SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
( TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from to
Commission file Number 0-27782
DIME COMMUNITY BANCSHARES, INC.
(Exact Name of registrant as specified in its charter)
Delaware 11-3297463
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
209 Havemeyer Street, Brooklyn, NY 11211
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 782-6200
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ X]
As of September 22, 2000, there were 11,544,774 shares of the Company's
common stock, $0.01 par value, outstanding. The aggregate market value of the
voting stock held by non-affiliates of the Company as of September 22, 2000 was
approximately $211,607,500. This figure is based upon the closing price on the
NASDAQ National Market for a share of the Company's common stock on September
22, 2000, which was $22.56 as reported in the Wall Street Journal on September
23, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
(1) The Annual Report to Shareholders for the fiscal year ended June 30, 2000
(Item 1 of Part I, and Items 5 through 8 of Part II) and (2) the definitive
Proxy Statement dated October 6, 2000 to be distributed on behalf of the Board
of Directors of Registrant in connection with the Annual Meeting of
Shareholders to be held on November 9, 2000 and any adjournment thereof and
which is expected to be filed with the Securities and Exchange Commission on or
about October 6, 2000 (Part III)
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS
GENERAL..........................................................3
ACQUISITION OF FINANCIAL BANCORP, INC............................3
ACQUISITION OF CONESTOGA BANCORP, INC............................4
MARKET AREA AND COMPETITION......................................4
LENDING ACTIVITIES...............................................5
ASSET QUALITY...................................................11
ALLOWANCE FOR LOAN LOSSES.......................................14
INVESTMENT ACTIVITIES...........................................17
SOURCES OF FUNDS................................................21
SUBSIDIARY ACTIVITIES...........................................24
PERSONNEL.......................................................24
FEDERAL , STATE AND LOCAL TAXATION
FEDERAL TAXATION.........................................25
STATE AND LOCAL TAXATION..................................25
REGULATION
GENERAL...................................................26
IMPACT OF ENACTMENT OF THE GRAMM-LEACH-BLILEY ACT ........26
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS................27
REGULATION OF HOLDING COMPANY.............................34
FEDERAL SECURITIES LAWS...................................35
ITEM 2.
PROPERTIES............................................................35
ITEM 3. LEGAL PROCEEDINGS.............................................36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........36
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS...................................................36
ITEM 6. SELECTED FINANCIAL DATA.......................................36
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..............37
ITEM 11. EXECUTIVE COMPENSATION.......................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..........................................37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K..............................................38
SIGNATURES............................................40
Statements contained in this Annual Report on Form 10-K relating to plans,
strategies, economic performance and trends, and other statements that are not
descriptions of historical facts may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward looking information is inherently
subject to various factors which could cause actual results to differ
materially from these estimates. These factors include: changes in general,
economic and market conditions, or the development of an adverse interest rate
environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments. The Company has no
obligation to update these forward looking statements.
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<PAGE>
PART I
ITEM 1. BUSINESS
General
Dime Community Bancshares, Inc. (the "Company") is a Delaware corporation
organized in December, 1995 at the direction of the Board of Directors of The
Dime Savings Bank of Williamsburgh (the "Bank") for the purpose of acquiring
all of the capital stock of the Bank issued in the conversion of the Bank, on
June 26, 1996, from a federal mutual savings bank to a federal stock savings
bank (the "Conversion"). In connection with the Conversion, the Company issued
14,547,500 shares (par value $0.01) of common stock at a price of $10.00 per
share to certain of the Bank's eligible depositors who subscribed for shares
and to an Employee Stock Ownership Plan ("ESOP") established by the Company.
The Company is a unitary savings and loan holding company, which, under
existing law, is generally not restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender. The primary business of the Company is the operation
of its wholly-owned subsidiary, the Bank. Under regulations of the Office of
Thrift Supervision ("OTS") the Bank is a qualified thrift lender if its ratio
of qualified thrift investments to portfolio assets ("QTL Ratio") is 65% or
more, on a monthly average basis in nine of every twelve months. At June 30,
2000, the Bank's QTL Ratio was 89.0%, and the Bank has maintained more that 65%
of its portfolio assets in qualified thrift investments in at least nine of the
preceding twelve months.
The Company neither owns nor leases any property but instead uses the
premises and equipment of the Bank. At the present time, the Company does not
employ any persons other than certain officers of the Bank who do not receive
any extra compensation as officers of the Company. The Company utilizes the
support staff of the Bank from time to time, as needed. Additional employees
may be hired as deemed appropriate by the management of the Company.
The Bank's principal business has been, and continues to be, gathering
deposits from customers within its market area, and investing those deposits,
primarily in multi-family and one-to-four family residential mortgage loans,
mortgage-backed securities, and obligations of the U.S. Government and
Government Sponsored Entities ("GSEs"). The Bank's revenues are derived
principally from interest on its loan and securities portfolios. The Bank's
primary sources of funds are: deposits; loan amortization, prepayments and
maturities; amortization, prepayments and maturities of mortgage-backed and
investment securities; and borrowings, and, to a lesser extent, the sale of
fixed-rate mortgage loans to the secondary market. The Bank is also a member
of the Federal Home Loan Bank of New York ("FHLBNY").
ACQUISITION OF FINANCIAL BANCORP, INC.
On January 21, 1999, the Company completed the acquisition of Financial
Bancorp, Inc., ("FIBC") the holding company for Financial Federal Savings Bank,
F.S.B (the "FIBC Acquisition"). Based upon the closing price of the Company's
common stock on January 21, 1999, of $21.25 per share, the total consideration
paid to FIBC stockholders, in the form of cash or the Company's common stock,
was $66.8 million, and was comprised of
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<PAGE>
$34.5 million in cash and 1,504,704 shares of the Company's common stock.
The Company's operating results for the fiscal year ended June 30, 1999
reflect the addition of earnings from the acquisition of FIBC for the period
January 22, 1999 through June 30, 1999. The FIBC Acquisition is being
accounted for as a purchase transaction, and goodwill of $44.2 million
generated from the transaction is being amortized on a straight-line basis
over 20 years.
ACQUISITION OF CONESTOGA BANCORP, INC.
On June 26, 1996 the Bank completed the acquisition of Conestoga Bancorp,
Inc. ("Conestoga"), resulting in the merger of Conestoga's wholly-owned
subsidiary, Pioneer Savings Bank, F.S.B. ("Pioneer") with and into the Bank,
with the Bank as the resulting financial institution (the "Conestoga
Acquisition"). The Conestoga Acquisition was accounted for in the financial
statements using the purchase method of accounting. Under purchase accounting,
the acquired assets and liabilities of Conestoga are recognized at their fair
value as of the date of the Conestoga Acquisition. Shareholders of Conestoga
were paid approximately $101.3 million in cash, resulting in goodwill of $28.4
million, which is being amortized on a straight line basis over a 12 year
period. Since the Conestoga Acquisition occurred on June 26, 1996, its impact
upon the Company's consolidated results of operations for the fiscal year ended
June 30, 1996 was minimal.
There are currently no other arrangements, understandings or agreements
regarding any such additional acquisition or expansion.
MARKET AREA AND COMPETITION
The Bank has been, and intends to continue to be, a community-oriented
financial institution providing financial services and loans for housing within
its market areas. The Bank maintains its headquarters in the Williamsburgh
section of the borough of Brooklyn. Currently, seventeen additional offices are
located in the boroughs of Brooklyn, Queens, and the Bronx, and in Nassau
County. The Bank gathers deposits primarily from the communities and
neighborhoods in close proximity to its branches. The Bank's primary lending
area is larger, and includes much of New York City, Nassau County and eastern
New Jersey. Most of the Bank's mortgage loans are secured by properties
located in its primary lending area.
Since 1993, the Bank's local economy has experienced strong performance.
Unemployment has remained low, home sales have increased, residential apartment
and commercial property vacancy rates have declined considerably, and local
real estate values have increased. A strong local economy existed throughout
the Company's entire fiscal year ended June 30, 2000. Despite these
encouraging trends, the outlook for the local economy remains uncertain.
During the fiscal year ended June 30, 1999, troubled economic conditions in
several nations throughout Europe, Asia and South and Central America created
interest rate volatility for U.S. government and agency obligations. As a
result of this interest rate volatility, the U.S. stock market, especially
amongst financial institutions, experienced even greater volatility. Due to
increased interest rate uncertainty, the overall performance of financial
institutions stocks trailed the overall performance of the aggregate U.S. stock
markets during the period July, 1998 through June, 1999. During the fiscal
year ended June 30, 2000, the Federal Reserve Board instituted a series of
interest rate increases in an effort to combat potential inflationary concerns.
As a result of these interest rate increases, the overall interest rate
environment remained uncertain, and the financial institution stock performance
continued to trail the aggregate performance of the U.S. stock market.
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's market area has a high density of financial
institutions, many of which have greater financial resources than the Bank, and
all of which are competitors of the Bank to varying degrees. The Bank's
competition for loans comes principally from commercial banks, savings banks,
savings and loan associations, mortgage banking companies and insurance
companies. The Bank has recently faced increased competition for the
origination of multi-family loans, which comprised 78.3% of the Bank's loan
portfolio at June 30, 2000. Management anticipates that competition for both
multi-family and one-to four-family loans will continue to increase in the
future. Thus, no assurances can be made that the Bank will be able to maintain
its current level of such loans. The Bank's most direct competition for
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<PAGE>
deposits has historically come from savings and loan associations, savings
banks, commercial banks and direct purchases of government securities. The Bank
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. Competition may
also increase as a result of the lifting of restrictions on the overall
operations of financial institutions, which may permit additional firms to
compete for deposits.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily
of multi-family loans secured by apartment buildings (including loans
underlying apartment buildings organized under cooperative form of ownership,
"underlying cooperatives"), conventional first mortgage loans secured primarily
by one- to four-family residences, including condominiums and cooperative
apartment share loans, and non-residential (commercial) property loans. At June
30, 2000, the Bank's loan portfolio totaled $1.72 billion. Within the loan
portfolio, $1.35 billion or 78.3% were multi-family loans, $239.7 million or
13.9% were loans to finance the purchase of one-to four-family properties and
cooperative apartment share loans, $118.6 million or 6.9% were loans to finance
the purchase of commercial properties, primarily small shopping centers,
warehouses and nursing homes, and $7.5 million or 0.4% were loans to finance
multi-family and residential properties with either full or partial credit
guarantees provided by either the Federal Housing Administration (''FHA'') or
the Veterans' Administration (''VA''). Of the total mortgage loan portfolio
outstanding at that date, 30.0% were fixed-rate loans and 70.0% were
adjustable-rate loans (''ARMs''), of which 92.1% are multi-family and non-
residential property loans which carry a maturity of 10 years, and an
amortization period of no longer than 25 years. At June 30, 2000, the Bank's
loan portfolio also included $1.9 million in passbook loans, $3.4 million in
home improvement loans, and $2.3 million in other consumer loans.
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans, the supply of money
available for lending purposes, and the rates offered by the Bank's
competitors. These factors are, in turn, affected by general and economic
conditions, and the fiscal and monetary policy of the federal government.
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<PAGE>
The following table sets forth the composition of the Bank's mortgage and other
loan portfolios in dollar amounts and percentages at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percent Percent Percent Percent Percent
2000 of 1999<F1> of 1998 of 1997 of 1996 of
Total Total Total <F2> Total Total
----------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Mortgage loans: <F3>
One-to-four family $212,238 12.32% $246,075 17.75% $125,704 13.18% $140,798 18.68% $170,182 29.05%
Multi-family and underlying
cooperative 1,349,854 78.33 1,000,859 72.20 717,638 75.26 498,536 66.15 296,630 50.63
Non-residential 118,576 6.88 88,837 6.41 50,062 5.25 43,180 5.73 37,708 6.44
FHA/VA insured 7,536 0.44 9,699 0.70 11,934 1.25 14,153 1.88 16,686 2.85
Cooperative apartment 27,465 1.59 32,893 2.37 42,553 4.46 50,931 6.76 59,083 10.08
----------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 1,715,669 99.56 1,378,363 99.43 947,891 99.40 747,598 99.20 580,289 99.05
----------------------------------------------------------------------------------------------------------------------------------
Other loans:
Student loans 990 0.05 794 0.06 677 0.07 1,005 0.13 1,307 0.22
Passbook savings (secured by
savings and time
deposits) 1,900 0.11 2,271 0.16 2,367 0.25 2,801 0.37 3,044 0.52
Home improvement loans 3,410 0.20 3,666 0.27 1,753 0.18 1,243 0.16 891 0.15
Consumer installment and 1,348 0.08 1,100 0.08 919 0.10 1,027 0.14 323 0.06
Other
----------------------------------------------------------------------------------------------------------------------------------
Total other loans 7,648 0.44 7,831 0.57 5,716 0.60 6,076 0.80 5,565 0.95
----------------------------------------------------------------------------------------------------------------------------------
Gross loans 1,723,317 100.00% 1,386,194 100.00% 953,607 100.00% 753,674 100.00% 585,854 100.00%
Less:
Unearned discounts and net
deferred loan fees 2,017 2,853 3,486 3,090 2,168
Allowance for loan losses 14,785 15,081 12,075 10,726 7,812
----------------------------------------------------------------------------------------------------------------------------------
Loans, net $1,706,515 $1,368,260 $938,046 $739,858 $575,874
==================================================================================================================================
Loans serviced for others:
One-to-four family and
cooperative apartment $47,909 $53,564 $55,802 $60,242 $63,360
Multi-family and underlying
cooperative 281 293 2,817 9,406 27,690
----------------------------------------------------------------------------------------------------------------------------------
Total loans serviced for
others $48,190 $53,857 $58,619 $69,648 $91,050
==================================================================================================================================
<FN>
<F1> Includes acquisition of $192.3 million loans from FIBC on January 21, 1999,
which were comprised primarily of one-to-four family loans.
<F2> Includes acquisition of $113.1 million loans from Conestoga on June 26,
1996, substantially all of which were one-to-four family loans.
<F3> Includes loans held for sale.
</TABLE>
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<PAGE>
LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. The Bank originates both
ARMs and fixed-rate loans, which activity is dependent upon customer demand and
market rates of interest, and generally does not purchase whole mortgage loans
or loan participations. Generally, the Bank sells all originated one-to-four
family fixed-rate mortgage loans in the secondary market to the Federal
National Mortgage Association (''Fannie Mae''), the Federal Home Loan Mortgage
Corporation (''Freddie Mac''), the State of New York Mortgage Agency
(''SONYMA'') and other private secondary market purchasers. ARMs, including
adjustable-rate multi-family loans, and fixed-rate multi-family and non-
residential mortgage loans with maturities up to 15 years, are retained for the
Bank's portfolio. For the fiscal year ended June 30, 2000 origination of ARMs
totaled $411.0 million or 84.5% of all loan originations. Originations of
fixed-rate mortgage loans totaled $75.4 million, virtually all of which were
multi-family and non-residential real estate loans. Sales of fixed-rate one-to
four-family mortgage and student loans totaled $1.5 million. The Bank generally
sells all fixed-rate loans without recourse and retains the servicing rights.
As of June 30, 2000, the Bank was servicing $48.2 million of loans for non-
related institutions. The Bank generally receives a loan servicing fee equal to
0.25% of the outstanding principal balance for servicing loans sold.
The following table sets forth the Bank's loan originations, loan sales and
principal repayments for the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended June 30,
---------------------------------
<S> <C> <C> <C>
(Dollars in Thousands) 2000 1999 1998
-------- -------- --------
Loans (gross):
At beginning of period $1,386,194 $953,607 $753,674
Mortgage loans originated:
One-to four-family 3,165 16,657 11,438
Multi-family and underlying cooperative 453,682 424,276 292,555
Non-residential 28,824 28,253 15,929
Cooperative apartment 744 2,187 1,281
Construction 24 130 -
-------- -------- --------
Total mortgage loans originated 486,439 471,503 321,203
Other loans originated 8,937 6,567 5,101
-------- -------- --------
Total loans originated 495,376 478,070 326,304
-------- -------- --------
Loans acquired <F1> - 192,318 -
Less:
Principal repayments 156,306 230,482 120,240
Loans sold <F2> 1,518 6,977 5,352
Loans transferred from real estate pending foreclosure - - -
Mortgage loans transferred to Other Real Estate Owned 429 342 779
-------- -------- --------
Unpaid principal balance at end of period $1,723,317 $1,386,194 $953,607
======== ======== ========
<FN>
<F1> Comprised primarily of one-to-four family mortgage loans received in the
FIBC Acquisition.
<F2> Includes fixed-rate mortgage loans and student loans.
</TABLE>
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<PAGE>
LOAN MATURITY AND REPRICING. The following table shows the earlier of
maturity or repricing period of the Bank's loan portfolio at June 30, 2000.
Loans that have adjustable rates are shown as being due in the period during
which the interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on the Bank's loan portfolio totaled $156.3 million for
the year ended June 30, 2000.
<TABLE>
<CAPTION>
At June 30, 2000
--------------------------------------------------------------------------------------------------------------------------------
Mortgage Loans
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Multi-
family and
Underlying
One-to-Four- Cooperative Non- FHA/VA Cooperative Other Total
Family Loans Residential Insured Apartment Loans Loans
--------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Amount due:
One year or less $33,202 $29,649 $4,479 $14 $17,431 $7,008 $91,783
--------------------------------------------------------------------------------------------------------------------------------
After one year:
One to three years 18,500 173,399 20,022 16 7,021 640 219,598
More than three years to five
years 9,273 265,753 34,456 75 533 - 310,090
More than five years to ten
years 38,546 810,126 51,473 2,126 104 - 902,375
More than ten years to twenty
years 51,992 70,927 8,146 5,305 2,376 - 138,746
Over twenty years 60,725 - - - - - 60,725
--------------------------------------------------------------------------------------------------------------------------------
Total due or repricing after one
year 179,036 1,320,205 114,097 7,522 10,034 640 1,631,534
--------------------------------------------------------------------------------------------------------------------------------
Total amounts due or repricing,
gross $212,238 $1,349,854 $118,576 $7,536 $27,465 $7,648 $1,723,317
================================================================================================================================
</TABLE>
The following table sets forth the dollar amounts in each loan category at
June 30, 2000 that are due after June 30, 2001, and whether such loans have
fixed or adjustable-interest rates.
<TABLE>
<CAPTION>
Due after June 30, 2001
---------------------------------------------------
<S> <C> <C> <C>
Fixed Adjustable Total
--------- --------- ---------
(Dollars In Thousands)
Mortgage loans:
One-to-four family $148,763 $30,273 $179,036
Multi-family and underlying
cooperative 325,050 995,155 1,320,205
Non-residential 30,879 83,218 114,097
FHA/VA insured 7,522 - 7,522
Cooperative apartment 2,502 7,532 10,034
Other loans - 640 640
--------- --------- ---------
Total loans $514,716 $1,116,818 $1,631,534
========= ========= =========
</TABLE>
MULTI-FAMILY AND NON-RESIDENTIAL LENDING. The Bank originates adjustable-
rate and fixed-rate multi-family (five or more units) and non-residential loans
which are secured primarily by apartment buildings, underlying cooperatives,
mixed-use (residential combined with commercial) and other non-residential
properties, generally located in the Bank's primary lending area. The main
competitors for loans in this market tend to be other small- to medium-sized
local savings institutions. Multi-family and non-residential loans in the
Bank's portfolio generally range in amount from $100,000 to $8.7 million, and
have an average loan size of approximately $827,000. Multi-family loans in
this range generally have between 5 and 100 apartments per building. The Bank
had a total of $1.22 billion of multi-family loans in its portfolio on
buildings with under 100 units as of June 30, 2000. Mostly as a result of rent
control and rent stabilization, the associated rent rolls for buildings of this
type indicate a rent range that would be considered affordable for low- to
moderate-income households. In addition, at June 30, 2000, the Bank had a total
of $180.7 million in loans secured by mortgages on underlying cooperative
apartment buildings.
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<PAGE>
The Bank originated multi-family loans totaling $453.7 million during the
fiscal year ended June 30, 2000, versus $424.3 million during the year ended
June 30, 1999. At June 30, 2000, the Bank had $57.5 million of commitments
outstanding to originate mortgage loans, which included $2.4 million of
commitments to refinance existing mortgage loans. This compares to $125.3
million of commitments outstanding at June 30, 1999, as recent increases in
interest rates have significantly reduced the multi-family loan origination and
refinance activities. All the mortgage commitments outstanding at June 30,
2000 were issued to borrowers within the Bank's service area, $56.2 million of
which are secured by multi-family and underlying cooperative apartment
buildings.
As part of the underwriting process for multi-family and non-residential
loans, the Bank considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar properties,
the market value of the property and the Bank's lending experience with the
borrower. The typical adjustable-rate multi-family loan carries a maturity of
10 years, and an amortization period of no longer than 25 years. These loans
have a fixed interest rate that adjusts after the fifth year indexed to the 5-
year FHLBNY advance rate, but may not adjust below the initial interest rate of
the loan. Prepayment penalties are assessed throughout the life of the loans.
The Bank also offers fixed-rate, self-amortizing, multi-family and non-
residential loans with maturities of up to 15 years.
At June 30, 2000, the Bank had multi-family and underlying cooperative loans
totaling $1.35 billion in its portfolio, comprising 78.3% of the gross loan
portfolio. The underwriting standards for new loans generally require (1) a
maximum loan-to-value ratio of 75% based on an appraisal performed by an
independent, state-certified appraiser and (2) sufficient cash flow from the
underlying property to adequately service the debt, represented by a debt
service ratio not below 1.15. Of the Bank's multi-family loans, $1.17 billion,
or 86.6%, were secured by apartment buildings and $180.7 million, or 13.4%,
were secured by underlying cooperatives at June 30, 2000. Multi-family loans
are generally viewed as exposing the Bank to a greater risk of loss than one-
to four-family residential loans and typically involve higher loan principal
amounts. At June 30, 2000, the Bank had 127 multi-family and non-residential
loans with principal balances greater than $2.0 million, totaling $419.1
million. These loans, while underwritten to the same standards as all other
multi-family and non-residential loans, tend to expose the Bank to a higher
degree of risk due to the potential impact of losses from any one loan relative
to the size of the Bank's capital position. As of June 30, 2000, none of these
loans were in arrears nor in the process of foreclosure. See ''- Asset
Quality.''
Repayment of multi-family loans is dependent, in large part, on sufficient
cash flow from the property to cover operating expenses and debt service.
Economic events and government regulations, such as rent control and rent
stabilization laws, which are outside the control of the borrower or the Bank,
could impair the value of the security for the loan or the future cash flow of
such properties. As a result, rental income might not rise sufficiently over
time to meet increases in the loan rate at repricing, or increases in overhead
expenses (I.E., utilities, taxes). During the last five fiscal years, the
Bank's charge-offs related to its multi-family loan portfolio totaled $1.7
million. As of June 30, 2000, the Bank had $2.6 million of non-performing
multi-family loans. See "- Asset Quality and - Allowance for Loan Losses" for
discussions of the Bank's underwriting procedures utilized in originating
multi-family loans.
The Bank's loan portfolio also includes $118.6 million in non-residential
real estate mortgage loans which represented 6.88% of gross loans at June 30,
2000. This portfolio is comprised of commercial and industrial properties, and
shopping centers. The Bank utilizes, where appropriate, rent or lease income,
business receipts, the borrowers' credit history and business experience, and
comparable appraisal values when underwriting non-residential applications. As
of June 30, 2000, there were no non-performing non-residential loans in the
Bank's portfolio. Like multi-family loans, the repayment of non-residential
real estate mortgage loans is dependent, in large part, upon sufficient cash
flows from the property to cover operating expenses and debt service. For this
reason, non-residential real estate mortgage loans are considered to include
greater risk than one to four-family residential loans.
The Bank's three largest loans at June 30, 2000, consisted of a $8.7 million
loan secured by a first mortgage on a 276 unit apartment building located in
midtown Manhattan originated in May, 1997; an $8.3 million first mortgage loan,
originated in June, 1997, secured by a 631 unit apartment building located in
the Forest Hills section of Queens; and a $7.8 million first mortgage loan,
originated in September, 1998, secured by a 129 unit apartment building located
in Manhattan. As of June 30, 2000, all of these loans were performing in
accordance with their terms. See "-Regulation of Federal Savings Associations
- Loans to One Borrower." While the loans are current, their large loan
balances subject the Bank to greater potential losses in the event of non-
compliance by the borrower.
-9-
<PAGE>
The Bank also currently services a total of $281,000 in multi-family loans
for various private investors. These loans were sold in the late 1980s, without
recourse.
ONE-TO FOUR-FAMILY MORTGAGE AND COOPERATIVE APARTMENT LENDING. The Bank
offers residential first mortgage loans secured primarily by owner-occupied,
one-to-four family residences, including condominiums, and cooperative
apartment share loans. Lending is primarily confined to an area covered by a
50-mile radius from the Bank's Main Office in Brooklyn. The Bank offers
conforming and non-conforming fixed-rate mortgage loans and adjustable-rate
mortgage loans with maturities of up to 30 years and a maximum loan amount of
$500,000. The Bank's residential mortgage loan originations are generally
obtained from existing or past loan customers, depositors of the Bank, members
of the local community and referrals from attorneys, realtors and independent
mortgage brokers who refer members of the communities located in the Bank's
primary lending area. The Bank is a participating seller/servicer with several
government-sponsored mortgage agencies: Fannie Mae, Freddie Mac, and SONYMA,
and generally underwrites its one-to-four family residential mortgage loans to
conform with standards required by these agencies. Although the collateral for
cooperative apartment loans is comprised of shares in a cooperative corporation
(a corporation whose primary asset is the underlying real estate), cooperative
apartment loans generally are treated as one-to-four family loans. The Bank's
portfolio of such loans is $27.5 million, or 1.6% of total loans as of June 30,
2000. The market for cooperative apartment loan financing has improved over
the past five years with the support of certain government agencies,
particularly SONYMA and Fannie Mae, who are insuring and purchasing,
respectively, cooperative apartment share loans in qualifying buildings. The
Bank adheres to underwriting guidelines established by SONYMA and Fannie Mae
for all fixed-rate cooperative apartment loans which are originated for sale.
Adjustable-rate cooperative apartment loans continue to be originated both for
portfolio and for sale.
At June 30, 2000, $239.7 million, or 13.9%, of the Bank's loans consisted of
one-to-four family and cooperative apartment mortgage loans. ARMs represented
36.5% of total one-to-four-family and cooperative apartment loans, while fixed-
rate mortgages comprised 63.5% of the total. The majority of these loans were
obtained through the acquisitions of Conestoga and FIBC. The Bank, which is
not an aggressive one-to-four-family mortgage lender, currently offers one-to
four-family and cooperative apartment mortgage ARMs secured by residential
properties with rates that adjust every one or three years. One-to-four family
ARMs are offered with terms of up to 30 years. The interest rate at repricing
on one-to-four family ARMs currently offered fluctuates based upon a spread
above the average yield on United States Treasury securities, adjusted to a
constant maturity which corresponds to the adjustment period of the loan (the
''U.S. Treasury constant maturity index'') as published weekly by the Federal
Reserve Board. Additionally, one and three-year one-to-four family ARMs are
generally subject to limitations on interest rate increases of 2% and 3%,
respectively, per adjustment period, and an aggregate adjustment of 6% over the
life of the loan.
The volume and types of ARMs originated by the Bank have been affected by
such market factors as the level of interest rates, competition, consumer
preferences and availability of funds. During the fiscal years ended June 30,
1998 and 1999, demand for one-to-four family ARMs was relatively weak due to
the prevailing low interest rate environment and consumer preference for fixed-
rate loans. For the year ended June 30, 2000, since the Bank continued to not
aggressively pursue ARM one- to four-family loans, it originated only $383,000
of one-to four-family and cooperative apartment mortgage ARMs. Accordingly,
although the Bank will continue to offer one-to four-family ARMs, there can be
no assurance that in the future the Bank will be able to originate or will
desire to originate a sufficient volume of one-to four- family ARMs to increase
or maintain the proportion that these loans bear to total loans.
The Bank currently offers fixed-rate mortgage loans with terms of 10 to 30
years secured by one-to four-family residences and cooperative apartments.
Interest rates charged on fixed-rate loans are based upon market conditions.
The Bank generally originates fixed-rate loans for sale in amounts up to the
maximum allowed by Fannie Mae, Freddie Mac and SONYMA, with private mortgage
insurance required for loans with loan-to-value ratios in excess of 80%. For
the year ended June 30, 2000, the Bank originated $3.8 million of fixed-rate,
one-to four-family residential mortgage and cooperative apartment loans.
The Bank generally sells its newly originated conforming fixed-rate mortgage
loans either to its wholly-owned subsidiary, DSBW Residential Preferred
Funding, or in the secondary market to federal and state agencies such as
Fannie Mae, Freddie Mac and SONYMA, and its non-conforming fixed-rate mortgage
loans to various private sector secondary market purchasers. With few
exceptions, such as SONYMA, the Bank retains the servicing rights on all such
loans sold. For the year ended June 30, 2000, the Bank sold mortgage loans
totaling $1.2 million to non-affiliates. As of June 30, 2000, the Bank's
portfolio of one-to-four family fixed-rate mortgage loans serviced for others
totaled $47.9 million.
-10-
<PAGE>
Originated mortgage loans in the Bank's one-to-four family portfolio
generally include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event
that the borrower transfers ownership of the property without the Bank's
consent. It is the Bank's policy to enforce due-on-sale provisions within the
applicable regulations and guidelines imposed by New York law and secondary
market purchasers.
Home equity loans currently are originated to a maximum of $250,000. When
combined with the balance of the first mortgage lien, the home equity loan may
not exceed 75% of the appraised value of the property at the time of the loan
commitment. The Bank's home equity loans outstanding at June 30, 2000, totaled
$8.7 million against total available credit lines of $16.4 million. During the
fiscal years ended June 30, 1998 and 1999, the Bank offered home-equity line
promotions to selected mortgage customers, which resulted in the increase in
credit lines from $1.2 million at June 30, 1997 to $8.7 million at June 30,
2000.
OTHER LENDING. The Bank also originates other loans, primarily student and
passbook loans. Total other loans outstanding at June 30, 2000, amounted to
$7.6 million, or 0.44%, of the Bank's loan portfolio. Passbook loans, totaling
$1.9 million, and home improvement loans, totaling $3.4 million, comprise the
majority of the Bank's other loan portfolio.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Board of Directors
establishes lending authorities for individual officers as to its various types
of loan products. For multi-family and one- to four-family mortgage loans,
including cooperative apartment and condominium loans, the Loan Operating
Committee, which is comprised of the Chief Executive Officer, President, and
Executive Vice President, and the heads of both the residential loan and multi-
family loan origination departments, has the authority to approve loans in
amounts up to $3.0 million. Any loan in excess of $3.0 million, however, must
be approved by the Board of Directors. All loans in excess of $500,000 are
presented to the Board of Directors for their review. In addition, regulatory
restrictions imposed on the Bank's lending activities limit the amount of
credit that can be extended to any one borrower to 15% of total capital. See
''- Regulation - Regulation of Federal Savings Associations - Loans to One
Borrower.''
For all one-to four-family loans originated by the Bank, upon receipt of a
completed loan application from a prospective borrower, a credit report is
ordered, income, assets and certain other information are verified by an
independent credit agency, and if necessary, additional financial information
is required to be submitted by the borrower. An appraisal of the real estate
intended to secure the proposed loan is required, which currently is performed
by an independent appraiser designated and approved by the Board of Directors.
In certain cases, the Bank may also require certain environmental hazard
reports on multi-family properties. It is the Bank's policy to require
appropriate insurance protection, including title and hazard insurance, on all
real estate mortgage loans prior to closing. Borrowers generally are required
to advance funds for certain items such as real estate taxes, flood insurance
and private mortgage insurance, when applicable.
ASSET QUALITY
DELINQUENT LOANS AND FORECLOSED ASSETS. Management reviews delinquent loans
on a continuous basis and reports monthly to the Board of Directors regarding
the status of all delinquent and non-accrual loans in the Bank's portfolio.
The Bank's real estate loan servicing policies and procedures require that the
Bank initiate contact with a delinquent borrower as soon after the tenth day of
delinquency as possible. Generally, the policy calls for a late notice to be
sent 10 days after the due date of the late payment. If payment has not been
received within 30 days of the due date, a letter is sent to the borrower.
Thereafter, periodic letters and phone calls are placed to the borrower until
payment is received. In addition, Bank policy calls for the cessation of
interest accruals on loans delinquent 90 days or more. When contact is made
with the borrower at any time prior to foreclosure, the Bank will attempt to
obtain the full payment due, or work out a repayment schedule with the borrower
to avoid foreclosure. Generally, foreclosure proceedings are initiated by the
Bank when a loan is 90 days past due. As soon as practicable after initiating
foreclosure proceedings on a loan, the Bank prepares an estimate of the fair
value of the underlying collateral. It is the Bank's general policy to dispose
of properties acquired through foreclosure or deeds in lieu thereof as quickly
and as prudently as possible in consideration of market conditions, the
physical condition of the property, and any other mitigating conditions. If a
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the real property securing the
loan is generally sold at foreclosure or by the Bank as soon thereafter as
practicable.
-11-
<PAGE>
The Bank retains outside counsel experienced in foreclosure and bankruptcy
procedures to institute foreclosure and other actions on the Bank's delinquent
loans.
Non-performing loans totaled $4.4 million at June 30, 2000, as compared to
$3.0 million at June 30, 1999. Of the $4.4 million non-performing loans at
June 30, 2000, $1.6 million relates to one multi-family loan which entered
foreclosure in June, 2000. The Company had 25 loans totaling $754,000
delinquent 60-89 days at June 30, 2000, as compared to 23 such delinquent loans
totaling $819,000 at June 30, 1999. The Company has experienced a shift in the
composition of its 60-89 day delinquencies from its conventional mortgage
portfolio, which loans typically carry larger average balances, to smaller
balance FHA/VA insured and consumer loans.
Under Statement of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan," ("SFAS 114"), the Company is required to
account for certain loan modifications or restructurings as ''troubled-debt
restructurings.'' In general, the modification or restructuring of a debt
constitutes a troubled-debt restructuring if the Company, for economic or legal
reasons related to the borrower's financial difficulties, grants a concession
to the borrower that the Company would not otherwise consider. Debt
restructurings or loan modifications for a borrower do not necessarily always
constitute troubled-debt restructurings, however, and troubled-debt
restructurings do not necessarily result in non-accrual loans. The Company had
one loan classified as troubled-debt restructuring at June 30, 2000, totaling
$700,000, which was on accrual status as it has been performing in accordance
with the restructuring terms for over one year. Troubled-debt restructurings
totaled $1.3 million at June 30, 1999, consisting of 2 loans, as one troubled-
debt restructuring totaling $590,000 was paid-in-full during the fiscal year
ended June 30, 2000. The current regulations of the Office of Thrift
Supervision require that troubled-debt restructurings remain classified as such
until either the loan is repaid or returns to its original terms. The Company
did not have any new troubled-debt restructurings during the fiscal year ended
June 30, 2000.
Under SFAS 114, the Bank established guidelines for determining and
measuring impairment in loans. In the event the carrying balance of the loan,
including all accrued interest, exceeds the estimate of fair value, the loan is
considered to be impaired and a reserve is established. The recorded investment
in loans deemed impaired was approximately $2.6 million as of June 30, 2000,
compared to $1.6 million at June 30, 1999, and the average balance of impaired
loans was $1.5 million for the year ended June 30, 2000 compared to $2.3
million for the year ended June 30, 1999. At June 30, 2000, reserves have been
provided on all impaired loans within specific reserves totaling $130,000
allocated within the allowance for loan losses. Generally, the Bank considers
non-performing loans to be impaired loans. However, at June 30, 2000, $1.8
million of one-to four-family, cooperative apartment and consumer loans on
nonaccrual status are not deemed impaired under SFAS 114. All of these loans
have outstanding balances less than $227,000, and are considered a homogeneous
loan pool not covered by SFAS 114.
-12-
<PAGE>
NON-PERFORMING ASSETS AND TROUBLED-DEBT RESTRUCTURINGS. The following
table sets forth information regarding the Bank's non-performing assets and
troubled-debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(Dollars In Thousands)
Non-performing loans:
One-to-four family $1,769 $1,577 $471 $1,123 $1,149
Multi-family and underlying
cooperative 2,591 1,248 236 1,613 4,734
Cooperative apartment 54 133 133 415 668
Other loans 7 43 44 39 -
--------- --------- --------- --------- ---------
Total non-performing loans 4,421 3,001 884 3,190 6,551
Total Other Real Estate Owned 381 866 825 1,697 1,946
--------- --------- --------- --------- ---------
Total non-performing assets $4,802 $3,867 $1,709 $4,887 $8,497
========= ========= ========= ========= =========
Troubled-debt restructurings $700 $1,290 $3,971 $4,671 $4,671
Total non-performing assets and troubled-
debt restructurings $5,502 $5,157 $5,680 $9,558 $13,168
========= ========= ========= ========= =========
Impaired loans $2,591 $1,563 $3,136 $4,294 $7,419
Total non-performing loans to total loans 0.26% 0.22% 0.09% 0.43% 1.12%
Total non-performing loans and troubled-
debt restructurings to total loans 0.30 0.31 0.51 1.05 1.92
Total non-performing assets to total
assets <F1> 0.19 0.17 0.11 0.37 0.62
Total non-performing assets and troubled-
debt restructurings to total assets 0.22 0.23 0.35 0.73 0.96
--------------------------
<FN>
<F1> Adjusting total assets at June 30, 1996, for $131.0 million of excess
subscription proceeds related to the Company's initial public offering,
total non-performing assets to total assets were 0.68% at June 30, 1996.
The excess subscription proceeds were refunded by the Company on July 1,
1996.
</TABLE>
OTHER REAL ESTATE OWNED ("OREO"). Property acquired by the Bank as a result
of a foreclosure on a mortgage loan is classified as OREO and is recorded at
the lower of the recorded investment in the related loan or the fair value of
the property at the date of acquisition, with any resulting write down charged
to the allowance for loan losses. The Bank obtains an appraisal on an OREO
property as soon as practicable after it takes possession of the real property.
The Bank will generally reassess the value of OREO at least annually
thereafter. The balance of other real estate owned ("OREO")was $381,000,
consisting of 7 properties, at June 30, 2000 compared to $866,000, consisting
of 13 properties, at June 30, 1999. During the year ended June 30, 2000, total
additions to OREO were $429,000. Offsetting these additions, were OREO sales
and charge-offs of $1.0 million during the year ended June 30, 2000. All
charge-offs were recorded against the allowance for losses on real estate
owned, which was $45,000 as of June 30, 2000.
CLASSIFIED ASSETS. The Bank's Loan Loss Reserve Committee meets every other
month to review all problem loans in the portfolio to determine whether any
loans require reclassification in accordance with applicable regulatory
guidelines. Recommendations are reported by the Loan Loss Reserve Committee to
the Board of Directors on a quarterly basis. The Loan Loss Reserve Committee,
subject to Board approval, establishes policies relating to the internal
classification of loans and believes that its classification policies are
consistent with regulatory policies. All non-performing loans and OREO are
considered to be classified assets. In addition, the Bank maintains a "watch
list" comprised of 37 loans totaling $3.6 million at June 30, 2000 which, while
performing, are characterized by weaknesses which require special attention
from management and are considered to be potential problem loans. All loans on
the watch list are considered to be classified assets or are otherwise
categorized as "Special Mention" as discussed below. As a result of its bi-
monthly review of the loan portfolio, the Loan Loss Reserve Committee may
decide to reclassify one or more of the loans on the watch list.
Federal regulations and Bank policy require that loans and other assets
considered to be of lesser quality be classified 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 have a
well-defined weakness or weaknesses and are characterized by the distinct
possibility that the Bank will sustain ''some loss'' if deficiencies are not
corrected. Assets classified as ''Doubtful'' have all of the weaknesses
inherent in those classified ''Substandard'' with the added characteristic that
the weaknesses present make ''collection or liquidation in full,'' on the basis
-13-
<PAGE>
of current existing facts, conditions, and values, ''highly questionable and
improbable.'' Assets classified as ''Loss'' are those considered
''uncollectible'' and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not expose the Bank to sufficient risk to warrant classification in
one of the aforementioned categories but possess potential weaknesses that
deserve management's attention are designated ''Special Mention'' by
management. At June 30, 2000 the Bank had $2.1 million of loans designated
Special Mention.
At June 30, 2000, the Bank had $7.3 million of assets classified
Substandard, consisting of 39 loans and 7 other real estate owned properties,
and no assets classified as Doubtful or Loss. At June 30, 1999, the Bank had
$4.0 million of assets classified Substandard, consisting of 29 loans and 9
other real estate owned properties, $328,000 of assets classified as Doubtful,
consisting of 1 loan, and no assets classified as Loss.
The following table sets forth at June 30, 2000 the Bank's aggregate
carrying value of the assets classified as Substandard, Doubtful or Loss or
designated as Special Mention.
<TABLE>
<CAPTION>
Special Mention Substandard Doubtful Loss
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number Amount Number Amount Number Amount Number Amount
---------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Mortgage Loans:
One-to-four family 3 $357 27 $2,976 - $- - $-
Multi-family and
underlying
cooperative 2 1,476 6 3,646 - - - -
Cooperative apartment 7 272 6 298 - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total Mortgage Loans 12 2,105 39 6,920 - - - -
------ ------ ------ ------ ------ ------ ------ ------
Other Real Estate Owned:
One-to-four family - - 1 134 - - - -
Cooperative apartment - - 6 247 - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total Other Real Estate
Owned - - 7 381 - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total 12 $2,105 46 $7,301 - $- - $-
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The Bank has established a Loan Loss Reserve Committee and has charged
it with, among other things, specific responsibility for monitoring
the adequacy of the loan loss reserve. The Loan Loss Reserve Committee's
findings, along with recommendations for additional loan loss reserve
provisions, if any, are reported directly to senior management of the Bank,
and to the Board of Directors. The Allowance for Loan Losses is supplemented
through a periodic provision for loan losses based on the Loan Loss Reserve
Committee's evaluation of several variables, including the level of
non-performing loans, the ratio of reserves to total performing loans, the
level and composition of new loan activity, and an estimate of future losses
determinable at the date the portfolio is evaluated. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers among other matters, the fair value of
the underlying collateral, economic conditions, historical loan loss
experience and other factors that warrant recognition in providing for an
adequate loan loss allowance. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Bank's allowance for loan losses, its valuation of OREO, and both the
level of loans in foreclosure and pending foreclosure. Based on their
judgments about information available to them at the time of
their examination, the regulators may require the Bank to recognize
additions to the allowance.
Loan loss reserves are established based upon a review of the two
componentsof the Bank's loan portfolio, performing loans and non-performing
loans. Performing loans are reviewed based upon the premise that certain
loans within the loan portfolio have incurred losses as of the balance
sheet date which have not yet been identified. The evaluation process is
thus based upon the Bank's historical loss experience.
Non-performing loans are reviewed individually to determine if the
liquidation value of the underlying collateral is sufficient to pay off the
existing debt. Should the bank determine that a non-performing loan is
likely to result in a principal
-14-
<PAGE>
loss, the loan is then placed into one of four classifications. The
particular classification assigned to any one loan, or proportion thereof,
(loss, doubtful, substandard or special mention) is based upon the actual
level of loss attributable to that loan, as determined by the Loan Loss
Reserve Committee. The Bank will then increase its general valuation
allowance in an amount established by the Loan Loss Reserve Committee to
appropriately reflect the anticipated loss from each loss classification
category.
Specific reserves are established against loans classified as ''loss.''
Rather than an estimation of potential loss, the establishment of a specific
reserve represents the identification of an actual loss which will result in
a charge-off. This loss amount will be set aside on the Bank's balance sheet
as a specific reserve and will serve to reduce the carrying value of the
associated loan. The Bank's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by
various regulatory agencies which can order the establishment of additional
general or specific loss allowances.
The Bank has maintained its allowance for loan losses to a level which
management believes is adequate to absorb probable losses that may be incurred
within the Bank's loan portfolio. The allowance for loan losses decreased
$296,000 from June 30, 1999 to June 30, 2000, as net charge-offs of $536,000
were partially offset by provisions to the allowance of $240,000.
Of the total net charge-offs during the fiscal year ended June 30, 2000,
$454,000 related to a loan pool participation investment acquired from FIBC.
Upon consummating the FIBC acquisition, we provided reserves within our
overall loan loss allowance to cover this potential loss on the loan pool
investment. After attempting to recover this portion of the total investment,
we determined in November, 1999, that it would not be collectible
and should be charged-off.
-15-
<PAGE>
The following table sets forth activity in the Bank's allowance for loan
losses at or for the dates indicated.
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars In Thousands)
Total loans outstanding at end of period <F1> $1,721,200 $1,383,341 $950,121 $750,584 $583,686
======== ======== ======== ======== ========
Average total loans outstanding <F1> $1,563,656 $1,164,982 $843,148 $648,357 $449,063
======== ======== ======== ======== ========
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $15,081 $12,075 $10,726 $7,812 $5,174
Provision for loan losses 240 240 1,635 4,200 2,979
Charge-offs
One-to-four family (500) (10) (165) (104) (21)
Multi-family and underlying cooperative - (98) (49) (985) (553)
Non-residential - - - - (274)
FHA/VA insured - - - - -
Cooperative apartment (24) (62) (112) (276) (170)
Other (21) (38) (2) (23) (5)
-------- -------- -------- -------- --------
Total charge-offs (545) (208) (328) (1,388) (1,023)
-------- -------- -------- -------- --------
Recoveries 9 7 42 102 14
-------- -------- -------- -------- --------
Reserve acquired in purchase acquisition - 2,967 - - 668
-------- -------- -------- -------- --------
Balance at end of period $14,785 $15,081 $12,075 $10,726 $7,812
======== ======== ======== ======== ========
Allowance for loan losses to total loans
at end of period 0.86% 1.09% 1.27% 1.43% 1.34%
Allowance for loan losses to total non-
performing loans at end of period 334.43 502.53 1,365.95 336.24 119.25
Allowance for loan losses to total non-
performing loans and troubled-debt
restructurings at end of period 288.71 351.46 248.71 136.45 69.61
Ratio of net charge-offs to average loans
outstanding during the period 0.03 0.03 0.03 0.20 0.22
ALLOWANCE FOR LOSSES ON OTHER REAL ESTATE
OWNED:
Balance at beginning of period $149 $164 $187 $114 $-
Provision charged to operations 25 16 114 450 586
Charge-offs, net of recoveries (129) (31) (137) (377) (472)
-------- -------- -------- -------- --------
Balance at end of period $45 $149 $164 $187 $114
======== ======== ======== ======== ========
_______________________________________
<FN>
<F1> Total loans represents loans, net, plus the allowance for loan losses.
During the fiscal year ended June 30, 1999, the Bank acquired $192.3
million of loans from FIBC.
</TABLE>
-16-
<PAGE>
The following table sets forth the Bank's allowance for loan losses
allocated by loan category and the percent of loans in each category to total
loans at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percent Percent Percent Percent Percent
of Loan of Loan of Loan of Loan of Loan
in Each in Each in Each in Each in Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Amount Loans(1) Amount Loans<F1> Amount Loans<F1> Amount Loans<F1> Amount Loans<F1>
---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Impaired
loans <F2> $130 0.15 $62 0.11% $23 0.33% $122 0.58% $955 1.30%
One-to-four
family 3,176 12.23 4,112 17.86 669 13.32 820 19.04 1,171 29.90
Multi-family
and
underlying
cooperative 10,000 78.65 9,652 72.63 10,160 75.90 7,398 66.83 3,808 50.81
Non-
residential 1,095 6.92 699 6.45 445 5.32 862 5.84 605 6.63
Cooperative
apartment 254 1.60 414 2.39 605 4.52 1,355 6.89 1,085 10.38
Other 130 0.45 142 0.56 173 0.61 169 0.82 188 0.98
---------------------------------------------------------------------------------------------------------------------------------
Total $14,785 100.00% $15,081 100.00% $12,075 100.00% $10,726 100.00% $7,812 100.00%
=================================================================================================================================
<FN>
<F1> Total loans represent gross loans less FHA and VA loans, which are
government guaranteed loans.
<F2> The Bank adopted SFAS 114 effective July 1, 1995. Prior to this date,
impaired loans were not measured. At June 30, 1999, 1998, 1997 and 1996,
impaired loans represent 0.11%, 0.33%, 0.57% and 1.27% of total loans.
</TABLE>
INVESTMENT ACTIVITIES
INVESTMENT STRATEGIES OF THE COMPANY - The Company's principal asset is its
investment in the Bank's common stock, which amounted to $194.4 million at June
30, 2000. The Company's other investments at that date totaled $60.1 million.
The largest component of these investments were Ginnie Mae adjustable rate
mortgage-backed securities totaling $42.0 million, which are tied closely to
short-term borrowings. The remaining $18.9 of investment securities are
utilized for general business activities, which may include, but are not
limited to: (1) repurchases of Common Stock, (2) acquisition of other
companies, (3) subject to applicable limitations, the payment of dividends,
and/or (4) investments in the equity securities of other financial institutions
and other investments not permitted for federally-insured institutions. There
can be no assurance that the Company will engage in any of these activities in
the future.
Otherwise, the investment policy of the Company calls for investments in
relatively short-term, liquid securities similar to such securities defined in
the securities investment policy of the Bank.
INVESTMENT POLICY OF THE BANK. The securities investment policy of the
Bank, which is established by its Board of Directors, is designed to help the
Bank achieve its overall asset/liability management objectives. Generally, the
policy calls for management to emphasize principal preservation, liquidity,
diversification, short maturities and/or repricing terms, and a favorable
return on investment when selecting new investments for the Bank's portfolio.
The Bank's current securities investment policy permits investments in various
types of liquid assets including obligations of the U.S. Treasury and federal
agencies, investment grade corporate obligations, various types of mortgage-
backed securities, commercial paper, certificates of deposit, and federal funds
sold to select financial institutions periodically approved by the Board of
Directors.
Investment strategies are implemented by the Asset and Liability Management
Committee ("ALCO") comprised of the Chief Executive Officer, President,
Executive Vice President and other senior management officers. The strategies
take into account the overall composition of the Bank's balance sheet,
including loans and deposits, and are intended to protect and enhance the
Company's earnings and market value. The strategies are reviewed monthly by
the ALCO and reported regularly to the Board of Directors.
The Company did not engage in any hedging transactions utilizing derivative
instruments (such as interest rate swaps and caps) during the fiscal year ended
June 30, 2000, and did not have any such hedging transactions in place at June
30, 2000. In the future, the Company may, with Board approval, engage in
hedging transactions utilizing derivative instruments.
-17-
<PAGE>
MORTGAGE-BACKED SECURITIES. In its securities investment activities over
the past few years the Company has increased its purchases of mortgage-backed
securities, which provide the portfolio with investments consisting of
desirable repricing, cash flow and credit quality characteristics. Mortgage-
backed securities generally yield less than the loans that underlie the
securities because of the cost of payment guarantees and credit enhancements
that reduce credit risk to the investor. While mortgage-backed securities
backed by federally sponsored agencies carry a reduced credit risk as compared
to whole loans, such securities remain subject to the risk that fluctuating
interest rates, along with other factors such as the geographic distribution of
the underlying mortgage loans, may alter the prepayment rate of such mortgage
loans and so affect both the prepayment speed, and value, of such securities.
However, mortgage-backed securities are more liquid than individual mortgage
loans and may readily be used to collateralize borrowings of the Company. The
Company's investment in mortgage-backed securities totaled $442.7 million, or
17.7% of total assets at June 30, 2000. Approximately 36.8% of the mortgage-
backed securities portfolio, was comprised of securities backed by either the
Governmental National Mortgage Association (''Ginnie Mae''), Freddie Mac, or
Fannie Mae. In addition to the superior credit quality provided by the agency
backing, the mortgage-backed securities portfolio also provides the Company
with important interest rate risk management features.
At June 30, 2000, the Company had $279.9 million in CMOs and REMICs, which
comprise the largest component of the Bank's mortgage-backed securities. All
of the securities are either backed by U.S agency obligations or have been
issued by highly reputable financial institutions. In addition, all of the
non-agency backed obligations had been rated in the highest rating category by
at least one nationally recognized rating agency at the time of purchase. In
addition, none of these securities have stripped principal and interest
components and the Company is positioned in priority tranches in all
securities. The majority of these securities have been purchased using funds
from short-term borrowings as part of reverse repurchase transactions, in which
these securities act as collateral for the borrowed funds. As of June 30,
2000, the fair value of these securities was approximately $7.8 million below
their cost basis, due primarily to reductions in market values associated with
increased short-term interest rates during the period May, 1999 through June,
2000.
The Company's remaining mortgage-backed securities portfolio is comprised of
a $116.0 million investment in adjustable rate Ginnie Mae, Freddie Mac and
Fannie Mae pass-through securities which have an average term to next rate
adjustment of less than one year, a $31.9 million investment in seasoned fixed-
rate Ginnie Mae, Fannie Mae and Freddie Mac pass-through securities, with an
estimated remaining life of less than three years, and a $15.2 million
investment in mortgage-backed securities, which provide a return of principal
and interest on a monthly basis, and have original maturities of between five
to seven years, at which point the entire remaining principal balance is repaid
(the ''balloon'' payment).
GAAP requires that investments in equity securities that have readily
determinable fair values and all investments in debt securities be classified
in one of the following three categories and accounted for accordingly:
trading securities, securities available for sale, or securities held to
maturity. The Company had no securities classified as trading securities
during the year ended June 30, 2000, and does not intend to trade securities.
Unrealized gains and losses on available for sale securities are excluded from
earnings and are reported as a separate component of stockholders' equity
referred to as other comprehensive income, net of deferred taxes. At
June 30, 2000, the Company had $550.5 million of securities classified as
available for sale which represented 22.00% of total assets at June 30, 2000.
Given the size of the available for sale portfolio, future fluctuations in
market values of these securities could result in fluctuations in the Company's
stockholders' equity.
The maturities on the Bank's fixed-rate mortgage-backed securities (balloon
payment securities, seasoned Ginnie Mae's and Freddie Mac's) are relatively
short as compared to the final maturities on its ARMs and CMO portfolios.
Except for fixed rate mortgage backed securities acquired from Conestoga, which
were generally classified as available for sale, the Company typically
classifies purchased fixed rate mortgage-backed securities as held-to-maturity,
and carries the securities at amortized cost. The Company has the intent and
ability to hold these securities to final maturity. The Company typically
classifies purchased ARMs and CMOs as available for sale, in recognition of the
greater prepayment uncertainty associated with these securities, and carries
these securities at fair market value.
The following table sets forth activity in the Company's mortgage-backed
securities portfolio for the periods indicated.
-18-
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
--------- --------- ---------
(Dollars In Thousands)
Amortized cost at beginning of period $530,306 $408,086 $306,164
Purchases/ Sales (net) 247 263,644 193,086
Principal repayments (78,874) (179,434) (90,686)
Premium and discount amortization, net (190) 230 (478)
Securities acquired in purchase of FIBC(1) - 37,780 -
--------- --------- ---------
Amortized cost at end of period $451,489 $530,306 $408,086
========= ========= =========
<FN>
<F1> Amount comprised of $13.8 million of Freddie Mac securities, $8.7 million
of Fannie Mae securities and $15.3 of Ginnie Mae securities.
</TABLE>
The following table sets forth the amortized cost and fair value of the
Company's securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------------------------------
2000 1999<F1> 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
--------- --------- --------- --------- --------- ---------
(Dollars In Thousands)
Mortgage-backed securities:
Ginnie Mae $133,222 $132,477 $133,057 $133,337 $87,889 $89,706
Fannie Mae 15,558 15,427 25,317 25,355 33,085 33,420
Freddie Mac 14,929 14,853 22,994 23,093 31,778 32,016
CMOs 287,780 279,867 348,938 344,254 255,334 256,176
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
Securities 451,489 442,624 530,306 526,039 408,086 411,318
--------- --------- --------- --------- --------- ---------
Investment securities:
U.S. treasury and agency 67,686 65,788 87,475 86,553 92,825 93,302
Other <F2> 58,860 57,194 77,746 76,704 57,981 58,322
--------- --------- --------- --------- --------- ---------
Total investment securities 126,546 122,982 165,221 163,257 150,806 151,624
Equity securities 14,948 15,490 14,162 15,142 10,425 12,675
Net unrealized(loss)gain <F2> (11,683) - (5,692) - 5,069 -
--------- --------- --------- --------- --------- ---------
Total securities, net $581,300 $581,096 $703,997 $704,438 $574,386 $575,617
========= ========= ========= ========= ========= =========
<FN>
<F1> Includes $13.8 million of Freddie Mac securities, $8.7 million of Fannie
Mae securities, $15.3 million in Ginnie Mae securities, $37.2 million in
agency obligations, and $6.6 million in equity securities acquired from
FIBC.
<F2> The net unrealized (loss) gain at June 30, 2000, 1999 and 1998 relates to
available for sale securities in accordance with Statement of Financial
Accounting Standards No. 115 "Accounting for Investments in Debt and Equity
Securities" ("SFAS 115"). The net unrealized gain is presented in order to
reconcile the ''Amortized Cost'' of the Company's securities portfolio to
the recorded value reflected in the Consolidated Statements of Condition.
</TABLE>
CORPORATE DEBT OBLIGATIONS. The Company invests in the short-term
investment grade debt obligations of various corporations. Corporate debt
obligations generally carry both a higher rate of return and a higher degree of
credit risk than U.S. Treasury securities with comparable maturities. In
addition, corporate securities are generally less liquid than comparable U.S.
Treasury securities. In recognition of the additional risks associated with
investing in these securities, the Company's investment policy limits new
investments in corporate obligations to those companies which are rated single
''A'' or better by one of the nationally recognized rating agencies, and limits
investments in any one corporate entity to the lesser of 1% of total assets or
15% of the Company's equity. At June 30, 2000, the Company's portfolio of
corporate debt obligations totaled $55.0 million, or 2.20% of total assets.
The following table sets forth the amortized cost and fair value of the
Company's securities, by accounting classification and by type of security, at
the dates indicated.
-19-
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------------------------------------
2000 1999<F1> 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
--------- --------- --------- --------- --------- ---------
(Dollars In Thousands)
Held-to-Maturity:
Mortgage-backed securities:<F2>
Pass through securities $13,329 $13,263 $22,820 $23,192 $46,714 $47,443
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities 13,329 13,263 22,820 23,192 46,714 47,443
Investment securities <F3> 17,489 17,351 31,698 31,768 78,091 78,593
--------- --------- --------- --------- --------- ---------
Total Held-to Maturity $30,818 $30,614 $54,518 $54,960 $124,805 $126,036
========= ========= ========= ========= ========= =========
Available-for-Sale:
Mortgage-backed securities:
Pass through securities $150,380 $149,494 $158,548 $158,593 $106,038 $107,699
CMOs 287,780 279,867 348,938 344,254 255,334 256,176
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities 438,160 429,361 507,486 502,847 361,372 363,875
Investment securities <F3> 109,057 105,631 133,523 131,489 72,715 73,031
Equity securities 14,948 15,490 14,162 15,142 10,425 12,675
Net unrealized(loss)gain <F4> (11,683) - (5,692) - 5,069 -
--------- --------- --------- --------- --------- ---------
Total Available-for-Sale $550,482 $550,482 $649,479 $649,478 $449,581 $449,581
========= ========= ========= ========= ========= =========
Total securities, net $581,300 $581,096 $703,997 $704,438 $574,386 $575,617
========= ========= ========= ========= ========= =========
<FN>
<F1> Includes $37.8 million of mortgage-backed pass-through securities, $37.2
million in investment securities and $6.6 million in equity securiies
acquired from FIBC, all of which were classified as available for sale.
<F2> Mortgage-backed securities include investments in CMOs and REMICs.
<F3> Includes corporate debt obligations.
<F4> The net unrealized (loss) gain at June 30, 2000, 1999 and 1998 relates to
available for sale securities in accordance with SFAS No. 115. The net
unrealized gain is presented in order to reconcile the ''Amortized Cost''
of the Company's securities portfolio to the recorded value reflected in
the Consolidated Statements of Condition.
</TABLE>
-20-
<PAGE>
The following table sets forth certain information regarding the amortized
cost, fair value and weighted average yield of the Company's securities at June
30, 2000, by remaining period to contractual maturity. With respect to
mortgage-backed securities, the entire amount is reflected in the maturity
period that includes the final security payment date and, accordingly, no
effect has been given to periodic repayments or possible prepayments. Other
than obligations of federal agencies and GSEs, the Company has no investments
in securities issued by any one entity in excess of 10% of stockholders' equity
at June 30, 2000.
<TABLE>
<CAPTION>
At June 30, 2000
-----------------------------------------------------------------------------------------
Held-to-Maturity Available-for Sale
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted
Amortized Average Amortized Average
Cost Fair Value Yield Cost Fair Value Yield
-------- -------- ------ -------- -------- ------
(Dollars In Thousands)
Mortgage-backed securities:
Due within 1 year $593 $588 6.19% $2,506 $2,327 6.00%
Due after 1 year but within 5 years 10,054 9,998 7.04 3,043 3,014 6.98
Due after 5 years but within 10
years 2,682 2,677 7.96 8,094 7,856 6.46
Due after ten years - - - 424,517 416,164 6.69
-------- -------- -------- --------
Total 13,329 13,263 7.19 438,160 429,361 6.69
-------- -------- -------- --------
U.S. Treasury and Agency:
Due within 1 year - - - 998 997 5.89
Due after 1 year but within 5 years 12,440 12,296 6.58 54,249 52,496 6.03
Due after 5 years but within 10
years - - - - - -
Due after ten years - - - - - -
-------- -------- -------- --------
Total 12,440 12,296 6.58 55,247 53,493 6.02
-------- -------- -------- --------
Corporate and Other
Due within 1 year 3,172 3,171 6.10 12,175 12,152 6.26
Due after 1 year but within 5 years 748 747 6.04 41,635 39,986 6.22
Due after 5 years but within 10
years 1,129 1,137 7.30 - - -
Due after ten years - - - - - -
-------- -------- -------- --------
Total 5,050 5,056 6.36 53,810 52,138 6.23
-------- -------- -------- --------
Equity Securities
Due within 1 year - - - 7,372 8,638 -
Due after 1 year but within 5 years - - - - - -
Due after 5 years but within 10
years - - - - - -
Due after ten years - - - 7,576 6,852 -
-------- -------- -------- --------
Total - - 6.36 14,948 15,490 -
-------- -------- -------- --------
Total:
Due within 1 year 3,765 3,759 6.12 23,051 24,114 6.20
Due after 1 year but within 5 years 23,242 23,041 6.76 98,927 95,496 6.13
Due after 5 years but within 10
years 3,811 3,814 7.77 8,094 7,856 6.46
Due after ten years - - - 432,093 423,016 6.69
-------- -------- -------- --------
Total $30,819 $30,614 6.81% $562,165 $550,482 6.57%
======== ======== ======== ========
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits, repayments of loans and mortgage-backed securities,
investment security maturities and redemptions, and short- to medium-term
borrowings from the FHLBNY, which include both advances and repurchase
agreements treated as financings, are the Bank's primary sources of funding for
its lending and investment activities. The
-21-
<PAGE>
Bank is also active in the secondary mortgage market, selling substantially
all of its new long-term, fixed-rate residential mortgage product to either
Fannie Mae, Freddie Mac, or SONYMA.
DEPOSITS. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank presently offers savings accounts, money
market accounts, checking accounts, NOW and Super NOW accounts, and
certificates of deposit. The flow of deposits is influenced significantly by
general economic conditions, changes in prevailing interest rates, and
competition from other financial institutions and investment products.
Traditionally, the Bank has relied upon customer service, convenience and long-
standing relationships with customers. The communities in which the Bank
maintains branch offices have historically provided the Bank with nearly all of
its deposits. At June 30, 2000, the Bank had deposit liabilities of $1.22
billion, down $27.9 million from June 30, 1999. Within total deposits, $75.6
million, or 6.2%, consisted of certificates of deposit with balances of
$100,000 or greater. Individual Retirement Accounts (''IRA's'') totaled $108.7
million, or 8.9% of total deposits.
In June, 2000, the Bank's Board of Directors approved acceptance of brokered
certificates of deposits up to an aggregate limit of $120.0 million. As of
June 30, 2000, no brokered certificates of deposit had been acceptance.
Brokered certificates of deposits, if accepted by the Bank, would be utilized
by the Bank solely as a funding alternative to borrowings.
The following table presents the deposit activity of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
For the Year Ended June 30,
-----------------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
--------- --------- ---------
(Dollars In Thousands)
Deposits $2,178,658 $1,686,616 $1,373,072
Withdrawals 2,223,597 1,754,874 1,345,095
--------- --------- ---------
Deposits (Withdrawals) in excess of (deposits) (44,939) (68,258) 27,977
withdrawals
Deposits acquired in purchase of FIBC <F1> - 230,627 -
Deposits relinquished in sale (17,949) - -
Interest credited 43,103 42,479 42,713
--------- --------- ---------
TOTAL (DECREASE) INCREASE IN DEPOSITS $(19,785) $204,848 $70,690
========= ========= =========
<FN>
<F1> Amount comprised of $123.0 million in certificates of deposit, $67.4 in
savings accounts, $15.1 million in checking accounts, $16.7 million in
money market accounts, and $7.5 million in NOW and Super NOW accounts.
</TABLE>
At June 30, 2000 the Bank had $75.6 million in certificate of deposit
accounts over $100,000 maturing as follows:
Weighted
Average
Amount Rate
--------- ---------
(Dollars In Thousands)
Maturity Period
Within three months $15,246 5.07%
After three but within six months 9,593 5.12
After six but within twelve months 24,557 5.69
After 12 months 26,229 5.99
---------
Total $75,625 5.60%
=========
-22-
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts and the related weighted average interest rates at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------- ------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percent Weighted Percent Weighted Percent Weighted
of Total Average of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
---------- -------- --------- -------- -------- -------- -------- -------- --------
(Dollars In Thousands)
Checking accounts $54,358 4.46% -% $50,414 4.70% -% $32,782 3.57% -%
NOW and Super NOW
accounts 26,787 2.20 1.24 25,687 2.06 1.22 17,927 1.73 1.24
Money market accounts 146,066 11.98 4.37 52,979 4.25 3.55 30,567 2.94 3.09
Savings accounts 373,772 30.66 2.08 406,602 32.60 2.09 340,481 32.79 2.27
Certificates of
deposit 618,165 50.70 5.51 703,251 56.39 5.31 612,328 58.97 5.84
---------- -------- -------- -------- -------- --------
Totals $1,219,148 100.00% $1,238,933 100.00% $1,034,085 100.00%
========== ======== ======== ======== ======== ========
</TABLE>
The following table presents, by interest rate ranges, the amount of
certificate accounts outstanding at the dates indicated and the period to
maturity of the certificate accounts outstanding at June 30, 2000.
<TABLE>
<CAPTION>
Period to Maturity at June 30, 2000 Total at June 30,
------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than One to Four to Over Five
Interest Rate Range One Year Three Years Five Years Years 2000 1999 1998
--------------- --------- --------- --------- -------- -------- -------- --------
(Dollars In Thousands)
4.00% and below $38,686 $- $- $- $38,686 $29,558 $1
4.01% to 5.00% 179,076 5,429 354 - 184,859 346,694 135,153
5.01% to 6.00% 158,094 121,575 10,299 167 290,135 178,183 233,082
6.01% to 7.00% 33,085 54,013 11,226 3 98,327 120,238 231,204
7.01% and above 5,997 161 - - 6,158 28,578 12,888
--------- --------- --------- -------- -------- -------- --------
Total $414,938 $181,178 $21,879 170 $618,165 $703,251 $612,328
========= ========= ========= ======== ======== ======== ========
</TABLE>
BORROWINGS. The Bank has been a member and shareholder of the FHLBNY
since February 14, 1980. One of the privileges accorded FHLBNY shareholders is
the ability to borrow money under various lending (referred to as Advances)
programs at competitive interest rates. The Bank, as a member of the FHLBNY,
is provided with a borrowing line which equaled $724.8 million at June 30,
2000. From time to time, the Bank borrows from the FHLBNY for various
purposes.
The Bank had borrowings from the Federal Home Loan Bank of New York
totaling $555.0 million and $250.0 million at June 30, 2000 and 1999,
respectively. The average cost of FHLB Advances was 5.89% and 5.96%,
respectively, during the years ended June 30, 2000 and 1999, and the average
interest rate on outstanding FHLBNY Advances was 6.07% and 5.52%, respectively,
at June 30, 2000 and 1999. At June 30, 2000, the Bank maintained in excess of
$610.5 million of qualifying collateral (principally real estate loans), as
defined by the FHLBNY, to secure such advances.
Securities sold with agreement to repurchase totaled $434.0 million at June
30, 2000. The investment and mortgage-backed securities sold with agreement to
repurchase mature at various periods beginning in September, 2000. Borrowings
under such reverse repurchase agreements involve the delivery of securities to
broker-dealers who arrange the transactions. The securities remain registered
in the name of the Bank, and are returned upon the maturities of the
agreements. Funds to repay the Bank's securities sold with agreement to
repurchase at maturity will be provided primarily by cash received from the
maturing securities.
-23-
<PAGE>
Presented below is information concerning securities sold with agreements to
repurchase and FHLB Advances for the years ended June 30, 2000, 1999 and 1998:
Securities Sold Under Agreements to Repurchase:
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-----------------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
--------- --------- ---------
(Dollars In Thousands)
Balance outstanding at end of period $434,027 $481,660 $256,601
Average interest cost at end of period 6.37% 5.28% 5.74%
Average balance outstanding 456,155 381,996 145,676
Average interest cost during the year 5.66% 5.45% 5.95%
Carrying value of underlying collateral $456,844 $496,500 $267,469
Estimated market value of underlying collateral 447,715 491,750 268,991
Maximum balance outstanding at month end during period 486,936 481,660 256,601
</TABLE>
FHLB Advances:
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-----------------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
--------- --------- ---------
Balance outstanding at end of period $555,000 $250,000 $103,505
Average interest cost at end of period 6.07% 5.52% 6.05%
Average balance outstanding 466,158 201,494 86,709
Average interest cost during the year 5.89% 5.96% 6.04%
Maximum balance outstanding at month end during period 560,000 260,000 103,505
</TABLE>
SUBSIDIARY ACTIVITIES
In addition to the Bank, the Company's direct and indirect subsidiaries
consist of six active wholly-owned subsidiary corporations, one of which is
directly owned by the Company and five of which are directly owned by the Bank.
In addition, DSBW Preferred Funding Corp. is a direct subsidiary of Havemeyer
Equities Inc., a direct subsidiary of the Bank. The following table presents
an overview of the Company's subsidiaries as of June 30, 2000.
<TABLE>
<CAPTION>
<S> <C> <C>
Year/ State of
COMPANY Incorporation Primary Business Activities
Havemeyer Equities Inc. 1977 / New York Ownership of DSBW Preferred Funding Corp.
Boulevard Funding Corp. 1981 / New York Currently Inactive
Havemeyer Investments Inc. 1997 / New York Sale of annuity products
DSBW Preferred Funding Corp. 1998 / Delaware Real Estate Investment Trust investing in multi-
family and non-residential real estate loans.
DSBW Residential Preferred Funding Corp. 1998 / Delaware Real Estate Investment Trust investing in one- to
four-family real estate loans
842 Manhattan Avenue Corp. (1) 1995/ New York Management and ownership of real estate.
<FN>
<F1> Acquired from FIBC on January 21, 1999.
</TABLE>
PERSONNEL
As of June 30, 2000, the Company had 248 full-time employees and 81 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.
-24-
<PAGE>
FEDERAL, STATE AND LOCAL TAXATION
FEDERAL TAXATION
GENERAL. The following is a discussion of material tax matters and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank was last audited for its taxable year ended
December 31, 1988. For federal income tax purposes, the Company and the Bank
file consolidated income tax returns on a June 30 fiscal year basis using the
accrual method of accounting and will be subject to federal income taxation in
the same manner as other corporations with some exceptions, including
particularly the Bank's tax reserve for bad debts, discussed below.
TAX BAD DEBT RESERVES. The Bank, as a "large bank" (one with assets having
an adjusted basis of more than $500 million), is unable to make additions to
its tax bad debt reserve, is permitted to deduct bad debts only as they occur
and is required to recapture (i.e. take into income), over a multi-year period,
a portion of the balance of its bad debt reserves as of June 30, 1997. Since
the Bank has already provided a deferred income tax liability for this tax for
financial reporting purposes, there was no adverse impact to the Bank's
financial condition or results of operations from the enactment of the federal
legislation that imposed such recapture. The recapture is suspended during the
tax years ended June 30, 1997 and 1998, based upon the Bank's origination
levels for certain residential loans which met the minimum levels required by
the Small Business Job Protection Act of 1996, (the "1996 Act") to suspend
recapture for that tax year.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve," i.e. its reserve as of
June 30, 1989, to the extent thereof and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid out
of the Bank's current or accumulated earnings and profits will not be so
included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the amount of such distribution (but not in excess of the amount
of such reserves) would be includable in income for federal income tax
purposes, assuming a 35% federal corporate income tax rate. See "Regulation"
and "Dividend Policy" for limits on the payment of dividends by the Bank. The
Bank does not intend to pay dividends that would result in a recapture of any
portion of its tax bad debt reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is adjusted
by determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, the Bank's AMTI is increased by an amount equal to 75% of the amount by
which the Bank's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and prior to reduction for net operating losses).
STATE AND LOCAL TAXATION
STATE OF NEW YORK. The Bank and the Company are subject to New York State
franchise tax on one of several alternative bases, whichever results in the
highest tax, and will file combined returns for purposes of this tax. The basic
tax is measured by "entire net income," which is federal taxable income with
adjustments. For New York State tax purposes, so long as the Bank continues to
meet certain definitional tests relating to its assets and the nature of its
business, it will be permitted deductions, within specified formula limits, for
additions to its bad debt reserves for purposes of computing its entire net
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, may be computed
using an amount based on the Bank's actual loss experience (the "Experience
Method") or an amount equal to 32% of the Bank's entire net income (the "PTI
Method"), computed without regard to this deduction and reduced by the amount
of any permitted addition to the Bank's reserve for non-qualifying loans.
New York State (the "State") enacted legislation, which enables the Bank to
avoid the recapture into income of the State tax bad debt reserves unless one
of the following events occur: 1) the Bank's retained earnings represented by
the reserve is used for purposes other than to absorb losses from bad debts,
including dividends in excess of the Bank's earnings and profits or
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distributions in liquidation or in redemption of stock; 2) the Bank fails to
qualify as a thrift as provided by the State tax law, or 3) there is a change
in state tax law.
The Bank's deduction with respect to non-qualifying loans must be computed
under the Experience Method which is based on the Bank's actual charge-offs.
Each year the Bank will review the most favorable way to calculate the
deduction attributable to an addition to the tax bad debt reserves.
The New York State tax rate for the 1999 calendar year is 10.53% (including
a commuter transportation surcharge) of net income. In general, the Company
will not be required to pay New York State tax on dividends and interest
received from the Bank.
CITY OF NEW YORK. The Bank and the Company are also subject to a similarly
calculated New York City banking corporation tax of 9% on income allocated to
New York City.
New York City also enacted legislation which conformed its tax law regarding
bad debt deductions to New York State's tax law.
STATE OF DELAWARE. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax, but is
required to file an annual report and pay an annual franchise tax to the State
of Delaware.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination, and supervision by
the OTS, as its chartering agency, and the FDIC, as its deposit insurer. The
Bank's deposit accounts are insured up to applicable limits by the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF")
which are administered by the FDIC, and the Bank is a member of the FHLBNY. The
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition, and it must obtain regulatory approvals prior to entering
into certain transactions, such as mergers with, or acquisitions of, other
depository institutions. The OTS and the FDIC conduct periodic examinations to
assess the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings association can engage and is intended primarily for the
protection of the insurance fund and depositors. The Company, as a publicly-
held unitary savings and loan holding company, is required to file certain
reports with, and otherwise comply with, the rules and regulations of the
Securities and Exchange Commission (the ''SEC'') under the federal securities
laws and of the OTS.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank, and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations, and it does not
purport to be a comprehensive description of all such statutes and regulations.
IMPACT OF ENACTMENT OF THE GRAMM-LEACH-BLILEY ACT
On November 12, 1999, the Gramm-Leach-Bliley Act, or Gramm-Leach was signed
into law. Among other things, Gramm-Leach establishes a comprehensive
framework to permit affiliations among commercial banks, insurance companies
and other financial service providers. Generally, the new law (i) repeals the
historical restrictions and eliminates many federal and state law barriers to
affiliations among banks and securities firms, insurance companies and other
financial service providers, (ii) provides a uniform framework for the
activities of banks, savings institutions and their holding companies, (iii)
broadens the activities that may be conducted by national banks and banking
subsidiaries of bank holding companies, (iv) provides an enhanced framework for
protecting the privacy of consumer's information, (v) adopts a number of
provisions related to the capitalization, membership, corporate governance and
other measures designed to modernize the FHLB system, (vi) requires
public disclosure of certain agreements relating to funds expended in
connection with the Community Reinvestment Act and (vii) addresses a variety
of other legal and regulatory issues affecting both day-to-day operations and
long-term activities of financial institutions, including the functional
regulation of bank securities activities.
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Gramm-Leach also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan holding companies that
are "grandfathered," I.E., became a unitary savings and loan holding company
pursuant to an application filed with the OTS before May 4, 1999, such as us,
retain their authority under the prior law. All other savings and loan holding
companies would be limited to financially related activities permissible for
bank holding companies, as defined under Gramm-Leach. Gramm Leach also
prohibits non-financial companies from acquiring grandfathered savings and loan
association holding companies.
Gramm-Leach also requires financial institutions to disclose, on ATM machines,
any non-customer fees and to disclose to their customers upon the issuance of
an ATM card any fees that may be imposed by the institution on ATM users. For
older ATMs, financial institutions will have until December 31, 2004 to provide
such notices.
Bank holding companies are permitted to engage in a wider variety of financial
activities than permitted under the prior law, particularly with respect to
insurance and securities activities. In addition, in a change from the prior
law, bank holding companies will be in a position to be owned, controlled or
acquired by any company engaged in financially related activities.
We do not believe that the new law will have a material adverse affect upon our
operations in the near term. However, to the extent the new law permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. This could result in a growing
number of larger financial institutions that offer a wider variety of financial
services than we currently offer and that can aggressively compete in the
markets we currently serve.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
BUSINESS ACTIVITIES. The Bank derives its lending and investment powers
from the Home Owner's Loan Act, as amended (''HOLA''), and the regulations of
the OTS thereunder. Under these laws and regulations, the Bank may invest in
mortgage loans secured by residential and commercial real estate, commercial
and consumer loans, certain types of debt securities, and certain other assets.
The Bank may also establish service corporations that may engage in activities
not otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on commercial loans, with the
amount of commercial loans in excess of 10% of assets being limited to small
business loans; (d) a limit of 35% of an association's assets on the aggregate
amount of consumer loans and acquisitions of certain debt securities; (e) a
limit of 5% of assets on non-conforming loans (loans in excess of the specific
limitations of HOLA); and (f) a limit of the greater of 5% of assets or an
association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
LOANS TO ONE BORROWER. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are fully secured by readily-marketable collateral. Such
collateral is defined to include certain debt and equity securities and
bullion, but generally does not include real estate. At June 30, 2000, the
Bank's limit on loans to one borrower was $29.1 million. At June 30, 2000, the
Bank's largest aggregate amount of loans to one borrower was $15.7 million and
the second largest borrower had an aggregate balance of $14.3 million.
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<PAGE>
QTL TEST. HOLA requires a savings association to meet a QTL test. A
savings association may satisfy the QTL test by maintaining at least 65% of its
''portfolio assets'' in certain ''qualified thrift investments'' in at least
nine months of the most recent twelve-month period. ''Portfolio assets'' means,
in general, an association's total assets less the sum of (a) specified liquid
assets up to 20% of total assets, (b) certain intangibles, including goodwill
and credit card and purchased mortgage servicing rights, and (c) the value of
property used to conduct the association's business. ''Qualified thrift
investments'' includes various types of loans made for residential and housing
purposes, investments related to such purposes, including certain mortgage-
backed and related securities, small business loans, education loans, and
credit card loans. At June 30, 2000, the Bank maintained 89.0% of its portfolio
assets in qualified thrift investments. The Bank had also satisfied the QTL
test in each of the prior 12 months and, therefore, was a qualified thrift
lender. A savings association may also satisfy the QTL test by qualifying as a
"domestic building and loan association" as defined in the Internal Revenue
Code of 1986.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The
initial restrictions include prohibitions against (a) engaging in any new
activity not permissible for a national bank, (b) paying dividends not
permissible under national bank regulations, (c) obtaining new advances from
any FHLB, and (d) establishing any new branch office in a location not
permissible for a national bank in the association's home state. In addition,
within one year of the date a savings association ceases to meet the QTL test,
any company controlling the association would have to register under, and
become subject to the requirements of, the Bank Holding Company Act of 1956, as
amended. If the savings association does not requalify under the QTL test
within the three-year period after it failed the QTL test, it would be required
to terminate any activity and to dispose of any investment not permissible for
a national bank and would have to repay as promptly as possible any outstanding
advances from any FHLB. A savings association that has failed the QTL test may
requalify under the QTL test and be free of such limitations, but it may do so
only once.
CAPITAL REQUIREMENTS. The OTS regulations require savings associations to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations and a risk-based
capital ratio requirement of 8% of core and supplementary capital to total
risk-based assets. The OTS regulations also provide that the minimum leverage
capital ratio, or core capital to total adjusted assets, under Office of Thrift
Supervision regulations for a depository institution that has been assigned the
highest composite rating of 1 under the Uniform Financial Institutions Rating
is 3% and that the minimum leverage capital ratio for any other depository
institution is 4%, unless a higher capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. In determining
the amount of risk-weighted assets for purposes of the risk-based capital
requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies, to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights and investments in and loans to subsidiaries engaged
in activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain
qualifying supervisory goodwill and certain purchased credit card
relationships. Supplementary capital currently includes cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, and the allowance for
possible loan losses. The OTS and other federal banking regulators adopted,
effective October 1, 1998, an amendment to their risk-based capital guidelines
that permits insured depository institutions to include in supplementary
capital up to 45% of the pretax net unrealized holding gains on certain
available-for-sale equity securities, as such gain are computed under the
guidelines. The allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets,
and the amount of supplementary capital that may be included as total capital
cannot exceed the amount of core capital.
The OTS regulations require a savings association with ''above normal''
interest rate risk to deduct a portion of such capital from its total capital
to account for the ''above normal'' interest rate risk. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (I.E., the difference between incoming and outgoing discounted cash
flows from assets, liabilities and off-balance sheet contracts) resulting from
a hypothetical 2% increase or decrease in market rates of interest, divided by
the estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. At the times when the 3-month
Treasury bond equivalent yield falls below 4%, an association may compute its
interest rate risk on the basis of a decrease equal to one-half of that
Treasury rate rather than on the basis of 2%. A savings association whose
measured interest rate risk exposure exceeds 2% would be considered to have
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''above normal'' risk. The interest rate risk component is an amount equal to
one-half of the difference between the association's measured interest rate
risk and 2%, multiplied by the estimated economic value of the association's
assets. That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Any required
deduction for interest rate risk becomes effective on the last day of the third
quarter following the reporting date of the association's financial data on
which the interest rate risk was computed. The OTS has indefinitely deferred
the implementation of the intrest rate risk component in the computation of an
institution's risk-based capital requirements. The OTS continues to monitor
the interest rate risk of individual institutions and retains the right to
impose additional capital requirements on individual institutions.
The table below presents the Bank's regulatory capital as compared to the
OTS regulatory capital requirements at June 30, 2000:
<TABLE>
<CAPTION>
Actual Minimum Capital Requirement
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Amount Ratio Amount Ratio
--------- --------- ---------- ----------
As of June 30, 2000: (Dollars In Thousands)
Tangible $136,772 5.76% $35,600 1.5%
Leverage Capital 136,772 5.76 94,934 4.0%
Risk-based capital 151,556 11.62 104,386 8.0%
</TABLE>
The following is a reconciliation of generally accepted accounting principles
(GAAP) capital to regulatory capital for the Bank:
<TABLE>
<CAPTION>
At June 30, 2000
<S> <C> <C> <C>
Tangible Leverage Risk-Based
Capital Capital Capital
--------- --------- ---------
(Dollars In Thousands)
GAAP capital $194,236 $194,236 $194,236
--------- --------- ---------
Non-allowable assets:
Unrealized loss on available for
sale securities 6,550 6,550 6,550
Goodwill (60,254) (60,254) (60,254)
Core deposit intangible (3,760) (3,760) (3,760)
General valuation allowance - - 14,784
--------- --------- ---------
Regulatory capital 136,772 136,772 151,556
Minimum capital requirement 35,600 94,934 104,386
--------- --------- ---------
Regulatory capital excess $101,172 $41,838 $47,170
========= ========= =========
</TABLE>
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital.
Under the OTS regulations governing capital distributions, certain savings
associations are permitted to pay capital distributions during a calendar year
that do not exceed the association's net income for the year plus its retained
net income for the prior two years, without notice to, or the approval of, the
OTS. However, a savings association subsidiary of a savings and loan holding
company, such as the Company, will continue to have to file an application to
receive the approval of the OTS. In addition, the OTS can prohibit a proposed
capital distribution, otherwise permissible under the regulation, if the OTS
has determined that the association is in need of more than normal supervision
or if it determines that a proposed distribution by an association would
constitute an unsafe or unsound practice. Furthermore, under the OTS prompt
corrective action regulations, the Bank would be prohibited from making any
capital distribution if, after the distribution, the Bank failed to meet its
minimum capital requirements, as described above. See '' - Prompt Corrective
Regulatory Action.''
LIQUIDITY. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of
certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of
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its net withdrawable deposit accounts plus short-term borrowings. This
liquidity requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10% depending upon economic conditions and the
savings flows of member institutions, and is currently 4%. Monetary penalties
may be imposed for failure to meet these liquidity requirements. The Bank's
average liquidity ratio for the month ended June 30, 2000 was 12.1% which
exceeded the applicable requirements. The Bank has never been subject to
monetary penalties for failure to meet its liquidity requirements.
ASSESSMENTS. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. The Bank's
assessment expense during the year ended June 30, 2000 totaled $360,000. The
OTS has adopted amendments to its regulations, effective January 1, 1999, that
are intended to assess savings associations on a more equitable basis. The
regulations base the assessment for an individual savings association on three
components: the size of the association, on which the basic assessment is
based; the association's supervisory condition, which results in percentage
increases for any savings institution with a composite rating of 3, 4 or 5 in
its most recent safety and soundness examination; and the complexity of the
association's operations, which results in percentage increases for a savings
association that managed over $1 billion in trust assets, serviced for others
loans aggregating more than $1 billion, or had certain off-balance sheet assets
aggregating more than $1 billion. In order to avoid a disproportionate impact
upon the smaller savings institutions, which are those whose total assets never
exceeded $100.0 million, the regulations provide that the portion of the
assessment based on asset size will be the lesser of the assessment under the
amended regulations or the regulations before the amendment.
BRANCHING. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
associations located in another state and (b) to an association that either
satisfies the QTL test for a "qualified thrift lender," or qualifies as a
''domestic building and loan association'' under the Internal Revenue Code of
1986, which imposes qualification requirements similar to those for a
''qualified thrift lender'' under HOLA. See ''QTL Test.'' The authority for a
federal savings association to establish an interstate branch network would
facilitate a geographic diversification of the association's activities. This
authority under HOLA and the OTS regulations preempts any state law purporting
to regulate branching by federal savings associations.
COMMUNITY REINVESTMENT. Under the CRA, as implemented by OTS regulations,
a savings association has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings association, to assess the association's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such association. The CRA also
requires all institutions to make public disclosure of their CRA ratings. The
Bank received an "Outstanding" CRA performance rating and a ''Satisfactory''
CRA compliance rating in its most recent examination. In May, 2000, the OTS
proposed regulations implementing the requirements under Gramm-Leach tha
insured depository institutions publicly disclose certain agreements that
are in fulfillment of CRA. We have no such agreement in place at this time.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that rates an institution based on its actual performance in
meeting community needs. In particular, the amended system focuses on three
tests: (a) a lending test, to evaluate the institution's record of making loans
in its service areas; (b) an investment test, to evaluate the institution's
record of investing in community development projects, affordable housing, and
programs benefiting low or moderate income individuals and businesses; and (c)
a service test, to evaluate the institution's delivery of services through its
branches, ATMs, and other offices. The amended CRA regulations also clarify how
an institution's CRA performance would be considered in the application
process.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with its ''affiliates'' is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act (''FRA''). In general, an
affiliate of the Bank is any company that controls the Bank or any other
company that is controlled by a company that controls the Bank, excluding the
Bank's subsidiaries other than those that are insured depository institutions.
Currently, a subsidiary of a bank that is not also a depository institution is
not treated as an affiliate of the bank for purposes of Sections 23A and 23B,
but the Federal Reserve
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Bank has proposed treating any subsidiary of a bank
that is engaged in activities not permissible for bank holding companies under
the BHCA as an affiliate for purposes of Sections 23A and 23B. The OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the Bank Holding Company Act (''BHC
Act'') and (b) from purchasing the securities of any affiliate other than a
subsidiary. Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
association and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings association's capital and surplus. Extensions
of credit to affiliates are required to be secured by collateral in an amount
and of a type described in Section 23A, and the purchase of low quality assets
from affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the association as those
prevailing at the time for comparable transactions with nonaffiliated
companies. In the absence of comparable transactions, such transactions may
only occur under terms and circumstances, including credit standards, that in
good faith would be offered to or would apply to nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive officers,
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the Federal Reserve Board (''FRB'') thereunder. Among other
things, these provisions require that extensions of credit to insiders (a) be
made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features and (b)
not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on
the amount of the association's capital. In addition, extensions of credit in
excess of certain limits must be approved by the association's board of
directors.
ENFORCEMENT. Under the Federal Deposit Insurance Act (''FDI Act''), the
OTS has primary enforcement responsibility over savings associations and has
the authority to bring enforcement action against all ''institution-affiliated
parties,'' including any controlling stockholder or any shareholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or
certain other wrongful actions that causes or is likely to cause a more than a
minimal loss or other significant adverse effect on an insured savings
association. Civil penalties cover a wide range of violations and actions and
range from $5,000 for each day during which violations of law, regulations,
orders, and certain written agreements and conditions continue, up to $1
million per day for such violations if the person obtained a substantial
pecuniary gain as a result of such violation or knowingly or recklessly caused
a substantial loss to the institution. Criminal penalties for certain financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. In addition, regulators have substantial discretion to take
enforcement action against an institution that fails to comply with its
regulatory requirements, particularly with respect to its capital requirements.
Possible enforcement actions range from the imposition of a capital plan and
capital directive to receivership, conservatorship, or the termination of
deposit insurance. Under the FDI Act, the FDIC has the authority to recommend
to the Director of OTS that enforcement action be taken with respect to a
particular savings association. If action is not taken by the Director of the
OTS, the FDIC has authority to take such action under certain circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the requirements of the
FDI Act, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994 (''Community Development Act''), the OTS,
together with the other federal bank regulatory agencies, have adopted a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, asset quality,
earnings and compensation, fees and benefits. In general, the guidelines
require, among other things, appropriate systems and practices to identify and
manage the risks and exposures specified in the guidelines. The guidelines
prohibit excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholder. In addition, the OTS adopted regulations
pursuant to FDICIA that authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that it is not satisfying any
of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may
issue an order directing other actions of the types to which an
undercapitalized association is subject under the ''prompt corrective action''
provisions of FDICIA. If an institution fails to comply with such an order, the
OTS may seek to enforce such order in judicial proceedings and to impose civil
money penalties.
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REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of
financing the construction of improvements on real estate. The OTS regulations
require each savings association to establish and maintain written internal
real estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards also must be
consistent with accompanying OTS guidelines, which include loan-to-value ratios
for the different types of real estate loans. Associations are also permitted
to make a limited amount of loans that do not conform to the proposed loan-to-
value limitations so long as such exceptions are reviewed and justified
appropriately. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value standards are justified.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings associations.
For this purpose, a savings association would be placed in one of five
categories based on the association's capital. Generally, a savings association
is treated as ''well capitalized'' if its ratio of total capital to risk-
weighted assets is at least 10.0%, its ratio of core capital to risk-weighted
assets is at least 6.0%, its ratio of core capital to total assets is at least
5.0%, and it is not subject to any order or directive by the OTS to meet a
specific capital level. A savings association will be treated as ''adequately
capitalized'' if its ratio of total capital to risk-weighted assets is at least
8.0%, its ratio of core capital to risk-weighted assets is at least 4.0%, and
its ratio of core capital to total assets is at least 4.0% (3.0% if the
association receives the highest rating on the CAMEL financial institutions
rating system). A savings association that has a total risk-based capital of
less than 8.0% or Tier 1 risk-based capital ratio that is less than 4.0% or a
leverage ratio (3.0% leverage ratio if the association receives the highest
rating on the CAMEL financial institutions rating system) is considered to be
''undercapitalized.'' A savings association that has a total risk-based capital
of less than 6.0% or a Tier 1 risk-based capital ratio or a leverage ratio of
less than 3.0% is considered to be ''significantly undercapitalized.'' A
savings association that has a tangible capital to assets ratio equal to or
less than 2% is deemed to be ''critically undercapitalized.'' The elements of
an association's capital for purposes of the prompt corrective action
regulations are defined generally as they are under the regulations for minimum
capital requirements. As of the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
institution's category. See ''- Capital Requirements.''
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching, and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent,
pay any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky, and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver for an
association, the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository association holding company or
combine with another depository association. The OTS and the FDIC have a broad
range of grounds under which they may appoint a receiver or conservator for an
insured depository association. Under FDICIA, the OTS is required to appoint a
receiver (or with the concurrence of the FDIC, a conservator) for a critically
undercapitalized association within 90 days after the association becomes
critically undercapitalized or, with the concurrence of the FDIC, to take such
other action that would better achieve the purposes of the prompt corrective
action provisions. Such alternative action can be renewed for successive 90-day
periods. However, if the association continues to be critically
undercapitalized on average during the quarter that begins 270 days after it
first became critically undercapitalized, a receiver must be appointed, unless
the OTS makes certain
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<PAGE>
findings with which the FDIC concurs and the Director of
the OTS and the Chairman of the FDIC certify that the association is viable. In
addition, an association that is critically undercapitalized is subject to more
severe restrictions on its activities, and is prohibited, without prior
approval of the FDIC from, among other things, entering into certain material
transactions or paying interest on new or renewed liabilities at a rate that
would significantly increase the association's weighted average cost of funds.
When appropriate, the OTS can require corrective action by a savings
association holding company under the ''prompt corrective action'' provisions
of FDICIA.
INSURANCE OF DEPOSIT ACCOUNTS. Savings associations are subject to a risk-
based assessment system for determining the deposit insurance assessments to be
paid by insured depository institutions. Under the risk-based assessment
system, which began in 1993, the FDIC assigns an institution to one of three
capital categories based on the institution's financial information as of the
reporting period ending seven months before the assessment period. The three
capital categories consist of (a) well capitalized, (b) adequately capitalized,
or (c) undercapitalized. The FDIC also assigns an institution to one of the
three supervisory subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based upon a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Under the regulation, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates currently range from 0.0% of deposits for an institution in
the highest category (i.e., well-capitalized and financially sound, with no
more than a few minor weaknesses) to 0.27% of deposits for an institution in
the lowest category (i.e., undercapitalized and substantial supervisory
concern). The FDIC is authorized to raise the assessment rates as necessary to
maintain the required reserve ratio of 1.25%. Both the BIF and SAIF currently
satisfy the reserve ratio requirement. If the FDIC determines that assessment
rates should be increased, institutions in all risk categories could be
affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. If such action is taken,
it could have an adverse effect upon the earnings of the Bank.
The Funds Act of 1996 also amended the FDIA to recapitalize the SAIF and to
expand the assessment base for the payments of FICO bonds. Beginning January
1, 1997, the assessment base included the deposits of both BIF and SAIF-insured
institutions. Until December 31, 1999, or such earlier date on which the last
savings association ceases to exist, the rate of assessment for BIF-assessable
deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits.
For the semi-annual period beginning on July 1, 1997, the rates of assessment
for FICO bonds are 0.0126% for BIF-assessable deposits and 0.0630% for SAIF-
assessable deposits. For the semi-annual period beginning July 1, 1998, the
rates of assessment for the FICO bonds is 0.0122% for BIF-assessable deposits
and 0.0610 for SAIF-assessable deposits.
PRIVACY PROTECTION. The OTS has recently adopted regulations implementing
the privacy protection provisions of Gramm-Leach. The regulations, which
require each financial institution to adopt procedures to protect customers'
and customers' "non-public personal information" will become effective November
13, 2000, however, full compliance will be optinal until July 1, 2001. The
Bank will be required to disclose our privacy policy, including
identifying with whom we share "non-public personal information," to
customers at the time of establishing the customer relationship and
annually thereafter. In addition, the Bank will be required to provide
its customers with the ability to "opt-out" of having us share their personal
information with unaffiliated third parties. The Bank currently has
a privacy protection policy in place and intends to review and amend this
policy, if necessary for compliance with the regulations. We do not
believe that these regulations will have a material impact on our business,
financial condition or results of operations.
Gramm-Leach also provides for the ability of each state to enact legislation
that is more protective of consumers' personal information. Currently there
are a number of privacy bills pending in the New York legislature. No action
has been taken on any of these bills, and we cannot predict what impact, if
any, these bills will have.
INSURANCE ACTIVITIES. As a federal savings bank, we are generally
permitted to engage in certain insurance activities through subsidiaries.
In August, 2000, the OTS and the other federal banking agencies proposed
regulations pursuant to Gramm-Leach which would prohibit depository
institutions from conditioning the extension of credit to individuals
upon either the purchase of an insurance product or annuity or an agreement
by the consumer not to purchase an insurance product or annuity from an entity
that is not affiliated with the depository institution. The proposed
regulations would also require
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<PAGE>
prior disclosure of this prohibition to
potential insurance product or annuity customers. We do not believe
that these regulations, if adopted as proposed, would have a material
impact on our operations.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLBNY, which
is one of the regional FHLBs composing the FHLB System. Each FHLB provides a
central credit facility primarily for its member institutions. The Bank, as a
member of the FHLBNY, is required to acquire and hold shares of capital stock
in the FHLB in an amount at least equal to the greater of 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year or one-twentieth{ }of its advances
(borrowings) from the FHLBNY. The Bank was in compliance with this requirement
with an investment in FHLB stock at June 30, 2000, of $42.4 million. Any
advances from a FHLB must be secured by specified types of collateral, and all
long-term advances may be obtained only for the purpose of providing funds for
residential housing finance. The FHLBNY paid dividends on the capital stock of
$2.6 million during the fiscal year ended June 30, 2000, $1.5 million during
the fiscal year ended June 30, 1999, and $663,000 during the years ended June
30, 1998. If dividends were reduced, or interest on future FHLB advances
increased, the Bank's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of FDICIA and the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (''FIRREA'') on the
FHLBs will not also cause a decrease in the value of the FHLB stock held by the
Bank.
FEDERAL RESERVE SYSTEM. The Bank is subject to provisions of the FRA and
the FRB's regulations pursuant to which depository institutions may be required
to maintain non-interest-earning reserves against their deposit accounts and
certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained in the amount of 3%
of the aggregate of transaction accounts up to $44.3 million. The amount of
aggregate transaction accounts in excess of $44.3 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 14%.
The FRB regulations currently exempt $4.9 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve Bank, or
a pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. FHLB System members are also
authorized to borrow from the Federal Reserve ''discount window,'' but FRB
regulations require such institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.
REGULATION OF HOLDING COMPANY
The Company is a non-diversified unitary savings association holding company
within the meaning of HOLA, as amended. As such, the Company is required to
register with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries, if
any. Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the financial safety,
soundness, or stability of a subsidiary savings association.
HOLA prohibits a savings association holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
association or holding company thereof, without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-
subsidiary savings association, a non-subsidiary holding company, or a non-
subsidiary company engaged in activities other than those permitted by HOLA; or
acquiring or retaining control of a depository institution that is not insured
by the FDIC. In evaluating an application by a holding company to acquire a
savings association, the OTS must consider the financial and managerial
resources and future prospects of the company and savings association involved,
the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community, and competitive factors.
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to satisfy the QTL test. See
''- Regulation of Federal Savings Associations - QTL Test'' for a discussion of
the QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association or of a savings bank that meets the QTL test and is
deemed to be a savings association by the OTS and that will be held as a
separate subsidiary, the Company will become a multiple savings association
holding company and will be subject to limitations on the types of business
activities in which it can engage. HOLA limits the activities of a multiple
savings association holding company and its non-insured association
subsidiaries primarily to activities
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<PAGE>
permissible for bank holding companies under Section 4(c)(8) of the BHC Act,
subject to the prior approval of the OTS, and to other activities authorized by
OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings association holding company controlling savings associations
in more than one state, subject to two exceptions: an acquisition of a savings
association in another state (a) in a supervisory transaction, and (b) pursuant
to authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of
requiring that the laws of both the state in which the acquiring holding
company is located (as determined by the location of its subsidiary savings
association) and the state in which the association to be acquired is located,
have each enacted legislation allowing its savings associations to be acquired
by out-of-state holding companies on the condition that the laws of the other
state authorize such transactions on terms no more restrictive than those
imposed on the acquiror by the state of the target association. Some of these
states also impose regional limitations, which restrict such acquisitions to
states within a defined geographic region. Other states allow full nationwide
banking without any condition of reciprocity. Some states do not authorize
interstate acquisitions of savings associations.
Transactions between the Company and the Bank, including any of its
subsidiaries, and any of its affiliates are subject to various conditions and
limitations. See '' Regulation of Federal Savings Associations - Transactions
with Related Parties.'' The Bank must file an application with the OTS prior to
any declaration of the payment of any dividends or other capital distributions
to the Company. See ''- Regulation of Federal Savings Associations - Limitation
on Capital Distributions.''
FEDERAL SECURITIES LAWS
The Company's Common stock is registered with the SEC under Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
ITEM 2 - PROPERTIES
The Bank conducts its business through eighteen full-service offices,
including six offices acquired from Conestoga in June, 1996, and five offices
acquired from FIBC in January, 1999. The Bank's Main Office and headquarters is
located at 209 Havemeyer Street, Brooklyn, New York. The Bank believes that its
current facilities are adequate to meet the present and immediately foreseeable
needs of the Bank and the Company.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Leased or Date Leased Lease Expiration Net Book Value
Owned or Acquired Date at June 30, 2000
-----------------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE OFFICE Owned 1989 - $3,607,488
275 South 5{th} Street
Brooklyn. New York 11211
MAIN OFFICE Owned 1906 - $1,005,424
209 Havemeyer Street
Brooklyn, New York 11211
AVENUE M BRANCH Owned 1993 - $462,282
1600 Avenue M at East 16{th}
Street Brooklyn, New York 11230
BAYSIDE BRANCH Leased 1974 May, 2004 $44,964
61-38 Springfield Boulevard
Bayside, New York 11364
BELLMORE BRANCH Owned 1973 - $464,589
2412 Jerusalem Avenue
Bellmore, New York 11710
BENSONHURST BRANCH Owned 1978 - $1,195,463
1545 86{th} Street
Brooklyn, New York 11228
BRONX BRANCH (1) Leased 1965 October, 2006 $124,184
1931 Turnbull Avenue
Bronx, New York 10473
FLUSHING BRANCH Leased 1974 November, 2013 $194,836
59-23 Main Street
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<PAGE>
Flushing, New York 11355
GREENPOINT BRANCH Owned 1995 - $872,597
814 Manhattan Avenue
Brooklyn, NY 11222
HELP CENTER Leased 1998 May, 2003 $78,092
1379 Jerusalem Avenue
Merrick, New York 11566
HILLCREST BRANCH Leased 1971 May, 2001 $35,317
176-47 Union Turnpike
Flushing, New York 11366
JACKSON HEIGHTS BRANCH Leased 1990 August, 2005 $520,180
75-23 37{th} Avenue
Jackson Heights, New York 11372
PROPERTIES (CONTINUED)
KINGS HIGHWAY BRANCH Owned 1976 - $708,107
1902-1904 Kings Highway
Brooklyn, New York 11229
LONG ISLAND CITY BRANCH Leased 1976 April, 2001 $64,418
45-14 46{th} Street
Long Island City, New York 11104
MARINE PARK BRANCH Owned 1993 - $795,549
2172 Coyle Street
Brooklyn, NY 11229
MERRICK BRANCH Owned 1960 - $220,067
1775 Merrick Avenue
Merrick, New York 11566
PORT WASHINGTON BRANCH Owned 1971 - $371,312
1000 Port Washington Boulevard
Port Washington, New York 11050
SUNNYSIDE BRANCH Owned 1962 - $2,769,619
42-25 Queens Boulevard
Long Island City, New York 11104
WESTBURY BRANCH (2) <F3> 1994 - $477,788
622 Old Country Road
Westbury, New York 11590
WHITESTONE BRANCH Owned 1979 - $758,743
24-44 Francis Lewis Boulevard
Whitestone, New York 11357
<FN>
<F1> The Bank has an option to extend this lease for an additional ten year term
at fair market rent, as determined by the agreement of the parties or, if
the parties cannot agree, by arbitration
<F2> This branch office opened April 29, 1995.
<F3> Building owned, land leased. Lease expires in October, 2003.
</TABLE>
ITEM 3 - LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than legal
actions arising in the ordinary course of its business which, in the aggregate,
involve amounts which are believed to be immaterial to the financial condition
and results of operations of the Bank.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5- MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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<PAGE>
Information regarding the market for the Company's common stock and related
stockholder matters appears in the 2000 Annual Report under the caption "Market
for the Company's Common Stock and Related Stockholder Matters," and is
incorporated herein by this reference.
ITEM 6. - SELECTED FINANCIAL DATA
Information regarding selected financial data appears in the 2000 Annual Report
to Shareholders for the year ended June 30, 2000 ("2000 Annual Report") under
the caption "Financial Highlights," and is incorporated herein by this
reference.
ITEM 7. -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information regarding management's discussion and analysis of financial
condition and results of operations appears in the 2000 Annual Report under
the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and is incorporated herein
by this reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding market risk appears in the 2000 Annual Report to
Shareholders under the caption "Discussion of Market Risk" and is incorporated
herein by reference.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information regarding financial statements and supplementary data, including
the Independent Auditors' Report appears in the 2000 Annual Report under the
captions:
"Independent Auditors' Report," "Consolidated Statements of Financial Condition
at June 30, 2000 and 1999,"
"Consolidated Statements of Operations for each of the years in the three year
period ended June 30, 2000,"
"Consolidated Statements of Stockholders' Equity and Comprehensive Income for
each of the years in the three year period ended June 30, 2000," "Consolidated
Statements of Cash Flows for each of the years in the three year period ended
June 30,2000,"and "Notes to Consolidated Financial Statements," and is
incorporated herein by this reference.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding directors and executive officers of the Company is
presented under the headings "Proposal 1 - Election of Directors - General, "-
Information as to Nominees and Continuing Directors,""- Nominees for Election
as Director," "-Continuing Directors," "-Meetings and Committees of the Board
of Directors," "-Executive Officers," "-Directors' Compensation," "-Executive
Compensation," and "-Section 16(a) Beneficial Ownership Reporting Compliance"
in the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on November 9, 2000 (the "Proxy Statement") which will
be filed with the SEC within 120 days of June 30, 2000, and is incorporated
herein by reference.
ITEM 11. - EXECUTIVE COMPENSATION
Information regarding executive and director compensation is presented
under the headings "Election of Directors - Directors' Compensation," "-
Executive Compensation," "-Summary Compensation Table," "Employment
Agreements," "- Employee Retention Agreements," "-Employee Severance
Compensation Plan," and "- Benefits," in the Proxy Statement and is
incorporated herein by reference.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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<PAGE>
Information regarding security ownership of certain beneficial owners and
management is included under the headings "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement and is incorporated
herein by reference.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
included under the heading "Transactions with Certain Related Persons" in the
Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements and schedules of the
Company, and the independent auditors' report thereon are included in the
Company's Annual Report to Shareholders for the year ended June 30, 2000,
and are incorporated herein by reference:
Independent Auditors' Report
Consolidated Statements of Financial Condition at June 30, 2000 and 1999
Consolidated Statements of Operations for each of the years in the three
year period ended June 30, 2000
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for each of the years in the three year period ended June 30, 2000
Consolidated Statements of Cash Flows for each of the years in the three
year period ended June 30,2000
Notes to Consolidated Financial Statements
Quarterly Results of Operations (Unaudited) for each of the years in the
two year period ended June 30, 2000
The remaining information appearing in the 2000 Annual Report is not
deemed to be filed as a part of this report, except as expressly provided
herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000
On April 6, 2000, the Company filed a Current Report on Form 8-K
regarding the issuance of its preliminary earnings for the quarter
ended March 31, 2000.
On April 12, 2000, the Company filed a Current Report on Form 8-K
regarding the issuance of $25.0 million in subordinated notes.
(c) Exhibits Required by Item 601 of Securities and Exchange Commission
Regulation S-K:
EXHIBIT
NUMBER
------------
3.1 Certificate of Incorporation of Dime Community Bancshares, Inc.(1)
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<PAGE>
3.2 Bylaws of Dime Community Bancshares, Inc. (1)
4.1 Certificate of Incorporation of Dime Community Bancshares, Inc. (See
Exhibit 3.1 hereto).
4.2 Bylaws of Dime Community Bancshares, Inc. (See Exhibit 3.2 hereto).
4.3 Draft Stock Certificate of Dime Community Bancshares, Inc. (1)
4.4 Certificate of Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock (2)
4.5 Rights Agreement, dated as of April 9, 1998, between Dime Community
Bancorp, Inc. and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent (2)
4.6 Form of Rights Certificate (2)
10.1 Agreement and Plan of Merger, dated as of July 18, 1998, by and
between Dime Community Bancshares, Inc. and Financial Bancorp,
Inc.(3)
10.2 Amended and Restated Employment Agreement between The Dime Savings
Bank of Williamsburgh and Vincent F. Palagiano (4)
10.3 Amended and Restated Employment Agreement between The Dime Savings
Bank of Williamsburgh and Michael P. Devine (4)
10.4 Amended and Restated Employment Agreement between The Dime Savings
Bank of Williamsburgh and Kenneth J. Mahon (4)
10.5 Employment Agreement between Dime Community Bancorp, Inc. and Vincent
F. Palagiano (4)
10.6 Employment Agreement between Dime Community Bancorp, Inc. and Michael
P. Devine (4)
10.7 Employment Agreement between Dime Community Bancorp, Inc. and
Kenneth J. Mahon (4)
10.8 Form of Employee Retention Agreements by and among The Dime Savings
Bank of Williamsburgh, Dime Community Bancorp, Inc. and certain
executive officers (4)
10.9 The Benefit Maintenance Plan of Dime Community Bancorp, Inc. (5)
10.10 Severance Pay Plan of The Dime Savings Bank of Williamsburgh (4)
10.11 Retirement Plan for Board Members of Dime Community Bancorp, Inc. (5)
10.12 Dime Community Bancorp, Inc. Stock Option Plan for Outside Directors ,
Officers and Employees, as amended by amendments number 1 and 2.(5)
10.13 Recognition and Retention Plan for Outside Directors, Officers and
Employees of Dime Community Bancorp, Inc., as amended by amendments
number 1 and 2. (5)
10.14 Form of stock option agreement for Outside Directors under Dime
Community Bancorp, Inc. 1996 Stock Option Plan for Outside Directors,
Officers and Employees. (5)
10.15 Form of stock option agreement for officers and employees under Dime
Community Bancorp, Inc. 1996 Stock Option Plan for Outside
Directors,Officers and Employees (5)
10.16 Form of award notice for outside directors under the Recognition and
Retention Plan for Outside Directors, Officers and Employees of
Dime Community Bancorp, Inc. (5)
10.17 Form of award notice for officers and employees under the Recognition
and Retention Plan for Outside Directors, Officers and Employees
of Dime Community Bancorp, Inc. (5)
10.18 Financial Federal Savings Bank Incentive Savings Plan in RSI
Retirement Trust.
10.19 Financial Federal Savings Bank Employee Stock Ownership Plan.
10.20 Option Conversion Certificates between Dime Community Bancshares, Inc.
and each of Messrs: Russo, Segrete, Calamari, Latawiec, O'Gorman,
and Ms. Swaya pursuant to Section 1.6(b) of the Agreement and Plan
of Merger, dated as of July 18, 1998 by and between Dime Community
Bancshares, Inc. and Financial Bancorp, Inc.
11.0 Statement Re: Computation of Per Share Earnings
13.1 2000 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (EDGAR filing only)
(1) Incorporated by reference to the registrant's Annual Report of Form 10K for
the fiscal year ended June 30, 1998, and filed on September 28, 1998.
(2) Incorporated by reference to the registrant's Current Report on Form 8-K
dated April 9, 1998, and filed on April 16, 1998.
(3) Incorporated by reference to the registrant's Current Report on Form 8-K,
dated July 18, 1998, and filed on July 20, 1998, and amended in July 27,
1998.
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<PAGE>
(4) Incorporated by reference to Exhibits to the Annual Report on Form 10-K for
the fiscal year ended June 30, 1997 and filed on September 26, 1997.
(5) Incorporated by reference to the registrant's Annual Report of Form 10K for
the fiscal year ended June 30, 1997, and filed on September 26, 1997.
(6) Incorporated by reference to the registrant's Current Report on Form 8-K,
dated July 18, 1998, and filed on July 20, 1998, and amended in July 27,
1998.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange
Act of 1934, as amended, the Registrant certifies that it has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on September 28, 2000.
Dime Community Bancshares, Inc.
By: /S/ VINCENT F. PALAGIANO
Vincent F. Palagiano
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/S/ VINCENT F. PALAGIANO
Vincent F. Palagiano Chairman of the Board and Chief September 28, 2000
Executive Officer (Principal
executive officer)
/S/ MICHAEL P. DEVINE
Michael P. Devine President and Chief Operating September 28, 2000
Officer and Director
/S/ KENNETH J. MAHON
Kenneth J. Mahon Executive Vice President, and September 28, 2000
Chief Financial Officer
(Principal financial officer)
/S/ ANTHONY BERGAMO
Anthony Bergamo Director September 28, 2000
/S/ GEORGE L. CLARK, JR.
George L. Clark, Jr. Director September 28, 2000
/S/ STEVEN D. COHN
Steven D. Cohn Director September 28, 2000
/S/ PATRICK E. CURTIN
Patrick E. Curtin Director September 28, 2000
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
/S/ JOSEPH H. FARRELL Director September 28, 2000
Joseph H. Farrell
/S/ FRED P. FEHRENBACH
Fred P. Fehrenbach Director September 28, 2000
/S/ JOHN J. FLYNN
John J. Flynn Director September 28, 2000
/S/ MALCOLM T. KITSON
Malcolm T. Kitson Director September 28, 2000
/S/ STANLEY MEISELS
Stanley Meisels Director September 28, 2000
/S/ LOUIS V. VARONE
Louis V. Varone Director September 28, 2000
</TABLE>
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<PAGE>
