ITEM 1. BUSINESS
(a) and (c) General Development of the Business: Narrative Description of Business.
Statewide Financial Corp. (the "Company") is a New Jersey business corporation and unitary savings and loan holding company registered under the Home Owner's Loan Act of 1933, as amended (the "HOLA"). The Company was incorporated on May 31, 1995 for the purpose of acquiring Statewide Savings Bank, S.L.A. (the "Bank") in connection with the Bank's conversion from the mutual form of ownership to the stock form of ownership. Management of the Bank believed that establishing a holding company structure in connection with the mutual to stock conversion would facilitate certain operations of the Bank, including acquisition of other financial institutions and provide additional financial flexibility for the growth of the Bank. On September 29, 1995, the Bank converted from a mutual to stock form and the Company acquired 100% of the outstanding stock of the Bank. The principal activities of the Company are owning and supervising the Bank.
The Bank was organized in 1943 as a New Jersey chartered savings and loan association. The Bank's principal business is attracting retail deposits from the general public, through its branch offices, and investing those deposits, together with borrowings and other funds generated from operations and principal payments, primarily in one-to four-family residential mortgage loans and mortgage-backed securities as well as through the origination of commercial business, commercial mortgage and consumer loans. In addition, the Company invests in U.S. government and agency obligations and other permissible investments. Over the past several years, the Company has sought to emphasize more commercial lending and diversify its loan portfolio. As part of this process, the Bank formed the Statewide Mortgage Funding division, which provides wholesale lines of credit to mortgage bankers. The Bank's revenues are derived principally from interest on its loan and mortgage-backed securities portfolios and interest and dividends on its debt and equity securities. The Bank's primary sources of funds are deposits, principal and interest payments on loans and mortgage- backed securities and borrowings from the Federal Home Loan Bank of New York ("FHLBNY"). Through its wholly owned subsidiary, Statewide Financial Services, Inc., the Bank also engages in the sale of annuity products.
MARKET AREA AND COMPETITION
The Company conducts business as a community-oriented savings bank offering a variety of financial services to meet the needs of the communities it serves. The Company's primary market area for deposit gathering includes the neighborhoods surrounding its sixteen offices. Nine of the Company's offices are located in Hudson County, three in Bergen County and four are located in Union County, New Jersey. The Company's primary market area for loan originations is northern and central New Jersey, although the Company originates loans throughout the State of New Jersey. On April 10, 1998, the Company transferred the lease of, and sold the deposits from, the Passaic in-store branch to another financial institution. Under this sale, the acquirer assumed all of the deposit liabilities associated with this branch, and assumed the Company's obligations under its lease of the branch location. The Company realized a pretax gain of $0.3 million on the sale of these deposits. On May 9, 1998, the Company opened a retail banking branch in North Arlington, New Jersey.
The Company faces significant competition both in originating loans and in attracting deposits. Northern New Jersey has a high density of financial institutions, many of which are branches of significantly larger money center and regional banks which have greater financial resources than the Company, and all of which are competitors of the Company to varying degrees. The Company's competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies and insurance companies. Its most direct competition for deposits has historically come from commercial banks, savings banks, savings and loan associations and credit unions. The Company faces additional competition for deposits from short-term money market funds and other corporate and government securities funds and from other financial institutions such as brokerage firms and insurance companies. The Company competes for loans and deposits principally on the basis of: quality of service it provides to customers, rates charged on loans and paid to depositors and extended business hours maintained in the retail branches.
PERSONNEL
At December 31, 1998, the Company had a total of 166 full-time employees and 45 part-time employees. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be good.
REGULATION AND SUPERVISION
General
The Bank is a New Jersey State chartered capital stock savings and loan association and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The Bank is subject to extensive regulation and supervision by the New Jersey Department of Banking and Insurance (the "Department"), as its chartering agency, the Office of Thrift Supervision ("OTS"), as its primary Federal regulator, and by the FDIC, as the deposit insurer. The Bank must file reports with the Department, the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other depository institutions. There are periodic examinations by the Department, the OTS, and the FDIC to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings and loan association can engage and is intended primarily for the protection of the insurance fund and depositors, not shareholders. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
As a unitary savings and loan holding company, the Company is subject to supervision and regulation by the OTS.
New Jersey Law
The Department regulates the corporate activities of the Bank as well as its deposit taking, lending and investment activities. The Department must approve changes to the Bank's Certificate of Incorporation, establishment or relocation of offices, mergers and the issuance of additional stock. In addition, the Department conducts periodic examinations of the Bank. Certain of the areas regulated by the Department are not subject to similar regulation by the OTS.
Federal and state legislative developments have reduced distinctions between commercial banks and SAIF insured savings institutions in New Jersey with respect to lending and investment authority as well as interest rate limitations. As Federal law has expanded the authority of federally chartered savings institutions to engage in activities previously reserved for commercial banks, New Jersey legislation and regulations ("parity legislation") has given New Jersey chartered savings institutions, such as the Bank, the powers of federally chartered savings institutions.
New Jersey law provides that, upon satisfaction of certain triggering conditions, as determined by the Department, insured institutions or savings and loan holding companies located in a state which has reciprocal legislation in effect on substantially the same terms and conditions as under New Jersey law may acquire, or be acquired by, New Jersey insured institutions or holding companies on either a regional or national basis. New Jersey law explicitly prohibits interstate branching.
Prompt Corrective Action
Federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions and requires the Federal banking agencies, including the OTS, to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's capital level. Generally, subject to a narrow exception, the appropriate Federal banking agency is required to appoint a receiver or conservator for an institution that is critically undercapitalized within 90 days after it becomes critically undercapitalized.
Under the rules implementing the prompt corrective action provisions, an institution that has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater, and is not subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure is deemed to be "well-capitalized." An institution that has a total risk-based capital ratio of 8.0% or greater, a Tier l risk-based capital ratio of 4.0% or greater and a leverage ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the bank is rated composite "1" under the FDIC financial institution grading system ("CAMEL rating") and is not experiencing or anticipating significant growth) and does not meet the definition of a "well-capitalized" bank is considered to be "adequately capitalized." An institution that has a total risk-based capital of less than 8.0% or has a Tier 1 risk-based capital ratio that is less than 4.0% or has a leverage ratio of less than 4.0% is considered "undercapitalized." An institution that has a total risk-based capital ratio of less than 6.0%, or a Tier 1 risk-based capital ratio that is less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized," and a bank that has a ratio of tangible equity to total assets (core capital, such as common equity capital, and cumulative perpetual preferred stock minus all intangible assets, except for limited amounts of purchased mortgage servicing rights and of purchased credit card relationships) to assets equal to or less than 2.0% is deemed to be "critically undercapitalized." Under the rule, the appropriate Federal banking agency may reclassify a well-capitalized bank as adequately capitalized, and may require an adequately capitalized bank or an undercapitalized bank to comply with certain mandatory or discretionary supervisory actions as if the bank were in the next lower capital category (except that the appropriate Federal banking agency may not reclassify a significantly undercapitalized bank as critically undercapitalized), if the appropriate Federal banking agency determines the bank is in an unsafe or unsound condition, or the bank has received and not corrected a less than satisfactory rating for any of the categories of asset quality, management, earnings or liquidity. At December 31, 1998, the Bank's leverage ratio as calculated under the prompt corrective action rule was 7.95%. The Bank is deemed "well-capitalized" for purposes of Section 38 of the Federal Deposit Insurance Act ("FDI ACT") and the regulations of the FDIC implementing that Section.
Generally, a bank that is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized" becomes immediately subject to certain regulatory restrictions, including, but not limited to, restrictions on growth, investment activities, capital distributions and affiliate transactions. In addition, an insured depository institution cannot make a capital distribution (as broadly defined to include, among other things, dividends, redemptions and other repurchases of stock), or pay management fees to any person that controls the institution, if thereafter it would be "undercapitalized." An "undercapitalized" bank is required to submit an acceptable capital restoration plan to its primary Federal regulator, which must be guaranteed by any parent holding company of the bank.
Insurance of Deposit Accounts
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Deposit Act") became law. The primary purpose of the Deposit Act was to recapitalize the SAIF by charging all SAIF member institutions a one time special assessment of 65.7 basis points of the institution's SAIF assessable deposits as of March 31, 1995. In addition, the Deposit Act separates the FDIC assessment into two components: first, deposit insurance premiums and second, payment of interest and principal due on certain bonds issued by the Federal Finance Corporation ("FICO") in the mid-1980's to fund a portion of the thrift bailout. As a result of the Deposit Act, insurance premiums for thrifts were equalized with those of commercial banks, with premiums ranging from 0% to 0.24% of assessed deposits. Since adoption of the Deposit Act, various legislation modernizing the United States' financial system has been proposed, although no legislation has yet passed. Some of these proposals would eliminate the thrift charter or restrict the activities of unitary thrift holding companies. Management is currently unable to predict whether any of these proposals will be adopted or what effect the adoption of any of these proposals will have on the Company.
The amount of insurance premiums paid by insured depository institutions is determined by the FDIC pursuant to a risk based system, whereby the FDIC assigns an institution to one of three capital categories consisting of (1) well-capitalized, (2) adequately capitalized, or (3) undercapitalized, and one of three supervisory categories. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under this system, there are nine assessment risk classifications (i.e., combinations of capital categories and supervisory subgroups within each capital group) to which differing assessment rates are applied. In addition, SAIF insured institutions like the Bank must pay an additional assessment in connection with repayment of the FICO obligations of 6.3 basis points per $100 of deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that, among other things, the institution has engaged in, or is engaging in, unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Regulatory Capital
The OTS's capital requirements applicable to the Bank consist of a "tangible capital requirement," a "leverage limit" and a "risk-based capital requirement."
Under the tangible capital requirement, a savings association must maintain tangible capital in an amount equal to at least 1.5% of adjusted total assets. Tangible capital is defined as core capital less all intangible assets, plus a specified amount of purchased mortgage servicing rights.
The leverage limit requires that the highest rated savings associations maintain "core capital" in an amount equal to at least 3.0% of adjusted total assets. All other savings associations will be required to maintain minimum core capital of 4.0% to 5.0% of total adjusted assets. In determining the required minimum core capital ratio, the OTS will assess the quality of risk management and the level of risk in each savings association on a case-by-case basis. Core capital is defined as common stockholders' equity (including retained earnings), non-cumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, plus purchased mortgage servicing rights valued at the lower of 90.0% of fair market value, 90.0% of original cost or the current amortized book value as determined under generally accepted accounting principles ("GAAP"), less non-qualifying intangible assets.
The risk-based capital standard for savings institutions requires the maintenance of total capital (which is defined as core capital and supplementary capital) to risk weighted assets of 8.0%. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk weight of 0-100% as assigned by the OTS capital regulation based on the risks the OTS believes are inherent in the type of asset. The components of core capital are equivalent to those discussed above under the leverage capital standard. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. Allowances for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of total gross risk weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100.0% of core capital.
The OTS has amended its risk-based capital requirements to require institutions with an "above normal" level of interest rate risk to maintain additional capital. A savings association is considered to have a "normal" level of interest rate risk if the decline in the market value of its portfolio equity after an immediate 200 basis point increase or decrease in market interest rates (whichever leads to the greater decline) is less than two percent of the current estimated market value of its assets. The market value of portfolio equity is defined as the net present value of expected cash inflows and outflows from an association's assets, liabilities and off-balance sheet items. The amount of additional capital that an institution with an above normal interest rate risk is required to maintain (the "interest rate risk component") equals one-half of the dollar amount by which its measured interest rate risk exceeds the normal level of interest rate risk. The interest rate risk component is in addition to the capital otherwise required to satisfy the risk-based capital requirement. Effectiveness of these risk-based capital requirements has been waived by the OTS until the OTS publishes final guidelines regarding implementation. Although no final determination may be made until the regulations are implemented, management believes that the Bank will be found to have an "above normal" level of interest rate risk, but that the Bank's additional capital requirements will not adversely impact the Bank or its operations.
Changes in the market value of a savings association's portfolio equity are calculated from data submitted by the savings association in a schedule to its Quarterly Thrift Financial Report. Net present values are calculated by using various methodologies depending on the asset or liability being valued. The OTS methodologies include an "option adjusted spread analysis" for assets and off-balance sheet items with prepayment risk, such as single-family mortgages and mortgage servicing assets, and the "static discounted cash flow analysis" for non-mortgage loans and for certain mortgage loans such as commercial and multi-family mortgages, construction and consumer loans, and second mortgages. The static discounted cash flow analysis involves adding up the calculated present values of future payments from an asset based on the current values of United States Treasury securities due on the various payment dates. The option adjusted spread analysis involves averaging the discounted predicted cash flows from a loan or other asset over approximately 200 different interest rate scenarios. The Bank has determined that it will continue to meet its risk based capital requirements under the interest rate risk component regulation.
The OTS and the FDIC generally are authorized to take enforcement action against a savings association that fails to meet its capital requirements, which action may include restrictions on operations and banking activities, the imposition of a capital directive, a cease- and-desist order, civil money penalties or harsher measures such as the appointment of a receiver or conservator or a forced merger into another institution. In addition, under current regulatory policy, an association that fails to meet its capital requirements is prohibited from paying any dividends.
Federal Home Loan Bank System
The Bank is a member of the FHLBNY which is one of the 12 regional Federal Home Loan Banks ("FHLB"). As a member of the FHLBNY, the Bank is required to purchase and maintain stock in the FHLBNY in an amount equal to the greater of 1.0% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year, or 1/20 (or such greater fraction as established by the FHLBNY from time to time) of outstanding FHLBNY advances. At December 31, 1998, the Bank had $10.3 million of FHLBNY stock, which was in compliance with this requirement. In past years the Bank has received dividends on its FHLBNY stock. Over the past five years such dividends have averaged 7.14%, and were 7.25% for the year ended December 31, 1998. Certain provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") require all 12 FHLB's to provide financial assistance for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low and moderate- income housing projects. These contributions could cause rates on the FHLBNY advances to increase and could affect adversely the level of FHLBNY dividends paid and the value of FHLBNY stock in the future.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the type of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of the Bank, to assess the institution's record of meeting the credit needs of its community and to take such records into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An unsatisfactory rating may be used as a basis for the denial of an application by the OTS.
Qualified Thrift Lender Test
The Qualified Thrift Lender ("QTL") test requires that a savings association maintain at least 65.0% of its total "portfolio assets" in "qualified thrift investments" on an average basis in nine of every twelve months on a rolling basis. For purposes of the test, portfolio assets are defined as the total assets of the savings association minus: goodwill and other intangible assets; the value of property used by the savings association to conduct its business; and liquid assets not to exceed a certain percentage of the savings association's total assets (20.0% under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")).
Under the QTL statutory and regulatory provisions, all forms of home mortgages, home improvement loans, home equity loans, and loans on the security of other residential real estate and mobile homes as well as a designated percentage of consumer loans are "qualified thrift investments," as are shares of stock of a FHLB, investments or deposits in other insured institutions, securities issued by the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Association ("GNMA"), or the RTC Financing Corporation and other mortgage-related securities. Investments in non-subsidiary corporations or partnerships whose activities include servicing mortgages or real estate development are also considered qualified thrift investments in proportion to the amount of primary revenue such entities derive from housing-related activities. Also included in qualified thrift investments are mortgage servicing rights, whether such rights are purchased by the insured institution or created when the institution sells loans and retains the right to service such loans.
A savings institution that fails to become or maintain its status as a qualified thrift lender must either become a commercial bank or be subject to restrictions specified in FIRREA. A savings institution that converts to a bank must pay the applicable exit and entrance fees involved in converting from one insurance fund to another. A savings institution that fails to meet the QTL test and does not convert to a bank will be: (1) prohibited from making any investment or engaging in activities that would not be permissible for national banks; (2) prohibited from establishing any new branch office where a national bank located in the savings institution's home state would not be able to establish a branch office; (3) ineligible to obtain new advances from any FHLB; and (4) subject to limitations on the payment of dividends comparable to the statutory and regulatory dividend restrictions applicable to national banks. Also, beginning three years after the date on which the savings institution ceases to be a qualified thrift lender, the savings institution would be prohibited from retaining any investment or engaging in any activity not permissible for a national bank and would be required to repay any outstanding advances to any FHLB. A savings institution may re- qualify as a qualified thrift lender if it thereafter complies with the QTL test. As of December 31, 1998, the Bank was in compliance with the QTL requirement. At December 31, 1998, 92.0% of the Bank's "portfolio assets" were "qualified thrift investments."
Limitations on Capital Distributions
OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, which are based primarily of an institution's capital level. An institution that exceeds all fully phased-in regulatory capital requirements before and after a proposed capital distribution ("Tier 1 Association") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of: (i) 100.0% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased- in capital requirements) at the beginning of the calendar year; or (ii) 75.0% of its net earnings for the previous four quarters. Any additional capital distributions would require prior OTS approval. In the event the Bank's capital should fall below its fully phased-in requirement or the OTS should notify it that it is in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank is prohibited from making any capital distribution if, after the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less that 4.0%.
In January 1999, the OTS issued an amendment to its current regulations with respect to capital distributions by savings associations. The amended regulations will be effective April 1, 1999. Under the new regulation, savings associations that would remain at least adequately capitalized following the capital distribution, and that meet other specified requirements, would not be required to file a notice or application for capital distributions (such as cash dividends) declared below specified amounts. Under the new regulation, saving associations which are eligible for expedited treatment under current OTS regulations are not required to file an application with the OTS if (i) the savings association would remain at least adequately capitalized following the capital distribution, (ii) the amount of capital distribution does not exceed an amount equal to the savings association's net income for that year to date, plus the savings association's retained net income for the previous two years and (iii) the proposed capital distribution would not violate any applicable law, regulation, agreement with or condition of the OTS. Thus, under the new regulation, only undistributed net income for the prior two years may be distributed in addition to the current year's undistributed net income without the filing of an application with the OTS. Savings associations which do not qualify for expedited treatment or which desire to make a capital distribution in excess of the specified amount, must file an application with, and obtain the approval of, the OTS prior to making the capital distribution. A savings association that is not required to file an application is also not required to file a notice with the OTS prior to making the capital distribution, unless (i) the savings association would not be well capitalized following the distribution, or (ii) the proposed distribution would reduce the amount of or retire any part of the savings association's common stock, preferred stock or debt instruments included in capital or (iii) the savings association is a subsidiary of a savings and loan holding company. The new OTS limitations on capital distributions are similar to the limitations imposed upon national banks.
Holding Company Regulation
The Company is registered with and is subject to OTS examination and supervision and certain reporting requirements as a unitary savings and loan holding company. In addition, the operations of the Company are subject to regulations promulgated by the OTS from time to time, as well as regulations promulgated by the Department. As a SAIF- insured subsidiary of a savings and loan holding company, the Bank will be subject to certain restrictions in dealing with the Company and with other persons affiliated with the Company, and will continue to be subject to examination and supervision by the OTS and FDIC.
The HOLA prohibits a savings and loan holding company, directly or indirectly, from: (i) acquiring control (as defined) of another insured institution (or holding company thereof) without prior OTS approval; (ii) acquiring more than 5.0% of the voting shares of another insured institution (or holding company thereof) which is not a subsidiary, subject to certain exceptions; (iii) acquiring through merger, consolidation or purchase of assets, another savings association or holding company thereof, or acquiring all or substantially all of the assets of such institution (or holding company thereof) without prior OTS approval; or (iv) acquiring control of a depository institution not insured by the FDIC (except through a merger with and into the holding company's savings association subsidiary that is approved by the OTS). A savings and loan holding company may acquire up to 15.0% of the voting shares of an undercapitalized savings association. A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has principal offices outside of the state where the principal offices of its subsidiary institution is located, except: (i) in the case of certain emergency acquisitions approved by the FDIC; (ii) if the holding company controlled (as defined) such insured institution as of May 5, 1987; or (iii) if the laws of the state in which the insured institution to be acquired is located specifically authorize a savings association chartered by that state to be acquired by a savings association chartered by the state where the acquiring savings association or savings and loan holding company is located, or by a holding company that controls such a state chartered association. No director or officer of a savings and loan holding company or person owning or controlling more than 25.0% of such holding company's voting shares may, except with the prior approval of the OTS, acquire control of any FDIC-insured depository institution that is not a subsidiary of such holding company. If the OTS approves such an acquisition, any holding company controlled by such officer, director or person shall be subject to the activities limitations that apply to multiple savings and loan holding companies, unless certain supervisory exceptions apply.
Transactions with Affiliates
Section 11 of HOLA provides that transactions between an insured subsidiary of a holding company and an affiliate thereof will be subject to the restrictions that apply to transactions between banks that are members of the Federal Reserve System and their affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act. Generally, Sections 23A and 23B: (i) limit the extent to which a financial institution or its subsidiaries may engage in "covered transactions" with an "affiliate," to an amount equal to 10.0% of the institution's capital and surplus, and limit all "covered transactions" in the aggregate with all affiliates to an amount equal to 20.0% of such capital and surplus; and (ii) require that all transactions with an affiliate, whether or not "covered transactions," be on terms substantially the same, or at least as favorable to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar types of transactions. Management believes that the Bank is in compliance with the requirements of Sections 23A and 23B. In addition to the restrictions that apply to financial institutions generally under Sections 23A and 23B, Section 11 of the HOLA places three other restrictions on savings associations, including those that are part of a holding company organization. First, savings associations may not make any loan or extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies. Second, savings associations may not purchase or invest in affiliate securities except for those of a subsidiary. Finally, the Director is granted authority to impose more stringent restrictions when justifiable for reasons of safety and soundness.
(b) Industry Segments - The Registrant has only one industry segment, banking.
(d) Financial Information About Foreign and Domestic Operations and Export Sales - Not Applicable
(e) Guide 3 Statistical Disclosure by Bank Holding Companies.
The following tables provide certain statistical information required by Securities and Exchange Commission ("SEC") Guide 3. The remaining statistical disclosure required by SEC Guide 3 is contained in Part II Item 7. The Company has changed its fiscal year end from March 31st to a calendar year end, effective with the calendar year beginning January 1, 1996 and, accordingly, has provided certain information at or for the nine-month period ended December 31, 1995 and at or for the year ended March 31, 1995.
The following table shows the carrying value, weighted average yield, and maturities of the Company's debt and equity securities portfolio, at December 31, 1998:
The following table shows the contractual maturity of the Company's mortgage-backed securities at December 31, 1998. The table does not include the effect of prepayments or scheduled principal amortization.
The following table shows the contractual maturity of the Company's loans at December 31, 1998. The table does not include the effect of prepayments or scheduled principal amortization.
As of December 31, 1998, the dollar amount of all loans due after December 31, 1999, and the composition of fixed interest rates and adjustable interest rates were:
Due After December 31, 1999 ----------------------------- Fixed Adjustable Total ----- ---------- ----- (Dollars in thousands)
Real estate mortgages $52,510 $195,894 $248,404 Other loans 37,852 10,616 48,468 ------- -------- -------- Total loans $90,362 $206,510 $296,872 ======= ======== ========
The following table sets forth the activity in the Company's allowance for loan losses at or for the dates indicated:
The allocation of the Company's allowance for loan losses is set forth below as indicated:
The following tables set forth the average dollar amount of deposits in the various types of savings programs, along with the weighted average effective rate paid for the periods indicated:
The following table shows rate information for the Company's certificates of deposit at the dates indicated and maturity information at December 31, 1998:
The following table sets forth the maturity dates of the Company's certificates of deposit of $100,000 or more at December 31, 1998:
Maturity Period Amount --------------- ------ (Dollars in thousands)
Three months or less $ 9,839 Three through six months 5,705 Six through twelve months 5,604 Over twelve months 2,206 ------- Total $23,354 =======
The following table sets forth the maximum month-end balance and average balance of borrowed funds for the periods indicated:
For the Year Ended December 31, --------------------------- (Dollars in thousands) 1998 1997 1996 ---- ---- ----
Maximum balance $206,681 $196,512 $180,347 Average balance $148,120 $159,234 $124,087 Weighted average interest 5.56% 5.59% 5.50%
The following table sets forth certain information as to FHLBNY advances at the dates indicated:
At December 31, -------------------------- 1998 1997 1996 ---- ---- ---- (Dollars in thousands) FHLBNY advances $25,300 $14,150 $24,800 Weighted average interest rate of FHLBNY advances 5.13% 6.63% 7.13%
ITEM 2.
ITEM 2. PROPERTIES
At December 31, 1998, the Bank conducted its business through its 16 offices, including its home office at 70 Sip Avenue, Jersey City, New Jersey. Original Date Leased Date of Leased or Lease Location or Owned Acquired Expiration -------- -------- --------- ---------- 70 Sip Avenue Owned 1/59 -- Jersey City, NJ
9 Path Plaza Leased 2/76 6/01 Jersey City, NJ
241 Central Avenue Owned 1/63 -- Jersey City, NJ
319 Martin Luther Leased 1/59 Monthly King, Jr. Drive Jersey City, NJ
214 Newark Avenue Owned 1/63 -- Jersey City, NJ
12 Chapel Avenue Leased 7/96 12/02 Jersey City, NJ
456 North Broad Street Owned 8/86 -- Elizabeth, NJ
314 Elizabeth Avenue Elizabeth, NJ Building Owned 1/75 -- Land Leased 4/74 3/99
One Statewide Court Owned 8/78 -- Secaucus, NJ
416 Anderson Avenue Owned 1/74 -- Cliffside Park, NJ
35 South Main Street Lodi, NJ Building Owned 1/76 -- Adjacent parcel of land Leased 1/74 12/00
19 Schuyler Avenue Leased 3/98 2/08 North Arlington, NJ
246 South Avenue Owned 10/79 -- Fanwood, NJ
345 South Avenue Owned 10/80 -- Garwood, NJ
400 Marin Boulevard Leased 6/95 6/10* Jersey City, NJ
86 River Street Leased 1/96 12/02 Hoboken, NJ
*The Bank has the option to cancel the lease on the fifth and tenth anniversary dates of the lease, with a six-month notice prior to that anniversary date.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time as a party to legal proceedings occurring in the ordinary course of its business. The Company believes that none of these proceedings would, if adversely determined, have a material effect on the Company's consolidated financial condition or results of operations.
On December 1, 1995, the Bank initiated a suit against the Federal government alleging, among other things, breach of contract and seeking restitution for harm caused to the Bank through changes in Federal banking regulations regarding the treatment of goodwill in calculating the capital of thrift institutions. The case relates to goodwill created by the Bank's 1982 acquisition of Arch Federal Savings and Loan Association. The 1989 change in Federal regulations required a phase-out of goodwill from the calculation of a thrift institution's capital ratios and required that by January 1, 1995, no goodwill be counted as capital. At the time the regulations went into effect, the Bank had $18.7 million in goodwill on its balance sheet.
The Bank's suit was initially subject to a stay pending a ruling by the United States Supreme Court of the government's appeal of a decision of the Federal District of Columbia Circuit Court in another case which had upheld the right of three thrift institutions to maintain such actions. In July 1996, the U.S. Supreme Court ruled in "United States v. Winstar Corporation" upholding the Federal District of Columbia Circuit Court's ruling in favor of the thrift institutions involved in that suit. Subsequently, the stay in all goodwill related cases was lifted. The Federal government then filed a motion seeking to dismiss all goodwill related claims filed six years after the date of FIRREA's adoption, August 9, 1995. The Bank had filed its claim on December 1, 1995. The Bank, along with the approximately 25 other institutions subject to the motion, vigorously opposed the government's dismissal motion. On January 7, 1997, the judge appointed to hear the issue in the United States Court of Federal Claims ruled against the Federal government, holding that the statute of limitations had not begun to run until OTS regulations implementing FIRREA were adopted on December 7, 1989. The case is currently in the discovery phase, and no trial date has been set. Accordingly, for these reasons and because of other facts affecting the predictability of litigation, management cannot predict the eventual outcome, the amount of damages, if any, or the timing of final disposition of the Bank's case.
PART II
ITEM 5.
ITEM 5. MARKET INFORMATION
The Company's stock is quoted on the NASDAQ National Market. The NASDAQ symbol for the Company's common stock is SFIN. As of December 31, 1998, there were 362 registered holders of the Company's common stock.
The following table presents the high and low bid prices for the common stock and dividends paid for the periods indicated below. The high and low bid range prices reflect inter dealer quotations, without commissions, and may not necessarily represent actual transactions.
High Low Dividend ---- --- -------- ----
Fourth Quarter 19 1/4 15 1/2 $ 0.13 Third Quarter 21 1/2 15 1/4 $ 0.13 Second Quarter 26 11/16 20 5/8 $ 0.11 First Quarter 24 1/8 21 1/4 $ 0.11
----
Fourth Quarter 24 18 $ 0.11 Third Quarter 22 17 3/4 $ 0.11 Second Quarter 18 1/8 14 1/2 $ 0.10 First Quarter 17 7/8 14 1/8 $ 0.10
During the third quarter of 1996, the Company declared its first quarterly dividend. The Company increased its quarterly dividend to $0.11 per share during the third quarter of 1997 and to $0.13 per share during the third quarter of 1998. The Company expects to continue to pay dividends. However, no assurance can be given that dividends will be paid in the future since the payments of such dividends will be based upon current and prospective earnings, anticipated asset growth, and the capital position of the Company. In addition, earnings and the financial condition of the Bank and applicable governmental policies and regulations could also affect the Company's ability to pay dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
At At December 31, March 31, ---------------------------------- --------- 1998 1997 1996 1995 1995 ---- ---- ---- ---- ---- (Dollars in thousands)
SELECTED FINANCIAL CONDITION DATA: Total assets $717,517 $675,316 $636,042 $559,049 $475,168 Loans receivable, net 366,458 332,509 325,470 195,773 169,909 Mortgage-backed securities 248,035 290,044 240,974 260,107 203,677 Debt and equity securities 68,312 19,093 40,243 80,126 80,987 Other real estate owned, net 523 440 563 652 825 Total deposits 443,705 443,878 457,056 438,021 407,758 Borrowed funds 206,681 160,300 107,200 44,703 41,492 Shareholders' equity 60,499 64,907 66,935 72,315 22,022
REGULATORY CAPITAL RATIOS (BANK): Tangible capital ratio 7.95% 8.96% 9.41% 10.28% 4.57% Core capital ratio 7.95% 8.96% 9.41% 10.28% 4.57% Risk-based capital ratio 13.72% 22.93% 26.21% 32.88% 16.65%
ASSET QUALITY RATIOS: Non-performing loans to total net loans 0.68% 0.75% 0.84% 2.87% 3.87% Non-performing loans to total assets 0.35% 0.37% 0.43% 1.01% 1.38% Non-performing assets to total assets 0.42% 0.44% 0.52% 1.12% 1.56% Allowance for loan losses to non- performing loans 122.73% 113.18% 95.43% 57.66% 46.37% Allowance for loan losses to total net loans 0.83% 0.85% 0.80% 1.66% 1.79%
OTHER DATA: Number of deposit accounts 52,272 54,677 53,695 50,062 46,767 Offices 16 16 16 15 13
Table 2 presents the relative contribution of changes in the volume of interest-earning assets and interest-bearing liabilities to changes in net interest income for the periods indicated. Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include non-accrual loans.
Table 2: Rate/Volume Analysis
Provision for Loan Losses. Provision for loan losses for 1998 increased to $642,000 from $500,000 for 1997. The increase in provision for loan losses in 1998 was determined by management after review of, among other things, the composition and volume of the Company's loan portfolio, the risk inherent in the Company's lending activities, and the economy in the Company's market areas. The increased provision in 1998 reflects both the increased average balance of loans as well as the change in composition of the portfolio toward more commercial loans. Commercial loans generally involve more potential risk than do loans secured by one-to-four family residences. Further provisions for loan losses will continue to be based upon management's assessment of the loan portfolio and its underlying collateral, trends in non-performing loans, the current economic condition and other factors which may warrant recognition in order to maintain the allowance for loan losses at levels sufficient to cover estimated losses. At December 31, 1998, allowance for loan losses was $3.1 million compared to $2.8 million at December 31, 1997, an increase of $223,000, or 7.9%. Non-performing loans, which consist of non-accrual loans and accruing loans delinquent 90 days or more, decreased slightly to $2,490,000 at December 31, 1998 from $2,503,000 at December 31, 1997. The coverage ratio of allowance for loan losses to non-performing loans and also to net loans at December 31, 1998 was 122.73% and 0.83%, respectively, as compared to 113.18% and 0.85%, respectively, at December 31, 1997.
Non-interest Income. Non-interest income for 1998 was $2.9 million compared to $1.7 million for 1997. Recurring non-interest income, exclusive of gains on sales of investment securities and the gain on the sale of the Passaic branch, was $2.5 million for 1998, an increase of $0.8 million or 53.8%, over 1997. Core deposit and commercial lending growth, along with increases in the Company's fees schedule during mid-second quarter 1998, were the principal reasons for the increase in recurring non-interest income. Specifically, this rise reflects increased deposit account fees for monthly maintenance on checking and savings products, returned check assessment charges, ATM surcharges for non-customer service usage, increased earned loan fees and charges, and higher annuity sales generated through cross selling efforts in our branch network.
During 1998, the Company realized a gain on the sale of the Passaic branch of $0.3 million and a gain of $4,000 from the sale of securities compared to a gain of $69,000 from the sale of securities in 1997.
Non-interest Expense. Non-interest expense totaled $18.5 million for 1998, an increase of $1.4 million, or 8.0%, as compared to $17.1 million for 1997. The current year reflects increases in salaries and benefits costs, professional fees, occupancy, postage, communications and ATM and MAC service costs.
Salaries and employee benefits expense is the largest component within non-interest expense, and increased $0.8 million, or 8.0%, during 1998 as compared to 1997. Of this amount, salary expense increased $0.4 million and employee benefit expense increased $0.4 million. The increase in salary and benefits expense reflects current year staff additions and annual wage increases, partially offset by the virtual elimination of the 1998 executive incentive plan benefits. During 1998, staffing increased for the newly formed Statewide Mortgage Funding division, expansion of the commercial lending division and for the opening of the North Arlington N.J. branch, partially offset by the sale of the Passaic branch during the second quarter of 1998. Employee benefit expense for 1998 includes an increase of $96,000 related to the Company's Employee Stock Ownership Plan ("ESOP") over the same period of the prior year because of an increase in the market value of the Company's stock for the current period over 1997. ESOP expense is included as compensation based upon the market value of the shares awarded. The increase in employee benefit expense was also caused by an unrealized market loss in the cash surrender value of policies held in conjunction with Company life insurance programs, higher employee recruitment costs, and a proportionate increase in payroll related taxes.
Occupancy expense, which includes rent, leasehold improvements, furniture, fixtures and equipment ("FF&E") and other occupancy related maintenance, was $2.3 million in 1998, $70,000 more than the expense incurred in 1997. The current year reflects the additional expense of operating system improvements, start-up of Statewide Mortgage Funding, increases in real estate taxes and utilities as well as ongoing facility renovations throughout the Company. In addition, the change in this expense reflects the closing of the Passaic, New Jersey and the opening of the North Arlington, New Jersey branches.
Professional fees increased $0.2 million, or 41.8%, to $0.8 million for 1998 as compared to $0.6 million in 1997 because of increased legal activity in conjunction with the Company's pursuit of its FIRREA litigation against the Federal government and review of its ESOP and other Company benefit plans, and because of increases in fees paid to other professionals for a study which resulted in a revision to the Company's non-interest income fees schedule.
Data processing costs increased $0.1 million, or 11.9%, to $0.7 million for 1998 from $0.6 for 1997. The increase resulted from higher transaction activity costs on loan and deposit products, and costs related to expansion and enhancements of the Company's application and network systems.
The remaining components of non-interest expense increased $0.2 million, or 5.4%, to $4.2 million for 1998 compared to $4.0 million for 1997 principally as a result of the Company's expansion and growth. Advertising and marketing expenses increased $218,000 over 1997 because of the opening of the North Arlington, New Jersey branch, efforts to increase name recognition and specific financial products. Transaction growth resulted in a 1998 expense increase of $122,000 from higher postage, communication and ATM expenses. These expense increases were partially offset by $162,000 from reductions in director benefits, bank correspondent fees and miscellaneous losses as well as lower charges for printing.
Income Tax Expense. Income tax decreased $1.1 million to $2.2 million for 1998 compared to $3.3 million for 1997. The reduction is principally the result of the tax effect of the $3.2 million reduction in pretax income for 1998 as compared to 1997.
FINANCIAL CONDITION
Total assets increased $42.2 million, or 6.2%, to $717.5 million at December 31, 1998 from total assets of $675.3 million at December 31, 1997. Net loans at December 31, 1998 were $33.9 million more than a year ago as originations of commercial mortgages, commercial business and consumer loans and wholesale mortgage loans to mortgage bankers, more than offset repayments in these portfolios and in the one-to-four family mortgage loan portfolio during 1998. Debt and equity securities at December 31, 1998 were $49.2 million more than the outstanding balance at the prior year end, primarily reflecting the purchase of corporate debt issues partially offset by maturities, calls and sales of federal agency and corporate debt securities during 1998. At December 31, 1998 mortgage-backed securities were $42.0 million lower than the investment at the prior year-end reflecting normal and accelerated principal payments in this portfolio, partially offset by purchases of mortgage-backed securities during the fourth quarter of 1998. Asset growth at December 31, 1998 over the prior year-end was primarily funded through short-term FHLB borrowings and an increase in core deposits, partially offset by a decrease in higher yielding certificates of deposit.
At December 31, 1998, shareholders' equity was $60.5 million, a decrease of $4.4 million compared to $64.9 million at December 31, 1997. The ratios of shareholders' equity to total assets was 8.43% at December 31, 1998 and 9.61% at December 31, 1997. The current year decrease resulted primarily from the purchase on the open market and retirement of 363,258 shares of common stock for $7.1 million at an average price of $19.53 per share, the payment of four quarterly dividends totaling $1.9 million and a net decrease of $0.4 million (net of taxes) in the market value of the investment portfolio. Partially offsetting these decreases were net income of $3.5 million, a reduction of $1.4 million in the unallocated and unearned ESOP, Employee RRP, and Director RRP shares.
LENDING ACTIVITIES
Loan Portfolio Composition. At December 31, 1998, the Company had total loans of $369.2 million compared to $334.6 million at December 31, 1997. Total loans increased $34.6 million, or 10.3%, during 1998 over 1997 as the Company's efforts continue towards the origination of commercial and multi-family mortgages, and commercial business and consumer loans. The largest portion of the portfolio continues to be one-to-four family first mortgage loans which totaled $200.1 million, or 54.2%, of the loan portfolio as compared to 73.0% of the loan portfolio at December 31, 1997. Other loan categories within the portfolio consist of: commercial business and wholesale funding loans of $68.7 million, or 18.6% of the loan portfolio; multi-family and non-residential mortgage loans of $49.1 million, or 13.3% of the loan portfolio; consumer loans primarily comprised of fixed rate second mortgage loans and FHA Title One insured home improvement loans of $40.9 million, or 11.1% of the loan portfolio; and acquisition, and construction loans of $10.4 million, or 2.8% of the loan portfolio.
The types and amount of loans that the Company may originate or purchase and hold in its portfolio are subject to Federal and state law and regulations. Interest rates charged by the Company on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by the Company's competitors. These factors are, in turn, affected by general economic conditions, monetary policies of the Federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.
First Mortgage Lending. The Company offers first mortgage loans secured by one-to-four family residences, including townhouse and condominium units. Typically, such residences are single family homes that serve as the primary residence of the owner. Loans may be internally originated or purchased from other sources such as mortgage bankers and other financial intermediaries. One-to-four family residential mortgage loans are generally underwritten to Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") guidelines, except that loans may exceed the maximum loan limits for the FNMA or the FHLMC.
During 1998, as a result of the continued low interest rate environment and increased rate competition, total one-to-four family first mortgage loans decreased $44.3 million, or 18.1%, to $200.1 million at December 31, 1998 from $244.4 million at December 31, 1997. This decrease reflected normal principal amortization and accelerated prepayments, partially offset by originations of $10.4 million of one-to-four family first mortgage loans. The Company did not emphasize one-to-four family lending during 1998, as the spreads between competitors' rates and the cost of funds with consideration of credit and duration risks, was not a sufficient incentive for new investment. Of the one-to-four family first mortgage loans outstanding at the current year end, 74.9% were ARM loans and 25.1% were fixed rate 15 and 30 year loans. The interest rate adjustment period on ARM loans ranges between 1 and 10 years, and as of December 31, 1998, the weighted average adjustment period approximated 2.3 years. The Company may offer ARM loans on which the interest rate for an initial period may be less than the fully indexed rate, although to be eligible, the Company requires that the borrower qualify for the maximum payment possible after the initial interest rate adjustment. ARM and fixed rate mortgages are originated for a term of up to 30 years. The Company generally charges origination fees of up to 1.0% on one-to-four family residential mortgage loans.
Generally, ARM loans pose credit risks different from the risks in fixed rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates.
The Company's commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, mixed-use buildings, small office buildings, strip shopping centers, and warehouses. Commercial and multi-family real estate loans generally have terms that do not exceed 15 years and have a variety of rate adjustment features and other terms. The loans are usually made in amounts up to 75% of the appraised value of the property securing the loan. Adjustable rate commercial and multi-family real estate loans provide for a margin over either the U.S. Treasury security adjusted to a constant maturity of three or five years, with periodic adjustments after three or five years, or the Prime Rate as reported in the Wall Street Journal, or to a lesser extent, the Company also offers commercial and multi-family real estate loans with a margin over short-term U.S. Treasury securities, LIBOR or tied to other published indices. In underwriting these loans, the Company analyzes the current financial condition of the borrower, the borrower's credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The Company generally requires personal guarantees of the borrowers. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers approved by the Company's Board of Directors. Updated financial statements are generally obtained, reviewed and analyzed annually to assure the strength of the borrower.
Multi-family and commercial real estate loans present a higher level of risk than loans secured by one-to-four family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower's ability to repay the loan may be impaired.
Consumer Loans. The Company offers second mortgages secured by owner-occupied residences wherein the property may not be encumbered by other than a first mortgage loan. These loans are generally subject to a 75% combined loan-to-value limitation, including any other outstanding mortgage or lien on the property. As of December 31, 1998, second mortgage loans amounted to $17.9 million, or 4.9%, of total loans, a decrease of $0.2 million, or 1.0%, from December 31, 1997.
The Company also originates and purchases FHA Title 1 improvement loans. It originates these loans both on a direct basis and through a network of improvement contractors/dealers who are approved by the Company under FHA guidelines. The Company purchases FHA Title 1 improvement loans from FHA approved lenders who have originated the loans in accordance with the Company's lending criteria and within FHA underwriting guidelines. These guidelines provide for more liberal equity and debt to income ratios than for non-FHA improvement loans. In the event of default, the FHA insures 90% of the principal balance plus accrued interest. The interest rates are normally higher than the interest rates for one-to-four family mortgage loans due to the more liberal underwriting standards. FHA Title 1 improvement loans amounted to $14.4 million, or 3.9%, of total loans at December 31, 1998.
Remaining other loans are home equity lines of credit, other home improvement loans, secured and unsecured personal loans, and automobile loans. As of December 31, 1998, these loans amounted to $8.5 million, or 2.3%, of total loans, an increase of $3.3 million, or 63.1%, from December 31, 1997.
Warehouse Mortgage Lines of Credit. During 1998, the Company started its Statewide Mortgage Funding division which originates revolving lines of credit to small and medium-sized mortgage banking companies at interest rates approximating prime. The lines are drawn upon by these companies to fund the origination of mortgages, primarily one- to-four family loans, where the amount of the draw is generally no higher than 97% of the loan which, in turn, is no higher than 80% of the appraised value of the property. The loans are repaid upon completion of the sale of the mortgage loan to third parties which usually occurs within 90 days. During the period that the loans are outstanding, the Company maintains possession of the original mortgage. The customers of Statewide Mortgage Funding are primarily located in New Jersey and surrounding states. However, the Company is seeking to expand this business line and may expand into other geographic regions. This is the fastest growing segment of the Company's loan portfolio, but these loans are short duration and made to a customer base who have approximately 50% of their business from mortgage refinancing. In the event of rising interest rates, the Company expects that utilization of these lines of credit, made through Statewide Mortgage Funding, would be substantially reduced and replaced only to the extent of strength in the general housing markets.
Commercial Business Loans. During 1998, the Company continued with its strategy of focusing its efforts on the origination of commercial business loans. These loans are secured by business assets other than real estate such as equipment, inventory, machinery, accounts receivable, and vehicles, and are usually guaranteed by principals of the business. Commercial business loans are in amounts which range from $50,000 to $2,500,000 at interest rates which are indexed to the prime rate, and for durations which coincide with the nature of the collateral, but not beyond ten years. The Company's target market is enterprises with annual sales between $1 million and $25 million. Commercial business loans present a higher level of risk than do loans secured by one-to-four family residences. The Company underwrites these loans by analyzing the current financial condition of the borrower including current and expected cash flows and historical and projected financial performance. The Company also analyzes the value of the collateral available as security, and the borrower's credit history. The Company seeks to maintain an active relationship with its commercial business borrowers in order to service their banking needs, and to keep current with their financial and operational condition.
Commercial Lending. At December 31, 1998, the Company's total loan portfolio included $49.1 million, or 13.3%, of commercial and multi-family mortgage loans and $68.7 million, or 18.6%, of commercial business loans, including loans made through Statewide Mortgage Funding. The combined total of $117.8 million at December 31, 1998 compares to $47.5 million of like loans at December 31, 1997. Commercial business loans totaled $21.0 million, an increase of $4.9 million, or 30.6%, over the prior year-end and wholesale loans to mortgage bankers totaled $47.8 million with no balance outstanding at year-end 1997. In addition, at December 31, 1998, $10.4 million, or 2.8%, of the Company's total loan portfolio consisted of construction loans, an increase of $6.1 million as compared to $4.3 million at December 31, 1997. The growth in these product lines was the result of management's strategy to develop higher yielding, variable rate based, non-residential loans. Additionally, the growth in Statewide Mortgage Funding was the result of management's strategy to find a secure, short duration investment alternative to accommodate increased cash flows from mortgage refinancing. Statewide Mortgage Funding allows the Company to place its cash flows into higher-yielding loans in the industry that is the driver for the accelerated prepayments. Management's strategy is that when prepayments slow, and consequently mortgage bankers' demand for wholesale funding slows, there will be opportunities for higher yields and spreads through other commercial lending and consumer lending as well as through investment in securities. These strategies help to diversify the Company's loan offerings and portfolio mix, and facilitate interest rate risk management.
The following table sets forth the composition of the Company's loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated:
Table 3: Composition of Loan Portfolio
Credit Quality. Maintenance of asset quality is one of management's most important objectives. Management reviews delinquent loans on a continuous basis and, through an Asset Review Committee which meets quarterly to review the Company's loan portfolio, makes changes in the classification of assets which the Committee deems necessary. The Company hires outside counsel experienced in collections and foreclosure to pursue collections and to institute foreclosure and other procedures on the Company's delinquent loans.
Lending policies are reviewed and approved annually by the Board of Directors of the Company. Credit approval limits have been established for each of the Company's loan officers. However, the Company's Loan Committee approves all credit extensions exceeding $500,000. It is the Company's policy for loans secured by real estate that an appraisal be obtained to ensure adequate value of the secured property and that title insurance be obtained on all first mortgage loans. The Company has engaged an independent consulting firm which specializes in loan reviews to provide independent reports to the Company's Board of Directors quarterly. In addition, loan officers monitor the Company's loans outstanding to identify potentially deteriorating loan situations which are then reported to the Asset Review Committee. This process allows management to implement a strategy to address potential credit concerns on a timely basis. The Company's internal audit department reviews loan documentation and collateral as part of its regular audit procedures.
Delinquent Loans and Foreclosed Assets
Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard", "doubtful," or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the distinct possibility that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weakness inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated "special mention" by management. Loans designated as special mention are generally loans that have exhibited some potential weakness that, if not corrected, could increase the level of risk in the future.
At December 31, 1998, the Company had loans categorized as special mention of $3.1 million, which consisted of $1.9 million in commercial business loans, $1.0 million in commercial mortgage loans, and $0.2 million in first and second mortgage loans. Substandard assets totaled $2.8 million and consisted of $0.5 million in real estate owned ("REO"), $0.7 million in commercial loans, and $1.6 million in first and second mortgage loans. In addition, at that date, the Company had doubtful loans of $0.4 million consisting of first and second mortgage loans and $38,000 of loans classified as loss which are fully reserved.
REO is transferred from the loan portfolio at the lower of cost or estimated fair value. If the estimated fair value is lower than cost, such difference is charged to the allowance for loan losses at the time of transfer. The Company also maintains a loss allowance for other real estate losses for subsequent declines to reduce the carrying book value to the estimated fair value of REO and estimated costs to sell.
Interest is not accrued on FHA insured home improvement loans where interest or principal is 120 days or more past due, and on all other loans, where interest or principal is 90 days or more past due, unless the loans are well secured and in the process of collection. Once the loans reach non-accrual status, accrued but unpaid interest is reversed and interest income is subsequently recognized only to the extent that payments are received. Interest on loans that have been restructured is accrued according to the renegotiated terms.
Table 4 below sets forth information regarding the Company's non-performing assets. At December 31, 1998, the Company had no restructured loans within the meaning of Statement of Financial Accounting Standards ("SFAS") No. 15 and SFAS No. 114 issued by the Financial Accounting Standards Board ("FASB"):
Table 4: Non-performing Assets
In addition to the loans included in the risk elements table above, the Company has at December 31, 1998, 23 loans delinquent between 31 days and 90 days totaling $230,000. These loans also have been considered in the analysis of the adequacy of the allowance for loan losses.
For the years ended December 31, 1998, 1997, and 1996, the amounts of interest income that would have been recorded on non-accrual loans, had they been current, approximated $0.1 million, $0.1 million, and $0.2 million, respectively. Also, for the years ended December 31, 1998, 1997, and 1996, the amount of interest income on non-accruing loans that was included in income approximated $41,000, $80,000, and $75,000, respectively.
The Company's REO before allowance for losses on REO, was $629,000 at December 31, 1998 as compared to $638,000 at December 31, 1997. During 1998, $642,000 of new REO was acquired which was offset by the sale of $651,000 in existing REO properties. The sales of REO reflects the continued efforts by the Company to dispose of REO outstanding in a timely manner.
Allowance for Loan Losses
The allowance for loan losses is established through charges (provisions for loan losses) to earnings. Loan losses are charged against the allowance for loan losses when management believes that the recovery of principal is unlikely. If, as a result of loans charged off or increases in the size or risk characteristics of the loan portfolio, management considers the allowance to be below the level necessary to absorb future loan losses on existing loans, an additional provision for loan losses is made to increase the allowance for loan losses to the level considered necessary to absorb probable losses on existing loans that may become uncollectible. Management considers such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and economic conditions that may affect the borrowers' ability to pay and the realization of collateral in determining the adequacy of the allowance.
Management believes that the allowance for losses on loans is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions in the Company's market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations.
INVESTMENT ACTIVITIES
The Company's earning assets, other than loans receivable, are its mortgage-backed securities, debt and equity securities, and Federal funds sold. Mortgage-backed securities, including collateralized mortgage obligations ("CMO's"), are issued, insured or guaranteed by the GNMA, FNMA or FHLMC, or are investment grade private issues. Debt and equity securities primarily consist of high grade corporate debt investment and U.S. Government and agency securities. At December 31, 1998, investments increased $7.3 million, or 2.3%, to $326.7 million compared to $319.4 million at December 31, 1997. During 1998, debt securities increased $49.2 million, or 257.8%, primarily from the purchase $77.0 million of corporate debt, including certain investment grade trust preferred securities of other financial institutions, offset by maturities, calls and sales of $24.9 million of federal agency debt and $3.2 million of corporate debt during the period. Offsetting the net increase in debt securities were reductions of mortgage-backed securities of $42.0 million, or 14.5%, resulting from $114.7 million of principal amortization and accelerated prepayments due to the continued low interest rate environment, partially offset by purchases of $77.0 million late in the fourth quarter of 1998.
The investment policy of the Company, which is approved by the Board of Directors and implemented by certain officers as authorized by the Board, is designed to provide and maintain liquidity and to manage the interest rate sensitivity of its overall assets and liabilities, and to generate a favorable return without incurring undue interest rate and credit risk. In establishing its investment strategies, the Company considers its business and growth plans, the economic environment, its interest rate sensitivity position, the types of securities to be held, and other factors.
Current regulatory and accounting guidelines regarding investment portfolio policy require securities to be classified as "held to maturity", "available for sale" or "trading." At December 31, 1998, 1997 and 1996, all of the Company's securities were classified as available for sale. Decisions to purchase or sell these securities are made within the framework of the Company's investment policy and are based on economic conditions including changes in interest rates, liquidity, and asset liability management strategies.
The following table sets forth the composition of the Company's investment in debt and equity securities and FHLBNY stock at the dates indicated:
Table 5: Debt and Equity Securities
The following table sets forth the composition of the Company's mortgage-backed securities portfolio in dollar amounts and in percentages of its total portfolio at the dates indicated:
Table 6: Mortgage-backed Securities
DEPOSITS
Deposit accounts have traditionally been the principal source of the Company's funds for use in lending and for other general business purposes. The Company does not actively solicit brokered deposits. In addition to deposits, the Company's sources of funds are primarily borrowings from the FHLBNY, loan and investment security repayments and cash flow generated from operations, including interest payments on loans and investment securities and fees. See "Liquidity and Capital Resources."
The Company offers a variety of deposit accounts having a range of interest rates and terms. The Company presently offers passbook accounts, demand deposit accounts, NOW accounts, money market accounts, fixed interest rate certificates of deposit with varying maturities and individual retirement accounts ("IRA's"). The Company emphasizes retention of its core deposits, as management believes that these deposits are a much more stable source of funds and are less sensitive to changes in the market level of interest rates. However, depending on its funding needs, interest rate risk management and other considerations, the Company may from time to time emphasize the origination of certificates of deposit. At December 31, 1998 and 1997, the percentage of core deposits to total deposits was 61.4% and 58.3%, respectively.
At December 31, 1998, deposits were $443.7 million compared to $443.9 million at December 31, 1997, a decrease of $0.2 million. During 1998, the Company's strategy was, and continues to be, to not match the competitions' most aggressive interest rates unless the Company believes that key relationships with deposit holders who have other deposit and/or loan relationships are in jeopardy. As a result, higher costing certificates of deposit, through controlled runoff, decreased $14.1 million from $185.2 million at December 31, 1997 to $171.1 million at December 31, 1998. During the second quarter of 1998, the Company transferred the lease and sold the deposits of the Company's Passaic, New Jersey branch. Despite the branch sale, through the Company's continuing cross selling efforts, marketing strategy and development of new customer relationships, core deposits grew $14.0 million, to $272.6 million at December 31, 1998 from $258.6 million at December 31, 1997. Within core deposits, growth in savings accounts of $14.5 million coupled with a $5.9 million increase in non- interest bearing demand and NOW accounts was partially offset by a decrease in money market deposits of $6.4 million.
During calendar year 1999, $147.1 million of the Company's certificates of deposit will be maturing. Certificates of deposit currently carry interest rates ranging from 2.00% to 7.07% and a weighted average interest rate of 4.85%. As of December 31, 1998, the Company's current interest rates offered, for certificates with similar maturities, were between 2.90% and 4.50%. Management does not believe that the maturity of these time deposits will have a material impact on the Company's liquidity.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is a measure of its ability to fund loans, withdrawals of deposits and repay maturing borrowed funds in a cost effective manner. The Company's primary financing sources are deposits obtained in its own market area, advances from the FHLBNY and securities sold under repurchase agreements. Other sources of funds include scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of debt securities and funds provided by operations. At December 31, 1998, the Company had total liquid assets (consisting of cash and amounts due from banks, Federal funds sold, debt, equity and mortgage-backed securities having final maturities within one year, and accrued interest from debt and mortgage-backed securities), which represented 5.2% of total assets and 8.3% of total deposits at December 31, 1998. At December 31, 1998, the Company had additional borrowing capacity to meet any funding needs of $7.5 million under a line of credit with the FHLBNY, expiring November 2, 1999. In addition, the Company has approximately $119.8 million in unpledged debt, equity and mortgage-backed securities which are classified as available for sale, and approximate $200.0 million in loans which could be used to collateralize additional borrowings or sold to provide liquidity.
At December 31, 1998, capital resources were sufficient to meet outstanding loan commitments of $59.6 million, commitments on unused lines of credit of $48.2 million and commercial letters of credit of $2.9 million. An important source of the Company's funds is the Bank's core deposits. Management believes that a substantial portion of the Bank's $272.6 million of its core deposits are a dependable source of funds due to long-term customer relationships. Certificates of deposit which are scheduled to mature in one year or less from December 31, 1998 totaled $147.1 million. Management is unable to predict the amount of such deposits that will renew with the Company. As a result of the Company's liquidity position, management does not believe the Company's operations will be materially affected by a failure to renew these deposits. However, the Company's experience indicate that a significant portion of such deposits should remain with the Company.
In addition to $10.7 million of funds provided from 1998 operating activities, the Company's current year principal funding needs were primarily provided by net increases on advances from the FHLBNY of $46.4 million, net proceeds received on mortgage-backed securities of $37.7 million and a net increase in deposits of $6.3 million. During 1998, cash provided was principally used for investing and financing activities. Purchases of debt securities, net of repayments and sales, totaled $48.9 million and origination and purchase of loans exceeded principal collections by $35.5 million. In addition, funds used for financing activities included the purchase and retirement of the Company's common stock, payment for the transfer of deposits from the sale of the Passaic branch, and for 1998 dividend payments.
During the year ended December 31, 1997, the Company's principal funding needs were primarily provided by net increases on advances from the FHLBNY of $53.1 million and net proceeds received on debt securities of $21.4 million. During 1997, cash provided was principally used for investing and financing activities. Purchases of mortgage-backed securities, net of repayments and sales, totaled $49.1 million and origination and purchase of loans exceeded principal collections by $8.0 million. In addition, funds used for financing activities included decreases in deposits, principally to liquidate high costing certificates of deposit, purchase and retirement of the Company's common stock, and for 1997 dividend payments.
Liquidity management is an important function and component of managements strategy. It allows the Company to support asset growth while satisfying the borrowing need and deposit withdrawal requirements of customers. As interest rates increase or decrease based on the economic environment, management determines the Company's anticipated funding requirements and the best source and duration of funding available. Interest rate market conditions determine the duration and level of borrowed funds the Company will use to leverage its excess capital. Purchases of debt securities throughout 1998 and mortgage-backed securities during the fourth quarter of 1998 continued as the Company sought to further balance and replace accelerated prepaying mortgage-backed securities during 1998 with higher yielding debt securities and intermediate term mortgage-backed securities. These purchases, along with loan growth during 1998, were funded with borrowings from the FHLBNY and prepayments of mortgage-backed securities. During the latter part of 1998, the Company increased its short-term borrowings as leveraging again became a viable growth strategy as the Company's borrowing rates declined with the decrease in the Federal Funds target rate. Borrowed funds at December 31, 1998 were $206.7 million, an increase of $46.4 million, or 28.9%, compared to $160.3 million for 1997. Of the outstanding borrowed funds at December 31, 1998, $60.3 million matures within 30 days, $0.4 million matures within 90 days, and the remaining $146.0 million have final maturity dates ranging from July 2000 to September 2002. All have earlier call options at the lender's discretion. Borrowings of $86.0 million, with interest rates ranging from 5.43% to 5.54%, are callable quarterly through maturity, and borrowed funds of $60.0 million, with interest rates of 5.52%, are first callable in November 1999 and quarterly thereafter.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
General. Net income for the for the year ended December 31, 1997 ("1997") was $5.6 million, or $1.30 per share, assuming dilution, as compared to $4.9 million, or $1.05 per share, assuming dilution, for the year ended December 31, 1996 ("1996"). Earnings during 1996 were affected by a one-time industry-wide assessment on thrift institutions to recapitalize the SAIF. The impact of this charge has been added back to the prior year results in order to normalize these comparisons. Inclusive of the one time SAIF assessment, the Company reported net income of $3.2 million, or $0.68 per share, assuming dilution, for the year ended 1996. Basic earnings per share were $1.34 for 1997 as compared to $1.05 for 1996 as adjusted, or $0.68 for 1996 inclusive of the SAIF assessment. Net income and earnings per share, assuming dilution, for 1997 increased 14.7% and 23.8%, respectively as compared to 1996. This increase is primarily the result of increased net interest income from the growth in average loans and investments at higher yields offset by an increase in borrowing costs due to increased average borrowing levels. Partially offsetting this net interest income growth was lower non-interest income and increased non-interest expense. In addition, the Company s average weighted shares outstanding during 1997 declined to 4,310,000 as compared to 4,662,000 during 1996, reflecting the Company's stock repurchase programs.
Net Interest Income. Net interest income is the principal source of income for the Company and represents the difference between total interest and fees earned on loans, mortgage-backed securities and other investments, and total interest incurred on deposits and borrowed funds. Net interest income increased $3.2 million, or 14.7%, to $24.8 million for 1997 as compared $21.6 million for 1996. This increase resulted from a 5.3% growth in interest-earning assets and a 32 basis point increase in net interest margin. For 1997, net interest margin was 3.77% as compared to 3.45% for 1996. Increase in net interest income resulted primarily from higher yield on and growth in interest-earning assets, partially offset by increases in the cost of interest-bearing liabilities.
Interest Income. Total interest and dividend income for 1997 increased to $50.2 million from $45.3 million for 1996, an increase of $4.9 million, or 10.9%, over the prior year. The average balance of interest-earning assets increased $33.5 million, or 5.3%, to $660.0 million for 1997 compared to $626.6 million for 1996. The related yields increased between the two periods to 7.61% from 7.23%. Throughout 1996, the Company changed its mix of interest-earning assets by purchasing one-to-four family residential mortgages, and selling lower yielding mortgage backed securities and debt securities. In addition, the Company has focused its efforts on originating higher yielding commercial and consumer loans reflecting increases in average balances of 304.1% and 7.0%, respectively in these portfolios. As a result, both the average balance and yield from interest-earning assets is higher for 1997. The average balance of first mortgage loans increased $47.7 million, or 20.7%, as a result of the prior year purchases partially offset by current year repayments, net of originations. However, yields on this portfolio decreased 10 basis points from 7.70% for 1996 to 7.60% for 1997, because of prepayments of higher yielding loans in the current low interest rate environment. Also for 1997, the yields on mortgage-backed securities increased due to sales of lower-yielding securities in 1996, and purchases during the current year of securities with yields in excess of the average yields in place for 1996. These factors combined to increase yields on mortgage-backed securities 61 basis points to 7.37% for 1997 compared to 6.76% for 1996. The average balance of the Company's mortgage-backed securities portfolio increased by 2.0%. Sales of lower-yielding debt securities during the fourth quarter of 1996 coupled with calls and maturities during 1997 caused the current year average balance to decline $32.9 million while increasing the average yield on the remaining portfolio 34 basis points to 6.86%.
Interest Expense. Interest expense increased $1.7 million, or 7.3%, to $25.4 million for 1997 compared to $23.7 million for 1996. Interest expense on deposits decreased $0.3 million while interest expense on borrowed funds increased $2.1 million. The increase in borrowed funds was due to increased borrowing levels coupled with a 9 basis point rise in average costs. The decrease in interest expense on total deposits was primarily caused by decreases in higher costing certificates of deposit partially offset by growth in core deposits.
Average borrowed funds during 1997 increased $35.1 million, or 28.3%, to $159.2 million as compared to $124.1 million for 1996. The increase in the average balance of borrowed funds reflects the Company's continued strategy to leverage its excess capital, and this growth funded the increase in commercial mortgage and business loans, consumer loans, and mortgage backed securities. In addition these funds were also used in part to support the repurchase of the Company's common stock and in part to liquidate certificates of deposit for holders who sought rates higher than the Company's alternate borrowing rates. The cost of borrowed funds increased 9 basis points to 5.59% for 1997 from 5.50% for 1996. The increase in rates reflected the Company's decision to migrate a greater portion of its short-term borrowed funds into longer-term instruments which lessens the impact of changes in short-term borrowing rates. Of the outstanding borrowed funds at December 31, 1997, $14.2 million mature overnight and the balance has final maturity dates ranging from July 2000 to September 2002. All have earlier call options at the lender's discretion. Borrowings of $86.0 million with interest rates ranging from 5.43% to 5.54% are first callable in 1998, and borrowings of $60.0 million with interest rates of 5.52% are first callable in November 1999.
Total interest expense on deposits for 1997 totaled $16.5 million compared to $16.8 million for 1996. The decrease in interest expense on deposits resulted primarily from the decrease of higher costing certificates of deposit and the change in mix of deposits during 1997. Total average deposits increased $3.8 million during 1997 resulting from decreases in certificates of deposit of $14.8 million, offset by increases in savings, NOW and non-interest bearing deposits of $18.5 million. The weighted average cost of interest-bearing deposits during 1997 decreased 5 basis points from 3.88% in 1996 to 3.83% in 1997. Although average deposits increased during the current year, 1997 period-end deposit balances decreased $13.2 million primarily due to controlled runoff of certificates of deposit throughout the year. The Company's strategy during 1997 was to not match the competition's aggressive rates, unless management believes that relationships with deposit holders who have other deposits or loan relationships are in jeopardy. Core deposits partially offset this decrease with growth of $10.8 million, or 4.4%, over 1996 period-end balances as customer relationships were developed through continued marketing efforts.
Provision for Loan Losses. The provision for loan losses for 1997 was $500,000, equal to the amount recorded for 1996. The provision for 1997 was determined by management after review of, among other things, the composition of the Company's loan portfolio, the risk inherent in the Company's lending activities and the economy in the Company's market areas. Further provisions for loan losses will continue to be based upon management's assessment of the loan portfolio and its underlying collateral, trends in non-performing loans, the current economic condition and other factors which may warrant recognition in order to maintain the allowance for loan losses at levels sufficient to cover estimated losses. At December 31, 1997, allowance for loan losses was $2.8 million compared to $2.6 million at December 31, 1996, an increase of $0.2 million, or 8.4%. As of December 31, 1997, non- performing loans, which consist of non-accrual loans and accruing loans delinquent 90 days or more, decreased $0.2 million, or 8.6%, to $2.5 million at December 31, 1997 from $2.7 million at December 31, 1996. The coverage ratio of allowance for loan losses to non- performing loans and also to net loans at December 31, 1997 was 113.18% and 0.85%, respectively, as compared to 95.43% and 0.80%, respectively at December 31, 1996.
Non-interest Income. Non-interest income, exclusive of gains and losses on sales of investment securities, was $1.7 million for 1997, $726,000 less than 1996. The prior year's non-interest income includes $917,000 from the collection of unaccrued interest associated with loans whose principal had been repaid in prior periods, with no like events occurring during the current year. Excluding this item, non-interest income increased $191,000, or 13.0%, for 1997 as compared to the same period during 1996. This increase resulted primarily from increased deposit account maintenance and service fees, surcharges, and earnings related to annuity sales partially offset by fewer mortgage late penalties.
During 1997, the Company realized a gain of $0.1 million from the sale of securities compared to a loss of $1.1 million for 1996. Proceeds from the sale of securities during 1997 approximated $42.6 million and were primarily used to repay short-term borrowings. Proceeds from the 1996 sales approximated $110.8 million and were used in conjunction with additional borrowings and deposits, to fund loan growth and for redeployment into higher-yielding securities.
Non-interest Expense. Non-interest expense totaled $17.1 million for 1997, an increase of $1.3 million, or 8.4%, as compared to $15.8 million for 1996, exclusive of the one-time SAIF assessment. Inclusive of the one-time SAIF assessment, total non-interest expense decreased $1.3 million, or 7.2%, from $18.4 million for 1996 to $17.1 million for 1997.
Salaries and employee benefits expenses for 1997 increased $1.1 million, or 12.9%, compared to the prior year. Of this amount, salary expense increased $0.3 million and employee benefit expenses increased $0.8 million. Salary expense increased primarily as a result of two new branches opened during 1996, whose operations are fully reflected in the current year, and staffing costs for commercial and institutional loan officers and support hired during 1996. There is limited expense for these items in the prior year. In addition, the current year also includes normal wage and salary increases. Employee benefit expense for 1997 includes an increase of $221,000 related to the Company's Employee Stock Ownership Plan ("ESOP") program over the same period of the prior year due to increases in the market value of the Company's stock for the current year period. ESOP expense is included as compensation based on the market value of the shares awarded. The current year also includes increased expense of $457,000 for the Recognition and Retention Plan for Executive Officers and Employees ("Employee RRP"). Such plans was in effect for the full year of 1997 versus one-half year in 1996.
Occupancy costs which include leasehold improvements, furniture, fixtures and equipment ("FF&E"), rent and other occupancy related maintenance costs increased $0.2 million, or 6.4%, to $2.3 million for 1997 as compared to $2.1 million for 1996. The current year increase primarily resulted from higher leasehold and FF&E depreciation related to the facilities refurbishment initiative started during 1996 along with the installation of a new operating system which was installed during the latter part of 1996. Partially offsetting this increase were lower rent costs which resulted from a branch closing and lease buy out during 1996, and lower utility and maintenance costs incurred during 1997.
Federal deposit insurance premiums decreased $0.7 million, or 71.6%, to $0.3 million for 1997 from $1.0 million for 1996. This decrease was principally the result of lower assessment fees charged on deposits during the full year 1997 due to the recapitalization of the SAIF during the third quarter of 1996.
Data processing costs increased $0.2 million, or 59.2%, to $0.6 million for 1997 from $0.4 million for 1996. The increase resulted from full year costs incurred during 1997 for a new upgraded operating system and its applications, which became operational during the second half of 1996.
Insurance premiums expense decreased $0.1 million, or 34.1%, to $0.2 million for 1997 compared to $0.3 million for the prior year. The current year decrease resulted primarily from a net lower cost for insurance coverage.
Other non-interest expense increased $0.8 million to $3.5 million for 1997 compared to $2.7 million for 1996. Advertising, marketing, and related printing were increased during 1997 as part of the Company's efforts to increase loan and core deposit growth. In addition, loan and deposit operations costs increased during 1997 as a result of greater transactional volumes from the prior year. Also, 1997 reflects this full year's cost for the Recognition and Retention Plan for Outside Directors ("Director RRP"), whereas these costs are only reflected in the second half of the prior year.
Income Tax Expense. Income tax increased $2.5 million to $3.3 million for 1997 compared to $0.8 million for 1996. Income tax expense for 1997 reflects the tax effect of the pretax income recognized in 1997. Income taxes for 1996 reflect the tax effect of the pretax income recognized for 1996, partially offset by a reversal of a $702,000 tax liability previously established, which expired during 1996.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Company's assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than does the effect of inflation.
MARKET RISK
The Company's operations may be subject to a variety of market risks, the most material of which is the risk of changing interest rates. Most generally, interest rate risk ("IRR") is the volatility in financial performance, attributable to changes in market interest rates, which may result in either fluctuation of net interest income or changes to the economic value of the equity of the Company.
The principal objective of the Company's IRR management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Company.
Consistent with its definition of IRR, the Company measures earnings at risk and value at risk. To measure earnings at risk, the Company utilizes an income simulation model which starts with a detailed inventory of balance sheet items and factors in the probability of the maturity and repricing characteristics of assets and liabilities, including assumed prepayment risks. Simulation of net interest income takes into account the relative sensitivities of these balance sheet items to dynamic rates and projects their behavior over an extended period of time. Simulation analysis of net interest income reflects both the possibility and probability of the behavior of balance sheet items.
In addition to simulating net interest income to measure earnings at risk, the Company also measures IRR from the perspective of value at risk. Such analysis is the measurement and management of IRR from the longer term perspective of the economic value of the equity of the Company. This is performed through Net Portfolio Value (NPV) analysis which is intended to address the changes in equity value arising from movements in interest rates. The NPV analysis first reprices all of the assets and liabilities under the current interest rate environment, then compares this result to repricing under a changed interest rate environment, thus evaluating the impact of immediate and sustained interest rate shifts across the current interest rate yield curve on the market value of the current balance sheet. A significant limitation inherent in NPV analysis is that it is static. Consequently, there is no recognition of the potential for strategy adjustments in a volatile rate environment which would protect or conserve equity values.
Changes in the estimates and assumptions made for IRR analysis could have a significant impact on projected results and conclusions. These analyses involve a variety of significant estimates and assumptions, including, among others: (1) estimates concerning assets and liabilities without definite maturities or repricing characteristics; (2) how and when yields on interest-earning assets and costs of interest-bearing liabilities will change in response to movement of market interest rates; (3) prepayment speeds; (4) future cash flows; and (5) discount rates. Therefore, these techniques may not accurately reflect the impact of general market interest rate movements on the Company's net interest income or the value of its economic equity.
The table below sets forth the assumed change to the Company's estimated net portfolio value at December 31, 1998, based upon an immediate and sustained interest rate change from the interest rate yield curve at December 31, 1998 of plus 100 and 200 basis points and minus 100 and 200 basis points.
1998 Change ---- ---------------- Amount Amount Percent ------ ------ ------- (Dollars in thousands) Change in rates: +200 basis points $50,808 $(21,042) (29)% +100 basis points $62,090 $ (9,760) (14)% Estimated Net Portfolio Value at December 31, 1998: $71,850 $ - - % -100 basis points $82,150 $ 10,300 14 % -200 basis points $94,362 $ 22,512 31 %
The table below sets forth the estimated change to the Company's estimate of its net interest income based upon the December 31, 1998 balance sheet, assuming an interest rate change from the December 31, 1998 interest rate yield curve of plus 200 basis points and minus 200 basis points. Such rate shift is assumed to occur linearly over the first twelve months, and to be stable at the new levels over the second twelve months.
1998 Percent Change ---- --------------------------- Year 1 Year 2 Total ------ ------ ----- Change in rates: +200 basis points 1.27% 6.20 % 3.72 % -200 basis points 0.02% (6.10)% (3.02)%
The Company manages its IRR through use of the tools described above, and its actions are taken under the guidance of the Asset Liability Committee ("ALCO") comprised of management with oversight provided by the Board of Directors. In addition to these tools, ALCO's review includes the book and market value of assets and liabilities, unrealized gains and losses, market conditions and interest rates, and cash flow needs with regard to investment activity, including loans, and deposit flow.
YEAR 2000 READINESS
The Year 2000 technology issues pose potential problems to financial institutions and other businesses who rely on computers to assist in normal daily operations of their business. Many computer programs and applications which use date fields may cease to function normally as a result of the way date fields have been programmed historically. Date sensitive software may recognize a date using 00 as the year 1900 rather than the year 2000. This could result in a system failure, miscalculations or lost systems files, causing disruptions of operations and could result in a temporary inability to process transactions or conduct normal business activity.
The Company has implemented a Year 2000 compliance plan and the execution of this plan is currently on target. The objective of this plan is to ensure that the Company will be Year 2000 ready prior to the turn of the century. To monitor and execute the Company's Year 2000 plan, the Company formed a Year 2000 Steering Committee and a Year 2000 Action Committee. The Year 2000 Steering Committee consists of senior executive officers of the Bank who review the progress of the plan and approve the course of action taken by the Year 2000 Action Committee. The Year 2000 Action Committee consists of department heads from various operating areas of the Company. This action committee performs the necessary steps needed to assure the Company is Year 2000 ready.
As recommended by the Federal Financial Institutions Examination Council ("FFIEC")guide, the Year 2000 compliance plan includes the following phases: awareness, assessment, renovation, validation (testing), and implementation. Completing these phases will enable the Company to assess the risks and effects of the Year 2000 issues, develop a strategic plan and a systematic approach guide, perform adequate testing, and implement corrective action necessary to be adequately assured that the Company's processing and information systems are Year 2000 ready. As of December 31, 1998, the Company has substantially completed the awareness, assessment and renovation phases of the Year 2000 compliance plan. The Company is currently in the testing phase.
The Company's deposit and loan account application systems are processed off site by a third party vendor. Based upon interface with these deposit and loan application systems, the Company internally generates deposit and loan transactions, and processes its general ledger and several other systems on its resident hardware. The Company has confirmed that this vendor has developed a Year 2000 action plan, that certain of its application modules are currently Year 2000 ready, and that it is currently testing its remaining systems and remedying as necessary. In addition, the Company and the vendor are jointly testing the Company's applications which are processed or affected by the vendor. This testing phase is on target for completion in April 1999, and the implementation phase is targeted for completion by the end of the second quarter 1999. The vendor also expects to have all of its systems tested, remedied and Year 2000 ready by the end of the second quarter 1999. In the event that the vendor does not meet acceptable target dates, the Company will proceed with its contingency plan to convert to the vendor's client server- based system, which is currently Year 2000 ready.
The Company is in the implementation phase for its hardware and other software. Its ATM software upgrades will be installed by May 1999. This software has been certified as Year 2000 ready. The Company's wide area network and hardware along with its facilities, HVAC, alarm systems and elevators are all Year 2000 ready.
The Company has initiated formal communication with all of its vendors to determine the extent to which the Company is vulnerable to third parties' failure to become Year 2000 ready. Replies received indicate that vital vendors, including power and telephone companies, are in various "in process" stages of the Year 2000 compliance issue. Continued contact and follow up will be maintained.
The Company has analyzed and segregated its loan portfolio into two categories for Year 2000 ready issues: loans collateralized by real estate and loans not collateralized by real estate, in order to determine and minimize the potential impact of its borrower's failure to become Year 2000 ready. The underlying value of the real estate on the loans secured by real estate minimizes the risk related to Year 2000 readiness. Of the remaining loans, which are not secured by real estate, the Company has identified and initiated formal communication with borrowers to determine who may experience a disruption in their business, because of a failure to become Year 2000 ready. Replies received indicate that the majority of these borrowers are in various "in process" stages of the Year 2000 compliance issue and are expected to be Year 2000 ready. A minimal number of borrowers have been identified as having additional credit risk as a direct result of the Year 2000 issue. Those risks have been estimated and incorporated in the analysis of the adequacy of the loan loss allowance. Assessment of Year 2000 readiness is part of the underwriting process for all new loan customers and renewals of existing loans. Continued contact and follow up will be maintained. However, there can be no guarantee that the systems of external third party venders, of which the Company relies, will become Year 2000 ready, or that the failure of the Bank's loan customers to become Year 2000 ready would not have a material adverse effect on the Company.
Currently, management believes that the cost incurred to become Year 2000 ready, both with regard to the Company's internal and outsourced data processing operations, will not be material. The costs identified directly with the Year 2000 contingency plan are not expected to exceed $75,000. These costs are being funded through operating cash flows and expensed as incurred. To date, costs totaling $18,000 have been incurred. A significant amount of the Company's hardware has been purchased since July 1996, and is Year 2000 ready. However, costs will also be incurred for replacement of various personal computers, software upgrades, and upgraded server software. The Company planned to upgrade and replace these items and accordingly did not accelerate replacement due to Year 2000 compliance. These estimated costs are management's best estimates based upon currently known information. There can be no guarantee that actual costs incurred to become Year 2000 ready will not increase due to additional issues which may arise internally in the future, and by the failure of third parties to fail to become Year 2000 ready.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131 "Disclosure About Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements, and requires those enterprises to report selected financial information about operating segments in interim financial reports to shareholders. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. Based upon the current operations of the Company and established reporting mechanisms, the Company does not have separate reportable operating segments and therefore, the adoption of SFAS No. 131 did not have an impact on the Company's financial disclosure.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 supersedes the disclosure requirements in SFAS Nos. 80, 105 and 119. This statement is effective for periods ending after June 15, 1999. The adoption of SFAS No. 133 is not expected to have an impact on the financial position or results of operations of the Company.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". This statement amends SFAS No. 65 Accounting for Certain Mortgage Banking Activities , to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. This statement is effective for periods beginning after December 15, 1998. The adoption of this statement is not expected to have a material impact on the financial position or results of operations of the Company.
UNAUDITED QUARTERLY FINANCIAL DATA
Table 8 presents selected quarterly consolidated financial data:
Table 8: Selected Consolidated Financial Quarterly Data (Unaudited)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Company as of December 31, 1998 and 1997, and for the years ended December 31, 1998 and 1997 and 1996, and the auditors' report thereon, are included herewith as indicated on "Index to Financial Statements and Schedule" on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information concerning directors and executive officers is included in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders, which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the SEC no later than April 30, 1999.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders, which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the SEC no later than April 30, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and management is included in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders, which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the SEC no later than April 30, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is included in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders, which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the SEC no later than April 30, 1999.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) Consolidated financial statements of the Company as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, and the auditors' report thereon, are included herewith as indicated on "Index to Consolidated Financial Statements" in Item 8.
(2) None
(3) Exhibits:
Exhibit No. Description ----------- ----------- 3(i) Certificate of Incorporation of the Company*
3(ii) Bylaws of the Company*
10.1 Second amended and restated Employment Agreement by and among Statewide Financial Corp., Statewide Savings Bank and Victor M. Richel*
10.2 Statewide Savings Bank, S.L.A. Employee Stock Ownership Plan*
10.3 Statewide Financial Corp. 1996 Amended and Restated Incentive Stock Option Plan**
10.4 Statewide Financial Corp. 1996 Amended and Restated Incentive Stock Option Plan for Outside Directors**
10.5 Statewide Financial Corp. Amended and Restated Recognition and Retention Plan for Executive Officers and Employees**
10.6 Statewide Financial Corp. Amended and Restated Recognition and Retention Plan for Outside Directors**
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule
* Incorporated by reference from Exhibits 3.1, 3.2, 10.1 and 10.2 of the Registrant's Registration Statement on Form S-1. 33-93380.
** Incorporated by reference from Exhibits A through D of the Company's Definitive Proxy Statement for the 1997 Annual Meeting of Shareholders.
(b) Reports on Form 8-K.
The Registrant has filed the following reports on Form 8-K during the quarter ended December 31, 1998.
Date Item Reported ---- ------------- November 5, 1998 Item 5 - Reporting on the Registrant's quarterly earnings and stock repurchase program
November 19, 1998 Item 5 - Reporting the Registrant's quarterly dividend.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report of KPMG LLP
Consolidated Financial Statements: Consolidated Statements of Financial Condition December 31, 1998 and 1997 Consolidated Statements of Income Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Statewide Financial Corp.
We have audited the consolidated financial statements of Statewide Financial Corp. and subsidiary as of December 31, 1998 and 1997 and for the each of the years ended in the three-year period ended December 31, 1998, as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Statewide Financial Corp. and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Short Hills, New Jersey January 26, 1999
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, ------------------- 1998 1997 ---- ---- (Dollars in thousands) ASSETS
Cash and amounts due from depository institutions $ 7,090 $ 6,767 Mortgage-backed securities available for sale 248,035 290,044 Debt and equity securities available for sale 68,312 19,093 Loans receivable, net 366,458 332,509 Accrued interest receivable, net 4,759 3,969 Real estate owned, net 523 440 Premises and equipment, net 6,547 6,064 FHLBNY stock, at cost 10,315 10,260 Excess of cost over fair value of net assets acquired 70 106 Other assets 5,408 6,064 -------- -------- Total assets $717,517 $675,316 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities: Deposits $443,705 $443,878 Borrowed funds: Securities sold under agreements to repurchase 181,381 146,150 FHLBNY advances 25,300 14,150 -------- -------- Total borrowed funds 206,681 160,300
Advance payments by borrowers for taxes and insurance 1,611 1,749 Accounts payable and other liabilities 5,021 4,482 -------- -------- Total liabilities 657,018 610,409 -------- -------- Shareholders' Equity Preferred stock, no par value, 2,000,000 shares authorized; no shares issued or outstanding - - Common stock, no par value, 12,000,000 shares authorized; 4,155,509 shares issued and 4,151,963 shares outstanding at December 31, 1998, and 4,518,767 shares issued and 4,509,531 shares outstanding at December 31, 1997 - - Paid in capital 32,904 39,533 Unallocated ESOP shares (2,856) (3,280) Unearned Recognition and Retention Plan shares (1,282) (1,755) Retained earnings - substantially restricted 31,190 29,580 Treasury stock, 3,546 and 9,236 shares at December 31, 1998 and 1997 (44) (119) Accumulated other comprehensive income: Net unrealized gain on securities available for sale, net of income tax 587 948 -------- -------- Total shareholders' equity 60,499 64,907 -------- -------- Commitments and contingencies - - -------- -------- Total liabilities and shareholders' equity $717,517 $675,316 ======== ========
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ----------------------- 1998 1997 1996 ---- ---- ---- (Dollars in thousands, except per share amounts) INTEREST INCOME: Interest and fees on loans $27,016 $25,955 $21,206 Interest on mortgage-backed securities 13,995 21,577 19,377 Interest and dividends on debt and equity securities 3,506 2,076 4,228 Dividends on FHLBNY stock 744 583 467 ------- ------- ------- Total interest and dividend income 45,261 50,191 45,278 ------- ------- ------- INTEREST EXPENSE: Deposits 14,991 16,481 16,827 Borrowed funds 8,232 8,903 6,829 ------- ------- ------- Total interest expense 23,223 25,384 23,656 ------- ------- ------- NET INTEREST INCOME 22,038 24,807 21,622 Provision for loan losses 642 500 500 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,396 24,307 21,122 NON-INTEREST INCOME: Mortgage banking fees 54 - - Service charges 1,326 879 771 Loan and other fees 912 617 465 Net gain (loss) on sales of securities 4 69 (1,093) Other 556 160 1,146 ------- ------- ------- Total non-interest income 2,852 1,725 1,289 ------- ------- ----- NON-INTEREST EXPENSE: Salaries and employee benefits 10,373 9,605 8,511 Occupancy, net 2,348 2,278 2,140 Federal deposit insurance premiums 268 287 1,011 SAIF assessment - - 2,651 Professional fees 842 594 645 Insurance premiums 178 180 273 Data processing fees 695 621 390 Foreclosed real estate expense, net 85 71 105 Other 3,698 3,476 2,717 ------- ------- ------- Total non-interest expenses 18,487 17,112 18,443 ------- ------- ------- Income before income taxes 5,761 8,920 3,968 Income taxes 2,231 3,333 796 ------- ------- ------- Net income $ 3,530 $ 5,587 $ 3,172 ======= ======= =======
Earnings per common share: Basic $0.90 $1.34 $ 0.68 Assuming dilution $0.86 $1.30 $ 0.68 Weighted average number of shares (in thousands): Basic 3,937 4,165 4,648 Assuming dilution 4,099 4,310 4,662
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------- 1998 1997 1996 ---- ---- ---- (Dollars in thousands)
Cash flows from operating activities: Net income $ 3,530 $ 5,587 $ 3,172 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 642 500 500 Provision for losses on foreclosed real estate 85 35 34 Depreciation and amortization 1,155 1,024 785 Net amortization of deferred premiums and unearned discounts 3,748 1,045 1,928 Net (gain) loss on sales of securities (4) (69) 1,093 Amortization of RRP awards and allocation of ESOP shares 1,349 1,266 858 Net (gain) loss on sale of real estate owned (90) (12) 10 Net gain on sale of deposits (301) - - Gain on sale of premises and equipment (10) - - Changes in assets and liabilities: (Increase) decrease in accrued interest receivable (790) 327 114 Increase in accrued interest payable 17 265 256 Decrease (increase) in other assets 860 (2,697) (2,591) Increase in accounts payable and other liabilities 543 1,310 834 ------- ------- ------- Net cash provided by operating activities 10,734 8,581 6,993 ------- ------- ------- Cash flows from investing activities: Net disbursements from lending activities (34,357) (4,859) (14,900) Proceeds from the sale of loans 95 - - Purchase of loans (1,224) (3,181) (115,694) Proceeds from mortgage-backed securities principal repayments 114,659 56,484 54,119 Proceeds from the sale of mortgage- backed securities - 42,558 90,657 Purchase of mortgage-backed securities (77,004)(148,157) (130,385) Proceeds from debt securities principal repayments 24,941 31,000 18,000 Proceeds from sale of debt securities 3,150 - 20,704 Purchase of debt and equity securities (77,013) (9,602) - Purchase of FHLBNY stock (55) (2,492) (4,141)
Proceeds from collection and sale of real estate owned 565 376 369 Proceeds from the sale of premises and equipment 221 - - Purchases and improvement of premises and equipment (1,813) (761) (2,185) ------- ------- ------- Net cash used in investing activities (47,835) (38,634) (83,456) ------- ------- ------- Cash flows from financing activities: Net increase (decrease)in deposits 6,336 (13,178) 19,035 Payment for sale of deposits (6,208) - - Repayment of borrowings (58,350)(773,100) (745,240) Proceeds from borrowings 104,731 826,200 807,737 (Decrease) increase in advance payments by borrowers for taxes and insurance (138) (104) 820 Cash dividends paid (1,920) (1,804) (912) Proceeds from issuance of common stock 69 - - Purchase of common stock (7,096) (7,780) (6,594) ------- ------- ------- Net cash provided by financing activities 37,424 30,234 74,846 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 323 181 (1,617) Cash and cash equivalents at beginning of period 6,767 6,586 8,203 ------- ------- ------- Cash and cash equivalents at end of period $ 7,090 $ 6,767 $ 6,586 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 1,569 $ 2,850 $ 1,776 ======= ======= =======
Interest $23,177 $25,226 $23,400 ======= ======= ======= Non-cash investing and financing activities: Transfer from loans receivable to real estate owned, net $ 643 $ 275 $ 324 ======= ======= ======= Change in unrealized (loss) gain on securities available for sale, net of income tax $ (361) $ 612 $(1,904) ======= ======= =======
See accompanying notes to consolidated financial statements.
STATEWIDE FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------
(a) Principles of Consolidation and Basis of Presentation ----------------------------------------------------- As more fully described in Note 2, Statewide Savings Bank, S.L.A. (the "Bank") converted from a mutual to capital stock form of ownership on September 29, 1995 and 100% of its outstanding common stock shares were acquired by Statewide Financial Corp., (the "Company") formed for that purpose.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and its wholly owned subsidiaries, Seventy Sip Corporation, Statewide Atlantic Corporation and Statewide Financial Services Inc. All significant intercompany balances and transactions have been eliminated in consolidation. The Bank and Statewide Financial Services Inc. are the only active subsidiaries at December 31, 1998. The Bank operates sixteen banking offices in Hudson, Union and Bergen counties; and through its wholly owned subsidiary, Statewide Financial Services, Inc., the Bank also engages in the sale of annuity products. Both the Company and the Bank are subject to supervision and regulation by various agencies including the New Jersey Department of Banking and Insurance, the OTS and the FDIC.
In preparing the consolidated financial statements, management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and income for the periods presented. Actual results could differ from these estimates. Estimates that are susceptible to change include the determination of the allowances for losses on loans and the valuation of real estate acquired through foreclosure.
(b) Cash and Cash Equivalents ------------------------- Cash and cash equivalents include cash on hand, amounts due from depository institutions and Federal funds sold. Generally, Federal funds sold are sold for a one day period.
(c) Debt, Equity and Mortgage-backed Securities ------------------------------------------- The Company classifies its investment securities and mortgage-backed securities at time of purchase among three categories: held to maturity, trading, and available for sale based upon management's intent and the Company's ability to hold such securities.
Currently, the Company classifies all of its debt, equity and mortgage-backed securities as available for sale. These securities are reported at fair value with unrealized gains and losses reported, net of income tax, as a separate component of shareholders' equity. Premiums and discounts are recognized over the lives of the securities using the level-yield method, as adjusted for prepayments for mortgage-backed securities. Realized gains and losses are determined using the specific identification method.
(d) Loans, Fees, Premiums and Discounts ----------------------------------- Interest is not accrued on FHA insured home improvement loans where interest or principal is 120 days or more past due and on all other loans where interest or principal is 90 days or more past due, unless the loans, including impaired loans, are well secured and in the process of collection. Once the loans reach non-accrual status or are considered impaired, accrued but unpaid interest is reversed and charged against current income and interest income is subsequently recognized only to the extent that payments are received and any remaining principal balance is deemed fully collectible. Interest on loans that have been restructured, under certain circumstances, is accrued according to the renegotiated terms.
Non-refundable loan origination fees, net of certain direct loan origination costs, are deferred. Net deferred fees, premiums and discounts on loans purchased are amortized as an adjustment of the yield over the estimate life of the loan using the level-yield method.
A loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based upon the present value of expected future cash flows, discounted at the loan's effective interest rate or the fair value of the underlying collateral, if the loan is collateral dependent. Conforming residential mortgage, consumer and all other loans less than $100,000 are excluded from the definition of impaired loans as they are characterized as smaller balance, homogeneous loans and are collectively evaluated. Impairment losses are included in the allowance for loan losses through provisions charged to operations.
(e) Allowance for Loan Losses ------------------------- The allowance for loan losses is established through charges (provision) to earnings. Loan losses (loans charged off, net of recoveries) are charged against the allowance for loan losses when management believes that the recovery of principal is unlikely. If, as a result of loans charged off or increases in the size or risk characteristics of the loan portfolio, the allowance is below the level necessary to absorb loan losses on existing loans, an additional provision for loan losses is made to increase the allowance for loan losses to the level considered necessary to absorb losses on existing loans that may become uncollectible. Management considers such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and economic conditions that may affect the borrowers' ability to pay and the realization of collateral in determining the adequacy of the allowance.
Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions in the Company's market area or due to the deterioration of the financial conditions of the Company's borrowers. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
(f) Real Estate Owned ----------------- Real estate owned is recorded at the lower of cost or estimated fair value, with any initial write-down at date of transfer from the loan portfolio charged to the allowance for loan losses. Fair value is generally determined using outside appraisals. The Company maintains an allowance for other real estate losses for subsequent declines in the estimated fair value and estimated costs to sell. Routine holding costs are charged to expense as incurred, and improvements to real estate owned that enhance the value of real estate owned are capitalized. Gains on the sale of real estate are recognized or deferred upon disposition of the property based on the specific terms of the transaction. Losses are charged to operations as incurred.
(g) Premises and Equipment ---------------------- Premises and equipment are stated at cost, less accumulated depreciation and amortization. Provisions for depreciation of premises and equipment are computed using the straight-line method over three to ten years for furniture, fixtures and equipment and 40 years for buildings. If there is an event or change in circumstances that indicates that the basis of premises and equipment may not be recoverable, management assesses the possible impairment of value through evaluation of the estimated future cash flow of the asset on an undiscounted basis as compared to the current carrying value. An asset's carrying value would be adjusted, if necessary, to its fair market value. Amortization of leasehold improvements is provided using the straight-line method over the shorter of either the respective lease or the estimated useful life of the improvement. System conversion costs and related equipment have been capitalized and is depreciated and amortized over the life of the system's services contract.
(h) Income Taxes ------------ The Company and its subsidiary file a consolidated Federal income tax return on a calendar year basis. Income taxes are allocated to the Bank and its subsidiaries based on the use of their income or loss in the consolidated return. Separate state income tax returns are filed by the Bank and its subsidiaries.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry- forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(i) Earnings Per Share -------------------- Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Earnings per share, assuming dilution, starts with the calculation of basic earnings per share and adds to it the dilutive effect of common stock equivalents. Such equivalents are the number of shares which would be issued assuming exercise of in-the-money options, and vesting of restricted awards, net of shares which could be purchased in the open market with proceeds from the assumed exercise of such options and from tax benefits and the future amortization associated with vesting of restricted awards.
(j) Comprehensive Income -------------------- On January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Under SFAS No. 130, comprehensive income includes net income and other comprehensive income. Other comprehensive income includes items previously recorded directly in equity, such as unrealized gains or losses on securities available for sale. Compensation income is reported in the consolidated statements of shareholders' equity for all periods presented.
(k) Stock Based Compensation ------------------------ The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company provides within Footnote 14- "Stock Plans", pro forma earnings and earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied.
2. LIQUIDATION ACCOUNT ------------------- In connection with the Bank's conversion from the mutual to stock form and its acquisition by the Company, the Company was required to establish a liquidation account in an amount equal to the Bank's capital as of June 30, 1995. The liquidation account will be reduced to the extent that eligible account holders reduce their qualifying deposits. In the unlikely event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account. The Bank is not permitted to declare or pay dividends on its capital stock, or repurchase any of its outstanding stock, if the effect thereof would cause its shareholders' equity to be reduced below the amount required for the liquidation account or applicable regulatory capital requirements. The balance of the liquidation account at December 31, 1998 and 1997 was approximately $3.9 million and $5.3 million, respectively.
3. DEBT AND EQUITY SECURITIES AVAILABLE FOR SALE --------------------------------------------- The amortized cost and estimated market values of debt and equity securities available for sale at December 31, 1998 and 1997 are as follows:
Sales of debt securities during the year ended December 31, 1998 resulted in proceeds of $3.2 million and a gross realized gain of $4,000. There were no sales of debt or equity securities during the year ended December 31, 1997. Sales of debt and equity securities during the year ended December 31, 1996 resulted in proceeds of $20.7 million and gross realized losses of $251,000.
4. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE --------------------------------------------- The amortized cost and estimated market values of mortgage-backed securities available for sale at December 31, 1998 and 1997 are as follows:
Mortgage-backed securities were pledged to secure FHLBNY advances and securities sold under agreement to repurchase at December 31, 1998 and 1997. The estimated market value of securities so pledged at December 31, 1998 and 1997 were $210.9 million and $255.3 million respectively. Mortgage-backed securities are also pledged to secure public deposits. The estimated market value of securities pledged for public deposits at December 31, 1998 and 1997 were $129,457 and $186,000, respectively.
There were no sales of mortgage-backed securities during the year ended December 31, 1998. Sales of mortgage-backed securities during the year ended December 31, 1997 resulted in proceeds of $42.6 million, gross realized gains of $207,000, and gross realized losses of $138,000. Sales of mortgage-backed securities during the year ended December 31, 1996 resulted in proceeds of $90.7 million and gross realized losses of $842,000.
The contractual maturities of mortgage-backed securities generally exceed five years. However, the effective lives are expected to be shorter due to prepayments of the underlying mortgages.
5. LOANS RECEIVABLE, NET --------------------- A summary of loans receivable, net at December 31, 1998 and 1997 is as follows:
December 31, ----------------------- (Dollars in thousands) 1998 1997 ---- ---- First mortgage loans: One-to-four family $200,145 $244,364 Multi-family 21,679 12,190 Non-residential 27,392 19,219 Construction 10,354 4,325 -------- -------- 259,570 280,098 Consumer loans: Second mortgage 17,937 18,110 FHA insured home improvement 14,447 15,115 Unsecured consumer 1,533 1,896 Home equity line of credit 3,737 1,485 Home improvement 2,415 1,051 Automobile 664 596 Other 171 197 -------- -------- 40,904 38,450 -------- -------- Warehouse mortgage lines of credit 47,752 - Commercial business 20,985 16,066 -------- -------- Total loans 369,211 334,614 Less (plus): Deferred loan fees 754 594 Deferred (premiums), unearned discounts, net (1,057) (1,322) Allowance for loan losses 3,056 2,833 -------- -------- 2,753 2,105 -------- -------- Loans receivable, net $366,458 $332,509 ======== ========
At December 31, 1998 and 1997, the Company serviced loans for others, including loan participations to others, amounting to $10.0 million and $4.8 million, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees.
At December 31, 1998 and 1997, loans in arrears three months or more or in the process of foreclosure are as follows:
December 31, ------------------ (Dollars in thousands) 1998 1997 ---- ---- Conventional first mortgage loans (non-accrual) $1,477 $1,767 FHA insured and VA guaranteed (accruing) 297 291 Commercial loans (non-accrual) 96 38 Consumer loans (non-accrual) 620 407 ------ ------ $2,490 $2,503 ====== ====== Percent of net loans outstanding 0.68% 0.75% ==== ====
The amount of interest income on non-accrual loans which would have been recorded for the years ended December 31, 1998, 1997 and 1996 had these loans continued to pay interest in accordance with their original terms, or since the date of origination if outstanding for only part of the period, was approximately $0.1 million, $0.1 million and $0.2 million, respectively. In addition, during the years ended December 31, 1998, 1997 and 1996 the amounts of interest income on non-accruing loans that was included in interest income totaled $41,000, $80,000 and $75,000, respectively.
An analysis of the allowance for loan losses for the years ended December 31, 1998, 1997 and 1996 is as follows:
December 31, --------------------- (Dollars in thousands) 1998 1997 1996 ---- ---- ----
Balance at beginning of period $2,833 $2,613 $3,241 Provision charged to operations 642 500 500 Charge-offs (454) (297) (1,140) Recoveries 35 17 12 ------ ------ ------ Balance at end of period $3,056 $2,833 $2,613 ====== ====== ======
At December 31, 1998, 1997 and 1996, no loans were designated as impaired. The average balance of impaired loans for the years ended December 31, 1998, 1997 and 1996 were $0, $0 and $2,781,000, respectively.
A substantial portion of the Company's loans are secured by real estate in the New Jersey market area. Accordingly, as with most financial institutions in the area, the ultimate collectibility of a portion of the Company's loan portfolio is susceptible to change in market conditions.
6. ACCRUED INTEREST RECEIVABLE, NET -------------------------------- A summary of accrued interest receivable at December 31, 1998 and 1997 is as follows:
December 31, ----------------- (Dollars in thousands) 1998 1997 ---- ----
Loans $2,137 $1,901 Mortgage-backed securities 1,288 1,908 Debt securities 1,334 160 ------ ------ $4,759 $3,969 ====== ======
7. PREMISES AND EQUIPMENT, NET --------------------------- A summary of premises and equipment at December 31, 1998 and 1997 is as follows:
December 31, ---------------- (Dollars in thousands) 1998 1997 ---- ----
Land $ 1,056 $ 1,056 Buildings 5,614 5,157 Leasehold improvements 998 974 Furniture, fixtures and equipment 7,880 6,971 ------- ------- Total $15,548 $14,158 ------- ------- Less accumulated depreciation 9,001 8,094 ------- ------- $ 6,547 $ 6,064 ======= =======
Depreciation and amortization expense included in occupancy and other expense in the consolidated statements of income amounted to $1,119,000, $993,000, and $708,000 for the years ended December 31, 1998, 1997, 1996, respectively.
8. REAL ESTATE OWNED, NET ---------------------- Real estate owned, net at December 31, 1998 and 1997 is summarized as follows:
December 31, ---------------- (Dollars in thousands) 1998 1997 ---- ---- Acquired by foreclosure or deed in lieu of foreclosure $629 $638 Less allowance for losses on real estate owned 106 198 ---- ---- $523 $440 ==== ====
An analysis of the allowance for losses on real estate owned for the years ended December 31, 1998, 1997 and 1996 is as follows:
December 31, ----------------------- (Dollars in thousands) 1998 1997 1996 ---- ---- ---- Balance at beginning of period $198 $178 $223 Provision charged to operations 85 35 34 Charge-offs (177) (15) (79) ---- ---- ---- Balance at end of period $106 $198 $178 ==== ==== ====
Results of real estate operations for the years ended December 31, 1998, 1997 and 1996 are as follows:
December 31, --------------------- (Dollars in thousands) 1998 1997 1996 ---- ---- ---- Acquired by foreclosure or deed in lieu of foreclosure: Net (gain) loss on sales of real estate (90) $(12) $ 10 Holding costs 90 48 61 Provision charged to operations 85 35 34 --- --- ---- Foreclosed real estate expense, net $85 $ 71 $105 ==== ==== ====
9. DEPOSITS -------- The weighted average cost of funds on deposit at December 31, 1998 and 1997 was 3.12% and 3.47%, respectively. A summary of deposits by type of account is as follows:
December 31, ----------------------------------- 1998 1997 ---------------- ---------------- Weighted Weighted Average Average Interest Interest (Dollars in thousands) Amount Rate Amount Rate ------ ---- ------ ---- Savings accounts $156,872 2.46% $142,399 2.91% Money market accounts 37,811 2.73 44,239 3.00 Non-interest bearing deposits 33,153 - 24,440 - NOW accounts 44,764 1.29 47,564 1.52 -------- -------- Core deposits 272,600 2.03 258,642 2.36
Certificates of deposit maturing: One year or less 147,083 4.85 156,791 4.98 One to three years 21,508 4.81 24,773 5.49 Three to five years 1,862 5.35 3,120 5.36 Five years and thereafter 652 5.91 552 6.12 -------- -------- Total certificates 171,105 4.85% 185,236 5.04% -------- -------- Total deposits $443,705 $443,878 ======== ========
Interest rates on certificate of deposit accounts ranged from 2.00% to 7.07% and 2.50% to 7.07% at December 31, 1998, and 1997, respectively. At December 31, 1998, the Company had approximately $23.4 million of certificates of deposit of $100,000 or more.
Interest expense on deposits for the years ended December 31, 1998, 1997 and 1996 is summarized as follows:
December 31, -------------------------- (Dollars in thousands) 1998 1997 1996 ---- ---- ---- Savings and club accounts $ 4,090 $ 4,082 $ 3,658 NOW and money market accounts 1,870 2,548 2,650 Certificates of deposit 9,031 9,851 10,519 ------- ------- ------- $14,991 $16,481 $16,827 ======= ======= =======
10. BORROWED FUNDS --------------
The following table sets forth certain information as to securities sold under agreements to repurchase for the years ended December 31, 1998, 1997 and 1996.
December 31, ---------------------------- (Dollars in thousands) 1998 1997 1996 ---- ---- ----
Maximum balance $181,381 $187,000 $163,047 Average balance 146,356 $146,245 $108,434 Weighted average interest rate 5.56% 5.59% 5.50%
At December 31, 1998, securities sold under agreements to repurchase with the FHLBNY consisted of FHLB bonds and mortgage pass-through certificates with an amortized cost and market value of $180.1 million and $180.6 million, respectively. The securities sold are carried as assets, and the funds received are shown as funds borrowed under security repurchase agreements. All securities used as collateral for repurchase agreements are held at, and are under the control of, the FHLBNY.
The scheduled maturities of securities sold under agreements to repurchase are summarized as follows:
December 31, ------------ (Dollars in thousands) 1998 1997 ---- ---- Maturity: Maturing within 90 days $35,381 $ 150 Maturing within 1-2 years 28,000 - Maturing within 2-3 years 60,000 28,000 Maturing within 3-4 years 58,000 60,000 Maturing within 4-5 years - 58,000 -------- -------- $181,381 $146,150 ======== =======
Borrowed funds with final maturities greater than 1 year consist of $86.0 million which are currently callable quarterly and $60.0 million which are first callable in November 1999 by the FHLBNY.
At December 31, 1998, the Company had a line of credit with the FHLBNY of $32.8 million which expires on November 2, 1999. At December 31, 1998, the Company had outstanding an overnight advance of $25.3 million against this line at an interest rate of 5.125%. At December 31, 1997, the Company's FHLBNY credit line was $33.7 million against which it then had an outstanding overnight advance of $14.2 million at an interest rate of 6.63%.
Advances from the FHLBNY are collateralized by pledged mortgage-backed securities and debt securities. The estimated market value of securities so pledged at December 31, 1998 and 1997 was $30.3 million and $56.6 million, respectively.
The following table sets forth the maximum month-end balance and average balance of FHLBNY advances for the periods indicated:
Years Ended December 31, ------------------------ (Dollars in thousands) 1998 1997 1996 ----- ---- ----
Maximum balance $25,300 $28,800 $26,300 Average balance 1,764 $12,990 $15,639 Weighted average interest rate 5.03% 5.64% 5.52%
11. INCOME TAXES ------------
Income tax expense for the years ended December 31, 1998, 1997 and 1996 is made up of the following components:
December 31, ------------------------- (Dollars in thousands) 1998 1997 1996 ---- ---- ---- Current tax expense: Federal $2,313 $3,428 $1,672 State 193 302 204 ------ ------ ------ 2,506 3,730 1,876 Deferred tax expense: Federal (252) (364) (990) State (23) (33) (90) ------ ------ ------ (275) (397) (1,080) ------ ------ ------ $2,231 $3,333 $ 796 ====== ====== ======
A reconciliation between the effective income tax expense and the amount calculated by multiplying the applicable statutory Federal income tax rate of 34% for the years ended December 31, 1998, 1997 and 1996 is as follows:
December 31, --------------------- 1998 1997 1996 ---- ---- ---- Computed "expected" Federal tax expense 34.0% 34.0% 34.0% State income tax, net of Federal tax benefit 2.0 2.0 2.0 Tax benefit from closed tax years - - (17.7) Other 2.7 1.4 1.7 ---- ---- ---- 38.7% 37.4% 20.0% ==== ==== ====
The Bank does not provide deferred taxes for the difference between book and tax bad debt expense taken in years prior to, or ending at, December 31, 1987. The tax bad debt expense deducted in those years (net of charge-off and recoveries) created an approximate $11.7 million tax loan loss reserve which could be recognized as taxable income and create a current and/or deferred tax liability of up to $4.2 million, under current income tax rates, if one of the following occurs: (a) the Bank's retained earnings represented by this reserve are used for purposes other than to absorb losses from bad debts, including excess dividends or distributions in liquidation; (b) the Bank redeems its stock; (c) the Bank fails to meet the definition provided by the Code for a Bank; or (d) there is a change in the Federal tax law.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are as follows:
December 31, -------------- (Dollars in thousands) 1998 1997 ---- ---- From operations: Deferred tax assets: Non-accrual loan interest $ - $ 59 Allowance for loan losses 1,013 964 Deferred loan fees 145 200 Purchase accounting discount on mortgage loans 25 38 Employee benefit plans 781 624 Other 172 46 ------ ------ Total gross deferred tax assets 2,136 1,931 Deferred tax liabilities: Accelerated depreciation 70 70 Amortization of discounts on purchases of securities 11 30 Other 1 11 Additions to post 1987 tax reserve 123 164 ------ ------ Total gross deferred tax liabilities 205 275 ------ ------ Net deferred tax asset from operations 1,931 1,656 Shareholders' equity - unrealized gains on securities available for sale (330) (533) ------ ------ Total net deferred tax asset $1,601 $1,123 ====== ======
The Company believes, based upon current information, that it is more likely than not there will be sufficient taxable income in future periods to realize the net deferred tax asset. However, there can be no assurance about the level of future earnings.
12. EMPLOYEE STOCK OWNERSHIP PLAN -----------------------------
In connection with the conversion from a mutual to a stock form, the Company established the ESOP for the benefit of employees of the Company and the Bank. Full time employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a twelve-month period and who attained age 21 are eligible to participate in the ESOP.
The Company funded the ESOP upon completion of the conversion, by granting it 423,200 shares, valued at $4.2 million. When the ESOP was funded, these shares were held in a suspense account within the ESOP, as unallocated shares to the participants. These shares will be released to participants as the Company recognizes related compensation expense. Shares released are allocated among participants on the basis of their total compensation. Participants will vest in 20% of their right to receive their account balances within the ESOP after three years of service. For vesting purposes, participants were credited for years of service prior to the adoption of the ESOP. Thereafter, vesting is an additional 20% per year.
Compensation expense related to the ESOP includes dividends on unallocated ESOP shares. The annual compensation expense related to the ESOP is the amount necessary to amortize the initial value of these shares evenly over a ten year period, inclusive of dividends on unallocated ESOP shares, plus or minus a valuation adjustment which is the difference between the fair value of the unallocated shares during the periods in which they become committed to be released and their initial value. This valuation adjustment will also be adjusted to equity. The Company receives a tax deduction equal to the initial value of the shares released.
The compensation expense related to the ESOP totaled $868,000, $771,000 and $569,000 for the years ended December 31, 1998, 1997 and 1996. Such expense for 1998, 1997 and 1996 includes $444,000, $348,000 and $146,000, respectively for the valuation adjustment to reflect the increase in the average fair value of the allocated shares over their initial value and $163,000, $160,000 and $85,000, respectively for dividends on unallocated shares. At December 31, 1998, the ESOP held 296,240 shares in suspense as unallocated shares, and 126,960 shares as allocated to participants. The fair value of the unallocated ESOP shares at December 31, 1998 was approximately $5.6 million, based upon a $19.00 closing price per share. Unallocated ESOP shares are a reduction of shareholders' equity and are excluded from the average number of shares outstanding in computing earnings per share.
13. EMPLOYEE BENEFIT PLAN ---------------------
The Bank currently offers a 401(k) profit sharing plan (the Plan) covering all employees wherein employees can invest up to 18% of their pretax base earnings. The Bank currently contributes 50% of each employee's contribution, up to 3% of his or her annual earnings. The Bank made matching contributions of $112,000, $115,000 and $110,000 in the years ended December 31, 1998, 1997 and 1996, respectively.
The Company does not have a qualified defined benefit pension plan. In lieu thereof, the Company seeks to provide primary retirement benefits for executive officers of the Company and certain officers of the Bank and their beneficiaries through its non-qualified, unfunded Supplemental Executive Retirement Plans ("SERP's"). The projected benefit obligation of the SERP's was $4.0 million as of December 31, 1998, $3.3 million as of December 31, 1997, and $2.9 million as of December 31, 1996, and the expense for the SERP's was approximately $649,000, $570,000 and $501,000 for the years ended December 31, 1998, 1997 and 1996.
14. STOCK PLANS -----------
During 1996, the Company established two non-qualified plans, the Employee RRP and the Director RRP, as a method of providing executive officers, employees and outside directors of the Company and Bank and its affiliates with a proprietary interest in the Company as an incentive designed to encourage such persons to promote the growth and profitability of the Company and the Bank. The Employee RRP and Director RRP authorizes the granting of plan share awards for up to 148,120 shares and 63,480 shares of common stock, respectively. Plan share awards of common stock of 2,000, 33,592 and 199,881 were granted and forfeitures of plan share awards of common stock of 2,000, 0 and 23,012 were recorded during 1998, 1997 and 1996, respectively. The plan share awards of common stock vest in five equal annual installments commencing one year from the date of grant. Compensation expense is based upon the fair market value of the stock at the date of grant. For the years ended December 31, 1998, 1997 and 1996, the Company recorded expense of $481,000, $495,000 and $183,000, respectively, related to the Employee RRP and Director RRP.
During 1996, the Company established two fixed stock option plans which are described below. The Company applies APB No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation costs have been recognized for its fixed stock option plans. Had compensation cost for the Company's two stock-based compensation plans been determined in accordance with FASB No. 123, the Company's net income and earnings per share for 1998, 1997 and 1996 would have been reduced on a pro forma basis as follows:
(Dollars in thousands 1998 1997 1996 except per share amounts) ---- ---- ----
Net income: As reported $3,530 $5,587 $3,172 Pro forma 3,227 5,420 3,103
Earnings per share: Basic As reported $0.90 $1.34 $0.68 Pro forma 0.82 1.30 0.67 Assuming dilution As reported $0.86 $1.30 $0.68 Pro forma 0.80 1.28 0.67
The fair value of options for both plans granted in 1998, 1997 and 1996 was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions, respectively: dividend yield of 2.98%, 2.28% and 3.28%; expected volatility of 22.71%, 21.54% and 25.00%; risk free interest rates of 4.63%, 6.05% and 6.81%; and expected lives of 5 years.
The 1996 Incentive Stock Option Plan authorized the granting of stock options to all key employees of the Company and its affiliates for the purchase of up to 370,300 shares of common stock. The 1996 Stock Option Plan for Outside Directors authorized the granting of non- statutory options for the purchase of up to 158,700 shares of common stock to members of the Board of Directors of the Company and the Bank who are not also serving as employees of the Company or its affiliates. The exercise price of the options, under both plans, is equal to the fair market value of the underlying common stock at the time of grant. Each plan has a 5 year vesting schedule with options becoming exercisable on the anniversary date of the grant, and has a maximum term of 10 years.
A summary of the status and activity of the Company's two fixed stock option plans for the years ended December 31, 1998 and 1997 is as follows:
At December 31, 1998 and 1997, there were 164,562 and 67,424 options exercisable under the two fixed stock option plans, respectively.
A summary of the fixed stock options outstanding under the Company's two fixed stock option plans at December 31, 1998 is as follows:
Weighted Average Remaining Weighted Weighted Range of Number Contractual Average Number Average Exercise Outstanding Life Exercise Exercisable Exercise Prices at 12/31/98 (in years) Price at 12/31/98 Price ------ ----------- ---- ----- ----------- -----
$12.19-$14.35 388,020 7.59 $12.51 143,962 $12.36 $18.93-$22.48 137,530 9.19 20.83 20,600 22.00 ------- ------- 525,550 8.01 $14.69 164,562 $13.57 ======= =======
15. EARNINGS PER SHARE COMPUTATION ------------------------------
The following table sets forth information as to the calculation of basic and diluted earnings per share for the years ended December 31, 1998, 1997 and 1996. For the Years Ended December 31, --------------------------------- 1998 1997 1996 ---- ---- ---- Net income available to common shareholders $3,530,000 $5,587,000 $3,172,000 ========== ========== ========== Weighted average common shares outstanding for computation of basic earnings per share 3,936,527 4,164,861 4,648,310 Effective of dilutive stock equivalent: Unvested restricted stock 46,574 50,009 6,028 Stock options 116,242 95,162 8,113 --------- --------- --------- Weighted average common shares outstanding for computation of earnings per share, assuming dilution 4,099,343 4,310,032 4,662,451 ========= ========= =========
Earnings per common share Basic $0.90 $1.34 $0.68 ===== ==== =====
Assuming dilution $0.86 $1.30 $0.68 ===== ===== =====
16. COMMITMENTS AND CONTINGENCIES -----------------------------
Leases and Service Contract --------------------------- Certain premises are leased under operating leases with terms expiring through the year 2003, exclusive of renewal options. The Bank has the option to renew or extend certain of the leases on premises from two years to 25 years beyond the original term. Some leases require the Bank to pay for insurance, increases in property taxes and other incidental costs. Future minimum rental payments due under noncancellable operating leases are as follows:
Year ended December 31: (Dollars in thousands) 1999 $ 329 2000 233 2001 159 2002 60 2003 57 Thereafter 244 ------ Total $1,082 ======
Net rental expense included in occupancy expense in the consolidated statements of income amounted to $344,000, $342,000 and $418,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company has entered into a contract to receive data processing services through October 4, 2002. Future payments under this contract are expected to total $624,000 annually through its expiration.
Litigation ---------- The Company is involved from time to time as a party to legal proceedings occurring in the ordinary course of its business. The Company believes that none of these proceedings would, if adversely determined, have a material effect on the Company's consolidated financial condition or results of operations.
On December 1, 1995, the Bank initiated suit against the Federal government alleging, among other things, breach of contract and seeking restitution for harm caused to the Bank through changes in Federal banking regulations regarding the treatment of goodwill in calculating the capital of thrift institutions. The case relates to goodwill created by the Bank's 1982 acquisition of Arch Federal Savings and Loan Association. A 1989 change in Federal regulations required a phase-out of goodwill from the calculation of a thrift institution's capital ratios and required that by January 1, 1995, no goodwill be counted as capital. At the time the regulations went into effect, the Bank had $18.7 million in goodwill on its balance sheet.
The Bank's suit was initially subject to a stay pending a ruling by the United States Supreme Court of the government's appeal of a decision of the Federal District of Columbia Circuit Court in another case which had upheld the right of three thrift institutions to maintain such actions. In July 1996, the U.S. Supreme Court ruled in "United States v. Winstar Corporation" upholding the Federal District of Columbia Circuit Court's ruling in favor of the thrift institutions involved in that suit. Subsequently, the stay in all goodwill related cases was lifted. The Federal government then filed a motion seeking to dismiss all goodwill related claims filed six years after the date of FIRREA's adoption, August 9, 1995. The Bank had filed its claim on December 1, 1995. The Bank, along with the approximately 25 other institutions subject to the motion, vigorously opposed the government's dismissal motion. On January 7, 1997, the judge appointed to hear the issue in the United States Court of Federal Claims ruled against the Federal government, holding that the statute of limitations had not begun to run until OTS regulations implementing FIRREA were adopted on December 7, 1989. The case is currently in the discovery phase, and no trial date has been set. Accordingly, for these reasons and because of other facts affecting the predictability of litigation, management cannot predict the eventual outcome, the amount of damages, if any, or the timing of final disposition of the Bank's case.
Financial Instruments with Off-balance-sheet Risk ------------------------------------------------- The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition.
The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
December 31, ------------------ (Dollars in thousands) 1998 1997 ---- ---- Financial instruments whose contract amounts represent credit risk (contract or notional amount):
Commitments to extend fixed rate credit $ 7,493 $ 1,530 Commitments to extend variable rate credit 52,116 25,153 Commercial letters of credit 2,899 1,520 Unused lines of credit 48,248 8,615 -------- ------- $110,756 $36,818 ======== =======
Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. The total commitment amounts do not necessarily represent future cash requirements since some of the commitments are expected to expire without being drawn upon. The Company evaluates each borrower's creditworthiness. The amount of collateral obtained by the Company upon extension of credit is based on such evaluation of the borrower. Collateral held varies but may include mortgages on commercial and residential real estate, deposit accounts with the Company, and automobiles.
Unused lines of credit are legally binding agreements to lend as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates or other termination clauses. The amount of collateral obtained, if deemed necessary by the Company, is based on credit evaluation of the borrower.
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -----------------------------------------------------
Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale, at one time, the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The table below excludes all non-financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows:
December 31, ------------------------------------- (Dollars in thousands) 1998 1997 ----------------- ----------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial assets: Cash and amounts due from depository institutions $ 7,090 $ 7,090 $ 6,767 $ 6,767 Debt and equity securities, available for sale 68,312 68,312 19,093 19,093 Mortgage-backed securities, available for sale 248,035 248,035 290,044 290,044 Loans receivable, net 366,458 370,499 332,509 337,539 FHLBNY stock 10,315 10,315 10,260 10,260
Financial liabilities: Deposits $443,705 443,692 $443,878 $443,671 Borrowed funds 206,681 208,639 160,300 159,913
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value:
Cash and Amounts Due From Depository Institutions and FHLBNY Stock ------------------------------------------------------------------
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Debt, Equity and Mortgage-backed Securities ------------------------------------------- For debt, equity and mortgage-backed securities fair values are based on quoted market prices.
Loans ----- Fair values are estimated for portfolios of loans with similar financial characteristics. The total loan portfolio is first divided into performing and non-performing categories. Performing loans are then segregated into adjustable and fixed rate interest terms. Fixed rate loans are segmented by type, such as construction and land development, multi-family and non-residential mortgage, commercial and industrial loans, and consumer loans. Certain types, such as commercial loans and loans to individuals, are further segmented by maturity and type of collateral.
For performing loans, the carrying amount is reduced by credit risk adjustment based on internal loan classifications and the fair value is calculated by discounting scheduled future cash flows through estimated maturity using a discount rate equivalent to average loan rates within the Company's market for loans which are similar with regard to collateral, maturity and the type of borrower. Based on the current composition of the Company's loan portfolio, as well as both past experience and current economic conditions and trends, future prepayments have been considered in calculating fair value.
For non-performing loans, fair value is calculated by first reducing the carrying value by a credit risk adjustment based on internal loan classifications, and then discounting the estimated future cash flows from the remaining carrying value at the rate at which the Company would currently make similar loans to creditworthy borrowers.
Deposit Liabilities ------------------- The fair value of deposits with no stated maturity, such as non- interest-bearing demand deposits, money market accounts, interest- bearing checking accounts, and savings accounts is equal to the amount payable on demand. Time deposits are segregated by type, size and remaining maturity. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered in the Company's market for deposits of similar size, type and remaining maturity.
Borrowed Funds -------------- The fair value of the Company's borrowed funds is estimated based on the discounted value of future contractual payments. The discount rate is equivalent to the rate currently offered for borrowings of similar type and maturity.
Commitments to Extend Credit, Letters of Credit and Commitments to ------------------------------------------------------------------ Purchase Loans -------------- The commitments to originate and purchase loans and extend credit have terms that are consistent with current market terms. Accordingly, the Company estimates that the fair value of these commitments approximates carrying value.
18. REGULATORY MATTERS ------------------ The Bank is required to maintain reserve balances, which are in the form of vault cash and non-interest-bearing balances with the Federal Reserve Bank, based principally upon transaction-type deposits. The average amount of required reserves for 1998 was $3.7 million compared to $3.0 million for 1997.
The Bank is required to maintain certain levels of capital in accordance with FIRREA and OTS regulations. Savings associations must maintain tangible capital of 1.5% of adjusted assets and investments in certain non-includable subsidiaries. Tangible capital, as defined by FIRREA and OTS regulations, consists generally of shareholders' equity less most intangible assets and investments in certain non- includable subsidiaries. The OTS requires that savings associations maintain core capital of 3% of adjusted tangible assets. Core capital consists of tangible capital plus certain intangible assets. There is also a risk-based capital requirement of 8% of risk-weighted assets for savings associations.
The OTS has incorporated an interest rate risk component that may require that an amount be added to an institution's risk-based capital requirement. The OTS has postponed the date on which the component will first be deducted from an institution's total capital until an appeals process is developed for the measurement of an institution's interest rate risk. In the opinion of management, the Bank would continue to exceed its risk-based minimum capital requirements under the new rule.
The FDICIA was signed into law on December 19, 1991. Regulations implementing the prompt corrective action provisions of FDICIA became effective on December 19, 1992. In addition to the prompt corrective action requirements, FDICIA includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the Federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning internal controls, accounting and operations.
The prompt corrective action regulations define specific capital categories based on an institution's capital ratios. The capital categories, in declining order, are "well capitalized," "adequately capitalized," "undercapitalized", "significantly undercapitalized," and "critically undercapitalized." Institutions categorized as "undercapitalized" or worse are subject to certain restrictions, including the requirement to file a capital plan with the OTS, prohibitions on the payment of dividends and management fees, restrictions on executive compensation, and increased supervisory monitoring, among other things. Other restrictions may be imposed on the institution either by the OTS or by the FDIC, including requirements to raise additional capital, sell assets, or sell the entire institution. Once an institution becomes "critically undercapitalized," it is generally placed in receivership or conservatorship within 90 days.
To be considered "adequately capitalized," an institution must generally have a core ratio of at least 4%, a Tier 1 risk-based capital ratio of at least 4%, and a total risk-based capital ratio of at least 8%. Generally, an institution is considered well capitalized if it has a Tier 1 (core) capital ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors.
Management believes that, as of December 31, 1998, the Bank meets all capital adequacy requirements of the OTS. Further, the most recent OTS notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification.
The following is a summary of the Bank's actual capital amounts and ratios as of December 31, 1998 and 1997, compared to the OTS minimum capital adequacy requirements and the OTS requirements for classification as a well-capitalized institution:
OTS REQUIREMENTS -------------------------------
FOR CLASSIFICATION MINIMUM CAPITAL AS WELL THE BANK ADEQUACY CAPITALIZED ---------------------------- -------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ---- December 31, 1998: Tangible capital $56,927 7.95% $10,743 1.50% Tier 1 (core) capital 56,927 7.95 28,648 4.00 $35,810 5.00% Risk-based capital: Tier 1 56,927 13.08 17,412 4.00 26,118 6.00 Total 59,706 13.72 34,824 8.00 43,530 10.00
December 31, 1997: Tangible capital $60,298 8.96% $10,095 1.50% Tier 1 (core) capital 60,298 8.96 26,919 4.00 $33,649 5.00% Risk-based capital: Tier 1 60,298 21.97 10,981 4.00 16,471 6.00 Total 62,953 22.93 21,961 8.00 27,451 10.00
The Deposit Act (the BIF/SAIF Act) was enacted into law on September 30, 1996. The BIF/SAIF Act mitigated the disparity between insurance premiums for deposits insured by SAIF and deposits insured by the BIF.
Effective January 1, 1997, SAIF members have the same risk-based assessment schedule as BIF members - zero to 27 basis points. FICO debt service assessments of 6.3 and 1.3 basis points will be added to the regular assessment for the SAIF-assessable base, and the BIF- assessment base, respectively, until December 31, 1999, unless the Federal thrift and bank charters have been consolidated. Upon the earlier of January 1, 2001 or the date of such consolidation, the BIF and SAIF will be merged and there will be full pro rata FICO debt service sharing.
Immediately preceding the enactment of the BIF/SAIF Act, the company was incurring deposit insurance expense at a rate of 23 cents per $100 of deposits. Effective January 1, 1997, the Company was not required to pay a deposit insurance assessment and is required a FICO assessment of 6.4 cents per $100 of deposits. In addition, pursuant to the recapitalization provision of the BIF/SAIF Act, during 1996, the Company incurred $2,651,000 additional FDIC insurance expense, a one-time assessment of 65.7 basis points on the amount of deposits held at March 31, 1995.
19. LOANS TO RELATED PARTIES ------------------------
The Company has had, and expects to have in the future, banking transactions in the ordinary course of business with directors, executive officers and their affiliates on the same terms as those prevailing for comparable transactions with other borrowers. These loans amounted to $6,758,000 and $3,839,000 at December 31, 1998 and 1997, respectively, and do not involve more than normal risks of repayment. During the year ended December 31, 1998, new loans of $6,215,000 were made to related parties and principal repayments of $3,296,000 were received.
20. PARENT COMPANY FINANCIAL INFORMATION ------------------------------------
The following are the financial statements for Statewide Financial Corp., Parent Company Only, as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, and should be read in conjunction with the Notes to the Consolidated Financial Statements.
PARENT COMPANY ONLY - STATEMENTS OF FINANCIAL CONDITION
December 31, ------------ (Dollars in thousands) 1998 1997 ---- ---- Assets: Cash $ 553 $ 3 Due from ESOP trust 106 106 Due from subsidiary 2,098 3,612 Investment in subsidiary 57,583 61,352 Other assets 237 - ------- ------- Total Assets $60,577 $65,073 ======= ======= Liabilities: Accrued expenses $ 78 $ 166 ------- ------- Shareholders' equity: Paid in capital 32,904 39,533 Unallocated ESOP shares (2,856) (3,280) Unearned RRP shares (1,282) (1,755) Treasury stock (44) (119) Retained earnings 31,777 30,528 ------- ------- Total shareholders' equity 60,499 64,907 ------- ------- Total liabilities and shareholders' equity $60,577 $65,073 ======= =======
PARENT COMPANY ONLY - STATEMENTS OF INCOME
For the Years Ended December 31, ------------------- (Dollars in thousands) 1998 1997 1996 ---- ---- ---- Other income $ 287 $ 326 $ 396 Expenses 216 - 9 ------ ------ ------ Income before taxes 71 326 387 ------ ------ ------ Income taxes 25 118 140 ------ ------ ------ Net income before equity in earnings of subsidiary 46 208 247 Equity in earnings of subsidiary 3,484 5,379 2,925 ------ ------ ------ Net income $3,530 $5,587 $3,172 ====== ====== ======
PARENT COMPANY ONLY - STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ------------------- (Dollars in thousands) 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income $3,530 $5,587 $3,172 Adjustments to reconcile net income to net cash provided from operating activities: Equity in earnings of subsidiary (3,484) (5,379) (2,925) Allocation of ESOP shares 424 423 529 Changes in assets and liabilities: Decrease in due from subsidiary 1,514 2,655 1,843 (Increase) in due from ESOP trust - - (106) (Increase) decrease in other assets (237) 85 122 (Decrease) increase in accrued taxes (88) 131 (39) ------ ------ ------ Net cash provided from operating activities 1,659 3,502 2,596 ------ ------ ------ Cash flows from investing activities: Return of investment from subsidiary 8,000 6,000 13,350 Investment in subsidiary (162) (160) (8,195) ------ ------ ------ Net cash provided from investing activities 7,838 5,840 5,155 ------ ------ ------ Cash flows from financing activities: Proceeds from issuance of common stock 69 - - Repurchase of common stock (7,096) (7,780) (6,594) Dividends paid (1,920) (1,804) (912) ------ ------ ------ Net cash from financing activities (8,947) (9,584) (7,506) ------ ------ ------ Net change in cash and cash equivalents 550 (242) 245 Cash and cash equivalents at beginning of period 3 245 - ------ ------ ------ Cash and cash equivalents at end of period $ 553 $ 3 $ 245 ====== ====== ======
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STATEWIDE FINANCIAL CORP.
Dated: March 24, 1999 By: /s/BERNARD F. LENIHAN ------------------ Bernard F. Lenihan Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
Signature Title Date --------- ----- ----
Chairman of the Board, President and Chief /s/VICTOR M. RICHEL Executive Officer March 15, 1999 ------------------- Victor M. Richel
Senior Vice President /s/BERNARD F. LENIHAN and Chief Financial --------------------- Officer March 15, 1999 Bernard F. Lenihan
/s/MARIA F. RAMIREZ Director March 15, 1999 ------------------- Maria F. Ramirez
/s/WALTER G. SCOTT Director March 15, 1999 ------------------ Walter G. Scott
/s/THOMAS J. SHARKEY, SR. Director March 15, 1999 ------------------------- Thomas J. Sharkey, Sr.
/s/STEPHEN R. TILTON Director March 15, 1999 -------------------- Stephen R. Tilton
/s/THOMAS V. WHELAN Director March 15, 1999 ------------------- Thomas V. Whelan
INDEX TO EXHIBITS
Exhibit No. Description ----------- -----------
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule