification No.) 93-22 JAMAICA AVENUE, WOODHAVEN, NEW YORK 11421 (Address of principal executive offices) (Zip Code) (718) 847-7041 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) 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 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. There were 4,322,904 shares of the Registrant's common stock outstanding as of November 8, 1996. HAVEN BANCORP, INC. FORM 10-Q INDEX PART I - FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition as of September 30, 1996 and December 31, 1995 3 Consolidated Statements of Operations for the Three Months and Nine Months ended September 30, 1996 and 1995 4 Consolidated Statements of Changes in Stockholders' Equity for the Nine Months ended September 30, 1996 and 1995 5 Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1996 and 1995 6 Notes to Consolidated Financial Statements 7-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-36 PART II - OTHER INFORMATION Item 1. Legal Proceedings 36-37 Item 2. Changes in Securities 37 Item 3. Defaults Upon Senior Securities 37 Item 4. Submission of Matters to a Vote of Security Holders 37 Item 5. Other Information 37 Item 6. Exhibits and Reports on Form 8-K 37 Signature Page 2 HAVEN BANCORP, INC. Consolidated Statements of Financial Condition (Dollars in thousands, except for share data) (Unaudited)
September 30, December 31, 1996 1995 ------------- ------------ ASSETS Cash and due from banks $ 30,573 $ 29,790 Money market investments 2,693 9,064 Securities available for sale (note 2) 445,604 503,058 Loans held for sale 10,594 11,412 Debt securities held to maturity (estimated fair value of $96,823 and $126,811 in 1996 and 1995, respectively) (note 2) 98,307 127,796 Federal Home Loan Bank of NY stock, at cost 9,140 8,138 Mortgage-backed securities held to maturity (estimated fair value of $198,422 and $189,551 in 1996 and 1995, respectively) (note 2) 203,442 190,714 Loans: First mortgage loans 693,933 519,804 Cooperative apartment loans 9,715 10,187 Other loans 34,592 38,967 --------- --------- Total loans 738,240 568,958 Less allowance for loan losses (10,314) (8,573) --------- --------- Loans, net 727,926 560,385 Premises and equipment, net 8,183 7,590 Accrued interest receivable 10,608 10,736 Real estate owned, net 2,198 2,033 Other assets 15,429 12,100 --------- --------- Total assets $1,564,697 $1,472,816 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits 1,127,257 1,083,446 Borrowed funds 319,012 270,583 Mortgagors' escrow balances 7,686 3,227 Due to broker 0 5,000 Other liabilities 16,819 12,041 --------- --------- Total liabilities 1,470,774 1,374,297 --------- --------- Stockholders' Equity: Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued - - Common stock, $.01 par value, 10,500,000 shares authorized, 4,959,375 issued; 4,322,904 and 4,511,457 shares outstanding in 1996 and 1995, respectively 50 50 Additional paid-in capital 48,614 47,331 Retained earnings, substantially restricted 62,216 57,919 Unrealized (loss) gain on securities available for sale, net of tax effect (2,984) 2,083 Treasury stock, at cost (636,471 and 447,918 shares in 1996 and 1995, respectively) (11,080) (6,023) Unallocated common stock held by Bank's ESOP (1,938) (2,197) Unearned common stock held by Bank's Recognition Plans and Trusts (294) (644) Unearned Compensation (661) - --------- --------- Total stockholders' equity 93,923 98,519 --------- --------- Total liabilities and stockholders' equity $1,564,697 $1,472,816 ========= =========
See accompanying notes to consolidated financial statements. 3 HAVEN BANCORP, INC. Consolidated Statements of Operations (Dollars in thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Interest income: Mortgage loans $13,715 $10,788 $37,670 $30,853 Other loans 884 1,045 2,781 3,172 Mortgage-backed securities 9,575 10,242 29,617 27,186 Money market investments 40 70 139 259 Debt and equity securities 3,749 3,172 10,674 8,959 ------ ------ ------ ------ Total interest income 27,963 25,317 80,881 70,429 ------ ------ ------ ------ Interest expense: Deposits: Passbook accounts 2,342 2,479 7,027 7,717 NOW accounts 247 236 704 652 Money market accounts 482 483 1,417 964 Certificate accounts 8,274 7,686 23,987 21,573 Borrowings 4,627 3,993 12,404 9,090 ------ ------ ------ ------ Total interest expense 15,972 14,877 45,539 39,996 ------ ------ ------ ------ Net interest income before provision for loan losses 11,991 10,440 35,342 30,433 Provision for loan losses 700 700 2,475 2,000 ------ ------ ------ ------ Net interest income after provision for loan losses 11,291 9,740 32,867 28,433 ------ ------ ------ ------ Non-interest income: Loan fees and servicing income 293 270 1,517 891 Savings/checking fees 867 722 2,440 2,083 Net (loss) gain on sales of interest-earning assets (11) 122 88 122 Insurance annuity and mutual fund fees 837 685 2,329 1,769 Other 265 277 814 976 ------ ------ ------ ------ Total non-interest income 2,251 2,076 7,188 5,841 ------ ------ ------ ------ Non-interest expense: Compensation and benefits 3,423 3,790 11,097 10,921 Occupancy and equipment 840 899 2,598 2,561 Real estate owned operations, net 8 402 312 1,236 SAIF Recapitalization (note 5) 6,800 - 6,800 - Federal deposit insurance premiums 629 673 1,865 1,971 Other 2,324 2,139 6,812 6,633 ------ ------ ------ ------ Total non-interest expense 14,024 7,903 29,484 23,322 ------ ------ ------ ------ Income (loss) before income tax expense (benefit) (482) 3,913 10,571 10,952 Income tax expense (benefit) (559) 1,708 4,610 5,053 ------ ------ ------ ------ Net income $ 77 $2,205 $5,961 $5,899 ====== ====== ====== ====== Net income per common share: Primary $ 0.02 $ 0.49 $ 1.35 $ 1.31 ====== ====== ====== ====== Fully diluted $ 0.02 $ 0.49 $ 1.35 $ 1.31 ====== ====== ====== ======
See accompanying notes to consolidated financial statements. 4 HAVEN BANCORP, INC. Consolidated Statements of Changes in Stockholders' Equity Nine Months ended September 30, 1996 and 1995 (Unaudited)
Unrealized Gain (Loss) Unallocated Unearned Additional on Securities Common Common Common Paid-In Retained Available Treasury Stock Held Stock Held Unearned Stock Capital Earnings for Sale Stock by ESOP by RRP Compensation Total ------ ---------- -------- ------------- -------- ----------- ---------- ------------ ----- (In thousands) Balance at December 31, 1995 $ 50 47,331 57,919 2,083 (6,023) (2,197) (644) - 98,519 Net income for the nine months ended September 30, 1996 - - 5,961 - - - - - 5,961 Dividends declared (note 4) - - (1,646) - - - - - (1,646) Purchase of treasury stock (225,537 shares) - - - - (5,516) - - - (5,516) Stock options exercised, net of tax effect (7,019 shares) - 412 (18) - 88 - - - 482 Treasury stock issued for deferred compensation plans (29,965 shares) - 411 - - 371 - - (782) - Change in unrealized gain (loss) on securities available for sale, net of tax effect - - - (5,067) - - - - (5,067) Allocation of ESOP stock and amortization of award of RRP stock, net of tax effect - 460 - - - 259 350 - 1,069 Amortization of deferred compensation plan - - - - - - - 121 121 ---- ------ ------ ------ ------ ------ ----- ----- ------ Balance at September 30, 1996 50 48,614 62,216 (2,984) (11,080) (1,938) (294) (661) 93,923 ==== ====== ====== ====== ====== ====== ===== ===== ====== Balance at December 31, 1994 50 46,495 50,331 (1,880) (5,093) (2,725) (943) - 86,235 Net income for the nine months ended September 30, 1995 - - 5,899 - - - - - 5,899 Dividends Declared - - (451) - - - - - (451) Purchase of treasury stock (75,570 shares) - - - - (1,360) - - - (1,360) Reissued Treasury Stock contributed to RRP (9,918 shares) - 49 - - 119 - (168) - - Stock options exercised (22,316 shares) - 45 (46) - 269 - - - 268 Change in unrealized gain (loss) on securities available for sale, net of tax effect - - - 1,625 - - - - 1,625 Allocation of ESOP stock and amortization of award of RRP stock - 370 - - - 439 349 - 1,158 ---- ------ ------ ------ ------ ------ ----- ----- ------ Balance at September 30, 1995 50 46,959 55,733 (255) (6,065) (2,286) (762) - 93,374 ==== ====== ====== ====== ====== ====== ===== ===== ======
See accompanying notes to consolidated financial statements. 5 HAVEN BANCORP, INC. Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)
Nine months ended September 30, ------------------ 1996 1995 ---- ---- Net cash flows from operating activities: Net income $ 5,961 $ 5,899 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of cost of stock benefit plans 1,190 1,158 Amortization of net deferred loan origination fees 235 (312) Premiums and discounts on loans, mortgage-backed and debt securities (963) 83 Provision for loan losses 2,475 2,000 Provision for losses on real estate owned 875 700 Deferred income taxes (5,519) 4,630 SAIF Recapitalization 6,800 - Net gain on sales of interest-earning assets (88) (122) Depreciation and amortization 661 702 Decrease (increase) in accrued interest receivable 128 (1,371) Decrease in due to broker (5,000) (8,800) (Decrease) increase in other liabilities (2,022) 806 Increase (decrease) in other assets 2,190 (2,780) ------ ------ Net cash provided by operating activities 6,923 2,593 ------ ------ Cash flows from investing activities: Net increase in loans (169,072) (45,098) Proceeds from disposition of assets (including REO) 2,562 8,342 Purchases of securities available for sale (254,969) (18,894) Principal repayments and maturities on securities available for sale 63,887 1,385 Proceeds from sales of securities available for sale 237,763 18,777 Purchases of debt securities held to maturity (7,741) (88,108) Principal repayments, maturities and calls on debt securities held to maturity 36,511 30,693 Purchases of mortgage-backed securities held to maturity (38,451) (146,692) Principal repayments on mortgage-backed securities held to maturity 26,138 49,264 Net decrease in premises and equipment 1,254 231 ------- ------- Net cash used in investing activities (102,118) (190,100) ------- ------- Cash flows from financing activities: Net increase in deposits 43,811 63,163 Net increase in borrowed funds 48,429 125,837 Increase in mortgagors' escrow balances 4,459 3,382 Purchase of treasury stock (5,516) (1,360) Payment of common stock dividends (1,646) - Stock options exercised 70 223 ------ ------- Net cash provided by financing activities 89,607 191,245 ------ ------- Net (decrease) increase in cash and cash equivalents (5,588) 3,738 Cash and cash equivalents at beginning of period 38,854 30,472 ------ ------- Cash and cash equivalents at end of period $33,266 $ 34,210 ====== ======= Supplemental information: Cash paid during the period for: Interest $44,208 $38,361 Additions to real estate owned 3,237 2,929 Securities purchased, not yet received - 22,000 ====== ======
See accompanying notes to consolidated financial statements. 6 HAVEN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 and 1995 (Unaudited) NOTE 1 - BASIS OF PRESENTATION. The accompanying unaudited consolidated financial statements include the accounts of Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") and its wholly- owned subsidiary, Columbia Federal Savings Bank ("Columbia Federal" or the "Bank") and subsidiaries, as of September 30, 1996 and December 31, 1995 and for the three-month and nine-month periods ended September 30, 1996 and 1995, respectively. Material intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all necessary adjustments, consisting only of normal recurring accruals necessary for a fair presentation have been included. The results of operations for the three-month and nine-month periods ended September 30, 1996 are not necessarily indicative of the results that may be expected for the entire fiscal year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1995. NOTE 2 - DEBT, EQUITY AND MORTGAGE-BACKED SECURITIES ("MBSs"). Under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115"), debt securities and MBSs which the Company has the ability and the intent to hold until maturity, are carried at cost adjusted for amortization of premiums and accretion of discounts. Debt and equity securities and MBSs to be held for indefinite periods of time and not intended to be held to maturity or on a long-term basis are classified as available for sale securities which are recorded at fair value, with unrealized gains (losses) reported as a separate component of stockholders' equity, net of taxes. 7 SECURITIES AVAILABLE FOR SALE The amortized cost and estimated fair values of securities available for sale at September 30, 1996 are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (In thousands) Debt and equity securities available for sale: U.S. Government and Agency obligations $112,656 40 (3,815) 108,881 FNMA Preferred Stock 19,065 20 - 19,085 Corporate Bonds 6,000 - (30) 5,970 ------- ----- ------ ------- 137,721 60 (3,845) 133,936 ------- ----- ------ ------- MBSs available for sale: GNMA Certificates 15,774 28 (323) 15,479 FNMA Certificates 41,647 710 (269) 42,088 FHLMC Certificates 75,574 1,071 (400) 76,245 CMOs and REMICS 180,520 68 (2,732) 177,856 ------- ----- ------ ------- 313,515 1,877 (3,724) 311,668 ------- ----- ------ ------- Total $451,236 1,937 (7,569) 445,604 ======= ===== ====== =======
The net unrealized loss on securities available for sale at September 30, 1996, was reported as a separate component of stockholders' equity, in the amount of $3.0 million which is net of a tax effect of $2.6 million. DEBT SECURITIES HELD TO MATURITY The amortized cost, gross unrealized gains and losses and estimated fair values of debt securities held to maturity at September 30, 1996 are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (In thousands) U.S. Government and Agency obligations $ 52,967 19 (1,428) 51,558 Corporate debt securities 45,340 34 (109) 45,265 ------- -- ------ ------- Total $ 98,307 53 (1,537) 96,823 ======= == ====== =======
It is the Company's intent to hold these securities until maturity and therefore the Company does not expect to realize the current unrealized losses brought about by the current market environment. 8 MORTGAGE-BACKED SECURITIES HELD TO MATURITY The amortized cost, gross unrealized gains and losses and estimated fair values of MBSs held to maturity at September 30, 1996 are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (In thousands) FHLMC Certificates $ 41,508 201 (899) 40,810 FNMA Certificates 73,503 19 (2,961) 70,561 CMOs and REMICs 88,431 287 (1,667) 87,051 ------- ----- ------ ------- Total $203,442 507 (5,527) 198,422 ======= ===== ====== =======
It is the Company's intent to hold these securities until maturity and therefore the Company does not expect to realize the current unrealized losses brought about by the current market environment. NOTE 3 - STOCK PLANS. Changes in outstanding options for the benefit of directors, officers and other key employees of the Bank for the nine months ended September 30, 1996 are as follows:
Weighted Average Options Exercise Price ------- ---------------- Balance at December 31, 1995 480,463 $10.84 Granted (1) 158,735 25.65 Forfeited - - Exercised (7,019) $10.00 ------- ----- Balance at September 30, 1996 632,179 $14.57 ======= ===== Shares exercisable at September 30, 1996 379,241 $10.24 ======= =====
(1) During the second quarter, 152,850 options were granted to directors and officers under the Haven Bancorp, Inc. 1996 Stock Incentive Plan. The remaining 5,885 options were granted from the 1993 Incentive Stock Option Plan. All options vest over a three year period beginning one year from the date of grant. 9 NOTE 4 - DIVIDENDS PAYABLE. On September 26, 1996, the Company's Board of Directors approved a quarterly cash dividend of $0.15 per share, payable on October 28, 1996, to shareholders of record as of October 7, 1996. NOTE 5 - RE-CAPITALIZATION OF SAIF FUND. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996. The Act empowered the Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") to impose a special assessment on "SAIF assessable deposits" of depository institutions. This special assessment, which is based on SAIF- assessable deposits at March 31, 1995, is intended to recapitalize the Savings Association Insurance Fund. The special assessment rate is 65.7 basis points per $100 of insured deposits. The cost of this assessment to Columbia Federal Savings Bank is $6.8 million which was accrued as of September 30, 1996. The legislation also calls for BIF-insured institutions to begin paying part of the $780 million in annual interest costs on Financial Corp. (FICO) bonds. To date, FICO interest has been paid from SAIF premium revenues, which is a key reason why the SAIF was under-capitalized. Until full pro-rata FICO sharing is in effect, for both BIF and SAIF institutions, the FICO premium for SAIF institutions will be 6.4 basis points beginning January 1, 1997. The total premium will be the sum of the FICO premium and any regular insurance assessment, currently nothing for the lower risk category institutions. NOTE 6 - NET INCOME PER SHARE OF COMMON STOCK. Primary and fully diluted net income per share were determined by dividing net income by the weighted average number of shares outstanding. There were 4,426,716 primary shares outstanding and 4,401,604 fully diluted shares outstanding for the three months ended September 30, 1996. There were 4,429,463 primary shares outstanding and 4,429,786 fully diluted shares outstanding for the nine months ended September 30, 1996. The weighted average number of shares outstanding does not include 193,782 shares which are unallocated by the Employee Stock Ownership Plan ("ESOP") as of September 30, 1996 in accordance with American Institute of CPAs ("AICPA") Statement of Position ("SOP") 93-6, "Employers' Accounting for ESOPs". Stock options are regarded as common stock equivalents and are considered in both primary earnings per share and fully diluted earnings per share using the treasury stock method. NOTE 7 - SUPERMARKET BANKING AGREEMENT WITH PATHMARK STORES. On September 25, 1996, Haven Bancorp announced that Columbia Federal Savings Bank and Pathmark Stores, Inc. had entered into an agreement to open approximately 44 full-service bank branches in Pathmark supermarkets throughout New York City, Long Island, Westchester and Rockland counties by early 1998. The Bank expects to open four of the new in-store banking offices by the end of 1996. 10 NOTE 8 - RECENT ACCOUNTING/REGULATORY PRONOUNCEMENTS. In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 applies to all transactions in which an entity acquires goods or services by issuing equity instruments or by incurring liabilities where the payment amounts are based on the entity's common stock price, except for employee stock ownership plans. SFAS No. 123 covers transactions with employees and non-employees. SFAS No. 123 established a new method of accounting for stock-based compensation arrangements with employees. The new method is a fair value based method rather than the intrinsic value based method that is contained in APB Opinion 25 ("Opinion 25"). However, SFAS No. 123 does not require an entity to adopt the new fair value based method for purposes of preparing its basic financial statements. Entities are allowed (1) to continue to use the Opinion 25 method or (2) to adopt the SFAS No. 123 fair value based method. SFAS No. 123 fair value based method is considered by the FASB to be preferable to the Opinion 25 method, and thus, once the fair value based method is adopted, an entity cannot change back to the Opinion 25 method. Also, the selected method applies to all of an entity's compensation plans and transactions. For entities not adopting SFAS No. 123 fair value based method, SFAS No. 123 requires the entity to display in the footnotes to the financial statements pro forma net income and earnings per share information as if the fair value based method had been adopted. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The accounting requirements of SFAS No. 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995, though they may be adopted on issuance. The disclosure requirements are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is initially adopted for recognizing compensation cost. Pro forma disclosures required for entities that elect to continue to measure compensation cost using the Opinion 25 method must include the effects of all awards granted in fiscal years that begin after December 15, 1994. Pro forma disclosures for awards granted in the first fiscal year beginning after December 15, 1994, need not be included in the financial statements for that fiscal year, but should be presented subsequently whenever financial statements for that fiscal year are presented for comparative purposes with financial statements for a later fiscal year. The Company will continue to apply the Opinion No. 25 method in preparing its consolidated financial statements and will provide the pro forma disclosures required by SFAS No. 123. In June, 1996, the FASB issued SFAS No. 125, "Accounting for 11 Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which establishes accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on the consistent application of the financial-components approach. This approach requires the recognition of financial assets and servicing assets that are controlled by the reporting entity, the derecognition of financial assets when control is surrendered, and the derecognition of liabilities when they are extinguished. Specific criteria are established for determining when control has been surrendered in the transfer of financial assets. The statement lays out in detail the criteria that must be met in order for a transaction to be considered a sale or a secured borrowing. The new rules employ the "financial components approach", which treats separately the various parts of a range of financial instruments. The new rules refine the treatment of servicing rights, amending in part the directives set forth in SFAS No. 122. Liabilities and derivatives incurred or obtained by transferors in conjunction with the transfer of financial assets are required to be measured at fair value, if practicable. Servicing assets and other retained interests in transferred assets are required to be measured by allocating the previous carrying amount between the assets sold, if any, and the interest that is retained, if any, based on the relative fair values of the assets at the date of the transfer. Servicing assets retained are subsequently subject to amortization and assessment for impairment. SFAS No. 125 provides implementation guidance for: assessing isolation of transferred assets; accounting for transfers of partial interests; servicing of financial assets; securitizations; transfers of sales-type and direct financing lease receivables; securities lending transactions; repurchase agreements (including "dollar rolls" and "wash sales"); loan syndications and participations; risk participations in banker's acceptances; factoring arrangements; transfers of receivables with recourse; extinguishment of liabilities. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. It is to be applied prospectively; earlier or retroactive application is not permitted. SFAS No. 125, when adopted, is not expected to have a material effect on the Company's financial statements. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") is the holding company for Columbia Federal Savings Bank ("Columbia" or the "Bank"), a federally chartered stock savings bank. Columbia converted from a mutual to a stock savings bank on September 23, 1993 in conjunction with the issuance of the Bank's capital stock to Haven Bancorp. Haven Bancorp's business currently consists of the business of the Bank. The Bank's principal business has been and continues to be attracting retail deposits from the general public and investing those deposits, together with funds generated from operations primarily in one-to four-family, owner occupied residential mortgage loans. In addition, in times of low loan demand, the Bank will invest in debt, equity and MBSs to supplement its lending portfolio. The Bank also invests, to a lesser extent, in multi- family residential mortgage loans, commercial real estate loans, equity lines of credit and other marketable securities. The Bank's results of operations are dependent primarily on its net interest income, which is the difference between the interest income earned on its loan and securities portfolios and its cost of funds, which primarily consist of the interest paid on its deposits and borrowed funds. The Bank's net income also is affected by its provision for loan losses as well as non-interest income and operating expenses consisting primarily of compensation and benefits, occupancy and equipment, real estate owned operations, net, federal deposit insurance premiums and other general and administrative expenses. The earnings of the Bank are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, and to a lesser extent by government policies and actions of regulatory authorities. ANALYSIS OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 1995 TO SEPTEMBER 30, 1996 ASSETS Total assets increased by $91.9 million, or 6.2% to $1.6 billion at September 30, 1996 from $1.5 billion at December 31, 1995. Securities available for sale decreased by $57.5 million, or 11.4% to $445.6 million at September 30, 1996 from $503.1 million at December 31, 1995. During the nine month period ended September 30, 1996, the Bank purchased $255.0 million of securities available for sale comprised of $122.2 million of MBSs, $107.7 million of government agency securities, $19.1 million in FNMA Preferred Stock 13 and $6.0 million of corporate bond securities. These purchases were offset by sales and principal repayments of $237.8 million and $63.9 million, respectively. The purchases and sales during the first nine months of 1996 in the available for sale portfolio were done primarily to improve the net interest margin by swapping lower yielding securities and loans for higher yielding securities while minimizing interest rate risk. During the third quarter of 1996, $70.9 million of MBSs were sold in the available for sale portfolio with an average yield of 7.03% and replaced with $36.2 million of MBS and agency securities yielding approximately 7.75%. The remainder of the proceeds were used to fund loan originations and the purchase of residential mortgages in the secondary market. Debt securities held to maturity declined by $29.5 million, or 23.1% to $98.3 million at September 30, 1996 from $127.8 million at December 31, 1995 mainly due to principal repayments and calls totalling $36.5 million which were partially offset by purchases totalling $7.0 million. MBSs held to maturity increased by $12.7 million, or 6.7% to $203.4 million at September 30, 1996 from $190.7 million at December 31, 1995. During the nine month period ended September 30, 1996, the Bank purchased $38.5 million of MBSs for the held to maturity portfolio which were partially offset by principal repayments totaling $26.1 million. Net loans increased by $167.5 million, or 29.8% to $727.9 million at September 30, 1996 from $560.4 million at December 31, 1995. Loan originations and purchases during the nine month period ended September 30, 1996 totaled $243.0 million (comprised of $181.0 million of residential one-to four-family mortgage loans, $6.0 million of equity loans and lines of credit, $2.9 million of construction advances, and $53.1 million of commercial real estate and multi-family loans. Originations for residential one-to four- family mortgage loans included purchases of $103.4 million of residential loans in the secondary market. The purchase of loans in the secondary market was done to enhance the Bank's internal loan origination volume. Multi-family, commercial real estate and construction and land lending are generally believed to involve a higher degree of credit risk than one-to four-family lending because such loans typically involve higher principal amounts and the repayment of such loans generally is dependent on income produced by the property sufficient to cover operating expenses and debt service. Economic events that are outside the control of the borrower or lender could adversely impact the value of the security for the loan or the future cash flows from the borrower's property. In recognition of these risks, the Bank has instituted more stringent underwriting criteria for all of its loans and originates multi-family, commercial real estate and construction and land loans only on a selective basis. During the nine months ended September 30, 1996, principal repayments totalled $70.2 million, $3.2 million was 14 transferred to REO and $1.2 million of loans were sold in the secondary market. REO, net increased by $165,000, or 8.1% to $2.2 million (net of a $79,000 reserve) at September 30, 1996 from $2.0 million (net of a $178,000 reserve) at December 31, 1995. During the third quarter, the Bank acquired $962,000 of REO properties, sold $847,000 of REO, and recorded write-downs to fair value of $306,000 on various properties. During the first six months of 1996, the Bank acquired $2.3 million of REO, sold $1.0 million of REO and recorded write- downs to fair value of $1.0 million on various properties. (See discussion of non-performing assets on pages 17-18). Included in other assets at September 30, 1996 was $9.6 million of net deferred tax assets compared to $4.1 million at December 31, 1995. The increase was primarily due to $4.5 million which represents the tax effect of the increase of $9.6 million in the unrealized loss on securities available for sale from December 31, 1995 to September 30, 1996. The remainder of the increase was primarily due to a net increase of $2.0 million in the allowance for loan losses. Management believes that the Company will generate future taxable income sufficient to utilize the deferred tax asset over time. LIABILITIES Deposits increased by $43.8 million between December 31, 1995 and September 30, 1996 primarily due to an increase in certificates of deposit outstanding of $57.4 million for the nine-month period. The Bank's strategy has been to attract deposits from short to medium term certificates of deposit (up to 24 months) as a lower cost alternative to borrowed funds to fund loan originations. In May, 1996, the Bank opened its first supermarket branch in an Edwards Super Store located in Medford, Long Island. This branch had $4.5 million in deposits at September 30, 1996. During July of 1996, the Bank opened its second supermarket branch in a Shoprite Store located in Uniondale, Long Island. This branch had $1.6 million in deposits at September 30, 1996. During September, Columbia Federal Savings Bank and Pathmark Stores, Inc. entered into an agreement to open approximately 44 full-service bank branches in Pathmark supermarkets throughout New York City, Long Island, Westchester and Rockland counties by early 1998. (See Note 7 to Notes to Consolidated Financial Statements.) Borrowed funds increased by $48.4 million, or 17.9% to $319.0 million from $270.6 million at December 31, 1995 primarily for the funding of residential mortgage loan originations and the purchase of residential loans in the secondary market. During the nine months ended September 30, 1996, the Bank purchased $103.4 million of residential mortgages in the secondary market. 15 STOCKHOLDERS' EQUITY Haven Bancorp's stockholders' equity decreased to $93.9 million at September 30, 1996 from $98.5 million at December 31, 1995. Net income of $6.0 million for the nine-month period was primarily offset by the purchase of 225,537 shares of treasury stock for $5.5 million. In addition, there was a decline of $5.1 million in the unrealized gain on securities available for sale, net of tax effect, and the Company declared dividends of $1.6 million for the first nine months of 1996. The allocation of ESOP stock due to the reduction of the Bank's ESOP debt and the amortization of awards of shares of stock by the Bank's RRPs and deferred compensation plans together with related tax benefits, increased stockholders' equity by $1.1 million. Finally, during the nine month period ended September 30, 1996, the exercise of 7,019 options by officers of the Company increased stockholders equity by $482,000. 16 NON-PERFORMING ASSETS The following table sets forth information regarding all non- accrual loans (which consist of loans 90 days or more past due and restructured loans that have not yet performed in accordance with their modified terms for the required nine-month seasoning period), restructured loans and real estate owned.
September 30, December 31, 1996 1995 ------------- ------------ Non-accrual loans One-to four-family $ 3,813 3,800 Cooperative 480 871 Multi-family 1,512 967 Non-residential and other 4,120 4,167 ------ ------ Total non-accrual loans 9,925 9,805 ------ ------ Restructured loans One-to four-family 890 853 Cooperative 488 494 Multi-family 2,368 3,602 Non-residential and other - 2,123 ------ ------ Total restructured loans 3,746 7,072 ------ ------ Total non-performing loans 13,671 16,877 ------ ------ REO, net One-to four-family 559 1,148 Cooperative 356 723 Multi-family - 156 Non-residential and other 1,362 184 ------ ------ Total REO 2,277 2,211 Less allowance for REO (79) (178) ------ ------ REO, net 2,198 2,033 ------ ------ Total non-performing assets $15,869 18,910 ====== ====== Non-performing loans to total loans 1.85% 2.97% Non-performing assets to total assets 1.01 1.28 Non-performing loans to total assets 0.87 1.15
17 The $3.0 million decrease in non-performing assets is primarily due to a decrease of $3.3 million in restructured loans partially offset by a $165,000 increase in REO, net. The decrease in restructured loans was due to the satisfaction of one loan for $1.6 million and the transfer of several other loans to performing status. The ratio of non-performing loans to total loans decreased primarily due to the decrease of $3.2 million in non-performing loans during the nine month period. In addition, total loans increased $169.3 million during the nine-month period. The decreases in the ratios of non-performing assets to total assets and non-performing loans to total assets were due to the aforementioned reduction in restructured loans and an increase of $91.9 million in total assets during the nine-month period. The increase in non-residential REO properties was primarily due to the acquisition of a commercial property valued at $700,000 which was subsequently sold in October. The Bank maintains an allowance for loan losses and an allowance for REO, which it believes are adequate for potential losses at each period end. Management's judgment as to potential losses is based on its review of the loan and REO portfolios and its judgment regarding prevailing and anticipated economic conditions and a variety of other factors which have an impact on those portfolios. Although management believes that the allowances are adequate as of the period end, additional provisions may be required in the future. 18 ALLOWANCE FOR LOAN LOSSES The following table sets forth the changes in the allowance for loan losses for the nine months ended September 30, 1996 and 1995:
1996 1995 ------- ------- Balance at beginning of period $ 8,573 $10,847 Charge-offs: Residential (703) (368) Cooperative (448) (1,638) Multi-family (30) (1,299) Non-residential and other (360) (1,170) ------ ------ Total charge-offs (1,541) (4,475) ------ ------ Recoveries 807 329 ------ ------ Net charge-offs (734) (4,146) Provision for loan losses 2,475 2,000 ------ ------ Balance at end of period $10,314 $ 8,701 ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period 0.15% 1.04% Ratio of allowance for loan losses to total loans at the end of the period 1.40 1.57 Ratio of allowance for loan losses to non- performing loans at the end of the period 75.44 41.29
The ratio of net charge-offs during the first nine months of 1996 to average loans outstanding decreased compared to the same period in 1995 due to the decrease in charge-offs as a result of the decrease in non-performing loans between the periods and an increase of $113.3 million in average loans outstanding. The ratio of allowance for loan losses to total loans also decreased due to the increase in average loans outstanding as previously mentioned. The ratio of allowance for loan losses to non-performing loans increased between the periods due to the decrease in non-performing loans. The Bank's allowance for loan losses was $10.3 million and $8.7 million at September 30, 1996 and 1995, respectively, while non-performing loans totalled $13.7 million and $21.1 million, respectively, at those dates. 19 ASSET/LIABILITY MANAGEMENT The Company closely monitors its interest rate risk as such risk relates to its operational strategies. The Asset/Liability Committee is responsible for reviewing the Company's asset/liability policies and interest rate risk position, and generally meets weekly and reports to the Board of Directors on interest rate risk and trends on a quarterly basis. In order to reduce its sensitivity to interest rate risk, the Company's current strategy includes emphasizing the origination or purchase for portfolio of adjustable-rate loans, debt securities and MBSs and maintaining a securities available for sale portfolio. The Company invests in MBSs and debt and equity securities and utilizes such investments to complement its mortgage lending activities and supplement such activities at times of low mortgage loan demand. While MBSs 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 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 Company has attempted to reduce its exposure to interest rate risk through the origination of ARM loans and the purchase of adjustable-rate securities which are expected to help protect net interest margins during periods of rising interest rates. During the first nine months of 1996, the Bank sold a large portion of its available for sale portfolio, most of which were fixed rate securities, to improve yield with purchases of fixed rate securities bearing higher yields and shorter duration. The Bank purchased fixed rate debt securities and MBSs during the period to take advantage of higher yields compared to rates offered on adjustable rate securities. At September 30, 1996, $197.5 million, or 38.3% of the Company's MBSs portfolio were adjustable-rate MBSs, of which $187.2 million are held in the available for sale portfolio and $10.3 million are in the held to maturity portfolio. The Company's adjustable debt securities are allocated as follows: $50.3 million are in the held to maturity portfolio and $6.0 million are in the available for sale portfolio. Historically, the Company has been able to maintain a substantial level of core deposits (comprised of passbook, money market, NOW and demand accounts) which the Company believes helps to limit interest rate risk by providing a relatively stable, low cost, long-term funding base. At September 30, 1996 core deposits represented 47.8% of deposits compared to 50.8% of deposits at December 31, 1995. During the first nine months of 1996, passbook accounts decreased by $11.1 million, net of interest, whereas, certificates of deposit increased by $57.4 million, net of 20 interest. The Bank's strategy during 1996 has been to emphasize certificates of deposit for terms up to 24 months in order to retain a portion of customer withdrawals from passbook accounts as customers sought higher yielding investment opportunities when rates started to rise again during February and as a less expensive alternative to borrowed funds. During the first nine months of 1996 the cost of certificate accounts was 5.66% compared to 5.86% for borrowed funds. The amount of certificate accounts outstanding at September 30, 1996 was $590.4 million compared to $533.0 million at December 31, 1995. LIQUIDITY AND CAPITAL The Bank is required to maintain minimum levels of liquid assets as defined by the OTS regulations. This requirement, which may be varied by the OTS depending upon economic conditions and deposit flows, is based upon a percentage of withdrawable deposits and short-term borrowings. The required ratio is currently 5%. The Bank's ratio was 13.43% at September 30, 1996 compared to 10.31% at December 31, 1995. The increase in the liquidity ratio during the nine-month period is due to the purchase of government agency securities, which are considered liquid assets according to the OTS guidelines, and an increase in federal funds sold. The Company's primary sources of funds are deposits, principal and interest payments on loans and MBSs, retained earnings and advances from FHLB-NY. Proceeds from the sale of securities available for sale and loans held for sale are also a source of funding, as are, to a lesser extent, the sales of annuities and securities brokerage activities conducted by the Bank's subsidiary, Columbia Investment Services, Inc. While maturities and scheduled amortization of loans and MBSs are somewhat predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, competition and regulatory changes. The Company's most liquid assets are cash and short term investments. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At September 30, 1996 and December 31, 1995, cash and short and intermediate-term investments totaled $33.2 million and $38.9 million, respectively. The Company and the Bank have other sources of liquidity which include debt securities maturing within one year, mortgage loans and MBSs available for sale. Other sources of funds include FHLB advances, which at September 30, 1996, totaled $175.0 million. 21 As of September 30, 1996, the Bank exceeded all regulatory capital requirements as detailed in the following table:
Tangible Capital Core Capital Risk-Based Capital -------------------- -------------------- ----------------------- Amount Percentage(1) Amount Percentage(1) Amount Percentage(1)(3) ------ ---------- ------ ---------- ------ ---------- (Dollars in thousands) Capital for regulatory purposes $93,173 5.95% $93,173 5.95% $101,911 13.47% Minimum regulatory requirement 23,492 1.50 46,984 3.00(2) 60,520 8.00 ------ ---- ------ ---- ------- ---- Excess $69,681 4.45% $46,189 2.95% $ 41,391 5.47% ====== ==== ====== ==== ======= ====
(1) Tangible and core capital are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets. (2) Although the minimum capital ratio is 3.0%, the OTS regulations provide that generally an institution with less than 4.0% core capital is undercapitalized. Failure to meet the capital requirements or to be deemed undercapitalized exposes an institution to regulatory sanctions, including limitations on asset growth. The OTS noted in the preamble to the final rulemaking for interest rate risk that its intention was to issue a proposal to lower this ratio requirement from 4.0% to 3.0%. (3) The OTS has incorporated an interest rate risk component into its regulatory capital rule. Under the rule, saving associations with "above normal" interest rate risk exposure would be subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. The OTS has postponed the date that the component will first be deducted from an institution's total capital until an appeals process is developed for the measurement of an institution's interest rate risk. The Bank does not anticipate that the new rule, when implemented, will have a material effect on the Bank's risk-based capital. ANALYSIS OF CORE EARNINGS The Company's profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans, MBSs and debt and equity securities, and the cost of deposits and borrowings. Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities. Net income is further affected by non-interest income, non-interest expense and income taxes. 22 The following tables set forth certain information relating to the Company's average consolidated statements of financial condition and reflect the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense annualized by the average balance of assets or liabilities, respectively, for the periods shown. Average balances were derived from average daily balances. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields.
Three months ended September 30, 1996 1995 ------------------------ ------------------------ Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ------- ------- -------- ------- (Dollars in thousands) Assets: Interest-earning assets: Mortgage loans $ 679,279 $13,715 8.08% $506,755 $10,788 8.52% Other loans 35,023 884 10.10 38,627 1,045 10.82 Mortgage-backed securities 522,471 9,575 6.93 620,588 10,242 6.60 Money market investments 2,693 40 5.94 4,909 70 5.70 Debt and equity securities 224,835 3,749 6.67 189,923 3,172 6.68 --------- ------ --------- ------ Total interest-earning assets 1,494,301 27,963 7.49 1,360,802 25,317 7.44 Non-interest earning assets 63,885 ------ 57,354 ------ --------- --------- Total assets 1,558,186 1,418,156 ========= ========= Liabilities and stockholders' equity: Interest-bearing liabilities: Passbook accounts 373,418 2,342 2.51 395,039 2,479 2.51 Certificate accounts 583,711 8,274 5.67 516,089 7,686 5.96 NOW accounts 111,174 247 0.89 98,474 236 0.96 Money market accounts 56,989 482 3.38 52,923 483 3.65 Borrowed funds 316,095 4,627 5.86 248,264 3,993 6.43 --------- ------ --------- ------ Total interest-bearing liabilities 1,441,387 15,972 4.43 1,310,789 14,877 4.54 Other liabilities 20,423 ------ 14,626 ------ --------- --------- Total liabilities 1,461,810 1,325,415 Stockholders' equity 96,376 92,741 --------- --------- Total liabilities and stockholders' equity 1,558,186 1,418,156 ========= ========= Net interest income/net interest rate spread $11,991 3.06% $10,440 2.90% ====== ==== ====== ==== Net interest earning assets/net interest margin $52,914 3.21% $50,013 3.07% ====== ==== ====== ==== Ratio of interest-earning assets to interest-bearing liabilities 103.67% 103.82% ====== ======
23
Nine months ended September 30, 1996 1995 ------------------------ ------------------------ Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ------- ------- -------- ------- (Dollars in thousands) Assets: Interest-earning assets: Mortgage loans $ 610,837 $37,670 8.22% $493,422 $30,853 8.34% Other loans 36,498 2,781 10.16 40,649 3,172 10.40 Mortgage-backed securities 574,702 29,617 6.87 559,941 27,186 6.47 Money market investments 2,947 139 6.29 4,653 259 7.42 Debt and equity securities 220,136 10,674 6.47 177,617 8,959 6.73 --------- ------ --------- ------ Total interest-earning assets 1,445,120 80,881 7.46 1,276,282 70,429 7.36 Non-interest earning assets 63,520 ------ 59,367 ------ --------- --------- Total assets 1,508,640 1,335,649 ========= ========= Liabilities and stockholders' equity: Interest-bearing liabilities: Passbook accounts 376,315 7,027 2.49 414,247 7,717 2.48 Certificate accounts 565,507 23,987 5.66 495,088 21,573 5.81 NOW accounts 109,980 704 0.85 94,193 652 0.92 Money market accounts 59,178 1,417 3.19 40,317 964 3.19 Borrowed funds 282,141 12,404 5.86 185,778 9,090 6.52 --------- ------ --------- ------ Total interest-bearing liabilities 1,393,121 45,539 4.36 1,229,623 39,996 4.34 Other liabilities 23,339 ------ 15,164 ------ --------- --------- Total liabilities 1,416,460 1,244,787 Stockholders' equity 92,180 90,862 --------- --------- Total liabilities and stockholders' equity 1,508,640 1,335,649 ========= ========= Net interest income/net interest rate spread $35,342 3.10% $30,433 3.02% ====== ==== ====== ==== Net interest earning assets/net interest margin $51,999 3.26% $46,659 3.18% ====== ==== ====== ==== Ratio of interest-earning assets to interest-bearing liabilities 103.73% 103.79% ====== ======
IMPACT OF NEW LEGISLATION Deposit Insurance - SAIF Recapitalization. For the first three quarters of 1996, SAIF-insured institutions paid deposit insurance assessment rates of $0.23 to $0.31 per $100 of deposits. In contrast, institutions insured by the FDIC's Bank Insurance Fund (the "BIF") that were well capitalized and without any significant supervisory concerns paid the minimum annual assessment of $2,000, and all other BIF-insured institutions paid deposit insurance assessment rates of $0.03 to $0.27 per $100 of deposits. In response to the SAIF/BIF assessment disparity, the Deposit Funds Insurance Act of 1996 (the "Funds Act") was enacted into law on September 30, 1996. The Funds Act amended the Federal Deposit Insurance Act (the "FDIA") in several ways to recapitalize the SAIF and reduce the disparity in the assessment rates for the BIF and the SAIF. The Funds Act authorized the FDIC to impose a special assessment on all institutions with SAIF-assessable deposits in the amount necessary to recapitalize the SAIF. As implemented by the FDIC, institutions with SAIF-assessable deposits will pay a 24 special assessment, subject to adjustment, of 65.7 basis points per $100 of the institution's SAIF-assessable deposits, and the special assessment will be paid on November 27, 1996. The special assessment is based on the amount of SAIF-assessable deposits held on March 31, 1995. The Funds Act provides that the amount of the special assessment will be deductible for federal income tax purposes for the taxable year in which the special assessment is paid. Based on the foregoing, the special assessment for the Bank is $6.8 million (before taxes) and has been charged against income for the quarter ended September 30, 1996. In view of the recapitalization of the SAIF, the FDIC proposed on October 8, 1996, to reduce the assessment rate for SAIF-assessable deposits for periods beginning on October 1, 1996. As would be effective for the SAIF-assessable deposits of SAIF-insured savings associations, such as the Bank, the proposed assessment rates would range from 18 to 27 basis points for the last quarter of 1996 and would range from 0 to 27 basis points for subsequent assessment periods. However, the Funds Act also provides that the FDIC cannot assess regular insurance assessments for an insurance fund unless required to maintain or to achieve the designated reserve ratio of 1.25%, except on those of its member institutions that are not classified as "well capitalized" or that have been found to have "moderately severe" or "unsatisfactory" financial, operation or compliance weaknesses. The Bank has not been so classified by the FDIC or the OTS. Accordingly, assuming that the designated reserve ratio is maintained by the SAIF after the collection of the special SAIF assessment, the Bank, as long as it maintains its regulatory status, will have to pay substantially lower regular SAIF assessments compared to those paid by the Bank in recent years. In addition, the Funds Act expanded the assessment base for the payments on the bonds (the "FICO bonds") issued in the late 1980s by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation to include the deposits of both BIF- and SAIF-insured institutions beginning January 1, 1997. Until December 31, 1999, or such earlier date on which the last savings association ceases to exist, the rate of assessment for BIF-assessable deposits will be one-fifth of the rate imposed on SAIF-assessable deposits. It has been estimated that the rates of assessment for the payment of interest on the FICO bonds will be approximately 1.3 basis points for BIF- assessable deposits and approximately 6.4 basis points for SAIF- assessable deposits. The Funds Act also provides for the merger of the BIF and SAIF on January 1, 1999, with such merger being conditioned upon the prior elimination of the thrift charter. The Secretary of the Treasury is required to conduct a study of relevant factors with respect to the development of a common charter for all insured depository institutions and abolition of separate charters for banks and 25 thrifts and to report the Secretary's conclusions and findings to the Congress on or before March 31, 1997. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 GENERAL. The Company reported net income of $77,000 for the three months ended September 30, 1996 compared to net income of $2.2 million for the three months ended September 30, 1995. The $2.1 million decrease was primarily attributable to an increase of $6.1 million in non-interest expenses due to a SAIF recapitalization charge of $6.8 million which was accrued on September 30, 1996. In addition, interest expense for the quarter increased $1.1 million when compared to the same period last year. These items were partially offset by interest income which increased $2.6 million, non-interest income which increased $175,000 and income tax expense which decreased $2.3 million. INTEREST INCOME. Interest income increased by $2.6 million, or 10.5% to $28.0 million for the three months ended September 30, 1996 from $25.3 million for the three months ended September 30, 1995. The increase was primarily the result of a $2.9 million increase in interest income on mortgage loans and an increase of $577,000 in interest income on debt and equity securities. These were partially offset by decreases in interest income on MBSs, other loans and money market investments of $667,000, $161,000 and $30,000, respectively. Interest income on mortgage loans increased by $2.9 million, or 27.1% to $13.7 million for the three months ended September 30, 1996, from $10.8 million for the comparable three-month period in 1995 primarily as a result of an increase in average balances of mortgage loans of $172.5 million partially offset by a decrease in the average yield on mortgage loans of 44 basis points. The average yield on mortgage loans decreased to 8.08% for the three months ended September 30, 1996 from 8.52% for the comparable three-month period in 1995. The decrease in yield on mortgage loans was attributable to a decline in the rate indexes used for residential and commercial real estate mortgage originations. These indexes which are the 30 year treasury bond for residential originations and the 5 year treasury note for commercial real estate originations were down 37 and 43 basis points, respectively, when compared to the same period last year. The increase in average balances of mortgage loans between the periods was primarily due to mortgage originations during 1996 and the later part of 1995. During the first six months of 1996 and the second half of 1995, the Bank originated $143.7 million (which included residential loans purchased of $55.5 million) and $92.7 million, respectively, in mortgage loans partially offset by principal payments of $38.3 and $42.3 million, respectively. During the third quarter of 1996, the Bank originated $93.3 million of 26 mortgage loans which included $47.9 million of residential loans purchased in the secondary market. Interest income on other loans decreased by $161,000, or 15.4% primarily due to a decrease of $3.6 million in average balances outstanding and a decrease of 72 basis points in average yield. During the fourth quarter of 1995, the Bank discontinued its non-real estate related consumer lending function. Interest income on MBSs decreased by $667,000, or 6.5% to $9.6 million for the three months ended September 30, 1996 from $10.2 million for the comparable three-month period in 1995 primarily due to a decrease in average balances of MBSs of $98.1 million partially offset by an increase in the average yield of 33 basis points. The decrease in average balances of MBSs between the periods was due to sales totalling $185.2 million from the available for sale portfolio partially offset by the purchase of $159.8 million of MBSs during 1996 of which $122.0 million were for the available for sale portfolio. During 1996, $136.5 million or 85.4% of the MBSs purchased were fixed rate securities. During the third quarter of 1996, the Company purchased $20.1 million of fixed rate MBSs, of which $13.5 million were for the available for sale portfolio. The emphasis on fixed rate securities was due to more favorable yield opportunities in fixed rate securities during the first nine months of 1996 compared to adjustable-rate securities. The Company has been actively managing its available for sale portfolio to increase yield while maintaining or reducing its interest-rate risk exposure. Interest income on debt and equity securities increased by $577,000, or 18.1% to $3.7 million for the three months ended September 30, 1996 from $3.1 million for the comparable three-month period in 1995 primarily as a result of an increase in average balances of $34.9 million. The increase in average balance was primarily due to the purchase of $144.7 million of debt securities during 1996 of which $137.8 million were purchased for the available for sale portfolio partially offset by sales totalling $46.9 million from the available for sale portfolio. During the third quarter of 1996, the Bank purchased $22.5 million of debt securities for its available for sale portfolio. Finally, interest income on money market investments decreased by $30,000, or 42.8% to $40,000 for the three months ended September 30, 1996 from $70,000 for the comparable three month period in 1995. The decrease was due to the average balance which declined $2.2 million from the same period last year. INTEREST EXPENSE. Interest expense increased by $1.1 million, or 7.3% to $16.0 million for the three months ended September 30, 1996 from $14.9 million for the three months ended September 30, 1995. The increase was primarily the result of a $461,000 increase in interest expense on deposits and an increase of $634,000 in interest expense on borrowings. 27 Interest on deposits increased by $461,000, or 4.2% to $11.3 million for the three months ended September 30, 1996 from $10.9 million for the comparable three-month period in 1995. The increase in interest on deposits was primarily due to the average balance which increased $62.8 million, or 5.8% to $1.13 billion for the three months ended September 30, 1996 from $1.06 billion for the comparable three-month period in 1995. The cost of deposits decreased between the periods from 4.10% in the 1995 period to 4.03% in the 1996 period. The increase in average balance was primarily due to certificate account balances which increased $67.6 million, or 13.1% to $583.7 million for the three months ended September 30, 1996 from $516.1 million for the comparable three- month period in 1995. The Bank's strategy during 1995 and 1996 has been to emphasize certificates of deposit with terms up to 24 months in order to retain a portion of customer withdrawals from passbook accounts as customers sought higher yielding investment opportunities in the rising interest rate environment and as a less expensive alternative to borrowed funds when appropriate. The average cost of certificate accounts was 5.67% for the third quarter of 1996 compared to 5.96% for the comparable 1995 period due to the decrease in market interest rates particularly for 12 to 18 month certificate accounts. Interest expense on certificate accounts increased by $588,000 or 7.7 to $8.3 million for the three months ended September 30, 1996 from $7.7 million in the same period in 1995. The average balance of passbook accounts decreased by $21.6 million, or 5.5% to $373.4 million for the three months ended September 30, 1996 from $395.0 million for the third quarter of 1995. The average cost of passbook accounts remained the same at 2.51% for both periods. Interest expense on passbook accounts decreased by $137,000, or 5.5% to $2.3 million for the three months ended September 30, 1996 from $2.5 million in the same period in 1995 primarily due to a decrease in average balances due to customers seeking higher yielding investment opportunities including the Bank's certificate of deposit accounts. Interest on borrowed funds increased by $634,000, or 15.9% to $4.6 million for the three months ended September 30, 1996 from $4.0 million for the comparable three-month period in 1995. Borrowed funds on an average basis increased by $67.8 million between the periods due to the addition of short-term FHLB advances and securities sold under agreements to repurchase during 1996 to provide additional funding along with deposit growth for the purchase of $103.4 million of residential mortgages in the secondary market and the purchase of debt and MBS securities during 1996. The average rate paid on borrowings decreased to 5.85% for the three months ended September 30, 1996 from 6.43% for the comparable prior-year period due to a decrease in market interest rates between the periods. NET INTEREST INCOME. Net interest income increased by $1.6 million to $12.0 million for the three months ended September 30, 1996 from 28 $10.4 million for the three months ended September 30, 1995. The increase reflects an increase in the average yield on interest- earning assets to 7.49% from 7.44% for the three months ended September 30, 1996 and 1995, respectively and a decrease in the average cost on interest-bearing liabilities to 4.43% from 4.54% for the three months ended September 30, 1996 and 1995, respectively. The net interest spread was 3.06% for the three months ended September 30, 1996 compared to 2.90% for the comparable period in 1995. PROVISION FOR LOAN LOSSES. The Bank provided $700,000 for loan losses for both the three months ended September 30, 1996 and September 30, 1995. This amount represents management's periodic review and evaluation of the loan portfolio. NON-INTEREST INCOME. Non-interest income increased by $175,000 or 8.4% for the three months ended September 30, 1996 to $2.3 million from $2.1 million for the comparable three-month period in 1995. Loan fees and servicing income increased by $23,000 due to normal portfolio volume. Savings and checking fees increased by $145,000 due to the number of checking accounts which increased by 9,709, or 18.8% to 61,279 at September 30, 1996 from 51,570 at September 30, 1995 due to the Bank's strategy to continue to attract lower cost checking deposit balances. The growth in deposit accounts includes new accounts opened at the Bank's supermarket branches located in Medford and Uniondale, Long Island. During the quarter ended September 30, 1996, the Bank incurred a net loss of $11,000 on the sale of interest-earning assets. The Bank realized a gain of $220,000 on the sale of $70.9 million of securities which had been available for sale. This was offset by a valuation adjustment of $230,000 on cooperative mortgages held for sale. Insurance, annuity and mutual fund fees increased by $152,000 due to an increase in sales volume. These were slightly offset by other income which declined $12,000 mainly due to a decrease in fees from corresponding Banks. NON-INTEREST EXPENSE. Non-interest expense increased by $6.1 million, or 77.5% for the three months ended September 30, 1996 to $14.0 million from $7.9 million for the comparable three-month period in 1995. The increase was due to the SAIF recapitalization assessment of $6.8 million which was accrued as of September 30, 1996. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 which empowered the Board of Directors of the FDIC to impose and collect the assessment. The special assessment rate is 65.7 basis points per $100 of insured deposits at March 31, 1995. The assessment will be collected on November 27, 1996. Compensation and benefit costs declined $367,000 for the three months ended September 30, 1996 to $3.4 million from $3.8 million in 1995. The decline was due to several factors. First, during July a curtailment gain of $560,000 was recorded upon the freeze of the Company's pension plan as of July 29 1, 1996. This gain along with a year-to-date accrual adjustment of $170,000 resulted in an overall reduction of $828,000 in pension expense when compared to the same period in 1995. This offset compensation and benefits expense increases totalling $375,000 due to merit increases and staff expansion for the Bank's supermarket banking program. In addition, ESOP compensation expense increased $45,000 when compared to the same period last year due to the average price of Haven stock which increased between the periods. REO expense, net declined $394,000 for the third quarter of 1996 when compared to the same period last year. Expenses incurred on properties in the portfolio and REO provisions declined $180,000 and $150,000, respectively, due to a reduction in REO residential properties from $2.1 million at September 30, 1995 to $915,000 at September 30, 1996. Finally, miscellaneous expenses increased $185,000 from the same period last year due to advertising, NYCE fees and parent company expenses which were up $64,000, $74,000 and $50,000, respectively. INCOME TAX EXPENSE. The Company recorded a tax benefit of $559,000 for the three months ended September 30, 1996 compared to income tax expense of $1.7 million for an effective tax rate of 43.6% for the comparable period in 1995. The tax benefit for the third quarter of 1996 included an adjustment related to the New York State tax bad debt reserve treatment available to the Company. The bad debt reserve treatment available to thrift institutions under S593 of the Internal Revenue Code was repealed for tax years beginning after 1995. The Bank is now required to use the specific charge off method for computing its tax bad debt deduction rather than the experience method for both Federal and New York City tax purposes. This change did not have a significant effect on the Company's effective tax rate. However, for New York State purposes, legislation recently signed by Gov. Pataki "decouples" the New York State thrift bad debt calculation from the Federal tax law. Accordingly, the Bank is allowed to use the percentage of taxable income deduction method when computing its bad debt deduction for New York State taxes. The use of the PTI method for New York State in 1996 reduced the tax provision for the third quarter by $240,000. In prior years, the Bank utilized the experience method for computing its New York State tax bad debt reserve. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 GENERAL. The Company reported net income of $6.0 million for the nine months ended September 30, 1996 compared to net income of $5.9 million for the nine months ended September 30, 1995. The $100,000 increase was primarily attributable to an increase of $10.5 million in interest income and an increase of $1.3 million in non-interest income. These were partially offset by interest expense which increased $5.5 million, the provision for loan losses which increased $475,000 and non-interest expense which increased $6.2 30 million (including the $6.8 million charge for the SAIF recapitalization). Finally, the provision for income tax expense decreased $443,000 due to the decrease in pre-tax income and the change in the New York State thrift bad debt deduction as previously discussed. INTEREST INCOME. Interest income increased by $10.5 million, or 14.8% to $80.9 million for the nine months ended September 30, 1996 from $70.4 million for the nine months ended September 30, 1995. The increase was primarily the result of a $6.8 million increase in interest income on mortgage loans, an increase of $2.4 million in interest income on MBSs, and an increase of $1.7 million in interest income on debt and equity securities. These were slightly offset by a decrease in interest income on other loans and money market investments of $391,000 and $120,000, respectively. Interest income on mortgage loans increased by $6.8 million, or 22.1% to $37.7 million for the nine months ended September 30, 1996 from $30.9 million for the comparable nine-month period in 1995 primarily as a result of an increase in average balances of mortgage loans of $117.4 million slightly offset by a decrease in the average yield on mortgage loans of 12 basis points. The average yield on mortgage loans decreased to 8.22% for the nine months ended September 30, 1996 from 8.34% for the comparable nine- month period in 1995. The drop in the overall yield on the portfolio was mainly attributable to the two rate indexes used for residential and commercial real estate loan originations. The average rate for the 30 year treasury bond and the 5-year treasury note declined 37 and 43 basis points, respectively, when compared to the first nine months of 1995. Market interest rates declined during the second half of 1995 and did not show any upward movement until February of 1996. The increase in average balances between the periods was due to mortgage originations of $237.0 million during 1996 which included the purchase of $103.4 million of residential mortgage loans in the secondary market. This was partially offset by principal repayments which totalled $59.9 million. Interest income on other loans decreased by $391,000, or 12.3% primarily due to a decrease of $4.2 million in average balances outstanding and a decrease of 24 basis points in average yield. During the fourth quarter of 1995, the Bank discontinued its non- real estate related consumer lending function. Interest income on MBSs increased by $2.4 million, or 8.9% to $29.6 million for the nine months ended September 30, 1996 from $27.2 million for the comparable nine-month period in 1995 primarily due to an increase in average balances of MBSs of $14.8 million and an increase in the average yield of 40 basis points. During 1996, the Bank purchased $159.8 million of MBSs, of which $122.0 million were for the available for sale portfolio. The Bank has been actively 31 managing its available for sale portfolio as part of its interest rate risk strategy. The purchases for the held to maturity portfolio which totalled $37.8 million were all fixed-rate securities and 80.9% or $98.7 million of the amount purchased for the available for sale portfolio were fixed rate. The emphasis on fixed rate securities during the nine-month period was due to more favorable yields available compared to adjustable-rate securities during the same period. Interest income on debt and equity securities increased by $1.7 million, or 19.1% to $10.7 million for the nine months ended September 30, 1996 from $9.0 million for the comparable nine-month period in 1995 primarily as a result of an increase in average balances of $42.5 million partially offset by a decrease in average yield of 26 basis points. The decline in average yield was due to a decrease in rates during the second half of 1995. The debt and equity security portfolio includes $51.3 million of corporate bonds which adjust quarterly with rates tied to the two year treasury index which declined 52 basis points from the same period last year. The average rate for the index for the first nine months of 1996 was 5.84% compared to 6.36% for the same period last year. During the third quarter of 1996, the Bank purchased $22.5 million of debt and equity securities which were designated as available for sale. During the first six months of 1996, the Bank purchased $137.3 million of debt and equity securities of which $130.3 million were designated as available for sale. The Bank has been actively managing its available for sale portfolio as part of its interest rate risk strategy. INTEREST EXPENSE. Interest expense increased by $5.5 million, or 13.9% to $45.5 million for the nine months ended September 30, 1996 from $40.0 million for the nine months ended September 30, 1995. The increase was the result of a $2.2 million increase in interest expense on deposits and an increase of $3.3 million in interest expense on borrowings. Interest on deposits increased by $2.2 million, or 7.2% to $33.1 million for the nine months ended September 30, 1996 from $30.9 million for the comparable nine-month period in 1995. The increase in interest on deposits was primarily due to the average balance which increased $67.1 million or 6.4% to $1.11 billion for the nine months ended September 30, 1996 from $1.04 billion for the comparable nine-month period in 1995 and an increase of 3 basis points in the average cost of deposits between the periods. The increase in average balance was primarily due to certificate account balances which increased $70.4 million, or 14.2% to $565.5 million for the nine months ended September 30, 1996 from $495.1 million for the comparable nine-month period in 1995. The average cost of certificate accounts was 5.66% for the first nine months of 1996 compared to 5.81% for the comparable 1995 period due to a falling interest rate environment during the second half of 1995 32 and the beginning of 1996. The average balance of passbook accounts decreased by $37.9 million, or 9.2% to $376.3 million for the nine months ended September 30, 1996 from $414.2 million for the first nine months of 1995. The average cost of passbook accounts was stable at approximately 2.49% for both periods. The average cost of all deposits was 3.98% for the period ended September 30, 1996 compared to 3.94% for the period ended September 30, 1995 primarily due to the shift from passbook accounts to higher costing certificates of deposit accounts. Interest on borrowed funds increased by $3.3 million, or 36.5% to $12.4 million for the nine months ended September 30, 1996 from $9.1 million for the comparable nine-month period in 1995. Borrowed funds on an average basis increased by $96.4 million between the periods due to the addition of short-term FHLB advances and securities sold under agreements to repurchase during 1996 to provide funding for loan originations and the purchase of $103.4 million of residential mortgages in the secondary market during the first nine months of 1996. The average rate paid on borrowings decreased to 5.86% for the nine months ended September 30, 1996 from 6.52% for the comparable prior-year period due to the decrease in market interest rates between the periods. For example, the weighted average rates outstanding on FHLB advances and repurchase agreements at September 30, 1996 were 5.83% and 5.56%, respectively, compared to 6.27% and 5.84% at September 30, 1995. NET INTEREST INCOME. Net interest income increased by $4.9 million to $35.3 million for the nine months ended September 30, 1996 from $30.4 million for the nine months ended September 30, 1995. The increase reflects an increase in the average yield on interest- earning assets to 7.46% from 7.36% for the nine months ended September 30, 1996 and 1995, respectively. This increase was partially offset by the average cost on interest-bearing liabilities which increased to 4.36% from 4.34% for the nine months ended September 30, 1996 and 1995, respectively. The net interest spread was 3.10% for the nine months ended September 30, 1996 compared to 3.02% for the comparable period in 1995. PROVISION FOR LOAN LOSSES. The Bank provided $2.5 million for loan losses for the nine months ended September 30, 1996 compared to $2.0 million for the comparable nine-month period in 1995. The increase was due to an additional provision of $400,000 that the Bank established during June 1996 related to the growth in the Bank's residential and commercial mortgage loan portfolios. NON-INTEREST INCOME. Non-interest income increased by $1.3 million or 23.1% for the nine months ended September 30, 1996 to $7.2 million from $5.9 million for the comparable nine-month period in 1995. Loan fees and servicing income increased by $626,000 due to the recovery of interest totalling $597,000 during the second quarter of 1996 on the satisfaction of a land loan that was 33 previously classified as a restructured loan. Insurance, annuity and mutual fund fees increased by $560,000 due to an increase in sales volume of 23% for the first nine months of 1996 from the same period in 1995. The net gain on sales of interest earning assets was $88,000 due to the sale of $237.2 million in securities which had been available for sale which generated a pre-tax gain of $318,000 for 1996. This was partially offset by a valuation adjustment of $230,000 on cooperative mortgages held for sale. The Bank has been actively managing its available for sale portfolio to improve yield by purchasing higher yielding securities and loans and to reduce interest rate risk on the overall portfolio when possible. Savings and checking fees increased by $357,000 due to the number of checking accounts which increased by 9,709 or 18.8% between September 30, 1995 and 1996 due to the Bank's strategy to attract lower cost deposit balances. These were partially offset by other non-interest income which declined $162,000 due to decreases of $45,000 and $35,000, respectively, in miscellaneous income and fees from corresponding Banks. NON-INTEREST EXPENSE. Non-interest expense increased by $6.2 million, or 26.4% for the nine months ended September 30, 1996 to $29.5 million from $23.3 million for the comparable nine-month period in 1995. The increase was primarily due to the SAIF recapitalization assessment of $6.8 million which was accrued on September 30, 1996. Compensation and benefit costs increased $176,000, or 1.6% to $11.1 million for the nine months ended September 30, 1996 from the same period last year. Salary costs increased $934,000 due to two factors: First, normal merit increases and staff hired for the supermarket banking program increased salary compensation by $700,000. Second, salary and commission costs for CIS, Inc. increased $230,000 due to an increase in sales volume of 23.5% from the same period last year. These factors were offset by a curtailment gain of $560,000 booked upon the freeze of the Company's pension plan as of July 1, 1996. This gain along with a year-to-date accrual adjustment of $170,000 resulted in an overall reduction of $840,000 in pension expense when compared to the same period in 1995. During 1996, the Company accrued a matching contribution for employee 401K contributions which amounted to $94,000 for the first nine months of 1996. Real estate owned expense, net declined $924,000 for the first nine months of 1996 when compared to the same period last year. Expenses incurred on properties in the portfolio and REO provisions declined $370,000 and $525,000, respectively, due to a reduction in REO residential properties from $2.1 million at September 30, 1995 to $915,000 at September 30, 1996. Miscellaneous operating expenses in total increased $179,000 from the same period last year. During June, 1996, the Bank took into income $389,000 of the reserve previously established against its claim against Nationar. This reduction in miscellaneous costs was offset by the following: Other miscellaneous expenses were up $240,000 due to agency fees of $90,000 paid for additions to staff and the settlement of two legal 34 actions for $150,000. In addition, NYCE fees increased $200,000 during the period. INCOME TAX EXPENSE. Income tax expense was $4.6 million for an effective tax rate of 43.6% for the nine months ended September 30, 1996 compared to income tax expense of $5.1 million for an effective tax rate of 46.1% for the comparable period in 1995. Prior to the enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996 (the "1996 Act"), for federal income tax purposes, thrift institutions such as the Bank, which met certain definitional tests primarily relating to their assets and the nature of their business, were permitted to establish tax reserves for bad debts and to make annual additions thereto, which additions could, within specified limitations, be deducted in arriving at their taxable income. The Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interest in real property, could be computed using an amount based on a six-year moving average of the Bank's actual loss experience (the "Experience Method"), or a percentage equal to 8.0% of the Bank's taxable income (the "PTI Method"), computed without regard to this deduction and with additional modifications and reduced by the amount of any permitted addition to the non-qualifying reserve. Similar deductions for additions to the Bank's bad debt reserve are permitted under the New York State Bank Franchise Tax and the New York City Banking Corporation Tax; however, for purposes of these taxes, the effective allowable percentage under the PTI method is 32% rather than 8%. The Bank has utilized the experience method for establishing its Federal, New York State and New York City tax bad debt reserves in recent years. Under the 1996 Act, the PTI Method was repealed and thrift institutions such as the Bank, as a "large bank" (one with assets having an adjusted basis of more than $500 million), will be unable to make additions to its tax bad debt reserve, will be permitted to deduct bad debts only as they occur and will be required to recapture (that is, take into taxable income) over a six-year period, beginning with the taxable year beginning January 1, 1996, the excess of the balance of its bad debt reserves (other than the supplemental reserve) as of December 31, 1995 over the greater of the balance of such reserves as of December 31, 1987 (or over a lesser amount if the Bank's loan portfolio decreased since December 31, 1987). However, under the 1996 Act, such recapture requirements will be suspended for each of the two successive taxable years beginning January 1, 1996 in which the Bank originates a minimum amount of certain residential loans during such years that is not less than the average of the principal amounts of such loans made by the Bank during its six taxable years preceding January 1, 1996. Since the Bank has utilized the experience method for computing its Federal tax bad debt reserve, it was not subject to the recapture provisions under the 1996 Act, and accordingly, there was no adverse impact to the Bank's financial condition or results of operations from the enactment of 35 this legislation. The New York State tax law has been amended to prevent a similar recapture of the Bank's bad debt reserve, and to permit continued future use of the bad debt reserve method for purposes of determining the Bank's New York State tax liability. The Bank is utilizing the PTI method for computing its New York State tax bad debt reserve in 1996 and utilized the experience method in prior years. The Company's officers and industry leaders continue to seek such amendments to the New York City tax law; however, the Company's cannot predict whether such changes to New York City law will be adopted and, if so, in what form. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 6, 1995, Nationar, the entity that provided check collection services for the Bank was seized by the Superintendent of Banks of the State of New York ("Superintendent"). Checks in process of collection for the Bank totalling $8.9 million were held by Nationar at the time it was seized. In April 1995, $3.9 million of these funds were remitted to the Bank. During the third quarter of 1995, the Bank filed Proofs of Claim totalling $5.0 million in the aggregate. However, there was a reasonable likelihood that the Bank would not recover all of the amounts owed by Nationar. Accordingly, management established a reserve for potential losses associated with Nationar deposits, in connection with its normal procedure for monitoring asset quality. During the year ended December 31, 1995, the Bank recorded $430,000 related to the ultimate recovery of amounts owed by Nationar. On June 27, 1996, the Bank received a partial payment of it's claims against Nationar totalling $4,987,000, at which time $389,000 of the reserve previously established was taken into income. On October 23, 1996, the Superintendent announced that he has filed an application with the New York State Supreme Court seeking authority to pay in full the balance of all accepted unsecured claims net of any amounts owed to Nationar (other than claims net of any amounts owed to Nationar for subordinated debt and stock interests). The Bank could receive further payment on the outstanding balance of its unsecured claims totalling $54,000, but the exact timing of such further payments, if any, are unknown at this time. In February, 1983, a burglary of the contents of safe deposit boxes occurred at a branch office of the Bank. At September 31, 1996, the Bank has a class action lawsuit related thereto pending, whereby the plaintiffs are seeking recovery of approximately $13,300,000 in actual damages and an additional $13,000,000 of unspecified damages. The Banks ultimate liability, if any, which might arise from the disposition of these claims cannot presently 36 be determined. Management believes it has meritorious defenses against these actions and has and will continue to defend its position. Accordingly, no provision for any liability that may result upon adjudication has been recognized in the accompanying consolidated financial statements. The Bank and certain of its officers are defendants in a lawsuit alleging discriminatory employment practices by the defendant. The suit was filed on June 1, 1994 in the United States District Court, Eastern District of New York and alleges violations under Title VII of the Civil Rights Act of 1964 and the New York Human Rights Law. The lawsuit seeks monetary damages. The Bank does not believe it engaged in any discriminatory employment practices and intends to vigorously defend this lawsuit. The Company is involved in various other legal actions arising in the ordinary course of business, which in the aggregate, are believed by management to be immaterial to the financial position of the Company. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The Company filed Form 8-K on September 25, 1996 regarding the Master Licensing Agreement that its wholly-owned subsidiary, Columbia Federal Savings Bank had entered into with Pathmark Stores, Inc. 37 SIGNATURES Pursuant to the requirements of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HAVEN BANCORP INC. (Registrant) Date: November 13, 1996 By: /s/ Philip S. Messina --------------------------- Philip S. Messina President and Chief Executive Officer Date: November 13, 1996 By: /s/ Catherine Califano --------------------------- Catherine Califano Senior Vice President and Chief Financial Officer
38 EX-27 2
9 This schedule contains summary financial information extracted from the Consolidated Statement of Financial Condition at September 30, 1996 and the Consolidated Statement of Operations for the nine months Ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 SEP-30-1996 30,573 1,085,533 0 0 445,604 301,749 295,245 738,240 10,314 1,564,697 1,127,257 136,230 201,070 62,170 0 0 50 93,873 1,564,697 40,451 40,430 0 80,881 33,135 45,539 35,342 2,475 88 29,484 10,571 10,571 0 0 5,961 1.35 1.35 7.46 9,925 0 3,746 20,791 8,573 1,541 807 10,314 10,314 0 0
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