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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to _______________
Commission File No.: 1-13503
STATEN ISLAND BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3958850
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15 BEACH STREET
STATEN ISLAND, NEW YORK 10304
(Address) (Zip Code)
Registrant's telephone number, including area code: (718) 447-7900
Securities registered pursuant to Section 12(g) of the Act: NOT APPLICABLE
Securities registered pursuant to Section 12(b) of the Act
COMMON STOCK (PAR VALUE $.01 PER SHARE)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes / / No /X/
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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Based upon the $20.875 closing price of the Registrant's common stock as of
March 24, 1998, the aggregate market value of the 41,181,350 shares of the
Registrant's common stock deemed to be held by non-affiliates of the Registrant
was: $859.7 million. Although directors and executive officers of the Registrant
and certain of its employee benefit plans were assumed to be "affiliates" of the
Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 24, 1998: 45,130,312
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 1997 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days of December 31, 1997 are incorporated
into Part III, Items 9 through 13 of this Form 10-K.
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PART I
ITEM 1. BUSINESS
STATEN ISLAND BANCORP, INC.
Staten Island Bancorp, Inc. (the "Company") is a Delaware corporation
organized in July 1997 by Staten Island Savings Bank (the "Bank" or "Staten
Island Savings") for the purpose of becoming a unitary holding company of the
Bank. The Bank's conversion to stock form and the concurrent offer and sale of
the Company's common stock was consummated on December 22, 1997. The only
significant assets of the Company are the capital stock of the Bank, the
Company's loan to the Employee Stock Ownership Plan ("ESOP"), and the portion of
the net Conversion proceeds retained by the Company. The business and management
of the Company consists primarily of the business and management of the Bank.
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 intend to
employ any persons other than officers of the Bank, and the Company will utilize
the support staff of the Bank from time to time. Additional employees will be
hired as appropriate to the extent the Company expands or changes its business
in the future.
The Company's executive office is located at the executive office of the
Bank at 15 Beach Street, Staten Island, New York 10304, and its telephone number
is (718) 447-7900.
STATEN ISLAND SAVINGS BANK
The Bank was originally founded as a New York State-chartered savings
bank in 1864. The Bank maintains a network of 16 full-service branch offices
located in Staten Island and one branch office located in the Bay Ridge area of
Brooklyn, New York as well as three limited service branch offices and its Trust
Department office in Staten Island. The Bank is a traditional, full-service,
community oriented savings bank headquartered in Staten Island, New York. Staten
Island Savings is primarily engaged in attracting deposits from the general
public and using those and other available sources of funds to originate loans
secured primarily by single-family (one- to four-units) residences located in
Staten Island and, to a lesser extent, Brooklyn, New York.
The Bank has long-standing ties to Staten Island with over 133 years of
service to the communities and residents of Staten Island, and more recently,
the Bay Ridge area of Brooklyn. As of June 30, 1997 (the latest available data),
the Bank was the largest depository institution in terms of deposit market share
in Staten Island with 30% of the total deposits and 23% of the total number of
branch offices of depository institutions in Staten Island. Historically, the
Bank also has been among the leaders in terms of the number and amount of
residential mortgage loan originations in Staten Island. Staten Island Savings'
operating strategy emphasizes customer service and convenience and, in large
part, the Bank attributes its commitment to maintaining customer satisfaction
for its market share position. The Bank attempts to differentiate itself from
its competitors by providing the type of personalized customer service not
generally available from larger banks while offering a greater variety of
products and services than is typically available from smaller, local depository
institutions. The Bank has an experienced management team directing its
operations. The Bank's Chairman and Chief Executive Officer and President and
Chief Operating Officer have 31 years and 27 years, respectively, of service
with the Bank while the other executive officers of the Bank have an average of
14 years of service with Staten Island Savings.
In recent years, the Bank has facilitated its growth through
acquisitions. In 1990, the Bank acquired several branch offices of a former
savings and loan association from the Resolution Trust Corporation and, in
August 1995, the Bank acquired Gateway Bancorp, Inc. and its wholly owned
subsidiary, Gateway State Bank, a New York-chartered commercial bank ("Gateway")
which was headquartered in Staten Island, New York, and which was merged with
and into the Bank. The acquisition of Gateway added $276.6 million in deposits,
$124.2 million in loans, $123.5 million in securities and five branch offices
(two of which were combined with other offices) to the Bank's balance sheet and
resulted in $15.6 million of goodwill which is being amortized over 20 years on
a straight-line basis. An integral part of the Bank's strategy in acquiring a
commercial bank was to facilitate the diversification of the products and
services offered by the Bank. As a local commercial bank, Gateway's efforts were
directed more towards the commercial sector than retail consumer banking which
had
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been the Bank's primary focus. Gateway also offered certain products and
services previously not available from the Bank, such as commercial business
loans and trust services.
The Bank has attempted to capitalize on its acquisition of Gateway by
generally continuing to offer, with certain changes, the products and services
previously offered by Gateway. As a result, the Bank is able to offer its
customers a more complete product line. In addition, the Bank also has attempted
to enhance its business development efforts through active personal solicitation
of potential new customers as well as by increased cross-selling efforts to
existing customers. While the Bank's lending focus continues to be single-family
(one- to four-units) residential mortgage loans, the acquisition of Gateway has
facilitated the Bank's ability to be a more active originator of commercial real
estate loans, construction and land loans and commercial business loans, which
amounted to 11.1%, 3.7%, and 1.80%, respectively, of the Bank's net loan
portfolio at December 31, 1997. In addition, at such date the Bank's demand
deposit accounts amounted to $183.9 million, or 11.3% of total deposits,
compared to $63.0 million, or 5.1% of total deposits, at December 31, 1994.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary federal regulator. The Bank is also regulated by the Federal Deposit
Insurance Corporation ("FDIC"), the administrator of the Bank Insurance Fund
("BIF"). The Bank is also subject to certain reserve requirements established by
the Board of Governors of the Federal Reserve System ("FRB") and is a member of
the Federal Home Loan Bank ("FHLB") of New York, which is one of the 12 regional
banks comprising the FHLB System.
Staten Island Savings' executive office is located at 15 Beach Street,
Staten Island, New York 10304, and its telephone number is (718) 447-7900.
This Form 10-K and the Company's Annual Report to Stockholders contain
certain forward-looking statements and information relating to the Company that
are based on the beliefs of management as well as assumptions made by and
information currently available to management. In addition, in those and other
portions of this document and the Company's Annual Report to Stockholders, the
words "anticipate, "believe," "estimate," "expect," "intend," "should" and
similar expressions, or the negative thereof, as they relate to the Company or
the Company's management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Company with respect to future
looking events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.
MARKET AREA AND COMPETITION
The Bank faces significant competition both in making loans and in
attracting deposits. There are a significant number of financial institutions
located within the Bank's market area, many of which have greater financial
resources than the Bank. The Bank's competition for loans comes principally from
commercial banks, other savings banks, savings associations and mortgage-banking
companies. The Bank's most direct competition for deposits has historically come
from savings associations, other savings banks, commercial banks and credit
unions. The Bank faces additional competition for deposits from short-term money
market funds and other corporate and government securities funds and from other
non-depository financial institutions such as brokerage firms and insurance
companies. Competition for banking services may increase as a result of, among
other things, the elimination of restrictions on interstate operations of
financial institutions.
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LENDING ACTIVITIES
GENERAL. At December 31, 1997, Staten Island Savings' total net loans
amounted to $1.083 billion or 40.8% of the Company's total assets at such date.
The Bank's primary emphasis has been, and continues to be, the origination of
loans secured by first liens on single-family residences (which includes one-to
four-family residences) located primarily in Staten Island and, to a lesser
extent, Brooklyn and other areas in New York. At December 31, 1997, $814.1
million or 76.9% of the Bank's total mortgage loans were secured by properties
located in Staten Island and an additional $195.9 million or 18.5% of total
mortgage loans were secured by properties located in other areas of New York.
In addition to loans secured by single-family residential real estate,
the Bank's mortgage loan portfolio includes loans secured by commercial real
estate, which amounted to $120.1 million or 11.1% of the net loan portfolio at
December 31, 1997, construction and land loans, which totaled $40.5 million or
3.7% at December 31, 1997, home equity loans, which totaled 6.5 million or .6%
at December 31, 1997, and loans secured by multi-family (over four units)
residential properties, which amounted to $28.2 million or 2.6% of the net loan
portfolio at December 31, 1997. In addition to mortgage loans, the Bank
originates various other loans including commercial business loans and consumer
loans. At December 31, 1997, the Bank's total other loans amounted to $43.7
million or 4.0% of the net loan portfolio.
The types of loans that the Bank may originate are subject to federal
and state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans and the supply of money
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, the monetary
policy of the federal government, including the Federal Reserve Board,
legislative tax policies and governmental budgetary matters.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
December 31,
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1997 1996 1995
---------------------- --------------------- ---------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential... $ 863,694 79.76% $743,089 76.76% $611,964 76.39%
Multi-family residential.... 28,218 2.61 26,444 2.73 25,977 3.24
Commercial real estate...... 120,084 11.09 115,593 11.94 99,000 12.36
Construction and land....... 40,479 3.74 28,779 2.97 18,123 2.26
Home equity................. 6,538 0.60 7,464 0.78 8,193 1.02
---------- ------- -------- ------ ------- ------
Total mortgage loans...... 1,059,010 97.80 921,369 95.18 763,257 95.27
Other loans:
Student loans............... 4,033 0.37 4,522 0.47 6,072 0.76
Automobile leases (1)....... -- -- 28,249 2.92 18,705 2.33
Passbook loans.............. 6,929 0.64 5,933 0.61 5,683 0.71
Commercial business loans... 19,559 1.81 14,995 1.55 15,257 1.90
Other....................... 13,212 1.22 9,712 1.00 9,079 1.13
---------- ------- -------- ------ ------- ------
Total other loans......... 43,733 4.04 63,411 6.55 54,796 6.83
---------- ------- -------- ------ ------- ------
Total loans receivable.... 1,102,743 101.84 984,780 101.73 818,053 102.11
Less:
Discount on loans purchased. (729) (0.07) (3,475) (0.36) (2,911) (0.36)
Allowance for loan losses... (15,709) (1.45) (9,977) (1.03) (10,704) (1.34)
Deferred loan fees.......... (3,387) (0.32) (3,313) (0.34) (3,301) (0.41)
---------- ------ -------- ------ -------- ------
Loans receivable, net......... $1,082,918 100.00% $968,015 100.00% $801,137 100.00%
========== ====== ======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1994 1993
-------------------- ---------------------
Percent of Percent of
Amount Total Amount Total
------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential... $506,397 83.16% $422,552 82.24%
Multi-family residential.... 24,347 4.00 24,190 4.71
Commercial real estate...... 30,037 4.93 26,002 5.06
Construction and land....... 3,003 0.49 2,626 0.51
Home equity................. 9,658 1.59 8,915 1.73
------- ------ ------- ------
Total mortgage loans...... 573,442 94.17 484,285 94.25
Other loans:
Student loans............... 23,398 3.84 22,607 4.40
Automobile leases (1)....... 8,344 1.37 -- --
Passbook loans.............. 4,673 0.77 3,927 0.76
Commercial business loans... 200 0.03 -- --
Other....................... 5,972 0.98 8,601 1.68
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Total other loans......... 42,587 6.99 35,135 6.84
------- ------ ------- ------
Total loans receivable.... 616,029 101.16 519,420 101.09
Less:
Discount on loans purchased. (1,134) (0.19) (15) --
Allowance for loan losses... (3,124) (0.51) (3,180) (0.62)
Deferred loan fees.......... (2,817) (0.46) (2,422) (0.47)
-------- ------ ------- ------
Loans receivable, net......... $608,954 100.00% $513,803 100.00%
======== ====== ======== ======
</TABLE>
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(1) Consists of loans secured by assignments of automobile lease payments.
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ACTIVITY IN LOANS. The following table shows the activity in the Bank's
loans during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Total loans held at beginning
of period.................................. $ 984,780 $818,053 $616,029
Originations of loans:
Mortgage loans:
Single-family residential................ 194,937 181,200 105,359
Multi-family residential................. 4,603 2,087 3,587
Commercial real estate................... 22,171 35,677 13,557
Construction and land.................... 27,936 32,080 15,425
Home equity.............................. 2,744 1,224 887
Other loans:
Student loans............................ 3,202 3,469 3,449
Automobile leases........................ 3,697 14,078 13,000
Passbook loans........................... 8,614 5,995 5,926
Discounted loans......................... 4,527 1,203 5,528
Commercial business loans................ 9,415 7,806 2,766
Other consumer loans..................... 7,666 3,131 1,236
---------- -------- --------
Total originations..................... 289,512 287,950 170,720
Purchases of loans:
Mortgage loans:
Single-family residential ............... -- -- 39,172
Multi-family residential................. -- -- 319
Commercial real estate................... -- -- 60,495
Construction and land.................... -- -- 15,925
Home equity.............................. -- -- --
Other loans: --
Student loans............................ -- -- --
Automobile leases........................ -- -- --
Passbook loans........................... -- -- --
Discounted loans......................... -- -- 7,456
Commercial business loans................ -- -- 8,947
Other consumer loans..................... -- -- 2,517
---------- -------- --------
Total purchases (1).................... -- -- 134,831
---------- -------- --------
Total originations and purchases..... 289,512 287,950 305,551
---------- -------- --------
Loans sold:
Mortgage loans:
Single-family residential................ 1,104 -- --
Multi-family residential................. -- -- --
Commercial real estate................... -- -- --
Construction and land.................... -- -- --
Home equity.............................. -- -- --
Other loans:
Student loans............................ 3,185 3,340 21,858
Automobile leases........................ -- -- --
Passbook loans........................... -- -- --
Discounted loans......................... -- -- --
Commercial business loans................ -- -- --
Other consumer loans..................... -- -- --
---------- -------- --------
Total sold............................. 4,289 3,340 21,858
Transfers to real estate owned............ 1,149 1,629 1,147
Charge-offs.................................. 1,022 2,373 615
Repayments................................... 165,089 113,881 79,907
---------- -------- --------
Net activity in loans........................ 117,963 166,727 202,024
---------- -------- --------
Gross loans held at end of period............ $1,102,743 $984,780 $818,053
========== ======== ========
</TABLE>
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(1) Includes $124.2 million of loans acquired from Gateway.
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The lending activities of Staten Island Savings are subject to written
underwriting standards and loan origination procedures established by management
and approved by the Bank's Board of Directors. Applications for mortgage and
other loans are taken at all of the Bank's branch offices. In addition, the
Bank's business development officers, loan officers and branch managers call on
individuals in the Bank's market area in order to solicit new loan originations
as well as other banking relationships. The Bank also relies on independent
mortgage brokers, a group of whom are authorized to accept and process mortgage
loan applications on the Bank's behalf, and a non-employee commercial loan
solicitor in order to obtain new loan applications. All loan applications are
forwarded to the Bank's loan origination center for underwriting and approval.
The Bank's employees at the loan origination center supervise the process of
obtaining credit reports, appraisals and other documentation involved with a
loan. The Bank requires that a property appraisal be obtained in connection with
all new mortgage loans. Property appraisals are performed by an independent
appraiser from a list approved by the Bank's Board of Directors. Staten Island
Savings requires that title insurance and hazard insurance be maintained on all
collateral properties (except for home equity loans) and that flood insurance be
maintained if the property is within a designated flood plain.
Certain officers of the Bank have been authorized by the Board of
Directors to approve loans up to certain designated amounts. The Loan Review
Committee of the Board of Directors must approve all loans where new monies
advanced would increase borrowers or guarantors total outstanding credit with
the Bank above $1.5 million but not exceeding $5.0 million. Loans in excess of
$5.0 million must be approved by the full Board of Directors of the Bank.
A federal savings association generally may not make loans to one
borrower and related entities in an amount which exceeds 15% of its unimpaired
capital and surplus, although loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. However, the Bank generally maintains
a more restrictive limit of loans to any one borrower and related entities of 5%
of the Bank's unimpaired capital and surplus, or $34.5 million at December 31,
1997.
SINGLE-FAMILY RESIDENTIAL AND HOME EQUITY LOANS. Substantially all of
the Bank's single-family residential mortgage loans consist of conventional
loans. Conventional loans are loans that are neither insured by the Federal
Housing Administration ("FHA") or partially guaranteed by the Department of
Veterans Affairs ("VA"). The vast majority of the Bank's single-family
residential mortgage loans are secured by properties located in Staten Island
and, to a lesser extent, Brooklyn and other areas of New York. Historically, the
Bank has retained substantially all mortgage loans which it has originated and
has not engaged in sales of residential mortgage loans. As of December 31, 1997,
$863.7 million, or 79.8%, of the Bank's net loans consisted of single-family
residential mortgage loans. The Bank originated $194.9 million of single-family
residential mortgage loans in the year ended December 31, 1997 and $181.2
million and $105.4 million in 1996 and 1995, respectively. The Bank anticipates
that a significant portion of its future new loan originations will continue to
be single-family residential mortgage loans.
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The Bank's residential mortgage loans have either fixed rates of
interest or interest rates which adjust periodically during the term of the
loan. Fixed-rate loans generally have maturities ranging from 15 to 30 years and
are fully amortizing with monthly or bi-weekly loan payments sufficient to repay
the total amount of the loan with interest by the end of the loan term. The
Bank's fixed-rate loans generally are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government-sponsored
agencies, such as the Federal Home Loan Mortgage Corporation ("FHLMC"), and
other investors in the secondary market for mortgages. At December 31, 1997,
$554.0 million, or 64.1%, of the Bank's single-family residential mortgage loans
were fixed-rate loans. Substantially all of the Bank's single-family residential
mortgage loans contain due-on-sale clauses, which permit the Bank to declare the
unpaid balance to be due and payable upon the sale or transfer of any interest
in the property securing the loan. The Bank enforces such due-on-sale clauses.
The adjustable-rate single-family residential mortgage ("ARM") loans
currently offered by the Bank have interest rates which adjust every one, three
or five years in accordance with a designated index such as one-, three- or
five-year U.S. Treasury obligations adjusted to a constant maturity ("CMT"),
plus a stipulated margin. In addition, the Bank offers an ARM with a fixed-rate
for the first ten years and which adjusts on an annual basis thereafter. At
December 31, 1997, the Bank's five-year and ten-year ARM loans amounted to
$251.9 million and $31.0 million, respectively. The Bank's adjustable-rate
single-family residential real estate loans generally have a cap of 2% or 3% on
any increase or decrease in the interest rate at any adjustment date, and
include a specified cap on the maximum interest rate over the life of the loan,
which cap generally is 5% or 6% above the initial rate. From time to time, based
on prevailing market conditions, the Bank may offer ARM loans with initial rates
which are below the fully indexed rate. Such loans generally are underwritten
based on the fully indexed rate. The Bank's adjustable-rate loans require that
any payment adjustment resulting from a change in the interest rate of an
adjustable-rate loan be sufficient to result in full amortization of the loan by
the end of the loan term and, thus, do not permit any of the increased payment
to be added to the principal amount of the loan, or so-called negative
amortization. At December 31, 1997, $309.7 million or 35.9% of the Bank's
single-family residential mortgage loans were adjustable-rate loans.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase, the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. The Bank believes that these risks, which have not had a material adverse
effect on the Bank to date, generally are less than the risks associated with
holding fixed-rate loans in an increasing interest rate environment.
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. In recent periods, demand for
single-family ARMs has been relatively weak due to the
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prevailing low interest rate environment and consumer preference for fixed-rate
loans. Accordingly, although the Bank will continue to offer single-family ARMs,
there can be no assurance that in the future the Bank will be able to originate
a sufficient volume of single-family ARMs to increase or maintain the proportion
that these loans bear to total loans.
The Bank's single-family residential mortgage loans generally do not
exceed $500,000. In addition, the maximum loan-to-value ("LTV") ratio for the
Bank's single-family residential mortgage loans generally is 95% of the
appraised value of the security property, provided, however, that private
mortgage insurance is obtained on the portion of the principal amount that
exceeds 80% of the appraised value.
At December 31, 1997, the Bank's home equity loans amounted to $6.5
million or 0.6% of the Bank's net loans. The Bank offers floating rate home
equity lines of credit. Home equity loans, like single-family residential
mortgage loans, are secured by the underlying equity in the borrower's
residence. However, the Bank generally obtains a second mortgage position to
secure its home equity loans. The Bank's home equity loans generally require LTV
ratios of 80% or less after taking into consideration any first mortgage loan.
COMMERCIAL REAL ESTATE LOANS AND MULTI-FAMILY RESIDENTIAL LOANS. At
December 31, 1997, the Bank's commercial real estate loans and multi-family
residential mortgage loans amounted to $120.1 million and $28.2 million,
respectively, or 11.1% and 2.6%, respectively, of the Bank's net loan portfolio.
A substantial portion of the Bank's commercial real estate loans were acquired
from Gateway. While the Bank retained all of the commercial loan personnel from
Gateway, the Bank has revised and strengthened the loan underwriting standards
with respect to commercial real estate and multi-family residential mortgage
loans.
The Bank's commercial real estate loans generally are secured by small
office buildings, retail and industrial use buildings, strip shopping centers
and other commercial uses located in the Bank's market area. The Bank's
commercial real estate loans seldom exceed $1.0 million and, as of December 31,
1997, the average size of the Bank's commercial real estate loans was $313,000.
The Bank originated $22.2 million of commercial real estate loans during the
year ended December 31, 1997 compared to $35.7 million and $13.6 million,
respectively, of commercial real estate loan originations in 1996 and 1995.
The Bank's multi-family residential real estate loans are concentrated
in Brooklyn and, to a lesser extent, Staten Island. The Bank originated $4.6
million of multi-family residential real estate loans during the year ended
December 31, 1997 compared to $2.1 million and $3.6 million, respectively, of
originations in 1996 and 1995. The Bank generally has not been a substantial
originator of multi-family residential real estate loans due to, among other
factors, the relatively limited amount of apartment and other multi-family
properties in Staten Island.
The Bank's commercial real estate and multi-family residential loans
generally are three-or five-year adjustable-rate loans indexed to three-or
five-year U.S. Treasury obligations adjusted to a CMT, plus a margin. Generally,
fees of between 50 basis points and 1.50% of the principal
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loan balance are charged to the borrower upon closing. The Bank generally
charges prepayment penalties on commercial real estate and multi-family
residential mortgage loans. Although terms for multi-family residential and
commercial real estate loans may vary, the Bank's underwriting standards
generally provide for terms of up to 25 years with amortization of principal
over the term of the loan and LTV ratios of not more than 75%. Generally, the
Bank obtains personal guarantees of the principals as additional security for
any commercial real estate and multi-family residential loans.
The Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the market, location and physical
condition. The Bank has also generally imposed a debt coverage ratio (the ratio
of net cash from operations before payment of debt service to debt service) of
not less than 125%. The underwriting analysis also includes credit checks and a
review of the financial condition of the borrower and guarantor, if applicable.
An appraisal report is prepared by an independent appraiser commissioned by the
Bank to substantiate property values for every commercial real estate and
multi-family loan transaction. All appraisal reports are reviewed by the Bank
prior to the closing of the loan.
Commercial real estate and multi-family residential lending entails
substantially different risks when compared to single-family residential lending
because such loans often involve large loan balances to single borrowers and
because the payment experience on such loans is typically dependent on the
successful operation of the project or the borrower's business. These risks can
also be significantly affected by supply and demand conditions in the local
market for apartments, offices, warehouses, or other commercial space. The Bank
attempts to minimize its risk exposure by limiting such lending to proven
businesses, only considering properties with existing operating performance
which can be analyzed, requiring conservative debt coverage ratios, and
periodically monitoring the operation and physical condition of the collateral.
As of December 31, 1997, $8.4 million or 7.0% of the Bank's commercial
real estate loans and $319,000 or 1.1% of its multi-family residential real
estate loans were considered non-performing loans.
CONSTRUCTION AND LAND LOANS. The Bank originates primarily residential
construction loans to local (primarily Staten Island) real estate builders,
generally with whom it has an established relationship. To a significantly
lesser extent, the Bank originates such loans to individuals who have a contract
with a builder for the construction of their residence. The Bank's construction
loans are secured by property located primarily in the Bank's market area. At
December 31, 1997, construction and land loans amounted to $40.5 million or 3.7%
of the Bank's net loan portfolio of which $33.9 million consisted of
construction loans and $6.6 million consisted of land loans. In addition, at
such date, the Bank had $11.0 million of undisbursed funds for construction
loans in process. The Bank originated $27.9 million of construction and land
loans during the year ended December 31, 1997, compared to $32.1 million and
$15.4
9
<PAGE> 11
million of construction loans in 1996 and 1995, respectively. Prior to its
acquisition of Gateway, the Bank generally was not an active originator of
construction and land loans.
The Bank's construction loans generally have floating rates of interest
for a term of up to two years. Construction loans to builders are typically made
with a maximum loan to value ratio of 75%. The Bank's construction loans to
local builders are made on either a pre-sold or speculative (unsold) basis.
However, the Bank generally limits the number of unsold homes under construction
to its builders, with the amount dependent on the reputation of the builder, the
present outstanding obligations of the builder, the location of the property and
prior sales of homes in the development and the surrounding area. The Bank
generally limits the number of construction loans for speculative units to two
to four model homes per project.
Prior to making a commitment to fund a construction loan, the Bank
requires an appraisal of the property by independent appraisers approved by the
Board of Directors. The Bank's staff also reviews and inspects each project at
the commencement of construction and prior to every disbursement of funds during
the term of the construction loan. Loan proceeds are disbursed after inspections
of the project based on a percentage of completion. The Bank requires monthly
interest payments during the construction term.
The Bank originates land loans to local developers for the purpose of
holding or developing the land (i.e., roads, sewer and water) for sale. Such
loans are secured by a lien on the property, are generally limited to 60% of the
appraised value of the secured property and are typically made for a period of
up to two years with a floating interest rate based on the prime rate. The Bank
requires monthly interest payments during the term of the land loan. The
principal of the loan is reduced as lots are sold and released. All of the
Bank's land loans are secured by property located in its market area. In
addition, the Bank generally obtains personal guarantees from its borrowers and
originates such loans to developers with whom it has established relationships.
Construction and land lending generally is considered to involve a
higher level of risk as compared to permanent single-family residential lending,
due to the concentration of principal in a limited number of loans and borrowers
and the effects of general economic conditions on developers and builders.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated cost (including interest) of the project. The nature
of these loans is such that they are generally more difficult to evaluate and
monitor. In addition, speculative construction loans to a builder are not
pre-sold and thus pose a greater potential risk to the Bank than construction
loans to individuals on their personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction and land lending generally and
by limiting its construction and land lending to primarily residential
properties. In addition, the Bank has adopted underwriting guidelines which
impose lower loan-to-value and higher debt service ratios than typically
utilized by Gateway and other requirements for loans which are believed to
involve higher elements of
10
<PAGE> 12
credit risk, by limiting the geographic area in which the Bank will do business
to its existing market and by working with builders with whom it has established
relationships. It is also the Bank's policy to obtain personal guarantees from
the principals of its corporate borrowers on its construction and land loans.
OTHER LOANS. The Bank offers a variety of other or non-mortgage loans.
Such other loans, which include commercial business loans, discounted loans,
passbook loans, student loans, overdraft loans and a variety of other personal
loans, amounted to $43.7 million or 4.0% of the Bank's loan portfolio at
December 31, 1997. Prior to April 1997, the Bank engaged in a program of
advancing funds to a national automobile leasing company on a non-recourse
basis, with the Bank's advances secured by a pledge and assignment of the
leasing company's interests in automobile leases made to its customers. Under
the program, the leasing company extended automobile leases to customers and
then presented such leases to the Bank for its underwriting, document review and
acceptance or rejection. The Bank only accepted lease assignments which met the
Bank's underwriting guidelines. The leasing company was purchased by another
financial institution in 1997 which resulted in a termination of the Bank's
automobile leasing activities and the repayment of the $29.8 million of loans
secured by automobile leases then outstanding at no loss to the Bank.
At December 31, 1997, the Bank's commercial business loans amounted to
$19.6 million or 1.8% of the Bank's net loan portfolio. The Bank's commercial
business loans have a term of up to five years and may have either fixed-rates
of interest or, to a lesser extent, floating rates tied to the prime rate. The
Bank's commercial business loans are made to small- to medium-sized businesses
within the Bank's market area. A substantial portion of the Bank's small
business loans are unsecured with the remainder generally secured by perfected
security interests in accounts receivable and inventory or other corporate
assets. In addition, the Bank generally obtains personal guarantees from the
principals of the borrower with respect to all commercial business loans. In
addition, the Bank may extend loans for a commercial business purpose which are
secured by a mortgage on the proprietor's home or the business property. In such
cases, the loan, while underwritten to commercial business loan standards, is
reported as a single-family or commercial real estate mortgage loan, as the case
may be. The Bank estimates that, at December 31, 1997, it had $21.5 million and
$120.1 million outstanding in loans for commercial business purposes which were
classified as single-family residential mortgage loans and commercial real
estate mortgage loans, respectively. Commercial business loans generally are
deemed to involve a greater degree of risk than single-family residential
mortgage loans.
The Bank's commercial business loans include discounted loans, which
amounted to $11.3 million or 1.0% of the Bank's loans at December 31, 1997. The
Bank's discounted loans, which are made primarily to local businesses, are
designed to provide an interim source of financing and require no payment of
principal or interest until the due date of the loan, which may be up to one
year but generally is 60 or 90 days from the date of origination. While the
borrower is contractually obligated to repay the entire face amount of the loan
at maturity, the Bank advances only a portion of the face amount with the
difference constituting the interest component. In addition to personal
guarantees, discounted loans may also be secured by perfected security interests
in receivables. However, due to the lack of an amortization schedule and, in
certain
11
<PAGE> 13
cases, the absence of perfected security interests, discounted loans generally
may be deemed to involve a greater risk of loss than single-family residential
mortgage loans.
At December 31, 1997, the Bank had $4.0 million of student loans in its
portfolio. The Bank has been and continues to be an active originator of student
loans. Substantially, all of these loans are originated under the auspices of
the New York State Higher Education Services Corporation ("NYSHESC"). Under the
terms of these loans, no repayment is due until the student's graduation, with
98% of the principal guaranteed by the NYSHESC. The terms and rates of these
loans are established by the NYSHESC. Commencing in 1995, the Bank's general
practice is to sell its student loans into the secondary market as the loans
reach repayment status.
The balance of the Bank's other loans consist of loans secured by
passbook accounts, loans on overdraft accounts, home improvement loans and
various other personal loans.
LOAN ORIGINATION AND LOAN FEES. In addition to interest earned on loans,
the Bank receives loan origination fees or "points" for many of the loans it
originates. Loan points are a percentage of the principal amount of the mortgage
loan and are charged to the borrower in connection with the origination of the
loan.
In accordance with SFAS No. 91, which addresses the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as
interest income over the contractual life, adjusted for prepayments, of the
related loans as an adjustment to the yield of such loans. At December 31, 1997,
the Bank had $3.4 million of such deferred loan fees.
ASSET QUALITY
GENERAL. As a part of the Bank's efforts to improve its asset quality,
it has developed and implemented an asset classification system. All of the
Bank's assets are subject to review under this classification system. Loans are
periodically reviewed and the classifications are reviewed by the Board of
Directors on at least a quarterly basis. In addition, the Bank has retained an
independent third party consultant to, among other things, review the Bank's
classifications on a periodic basis.
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made 16 days after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency continues, late charges are
assessed and additional efforts are made to collect the loan. While the Bank
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, the Bank does not accrue interest on mortgage loans past
12
<PAGE> 14
due 90 days or more although the Bank may, in limited circumstances, accrue
interest on consumer loans past due 90 days or more.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
Pursuant to Statement of Position ("SOP") 92-3 issued by the American Institute
of Certified Public Accountants ("AICPA") in April 1992, which provides guidance
on determining the balance sheet treatment of foreclosed assets in annual
financial statements for periods ending on or after December 15, 1992, there is
a rebuttable presumption that foreclosed assets are held for sale and such
assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value. The Bank's accounting for its real estate owned
complies with the guidance set forth in SOP 92-3.
DELINQUENT LOANS. The following table sets forth information concerning
delinquent mortgage loans at December 31, 1997, in dollar amounts and as a
percentage of each category of the Bank's loan portfolio. The amounts presented
represent the total outstanding principal balances of the related loans, rather
than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------
30-59 Days 60-89 Days
-------------------------------- -------------------------------
Percent of Loan Percent of Loan
Amount Category Amount Category
------------- --------------- ------------ ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential:
Single-family................ $4,946 0.57% $ -- --%
Multi-family................. 82 0.29 -- --
Commercial real estate......... 472 0.39 -- --
Construction and land......... -- -- -- --
Home equity.................... 169 2.58 7 .11
------ ------
Total........................ $5,669 0.54% $ 7 --%
====== ======
</TABLE>
In addition to delinquent mortgage loans, at December 31, 1997, $1.4
million or 3.2% of the Bank's other loans were delinquent 30 days or more but
less than 90 days.
13
<PAGE> 15
NON-PERFORMING ASSETS. The following table sets forth information with
respect to non-performing assets identified by the Bank, including non-accrual
loans and other real estate owned.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1997 1996 1995(1) 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans 90 days or more
past due:
Mortgage loans............... $ -- $ -- $ -- $ -- $ --
Other loans.................. 85 1 302 415 262
-------- -------- -------- -------- --------
Total accruing loans. 85 1 302 415 262
-------- -------- -------- -------- --------
Non-accrual loans:
Mortgage loans:
Single-family residential 9,395 10,417 11,159 6,692 7,240
Multi-family residential. 319 322 98 86 58
Commercial real estate... 8,436 11,102 11,653 560 --
Construction and land.... 1,131 -- 379 240 --
Home equity.............. 545 644 124 -- --
Other loans:
Automobile leases........ -- 15 18 -- --
Commercial business loans 81 49 -- --
Discounted loans......... 835 25 126 -- --
Other loans.............. 570 144 307 61 157
-------- -------- -------- -------- --------
Total non-accruing loans 21,231 22,750 23,913 7,639 7,455
-------- -------- -------- -------- --------
Total non-performing loans....... 21,316 22,751 24,215 8,054 7,717
-------- -------- -------- -------- --------
Other real estate owned, net..... 618 1,103 627 373 766
-------- -------- -------- -------- --------
Total non-performing assets...... 21,934 23,854 24,842 8,427 8,483
-------- -------- -------- -------- --------
Total non-performing assets...... $ 21,934 $ 23,854 $ 24,842 $ 8,427 $ 8,483
======== ======== ======== ======== ========
Non-performing assets to total
loans.......................... 1.99% 2.42% 3.04% 1.37% 1.63%
Non-performing assets to total
assets......................... 0.83% 1.34% 1.44% 0.61% 0.62%
Non-performing loans to total 1.93%
loans.......................... 2.31% 2.96% 1.31% 1.49%
Non-performing loans to total
assets......................... 0.80% 1.28% 1.40% 0.59% 0.57%
</TABLE>
- ------------------
(1) The acquisition of Gateway occurred in August 1995.
Non-performing assets at December 31, 1997 totaled $21.9 million down
from $23.9 million at December 31, 1996 and $24.8 million at December 31, 1995.
The primary reason for the increase in non-performing assets in 1995 compared to
earlier periods was the acquisition of Gateway. Gateway was an originator of
commercial real estate loans, construction and land loans, and to a lesser
extent commercial business loans, all of which generally are deemed to involve
more risk than the single-family residential loans which the Bank traditionally
has emphasized. While the Bank has continued to originate commercial real estate
loans, construction and land loans, and commercial business loans, and intends
to increase the level of originations of such loans, management has implemented
loan underwriting policies and procedures which it believes are more
conservative than those previously used by Gateway. Management has also enhanced
the collection and workout procedures and staff with regard to non-performing
assets which is reflected in the decrease obtained in 1997.
14
<PAGE> 16
The interest income that would have been recorded during the year ended
December 31, 1997, if all of the Bank's non-performing loans at the end of such
period had been current in accordance with their terms during such period was
$899,000. The actual amount of interest recorded as income (on a cash basis) on
such loans during the period amounted to $563,000.
CLASSIFIED AND CRITICIZED ASSETS. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
probability of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. At December 31, 1997, the Bank had an aggregate
of $23.6 million of classified assets, all of which were classified substandard.
In addition, at such date the Bank had $2.1 million of assets which were deemed
special mention.
ALLOWANCE FOR LOAN LOSSES. The Bank's policy is to establish reserves
for estimated losses on delinquent loans when it determines that losses are
expected to be incurred on such loans. The allowance for losses on loans is
maintained at a level believed adequate by management to absorb potential losses
in the portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, past loss experience, current economic
conditions, volume, growth and composition of the portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses which are
charged against income. As shown in the table below, at December 31, 1997, the
Bank's allowance for loan losses amounted to $15.7 million or 73.7% and 1.4% of
the Bank's non-performing loans and total loans receivable, respectively. The
Bank's provision to the allowance for loan losses amounted to $6.0 million for
1997 and $1.0 million during 1996. Such provisions during 1997 and 1996 were
substantially higher than the Bank traditionally made in earlier periods and
were the result of, among other things, management's continuing review of the
risk elements in the Bank's loan portfolio. As part of its 1997 review,
management considered a report prepared by an independent third-party consultant
with respect to the risk elements in the Bank's loan portfolio and an analysis
prepared by the Bank's management with respect to certain trends affecting the
Bank's loan portfolio such as charge-offs, delinquencies and other external
economic factors including interest rates. Such trend analysis and third-party
report indicated certain additional potential risk factors to be considered in
estimating the level of the allowance for loan losses. In establishing
provisions in 1997 and 1996, management of the Bank also considered the overall
increase in the Bank's loan portfolio, the potential increased risk of loss
generally attributed to commercial real estate loans, construction and land
loans and commercial business loans as well
15
<PAGE> 17
as management's continuing experience with the loan portfolio acquired from
Gateway. The Bank has experienced a longer than anticipated work-out period with
respect to such loans, and charged-off $1.3 million of loans in 1997 and $2.7
million of loans in 1996. Based on the various factors considered in its 1997
review of risk elements, and in particular the longer than anticipated work-out
periods for the Gateway portfolio, management also determined that in certain
circumstances more aggressive work-out procedures for non-performing loans would
be warranted. The fact that more aggressive work-out procedures could increase
the risk of loss with respect to such loans also affected management's
determination to increase the provision levels during 1997. In addition to
general provisions of approximately $2.0 million during 1997, management
determined that additional provisions of approximately $4.0 million were
necessary in light of estimated losses with respect to the loans acquired from
Gateway and with respect to the Bank's portfolio of non-performing loans.
Management views approximately $4.0 million of the provisions established during
1997 as generally non-recurring in nature. While no assurance can be given that
future charge-offs and/or additional provisions will not be necessary,
management of the Company believes that, as of December 31, 1997, the allowance
for loan losses was adequate.
Effective December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency, the FDIC and/or the Federal Reserve Board,
issued a Policy Statement regarding an institution's allowance for loan and
lease losses. The Policy Statement, which reflects the position of the issuing
regulatory agencies and does not necessarily constitute GAAP, includes guidance
(i) on the responsibilities of management for the assessment and establishment
of an adequate allowance and (ii) for the agencies' examiners to use in
evaluating the adequacy of such allowance and the policies utilized to determine
such allowance. The Policy Statement also sets forth quantitative measures for
the allowance with respect to assets classified substandard and doubtful and
with respect to the remaining portion of an institution's loan portfolio.
Specifically, the Policy Statement sets forth the following quantitative
measures which examiners may use to determine the reasonableness of an
allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the
portfolio that is classified substandard; and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming 12 months based on facts and
circumstances available on the evaluation date. While the Policy Statement sets
forth this quantitative measure, such guidance is not intended as a "floor" or
"ceiling." The Bank's policy for establishing loan losses is not inconsistent
with the Policy Statement.
16
<PAGE> 18
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ------- ------- ------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $ 9,977 $10,704 $ 3,124 $3,180 $ 2,303
------- ------- ------- ------ --------
Allowance from acquisition.. -- -- 8,026 -- --
Provisions.................. 6,003 1,000 -- 76 1,286
Charge-offs:
Mortgage loans:
Single-family residential 501 1,590 606 107 463
Multi-family residential 100 -- -- 36 67
Commercial real estate 210 376 -- -- --
Other loans............. 507 729 176 275 386
------- ------- ------- ------ --------
Total charge-offs..... 1,318 2,695 782 418 916
Recoveries:
Mortgage loans:
Single-family residential 533 408 198 166 335
Multi-family residential -- -- -- 10 43
Commercial real estate. 251 413 19 -- --
Construction, land and land
development........... 10 -- -- -- --
Other loans............. 253 147 119 110 129
------- ------- ------- ------ --------
Total recoveries...... 1,047 968 336 286 507
------- ------- ------- ------ --------
Allowance at end of period.. $15,709 $ 9,977 $10,704 $3,124 $3,180
======= ======= ======= ====== ======
Allowance for loan losses to total
nonperforming loans at end of
period..................... 73.69% 43.85% 44.20% 38.79% 41.21%
======= ======= ======= ====== ======
Allowance for loan losses to total
loans at end of period..... 1.42% 1.02% 1.32% 0.51% 0.62%
======= ======= ======= ====== ======
</TABLE>
17
<PAGE> 19
The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------- -------------------- ------------------- ------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential ..... $ 5,853 82.37% $3,192 77.20% $ 2,002 77.50% $2,100 85.78% $2,031 86.25%
Other............ 6,696 15.43 5,842 17.98 7,735 17.77 -- 8.39 -- 8.00
Other loans........ 3,160 4.04 943 6.55 967 6.84 1,024 6.99 1,149 6.84
------- ------ ------ ------ ------- ------ ------ ------ ------ ------
Total......... $15,709 101.84% $9,977 101.73% $10,704 102.11% $3,124 101.16% $3,180 101.09%
======= ====== ====== ====== ======= ====== ====== ====== ====== ======
</TABLE>
18
<PAGE> 20
The Bank will continue to monitor and modify its allowance for loan
losses as conditions dictate. While management believes that, based on
information currently available, the Bank's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurance can be given that the Bank's level of allowance for loan losses will
be sufficient to absorb future loan losses incurred by the Bank or that future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for loan
losses. In addition, the OTS, as an integral part of its examination process,
periodically reviews the Bank's allowance for loan losses. Such agency may
require the Bank to make additional provisions for estimated loan losses based
upon judgments different from those of management.
SECURITIES ACTIVITIES
GENERAL. As of December 31, 1997, the Bank had an aggregate of $1.4
billion of securities, or 50.9% of the Company's total assets at such date. At
such date, the unrealized appreciation on the Bank's securities available for
sale amounted to $12.7 million, net of income taxes. The securities investment
policy of the Bank, which has been established by the Board of Directors, is
designed, among other things, to assist the Bank in its asset/liability
management policies. The Bank's investment policy emphasizes principal
preservation, favorable returns on investment, maintaining liquidity within
designated guidelines, minimizing credit risk and maintaining flexibility.
Interest and dividend income from the Bank's securities portfolio generally
provides the second largest source of income to the Bank after interest on
loans. 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 and mortgage-related securities, commercial paper, certificates
of deposit, and federal funds sold to financial institutions approved by the
Board of Directors.
The Bank converted to a federally chartered mutual savings bank in
August 1997. Prior to that date, the Bank operated as a New York-chartered
mutual savings bank. While operating under its New York charter, the Bank was
permitted to make certain investments in equity securities and stock mutual
funds. At December 31, 1997, these equity investments totaled $53.0 million,
comprised primarily of a $31.1 million investment in a common stock mutual fund
designed specifically for New York State savings banks, and $21.9 million of
various other equity securities. Pursuant to current law, the Bank is required
to divest or transfer such securities. The Bank transferred these securities to
the holding company during the month of February 1998.
The Bank currently does not participate in hedging programs, interest
rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. These activities require the prior approval of
the Board of Directors under the Bank's securities investment policy. Similarly,
the Bank has not and does not invest in mortgage derivative securities which are
deemed to be "high risk," or purchase privately issued securities which are not
rated investment
19
<PAGE> 21
grade. The Bank tests its securities on at least a semi-annual basis to ensure
that they would not be considered "high risk" securities under Federal banking
laws.
At December 31, 1997, all of the Bank's securities were classified as
available for sale. In December 1995, the Bank, pursuant to SFAS No. 115,
reviewed its securities portfolio and reclassified all of its securities then
classified as held to maturity as available for sale. Such classification as
available for sale provides the Bank with the flexibility to sell securities if
deemed appropriate in response to, among other factors, changes in interest
rates. Securities which are held to maturity are carried at cost, adjusted for
the amortization of premiums and the accretion of discounts using a method which
approximates a level yield. Securities classified as available for sale are
carried at fair value. Unrealized gains and losses on available for sale
securities are recognized as direct increases or decreases in equity, net of
applicable income taxes. Securities classified as trading account are carried at
market value with any increase or decrease in unrealized appreciation or
depreciation included in the Company's income statement. In the years ended
December 31, 1997, 1996 and 1995, the Bank recognized losses on securities
transactions of $85,000, $2.7 million and $305,000, respectively.
The Bank's investment policy provides management with the authority to
periodically sell securities provided, among other things, any losses on such
sales do not exceed $500,000, in which event prior approval of the Board of
Directors is required. Generally, management will enter into such securities
sales only if it believes that it can replace the securities sold with newly
purchased securities that, due to their higher yield, will offset the losses
within a twelve month period. In addition, during the fourth quarter of each of
1996 and 1995, management and the Board of Directors reviewed the Bank's entire
securities portfolio and authorized extensive sales as part of its securities
restructuring efforts. In each case, the Bank substantially replaced the
securities sold with securities having a significantly higher (over 75 basis
points) projected yield without, in management's view, sacrificing credit
quality or liquidity. In addition, sales in the fourth quarter of 1995 included
certain lower grade ("A rated") corporate debt securities. The Bank does not
anticipate that it will, as a matter of course, continue to authorize similar
amounts of losses in its securities activities.
20
<PAGE> 22
The following table sets forth the activity in the Bank's aggregate
securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
---------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Securities at beginning of period... $ 703,134 $788,622 $699,470
Purchases:
U.S. government and agencies...... 25,073 29,670 215,948
State and municipals.............. -- -- 11,591
Agency mortgage-backed securities. 519,430 212,634 136,610
Agency CMOs....................... 166,015 35,079 19,944
Private CMOs...................... 165,137 53,258 116
Other debt securities............. 167 -- 350
Marketable equity securities...... 34,483 15,059 4,614
----------- --------- ---------
Total purchases................. 910,305 345,700 389,173
Sales:
U.S. government and agencies...... 30,000 71,051 5,000
State and municipals.............. -- 70 12,132
Agency mortgage-backed securities. 18,183 113,617 --
Agency CMOs....................... -- 16,332 --
Private CMOs...................... 24,952 -- --
Other debt securities............. -- 36,042 99,122
Marketable equity securities...... 24,822 3,305 5,272
---------- -------- --------
Total sales..................... 97,957 240,417 121,526
Repayments and prepayments:
U.S. government and agencies...... 22,025 46,800 53,610
State and municipals.............. 3,045 -- 100
Agency mortgage-backed securities. 104,187 102,748 54,430
Agency CMOs....................... 33,366 4,399 3
Private CMOs...................... 16,866 3,466 24
Other debt securities............. 1,000 31,767 86,470
Marketable equity securities...... -- -- --
---------- -------- --------
Total repayments and prepayments 180,489 189,180 194,637
Accretion of discount and amortization
of premium........................ (520) (692) (4,421)
Unrealized gains or (losses) on
available-for-sale securities..... 16,435 (899) 20,563
Realized gains and losses on trading
assets............................ (442) -- --
---------- -------- --------
Securities at end of period......... $1,350,466 $703,134 $788,622
========== ======== ========
</TABLE>
21
<PAGE> 23
MORTGAGE-BACKED AND MORTGAGE-RELATED SECURITIES. At December 31, 1997,
the Company's securities included $826.7 million, or 31.2% of total assets, of
mortgage participation certificates (which are also known as mortgage-backed
securities).
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages. The principal and interest payments
on mortgage-backed securities are passed from the mortgage originators, as
servicer, through intermediaries (generally U.S. Government agencies and
government-sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Bank. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the FHLMC, the
FNMA and the Government National Mortgage Association ("GNMA").
The FHLMC is a private corporation chartered by the U.S. Government. The
FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. The FNMA is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low- and middle-income housing, there are limits to the maximum size of loans
that qualify for these programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
The Bank's mortgage-backed securities portfolio includes investments in
mortgage-backed securities backed by ARMs or securities which otherwise have an
adjustable rate feature.
The Bank's securities also include $338.9 million in interests in
collateralized mortgage obligations ("CMOs") (which are also known as
mortgage-related securities). CMOs have been developed in response to investor
concerns regarding the uncertainty of cash flows associated with the prepayment
option of the underlying mortgagor and are typically issued by governmental
agencies, governmental sponsored enterprises and special purpose entities, such
as trusts,
22
<PAGE> 24
corporations or partnerships, established by financial institutions or other
similar institutions. A CMO can be collateralized by loans or securities which
are insured or guaranteed by the FNMA, the FHLMC or the GNMA. As of December 31,
1997, $167.7 million of the Bank's CMOs were insured or guaranteed by the GNMA,
FNMA or FHLMC and the remaining $171.2 million of the Bank's CMOs were rated
"AAA" by national rating agencies. While non-agency private issue CMOs are
somewhat less liquid than CMOs insured or guaranteed by the GNMA, FNMA or FHLMC,
they generally have a higher yield than agency insured or guaranteed CMOs. In
contrast to pass-through mortgage-backed securities, in which cash flow is
received pro rata by all security holders, the cash flow from the mortgages
underlying a CMO is segmented and paid in accordance with a predetermined
priority to investors holding various CMO classes. By allocating the principal
and interest cash flows from the underlying collateral among the separate CMO
classes, different classes of bonds are created, each with its own stated
maturity, estimated average life, coupon rate and prepayment characteristics.
The regular interests of some CMOs are like traditional debt instruments because
they have stated principal amounts and traditionally defined interest rate
terms. Purchasers of certain other CMOs are entitled to the excess, if any, of
the issuer's cash inflows, including reinvestment earnings, over the cash
outflows for debt service and administrative expenses. These CMOs may include
instruments designated as residual interests, which represent an equity
ownership interest in the underlying collateral, subject to the first lien of
the investors in the other classes of the CMO. Certain residual CMO interests
may be riskier than many regular CMO interests to the extent that they could
result in the loss of a portion of the original investment. Moreover, cash flows
from residual interests are very sensitive to prepayments and, thus, contain a
high degree of interest rate risk. As of December 31, 1997, the Bank's CMOs did
not include any residual interests or interest-only or principal-only
securities. As a matter of policy, the Bank does not invest in residual
interests of CMOs or interest-only and principal-only securities.
Mortgage-backed and mortgage-related securities generally yield less
than the loans which underlie such securities because of their payment
guarantees or credit enhancements which offer nominal credit risk. In addition,
mortgage-backed and related securities are more liquid than individual mortgage
loans and may be used to collateralize borrowings of the Bank. Mortgage-backed
securities issued or guaranteed by the FNMA or the FHLMC (except interest-only
securities or the residual interests in CMOs) are weighted at no more than 20.0%
for risk-based capital purposes, compared to a weight of 50.0% to 100.0% for
residential loans.
The Bank generally does not invest in mortgage-backed and
mortgage-related securities with estimated average lives exceeding 10 years. At
December 31, 1997, the estimated weighted average life of the Bank's
mortgage-backed and mortgage-related securities was approximately 4.5 years. The
actual maturity of a mortgage-backed or mortgage-related security may be less
than its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and adversely affect its yield to maturity. The yield is based upon the
interest income and the amortization of any premium or accretion of discount
related to the mortgage-backed security. In accordance with GAAP, premiums are
amortized and discounts are accreted over the estimated lives of the loans,
which decrease and increase interest income, respectively. The prepayment
assumptions used to
23
<PAGE> 25
determine the amortization period for premiums and discounts can significantly
affect the yield of the mortgage-backed or mortgage-related security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments.
During periods of rising mortgage interest rates, if the coupon rates of
the underlying mortgages are less than the prevailing market interest rates
offered for mortgage loans, refinancings generally decrease and slow the
prepayment of the underlying mortgages and the related securities. Conversely,
during periods of falling mortgage interest rates, if the coupon rates of the
underlying mortgages exceed the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages and the related securities. Under such
circumstances, the Bank may be subject to reinvestment risk because to the
extent that the Bank's mortgage-backed and mortgage-related securities amortize
or prepay faster than anticipated, the Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate. At December
31, 1997, of the $826.7 million of mortgage-backed and mortgage-related
securities, an aggregate of $349.9 million were secured by fixed-rate securities
and an aggregate of $476.8 million were secured by adjustable-rate securities.
OTHER SECURITIES. Other than mortgage-backed and mortgage-related
securities, the Bank's securities consist primarily of U.S. Treasury and Federal
agency obligations, which amounted to $106.7 million at December 31, 1997, and
marketable equity securities, which amounted to $74.9 million at December 31,
1997. In addition, as previously discussed, the Bank transferred its marketable
equity securities with the exception of agency issued preferred stocks to the
Company. As with its mortgage-backed and mortgage-related securities, the Bank
attempts to maintain a high degree of liquidity in its other securities and
generally does not invest in debt securities with terms to maturity in excess of
10 years. As of December 31, 1997, the estimated term to maturity of the Bank's
other securities was 3.4 years.
The following table sets forth certain information regarding the
maturities of the Bank's other securities (all of which were classified as
available for sale) at December 31, 1997.
<TABLE>
<CAPTION>
Contractually Maturing
--------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average 1-5 Average 6-10 Average Over 10 Average
Year Yield Years Yield Years Yield Years Yield
-------- -------- ------ -------- ------ ------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal
agency obligations.... $30,450 6.98% $49,712 6.63% $25,000 7.08% $ -- -- %
Other................... -- -- 100 8.13 -- -- 820 10.89
------- ------- ------- ----
$30,450 $49,812 $25,000 $820
</TABLE>
24
<PAGE> 26
SOURCES OF FUNDS.
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments and prepayments and borrowings. Loan repayments
are a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer term
basis for general business purposes.
DEPOSITS. The Bank's deposit products include a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") accounts,
money market accounts, non-interest bearing checking accounts, regular savings
accounts and term certificate accounts. Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.
The Bank utilizes traditional marketing methods to attract new customers
and savings deposits. The Bank does not advertise for deposits outside of its
market area and management believes that an insignificant number of deposit
accounts were held by non-residents of New York at December 31, 1997. The Bank
does not utilize the services of deposit brokers. The Bank traditionally has
relied on customer service and convenience in marketing its deposit products,
and the Bank generally has not sought to be a price leader on its deposits. The
Bank is the largest depository institution, by deposit market share, in Staten
Island and the Bank's acquisition of Gateway, which had $276.6 million in
deposits at the time of acquisition, added to the Bank's deposit base. Despite
its strong market presence, during each of 1997, 1996 and 1995 (excluding the
effect of the Gateway acquisition), the Bank experienced disintermediation of
deposits. Management attributes such disintermediation in large part to certain
higher rate competing investment products being offered by non-depository
institutions. For the year ended December 31, 1997 deposits before interest
credits decreased $9.4 million compared with a decrease of $8.4 million in 1996.
Inclusive of interest credits deposits increased $45.9 million and $42.1 million
in 1997 and 1996 respectively. Total deposits held by banks in the Bank's market
area have decreased over the past few years. To offset this trend, commencing in
April 1996, the Bank's business development officers have actively solicited
through individual meetings and other contacts, deposit accounts, particularly
commercial accounts. In addition in recent periods, the Bank's lending officers,
and branch managers have increased their effort to solicit new deposits from the
Bank's loan customers and other residents in its market areas.
25
<PAGE> 27
The following table sets forth the activity in the Bank's deposits
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Beginning balance............... $1,577,748 $1,535,617 $1,225,918
Net increase (decrease) before
interest credited............. (9,386) (8,397) 265,485(1)
Interest credited............... 55,290 50,528 44,214
Net increase in deposits........ 45,904 42,131 309,699
---------- ---------- ----------
Ending balance.................. $1,623,652 $1,577,748 $1,535,617
========== ========== ==========
</TABLE>
- ---------------
(1) Includes $276.6 million of deposits acquired from Gateway.
The following table sets forth by various interest rate categories the
certificates of deposit with the Bank at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
0.00% to 2.99%...................... $ -- $ -- $ --
3.00% to 3.99%...................... 9,704 12,314 20,138
4.00% to 4.99%...................... 128,150 223,234 103,882
5.00% to 6.99%...................... 380,820 262,924 334,922
7.00% to 8.99%...................... 2,019 2,098 8,420
9.00% to 10.99%..................... -- -- --
11.00% and over..................... -- -- --
-------- -------- --------
Total........................... $520,693 $500,570 $467,362
======== ======== ========
</TABLE>
26
<PAGE> 28
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit at December 31, 1997.
<TABLE>
<CAPTION>
Over Six Over One Over Two
Months Year Years
Six Months Through One Through Through Over Three
and Less Year Two Years Three Years Years
---------- ----------- --------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
0.00% to 2.99%........... $ -- $ -- $ -- $ -- $ --
3.00% to 3.99%........... 8,921 783 -- -- --
4.00% to 4.99%........... 96,052 23,071 8,950 76 --
5.00% to 6.99%........... $160,608 116,130 71,937 17,794 14,332
7.00% to 8.99%........... -- -- -- 2,019 --
9.00% to 10.99% ......... -- -- -- -- --
11.00% and over.......... -- -- -- -- --
-------- -------- ------- ------- -------
Total................ $265,581 $139,984 $80,887 $19,909 $14,332
======== ======== ======= ======= =======
</TABLE>
As of December 31, 1997, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000, was
approximately $99.9 million. The following table presents the maturity of these
time certificates of deposit at such dates.
<TABLE>
<CAPTION>
December 31,
1997
------------
(In Thousands)
<S> <C>
3 months or less.................................... $41,351
Over 3 months through 6 months...................... 20,780
Over 6 months through 12 months..................... 18,338
Over 12 months...................................... 19,446
-------
$99,915
=======
</TABLE>
The following table sets forth the dollar amount of deposits in various
types of deposits offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts........ $ 827,757 50.98% $ 832,584 52.77% $ 739,697 48.17%
Certificates of deposit. 520,693 32.07 500,570 31.73 467,362 30.43
Money market accounts... 76,088 4.69 79,704 5.05 83,343 5.43
NOW accounts............ 15,249 0.94 14,298 0.91 55,124 3.59
Demand deposits......... 183,865 11.32 150,592 9.54 190,091 12.38
---------- ------ ---------- ------ ---------- ------
Total............... $1,623,652 100.00% $1,577,748 100.00% $1,535,617 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
27
<PAGE> 29
BORROWINGS. Traditionally, the Bank made very limited use of borrowings.
During 1997, the Bank determined to utilize borrowings as an additional source
of funds to leverage its capital. In August 1997 the Bank became a member of the
FHLB of New York. This enabled the Bank to participate in the lending programs
offered by the FHLB of New York, some of which would enable the Bank to use its
residential mortgage loans as collateral. At December 31, 1997, the Bank had
$250 million of borrowed funds, which consisted of reverse repurchase agreements
with established brokerage firms and the FHLB of New York. The Bank intends to
continue to utilize borrowing as a source of funds to leverage the balance
sheet.
The following table sets forth information with respect to the Company's
reverse repurchase agreements at and during the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------
1997 1996 1995
-------- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance $250,000 $-- $--
Average balance $ 81,071 -- --
Year end balance $250,000 -- --
Weighted average
interest rate:
At end of year 5.86% --% --%
During the year 5.88 -- --
</TABLE>
TRUST ACTIVITIES
Staten Island Savings also provides a full range of trust and investment
services, and acts as executor or administrator of estates and as trustee for
various types of trusts. Trust and investment services are offered through the
Bank's Trust Department which was acquired as part of the Gateway acquisition.
Fiduciary and investment services are provided primarily to persons and entities
located in Staten Island, New York. Services offered include fiduciary services
for trusts and estates, money management, custodial services and pension and
employee benefits consulting. As of December 31, 1997, the Trust Department
maintained approximately 551 trust/fiduciary accounts, with an aggregate
principal balance of $96.8 million at such date.
The accounts maintained by the Trust/Investment Services Division
consist of "managed" and "non-managed" accounts. "Managed accounts" are those
accounts under custody for which the Bank has responsibility for administration
and investment management and/or investment advice. "Non-managed" accounts are
those accounts for which the Bank merely acts as a custodian. The Company
receives fees dependent upon the
28
<PAGE> 30
level and type of service provided. The Trust Department administers various
trust accounts (revocable, irrevocable and charitable trusts, and trusts under
wills), agency accounts (various investment fund products), estate accounts, and
employee benefit plan accounts (assorted plans and IRA accounts). Two trust
officers and related staff are assigned to the Trust Department. The
administration of trust and fiduciary accounts are monitored by the Trust
Committee of the Board of Directors of Staten Island Savings.
SAVINGS BANK LIFE INSURANCE
The Bank has a Savings Bank Life Insurance ("SBLI") department, which
issues life insurance to individuals. The financial statements of the SBLI
Department are not consolidated with the Bank's. The SBLI Department's
activities are segregated from the Bank and, while they do not directly affect
the Bank's earnings, management believes that offering SBLI is beneficial to the
Bank's relationship with its depositors and the general public. The SBLI
Department pays its own expenses and reimburses the Bank for expenses incurred
on its behalf. At December 31, 1997, the SBLI Department had policies totaling
$1.7 billion in force.
SUBSIDIARIES
At December 31, 1997, the Bank did not have any subsidiaries.
EMPLOYEES
The Bank had 534 full-time employees and 92 part-time employees at
December 31, 1997. None of these employees is represented by a collective
bargaining agent, and the Bank believes that it enjoys good relations with its
personnel.
REGULATION
GENERAL
The Bank is a federally chartered and insured savings bank subject to
extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the
BIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Company or the Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals.
29
<PAGE> 31
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
HOLDING COMPANY ACQUISITIONS. The Company is a savings and loan holding
company within the meaning of the Home Owners' Loan Act, as amended ("HOLA").
The HOLA and OTS regulations generally prohibit a savings and loan holding
company, without prior OTS approval, from acquiring, directly or indirectly, the
ownership or control of any other savings association or savings and loan
holding company, or all, or substantially all, of the assets or more than 5% of
the voting shares thereof. These provisions also prohibit, among other things,
any director or officer of a savings and loan holding company, or any individual
who owns or controls more than 25% of the voting shares of such holding company,
from acquiring control of any savings association not a subsidiary of such
savings and loan holding company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. The Company operates as a unitary savings
and loan holding company. Generally, there are limited restrictions on the
activities of a unitary savings and loan holding company and its non-savings
association subsidiaries. If the Company ceases to be a unitary savings and loan
holding company, the activities of the Company and its non-savings association
subsidiaries would thereafter be subject to substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid. See "- Regulation
of Federal Savings Banks - Capital Distribution Regulation."
AFFILIATE RESTRICTIONS. Transactions between a savings association and
its "affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in
connection therewith limit the extent to which a savings association or its
subsidiaries may engage in certain "covered transactions" with affiliates to an
amount equal to 10% of the association's capital and surplus, in the case of
covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings association and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
30
<PAGE> 32
In addition, under the OTS regulations, a savings association may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings association and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings association or its subsidiaries and
an affiliate must be on terms and conditions that are consistent with safe and
sound banking practices. With certain exceptions, each loan or extension of
credit by a savings association to an affiliate must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of affiliate transactions.
REGULATION OF FEDERAL SAVINGS BANKS
REGULATORY SYSTEM. As a federally insured savings bank, lending
activities and other investments of the Bank must comply with various statutory
and regulatory requirements. The Bank is regularly examined by the OTS and must
file periodic reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the BIF, up to applicable limits.
FEDERAL HOME LOAN BANKS. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal to the greater of: (i) 1% of its aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5% of
its FHLB advances (borrowings).
LIQUID ASSETS. Under OTS regulations, for each calendar month, a savings
bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during the
preceding calendar month. This liquidity requirement, which is currently at
5.0%, may be changed from time to time by the OTS to any amount between 4.0% to
10.0%, depending upon certain factors. OTS regulations also require each savings
association to maintain an average daily balance of
31
<PAGE> 33
short-term liquid assets equal to not less than 1.0% of the average daily
balance of its net withdrawable accounts and short-term borrowings during the
preceding calendar month. The Bank maintains liquid assets in compliance with
these regulations.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require savings
banks to satisfy minimum capital standards: risk-based capital requirements, a
leverage requirement and a tangible capital requirement. Savings banks must meet
each of these standards in order to be deemed in compliance with OTS capital
requirements. In addition, the OTS may require a savings association to maintain
capital above the minimum capital levels.
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings bank is required to maintain
core capital equal to a minimum of 3% of adjusted total assets. (In addition,
under the prompt corrective action provisions of the OTS regulations, all but
the most highly-rated institutions must maintain a minimum leverage ratio of 4%
in order to be adequately capitalized. See "- Prompt Corrective Action.") A
savings bank is also required to maintain tangible capital in an amount at least
equal to 1.5% of its adjusted total assets.
Under OTS regulations, a savings bank with a greater than "normal" level
of interest rate exposure must deduct an interest rate risk ("IRR") component in
calculating its total capital for purposes of determining whether it meets its
risk-based capital requirement. Interest rate exposure is measured, generally,
as the decline in an institution's net portfolio value that would result from a
200 basis point increase or decrease in market interest rates (whichever would
result in lower net portfolio value), divided by the estimated economic value of
the savings association's assets. The interest rate risk component to be
deducted from total capital is equal to one-half of the difference between an
institution's measured exposure and "normal" IRR exposure (which is defined as
2%), multiplied by the estimated economic value of the institution's assets. In
August 1995, the OTS indefinitely delayed implementation of its IRR regulation.
Based on internal measures of interest rate risk at December 31, 1997, the Bank
would have been required to deduct $22.1 million pursuant to the IRR component
in calculating total risk-based capital had the IRR component of the capital
regulations been in effect. However, even in the event of such a deduction, the
Bank would still be deemed to be a "well-capitalized" institution.
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain
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<PAGE> 34
risks arising from nontraditional activities, or similar risks or a high
proportion of off-balance sheet risk; (2) a savings association is growing,
either internally or through acquisitions, at such a rate that supervisory
problems are presented that are not dealt with adequately by OTS regulations;
and (3) a savings association may be adversely affected by the activities or
condition of its holding company, affiliates, subsidiaries or other persons or
savings associations with which it has significant business relationships. The
Bank is not subject to any such individual minimum regulatory capital
requirement.
The Bank's tangible capital ratio was 14.67%, its core capital ratio was
14.81% and its total risk-based capital ratio was 36.14% at December 31, 1997.
PROMPT CORRECTIVE ACTION. The prompt corrective action regulation of the
OTS, promulgated under the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), requires certain mandatory actions and authorizes certain
other discretionary actions to be taken by the OTS against a savings bank that
falls within certain undercapitalized capital categories specified in the
regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. The Bank meets the capital requirements of a "well capitalized"
institution under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept brokered deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew or roll-over brokered
deposits.
Institutions that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the institution and periodic review
of the institution's efforts to restore its capital, (ii) a requirement that the
institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time it received notice of being undercapitalized, or the amount
necessary to bring the institution into compliance with applicable capital
standards at the time it fails to comply with the plan, and (iii) a limitation
on the institution's ability to make any acquisition, open any new branch
offices, or engage in any new line of business without the prior approval of the
appropriate federal banking agency for the institution or the FDIC.
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<PAGE> 35
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are necessary to resolve the problems of the
institution at the least possible long-term cost to the deposit insurance fund.
These supervisory actions include: (i) requiring the institution to raise
additional capital or be acquired by another institution or holding company if
certain grounds exist, (ii) restricting transactions between the institution and
its affiliates, (iii) restricting interest rates paid by the institution on
deposits, (iv) restricting the institution's asset growth or requiring the
institution to reduce its assets, (v) requiring replacement of senior executive
officers and directors, (vi) requiring the institution to alter or terminate any
activity deemed to pose excessive risk to the institution, (vii) prohibiting
capital distributions by bank holding companies without prior approval by the
FRB, (viii) requiring the institution to divest certain subsidiaries, or
requiring the institution's holding company to divest the institution or certain
affiliates of the institution, and (ix) taking any other supervisory action that
the agency believes would better carry out the purposes of the prompt corrective
action provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a
timely, acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The regulation
also makes mandatory for significantly undercapitalized institutions certain of
the supervisory actions that are discretionary for institutions classified as
undercapitalized, creates a presumption in favor of certain discretionary
supervisory actions, and subjects significantly undercapitalized institutions to
additional restrictions, including a prohibition on paying bonuses or raises to
senior executive officers without the prior written approval of the appropriate
federal bank regulatory agency. In addition, significantly undercapitalized
institutions may be subjected to certain of the restrictions applicable to
critically undercapitalized institutions.
The regulation requires that an institution be placed into
conservatorship or receivership within 90 days after it becomes critically
undercapitalized, unless the OTS, with concurrence of the FDIC, determines that
other action would better achieve the purposes of the prompt corrective action
provisions of FDICIA. Any such determination must be renewed every 90 days. A
depository institution also must be placed into receivership if the institution
continues to be critically undercapitalized on average during the fourth quarter
after the institution initially became critically undercapitalized, unless the
institution's federal bank regulatory agency, with concurrence of the FDIC,
makes certain positive determinations with respect to the institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized institutions
and to a number of other severe restrictions. For example, beginning 60 days
after becoming critically undercapitalized, such institutions may not pay
principal or interest on subordinated debt without the prior approval of the
FDIC. (However, the regulation does not prevent unpaid interest from accruing on
subordinated debt under the terms of the debt instrument, to the extent
otherwise permitted by law.) In addition, critically undercapitalized
institutions may be prohibited from engaging in a
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<PAGE> 36
number of activities, including entering into certain transactions or paying
interest above a certain rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
CONSERVATORSHIP/RECEIVERSHIP. In addition to the grounds discussed under
"- Prompt Corrective Action," the OTS (and, under certain circumstances, the
FDIC) may appoint a conservator or receiver for a savings association if any one
or more of a number of circumstances exist, including, without limitation, the
following: (i) the institution's assets are less than its obligations to
creditors and others, (ii) a substantial dissipation of assets or earnings due
to any violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books, papers,
records or assets or refusal to submit such items for inspection to any examiner
or lawful agent of the appropriate federal banking agency or state bank or
savings association supervisor, (vi) the institution is likely to be unable to
pay its obligations or meet its depositors' demands in the normal course of
business, (vii) the institution has incurred, or is likely to incur, losses that
will deplete all or substantially all of its capital, and there is no reasonable
prospect for the institution to become adequately capitalized without federal
assistance, (viii) any violation of law or unsafe or unsound practice that is
likely to cause insolvency or substantial dissipation of assets or earnings,
weaken the institution's condition, or otherwise seriously prejudice the
interests of the institution's depositors or the federal deposit insurance fund,
(ix) the institution is undercapitalized and the institution has no reasonable
prospect of becoming adequately capitalized, fails to become adequately
capitalized when required to do so, fails to submit a timely and acceptable
capital restoration plan, or materially fails to implement an accepted capital
restoration plan, (x) the institution is critically undercapitalized or
otherwise has substantially insufficient capital, or (xi) the institution is
found guilty of certain criminal offenses related to money laundering.
ENFORCEMENT POWERS. The OTS and, under certain circumstances, the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
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<PAGE> 37
reimbursement, indemnification or guarantee against loss; restrict the growth of
the institution; and rescind agreements and contracts.
CAPITAL DISTRIBUTION REGULATION. In addition to the prompt corrective
action restriction on paying dividends, OTS regulations limit certain "capital
distributions" by OTS-regulated savings associations. Capital distributions are
defined to include, in part, dividends and payments for stock repurchases and
cash-out mergers.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has not
been notified by the OTS that it is in need of more than normal supervision (a
"Tier 1 association") may, after prior notice to, but without the approval of
the OTS, make capital distributions during a calendar year up to the higher of:
(i) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four-quarter
period. A Tier 1 association may make capital distributions in excess of the
above amount if it gives notice to the OTS and the OTS does not object to the
distribution. A savings association that meets its regulatory capital
requirements both before and after a proposed distribution but does not meet its
fully phased-in capital requirement (a "Tier 2 association") is authorized,
after prior notice to the OTS but without OTS approval, to make capital
distributions in an amount up to 75% of its net income over the most recent
four-quarter period, taking into account all prior distributions during the same
period. Any distribution in excess of this amount must be approved in advance by
the OTS. A savings association that does not meet its current regulatory capital
requirements (a "Tier 3 association") cannot make any capital distribution
without prior approval from the OTS, unless the capital distribution is
consistent with the terms of a capital plan approved by the OTS.
The Bank qualifies as a Tier 1 association for purposes of the capital
distribution rule. The OTS may prohibit a proposed capital distribution that
would otherwise be permitted if the OTS determines that the distribution would
constitute an unsafe or unsound practice. The requirements of the capital
distribution regulation supersede less stringent capital distribution
restrictions in earlier agreements or conditions.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation. Under
the proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a holding
company, would be required to provide notice to the OTS prior to making a
capital distribution. "Troubled" associations and undercapitalized associations
would be allowed to make capital distributions only by filing an application and
receiving OTS approval, and such applications would be approved under certain
limited circumstances.
QUALIFIED THRIFT LENDER TEST. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets).
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<PAGE> 38
A savings association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the Code as a "domestic building and loan association." The
Bank is a domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At December 31, 1997, under the
expanded QTL test, approximately 91.27% of the Bank's portfolio assets were
qualified thrift investments.
FDIC ASSESSMENTS. The deposits of the Bank are insured to the maximum
extent permitted by the BIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
The BIF fund met its target reserve level in September 1995, but the
SAIF was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance premiums
for SAIF members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).
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On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF. The legislation also provided for the merger of the BIF and the SAIF, with
such merger being conditioned upon the prior elimination of the thrift charter.
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was collected on November 27, 1996.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective BIF and SAIF rates both range from zero basis points to 27 basis
points. From 1997 through 1999, FDIC-insured institutions will pay approximately
1.3 basis points of their BIF-assessable deposits and 6.4 basis points of their
SAIF-assessable deposits to fund the Financing Corporation. The Bank's insurance
premiums, which had amounted to the minimum $2,000 annual fee for its
BIF-insured deposits, were increased to 1.3 basis points. The Bank paid $248,000
in insurance premiums during 1997.
THRIFT CHARTER. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. Recent legislation required the
Treasury Department to prepare for Congress a comprehensive study on development
of a common charter for federal savings associations and commercial banks; and,
in the event that the thrift charter was eliminated by January 1, 1999, would
require the merger of the BIF and the SAIF into a single Deposit Insurance Fund
on that date. The Bank cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would not adversely affect the Bank and its parent
holding company.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings
associations have a responsibility under the Community Reinvestment Act ("CRA")
and related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Fair
Lending Laws could result in enforcement actions by the OTS, as well as other
federal regulatory agencies and the Department of Justice.
NEW SAFETY AND SOUNDNESS GUIDELINES. The OTS and the other federal
banking agencies have established guidelines for safety and soundness,
addressing operational and managerial, as well as compensation matters for
insured financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
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OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
CHANGE OF CONTROL. Subject to certain limited exceptions, no company can
acquire control of a savings association without the prior approval of the OTS,
and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding Company
Act that acquire or own savings associations are no longer defined as savings
and loan holding companies under the HOLA and, therefore, are not generally
subject to supervision and regulation by the OTS. OTS approval is no longer
required for a bank holding company to acquire control of a savings association,
although the OTS has a consultative role with the FRB in examination,
enforcement and acquisition matters.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank are subject to federal income taxation
in the same general manner as other corporations with some exceptions discussed
below. The following discussion of federal taxation is intended only to
summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Bank. The Bank's
federal income tax returns have been audited or closed without audit by the IRS
through 1993.
METHOD OF ACCOUNTING. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its consolidated federal
income tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective for taxable years beginning after 1995.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific chargeoff method in computing its bad debt deduction
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<PAGE> 41
beginning with its 1996 Federal tax return. In addition, the federal legislation
requires the recapture (over a six year period) of the excess of tax bad debt
reserves at December 31, 1995 over those established as of December 31, 1987.
The amount of such reserve subject to recapture as of December 31, 1997 is
approximately $8.4 million. The Bank will begin to recapture the reserve in
1998.
As discussed more fully below, the Bank and subsidiaries file combined
New York State Franchise and New York City Financial Corporation tax returns.
The basis of the determination of each tax is the greater of a tax on entire net
income (or on alternative entire net income) or a tax computed on taxable
assets. However, for state purposes, New York State enacted legislation in 1996,
which among other things, decoupled the Federal and New York State tax laws
regarding thrift bad debt deductions and permits the continued use of the bad
debt reserve method under section 593. Thus, provided the Bank continues to
satisfy certain definitional tests and other conditions, for New York State and
City income tax purposes, the Bank is permitted to continue to use the special
reserve method for bad debt deductions. The deductible annual addition to the
state reserve may be computed using a specific formula based on the Bank's loss
history ("Experience Method") or a statutory percentage equal to 32% of the
Bank's New York State or City taxable income ("Percentage Method").
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a bank
charter.
At December 31, 1997 the Bank's total federal pre-1988 reserve was
approximately $11.7 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 1997, the Bank had no net
operating loss carryforwards for federal income tax purposes.
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<PAGE> 42
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
STATE AND LOCAL TAXATION
NEW YORK STATE AND NEW YORK CITY TAXATION. The Company and the Bank
report income on a combined calendar year basis to both New York State and New
York City. New York State Franchise Tax on corporations is imposed in an amount
equal to the greater of (a) 9% of "entire net income" allocable to New York
State (b) 3% of "alternative entire net income" allocable to New York State (c)
0.01% of the average value of assets allocable to New York State or (d) nominal
minimum tax. Entire net income is based on federal taxable income, subject to
certain modifications. Alternative entire net income is equal to entire net
income without certain modifications. The New York City Corporation Tax is
imposed using similar alternative taxable income methods and rates.
A temporary Metropolitan Transportation Business Tax Surcharge on
Banking corporations doing business in the Metropolitan District has been
applied since 1982. The Bank transacts a significant portion of its business
within this District and is subject to this surcharge. For the tax year ended
December 31, 1997, the surcharge rate is 17% of the State franchise tax
liability. For 1997, an additional 2.5% tax surcharge on the New York State
Franchise Tax is also imposed on the Company. New York City does not impose
surcharges applicable to the Company.
DELAWARE STATE TAXATION. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $150,000. The prorated Delaware Tax for 1997
was $66,700.
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PART II
ITEM 2. PROPERTIES
At December 31, 1997, the Bank conducted its business from its executive
and administrative offices in Staten Island, New York, and 16 full service
branch offices in Staten Island, one full service branch office in Brooklyn as
well as three limited service branch offices, a loan origination center and its
Trust Department in Staten Island. In addition, the Bank maintains 36 automated
teller machines ("ATMs"), with at least two ATMs at each of the Bank's branch
offices, and an office for its SBLI activities.
The following table sets forth certain information relating to the
Bank's offices at December 31, 1997.
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date December 31, 1997 December 31, 1997
- ------------------------- --------- ---------- ------------------ ------------------
(In Thousands)
<S> <C> <C> <C> <C>
EXECUTIVE OFFICE:
15 Beach Street Owned $1,668 $ --
Staten Island, NY 10304
BRANCH OFFICES:
81-91 Water Street Owned 248 121
Staten Island, NY 10304
15 Hyatt Street Owned 42 65
Staten Island, NY 10301
257 New Dorp Lane Owned 23 132
Staten Island, NY 10305
260 New Dorp Lane Owned 505 --(1)
Staten Island, NY 10305
1837 Victory Boulevard Owned 211 159
Staten Island, NY 10314
1850 Victory Boulevard Owned 166 --(2)
Staten Island, NY 10314
1320 Hylan Boulevard Owned 558 155
Staten Island, NY 10305
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date December 31, 1997 December 31, 1997
- ------------------------- --------- ---------- ------------------ ------------------
(In Thousands)
<S> <C> <C> <C> <C>
461-465, 475 Forest Avenue Owned $1,185 $ 107
Staten Island, NY 10310
3150 Amboy Road Owned 445 98
Staten Island, NY 10308
900 Huguenot Avenue Leased 2000(3) 374 67
Staten Island, NY 10312
5840 Amboy Road Owned 1,218 --(4)
Staten Island, NY 10309
2700 Hylan Boulevard Leased 2005(3) 411 119
Staten Island, NY 10306
4025 Amboy Road Owned 299 99
Staten Island, NY 10308
6975 Amboy Road Owned 1,415 60
Staten Island, NY 10309
1630 Forest Avenue Owned 1,152 80
Staten Island, NY 10302
43 Richmond Hill Road Leased 1999(3) 530 68
Staten Island, NY 10314
800 Forest Avenue Owned 821 55
Staten Island, NY 10310
1630 Richmond Road Owned 1,121 137
Staten Island, NY 10304
4310-4312-4320 Amboy Road Leased 1998(3) 99 51
Staten Island, NY 10312
9512-20 3rd Avenue Leased 1999(3) 304 52
Brooklyn, NY 11209
OTHER OFFICES:
45 Beach Street Owned 534 --(5)
Staten Island, NY 10304
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date December 31, 1997 December 31, 1997
- ------------------------- --------- ---------- ------------------ ------------------
(In Thousands)
<S> <C> <C> <C> <C>
260 Christopher Lane Leased 2003 $ 224 $ --(6)
Staten Island, NY 10314
96 Prospect Street Owned 898 --(5)
Staten Island, NY 10304
1591 Richmond Road Owned 652 --(7)
Staten Island, NY 10304
176 Broadway Leased 2000 -- --(8)
New York, NY 10038
</TABLE>
- ---------------
(1) Consists of two ATMs and a manned drive-in facility.
(2) Consists of three ATMs and a manned drive-in facility.
(3) Excludes options to extended term.
(4) An automated drive through facility with two ATMs.
(5) Administrative office.
(6) Loan origination center.
(7) Trust Department office.
(8) SBLI Department.
44
<PAGE> 46
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any legal proceedings other than
immaterial proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Certain of the information required herein is incorporated by reference
from the back page of the Company's 1997 Annual Report ("1997 Annual Report").
At March 24, 1998, the Company had 45,130,312 shares of common stock
outstanding and had approximately 13,883 stockholders of record. Such holdings
do not reflect the number of beneficial owners of common stock. Between
December 22, 1997 (the day the common stock commenced trading on the NYSE) and
December 31, 1997, the high and low price of the common stock was $20.9375 and
$19.0625, respectively. The Company did not pay any dividends during such
period.
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page
10 of the 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OF OPERATIONS.
The information required herein is incorporated by reference from pages
11 to 20 of the 1997 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages
11 to 14 of the 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
21 to 37 of the 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
45
<PAGE> 47
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from
pages 2 to 5 of the definitive proxy statement of the Company for the Annual
Meeting of Stockholders to be held on April 30, 1998, which was filed on March
30, 1998 ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
pages 8 to 12 of the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
pages 6 and 7 of the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from
pages 10 and 11 of the Definitive Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Report of Independent Auditors
Consolidated Statements of Condition as of December 31, 1997 and
1996.
Consolidated Statements of Income for the Years Ended December
31, 1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended June 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
<TABLE>
<CAPTION>
Exhibit Index
-------------
<S> <C>
3.1* Certificate of Incorporation of Staten Island Bancorp, Inc.
3.2* Bylaws of Staten Island Bancorp, In
4.0* Specimen Stock Certificate of Staten Island Bancorp, Inc.
</TABLE>
46
<PAGE> 48
<TABLE>
<S> <C>
10.1* Form of Employment Agreement to be entered into among Staten Island Bancorp, Inc.,
Staten Island Savings Bank and certain executive officers.
10.2* Form of Employment Agreement to be entered into between Staten Island Bancorp, Inc.
and each of Harry P. Doherty and James R. Coyle.
10.3* Form of Employment Agreement to be entered into between Staten Island Savings Bank
and each of Harry P. Doherty and James R. Coyle.
13.0 1997 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is made to "Item 2.
"Business" for the required information
23.1 Consent of Arthur Andersen L.L.P.
27.0 Financial Data Schedule
</TABLE>
- ----------------------
(*) Incorporated herein by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-32113) filed by the Company
with the SEC.
47
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STATEN ISLAND BANCORP, INC.
By: /s/ Harry P. Doherty
------------------------------------
Harry P. Doherty
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---------------------------- ---------------------------- ----------------------
<S> <C> <C>
/s/ Harry P. Doherty Chairman and Chief Executive March 27, 1998
- ---------------------------- Officer
Harry P. Doherty
/s/ James R. Coyle Director, President and Chief
- ---------------------------- Operating Officer March 27, 1998
James R. Coyle
/s/ Edward J. Klingele Senior Vice President and Chief
- ---------------------------- Financial Officer (principal
Edward J. Klingele financial and accounting officer) March 27, 1998
/s/ Harold Banks Director March 27, 1998
- ----------------------------
Harold Banks
/s/ Charles J. Bartels Director March 27, 1998
- ----------------------------
Charles J. Bartels
/s/ William G. Horn Director March 27, 1998
- ----------------------------
William G. Horn
/s/ Dennis P. Kelleher Director March 27, 1998
- ----------------------------
Dennis P. Kelleher
</TABLE>
48
<PAGE> 50
<TABLE>
<CAPTION>
Name Title Date
- ---------------------------- ---------------------------- ----------------------
<S> <C> <C>
/s/ Julius Mehrberg Director March 27, 1998
- ----------------------------
Julius Mehrberg
/s/ John R. Morris Director March 27, 1998
- ----------------------------
John R. Morris
/s/Kenneth W. Nelson Director March 27, 1998
- ----------------------------
Kenneth W. Nelson
/s/ William E. O'Mara Director March 27, 1998
- ----------------------------
William E. O'Mara
</TABLE>
49
<PAGE> 1
[COLLAGE OF PICTURES OF PEOPLE]
STATEN ISLAND BANCORP, INC.
<PAGE> 2
STATEN ISLAND BANCORP, INC.
OUR PROFILE
Staten Island Bancorp, Inc. was organized in 1997 and is the holding
company for Staten Island Savings Bank, a federally chartered, FDIC insured
thrift institution, originally organized in 1864. Headquartered in Staten
Island, New York, the bank operates 16 full service branches in Staten Island
and one branch office in Bay Ridge, Brooklyn, New York.
The principal business of the Bank consists of attracting deposits from
consumers and businesses in its market area and originating consumer,
residential, multi-family and commercial real estate loans as well as other
business loans.
Staten Island Bancorp, Inc's common stock is publicly traded on the New
York Stock Exchange under the symbol "SIB".
["OUR PEOPLE" WRITTEN VERTICLE LEFT WITH PHOTOS OF THREE PEOPLE]
OUR MISSION
Staten Island Savings Bank will continue to be a strong financial
institution with an ongoing commitment to improving shareholder value, while
delivering the highest quality products and services responsive to the changing
needs of our consumer and business markets. As we grow, we will consistently
strive to give extraordinary service to our customers by providing our employees
with the means and opportunities to make full use of their skills and
capabilities. These commitments to our shareholders, customers and employees
will enable the Bank to maintain a level of profitability necessary to remain an
independent institution for the benefit of the communities we serve.
1
<PAGE> 3
TO OUR SHAREHOLDERS
ON DECEMBER 22, 1997 THE RINGING OF THE OPENING BELL ON THE NEW YORK STOCK
EXCHANGE SIGNALED A NEW ERA IN THE HISTORY OF STATEN ISLAND SAVINGS BANK, NOW A
SUBSIDIARY OF THE NEWLY FORMED HOLDING COMPANY OF STATEN ISLAND BANCORP, INC. IT
ALSO MARKED THE CULMINATION OF NEARLY A YEAR LONG EFFORT TO CONVERT THE BANK
FROM A MUTUAL INSTITUTION TO A PUBLICLY HELD COMPANY.
Our conversion was the second largest thrift IPO to-date and was an
unqualified success as evidenced by the overwhelming demand for shares. More
than $507 million in net proceeds was raised with the issuance of 45.1 million
shares of common stock at the initial offering price of $12.00 per share. This
additional capital will enable us to grow and take advantage of new
opportunities without sacrificing the dominant position we have achieved in the
communities we have served for over 133 years.
Our strong commitment to these communities was further evidenced by the
creation of the SISB Community Foundation which was funded with a donation of
2.1 million shares of Staten Island Bancorp Inc. common stock. The Foundation
will continue the Bank's previously demonstrated commitment to the housing,
civic and special needs of our community.
THE FINANCIAL YEAR IN REVIEW
Net income, excluding the one-time funding of the Foundation, was $28.3
million -- an increase of $6.6 million or 30% over 1996. Total assets increased
by 48.7% to $2.65 billion, primarily through the growth in the securities
portfolio of $647.3 million and $114.9 million of net growth in loans.
The asset growth was primarily funded by proceeds generated from the
stock conversion. In addition, the Bank implemented a strategy to accelerate
asset growth and enhance earnings through prudent and conservative leveraging of
the balance sheet with $250 million in borrowings.
Loan growth of 12% was accomplished with record levels of originations
in 1-4 family residential properties, the traditional backbone of our lending
operations. We also continued to diversify our loan portfolio by pursuing
commercial real estate and other business lending opportunities. In total, we
originated over $300 million in loans and we remain the leading lender in Staten
Island. Together with this growth, asset quality remains strong, as evidenced by
the reduction of non-performing loans to $21.3 million, or 1.97% of loans.
Non-interest income increased by 13%, largely a result of the enhanced
fee income opportunities available through the ongoing expansion of the
commercial customer base, as well as modest changes to the pricing of consumer
services.
STRONG COMMUNITY
BANKING FRANCHISE
Our leadership role in lending in the communities we serve, continues
to be complemented by our 30% share of the Staten Island deposit market. We also
experienced deposit growth in excess of 30% in our office in Bay Ridge,
Brooklyn.
Core deposits, made up of regular savings and checking balances,
account for about two-thirds of our deposit base and give us the ability to
maintain stability in our net interest spread. As of December 31, 1997, our
weighted average cost of deposits of 3.13% places us among the top performers in
our peer group.
Our ability to successfully serve the financial needs of individuals
and businesses in our markets is due to a number of factors. The breadth of
services, which include a full service trust department as well as savings bank
life insurance, continue to be evaluated and enhanced based on responses from
our customer base. For example, as the year ended we were nearing completion of
an on-line PC banking product which will enhance our electronic delivery
systems. Introduction of this service is scheduled for later this year.
Experienced staff, knowledgeable in the unique needs of our retail
customers and small business have been trained to expand
2
<PAGE> 4
["LEADERSHIP" WRITTEN VERTICALLY ON LEFT]
[TWO PHOTOS OF HARRY P. DOHERTY]
HARRY P. DOHERTY
chairman and chief executive officer
[TWO PHOTOS OF JAMES R. COYLE]
JAMES R. COYLE
president and chief operating officer
their commercial banking skills. Recruiting of new staff and restructuring has
occurred in response to the growth we have accomplished. We have also
implemented aggressive sales and service practices, supported by comprehensive
training programs, which enable our customers to receive first rate service.
Product enhancement and service oriented employees are key to the
strength of our community banking franchise. We must continue to take advantage
of cross-selling opportunities for expanded relationships and fee income that
exist within the households and businesses we serve. We will also continue our
efforts to build new household and business relationships which together will
enable the bank to maintain profitable growth by capitalizing on our significant
market penetration.
LOOKING AHEAD
Cost efficient and flexible technology is critical in the delivery of
banking services in this rapidly changing environment. A major conversion to a
new data processing service provider is planned for the third quarter of 1998.
This conversion is expected to reduce our data processing costs and improve the
flexibility of our technical support systems. More importantly, our new systems
should enable the Bank to compete more effectively and efficiently beyond the
turn of the century.
Our conversion to a public company has clearly presented Staten Island
Bancorp with new challenges. We are carefully considering the many capital
management strategies available to us, which include: in-market or geographic
expansion through acquisition or de novo branching and product development;
exploring new opportunities for asset generation and loan growth; and decisions
concerning stock repurchase and dividends. Of course the objective of any of
these capital management decisions will be to build long-term value for our
shareholders.
While the mission of the Bank now includes the enhancement of
shareholder value, the underlying commitment to providing quality banking
services has not changed. We have worked hard at becoming the leading financial
institution serving our market area and our dedication will only become stronger
as we all share in the success of the Company.
As we begin to address the new challenges ahead of us, we must
recognize the past efforts of our directors, officers and staff and thank them
for their contribution to our success. At the same time, we are grateful to the
stockholders and customers for their confidence in us and we are excited about
the opportunities for continued success.
<PAGE> 5
PERSONAL BANKING
Robin Mollica
[PHOTO OF ROBIN MOLLICA]
RESPONSIVE
[PHOTO OF PATRICIA PHOEL]
Patricia Phoel
Richard G. Budalich
[PHOTO RICHARD G. BUDALICH]
ACCESS
QUALITY
[PHOTO OF ZENAIDA CORDERO]
Zenaida Cordero
[PHOTO OF ROBERT S. RYAN]
Robert S. Ryan
Staten Island Savings Bank's network of 17 branch locations remains at
the very heart of our franchise. The 16 locations on Staten Island and one in
Bay Ridge, Brooklyn provide unequaled market penetration and convenient access
to THE bank's full range of personal deposit and loan services. We believe this
extensive branch network is among several reasons why we continue to maintain
our 30% share of the deposit market on Staten Island. For the second year in a
row the branch in Bay Ridge, our first location off of Staten Island,
experienced the largest deposit growth in our system.
With an established branch network, our long history of personalized
service is augmented by an extensive electronic delivery system. Our network of
36 ATMs and bank-by-phone service offer 24 hour/ 7 day access to transactions
and information. In 1997, we installed three new ATM locations and upgraded
nearly one-half of the ATM terminals, providing transaction enhancements such as
mini-statement capabilities. In addition, our cardholders can access cash and
account information through national and worldwide ATM networks. The transaction
capabilities for bank-by-phone were also enhanced in response to requests
received through regularly conducted customer service surveys. By the end of the
year, electronic delivery capabilities will be expanded to include on-line PC
banking.
Our relationship with over 70,000 households, the majority of which
have multiple accounts with THE bank, continues to present excellent sales
opportunities as household needs change and new products are introduced. A
successful introduction in 1996 and ongoing growth in our credit card product
has expanded our product delivery and provides additional fee income through an
agent program with MBNA America.
Single-family residential loan volume remains at record levels with
$195 million in originations in 1997, once again placing Staten Island Savings
Bank as the leading lender in this market. During the year, we focused our
efforts on improving customer service and outreach by hiring a full-time
residential loan originator. This individual is available for consultation at
times and locations most convenient to the applicant.
We also concentrated on strengthening relationships within our Priority
Access Broker Program by hiring an experienced full-time manager of the program.
This has improved the awareness of our products, increased the percentage of
active members, and enabled us to respond more quickly to pricing and product
changes. We are also more aggressive in enlisting new productive members into
the program.
Mortgage loan referrals are also being generated through the commercial
lending department as end loans become available following construction loan
financing.
These new programs are supported by a talented staff of mortgage
professionals who continue to receive high marks from the borrowers who respond
to our customer service surveys. Our dedication to high levels of customer
service, together with an extensive product mix, have enabled THE bank to
increase market share locally and effectively enter new markets.
4
<PAGE> 6
["PERSONAL" WRITTEN VERTICALLY ON LEFT]
[PHOTO OF FAMILY: JOSEPH, ANTHONY, AND SHARON]
AS THEIR FAMILY GROWS, THE OLIVA'S RELY ON THE BANK FOR THEIR CHECKING, SAVINGS
AND MORTGAGE NEEDS. L. TO R. JOSEPH, ANTHONY AND SHARON
5
<PAGE> 7
[PHOTO OF THE DEVELOPMENT TEAM OF EUGENE BOCCIERI, MICHAEL CASSINO, R. RANDY LEE
AND MICHAEL BOCCIERI REVIEWING PLANS FOR THE NEXT PHASE]
WITH FINANCING FROM THE BANK, THE CELEBRATION AT RAINBOW HILL, AN AFFORDABLE
HOUSING PROJECT OF 586 HOMES, IS NEARING COMPLETION. THE DEVELOPMENT TEAM OF
EUGENE BOCCIERI, MICHAEL CASSINO, R. RANDY LEE AND MICHAEL BOCCIERI REVIEW PLANS
FOR THE NEXT PHASE.
6
<PAGE> 8
BUSINESS BANKING
Frederick Volk
[PHOTO OF FREDERICK VOLK]
EXPERIENCE
[PHOTO OF CARL TULLIS]
Carl Tullis
Eileen Merkent
[PHOTO OF EILEEN MERKENT]
SOLUTIONS
FLEXIBILITY
[PHOTO OF ANDREA R. CICERO & ROXANA MONTALVO]
Andrea R. Cicero & Roxana Montalvo
Jean Ringhoff
[PHOTO OF JEAN RINGHOFF]
In 1997, we continued to solidify our penetration in the local business
market through enhancements to existing products and services, as well as
accelerating relationship management and business development efforts. Ninety
percent of businesses in Staten Island have sales volumes of less than $5
million per year. With over 10,000 business checking accounts, no one knows the
needs of businesses in our market area better than we do.
With our network of branches located in or near the heart of retail
centers in neighborhoods throughout Staten Island and Bay Ridge, THE bank is
"right down the block" from local businesses. The employees in each of our
branches understand the importance of time and flexibility to the small business
owner and deliver fast and efficient service.
Unique services, like phone calls for checks presented against
insufficient or uncollected funds are valuable to small businesses and are a
source of fee income. Business customers with special investment and banking
needs can receive personal service through our Personal Financial Center and may
be referred to the Trust Department for retirement planning or other investment
management services.
The availability of ATM cards for select businesses and bank-by-phone
for all businesses, allow 24 hour access to transactions and information.
Enhancements to bank-by-phone enabled businesses to request daily account
statements, automatically or on demand. Businesses will also benefit from the
availability of PC banking in 1998.
Commercial lending remained an area of continued development following
our 1995 acquisition of a local commercial bank, as loan originations exceeded
$60 million in 1997. Seasoned loan officers with experience in the Brooklyn
market were recruited to accelerate our development of the opportunities in this
market. A primary strategy for commercial real estate lending is to establish a
conduit for the end loan financing of projects created through our construction
lending efforts.
New business development is accomplished through the full-time efforts
of a team of officers who tailor our products to the individual needs of each
business owner they approach. Branch managers are actively involved in calling
on current customers in order to seek new opportunities or handle current needs.
We will continue to integrate the activities of our branch network, loan
officers, business development staff and back-office operations to provide
seamless service to this important and profitable group of customers.
Our high penetration into the local business market allows us to
capitalize on opportunities to attain the personal business of owners and
employees as well. Staff training directed toward cross-selling loan and
non-loan products continues, and enables THE bank to strengthen the overall
relationship with our business customers.
7
<PAGE> 9
COMMUNITY BANKING
Usha Ramaswamy
[PHOTO OF USHA RAMASWAMY]
COMMITMENT
Marlene Blum
[PHOTO OF MALENE BLUM]
Catherine M. Paulo
[PHOTO OF CATHERINE M. PAULO]
TRUST
SERVICE
[PHOTO OF DIANA J. ALORE]
Diana J. Alore
Mary Palmieri
[PHOTO OF MARY PALMIERI]
Staten Island Savings Bank's dominant share of households and
businesses clearly positions THE bank as the full service community bank in our
market area. Additional lines of business in our Trust & Investment Department
and Savings Bank Life Insurance expand the scope of products and services and
further solidifies this position.
The Trust Department is beginning to experience growth in client
relationships as a result of recent marketing and business development
initiatives. Personal and business customers have access to services which
include trust and estate planning, retirement planning, and investment
management planning services. We currently have $96 million in assets under
management. The availability of Trust services is another source for
establishing profitable relationships.
Over 30,000 policyholders have taken advantage of the low-cost term and
whole life insurance product lines available through Savings Bank Life
Insurance. Sales representatives in all branches are supported by a staff of
dedicated specialists. We have just completed the first year of operation
following our acquisition of this department in December, 1996.
Community lending and economic development initiatives continued with
officer involvement in the Neighborhood Housing Services, the Staten Island
Economic Development Corporation and other agencies or projects that seek to
enhance the quality of life or provide opportunities for local families,
individuals and businesses.
THE bank has made a tradition of solidifying its ties with the
community and developing business through support of local charitable, housing,
educational, health care and civic organizations. To further illustrate the
commitment to these causes, the SISB Community Foundation was formed and funded
through the stock conversion. The Foundation is dedicated to the promotion of
charitable purposes, including but not limited to community development, grants,
or donations to support housing assistance and affordable housing programs,
not-for-profit community groups and other similar types of organizations or
civic minded projects.
In addition to the formation of the Foundation, directors, officers and
staff continue to support local organizations with contributions of time, talent
and money. Proceeds from team activities in walk-a-thons, dress down days and
other events are donated to various charitable organizations. Directors and
officers also serve on numerous boards and advisory committees providing their
time and talent to these groups.
In 1997, THE bank was the exclusive partner with the Staten Island
Advance in the development of the "Newspaper-in-Education" program, introduced
in schools throughout the Island. This program enabled children in over 280
classrooms in 80 schools to develop their reading, math and social skills
through a special section of the newspaper specifically designed for their
benefit.
We believe that these activities further expand our reach into the
households and businesses in our community and present Staten Island Savings
Bank with additional opportunities for growth.
8
<PAGE> 10
COMMUNITY
[PHOTO OF A. ROMI COHN]
A. ROMI COHN HAS HAD A RELATIONSHIP WITH STATEN ISLAND SAVINGS BANK FOR NEARLY
40 YEARS, AND CURRENTLY UTILIZES THE TRUST DEPARTMENT'S INVESTMENT MANAGEMENT
SERVICES FOR A SCHOLARSHIP FOUNDATION.
9
<PAGE> 11
TABLE OF CONTENTS
Letter to Shareholders ..................................................... 2
Selected Consolidated Financial and Other Data ............................. 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 11
Financial Statements ....................................................... 21
Report of Independent Public Accountants ................................... 37
Services Available ......................................................... 38
Directors and Officers, Shareholder Information ............................ IBC
Banking Locations .......................................................... BC
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected historical financial data for the five years ended
December 31, 1997 is derived in part from the audited financial statements of
the Company. The selected historical financial data set forth below should be
read in conjunction with the historical financial statements of the Company,
including the related notes, included elsewhere herein.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
(000's omitted) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ................................ $2,651,170 $1,782,323 $1,728,130 $1,376,220 $1,365,543
Cash and cash equivalents ................... 148,935 52,622 77,263 29,984 44,155
Securities held to maturity ................. -- -- -- 321,263 310,460
Securities available for sale ............... 1,350,467 703,134 788,622 378,207 463,176
Loans receivable, net ....................... 1,082,918 968,015 801,137 608,954 513,803
Intangible assets(1) ........................ 18,414 20,490 22,633 492 1,028
Deposit accounts ............................ 1,623,652 1,577,748 1,535,617 1,225,918 1,223,708
Borrowings .................................. 250,042 54 46 47 49
Stockholders' equity ........................ 685,886 171,080 150,082 125,444 118,619
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income ............................. $ 146,812 $ 124,430 $ 104,356 $ 90,284 $ 93,152
Interest expense ............................ 60,057 50,437 44,234 36,537 38,327
--------------------------------------------------------------------
Net interest income ......................... 86,755 73,993 60,122 53,747 54,825
Provision for loan losses ................... 6,003 1,000 -- 76 1,335
--------------------------------------------------------------------
Net interest income after provision for
loan losses ............................... 80,752 72,993 60,122 53,671 53,490
Other income ................................ 7,454 3,929 4,040 2,048 3,307
Charitable contribution to SISB
Community Foundation ...................... 25,817 -- -- -- --
Other expenses .............................. 42,908 40,066 32,953 25,557 24,873
--------------------------------------------------------------------
Income before provision for income taxes .... 19,481 36,856 31,209 30,162 31,924
Provision for income taxes .................. 4,932 15,081 13,284 13,958 14,150
--------------------------------------------------------------------
Income before cumulative effect of
accounting change ......................... 14,549 21,775 17,925 16,204 17,774
Cumulative effect of change in
accounting for income taxes ............... -- -- 4,700 -- 1,514
--------------------------------------------------------------------
Net income .................................. $ 14,549 $ 21,775 $ 13,225 $ 16,204 $ 16,260
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Key Operating Ratios: At or For the Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:(2)(3)
Return on average assets ........................... 0.70% 1.24% 0.88% 1.17% 1.21%
Return on average equity ........................... 7.79 14.03 9.54 13.27 15.17
Average interest-earning assets to average
interest-bearing liabilities ..................... 118.70 120.24 117.17 113.05 110.61
Interest rate spread(4) ............................ 3.82 3.84 3.63 3.64 3.91
Net interest margin(4) ............................. 4.39 4.46 4.16 4.00 4.22
Noninterest expenses, exclusive of
amortization of intangible assets, to assets ..... 1.96 2.16 2.11 1.81 1.82
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period(5) .............................. 0.83% 1.34% 1.44% 0.61% 0.62%
Allowance for loan losses to
nonperforming loans at end of period ............. 73.69 43.85 44.20 38.79 41.21
Allowance for loan losses to total loans
at end of period ................................. 1.42 1.02 1.32 0.51 0.62
Capital and Other Ratios:
Average equity to average assets(3) ................ 8.96% 8.85% 9.21% 8.84% 8.00%
Tangible equity to assets at end of period ......... 25.35 8.55 7.09 9.55 8.40
Total capital to risk-weighted assets .............. 62.70 20.66 19.65 17.16 16.30
</TABLE>
(1) Consists of excess of cost over fair value of net assets acquired
("goodwill") and core deposit intangibles which amounted to $14.1 million
and $4.3 million at December 31, 1997, respectively.
(2) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods and are annualized where
appropriate.
(3) The conversion proceeds were received on December 22, 1997 and have been
reflected in the performance and other ratios as of that date. Per share
information has been omitted as it is not meaningful for the periods
presented.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(5) Nonperforming assets consist of non-accrual loans, accruing loans more than
90 days past due and real estate acquired through foreclosure or by
deed-in-lieu thereof.
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General. The following discussion is intended to assist in understanding the
financial condition and results of operations of the Company. The information
contained in this section should be read in conjunction with the Financial
Statements and the accompanying Notes to Financial Statements and the other
sections contained in this Annual Report.
The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans and mortgage-backed and investment
securities, and interest expense on interest-bearing liabilities which
principally consist of deposits. The Company's results of operations also are
affected by the provision for loan losses, the level of its noninterest income
and expenses, and income tax expense.
Asset and Liability Management. The ability to maximize net interest income is
largely dependent upon the achievement of a positive interest rate spread that
can be sustained during fluctuations in prevailing interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities which either reprice or mature within a
given period of time. The difference, or the interest rate repricing "gap",
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities, and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect. As of December 31, 1997, the ratio of the Company's one-year
gap to total assets was a negative 8.43% and its ratio of interest-earning
assets to interest-bearing liabilities maturing or repricing within one year was
73.6%.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of operations,
the Company has adopted asset and liability management policies to better match
the maturities and repricing terms of the Company's interest-earning assets and
interest-bearing liabilities. The Finance and Planning Committee, a Board
committee, sets and recommends the asset and liability policies of the Company
which are implemented by the Asset and Liability Management Committee ("ALCO").
The ALCO is chaired by the Chief Financial Officer and comprised of members of
the Company's management. The purpose of the ALCO is to communicate, coordinate
and control asset/liability management consistent with the Company's business
plan and Board approved policies. The ALCO establishes and monitors the volume
and mix of assets and funding sources taking into account relative costs and
spreads, interest rate sensitivity and liquidity needs. The objectives are to
manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals. The ALCO
generally meets on a quarterly basis to review, among other things, economic
conditions and interest rate outlook, current and projected liquidity needs and
capital positions, anticipated changes in the volume and mix of assets and
liabilities and interest rate risk exposure limits versus current projections
pursuant to gap analysis and income simulations. At each meeting, the ALCO
recommends appropriate strategy changes based on such review. The Chief
Financial Officer or his designate is responsible for reviewing and reporting on
the effects of the policy implementations and strategies to the Finance and
Planning Committee, at least quarterly.
In order to manage its assets and liabilities and achieve the desired
liquidity, credit quality, interest risk, profitability and capital targets, the
Company has focused its strategies on (i) originating adjustable rate loans,
(ii) originating relatively short-term commercial business and consumer loans,
(iii) maintaining a significant level of investment securities and
mortgage-backed and investment securities with terms to repricing, maturities or
estimated average lives of less than five years and (iv) managing its deposits
to establish stable deposit relationships.
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The ALCO regularly reviews interest rate risk by forecasting the impact of
alternative interest rate environments on net interest income and market value
of portfolio equity ("MVPE"), which is defined as the net present value of an
institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential changes in net
interest income and MVPE that is authorized by the Board of Directors of the
Company.
The following table sets forth as of December 31, 1997 the estimated
percentage change in the Company's net interest income over a four-quarter
period and MVPE based on the indicated changes in interest rates.
<TABLE>
<CAPTION>
Estimated Change in
Change (in Basis ----------------------------------------------------------------------------
Points) in Interest Net Interest Income
Rates(1) (next four quarters) MVPE
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 (25.6)% $(29,845) (22.4)% $(175,414)
+300 (19.3) (22,465) (17.8) (140,022)
+200 (12.7) (14,805) (12.5) (97,926)
+100 (6.1) (7,060) (5.8) (45,694)
0
-100 4.2 4,898 1.4 11,257
-200 6.8 7,953 3.4 26,450
-300 6.3 7,349 6.6 51,528
-400 2.6 3,012 12.0 94,151
</TABLE>
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
The assumptions used by management to evaluate the vulnerability of the
Company's operations to changes in interest rates in the table above are based
on assumptions provided by the OTS (Office of Thrift Supervision) and utilized
in the gap table. The interest rate sensitivity of the Company's assets and
liabilities and the estimated effects of changes in interest rates on the
Company's net interest income and MVPE indicated in the above table could vary
substantially if different assumptions were used or actual experience differs
from such assumptions. Based upon the above-described changes in the Company's
MVPE, the Company could be required to deduct $22.1 million from its total
capital if certain OTS regulations were applicable, although the Company would
continue to be deemed a "well-capitalized" institution.
12
<PAGE> 15
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1997, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
More than
Three to More than Three Years
Within Three Twelve One Year to to Five Over Five
Months Months Three Years Years Years Total
- -----------------------------------------------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable(2):
Mortgage loans:
Fixed .............................. $ 5,389 $ 16,817 $ 49,997 $ 52,935 $448,358 $ 573,496
Adjustable ......................... 89,939 85,222 113,136 146,736 30,655 465,688
Other loans .......................... 9,093 14,159 17,521 1,554 -- 42,327
Securities:
Non-mortgage(3) ...................... 21,938 28,804 50,799 4,316 -- 105,857
Mortgage-backed fixed(4) ............. 10,713 119,509 88,901 121,057 332,430 672,610
Mortgage-backed adjustable(4) ........ 42,545 88,896 211,279 140,694 -- 483,414
Other interest-earning assets .......... 90,500 -- -- -- -- 90,500
-------- --------- -------- -------- -------- ----------
Total interest-earning assets ...... $270,117 $ 353,407 $531,633 $467,292 $811,443 $2,433,892
======== ========= ======== ======== ======== ==========
Interest-bearing liabilities:
Deposits:
NOW accounts(5) ...................... $ 1,411 $ 4,232 $ 5,185 $ 1,372 $ 3,049 $ 15,249
Savings accounts(5) .................. 35,180 105,539 215,217 140,719 331,102 827,757
Money market deposit accounts(5) ..... 15,027 45,082 8,370 3,995 3,614 76,088
Certificates of deposit .............. 150,195 255,370 100,796 14,324 8 520,693
Other borrowings ....................... 50,000 185,000 15,000 -- 42 250,042
-------- --------- -------- -------- -------- ----------
Total interest-bearing liabilities . $251,813 $ 595,223 $ 344,568 $160,410 $337,815 $1,689,829
======== ========== ========= ======== ======== ==========
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ........... $ 18,304 $(241,816) $ 187,065 $306,882 $473,628 $ 744,063
======== ========= ========= ======== ======== ==========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ........... $ 18,304 $(223,512) $(36,447) $270,435 $744,063
======== ========= ======== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets ................ 0.69% (8.43)% (1.37)% 10.20% 28.07%
======== ========= ======== ======== ========
</TABLE>
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, as adjusted to
take into account estimated prepayments based on assumptions used by the
OTS in assessing the interest rate sensitivity of savings associations in
the Company's region.
(2) Balances have been reduced for non-performing loans, which amounted to
$21.3 million at December 31, 1997.
(3) Based on contractual maturities.
(4) Reflects estimated prepayments in the current interest rate environment.
(5) Although the Company's NOW accounts, passbook savings accounts and money
market deposit accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer effective maturities. The decay rates used on these
accounts are based on the latest available OTS assumptions and should not
be regarded as indicative of the actual withdrawals that may be experienced
by the Company. If all of the Company's NOW accounts, passbook savings
accounts and money market deposit accounts had been assumed to be subject
to repricing within one year, interest-bearing liabilities which were
estimated to mature or reprice within one year would have exceeded
interest-earning assets with comparable characteristics by $936.1 million
or 35.3% of total assets.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Certain assumptions are contained in the previous table which affect the
presentation therein. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates of other types of assets and liabilities lag behind changes
in market interest rates. Certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table.
CHANGES IN FINANCIAL CONDITION
General. The Company's total assets increased by $868.8 million or 48.7% to
$2.65 billion at December 31, 1997, from $1.78 billion at December 31, 1996. The
increase was mainly due to an increase in net loans by $114.9 million or 11.9%,
investment securities by $647.3 million or 92.1% and federal funds sold by $81.4
million. Such increases were funded primarily by net proceeds of $507.2 million
received in the Conversion, an increase of $250.0 million in borrowed funds and
a $45.9 million increase in deposits.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of cash and
due from banks and federal funds sold, amounted to $148.9 million and $52.6
million at December 31, 1997 and December 31, 1996, respectively. The increase
of $96.3 million between December 31, 1996 and December 31, 1997 was primarily
due to the net proceeds received in the Conversion, funds received in connection
with the repayment of the Company's $29.8 million automobile lease portfolio in
the first quarter of 1997 and positive deposit inflows.
Loans. The Company's net loan portfolio increased $114.9 million or 11.9% to
$1.08 billion at December 31, 1997 from $968.0 million at December 31, 1996. The
increase in the loan portfolio during this period was due to increased loan
demand primarily in one to four family residential loans and to a lessor extent,
commercial real estate, construction and land loans and commercial business
lending. The Company continued its efforts to expand its lending activities with
the hiring of business development officers, commercial loan officers, mortgage
loan originators and further accessing builders and mortgage brokers in its
market areas. The increase in the Company's loan portfolio was partially offset
by the repayment of $29.8 million of loans secured by a pledge and assignment of
an interest in automobile leases (constituting the Company's entire automobile
lease portfolio) during the year.
Securities. Securities amounted to $703.1 million and $1.35 billion at December
31, 1996 and December 31, 1997, respectively. All of the Company's securities
were classified as available for sale at such dates. The securities portfolio
increased $647.3 million or 92.1% during the period between December 31, 1996
and December 31, 1997. The increase was primarily due to the use of funds from
the Conversion and increased borrowings as a funding source. The Company
presently intends to increase the securities portfolio as part of its strategy
to leverage the funds received in the Conversion.
Stockholders' Equity. Stockholders' equity amounted to $685.9 million at
December 31, 1997 and $171.1 million at December 31, 1996 or 25.9% and 9.6% of
total assets at such dates. The increase of $514.8 million during the period
December 31, 1996 through December 31, 1997 was primarily due to the net
proceeds of $507.2 million from the sale of common stock in the Conversion and
the contribution of 2,149,062 shares of common stock valued at $25.8 million to
the Foundation. The increase in stockholders' equity was also due to net income
of $14.5 million for 1997 and an increase of $8.5 million in net unrealized
appreciation in securities available for sale, net of taxes to $12.7 million at
December 31, 1997 from $4.1 million at December 31, 1996. Such increases were
partially offset by a reduction of $41.3 million for the unallocated ESOP
shares.
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1):
Real estate loans ......... $ 982,569 $ 79,521 8.09% $ 833,770 $ 68,600 8.23% $ 645,250 $ 53,265 8.25%
Other loans ............... 47,150 4,510 9.57 57,913 5,144 8.88 54,719 4,871 8.90
---------- -------- ---------- -------- ---------- --------
Total loans ............. 1,029,719 84,031 8.16 891,683 73,744 8.27 699,969 58,136 8.31
Securities .................. 823,949 55,973 6.79 737,796 49,083 6.65 700,048 43,593 6.23
Other earning
assets(2) ................. 124,304 6,808 5.48 29,853 1,603 5.37 45,646 2,627 5.76
---------- -------- ---------- -------- ---------- --------
Total interest-
earning assets ........ 1,977,972 146,812 7.42 1,659,332 124,430 7.49 1,445,663 104,356 7.22
-------- -------- --------
Noninterest-
earning assets .............. 105,101 93,611 60,104
---------- ---------- ----------
Total assets ............ $2,083,073 $1,752,943 $1,505,767
========== ========== ==========
Interest-bearing liabilities:
Deposits:
NOW and money
market deposits ......... $ 102,837 2,824 2.75 $ 134,600 3,479 2.58 $ 100,824 2,573 2.55
Savings deposits .......... 951,188 25,281 2.66 752,190 21,192 2.82 741,147 20,915 2.82
Certificates of deposit ... 531,293 27,185 5.12 493,180 25,760 5.22 391,786 20,741 5.29
---------- -------- ---------- -------- ---------- --------
Total deposits .......... 1,585,318 55,290 3.49 1,379,970 50,431 3.65 1,233,757 44,229 3.58
Total other
borrowings ............ 81,071 4,767 5.88 47 6 12.77 46 5 10.87
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities ........... 1,666,389 60,057 3.60 1,380,017 50,437 3.65 1,233,803 44,234 3.59
-------- -------- --------
Noninterest bearing
liabilities(3) .............. 230,017 217,740 133,275
---------- ---------- ----------
Total liabilities ......... 1,896,406 1,597,757 1,367,078
Stockholders' equity .......... 186,667 155,186 138,689
---------- ---------- ----------
Total liabilities and
stockholders'
equity .................. $2,083,073 $1,752,943 $1,505,767
========== ========== ==========
Net interest-earning
assets ...................... $ 311,583 $ 279,315 $ 211,860
========== ========== ==========
Net interest
income/interest
rate spread ................. $ 86,755 3.82% $ 73,993 3.84% $ 60,122 3.63%
======== ==== ======== ==== ======== ====
Net interest margin ........... 4.39% 4.46% 4.16%
==== ==== ====
Ratio of average
interest-earning assets
to average interest-
bearing liabilities ......... 118.70% 120.24% 117.17%
====== ====== ======
</TABLE>
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Includes money market accounts, Federal Funds sold and interest-earning
bank deposits.
(3) Consists primarily of demand deposit accounts.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 compared to 1996 1996 compared to 1995
------------------------------------------------------------------------------
Increase (decrease) due to Increase (decrease) due to
--------------------------- Total Net -------------------------- Total Net
Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
- ------------------------------------------------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans ................. $(1,122) $12,243 $ (200) $10,921 $ (176) $15,562 $ (51) $15,335
Other loans ....................... 395 (956) (73) (634) (11) 284 -- 273
-----------------------------------------------------------------------------
Total loans receivable .......... (727) 11,287 (273) 10,287 (187) 15,846 (51) 15,608
Securities .......................... 1,037 5,732 121 6,890 2,979 2,351 160 5,490
Federal funds sold .................. 32 5,072 101 5,205 (176) (909) 61 (1,024)
-----------------------------------------------------------------------------
Total net change in income on
interest-earning assets ........... 342 22,091 (51) 22,382 2,616 17,288 170 20,074
-----------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW and money market deposits ..... 217 (821) (51) (655) 33 862 11 906
Savings accounts .................. (1,200) 5,607 (318) 4,089 (34) 312 (1) 277
Certificates of deposit ........... (525) 1,991 (41) 1,425 (277) 5,367 (71) 5,019
-----------------------------------------------------------------------------
Total deposits .................. (1,508) 6,777 (410) 4,859 (278) 6,541 (61) 6,202
Other borrowings .................... (3) 10,343 (5,579) 4,761 1 -- -- 1
-----------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities ...... (1,511) 17,120 (5,989) 9,620 (277) 6,541 (61) 6,203
-----------------------------------------------------------------------------
Net change in net interest income ..... $ 1,853 $ 4,971 $ 5,938 $12,762 $2,893 $10,747 $ 231 $13,871
=============================================================================
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996
General. The Company reported net income of $14.5 million for the year ended
December 31, 1997 compared to net income of $21.8 million for the year ended
December 31, 1996, a decrease of $7.2 million or 33.2%. The earnings for the
year ended December 31, 1997 included a one-time non-recurring contribution of
$25.8 million ($13.8 million net of taxes) for the funding of the SISB Community
Foundation (the "Foundation"). The Foundation was established in connection with
the Conversion. At the close of the Conversion in December 1997, the Company
funded the Foundation with a one-time donation of 2,149,062 shares of common
stock. Excluding the effect of this contribution to the Foundation, net income
would have been $28.4 million. The establishment of the Foundation should
enhance the bond between the Company and the communities that it serves and
thereby enable such communities to share in the potential growth and success of
the Company over the long term. By further enhancing the Company's visibility
and reputation in the communities that it serves, the Company believes that the
Foundation will benefit the long term value of the Company's community banking
franchise. In addition to this one-time charge, the loan loss provision
increased by $5.0 million and total other expenses increased $2.8 million, net
of the one-time contribution to the Foundation. These increases were partially
offset by an increase in net interest income of $12.8 million and a decrease in
the provision for income taxes of $10.1 million. These and other significant
fluctuations in the Company's results of operation are discussed below.
Interest Income. The increase in interest income for the year ended December 31,
1997 was primarily due to an increase in the average balance of the Company's
earning assets, and an increase in the average yield on securities partially
offset by a decrease in the average yield on loans. The average balance of the
loan portfolio
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
increased $138.0 million or 15.48% to $1.03 billion primarily as a result of
increased loan demand and the Company's continued efforts to expand its lending
activity. The average balance of the Company's securities portfolio increased
$86.2 million or 11.68% to $823.9 million for 1997 primarily as a result of the
use of a portion of the net proceeds from the Conversion and, to a lesser
extent, the Company's leveraging strategy. The increase in the average balance
of other earning assets to $124.3 million for 1997 is directly related to the
funds generated during the Conversion. The average yield earned on the Company's
loan portfolio decreased from 8.27% for 1996 to 8.16% for 1997. This decrease in
the average yield on the loan portfolio was primarily due to the increased loan
repayment activity in higher yielding loans and the downward pricing of certain
of the Company's adjustable rate loans. The yield on the securities portfolio
increased to 6.79% for 1997 compared to 6.65% for 1996 which reflects the sale
of lower rate securities in connection with the Company's restructuring of its
investment portfolio in the past fifteen months along with the investment in
higher yielding mortgage-backed securities.
Interest Expense. Interest expense was $60.1 million for 1997 compared to $50.4
million for 1996, an increase of $9.6 million or 19.07%. Interest on borrowed
funds increased $4.8 million due to a $81.1 million increase in the average
balance of borrowings in 1997. The average balance of borrowings for 1996 was
$47,000. The significant increase in the average balance of borrowings reflects
the leveraging strategy instituted by the Company during the current fiscal
year. The average balance of interest bearing deposits increased by $205.3
million from December 31, 1996 to December 31, 1997 while the average cost of
these deposits decreased from 3.65% for 1996 to 3.49% for 1997. The increase in
the average balance of deposits and the decrease in the average cost was a
result of the Company's continued business development efforts for demand
deposits along with deposits made in anticipation of payment for the Company's
common stock in the Conversion.
Net Interest Income. Net interest income was $86.8 million for 1997 compared to
$74.0 million for 1996. This represents an increase of $12.8 million or 17.2%.
The increase was a result of a $22.4 million increase in interest income which
was partially offset by a $9.6 million increase in interest expense. The
increase in interest income was the result of an increase of $318.6 million in
the average balance of interest earning assets partially offset by a decrease of
seven basis points from 7.49% for 1996 to 7.42% for 1997 in the average yield on
interest earning assets. Interest expense increased due to a $286.4 million
increase in the average balance of interest bearing liabilities which was
partially offset by a decrease of five basis points in the average rate paid
from 3.65% to 3.60% for the year 1996 and 1997, respectively. The net interest
rate spread and margin decreased to 3.82% and 4.39%, respectively, for the year
ended December 31, 1997 compared to 3.84% and 4.46%, respectively for the year
ended December 31, 1996.
Provision for Loan Losses. For the year ended December 31, 1997 the provision
for loan losses was $6.0 million compared to $1.0 million for the year ended
December 31, 1996. The provision for loan losses in 1997 was based on
management's continued review of the risk elements in the Company's loan
portfolio. As part of its 1997 review, management considered a report prepared
by an independent third-party consultant with respect to the risk elements in
the Company's loan portfolio and an analysis prepared by the Company's
management with respect to certain trends affecting the Company's loan portfolio
such as charge-offs, delinquencies and other external economic factors including
interest rates. Such trend analysis and third-party report indicated certain
additional potential risk factors to be considered in estimating the level of
the allowance for loan losses. In establishing the provision in 1997, management
of the Company also considered the overall increase in the Company's loan
portfolio, the potential increased risk of loss generally attributed to
commercial real estate loans, construction and land loans and commercial
business loans as well as management's continuing experience with the loan
portfolio acquired from Gateway. The Company has experienced a longer than
anticipated work-out period with respect to such loans, and charged-off $1.3
million in 1997 and $2.7 million in 1996. Based on the various factors
considered in its 1997 review of risk elements, and in particular the longer
than anticipated work-out periods for the Gateway portfolio, management
determined that in certain circumstances more aggressive work-out procedures for
non-performing loans would be warranted. The fact that more aggressive work-out
procedures could increase the risk of loss with respect to such loans also
affected management's determination to increase the provision levels during
1997. In addition to general provisions of approximately $2.0 million during
1997, management determined that an additional provision of approximately $4.0
million was necessary in light of estimated losses with respect to the loans
acquired from Gateway and with respect to the Company's portfolio of
non-performing loans. Management views approximately $4.0 million of the
provision during 1997 as generally non-recurring in nature. While no assurance
can be given that future charge-offs and/or additional provisions will not be
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
necessary, management of the Company believes that, as of December 31, 1997, the
allowance for loan losses was adequate.
Other Income. Other income increased $3.5 million or 89.7% to $7.5 million for
1997 from $3.9 million for 1996. Such increase was primarily due to a $2.7
million net loss on securities transactions in 1996 compared to a net loss of
$85,000 in 1997. The Company's program of restructuring its securities portfolio
in the past fifteen months was the primary cause of these losses. Service and
fee income increased $900,000 to $7.5 million for 1997 from $6.6 million in
1996. The increase in service and fee income was due to an increase in the
volume of transactions as well as an increase in demand deposit accounts.
Other Expenses. Other expenses, exclusive of the $25.8 million contribution to
the Foundation, were $42.9 million for the year ended December 31, 1997, an
increase of $2.8 million or 7.1% compared to $40.1 million for the year ended
December 31, 1996. The primary reasons for the increase were an increase in
personnel cost of $1.3 million, data processing of $1.1 million, miscellaneous
other expenses of $327,000 and marketing of $318,000. The increase in personnel
expense was the result of normal salary increases as well as the payment of a
special bonus of $600,000 to all officers and employees. The increase in data
processing reflects a one time write-off of the $969,000 investment in the
Company's data processing provider. The Company in 1997 became the sole owner of
the data processing service bureau as a result of the other last remaining owner
being acquired by another institution. Over the past years with consolidation in
the banking industry, the number of bank customers of such service bureau has
decreased significantly. As a result, the Company in 1997 conducted a review of
the continuing viability of such service bureau and, based on such review, has
signed a contract with another data processing provider. The current service
bureau will continue to provide data processing services to the Company until
the conversion to the new service bureau and then be liquidated. As a result,
this data processing company is not included in the consolidated financial
statements of the Company. The Company's decision to enhance its data processing
capabilities and convert to a new service bureau may result in increased other
expenses. The increase in miscellaneous other expenses was due to an increase in
stationery and supplies. The increase in marketing expense reflects the
Company's efforts to penetrate new business opportunities particularly in the
commercial business development area, and trust services.
Provision for Income Taxes. The provision for income taxes amounted to $4.9
million for 1997 compared with $15.1 million for 1996. The decrease in the
provision for income taxes for the year was due to the reduction of income
before taxes due to the $25.8 million contribution to the Foundation and a $2.6
million reversal of previously deferred income taxes related to bad debt
reserves accumulated for New York City purposes. For a further discussion of the
reversal of such income taxes related to bad debt reserves, see Note 11 of the
Notes to Consolidated Financial Statements.
The Company has recorded a $12.0 million deferred tax benefit from the
contribution to the Foundation. Contributions are subject to an annual
limitation based on 10% of the Company's annual taxable income. Any unused
portion of the deduction can be carried forward for five years following the
contribution. At year-end the deferred tax benefit was reduced by the current
deductible portion to $10.1 million and based on anticipated future earnings,
the Company believes the deferred tax benefit will be realized within the next
five years.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995
General. The Company reported net income of $21.8 million for the year ended
December 31, 1996 compared to net income of $13.2 million for the year ended
December 31, 1995, an increase of $8.6 million or 64.7%. The $13.2 million of
net income for 1995 reflects a $4.7 million reduction due to the cumulative
effect of change in accounting for income taxes as discussed in Note 11 of the
Notes to Consolidated Financial Statements. In addition to the absence of the
$4.7 million change in accounting for income taxes, the increase in 1996 was due
to an increase in net interest income, which was partially offset by increases
in total other expenses and the provision for income taxes. These and other
significant fluctuations in the Company's results of operations are discussed
below.
Net Interest Income. Net interest income increased $13.9 million or 23.1% to
$74.0 million for 1996 compared to 1995, reflecting a $20.1 million or 19.2%
increase in interest income which was partially offset by a $6.2 million or
14.0% increase in interest expense. The Company's interest rate spread and net
interest margin increased to 3.84% and 4.46%, respectively, for 1996 compared to
3.63% and 4.16%, respectively, for 1995. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities increased to
120.24% for 1996 compared to 117.17% for 1995.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Interest Income. The increase in interest income during the year ended December
31, 1996 was primarily due to an increase in the average balance of the
Company's interest-earning assets and, to a lesser extent, the yield earned on
the Company's securities portfolio. The average balance of the loan portfolio
increased $191.7 million or 27.4% to $891.7 million for 1996 compared to 1995
primarily as a result of the full year impact of the Gateway acquisition and, to
a lesser extent, increased loan demand, new loan products and an increased
emphasis on commercial and other lending. The average balance of the Company's
securities portfolio increased $37.7 million or 5.4% to $737.8 million for 1996
compared to 1995 primarily as a result of the $123.5 million securities
portfolio acquired in the Gateway acquisition. The average yield earned on the
Company's loan portfolio remained constant between 1995 and 1996 while the
average yield earned on the Company's securities portfolio increased from 6.23%
for 1995 to 6.65% for 1996. Such increase in the average yield earned on the
Company's securities portfolio was primarily due to the restructuring of the
securities portfolio and the purchase of higher-yielding securities.
Interest Expense. The increase in interest expense during the year ended
December 31, 1996 was primarily due to an increase in the average balance of
deposits, particularly certificates of deposit. The average balance of deposits
increased $146.2 million or 11.9% to $1.38 billion for 1996, $101.4 million of
which consisted of an increase in the average balance of certificates of deposit
and $33.8 million of which consisted of an increase in demand deposits,
including noninterest-bearing checking, NOW and money market accounts. The
increase in the average balance of deposits was primarily due to the full year
impact of deposits acquired in the Gateway acquisition. The average rate paid on
deposits increased slightly from 3.58% in 1995 to 3.65% in 1996.
Provision for Loan Losses. For the year ended December 31, 1996, the provision
for loan losses amounted to $1.0 million. The Company did not make a provision
for loan losses in 1995. The provision for loan losses during 1996 was due to,
among other factors, management's continuing review of the risk elements in the
Company's loan portfolio. In establishing provisions in 1996, management of the
Company considered the overall increase in the Company's loan portfolio, the
potential increased risk of loss generally attributed to commercial real estate
loans, construction and land loans and commercial business loans as well as
management's continuing experience with the loan portfolio acquired from Gateway
and its consideration that, despite charge-offs of $2.7 million in 1996, the
Company's total non-performing loans had not been reduced but had increased
slightly since December 31, 1995.
Other Income. Other income amounted to $3.9 million and $4.0 million for the
years ended December 31, 1996 and 1995, respectively. The increase of $2.3
million or 52.8% in service and fee income to $6.6 million for 1996 from $4.3
million for 1995 was offset by a $2.4 million increase in the loss from
securities transactions to a loss of $2.7 million for 1996 from a loss of
$305,000 for 1995. The increase in service and fee income was primarily due to
an increase in the number of transaction accounts as a result of the Gateway
acquisition. The increase in the loss from securities transactions for 1996 was
due primarily to a restructuring of the Company's investment portfolio to
increase the yield of such portfolio.
Other Expenses. Other expenses increased $7.1 million or 21.6% to $40.1 million
for the year ended December 31, 1996 compared to the year ended December 31,
1995. Such increase was due to increases in personnel expenses, occupancy and
equipment, amortization of intangible assets, professional fees and other
miscellaneous expenses, which were partially offset by a decrease in FDIC
insurance premiums.
Personnel expenses increased $4.0 million or 25.9% to $19.7 million for
1996 compared to 1995 due to an increase in personnel as a result of the Gateway
acquisition and normal merit and salary increases.
Occupancy and equipment expenses increased $1.0 million or 23.6% to $5.4
million for 1996 compared to 1995 primarily due to the addition of three branch
offices, a loan production facility and a trust department office as a result of
the Gateway acquisition.
Amortization of intangible assets increased $988,000 or 85.5% to $2.1
million for 1996 compared to 1995 due primarily to the Gateway acquisition. The
excess of the purchase price over the fair value of the net assets acquired was
$15.6 million and is being amortized on a straight-line basis over 20 years. The
deposit premium paid was $7.0 million, and is being amortized on a straight-line
basis over a period of 6 years.
Professional fees increased $491,000 or 46.7% to $1.5 million for 1996
compared to 1995 primarily as a result of the use of various consulting firms to
resolve issues from the Gateway acquisition, restructure the commercial lending
function and conduct a technology platform review.
Other miscellaneous expenses increased $1.6 mil-
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
lion or 26.8% to $7.3 million for 1996 compared to 1995 due to increases in a
variety of categories, including telephone and telecommunications, stationery
and supplies, postage, insurance and legal fees related to non-performing loans.
FDIC insurance premiums decreased $1.4 million or 99.9% to $2,000 for 1996
as a result of the reduction in insurance assessment rates by the FDIC in
September 1995.
Provision for Income Taxes. The provision for income taxes amounted to $15.1
million and $13.3 million for 1996 and 1995, respectively, resulting in
effective tax rates of 40.9% and 42.6%, respectively.
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, amortization, prepayments and maturities
of outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-related
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Company invests excess funds in federal funds sold
and other short-term interest-earning assets which provide liquidity to meet
lending requirements. Historically, the Company has been able to generate
sufficient cash through its deposits and has only utilized borrowings to a very
limited degree. During the year ended December 31, 1997, the Company entered
into repurchase agreements as an alternative funding source. At December 31,
1997, such borrowings amounted to $250.0 million. The Company intends to
continue to utilize repurchase agreements and FHLB advances to leverage its
capital base and provide funds for its lending and investing activities.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds sold or U.S. Treasury securities. On a longer term basis,
the Company maintains a strategy of investing in various lending products. The
Company uses its sources of funds primarily to meet its ongoing commitments, to
pay maturing certificates of deposit and savings withdrawals, fund loan
commitments and maintain a portfolio of mortgage-backed and mortgage-related
securities and investment securities. At December 31, 1997, the total approved
loan origination commitments outstanding amounted to $48.0 million and unused
credit lines equalled $22.1 million. At the same date, the unadvanced portion of
construction loans totaled $11.0 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 1997, totaled $405.6 million.
Investment securities scheduled to mature in one year or less at December 31,
1997 totalled $50.7 million. Based on historical experience, management believes
that a significant portion of maturing deposits will remain with the Company.
The Company anticipates that it will continue to have sufficient funds, together
with borrowings, to meet its current commitments.
YEAR 2000
The Company has completed its assessment of the Company's vulnerability to
Year 2000 issues and has prepared initial estimates of the costs of resolution.
The Company has signed a contract to have its most critical systems such as
loans and deposits be processed by a new data processor. This processor has made
a representation and warranty to be Year 2000 compliant by December 31, 1998.
The costs of compliance will be borne by the vendor under the contract. Company
personnel will participate in tests of this system as soon as practical to
ensure full compliance. Failure to prepare this system for the Year 2000 would
materially affect the Company's ability to operate and serve its customers. The
Company's other information technology-controlled systems have also been
identified and are in various states of readiness. Progress is underway to
address these other issues, with an estimated cost of $50,000 to $100,000; the
actual amount will depend on choices to be made by management in the coming
months. This amount could increase materially if problems are noted in the
testing process that have not yet been identified. The majority of these costs
are expected to be incurred during calendar year 1998 and 1999; all such costs
will be charged to expense as incurred.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies,
virtually all of the Company's assets and liabilities are monetary in nature. As
a result, interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
20
<PAGE> 23
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31, 1997 and 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
ASSETS (000's omitted)
<S> <C> <C>
Assets:
Cash and due from banks ............................................................... $ 58,435 $ 43,522
Federal funds sold .................................................................... 90,500 9,100
Securities available for sale ......................................................... 1,350,467 703,134
Loans, net ............................................................................ 1,082,918 968,015
Accrued interest receivable ........................................................... 15,707 11,739
Bank premises and equipment, net ...................................................... 19,737 18,675
Intangible assets, net ................................................................ 18,414 20,490
Other assets .......................................................................... 14,992 7,648
---------- ----------
Total assets ...................................................................... $2,651,170 $1,782,323
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due depositors --
Savings ............................................................................. $ 827,757 $ 832,584
Time ................................................................................ 520,693 500,570
Money market ........................................................................ 76,088 79,704
NOW accounts ........................................................................ 15,249 14,298
Demand deposits ..................................................................... 183,865 150,592
---------- ----------
1,623,652 1,577,748
Borrowed Funds ........................................................................ 250,042 54
Advances from borrowers for taxes and insurance ....................................... 4,623 4,563
Accrued interest and other liabilities ................................................ 86,967 28,878
---------- ----------
Total liabilities ................................................................. 1,965,284 1,611,243
---------- ----------
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Common stock par value $.01 per share: 100,000,000 shares
authorized; 45,130,312 issued and outstanding ..................................... 451 --
Additional paid in capital .......................................................... 532,521 --
Retained earnings substantially restricted .......................................... 181,499 166,950
Unallocated ESOP shares ............................................................. (41,262) --
Unrealized appreciation on securities available for sale, net of taxes .............. 12,677 4,130
---------- ----------
Total stockholders equity ......................................................... 685,886 171,080
---------- ----------
Total liabilities and stockholders' equity ........................................ $2,651,170 $1,782,323
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 24
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C>
Interest Income:
Loans ................................................................... $ 84,031 $ 73,744 $ 58,136
Securities available for sale ........................................... 55,973 49,083 43,593
Federal funds sold ...................................................... 6,808 1,603 2,627
-------- -------- --------
Total interest income ............................................. 146,812 124,430 104,356
-------- -------- --------
Interest Expense:
Savings ................................................................. 25,192 21,111 20,817
Time .................................................................... 27,185 25,760 20,741
Money market, NOW and escrow ............................................ 2,913 3,560 2,671
Borrowed funds .......................................................... 4,767 6 5
-------- -------- --------
Total interest expense ............................................ 60,057 50,437 44,234
-------- -------- --------
Net interest income ................................................. 86,755 73,993 60,122
Provision for Loan Losses ............................................... 6,003 1,000 --
-------- -------- --------
Net interest income after provision for loan losses ................. 80,752 72,993 60,122
-------- -------- --------
Other Income (Loss):
Service and fee income .................................................. 7,539 6,639 4,345
Securities transactions ................................................. (85) (2,710) (305)
-------- -------- --------
7,454 3,929 4,040
-------- -------- --------
Other Expenses:
Personnel ............................................................... 20,934 19,684 15,635
Occupancy and equipment ................................................. 5,666 5,397 4,365
Amortization of intangible assets ....................................... 2,076 2,143 1,155
FDIC Insurance .......................................................... 248 2 1,414
Data processing ......................................................... 3,950 2,842 2,398
Marketing ............................................................... 1,430 1,112 1,141
Professional fees ....................................................... 933 1,542 1,051
Contribution to SISB Community Foundation ............................... 25,817 -- --
Other ................................................................... 7,671 7,344 5,794
-------- -------- --------
Total other expenses .............................................. 68,725 40,066 32,953
-------- -------- --------
Income before provision for income taxes .......................... 19,481 36,856 31,209
Provision for Income Taxes .............................................. 4,932 15,081 13,284
-------- -------- --------
Income before cumulative effect of accounting change .............. 14,549 21,775 17,925
Cumulative effect of change in accounting
for income taxes ................................................ -- -- 4,700
-------- -------- --------
Net Income ........................................................ $ 14,549 $ 21,775 $ 13,225
======== ======== ========
Earnings (Loss) Per Share Since Conversion:
Basic ............................................................. $ (.29) N/A N/A
Fully diluted ..................................................... $ (.29) N/A N/A
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE> 25
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Unrealized
Unallocated Appreciation
Additional Common (Depreciation) on
For the years ended Common Paid-In Stock Retained Securities Available
December 31, 1997, 1996 and 1995 Stock Capital Held by ESOP Earnings for Sale, Net of Taxes Total
- ------------------------------------------------------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1995 ............. $ -- $ -- $ -- $131,950 $ (6,506) $125,444
Change in unrealized
appreciation (depreciation)
on securities, net of taxes ....... 11,413 11,413
Net Income .......................... 13,225 13,225
--------------------------------------------------------------------------------------
Balance December 31, 1995 ........... -- -- -- 145,175 4,907 150,082
Change in unrealized
appreciation (depreciation)
on securities, net of taxes ....... (777) (777)
Net Income .......................... 21,775 21,775
--------------------------------------------------------------------------------------
Balance December 31, 1996 ........... -- -- -- 166,950 4,130 171,080
Net proceeds from common
stock issued in conversion ........ 451 532,521 532,972
Purchase of common stock
by ESOP ........................... (41,262) (41,262)
Change in unrealized
appreciation (depreciation)
on securities, net of taxes ....... 8,547 8,547
Net income .......................... 14,549 14,549
--------------------------------------------------------------------------------------
Balance December 31, 1997 ........... $ 451 $532,521 $(41,262) $181,499 $12,677 $685,886
======================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 14,549 $ 21,775 $ 13,225
Adjustments to reconcile net income
to net cash provided by operating activities --
Charitable contribution to SISB Community Foundation............... 25,817 -- --
Depreciation and amortization ..................................... 1,724 1,581 1,436
Accretion and amortization of bond and mortgage premiums........... (1,772) 1,053 4,724
Amortization of intangible assets.................................. 2,076 2,143 1,155
Loss on sale of available for sale securities...................... 85 2,710 305
Other noncash expense (income)..................................... (2,707) (3,529) (1,968)
Provision for loan losses.......................................... 6,003 1,000 --
Increase in deferred loan fees..................................... 74 578 105
Decrease (increase) in accrued interest receivable................. (3,969) 2,036 2,043
Decrease (increase) in other assets................................ (4,691) 197 (2,271)
(Decrease) increase in accrued interest and other liabilities...... 62,337 (8,023) 6,471
(Increase) decrease in deferred income taxes....................... (13,327) (190) 4,340
Recoveries on loans................................................ 1,047 968 336
--------------------------------------------
Net cash provided by operating activities........................ $ 87,246 $ 22,299 $ 29,901
--------------------------------------------
Cash Flows from Investing Activities:
Maturities of investment securities.................................... -- -- 110,258
Purchases of investment securities..................................... -- -- (87,649)
Maturities of available for sale securities............................ 180,489 189,180 90,149
Sales of available for sale securities................................. 97,757 240,417 115,641
Purchases of available for sale securities............................. (910,305) (345,700) (178,036)
Principal collected on loans........................................... 167,260 113,881 128,305
Purchase of loans...................................................... -- -- (10,631)
Sales of loans......................................................... 4,289 3,340 21,858
Loans made to customers................................................ (289,512) (287,950) (216,305)
Capital expenditures................................................... (2,786) (3,448) (2,481)
Acquisition of Gateway Bancorp, Inc., net of cash acquired............. -- -- 13,564
--------------------------------------------
Net cash used in investing activities............................ (752,808) (90,280) (15,327)
--------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts....................................... 45,964 43,340 32,705
Borrowings............................................................. 249,988 -- --
Issuance of Common Stock............................................... 507,185 -- --
Loan to ESOP for purchase of shares.................................... (41,262) -- --
--------------------------------------------
Net cash provided by financing activities........................ 761,875 43,340 32,705
--------------------------------------------
Net (decrease) increase in cash and cash equivalents............. 96,313 (24,641) 47,279
Cash and Cash Equivalents, beginning of year........................... 52,622 77,263 29,984
--------------------------------------------
Cash and Cash Equivalents, end of year................................. $148,935 $ 52,622 $ 77,263
============================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for --
Interest............................................................. $ 60,054 $ 50,450 $ 44,200
Income taxes......................................................... 14,298 14,381 14,081
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accounting and reporting policies of Staten Island Bancorp, Inc. (the
"Company") and subsidiary conform with generally accepted accounting principles
and to general practice within the banking industry. The following is a
description of the more significant policies which the Company follows in
preparing and presenting its consolidated financial statements.
Basis of Presentation
The accompanying consolidated financial statements include the amounts of
the Company and its wholly-owned subsidiary Staten Island Savings Bank (the
"Bank"). All significant intercompany transactions and balances are eliminated
in consolidation.
As more fully discussed in Note 2, the Company, a Delaware corporation, was
organized by the Bank for the purpose of acquiring all of the capital stock of
the Bank pursuant to the conversion of the Bank from a federally chartered
mutual savings bank to a federally chartered stock savings bank. The Company is
subject to the financial reporting requirements of the Securities and Exchange
Act of 1934, as amended.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported assets, liabilities,
revenues and expenses as of the dates of the financial statements. Actual
results could differ significantly from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold for the years ended December 31,
1997, 1996 and 1995.
Securities Available For Sale
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," debt
and equity securities used as part of the Company's asset/liability management
that may be sold in response to changes in interest rates, reported at fair
value, with unrealized gains and losses excluded from earnings and reported on
an after-tax basis in a separate component of stockholders' equity. Gains and
losses on the disposition of securities are recognized on the
specific-identification method in the period in which they occur.
Premiums and discounts on mortgage backed securities are amortized over the
average life of the security using a method which approximates the level-yield
method.
Due to a one time reassessment under SFAS 115, the Bank in December 1995
reclassified $314,588,000 of securities which were held to maturity to available
for sale at a market value of $316,715,000.
Loans
Loans are stated at the principal amount outstanding, net of unearned
income. Loan origination fees are recognized in interest income as an adjustment
to yield over the life of the loan. Loans are placed on nonaccrual status when
management has determined that the borrower will be unable to meet contractual
principal or interest obligations or when unsecured interest or principal
payments are 90 days past due. When a loan is classified as nonaccrual, the
recognition of interest income ceases. Interest previously accrued and remaining
unpaid is reversed against income. Cash payments received are applied to
principal, and interest income is not recognized unless management determines
that the financial condition and payment record of the borrower warrant the
recognition of income.
The Bank has defined its impaired loans as its nonaccrual loans under the
guidance of SFAS No. 114, entitled, "Accounting by Creditors for Impairment of a
Loan." Pursuant to this accounting guidance, a valuation allowance is recorded
on impaired loans to reflect the difference, if any, between the loan face value
and the present value of projected cash flows, observable fair value or
collateral value. This valuation allowance is reported within the overall
allowance for loan losses.
Allowance for Loan Losses
The allowance for loan losses is established by management to absorb future
charge-offs of loans deemed uncollectible. The allowance is increased or
decreased by charges to operations and reduced by net charge-offs. The amount of
the allowance is based on estimates and the ultimate losses may vary from the
current estimates. These estimates are evaluated periodically and, as
adjustments become necessary, they are reflected in operations in the periods in
which they become known. Considerations in this evaluation include past and
anticipated loss experience, evaluation of real estate collateral, as well as
current and anticipated economic conditions.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less allowance for
depreciation and amortization applied on a straight-line basis over the
estimated useful lives of 10 to 50 years for buildings and improvements and 3 to
10 years for furniture, fixtures and equipment.
Core Deposit Intangibles
Core deposit intangibles, which resulted from acquisitions, are being
amortized on a straight-line basis to expense over the estimated periods
benefited, not exceeding six years. Core deposit intangibles of
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
$4,278,000 and $5,444,000 as of December 31, 1997 and 1996, respectively, are
included in intangible assets in the accompanying financial statements.
Investments in Real Estate
Investments in real estate consist of real estate acquired through
foreclosure or by deed in lieu of foreclosure ("real estate owned" or "REO").
REO properties are carried at the lower of cost or fair value at the date of
foreclosure (new cost basis) and at the lower of the new cost basis or fair
value less estimated selling costs thereafter.
Income Taxes
Deferred income taxes provide for temporary differences between items of
income or expense reported in the financial statements and those reported for
income tax purposes.
Earnings Per Share
Earnings per share is computed by dividing net income by the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding, adjusted for the unallocated portion of shares held by the Employee
Stock Ownership Plan (ESOP). Since the conversion on December 22, 1997, basic
and fully diluted weighted average common stock outstanding was 41,691,812
shares, (adjusted for unallocated ESOP shares).
Employee Benefits
The Company follows AICPA Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP 93-6") to account for the
established ESOP. SOP 93-6 requires that compensation expense be recognized for
shares committed to be released to directly compensate employees equal to the
fair value of the shares committed. In addition, SOP 93-6 requires that
leveraged ESOP debt and related interest expense be reflected in fluctuations in
compensation expense as a result of changes in the fair value of the Company's
common stock; however, any such compensation expense fluctuations will result in
an offsetting adjustment to paid in capital. Therefore, total capital will not
be affected.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." This statement is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1996.
In March 1997, the FASB issued Statement 128, "Earnings per Share,"
superseding Opinion 15. The main goal of the Statement is to harmonize the EPS
calculation in the United States with those common in other countries and with
International Accounting Standard No. 33. The Statement is effective for fiscal
years ending after December 15, 1997.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." Statement 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements. The Statement is effective for financial statements for
periods ending after December 15, 1997.
The adoption of SFAS No. 125, 128, and 129 did not have a material impact
effect on the Company's financial statements.
In July 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." Statement 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Statement is effective for fiscal years beginning
after December 15, 1997 with earlier application permitted.
In July 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of
an Enterprise and Related Information." Statement No. 131 requires disclosures
for each segment that are similar to those required under current standards with
the addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. The Statement is effective for fiscal years beginning
after December 15, 1997 with earlier application permitted.
In management's opinion, SFAS Nos. 130 and 131 when adopted, will not have
a material effect on the Company's financial statements.
Reclassifications
Certain reclassifications have been made to the December 31, 1996 financial
statements to conform with current year presentation.
2. ORGANIZATION/FORM OF OWNERSHIP
The Bank was originally founded as a New York State chartered savings bank
in 1864. In August 1997, the Bank converted to a federally-chartered mutual
savings bank and is now regulated by the Office of Thrift Supervision. The Bank
is a community bank providing a complete line of retail and commercial banking
services along with trust services. Individual customer deposits are insured up
to $100,000 by the Federal Deposit Insurance Corporation.
26
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On April 16, 1997, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of a
holding company. As part of the conversion, the Company was incorporated under
Delaware law in July 1997. The Company completed its initial public offering on
December 22, 1997 and issued 42,981,250 shares of common stock resulting in
proceeds of $507,183,000, net of expenses totaling $8,591,000. The Company used
$253,592,000 or 50% of the net proceeds to purchase all of the outstanding stock
of the Bank. The Company also loaned $41,262,000 to the ESOP which purchased
3,438,500 shares of the Company's stock in the initial public offering.
As part of the Plan of Conversion, the Company formed the SISB Community
Foundation and donated 2,149,062 shares of the Company valued at approximately
$25,789,000. The Company recorded a contribution expense charge and a
corresponding deferred tax benefit of $11,987,000 for this donation. The
formation of this private charitable foundation is to further the Bank's
commitment to the communities that it serves.
Additionally, the Bank established, in accordance with the requirements of
the Office of Thrift Supervision (OTS) a liquidation account for $183,947,000
which was equal to its capital as of the date of the latest consolidated
statement of financial condition (September 30, 1997) appearing in the IPO
prospectus supplement. The liquidation account is reduced as and to the extent
that eligible account holders have reduced their qualifying deposits. Subsequent
increases in deposits do not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation of the Bank,
each eligible account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the adjusted qualifying
balances for accounts then held.
In addition to the restriction described above, the Company may not declare
or pay cash dividends on or repurchase any of its shares of common stock if the
effect thereof would cause stockholder's equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration and payment
would otherwise violate regulatory requirements.
3. ACQUISITION
On August 18, 1995, the Bank acquired all of the outstanding shares of
Gateway Bancorp, Inc., a Staten Island commercial bank with over $300 million in
total assets, for cash consideration totaling $57,933,000, including deal costs.
The fair market value of the assets and liabilities acquired were $338,978,000
and $281,726,000 respectively.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was $15,613,000 and has been recorded as goodwill, which is
being amortized on a straight-line basis over 20 years. The amount of goodwill
amortization for 1997, 1996 and 1995 was $781,000, $781,000, and $272,000
respectively, and is included in other expenses.
4. REGULATORY MATTERS
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
imposes a number of mandatory supervisory measures on banks and thrift
institutions. One of the items FDICIA imposed was certain minimum capital
requirements or classifications. Such classifications are used by the FDIC and
other bank regulatory agencies to determine matters ranging from each
institution's semi-annual FDIC deposit insurance premium assessments, to
approvals of applications authorizing institutions to grow their asset size or
otherwise expand business activities. Under OTS capital regulations, the Bank is
required to comply with each of three separate capital adequacy standards. Set
forth below is a summary of the Bank's compliance with OTS capital standards as
of December 31, 1997 and 1996 (000's omitted):
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------
Actual % Required %
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Tangible
capital ......... $383,789 14.67% $39,233 1.50%
Core capital ...... 383,067 14.81% 78,594 3.00%
Risk-based
capital ......... 401,991 36.14% 88,973 8.00%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------
<S> <C> <C> <C> <C>
Tangible
capital ......... $146,460 8.33% $26,366 1.50%
Core capital ...... 166,950 9.50% 52,731 3.00%
Risk-based
capital ......... 156,437 18.89% 66,260 8.00%
</TABLE>
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SECURITIES AVAILABLE FOR SALE
The amortized cost and approximate market value of securities available for
sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government
and agencies ..... $ 105,491 $ 1,128 $ -- $ 106,619
GNMA, FNMA
and FHLMC
mortgage
participation
certificates ..... 815,485 11,334 (90) 826,729
Agency CMOs ........ 166,587 1,133 -- 167,720
Privately
issued CMOs ...... 171,034 402 (215) 171,221
Other .............. 3,285 -- (1) 3,284
-------------------------------------------------------
1,261,882 13,997 (306) 1,275,573
-------------------------------------------------------
Marketable equity
securities:
Common
stocks ......... 23,643 4,424 (841) 27,226
Preferred
stocks ......... 15,965 584 -- 16,549
IIMF capital
appreciation ... 24,599 6,520 -- 31,119
-------------------------------------------------------
64,207 11,528 (841) 74,894
-------------------------------------------------------
Total securities
available
for sale ..... $ 1,326,089 $ 25,525 $ (1,147) $ 1,350,467
=======================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -----------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government
and agencies ..... $ 141,833 $ 821 $ (101) $ 142,553
State and
municipals ....... 3,045 30 -- 3,075
GNMA, FNMA
and FHLMC
mortgage
participation
certificates ..... 408,424 6,578 (502) 414,500
Agency CMOs ........ 33,956 104 (4) 34,056
Privately
issued CMOs ...... 49,495 75 (326) 49,244
Other .............. 3,841 -- (16) 3,825
------------------------------------------------
640,594 7,608 (949) 647,253
------------------------------------------------
Marketable equity
securities:
Common
stocks ......... 1 352 -- 353
Preferred
stocks ......... 10,682 150 (47) 10,785
IIMF capital
appreciation ... 22,914 1,400 (124) 24,190
Adjustable
rate and
intermediate
mortgage
funds .............. 21,000 -- (447) 20,553
------------------------------------------------
54,597 1,902 (618) 55,881
------------------------------------------------
Total securities
available
for sale ..... $ 695,191 $ 9,510 $ (1,567) $ 703,134
================================================
</TABLE>
28
<PAGE> 31
The amortized cost and market value of debt securities available for sale
at December 31, 1997 and 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
-------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Due in one
year or less... $ 30,329 $ 30,416 $ 22,995 $ 23,008
Due after one
year through
five years .. 29,978 47,153 94,056 94,652
Due after five
years through
ten years ... 45,284 29,149 25,917 26,012
Due after
ten years ... 171,204 171,391 3,045 3,075
-------------------------------------------------
276,795 278,109 146,013 146,747
GNMA,
FNMA and
FHLMC
mortgage
participation
certificates .. 985,087 997,464 494,581 500,506
-------------------------------------------------
$1,261,882 $1,275,573 $ 640,594 $ 647,253
=================================================
</TABLE>
Proceeds from sales of securities available for sale during 1997, 1996 and
1995 were $97,757,000, $240,417,000 and $115,641,000 with realized gross gains
of $945,000, $488,000 and $181,000 realized gross losses of $1,030,000,
$3,198,000 and $486,000, respectively.
Other
Under a securities lending agreement, the Bank's investment custodian made
loans of the Bank's available for sale securities with a market value of
approximately $65,563,000 and $24,200,000 as of December 31, 1997 and 1996,
respectively. Cash collateral received for such loans exceeded 100% of the
market value of all loaned securities.
6. LOANS
A significant portion of the Bank's loans are to borrowers who are
domiciled on Staten Island. The income of many of those customers is dependent
on the New York City economy. In addition, most of the Bank's real estate loans
involve mortgages on Staten Island properties. Thus, the Bank's loan portfolio
is susceptible to the economy of Staten Island, a borough of New York City,
which is its primary market place.
While management uses available information to provide for losses of value
on loans and foreclosed properties, future loss provisions may be necessary
based on changes in economic conditions. In addition, the Bank's regulators, as
an integral part of their examination process, periodically review the valuation
of the Bank's loans and foreclosed properties. Such regulators may require the
Bank to recognize write-downs based on judgments different from those of
management.
Loans, net consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C>
Loans secured by
mortgages on real estate:
1-4 family residential ............................. $ 863,694 $ 743,089
Multifamily properties ............................. 28,218 26,444
Commercial properties .............................. 120,084 115,593
Home equity ........................................ 6,538 7,464
Construction and land .............................. 40,476 28,779
Less -- Deferred origination
fees and unearned
income, net ...................................... (4,116) (6,788)
--------------------------
Net loans secured by
mortgages on real estate ....................... 1,054,894 914,581
--------------------------
Other loans:
Student ............................................ 4,033 4,522
Automobile leases .................................. -- 28,249
Passbook ........................................... 6,929 5,933
Discounted loans ................................... 11,259 6,731
Commercial ......................................... 8,300 8,264
Other .............................................. 13,212 9,712
--------------------------
Net other loans .................................. 43,733 63,411
Net loans before the
allowance for loan losses ...................... 1,098,627 977,992
Allowance for loan losses .......................... (15,709) (9,977)
--------------------------
Net loans ........................................ $ 1,082,918 $ 968,015
==========================
</TABLE>
A summary of activity in the allowance for loan losses for the years ended
December 31, 1997, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
Beginning balance .... $ 9,977 $ 10,704 $ 3,124
Increase as a result
of acquisition ... -- -- 8,026
Provision charged
to operations .... 6,003 1,000 --
Charge-offs ........ (1,318) (2,695) (782)
Recoveries ......... 1,047 968 336
--------------------------------
Ending balance ....... $ 15,709 $ 9,977 $ 10,704
================================
</TABLE>
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Nonaccrual loans totaled $21,316,000 at December 31, 1997, which is also
the Bank's recorded investment in loans for which impairment has been recognized
in accordance with SFAS No. 114 and SFAS No. 118. Nonaccrual loans totaled
approximately $22,751,000 at December 31, 1996. The loss of interest income
associated with loans on nonaccrual status was approximately $899,000, $696,000
and $727,000 for the years ended December 31 1997, 1996 and 1995 respectively.
At December 31, 1997, the valuation allowance related to all impaired loans
totaled $6,258,000 and is included in the allowance for loan losses shown on the
balance sheet. The average recorded investment in impaired loans for the twelve
months ended December 31, 1997, was approximately $23,154,000.
At December 31, 1997 and 1996, the Bank has other real estate totaling
approximately $618,000 and $1,103,000, respectively, classified in other assets.
At December 31, 1997 and 1996, the Bank was servicing mortgages for others
totaling approximately $156,865,000 and $148,422,000, respectively.
At December 31, 1997 and 1996, the Bank has balances outstanding from
various officers totaling approximately $2,472,000 and $2,424,000, respectively.
7. BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1997 and 1996, are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------
(000's omitted)
<S> <C> <C>
Land, building and
leasehold improvements ........ $ 21,662 $ 19,969
Furniture, fixtures
and equipment ................. 11,434 10,928
---------------------
33,096 30,897
Less -- Accumulated
depreciation and
amortization .................. (13,359) (12,222)
---------------------
$ 19,737 $ 18,675
=====================
</TABLE>
8. DUE DEPOSITORS
Scheduled maturities of time deposits at December 31, 1997, are summarized
as follows (000's omitted):
<TABLE>
<CAPTION>
Weighted
Average
Amount Rate
- ---------------------------------------------------------
<S> <C> <C>
1998............................... $405,565 5.13%
1999............................... 80,887 5.39%
2000............................... 19,909 6.09%
2001............................... 6,107 5.28%
2002 and thereafter................ 8,225 5.56%
--------------------
$520,693 5.21%
====================
</TABLE>
The aggregate amounts of outstanding time certificates of deposit in
denominations of $100,000 or more at December 31, 1997 and 1996 were
approximately $99,915,000 and $98,204,000, respectively.
9. BORROWED FUNDS
The Bank was obligated for borrowings of $250,042,000 as of December 31,
1997. Reverse repurchase agreements total $250,000,000 with a weighted average
rate of 5.86%, with $235,000,000 maturing in 1998 and $15,000,000 in 1999. The
remaining $42,000 represents a mortgage on bank property. The average balance of
borrowings for 1997 was $81,071,000 with a weighted average rate of 5.88%.
10. ACCOUNTING FOR PENSION
COSTS AND OTHER
POSTRETIREMENT BENEFITS
Pension Plan
The Bank maintains a noncontributory defined benefit pension plan (the
"Plan") covering substantially all full-time employees 21 years of age or older.
The benefits are computed as 2% of the highest three-year average annual
earnings multiplied by credited service, to a maximum of 60% of average annual
earnings. The annual benefit is reduced by 5% for each year the benefit payments
commence before age 65. The amounts contributed to the Plan are determined
annually on the basis of (a) the maximum amount that can be deducted for federal
income tax purposes, or (b) the amount certified by a consulting actuary as
necessary to avoid an accumulated funding deficiency in accordance with federal
law and regulations. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future. Assets of the Plan are primarily invested in various equity and fixed
income funds.
30
<PAGE> 33
Costs of the Bank's retirement plan are accounted for in accordance with
SFAS No. 87. The following table sets forth the Plan's funded status and amounts
recognized in the Bank's financial statements at December 31, 1997 and 1996,
based upon the latest available actuarial measurement dates of September 30,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$14,941 and $13,240 in 1997
and 1996, respectively ............................. $ 15,217 $ 13,948
====================
Projected benefit obligation for
service rendered to date ........................... $ 18,630 $ 17,237
Plan assets at fair value ............................ 23,002 18,582
--------------------
Plan assets in excess
of projected benefit
obligation ....................................... 4,372 1,345
Amount contributed
after valuation date ............................... -- 330
Unrecognized net (asset) at
transition being recognized
over 11.08 years ................................... (191) (320)
Unrecognized past
service liability .................................. 440 486
Unrecognized net (gain) loss ......................... (3,221) (551)
--------------------
Prepaid pension cost ............................... $ 1,400 $ 1,290
====================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
------------------------------
1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Net pension cost for 1997,
1996 and 1995 included
the following components:
Service cost - benefits
earned during
the period ............. $ 981 $ 908 $ 555
Interest cost on projected
benefit obligation ..... 1,243 1,206 911
Actual return on
plan assets ............ (4,213) (2,275) (2,398)
Amortization of --
Unrecognized past
service liability .... 47 48 (27)
Unrecognized
transition asset ..... (129) (129) (129)
Deferred
investment gain ...... 2,714 1,007 1,476
------------------------------
Net pension cost
included in
personnel
expenses ........... $ 643 $ 765 $ 388
==============================
</TABLE>
Major assumptions utilized:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Discount rate .................. 7.25% 7.50% 7.50%
Rate of increase in
compensation levels .......... 5.00 5.50 5.50
Expected long-term rate
of return on Plan assets...... 8.00 8.00 8.00
</TABLE>
Postretirement Benefits
The Bank provides postretirement benefits, including medical care and life
insurance, which cover substantially all active employees upon their retirement.
The following table reconciles the Plan's status to the accrued
postretirement benefit cost included in other liabilities on the statements of
condition as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees ............................................... $ 1,514 $ 2,084
Other fully eligible participants ...................... 2,592 1,954
Unrecognized (loss) .................................... (747) (954)
Unrecognized past service liability .................... 657 732
-------------------
Accrued postretirement
benefit cost ....................................... $ 4,016 $ 3,816
===================
</TABLE>
Net periodic postretirement benefit cost for 1997, 1996, and 1995 included
the following components:
<TABLE>
<CAPTION>
For the Years Ended
-----------------------
1997 1996 1995
- --------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C>
Service cost -- benefits
attributed to service
during period ................................. $ 204 $ 175 $ 219
Interest cost on accumulated
postretirement
benefit obligation ............................ 269 297 346
Amortization of:
Unrecognized loss ............................. 10 51 22
Unrecognized past
service liability ........................... (75) (75) 11
-----------------------
Net periodic
postretirement
benefit cost .............................. $ 408 $ 448 $ 598
=======================
</TABLE>
The average health care cost trend rate assumption significantly affects
the amounts reported. For example, a 1% increase in this rate would increase the
accumulated benefit obligation by $196,000, $128,200 and $319,000 at December
31, 1997, 1996 and 1995 respectively, and increase the net periodic cost by
$27,700, $7,000 and $18,000 for the years ended
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995, respectively. The postretirement benefit cost
components for 1997 were calculated assuming average health care cost trend
rates ranging up to 7.5% and grading to 5% in 2005 and thereafter.
The pension and postretirement benefit plans of Gateway Bancorp, Inc. were
terminated upon the Bank's acquisition of Gateway. Accrued benefits attributable
to former Gateway employees were rolled into the Bank's existing plans.
401(k) Plan
The Bank has a 401(k) plan (the "Plan") covering substantially all
full-time employees. The Plan provides for employer matching contributions
subject to a specified maximum, and also contains a profit-sharing feature which
provides for contributions at the discretion of the Bank. Amounts charged to
operations for the years ended December 31, 1997, 1996 and 1995 were
approximately $1,266,348, $1,426,500 and $1,142,000 respectively.
Employee Stock Ownership Plan
The ESOP borrowed $41,262,000 from the Company and used the funds to
purchase 3,438,500 shares of the Company's stock issued in the conversion. The
loan has an interest rate of 8.25% and will be repaid over a 15 year period. The
loan was issued on December 22, 1997. Shares purchased are held in a suspense
account for allocation among the participants as the loan is paid. Contributions
to the ESOP and shares released from the loan collateral will be in an amount
proportional to repayment of the ESOP loan. Shares allocated will first be used
for the employer matching contribution for the 401(K) plan with the remaining
shares allocated to the participants based on compensation as described in the
plan, in the year of allocation. The vesting schedule will be the same as the
Bank's current 401(K) plan. Forfeitures from the 401(K) match portions will be
used to reduce the employer 401(K) match expense while forfeitures from shares
allocated to the participants will be allocated among the participants the same
as contributions. There were no shares allocated in 1997.
Supplemental Executive Retirement Plan
In 1993, the Bank adopted a Supplemental Executive Retirement Plan (the
"Executive Plan") for certain senior officers that provides for payments upon
retirement, death or disability. The annual benefit is based upon annual salary
(as defined) plus interest. Amounts charged to operations for the years ended
December 31, 1997, 1996 and 1995 were $186,000, $255,000 and $54,000,
respectively.
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C>
Current:
Federal ......................................... $ 14,137 $ 11,213 $ 9,242
State ........................................... 3,150 2,489 2,865
City ............................................ 227 3,294 2,780
--------------------------------
17,514 16,996 14,887
Deferred ........................................ (12,582) (1,915) (1,603)
--------------------------------
$ 4,932 $ 15,081 $ 13,284
================================
</TABLE>
The following table reconciles the federal statutory rate to the Bank's
effective tax rate (000's omitted):
<TABLE>
<CAPTION>
December 31, 1997
---------------------
Percentage
of Pretax
Amount Income
- ---------------------------------------------------------
<S> <C> <C>
Federal tax at statutory rate ... $ 6,818 35.0%
State and local income taxes .... (2,313) (11.9)
Tax-exempt dividend income ...... (305) (1.5)
Amortization of goodwill ........ 318 1.6
Other ........................... 414 2.1
---------------------
Income tax provision .......... $ 4,932 25.3%
=====================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------
Percentage
of Pretax
Amount Income
- --------------------------------------------------------------
<S> <C> <C>
Federal tax at statutory rate ....... $13,022 35.0%
State and local income taxes ........ 2,057 5.5
Tax-exempt interest ................. (69) (.2)
Tax-exempt dividend income .......... (276) (.7)
Amortization of goodwill ............ 318 (.2)
Other................................ 29 .8
---------------------
Income tax provision .............. $15,081 40.5%
=====================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
---------------------
Percentage
of Pretax
Amount Income
- ----------------------------------------------------------------
<S> <C> <C>
Federal tax at statutory rate .......... $10,923 35.0%
State and local income taxes ........... 2,872 9.2
Tax-exempt interest .................... (101) (.3)
Other .................................. (410) (1.3)
-------------------
Income tax provision ................. $13,284 42.6%
===================
</TABLE>
32
<PAGE> 35
The following is a summary of the income tax (liability) receivable at
December 31, 1997 and 1996 (000's omitted):
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------
<S> <C> <C>
Current taxes $ 86 $ 632
Deferred taxes 2,653 (4,248)
-------------------
$ 2,739 $(3,616)
===================
</TABLE>
The components of the net deferred tax (liability) asset at December 31,
1997 and 1996 are as follows (000's omitted):
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------
<S> <C> <C>
Assets
Contribution to Foundation.. $ 10,105 $ --
Allowance for Loan Losses... 6,598 4,789
Post Retirement Accrual .... 1,672 1,815
Nonaccrual Loans ........... 706 957
Deferred Compensation ...... 813 762
IGIC Investment ............ 381 242
Deferred Loan Fees ......... 339 581
Other ...................... 827 1,225
-------------------
Gross Deferred Tax Asset.. 21,441 10,371
Valuation Allowance ...... -- --
Total .................... 21,441 10,371
-------------------
Liabilities
Bad Debt Recapture
Under Section 593 ...... 2,950 5,550
Deposit Premium .......... 1,797 2,613
Unrealized Gain on
AFS Securities ......... 10,239 3,813
Pension Plan ............. 572 436
Bond Discounts ........... 331 275
Other .................... 2,899 1,932
-------------------
Gross Deferred
Tax Liability ........ 18,788 14,619
-------------------
Net Deferred
Tax Asset (Liability) $ 2,653 $ (4,248)
===================
</TABLE>
At December 31, 1997, the net deferred tax asset is included in other
assets and at December 31, 1996, the net deferred tax liability is included in
other liabilities in the accompanying financial statements.
Bad Debt Deduction
Through January 1, 1996, under Section 593 of the Internal Revenue Code,
thrift institutions such as the Bank which met certain definitional tests,
primarily relating to their assets and the nature of their business, were
permitted to establish a tax reserve for bad debts and to make annual additions
thereto, which additions may, within specified limitations, be deducted in
arriving at their taxable income. The Bank's deduction with respect to
"qualifying loans", which are generally loans secured by certain interests in
real property, was computed using an amount based on the Bank's actual loss
experience (the "Experience Method"), or a percentage equal to 8% of the Bank's
taxable income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the nonqualifying reserve. Similar deductions or additions to the
Bank's bad debt reserve are permitted under the New York State Bank Franchise
Tax; however, for purposes of these taxes, the effective allowable percentage
under the PTI Method was approximately 32% rather than 8%.
Effective January 1, 1996, Section 593 was amended, and the Bank is unable
to make additions to its federal tax bad debt reserve, is permitted to deduct
bad debts only as they occur and is additionally required to recapture (that is,
take into taxable income) over a six year period, beginning with the Bank's
taxable year beginning on January 1, 1996, the excess of the balance of its bad
debt reserves as of December 31, 1995 over the balance of such reserves as of
December 31, 1987, or over a lesser amount if the Bank's loan portfolio has
decreased since December 31, 1987. Such recapture requirements have been
deferred for taxable years through December 31, 1997, as the Bank originated a
minimum amount of certain residential loans based upon the average of the
principal amounts of such loans originated by the Bank during its six taxable
years preceding January 1, 1996.
The New York State tax law has been amended to prevent a similar recapture
of the Bank's bad debt reserve, and to permit continued future use of the bad
debt reserve method for purposes of determining the Bank's New York State tax
liability. In connection with this change, which also provides for an indefinite
deferral of the recapture of the bad debt reserves generated for New York State
purposes, the Bank reversed $2.1 million in 1996 of previously deferred income
taxes related to the bad debt reserves accumulated for New York State purposes.
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The New York City tax law was amended in the first quarter of 1997 and is
now similar to the New York State tax law regarding bad debt reserves and
provides for the indefinite deferral of the recapture of bad debt reserves
generated for New York City purposes. The Bank reversed $2.6 million in 1997 of
previously deferred income taxes related to the bad debt reserve accumulated for
New York City purposes. Prior to the tax law changes mentioned above, for New
York State and New York City purposes, the bad debt deduction was equal to a
multiple of the federal bad debt deduction, which is approximately four times
the federal amount.
In 1995, the Bank began providing for deferred taxes on the state and city
deduction which has accumulated since 1987 (the base year as defined by SFAS No.
109, "Accounting for Income Taxes"). The cumulative effect of this change in
accounting principle was $4,700,000 and is reflected on the statement of income.
State, Local and Other Taxes
The Company files state and local tax returns on a calendar-year basis.
State and local taxes imposed on the Company consist of New York State franchise
tax, New York City Financial Corporation tax and Delaware franchise tax. The
Company's annual liability for New York State and New York City purposes is the
greater of a tax on income or an alternative tax based on a specified formula.
The Company's liability for Delaware franchise tax is based on the lesser of a
tax based on an authorized shares method or an assumed par value capital method,
however, under each method, the Company's total tax will not exceed $150,000.
12. COMMITMENTS AND
CONTINGENCIES AND RELATED
PARTY TRANSACTIONS
In the normal course of business, there are various outstanding commitments
and contingent liabilities, such as standby letters of credit and commitments to
extend credit, which are not reflected in the accompanying financial statements.
The Bank uses the same policies in making commitments as it does for on-balance
sheet instruments. No material losses are anticipated as a result of these
transactions. The Bank is contingently liable under standby letters of credit in
the amount of $1,636,000 and $1,424,000 at December 31, 1997 and 1996,
respectively. In addition, at December 31, 1997 and 1996, mortgage loan
commitments and unused balances under revolving credit lines were $81,100,000
and $54,260,000, respectively.
Total operating rental commitments on bank facilities, which expire at
various dates through June 2007, exclusive of renewal options, are as follows
(000's omitted):
<TABLE>
<S> <C>
1998 ............................................ $ 671
1999 ............................................ 617
2000 ............................................ 443
2001 ............................................ 444
2002 and thereafter ............................. 1,020
------
$3,195
======
</TABLE>
Rental expense included in the statements of income was approximately
$702,000, $708,000 and $452,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
In October of 1997, the Company became the primary owner of an entity that
provides data processing services to the Bank. Based on its assessment of the
continuing viability of this company, the Bank had earlier in 1997, written off
it's entire investment of $969,000 which is reflected in data processing
expense. The Company intends to liquidate this company in 1998 with no material
effect on the Company's financial statements. As a result this data processing
company is not included in the consolidated financial statements of the Company.
In early 1998, the Bank signed a contract to outsource substantially all of its
data processing to another data service provider.
13. DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Due from Banks and Federal Funds Sold
For these short-term instruments the carrying amount is a reasonable
estimate of fair value.
Accrued Interest
The carrying amount is a reasonable estimate of fair value.
Securities Available for Sale
Fair values for securities are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
34
<PAGE> 37
Loans
For loans, fair value is based on the credit and interest rate
characteristics of individual loans. These loans are stratified by type,
maturity, interest rate, underlying collateral where applicable, and credit
quality ratings. Fair value is estimated by discounting scheduled cash flows
through estimated maturities using discount rates which in management's opinion
best reflect current market interest rates that would be charged on loans with
similar characteristics and credit quality. Credit risk concerns are reflected
by adjusting cash flow forecasts, by adjusting the discount rate or by adjusting
both.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Demand deposits, savings accounts and certain money market deposits are
valued at their carrying value. In the Bank's opinion, these deposits could be
sold at a premium based on management's knowledge of the results of recent sales
of financial institutions in the New York City area.
Advances from Borrowers for Taxes and Insurance
The carrying amount is a reasonable estimate of fair value.
Commitments to Extend Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------
Carrying Fair
Amount Value
- ----------------------------------------------------------
(000's omitted)
<S> <C> <C>
Financial assets:
Cash and due from banks ..... $ 58,435 $ 58,435
Federal funds sold .......... 90,500 90,500
Securities available for sale 1,350,467 1,350,467
Loans ....................... 1,098,627 1,107,013
Less -- Allowance
for loan losses ........... (15,709) --
Accrued interest receivable . 15,707 15,707
Financial liabilities:
Savings and demand deposits . 1,102,961 1,102,961
Time deposits ............... 520,693 521,841
Advances from borrowers for
taxes and insurance ....... 4,623 4,623
Accrued interest payable .... 972 972
Unrecognized
financial instruments:
Commitments to
extend credit ........... -- 131
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------
Carrying Fair
Amount Value
- -------------------------------------------------------
(000's omitted)
<S> <C> <C>
Financial assets:
Cash and due from banks ....... $ 43,522 $ 43,522
Federal funds sold ............ 9,100 9,100
Securities available for sale.. 703,134 703,134
Loans ......................... 977,992 980,643
Less -- Allowance for
loan losses ................. (9,977) --
Accrued interest receivable ... 11,739 11,739
Financial liabilities:
Savings and demand deposits ... 832,582 832,582
Time deposits ................. 500,570 507,543
Advances from borrowers for
taxes and insurance ......... 4,563 4,563
Accrued interest payable ...... 34 34
Unrecognized
financial instruments:
Commitments to
extend credit ............. -- 145
</TABLE>
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. STATEN ISLAND BANCORP, INC.
The following condensed statements of financial condition, as of December
31, 1997 and condensed statement of income and cash flows for the period
December 22, 1997 through December 31, 1997 should be read in conjunction with
the consolidated financial statements and the notes thereto.
CONDENSED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
December 31,
1997
- -----------------------------------------------------------
(000's omitted)
<S> <C>
Assets:
Checking account with subsidiary .......... $ 212,301
Investment in subsidiary .................. 420,349
Loan receivable from ESOP ................. 41,262
Other assets .............................. 11,974
---------
$ 685,886
=========
Stockholders' equity:
Common stock .............................. $ 451
Additional paid in capital ................ 532,521
Retained earnings
(substantially restricted) .............. 181,499
Unallocated ESOP shares ................... (41,262)
Unrealized appreciation on
securities available for sale, net of tax 12,677
---------
$ 685,886
=========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<S> <C>
Expenses:
Contribution to
SISB Community Foundation ............. $ 25,817
Benefit for income taxes ................ (11,974)
---------
13,843
=========
Loss before income taxes and
undistributed earnings of
subsidiary bank ......................... (13,843)
Equity in undistributed
earnings of subsidiary .................. 1, 642
---------
Net Loss ................................ $ (12,201)
=========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Period Ended
December 31,
1997
- -------------------------------------------------------
(000's omitted)
<S> <C>
Cash Flows From Operating Activities
Net loss ............................... $ (12,201)
Adjustments to reconcile net income
to net cash provided by
operating activities
(Increase) in deferred income taxes... (10,105)
(Increase) in other assets ........... (1,869)
Undistributed earnings of
subsidiary bank .................... (1,642)
---------
Net cash used by
operating activities ............. (25,817)
---------
Cash Flows From Investing Activities
(Increase) in investment in subsidiary .. (253,592)
Loan made to SISB Employee
Stock Ownership Plan ................. (41,262)
---------
Net cash used in
investing activities ............... (294,854)
---------
Cash Flows From Financing Activities
Net proceeds from issuance of
common stock in initial
public offering ...................... 532,972
---------
Net cash provided by
financing activities ................. 532,972
---------
Net increase in cash ................... 212,301
Cash at beginning of year .............. --
---------
Cash at end of year .................... $ 212,301
=========
</TABLE>
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
December 31, 1997, 1996 and 1995
15. QUARTERLY FINANCIAL DATA
(UNAUDITED)
Selected unaudited quarterly financial data for the year ended December 31,
1997 and 1996 is presented below:
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Interest
income ...... $ 46,495 $ 35,231 $ 33,210 $ 31,876
Interest
expense ..... 19,187 15,082 13,272 12,516
Net interest
income ...... 27,308 20,149 19,938 19,360
Provision
for loan
losses ...... 501 501 2,501 2,500
Noninterest
income ...... 2,285 2,118 1,840 1,210
Noninterest
expense ..... *35,820 11,468 10,589 10,847
Income
before
income
taxes ....... (6,728) 10,298 8,688 7,223
Income
taxes ....... (4,280) 4,261 3,655 1,296
Net
income (loss) (2,448) 6,037 5,033 5,927
Earnings (loss)
per share
since
conversion
Basic ....... $ (.29) N/A N/A N/A
Diluted ..... (.29) N/A N/A N/A
1996
Interest
income ...... $ 33,335 $ 31,122 $ 30,482 $ 29,498
Interest
expense ..... 12,667 12,689 12,553 12,529
Net interest
income ...... 20,668 18,433 17,929 16,969
Provision
for loan
losses ...... 500 500 -- --
Noninterest
income ...... (748) 1,213 1,680 1,782
Noninterest
expense ..... 9,934 10,161 10,038 9,937
Income
before income
taxes ....... 9,486 8,985 9,571 8,814
Income taxes .. 4,299 2,739 4,638 3,405
Net income .... 5,187 6,246 4,933 5,409
</TABLE>
* Fourth quarter of 1997 includes one time contribution of $25,817 to the
SISB Community Foundation formed as part of the Conversion.
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Staten Island Bancorp, Inc.
We have audited the accompanying consolidated statements of condition of
Staten Island Bancorp, Inc. and subsidiary (the "Company") as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Staten
Island Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
As explained in Note 11 to the financial statements, effective January 1,
1995, the Company changed its method of accounting for New York State and New
York City income taxes.
/s/ Arthur Anderson LLP
- ----------------------------------
New York, New York
January 21, 1998
37
<PAGE> 40
SERVICES AVAILABLE
PERSONAL BANKING SERVICES
Day of Deposit-Day of Withdrawal Savings Accounts
Holiday Club Accounts
Insured Money Market Accounts
Time Savings Accounts
Checking Accounts
Checking with Interest
Checking Overdraft
Retirement Plans
Mortgage Loans
Bi-weekly Mortgage Loans
Home Equity Loans
Home Improvement Loans
HomeSecured Advantage Loans
Personal Loans
Passbook Loans
Student Loans
Automated Payment System
Bank-by-Phone
Quick Card
24 Hour Automated Teller Machines
Direct Deposit of Payroll and Government Checks
Safe Deposit Boxes
Savings Bank Life Insurance
Money Orders
Banking by Mail
U.S. Savings Bonds
Travelers Checks
Utility Bill Payments
Drive-thru Banking
Drive-thru ATM
BUSINESS BANKING SERVICES
Business Checking Accounts
Business Checking with Interest
Business Savings Accounts
Retirement Accounts
Lawyer Escrow Accounts (IOLA)
Bank-by-Phone
Automatic Transfers and Payments
Direct Payroll Deposit
Payroll Check Cashing
Night Deposit Boxes
Safe Deposit Boxes
24 Hour Automatic Teller Machines
Merchant Card Services
Treasury Tax and Loan Payment
Secured Lines of Credit
Unsecured Lines of Credit
Commercial Mortgage Loans
Tailored Business Loans
Small Business Administration (SBA) Loans
TRUST AND INVESTMENT SERVICES
Estate Management
Trust Management
Custody
Record Keeping
Income Collection
Security Processing and Safekeeping
Investment Management
38
<PAGE> 41
EXECUTIVE OFFICE
15 Beach Street
Staten Island, NY 10304
LOAN CENTER
260 Christopher Lane
Staten Island, NY 10314
TRUST & INVESTMENT OFFICE
1591 Richmond Road
Staten Island, NY 10304
STAPLETON BRANCH
81 Water Street
Staten Island, NY 10304
ST. GEORGE BRANCH
15 Hyatt Street
Staten Island, NY 10301
NEW DORP LANE BRANCH
257 New Dorp Lane
Staten Island, NY 10306
CASTLETON CORNERS BRANCH
1837 Victory Boulevard
Staten Island, NY 10314
GRASMERE BRANCH
1320 Hylan Boulevard
Staten Island, NY 10305
NORTH SHORE BRANCH
475 Forest Avenue
Staten Island, NY 10301
OAKWOOD BRANCH
3150 Amboy Road
Staten Island, NY 10306
HUGUENOT BRANCH
900 Huguenot Avenue
Staten Island, NY 10312
NEW DORP/HYLAN BRANCH
2700 Hylan Boulevard
Staten Island, NY 10306
GREAT KILLS BRANCH
4025 Amboy Road
Staten Island, NY 10308
TOTTENVILLE BRANCH
6975 Amboy Road
Staten Island, NY 10307
PORT RICHMOND BRANCH
1630 Forest Avenue
Staten Island, NY 10302
NEW SPRINGVILLE BRANCH
43 Richmond Hill Road
Staten Island, NY 10314
WEST BRIGHTON BRANCH
800 Forest Avenue
Staten Island, NY 10310
DONGAN HILLS BRANCH
1630 Richmond Road
Staten Island, NY 10304
ELTINGVILLE BRANCH
4310 Amboy Road
Staten Island, NY 10312
BAY RIDGE, BROOKLYN BRANCH
9512 Third Avenue
Brooklyn, NY 11209
STATEN ISLAND BANCORP, INC.
15 BEACH STREET, STATEN ISLAND, NY 10304
Member F.D.I.C. Equal Opportunity Employer Equal Housing Lender
<PAGE> 42
Staten Island Bancorp, Inc.
CORPORATE INFORMATION
STATEN ISLAND
BANCORP, INC.
BOARD OF DIRECTORS
Harold Banks
Charles J. Bartels
James R. Coyle
Harry P. Doherty
William G. Horn
Denis P. Kelleher
Julius Mehrberg
John R. Morris
Kenneth W. Nelson
William E. O'Mara
DIRECTORS EMERITI
Elliott L. Chapin
Pio Paul Goggi
Dennis E. Knudsen
Edward J. Maloy, Jr.
Albert V. Maniscalco
Edward F. Norton, Jr.
Edward F. Vitt
Raymond A. Vomero
EXECUTIVE OFFICERS
Harry P. Doherty
Chief Executive Officer
James R. Coyle
Chief Operating Officer
Edward Klingele
Chief Financial Officer
Patricia J. Villani
Corporate Secretary
STATEN ISLAND SAVINGS BANK -- A STATEN ISLAND BANCORP COMPANY
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Harry P. Doherty
PRESIDENT AND CHIEF OPERATING OFFICER
James R. Coyle
EXECUTIVE VICE PRESIDENT
John P. Brady
SENIOR VICE PRESIDENTS
Frank J. Besignano
Donald C. Fleming
Edward Klingele
Deborah Pagano
VICE PRESIDENTS
Diana J. Alore
Catherine Arcuri
Marlene Blum
Michael J. Brennan
Andrea R. Cicero
Thomas Longendyke
Dorothy A. MacIver
James J. Oswald
Catherine M. Paulo
Robert S. Ryan
Harvey B. Singer
Barbara Tichenor
Frederick Volk
Anna Williams
AUDITOR
Suzanne Lackow
CONTROLLER
Scott Salner
ASSISTANT VICE PRESIDENTS
Paula Armband
Arlene Brown
Richard G. Budalich
Daniel Callahan
Karen Capela
Mary Cautela
Zenaida Cordero
Maureen DeAngelo
Barbara Giardiello
Joseph Gilroy
Maryann Hurley
Therese Marks
Eileen Merkent
Jose Nieves
Mary Palmieri
Barbara Palomba
Patricia Phoel
Usha Ramaswamy
Jean Ringhoff
Helena V. Soriano
Carl Tullis
Patricia J. Villani (and secretary
to the Board of Directors
Clifford Zoller
ASSISTANT CONTROLLER
Barbara Corbett
ASSISTANT SECRETARIES
Dorri Aspinwall
Kathleen Geosits
David E. Kennedy
Robin Mollica
Maryanne Sexton
Lynne Sigona
Carmela Taliento
Donald Thorsen
CORPORATE OFFICE
15 Beach Street
Staten Island, New York 10304
ANNUAL MEETING
The annual meeting of stockholders will be held on April 30, 1998 at 10:00 a.m.
at the Excelsior Grand, 2380 Hylan Boulevard, Staten Island, New York 10306.
Notice of the meeting and a proxy form are included with this mailing to
shareholders of record as of March 20, 1998.
INVESTOR RELATIONS
Shareholders, analysts and others interested in additional information may
contact:
Donald C. Fleming
Senior Vice President at
15 Beach Street
Staten Island, New York 10304
(718) 447-7900
TRANSFER AGENT AND REGISTRAR
Inquiries regarding stock transfer, lost certificates, or changes in name and/or
address should be directed to the stock and transfer agent and registrar:
Registrar and Transfer Company
Investor Relations
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
STOCK LISTING
Staten Island Bancorp Inc.'s
common stock is traded on the New York Stock Exchange (NYSE) under the symbol
SIB.
INDEPENDENT
PUBLIC ACCOUNTANTS
Arthur Andersen LLP
1345 Avenue of the Americas
New York, New York 10105
COUNSEL
The Law Firm of Hall & Hall
57 Beach Street
Staten Island, New York 10304
Elias, Matz, Tiernan and Herrick 734 15th Street N.W., 12th fl.
Washington, D.C. 20005
Designed by Curran & Connors, Inc. Photography by V. Amesse
<PAGE> 1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 21, 1998 incorporated by reference in this Form 10-K
of Staten Island Bancorp, Inc. ("Bancorp"), into Bancorp's previously filed
Registration Statement on Form S-8 (File No. 333-46693).
/s/ Arthur Andersen LLP
New York, New York
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 55,073
<INT-BEARING-DEPOSITS> 3,362
<FED-FUNDS-SOLD> 90,500
<TRADING-ASSETS> 1,350,467
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,098,267
<ALLOWANCE> 15,709
<TOTAL-ASSETS> 0
<DEPOSITS> 1,623,652
<SHORT-TERM> 235,000
<LIABILITIES-OTHER> 91,500
<LONG-TERM> 15,042
0
0
<COMMON> 451
<OTHER-SE> 685,435
<TOTAL-LIABILITIES-AND-EQUITY> 2,651,170
<INTEREST-LOAN> 84,031
<INTEREST-INVEST> 55,973
<INTEREST-OTHER> 6,808
<INTEREST-TOTAL> 146,812
<INTEREST-DEPOSIT> 55,290
<INTEREST-EXPENSE> 60,057
<INTEREST-INCOME-NET> 86,755
<LOAN-LOSSES> 6,003
<SECURITIES-GAINS> (85)
<EXPENSE-OTHER> 68,725
<INCOME-PRETAX> 19,481
<INCOME-PRE-EXTRAORDINARY> 19,481
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,549
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
<YIELD-ACTUAL> 7.42
<LOANS-NON> 0
<LOANS-PAST> 85
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,704
<ALLOWANCE-OPEN> 9,977
<CHARGE-OFFS> 1,318
<RECOVERIES> 1,047
<ALLOWANCE-CLOSE> 15,709
<ALLOWANCE-DOMESTIC> 15,709
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
