-----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, PuwSZtMxGrsN+MnOHWXMpdsgjROA/IEF/L19eqM9odv8Ve784sfUpPc6JTnk3HoT pkm1Q27lh9foW7kIsadB/A== 0000900741-97-000005.txt : 19970329 0000900741-97-000005.hdr.sgml : 19970329 ACCESSION NUMBER: 0000900741-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961230 FILED AS OF DATE: 19970328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21628 FILM NUMBER: 97567290 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual report pursuant to Section 13 of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission File No.: 0-21628 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 I.D. No.) 93-22 Jamaica Avenue, Woodhaven, New York 11421 (Address of principal executive offices) (718) 847-7041 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock par value $0.01 per share (Title of class) The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not considered herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the voting stock held by non- affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is $141,737,049 and is based upon the last sales price as quoted on Nasdaq Stock Market for March 25, 1997. The registrant had 4,329,624 shares outstanding as of March 25, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 1996, are incorporated by reference into Parts I and II of this Form 10-K. Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. INDEX PART I Page Item 1. Description of Business .......................... 1 - 57 Business ....................................... 1 - 2 Market Area and Competition .................... 2 - 3 Lending Activities ............................. 3 - 15 Delinquencies and Classified Assets ............ 16 - 21 Allowances for Loan and REO Losses ............. 21 - 25 Investment Activities .......................... 26 - 29 Mortgage-Backed Securities ..................... 30 - 36 Sources of Funds ............................... 36 - 39 Borrowings ..................................... 39 - 41 Subsidiary Activities .......................... 42 Personnel ...................................... 42 Regulation and Supervision ..................... 43 - 54 Federal and State Taxation ..................... 54 - 57 Item 2. Properties ....................................... 57 - 58 Item 3. Legal Proceedings ................................ 59 Item 4. Submission of Matters to a Vote of Security Holders 59 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................... 59 - 60 Item 6. Selected Financial Data .......................... 60 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 60 Item 8. Financial Statements and Supplementary Data ...... 60 Item 9. Change In and Disagreements with Accountants on Accounting and Financial Disclosure .............. 60 PART III Item 10. Directors and Executive Officers of the Registrant 60 Item 11. Executive Compensation ........................... 61 Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 61 Item 13. Certain Relationships and Related Transactions ... 61 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K .............................. 61 - 63 EXHIBIT INDEX Exhibit 11.0 Computation of earnings per share Exhibit 13.0 1996 Annual Report to Stockholders Exhibit 23.0 Consent of Independent Auditors Exhibit 27.0 Financial Data Schedule Exhibit 99 Proxy Statement for 1997 Annual Meeting PART I ITEM 1. DESCRIPTION OF BUSINESS BUSINESS Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") was incorporated under Delaware law on March 25, 1993 as the holding company for Columbia Federal Savings Bank ("Columbia" or the "Bank") in connection with the Bank's conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank. The Company is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision ("OTS"). The Company is headquartered in Woodhaven, New York and its principal business currently consists of the operation of its wholly owned subsidiary, the Bank. At December 31, 1996, the Company had consolidated total assets of $1.6 billion and stockholders' equity of $99.4 million. Currently, the Company does not transact any material business other than through its subsidiary, the Bank. Columbia was established in 1889 as a New York-chartered building and loan association. The Bank converted to a New York-chartered savings and loan association in 1940. The Bank subsequently converted to a federal savings and loan association and in 1983 the Bank converted to a federal savings bank under its current name. The Bank is a member of the Federal Home Loan Bank ("FHLB") System, and its deposit accounts are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). At December 31, 1996, the Bank had total assets of $1.6 billion and stockholders' equity of $97.8 million. 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 and borrowings, primarily in one-to four-family, owner-occupied residential mortgage loans. Since 1994, the Bank has gradually increased its activity in multi-family and commercial real estate lending. In addition, in times of low loan demand, the Bank will invest in debt, equity and mortgage-backed securities to supplement its lending portfolio. The Bank also invests, to a lesser extent, in home equity loans, home 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 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 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. MARKET AREA AND COMPETITION The Bank has been, and continues to be, a community oriented savings institution offering a variety of traditional financial services to meet the needs of the communities in which it operates. Management considers the Bank's reputation and customer service as its major competitive advantage in attracting and retaining customers in its market area. In order to better serve its customers, the Bank has installed ATMs in all of its branches. The Bank's primary market area is concentrated in the neighborhoods surrounding its nine full service banking and nine supermarket banking facilities (five of which opened in the first quarter of 1997) located in the New York City Boroughs of Queens and Brooklyn and in Nassau and Suffolk Counties, New York. During 1996, the Bank opened four supermarket branches and announced plans to open approximately 44 full-service branches in Pathmark Supermarkets throughout New York City, Long Island, Westchester and Rockland counties. Management believes that supermarket branching is a cost effective way to extend the Bank's franchise and put its sales force in touch with more prospective customers than possible through conventional bank branches. Management believes that all of its branch offices are located in communities that can generally be characterized as stable, residential neighborhoods of predominantly one-to four- family residences and middle income families. During the past three years, the Bank's expanded loan work- out/resolution efforts have successfully contributed toward reducing non-performing assets to manageable levels. Although there are a number of encouraging signs in the local economy and the Bank's real estate markets, it is unclear how these factors will affect the Bank's asset quality in the future. See "Delinquencies and Classified Assets." The New York City metropolitan area has a high number of financial institutions, many of which are significantly larger and have greater financial resources than the Bank, and all of which are competitors of the Bank to varying degrees. The Bank's competition for loans and deposits comes principally from savings and loan associations, savings banks, commercial banks, mortgage banking companies, insurance companies and credit unions. In addition, the Bank faces increasing competition for deposits from non-bank institutions such as brokerage firms and insurance companies in such areas as short-term money market funds, corporate and government securities funds, mutual funds and annuities and insurance. Competition may also increase as a result of the lifting of restrictions on the interstate operations of financial institutions. LENDING ACTIVITIES LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily of conventional first mortgage loans secured by owner occupied one-to four-family residences, and, to a lesser extent, multi-family residences, commercial real estate and construction and land loans. Also, the Bank's loan portfolio includes cooperative loans, which the Bank has not originated since 1990 except to facilitate the sale of real estate owned ("REO") or to restructure a problem asset. During 1996, loan originations and purchases totalled $363.6 million (comprised of $271.1 million of residential one-to four family mortgage loans, $83.8 million of commercial and multi-family real estate loans and $8.7 million of consumer loans). One-to four-family mortgage loan originations included $172.3 million of loans purchased in the secondary market during 1996. During the fourth quarter of 1996, $10.6 million of cooperative apartment loans previously transferred to loans held for sale were returned to the loan portfolio at their estimated market value. At December 31, 1996, the Bank had total mortgage loans outstanding of $814.3 million, of which $556.8 million were one- to four-family residential mortgage loans, or 65.6% of the Bank's total loans. At that same date, multi-family residential mortgage loans totalled $105.3 million, or 12.4% of total loans. The remainder of the Bank's mortgage loans, which totalled $152.2 million, or 18% of total loans at December 31, 1996, included $128.0 million of commercial real estate loans, or 15.1% of total loans, $19.9 million of cooperative apartment loans, or 2.4% of total loans and $4.2 million of construction and land loans, or 0.5% of total loans. Other loans in the Bank's portfolio principally consisted of home equity lines of credit and consumer loans and totalled $34.1 million, or 4.0% of total loans at December 31, 1996. The following table sets forth the composition of the Bank's loan portfolio, excluding loans held for sale, in dollar amounts and in percentages of the respective portfolios at the dates indicated.
At December 31, --------------- 1996 1995 1994 1993 1992 --------------- --------------- --------------- --------------- --------------- Percent Percent Percent Percent Percent of of of of of Amount Total Amount Total Amount Total Amount Total Amount Total ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in thousands) Mortgage loans: One-to four-family $556,818 65.63% $325,050 57.03% $258,698 49.34% $211,946 31.07% $134,920 20.87% Multi-family 105,341 12.42 79,008 13.86 94,259 17.98 124,566 18.26 135,352 20.94 Commercial 127,956 15.08 111,038 19.48 102,415 19.54 126,059 18.48 131,497 20.34 Cooperative 19,936 2.35 10,187 1.79 24,369 4.65 183,403 26.88 198,653 30.73 Construction and land 4,227 0.50 5,737 1.01 3,491 0.67 2,347 0.34 4,887 0.75 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total mortgage loans 814,278 95.98 531,020 93.17 483,232 92.17 648,321 95.03 605,309 93.63 Other loans: Home equity lines of credit 15,677 1.85 16,454 2.89 17,802 3.39 17,032 2.50 18,587 2.88 Property improvement loans 6,957 0.82 10,248 1.80 11,814 2.26 7,794 1.14 8,488 1.31 Loans on deposit accounts 809 0.10 821 0.14 940 0.18 1,143 0.17 1,550 0.24 Commercial loans 351 0.04 479 0.08 605 0.12 693 0.10 1,114 0.17 Guaranteed student loans 985 0.12 1,181 0.21 1,761 0.34 2,357 0.35 2,560 0.40 Unsecured consumer loans 809 0.10 1,950 0.34 2,366 0.45 1,659 0.24 1,918 0.30 Other loans 8,506 0.99 7,834 1.37 5,737 1.09 3,220 0.47 6,947 1.07 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total other loans 34,094 4.02 38,967 6.83 41,025 7.83 33,898 4.97 41,164 6.37 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total loans 848,372 100.00% 569,987 100.00% 524,257 100.00% 682,219 100.00% 646,473 100.00% ====== ====== ====== ====== ====== Less: Unearned discounts, premiums and deferred loan fees, net (786) (1,029) (1,375) (805) (1,356) Allowance for loan losses (10,704) (8,573) (10,847) (21,606) (21,027) ------- ------- ------- ------- ------- Loans, net $836,882 $560,385 $512,035 $659,808 $624,090 ======= ======= ======= ======= =======
The following table shows the estimated contractual maturity of the Bank's loan portfolio at December 31, 1996, assuming no prepayments.
At December 31, 1996 Mortgage Other Loans, Loans Loans Net -------- ----- ------ (In thousands) Amounts due: Within one year $ 39,684 $ 1,031 $ 40,715 ------- ------ ------- After one year: One to three years 43,547 4,071 47,618 Three to five years 98,126 2,306 100,432 Five to ten years 80,429 21,944 102,373 Ten to twenty years 266,979 4,232 271,211 Over twenty years 285,513 510 286,023 ------- ------ ------- Total due after one year 774,594 33,063 807,657 ------- ------ ------- Total loans $814,278 $34,094 $848,372 ======= ====== =======
The following table sets forth at December 31, 1996, the dollar amount of all loans due after December 31, 1997, and whether such loans have fixed interest rates or adjustable interest rates.
Due After December 31, 1997 Fixed Adjustable Total ----- ---------- ----- (In thousands) Mortgage loans: One-to four-family $352,251 $201,890 $554,141 Multi-family 50,993 40,968 91,961 Commercial real estate 83,122 25,770 108,892 Cooperative 4,813 14,787 19,600 Other loans 15,259 17,804 33,063 ------- ------- ------- Total loans $506,438 $301,219 $807,657 ======= ======= ======= The following table sets forth the Bank's loan origination, loan purchases, sales and principal repayments for the periods indicated:
Years Ended December 31, 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (In thousands) Mortgage loans (gross): At beginning of year $531,020 $483,232 $648,321 $605,309 $685,681 Mortgage loans originated: One-to four-family 98,783 64,139 77,499 121,812 30,368 Multi-family 46,310 11,726 - 4,667 12,841 Commercial real estate 35,886 26,047 4,688 7,386 6,071 Cooperative (1) - 63 499 362 1,828 Construction and land loans 1,562 4,367 1,000 176 936 ------- ------- ------- ------- ------- Total mortgage loans originated 182,541 106,342 83,686 134,403 52,044 Mortgage loans purchased 172,300 26,241 - - - Transfer of mortgage loans to REO (3,470) (4,638) (10,998) (22,042) (12,861) Transfer of mortgage loans to MBSs - - - - (32,741) Transfer of mortgage loans from/ (to) loans held for sale 10,594 (12,038) - - - Principal repayments (78,209) (67,274) (64,686) (60,315) (66,708) Sales of mortgage loans (2) (498) (845) (173,091) (9,034) (20,106) ------- ------- ------- ------- ------- At end of year $814,278 $531,020 $483,232 $648,321 $605,309 ======= ======= ======= ======= ======= Other loans (gross): At beginning of year $ 38,967 $ 41,025 $ 33,898 $ 41,164 $ 53,462 Other loans originated 8,735 10,746 21,533 12,237 11,639 Principal repayments (13,608) (12,804) (14,406) (19,503) (23,937) ------- ------- ------- ------- ------- At end of year $ 34,094 $ 38,967 $ 41,025 $ 33,898 $ 41,164 ======= ======= ======= ======= =======
(1) Cooperative loan originations in the four years ended 1995 were done solely to facilitate the restructuring and the sale of delinquent cooperative loans and cooperative units held by the Bank as REO. (2) As part of the major bulk sales program in 1994, the Bank sold $170.5 million of loans. ONE-TO FOUR-FAMILY MORTGAGE LENDING. The Bank offers both fixed- rate and ARM loans secured by one-to four-family residences located in the Bank's primary market area. The majority of such loans are secured by property located on Long Island (in Queens, and Nassau and Suffolk Counties), and, to a lesser extent, Manhattan, Brooklyn, Staten Island, and Westchester Counties, and typically serve as the primary residence of the owner. Loan originations are generally obtained from existing or past customers, members of the local communities and local real-estate brokers and attorney referrals. The substantial majority of the Bank's loans are originated through efforts of Bank employed sales representatives who solicit loans from the communities served by the Bank by visiting real estate attorneys, brokers and individuals who have expressed an interest in obtaining a mortgage loan. The Bank also originates loans from its customer base in its branch offices. Beginning in 1995, the Bank also purchased loans on a flow basis from correspondent mortgage bankers in New York, New Jersey and Connecticut in order to supplement one-to four-family loan originations. The Bank generally originates one-to four-family residential mortgage loans in amounts up to 90% of the lower of the appraised value or selling price of the property securing the loan. Properties securing such loans are primarily owner-occupied principal residences. Residential condominium loans are originated in amounts up to a maximum of 90% of the appraised value of the condominium unit. One-to four-family mortgage loans may be originated with loan-to-value ratios of up to 97% of the appraised value of the property under the Federal National Mortgage Association ("FNMA") Community Home Buyers Program, which targets low to moderate income borrowers. Private mortgage insurance is required whenever loan-to-value ratios exceed 80% of the appraised value of the property securing the loan. Loan amounts generally conform to FNMA/Federal Home Loan Mortgage Corporation ("FHLMC") limits. Mortgage loans originated by the Bank generally include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent. Due-on-sale clauses are an important means of enabling the Bank to redeploy funds at current rates thereby causing the Bank's loan portfolio to be more interest rate sensitive. The Bank has generally exercised its rights under these clauses. The Bank currently offers fixed-rate loans up to $750,000 on one- to four-family residences with terms up to 30 years. During 1996, the Bank introduced 30 year and 15 year fixed-rate bi- weekly loans. Interest rates charged on fixed-rate mortgage loans are competitively priced based on market conditions and the Bank's cost of funds. Origination fees generally range from 0% to 3% of the principal amount of the loan. Generally, the Bank's standard underwriting guidelines conform to the FNMA/FHLMC guidelines. The Bank currently offers ARM loans up to $750,000 which adjust either annually, or in 3, 5, 7 or 15 years with maximum loan terms of 30 years. The Bank's ARM loans typically carry an initial interest rate below the fully-indexed rate for the loan. For one year ARMs the Bank qualifies borrowers based upon a rate of 2% over the initial rate. The initial discounted rate is determined by the Bank in accordance with market and competitive factors and, as of December 31, 1996, the discount offered by the Bank on the one year adjustable ARM loan ranged from 289 basis points (with 0% origination fees) to 339 basis points (with 2% origination fees) below the fully-indexed rate, which was 8.26% as of such date. The discount offered by the Bank on the three- year adjustable ARM loan ranged from 211 basis points (with 0% origination fees) to 261 basis points (with 2% origination fees) below the fully-indexed rate, which was 8.73% as of December 31, 1996. The discount offered by the Bank on the five year adjustable ARM loan ranged from 190 basis points (with 0% origination fees) to 240 basis points (with 2% origination fees) below the fully-indexed rate, which was 8.90% as of December 31, 1996. As of December 31, 1996, the discount offered by the Bank on the seven year adjustable ARM loan ranged from 101 basis points (with 0% origination fees) to 151 basis points (with 2% origination fees) below the fully-indexed rate, which was 8.26% as of such date. Finally, as of December 31, 1996, the discount offered by the Bank on the fifteen year adjustable ARM loan ranged from 39 basis points (with 0% origination fees) to 89 basis points (with 2% origination fees) below the fully indexed rate which was 8.26%. As of December 31, 1996, the Bank's ARM loans, with the exception of the five, seven and fifteen year ARM loans, adjust by a maximum of 2.0% each adjustment period, with a life-time cap of 6% over the initial note rate. The maximum periodic rate adjustment on the five year ARM loan is 2.5% and the maximum periodic rate adjustment on the seven year and fifteen year ARM loans for the first adjustment period are 5% which defaults to 2% for all adjustment periods thereafter. The Bank currently charges origination fees ranging from 0% to 2.0% for its one-to four-family ARM loans. ARM loans generally pose a risk that as interest rates rise, the amount of a borrower's monthly loan payment also rises, thereby increasing the potential for delinquencies and loan losses. This potential risk is mitigated by the Bank's policy of originating ARM loans with annual and lifetime interest rate caps that limit the amount that a borrower's monthly payment may increase. However, interest rates and the resulting cost of funds increases in a rapidly increasing interest rate environment could exceed the cap levels on these loans and negatively impact net interest income. During 1996, the Bank originated or purchased $205.1 million of adjustable-rate mortgage loans. In the past, the Bank originated most 30 year fixed-rate loans for immediate sale to the FHLMC or FNMA. The Bank retains 10, 15, 20 year and 15 and 30 year bi-weekly fixed-rate loans while continuing to originate 30-year fixed-rate loans for immediate sale. The Bank arranges for the sale of such loans at the acceptance of the commitment by the applicant to FHLMC or FNMA through forward purchase commitments. The Bank retains the servicing on the loans it sells. For the year ended December 31, 1996, the Bank did not emphasize the origination of 30-year fixed-rate loans and, accordingly, sold only 11 loans totalling $0.5 million to the FNMA and other lenders. During 1996, the Bank purchased $172.3 million of one-to four- family mortgage loans from correspondent mortgage bankers and bulk whole loan purchases to supplement retail originations. Purchases of one-to four-family mortgage loans on a flow basis are limited to the New York, New Jersey and Connecticut metropolitan area to approved correspondents. Credit packages submitted to the Bank by a correspondent are underwritten by the Bank and are subject to the Bank's quality control procedures. The Bank purchased approximately $70.0 million of bulk residential whole loan packages during the year. The Bank performed due diligence procedures on the credit quality of the loans and the servicing operations of the servicer, if applicable, before purchasing the loans. MULTI-FAMILY LENDING. The Bank originates multi-family loans with contractual terms ranging from 5 to 15 years with interim interest rate repricing tied to matching U.S. Treasury Notes plus a margin. These loans are generally secured by apartment and mixed-use (business and residential, with the majority of income coming from the residential units) properties, located in the Bank's primary market area and are made in amounts of up to 75% of the appraised value of the property. In making such loans, the Bank bases its underwriting decision primarily on the net operating income generated by the real estate to support the debt service, the financial resources credit history and ownership/ management experience of the principals/guarantors, and the marketability of the property. The Bank generally requires a debt service coverage ratio of at least 1.20x and sometimes requires personal guarantees from borrowers. As of December 31, 1996, $105.3 million, or 12.4% of the Bank's total loan portfolio, consisted of multi-family residential loans. At December 31, 1996, the Bank's largest multi-family loan had an outstanding balance of $4.6 million and is secured by a mixed use building containing 110 residential units and 5,400 square feet of ground floor retail space. The appraised value of the property securing this loan at July, 1996, the date of the most recent appraisal, exceeded the outstanding loan balance. 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 applies stringent underwriting criteria for all of its loans and originates multi- family, commercial real estate and construction and land loans on a selective basis. See "Commercial Real Estate Lending" and "Construction and Land Lending". COMMERCIAL REAL ESTATE LENDING. The Bank originates commercial real estate loans that are generally secured by properties used exclusively for business purposes such as retail stores, mixed- use properties (residential and retail combined where the majority of the income from the property comes from the commercial business) and, light industrial and small office buildings located in the Bank's primary market area. The Bank's commercial real estate loans are generally made in amounts up to the lesser of 70% of the appraised value of the property or 65% for owner occupied properties. Commercial real estate loans are made on a negotiated basis where the interest rate generally reprices during the term of the loan and is tied to the prime rate or the U.S. Treasury Note rate matched to the repricing frequency of the loan and are made as 10 year balloon loans. The Bank's underwriting standards and procedures are similar to those applicable to its multi-family loans, whereby the Bank considers the net operating income of the property and the borrower's expertise, credit history and profitability. The Bank generally requires that the properties securing commercial real estate loans have debt service coverage ratios of not less than 1.20x and also generally requires personal guarantees from the borrowers or the principals of the borrowing entity. At December 31, 1996, the Bank's commercial real estate loan portfolio totalled $128.0 million, or 15.1% of the Bank's total loan portfolio. The largest commercial real estate loan in the Bank's portfolio was a loan secured by an office building in Brooklyn, New York, which, as of December 31, 1996, had an outstanding balance of $15.9 million and was performing. COOPERATIVE APARTMENT LOANS. Until 1990, the Bank originated loans secured by cooperative units. Since 1990, the Bank has not originated any loans secured by cooperative units with the exception of loans to facilitate the restructuring of a classified asset or sale of REO. In 1994, the Bank was approved as a seller/servicer in a FNMA pilot program, enabling it to originate cooperative apartment loans for immediate sale to FNMA. During 1996, the Bank did not originate any cooperative loans. In addition, during 1996, the Bank returned $10.6 million of performing cooperative apartment loans previously transferred to loans held for sale to the loan portfolio at their estimated market value. CONSTRUCTION AND LAND LENDING. The Bank's construction loans primarily have been made to finance the construction of one-to four-family residential properties, multi-family residential properties and retail properties. The Bank's policies provide that construction and land loans may generally be made in amounts up to 70% of the value when completed. The Bank currently does not actively solicit land loans. The Bank generally requires personal guarantees and evidence that the borrower has invested an amount equal to not less than 20% of the estimated cost of the land and improvements. Construction loans generally are made with adjustable rates and a maximum term of 18 months, subject to renewal. Construction loans are generally made based on pre- sales or pre-leasing. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. As of December 31, 1996, the Bank had $4.2 million, or 0.5% of its total loan portfolio invested in construction and land loans. At December 31, 1996, the Bank's largest construction and land loan had an outstanding balance of $3.0 million for the construction of 108 senior citizen residential apartment units in Bay Port, New York. The loan has been performing since origination. Construction and land loans involve additional risks attributable to the uncertainties inherent in estimating construction and land development costs as well as the market value on the completed project and the effects of governmental regulation of real property. It is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan- to-value ratio to mitigate these risks. The Bank generally engages professional engineers and appraisers at the borrower's expense, to evaluate project costs and value upon completion. As a result of the foregoing, construction and land loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank is forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, the Bank may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time. OTHER LOANS. The Bank also offers home equity loans, equity lines of credit, business loans-lines of credit and Government- guaranteed student loans. As of December 31, 1996 other loans totalled $34.1 million, or 4.0% of the Bank's total loan portfolio. Home equity loans are offered as fixed-rate loans with a maximum term of 15 years, as adjustable-rate loans with a 15 year term or as fixed-variable loans which are fixed for the first 5 years and then become adjustable for the remaining 15 years. The maximum amount is $50,000 and principal and interest amortize over the life of the loan. The Bank also offers equity lines of credit with a term of 25 years on which interest only is due for the first 10 years and thereafter principal and interest payments sufficient to liquidate the line are required for the remaining term not to exceed 15 years. The maximum amount for a equity line of credit is $200,000. All products are underwritten pursuant to the standards applicable to one-to four-family loans which include a determination of the applicant's payment history on other debts and an assessment of the borrower's ability to meet payments on the proposed loan in addition to the borrower's existing obligations. In addition to the credit worthiness of the applicant, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount. The Bank also offers secured and unsecured business loans and lines of credit whose term and rate are negotiable based on the credit standing and financial position of the customer. The Bank's other loans tend to have higher interest rates and shorter maturities than one-to four-family mortgage loans, but also tend to have a higher risk of default than such loans. Although the level of delinquencies in the Bank's other loan portfolio has generally been low ($375,000, or approximately 1.1% of the other loan portfolio, at December 31, 1996 was 90 days or more delinquent), there can be no assurance that delinquencies will not increase in the future. During the fourth quarter of 1995, the Bank stopped offering all other consumer loans, including personal secured and unsecured loans. LOAN APPROVAL PROCEDURES AND AUTHORITY. For one-to four-family real estate loans each loan is reviewed and approved by an underwriter and the department head in accordance with the policies approved by the Board of Directors. Multi-family, commercial and construction loans are approved by designated lending officers within lending authorities approved by the Board of Directors. Loans greater than $750,000 up to $1,500,000 must be approved by the Officers Loan Committee, whereas, loans over $1,500,000 must be approved by the Board of Directors - Loan Committee. Loans exceeding $2,500,000 must be approved by the Board. Loans not secured by real estate and unsecured other loans, depending on the amount of the loan and the loan to value ratio, where applicable, require the approval of at least one lending officer and/or underwriter designated by the Board. For all loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered and certain other information is verified by the Bank's loan underwriters and, if necessary, additional financial information is required. An appraisal of the real estate intended to secure the proposed loan is required which currently is performed by either the staff appraisers of the Bank or by an independent appraiser designated and approved by the Bank. The Board annually approves the independent appraisers used by the Bank and approves the Bank's appraisal policy. It is the Bank's policy to obtain title insurance on all real estate first mortgage loans. Borrowers must also obtain hazard insurance prior to closing. Borrowers generally are required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes, and in some cases, hazard insurance premiums. LOAN CONCENTRATIONS. As a result of OTS regulations, the Bank may not extend credit to a single borrower or related group of borrowers in an amount greater than 15% of the Bank's unimpaired capital and surplus. An additional amount of credit may be extended, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which does not include real estate. At December 31, 1996, the Bank's loans-to-one borrower limit was $16.2 million. There was no one borrower which exceeded this limit in accordance with applicable regulatory requirements. DELINQUENCIES AND CLASSIFIED ASSETS DELINQUENT LOANS. The Bank's collection procedures for mortgage loans include sending a reminder notice to the borrower if the loan is 10 days past due, another notice at 16 days and a late notice after payment is 30 days past due. In the event that payment is not received after the late notice, the loan is referred to the collection department and letters are sent or phone calls are made to the borrower by the collection department. When contact is made with the borrower at any time prior to foreclosure, the Bank attempts to obtain full payment or work out a repayment schedule with the borrower to avoid foreclosure. Generally, foreclosure procedures are initiated when a loan is over 90 days delinquent. Property foreclosed upon is held by the Bank as REO at the lower of its estimated fair value or cost less selling costs at the time of foreclosure. The Bank ceases to accrue interest on all loans 90 days or more past due. The collection procedures for other loans, excluding student loans, generally include telephone calls to the borrower after 10 days of the delinquency. At the 120th day and not later than 180 days past due, unsecured loans are written-off by the Bank and secured loans may be foreclosed upon or negotiations with the borrower continued. The collection procedures for student loans follow those specified by federal and state guidelines. CLASSIFIED ASSETS. Federal regulations and the Bank's Classification of Assets Policy provide for the classification of loans and other assets considered by the OTS to be of lesser quality as "substandard", "doubtful" or "loss" assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor and/or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make "collection or liquidation in full", on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as loss are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Pursuant to OTS guidelines, the Bank is no longer required to classify assets as "special mention" if such assets possess weaknesses but do not expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories. However, the Bank continues to classify assets as "special mention" for internal monitoring purposes. When an insured institution classifies one or more assets, or a portion thereof, as substandard or doubtful, it is required to establish a general allowance for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or a portion thereof, as "loss", it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances. Generally, the policy statement requires that institutions have effective systems and controls to identify, monitor and address asset quality problems, have analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner, and have established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. The Bank's policies provide that the Board of Directors regularly review problem loans and review all classified assets. The Bank believes its policies are consistent with the regulatory requirements regarding classified assets. The Bank generally obtains appraisals on all properties securing loans in foreclosure and foreclosed real estate at or about the time it obtains possession of the property and charges-off any declines in value against the allowance for loan losses. The Bank assesses the value of all REO periodically and charges off any amounts carried in excess of the appraised value against the allowance for REO. Non-performing loans (consisting of non-accrual loans and restructured loans) decreased from $72.8 million at December 31, 1992 to $63.9 million at December 31, 1993, and declined to $28.3 million at December 31, 1994, $16.9 million at December 31, 1995 and $13.9 million at December 31, 1996. The continued decline in the balance of non-performing loans during the five year period was due to the Bank's ongoing efforts to reduce non-performing assets. The significant decrease in non-performing loans during 1994 was mainly due to the sale of $22.0 million of non-accrual and restructured loans as part of the major bulk sales program involving loans and REO completed during the year. REO decreased each year during the five years ended December 31, 1996 from $22.5 million at December 31, 1992 to $17.9 million at December 31, 1993 to $7.8 million at December 31, 1994 (net of an allowance for REO of $717,000) to $2.0 million at December 31, 1995 (net of an allowance for REO of $178,000) to a balance at December 31, 1996 of $1.0 million (net of an allowance for REO of $81,000). During 1994, the Bank sold $12.0 million of cooperative apartment REO in a bulk sale transaction. The Bank intends to continue its efforts to reduce non-performing assets in the normal course of business, but it may continue to seek opportunities to dispose of its non-performing assets through sales to investors or otherwise. The Bank also has restructured loans, which has enabled the Bank to avoid the costs involved with foreclosing on the properties securing such loans while continuing to collect payments on the loans under their modified terms. Troubled debt restructurings ("TDRs") are loans for which certain concessions, such as the reduction of interest rates or the deferral of interest or principal payments, have been granted due to the borrower's financial condition. Interest on TDRs is recognized at the reduced interest rates when the interest rate on the loan is reduced. The Bank restructures loans when it determines that the borrower has attempted to perform on his loan obligation and would perform if the borrower was receiving sufficient income on the property securing the loan to satisfy the borrower's debt obligation. Further, the Bank must find that the insufficient cash flow is most likely due to current market conditions and is temporary, and that the borrower is taking reasonable steps to increase the income generated from the property. At December 31, 1996, the Bank had 23 restructured loans with aggregate principal balances of $3.4 million. Of this amount, 47.0% were residential loans (including cooperative apartment loans), 42.3% were multi-family loans and 10.7% were commercial real estate loans. Management is able to avoid the costs of foreclosing on loans that it restructures and avoids acquiring the properties securing such loans as REO. However, restructured loans have a higher probability of becoming delinquent than loans that have no previous history of delinquency. As of December 31, 1996, 1 restructured loan for $77,000 was 90 days or more past due. There can be no assurance that the remaining loans will continue to perform in accordance with their modified terms. To the extent that the Bank is unable to return these loans to performing status, the Bank will have to foreclose on such loans, which will increase the Bank's REO. The Bank's policy is to recognize income on a cash basis for restructured loans for a period of six months, after which such loans are returned to an accrual basis if they are performing in accordance with their modified terms. At December 31, 1996, the Bank had 21 restructured loans with principal balances of $3.2 million that were on accrual status and 1 additional restructured loan for $134,000 that was on non-accrual status because the loan had not yet performed in accordance with its modified terms for the required six-month seasoning period. For restructured loans that are 90 days or more past due, the loan is returned to non- accrual status and previously accrued but uncollected interest is reversed. At December 31, 1996, the Bank's classified assets consisted of $13.5 million of loans and REO of which $1.1 million was classified as doubtful. The Bank's assets classified as substandard at December 31, 1996 consisted of $12.3 million of loans and $1.2 million of gross REO. Classified assets in total declined $4.6 million, or 25.4% since December 31, 1995. At December 31, 1996, the Bank also had loans aggregating $6.5 million that it had designated special mention. The Bank continues to use the special mention designation for internal monitoring purposes although it is not required by OTS guidelines. Of those assets, 50.6% were multi-family loans and 49.4% were commercial real estate loans. The loans were performing in accordance with their terms at December 31, 1996 but were deemed to warrant close monitoring by management due to one or more factors, such as the absence of current financial information relating to the borrower and/or the collateral, financial difficulties of the borrower or inadequate cash flow from the security property. At December 31, 1996, 1995, and 1994, delinquencies in the Bank's loan portfolio were as follows:
At December 31, 1996 At December 31, 1995 60-89 Days 90 Days or More 60-89 Days 90 Days or More Number Principal Number Principal Number Principal Number Principal of Balance of Balance of Balance of Balance Loans of Loans Loans of Loans Loans of Loans Loans of Loans ------ -------- ------ --------- ------ -------- ------ --------- (Dollars in thousands) One-to four-family 9 $ 950 47 $ 4,083 18 $ 1,215 42 $ 3,800 Multi-family - - 6 1,463 - - 5 967 Commercial - - 11 4,321 - - 8 2,411 Cooperative 5 281 9 431 12 580 15 871 Construction and land loans - - 1 60 - - 4 1,067 Other loans 26 171 21 375 10 53 38 689 -- ------ --- ------ --- ------ --- ------ Total loans 40 $ 1,402 95 $10,733 40 $ 1,848 112 $ 9,805 == ====== === ====== === ====== === ====== Delinquent loans to total loans (1) 0.17% 1.27% 0.32% 1.72% ==== ==== ==== ====
At December 31, 1994 60-89 Days 90 Days or More Number Principal Number Principal of Balance of Balance Loans of Loans Loans of Loans ------ --------- ------ --------- (Dollars in thousands) One-to four-family 15 $ 1,015 58 $ 5,995 Multi-family - - 13 5,088 Commercial 1 41 10 5,579 Cooperative 11 561 18 934 Construction and land loans - - 2 878 Other loans 36 205 34 275 --- ------ --- ------ Total loans 63 $ 1,822 135 $18,749 === ====== === ====== Delinquent loans to total loans (1) 0.35% 3.58% ==== ====
(1) Restructured loans that have become seasoned for the required six month period and are currently performing in accordance with their restructured terms are not included in delinquent loans. There was 1 restructured loan for $77,000 that was included in loans delinquent 90 days or more at December 31, 1996 because it had not yet performed in accordance with its modified terms for the required six month seasoning period. NON-PERFORMING ASSETS. The following table sets forth information regarding all non-accrual loans (which consists 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 six-month seasoning period), restructured loans and REO. The Bank does not accrue interest on loans 90 days past due and restructured loans that have not yet performed in accordance with their modified terms for at least six months. If non-accrual loans had been performing in accordance with their original terms, the Bank would have recorded interest income from such loans of $489,000, $889,000 and $1.3 million for the years ended December 31, 1996, 1995 and 1994, respectively, compared to $220,000, $280,000 and $261,000, which was recognized on non- accrual loans for such periods, respectively. If all restructured loans, as of December 31, 1996, 1995 and 1994, had been performing in accordance with their original loan terms (prior to being restructured), the Bank would have recognized interest income from such loans of $505,000, $714,000 and $967,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (Dollars in thousands) Non-accrual mortgage loans $ 10,358 $ 9,116 $ 18,474 $ 43,170 $ 38,133 Restructured mortgage loans 3,160 7,072 9,550 20,398 33,821 Non-accrual other loans 375 689 275 299 816 ------- ------- ------- ------- ------- Total non-performing loans 13,893 16,877 28,299 63,867 72,770 Real estate owned, net of related reserves 1,038 2,033 7,844 17,887 22,473 ------- ------- ------- ------- ------- Total non-performing assets $ 14,931 $ 18,910 $ 36,143 $ 81,754 $ 95,243 ======= ======= ======= ======= ======= Non-performing loans to total loans 1.64% 2.97% 5.41% 9.37% 11.28% Non-performing assets to total assets 0.94 1.28 2.85 6.65 8.15 Non-performing loans to total assets 0.88 1.15 2.23 5.20 6.23
ALLOWANCES FOR LOAN AND REO LOSSES The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Impaired loans and related reserves have been identified and calculated in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114. On January 1, 1995, the Company adopted, on a prospective basis, SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and the amendment thereof, SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". See Note 1 of Notes to Consolidated Financial Statements in the Registrant's 1996 Annual Report to Stockholders on page 31, which is incorporated herein by reference. The total allowance for loan losses has been determined in accordance with the provisions of SFAS No. 5, "Accounting for Contingencies". The Bank's allowance for loan losses is intended to be maintained at a level sufficient to absorb all estimable and probable losses inherent in the loan portfolio. The Bank reviews the adequacy of the allowance for loan losses on a monthly basis taking into account past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, current and prospective economic conditions and current regulatory guidance. In response to the general decline in the economic conditions of the Bank's primary market area and the national economy in general, management increased the Bank's allowance for loan losses in 1992 and 1993 to account for its evaluation of the potential effects of such factors and in consideration of the deterioration of real estate values experienced in recent periods. During 1994, the Bank established additional loan loss provisions totalling $7.5 million in connection with the bulk sales. At December 31, 1995, the allowance for loan losses was $8.6 million, or 1.51% of total loans compared to $10.8 million, or 2.07% of total loans at December 31, 1994. The Bank took charge-offs of $5.5 million in 1995 compared to $24.7 million in 1994, which included $14.4 million in connection with the bulk sales. The allowance as a percentage of non-performing loans was 50.8% at December 31, 1995 compared to 38.3% at December 31, 1994. During 1996, the Bank took charge-offs of $1.9 million against its loan portfolio compared to $5.5 million for 1995. The reduction in charge-offs for 1996 when compared to 1995 is a direct result of the ongoing decline in non-performing loans during the last five years. Non-performing loans as a percentage of total loans was 1.64% at December 31, 1996 compared to 11.28% at December 31, 1992. The allowance as a percentage of non- performing loans was 77.05% at December 31, 1996 compared to 50.8% at December 31, 1995. The Bank's provisions for loan losses have varied significantly over the past five years. Specifically, the Bank made provisions for loan losses of $19.8 million, $6.4 million, $13.4 million, $2.8 million and $3.1 million for the five years ended December 31, 1996, respectively. Beginning in 1991, it became apparent to the Bank that given the decline in the local economy, increased unemployment rates in the Bank's local market area, the substantial deterioration in local real estate values as evidenced by receipt of appraisals reflecting sharp decreases in property values and increased vacancies in multi-family dwellings as well as an increase in loan delinquencies, it was likely that the Bank would sustain additional losses. It is the Bank's policy to obtain appraisals on properties that the Bank acquires as REO and charge-off that amount of the loan exceeding the appraised value against the allowance for loan losses. The decrease in real estate values that occurred in the early 1990s in the New York metropolitan area resulted in substantial decreases in the value of the collateral securing the Bank's non- performing loans and resulted in an increase in the Bank's charge-offs. Therefore, during 1992 the Bank booked a loan provision of $19.8 million. This provision booked was deemed adequate by management given the decline in the regional economy and the deterioration of real estate values experienced in such periods as evidenced by receipt of appraisals reflecting sharp decreases in property values from prior years; increases in unemployment rates in the Bank's local market areas and increased vacancies in multi-family dwellings as well as an increase in loan delinquencies. Regulatory criticism of the Bank's loan portfolio in prior regulatory examinations was also a factor. The Bank provided $6.4 million for loan losses during 1993 which reflected management's review of the adequacy of the allowance on an ongoing basis. The provision of $13.4 million provided during 1994 included additional provisions of $7.5 million that were established in connection with the bulk sale transactions. During 1995 and 1996, the Bank provided provisions of $2.8 million and $3.1 million, respectively, to maintain the allowance at an adequate level. The Bank also booked provisions for losses on its REO of $291,000 and $750,000, respectively, for the years ended December 31, 1996 and 1995. The significant decline in the provision from 1995 was attributable to the REO portfolio which declined by $995,000, or 48.9% from the previous year. The $10.3 million provision for 1994 was significantly higher because that year's amount included an additional provision of $7.7 million in connection with the bulk sale of $12.0 million of cooperative apartment properties. During 1996, the Bank sold 60 REO properties with a fair value of $3.1 million. The contribution of REO sales and normal write- downs over the past four years has reduced the amount of REO, net from $22.5 million at December 31, 1992 to $1.0 million at December 31, 1996. The Bank will continue to monitor and modify its allowances for loan and REO losses as conditions dictate. Although the Bank maintains its allowance at a level which it considers adequate to provide for potential losses, there can be no assurance that such losses will not exceed the estimated amounts. The following table sets forth the changes in the Bank's allowance for loan losses at the dates indicated.
At or For the Years Ended December 31, 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (Dollars in thousands) Balance at beginning of year $ 8,573 $10,847 $21,606 $21,027 $11,059 Charge-offs: One-to four-family (771) (472) (264) (353) (361) Cooperative (524) (2,142) (8,747) (3,028) (3,266) Multi-family (30) (1,299) (7,932) (1,174) (616) Non-residential and other (560) (1,541) (7,798) (1,651) (5,809) ------ ------ ------ ------ ------ Total charge-offs (1) (1,885) (5,454) (24,741) (6,206) (10,052) Recoveries 891 405 582 385 177 ------ ------ ------ ------ ------ Net charge-offs (994) (5,049) (24,159) (5,821) (9,875) Provision for loan losses 3,125 2,775 13,400 6,400 19,843 ------ ------ ------ ------ ------ Balance at end of year $10,704 $ 8,573 $10,847 $21,606 $21,027 ====== ====== ====== ====== ====== Ratio of net charge-offs during the year to average loans out- standing during the year (2) 0.15% 0.93% 3.83% 0.90% 1.45% Ratio of allowance for loan losses to total loans at the end of year (3) 1.26 1.51 2.07 3.17 3.26 Ratio of allowance for loan losses to non-performing loan at the end of the year (4) 77.05 50.80 38.33 33.83 28.90
(1) Total charge-offs for 1992 were attributable to the substantial increase in non-performing assets that occurred in 1990 and continued into 1992 and the Bank's recognition that given the national recession and the economic conditions in the New York metropolitan area, it was likely that, contrary to the Bank's past experience, the Bank would incur losses on its non- performing assets into the future. Moreover, poor economic conditions resulted in a decrease in the value of the collateral securing the Bank's non-performing loans, which necessitated charge-offs. Total charge-offs for the year ended 1994 were attributable to the bulk sale transactions. (2) The ratio of net charge-offs during the year to average loans outstanding during the year increased significantly in 1994 due to substantial charge-offs taken during the year as a result of the bulk sale transaction and the decrease in average loans outstanding due to the bulk sale transactions. (3) The steady decline in the ratio of allowance for loan losses to total loans is attributable to a decline in non-performing loans as previously mentioned coupled with growth in the Bank's total loans outstanding. Specifically, the Bank's total loans increased from $522.9 million at December 31, 1994 to $569.0 million at December 31, 1995 to $847.6 million at December 31, 1996. (4) The ratio of allowance for loan losses to non-performing loans has increased significantly over the last five years as non-performing loans have declined. The following table sets forth the Bank's allocation of its allowance for loan losses to the total amount of loans in each of the categories listed.
At December 31, 1996 1995 1994 ------ ------ ------ % of % of % of Loans in Loans in Loans in Category Category Category to Total to Total to Total Amount Loans Amount Loans Amount Loans ------ -------- ------ -------- ------ -------- (Dollars in thousands) Mortgage loans: Residential (1) $5,929 80.90% $3,838 72.67% $ 5,685 71.97% Commercial 4,340 15.08 4,175 19.48 4,308 19.53 Construction - - 69 1.00 248 .66 Other loans 435 4.02 491 6.85 606 7.84 ----- ------ ------ ------ ------ ------ Total allowance for loan losses (2) $10,704 100.00% $8,573 100.00% $10,847 100.00% ====== ====== ===== ====== ====== ======
(1) Includes one-to four-family, cooperative and multi-family loans. (2) In order to comply with certain regulatory reporting requirements, management has prepared the above allocation of the Bank's allowance for loan losses among various categories of the loan portfolio for each of the years in the three-year period ended December 31, 1996. In management's opinion, such allocation has, at best, a limited utility. It is based on management's assessment as of a given point in time of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes as and when the risk factors of each such component changes. Such allocation is not indicative of either the specific amounts or the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. In addition, by presenting such allocation, management does not mean to imply that the allocation is exact or that the allowance has been precisely determined from such allocation. INVESTMENT ACTIVITIES The investment policy of the Bank, which is established by the Board of Directors and implemented by the Bank's Asset/ Liability Committee, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Bank's lending activities. Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Additionally, the Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. See "Regulation and Supervision-Federal Savings Institution Regulation-Liquidity." Historically, the Bank has maintained liquid assets above the minimum OTS requirements and at a level believed to be adequate to meet its normal daily activities. At December 31, 1996, the Bank had money market investments and debt and equity securities in the aggregate amount of $6.9 million and $243.4 million (including $146.1 million of debt and equity securities available for sale) with a fair value of $6.9 million and $242.4 million, respectively. On January 1, 1994 the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under SFAS No. 115, debt and mortgage-backed securities ("MBSs") which the Company has the positive intent and ability to hold until maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts using the level yield method over the remaining period to contractual maturity, adjusted, in the case of MBSs, for actual prepayments. Debt and equity securities and MBSs to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale securities and are recorded at fair value, with unrealized gains (losses), net of taxes, reported as a separate component of stockholders' equity. In November, 1995, the Financial Accounting Standards Board ("FASB") issued an implementation guide for SFAS No. 115. The implementation guide provided guidance in the form of a question and answer format and allowed an opportunity from mid-November 1995 to December 31, 1995 for companies to reclassify securities in the held to maturity portfolio to securities in the available for sale portfolio without tainting the remainder of the portfolio. In connection with the implementation guide for SFAS No. 115, the Company reclassified $41.9 million of debt securities and $405.3 million of MBSs previously classified as held to maturity to securities available for sale. The carrying value of the MBSs was adjusted to their market value, which resulted in increasing the carrying value by $3.9 million, and increasing stockholders' equity by $2.1 million, which was net of taxes of $1.8 million. The carrying value of the debt securities approximated market value at the time of the reclassification. At December 31, 1996, the securities available for sale portfolio totalled $370.1 million of which $166.2 million were adjustable- rate securities and $203.9 million were fixed-rate securities. At December 31, 1996, the held to maturity portfolios totalled $295.2 million, comprised of $60.4 million of adjustable-rate securities and $234.8 million of fixed-rate securities. The estimated fair value of the Company's debt securities and MBSs held to maturity portfolios was $3.2 million below the carrying value of the portfolios at December 31, 1996. 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. The following table sets forth certain information regarding the carrying and market values of the Company's money market investments, debt and equity securities and Federal Home Loan Bank ("FHLB") of New York stock at the dates indicated:
At December 31, 1996 1995 1994 ------ ------ ------ Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value -------- ------ -------- ------ ------- ------ (In thousands) Debt and Equity Securities: U.S. Government and agency obligations $170,709 $169,849 $142,383(2) $142,281(2) $111,430(3) $105,938(3) Corporate debt securities 45,350 45,227 45,320 44,437 31,571 31,129 Preferred stock 27,329 27,329 - - - - ------- ------- ------- ------- ------- ------- Subtotal 243,388 242,405 187,703 186,718 143,001 137,067 ------- ------- ------- ------- ------- ------- Adjustable-rate MBS- Mutual Fund - - 3,976 3,976 4,757 4,757 Federal Funds sold 5,000 5,000 5,000 5,000 1,725 1,725 FHLB-NY stock 9,890 9,890 8,138 8,138 6,888 6,888 Money market investments 1,869 1,869 4,064 4,064 5,129 5,129 ------- ------- ------- ------- ------- ------- Total $260,147(1) $259,164(1) $208,881(1) $207,896(1) $161,500(1) $155,566(1) ======= ======= ======= ======= ======= =======
(1) Includes debt and equity securities available for sale totalling $146.1 million, $63.9 million and $17.1 million, at December 31, 1996, 1995 and 1994, respectively, carried at fair value. (2) Included in U.S. Government and agency obligations at December 31, 1995 are federal government agency and FHLB multiple step-up callable notes available for sale with a carrying value and estimated fair value of $42.0 million. These notes are callable periodically at the option of the issuer, but, if not called, have a pre-determined upward adjustment of the interest rate. The notes at December 31, 1995 had contractual maturities between February 1999 and April 2004, and a weighted average rate of 5.75%. During 1996, $40.0 million of the notes were sold and $2.0 million were called. (3) Included in U.S. Government and agency obligations at December 31, 1994 are federal government agency and FHLB multiple step-up callable notes held to maturity with an amortized cost and estimated fair value of $80.0 million and $75.2 million, respectively. These notes are callable periodically at the option of the issuer, but, if not called, have a pre-determined upward adjustment of the interest rate. The notes at December 31, 1994 had contractual maturities between May 1997 and April 2009, and a weighted average rate of 5.99%. During 1995, $38.0 million of the multiple step-up callable notes were called. The table below sets forth certain information regarding the carrying value, weighted average yields and maturities of the Company's money market investments and debt and equity securities at December 31, 1996.
At December 31, 1996 ---------------------------------------------------------------------------------------------------------------- Total Money Market Investments More than More than Five and Debt and Equity Securities One Year or Less One to Five Years to Ten Years Due After 10 Years --------------------------------------- ----------------- ----------------- --------------- ------------------ Average Weighted Weighted Weighted Weighted Remaining Estimated Weighted Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Fair Average Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield -------- -------- -------- -------- -------- -------- -------- -------- --------- -------- -------- -------- (Dollars in thousands) U.S. Government securities and agency obligations $ - - % $ 38,473 6.03% $ 74,203 7.10% $ 58,033 7.38% 9.7 $170,709 $169,849 6.95% Corporate debt securities - - 45,350 5.76 - - - - 2.2 45,350 45,227 5.76 Federal Funds 5,000 5.50 - - - - - - - 5,000 5,000 5.50 Money market investments 1,869 5.39 - - - - - - - 1,869 1,869 5.39 ------- ------- ------- ------- ------- ------- ----- Total $ 6,869 5.47% $ 83,823 5.88% $ 74,203 7.10% $ 58,033 7.38% 5.6 $222,928(1) $221,945(1) 6.67% ======= ===== ======= ===== ======= ===== ======= ===== === ======= ======= ===== Preferred Stock $ 27,329 $ 27,329 6.46% FHLB-NY stock $ 9,890 $ 9,890 6.41% ======= ======= =====
(1) Includes U.S. Government and agency obligations available for sale totalling $118,752. MORTGAGE-BACKED SECURITIES The Bank also invests in MBSs. At December 31, 1996, total MBSs, net, aggregated $422.0 million (including MBSs available for sale with a fair value of $224.0 million, net), or 26.7% of total assets. At December 31, 1996, 77.5% of the MBS portfolio, including Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"), were insured or guaranteed by either FNMA, FHLMC or the Government National Mortgage Association ("GNMA"). At December 31, 1996, $176.2 million, or 41.8% of total MBSs were adjustable-rate and $245.8 million, or 58.2% of total MBSs were fixed-rate. The following table sets forth the carrying amount of the Company's MBS portfolio in dollar amounts and in percentages at the dates indicated.
At December 31, 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Percent Percent Percent Percent Percent Carrying of Carrying of Carrying of Carrying of Carrying of Value Total Value Total Value Total Value Total Value Total -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) MBSs(1): CMOs and REMICS - Agency-backed(2) $117,969 27.96% $220,284 34.97% $111,076 21.11% $101,245 22.46% $ 47,348 13.12% CMOs and REMICS - Non-agency(2) 94,877 22.48 69,109 10.97 65,984 12.54 59,370 13.17 12,261 3.40 FHLMC 97,953 23.21 172,770 27.43 183,874 34.94 166,876 37.01 222,073 61.56 FNMA 110,182 26.12 153,793 24.42 165,314 31.41 123,376 27.36 79,102 21.92 GNMA 983 0.23 13,933 2.21 - - - - - - ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Net MBSs $421,964 100.00% $629,889 100.00% $526,248 100.00% $450,867 100.00% $360,784 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Includes MBSs available for sale of $224.0 million, $439.2 million, $31.1 million, $38.2 million and $94.2 million at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. Effective January 1, 1994, the Company's MBSs available for sale are carried at estimated fair value with the resultant net unrealized gain or loss reflected as a separate component of stockholders' equity, net of related income taxes. Prior to the adoption of SFAS No. 115, the Company carried MBSs held for sale at the lower of amortized cost or estimated fair value. (2) Included in total MBSs are CMOs and REMICs, which, at December 31, 1996, had a gross carrying value of $212.8 million. A CMO is a special type of pass-through debt in which the stream of principal and interest payments on the underlying mortgages or MBSs is used to create classes with different maturities and, in some cases, amortization schedules, as well as a residual interest, with each such class possessing different risk characteristics. The Bank has in recent periods increased its investment in REMICs and CMOs because these securities generally exhibit a more predicable cash flow than mortgage pass-through securities. The Bank's policy is to limit its purchases of REMICs to non high-risk securities as defined by the OTS. The following tables set forth certain information regarding the carrying and market values and percentage of total carrying values of the Bank's mortgage-backed and related securities portfolio.
At December 31, 1996 1995 1994 ------ ------ ------ Carrying % of Market Carrying % of Market Carrying % of Market Value Total Value Value Total Value Value Total Value -------- ----- ------ -------- ----- ------ -------- ----- ------ (Dollars in thousands) Held to maturity: MBSs: FHLMC $ 39,889 9.45% $ 39,594 $ 41,222 6.54% $ 41,352 $162,607 30.90% $157,082 FNMA 71,460 16.94 69,914 78,995 12.54 78,114 165,314 31.41 154,008 ------- ----- ------- ------- ----- ------- ------- ----- ------- Total MBSs 111,349 26.39 109,508 120,217 19.09 119,466 327,921 62.31 311,090 ------- ----- ------- ------- ----- ------- ------- ----- ------- Mortgage-related securities: CMOs and REMICS-Agency backed 24,449 5.79 24,142 22,969 3.65 22,476 101,206 19.23 94,710 CMOs and REMICS- Non-agency 62,142 14.73 62,032 47,528 7.55 47,609 65,984 12.54 61,100 ------- ----- ------- ------- ----- ------- ------- ----- ------- Total mortgage-related securities 86,591 20.52 86,174 70,497 11.20 70,085 167,190 31.77 155,810 ------- ----- ------- ------- ----- ------- ------- ----- ------- Total mortgage-backed and related securities held to maturity 197,940 46.91 195,682 190,714 30.29 189,551 495,111 94.08 466,900 ------- ----- ------- ------- ----- ------- ------- ----- ------- Available for sale: MBSs: GNMA 983 0.23 983 13,933 2.21 13,933 - - - FHLMC 58,064 13.76 58,064 131,548 20.88 131,548 21,267 4.04 21,267 FNMA 38,722 9.18 38,722 74,798 11.87 74,798 - - - ------- ----- ------- ------- ----- ------- ------- ----- ------- Total MBSs 97,769 23.17 97,769 220,279 34.96 220,279 21,267 4.04 21,267 ------- ----- ------- ------- ----- ------- ------- ----- ------- Mortgage-related securities: CMOs and REMICs-Agency backed 93,520 22.16 93,520 197,315 31.32 197,315 9,870 1.88 9,870 CMOs and REMICs- Non-agency 32,735 7.76 32,735 21,581 3.43 21,581 - - - ------- ----- ------- ------- ----- ------- ------- ----- ------- Total mortgage-related securities 126,255 29.92 126,255 218,896 34.75 218,896 9,870 1.88 9,870 ------- ----- ------- ------- ----- ------- ------- ----- ------- Total available for sale securities 224,024 53.09 224,024 439,175 69.71 439,175 31,137 5.92 31,137 ------- ----- ------- ------- ----- ------- ------- ----- ------- Total mortgage-backed and related securities $421,964 100.00% $419,706 $629,889 100.00% $628,726 $526,248 100.00% $498,037 ======= ====== ======= ======= ====== ======= ======= ====== =======
The table below sets forth certain information regarding the carrying value, weighted average yields and maturities of the Company's mortgage-backed and related securities at December 31, 1996.
At December 31, 1996 Over One to Over Five to Mortgage-Backed One Year or Less Five Years Ten Years Over Ten Years and Related Securities Totals ---------------- ----------- ------------ -------------- ----------------------------- Average Weighted Weighted Weighted Weighted Remaining Estimated Weighted Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Market Average Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield -------- -------- -------- -------- -------- -------- -------- -------- --------- -------- --------- -------- (Dollars in thousands) Held to maturity: FNMA $ - - % $ 5,131 7.29% $ 9,793 5.75% $56,536 6.45% 15.2 $71,460 $69,914 6.41% FHLMC 6,405 6.93 2,013 7.00 7,232 6.30 24,239 6.77 14.4 39,889 39,594 6.72 CMOs and Remics 37 6.87 4,339 5.69 - - 82,215 6.72 22.9 86,591 86,174 6.67 ------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ---- Total mortgage- backed and related securities held to maturity 6,442 6.93 11,483 6.63 17,025 5.98 162,990 6.63 18.4 197,940 195,682 6.58 ------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ---- Available for sale: FNMA - - - - - - 38,722 6.98 25.3 38,722 38,722 6.98 FHLMC - - 329 5.47 3,588 7.12 54,147 7.85 23.8 58,064 58,064 7.79 GNMA - - - - - - 983 7.85 27.3 983 983 7.85 CMOs and Remics - - - - - - 126,255 6.69 25.0 126,255 126,255 6.69 ------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ---- Total mortgage- backed and related securities available for sale - - 329 5.47 3,588 7.12 220,107 7.03 24.8 224,024 224,024 7.03 ------ ---- ------- ---- ------- ---- ------- ---- ---- ------- ------- ---- Total mortgage- backed and related securities $ 6,442 6.93% $11,812 6.60% $20,613 6.18% $383,097 6.86% 21.8 $421,964 $419,706 6.82% ====== ==== ====== ==== ====== ==== ======= ==== ==== ======= ======= ====
The following table shows the carrying value, maturity or period to repricing of the Company's mortgage-backed and related securities portfolio at December 31, 1996.
At December 31, 1996 Total Mortgage Fixed Backed Fixed Rate ARM Rate ARM and Related MBSs MBSs CMOs CMOs Securities(1) ---------- ---------- ----- ---- ----------- (In thousands) Amounts due: Within one year $ 6,402 74,843 37 98,193 179,475 ------- ------- ------ ------- ------- After one year: One to three years 7,141 814 - - 7,955 Three to five years 307 - 4,333 - 4,640 Five to 10 years 20,505 - - - 20,505 10 to 20 years 68,888 - 30,880 - 99,768 Over 20 years 27,487 - 80,924 - 108,411 ------- ------- ------- ------- ------- Total due or repricing after one year 124,328 814 116,137 - 241,279 ------- ------- ------- ------- ------- Total 130,730 75,657 116,174 98,193 420,754 Adjusted for: Unamortized yield adjustment 675 329 (1,591) 757 170 Unrealized gain/loss 285 1,442 (528) (159) 1,040 ------- ------- ------- ------- ------- Total mortgage-backed and related securities $131,690 77,428 114,055 98,791 421,964 ======= ======= ======= ======= =======
At December 31, 1996, the weighted average contractual maturity of the Bank's mortgage-backed and related securities portfolio was 21.8 years. (1) Includes $224.0 million of mortgage-backed and related securities available for sale at December 31, 1996, carried at fair value. The following table sets forth the carrying value and the activity in the Company's mortgage-backed and related securities portfolio during the periods indicated.
For the Years Ended December 31, 1996 1995 1994 ------ ------ ------ (In thousands) Mortgage-backed and related securities: At beginning of period $629,889 $526,248 $450,867 MBSs purchased 41,647 68,990 145,468 MBSs sold (101,604) - (51,888) CMOs and Remics purchased 158,654 123,835 95,831 CMOs and Remics sold (205,760) (17,465) (4,909) Amortization and repayments (97,969) (78,086) (106,753) Change in unrealized gain (loss) (2,893) 6,367 (2,368) -------- ------- ------- Balance of mortgage-backed and related securities at end of period (1) $421,964 $629,889 $526,248 ======= ======= =======
(1) Includes $224.0 million, $439.2 million and $31.1 million of mortgage-backed and related securities available for sale at December 31, 1996, 1995 and 1994, respectively, carried at fair value. Effective February 10, 1992, the OTS adopted the Federal Financial Institutions Examination Council "Statement of Policy on Securities Activities" through its Thrift Bulletin 52 ("Bulletin"). The Bulletin requires depository institutions to establish prudent policies and strategies for securities transactions, describes securities trading and sales practices that are unsuitable when conducted in an investment portfolio and sets forth certain factors that must be considered when evaluating whether the reporting of an institution's investments is consistent with its intent and ability to hold such investments. The Bulletin also establishes a framework for identifying when certain mortgage derivative products are high- risk mortgage securities that must be reported in a "trading" or "available for sale" account. Purchases of high-risk mortgage securities prior to the effective date of the Bulletin generally will be reviewed in accordance with previously-existing OTS supervisory policies. The Bank believes that it currently holds and reports its securities and loans in a manner consistent with the Bulletin. The Asset/Liability Committee determines when to make substantial changes in the MBS portfolio. During 1994, the Bank purchased $145.6 million of adjustable rate MBSs which repriced upward due to an increase in rates during 1995. In 1995, the Company purchased $192.8 million of MBSs, of which $160.8 million were adjustable-rate which are expected to help protect the net interest margin during periods of rising interest rates as was experienced during the second half of 1996. The Company completed a $75.0 million leverage transaction in the second quarter of 1995 which utilized short-term borrowings to purchase floating rate, prime-based CMOs. In 1996, the Company purchased $199.5 million of MBSs, of which $49.3 million were adjustable- rate and $150.2 million were fixed-rate primarily to supplement weak loan demand in the first half of 1996. Total adjustable rate securities as a percentage of total MBSs was 46% at December 31, 1995 compared to 42% at December 31, 1996. At December 31, 1996, $327.1 million, or 77.5% of the Bank's MBS portfolio, was directly insured or guaranteed by the FNMA, FHLMC or GNMA. FNMA and FHLMC provide the certificate holder a guarantee of timely payments of interest and scheduled principal payments, whether or not they have been collected. The GNMA MBSs provide a guarantee to the holder of timely payments of principal and interest and is backed by the full faith and credit of the U.S. government. The privately-issued CMOs and REMICs contained in the Bank's held to maturity portfolio and available for sale portfolio totalling $94.9 million, or 22.5% of MBSs have generally been underwritten by large investment banking firms with the timely payment of principal and interest on these securities supported (credit enhanced) in varying degrees by either insurance issued by a financial guarantee insurer, letters of credit or subordination techniques. Substantially all such securities are rated AAA by one or more of the nationally recognized securities rating agencies. These securities are subject to certain credit-related risks normally not associated with U.S. Government and agency MBSs. Among such risks is the limited loss protection generally provided by the various forms of credit enhancements as losses in excess of certain levels are not protected. Furthermore, the credit enhancement itself is subject to the credit-worthiness of the enhancer. Thus, in the event a credit enhancer does not fulfill its obligations, the MBS holder could be subject to risk of loss similar to the purchaser of a whole loan pool. Management believes that the credit enhancements are adequate to protect the Bank from losses, and therefore the Bank has not provided an allowance for losses on its privately issued MBSs. MBSs generally yield less than the loans that underlie such securities, because of the cost of payment guarantees or credit enhancements that result in nominal credit risk. The MBS portfolio had a weighted average yield of 6.90% at December 31, 1996. In addition, MBSs are more liquid than individual mortgage loans and may be used to collateralize obligations of the Bank. In general, MBSs issued or guaranteed by FNMA and FHLMC and certain AA-rated mortgage-backed pass-through securities are weighted at no more than 20% for risk-based capital purposes, and MBSs issued or guaranteed by GNMA are weighted at 0% for risk- based capital purposes, compared to an assigned risk weighting of 50% to 100% for whole residential mortgage loans. These types of securities thus allow the Bank to optimize regulatory capital to a greater extent than non-securitized whole loans. 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 the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. In contrast to MBSs in which cash flow is received (and, hence, prepayment risk is shared) pro rata by all securities holders, the cash flows from the mortgages or MBSs underlying REMICs or CMOs are segmented and paid in accordance with a predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of REMICs or CMOs may therefore carry prepayment risk that differs from that of both the underlying collateral or other tranches. SOURCES OF FUNDS GENERAL. Deposits, loan, mortgage-backed and debt securities repayments, retained earnings and, to a lesser extent, Federal Home Loan Bank ("FHLB") advances are the primary source of the Company's and the Bank's funds for use in lending, investing and for other general purposes. DEPOSITS. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank's deposits consist of passbook, NOW, checking, money market and certificate accounts. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. During 1996, the Bank implemented its supermarket banking program. In May, the Bank opened its first supermarket branch in an Edwards Super Food Store in Medford, Long Island. During July, the Bank opened its second supermarket branch in a ShopRite store in Uniondale, Long Island. During September, the 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. The cost of opening a supermarket branch is approximately one-fifth the cost of a traditional branch, and in the typical store the branch is visible to approximately 20,000 people each week. The Bank believes that supermarket branching is a cost-effective way to extend its franchise and put its sales force in touch with a significant number of prospective customers. During the fourth quarter of 1996, two additional supermarket locations opened, one at an Edwards Super Food Store in West Babylon, Long Island and one at a Pathmark Store in Brooklyn, New York. The branches will be open seven days a week and will provide a broad range of traditional banking services, as well as the full package of financial services offered by CIS, Inc. The Bank's deposits are obtained primarily from the areas in which its branch offices are located. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits. Certificate accounts in excess of $100,000 are not actively solicited by the Bank nor does the Bank use brokers to obtain deposits. During 1996, the Bank continued to offer competitive rates without jeopardizing the value of existing core deposits. During 1996, the Bank continued to experience a transfer of deposits from passbook accounts into certificates of deposit. Certificates of deposit increased from 49.2% of deposits at December 31, 1995 to 52.8% of deposits at December 31, 1996. The Company has been able to maintain a substantial level of core deposits which the Company believes helps to limit interest rate risk by providing a relatively stable, low cost long-term funding base. At December 31, 1996 core deposits represented 47.2% of deposits compared to 50.8% of deposits at December 31, 1995. The Company expects to attract a higher percentage of core deposits from its supermarket branch locations as these locations continue to grow and mature. The following table presents the deposit activity of the Bank for the periods indicated.
Years Ended December 31, 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (In thousands) Deposits $2,441,295 2,055,132 1,810,714 1,671,964 1,508,024 Withdrawals 2,428,315 2,041,495 1,816,309 1,682,613 1,584,433 --------- --------- --------- --------- --------- Net deposits (withdrawals) 12,980 13,637 (5,595) (10,649) (76,409) Deposits acquired - 17,024 - - - Interest credited on deposits 41,362 39,623 31,997 33,691 41,270 --------- --------- --------- --------- --------- Total increase (decrease) in deposits $ 54,342 70,284 26,402 23,042 (35,139) ========= ========= ========= ========= =========
Time deposits by maturity at December 31, 1996 over $100,000 are as follows: Maturity Period Amount --------------- ------ (In thousands) Six months or less $21,703 Over six through 12 months 10,950 Over 12 months 9,038 ------ Total $41,691 ====== The following table sets forth the distribution of the Bank's deposit accounts for the periods indicated and the weighted average nominal interest rates for each category of deposits presented.
Years Ended December 31, 1996 1995 1994 ------ ------ ------ Percent Weighted Percent Weighted Percent Weighted of Average of Average of Average Average Total Nominal Average Total Nominal Average Total Nominal Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate ------- -------- ------ ------- -------- ------ ------- -------- ------ (Dollars in thousands) Passbook accounts $373,337 33.46% 2.49% $405,932 38.60% 2.49% $499,326 50.63% 2.49% Interest earning checking 99,089 8.88 0.90 84,544 8.04 .98 84,643 8.58 1.04 Non-interest earning accounts 12,336 1.11 - 11,698 1.11 - 4,534 .46 - ------- ----- ---- ------- ----- ----- ------- ----- ----- Total passbook and checking accounts 484,762 43.45 2.13 502,174 47.75 2.21 588,502 59.67 2.27 ------- ----- ---- ------- ----- ----- ------- ----- ----- Money market accounts 58,108 5.21 3.32 45,472 4.32 3.49 30,502 3.09 2.47 ------- ----- ---- ------- ----- ----- ------- ----- ----- Certificate accounts: 91 days 7,783 0.70 3.92 11,125 1.06 4.61 8,859 .90 3.20 6 months 85,768 7.69 5.12 75,616 7.19 5.47 70,942 7.19 3.96 7 months 2,228 .20 2.99 3,894 .37 2.94 8,219 .83 2.95 One year 203,259 18.22 5.51 166,956 15.88 5.91 77,790 7.89 4.17 13 months 11,036 0.99 5.12 5,784 .55 3.60 8,708 .88 3.38 18 months 23,407 2.10 5.98 40,453 3.85 6.03 10,477 1.06 4.99 2 to 4 years 131,931 11.82 5.87 88,054 8.37 5.66 72,882 7.39 4.89 Five years 101,690 9.11 6.30 106,366 10.11 6.40 103,278 10.48 6.40 7 to 10 years 5,666 0.51 6.28 5,742 .55 6.25 6,152 .62 6.22 --------- ------ ---- -------- ------ ---- ------- ------ ---- Total certificates 572,768 51.34 5.66 503,990 47.93 5.84 367,307 37.24 4.86 --------- ------ ---- --------- ------ ---- ------- ------ ---- Total deposits $1,115,638 100.00% 4.00% $1,051,636 100.00% 4.00% $986,312 100.00% 3.24% ========= ====== ==== ========= ====== ==== ======= ====== ====
The following table presents, by various rate categories, the amount of certificate accounts outstanding at December 31, 1996, 1995 and 1994 and the periods to maturity of the certificate accounts outstanding at December 31, 1996.
Period of Maturity from December 31, 1996 Within One to Two to Over At December 31, One Two Three Three 1996 1995 1994 Year Years Years Years Total ------ ------ ------ ------ ------ ------ ----- ------- (In thousands) Certificate accounts: 3.99% or less $ 10,396 10,425 50,373 9,940 46 38 372 10,396 4.00% to 4.99% 18,545 55,732 89,735 15,064 1,874 1,378 229 18,545 5.00% to 5.99% 456,789 267,113 143,698 380,083 63,515 3,489 9,702 456,789 6.00% to 6.99% 104,732 175,183 134,733 38,221 48,588 8,389 9,534 104,732 7.00% to 7.99% 10,637 24,557 16,515 2,862 2,959 529 4,287 10,637 8.00% to 8.99% - - 2,835 - - - - - ------- ------- ------- ------- ------ ------ ------ ------- Total $601,099 533,010 437,889 446,170 116,982 13,823 24,124 601,099 ======= ======= ======= ======= ====== ====== ====== =======
BORROWINGS Although deposits are the Bank's primary source of funds, the Bank has from time to time utilized borrowings as an alternative or less costly source of funds. The Bank's primary source of borrowing is advances from the FHLB-NY. These advances are collateralized by the capital stock of the FHLB-NY held by the Bank and certain of the Bank's MBSs. See "Regulation and Supervision-Federal Home Loan Bank System." Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB-NY will advance to member institutions, including the Bank, for purposes other than meeting withdrawals, fluctuates from time to time in accordance with the policies of the OTS and the FHLB-NY. At December 31, 1996, the Bank had $178.4 million of advances outstanding from the FHLB-NY. In addition, the Bank may, from time to time, enter into sales of securities under agreements, generally for up to 30 days, to repurchase ("reverse repurchase agreements") with nationally recognized investment banking firms. Reverse repurchase agreements are accounted for as borrowings by the Bank and are secured by designated securities. The proceeds of these transactions are used to meet cash flow or asset/liability needs of the Bank. At December 31, 1996, the Bank had $142.9 million of reverse repurchase agreements outstanding. The Bank had additional borrowings outstanding in the form of a CMO, which was issued by the Bank's subsidiary, CFSB Funding. The CMO is secured by MBSs that are held by an unaffiliated commercial bank as trustee. The original issuance aggregated $91.7 million, and the Bank received cash of $86.7 million. The outstanding aggregate balance of the CMO at December 31, 1996 was $3.0 million and the book value of the MBSs collateralizing the CMO was $12.2 million. The CMO was originally issued in four tranches, the fourth being a zero coupon tranche. The first three tranches have been paid out and principal and interest payments are now being received by holders of the fourth tranche. The original maturity of the bond issue was structured over 30 years. The estimated remaining life of the CMO as of December 31, 1996 was one year. The funds derived from the issuance of the CMO were used to purchase investment securities. The Bank has an ESOP loan from an unrelated third party lender with an outstanding balance of $2.1 million and an interest rate of 7.91% at December 31, 1996. See Note 11 of Notes to Consolidated Financial Statements in the Registrant's 1996 Annual Report to Stockholders on page 45 which is incorporated herein by reference. The loan, as amended on December 29, 1995, is payable in thirty-two equal quarterly installments beginning December 1995 through September 2003. The loan bears interest at a floating rate based on the federal funds rate plus 250 basis points. The following table sets forth certain information regarding borrowed funds for the dates indicated:
At or For the Years Ended December 31, 1996 1995 1994 ------ ------ ------ (Dollars in thousands) FHLB-NY advances: Average balance outstanding $152,005 $ 95,775 $ 83,147 Maximum amount outstanding at any month-end during the period 195,000 134,175 110,775 Balance outstanding at end of period 178,450 134,175 86,000 Weighted average interest rate during the period 5.54% 5.59% 4.55% Weighted average interest rate at end of period 4.72% 4.21% 5.05% Securities Sold under Agreements to Repurchase: Average balance outstanding $128,677 $ 94,375 $ 47,581 Maximum amount outstanding at any month-end during the period 142,906 150,249 67,538 Balance outstanding at end of period 142,906 126,032 23,003 Weighted average interest rate during the period 5.65% 5.98% 4.45% Weighted average interest rate at end of period 5.09% 4.47% 6.27% Other Borrowings (1): Average balance outstanding $ 7,667 $ 13,293 $ 20,775 Maximum amount outstanding at any month-end during the period 10,725 16,162 27,135 Balance outstanding at end of period 5,077 10,376 16,078 Weighted average interest rate during the period 6.38% 5.49% 6.92% Weighted average interest rate at end of period 9.63% 7.03% 8.86% Total Borrowings: Average balance outstanding $288,349 $203,443 $151,503 Maximum amount outstanding at any month-end during the period 348,631 270,583 199,213 Balance outstanding at end of period 326,433 270,583 125,081 Weighted average interest rate during the period 5.84% 6.50% 5.64% Weighted average interest rate at end of period 5.11% 4.83% 5.82%
(1) Includes the CMO and ESOP loan. SUBSIDIARY ACTIVITIES COLUMBIA RESOURCES CORP. Columbia Resources is a wholly owned subsidiary of the Bank and was formed in 1984 for the sole purpose of acting as a conduit for a partnership to acquire and develop a parcel of property in New York City. Columbia Resources acquired the property, but never developed it. The property was later sold. During 1996, two REO commercial properties totalling $524,000 were transferred from the Bank to Columbia Resources to limit exposure to the Bank from unknown creditors. By December 31, 1996 the properties were written down to a combined value of $440,000. CFSB FUNDING CORP. CFSB Funding is a limited purpose wholly owned finance subsidiary of the Bank that was established in 1986 for the issuance and sale of a CMO collateralized by FHLMC Participation Certificates. The Bank transferred to CFSB Funding FHLMC Participation Certificates having a market value of $91.2 million and $10,000 in cash. See "Borrowings." Upon repayment of the CMO bond, CFSB Funding will have served its limited purpose as a finance subsidiary of the Bank. COLUMBIA INVESTMENT SERVICES, INC. ("CIS") CIS is a wholly owned subsidiary of the Bank organized in 1989 that is engaged in the sale of tax deferred annuities, securities brokerage activities and insurance. CIS participates with MDS/Bankmark, which is registered as a broker-dealer with the SEC and state securities regulatory authorities. All employees of CIS engaged in securities brokerage activities are dual employees of MDS/Bankmark. Products offered through MDS/Bankmark include debt and equity securities, mutual funds, unit investment trusts and fixed and variable annuities. Fixed annuities, life and health insurance, and long term nursing care products are offered through CIS; a licensed general agent with the New York State Department of Insurance. In January 1997, CIS changed its broker/dealer relationship from MDS to BHC Securities, Inc. Management believes that BHC will enhance CIS's distribution of investment products by providing superior technology support, and the ability to offer enhanced product lines. HAVEN CAPITAL TRUST I. On February 12, 1997, Haven Capital Trust I, a statutory business trust fund formed under the laws of the State of Delaware issued $25 million of 10.46% capital securities. See Note 17 of Notes to Consolidated Financial Statements in the Registrant's 1996 Annual Report to Stockholders on page 53 which is incorporated herein by reference. PERSONNEL As of December 31, 1996, the Bank had 346 full-time employees and 60 part-time employees. Even though the employees are not represented by a collective bargaining unit, the Bank considers its relationship with its employees to be good. REGULATION AND SUPERVISION GENERAL The Bank is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The Bank is a member of the FHLB System and its deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to test the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank and their operations. Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings associations set forth herein do not purport to be complete descriptions of such statutes and regulations and their effects on the Bank. FEDERAL SAVINGS INSTITUTION REGULATION Business Activities. The activities of federal savings institutions are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations issued by the agencies to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for federal associations, e.g., commercial, non-residential real property loans, consumer loans, are limited to a specified percentage of the institutions's capital or assets. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limit on loans to one borrower. Generally, this limit is 15% of the Bank's unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. At December 31, 1996, the Bank's unimpaired capital and surplus was $108.2 million and its limit on loans to one borrower was $16.2 million. At December 31, 1996, the Bank's largest aggregate amount of loans to one borrower had an aggregate balance of $8.2 million. QTL Test. The HOLA requires savings institutions to meet a Qualified Thrift Lender ("QTL") test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least 9 months out of each 12 month period. A savings association that fails the QTL test must either convert to a bank charter or operate under certain restrictions. As of December 31, 1996, the Bank maintained 83.1% of its portfolio assets in qualified thrift investments and had more than 65% of its portfolio assets in qualified thrift investments in each of the prior 12 months. Therefore, the Bank met the QTL test. Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, which are based primarily on an institution's capital level. An institution that exceeds all fully phased-in regulatory capital requirements before and after a proposed capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice to, but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of: (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year; or (ii) 75% of its net earnings for the previous four quarters. Any additional capital distributions would require prior OTS approval. In the event the Bank's capital fell below its capital requirements or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. During 1996, the Bank paid dividends of $2.0 million to the Holding Company. The OTS has proposed regulations that would simplify the existing procedures governing capital distributions by savings associations. Under the proposed regulations, the approval of the OTS would be required only for an association that is deemed to be in troubled condition or that is undercapitalized or would be undercapitalized after the capital distribution. A savings association would be able to make a capital distribution without notice to or approval of the OTS if it is not held by a saving and loan holding company, is not deemed to be in troubled condition, has received either of the two highest composite supervisory ratings and would continue to be adequately capitalized after such distribution. Notice would have to be given to the OTS by an association that is held by a savings and loan holding company or that had received a composite supervisory rating below the highest two composite supervisory ratings. An association's capital rating would be determined under the prompt corrective action regulations. See "-Prompt Corrective Regulatory Action." Liquidity. The Bank is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage (currently 5%) of its net withdrawable deposit accounts plus short-term borrowings. OTS regulations also require each savings institution to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1%) of the total of its net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's average liquidity and short- term liquidity ratios for December 31, 1996 were 14.99% and 2.80%, respectively, which exceeded the then applicable requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. Assessments. Savings institutions are required by regulation to pay assessments to the OTS to fund the agency's operations. The general assessment, paid on a semi-annual basis, is computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly Thrift Financial Report. The assessments paid by the Bank for the years ended December 31, 1995 and 1996, totalled $241,000 and $262,000, respectively. Branching. OTS regulations permit federally chartered savings associations to branch nationwide under certain conditions. Generally, federal savings associations may establish interstate networks and geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings associations. Transactions with Related Parties. The Bank's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of transactions with all affiliates to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally requires that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit underwriting standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. Notwithstanding Sections 23A and 23B, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act ("BHC Act"). Further, no savings institution may purchase the securities of any affiliate other than a subsidiary. The Bank's authority to extend credit to its executive officers, directors and 10% shareholders, as well as to entities controlled by such persons, is currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O thereunder. Among other things, these regulations require that such loans to be made on terms and conditions, including credit underwriting standards, substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Regulation O also places individual and aggregate limits on the amount of loans the Bank may make to such persons based, in part, on the Bank's capital position, and requires that certain board approval procedures be followed. HOLA and the OTS regulations, with certain minor variances, apply Regulation O to savings institutions. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring action against all "institution-affiliated parties," including controlling stockholders, and any stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause a more than a minimal loss or other significant adverse effect on an insured savings association. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $5,000 per day for less serious violations, and up to $1 million per day in more egregious cases. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The FDI Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. The OTS and the federal banking agencies have adopted a final rule and Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to implement these safety and soundness standards. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; asset quality; earnings and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final rule establishes deadlines for the submission and review of such safety and soundness compliance plans, when such plans are required. Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations, a leverage ratio requirement of 3.0% of core capital to such adjusted total assets, and a risk-based capital ratio requirement of 8.0% of core and supplementary capital to total risk-based assets. Tangible capital is defined, generally, as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital (also called "Tier 1" capital) is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. In addition, the OTS prompt corrective action regulation provides that a savings institution that has a leverage capital ratio of less than 4% (3% for institutions receiving the highest CAMEL examination rating) will be deemed to be "undercapitalized" and may be subject to certain restrictions. See "- Prompt Corrective Regulatory Action." The risk-based capital standard for savings institutions requires the maintenance of total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 8%. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. The components of core capital are equivalent to those discussed earlier under the 3% leverage standard. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible debt securities, subordinated debt and intermediate preferred stock and, within specified limits, the allowance for loan and lease losses. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The OTS has incorporated an interest rate risk component into its regulatory capital rule. The final interest rate risk rule also adjusts the risk-weighting for certain mortgage derivative securities. Under the rule, savings 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. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200-basis point increase or decrease in market interest rates divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. A savings association whose measured interest rate risk exposure exceeds 2% must deduct an interest rate component in calculating its total capital under the risk-based capital rule. The interest rate risk component is an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Under the rule, there is a two quarter lag between the reporting date of an institution's financial data and the effective date for the new capital requirement based on that data. A savings association with assets of less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. The rule also provides that the Director of the OTS may waive or defer an association's interest rate risk component on a case-by-case basis. The OTS has not implemented the regulatory requirement for savings associations to deduct an interest-rate risk component in calculating their risk-based capital. If the Bank had been subject to an interest rate risk capital component as of December 31, 1996, there would have been no material effect on the Bank's risk-weighted capital. At December 31, 1996, the Bank met each of its capital requirements, in each case on a fully phased-in basis. A chart which sets forth the Bank's compliance with its capital requirements appears in Note 13 to Notes to Consolidated Financial Statements in the Registrant's 1996 Annual Report to Stockholders on page 49, and is incorporated herein by reference. PROMPT CORRECTIVE REGULATORY ACTION Under the OTS prompt corrective action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, a savings institution that has a total risk-based capital of less than 8.0% or either a leverage ratio or a Tier 1 risk-based capital ratio that is less than 4.0% is considered to be undercapitalized. A savings institution that has a total risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is critically undercapitalized. The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "under- capitalized", "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to the institution depending upon its category, including, but not limited to, increased monitoring by regulators, restrictions on growth,and capital distributions and limitations on expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. INSURANCE OF DEPOSIT ACCOUNTS The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending seven months before the assessment period, consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. On September 30, 1996, as part of the omnibus appropriations bill, Congress passed and President Clinton signed the Deposit Insurance Funds Act of 1996 ("Act"). The Act significantly reduced and should eventually end the premium disparity that has existed between banks insured by the BIF and thrifts insured by the SAIF. The Act required SAIF-insured institutions to pay a special one-time assessment to recapitalize the SAIF. The Bank's special one-time insurance assessment amounted to $6.8 million. As a result of the special assessment, the SAIF was capitalized at the required Designated Reserve Ratio (DDR) of 1.25% of estimated insured deposits. Section 7 of the Federal Deposit Insurance Act, as amended by the Funds Act, requires the FDIC to set assessments in order to maintain the target DDR. The Board has, therefore, lowered the rates on deposit insurance assessments paid to the SAIF, while simultaneously widening the spread between the lowest and highest rates to improve the effectiveness of the FDIC's risk-based premium system. The Board has established a process, similar to that which has applied to the Bank Insurance Fund (BIF), for adjusting the rate schedules for both the SAIF and the BIF within a limited range without notice and comment to maintain each of the fund balances at the target DDR. Effective with the semi-annual period beginning on January 1, 1997, the rates of assessments for both BIF-assessable and SAIF-assessable deposits were the same, ranging from 0 to 27 basis points. The Funds Act also separates, effective January 1, 1997, the Financing Corporation ("FICO") assessment to service the interest on its bond obligations from the SAIF assessment. The amount assessed on individual institutions by the FICO will be in addition to any amount paid for deposit insurance pursuant to the FDIC's risk-related assessment rate schedules. However, between October 1, 1996, and January 1, 1997, the amount required by the FICO was deducted from the amounts the FDIC was authorized to assess SAIF-member savings associations, and must not be assessed against Sasser and BIF-member Oakar institutions. FICO assessment rates for the first semi-annual period of 1997 were set at 1.30 basis points annually for BIF-assessable deposits and 6.48 basis points annually for SAIF-assessable deposits. (These rates may be adjusted quarterly to reflect changes in assessment bases for the BIF and the SAIF. By law, the FICO rate on BIF- assessable deposits must be one-fifth the rate on SAIF-assessable deposits until the insurance funds are merged or until January 1, 2000, whichever occurs first.) Beginning January 1, 2000, or the date at which no thrift institution continues to exist, BIF- insured institutions will be required to pay their full pro-rate share of FICO payments. The Bank's annual assessment rate for the first three quarters of 1996 was 23 basis points and was 18 basis points for the last quarter of 1996. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Federal Home Loan Bank System The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB of New York, is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Bank was in compliance with this requirement with an investment in FHLB stock at December 31, 1996 of $9.9 million. FHLB advances must be secured by specified types of collateral, and all long-term advances may only be obtained for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the years ended December 31, 1996, 1995 and 1994, dividends from the FHLB to the Bank amounted to $571,000, $496,000 and $545,000, respectively. If dividends were reduced or interest on future FHLB advances increased, the Bank's net interest income would likely also be reduced. Further, there can be no assurance that the impact of recent legislation on the FHLBs will not also cause a decrease in the value of the FHLB stock held by the Bank. Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $49.3 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $49.3 million, the reserve requirement is $1.5 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $49.3 million. The first $4.4 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The Bank is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but Federal Reserve Board regulations require institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. HOLDING COMPANY REGULATION The Company is a non-diversified unitary savings and loan holding company within the meaning of the HOLA. As such, the Company is required to be registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. The Bank must notify the OTS 30 days before declaring any dividend to the Company. As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a QTL. See "- Federal Savings Institution Regulation - QTL Test" for a discussion of the QTL requirements. Upon any non-supervisory acquisition by the Company of another savings association, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the BHC Act, subject to the prior approval of the OTS, and to other activities authorized by OTS regulation. Legislation has been proposed in the past to restrict the activities of unitary savings and loan holding companies to those permissible for multiple savings and loan holding companies. See "Legislative Developments". The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution or holding company thereof, without prior written approval of the OTS; and from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. LEGISLATIVE DEVELOPMENTS The 1996 Funds Act requires the Secretary of the Treasury to conduct a study of the relevant factors with respect to the development of a common charter for all insured depository institutions and to the abolition of separate charters for banks and thrifts, and the Secretary of the Treasury is to report his conclusions and findings to the Congress on or before March 31, 1997. Proposals to eliminate the thrift charter are included in two bills that have been introduced in Congress to remove statutory restrictions on the operations and activities of financial institutions, including proposed amendments to eliminate the federal thrift charter. One bill would require a federal thrift to convert to a bank charter and the other bill would give the federal thrift the option to convert to a national or state chartered bank or to a state savings and loan association. Existing thrift holding companies, such as the Company, would be grandfathered and continue to be able to engage in the same activities as were permissible for it before the enactment of the new law. Other proposed statutory changes would permit (a) depository institutions to engage in a wider range of securities and insurance activities and (b) affiliations between depository institutions and insurance, securities and other financial companies. The outcome of these efforts to eliminate the thrift charter and to change the regulation of depository institutions and their holding companies is uncertain. Therefore, the Company is unable to determine the extent to which any such legislation, if enacted, would affect the Company's business. FEDERAL SECURITIES LAWS The Company's Common Stock is registered with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. The registration under the Securities Act of 1933 (the "Securities Act") of shares of the Common Stock issued in the Conversion does not cover the resale of such shares. Shares of the Common Stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company will be subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Shares acquired through the Company's option plans have been registered under the Securities Act and, therefore, are not subject to resale restrictions. Provision may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. FEDERAL AND STATE TAXATION FEDERAL TAXATION General. The Company and the Bank report their income on a calendar year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. The Bank and the Company have not been audited by the Internal Revenue Service during the last five fiscal years. The Company and its subsidiaries file a consolidated Federal income tax return on a calendar-year basis. Under Section 593 of the Internal Revenue Code of 1986, as amended ("Code"), prior to January 1, 1996 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 a tax reserve for bad debts. Such thrift institutions were also permitted to make annual additions to the reserve, to be deducted in arriving at their taxable income within specified limitations. The Bank's deduction was computed using an amount based on the Bank's actual loss experience ("experience method"), or a percentage equal to 8% of the Bank's taxable income ("PTI method"). Similar deductions for additions to the Bank's bad debt reserve were also 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 was 32% rather than 8%. Under the Small Business Job Protection Act of 1996 ("1996 Act"), signed into law in August 1996, the special rules for bad debt reserves of thrift institutions no longer apply and the Bank will be unable to make additions to the tax bad debt reserves but will be permitted to deduct bad debts as they occur. Additionally, under the 1996 Act, the Bank will be required to recapture (that is, include in taxable income) the excess of the balance of its bad debt reserves as of December 31, 1995 over the balance of such reserves as of December 31, 1987 ("base year"). The Bank's federal tax bad debt reserves at December 31, 1995 exceeded its base year reserves by $2.7 million which will be recaptured into taxable income ratably over a six year period. This recapture will be suspended for 1997 since the Bank satisfies the residential loan requirement. A taxpayer meets the residential loan requirement if the principal amount of residential loans made by the taxpayer during the year is not less than its base amount. The "base amount" means the average of the principal amounts of the residential loans made by the taxpayer during the six most recent tax years beginning before January 1, 1996. The base year reserves will be subject to recapture, and the Bank could be required to recognize a tax liability, if (i) the Bank fails to qualify as a "bank" for Federal income tax purposes; (ii) certain distributions are made with respect to the stock of the Bank (see "Distributions"); (iii) the Bank uses the bad debt reserves for any purpose other than to absorb bad debt losses; and (iv) there is a change in Federal tax law. Management is not aware of the occurrence of any such event. Distributions. To the extent that the Bank makes "non-dividend distributions" to stockholders, such distributions will be considered as made from the Bank's base year reserve to the extent thereof, and then from the supplemental reserve for losses on loans and an amount based on the amount distributed will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserves. The amount of additional taxable income created from a non- dividend distribution is an amount that when reduced by the tax attributable to the income is equal to the amount of the distribution. Thus, if the Bank makes a non-dividend distribution, approximately one and one-half times the amount so used would be includable in the Bank's gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state taxes). See "Regulation and Supervision" and "Dividend Policy" for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves. Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which a corporation's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). In addition, pending legislative proposals would retroactively reinstate an environmental tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank was subject to an environmental tax liability for tax year ended December 31, 1992, which was not material. Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, 80% of any dividends received may be deducted. Under pending legislative proposals, the 70% dividends received deduction would be reduced to 50%. STATE AND LOCAL TAXATION New York State and New York City Taxation. The Bank and the Company are subject to New York State and City franchise taxes on net income or one of several alternative bases, whichever results in the highest tax. "Net income" means federal taxable income with adjustments. The Company's annual tax liability for each year is the greatest of a tax on allocated entire net income; allocated alternative entire net income; allocated assets to New York State and/or New York City; or a minimum tax. Operating losses cannot be carried back or carried forward for New York State or New York City tax purposes. The Bank is also subject to a surcharge (at the rate of 2.5% of the New York State Franchise Tax for calendar 1996) on its New York State tax and the 17% Metropolitan Commuter District Surcharge on its New York State tax after the deduction of credits. In response to the 1996 Act, the New York State and New York City tax laws have been amended to prevent the recapture of existing tax bad debt reserves and to allow for the continued use of the PTI method to determine the bad debt deduction in computing New York State tax liability. Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempted from Delaware Corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. ITEM 2. PROPERTIES The Bank conducts its business through nine full-service banking and nine supermarket banking facilities (five of which were opened during the first quarter of 1997) located in the New York City Boroughs of Queens and Brooklyn and in Nassau and Suffolk counties, New York. The Bank also maintains an office for data processing and other property for possible future expansion. The total net book value of the Bank's premises and equipment was $8.8 million at December 31, 1996, which included four supermarket branches. During 1996, the Bank opened four supermarket branches and announced plans to open approximately 44 full-service branches in Pathmark supermarkets throughout New York City, Long Island, Westchester and Rockland counties. The Company believes that the Bank's current facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Company.
Net Book Value of Property or Leasehold Improvements Leased or Leased or Date of Lease at December 31, Location Description Owned Acquired Expiration(1) 1996 -------- ----------- --------- --------- ------------- --------------- 93-22/93-30 & 94-09/ Main Office Owned 1957 - $2,806 94-13 Jamaica Avenue Complex & 87-14/86-35 94th St. Woodhaven, NY 11421 Forest Parkway Branch Owned 1979 - 344 80-35 Jamaica Avenue Woodhaven, NY 11421 Howard Beach Branch Owned 1971 - 879 82-10 153rd Avenue Howard Beach, NY 11414 Ozone Park Branch Owned 1976 - 579 98-16 101st Avenue Ozone Park, NY 11416 Bellerose (2) Branch Leased 1973 2003 152 244-19 Braddock Avenue Bellerose, NY 11426 Forest Hills Branch Leased 1959 1999 51 106-17 Continental Ave. Forest Hills, NY 11375 Snug Harbor Branch Leased 1977 2001 459 343 Merrick Road Amityville, NY 11701 Clock Tower(3) Branch Leased 1985 2000 303 91-20 Atlantic Avenue Ozone Park, NY 11417 Rockaway Beach Branch Leased 1996 1998 42 104-08 Rockaway Beach Blvd. Rockaway Beach, NY 11693 Medford (Edwards Super Branch Leased 1996 2001 216 Food Stores) 700-60 Patchogue-Yaphank Road Medford, NY 11763 Uniondale (ShopRite Branch Leased 1996 2001 243 Supermarket) 1121 Jerusalem Avenue Uniondale, NY 11553 Mineola Office Leased 1996 1998 6 242 & 250 Old Country Road Mineola, NY 11501 Bayshore (Edwards Super Branch Leased 1996 2001 340 Food Stores) 533 Montauk Highway Bayshore, NY 11708 Atlantic Terminal (Pathmark Branch Leased 1996 2001 267 Supermarket) 625 Atlantic Avenue Brooklyn, NY 11217
(1) Rent expense for the year ended December 31, 1996 was $404,000. (2) Includes land that is adjacent to the branch office that was acquired by the Bank in 1973. (3) The Bank expects to close this branch in April 1997 and consolidate its operations in a branch located at a Pathmark Supermarket, 92-10 Atlantic Avenue, Ozone Park, New York 11416 which opened in March 1997. ITEM 3. 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. On June 27, 1996, the Bank received a partial payment of its claims against Nationar totalling $4,987,000, at which time $389,000 of a $430,000 reserve previously established was taken into income. On November 20, 1996, the Supreme Court of the State of New York entered an order authorizing the Superintendent to pay a final payment to creditors of Nationar whose claims or accounts payable have been accepted by the Superintendent, reduced by any previous partial payments on such claims or account payable. The Bank received $33,000, which represents the final aggregate payment on the remaining claims totaling $54,000. In February, 1983, a burglary of the contents of safe deposit boxes occurred at a branch office of the Bank. At December 31, 1996, the Bank has a class action lawsuit related thereto pending, whereby the plaintiffs are seeking recovery of approximately $12,900,000 in actual damages and an additional $12,900,000 of unspecified damages. The Bank's ultimate liability, if any, which might arise from the disposition of these claims cannot presently 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information relating to the market for Registrant's common equity and related stockholder matters appears under "Common Stock Information" in the Registrant's 1996 Annual Report to Stockholders on page 56, and is incorporated herein by reference. Information relating to the payment of dividends by the Registrant appears in "Note 13 to Notes to Consolidated Financial Statements" in the Registrant's Annual Report on page 48 and is incorporated herein by reference. The Company initiated a quarterly cash dividend of $0.10 per share in the third quarter of 1995 paid on October 20, 1995. The following schedule summarizes the cash dividends paid for 1995 and 1996: Dividend Payment Dividend Paid Date Per Share Record Date ---------------- ------------- ----------- October 20, 1995 .10 October 2, 1995 January 19, 1996 .10 January 2, 1996 April 29, 1996 .10 April 8, 1996 July 12, 1996 .15 June 27, 1996 October 28, 1996 .15 October 7, 1996 ITEM 6. SELECTED FINANCIAL DATA The above-captioned information appears in the Registrant's 1996 Annual Report to Stockholders on pages 12 and 13 and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The above-captioned information appears under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1996 Annual Report to Stockholders on pages 14 through 26 and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of Haven Bancorp, Inc. and its subsidiaries, together with the report thereon by KPMG Peat Marwick LLP appears in the Registrant's 1996 Annual Report to Stockholders on pages 27 through 54 and are incorporated herein by reference. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 23, 1997, on pages 4 through 8. ITEM 11. EXECUTIVE COMPENSATION The information relating to executive compensation is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 23, 1997, on pages 8 through 20 (excluding the Report of the Compensation Committee on pages 11 through 13 and the Stock Performance Graph on page 14). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 23, 1997, on pages 3 and 5 through 7. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 23, 1997, on pages 20 and 21. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) Consolidated Financial Statements of the Company are incorporated by reference to the following indicated pages of the 1996 Annual Report to Stockholders. Pages Consolidated Statements of Financial Condition as of December 31, 1996 and 1995 ................... 27 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 ............. 28 Consolidated Statements of Changes In Stockholders' Equity for the Three Years Ended December 31, 1996 . 29 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 ............. 30 Notes to Consolidated Financial Statements ......... 31 - 53 Independent Auditors' Report ....................... 54 The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits (filed herewith unless otherwise noted) (a) The following exhibits are filed as part of this report: 3.1 Amended Certificate of Incorporation of Haven Bancorp, Inc.* 3.2 Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock** 3.3 Bylaws of Haven Bancorp, Inc.* 4.0 Rights Agreement between Haven Bancorp, Inc. and Chemical Bank** 10.1 Employment Agreement between Haven Bancorp, Inc. and Philip S. Messina**** 10.2 (a) Form of Change in Control Agreement between Columbia Federal Savings Bank and certain executive officers, as amended**** 10.2 (b) Form of Change in Control Agreement between Haven Bancorp, Inc. and certain executive officers, as amended**** 10.3 Consultation Agreement between Haven Bancorp, Inc. and George S. Worgul*** 10.4 (a) Amended and Restated Columbia Federal Savings Bank Recognition and Retention Plans and Trusts for Officers and Employees*** 10.4 (b) Amended and Restated Recognition and Retention Plan and Trusts for Outside Directors*** 10.5 Haven Bancorp, Inc. 1993 Incentive Stock Option Plan*** 10.6 Haven Bancorp, Inc. 1993 Stock Option Plan for Outside Directors*** 10.7 Columbia Federal Savings Bank Employee Severance Compensation Plan, as amended**** 10.8 Columbia Federal Savings Bank Consultation and Retirement Plan for Non-Employee Directors*** 10.9 Form of Supplemental Executive Retirement Plan* 10.10 Haven Bancorp, Inc. 1996 Stock Incentive Plan**** 11.0 Computation of earnings per share (filed herewith) 13.0 1996 Annual Report to Stockholders (filed herewith) 21.0 Subsidiary information is incorporated herein by reference to "Part I - Subsidiaries" 23.0 Consent of Independent Auditors (filed herewith) 27.0 Financial Data Schedule (filed herewith) 99 Proxy Statement for 1997 Annual Meeting (filed herewith) ________________ * Incorporated herein by reference into this document from the Exhibits to Form S-1, Registration Statement and any amendments thereto, filed on April 14, 1993, Registration No. 33-61048. ** Incorporated herein by reference into this document from the Exhibits to Form 8-K, Current Report, filed on January 30, 1996. *** Incorporated herein by reference into this document from the Exhibits to Form 10-K for the year ended December 31, 1994, filed on March 30, 1995. **** Incorporated herein by reference into this document from the Exhibits to Form 10-K for the year ended December 31, 1995, filed on March 29, 1996. (b) Reports on Form 8-K. One report on Form 8-K was filed by the Company dated September 25, 1996 relating to its agreement with Pathmark Stores, Inc. No financial statements were filed as a part of such report. SIGNATURES Pursuant to the requirements of Section 13 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. By: /s/ George S. Worgul -------------------- George S. Worgul Dated: March 28, 1997 Chairman of the Board Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date /s/ George S. Worgul Chairman of the Board March 28, 1997 - -------------------------- George S. Worgul /s/ Philip S. Messina President and Chief March 28, 1997 - -------------------------- Executive Officer Philip S. Messina /s/ Robert L. Koop Director March 28, 1997 - -------------------------- Robert L. Koop /s/ Robert M. Sprotte Director March 28, 1997 - -------------------------- Robert M. Sprotte /s/ Joseph A. Ruggiere Director March 28, 1997 - -------------------------- Joseph A. Ruggiere /s/ Michael J. Fitzpatrick Director March 28, 1997 - -------------------------- Michael J. Fitzpatrick /s/ William J. Jennings II Director March 28, 1997 - -------------------------- William J. Jennings II /s/ Michael J. Levine Director March 28, 1997 - -------------------------- Michael J. Levine /s/ Catherine Califano Senior Vice President and March 28, 1997 - -------------------------- Chief Financial Officer Catherine Califano
EX-11 2 COMPUTATION OF EPS Exhibit No. 11 Statement re Computation of Earnings Per Share Year Ended December 31, 1996 ----------------- Net income $ 9,424,724 ========= Weighted average shares outstanding 4,158,271 Common stock equivalents due to dilutive effect on stock options 277,397 --------- Total weighted average common shares and equivalents outstanding 4,435,668 ========= Primary earnings per share $ 2.12 ========= Total weighted average common shares and equivalents outstanding 4,435,668 Additional dilutive shares using the end of period market value versus the average market value when applying the treasury stock method 31,699 --------- Total weighted average common shares and equivalents outstanding for fully diluted computation 4,467,367 ========= Fully diluted earnings per share $ 2.11 ========= EX-13 3 ANNUAL RPT TO STOCKHLDRS EXHIBIT 13.0 Annual Report 1996 This report contains statements that are forward-looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially. Such risks and uncertainties include, but are not limited to, those related to overall business conditions, particularly in the markets in which Haven operates, fiscal and monetary policy, competitive products and pricing, credit risk management and changes in regulations affecting financial institutions and other risks and uncertainties discussed from time to time in the Company's SEC filings. Table of Contents President's Letter 1 Financial Highlights 4 A Year of Achievement 5 Selected Financial and Other Data 12 Management's Discussion and Analysis 14 Consolidated Financial Statements 27 Notes to Consolidated Financial Statements 31 Independent Auditors' Report 54 Directors and Officers/Directory 55 Stockholder Information 56 Dear Fellow Stockholders, This past year will undoubtedly prove to be one of the most pivotal in Haven Bancorp's recent history. In addition to building upon our considerable earnings momentum, we embarked on a path we believe will produce tremendous rewards for our shareholders and customers alike. We typically like to take this opportunity to look back to see how successful we have been in accomplishing our goals for the year. We have more than once described 1995 as a "turning point" and "the first of many more years of improving, positive results" for Haven. Also, we have referred to 1996 as a year in which we expected to carry on many of the initiatives we set in place, such as reinvigorating our mortgage loan origination efforts, developing innovative new products and services for our expanding customer base and the start of our supermarket banking strategy. In addition, we noted Haven's improvement in return on average equity to 9.3% for 1995 and stated our interim target return for 1996 to be 12%. Haven Bancorp earned a record $9.4 million in 1996, which included a one-time assessment charge of $6.8 million to recapitalize the Savings Association Insurance Fund (SAIF). Excluding the SAIF assessment charge, our earnings would have been $13.5 million, or a return on average equity of 14.0%. Mortgage loans originated and purchased during 1996 were more than two and a half times greater than the comparable volume for 1995 and first mortgages experienced a year to year increase of 53%. We unveiled many new, successful retail products. However, the most significant event in 1996 was the agreement we reached with Pathmark Supermarkets, Inc. whereby Columbia Federal Savings Bank will open a minimum of 44 in-store bank branches throughout the five boroughs of New York City, Long Island, Westchester and Rockland counties. These are in addition to the two branches we currently have open in Edwards Super Food Stores and another in a ShopRite Supermarket, Inc. The results we have thus far experienced at our first five supermarket branches give us much reason to be optimistic about this enormously important venture. We determined that this project, based on low entry costs, the magnitude of expected returns and the franchise value it will ultimately produce, was the clearest course for Haven Bancorp to enhance shareholder value. We expect this value enhancement to continue for many years to come. We believe that Supermarket Banking or, as we call it, "Banking A La Cart," positions us on the cutting edge of what is certain to be one of the most significant developments in the distribution of banking services in the 1990s. Within 18 months, Columbia expects to have more supermarket branches in the New York area than any other banking institution. We believe we will rank among the top-ten supermarket banks in the country. Supermarket branching is a cost-effective way to extend our franchise and put our sales force in touch with more prospective customers than possible through conventional bank branches while offering the public convenient one-stop shopping. The cost of opening a supermarket branch is approximately one-fifth the cost of a traditional branch, and in the typical store we are clearly visible to some 20,000 prospects each week. At our first five supermarket branches, we have opened thousands of new accounts with balances that exceeded our original forecasts. This strategy not only lengthens our reach into new areas such as Westchester and Rockland counties, it demonstrates Columbia's commitment to providing full-service banking seven days a week with extended customer-friendly hours. Each branch will offer all of our products and services including checking and savings accounts, certificates of deposit, home mortgages and home equity loans, discount brokerage services, mutual funds, annuities and life insurance. The outstanding growth in mortgages originated and purchased over the past eighteen months has resulted in an important shift in the composition of Haven's balance sheet. For the first time in three years, total loans exceeded investment securities. Since loans typically provide a higher yield than investment securities, such a shift in the mix can have a very positive effect on gross yields and ultimate profitability, which, in fact, occurred in 1996. As our growth in loan originations continues, this positive trend and the resultant effect on asset yields will similarly follow. It is important to note that we have undertaken this expansion in mortgage originations while concurrently maintaining a strict vigil on our credit standards and asset quality. Haven's overall asset quality has improved, to the point where our year-end ratio of non-performing assets to total assets, at 0.94%, was one-third below the average of all publicly traded thrifts operating in New York State. Although the challenging credit circumstances we faced during the first half of this decade are clearly behind us, the lessons we learned are deeply ingrained on our lending philosophy and strategies. In 1996, Columbia celebrated substantial successes in a variety of retail and commercial services areas. New customers came to Columbia Federal Savings Bank branches in record numbers to take advantage of our most popular product, Positively Free Checking. The wide acceptance of this account demonstrates the customer- friendly and cost-efficient product positioning we targeted. The account eliminates monthly charges and has served as a powerful magnet for us in attracting new accounts. A specially designed direct marketing program has attracted thousands of new depositors. For our retail customers, 1996 was a year of new services and greater convenience. For instance, with our WealthBuilder Savings account, Columbia customers can make regular monthly deposits and earn a guaranteed annual yield of 6%. Our SmartMoney T-Bill CD Plus earns a monthly variable rate that's always 50 basis points, or 0.5%, above the 90-day T-Bill rate. Our Cash-It Club, which offers check cashing and other convenient services to non-depositors, was introduced at two branches in 1996, with 10 more branches slated to offer the service in the next 12 months. It not only represents a source of income for the bank, it serves as a perfect introduction to the bank's products and services for an entirely new market of potential depositors. EasyTouch Telephone Banking added significant volume as well in 1996, bringing our array of products and services to thousands every day from the convenience of a nearby telephone. We plan to unveil a sophisticated Home Banking system this spring which will revolutionize access to our products and services. Home Banking will enable customers to log on to Columbia via their personal computer and open accounts, check balances, make transfers, and perform a host of other transactions. The Internet also came alive for Columbia in 1996, and we made an impressive showing with a highly informative, extremely user- friendly Web site. Present and prospective customers who log on to our Internet site (http://www.cfsb.com) receive a warm welcome on our Home Page, followed by a logical series of Web pages packed with information on Columbia's products and services. Customers can open an account, check on current rates, and even calculate how much they'll need for a mortgage. Our Internet site has proven extremely successful, with an average of 5,500 "hits" - -or visits- each week from interested consumers. We pride ourselves on creating products that anticipate as well as respond to the financial needs of our customers. We devote considerable effort to maintaining close contact with our market. Through our subsidiary, Columbia Investment Services, Inc., many current and new customers have begun to explore investment services with us, and a large number have signed on for products ranging from stocks, bonds and annuities to mutual funds and life insurance. The bulk of Columbia's investment sales last year were in fixed and variable annuities. We broke the $60 million mark in investment sales for 1996, compared with investments sales of $54 million in 1995. Relative to asset size, Columbia Investment Services, Inc. ranks within the top 1% in gross sales and profits among the country's 416 largest commercial banks and thrift institutions. In February, 1997, Haven Capital Trust I issued $25 million of 10.46% capital securities and invested the proceeds in Junior Subordinated Debentures of Haven. Haven intends to use the net proceeds from the sale of the Junior Subordinated Debentures for general corporate purposes, which may include capital contributions to Columbia, the financing of future acquisitions and the funding of repurchases of the Company's common stock. On a more personal level, we note the passing of our Director, Robert J. Webster, who died in September, 1996 following distinguished and valuable service to the Board for 28 years. In addition, William J. Claffey retired from the Board in January, 1997 after 26 years of service and Robert M. Cashill resigned from the Board in February 1997. These three gentlemen each made significant contributions in guiding Haven to the success we currently enjoy. We welcome William J. Jennings II and Michael J. Levine to our Board of Directors. Mr. Jennings is Managing Director and Chief of Staff to the Chairman of Salomon Brothers Inc., investment bankers. Mr. Levine is President of Norse Realty Group & Affiliates, real estate developers, and a partner of Levine & Schmutter, Certified Public Accountants. They bring a wealth of experience and expertise that will add to the existing Board commitment to enhance shareholder value. We are also pleased to announce the appointment of Msgr. Thomas J. Hartman, Director of Radio and Television for the Diocese of Rockville Centre, to the Board to fill the vacancy created by Mr. Cashill's departure. As I indicated earlier, this was a year of considerable accomplishment. It was also a unique beginning of what we believe will be a major defining point in our Company's future. The development of supermarket branching is an enormous challenge for Haven Bancorp. It is a challenge we relish and one that our employees are singularly prepared to meet with the enthusiasm, talent and skills they bring to bear. We would not have enjoyed our significant success nor be poised for such an attractive future without the support of our loyal customers, stockholders and dedicated staff to whom I extend my most sincere thanks. Sincerely, Philip S. Messina President & Chief Executive Officer March 3, 1997 FINANCIAL HIGHLIGHTS (In thousands of dollars, except per share data)
1996 1995 At Year End --------- --------- Total Assets $1,583,545 1,472,816 Loans, Net 836,882 560,385 Securities Available for Sale 370,105 503,058 Debt Securities Held to Maturity 97,307 127,796 Mortgage-Backed Securities Held to Maturity 197,940 190,714 Real Estate Owned, Net 1,038 2,033 Deposits 1,137,788 1,083,446 Borrowed Funds 326,433 270,583 Stockholders' Equity 99,384 98,519 Non-Performing Assets 14,931 18,910
1996 1995 1994 For the Year ------ ------ ------ Net Interest Income $47,885 41,319 41,202 Provision for Loan Losses 3,125 2,775 13,400 Non-Interest Income 9,554 9,022 6,529 Real Estate Operations, Net 277 1,405 12,253 SAIF Recapitalization Charge 6,800 - - Other Non-Interest Expense 31,378 30,387 28,888 Income Tax Expense (Benefit) 6,434 7,230 (2,475) Net Income (Loss) 9,425(1) 8,544 (4,335) Net Income (Loss) per common share: Primary 2.12(1) 1.89 (0.94) Fully Diluted 2.11(1) 1.87 (0.94) Performance Ratios Return on Average Assets 0.62% 0.63% (0.35)% Return on Average Assets excluding SAIF assessment charge 0.89 0.63 (0.35) Return on Average Equity 9.83 9.27 (4.90) Return on Average Equity excluding SAIF assessment charge 14.04 9.27 (4.90) Net Interest Margin 3.29 3.17 3.48 Non-Performing Assets to Total Assets 0.94 1.28 2.85 Allowance for Loan Losses to Non- Performing Loans 77.05 50.80 38.33
(1) Net income excluding the SAIF assessment charge would have been $13.5 million, or $3.03 per share ($3.01 per share, fully diluted). Haven Bancorp, Inc. is the holding company for Columbia Federal Savings Bank which converted from a federally chartered mutual to a federally chartered stock savings bank on September 23, 1993. Columbia Federal is a wholly-owned subsidiary of the holding company whose principal business is the operation of the Bank. The Bank, which was organized in 1889, is a community oriented institution offering deposit products, residential and commercial real estate loans and a full range of financial services including discount brokerage, mutual funds, annuities and insurance. Headquartered in Woodhaven, New York, the Bank serves its customers through nine full-service banking and five supermarket banking facilities located in the New York City Boroughs of Queens and Brooklyn and in Nassau and Suffolk Counties, New York. The Bank's deposits are insured up to the maximum allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). A Year of Achievement The future of banking has arrived, and it's revolutionizing the way financial products and services are reaching consumers. Columbia Federal Savings Bank's Supermarket Banking program will give us a presence throughout the New York region - in the form of "Banking A La Cart." Columbia has a reputation for outstanding customer service based on our in-depth knowledge of our customers and a long history of anticipating and responding to their needs with market specific products and services. In 1996 we continued to demonstrate this unique understanding of our constituency in a bold fashion by embarking on a plan of strategic growth that promises to broaden our customer base and improve profit-ability. Supermarket Banking is at the nucleus of our commitment to expansion. Those unaccustomed to Banking A La Cart may be surprised to discover a full-service in-store branch right inside their local supermarket. Every one of these locations reveals our dedication to meeting our customers' demands for convenient and attractive products and services, every day of the week. Our Banking A La Cart branches are a natural outgrowth of our traditional branch structure. In the supermarket environment, customers are offered an array of checking and savings accounts, loan products and mortgages found at every Columbia branch office. Offerings include financial products and services, investments, as well as life insurance. Although the typical supermarket branch measures approximately 500 square feet, the space is optimized to allow sales associates to interact with customers in a comfortable setting. Supermarket Banking affords Columbia the opportunity to tap a vast and varied demographic mix and to offer banking services in a safe, convenient environment. In order to maximize the benefits of operating an in-store branch, Columbia sales associates open accounts and establish relationships by greeting prospective customers in the aisles and explaining the Bank's offerings in a simple, friendly manner. As a result, the account process is facilitated and customers are easily introduced to an assortment of financial services. Columbia's premier account! Positively Free Checking! represents a strong anchor in attracting customers and in creating cross- selling opportunities. With no minimum balance requirements, no monthly fees and no per-check charges, Positively Free Checking has served as a powerful magnet for new depositors, and for new accounts from current customers. No other bank in Columbia's marketing area offers such an attractive checking program. Therefore, depositors who have been locked out of the opportunity to open a checking account because of the high account charges and strict balance requirements imposed by other institutions are heartened to learn that Columbia offers an affordable checking plan. Columbia continues to appeal to a broad constituency by offering alternatives to Positively Free Checking in the form of a variety of interest-earning checking accounts. Full service for Columbia means catering to the needs of the community with products and services that make a difference in people's lives. We've responded to the needs of our marketplace again in 1996 by making the banking and borrowing process easier and more convenient in numerous ways. This is evident in our innovative, user-friendly Web site and our Telephone Banking program. In 1997 our PC Banking program will let customers bank conveniently from their home or office computer. Notwithstanding an increasingly competitive marketplace in 1996, Columbia Federal Savings Bank doubled its commercial and multi- family real estate loan production as compared to 1995. Our disciplined credit and underwriting standards were applied to larger average loans. Flexible loan structure coupled with longer terms and more frequent repricings have resulted in significant efficiencies. Columbia's timely and understanding response to borrower needs have been responsible for developing and maintaining strong customer relationships. The growth of residential lending, which experienced enormous success in 1996, will be enhanced by in-store banking. Mortgage customers outside our current market area will soon be able to establish a full-service banking relationship at future in-store locations. The sales associates at each Supermarket Banking location are well trained in and prepared to advise customers of the wide variety of residential lending products offered by the Bank. One example is the Bi-Weekly Mortgage option. This allows mortgage holders to make payments on a biweekly basis, rather than on a traditional monthly schedule resulting in savings of thousands of dollars in interest costs over the life of their loan. The Bank continues to target home equity credit opportunities. With a variety of home equity loans and a home equity line of credit, Columbia serves homeowners from across the region who may be looking for financing for any purpose, from home improvements or a new car, to education, a wedding, or even a vacation. Customers looking for Savings Accounts continue to look to Columbia, which provides savings packages tailored to virtually every need. To complement the Banking A La Cart program and as an incentive for our Supermarket Banking customers, Columbia created the exclusive SmartShopper's Savings Account. Depositors with a Positively Free Checking account earn a higher rate when they open the innovative Smartshopper's Savings Account. Columbia's Management Savings Account, a multi-tiered savings plan linked to account balances, once again satisfies the requirements of a varied customer base by allowing customers to save at their own pace. Again responding to the needs of the marketplace, Columbia offers a range of Certificates of Deposit, as well as the popular SmartMoney T-Bill CD Plus. This represents another example of a product innovation by offering a rate that adjusts every month to one-half of one percentage point over the prevailing 90-day T- Bill rate. Columbia's supermarket sales associates are trained and licensed to offer annuity and life insurance products provided through Columbia Investment Services, Inc. (CIS), as well as mutual funds and discount stock and bond brokerage services offered through CIS's relationship with BHC Securities, Inc. Customers interested in life insurance are put in touch with a qualified CIS life insurance specialist. Beginning in 1997, CIS will be dealing directly with a select group of insurance companies that offer virtually every type of policy. Columbia has responded to its customer base by expanding the Good-Friends, GreatTimes Club. This group grows more popular every year, and 1996 was no exception. What began as a simple gathering of people from all segments of the community who get together to take in local events and visit regional sites, has expanded enormously. Today this popular travel club attracts hundreds of community residents to a variety of destinations and functions. Its horizons are broadening each year: Trips are slated for Hawaii, Alaska and the Caribbean Islands. Columbia's Cash-It Club appeals to those who, although not Columbia depositors, want the convenience of quick and easy check cashing and bill paying. It represents a viable entree into the accounts and services offered by Columbia. The Club made its debut in supermarket branches in 1996 and will be introduced to 10 Banking A La Cart locations in the near future. As Columbia opens more in-store banking branches in New York City, Long Island, Westchester and Rockland, more shoppers are destined to discover the full complement of financial products and services, all delivered in a convenient, shopper-friendly manner from true banking professionals. SELECTED CONSOLIDATED FINANCIAL DATA
December 31, (In thousands) 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Total assets $1,583,545 1,472,816 1,268,774 1,229,140 1,168,120 Loans, net 836,882 560,385 512,035 659,808 624,090 Securities available for sale 370,105 503,058 48,189 38,190 94,205 Debt securities held to maturity 97,307 127,796 130,706 19,208 11,275 Mortgage-backed securities held to maturity 197,940 190,714 495,111 412,677 266,579 Real estate owned, net 1,038 2,033 7,844 17,887 22,473 Deposits 1,137,788 1,083,446 1,013,162 986,760 963,718 FHLB advances 178,450 134,175 86,000 55,800 - Other borrowed funds 147,983 136,408 39,081 80,216 139,777 Stockholders' equity 99,384 98,519 86,235 95,810 55,358
SELECTED FINANCIAL RATIOS AND OTHER DATA
At or For the Years Ended December 31, (In thousands of dollars, 1996 1995 1994 1993 1992 except per share data) ------ ------ ------ ------ ------ Performance Ratios: Return on average assets 0.62% 0.63 (0.35) (0.06) 0.25 Return on average assets excluding SAIF assessment charge (1) 0.89 0.63 (0.35) (0.06) 0.25 Return on average equity 9.83 9.27 (4.90) (1.05) 5.58 Return on average equity excluding SAIF assessment charge (1) 14.04 9.27 (4.90) (1.05) 5.58 Stockholders' equity to total assets 6.28 6.69 6.80 7.79 4.74 Net interest spread 3.12 2.99 3.34 3.28 3.11 Net interest margin (2) 3.29 3.17 3.48 3.38 3.22 Average interest-earning assets to average interest-bearing liabilities 103.95 104.23 104.42 102.61 102.24 Operating expenses to average assets (3) 2.04 2.18 2.26 2.26 2.01 Stockholders' equity per share (4) $ 22.98 21.84 18.95 19.49 NA Asset Quality Ratios: Non-performing loans to total loans (5) 1.64% 2.97 5.41 9.37 11.28 Non-performing assets to total assets 0.94 1.28 2.85 6.65 8.15 Allowance for loan losses to non- performing loans (5) 77.05 50.80 38.33 33.83 28.90 Allowance for loan losses to total loans 1.26 1.51 2.07 3.17 3.26 Other Data: Number of deposit accounts 171,382 155,424 140,701 132,044 122,880 Mortgage loans serviced for others $197,017 219,752 239,844 110,058 138,386 Loan originations and purchases $363,576 143,329 105,219 146,640 63,683 Facilities: Full service offices 14 9 9 9 10
(1) Excludes the SAIF assessment charge in 1996 of $6.8 million. (2) Calculation is based on net interest income before provision for loan losses divided by average interest-earning assets. (3) For purposes of calculating these ratios, operating expenses equal non-interest expense less real estate operations, net where applicable, of $0.3 million, $1.4 million, $12.3 million, $9.4 million and $5.7 million for the five years ended December 31, 1996, respectively. For the five years ended December 31, 1996, non-performing loan expense of $0.4 million, $0.6 million, $0.9 million, $1.2 million and $1.6 million, respectively, was also excluded from non-interest expense. For the year ended December 31, 1996, the SAIF assessment charge of $6.8 million was also excluded. (4) Not applicable prior to conversion on September 23, 1993. Based on 4,325,407, 4,511,457 and 4,551,406 shares outstanding at December 31, 1996, 1995 and 1994, respectively. (5) For purposes of calculating these ratios, non-performing loans consist of all non-accrual loans and restructured loans. SELECTED CONSOLIDATED OPERATING DATA
At or For the Years Ended December 31, (In thousands of dollars, 1996 1995 1994 1993 1992 except per share data) ------ ------ ------ ------ ------ Interest income $ 109,253 96,434 81,491 79,236 93,481 Interest expense 61,368 55,115 40,289 41,833 56,914 Net interest income 47,885 41,319 41,202 37,403 36,567 Provision for loan losses 3,125 2,775 13,400 6,400 19,843 Net interest income after provision for loan losses 44,760 38,544 27,802 31,003 16,724 Non-interest income: Loan fees and servicing income 1,807 2,241 790 943 957 Savings/checking fees 3,378 2,861 2,282 2,205 2,168 Net gain on sales of interest-earning assets 140 126 372 552 3,449 Insurance annuity and mutual fund fees 3,114 2,525 2,025 1,736 2,636 Other 1,115 1,269 1,060 1,072 1,096 Total non-interest income 9,554 9,022 6,529 6,508 10,306 Non-interest expense: Compensation and benefits 15,737 14,889 13,605 11,809 10,679 Occupancy and equipment 3,478 3,334 3,238 3,631 3,450 Real estate operations, net 277 1,405 12,253 9,401 5,676 SAIF recapitalization charge 6,800 - - - - Federal deposit insurance premiums 2,327 2,653 2,709 2,554 2,223 Other 9,836 9,511 9,336 9,416 9,125 Total non-interest expense 38,455 31,792 41,141 36,811 31,153 Income (loss) before income tax expense (benefit) and cumulative effect of change in accounting principle 15,859 15,774 (6,810) 700 (4,123) Income tax expense (benefit) 6,434 7,230 (2,475) 1,392 (1,615) Income (loss) before cumulative effect of change in accounting principle 9,425 8,544 (4,335) (692) (2,508) Cumulative effect of change in accounting principle (1) - - - - 5,487 Net income (loss) $ 9,425(2) 8,544 (4,335) (692) 2,979 Net income (loss) per common share: Primary $ 2.12(2) 1.89 (0.94) (0.09)(3) NA Fully diluted $ 2.11(2) 1.87 (0.94) (0.09)(3) NA
(1) This addition to net income relates to the Bank's adoption of SFAS No. 109 effective January 1, 1992. (2) Net income excluding the SAIF assessment charge would have been $13.5 million, or $3.03 per share ($3.01 per share, fully diluted). (3) Represents loss per common share for the quarter ended December 31, 1993 since the stock conversion occurred on September 23, 1993. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") was formed on March 25, 1993 as the Holding Company for Columbia Federal Savings Bank ("Columbia" or the "Bank") in connection with the Bank's conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank. The Company is headquartered in Woodhaven, New York and its principal business currently consists of the operation of its wholly-owned subsidiary, Columbia Federal Savings Bank. The Company had no operations prior to September 23, 1993. 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 mortgage-backed securities to supplement its lending portfolio. The Bank also invests, to a lesser extent, in multi-family residential mortgage loans, commercial real estate loans 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 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 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. FINANCIAL CONDITION The Company had total assets of $1.58 billion at December 31, 1996, compared to $1.47 billion at December 31, 1995, an increase of $110.7 million, or 7.5%. The Company's portfolio of debt and equity securities and mortgage-backed securities ("MBSs") available for sale ("AFS") totalled $370.1 million, a decrease of $133.0 million, or 26.4% at December 31, 1996 compared to $503.1 million at December 31, 1995. At December 31, 1996, of the AFS securities portfolio, $166.2 million were adjustable-rate securities and $203.9 million were fixed-rate securities. During 1996, there was a continued shift in interest-earning assets to mortgage loans from MBSs through management of the Company's AFS portfolio to maximize yields. Mortgage loan yields are generally higher than those of MBSs. During 1996, the Company purchased $321.2 million of debt and equity securities and MBSs for its AFS portfolio, of which $52.3 million were adjustable-rate and $268.9 million were fixed- rate. Principal repayments and proceeds from sales of AFS securities totalled $448.3 million. A portion of the proceeds from AFS sales were used to fund loan originations and to purchase bulk whole loan packages totalling approximately $70.0 million. In November, 1995, the Financial Accounting Standards Board ("FASB") issued an implementation guide for Statement of Financial Accounting Standards ("SFAS") No. 115. The implementation guide provided guidance in the form of a question and answer format and allowed an opportunity from mid-November 1995 to December 31, 1995 for companies to reclassify securities in the held to maturity portfolio to securities in the AFS portfolio without tainting the remainder of the portfolio. In connection with the implementation guide for SFAS No. 115, the Company reclassified $41.9 million of debt securities and $405.3 million of MBSs previously classified as held to maturity to AFS securities. The carrying value of the MBSs was adjusted to their market value, which resulted in increasing the carrying value by $3.9 million, and increasing stockholders' equity by $2.1 million, which was net of taxes of $1.8 million. The carrying value of the debt securities approximated market value at the time of the reclassification. At December 31, 1996, the debt securities and MBS held to maturity portfolios totalled $295.2 million, comprised of $60.4 million of adjustable-rate securities and $234.8 million of fixed-rate securities. During 1996, the Company purchased $45.3 million of debt securities and MBSs for its held to maturity portfolio. These were all fixed rate securities. Principal repayments on MBSs and debt securities and maturities and calls on debt securities held to maturity totalled $69.5 million. The estimated fair value of the Company's debt securities and MBS held to maturity portfolios were $3.2 million below the carrying value of the portfolios at December 31, 1996. 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. Net loans increased by $276.5 million, or 49.3% during 1996 to $836.9 million at December 31, 1996 from $560.4 million at December 31, 1995. Loan originations and purchases during 1996 totalled $363.6 million (comprised of $271.1 million of residential one-to four-family mortgage loans, $83.8 million of commercial and multi-family real estate loans and $8.7 million of consumer loans). One-to four-family mortgage loan originations included $172.3 million of loans purchased in the secondary market during 1996. Commercial and multi-family real estate loan originations increased by $41.6 million to $83.8 million in 1996 from $42.2 million in 1995, or 98.6% comprised of $46.3 million of multi-family loans and $37.5 million of commercial real estate loans. Total loans increased substantially while the Company continued towards its objective to shift toward adjustable-rate loans. At December 31, 1996, total loans were comprised of $301.8 million adjustable-rate loans and $545.8 million fixed-rate loans. During 1996, principal repayments totalled $91.8 million and $3.5 million was transferred to REO. During the fourth quarter, $10.6 million of loans held for sale were returned to the loan portfolio at their estimated fair value. Included in other assets at December 31, 1996 was $6.2 million of net deferred tax assets compared to $4.1 million at December 31, 1995. The increase in the overall deferred tax asset from 1995 was attributable to an increase in the difference between the financial statement credit loss provision and the tax bad debt deduction along with a decrease in the deferred tax liability related to securities marked to market for financial statement purposes. These increases were partially offset by the deferred tax liability related to the recapture of a portion of the tax bad debt reserve per Section 593 of the Internal Revenue Code, as amended during 1996. (See Note 9 to Notes to Consolidated Financial Statements). Management believes that the Company's projected future earnings will allow the Company to generate future taxable income sufficient to utilize the deferred tax asset over time. Deposits totalled $1.14 billion at December 31, 1996, an increase of $54.3 million, or 5.0% from $1.08 billion at December 31, 1995. Interest credited retained totalled $41.4 million in addition to deposit growth of $12.9 million. In May, 1996, the Bank opened its first supermarket branch in an Edwards Super Food Store in Medford, Long Island. During July, 1996, the Bank opened its second supermarket branch in a ShopRite store in Uniondale, Long Island. During September, Columbia 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. During the fourth quarter of 1996, two additional supermarket locations opened, one at an Edwards Super Food Store in West Babylon, Long Island, and one at a Pathmark Store in Brooklyn, New York, bringing total deposits for the four locations to $12.1 million at December 31, 1996. Throughout most of 1996, the Bank continued to experience a transfer of deposits from passbook and money market accounts into certificates of deposit. As a result, certificates of deposit increased from 49.2% of deposits at December 31, 1995 to 52.8% of deposits at December 31, 1996. Other deposit accounts decreased from 50.8% of deposits at December 31, 1995 to 47.2% of deposits at December 31, 1996. Borrowed funds increased 20.6% to $326.4 million at December 31, 1996 from $270.6 million at December 31, 1995. The increase in borrowings was used to provide funding for loan originations and whole loan bulk purchases during 1996. Stockholders' equity totalled $99.4 million, or 6.3% of total assets at December 31, 1996, an increase of $0.9 million, or 0.9% from $98.5 million, or 6.7% of total assets at December 31, 1995. The increase reflects net income of $9.4 million, an increase of $1.9 million related to the allocation of ESOP stock, amortization of awards of shares of common stock by the Bank's Recognition and Retention Plans and Trusts ("RRPs") and amortization of deferred compensation plan and $0.2 million related to stock options exercised, net of taxes. These components were offset by a decrease of $2.9 million in unrealized appreciation on AFS securities, the purchase of 225,537 shares of treasury stock for $5.5 million and dividends declared of $2.2 million. INTEREST RATE SENSITIVITY ANALYSIS The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap". An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within the same period. A gap is considered positive when the amount of interest-earning assets maturing or repricing exceeds the amount of interest-bearing liabilities maturing or repricing within the same period. A gap is considered negative when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest- earning assets maturing or repricing within the same period. Accordingly, in a rising interest rate environment, an institution with a positive gap would be in a better position to invest in higher yielding assets which would result in the yield on its assets increasing at a pace closer to the cost of its interest-bearing liabilities, than would be the case if it had a negative gap. During a period of falling interest rates, an institution with a positive gap would tend to have its assets repricing at a faster rate than one with a negative gap, which would tend to restrain the growth of its net interest income. The Company closely monitors its interest rate risk as such risk relates to its operational strategies. The Company's Board of Directors has established an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which generally meets weekly and reports to the Board on interest rate risk and trends on a quarterly basis. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1996 which are anticipated by the Company, based upon certain assumptions described below, to reprice or mature in each of the future time periods shown. Adjustable-rate assets and liabilities are included in the table in the period in which their interest rates can next be adjusted. For purposes of this table, prepayment assumptions for fixed interest-rate assets are based upon industry standards as well as the Company's historical experience and estimates. The Company has assumed an annual prepayment rate of approximately 11% for its fixed-rate MBS portfolio. The computation of the estimated one-year gap assumes that the interest rate on passbook account deposits is variable and, therefore, interest sensitive. During the rising interest rate environment throughout 1996, these funds were maintained at an average rate of 2.49%, but may be repriced upward if rates continue to rise. The Company has assumed that its passbook, NOW and money market accounts, which totaled $528.2 million at December 31, 1996, are withdrawn at the annual percentages of approximately 11%, 5% and 26%, respectively.
More Than More Than More Than More Than Three One Year Three Five Years Ten Years Months Three to to Years to to to More Than (Dollars in thousands) or Less Twelve Months Three Years Five Years Ten Years Twenty Years Twenty Years Total ------- ------------- ----------- ---------- ---------- ------------ ------------ ----- Interest-earning assets: Mortgage loans (1) $ 65,434 119,134 200,096 206,736 123,095 89,425 - 803,920 Other loans (1) 13,694 6,263 2,686 2,125 6,604 2,150 197 33,719 MBSs held to maturity 8,338 19,308 42,818 42,258 64,194 21,024 - 197,940 Debt securities held to maturity - - 52,249 2,075 12,022 30,961 - 97,307 Securities available for sale 370,105 - - - - - - 370,105 Money market investments 6,869 - - - - - - 6,869 ------- ------- ------- ------- ------- ------- ------ --------- Total interest-earning assets 464,440 144,705 297,849 253,194 205,915 143,560 197 1,509,860 Premiums, net of unearned discount and deferred fees (2) 10 3 7 6 5 3 - 34 ------- ------- ------- ------- ------- ------- ------ --------- Net interest-earning assets 464,450 144,708 297,856 253,200 205,920 143,563 197 1,509,894 ------- ------- ------- ------- ------- ------- ------ --------- Interest-bearing liabilities: Passbook accounts 10,019 30,022 100,048 65,252 82,795 57,258 16,313 361,707 NOW accounts 1,461 4,360 56,817 15,200 20,396 11,207 2,075 111,516 Money market accounts 3,592 10,749 21,311 10,017 7,839 1,425 775 5,010 Certificate accounts 170,897 275,273 130,749 24,168 12 - - 601,099 Borrowed funds 205,437 42,413 77,420 620 543 - - 326,433 ------- ------- ------- ------- ------- ------- ------ --------- Total interest-bearing liabilities 391,406 362,817 386,345 115,257 111,585 69,890 18,465 1,455,765 ------- ------- ------- ------- ------- ------- ------ --------- Interest sensitivity gap $73,044 (218,109) (88,489) 137,943 94,335 73,673 (18,268) 54,129 ======= ======= ======= ======= ======= ======= ====== ========= Cumulative interest sensitivity gap $73,044 (145,065) (233,554) (95,611) (1,276) 72,397 54,129 ======= ======= ======= ======= ======= ======= ====== Cumulative interest sensitivity gap as a percentage of total assets 4.61% (9.16)% (14.75)% (6.04)% (0.08)% 4.57% 3.42% Cumulative net interest-earning assets as a percentage of interest-sensitive liabilities 118.66% 80.77% 79.52% 92.39% 99.91% 105.04% 103.72%
(1) For purposes of the gap analysis, mortgage and other loans are reduced for non-performing mortgage loans and other loans but are not reduced for the allowance for loan losses. (2) For purposes of the gap analysis, premiums, unearned discount and deferred fees are pro-rated. At December 31, 1996, the Company's total interest-bearing liabilities maturing or repricing within one year exceeded its total interest-earning assets maturing or repricing within the same time period by $145.1 million, representing a one year cumulative gap ratio of negative 9.16%. 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 an AFS securities portfolio. During 1996, the Company purchased $49.3 million of adjustable- rate MBSs which are expected to help protect net interest margins during periods of rising interest rates. The Company also purchased $6.0 million of floating rate corporate notes for its debt securities portfolio. In 1996, the Company originated or purchased $205.1 million of adjustable-rate mortgage loans. Historically, the Company has been able to maintain a substantial level of core deposits which the Company believes helps to limit interest rate risk by providing a relatively stable, low cost long-term funding base. At December 31, 1996, core deposits represented 47.2% of deposits compared to 50.8% of deposits at December 31, 1995. The Company expects to attract a higher percentage of core deposits from its supermarket branch locations as these locations continue to grow and mature. AVERAGE STATEMENTS OF FINANCIAL POSITION The following table sets forth certain information relating to the Company's average consolidated statements of financial condition and consolidated statements of operations for the three years ended December 31, 1996 and reflects 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 by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are 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.
1996 1995 1994 Average Average Average Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ------- ------- -------- ------- ------- -------- ------- Assets: Interest-earning assets: Mortgage loans $647,516 $53,110 8.20% $503,085 $42,115 8.37% $594,104 $45,277 7.62% Other loans 35,952 3,638 10.12 40,418 4,215 10.43 36,478 3,417 9.37 MBSs(1) 543,810 37,517 6.90 557,977 37,510 6.72 439,189 25,705 5.85 Money market investments 2,175 176 8.09 4,313 339 7.86 8,344 821 9.84 Debt and equity securities (1) 227,521 14,812 6.51 199,600 12,255 6.14 105,356 6,271 5.95 --------- ------- --------- ------ --------- ------ Total interest-earning assets 1,456,974 109,253 7.50 1,305,393 96,434 7.39 1,183,471 81,491 6.89 Non-interest earning assets 61,120 57,149 54,348 --------- --------- --------- Total assets 1,518,094 1,362,542 1,237,819 Liabilities and stockholders' equity: Interest-bearing liabilities: Passbook accounts 373,337 9,314 2.49 405,932 10,105 2.49 499,326 12,458 2.49 Certificate accounts 572,768 32,436 5.66 503,990 29,426 5.84 367,307 17,864 4.86 NOW accounts 111,425 999 0.90 96,242 939 0.98 89,177 923 1.04 Money market accounts 58,108 1,929 3.32 45,472 1,585 3.49 30,502 752 2.47 Borrowed funds 285,951 16,690 5.84 200,788 13,060 6.50 147,112 8,292 5.64 --------- ------- --------- ------ --------- ------ Total interest-bearing liabilities 1,401,589 61,368 4.38 1,252,424 55,115 4.40 1,133,424 40,289 3.55 Other liabilities 20,628 17,946 15,845 --------- --------- --------- Total liabilities 1,422,217 1,270,370 1,149,269 Stockholders' equity 95,877 92,172 88,550 --------- --------- --------- Total liabilities and stockholders' equity $1,518,094 $1,362,542 $1,237,819 Net interest income/net interest ========= ========= ========= rate spread (2) $47,885 3.12% $41,319 2.99% $41,202 3.34% Net interest-earning assets/net ====== ==== ====== ==== ====== ==== interest margin (3) $55,385 3.29% $52,969 3.17% $50,047 3.48% Ratio of interest-earning assets ====== ==== ====== ==== ====== ==== to interest-bearing liabilities 103.95% 104.23% 104.42% ====== ====== ======
(1) Includes AFS securities and securities held to maturity. (2) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net interest margin represents net interest income before provision for loan losses divided by average interest-earning assets. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 GENERAL The Company reported net income of $9.4 million for 1996 compared to a net income of $8.5 million for 1995. The $0.9 million increase in earnings was primarily attributable to an increase of $12.9 million in interest income, an increase of $0.5 million in non-interest income and a reduction of $0.8 million in income tax expense. These factors were mainly offset by interest expense which increased by $6.3 million, an increase of $0.4 million in the provision for loan losses and non-interest expense which increased by $6.7 million (which included the one-time $6.8 million SAIF assessment charge). INTEREST INCOME Interest income increased by $12.9 million, or 13.3% to $109.3 million in 1996 from $96.4 million in 1995. The increase was primarily the result of an increase in interest income on mortgage loans, and debt and equity securities which were partially offset by a decrease in interest income on other loans and money market investments. Interest income on mortgage loans increased by $11.0 million, or 26.1% to $53.1 million in 1996 from $42.1 million in 1995 primarily as a result of an increase in the average mortgage loan balance of $144.4 million partially offset by a decrease in average yield on mortgage loans of 17 basis points. During 1996, the Bank originated or purchased $354.9 million of mortgage loans which included $172.3 million of one-to four-family mortgage loans purchased in the secondary market during 1996. Mortgage loan originations for 1996 were originated at an average rate of 7.56% compared to 8.03% for 1995. The decline in the average rate for originations was primarily due to decreases in the rate indices used for residential and commercial real estate loans. These indices which are the 30 year treasury bond and the 5 year treasury note declined 19 and 21 basis points, respectively, for 1996 when compared to 1995. Principal repayments totalled $78.2 million in 1996 compared to $67.0 million in 1995. RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31, 1996 Year Ended December 31, 1995 Compared to Compared to Year Ended December 31, 1995 Year Ended December 31, 1994 Increase (Decrease) Increase (Decrease) In Net Interest Income In Net Interest Income Due to Due to (In thousands) Volume Rate Net Volume Rate Net ------ ------ --- ------ ------ --- Interest-earning assets: Mortgage loans $11,866 (871) 10,995 (7,351) 4,189 (3,162) Other loans (455) (122) (577) 390 408 798 MBSs(1) (974) 981 7 7,617 4,188 11,805 Money market investments (173) 10 (163) (341) (141) (482) Debt and equity securities(1) 1,787 770 2,557 5,778 206 5,984 ------ ----- ------ ------ ------ ------ Total 12,051 768 12,819 6,093 8,850 14,943 ------ ----- ------ ------ ------ ------ Interest-bearing liabilities: Passbook accounts (791) - (791) (2,353) - (2,353) Certificate accounts 3,935 (925) 3,010 7,498 4,064 11,562 NOW accounts 141 (81) 607 1 (55) 16 Money market accounts 424 (80) 344 453 380 833 Borrowed funds 5,067 (1,437) 3,630 3,363 1,405 4,768 ------ ----- ------ ------ ------ ------ Total 8,776 (2,523) 6,253 9,032 5,794 14,826 ------ ----- ------ ------ ------ ------ Net change in net interest income $ 3,275 3,291 6,566 (2,939) 3,056 117 ====== ===== ====== ====== ====== ======
Interest income on other loans decreased by $577,000, or 13.7% to $3.6 million in 1996 from $4.2 million in 1995 due to a decrease of $4.5 million in average balances and a decline of 31 basis points in the average yield. The Bank's consumer loan products with the exception of equity loan/lines was discontinued in November 1995. The consumer loan portfolio balance will continue to amortize until all loans are satisfied except for the overdraft line-of-credit product. Interest income on MBSs was $37.5 million for both 1996 and 1995. The average balance for 1996 decreased by $14.2 million, or 2.5% to $543.8 million from $558.0 for 1995. This decrease was offset by the average yield which increased by 18 basis points to 6.90% for 1996 from 6.72% in 1995. During 1996, the Bank purchased $161.1 million of MBSs for its AFS portfolio which were offset by sales totalling $304.2 million. The average balance for 1996 was down only $14.2 million because 96% of the net change in the MBS portfolio occurred during the second half of 1996. The sales from the AFS portfolio were used to fund mortgage loan originations, purchases of loans in the secondary market and also for managing the AFS portfolio to improve overall yield and shorten duration of various securities. The improvement in the overall yield on MBS securities was due to an increase in market rates during the first quarter of 1996. During 1996, the Bank also purchased $38.4 million of MBSs for the held to maturity portfolio which were offset by principal repayments totalling $32.0 million. Interest income on money market investments decreased by $163,000, or 48.1% to $176,000 in 1996 from $339,000 in 1995 primarily as a result of a decrease in average balances of $2.1 million in 1996. The decrease in the average balances is the result of the Company's strategy to take advantage of its liquidity and invest in higher yielding assets. Interest on debt and equity securities increased by $2.6 million, or 20.9% to $14.8 million in 1996 from $12.3 million in 1995 primarily as a result of an increase in the average balance of $27.9 million and an increase in average yield of 37 basis points. During 1996, the Company purchased $160.1 million of debt and equity securities for its AFS portfolio which were offset by sales totalling $63.5 million. The increase in the overall yield to 6.51% from 6.14% was due to the acquisition of callable agency securities and Federal National Mortgage Association ("FNMA") preferred stock. In addition, during 1996, the Bank purchased $7.0 million of debt securities for the held to maturity portfolio offset by principal repayments totalling $37.5 million. INTEREST EXPENSE Interest expense increased by $6.3 million, or 11.3% to $61.4 million in 1996 from $55.1 million in 1995. The increase was partially attributable to an increase in interest on deposits of $2.6 million, or 6.2% to $44.7 million in 1996 from $42.1 million in 1995. The increase in interest on deposits was due to an increase of $64.0 million, or 6.1% in average deposits to $1.12 billion in 1996 from $1.05 billion in 1995. The overall cost of deposits was 4.00% for both years. Interest expense on certificate accounts increased by $3.0 million, or 10.2% to $32.4 million in 1996 from $29.4 million in 1995. The average balance of certificate accounts increased by $68.8 million, or 13.6% to $572.8 million in 1996 from $504.0 million in 1995. The average cost of certificates decreased to 5.66% in 1996 from 5.84% in 1995. During most of 1996, the Bank continued to experience net outflows from passbook accounts into its certificates of deposit accounts. In 1996, passbook accounts experienced an excess of withdrawals over deposits of $16.0 million, while certificates of deposit experienced an excess of deposits over withdrawals of $36.8 million. Interest expense on passbook accounts decreased by $791,000, or 7.8% to $9.3 million in 1996 from $10.1 million in 1995 primarily due to a decrease in average balances of $32.6 million due to customers seeking higher yielding investment opportunities including the Bank's certificates of deposit accounts. The Bank maintained its passbook rate at 2.49% for both years. Interest on borrowed funds increased by $3.6 million, or 27.8% to $16.7 million in 1996 compared to $13.1 million in 1995. Borrowed funds on an average basis increased by $85.2 million in 1996 due to an increase in short-term advances with the Federal Home Loan Bank ("FHLB") and reverse repurchase agreements with brokers to provide funding for loan originations and partial funding for residential loans purchased in the secondary market which included two bulk purchases totalling approximately $70.0 million. The average cost of borrowings decreased to 5.84% in 1996 from 6.50% in 1995 due to a reduction in short and intermediate term rates during the end of 1995 and the beginning of 1996. NET INTEREST INCOME Net interest income increased by $6.6 million, or 15.9% to $47.9 million in 1996 from $41.3 million in 1995. The average yield on interest-earning assets increased by 11 basis points to 7.50% in 1996 from 7.39% in 1995, and the average cost of liabilities decreased by 2 basis points to 4.38% in 1996 from 4.40% in 1995. The net interest rate spread was 3.12% in 1996 compared to 2.99% in 1995. PROVISION FOR LOAN LOSSES The Bank provided $3.1 million for loan losses in 1996 compared to $2.8 million in 1995. The provision for loan losses reflects management's periodic review and evaluation of the loan portfolio. The increase in the provision for loan losses was due to the growth in the Bank's residential and commercial mortgage loan portfolios. As of December 31, 1996, the allowance for loan losses was $10.7 million compared to $8.6 million at December 31, 1995. As of December 31, 1996, the allowance for loan losses was 1.26% of total loans compared to 1.51% of total loans at December 31, 1995. The decrease was attributable to the growth in the loan portfolio and a decline in non-performing loans. The allowance for loan losses was 77.05% of non-performing loans at December 31, 1996 compared to 50.80% at December 31, 1995. NON-INTEREST INCOME Non-interest income increased by $532,000, or 5.9% to $9.6 million in 1996 from $9.0 million in 1995. Fee income on savings and checking accounts increased by $517,000, or 18.1% primarily due to an increase of approximately 16,000 in the number of active accounts. Annuity, insurance and mutual fund fees increased by $589,000, or 23.3% due to an increase of $224,000 in annuity income, an increase of $200,000 in mutual fund income and an increase of $165,000 in revenue from the distribution of traditional life insurance products. The increase in sales of annuity and mutual fund products by Columbia Investment Services, Inc. ("CIS"), the Bank's wholly-owned subsidiary, is partially due to the increased demand for alternative sources of investments by the Bank's depositors. Approximately 45% of sales were from withdrawals of deposit balances from the Bank. Finally, loan fees and servicing income decreased by $434,000, or 19.4% to $1.8 million in 1996 from $2.2 million in 1995. The decrease was attributable to prepayment fees on commercial real estate loans which were higher in 1995 due to the prepayment of several large commercial real estate loans. During 1996, the Company realized net gains of $371,000 on the sales of AFS securities which were offset by an increase of $228,000 in the valuation allowance on cooperative apartment loans held for sale. NON-INTEREST EXPENSE Non-interest expense increased by $6.7 million, or 21.0% to $38.5 million in 1996 from $31.8 million in 1995. The increase in non- interest expense was primarily due to the SAIF recapitalization charge of $6.8 million which was recorded in the third quarter of 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 was 65.7 basis points per $100 of insured deposits at March 31, 1995. Compensation and benefit costs increased by $848,000, or 5.7% to $15.7 million in 1996 from $14.9 million in 1995. Salary costs increased by $1.6 million due to normal merit increases, staff hired for the supermarket banking program and an increase in commission costs for CIS. These factors were partially offset by a curtailment gain of $266,000 which was recorded upon the freeze of the Bank's pension plan as of July 1, 1996. The curtailment gain coupled with a decrease in the normal accrual for 1996 reduced pension expense by $462,000 when compared to the previous year. During 1996, the Bank accrued a matching contribution for its employee 401(k) contributions of $120,000. Real estate owned ("REO") operations, net decreased by $1.1 million, or 80.3% to $277,000 for 1996 from $1.4 million for 1995. REO expenses incurred on properties in the portfolio decreased by $669,000 and the provision for REO decreased by $459,000, respectively, since the REO portfolio decreased by $995,000, or 48.9% from the previous year. The annual premium paid for SAIF insurance, exclusive of the SAIF assessment charge, decreased by $326,000, or 12.3% to $2.3 million for 1996 from $2.7 million for 1995 due to a reduction in the premium for the fourth quarter of 1996 which included a rebate for the 1996 overassessment. Finally, other non-interest expenses increased by $325,000, or 3.4% to $9.8 million for 1996 from $9.5 million for 1995. During 1996, advertising costs increased by $233,000 to support the Bank's various products and for the implementation of the supermarket banking program. Miscellaneous expenses increased by $587,000 due to the settlement of two legal suits totalling $150,000 and agency fees incurred to hire staff for the supermarket program. These increases were partially offset by the reversal of a reserve of $430,000 for potential losses relating to checks in process of collection which were held by Nationar. During 1996, the Bank recovered all of its previously outstanding claims. (See Note 12 to Notes to Consolidated Financial Statements.) INCOME TAX EXPENSE Income tax expense was $6.4 million in 1996 compared to $7.2 million in 1995. In the fourth quarter of 1996, the Company recorded the benefit resulting from a change in the method it used for determining the federal tax return treatment of its bad debt reserve. This resulted in a reduction in its effective federal tax rate for the fourth quarter of 1996 and the entire year. In the third quarter of 1996, the Company recorded a tax benefit relating to the method of computing its bad debt reserve for New York State income tax purposes. Income tax expense for 1996 was reported at an effective tax rate of 40.6% compared to 45.8% in 1995. (See Note 9 to Notes to Consolidated Financial Statements.) COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 GENERAL The Company reported net income of $8.5 million for 1995 compared to a net loss of $4.3 million for 1994. The $12.8 million increase in earnings was primarily attributable to an increase of $14.9 million in interest income, a decrease of $10.6 million in the provision for loan losses, a decrease of $9.3 million in non- interest expense and an increase of $2.5 million in non-interest income. These were partially offset by an increase in interest expense of $14.8 million and an increase of $9.7 million in income tax expense. INTEREST INCOME Interest income increased by $14.9 million, or 18.3% to $96.4 million in 1995 from $81.5 million in 1994. The increase was primarily the result of an increase in interest income on MBSs, debt securities and other loans which was partially offset by a decrease in interest income on mortgages and money market investments. Interest income on mortgage loans decreased by $3.2 million, or 7.0% to $42.1 million in 1995 from $45.3 million in 1994 primarily as a result of a decrease in the average loan balance of $91.0 million partially offset by an increase in average yield of 75 basis points. The decrease in average balances of mortgage loans is primarily due to the sale of non-performing commercial, multi-family real estate and cooperative apartment loans and performing cooperative apartment loans in several bulk sale transactions during 1994. These sales were partially offset by loan originations of $132.6 million during 1995 which were originated at an average rate of 8.03% compared to $83.7 million of mortgage loans which were originated at an average rate of 7.17% in 1994. Principal repayments totalled $67.0 million in 1995 compared to $64.8 million in 1994. Interest income on other loans increased by $798,000, or 23.4% to $4.2 million in 1995 from $3.4 million in 1994 due to an increase in average yield of 106 basis points coupled with an increase in average balances of $3.9 million. The increase in average balances was due primarily to loan originations of $10.7 million in 1995. The increase in yield was due to higher rates on new loans originated in 1995. Interest income on MBSs increased by $11.8 million, or 45.9% to $37.5 million in 1995 from $25.7 million in 1994 primarily due to an increase in average balances of $118.8 million and an increase in average yield of 87 basis points. The increase in average balances was primarily due to the reinvestment of the proceeds of the bulk sales of loans and REO during the second half of 1994 into MBSs. In addition, during the second quarter of 1995, the Company completed a $75 million leverage transaction which utilized short-term borrowings to purchase floating-rate CMOs. The increase in yield was primarily due to the purchase of $160.8 million of adjustable-rate MBSs during 1995 and $145.6 million of adjustable-rate MBSs during 1994 which repriced upward due to the increase in market interest rates during 1995. The increase in yield was also attributable to a decrease in premium amortization since the prepayment rate was slower in 1995 than during 1994. Interest income on money market investments decreased by $482,000, or 58.7% to $339,000 in 1995 from $821,000 in 1994 primarily as a result of a decrease in average balances of $4.0 million in 1995. The decrease in the average balances is the result of the Company's strategy to take advantage of its liquidity and invest in higher yielding assets. Interest on debt and equity securities increased by $6.0 million, or 95.4% to $12.3 million in 1995 from $6.3 million in 1994 primarily as a result of an increase in the average balances of $94.2 million and an increase in average yield of 19 basis points. The increase in average balances was due to purchases of $112.1 million of which $21.8 million were adjustable-rate securities. These purchases were made to supplement a lack of loan demand during the first quarter of 1995. INTEREST EXPENSE Interest expense increased by $14.8 million, or 36.8% to $55.1 million in 1995 from $40.3 million in 1994. The increase was primarily the result of an increase in interest on deposits of $10.1 million, or 31.4% to $42.1 million in 1995 from $32.0 million in 1994. The increase in interest on deposits was primarily due to an increase of 76 basis points in the average cost of deposits and an increase of $65.3 million in average balances of deposits. Interest expense on certificate accounts increased by $11.5 million, or 64.7% to $29.4 million in 1995 from $17.9 million in 1994. The average balance of certificate accounts increased by $136.7 million, or 37.2% to $504.0 million in 1995 from $367.3 million in 1994. The average cost of certificates increased to 5.84% in 1995 from 4.86% in 1994. During most of 1995, the Bank experienced net outflows from passbook accounts into its certificates of deposit accounts. In 1995, passbook accounts experienced an excess of withdrawals over deposits of $92.6 million, while certificates of deposit experienced an excess of deposits over withdrawals of $62.5 million. Interest expense on passbook accounts decreased by $2.4 million, or 18.9% to $10.1 million in 1995 from $12.5 million in 1994 primarily due to a decrease in average balances of $93.4 million due to customers seeking higher yielding investment opportunities including the Bank's certificates of deposit accounts. Interest on borrowed funds increased by $4.8 million, or 57.5% to $13.1 million in 1995 compared to $8.3 million in 1994. Borrowed funds on an average basis increased by $53.7 million in 1995 due to an increase in short-term advances with the FHLB and reverse repurchase agreements with brokers to provide funding for purchases of debt securities and MBSs with wholesale borrowings including the Bank's $75.0 million leverage transaction. The average cost of borrowings increased to 6.50% in 1995 from 5.64% in 1994 due to increases in market interest rates. NET INTEREST INCOME Net interest income increased by $117,000, or 0.3% to $41.3 million in 1995 from $41.2 million in 1994. The average cost of liabilities increased 85 basis points to 4.40% in 1995 from 3.55% in 1994, which was partially offset by the average yield on interest-earning assets which increased by 50 basis points to 7.39% in 1995 from 6.89% in 1994. The net interest rate spread was 2.99% in 1995 compared to 3.34% in 1994. PROVISION FOR LOAN LOSSES The Bank provided $2.8 million for loan losses in 1995 compared to $13.4 million in 1994. The provision for loan losses represents management's periodic review and evaluation of the loan portfolio. The decrease in 1995 when compared to 1994 was principally due to additional provisions of $7.5 million booked in 1994 in connection with the bulk sales completed in 1994. As of December 31, 1995, the allowance for loan losses was $8.6 million compared to $10.8 million at December 31, 1994. The Bank took charge-offs totaling $5.5 million in 1995, compared to $24.7 million in 1994 which included $14.4 million in connection with the bulk sales. As of December 31, 1995, the allowance for loan losses was 1.51% of total loans compared to 2.07% of total loans at December 31, 1994. The decrease was attributable to the growth in the loan portfolio and a decline in non-performing loans. The allowance for loan losses was 50.80% of non-performing loans at December 31, 1995 compared to 38.33% at December 31, 1994. NON-INTEREST INCOME Non-interest income increased by $2.5 million, or 38.2% to $9.0 million in 1995 from $6.5 million in 1994. The increase of $1.5 million in loan fees and servicing income was primarily due to $975,000 received in prepayment fees on several commercial real estate loans repaid during the fourth quarter of 1995. Fee income on savings and checking accounts increased by $579,000, or 25.4% due to an increase of approximately 7,700 in the number of active accounts. Annuity, insurance and mutual fund fees increased by $500,000, or 24.7% due to an increase of $437,000 in annuity income, an increase of $37,000 in mutual fund income and an increase of $26,000 in revenue from our new venture, the distribution of traditional life insurance products. The increase in sales of annuity and mutual fund products by CIS, the Bank's wholly-owned subsidiary, is partially due to the increased demand for alternative sources of investments by the Bank's depositors. Approximately 49% of sales were from withdrawals of deposit balances from the Bank. NON-INTEREST EXPENSE Non-interest expense decreased by $9.3 million, or 22.7% to $31.8 million in 1995 from $41.1 million in 1994. The decrease is primarily due to a decrease of $10.8 million in expenses from REO operations due to provisions on REO losses recorded during 1994 in connection with the bulk sale transactions. Compensation and benefit expenses increased by $1.3 million, or 9.4% due to normal merit increases and the implementation of an executive and staff incentive plan and an increase of $461,000 in the cost of the ESOP plan due to the significant appreciation in the Company's stock price. Other miscellaneous expenses increased by $175,000, or 1.9% when compared to 1994, partially due to additions of $430,000 to the reserve for possible losses for checks in the process of collection being held by Nationar. (See Note 12 to Notes to Consolidated Financial Statements.) INCOME TAX EXPENSE The income tax provision was $7.2 million in 1995 compared to a tax benefit of $2.5 million in 1994. The increase in income taxes is primarily due to an increase of $22.6 million in income before income taxes. Income tax expense in 1995 reflects a reduction of $300,000 in the valuation allowance for the Bank's net deferred tax asset due to a decline in the deferred tax asset allocated to state and local taxes. NON-PERFORMING ASSETS The following table sets forth information regarding non- performing assets which include 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 six-month seasoning period), accruing restructured loans and real estate owned.
December 31, (In thousands) 1996 1995 1994 ------ ------ ------ Non accrual loans: One-to four-family $ 4,083 3,800 5,995 Cooperative 431 871 934 Multi-family 1,463 967 5,088 Non-residential and other 4,756 4,167 6,732 ------ ------ ------ Total non-accrual loans 10,733 9,805 18,749 ------ ------ ------ Restructured loans: One-to four-family 887 853 815 Cooperative 486 494 502 Multi-family 1,427 3,602 4,071 Non-residential and other 360 2,123 4,162 ------ ------ ------ Total restructured loans 3,160 7,072 9,550 ------ ------ ------ Total non-performing loans 13,893 16,877 28,299 ------ ------ ------ REO, net: One-to four-family 266 1,148 971 Cooperative 292 723 1,128 Multi-family - 156 - Non-residential and other 561 184 6,462 ------ ------ ------ Total REO 1,119 2,211 8,561 Less allowance for REO (81) (178) (717) ------ ------ ------ REO, net 1,038 2,033 7,844 ------ ------ ------ Total non-performing assets $14,931 18,910 36,143 ====== ====== ======
During the past three years the Company's expanded loan workout/resolution efforts have successfully contributed toward reducing non-performing assets to manageable levels. Since year- end 1994, non-performing assets have declined by $21.2 million, or 58.7%, from a level of $36.1 million to $14.9 million at year- end 1996. The decrease in non-performing assets is reflected in the following ratios: Non-performing loans to total loans was 1.64% for 1996 compared to 2.97% for 1995 and 5.41% for 1994; Non-performing assets to total assets was 0.94% for 1996 compared to 1.28% for 1995 and 2.85% for 1994 and Non-performing loans to total assets was 0.87% for 1996 compared to 1.15% for 1995 and 2.23% for 1994. There can be no assurance that non-performing assets will continue to decline. The decrease in non-performing assets in 1996 was primarily due to continued sales of REO properties and a continued decline in non-performing loans. During 1996, the Company sold 60 REO properties with a fair value of $3.1 million. During 1996, 2 restructured loans with a balance of $2.1 million were reclassified to performing loans since they had performed in accordance with their modified terms for a period of 18 months and are no longer considered classified assets. Total non-accrual loans increased by $928,000 during 1996 due to an increase in non-residential loans. The decrease in non-performing assets in 1995 was primarily due to continued sales of REO properties and a continued decline in non-performing loans. During 1995, the Company sold 76 REO properties with a fair value of $8.5 million. During 1995, six restructured loans with a balance of $3.0 million were reclassified to performing loans since they had performed in accordance with their modified terms for a period of 18 months and are no longer considered classified assets. Also, total non- accrual loans declined by $8.9 million during 1995 due to the Company's continued efforts to reduce non-performing loans. LIQUIDITY The Bank is required to maintain minimum levels of liquid assets as defined by the Office of Thrift Supervision ("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 14.99% at December 31, 1996 compared to 10.31% at December 31, 1995. The Company's primary sources of funds are deposits, principal and interest payments on loans, debt securities and MBSs, retained earnings and advances from FHLB and other borrowings. Proceeds from the sale of AFS securities are also a source of funding, as are, to a lesser extent, the sales of annuities, insurance and securities brokerage activities conducted by the Bank's wholly-owned subsidiary, CIS. While maturities and scheduled amortization of loans and securities 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 December 31, 1996 and December 31, 1995, cash and short and intermediate-term investments totaled $35.7 million and $38.9 million, respectively. The Company and the Bank have other sources of liquidity which include debt securities maturing within one year and AFS securities. Other sources of funds include FHLB advances, which at December 31, 1996, totaled $178.4 million. If needed, the Bank may borrow an additional $11.6 million from the FHLB. The Company's cash flows are comprised of three primary classifications: cash flows from operating activities; investing activities and financing activities. Net cash provided by (used in) operating activities, consisting primarily of interest and dividends received less interest paid on deposits were $10.7 million, $(8.3) million and $45.0 million for the years ended December 31, 1996, 1995 and 1994, respectively. Net cash used in investing activities, consisting primarily of disbursements of loan originations and securities purchases, offset by principal collections on loans and proceeds from maturities of securities held to maturity or sales of AFS securities or disposition of assets including REO were $(117.6) million, $(197.6) million and $(62.4) million for the years ended December 31, 1996, 1995 and 1994, respectively. Net cash provided by financing activities, consisting primarily of net activity in deposits and borrowings, purchases of treasury stock, payments of common stock dividends and proceeds from stock options exercised were $103.7 million, $214.3 million and $11.8 million for the years ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, the Bank had outstanding loan commitments to originate $55.8 million of loans. The Bank also had commitments to purchase $1.0 million of debt securities. The Bank believes that it will have sufficient funds available to meet these commitments. At December 31, 1996, certificates of deposit which are scheduled to mature in one year or less totalled $446.2 million. INFLATION AND CHANGING PRICES The consolidated financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time and changes due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS See Note 1 to Notes to Consolidated Financial Statements. STOCK DATA Haven Bancorp, Inc.'s common stock, listed under the symbol HAVN is publicly traded on the Nasdaq Stock Market. As of March 5, 1997, the Company had approximately 450 stockholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms) and 4,328,874 outstanding shares of common stock (excluding treasury shares). The common stock traded in a high and low range of $291/2 and $221/4 during the year ended December 31, 1996. HAVEN BANCORP, INC. Consolidated Statements of Financial Condition (Dollars in thousands, except for share data)
December 31, December 31, 1996 1995 ------------ ------------ ASSETS Cash and due from banks $ 28,848 $ 29,790 Money market investments 6,869 9,064 Securities available for sale (note 2) 370,105 503,058 Loans held for sale (note 5) - 11,412 Debt securities held to maturity (estimated fair value of $96,324 and $126,811 in 1996 and 1995, respectively) (note 3) 97,307 127,796 Federal Home Loan Bank of NY Stock, at cost 9,890 8,138 Mortgage-backed securities held to maturity (estimated fair value of $195,682 and $189,551 in 1996 and 1995, respectively) (notes 4 and 8) 197,940 190,714 Loans (note 5): First mortgage loans 793,556 519,804 Cooperative apartment loans 19,936 10,187 Other loans 34,094 38,967 --------- --------- Total loans 847,586 568,958 Less allowance for loan losses (note 6) (10,704) (8,573) --------- --------- Loans, net 836,882 560,385 Premises and equipment, net 8,820 7,590 Accrued interest receivable (notes 2, 3, 4 and 5) 12,172 10,736 Real estate owned, net (note 6) 1,038 2,033 Other assets (note 9) 13,674 12,100 --------- --------- Total assets $1,583,545 1,472,816 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (note 7) $1,137,788 1,083,446 Borrowed funds (note 8) 326,433 270,583 Mortgagors' escrow balances 4,621 3,227 Due to broker 1,000 5,000 Other liabilities (note 9) 14,319 12,041 --------- --------- Total liabilities 1,484,161 1,374,297 --------- --------- Commitments and contingencies (notes 6 and 12) Stockholders' Equity (note 13): 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; 4,325,407 and 4,511,457 shares outstanding in 1996 and 1995, respectively 50 50 Additional paid-in capital 48,844 47,331 Retained earnings, substantially restricted (note 13) 65,092 57,919 Unrealized (loss) gain on securities available for sale, net of tax effect (note 2) (840) 2,083 Treasury stock, at cost (633,968 and 447,918 shares in 1996 and 1995, respectively) (11,049) (6,023) Unallocated common stock held by ESOP (note 11) (1,854) (2,197) Unearned common stock held by Bank's Recognition Plans and Trusts (note 11) (267) (644) Unearned compensation (note 11) (592) - --------- --------- Total stockholders' equity 99,384 98,519 --------- --------- Total liabilities and stockholders' equity $1,583,545 1,472,816 ========= =========
See accompanying notes to consolidated financial statements. HAVEN BANCORP, INC. Consolidated Statements of Operations (Dollars in thousands, except per share data)
Years Ended December 31, ------------------------------ 1996 1995 1994 ------ ------ ------ Interest income: Mortgage loans $53,110 42,115 45,277 Other loans 3,638 4,215 3,417 Mortgage-backed securities 37,517 37,510 25,705 Money market investments 176 339 821 Debt and equity securities 14,812 12,255 6,271 ------- ------ ------ Total interest income 109,253 96,434 81,491 ------- ------ ------ Interest expense: Deposits: Passbook accounts 9,314 10,105 12,458 NOW accounts 999 939 923 Money market accounts 1,929 1,585 752 Certificate accounts 32,436 29,426 17,864 Borrowings 16,690 13,060 8,292 ------ ------ ------ Total interest expense 61,368 55,115 40,289 ------ ------ ------ Net interest income before provision for loan losses 47,885 41,319 41,202 Provision for loan losses (note 6) 3,125 2,775 13,400 ------ ------ ------ Net interest income after provision for loan losses 44,760 38,544 27,802 ------ ------ ------ Non-interest income: Loan fees and servicing income 1,807 2,241 790 Savings/checking fees 3,378 2,861 2,282 Net gain on sales of interest-earning assets 140 126 372 Insurance annuity and mutual funds fees 3,114 2,525 2,025 Other 1,115 1,269 1,060 ------ ------ ------ Total non-interest income 9,554 9,022 6,529 ------ ------ ------ Non-interest expense: Compensation and benefits (notes 10 and 11) 15,737 14,889 13,605 Occupancy and equipment (note 12) 3,478 3,334 3,238 Real estate owned operations, net 277 1,405 12,253 SAIF recapitalization charge (note 7) 6,800 - - Federal deposit insurance premiums 2,327 2,653 2,709 Other 9,836 9,511 9,336 ------ ------ ------ Total non-interest expense 38,455 31,792 41,141 ------ ------ ------ Income (loss) before income tax expense (benefit) 15,859 15,774 (6,810) Income tax expense (benefit) (note 9) 6,434 7,230 (2,475) ------ ------ ------ Net income (loss) $9,425 8,544 (4,335) ====== ====== ====== Net income (loss) per common share: Primary $ 2.12 1.89 (0.94) ====== ====== ====== Fully diluted $ 2.11 1.87 (0.94) ====== ====== ======
See accompanying notes to consolidated financial statements. HAVEN BANCORP, INC. Consolidated Statements of Changes in Stockholders' Equity
The three years ended December 31, 1996 Unrealized Gain (Loss) Unallocated Unearned Additional on Securities Common Common Common Paid-In Retained Available Treasury Stock Held Stock Held Unearned (In thousands of dollars, Stock Capital Earnings for Sale Stock by ESOP by RRPs Compensation Total except for share data) ------ ---------- -------- ------------- -------- ----------- ---------- ------------ ----- Balance at December 31, 1993 $ 50 46,303 54,666 - (518) (3,318) (1,373) - 95,810 Net loss - - (4,335) - - - - - (4,335) Purchase of treasury stock (365,469 shares) - - - - (4,575) - - - (4,575) Unrealized appreciation on securities transferred from held to maturity to available for sale, net of tax effect - - - 321 - - - - 321 Change in unrealized appreciation on securities available for sale, net of tax effect - - - (2,201) - - - - (2,201) Allocation of ESOP stock and amortization of award of RRP stock and related tax benefits - 192 - - - 593 430 - 1,215 ---- ------ ------ ------ ------ ------ ----- ----- ------ Balance at December 31, 1994 50 46,495 50,331 (1,880) (5,093) (2,725) (943) - 86,235 Net income - - 8,544 - - - - - 8,544 Dividends declared - - (902) - - - - - (902) 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 and related tax effect (25,703 shares) - 45 (54) - 311 - - - 302 Unrealized appreciation on securities transferred from held to maturity to available for sale, net of tax effect - - - 2,091 - - - - 2,091 Change in unrealized appreciation on securities available for sale, net of tax effect - - - 1,872 - - - - 1,872 Allocation of ESOP stock and amortization of award of RRP stock and related tax benefits - 742 - - - 528 467 - 1,737 ---- ------ ------ ------ ------ ------ ----- ----- ------ Balance at December 31, 1995 50 47,331 57,919 2,083 (6,023) (2,197) (644) - 98,519 Net income - - 9,425 - - - - - 9,425 Dividends declared - - (2,229) - - - - - (2,229) Purchase of treasury stock (225,537 shares) - - - - (5,516) - - - (5,516) Treasury Stock issued for deferred compensation plan (30,081 shares) - 410 - - 372 - - (782) - Stock options exercised and related tax effect (9,406 shares) - 104 (23) - 118 - - - 199 Change in unrealized appreciation on securities available for sale, net of tax effect - - - (2,923) - - - - (2,923) Allocation of ESOP stock and amortization of award of RRP stock and related tax benefits - 999 - - - 343 377 - 1,719 Amortization of deferred compensation plan - - - - - - - 190 190 ---- ------ ------ ------ ------ ------ ----- ----- ------ Balance at December 31, 1996 $ 50 48,844 65,092 (840) (11,049) (1,854) (267) (592) 99,384 ==== ====== ====== ====== ====== ====== ===== ===== ======
See accompanying notes to consolidated financial statements. HAVEN BANCORP, INC. Consolidated Statements of Cash Flows (Dollars in thousands)
Years Ended December 31, -------------------------- 1996 1995 1994 ------ ------ ------ Cash flows from operating activities: Net income (loss) $ 9,425 8,544 (4,335) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Amortization of cost of stock benefit plans 1,909 1,737 1,388 Amortization of net deferred loan origination fees (245) (433) (71) Premiums and discounts on loans, mortgage-backed and debt securities 233 390 2,081 Provision for loan losses 3,125 2,775 13,400 Provision for losses on real estate owned 291 750 10,309 Deferred income taxes 230 5,232 (1,782) Net gain on sales of interest-earning assets (140) (126) (372) Depreciation and amortization 878 925 1,208 Increase in accrued interest receivable (1,436) (2,163) (863) (Decrease) increase in due to broker (4,000) (25,800) 30,800 Increase (decrease) in other liabilities 2,278 1,682 (2,022) Increase in other assets (1,804) (1,844) (4,747) ------- ------- ------- Net cash provided by (used in) operating activities 10,744 (8,331) 44,994 ------- ------- ------- Cash flows from investing activities: Net increase in loans (269,343) (65,505) (55,080) Proceeds from disposition of assets (including REO) 4,313 9,703 169,399 Purchases of securities available for sale (321,162) (28,964) (5,000) Principal repayments on securities available for sale 73,472 2,800 15,015 Proceeds from sales of securities available for sale 374,840 25,152 59,432 Purchases of debt securities held to maturity (6,989) (99,022) (130,537) Principal repayments, maturities and calls on debt securities held to maturity 37,511 60,693 - Purchases of mortgage-backed securities held to maturity (38,357) (175,859) (206,449) Principal repayment on mortgage-backed securities held to maturity 32,004 74,163 91,015 Purchases of Federal Home Loan Bank Stock, net (1,752) (1,250) - Net (increase) decrease in premises and equipment (2,108) 483 (200) ------- ------- ------- Net cash used in investing activities (117,571) (197,606) (62,405) ------- ------- ------- Cash flows from financing activities: Net increase in deposits 54,342 70,284 26,402 Net increase (decrease) in borrowed funds 55,850 145,502 (10,935) Increase in mortgagors' escrow balances 1,394 90 920 Purchase of treasury stock (5,516) (1,360) (4,575) Payment of common stock dividends (2,475) (454) - Stock options exercised 95 257 - ------- ------- ------- Net cash provided by financing activities 103,690 214,319 11,812 ------- ------- ------- Net (decrease) increase in cash and cash equivalents (3,137) 8,382 (5,599) Cash and cash equivalents at beginning of year 38,854 30,472 36,071 ------- ------- ------- Cash and cash equivalents at end of year $35,717 38,854 30,472 ======= ======= ======= Supplemental information: Cash paid during the year for: Interest $60,187 54,042 39,489 Income taxes 7,824 685 63 Additions to real estate owned 3,470 4,638 7,764 Loans transferred (from) to loans held for sale (10,594) 12,038 170,500 Securities purchased not yet received 1,000 5,000 30,800 Mortgage-backed securities and debt securities held to maturity transferred to securities available for sale (note 1) - 447,200 82,800 ======= ======= =======
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Haven Bancorp, Inc. (the "Holding Company") was formed on March 25, 1993, as the holding company for Columbia Federal Savings Bank (the "Bank"). On September 23, 1993, the Holding Company completed its initial public offering of 4,959,375 shares of common stock in connection with the Bank's conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank (the "Conversion"). Concurrent with the conversion process, the Holding Company acquired all of the issued and outstanding stock of the Bank with a portion of the net proceeds. The accounting and reporting policies of the Holding Company and the Bank and its subsidiaries (the "Company") conform to generally accepted accounting principles and to general practices within the banking industry. The following summarizes the significant policies and practices: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Holding Company and its subsidiary, the Bank, and its wholly-owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of each consolidated statement of financial condition and revenues and expenses for the year then ended. Actual results could differ from those estimates. For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and money market investments. MONEY MARKET INVESTMENTS Money market investments represent instruments with maturities of ninety days or less. These investments are carried at cost, adjusted for premiums and discounts which are recognized in interest income over the period to maturity. DEBT, EQUITY AND MORTGAGE-BACKED SECURITIES In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", debt and mortgage-backed securities ("MBSs") which the Company has the positive intent and ability to hold until maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts on a level yield method over the remaining period to contractual maturity, adjusted, in the case of MBSs, for actual prepayments. Debt and equity securities and MBSs to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale securities and are recorded at fair value, with unrealized gains (losses), net of tax, reported as a separate component of stockholders' equity. In connection with its adoption of SFAS No. 115 on January 1, 1994, the Company reclassified $19.0 million of debt securities and $63.8 million of MBSs previously classified as held to maturity to securities available for sale. In November, 1995, the Financial Accounting Standards Board ("FASB") issued an implementation guide for SFAS No. 115. The implementation guide provided guidance in the form of a question and answer format and allowed an opportunity from mid-November 1995 to December 31, 1995 for companies to reclassify securities in the held to maturity portfolio to securities in the available for sale portfolio without tainting the remainder of the portfolio. In connection with the implementation guide for SFAS No. 115, the Company reclassified $41.9 million of debt securities and $405.3 million of MBSs previously classified as held to maturity to securities available for sale. Gains and losses on the sale of securities are determined using the specific identification method and are included in non- interest income. LOANS HELD FOR SALE Loans held for sale are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance created through charges to operations. Transfers to/from loans held for investment to loans held for sale are recorded at the lower of cost or estimated market value in the aggregate. LOANS Loans are carried at their unpaid principal balances, less unearned discounts, net deferred loan origination fees and the allowance for loan losses. Purchased loans are recorded at cost. Related premiums or discounts are amortized to expense or accreted to income using the level-yield method over the estimated life of the loans. On January 1, 1995, the Company adopted, on a prospective basis, SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and the amendment thereof, SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These statements require that impaired loans that are within their scope be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or as a practical expedient, at the loan's current observable market price, or the fair value of the collateral if the loan is collateral dependent. The amount by which the recorded investment of an impaired loan exceeds the measurement value is recognized by creating a valuation allowance through a charge to the provision for loan losses. SFAS No. 114 does not apply to those large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, which, for the Company, include one-to four-family first mortgage loans and cooperative apartment loans ("residential loans") and consumer loans. The implementation of SFAS No. 114 and SFAS No. 118 did not materially affect the Company's consolidated financial statements. Loans individually reviewed for impairment by the Company within the scope of SFAS No. 114 are limited to loans modified in a troubled debt restructuring ("TDR") and commercial and multi- family first mortgage loans. The measurement value of the Company's impaired loans was based on the fair value of the underlying collateral. The Company's impaired loan identification and measurement process are conducted in conjunction with the Company's review of the adequacy of its allowance for loan losses. Specific factors utilized in the impaired loan identification process include, but are not limited to, delinquency status, loan-to-value ratio, the condition of the underlying collateral, credit history and debt coverage. At a minimum, such loans are classified as impaired by the Company when they become past due 90 days. A loan modified in a TDR subsequent to the adoption of SFAS No. 114 is, except as noted, considered impaired. A loan modified in a TDR subsequent to the adoption of SFAS No. 114 is not considered impaired in years following the restructuring if the restructuring agreement specifies an interest rate equal to or greater than the rate the Company was willing to accept at the restructuring date for a new loan with comparable risk and the loan is not impaired based on the terms of the restructuring agreement. Loans that were modified in a TDR prior to the Company's adoption of SFAS No. 114 that are not considered impaired based on the terms of the restructuring agreement continue to be accounted for under SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". The Company places loans, including impaired loans, on non- accrual status when they become past due 90 days. All interest previously accrued and not collected is reversed against interest income, and income is subsequently recognized only to the extent cash is received until, in management's judgement, a return to accrual status is warranted. Cash receipts on impaired loans are applied to principal and interest in accordance with the contractual terms of the loan unless full payment of principal is not expected, in which case, both principal and interest payments received are applied as a reduction of the carrying value of the loan. For non-performing impaired loans, interest income is recognized to the extent received in cash and not otherwise utilized to reduce the carrying value of the loan. For impaired loans not classified as non-performing by the Company, interest income is recognized on an accrual basis as the Company anticipates the full payment of principal and interest due. The Company's policy is to recognize income on a cash basis for TDRs for a period of six months, after which such loans are returned to an accrual status. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Impaired loans and related reserves have been identified and calculated in accordance with the provisions of SFAS No. 114. The total allowance for loan losses has been determined in accordance with the provisions of SFAS No. 5, "Accounting for Contingencies". The Company's allowance for loan losses is intended to be maintained at a level sufficient to absorb all estimable and probable losses inherent in the loan portfolio. The Company reviews the adequacy of the allowance for loan losses on a monthly basis taking into account past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, current and prospective economic conditions and current regulatory guidance. Management believes that the allowance for loan losses is adequate. While Management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and the reviews of various regulatory agencies. Loan fees received and certain direct loan origination costs are deferred, and the net fee or cost is recognized in income using the interest method over the contractual lives of the related loans, adjusted for estimated prepayments. PREMISES AND EQUIPMENT Land is carried at cost. Buildings, leasehold improvements, furniture, fixtures and equipment are carried at cost, less accumulated depreciation and amortization. Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the respective assets except for leasehold improvements which are amortized over the related lease term or estimated useful life. REAL ESTATE OWNED Real estate properties acquired through loan foreclosure are recorded at the lower of cost or estimated fair value less estimated selling costs at the time of foreclosure. Subsequent valuations are periodically performed by management and the carrying value may be adjusted by a valuation allowance, established through charges to income and included in real estate operations, net to reflect subsequent declines in the estimated fair value of the real estate. Real estate owned ("REO") is shown net of the allowance. Operating results of real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of properties owned, are also recorded in real estate operations, net. REVERSE REPURCHASE AGREEMENTS Reverse repurchase agreements are accounted for as financing transactions. Accordingly, the collateral securities continue to be carried as assets and a borrowing liability is established for the transaction proceeds. INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Additionally, the recognition of net deferred tax assets is based upon the likelihood of realization of tax benefits in the future. A valuation allowance would be provided for deferred tax assets which are determined more than likely not to be realized. BENEFIT PLANS The Company maintains various pension, savings, employee stock ownership and other benefit plans and programs for its employees, including the Bank's Retirement Plan covering substantially all employees who have attained minimum service requirements. The Bank's funding policy is to make contributions to the plan at least equal to the amounts required by applicable Internal Revenue Service regulations. The Bank periodically evaluates the overall effectiveness and economic value of such programs, in the interest of maintaining a comprehensive benefit package for employees. Based on an evaluation of the Retirement Plan in 1996, the Bank concluded that future benefit accruals under the Retirement Plan would cease, or "freeze" on July 1, 1996. Although the benefit accruals are frozen, the Bank will continue to maintain and provide benefits under its Employee Stock Ownership Plan and Employee 401(k) Thrift Incentive Savings Plan ("401(k) Plan"). In connection with the Retirement Plan "freeze", the Bank resumed its matching of contributions to the 401(k) Plan on July 1, 1996. Post-retirement and post-employment benefits are recorded on an accrual basis with an annual provision that recognizes the expense over the service life of the employee, determined on an actuarial basis. STOCK COMPENSATION PLANS 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. For entities not adopting the 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. 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. (See Note 11 to Notes to Consolidated Financial Statements.) OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The Company has utilized interest rate caps to manage its interest rate risk. Generally, the net settlements on such transactions used as hedges of non-trading liabilities are accrued as an adjustment to interest expense over the life of the agreements. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common and common equivalent share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding and common stock equivalents. Stock options are regarded as common stock equivalents and therefore considered in net income per common share calculations if dilutive. Common stock equivalents are computed using the treasury stock method. The weighted average number of shares outstanding does not include shares which are unallocated by the Employee Stock Ownership Plan ("ESOP") in accordance with American Institute of CPAs ("AICPA") Statement of Position ("SOP") 93-6, "Employers Accounting for ESOPs". RECENT ACCOUNTING PRONOUNCEMENTS In June, 1996, the FASB issued SFAS No. 125, "Accounting for 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. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement supersedes SFAS No. 76, "Extinguishment of Debt," SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse," and SFAS No. 122, "Accounting for Mortgage Servicing Rights," and amends SFAS No. 115 and SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." 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. In December, 1996, the FASB issued SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125". The FASB was made aware that the volume and variety of certain transactions and the related changes to information systems and accounting processes that are necessary to comply with the requirements of SFAS No. 125 would make it extremely difficult, if not impossible, for some affected enterprises to apply the transfer and collateral provisions of SFAS No. 125 to those transactions as soon as January 1, 1997. As a result, the Statement defers for one year the effective date (a) of paragraph 15 of SFAS No. 125 and (b) for repurchase agreement, dollar-roll, securities lending, and similar transactions, of paragraphs 9-12 and 237(b) of SFAS No. 125. The provisions of SFAS No. 125 will continue to be applied prospectively, and earlier or retroactive application is not permitted. 2. SECURITIES AVAILABLE FOR SALE The amortized cost and estimated fair values of securities available for sale at December 31 are summarized as follows:
Gross Gross Estimated Amortized unrealized unrealized fair (In thousands) Cost gains losses value --------- ---------- ---------- --------- 1996 Debt and equity securities available for sale: U.S. Government and agency obligations $121,647 163 (3,058) 118,752 Preferred stock 26,896 433 - 27,329 ------- ------ ------ ------- 148,543 596 (3,058) 146,081 ------- ------ ------ ------- MBSs available for sale: GNMA Certificates 949 34 - 983 FNMA Certificates 38,230 518 (26) 38,722 FHLMC Certificates 56,863 1,226 (25) 58,064 CMOs and REMICs 126,942 230 (917) 126,255 ------- ------ ------ ------- 222,984 2,008 (968) 224,024 ------- ------ ------ ------- Total $371,527 2,604 (4,026) 370,105 1995 Debt and equity securities available for sale: U.S. Government and agency obligations $ 59,983 - (76) 59,907 Adjustable-rate MBS Mutual Fund 3,976 - - 3,976 ------- ------ ------ ------- 63,959 - (76) 63,883 ------- ------ ------ ------- MBSs available for sale: GNMA Certificates 13,594 339 - 13,933 FNMA Certificates 73,613 1,335 (150) 74,798 FHLMC Certificates 129,622 2,042 (116) 131,548 CMOs and REMICs 218,413 1,120 (637) 218,896 ------- ------ ------ ------- 435,242 4,836 (903) 439,175 ------- ------ ------ ------- Total $499,201 4,836 (979) 503,058 ======= ====== ====== =======
In connection with the implementation guide for SFAS No. 115 issued in November 1995, $405.3 million of MBSs previously classified as held to maturity, and carried at amortized cost, were reclassified to MBSs available for sale. The carrying value of such MBSs was adjusted to their market value, which resulted in increasing the carrying value by $3.9 million, and increasing stockholders' equity by $2.1 million, which was net of taxes of $1.8 million. In addition, $41.9 million of debt securities previously classified as held to maturity, and carried at amortized cost, were classified as available for sale. The carrying value of these debt securities approximated market value at the time of the reclassification. Gross gains of approximately $1,948,000, $126,000 and $639,000 for the years ended December 31, 1996, 1995 and 1994, respectively, were realized on sales of securities available for sale. Gross losses amounted to $1,577,000, $0 and $135,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company's portfolio of MBSs available for sale has an estimated weighted average expected life of approximately 10 years at December 31, 1996. At December 31, 1996, $166.2 million of MBSs available for sale were adjustable-rate securities. U.S. Government and agency obligations at December 31, 1996 had contractual maturities between June 30, 2000 and September 1, 2016. Accrued interest receivable on securities available for sale amounted to $4,848,000 and $3,760,000 at December 31, 1996 and 1995, respectively. 3. DEBT SECURITIES HELD TO MATURITY The amortized cost, gross unrealized gains and losses and estimated fair values of debt securities held to maturity at December 31 are summarized as follows:
Gross Gross Estimated Amortized unrealized unrealized fair (In thousands) Cost gains losses value --------- ---------- ---------- --------- 1996 U.S. Government and agency obligations $51,957 16 (876) 51,097 Corporate debt securities 45,350 46 (169) 45,227 ------ --- ----- ------- Total $97,307 62 (1,045) 96,324 ====== === ===== ======= 1995 U.S. Government and agency obligations $82,476 15 (117) 82,374 Corporate debt securities 45,320 - (883) 44,437 ------ --- ----- ------- Total $127,796 15 (1,000) 126,811 ====== === ===== =======
The amortized cost and estimated fair value of debt securities held to maturity at December 31 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
1996 1995 Estimated Estimated Amortized fair Amortized fair (In thousands) Cost value Cost value --------- --------- --------- --------- Due in one year or less $ - - 18 18 Due after one year through five years 54,324 54,212 70,372 69,384 Due after five years through ten years 12,022 11,853 32,481 32,496 Due after ten years 30,961 30,259 24,925 24,913 ------- ------- ------- ------- Total $ 97,307 96,324 127,796 126,811 ======= ======= ======= =======
Accrued interest receivable on debt securities held to maturity amounted to $1,318,000 and $1,921,000 at December 31, 1996 and 1995, respectively. 4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY The amortized cost, gross unrealized gains and losses and estimated fair values of MBSs held to maturity at December 31 are summarized as follows:
Gross Gross Estimated Amortized unrealized unrealized fair (In thousands) Cost gains losses value --------- ---------- ---------- --------- 1996 FNMA Certificates $ 71,460 185 (1,731) 69,914 FHLMC Certificates 39,889 284 (579) 39,594 CMOs and REMICs 86,591 409 (826) 86,174 ------- ---- ------ ------- Total $197,940 878 (3,136) 195,682 ======= ==== ====== ======= 1995 FNMA Certificates $ 78,995 162 (1,043) 78,114 FHLMC Certificates 41,222 331 (201) 41,352 CMOs and REMICs 70,497 405 (817) 70,085 ------- ---- ------ ------- Total $190,714 898 (2,061) 189,551 ======= ==== ====== =======
The estimated weighted average expected life of the MBSs held to maturity portfolio was approximately 5.0 years at December 31, 1996. At December 31, 1996 and 1995, $10.1 million and $11.9 million, respectively, of the MBSs held to maturity portfolio consists of adjustable-rate securities. Such securities had an estimated fair value of $10.0 million and $11.8 million, respectively. The privately-issued CMOs and REMICs contained in the Company's held to maturity and available for sale portfolios have generally been underwritten by large investment banking firms with the timely payment of principal and interest on these securities supported (credit enhanced) in varying degrees by either insurance issued by a financial guarantee insurer, letters of credit or subordination techniques. Substantially all such securities are rated AAA by one or more of the nationally recognized securities rating agencies. These securities are subject to certain credit-related risks normally not associated with U.S. Government and agency mortgage-backed securities. Among such risks is the limited loss protection generally provided by the various forms of credit enhancements as losses in excess of certain levels are not protected. Furthermore, the credit enhancement itself is subject to the credit worthiness of the enhancer. Thus, in the event a credit enhancer does not fulfill its obligations, the MBS holder could be subject to risk of loss similar to the purchaser of a whole loan pool. Management believes that the credit enhancements are adequate to protect the Company from losses, and therefore the Company has not provided an allowance for losses on its privately issued MBSs. Accrued interest receivable on MBSs held to maturity amounted to $1,180,000 and $1,118,000 at December 31, 1996 and 1995, respectively. 5. LOANS Loans, net at December 31 are summarized as follows:
(In thousands) 1996 1995 ------ ------ First mortgage loans: Principal balances: One-to four-family $552,968 320,442 Multi-family 105,341 78,797 Commercial 127,956 111,038 Construction 4,227 5,737 Partially guaranteed by VA or insured by FHA 3,850 4,819 ------- ------- 794,342 520,833 Less net deferred loan origination fees, unearned discounts and unamortized premiums (786) (1,029) ------- ------- Total first mortgage loans 793,556 519,804 ------- ------- Cooperative apartment loans, net 19,936 10,187 ------- ------- Other loans: Consumer loans 15,938 19,619 Home equity loans 15,677 16,454 Other 2,479 2,894 ------- ------- Total other loans 34,094 38,967 ------- ------- 847,586 568,958 Less allowance for loan losses (10,704) (8,573) ------- ------- Total $836,882 560,385 ======= =======
Included in total loans are loans on which interest is not being accrued and loans which have been restructured with the result that interest has been reduced or foregone. The principal balances of these loans are summarized as follows:
December 31, (In thousands) 1996 1995 ------ ------ Non-accrual loans $ 10,733 9,805 Restructured loans 3,160 7,072 ------ ------ Total $ 13,893 16,877 ====== ======
If interest income on non-accrual loans had been current in accordance with the original terms, approximately $489,000, $889,000 and $1,278,000 of interest income would have been recorded for the years ended December 31, 1996, 1995 and 1994, respectively. Approximately $220,000, $280,000 and $261,000 of interest income was recognized on non-accrual loans for the years ended December 31, 1996, 1995 and 1994, respectively. The Bank has no obligation to fund any additional monies on these loans. The amount of interest income that would have been recorded if restructured loans had been performing in accordance with their original terms (prior to being restructured) was $505,000, $714,000 and $967,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The Bank services for investors first mortgage loans which are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of such loans were approximately $197.0 million and $219.8 million at December 31, 1996 and 1995, respectively. The geographical location of the Bank's loan portfolio is primarily within the New York metropolitan area. During 1996, $10.6 million of cooperative apartment loans previously transferred to loans held for sale were returned to the loan portfolio at their estimated market value. Accrued interest receivable on loans amounted to $4,826,000 and $3,640,000 at December 31, 1996 and 1995, respectively. 6. ALLOWANCES FOR LOAN AND REAL ESTATE OWNED LOSSES Impaired loans and related reserves have been identified and calculated in accordance with the provisions of SFAS No. 114. The total allowance for loan losses has been determined in accordance with the provisions of SFAS No. 5, "Accounting for Contingencies". As such, the Company has provided amounts for anticipated losses that exceed the immediately identified losses associated with loans that have been deemed impaired. Provisions have been made and reserves established accordingly, based upon experience and expectations, for losses associated with the general population of loans, specific industry and loan types, including residential and consumer loans which are not subject to the provisions of SFAS 114. The following table summarizes information regarding the Company's impaired loans at December 31:
1996 1995 Related Related Allowance Allowance Recorded for Loan Net Recorded for Loan Net (In thousands) Investment Losses Investment Investment Losses Investment ---------- ------- ---------- ---------- -------- ---------- Residential loans: With a related allowance $ - - - 3,076 517 2,559 Without a related allowance 4,423 - 4,423 1,552 - 1,552 ------ ---- ------ ------ ----- ------ Total residential loans 4,423 - 4,423 4,628 517 4,111 ------ ---- ------ ------ ----- ------ Multi-family and non-residential loans: With a related allowance 981 321 660 1,228 243 985 Without a related allowance 5,329 - 5,329 11,611 - 11,611 ------ ---- ------ ------ ----- ------ Total multi-family and non-residential loans 6,310 321 5,989 12,839 243 12,596 ------ ---- ------ ------ ----- ------ Total impaired loans $10,733 321 10,412 17,467 760 16,707 ====== ==== ====== ====== ===== ======
The Company's average recorded investment in impaired loans for the years ended December 31, 1996 and 1995 was $9.8 million and $23.9 million, respectively. Interest income recognized on impaired loans, which was not materially different from cash- basis interest income, amounted to $489,000 and $949,000 for the years ended December 31, 1996 and 1995, respectively. Activity in the allowance for loan losses for the years ended December 31 is as follows:
(In thousands) 1996 1995 1994 ------ ------ ------ Balance at beginning of year $ 8,573 10,847 21,606 Charge-offs: One-to four-family (771) (472) (264) Cooperative (524) (2,142) (8,747) Multi-family (30) (1,299) (7,932) Non-residential and other (560) (1,541) (7,798) ------ ------ ------ Total charge-offs (1,885) (5,454) (24,741) Recoveries 891 405 582 ------ ------ ------ Net charge-offs (994) (5,049) (24,159) Provision for loan losses 3,125 2,775 13,400 ------ ------ ------ Balance at end of year $10,704 8,573 10,847 ====== ====== ======
As part of the major bulk sales program in 1994, the Bank sold $170.5 million of loans and established additional provisions of $7.5 million in connection with the sales. In connection with the sale of cooperative apartment loans, a letter of credit was established. (See Note 12 to Notes to Consolidated Financial Statements.) Activity in the allowance for REO for the years ended December 31 is as follows:
(In thousands) 1996 1995 1994 ------ ------ ------ Balance at beginning of year $ 178 717 2,188 Provision charged to operations 291 750 10,309 Charge-offs (450) (1,414) (11,780) Recoveries 62 125 - --- ----- ------ Balance at end of year $ 81 178 717 === ===== ======
As part of the major bulk sales program during 1994, the Company sold $12.0 million of cooperative apartments and established additional provisions of $7.7 million in connection with the sales which are included in REO operations, net in the Consolidated Statements of Operations. 7. DEPOSITS Deposits at December 31 are summarized as follows:
Weighted (Dollars in thousands) Amount Percent average rates ------ ------- ------------- 1996 Passbook accounts $ 361,707 31.8% 2.58% Money market 55,010 4.8 3.51 NOW 111,516 9.8 0.90 Demand 8,456 0.8 - --------- ---- 536,689 47.2 2.28 Certificates of deposit 601,099 52.8 5.40 --------- ----- Total $1,137,788 100.0% 3.93% ========= ===== 1995 Passbook accounts $ 375,957 34.7% 2.52% Money market 63,047 5.8 3.63 NOW 95,617 8.8 1.74 Demand 15,815 1.5 - --------- ----- 550,436 50.8 2.44 Certificates of deposit 533,010 49.2 6.02 --------- ----- Total $1,083,446 100.0% 4.20% ========= =====
The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to approximately $41,691,000 and $34,323,000 at December 31, 1996 and 1995, respectively. Scheduled maturities of certificates of deposit at December 31 are summarized as follows:
1996 1995 (Dollars in thousands) Amount Percent Amount Percent ------ ------- ------ ------- Within six months $305,641 50.8% $233,972 43.9% Six months to one year 140,529 23.4 147,201 27.6 One to two years 116,982 19.5 82,527 15.5 Over two years 37,947 6.3 69,310 13.0 ------- ----- ------- ----- Total $601,099 100.0% $533,010 100.0% ======= ===== ======= =====
The deposits of the Bank are insured up to $100,000 per depositor (as defined by law and regulation) by the Savings Association Insurance Fund ("SAIF") which is administered by the FDIC. Deposits of certain other financial institutions are insured by the Bank Insurance Fund ("BIF"). On September 30, 1996, as part of the omnibus appropriations bill, Congress passed and President Clinton signed the Deposit Insurance Funds Act of 1996 ("Act"). The Act has significantly reduced and should eventually end the premium disparity that has existed between banks insured by the BIF and thrifts insured by the SAIF. The Act required SAIF- insured institutions to pay a special one-time assessment to recapitalize the SAIF. The Bank's special one-time insurance assessment amounted to $6.8 million. Beginning January 1, 1997, the schedule of SAIF assessment rates became the same as the schedule of BIF assessment rates. The Act also required BIF- insured institutions to pay a portion of the interest due on Financial Corporation ("FICO") bonds beginning January 1, 1997. Beginning January 1, 2000, or the date at which no thrift institution continues to exist, BIF-insured institutions will be required to pay their full pro rata share of FICO payments. 8. BORROWED FUNDS Borrowed funds at December 31 are summarized as follows:
(Dollars in thousands) 1996 1995 ------ ------ Other secured borrowings: Collateralized mortgage obligation at 9.00% maturing through 2016, net of unamortized discount of $0 in 1996 and $231 in 1995 secured by mortgage-backed securities with a carrying value of $12,214 in 1996 and $16,529 in 1995 (notes 2 and 4) $ 2,985 7,974 ------- ------- Fixed-rate advances from the FHLB of New York: 4.61% to 6.93% due in 1996 - 94,175 5.55% to 7.125% due in 1997 138,450 20,000 5.74% due in 1998 20,000 20,000 5.355% due in 1999 20,000 - ------- ------- 178,450 134,175 ------- ------- Securities sold under agreements to repurchase: Fixed rate agreements: 5.70% to 5.96% due in 1996 - 104,590 5.50% to 6.250% due in 1997 108,106 21,442 5.51% to 5.72% due in 1998 34,800 - ------- ------- 142,906 126,032 ------- ------- Debt of Employee Stock Ownership Plan (note 11) 2,092 2,402 ------- ------- $326,433 270,583 ======= =======
At December 31, 1996 and 1995, pursuant to a physical pledge collateral agreement, advances from the FHLB of New York were collateralized by MBSs with an estimated fair value of approximately $90,814,000 and $107,600,000, respectively. At December 31, 1996 and 1995, advances from the FHLB of New York were also collateralized by U.S. Government and Agency obligations with an estimated fair value of approximately $126,826,000 and $50,000,000, respectively. At December 31, 1996 the Bank has unused lines of credit totalling $11,550,000 with the FHLB of New York. At December 31, 1996, all securities sold under agreements to repurchase were delivered to primary dealers who arranged the transactions. The securities will remain registered in the name of the Bank and will be returned at maturity. During the years ended December 31, 1996 and 1995, securities sold under agreements to repurchase averaged $128,677,000 and $94,374,000, respectively. The maximum amounts outstanding at any month-end were $142,906,000 and $150,249,000, respectively. The average interest rate paid during the years ended December 31, 1996 and 1995 were 5.65% and 5.98%, respectively. MBSs with an estimated fair value of approximately $151,700,000 and $133,700,000 were pledged as collateral at December 31, 1996 and 1995, respectively. 9. FEDERAL, STATE AND LOCAL TAXES FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return on a calendar-year basis. Under Section 593 of the Internal Revenue Code of 1986, as amended ("Code"), prior to January 1, 1996 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 a tax reserve for bad debts. Such thrift institutions were also permitted to make annual additions to the reserve, to be deducted in arriving at their taxable income within specified limitations. The Bank's deduction was computed using an amount based on the Bank's actual loss experience ("experience method"), or a percentage equal to 8% of the Bank's taxable income ("PTI method"). Similar deductions for additions to the Bank's bad debt reserve were also 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 was 32% rather than 8%. Under the Small Business Job Protection Act of 1996 ("1996 Act"), signed into law in August 1996, Section 593 of the Code was amended. The Bank will be unable to make additions to the tax bad debt reserves but will be permitted to deduct bad debts as they occur. Additionally, the 1996 Act required institutions to recapture (that is, include in taxable income) the excess of the balance of its bad debt reserves as of December 31, 1995 over the balance of such reserves as of December 31, 1987 ("base year"). The Bank's federal tax bad debt reserves at December 31, 1995 exceeded its base year reserves by $2.7 million which will be recaptured into taxable income ratably over a six year period. This recapture will be frozen for 1997 since the Bank satisfies specified mortgage origination tests. The base year reserves will be subject to recapture, and the Bank could be required to recognize a tax liability, if (i) the Bank fails to qualify as a "bank" for Federal income tax purposes; (ii) certain distributions are made with respect to the stock of the Bank; (iii) the Bank uses the bad debt reserves for any purpose other than to absorb bad debt losses; and (iv) there is a change in Federal tax law. Management is not aware of the occurrence of any such event. In response to the Federal legislation, the New York State tax law has been amended to prevent the recapture of existing tax bad debt reserves and to allow for the continued use of the PTI method to determine the bad debt deduction in computing New York State tax liability. No such amendments have been made to date with respect to the New York City tax law. This may result in there being a recapture of the New York City bad debt reserves in excess of the base year, December 31, 1987. However, the Company cannot predict whether such changes will be made or as to the form of the changes. The components of the net deferred tax assets at December 31 are as follows:
(In thousands) 1996 1995 ------ ------ Deferred tax assets: Difference between financial statement credit loss provision and tax bad-debt deduction $ 4,874 4,087 Non-accrual interest and non-performing loan expense 1,002 1,347 Securities marked to market for financial statement purposes 582 - Other 1,235 1,214 ------ ------ Total deferred tax assets 7,693 6,648 ------ ------ Valuation allowance - (800) ------ ------ Deferred tax liabilities: Recapture of Tax Bad Debt Reserve (1,241) - Securities marked to market for financial statement purposes - (1,774) Basis difference of fixed assets (143) (15) Other (124) - ------ ------ Total deferred tax liabilities (1,508) (1,789) ------ ------ Net deferred tax assets $ 6,185 4,059 ====== ======
The Company had an $800,000 valuation allowance for its deferred tax asset as of December 31, 1995, related to potential New York State and New York City deferred tax assets. Upon review of the Company's deferred tax assets as of December 31, 1996, the Company determined that the valuation allowance was no longer required. The Company will continue to review the recognition criteria as set forth in SFAS No. 109, "Accounting for Income Taxes" on a quarterly basis and determine the need for a valuation allowance accordingly. Income tax expense (benefit) for the years ended December 31 are summarized as follows:
(In thousands) 1996 1995 1994 ------ ------ ------ Current: Federal $ 3,391 1,273 (943) State and local 2,813 725 250 ------ ------ ------ 6,204 1,998 (693) ------ ------ ------ Deferred: Federal 906 3,302 (1,053) State and local (676) 1,930 (729) ------ ------ ------ 230 5,232 (1,782) ------ ------ ------ Total income tax expense (benefit) $ 6,434 7,230 (2,475) ====== ====== ======
The following is a reconciliation of statutory Federal income tax expense (benefit) to the combined effective income tax expense (benefit) for the years ended December 31:
(In thousands) 1996 1995 1994 ------ ------ ------ Statutory Federal income tax expense (benefit) $ 5,392 5,363 (2,315) State and local income taxes, net of Federal income tax benefit 1,410 1,752 (311) Change in deferred tax asset valuation allowance (800) (300) - Tax bad debt reserve (780) - - Other, net 1,212 415 151 ------ ------ ------ Total income tax expense (benefit) $ 6,434 7,230 (2,475) ====== ====== ======
STATE AND LOCAL TAXES The Company and subsidiaries file combined New York State franchise tax and New York City financial corporation tax returns on a calendar-year basis. The Company's annual tax liability for each year is the greatest of a tax on (i) allocated entire net income; (ii) allocated alternative entire net income; (iii) allocated assets to New York State and/or New York City; or (iv) a minimum tax. Operating losses cannot be carried back or carried forward for New York State or New York City tax purposes. The Company expects to determine its 1996 New York State and New York City tax liability based on entire net income. The Company has provided for New York State and New York City taxes based on assets for the years ended December 31, 1995 and 1994. 10. EMPLOYEE BENEFIT PLANS AND POST-RETIREMENT BENEFITS RETIREMENT PLAN The Company has a qualified, non-contributory defined benefit pension plan covering substantially all of its eligible employees. The Company's policy is to fund pension costs in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974, and to provide the plan with sufficient assets with which to pay pension benefits to plan participants. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Based on an evaluation of the Retirement Plan in 1996, the Bank concluded that future benefit accruals under the Retirement Plan would cease or "freeze" effective July 1, 1996. The Bank recognized a curtailment gain of approximately $266,000 as of July 1, 1996. The Bank made a cash contribution of $352,000 to the plan in January 1997. The following is a reconciliation of the funded status of the Plan and the amount of accrued pension cost as determined by the Plan's actuary in accordance with SFAS No. 87, based upon actuarial information as of July 1, 1996 and January 1, 1995, respectively:
(In thousands) 1996 1995 Actuarial present value of benefit obligations: Vested $ 7,800 6,906 Non-vested 356 207 ----- ----- 8,156 7,113 Effect of projected future compensation - 1,726 ----- ----- Projected benefit obligation for service rendered to date 8,156 8,839 Plan assets, at fair value 7,832 7,327 ----- ----- Deficiency of plan assets under projected benefit obligation (324) (1,512) Unrecognized net transition asset (from adoption of SFAS No. 87) being amortized over 18 years - (125) Prior service cost not yet recognized - (138) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions - 1,331 ----- ----- Accrued pension cost $ (324) (444) ===== =====
The amount of accrued pension cost recognized in the Company's consolidated statements of financial condition at December 31, 1996 was $101,000. The components of net pension expense, exclusive of the aforementioned 1996 curtailment gain, for the years ended December 31 are as follows:
(In thousands) 1996 1995 1994 ---- ---- ---- Service cost (benefits earned during the period) $ 211 338 409 Interest cost on projected benefit obligation 597 626 591 Actual return on plan assets (714) (652) (587) Net amortization and deferral 2 (20) (19) --- --- --- Net pension expense $ 96 292 394 === === ===
Assumptions used to develop the actuarial present value of benefit obligations at December 31 were:
1996 1995 1994 ------ ------ ------ Discount rate 7.00% 8.25% 7.25% Expected long-term rate of return 9.00 9.00 8.00 Rate of increase in compensation levels 5.00 6.00 4.50
THRIFT INCENTIVE SAVINGS PLAN The Bank maintains a 401(k) thrift incentive savings plan which provides for employee contributions on a pre-tax basis up to a maximum of 16% of total compensation, with matching contributions to be made by the Bank equal to 50% of employee contributions, not to exceed employee contributions greater than 6% of total compensation. During the two years ended December 31, 1995, the Bank elected not to match employee contributions. In connection with the Retirement Plan freeze, the Bank resumed matching employee contributions which totalled $120,000 for the period July 1, 1996 through December 31, 1996. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN In 1996, the Bank implemented a non-qualified defined benefit supplemental executive retirement plan ("SERP") for the President and Chief Executive Officer. The SERP is an unfunded plan. During 1996, the Bank accrued $132,000 for the SERP. At December 31, 1996, the accumulated benefit obligation was $890,000. The Bank also maintains a non-qualified defined benefit SERP for the Chairman of the Board. The SERP is an unfunded plan. The SERP provides for an annual retirement benefit of $120,000 for 10 years after retirement which occurred in 1995. The SERP also provides for a lump sum benefit of $1.2 million payable to the estate of the Chairman of the Board in the event of his death prior to retirement, or in the event of a hostile change in control after retirement but prior to the payment of the entire benefit; any unpaid benefit shall be paid in a lump sum. The Company had accrued the entire $1.2 million liability under the unfunded plan through December 31, 1995. POST-RETIREMENT LIFE INSURANCE BENEFITS The Company provides life insurance coverage to retirees under two separate insurance plans. The first plan provides life insurance coverage equal to one-half of annual pay at retirement, subject to a maximum of $10,000 and a minimum of $2,000. The second plan provides life insurance coverage equal to two times annual pay reduced by 10% per year for each of the first five years following retirement. The following table sets forth the components of post-retirement life insurance benefits expense for the years ended December 31:
1996 1995 1994 ------ ------ ------ Service cost $ 29 18 21 Interest cost 59 46 44 Actual return on plan assets 9 - - Amortization of transition obligation (from adoption of SFAS No. 106) being amortized over 20 years 25 25 25 --- --- --- Net post-retirement benefits expense $122 89 90 === === === Assumptions used to develop the accumulated post-retirement benefit obligation were: Discount rate 7.50% 8.25% 7.25% Rate of increase in compensation levels 5.00 6.00 4.50
At December 31, 1996 and 1995, the accumulated post-retirement benefit obligation totaled $824,000 and $559,000, respectively. The accrued post-retirement benefit liability at those dates was $360,000 and $238,000, respectively. 11. STOCK PLANS EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) The Bank established for eligible employees an Employee Stock Ownership Plan ("ESOP") in connection with the Conversion. The ESOP borrowed $3.5 million from an unrelated third party lender and purchased 347,156 common shares issued in the Conversion. The Bank is expected to make scheduled cash contributions to the ESOP sufficient to service the amount borrowed over a period not to exceed 10 years. The unpaid balance of the ESOP loan is included in borrowed funds and the unamortized balance of unearned compensation is shown as unallocated common stock held by the ESOP reflected as a reduction of stockholders' equity. As of December 31, 1996, total contributions to the ESOP which were used to fund principal and interest payments on the ESOP debt totaled approximately $2,057,000. At December 31, 1996, the loan had an outstanding balance of $2,092,000 and an interest rate of 7.91%. The loan, as amended on December 29, 1995, is payable in thirty two equal quarterly installments beginning December 1995 and ending September 2003. The loan bears interest at a floating rate based on the federal funds rate plus 250 basis points. Dividends declared on common stock held by the ESOP which have been allocated to the account of a participant are allocated to the account of such participant. Dividends declared on common stock held by the ESOP and not allocated to the account of a participant are used to repay the ESOP loan. The Company recorded $983,000, $1,246,000 and $785,000 of ESOP expense for the years ended December 31, 1996, 1995 and 1994, respectively. For the years ended December 31, 1996, 1995 and 1994, ESOP expense was based on the fair market value of the shares allocated in accordance with the AICPA SOP 93-6 which was adopted on January 1, 1994. At December 31, 1996, there were 219,725 shares remaining for future allocation, of which 34,330 shares will be allocated for the 1996 year in the first quarter of 1997. RECOGNITION AND RETENTION PLANS The Bank has established several Recognition and Retention Plans ("RRPs") which purchased in the aggregate 148,781 shares of common stock in the Conversion. The Bank contributed $1.5 million to fund the purchase of the RRP shares. In 1995, the RRP was amended to increase the number of shares of common stock which may be granted by 9,918 shares and such shares were contrib-uted to the RRP from treasury stock. During 1996, the remaining previously unallocated shares totaling 8,601 were awarded to directors and officers. The fair market value of these shares at the date of the award will be amortized as compensation expense as participants become vested. The unamortized cost, which is comparable to deferred compensation, is reflected as a reduction of stockholders' equity. For the years ended December 31, 1996, 1995 and 1994, respectively, $409,000, $490,000 and $430,000 of expense has been recognized. STOCK OPTION AND INCENTIVE PLANS In 1993, the Holding Company adopted stock option plans for the benefit of directors (the "1993 Directors Plan") and for officers and other key employees (the "1993 Stock Plan") of the Bank. The number of shares of common stock reserved for issuance under the stock option plans was equal to 10% of the total number of shares of common stock issued pursuant to the Bank's Conversion to the stock form of ownership. In 1995, the 1993 Stock Plan was amended to increase the number of shares for which stock options may be granted by 34,715 shares. All options awarded to employees vest over a three year period beginning one year from the date of grant. The option exercise price cannot be less than the fair value market of the underlying common stock as of the date of the option grant, and the maximum option term cannot exceed ten years. The stock options awarded to directors become exercisable one year from the date of grant. In 1996, the remaining 5,885 options were granted from the 1993 Stock Plan and the remaining 18,602 options were granted from the 1993 Directors Plan. At the annual meeting of stockholders on April 24, 1996, the stockholders approved the Haven Bancorp, Inc. 1996 Stock Incentive Plan which provided 210,000 shares for the grant of options and restricted stock awards. On April 24, 1996, an aggregate of 1,976 shares of restricted stock was granted to directors which vested six months from the date of grant and an aggregate of 27,989 shares was granted to officers and employees on May 23, 1996, which vest over a three year period beginning one year from the date of grant. In addition, an aggregate of 116 shares was granted to two new directors on October 1, 1996 which vested on December 31, 1996. Such shares were recorded as unearned compensation at their fair market value on the date of the award (which is reflected as a reduction of stockholders' equity), to be amortized to expense over the vesting period. During 1996, an aggregate of 160,850 options were granted to directors and officers under the 1996 Stock Incentive Plan, which vest over a three year period beginning one year from the date of grant. The following table summarizes certain information regarding the stock option plans:
Number of shares of Non- Non- Weighted Incentive Statutory Qualified Average Stock Stock Options to Exercise Options Options Directors Price --------- --------- ---------- -------- Options reserved in conversion 158,112 189,044 148,781 $10.00 ------- ------- ------- ----- Balance outstanding at December 31,1993 154,381 189,044 111,582 10.00 Granted - - 18,597 16.69 Forfeited (7,438) - - 10.00 Exercised - - - - ------- ------- ------- ----- Balance outstanding at December 31, 1994 146,943 189,044 130,179 10.27 Granted - 40,000 - 16.94 Forfeited - - - - Exercised (20,825) (4,878) - 10.00 ------- ------- ------- ----- Balance outstanding at December 31, 1995 126,118 224,166 130,179 10.84 Granted 91,285 19,450 74,602 25.82 Forfeited - - - - Exercised (9,406) - - 10.00 ------- ------- ------- ----- Balance outstanding at December 31, 1996 207,997 243,616 204,781 $15.08 ======= ======= ======= ===== Shares exercisable at December 31, 1996 89,934 197,499 130,179 $10.51 ======= ======= ======= =====
The fair value of each share grant is estimated on the date of grant using the Black-Scholes option - pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 1.93% in 1996 and 1995; expected volatility of 16.85% in 1996 and 1995; risk-free interest rates of 5.89% to 6.38% in 1996 and 6.29% in 1995; and expected lives of 3 years for the 1993 Stock Plan, 8 years for the 1993 Directors Plan and 3 years for grants to officers and employees under the 1996 Stock Incentive Plan and 8 years for grants to directors under that plan. Had compensation cost for the Company's three stock-based compensation plans been determined consistent with SFAS No. 123 for awards made after January 1,1995, the Company's net income and net income per common share would have been reduced to the pro forma amounts indicated below for the years ended December 31: (Dollars in thousands, 1996 1995 except per share data) ------ ------ Net income As reported $ 9,425 8,544 Pro forma 9,135 8,364 Net income per common share: Primary As reported $ 2.12 1.89 Pro forma 2.06 1.85 Fully diluted As reported $ 2.11 1.87 Pro forma 2.04 1.83 12. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS At December 31, 1996, the Company was obligated under several noncancelable operating leases on property used for office space and banking purposes. Several of the leases contain escalation clauses which provide for increased rentals, primarily based upon increases in real estate taxes. Rent expense under these leases was approximately $404,000, $379,000 and $310,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The projected minimum rental payments under the terms of the noncancelable leases at December 31, 1996 are as follows: Years ending December 31, (In thousands) 1997 $ 772 1998 661 1999 577 2000 415 2001 245 Thereafter 25 ----- $2,695 ===== Four supermarket branches have opened through December 31, 1996, and the leases related thereto are reflected in the table above. In September 1996, the Bank 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. LOAN COMMITMENTS The Company had outstanding commitments totaling $55.8 million to originate loans at December 31, 1996 of which $15.2 million were fixed rate loans and $40.6 million were variable rate loans. For fixed rate loan commitments at December 31, 1996, the interest rates on mortgage loans ranged from 6.375% to 10.0%. The standard commitment term for these loans is 45 days. For other consumer fixed-rate loan commitments, interest rates ranged from 9.75% to 10.5% with the standard term of the commitment of 30 days. Loan commitments are made at current rates and no material difference exists between book and market values of such commitments. For commitments to originate loans, the Company's maximum exposure to credit risk is represented by the contractual amount of those instruments. Those commitments represent ultimate exposure to credit risk only to the extent that they are subsequently drawn upon by customers. The Company uses the same credit policies and underwriting standards in making loan commitments as it does for on-balance-sheet instruments. For loan commitments, the Company would generally be exposed to interest rate risk from the time a commitment is issued with a defined contractual interest rate. In connection with the securitization and sale of $48.6 million of cooperative apartment loans in 1994, a letter of credit totalling $6.8 million was established with the FHLB. The letter of credit provides a level of protection of approximately 14% to the buyer against losses on the cooperative apartment loans sold behind a pool insurance policy the Bank purchased which provides a level of protection of approximately 20%. The letter of credit totalled $6.8 million at December 31, 1996. INTEREST RATE CAPS During the year ended December 31, 1995, the Company, in order to hedge a portion of the borrowings to fund a $75 million leverage transaction, purchased an interest rate cap on a $25.0 million notional principal amount on which it will receive a payment, based on the notional principal amount, equal to the three month LIBOR rate in excess of 8% on any reset date for a three year period. The premium paid for the cap, $133,000, which is carried in other assets is being amortized to interest expense over the term of the contract. As of December 31, 1996 and 1995, three month LIBOR was 5.56% and 5.63%, respectively. Interest expense on borrowed funds was increased by approximately $44,000 and $11,000 during the years ended December 31, 1996 and 1995, respectively, as a result of this agreement. LITIGATION AND LOSS CONTINGENCY 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. On June 27, 1996, the Bank received a partial payment of its claims against Nationar totalling $4,987,000, at which time $389,000 of a $430,000 reserve previously established was taken into income. On November 20, 1996, the Supreme Court of the State of New York entered an order authorizing the Superintendent to pay a final payment to creditors of Nationar whose claims or accounts payable have been accepted by the Superintendent, reduced by any previous partial payments on such claims or account payable. The Bank received $33,000 which represents the final aggregate payment on the remaining claims totaling $54,000. In February, 1983, a burglary of the contents of safe deposit boxes occurred at a branch office of the Bank. At December 31, 1995, the Bank has a class action lawsuit related thereto pending, whereby the plaintiffs are seeking recovery of approximately $12,900,000 in actual damages and an additional $12,900,000 of unspecified damages. The Banks ultimate liability, if any, which might arise from the disposition of these claims cannot presently 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 Company is involved in various 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. 13. STOCKHOLDERS' EQUITY At the time of its conversion to a stock savings bank, the Bank established a liquidation account in an amount equal to its total retained earnings as of June 30, 1993. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank, after the conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The balance of the liquidation account was approximately $20.8 million at December 31, 1996. Subsequent to the conversion, the Bank may not declare or pay cash dividends on or repurchase any of its shares of common stock, if the effect would cause stockholders' equity to be reduced below the amount required for the liquidation account, applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements. Office of Thrift Supervision ("OTS") regulations provide that an institution that exceeds all fully phased-in capital requirements, before and after a proposed capital distribution could, after prior notice but without prior approval of the OTS, make capital distributions during the calendar year up to 100% of net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year period. Any additional capital distributions would require prior regulatory approval. Unlike the Bank, the Company is not subject to these regulatory restrictions on the payment of dividends to its stockholders. However, the source of future dividends may depend upon dividends from the Bank. TREASURY STOCK TRANSACTIONS During the year ended December 31, 1996, the Company repurchased 225,537 shares under its third repurchase program that was completed March 11, 1996. During the year ended December 31, 1995, the Company repurchased 75,570 shares under its second repurchase program that was completed June 28, 1995. REGULATORY CAPITAL As required by regulation of the OTS, savings institutions are required to maintain regulatory capital in the form of a "tangible capital requirement," a "core capital requirement," and a "risk-based capital requirement." The Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As of December 31, 1996, the Bank has been categorized as "well capitalized" by the OTS under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. The following table sets forth the required ratios and amounts and the Bank's actual capital amounts and ratios at December 31:
To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Action Actual Purposes Provisions Amount Ratio(3) Amount Ratio Amount Ratio (Dollars in thousands) ------ -------- ------ ----- ------ ----- 1996 Tangible Capital $ 97,201 6.14% $23,743 1.50% N/A N/A Core Capital (1) 97,201 6.14 47,487 3.00 79,144 5.00% Risk-based Capital (2) 106,555 13.22 64,479 8.00 80,599 10.00 1995 Tangible Capital $ 87,723 6.01% $21,909 1.50% N/A N/A Core Capital (1) 87,723 6.01 43,819 3.00 73,03 15.00% Risk-based Capital (2) 94,968 14.625 1,955 8.00 64,944 10.00
(1) Under the OTS's prompt corrective action regulations, the core capital requirement was effectively increased to 4.00% since OTS regulations stipulate that as of that date an institution with less than 4.00% core capital will be deemed to be classified as "undercapitalized." (2) The OTS adopted a final regulation which incorporates an interest rate risk component into its existing risk-based capital standard. The regulation requires certain institutions with more than a "normal level" of interest rate risk to maintain capital in addition to the 8.0% risk-based capital requirement. The Bank does not anticipate that its risk-based capital requirement will be materially affected as a result of the new regulation. (3) For tangible and core capital, the ratio is to adjusted total assets. For risk-based capital, the ratio is to total risk- weighted assets. STOCKHOLDER RIGHTS PLAN On January 26, 1996, the Board of Directors of the Holding Company (the "Board") adopted a Stockholder Rights Plan (the "Rights Plan"). Under the Rights Plan, which expires in February, 2006, the Board declared a dividend of one right on each outstanding share of the Holding Company's common stock, which was paid on February 5, 1996 to stockholders of record on that date (the "Rights"). Until it is announced that a person or group has acquired 10% or more of the outstanding common stock of the Holding Company (an "Acquiring Person") or has commenced a tender offer that could result in their owning 10% or more of such common stock, the Rights are initially redeemable for $.01 each, are evidenced solely by the Holding Company's common stock certificates, automatically trade with the Holding Company's common stock and are not exercisable. Following any such announcement, separate Rights would be distributed, with each Right entitling its owner to purchase participating preferred stock of the Holding Company having economic and voting terms similar to those of one share of the Holding Company's common stock for an exercise price of $90. Upon announcement that any person or group has become an Acquiring Person and unless the Board acts to redeem the Rights, then twenty business days thereafter (the "Flip-in Date"), each Right (other than Rights beneficially owned by any Acquiring Person or transferee thereof, which become void) will entitle the holder to purchase, for the $90 exercise price, a number of shares of the Holding Company's common stock having a market value of $180. In addition, if after an Acquiring Person gains control of the Board, the Holding Company is involved in a merger or sells more than 50% of its assets or assets generating more than 50% of its operating income or cash flow, or has entered into an agreement to do any of the foregoing (or an Acquiring Person is to receive different treatment than all other stockholders), each Right will entitle its holder to purchase, for the $90 exercise price, a number of shares of common stock of the Acquiring Person having a market value of $180. If any person or group acquires more than 50% of the outstanding common stock of the Holding Company, the Board may, at its option, exchange one share of such common stock for each Right. The Rights may also be redeemed by the Board for $0.01 per Right prior to the Flip-in Date. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" requires the Company to disclose estimated fair values for substantially all of its financial instruments. The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are determined for on and off-balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following table summarizes the carrying values and estimated fair values of the Company's on-balance-sheet financial instruments at December 31:
1996 1995 Estimated Estimated Carrying Fair Carrying Fair (In thousands) Value Value Value Value -------- --------- -------- --------- Financial Assets: Cash and cash equivalents $ 35,717 35,717 38,854 38,854 Securities available for sale 370,105 370,105 503,058 503,058 Loans held for sale - - 11,412 11,412 Debt securities held to maturity 97,307 96,324 127,796 126,811 FHLB-NY stock 9,890 9,890 8,138 8,138 Mortgage-backed securities held to maturity 197,940 195,682 190,714 189,551 Loans, net 836,882 850,513 560,385 568,007 Accrued interest receivable 12,172 12,172 10,736 10,736 Financial Liabilities: Deposits 1,137,788 1,138,385 1,083,446 1,086,814 Borrowed funds 326,433 326,341 270,583 271,334 Mortgagors' escrow balances 4,621 4,621 3,227 3,227 Due to broker 1,000 1,000 5,000 5,000 Accrued interest payable 1,002 1,002 660 660
The methods and significant assumptions used to estimate fair values for different categories of financial instruments are as follows: Cash and cash equivalents - The estimated fair values of cash and cash equivalents are assumed to equal the carrying values as these financial instruments are either due on demand or mature within 90 days. Securities available for sale, Debt Securities and Mortgage- Backed Securities Held to Maturity - Estimated fair value for substantially all of the Company's bonds, notes and equity securities, both available for sale and held to maturity are based on market quotes as provided by an independent pricing service. For MBSs, the Company obtains bids from broker dealers to estimate fair value. For those occasional securities for which a market price cannot be obtained, market prices of comparable securities are used. Loans held for sale - Fair value is estimated based on preliminary pricing information obtained by the Company from a major Wall Street investment banking firm, active in the purchase and sale of such assets. FHLB-NY stock - The estimated fair value of the Company's investment in FHLB-NY stock is deemed to be equal to its carrying value which represents the price at which it may be redeemed. Residential loans - Residential loans include 1-4 family mortgages and individual cooperative apartment loans. Estimated fair value is based on discounted cash flow analysis. The residential loan portfolio is segmented by loan type (fixed conventional, adjustable products, etc.) with weighted average coupon rate, remaining term, and other pertinent information for each segment. A discount rate is determined based on the U.S. Treasury yield curve plus a pricing spread. Expected principal prepayments, consistent with empirical evidence and management's future expectations, are used to modify the future cash flows. For potential problem loans, the present value result is separately adjusted downward consistent with management's assumptions in evaluating the adequacy of the allowance for loan losses. Commercial real estate and other loans - Estimated fair value is based on discounted cash flow analysis which take into account the contractual coupon rate and maturity date of each loan. A discount rate is determined based on the U.S. Treasury yield curve plus a pricing spread. For potential problem loans, the present value result is separately adjusted downward consistent with management's assumptions regarding the value of any collateral underlying the loans. Deposits - Certificates of deposit are valued by performing a discounted cash flow analysis of the remaining contractual maturities of outstanding certificates. The discount rates used are wholesale secondary market rates as of the valuation date. For all other deposits, fair value is deemed to be equivalent to the amount payable on demand as of the valuation date. Borrowed funds - Borrowings are fair valued based on rates available to the Company in either public or private markets for debt with similar terms and remaining maturities. Accrued interest receivable, accrued interest payable, mortgagors' escrow balances and due to broker - The fair values are estimated to equal the carrying values of short-term receivables and payables, including accrued interest, mortgage escrow funds and due to broker. Off-balance sheet financial instruments - The fair value of the interest rate cap was obtained from dealer quotes and represents the cost of terminating the agreement. The estimated fair value of open off-balance sheet financial instruments results in an unrealized loss of $62,000 and $70,000 at December 31, 1996 and 1995, respectively. The estimated fair value of commitments to extend credit is estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. Generally, for fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed interest rates. The fair value of commitments to purchase debt securities and MBSs is based on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The estimated fair value of these off-balance sheet financial instruments resulted in no unrealized gain or loss at December 31, 1996 and 1995. 15. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS The condensed financial statements of the Holding Company (parent company only) are as follows: Parent Company Condensed Statements of Financial Condition December 31,
(In thousands) 1996 1995 ------ ------ Assets: Cash $ 38 119 Money market investments 1,869 4,064 Securities available for sale - 3,976 Accrued interest receivable 2 25 Accrued income taxes receivable 359 184 Investment in net assets of Bank 97,789 90,891 ------- ------- Total assets 100,057 99,259 ======= ======= Liabilities: Other liabilities 673 740 ------- ------- Total liabilities 673 740 ------- ------- Stockholders' equity: Common stock 50 50 Additional paid-in capital48,84447,331 Retained earnings, substantially restricted 65,092 57,919 Unrealized (loss) gain on securities available for sale, net of tax effect (840) 2,083 Treasury stock, at cost (11,049) (6,023) Unallocated common stock held by ESOP (1,854) (2,197) Unearned common stock held by RRPs (267) (644) Unearned compensation (592) - ------- ------- Total stockholders' equity 99,384 98,519 ------- ------- Total liabilities and stockholders' equity $100,057 99,259 ======= =======
Parent Company Only Condensed Statements of Operations
Years Ended December 31, (In thousands) 1996 1995 1994 ------ ------ ------ Dividend from Bank $2,000 - - Interest income 178 571 541 Other operating expenses (961) (788) (788) ----- ---- ---- Income (loss) before income tax expense (benefit) and equity in undistributed net income (loss) of Bank 1,217 (217) (247) Income tax (benefit) expense (360) (100) 181 ----- ---- ---- Net income (loss) before equity in undistributed net income (loss) of Bank 1,577 (117) (428) Equity in undistributed net income (loss) of Bank 7,848 8,661 (3,907) ----- ---- ---- Net income (loss) $9,425 8,544 (4,335) ===== ===== =====
Parent Company Only Condensed Statements of Cash Flows Years Ended December 31,
Years Ended December 31, (In thousands) 1996 1995 1994 ------ ------ ------ Operating activities: Net income (loss) $ 9,425 8,544 (4,335) Less equity in undistributed net income (loss) of the Bank (7,848) (8,661) 3,907 Decrease in accrued interest receivable 23 8 1 (Increase) decrease in accrued income tax receivable (175) 774 320 Increase (decrease) in other liabilities 219 (841) (146) ----- ---- ---- Net cash provided by (used in) operating activities 1,644 (176) (253) ----- ---- ---- Financing activities: Purchase of treasury stock (5,516) (1,360) (4,575) Payment of common stock dividends (2,475) (454) - Exercise of stock options 95 257 - ----- ----- ----- Net cash used in financing activities (7,896) (1,557) (4,575) ----- ----- ----- Net decrease in cash (6,252) (1,733) (4,828) Cash at beginning of year 8,159 9,892 14,720 ----- ----- ----- Cash at end of year $1,907 8,159 9,892 ===== ===== =====
16. QUARTERLY FINANCIAL DATA (Unaudited) The following table is a summary of financial data by quarter for the years ended December 31, 1996 and 1995:
1996 1995 (Dollars in thousands, 1st 2nd 3rd 4th 1st 2nd 3rd 4th except for share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- ------- Interest income $25,905 27,013 27,963 28,372 21,844 23,268 25,317 26,005 Interest expense 14,566 15,001 15,972 15,829 11,921 13,198 14,877 15,119 ------ ------ ------ ------ ------ ------ ------ ------ Net interest income before provision for loan losses 11,339 12,012 11,991 12,543 9,923 10,070 10,440 10,886 Provision for loan losses 650 1,125 700 650 600 700 700 775 ------ ------ ------ ------ ------ ------ ------ ------ Net interest income after provision for loan losses 10,689 10,887 11,291 11,893 9,323 9,370 9,740 10,111 Non-interest income 2,153 2,784 2,251 2,366 1,866 1,899 2,076 3,181 Non-interest expense 7,445 8,015 14,024 8,971 7,668 7,751 7,903 8,470 ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) before income tax expense (benefit) 5,397 5,656 (482) 5,288 3,521 3,518 3,913 4,822 Income tax expense (benefit) 2,539 2,630 (559) 1,824 1,675 1,670 1,708 2,177 ------ ------ ------ ------ ------ ------ ------ ------ Net income 2,858 3,026 77 3,464 1,846 1,848 2,205 2,645 ====== ====== ====== ====== ====== ====== ====== ====== Net income per common share: Primary $ 0.64 0.69 0.02 0.78 0.41 0.41 0.49 0.58 Fully diluted $ 0.64 0.69 0.02 0.78 0.41 0.41 0.49 0.58 ====== ====== ====== ====== ====== ====== ====== ====== Weighted average number of shares outstanding and common stock equivalents: Primary 4,459,742 4,379,980 4,425,562 4,436,178 4,454,320 4,509,829 4,508,766 4,540,392 Fully diluted 4,460,495 4,407,301 4,400,450 4,448,266 4,482,491 4,522,057 4,529,509 4,549,727
17. SUBSEQUENT EVENT (UNAUDITED) On February 12, 1997, Haven Capital Trust I, a trust formed under the laws of the State of Delaware (the "Trust") issued $25 million of 10.46% capital securities. The Holding Company is the owner of all the beneficial interests represented by common securities of the Trust. The Trust exists for the sole purpose of issuing the Trust securities (comprised of the capital securities and the common securities) and investing the proceeds thereof in the 10.46% Junior Subordinated Deferrable Interest Debentures issued by the Holding Company on February 12, 1997 which are scheduled to mature on February 1, 2027. The Holding Company intends to use the net proceeds from the sale of the Junior Subordinated Debentures for general corporate purposes, which may include capital contributions to the Bank, the financing of future acquisitions and the funding of repurchases of the Company's common stock. INDEPENDENT AUDITORS' REPORT The Board of Directors Haven Bancorp, Inc.: We have audited the accompanying consolidated statements of financial condition of Haven Bancorp, Inc. (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. January 23, 1997 Jericho, New York DIRECTORS AND OFFICERS AND DIRECTORY DIRECTORS Haven Bancorp, Inc. and Columbia Federal Savings Bank George S. Worgul Chairman of the Board Philip S. Messina Chief Executive Officer and President Robert L. Koop President, Haven Chevrolet Robert M. Sprotte President, Schmelz Bros., Inc. President, RDR Realty Corp. Joseph A. Ruggiere President, Ohlert-Ruggiere, Inc. Michael J. Fitzpatrick C.P.A., Financial Consultant Retired, Vice President, National Thrift Director, E.F. Hutton & Co. William J. Jennings II Managing Director, Salomon Brothers Inc. Michael J. Levine President, Norse Realty Group Inc. & Affiliates Partner, Levine & Schmutter, CPAs Msgr. Thomas J. Hartman Director of Radio and Television for the Diocese of Rockville Centre (Appointed on February 26, 1997) EXECUTIVE OFFICERS Haven Bancorp, Inc. and Columbia Federal Savings Bank Philip S. Messina Chief Executive Officer, President Gerard H. McGuirk Executive Vice President, Chief Lending Officer Thomas J. Seery Executive Vice President, Operations Catherine Califano Senior Vice President, Chief Financial Officer Joseph W. Rennhack Senior Vice President, Secretary DIRECTORY Administrative Headquarters Haven Bancorp, Inc. 93-22 Jamaica Avenue Woodhaven, NY 11421 (718) 847-7041 Columbia Federal Savings Bank Locations Main Office 93-22 Jamaica Avenue Woodhaven, NY 11421 Forest Parkway 80-35 Jamaica Avenue Woodhaven, NY 11421 Forest Hills 106-19 Continental Avenue Forest Hills, NY 11375 Ozone Park 98-16 101st Avenue Ozone Park, NY 11416 Clock Tower 91-20 Atlantic Avenue Ozone Park, NY 11416 Howard Beach 82-10 153rd Avenue Howard Beach, NY 11414 Rockaway 104-08 Rockaway Beach Boulevard Rockaway, NY 11694 Bellerose 244-19 Braddock Avenue Bellerose, NY 11426 Snug Harbor 343 Merrick Road Amityville, NY 11701 Medford (Edwards Super Food Stores) 700-60 Patchogue-Yaphank Road Medford, NY 11763 Uniondale (ShopRite Supermarket) 1121 Jerusalem Avenue Uniondale, NY 11553 Bay Shore (Edwards Super Food Stores) 533 Montauk Highway Bayshore, NY 11706 Atlantic Terminal (Pathmark Supermarket) 625 Atlantic Avenue and Fort Green Place Brooklyn, NY 11217 North Babylon (Pathmark Supermarket) 1251 Deer Park Avenue North Babylon, NY 11703 Stockholder Information Corporate Offices Haven Bancorp, Inc. 93-22 Jamaica Avenue Woodhaven, NY 11421 Annual Meeting The annual meeting of stockholders will be held on Wednesday, April 23, 1997 at 9:00 A.M., at the Holiday Inn Crowne Plaza, 104-04 Ditmars Blvd., East Elmhurst, New York. A notice of the meeting, a proxy statement and a proxy form are included with this mailing to stockholders of record as of March 5, 1997. Common Stock Information Haven Bancorp common stock is traded on the Nasdaq National Market under the symbol HAVN. The table below shows the reported high and low sales prices of the common stock during the periods indicated in 1996 and 1995. 1996 1995 High Low High Low First Quarter 25 5/16 22 1/4 17 7/8 12 7/8 Second Quarter 28 3/4 22 3/8 18.88 12.88 Third Quarter 29 3/8 25 1/4 23 5/8 18 Fourth Quarter 29 1/2 25 1/2 25 20.88 As of March 5, 1997, the Company had approximately 450 stockholders of record, not including the number of persons or entities holding stock in nominee or street name through various brokers and banks. At December 31, 1996, there were 4,325,407 shares of common stock outstanding. Transfer Agent and Registrar Inquiries regarding stockholder administration and services should be directed to: ChaseMellon Shareholder Services, L.L.C. Overpeck Center 85 Challenger Road Ridgefield Park, NJ 07660 1-800-851-9677 Independent Auditors KPMG Peat Marwick LLP 1 Jericho Plaza Jericho, NY 11753 Legal Counsel Thacher Proffitt & Wood Two World Trade Center New York, NY 10048 Investor Relations Inquiries regarding Haven Bancorp, Inc. should be directed to: Catherine Califano Haven Bancorp, Inc. 93-22 Jamaica Avenue Woodhaven, NY 11421 (718) 847-7041 Annual Report on Form 10-K A copy of the annual report on Form 10-K for the year ended December 31, 1996, which has been filed with the Securities and Exchange Commission, is available to stockholders (excluding exhibits) at no charge, upon written requests to: Investor Relations Haven Bancorp, Inc. 93-22 Jamaica Avenue Woodhaven, NY 11421 ** World Wide Web Site: http://www.cfsb.com EX-23 4 CONSENT OF IND AUDITORS Exhibit 23.0 Independent Accountants' Consent The Board of Directors Haven Bancorp, Inc.: We consent to incorporation by reference in the registration statements (No. 333-79740, No. 333-85056 and No. 333-20823) on Form S-8 of Haven Bancorp, Inc. of our report dated January 23, 1997, relating to the consolidated statements of financial condition of Haven Bancorp, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which report is incorporated by reference in the 1996 Annual Report on Form 10-K of Haven Bancorp, Inc. KPMG Peat Marwick LLP Jericho, New York March 28, 1997 EX-27 5 FDS
9 This schedule contains summary financial information extracted from the Consolidated Statement of Financial Condition at December 31, 1996 and the Consolidated Statement of Operations for the twelve months ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1996 DEC-31-1996 28,848 1,125,386 5,000 0 370,105 295,247 292,006 847,586 10,704 1,583,545 1,137,788 261,356 19,940 65,077 0 0 50 99,334 1,583,545 56,748 52,505 0 109,253 9,314 61,368 47,885 3,125 140 38,455 15,859 15,859 0 0 9,425 2.12 2.11 7.50 10,733 0 3,160 28,270 8,573 1,885 891 10,704 10,704 0 0
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