STATEN ISLAND
[GRAPHIC-LOGO] Bancorp, Inc.
15 BEACH STREET, STATEN ISLAND, NY 10304
Member F.D.I.C. Equal Opportunity Employer, Equal Housing Lender
www.sisb.com
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STATEN ISLAND
[GRAPHIC-LOGO] Bancorp, Inc.
[GRAPHIC-THREE PHOTOS]
Staten Island Bancorp
1 9 9 9 ANNUAL REPORT
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Profile
Staten Island Bancorp, Inc. (SIB) 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 and a trust
department in Staten Island, and one branch office in Bay Ridge, Brooklyn, New
York. In January 2000, SIB acquired First State Bancorp. First State will
operate as a division of Staten Island Savings Bank with two branches in
Monmouth County, New Jersey and four branches in Ocean County, New Jersey.
Staten Island Savings Bank also has two operating subsidiaries: SIB Mortgage
Corp., d/b/a Ivy Mortgage; and American Construction Lending Services.
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". Staten Island Bancorp
Mission
Staten Island Savings Bank will continue to be a strong financial services
company committed 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 Company
to maintain a level of profitability necessary to remain independent for the
benefit of the communities we serve.
[GRAPHIC-MAP]
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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
Construction Loans
Home Equity Loans
Home Improvement Loans
HomeSecured Advantage Loans
Personal Loans
Passbook Loans
Student Loans
Automated Payment System
Bank-by-Phone
Bill Pay-by-Phone
THE bankCard
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
PC Banking
Visa Check Card
Drive-thru ATM
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BUSINESS BANKING SERVICES
Business Checking Accounts
Business Checking with Interest
Business Overdraft Checking
Business Savings Accounts
Retirement Accounts
Lawyer Escrow Accounts (IOLA)
Bank-by-Phone
Bill Pay-by-Phone
Automatic Transfers and Payments
Direct Payroll Deposit
Payroll Check Cashing
Night Deposit Boxes
Safe Deposit Boxes
24 Hour Automated Teller Machines
Merchant Card Services
Treasury Tax and Loan Payment
Secured Lines of Credi
Unsecured Lines of Credit
Business Term Loans
Commercial Mortgage Loans
Construction Loans
Tailored Business Loans
Small Business Administration (SBA)
Loans
PC Banking for Business
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Trust and investment services
Estate Management
Trust Management
Custody
Record Keeping
Income Collection
Security Processing and Safekeeping
Investment Management
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<TABLE>
<CAPTION>
Staten Island Bancorp, Inc. and Subsidiary
FINANCIAL HIGHLIGHTS
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At or For the Years Ended December 31,
(dollars in thousands, except per share data) 1999 1998 1997
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Operations Data
<S> <C> <C> <C>
Net interest income ................................................... $ 138,409 $ 121,072 $ 86,755
Provision (benefit) for loan losses ................................... (1,843) 1,594 6,003
Total other income .................................................... 30,853 10,380 7,454
Contribution to SISB Community Foundation ............................. -- -- 25,817
Total other expenses .................................................. 82,971 55,918 42,908
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Income before provision for income taxes .............................. 88,134 73,940 19,481
Provision for income taxes ............................................ 35,259 29,678 4,932
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Net income ............................................................ 52,875 44,262 14,549
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Financial
Condition Data
Total assets .......................................................... $ 4,489,314 $ 3,776,947 $ 2,651,170
Loans receivable, net ................................................. 2,150,039 1,457,058 1,082,918
Loans held for sale, net .............................................. 46,588 77,943 --
Securities available for sale, net .................................... 1,963,954 2,029,041 1,350,467
Deposits .............................................................. 1,820,233 1,729,061 1,623,652
Borrowed funds ........................................................ 2,049,411 1,344,517 250,042
Stockholders' equity .................................................. 571,377 669,042 685,886
Non-performing assets ................................................. 13,361 17,081 21,943
Net loan charge-offs .................................................. 503 782 271
Allowance for loan losses ............................................. 14,271 16,617 15,709
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Selected Financial Ratios
Stockholders' equity to total assets .................................. 12.73% 17.71% 25.87%
Tangible equity to assets ............................................. 13.01 16.84 24.78
Total risk-based capital .............................................. 25.58 35.93 59.62
Net interest margin ................................................... 3.50 4.13 4.39
Interest rate spread .................................................. 2.60 2.93 3.82
Return on average assets .............................................. 1.28 1.45 0.70
Return on average equity .............................................. 8.44 6.39 7.79
Efficiency ratio ...................................................... 47.70 41.11 43.30
Non-performing assets to total assets ................................. 0.30 0.45 0.83
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Per Share
Data
Basic earnings (loss) since conversion ................................ $ 1.40 $ 1.06 $ (0.29)
Fully diluted earnings (loss) since conversion ........................ 1.40 1.06 (0.29)
Tangible book value ................................................... 14.37 14.90 14.79
Market value .......................................................... 18.00 19.94 20.94
Cash dividends declared ............................................... 0.44 0.32 --
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</TABLE>
Total Assets (In millions of dollars) [Graphic - bar chart]
Total Loans (In millions of dollars) [Graphic - bar chart]
Total Deposits (In millions of dollars) [Graphic - bar chart]
1
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1999 Highlights
Earnings per share increased by 32.1%
Residential loan production exceeds a record $1.3 billion
Commercial loan production reaches a record $360 million
Non-performing loans decline to 0.28% of total loans
Formed American Construction Lending Services
Deposit share in Staten Island increases to 30.4%
Announced intention to acquire First State Bancorp in New Jersey
Received approvals for three new branches in the year 2000
TO OUR SHAREHOLDERS
"Our success is due to a number of factors, not the least of which is a
dedication toward product development and excellence in customer service."
We are pleased to present this report to you following the successful
completion of our second year as a public company. The year 1999 was highlighted
by our ability to significantly improve upon the earnings momentum generated in
our first year, while we continued to position our Company for future growth and
profitability.
In the third quarter of 1999, we announced our agreement to acquire First
State Bancorp and its subsidiary, First State Bank, a $374 million commercial
bank with branches located in Monmouth and Ocean Counties, New Jersey. This
acquisition was completed in January 2000.
In the fourth quarter we announced the formation of American Construction
Lending Services (ACLS), as an operating subsidiary of the Bank providing
construction lending on a nationwide basis. ACLS initiated loan production in
the fourth quarter.
These activities, as well as others noted in this report, demonstrate
management's commitment to improve shareholder value through expansion of our
franchise, our key business lines, and our products and services.
We are proud of the accomplishments noted in this report and eager to continue
to provide results that reflect our commitment toward improving shareholder
value.
The Financial Year in Review
Last year we reported that strategies were in place that would enable the
Company to continue earnings growth and business expansion. Net income for the
year 1999 was $52.9 million or
2
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"We are proud of the accomplishments noted in this report and
eager to continue to provide results that reflect our commitment
toward improving shareholder value."
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$1.40 on a diluted per share basis. This represents a very strong 32.1% increase
in earnings per share as compared to the prior year.
Total assets increased by 18.9% to $4.5 billion--primarily through another
year of record growth of $662 million in net loans. Asset generation through
loan growth remains an enormous strength of our Company. This is accomplished
through expansion into new markets, close monitoring of the changing demands of
the residential and commercial marketplace, flexibility in product offerings,
and a high level of service to loan brokers and individual borrowers. In total,
the Company originated $1.6 billion in loans, an increase of $964 million over
last year. Our mortgage banking subsidiary, Ivy Mortgage, originated over $700
million in residential mortgage loans, of which $85 million in adjustable-rate
loans are held in the Bank's portfolio. We anticipate that our new
construction-lending subsidiary, American Construction Lending Services, Inc.,
will enable the Company to capitalize on the opportunities available in this
rapidly growing loan sector.
Asset growth was mainly funded by an increase of $705 million in borrowed
funds, a capital management strategy that was implemented in an effort to
prudently generate earnings on the expanded capital base resulting from the
Bank's stock conversion in December 1997. Borrowings now total $2.0 billion.
While we have been comfortable with this strategy to date, we do not anticipate
materially increasing borrowings in the year 2000. This means that additional
loan growth will be funded through cash flows and sales of our securities
portfolio, sales of long-term fixed-rate mortgage loans, and through deposit
growth in new markets. Our net loan growth of 43% during 1999 was accomplished
through a significant increase in loan originations, primarily with respect to
loans on one-to-four 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.
Loan quality remains a priority, particularly as we expand into new markets
with a much broader product line. We are proud to report that, while we have
substantially increased our loan portfolio, we also have reduced non-performing
assets. Non-performing loans declined by 21.7% during the year, and now total
$12.5 million, or 0.28% of total assets. At year-end the Company's allowance for
loan losses was $14.3 million, or 114.4% of non-performing loans.
Despite steadily rising interest rates throughout the year, we were able to
reduce the overall cost of deposits from 2.96% to 2.75%, and at the same time
increase market share and maintain our level of core deposits at an outstanding
69% of total deposits. This was accomplished through continued growth in
lower-cost commercial deposit accounts, and from customer loyalty created as a
result of our strong service and cross-selling practices.
3
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"Our success is due to a number of factors, not the least
of which is a dedication toward product development and
excellence in customer service."
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Capital Management Strategies
The continuation of effective capital management strategies remained a
priority throughout 1999. These strategies included a stock repurchase program,
the payment of regular quarterly dividends, acquisition and expansion, and
prudent leveraging of the balance sheet.
Regular quarterly dividend payments continued in 1999 with total dividends of
$0.44 per share declared during the year. The stock repurchase plan also
continued, and by December, the Company completed its third 5% repurchase
program. In total, $93.7 million was used to repurchase Company stock during the
year. We remain predisposed toward this program as a way of deploying excess
capital, and the Company commenced a new 5% repurchase program during the first
quarter 2000.
As we mentioned in the introduction, two important decisions were made with
respect to expansion of the Company in 1999. We formed American Construction
Lending Services, Inc., in an effort to capitalize on the rapidly growing
segment of residential construction lending occurring throughout the country.
ACLS is operated by senior lenders with significant prior experience serving
this segment. We expect that ACLS will enable the Company to improve its yield
on interest earning assets through a product line of short-term variable-rate
loans.
The Company also announced the acquisition of First State Bancorp, Inc. and
First State Bank, a $374 million commercial bank with six branches serving
communities in Monmouth and Ocean Counties, New Jersey. This is the Company's
first extension of branch operations west into the State of New Jersey and will
serve as the platform for continued geographic and product expansion. With cost
savings resulting from the elimination of duplicate operations and selective
restructuring of First State's balance sheet, this transaction is expected to be
accretive to cash earnings in 2000.
Expanding the Franchise
The formation of ACLS and the acquisition of First State should enhance the
Company's core deposit and lending franchise and improve the earnings stream.
Synergies between the Bank's loan department, Ivy Mortgage and ACLS are being
implemented which we anticipate will make the origination, servicing and sale of
loans much more efficient, less costly and more profitable.
We also anticipate excellent opportunities to grow market share in the First
State markets due to the broader range of commercial and consumer products
supported by Staten Island Savings Bank's state of the art technology, and
proven expertise in product delivery and service.
Our ability to serve the financial needs of individuals and businesses in our
core markets is demonstrated by our ongoing leadership role in residential and
business lending in the communities we serve, along with our leading share of
the Staten Island deposit market.
Our success is due to a number of factors, not the least of which is a
dedication toward product development and excellence in customer service.
4
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By year-end, new small business loan products, debit cards, and on-line PC
banking and bill payment services were highly successful.
The scope of services, which also 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.
New Opportunities in a New Century
We enter the 21st Century with enthusiasm and confidence in our ability to
continue to profitably grow our Company. We have made significant progress in
many areas and we look forward to capitalizing on the decisions that have
brought us to this point.
Active management of our balance sheet remains a priority and our recent
expansion provides even greater opportunities for earnings growth, particularly
in developing non-interest income to offset the compressing net interest
margins. We are entering new markets with new products, and with the confidence
that our proven success and traditional customer service values will benefit our
new and future customers and, more importantly, our shareholders.
We would like to extend our appreciation to our directors, officers and staff
for constantly meeting the challenges presented by our fast-paced growth.
Together, we will continue our commitment to the highest quality of banking
services. And together, we remain appreciative to our shareholders for their
trust and confidence.
STATEN ISLAND
[GRAPHIC-LOGO] Bancorp, Inc.
[Graphic - PHOTO OF JAMES R. COYLE]
/S/JAMES R. COYLE
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JAMES R. COYLE
President and Chief Operating Officer
[Graphic - PHOTO OF HARRY P. DOHERTY]
/S/HARRY P. DOHERTY
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HARRY P. DOHERTY
Chairman and Chief Executive Officer
5
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The Year in Review
Loan originations of
$1.6 billion exceeded 1998
activity by $963 million.
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Loan Production Increases Dramatically
In 1999, Staten Island Savings Bank pursued new opportunities for loan growth,
while we remained the leading lender in our traditional core markets. Loan
production reached record levels once again. Originations of $1.6 billion
exceeded 1998 activity by $963 million. This production included $709 million in
loans originated by THE bank's mortgage company, SIB Mortgage Corp., d/b/a Ivy
Mortgage, which was acquired in the fourth quarter of 1998. In addition, the
Bank's residential, commercial and consumer loan units originated in excess of
$900 million for the first time in the Bank's history. This extraordinary growth
was accomplished in several ways.
Our extensive product line gives borrowers the opportunity to select among the
aspects that are most important to them. Fixed-rate mortgage loans with terms
from ten-to-thirty years, and adjustable-rate loans ranging from one-to-ten
years, provide ample options to borrowers with varying needs.
"No-point" options are available on most products, along with other features
including "no-income" verification, and bi-weekly payments on fixed-rate
mortgage loans. The availability of jumbo loans, government-backed FHA loans and
loans provided through state housing programs such as the State of New York
Mortgage Association (SONYMA) round out the product mix which covers the
first-time buyer, to the more experienced buyer.
Responsiveness is another important factor in the successful growth of our
residential mortgage loan volumes. Our Priority Access program, available to
mortgage brokers, accounted for approximately 75% of our total mortgage loan
originations for the year. Our program members are constantly providing us with
feedback concerning the changing conditions of the residential lending
marketplace. This enables us to react more quickly with respect to pricing and
product changes.
In addition, many applicants have schedules that may not allow them to speak
to loan representatives during "normal" business hours. THE bank provides a loan
specialist who is available seven days a week at locations determined by the
borrower.
Loan Subsidiaries Enhance Asset Generation
The operations of Ivy Mortgage and American Construction Lending Services
("ACLS") extend beyond our traditional market of the New York Metropolitan area.
Ivy Mortgage, with its offices in 22 states, has an extensive presence as a
licensed mortgage banker in the northeast and mid-Atlantic regions of the
country. The Bank also purchased approximately $85 million of Ivy Mortgage's
adjustable-rate loan production in order to increase the amount of
adjustable-rate loans in the portfolio.
[GRAPHIC-PHOTO]
6
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[GRAPHIC-PHOTO OF HOUSE]
We are excited about the new markets we will serve through ACLS. With
experienced lenders in the construction lending business, ACLS is ready to serve
this rapidly growing segment on a national level. We expect to increase our
originations of relatively higher yielding, variable-rate construction loans
through this operation.
The activities of these subsidiaries are expected to reduce the Company's
dependence on a single market. We will also be taking advantage of the synergies
between the Bank's lending units, Ivy Mortgage and ACLS. These synergies should
improve the efficiency and reduce the cost of our lending operations.
Commercial Loan Production Increases by 44%
We continue to achieve controlled, yet significant, improvement in commercial
loan production. With an approach toward "relationship lending," THE bank's
commercial real estate and business loan officers have the expertise and the
resources to structure complicated transactions and to meet tight deadlines. We
also continued to enhance the profitability of these customers by generating
deposits and other fee business such as trust services.
The new Small Business Unit, formed in the fourth quarter of 1998, was well
received by business borrowers in need of quick decisions on secured and
unsecured loans in amounts up to $100,000. We also initiated a program to
utilize representatives of Ivy Mortgage in the delivery of this Small Business
Loan program. By leveraging the network of Ivy Mortgage's sales staff, we are
committed to accelerating the growth of this unit.
Growth in the Community Bank Franchise
In 1999, deposits in Staten Island Savings Bank's branch network increased by
5.3%. THE bank's deposit market share on Staten Island increased to 30.4%.
Household penetration is outstanding and continues to exceed 50% of Staten
Island households.
7
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On-line banking for home
and business was introduced through PC direct.
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Once again our branch in Bay Ridge, Brooklyn experienced the largest deposit
growth in our system in 1999, with an increase of 26% in total deposits. As a
result of the Bank's success in this market, we are planning to open our second
branch in Brooklyn by the third quarter, 2000, which will serve the communities
of Bensonhurst and Borough Park.
Core deposits continue to exceed two-thirds of our deposit base of which 19%
of total deposits are non-interest bearing checking accounts. Our weighted
average cost of deposits at year-end (including non-interest bearing DDA
accounts) was 2.75%, a decrease from 2.96% at December 31, 1998, and
continues to place us among the top performers in our peer group.
Product expansion was at the forefront of our retail banking strategies in
1999. On-line banking for home and business was introduced through PC direct.
Using a personal computer, customers can access their savings and checking
account balances, review account history and checks paid, transfer money between
accounts and more. In addition, on-line bill payment is available through PC
direct. Our Bank-by-phone service was also enhanced to include bill payment
capabilities.
We also introduced our website on the Internet. By logging on to www.sisb.com,
consumers, businesses and investors can access the latest information on the
Bank's products, services and financial results. We are planning to expand our
Internet presence in 2000 by transferring on-line banking and bill payment and
other transaction based business to the world wide web.
During 1999, we also expanded the functionality of our ATM card by introducing
the Visa Check Card. This new product enables customers to make payments for
purchases directly from their checking account by using their ATM card at all
retail and merchant locations where Visa is accepted.
Product expansion has occurred in response to customer demand and our
continuing commitment to meet the constantly changing needs of our customer
base. One forum used for customer feedback is regularly scheduled customer
satisfaction surveys. Responses to these surveys continue to reflect high levels
of customer satisfaction among the 70,000 plus households doing business with
THE bank.
New business development is accomplished through the full-time efforts of a
team of officers. Branch managers are actively involved in calling on current
customers in order to seek new opportunities or handle current needs. We plan to
continue to integrate the activities of our branch network, loan officers,
business development staff and back-office operations to provide seamless
service to our customers.
We also recognize that our high penetration into the local business and
consumer markets presents excellent opportunities for growth through expanded
product use by current customers. Staff training directed toward cross-selling
banking services continues, and enables THE bank to strengthen the overall
relationship with our customers.
[GRAPHIC-PHOTO]
8
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Personal and business customers also have access to services which include
trust and estate planning, retirement planning, and investment management
planning services. Our Trust Department currently has $133 million in assets
under management. The availability of Trust services remains another source for
establishing profitable relationships.
Expansion Through Acquisition
In August 1999, as part of its efforts to strengthen its franchise and enter
new markets, Staten Island Bancorp announced its intention to acquire First
State Bancorp and its subsidiary, First State Bank, a $374 million commercial
bank with six branch offices. The acquisition was completed in January 2000.
The First State Division serves as the Bank's platform for entering the strong
markets of Monmouth and Ocean Counties, New Jersey. Significant opportunities
for growth exist through the implementation of Staten Island Savings Bank's
proven sales and service philosophies. The introduction of new business and
consumer products to the 10,000 households currently banking at First State will
include electronic banking services, mortgage and consumer loans, secured and
unsecured commercial loans and trust services. We also have received approvals
to open two new branches in Ocean County by year-end.
We understand that an important element to the successful expansion of our
Company is keeping a sharp focus on the traditional values of community banking.
Customer service, accessibility, convenience, flexibility and responsiveness are
several factors associated with our current and future success.
We have confidence that we will meet the needs of consumers and businesses in
new markets as successfully as we have in current markets. Our commitment to
staff training and development, technology and carefully planned geographic and
product expansion will ensure this success.
[GRAPHIC-PHOTO]
9
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected historical financial data for the five years ended
December 31, 1999 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,
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(000's omitted except share data) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets .................................. $ 4,489,314 $ 3,776,947 $ 2,651,170 $ 1,782,323 $ 1,728,130
Securities available for sale, net ............ 1,963,954 2,029,041 1,350,467 703,134 788,622
Loans receivable, net ......................... 2,150,039 1,457,058 1,082,918 968,015 801,137
Loans held for sale, net ...................... 46,588 77,943 -- -- --
Intangible assets(1) .......................... 15,432 17,701 18,414 20,490 22,633
Deposits ...................................... 1,820,233 1,729,061 1,623,652 1,577,748 1,535,617
Borrowings .................................... 2,049,411 1,344,517 250,042 54 46
Stockholders' equity .......................... 571,377 669,042 685,886 171,080 150,082
Tangible book value per share ................. 14.37 14.90 14.79 -- --
Common Shares Outstanding ..................... 38,693,623 43,704,812 45,130,312 -- --
<CAPTION>
For the Year Ended December 31,
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Selected Operating Data: 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Net interest income ............................. $ 138,409 $ 121,072 $ 86,755 $ 73,993 $ 60,122
Provision (benefit) for loan losses ............. (1,843) 1,594 6,003 1,000 --
Other income .................................... 30,853 10,380 7,454 3,929 4,040
Charitable contribution to
SISB Community Foundation ..................... -- -- 25,817 -- --
Other expenses .................................. 82,971 55,918 42,908 40,066 32,953
Income tax expense .............................. 35,259 29,678 4,932 15,081 13,284
Net income ...................................... $ 52,875 $ 44,262 $ 14,549 $ 21,775 $ 13,225
Earnings (loss) per share basic and fully diluted $ 1.40 $ 1.06 $ (.29)(3) -- --
Dividends paid .................................. $ .41 $ .23 $ -- $ -- $ --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-----------------------------------------------------
Key Operating Ratios: 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Performance Ratios:(2)(3)
Return on average assets ................. 1.28% 1.45% 0.70% 1.24% 0.88%
Return on average equity ................. 8.44 6.39 7.79 14.03 9.54
Average interest-earning assets to
average interest-bearing liabilities ... 125.65 139.98 118.70 120.24 117.17
Interest rate spread(4) .................. 2.60 2.93 3.82 3.84 3.63
Net interest margin(4) ................... 3.50 4.13 4.39 4.46 4.16
Non-interest expenses, exclusive of
amortization of intangible
assets, to average assets .............. 1.93 1.76 1.96 2.16 2.11
Asset Quality Ratios:
Non-performing assets to
total assets at end of period(5) ....... 0.30% 0.45% 0.83% 1.34% 1.44%
Allowance for loan losses to
non-performing loans at
end of period .......................... 114.40 102.37 73.69 43.85 44.20
Allowance for loan losses to
total loans at end of period ........... 0.66 1.13 1.42 1.02 1.32
Capital Ratios:
Average equity to average assets(3) ...... 15.17% 22.64% 8.96% 8.85% 9.21%
Tangible equity to assets at end of period 13.01 16.84 24.78 8.55 7.09
Total capital to risk-weighted assets .... 25.58 35.93 59.62 20.66 19.65
</TABLE>
(1)Consists of excess of cost over fair value of net assets acquired
("goodwill") and core deposit intangibles which amounted to $13.5 million and
$1.9 million, respectively at December 31, 1999.
(2)With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods.
(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 for 1997 is since conversion.
(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)Non-performing assets consist of non-accrual loans and real estate acquired
through foreclosure or by deed-in-lieu thereof.
10
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
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, 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 and borrowed funds. The Company's results of
operations also are affected by the provision or benefit for loan losses, the
level of its non-interest income and expenses, and income tax expense.
Asset and Liability Management. The principal goal of the Company's interest
rate risk management is to minimize potential adverse effects on the Company's
results of operations caused by material and prolonged increases or decreases in
interest rates. The Company evaluates the inherent interest rate risk in certain
balance sheet accounts in an effort to determine the acceptable level of
interest rate risk exposure based on the Company's business plan, operating
environment, capital and liquidity requirements, and performance objectives. The
Board of Directors sets limits for earnings at risk and the net portfolio value
(NPV) ratio in order to reduce the potential vulnerability of the Company's
operations to changes in interest rates. The Company's Asset and Liability
Management Committee (ALCO) is comprised of members of the Company's management
under the direction of the Board of Directors. The purpose of the ALCO is to
communicate, coordinate and control asset and liability management consistent
with the Company's business plan and Board approved policies and limits. 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 monthly 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 compared to current projections pursuant to "gap analysis" and income
simulations. At each meeting, the ALCO recommends appropriate strategy changes
based on such review which are then reported to the Board of Directors.
Market Risk. The Company's primary market risk is in market interest rate
volatility due to the potential impact on net interest income and the market
value of all interest-earning assets and interest-bearing liabilities resulting
from changes in interest rates. The operation of the Company does not subject it
to foreign exchange or commodity price risk and the Company does not own any
trading assets. The real estate loan portfolio of the Company is concentrated
primarily within the New York metropolitan area making it subject to the risks
associated with the local economy.
<PAGE>
Interest Rate Sensitivity. 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 by 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, 1999, the ratio of the Company's one-year gap to total assets was a
negative 26.0% and its ratio of interest-earning assets to interest-bearing
liabilities maturing or repricing within one year was 46.72%.
The static gap analysis alone is not a complete representation of interest
rate risk since it fails to account for changes in prepayment speeds on the
Company's loan and investment portfolios in different rate environments and does
not address the extent to which rates on assets or liabilities may change or
reprice. The behavior of deposit balances will also vary with changes in the
customer mix, management's pricing strategies and changes in the general level
of interest rates. Thus gap analysis does not provide a comprehensive
presentation of the possible risks to income embedded in the balance sheet,
customer structure and various management strategies.
To measure earnings at risk, ALCO makes extensive use of an earnings
simulation model in the formation of its interest rate risk management
strategies. The model uses management assumptions concerning the repricing of
assets and liabilities as well as business volumes, projected under a variety of
interest rate scenarios. These scenarios incorporate interest rate increases and
decreases of 200 basis points over a twelve-month period.
Management's assumptions for prepayments in the loan portfolio and pricing of
the Company's deposit products are based on management's review of past behavior
of the Company's depositors and borrowers in response to changes in both general
market interest rates and rates offered by the Bank. These assumptions represent
management's estimates and do not necessarily reflect actual results.
At December 31, 1999, based on this model, the Company's potential earnings at
risk to a gradual 200 basis point rise or decline in market interest rates over
the next twelve months was a 3.37% decrease in projected net income for the year
2000 in a rising rate environment and a 6.62% increase in projected net income
11
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Actual interest rate changes during the past three years have fallen within
this range and management expects that any changes over the next year will not
exceed this range.
Management has included all financial instruments and assumptions that have a
material effect in calculating the Company's potential net income. These
measures of risk represent the Company's exposure to interest rate movements at
a particular point in time. The ALCO monitors the Company's risk profile on a
quarterly basis or as needed to monitor the effects of movement in interest
rates and also any changes or developments in the Company's core business.
The Company also reviews the market value of portfolio equity (NPV) which is
defined as the net present value of an institution's existing assets,
liabilities and off balance sheet instruments, on a quarterly basis. The Office
of Thrift Supervision (OTS) monitors the Bank's interest rate risk through this
calculation, which they prepare quarterly, based on information provided by the
Bank. In addition the Company prepares its NPV calculation based on its own
assumptions which could vary from those used by the OTS.
<TABLE>
<CAPTION>
Four to More than More than
Within Three Twelve One Year to Three Years to Over Five
Months Months Three Years Five Years Years Total
----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable(2):
Mortgage loans:
Fixed ......................... $ 56,372 $ 155,405 $ 329,562 $ 247,112 $ 455,059 $ 1,243,510
Adjustable .................... 141,449 182,255 267,304 223,254 50,339 864,601
Other loans ..................... 5,051 18,731 18,947 15,815 26,232 84,776
Securities:
Non-mortgage(3) ................... 94,907 20,659 6,701 10,651 385,680 518,598
Mortgage-backed fixed(4) .......... 54,017 163,723 457,693 233,833 262,920 1,172,186
Mortgage-backed adjustable(4) ..... 31,772 78,329 143,352 84,490 1,828 339,771
Other interest-earning assets ....... 20,400 -- -- -- -- 20,400
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets ..... $ 403,968 $ 619,102 $ 1,223,559 $ 815,155 $ 1,182,058 $4,243,842
=========== =========== =========== =========== =========== ===========
Interest-bearing liabilities:
Deposits:
NOW accounts(5) ................. 8,432 25,296 30,993 8,204 18,232 91,157
Savings accounts(5) ............. 31,356 94,069 191,826 125,425 295,118 737,794
Money market deposit accounts(5) 17,578 52,735 9,790 4,673 4,228 89,004
Certificates of deposit ......... 234,511 222,938 98,721 16,873 -- 573,043
Other borrowings .................. 635,585 867,137 356,689 190,000 -- 2,049,411
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 927,462 $ 1,262,175 $ 688,019 $ 345,175 $ 317,578 $ 3,540,409
=========== =========== =========== =========== =========== ===========
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities .... $ (523,494) $ (643,073) $ 535,540 $ 469,980 $ 864,480 $ 703,433
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Cumulative excess (deficiency) of
Interest-earning assets over
interest-bearing liabilities .... $ (523,494) $(1,166,567) $ (631,027) $ (161,047) $ 703,433
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of assets ............... (11.66)% (25.99)% (14.06)% (3.59)% 15.67%
=========== =========== =========== =========== =========== ===========
</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 in the current rate environment.
(2) Balances have been reduced for non-performing loans, which amounted to $12.5
million at December 31, 1999.
(3) Reflects estimated prepayments in the current interest rate environment.
(4) Based on contractual maturities.
(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 $1.9 billion or 41.32% of total assets.
12
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
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 recorded total assets of $4.5 billion at December 31, 1999,
representing a $712.4 million or 18.9% increase from the level recorded at
December 31, 1998. The primary components of asset growth were a $661.6 million
or 43.1% increase in net loans and a $143.0 million increase in other assets.
The primary source of funding for asset growth was an increase in borrowed funds
of $704.9 million or 52.4% and an increase of $91.2 million or 5.3% in deposits.
Cash and Cash Equivalents. Cash and cash equivalents which consist of cash and
due from banks, money market accounts and federal funds sold, amounted to $101.4
million and $133.1 million at December 31, 1999 and December 31, 1998,
respectively. The decrease of $31.7 million or 23.8% between December 31, 1998
and December 31, 1999 was primarily due to the increased investment of funds
into the origination of new loans.
Loans. The Company's net loan portfolio increased $661.6 million or 43.1% to
$2.2 billion at December 31, 1999. The increase in the loan portfolio was due to
record loan originations of $1.6 billion or $963.6 million more than last year.
Included in the amount originated is $708.5 million in originations by the
Bank's mortgage banking subsidiary, Ivy Mortgage. Loan sales during the year
amounted to $644.6 million, primarily due to the operation of Ivy Mortgage. Loan
demand was primarily in one to four family residential loans, however, the
Company also had originations of commercial real estate loans totaling $126.6
million. The Company continues to expand its lending activities through the use
of business development officers, commercial loan officers, mortgage loan
originators and mortgage brokers. The Company retained $85.0 million of
adjustable-rate residential loans originated by Ivy Mortgage for its own
portfolio. The formation of it's subsidiary American Construction Lending
Services Inc., is expected to enhance the Company's ability to generate
increased volumes of relatively higher yielding variable-rate construction
loans. ACLS recently began originating loans for the construction of
single-family residential and, to a lesser extent, commercial real estate loans
on a non-speculative (pre-sold) basis.
Securities. Securities amounted to $2.0 billion at December 31, 1999 and 1998.
These amounts represent 43.7% and 53.7% of assets, respectively. The decrease
reflects the Company's efforts to reallocate cash flows into higher yielding
loans. All of the Company's securities are classified as available for sale at
such dates.
Other Assets. The primary reason for the increase in other assets was due to
the implementation of a bank owned life insurance program (BOLI) for the purpose
of funding various employee benefit programs. The cash surrender value of the
life insurance policies is recorded as other assets, resulting in the increase.
<PAGE>
Deposits. Deposits rose $91.2 million to $1.8 billion at December 31, 1999
primarily reflecting increases of $35.9 million in certificates of deposits to
$573.0 million, $34.6 million in demand deposits to $340.0 million, $7.2 million
in savings deposits to $737.8 million, $6.8 million in NOW deposits to $80.4
million and $6.6 million in money market deposits to $89.0 million. Deposit
growth especially in demand deposits is a result of the Bank's continued
business development efforts to obtain commercial relationships which include
demand deposits as well as the Bank's continued emphasis on customer service
which results in customer loyalty and the retention of a strong core deposit
base.
Borrowed Funds. The Company's borrowings at December 31, 1999 were $2.0
billion, which represents an increase of $704.9 million or 52.4% compared to
$1.3 billion at December 31, 1998. The Company utilizes borrowings to fund asset
growth in both the securities and loan portfolios. The borrowings consist of
reverse repurchase agreements and advances from the Federal Home Loan Bank,
which are secured by the one-to-four-family residential loan portfolio. At the
present time, the Company intends to reduce its utilization of borrowings to
fund asset growth during 2000 and to emphasize more traditional funding sources
such as deposit growth.
Stockholders' Equity. Stockholders' equity amounted to $571.4 million at
December 31, 1999 and $669.0 million at December 31, 1998 or 12.7% and 17.7% of
total assets, at such dates, respectively. The decrease of $97.7 million was due
to the use of $93.7 million to continue the Company's stock repurchase program
which has resulted in the repurchase of 6.4 million shares of treasury stock,
aggregate cash dividend payments of $17.0 million and a decrease of $50.2
million in unrealized appreciation on securities available for sale, net of
taxes. These decreases were partially offset by net income of $52.9 million and
an allocation of Employee Stock Ownership Plan (ESOP) and Recognition and
Retention Plan (RRP) shares, resulting in an increase of $10.3 million.
13
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
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 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 spreads; and (v) net interest margin.
Information is based on average daily balances during the indicated periods.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1999 1998
----------------------------------- ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
(000Os omitted)
Interest-earning assets:
Loans receivable(1):
Real estate loans .......... $1,739,898 $131,978 7.59% $1,213,098 $ 95,742 7.89%
Other loans ................ 77,054 7,219 9.37 48,212 5,433 11.27
------------------------- ------------------------
Total loans ................ 1,816,952 139,197 7.66 1,261,310 101,175 8.02
Securities .................. 2,089,829 136,023 6.51 1,631,050 106,025 6.50
Other interest-
earning assets(2) .......... 49,679 2,253 4.53 36,648 1,941 5.30
------------------------- ------------------------
Total interest-
earning assets ............. 3,956,460 277,473 7.01 2,929,008 209,141 7.14
---------- ---------
Non-interest-
earning assets ............ 173,512 132,995
---------- ----------
Total assets ................ $4,129,972 $3,062,003
========== ==========
Interest-bearing liabilities:
Deposits:
NOW and money
market deposits ............ $ 165,071 4,152 2.52% $ 118,318 3,114 2.63%
Savings and
Escrow accounts ........... 752,131 18,716 2.49 780,536 20,953 2.68
Certificates
of deposits ................ 556,635 26,477 4.76 528,686 26,875 5.07
------------------------- ------------------------
Total deposits ............. 1,473,837 49,345 3.35 1,427,540 50,942 3.57
Total other
borrowings ................. 1,674,990 89,719 5.36 664,863 37,127 5.58
------------------------- ------------------------
Total interest-bearing
liabilities ................ 3,148,827 139,064 4.42 2,092,403 88,069 4.21
---------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Non-interest-bearing
liabilities(3) ............. 354,671 276,455
---------- ----------
Total liabilities ........... 3,503,498 2,368,858
Stockholders' equity ........ 626,474 693,145
---------- ----------
Total liabilities and
stockholders' equity ...... $4,129,972 $3,062,003
---------- ----------
Net interest-
earning assets .............. $ 807,633 $ 836,605
========== ==========
Net interest income/
interest rate spread ........ $ 138,409 2.60% $121,072 2.93%
=================== ===================
Net interest margin ......... 3.50% 4.13%
===== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities ................ 125.65% 139.98%
====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
--------------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1):
Real estate loans .......... $ 982,569 $ 79,521 8.09%
Other loans ................ 47,150 4,510 9.57
-----------------------
Total loans ................ 1,029,719 84,031 8.16
Securities .................. 822,045 55,973 6.81
Other interest-
earning assets(2) .......... 126,208 6,808 5.39
Total interest-
earning assets ............. 1,977,972 146,812 7.42
----------
Non-interest-
earning assets ............ 105,101
----------
Total assets ................ $2,083,073
==========
Interest-bearing liabilities:
Deposits:
NOW and money
market deposits ............ $ 102,837 2,824 2.75%
Savings and
Escrow accounts ........... 951,188 25,281 2.66
Certificates
of deposits ................ 531,293 27,185 5.12
-----------------------
Total deposits ............. 1,585,318 55,290 3.49
Total other
borrowings ................. 81,071 4,767 5.88
-----------------------
Total interest-bearing
liabilities ................ 1,666,389 60,057 3.60
-------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Non-interest-bearing
liabilities(3) ............. 230,017
----------
Total liabilities ........... 1,896,406
Stockholders' equity ........ 186,667
----------
Total liabilities and
stockholders' equity ...... $2,083,073
----------
Net interest-
earning assets .............. $ 311,583
==========
Net interest income/
interest rate spread ........ $ 86,755 3.82%
=========================
Net interest margin ......... 4.39%
======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities ................ 118.70%
======
</TABLE>
(1) The average balance of loans receivable includes non-performing 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.
14
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
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>
For the Year Ended December 31,
------------------------------------------------------------------------------
1999 compared to 1998 1998 compared to 1997
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 ........... $ (3,724) $ 41,577 $(1,617) $36,236 $(1,973) $18,657 $ (463) $16,221
Other loans ................. (916) 3,250 (548) 1,786 803 101 18 922
--------------------------------------------------------------------------------------------------
Total loans receivable ...... (4,640) 44,827 (2,165) 38,022 (1,170) 18,758 (445) 17,143
Securities .................. 136 29,823 39 29,998 (2,537) 55,085 (2,496) 50,052
Other earning assets ........ (279) 690 (99) 312 (125) (4,831) 89 (4,867)
--------------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets ..... (4,783) 75,340 (2,225) 68,332 (3,832) 69,012 (2,852) 62,328
--------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW and money
market deposits ............ (138) 1,231 (55) 1,038 (117) 425 (18) 290
Savings and
Escrow accounts ............ (1,530) (763) 56 (2,237) 252 (4,536) (45) (4,329)
Certificates of deposits .... (1,727) 1,421 (92) (398) (177) (133) -- (310)
--------------------------------------------------------------------------------------------------
Total deposits .............. (3,395) 1,889 (91) (1,597) (42) (4,244) (63) (4,349)
Borrowings ................... (1,514) 56,406 (2,300) 52,592 (240) 34,325 (1,725) 32,360
--------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (4,909) 58,295 (2,391) 50,995 (282) 30,081 (1,788) 28,011
--------------------------------------------------------------------------------------------------
Net change in
net interest income ......... $ 126 $ 17,045 $ 166 $ 17,337 $(3,550) $38,931 $(1,064) $34,317
==================================================================================================
</TABLE>
15
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Comparison of Results of Operations for the
Years Ended December 31, 1999 and 1998
General. The Company reported net income of $52.9 million or $1.40 on a
diluted per share basis for the year ended December 31, 1999 compared to net
income of $44.3 million or $1.06 on a diluted per share basis for the year ended
December 31, 1998, an increase of $8.6 million or 19.4%. Core earnings for the
year ended December 31, 1999 were $52.5 million or diluted earnings per share of
$1.39 compared to core earnings for the year ended December 31, 1998 of $43.9
million or diluted earnings per share of $1.06. Core earnings for the year ended
December 31, 1999 exclude a $1.8 million benefit for loan losses, a $4.1 million
curtailment gain on the freezing of the Bank's defined benefit pension plan and
$5.5 million in net security losses. Core earnings for the year ended December
31, 1998 exclude $524,000 of net securities gains.
Based upon management's assessment of the credit quality of the Company's loan
portfolio, among other factors, during the fourth quarter the Company determined
to reverse $1.9 million of the allowance for loan losses which was the primary
reason for a benefit for loan losses of $1.8 million for the year ended December
31, 1999. As a result of management's continuing efforts to moderate
non-interest expense and in light of stock based employee benefit plans
implemented since the Company's initial public offering in 1997, the Company
froze its defined benefit pension plan in 1999 which, due to its over-funded
status, resulted in a curtailment gain of $4.1 million. The $5.5 million in net
security losses for 1999 were primarily the result of writedowns of $9.0 million
with respect to corporate debt securities of one financially distressed issuer.
The increase in net income for the year ended December 31, 1999 was primarily
due to an increase in net interest income of $17.3 million, the benefit for loan
losses of $1.8 million and an increase in other income of $20.5 million, which
were partially offset by an increase of $27.1 million in total other expenses
and an increase in the provision for income taxes of $5.6 million.
Interest Income. The increase in interest income of $68.3 million for the year
ended December 31, 1999 was primarily due to an increase in the average balance
of the Company's interest-earning assets, which was partially offset by a
decrease in the average yield on loans. The average balance of the loan
portfolio increased $555.6 million or 44.1% to $1.8 billion during 1999
primarily as a result of increased loan demand, and the Company's continued
efforts to expand it's lending activity through it's business development
programs and the expansion of the mortgage broker program. The average balance
of the securities portfolio increased $458.8 million or 28.1% to $2.1 billion
during 1999 primarily as a result of the Company's continuing leveraging
strategy to fund asset growth with borrowed funds when acceptable spreads can be
obtained. The average yield earned on the Company's loan portfolio decreased
from 8.02% during 1998 to 7.66% for 1999. This decrease was due to the repayment
of substantial amounts of relatively higher yielding loans, particularly during
the first six months of 1999, and the origination of loans at market interest
rates which were lower than the average yield of the Company's loan portfolio
during the first half of the year.
<PAGE>
Interest Expense. The Company recorded interest expense of $139.1 million for
the year ending December 31, 1999 compared to $88.1 million for the year ending
December 31, 1998, an increase of $51.0 million or 57.9%. The primary reason for
the increase was a $52.6 million increase in the interest on borrowed funds. The
increase in interest expense on borrowed funds was primarily due to an increase
of $1.0 billion in the average balance of borrowed funds partially offset by a
decrease in the average cost from 5.58% during 1998 to 5.36% during 1999. The
increase in the average balance of borrowed funds is due to the Company's
program to fund asset growth with borrowed funds at acceptable spreads. The
average cost of borrowings has decreased due to the lower interest rates during
the first half of the year.
Net Interest Income. Net interest income was $138.4 million for 1999 compared
to $121.1 million for 1998. This represents an increase of $17.3 million or
14.3%. The increase was the result of a $68.3 million increase in interest
income, which was partially offset by a $51.0 million increase in interest
expense. The increase in interest income was due to a $1.0 billion increase in
the average balance of interest-earning assets which was partially offset by a
13 basis point decrease in the average yield earned on interest-earning assets
from 7.14% in 1998 to 7.01% in 1999. Interest expense increased due to a $1.1
billion increase in the average balance of interest-bearing liabilities and a 21
basis point increase in the average cost from 4.21% in 1998 to 4.42% in 1999 due
to the Company's increasing reliance on borrowings as a source of funds and the
rising interest rate environment during much of 1999. The net interest rate
spread and margin decreased to 2.60% and 3.50%, respectively, for the year ended
December 31, 1999 from 2.93% and 4.13%, respectively, for the year ended
December 31, 1998. Such decreases were primarily due to the Bank's continued use
of borrowed funds to leverage the balance sheet which is intended to
incrementally increase net interest income although it may incrementally
decrease the net interest margin and net interest spread. The interest rate
environment during the year has resulted in lower net interest spreads and
margins.
16
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Provision (Benefit) For Loan Losses. The provision (benefit) for loan losses
is based on management's continuing review of the adequacy of the loan loss
allowance, which includes such factors as the composition of the loan portfolio
and its inherent risk characteristics, the level of charge-offs, both current
and historic, the level of non-performing loans, local economic conditions,
including the direction of real estate values, and current trends in regulatory
supervision. During 1999, the quality of the loan portfolio remained strong and
the level of non-accrual loans decreased by $3.8 million or 23.2%. The Company's
net loan charge-offs were $503,000 for the year ended December 31, 1999 compared
to $782,000 for the year ended December 31, 1998. As a result of the continued
improvement in the Company's non-accruing loans, among other factors, during the
fourth quarter of 1999, management deemed it prudent to reverse $1.9 million of
the allowance for loan losses which was the primary reason for a $1.8 million
benefit for the loan loss reserve for the year 1999 compared to a provision of
$1.6 million in the year 1998. The Company's allowance for loan losses was $14.3
million at December 31, 1999, or 114.4% of non-accrual loans at such date,
compared to $16.6 million at December 31, 1998, or 102.4% of non-accrual loans
at such date.
Other Income. Other income amounted to $30.9 million and $10.4 million for the
years ended December 31, 1999 and 1998, respectively. The increase of $20.5
million was due to an increase in service and fee income of $22.4 million, a
$4.1 million curtailment gain stemming from the freezing of the Bank's defined
benefit pension plan at year end, which were partially offset by net security
losses of $5.5 million. The increase in service and fee income was primarily due
to an increase of $19.7 million in fees generated by Ivy Mortgage and a $2.6
million increase in the cash surrender value of the Company's bank owned life
insurance (BOLI). The increase in net security losses for the year ended
December 31, 1999 compared to the year ended December 31, 1998 was primarily due
to the $9.1 million writedown of certain corporate bonds held in the Company's
available for sale securities portfolio and determined by management to be
permanently impaired due to the distressed financial condition of the issuer,
which was partially offset by $3.5 million in net gains realized from various
security sales.
Other Expenses. Other expenses for the year ended December 31, 1999 were $83.0
million or 48.5% more than other expenses of $55.9 million for the year ended
December 31, 1998. The primary reasons for the increase were increases in
personnel costs of $19.5 million, in occupancy and equipment costs of $1.8
million, and other expenses of $6.3 million. The increase in personnel costs was
primarily due to an increase in aggregate personnel costs of $6.5 million
primarily as the result of the operation of Ivy Mortgage, for the entire year,
which was acquired in November 1998, a $7.6 million increase in commission
expense for Ivy Mortgage, an increase of $3.0 million in the non-cash expense
related to the Company's RRP, a $1.1 million increase in the Bank's incentive
plan and other routine merit pay increases. The increase in occupancy and
equipment expense is primarily due to the additional expense of $1.1 million
from the Mortgage Company and additional property and equipment expense due to
business expansion and growth. The increase in other expenses again was due
primarily to loan related expenses resulting from the operation of Ivy Mortgage.
<PAGE>
Provision For Income Taxes. The provision for income taxes was $35.3 million
for the year 1999 compared to $29.7 million for the year ended December 31,
1998. The increase in the provision was primarily due to an increase of $14.2
million in income before taxes. The effective consolidated tax rate for 1999 was
40.0% compared to 40.1% for the year 1998.
Comparison of Results of Operations for the
Years Ended December 31, 1998 and 1997
General. The Company reported net income of $44.3 million or $1.06 per share
for the year ended December 31, 1998 compared to net income of $14.5 million for
the year ended December 31, 1997, an increase of $29.8 million or 205.5%. The
earnings for the year ended December 31, 1997 included a one time non-recurring
contribution to the SISB Community Foundation (the Foundation) of $25.8 million
($13.8 million net of taxes). The Foundation was established as part of the
Conversion to enhance the Company's visibility and reputation in the communities
that it serves. The Foundation continues the Bank's demonstrated commitment to
the housing, civic and special needs of the community. The Company's net income
for 1998 represents a $15.9 million or 56.0% increase over 1997 net income as
adjusted to exclude the effect of the contribution to the Foundation.
The increase in net income for the year ended December 31, 1998 was primarily
due to an increase in net interest income of $34.3 million and a decrease in the
provision for loan losses of $4.4 million, which was partially offset by an
increase of $13.0 million in total other expenses and an increase of $12.7
million in the provision for income taxes exclusive of related deferred tax
benefit from the contribution to the Foundation. These and other significant
fluctuations in the Company's results of operations are discussed below.
Interest Income. The increase in interest income of $62.3 million for the year
ended December 31, 1998 was primarily due to an increase in the average balance
of the Company's interest-earning assets, which was partially offset by a
decrease in the average yield on loans and securities. The average balance of
the loan portfolio increased $231.6 million or 22.49% to $1.3 billion primarily
as a result of increased loan demand and the Company's continued efforts to
expand its lending activity including the purchase of assets from Ivy Mortgage
in the fourth quarter of 1998. The average balance of the Company's securities
portfolio increased $809.0 million or 98.41% to $1.6 billion for 1998 primarily
as a result of the use of the net proceeds from the Conversion and the Company's
leveraging strategy. These increases were partially offset by a decrease in the
average balance of other interest-earning assets of $89.6 million or 70.96%. The
average yield earned on the Company's loan portfolio decreased from 8.16% in
1997 to 8.02% in 1998. This decrease in the average yield on the loan portfolio
was a result of declining interest rates during the year resulting in the payoff
of higher yielding loans and the origination of loans at market interest rates
which were lower than the average yield on the Bank's loan portfolio. The
average yield was also reduced by downward pricing of certain of the Company's
adjustable-rate loans. The yield on the securities portfolio decreased 31 basis
points to 6.50% in 1998 from 6.81% in 1997. The decrease was a result of
declining interest rates in 1998 and the accelerated payoff of higher yielding
mortgage-backed securities.
17
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Interest Expense. The Company recorded interest expense of $88.1 million for
the year ended December 31, 1998 compared to $60.1 million for the year ended
December 31, 1997, an increase of $28.0 million or 46.64%. Interest on borrowed
funds increased $32.4 million due to a $583.8 million increase in the average
balance of borrowings in 1998. The increase in the average balance of borrowings
reflects the Bank's leveraging strategy which was instituted in 1997 to fund
asset growth through borrowings at acceptable spreads. The average cost of
borrowings decreased 30 basis points from 5.88% in 1997 to 5.58% in 1998
primarily due to the declining interest rate environment and the use of certain
callable borrowings. The average balance of interest-bearing deposits decreased
$157.8 million as a result of the withdrawal of temporary deposits in the fourth
quarter of 1997 in anticipation of the Bank's mutual-to-stock conversion. The
average cost of interest-bearing deposits increased to 3.57% due to the change
in the mix of the interest-bearing deposit base.
Net Interest Income. Net interest income was $121.1 million for the year ended
December 31, 1998 compared to $86.8 million for the year ended December 31,
1997. This represents an increase of $34.3 million or 39.56%. The increase was a
result of a $62.3 million increase in interest income which was partially offset
by a $28.0 million increase in interest expense. The increase in interest income
was the result of an increase of $951.0 million in the average balance of
interest-earning assets which was partially offset by a decrease in the average
yield of interest-earning assets of 27 basis points from 7.41% in 1997 to 7.14%
in 1998. Interest expense increased due to a $426.0 million increase in the
average balance of interest-bearing liabilities and a 61 basis point increase in
the average cost from 3.60% in 1997 to 4.21% in 1998 due to a change in the
composition of the Company's interest-bearing liabilities and the respective
costs of the funding sources found within the mix. The net interest rate spread
and margin decreased to 2.93% and 4.13%, respectively, for the period ended
December 31, 1998 from 3.82% and 4.39%, respectively, as of December 31, 1997.
Such decreases were primarily due to the Bank's continued use of borrowed funds
to leverage the balance sheet coupled with the declining interest rate
environment during most of 1998 which resulted in lower interest-earning asset
yields in 1998 compared to 1997.
Provision for Loan Losses. For the year ended December 31, 1998 the provision
for loan losses was $1.6 million compared to $6.0 million for the year ended
December 31, 1997. The provision in 1997 included a non-recurring amount of $4.0
million based on management's review of the risk elements in the loan portfolio
and also the longer-than-anticipated workout periods for the commercial
portfolio that was acquired from the commercial bank acquired in 1995.
Management determined that, in certain circumstances, more aggressive workout
procedures for such non-performing loans would be warranted, which could
increase the risk of loss with respect to such loans. As a result, management
decided to increase the reserve levels in 1997. The provision in 1998 was based
on management's continuing review of the risk elements in the Bank's loan
portfolio and past history related to charge-offs and recoveries. In particular,
management considered the continued growth in the loan portfolio, as well as the
decrease in its non-performing loans in determining the level of the provision
in 1998.
Other Income. Other income amounted to $10.4 million and $7.5 million for the
years ended December 31, 1998 and 1997, respectively. The increase of $2.9
million or 39.27% in 1998 compared to 1997 was primarily due to an increase of
$2.3 million in service and fee income and a $0.6 million increase in net gains
on securities. The increase in service and fee income was due to the fees
generated by the operations of Ivy Mortgage, increased fees due to the growth of
checking accounts and related transactions and increased gains related to the
disposition of other real estate owned ("ORE") properties. The increase in net
gains on security transactions reflect management's decision to sell certain
available for sale securities as market conditions warrant in the normal course
of business.
18
<PAGE>
Other Expenses. Other expenses for the year ended December 31, 1998 were $55.8
million or 30.30% more than other expenses of $42.9 million for the year ended
December 31, 1997, exclusive of the $25.8 million contribution to the
Foundation. The primary reasons for the increase in other expenses were
increases in personnel costs of $9.3 million, data processing costs of $1.0
million, professional fees of $1.5 million and other expenses of $0.9 million.
The increase in personnel costs was primarily due to the $7.1 million non-cash
expense generated by the allocation and appreciation of shares held in the
Company's stock related benefit plans during the year and staff additions to the
Bank's lending operations in an effort to enhance credit administration and
process the substantial increase in new loan originations. The increase in data
processing costs was primarily due to non-recurring costs related to the
conversion to a new data processing system in the third quarter of 1998. The
increase in professional fees was primarily due to the costs related to forming
a passive real estate investment trust (REIT) and a New Jersey investment
company in connection with certain of the Company's tax planning strategies.
Professional fees also increased due to increased audit and legal fees
associated with operating for a full year as a public company. Other expenses
increased primarily as a result of additional costs related to regulatory and
reporting requirements as a public company.
Provision for Income Taxes. The provision for income taxes amounted to $29.7
million for the year ended December 31, 1998 compared to $4.9 million for the
year ended December 31, 1997. The Company in 1997 recorded a $12.0 million
deferred tax benefit from the $25.8 million contribution to the Foundation along
with a $2.6 million reversal of previously deferred income taxes related to bad
debt reserves accumulated for New York City purposes, resulting in an adjusted
tax provision of $19.5 million. The effective tax rate in 1998 was 40.1%
compared to 43.1% in 1997. The decrease in the effective tax rate was primarily
a result of the Bank's tax planning strategies put in place in 1998.
LIQUIDITY AND CAPITAL
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 Bank relied almost exclusively on its
deposits as a source of funds. Commencing in late 1997, the Company began a
leveraging program whereby it uses borrowings, such as FHLB advances and reverse
repurchase agreements as an additional source of funds to fund asset growth at
acceptable spreads. This leveraging strategy continued throughout 1998 and 1999.
However, it is management's intent to place less emphasis on this strategy in
the year 2000. At December 31, 1999, such borrowings amounted to $2.0 billion.
<PAGE>
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, 1999, the total approved
loan origination commitments outstanding amounted to $302.8 million and unused
credit lines equaled $55.3 million. At the same date, the unadvanced portion of
construction loans totaled $27.1 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 1999 totaled $469.8 million.
Investment securities scheduled to mature in one year or less at December 31,
1999 totaled $8.1 million and amortization from investments and loans is
projected at $533.0 million for the year 2000. Based on historical experience,
the current pricing strategy, and the strong core deposit base, 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.
At December 31, 1999 the Bank's capital ratios exceeded all the regulatory
requirements. Under OTS regulations, the Bank is required to comply with each of
three separate capital adequacy standards: tangible capital of $388.2 million or
8.93% of adjusted assets compared to a requirement of $65.2 million or 1.50% of
adjusted assets, core capital of $390.2 million or 8.97% of adjusted assets
compared to a requirement of $174.0 million or 4% of adjusted assets, and risk
based capital of $404.5 million or 19.80% of risk weighted assets compared to a
requirement of $163.4 million or 8% of risk-weighted assets.
19
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated 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.
Private Securities Litigation Reform Act
Safe Harbor Statement
In addition to historical information, this Annual Report includes certain
"forward-looking statements" based on current management expectations. The
Company's actual results could differ materially, as defined in the Securities
Act of 1933 and the Securities Exchange Act of 1934, from those management
expectations. Such forward-looking statements include statements regarding our
intentions, beliefs or current expectations as well as the assumptions on which
such statements are based. Stockholders and potential stockholders are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Factors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the federal
government, changes in tax policies, rates and regulations of federal, state and
local tax authorities, changes in interest rates, deposit flows, the cost of
funds, demand for loan products, demand for financial services, competition,
changes in the quality or composition of the Company's loan and investment
portfolios, changes in accounting principles, policies or guidelines, and other
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and fees.
The Company undertakes no obligation to update or revise any forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
20
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (000's omitted)
Assets:
Cash and due from banks ..................................................... $ 80,998 $ 88,059
Federal funds sold ......................................................... 20,400 45,050
Securities available for sale ................................................ 1,963,954 2,029,041
Loans, net ................................................................... 2,150,039 1,457,058
Loans held for sale, net ..................................................... 46,588 77,943
Accrued interest receivable .................................................. 23,621 19,389
Bank premises and equipment, net ............................................ 24,731 22,163
Intangible assets, net ..................................................... 15,432 17,701
Other assets ................................................................. 163,551 20,543
--------------------------
Total assets ................................................................. $ 4,489,314 $3,776,947
===========================
Liabilities and Stockholders' Equity
Liabilities:
Due depositors--
Savings .................................................................. $ 737,794 $ 730,614
Time ..................................................................... 573,043 537,154
Money market ............................................................. 89,004 82,360
NOW accounts ............................................................. 80,352 73,541
Demand deposits .......................................................... 340,040 305,392
--------------------------
1,820,233 1,729,061
Borrowed funds ............................................................. 2,049,411 1,344,517
Advances from borrowers for taxes and insurance ............................ 10,805 7,091
Accrued interest and other liabilities ..................................... 37,488 27,236
--------------------------
Total liabilities ...................................................... 3,917,937 3,107,905
--------------------------
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Common stock, par value $.01 per share, 100,000,000 shares authorized,
45,130,312 issued and 38,693,623 outstanding at December 31, 1999
and 45,130,312 issued and 43,704,812 outstanding at December 31, 1998 ...... 451 451
Additional paid-in capital ................................................. 536,539 534,464
Retained earnings--substantially restricted ................................ 251,315 215,414
Unallocated common stock held by ESOP ...................................... (35,709) (38,456)
Unearned common stock held by RRP .......................................... (25,439) (30,873)
Less--Treasury stock (6,436,689 and 1,425,500 shares at
December 31, 1999 and 1998, respectively), at cost ......................... (121,149) (27,480)
Accumulated other comprehensive income (loss), net of taxes ................ (34,631) 15,522
--------------------------
Total stockholders' equity ............................................. 571,377 669,042
--------------------------
Total liabilities and stockholders' equity ............................. $ 4,489,314 $ 3,776,947
===========================
</TABLE>
The accompanying notes are an integral part of these statements
21
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997
(000's omitted)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans ......................................................... $139,197 $101,175 $ 84,031
Securities available for sale ................................. 136,023 106,025 55,973
Other earning assets .......................................... 2,253 1,941 6,808
----------------------------------
Total interest income ....................................... 277,473 209,141 146,812
----------------------------------
Interest Expense:
Borrowed funds ................................................ 89,719 37,127 4,767
Time .......................................................... 26,477 26,875 27,185
Savings and escrow ............................................ 18,716 20,953 25,281
Money market and NOW .......................................... 4,152 3,114 2,824
----------------------------------
Total interest expense ...................................... 139,064 88,069 60,057
----------------------------------
Net interest income ......................................... 138,409 121,072 86,755
Provision (Benefit) for Loan Losses ............................. (1,843) 1,594 6,003
----------------------------------
Net interest income after provision (benefit) for loan losses 140,252 119,478 80,752
----------------------------------
Other Income (Loss):
Service and fee income ........................................ 32,291 9,856 7,539
Defined benefit plan curtailment gain ......................... 4,093 -- --
Securities transactions ....................................... (5,531) 524 (85)
----------------------------------
Total other income .......................................... 30,853 10,380 7,454
----------------------------------
Other Expenses:
Personnel ..................................................... 49,719 30,248 20,934
Occupancy and equipment ....................................... 7,912 6,150 5,666
Data processing ............................................... 4,448 4,915 3,950
Amortization of intangible assets ............................. 2,236 2,089 2,076
Professional fees ............................................. 2,063 2,403 933
Contribution to SISB Community Foundation ..................... -- -- 25,817
Other ......................................................... 16,593 10,113 9,349
----------------------------------
Total other expenses ........................................ 82,971 55,918 68,725
----------------------------------
Income before provision for income taxes .................... 88,134 73,940 19,481
Provision for Income Taxes ...................................... 35,259 29,678 4,932
----------------------------------
Net income .................................................. $ 52,875 $ 44,262 $ 14,549
==================================
Earnings (Loss) per Share:
Basic ......................................................... $ 1.40 $ 1.06 $ (.29)(1)
Fully diluted ................................................. $ 1.40 $ 1.06 $ (.29)
</TABLE>
(1) Since conversion on December 22, 1997
The accompanying notes are an integral part of these statements.
22
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unallocated Unearned
Common Common
For the Years Ended Additional Stock Stock Compre-
December 31, 1999, Common Paid-in Held by Held by Treasury hensive
1998 and 1997 Stock Capital ESOP RRP Stock Income
- ---------------------------------------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 .... $ -- $ -- $ -- $ -- $ -- $ --
Net proceeds from
common stock issued
in conversion ............. 451 532,521 -- -- -- --
Purchase of common
stock by ESOP ............. -- -- (41,262) -- -- --
Change in net unrealized
appreciation (depreciation)
on securities, net of tax . -- -- -- -- -- 8,547
Net income ................ -- -- -- -- -- 14,549
--------------------------------------------------------------------------------
Comprehensive income ...... $23,096
=======
Balance, December 31, 1997 .. 451 532,521 (41,262) -- -- --
Allocation of 233,843
ESOP shares ............... -- 1,886 2,806 -- -- --
Purchase of RRP shares .... -- -- -- (31,397) -- --
Earned RRP shares ......... -- 57 -- 524 -- --
Treasury stock (1,425,500
shares), at cost .......... -- -- -- -- (27,480) --
Dividends paid ............ -- -- -- -- -- --
Change in unrealized
appreciation
(depreciation) on
securities, net of tax .... -- -- -- -- -- 2,845
Net income ................ -- -- -- -- -- 44,262
--------------------------------------------------------------------------------
Comprehensive income ...... $47,107
=======
Balance, December 31, 1998 .. 451 534,464 (38,456) (30,873) (27,480)
Allocation of 228,904
ESOP shares ............... -- 1,484 2,747 -- -- --
Earned RRP shares ......... -- 591 -- 5,434 -- --
Treasury stock
(5,011,189 shares),
at cost ................... -- -- -- -- (93,669) --
Dividends paid ............ -- -- -- -- -- --
Change in unrealized
appreciation (depreciation)
on securities, net of tax . -- -- -- -- -- (50,153)
Net income ................ -- -- -- -- -- 52,875
--------------------------------------------------------------------------------
Comprehensive income ...... $ 2,722
=========
Balance, December 31, 1999 .. $ 451 $536,539 $ (35,709) $ (25,439) $(121,149)
==============================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive
Earnings Income (Loss), Net Total
-------- ------------------ -----
<S> <C> <C> <C>
Balance, January 1, 1997 .... $166,950 $ 4,130 $171,080
Net proceeds from
common stock issued
in conversion ............. -- -- 532,972
Purchase of common
stock by ESOP ............. -- -- (41,262)
Change in net unrealized
appreciation (depreciation)
on securities, net of tax . -- 8,547 8,547
Net income ................ 14,549 -- 14,549
---------------------------------------------------
Comprehensive income ......
Balance, December 31, 1997 .. 181,499 12,677 685,886
Allocation of 233,843
ESOP shares ............... -- -- 4,692
Purchase of RRP shares .... -- -- (31,397)
Earned RRP shares ......... -- -- 581
Treasury stock (1,425,500
shares), at cost .......... -- -- (27,480)
Dividends paid ............ (10,347) -- (10,347)
Change in unrealized
appreciation
(depreciation) on
securities, net of tax .... -- 2,845 2,845
Net income ................ 44,262 -- 44,262
---------------------------------------------------
Comprehensive income ......
Balance, December 31, 1998 .. 215,414 15,522 669,042
Allocation of 228,904
ESOP shares ............... -- -- 4,231
Earned RRP shares ......... -- -- 6,025
Treasury stock
(5,011,189 shares),
at cost ................... -- -- (93,669)
Dividends paid ............ (16,974) -- (16,974)
Change in unrealized
appreciation (depreciation)
on securities, net of tax . -- (50,153) (50,153)
Net income ................ 52,875 -- 52,875
------------- ------------ -------------
Comprehensive income ......
Balance, December 31, 1999 .. $ 251,315 $(34,631) $ 571,377
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income ...................................................... $ 52,875 $ 44,262 $ 14,549
Adjustments to reconcile net income to net cash
(used in) provided by operating activities--
Charitable contribution to SISB Community Foundation ........ -- -- 25,817
Depreciation and amortization ............................... 2,543 1,983 1,724
(Accretion) and amortization of bond and mortgage premiums .. 4,715 (1,258) (1,772)
Amortization of intangible assets ........................... 2,236 2,089 2,076
Realized loss (gain) on sale of available for sale securities (3,539) (524) 85
Expense charge relating to allocation and earned portions
of employee benefit plans ................................ 8,790 7,583 --
Other non-cash expense ...................................... (1,439) (2,374) (2,707)
Provision (benefit) for loan losses ......................... (1,843) 1,594 6,003
Increase in deferred loan fees .............................. 1,512 1,477 74
(Increase) in accrued interest receivable ................... (4,232) (3,682) (3,969)
(Increase) in other assets .................................. (90,479) (5,528) (4,691)
(Decrease) increase in accrued interest and other liabilities 12,103 (55,611) 62,337
(Increase) decrease in deferred income taxes ................ 4,691 (6,769) (13,327)
Recoveries of loans ......................................... 1,161 1,337 1,047
--------------------------------------------------
Net cash (used in) provided by operating activities ...... (10,906) (15,421) 87,246
--------------------------------------------------
Cash Flows from Investing Activities:
Maturities and amortization of available for sale securities .... 389,930 519,667 180,489
Sales of available for sale securities .......................... 76,257 109,224 97,757
Purchases of available for sale securities ...................... (517,115) (1,304,385) (910,305)
Principal collected on loans .................................... 324,937 201,091 167,260
Loans made to customers ......................................... (1,607,459) (643,854) (289,512)
Purchase of loans ............................................... (16,088) (66,267) --
Sales of loans .................................................. 644,557 57,577 4,289
Capital expenditures ............................................ (4,961) (4,392) (2,786)
Acquisition of Ivy Mortgage, net of cash acquired ............... -- (2,194) --
--------------------------------------------------
Net cash used in investing activities ..................... (709,942) (1,133,533) (752,808)
--------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts ................................ 94,886 107,877 45,964
Borrowings ...................................................... 704,894 1,094,475 249,988
Issuance of common stock ........................................ -- -- 507,185
Dividends paid .................................................. (16,974) (10,347) --
Purchase of shares for ESOP ..................................... -- -- (41,262)
Purchase of treasury stock ...................................... (93,669) (27,480) --
Purchase of shares for RRP ...................................... -- (31,397) --
--------------------------------------------------
Net cash provided by financing activities ................. 689,137 1,133,128 761,875
--------------------------------------------------
Net increase (decrease) in cash and cash equivalents ...... (31,711) (15,826) 96,313
Cash and Cash Equivalents, beginning of year ...................... 133,109 148,935 52,622
--------------------------------------------------
Cash and Cash Equivalents, end of year ............................ $ 101,398 $ 133,109 $ 148,935
==================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid for--
Interest ...................................................... $ 131,043 $ 80,540 $ 60,054
Income taxes .................................................. 31,300 30,529 14,298
Acquisition of Ivy Mortgage--
Fair value of assets acquired ................................. -- 65,823 --
Fair value of liabilities assumed ............................. -- 63,937 --
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Staten Island Bancorp, Inc. (the
"Company") and subsidiaries conform to 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 accounts of the
Company and its wholly owned subsidiary Staten Island Savings Bank (the "Bank").
The Bank's wholly owned subsidiaries are SIB Mortgage Corp. (the "Mortgage
Company"), SIB Investment Corporation, Staten Island Funding Corporation and
American Construction Lending Services, Inc. All significant intercompany
transactions and balances are eliminated in consolidation.
The SIB Mortgage Corp. was set up to acquire the operations of Ivy Mortgage as
discussed in Note 3. The Staten Island Funding Corporation was set up as a real
estate investment trust, SIB Investment Corporation was set up to hold certain
Bank investments and American Construction Lending Services, Inc. was set up to
originate residential construction loans throughout the country.
As more fully discussed in Note 2, Staten Island Bancorp, Inc., 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 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, money market deposits and federal funds sold for the years
ended December 31, 1999, 1998 and 1997.
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, are 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.
<PAGE>
Loans
Loans are stated at the principal amount outstanding, net of unearned income,
loan origination fees and costs, and an allowance for loan losses. Loan
origination fees and costs are recognized in interest income as an adjustment to
yield over the life of the loan or at the time of the sale of the loan for loans
held in the portfolio. Premiums and discounts on purchased mortgages are
amortized over the average life of the loan using a method which approximates
the level yield method.
Loans are placed on non-accrual status when the interest or principal payments
are 90 days past due unless in the opinion of management, collection is deemed
probable. When interest accruals are discontinued, the recognition of interest
income ceases and previously accrued interest remaining unpaid is reversed
against income. Cash payments received are applied to principal, and interest
income is recognized when 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 non-accrual 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.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market as determined
by outstanding commitments from investors or current investor yield
requirements.
Allowance for Loan Losses
The allowance for loan losses is established by management through provisions
for loan losses charged against income. Amounts deemed to be uncollectible are
charged against the allowance for loan losses, and subsequent recoveries, if
any, are credited to the allowance.
The amount of the allowance for loan losses is inherently subjective, as it
requires making material estimates which may vary from actual results. 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,
current portfolio composition, evaluation of real estate collateral, as well as
current and anticipated economic conditions. In the opinion of management, the
allowance, when taken as a whole, is adequate to absorb estimated loan losses
inherent in the Bank's entire portfolio.
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.
25
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
Investments in Real Estate
Investments in real estate consist of real estate acquired through foreclosure
or by deed in lieu of foreclosure ("owned real estate " or "ORE"). ORE
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.
Demand Deposits
Each of the Bank's commercial and personal demand (checking) accounts and NOW
accounts has a related interest-bearing money market sweep account. The sole
purpose of the sweep accounts is to reduce the non-interest-bearing reserve
balances that the Bank is required to maintain with the Federal Reserve Bank,
and thereby increase funds available for investment. Although the sweep accounts
are classified as money market accounts for regulatory purposes, they are
included in demand deposits and NOW accounts in the accompanying consolidated
statements of financial condition.
Comprehensive Income
Comprehensive income includes net income and all other changes in equity
during a period except those resulting from investments by owners and
distribution to owners. Other comprehensive income includes revenues, expenses,
gains and losses that under generally accepted accounting principles are
included in comprehensive income but excluded from net income.
Comprehensive income and accumulated other comprehensive income are reported
net of related income taxes. Accumulated other comprehensive income consists
solely of unrealized holding gains and losses on available for sale securities.
Income Taxes
Deferred income taxes are provided 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 are 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") and ungranted Recognition and Retention Plan
("RRP") in accordance with the American Institute of Certified Public
Accountants Statement of Position 93-6. For the year ended December 31, 1999,
the basic and fully diluted weighted average common stock outstanding was
37,878,481 shares. For the year ended December 31, 1998, the basic and fully
diluted weighted average common stock outstanding was 41,567,051 shares. From
the conversion on December 22, 1997 to December 31, 1997, the basic and fully
diluted weighted average common stock outstanding was 41,691,812 shares.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value rather than the intrinsic value-based method
<PAGE>
that is contained in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and related Interpretations. The
Company has chosen to account for stock-based compensation using the intrinsic
value method as prescribed in APB No. 25, measuring compensation cost for stock
options as the excess, if any, of the quoted market price of the Company's stock
at the date of the grant over the amount an employee must pay to acquire the
stock.
Treasury Stock
Repurchases of common stock are recorded as treasury stock
at cost.
Bank Owned Life Insurance (BOLI)
In August 1999, the Bank invested in BOLI policies to fund future employee
benefit costs. The Bank's investment totaled approximately $100 million and the
Bank is the beneficiary of these policies. The cash surrender value of the BOLI
policies is recorded on the Company's balance sheet as other assets and the
change in the cash surrender value is recorded as other income.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities Deferral of the Effective Date of SFAS No. 133," which
amended the effective date of SFAS No. 133. SFAS No. 133 is now effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
statement established accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management is currently
evaluating the impact SFAS Nos. 133 and 137 will have on the Company's financial
statements.
Reclassifications
Certain reclassifications have been made to the prior year amounts to conform
with current year presentation.
26
<PAGE>
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 "OTS." 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 ("FDIC).
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 approximately $532,972,000, net of expense totaling $8,591,000,
before the contribution to the SISB Community Foundation. 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 Bank to establish an
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 of $25,789,000
and a corresponding deferred tax benefit of $11,987,000 for this donation. In
addition, the Bank paid expenses on behalf of the Foundation totaling
approximately $28,000 in 1997. 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
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. This account had a
balance of $58,589,000 at December 31, 1999.
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 stockholders' equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration and payment
would otherwise violate regulatory requirements.
3. ACQUISITIONS
On November 20, 1998, SIB Mortgage Corp. acquired the assets of Ivy Mortgage,
a New Jersey-based mortgage loan originator which has branch offices primarily
throughout the Northeastern United States. The acquisition by SIB Mortgage Corp.
was funded by the Bank. 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 value of the net assets acquired was approximately $1,775,000 and has
<PAGE>
been recorded as goodwill. Included as part of the purchase price is a
noncompete agreement (the "Agreement") with the sellers of Ivy Mortgage. The
noncompete agreement, which is recorded as goodwill, is being amortized over 5
years on a straight-line basis and the remaining goodwill is being amortized
over 15 years on a straight-line basis. The original Agreement contained
provision for payments which are contingent upon future earnings. In January
2000, the original Agreement was amended to relieve the seller of certain
potential obligations and to eliminate the provisions which provided for future
payments to the sellers contingent upon future earnings. The amount of goodwill
amortization for 1999 is $160,000 and is included in other expenses.
On January 14, 2000, the Company acquired First State Bancorp, the holding
company for First State Bank, which operates six full-service branches in the
State of New Jersey. The asset size of First State Bancorp was approximately
$374.0 million and the cost of the acquisition was approximately $84.5 million,
which was paid in cash. The transaction will be accounted for as a purchase with
the excess of cost over fair value of net assets acquired (goodwill) estimated
at $46.0 million, which will be amortized on a straight-line basis over a
15-year period.
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 semiannual 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
27
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
compliance with OTS capital standards as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------
Actual Percent Required Percent
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Staten Island Savings Bank:
Tangible capital ........ $388,248 8.93% $ 65,213 1.50%
Core capital ............ 390,192 8.97 173,980 4.00
Risk-based capital ...... 404,463 19.80 163,442 8.00
<CAPTION>
December 31, 1998
----------------------------------------------------
Actual Percent Required Percent
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Staten Island Savings Bank:
Tangible capital ........ $402,472 11.31% $ 53,355 1.50%
Core capital ............ 405,583 11.39 142,404 4.00
Risk-based capital ...... 422,512 26.04 129,794 8.00
<CAPTION>
December 31, 1999
----------------------------------------------------
Actual Percent Required Percent
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Staten Island Bancorp:
Tangible capital ........ $585,976 13.01% $ 67,559 1.50%
Core capital ............ 587,921 13.05 180,234 4.00
Risk-based capital ...... 602,191 25.58 188,340 8.00
<CAPTION>
December 31, 1998
----------------------------------------------------
Actual Percent Required Percent
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Staten Island Bancorp:
Tangible capital ........ $629,519 16.84% $ 56,061 1.50%
Core capital ............ 632,630 16.91 149,621 4.00
Risk-based capital ...... 649,247 35.93 144,565 8.00
</TABLE>
<PAGE>
5. INVESTMENT SECURITIES
Securities Available for Sale
The amortized cost and approximate market value of securities available for
sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------
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 .............. $ 164,236 $ 63 $ (8,542) $ 155,757
GNMA, FNMA and
FHLMC mortgage
participation
certificates .............. 813,632 1,380 (21,401) 793,611
Agency CMOs ............... 248,376 60 (9,819) 238,617
Privately issued
CMOs .................... 436,604 1 (18,403) 418,202
Other ..................... 163,357 628 (11,168) 152,817
-----------------------------------------------------
1,826,205 2,132 (69,333) 1,759,004
-----------------------------------------------------
Marketable equity securities:
Common stocks ............. 97,787 9,201 (5,943) 101,046
Preferred stocks .......... 79,870 604 (10,916) 69,558
Mutual fund ............... 26,691 7,779 (123) 34,346
-----------------------------------------------------
204,348 17,584 (16,982) 204,950
-----------------------------------------------------
Total securities
available
for sale .................. $2,030,553 $ 19,716 $ (86,315) $1,963,954
=====================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------
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 .............. $ 75,310 $ 1,032 $ -- $ 76,342
GNMA, FNMA and
FHLMC mortgage
participation
certificates .............. 901,536 11,683 (198) 913,021
Agency CMOs ............... 232,070 2,569 (1) 234,638
Privately issued
CMOs ...................... 473,424 3,224 (319) 476,329
Other ..................... 151,219 1,695 (5,684) 147,230
----------------------------------------------------------
1,833,559 20,203 (6,202) 1,847,560
----------------------------------------------------------
Marketable equity securities:
Common stocks ............. 58,995 7,695 (5,407) 61,283
Preferred stocks .......... 79,010 2,040 (901) 80,149
Mutual fund ............... 27,626 12,423 -- 40,049
----------------------------------------------------------
165,631 22,158 (6,308) 181,481
----------------------------------------------------------
Total securities
available
for sale .................. $ 1,999,190 $ 42,361 $ (12,510) $ 2,029,041
==========================================================
</TABLE>
The amortized cost and market value of debt securities available for sale at
December 31, 1999 and 1998, 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.
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------- -----------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Due in one year
or less ................. $ 8,150 $ 8,176 $ 17,297 $ 17,447
Due after one
year through
five years ................ 58,256 56,785 43,058 40,509
Due after five
years through
ten years ................. 132,988 125,979 56,479 56,889
Due after
ten years ............... 564,803 535,836 583,119 585,056
----------------------------------------------------
764,197 726,776 699,953 699,901
GNMA, FNMA
and FHLMC
mortgage
participation
certificates
and agency
CMOs ...................... 1,062,008 1,032,228 1,133,606 1,147,659
----------------------------------------------------
$1,826,205 $1,759,004 $1,833,559 $1,847,560
====================================================
</TABLE>
28
<PAGE>
Proceeds from sales of securities available for sale during 1999, 1998 and
1997 were $76,257,000, $109,224,000 and $97,957,000 with realized gross gains of
$8,876,000, $2,374,000 and $945,000 and realized gross losses of $14,407,000,
$1,850,000 and $1,030,000, respectively. Gross losses in 1999 include
write-downs of approximately $9,100,000 on securities whose decline in value was
deemed to be other than temporary.
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 majority of the Bank's loan
portfolio is susceptible to the economy of Staten Island, a borough of New York
City, which is its primary marketplace. 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C>
Loans secured by mortgages
on real estate:
1-4 family residential ........... $ 1,737,913 $ 1,187,212
Multifamily properties ........... 42,501 33,328
Commercial properties ............ 223,809 137,720
Home equity ...................... 5,390 6,121
Construction and land ............ 60,105 42,420
Deferred origination costs (fees)
and unearned income, net ....... 5,537 (717)
------------------------------------
Net loans secured
by mortgages on
real estate ................ 2,075,255 1,406,084
------------------------------------
Other loans:
Student ............................ 657 940
Passbook ........................... 5,357 5,989
Commercial ......................... 33,646 36,592
Other .............................. 49,395 24,070
------------------------------------
Net other loans .............. 89,055 67,591
------------------------------------
Net loans before the
allowance for
loan losses ........................ 2,164,310 1,473,675
Allowance for loan losses ............ (14,271) (16,617)
------------------------------------
Net loans .................... $ 2,150,039 $ 1,457,058
====================================
</TABLE>
<PAGE>
A summary of activity in the allowance for loan losses for the years ended
December 31, 1999, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------
(000's omitted)
<S> <C> <C> <C>
Beginning balance ................. $ 16,617 $15,709 $ 9,977
Increase as a result
of acquisition .................. -- 96 --
Provision (benefit) charged
to operations ................... (1,843) 1,594 6,003
Charge-offs ..................... (1,665) (2,119) (1,318)
Recoveries ...................... 1,162 1,337 1,047
-----------------------------------------
Ending balance .................... $ 14,271 $16,617 $15,709
=========================================
</TABLE>
Non-accrual loans totaled approximately $12,474,000 at December 31, 1999,
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. Non-accrual
loans totaled approximately $16,232,000 at December 31, 1998. The loss of
interest income associated with loans on non-accrual status was approximately
$746,000, $794,000 and $899,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
At December 31, 1999 and 1998, the valuation allowance related to all impaired
loans totaled $7,195,000 and $5,898,000, respectively, and is included in the
allowance for loan losses shown on the statement of financial condition. The
average recorded investment in impaired loans for the years ended December 31,
1999 and 1998, was approximately $13,342,000 and $18,693,000, respectively.
At December 31, 1999 and 1998, the Bank has other real estate totaling
approximately $887,000 and $849,000, respectively, classified in other assets.
At December 31, 1999 and 1998, the Bank was servicing mortgages for others
totaling approximately $122,589,000 and $140,748,000, respectively.
At December 31, 1999 and 1998, the Bank has balances outstanding from various
officers totaling approximately $3,944,000 and $2,999,000, respectively.
7. BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1999 and 1998, are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(000's omitted)
---------------
<S> <C> <C>
Land, building and leasehold
improvements .............................. $ 22,821 $ 22,499
Furniture, fixtures and
equipment ................................. 19,561 14,922
------------------------------
42,382 37,421
Less--Accumulated depreciation
and amortization .......................... (17,651) (15,258)
------------------------------
$ 24,731 $ 22,163
==============================
</TABLE>
29
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
8. DUE DEPOSITORS
Scheduled maturities of time deposits at December 31, 1999, are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
Amount Average Rate
- ----------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C>
2000 $469,837 4.69%
2001 72,984 5.14
2002 12,245 5.33
2003 10,746 5.34
2004 6,807 5.26
2005 and thereafter 424 5.69
------------------------
$573,043 4.78%
========================
</TABLE>
The aggregate amounts of outstanding time certificates of deposit in
denominations of $100,000 or more at December 31, 1999 and 1998 were
approximately $161,603,000 and $122,166,000, respectively.
9. BORROWED FUNDS
The Bank was obligated for borrowings as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1999 1998
-------------------------------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C> <C>
Reverse Repurchase
Agreements
Non-FHLB ............. 5.56% $ 846,372 5.19% $ 773,477
Reverse Repurchase
Agreements FHLB ...... 5.38 318,000 5.30 571,000
FHLB Advances .......... 5.90 885,000 -- --
Mortgage payable ....... 12.00 39 12.00 40
-------------------------------------------------
5.68% $2,049,411 5.24% $1,344,517
=================================================
</TABLE>
<PAGE>
The average balance of borrowings for the years ended December 31, 1999 and
1998 were $1,674,990,000 and $664,863,000, respectively. The borrowings at
December 31, 1999 have contractual maturities as follows:
<TABLE>
<CAPTION>
(000's omitted)
<S> <C>
2000 $1,275,022
2001 171,600
2002 50,000
2003 161,500
2004 53,250
2008 303,000
2009 35,039
----------
$2,049,411
==========
</TABLE>
As of December 31, 1999, $2,355,994,000 of investment securities were pledged
as collateral for these borrowed funds.
10. EMPLOYEE BENEFIT PLANS
Defined Benefit Plan
Costs of the Bank's defined benefit plan are accounted for in accordance with
SFAS No. 87. The following table sets forth the change in benefit obligations,
the change in the plan assets, the funded status of the plan, and amounts
recognized in the accompanying consolidated financial statements at December 31,
1999 and 1998, respectively, based upon the latest available actuarial
measurement dates of September 30, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
-------------------------
(000's omitted)
<S> <C> <C>
Projected benefit obligation,
beginning of year .......................... $22,483 $18,630
Service cost ............................. 1,355 1,172
Interest cost ............................ 1,457 1,350
Benefits paid ............................ (1,203) (919)
Actuarial loss (gain) .................... (2,599) 2,250
Curtailment of future benefits ........... (4,248) --
-------------------------
Projected benefit obligation,
end of year ................................ $ 17,245 $ 22,483
=========================
</TABLE>
<PAGE>
The following table sets forth the Plan's change in plan assets:
<TABLE>
<CAPTION>
1999 1998
------------------------
(000's omitted)
<S> <C> <C>
Fair value of the plan assets,
beginning of year .......................... $22,507 $23,002
Actual return on plan assets ............. 6,938 21
Employer contributions ................... -- 403
Benefits paid ............................ (1,203) (919)
------------------------
Fair value of the plan assets,
end of year ................................ $ 28,242 $ 22,507
=========================
Funded status ................................ $ 10,998 $ 25
Unrecognized net asset ....................... -- (62)
Unrecognized prior service cost .............. -- 393
Unrecognized net actuarial
loss (gain) ................................ (6,680) 871
------------------------
Prepaid cost ........................... $ 4,318 $ 1,227
========================
</TABLE>
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------
(000's omitted)
<S> <C> <C> <C>
Service cost-benefits earned
during the year .................... $ 1,355 $ 1,172 $ 981
Interest cost on projected
benefit obligation ................. 1,457 1,350 1,243
Net amortization and deferral ........ (15) (125) (82)
Actual return on plan assets ......... (2,599) (21) (4,213)
Deferred investment gain (loss) ...... 614 (1,799) 2,714
-----------------------------------
Net pension expense ............ $ 812 $ 577 $ 643
===================================
</TABLE>
30
<PAGE>
Major assumptions utilized:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Weighted average discount rate ....... 6.75% 6.50% 7.25%
Rate of increase in
compensation levels ................ 4.50 4.50 5.00
Expected long-term rate
of return on assets ................ 9.00 8.00 8.00
</TABLE>
During 1999, the Bank amended the defined benefit plan to freeze future
benefit accruals on December 31, 1999. In connection with the freezing of the
plan and the plan's measurement date of December 31, 1999, in accordance with
SFAS No. 88, the Bank recognized a curtailment gain of approximately $4.1
million for the year ended December 31, 1999.
Postretirement Benefits
The Bank provides postretirement benefits, including medical care and life
insurance, which cover substantially all active employees upon their retirement.
The Bank's postretirement benefits are unfunded. The following table shows the
components of the plan's accrued postretirement benefit cost included in other
liabilities on the consolidated statements of financial condition as of December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------
(000's omitted)
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees ............................................. $1,522 $1,324
Other fully eligible participants .................... 2,024 2,249
Unrecognized gain (loss) ............................. 399 50
Unrecognized past service liability .................. 508 583
------------------
Accrued postretirement benefit cost ................ $4,453 $4,206
==================
</TABLE>
Net periodic postretirement benefit cost for 1999, 1998 and 1997 included the
following components:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------
(000's omitted)
<S> <C> <C> <C>
Service cost--benefits attributed to
service during period ....................... $ 217 $ 173 $ 204
Interest cost on accumulated
postretirement benefit obligation ........... 228 205 269
Amortization of:
Unrecognized (gain) loss .................. -- (13) 10
Unrecognized past service liability ....... (75) (75) (75)
---------------------------
Net periodic postretirement
benefit cost ........................... $ 370 $ 290 $ 408
===========================
</TABLE>
<PAGE>
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 $214,000, $280,000 and $196,000 at December
31, 1999, 1998 and 1997, respectively, and increase the net periodic cost by
$43,000, $37,000 and $27,700 for the years ended December 31, 1999, 1998 and
1997, respectively. The postretirement benefit cost components for 1999 were
calculated assuming average health care cost trend rates ranging up to 6.5% and
grading to 5% in 2005 and thereafter.
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. The Plan expense in 1999 and 1998
was matched through stock contributions under the ESOP. Amounts charged to
operations for the years ended December 31, 1999, 1998 and 1997 were
approximately $535,000, $514,000 and $1,266,000, 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 19, 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) matching contributions will be
used to reduce future employer 401(k) matching contributions while forfeitures
from shares allocated to the participants will be allocated among the
participants the same as contributions. There were 228,904 and 233,843 shares
allocated in 1999 and 1998, respectively. The Company recorded compensation
expense of $2,790,000, $4,020,000 and $0 for the ESOP for the years ended
December 31, 1999, 1998 and 1997 respectively.
Recognition and Retention Plan
The Company maintains the 1998 Recognition and Retention Plan ("RRP") for the
directors and officers of the Bank which was implemented in July 1998. The
objective of the RRP is to enable the Company to provide officers, key employees
and directors of the Bank with a proprietary interest in the Company as an
incentive to contribute to its success. During 1998, the RRP purchased 1,719,250
shares of the Company or 4% of the common stock sold in the Conversion on the
open market. These purchases were funded by the Bank. On July 31, 1998,
1,501,675 shares were granted to the directors and officers of the Company at a
price of $20.25 per share. On December 15, 1999, 18,200 shares were granted to
certain officers of the Company at a price of $18.63 per share and during the
year 1999, 5,325 shares were forfeited. At year-end 1999, the plan holds 204,700
shares which have not been granted. Awards vest at a rate of 20% per year for
directors and officers, commencing one year from the date of award. Awards
become 100% vested upon
31
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
termination of employment due to death or disability or upon a change in
control. Pursuant to the plan 297,530 shares vested during the year. The Company
recorded compensation expense of $5,532,000 and $3,049,000 for the RRP for the
years ended December 31, 1999 and 1998, respectively.
Stock Option Plan
The Company maintains the 1998 Stock Option Plan (the "Option Plan"). The
Company has reserved for future issuance pursuant to the Option Plan 4,298,125
shares of common stock, which is equal to 10% of the common stock sold in the
Conversion. Under the Option Plan, stock options (which expire ten years from
the date of grant) have been granted to the directors and officers of the Bank.
Each option entitles the holder to purchase one share of the Company's common
stock at an exercise price equal to the fair market value of the stock at the
date of the grant. Options will be exercisable in whole or in part over the
vesting period. The options vest ratably over a five-year period. However, all
options become 100% exercisable in the event the employee terminates his
employment due to death or disability or upon change of control.
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in APB No. 25. Since each option granted at a
price equal to the fair market value of one share of the Company's stock on the
date of the grant, no compensation cost has been recognized. The following table
compares reported net income and earnings per share to net income and earnings
per share on a pro forma basis assuming that the Company accounted for
stock-based compensation under SFAS No. 123. The effects of applying SFAS No.
123 in this pro forma disclosure are not indicative of future amounts.
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported ........................ $ 52,875 $ 44,262
Pro forma .......................... 47,341 40,108
Earnings per share:
As reported--
Basic ............................ 1.40 1.06
Diluted .......................... 1.40 1.06
Pro forma--
Basic ............................ 1.25 0.97
Diluted .......................... 1.25 0.97
</TABLE>
<PAGE>
Stock Option Activity
The following table sets forth stock option activity and the weighted average
fair value of options granted.
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
--------------------------
Weighted
Average
Shares Exercise Price
---------------------------
<S> <C> <C>
Outstanding as of January 1, 1998 ............ 3,056,000 $ 22.875
Granted .................................... -- --
Exercised .................................. -- --
Forfeited .................................. -- --
---------
Outstanding as of January 1, 1999 ............ 3,056,000 22.875
Granted .................................... 91,000 18.625
Exercised .................................. -- --
---------
Forfeited .................................. (101,000) 22.875
Outstanding as of
December 31, 1999 .......................... 3,046,000 $ 22.748
========= ===========
Options exercisable as of
December 31, 1999 .......................... 626,200
=========
Weighted average fair
value of options granted ................... $ 6.77
==========
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model using the following weighted average
assumptions: risk-free interest rates of 5.50%, volatility of 29.92%, expected
dividend yield of 2.7% and expected life of six years.
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, 1999, 1998 and 1997 were approximately $458,000, $436,000 and
$186,000, respectively.
<PAGE>
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C> <C>
Current:
Federal ............... $ 26,353 $21,299 $ 14,137
State ................. 2,778 2,610 3,150
City .................. 2,776 2,676 227
--------------------------------------------
31,907 26,585 17,514
Deferred ................ 3,352 3,093 (12,582)
--------------------------------------------
$ 35,259 $ 29,678 $ 4,932
============================================
</TABLE>
32
<PAGE>
The following table reconciles the federal statutory rate to the Bank's
effective tax rate:
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------
Percentage of
Amount Pretax Income
- -----------------------------------------------------------------------------------
(000's omitted)
Federal tax at statutory rate .............. $ 30,847 35.0%
State and local income taxes ............... 4,475 5.0
Tax-exempt dividend income ................. (1,425) (1.6)
Amortization of goodwill ................... 318 0.4
Other ...................................... 1,044 1.2
------------------------------
Income tax provision ..................... $35,259 40.0%
==============================
<CAPTION>
December 31, 1998
-------------------------------
Percentage of
Amount Pretax Income
- -----------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C>
Federal tax at statutory rate .............. $ 25,879 35.0%
State and local income taxes ............... 2,837 3.8
Tax-exempt dividend income ................. (436) (0.6)
Amortization of goodwill ................... 318 0.4
Other ...................................... 1,080 1.5
------------------------------
Income tax provision ..................... $29,678 40.1%
==============================
<CAPTION>
December 31, 1997
-------------------------------
Percentage of
Amount Pretax Income
- -----------------------------------------------------------------------------------
(000's omitted)
<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>
<PAGE>
The following is a summary of the income tax (liability) receivable at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C>
Current taxes ......................... $ (2,286) $ 1,257
Deferred taxes ........................ 47,146 1,861
-----------------------------
$ 44,860 $ 3,118
=============================
</TABLE>
The components of the net deferred tax asset at December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C>
Assets:
Contribution to Foundation ..................... $ 4,051 $ 6,571
Allowance for loan losses ...................... 5,991 7,005
Postretirement benefit accrual ................. 1,935 1,809
Non-accrual loans .............................. 634 583
Deferred compensation .......................... 1,088 1,031
Investment in data processing entity ........... 381 381
ESOP shares .................................... 1,053 565
Unrealized loss on AFS securities .............. 30,764 --
Deferred loan fees ............................. -- 170
Other .......................................... 6,151 832
----------------------
Gross deferred tax asset ..................... 52,048 18,947
Valuation Allowance ............................ -- --
----------------------
Total assets ................................. 52,048 18,947
----------------------
Liabilities:
Bad debt recapture under Section 593 ........... 1,666 2,354
Deposit premium ................................ 817 1,009
Unrealized gain on AFS securities .............. -- 12,537
Pension plan ................................... 216 499
Pension curtailment gain ....................... 1,719 --
Bond discounts ................................. 51 303
Other .......................................... 433 384
----------------------
Gross deferred tax liability ................. 4,902 17,086
----------------------
Net deferred tax asset ....................... $47,146 $ 1,861
======================
</TABLE>
At December 31, 1999 and 1998, the deferred tax asset is included in other
assets in the accompanying consolidated 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%.
33
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
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 recapture requirement amount for the year
1999 was $1,190,000.
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. This change also provides for an indefinite deferral of the recapture
of the bad debt reserves generated for New York State purposes.
The New York City tax law was amended in the first quarter of 1997 and is
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.
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 primarily of New York State
franchise tax, New York City Financial Corporation tax, Delaware franchise tax
and state taxes for an additional 22 states. These additional state taxes are
attributable to the operation of SIB Mortgage Corp. which has offices in these
<PAGE>
additional locations. 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. Liability for other state taxes are determined in
accordance with the applicable local tax code. 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
<PAGE>
extend credit, which are not reflected in the accompanying consolidated
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 $4,811,000 and $1,777,000 at December 31,
1999 and 1998, respectively. In addition, at December 31, 1999 and 1998,
mortgage loan commitments and unused balances under revolving credit lines
approximated $390,479,000 and $297,000,000, respectively. Total operating rental
commitments on bank facilities, which expire at various dates through August
2010, exclusive of renewal options, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C>
2000 $1,789
2001 1,674
2002 1,197
2003 751
2004 and thereafter 1,410
------
$6,821
======
</TABLE>
Rental expense included in the statements of income was approximately
$1,648,000, $768,000 and $702,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
In October 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
its entire investment of $969,000 which is reflected in data processing expense.
The Company intends to liquidate this company 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 1998, the
Bank signed a five-year contract to outsource substantially all of its data
processing to another data service provider and, in August 1998, converted its
data processing systems to this new provider.
34
<PAGE>
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.
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:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------
Carrying Fair
Amount Value
(000's omitted)
- --------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and due from banks ............. $ 80,998 $ 80,998
Federal funds sold .................. 20,400 20,400
Securities available for sale ....... 1,963,954 1,963,954
Loans ............................... 2,210,898 2,111,761
Less--Allowance for loan losses ..... (14,271) (14,271)
Accrued interest receivable ......... 24,731 24,731
Financial liabilities:
Savings and demand deposits ......... 1,247,190 1,247,190
Time deposits ....................... 573,043 573,230
Borrowed funds ...................... 2,049,411 2,049,411
Advances from borrowers for
taxes and insurance ................. 10,805 10,805
Accrued interest payable ............ 16,485 16,485
Unrecognized financial instruments:
Commitments to extend credit ........ -- 646
<CAPTION>
December 31, 1998
------------------------------------
Carrying Fair
Amount Value
(000's omitted)
- --------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and due from banks ............. $ 88,059 $ 88,059
Federal funds sold .................. 45,050 45,050
Securities available for sale ....... 2,029,041 2,029,041
Loans ............................... 1,551,618 1,567,486
Less--Allowance for loan losses ..... (16,617) (16,617)
Accrued interest receivable ......... 19,389 19,389
Financial liabilities:
Savings and demand deposits ......... 1,191,906 1,191,906
Time deposits ....................... 537,154 540,144
Borrowed funds ...................... 1,345 1,345
Advances from borrowers for
taxes and insurance ................. 7,091 7,091
Accrued interest payable ............ 8,464 8,464
Unrecognized financial instruments:
Commitments to extend credit ........ -- 1,257
</TABLE>
14. STATEN ISLAND BANCORP, INC.
The following condensed statements of financial condition as of December 31,
1999 and 1998, and condensed statements of income and cash flows for the years
ended December 31, 1999 and 1998 represent the parent company-only financial
information and should be read in conjunction with the consolidated financial
statements and the notes thereto.
35
<PAGE>
Staten Island Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999, and 1998
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition
December 31,
---------------------------------
1999 1998
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C>
Assets:
Cash ................................. $ 3,482 $ 14,008
Securities available for sale ........ 145,332 171,563
Investment in Bank ................... 374,187 435,258
ESOP loan receivable
from Bank .......................... 38,217 39,801
Other assets ......................... 11,284 9,524
---------------------------------
Total assets ..................... $ 572,502 $ 670,154
=================================
Liabilities:
Accrued interest and
other liabilities .................. $ 1,125 $ 1,112
Stockholders' equity:
Common stock ......................... 451 451
Additional paid-in capital ........... 536,539 534,464
Retained earnings
(substantially restricted) ......... 251,315 215,414
Unallocated ESOP shares .............. (35,709) (38,456)
Unearned RRP shares .................. (25,439) (30,873)
Less--Treasury stock (6,436,689
and 1,425,000 shares at
December 31, 1999 and 1998,
respectively), at cost ............... (121,149) (27,480)
Accumulated other comprehensive
income (loss), net of taxes .......... (34,631) 15,522
---------------------------------
Total liabilities and
stockholders' equity ................. $ 572,502 $ 670,154
=================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Income
December 31,
---------------------------------
1999 1998
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C>
Income:
Investment income ..................... $12,222 $ 7,810
Other interest income ................. 172 287
Interest income ESOP
loan receivable .................... 3,236 3,464
Other Income .......................... 76 --
Loss on sale of investments ........... (5,555) (646)
---------------------------------
10,151 10,915
Expenses:
Interest expense ...................... 1,675 657
Other expense ......................... 483 598
Income before taxes and
equity in undistributed
earnings of subsidiary ................ 7,993 9,660
Provision for income taxes ............ 3,830 3,107
---------------------------------
Income before equity in
undistributed earnings
of Bank ............................ 4,163 6,553
Equity in undistributed
earnings of Bank ...................... 48,712 37,709
---------------------------------
Net income ........................ $ 52,875 $ 44,262
==================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
December 31,
---------------------------------
1999 1998
- --------------------------------------------------------------------------------
(000's omitted)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................ $ 52,875 $ 44,262
Adjustments to reconcile net
income to net cash provided
by operating activities--
Undistributed earnings of Bank ..... (48,712) (37,709)
Amortization of bond and
mortgage premium ................... 74 28
Loss on sale of available for
sale securities .................... 1,737 646
Other non-cash expense (income) ....... -- (51)
Decrease (increase) in
accrued interest receivable ........ 171 (683)
Decrease in other assets .............. -- 1,868
(Decrease) increase in
accrued interest payable ........... (13) 1,112
Decrease in deferred income taxes ..... 5,539 1,684
---------------------------------
Net cash provided by
operating activities .................. 11,671 11,157
---------------------------------
Cash flows from investing activities:
(Increase) decrease in
investment in subsidiary Bank ...... 80,000 --
Maturities of available for
sale securities .................... 7,428 --
Sales of available for
sale securities .................... 66,205 99,627
Purchases of available for
sale securities .................... (66,771) (272,711)
Principal collected on loans .......... 1,584 1,461
---------------------------------
Net cash provided by (used in)
investing activities ................. 88,446 (171,623)
---------------------------------
Cash flows from financing activities:
Cash dividends ........................ (16,974) (10,347)
Purchase of treasury stock ............ (93,669) (27,480)
---------------------------------
Net cash used in
financing activities .................. (110,643) (37,827)
---------------------------------
Net decrease in cash and
cash equivalents ...................... (10,526) (198,293)
Cash and cash equivalents,
beginning of year ..................... 14,008 212,301
---------------------------------
Cash and cash equivalents,
end of year ........................... $ 3,482 $ 14,008
=================================
</TABLE>
36
<PAGE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data for the years ended December 31,
1999 and 1998 is presented below:
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999:
Interest income ............. $77,033 $70,856 $66,840 $62,744
Interest expense ............ 40,538 36,266 32,533 29,727
Net interest income ......... 36,495 34,590 34,307 33,017
Provision (benefit) for
loan losses ............... (1,943) 30 11 59
Service and
fee Income ................ 8,998 8,756 9,043 5,494
Securities
transactions ............. (6,452) 436 361 124
Defined benefit plan
curtailment gain .......... 4,093 -- -- --
Non-interest expense ........ 22,612 21,440 21,240 17,679
Income before
income taxes .............. 22,465 22,312 22,460 20,897
Income taxes ................ 8,813 8,740 9,129 8,577
Net income .................. 13,652 13,572 13,331 12,320
Earnings per share--
Basic ..................... .38 .36 .35 .31
Diluted ................... .38 .36 .35 .31
Dividends declared
per common
share .................... .12 .11 .11 .10
Stock price per
common share--
High .................... 20 3/16 18 7/8 19 1/4 19 15/16
Low ..................... 17 11/16 17 3/8 16 1/4 16 1/2
Close ................... 18 18 13/16 18 17 3/16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Interest income ........... $62,557 $54,068 $48,050 $44,466
Interest expense .......... 28,953 24,143 18,883 16,090
Net interest income ....... 33,604 29,925 29,167 28,376
Provision for
loan losses............ 92 500 501 501
Service and
fee income ........... 3,886 1,844 1,977 2,149
Securities
transactions .......... (223) 72 92 583
Non-interest expense ...... 18,142 13,327 12,277 12,172
Income before
income taxes .......... 19,033 18,014 18,458 18,435
Income taxes .............. 7,259 7,066 7,515 7,838
Net income ................ 11,774 10,948 10,943 10,597
Earnings per share--
Basic ................... .28 .26 .27 .25
Diluted ................. .28 .26 .27 .25
Dividends declared
per common
share ................. .09 .08 .08 .07
Stock price per
common share--
High .................. 21 3/4 23 1/8 23 5/8 21 1/8
Low ................... 14 1/8 15 9/16 20 5/8 18 13/16
Close ................. 19 15/16 18 22 3/4 20 3/8
</TABLE>
<PAGE>
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 financial
condition of Staten Island Bancorp, Inc. and subsidiary (the "Company") as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/Arthur Andersen LLP
- ----------------------
Arthur Andersen LLP
New York, New York
January 21, 2000
37
<PAGE>
Staten Island Bancorp, Inc. and Subsidiaries
CORPORATE INFORMATION
STATEN ISLAND BANCORP INC.
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.
Edward F. Norton, Jr.
Edward F. Vitt
Raymond A. Vomero
OFFICERS OF STATEN ISLAND
BANCORP INC.
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
Senior Officers
Harry P. Doherty
Chairman and Chief Executive Officer
James R. Coyle
President and Chief Operating Officer
John P. Brady
Executive Vice President
Frank J. Besignano
Senior Vice President
Donald C. Fleming
Senior Vice President
Edward Klingele
Senior Vice President
Deborah Pagano
Senior Vice President
Ira Hoberman
President, First State Division
<PAGE>
SIB MORTGAGE CORPORATION--
d/b/a IVY MORTGAGE
Richard W. Payne
President and Chief Executive Officer
Paul Heckman
Executive Vice President
Ralph Picarillo
Executive Vice President, Treasurer and
Chief Financial Officer
AMERICAN CONSTRUCTION
LENDING SERVICES, INC.
Robert M. Imperato
President and Chief Executive Officer
Craig R. Peterson
Executive Vice President
STATEN ISLAND INVESTMENT CORP.
Bernard Durnin
President
CORPORATE OFFICE
15 Beach Street
Staten Island, New York 10304
ANNUAL MEETING
The annual meeting of stockholders will be held on April 27, 2000 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 17, 2000.
INVESTOR RELATIONS
Shareholders, analysts and others interested in additional information may
contact:
Donald C. Fleming
Senior Vice President
15 Beach Street
Staten Island, New York 10304
(718) 556-6518
www.sisb.com
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.
<PAGE>
INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
Arthur Andersen LLP
1345 Avenue of the Americas
New York, New York 10105
<PAGE>
COUNSEL
The Law Firm of Hall & Hall
57 Beach Street
Staten Island, New York 10304
Elias, Matz, Tiernan & Herrick, LLP
734 15th Street N.W., 12th fl.
Washington, D.C. 20005
38
