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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
Commission file number 0-23271
RICHMOND COUNTY FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
06-1498455
(I.R.S. Employer
Identification No.)
1214 Castleton Avenue, Staten Island, New York 10310
(Address of principal executive offices)
Registrant's Telephone number, including area code: (718) 448-2800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes: X No:
Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the shares of registrant's common stock held by
non-affiliates of the Registrant was $472,153,506 as of September 22, 2000.
There were issued and outstanding 27,087,709 common shares of the Registrant's
Common Stock as of September 22, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended June 30, 2000
are incorporated by reference into Part II of this Form 10-K. Portions of the
Proxy Statement for the 2000 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-K.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
Item 1 Business................................................ 1
Item 2 Properties.............................................. 36
Item 3 Legal Proceedings....................................... 38
Item 4 Submission of Matters to a Vote of Security Holders..... 38
PART II
Item 5 Market for Registrant's Common Stock and
Related Stockholder Matters............................. 39
Item 6 Earnings Summary and Selected Financial Data and
Condensed Quarterly Statements of Operations............ 39
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 39
Item 7a Quantitative and Qualitative Disclosures
About Market Risk....................................... 39
Item 8 Financial Statements.................................... 39
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 39
PART III
Item 10 Directors and Executive Officers of the Registrant...... 40
Item 11 Executive Compensation.................................. 40
Item 12 Security Ownership of Certain Beneficial Owners and
Management.............................................. 40
Item 13 Certain Relationships and Related Transactions.......... 40
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K..................................... 41
SIGNATURES............................................................. 43
</TABLE>
<PAGE>1
PART I
Item 1. Business
General
Richmond County Financial Corp. (the "Company" or the "Registrant") was
incorporated under Delaware law in September 1997. On February 18, 1998, the
Company acquired Richmond County Savings Bank and subsidiaries (the "Bank"),
Staten Island, New York, as part of the Bank's conversion from the mutual to
stock form of organization (the "Conversion"). On February 18, 1998, the Company
issued an aggregate of 26,423,550 shares of its common stock, par value $0.01
per share, of which 24,466,250 shares were issued in a subscription offering and
1,957,300 shares were issued to the Richmond County Savings Foundation (the
"Foundation"), a charitable foundation established by the Bank. Prior to such
date, the Company had no assets, liabilities or operations. In connection with
the Conversion, the Company raised $234.9 million of net conversion proceeds, of
which $117.4 million was utilized for the acquisition of 100% of the outstanding
stock of the Bank. The Company is a savings and loan holding company and is
subject to regulation by the Office of Thrift Supervision (the "OTS") and the
Securities and Exchange Commission (the "SEC"). At June 30, 2000, the Company
had consolidated total assets of $2.9 billion, deposits of $1.8 billion and
stockholders' equity of $306.4 million. Currently, the Company's activities
consist solely of managing the Bank and investing the portion of net conversion
proceeds retained by the Company. The following discussions address the
operations of the Bank and its subsidiaries.
The Bank is a community-oriented savings bank, which was originally
chartered in the State of New York in 1886. The Bank's principal businesses
consist of the acceptance of retail deposits from the general public in the
areas surrounding its branch offices and the investment of those deposits,
together with funds generated from operations and borrowings, primarily in one-
to four-family residential and multifamily mortgage loans and, to a lesser
extent, commercial real estate, construction and development, commercial, home
equity, consumer and student loans and in mortgage-backed and mortgage-related
securities and various debt and equity securities. The Bank's revenues are
derived principally from the interest on its mortgage, commercial and consumer
loans and securities. The Bank's primary sources of funds are deposits,
borrowings, principal and interest payments on loans and securities, and
proceeds from the sale of loans and securities.
As a New York State chartered savings bank, the Bank's deposits are
insured up to the applicable limits by the Federal Deposit Insurance Corporation
(the "FDIC"). The Bank is regulated by the Superintendent of Banks of the State
of New York, (the "Superintendent") the New York Banking Board (the "NYBB") and
the New York State Banking Department (the "NYSBD").
The Company's executive offices are located at the administrative offices
of the Bank, 1214 Castleton Avenue, Staten Island, New York 10310. Its telephone
number is (718) 448-2800.
Acquisitions
South Jersey Financial Corporation, Inc. On March 15, 2000, the Company
and South Jersey Financial Corporation, Inc. ("South Jersey") entered into a
definitive agreement pursuant to which South Jersey, the holding company of
South Jersey Savings and Loan Association, a community savings association with
three full service banking offices in the New Jersey counties of Gloucester and
Camden, was acquired by the Company. Under the terms of the agreement, South
Jersey shareholders will receive $20 per share in cash for each outstanding
share of common stock of South Jersey. The total transaction value is
approximately to be $68.0 million. The excess of cost over the fair value of net
assets acquired ("goodwill") in the transaction is estimated at $20 million,
which will be amortized on a straight line basis over 20 years. As of June 30,
2000 (unaudited), the total assets of South Jersey were $322.5 million, deposits
were $238.1 million and total stockholders' equity was $53.8 million. The
acquisition was completed at the close of business on July 31, 2000.
Bayonne Bancshares, Inc. At the close of business on March 22, 1999, the
Company completed its acquisition of Bayonne Bancshares, Inc. ("Bayonne"), the
holding company of First Savings Bank of New Jersey, SLA, a New Jersey State
chartered savings and loan association with four full service banking offices in
Bayonne, New Jersey in a transaction which was accounted for as a purchase. The
cost of the acquisition was approximately $118.5 million for which the Company
issued 1.05 shares of its common stock for each outstanding share of Bayonne
common stock for a total of 8,668,615 common shares, of which 3,938,731 shares
were issued from its treasury shares. Options to purchase 683,577 shares of
<PAGE>2
Bayonne common stock were also converted into options to purchase 717,755 shares
of the Company's common stock. The excess of cost over the fair value of net
assets acquired ("goodwill") in the transaction was $31.4 million, which is
being amortized on a straight line basis over 15 years.
Ironbound Bankcorp, NJ. At the close of business on March 5, 1999, the
Company completed its acquisition of Ironbound Bankcorp, NJ ("Ironbound"), the
holding company of Ironbound Bank, a New Jersey chartered commercial bank with
three full service commercial banking offices in the New Jersey counties of
Union and Essex, in a transaction which was accounted for as a purchase. The
cost of the acquisition was approximately $27.7 million. The Company issued
1.463 shares of its common stock for each outstanding share of Ironbound common
stock for a total of 1,458,842 common shares. The goodwill attributable to the
transaction was $14.9 million, which is being amortized on a straight line basis
over 15 years.
Market Area
The Bank is a community-oriented financial institution offering a variety
of financial services to meet the needs of the communities it serves. The Bank
currently operates 15 banking offices on Staten Island, one banking office in
Brooklyn, 11 banking offices in the counties of Camden, Essex, Gloucester,
Hudson and Union, New Jersey, and operates a multifamily loan processing center
in Jericho, Long Island.
The Bank's primary deposit gathering area is currently concentrated around
the areas where its full service banking offices are located in the counties of
Camden, Essex, Gloucester, Hudson and Union, New Jersey and in the New York
boroughs of Staten Island and Brooklyn, which the Bank generally considers to be
its primary market area. The Bank's primary lending area has also historically
been concentrated in Staten Island and, to a lesser extent, in the area around
its office in Brooklyn. As of June 1999, based on a survey by a
nationally-recognized bank consulting firm, the Bank had 18.0% of total deposits
in Staten Island.
The economy of the New York City metropolitan area has historically
benefited from having a large number of corporate headquarters and a diversity
of financial service entities. Additionally, Staten Island has historically
benefited from steady residential growth and an expanding base of service
businesses. During the late 1980s and early 1990s, however, due in part to the
effects of a prolonged period of weakness in the national economy, the decline
in the regional economy, layoffs in the financial services industry and
corporate relocations, the New York City metropolitan area experienced reduced
levels of employment. These conditions, in conjunction with a surplus of
available commercial and residential property, resulted in an overall decline in
the underlying values of properties located in the area during the late 1980s
and early 1990s. Staten Island, due to its location and its relatively large
population of government employees, was somewhat insulated from the economic
decline of the late 1980s and early 1990s. Since 1993, the prices and values of
real estate have stabilized and, in certain areas, the prices and values of real
estate have increased. In the past several years, the New York City metropolitan
area has benefited from the resurgence and growth in employment and
profitability experienced by national securities and investment banking firms,
many of which are domiciled in the Borough of Manhattan, as well as the growth
and profitability of other financial services companies, such as money center
banks. However, there can be no assurances that conditions in the local economy,
national economy or real estate market in general will not deteriorate in the
future.
Competition
The Bank faces significant competition, both in making loans and in
attracting deposits. The New York City metropolitan area has a high density of
financial institutions, many of which are branches of significantly larger
institutions that have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. The Bank's competition for
loans comes principally from savings banks, commercial banks, savings and loan
associations, mortgage banking companies, credit unions, insurance companies and
other financial service companies. Its most direct competition for deposits has
historically come from savings and loan associations, savings banks, commercial
banks and credit unions. The Bank faces additional competition for deposits from
non-depository competitors, such as the mutual fund industry, securities and
brokerage firms and insurance companies. There are approximately 11 depository
institutions with operations in the Borough of Staten Island. Competition may
also increase as a result of the lifting of restrictions on the interstate
operations of financial institutions.
<PAGE>3
Lending Activities
Loan Portfolio Composition. The types of loans that the Bank may originate
are subject to federal and state law and regulations. Interest rates charged by
the Bank on loans are affected principally by the demand for such loans, the
supply of money available for lending purposes and the rates offered by its
competitors. These factors are, in turn, affected by general and economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board (the "FRB"), legislative tax policies and governmental budgetary
matters.
The following table sets forth the composition of the Bank's loan
portfolio, including loans held for sale, in dollar amounts and in percentages
of the respective portfolios at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ------------------ ------------------ ------------------ -----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 810,853 51.1% $ 834,528 62.8% $ 470,385 72.2% $ 394,588 78.4% $ 325,139 76.3%
Multifamily 549,151 34.6 290,066 21.8 50,491 7.8 2,705 0.5 1,238 0.3
Commercial real estate 108,532 6.8 107,280 8.1 55,416 8.5 40,713 8.1 39,892 9.3
Construction and
development 65,603 4.1 51,044 3.8 31,297 4.8 18,343 3.7 12,812 3.0
Home equity 31,497 2.0 18,575 1.5 15,379 2.4 16,729 3.3 18,054 4.2
Commercial 16,020 1.0 14,557 1.1 6,783 1.0 6,662 1.3 6,300 1.5
Consumer and student 5,458 0.4 11,817 0.9 21,770 3.3 23,589 4.7 22,932 5.4
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Gross loans $1,587,114 100.0% $1,327,867 100.0% $ 651,521 100.0% $ 503,329 100.0% $ 426,367 100.0%
======= ======= ======= ======= =======
Less:
Unamortized discounts, net 598 433 (631) (788) (947)
Deferred loan costs (fees) 794 (888) 855 (813) (1,354)
Allowance for loan losses (14,698) (13,885) (7,276) (5,470) (4,796)
---------- ---------- ---------- ---------- ----------
Total loans, net 1,573,808 1,313,527 644,469 496,258 419,270
Less:
Loans held for sale, net:
One- to four-family -- -- -- -- 1,155
---------- ---------- ---------- ---------- ----------
Loans receivable held for
investment, net $1,573,808 $1,313,527 $ 644,469 $ 496,258 $ 418,115
========== ========== ========== ========== ==========
</TABLE>
Loan Originations. The Bank originates both adjustable-rate and fixed-rate
one- to four-family mortgage loans, multifamily loans, commercial real estate
loans, construction and development loans, home equity loans, commercial loans,
consumer loans and student loans. The Bank's one- to four-family mortgage
lending activities are conducted primarily through the utilization of mortgage
brokers and by the Bank's loan personnel, generally operating in the Bank's loan
center. Although the Bank has authorized the use of approximately 64 mortgage
brokers in connection with one- to four-family loan originations, the Bank
primarily utilizes the services of 37 mortgage brokers operating primarily on
Staten Island and in Brooklyn. During the years ended June 30, 2000 and 1999,
the Bank originated $167.4 million and $129.9 million, respectively, of one- to
four-family loans through mortgage brokers and $75.6 million and $120.3 million,
respectively, of such loans through Bank personnel. Recently, the Bank began
offering, through brokers, its fully processed loan program, which is a zero
point loan that is originated and processed by the broker. The Bank pays
mortgage brokers a processing fee for a fully processed loan. All loans are
underwritten by the Bank pursuant to the Bank's loan underwriting policies and
procedures.
Recently, the Bank has placed increased emphasis on the origination of
commercial real estate, construction and development and commercial loans as
part of its efforts to broaden the services it provides to the Staten Island
business community. In this regard, the Bank has recently hired commercial
lending personnel with experience in the Bank's primary market area and may add
additional personnel as needed. In addition, the Bank has increased its
marketing efforts with respect to commercial real estate, construction and
development and commercial lending by making its existing business customers
aware of the expanded products and services available to businesses. The Bank's
ability to originate loans is dependent upon customer demand, demand for
fixed-rate or adjustable-rate loans and expected future levels of interest
rates.
<PAGE>4
In addition, the Bank has placed increased emphasis on the origination of
multifamily loans and, in April 1998, established a multifamily lending
department staffed by personnel experienced in the multifamily lending business.
Generally, all loans are originated for investment with certain exceptions
for longer-term fixed-rate one- to four-family mortgage loans. From time to
time, the Bank will retain fixed-rate mortgage loans with terms over 15 years,
depending on the asset quality and the interest rate risk position of the Bank.
The one- to four-family loan products currently originated for sale by the Bank
include a variety of mortgage loans that conform to underwriting standards
specified by Fannie Mae ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC") ("conforming loans"). Loans that do not conform to FNMA or FHLMC
standards due to loan amounts ("jumbo loans") are originated for the Bank's
portfolio. With the exception of customary provisions relating to breaches of
representations and warranties, sales of loans are made without recourse to the
Bank in the event of default by the borrower. The Bank generally retains the
servicing rights on the mortgage loans sold to FHLMC and FNMA.
At June 30, 2000, the Bank was servicing its own portfolio of $1.6 billion
of loans receivable and $260.5 million of loans for others, primarily consisting
of conforming fixed-rate loans sold by the Bank. Loan servicing includes
collecting and remitting loan payments, accounting for principal and interest,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and
tax payments on behalf of the borrowers, and generally administering the loans.
During the years ended June 30, 2000 and June 30, 1999, the Bank
originated $243.0 million and $250.2 million of fixed-rate and adjustable-rate
one- to four-family loans, respectively, of which $243.0 million and $250.2
million, respectively, were retained by the Bank. The fixed-rate loans retained
by the Bank consisted primarily of loans with terms of 15 to 30 years. At June
30, 2000, the Bank had no mortgage loans held for sale. The Bank has, in the
past, purchased participations in loans, primarily one- to four-family mortgage
loans, and had approximately $273,000 of participations in loans at June 30,
2000. The Bank acquired $72.5 million in purchased whole loans as a result of
the acquisition of Bayonne Bancshares, Inc. At June 30, 2000 the balance of
purchased whole loans were $51.8 million.
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended June 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Gross loans:
Balance outstanding at beginning of period $1,327,867 $ 651,521 $ 503,329
---------- ---------- ----------
Loans originated:
One- to four-family 242,965 250,204 118,384
Multifamily 277,433 235,213 9,393
Commercial real estate 10,475 16,134 22,537
Construction and development 34,284 28,447 22,280
Home equity 7,045 6,603 3,567
Commercial 15,350 9,848 10,083
Consumer and student 2,059 2,458 7,024
---------- ---------- ----------
Total loans originated 589,611 548,907 193,268
Loans of acquired institutions -- 332,639 --
Loans purchased -- 1,500 38,616
---------- ---------- ----------
Total loans originated and purchased 589,611 883,046 231,884
---------- ---------- ----------
Less:
Principal repayments 147,041 113,189 83,120
Sales of loans 89,342 15,821 --
Mortgage securitization 93,596 77,159 --
Transfers to real estate owned 355 482 532
Principal charged off 30 49 40
---------- ---------- ----------
Total loans receivable held for investments at
end of period $1,587,114 $1,327,867 $ 651,521
========== ========== ==========
</TABLE>
<PAGE>5
Loan Maturity. The following table shows the contractual maturity of the
Bank's loan portfolio at June 30, 2000. The table does not include prepayments
or scheduled principal amortization. Prepayments and scheduled principal
amortization on mortgage loans totaled $147.0 million, $113.2 million and $83.1
million for the years ended June 30, 2000, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
At June 30, 2000
---------------------------------------------------------------------------------------
Real Estate Loans
-----------------------------------------------------
One- to Construction Consumer Total
Four- Multi- Commercial and Home and Loans
Family Family Real Estate Development Equity Commercial Student Receivable
--------- -------- ------------ ------------ -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 1,111 $ 245 $ 5,791 $ 55,599 $ 1,122 $ 9,012 $ 1,575 $ 74,455
--------- -------- ------------ ------------ -------- ----------- --------- -----------
After one year:
More than one year
to three years 9,828 2,249 16,643 10,004 479 4,176 1,878 45,257
More than three years
to five years 5,690 568 5,805 -- 390 2,075 29 14,557
More than five years
to 10 years 104,790 64,658 33,055 -- 7,134 527 1,976 212,140
More than 10 years
to 20 years 224,773 481,431 44,491 -- 4,286 230 -- 755,211
More than 20 years 464,661 -- 2,747 -- 18,086 -- -- 485,494
--------- -------- ------------ ------------ -------- ----------- --------- -----------
Total due after June 30, 2000 809,742 548,906 102,741 10,004 30,375 7,008 3,883 1,512,659
--------- -------- ------------ ------------ -------- ----------- --------- -----------
Total amount due $810,853 $549,151 $108,532 $ 65,603 $ 31,497 $ 16,020 $ 5,458 $1,587,114
========= ======== ============ ============ ======== =========== ========= ===========
Less:
Unamortized discounts, net 598
Deferred loan costs, net 794
Allowance for possible loan losses (14,698)
-----------
Loans receivable held for investment, net $1,573,808
===========
</TABLE>
The following table sets forth at June 30, 2000, the dollar amount of
gross loans receivable contractually due after June 30, 2001, and whether such
loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After June 30, 2001
--------------------------------
Fixed Adjustable Total
--------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family $415,188 $394,554 $ 809,742
Multifamily 56,602 492,304 548,906
Commercial real estate 23,411 79,330 102,741
Construction and development -- 10,004 10,004
Home equity 24,660 5,715 30,375
--------- ---------- -----------
Total real estate loans 519,861 981,907 1,501,768
Commercial loans 3,579 3,429 7,008
Consumer and student loans 3,883 -- 3,883
--------- ---------- -----------
Total loans receivable $527,323 $985,336 $1,512,659
========= ========== ===========
</TABLE>
One- to four-family Loans. The Bank currently offers both fixed-rate and
adjustable-rate mortgage loans secured by one- to four-family residences located
in the Bank's primary market areas, primarily with maturities of up to 30 years.
One- to four-family mortgage loan originations are obtained through the use of
mortgage brokers, the Bank's loan center, existing or past customers,
advertising, and referrals from real estate brokers and attorneys.
At June 30, 2000, the Bank's one- to four-family loans totaled $810.9
million, or 51.1%, of gross loans. Of the one- to four-family loans outstanding
at that date, 51.5% were fixed-rate mortgage loans and 48.5% were
adjustable-rate mortgage loans. The Bank generally offers fixed-rate mortgage
loans with terms of 15 and 30 years. The Bank, from time to time, may sell
fixed-rate residential mortgage loans it originates with terms in excess of 15
years, except for non-conforming loans, to FHLMC or FNMA, and retains the
servicing on all loans sold, although the Bank may retain fixed-rate mortgage
loans with terms exceeding 15 years, depending on the asset quality and the
<PAGE>6
interest rate risk position of the Bank. The Bank generally retains for its
portfolio shorter-term, fixed-rate loans with maturities of 15 years or less and
all adjustable-rate one- to four-family loans.
The Bank currently offers a number of adjustable-rate mortgage loans with
terms of up to 30 years and interest rates which adjust annually from the outset
of the loan or which adjust annually after a one, three, five or seven year
initial fixed period. Forty-year terms are available on certain adjustable-rate
loans. The interest rates for the Bank's adjustable-rate mortgage loans are
indexed to the one or three year U.S. Treasury Securities Index. Interest rate
adjustments on loans are limited to a 2% periodic adjustment cap (2.5% on
five-year adjustable-rate loans) and a maximum adjustment of 6% over the life of
the loan. Certain of the Bank's adjustable-rate mortgage loans can be converted
to a fixed-rate loan with interest rates based upon the then-current market
rates plus a varying margin.
The volume and type of adjustable-rate mortgage loans originated by the
Bank have been affected by such market factors as the level of interest rates,
competition, consumer preferences and the availability of funds. The origination
of adjustable-rate residential mortgage loans, as opposed to fixed-rate
residential mortgage loans, are intended, in part, to reduce the Bank's exposure
to increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases are
expected to reduce the risks associated with adjustable-rate loans but also may
limit the interest rate sensitivity thereof.
One- to four-family residential mortgage loans are generally underwritten
according to FNMA or FHLMC guidelines. The Bank currently originates one- to
four-family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan and up to
97% of the appraised value or selling price if private mortgage insurance is
obtained. Mortgage loans originated by the Bank include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
without the Bank's consent. Due-on-sale clauses are an important means of
adjusting the yields on the Bank's fixed-rate mortgage loan portfolio and the
Bank has generally exercised its rights under these clauses.
In an effort to provide financing for low and moderate-income homebuyers,
the Bank participates in residential mortgage programs and products sponsored by
the State of New York Mortgage Association ("SONYMA"). The SONYMA mortgage
programs provide low and moderate-income households with fixed-rate loans, which
have market rates generally below prevailing fixed-rate mortgages and which
allow below market down payments. At June 30, 2000, $11.5 million, or 0.7% of
total loans, were sponsored by SONYMA.
Multifamily Lending. During fiscal 1998, the Bank increased its
origination of multifamily loans through the establishment of a separate
department staffed by personnel experienced in the multifamily lending business.
During fiscal 2000, the Bank originated $277.4 million of multifamily loans as
compared to originations of $235.2 million and $9.4 million in fiscal years 1999
and 1998, respectively. As a result, the Bank had approximately $549.2 million,
or 34.6% of the total loan portfolio invested in multifamily loans. The largest
multifamily loan in the Bank's portfolio at June 30, 2000 was an $8.3 million
loan secured by 11 garden apartment buildings with an aggregate of 156 units in
Doylestown, Pennsylvania.
Multifamily loans generally involve large principal amounts and a greater
degree of risk than one- to four-family residential mortgage loans. Because
payments on loans secured by multifamily properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to a greater extent to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks by originating
such loans within market areas where it has knowledge and experience.
In reaching its decision on whether to make a multifamily loan, the Bank
considers the qualifications and financial condition of the borrower, including
credit history, profitability and expertise, as well as the value and condition
of the underlying property. Multifamily loans originated by the Bank require a
debt service coverage ratio of at least 120% and a loan to value ratio of no
more than 75% of the lower of the appraised value or sales price of the
underlying property. Generally, these loans are five year adjustable-rate loans
with a term of 15 years and an amortization schedule not exceeding 30 years. The
Bank's multifamily loans are originated with rates that are generally fixed for
the first five years with a single adjustment on the fifth anniversary of the
loan based upon the
<PAGE>7
average monthly yield on the U.S. Treasury obligations,adjusted to a constant
maturity of five years, plus a margin of 1.75% to 2.50%.
Commercial Real Estate Lending. The Bank originates commercial real estate
loans that are generally secured by properties used for business purposes or a
combination of residential and retail purposes and that are generally located in
the Bank's primary market areas. All mixed-use properties are classified as
commercial real estate. At June 30, 2000, the Bank's commercial real estate loan
portfolio totaled approximately $108.5 million, or 6.8%, of total loans. The
Bank's underwriting procedures provide that commercial real estate loans
generally may be made in amounts up to 75% of the lower of the appraised value
or sales price of the property, subject to the Bank's current regulatory
loans-to-one-borrower limit. These loans generally may be made with terms up to
20 years and are generally offered at interest rates that adjust every one,
three or five years, utilizing the corresponding U.S. Treasury Securities Index
as a base. The Bank also offers fixed-rate commercial real estate loans with ten
year terms. In reaching its decision on whether to make a commercial real estate
loan, the Bank considers the net operating income of the property and the
borrower's expertise, credit history and profitability. In addition, the Bank
considers the business activities and present and past uses of the properties in
evaluating potential environmental issues and, where such consideration
indicates a need, a more detailed investigation by a qualified environmental
expert is conducted. The Bank has generally required that the properties
securing commercial real estate loans have a debt service coverage ratio (the
ratio of earnings before debt service to debt service) of at least 120%.
Exceptions to this ratio are considered on an individual basis and must be
approved by the appropriate lending authority. Generally, all commercial real
estate loans made to corporations, partnerships and other business entities
require personal guarantees by the principals. The largest commercial real
estate loan in the Bank's portfolio at June 30, 2000 was a $3.3 million loan
secured by a shopping plaza on Staten Island.
Loans secured by commercial real estate properties generally involve
larger principal amounts and a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on successful operation or management of
the properties, or business operated on such properties, repayment of such loans
may be affected by adverse conditions in the real estate market or the economy.
The Bank seeks to minimize these risks through its underwriting standards, which
require such loans to be qualified on the basis of the property's income and
debt service coverage ratio. As part of the operating strategy, the Bank intends
to continue to emphasize its commercial real estate lending activities in its
primary market area depending on the demand for such loans and commercial real
estate market conditions.
Construction and Development Lending. The Bank originates construction and
development loans for the development of commercial and residential property
located in its primary market areas, and may originate construction and
development loans outside its primary market area to existing customers. At June
30, 2000, the Bank had $65.6 million of construction loans, most of which
related to the construction of one- to four-family properties, of which $29.9
million of these loans were outstanding at that date. The Bank originates loans
for the acquisition of commercial and residential property located in its
primary market areas usually if such acquisition loan is part of an overall
development loan. Construction loans are offered primarily to experienced local
developers operating in the Bank's primary market areas and, to a lesser extent,
to individuals for the construction of their residences. The majority of the
Bank's construction loans are originated primarily to finance the construction
of one- to four-family, owner-occupied residential real estate, and commercial
real estate properties located in the Bank's primary market areas. Construction
loans are generally offered with terms of up to two years. Construction loans
may be made in amounts up to 75% of the estimated cost of construction, or up to
80% in the case of loans to individuals for the construction of their
residences. With respect to commercial construction loans, the Bank generally
requires borrowers, with whom the Bank does not have experience, to secure
permanent-financing commitments from generally recognized lenders for an amount
equal to or greater than the amount of the loan. In some cases, the Bank may
itself provide permanent financing. Loan proceeds are disbursed periodically in
increments as construction progresses and as inspections by the Bank's lending
officers warrant.
The Bank originates land loans to local developers for the purpose of
holding or developing the land for sale. At June 30, 2000, the Bank had $21.2
million of land loans. Such loans are secured by a lien on the property, and
limited to 65% of the appraised value of the secured property on raw land or up
to 75% on developed building lots, and have terms of up to two years, with
floating interest rates based on the prime rate (which is the prime rate as
published in The Wall Street Journal). The principal of the loan is reduced as
lots are sold and released. The Bank's land loans are generally secured by
property in its primary market areas; however, the Bank may originate land loans
<PAGE>8
outside its primary market areas to existing customers. In addition, the Bank
generally originates such loans to developers with whom it has established
relationships and obtains personal guarantees.
Construction and development financing is generally considered to involve
a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction and other assumptions, including the
estimated time to sell residential properties. If the estimate of value proves
to be inaccurate, the Bank may be confronted with a project, when completed,
having a value which is insufficient to assure full repayment. The largest
construction loan in the Bank's portfolio at June 30, 2000, was a $9.5 million
loan for the construction of a four story office complex located in the Borough
of Staten Island.
Home Equity Lending. The Bank offers fixed-rate, fixed-term home equity
loans and lines of credit and adjustable-rate home equity loans in its primary
market area. At June 30, 2000, the Bank's home equity loans and lines of credit
totaled $31.5 million, or 2.0%, of the Bank's gross loans. Fixed-rate,
fixed-term home equity loans and lines of credit are offered in amounts up to
80% of the appraised value of the property (including the first mortgage).
Fixed-rate, fixed-term home equity loans and lines of credit are offered with
terms of up to ten years, with interest-only payments during the first five
years and repayment of principal and interest during the final five years.
Adjustable-rate home equity loans are offered in amounts up to 80% of the
appraised value of the property (including the first mortgage) with terms of up
to 20 years. Adjustable-rate loans are indexed to the prime rate (which is the
prime rate as published in The Wall Street Journal).
Commercial Lending. The Bank also originates commercial loans to small and
medium sized businesses operating in the Bank's primary market areas. At June
30, 2000, the Bank had $16.0 million of commercial loans, which amounted to 1.0%
of the Bank's total loans receivable. Although such loans are sometimes secured
by equipment, leases, inventory and accounts receivable, in the case of the
Bank, the majority of its commercial loans are secured by real estate. Term
loans are generally offered with adjustable rates of interest and terms of up to
five years. Secured commercial loans will be made based upon the value of the
collateral provided to secure the loan. All term loans fully amortize during the
term of such loan. Business lines of credit have terms of up to seven years, if
secured, and up to one year, if unsecured. Secured lines of credit will
generally be made based upon the collateral provided in securing the line.
Interest rates on business lines of credit adjust on a daily basis and are
indexed to the prime rate.
The Bank also issues both secured and unsecured letters of credit to
business customers of the Bank. Secured letters of credit will be issued in
amounts up to 100% of the value of the collateral securing the letter of credit.
Acceptable collateral includes an assigned deposit account with the Bank, real
estate or marketable securities. Letters of credit have a maximum term of two
years. At June 30, 2000, there was $236,830 in letters of credit outstanding.
In making commercial loans, the Bank considers primarily the financial
resources of the borrower, the borrower's ability to repay the loan out of net
operating income, the Bank's lending history with the borrower and the value of
any collateral. Generally, if the borrower is a corporation, partnership or
other business entity, personal guarantees by the principals are required.
However, personal guarantees may not be required on such loans, depending on the
creditworthiness of the borrower and other mitigating circumstances. The Bank's
largest commercial loans at June 30, 2000 were two loans for $1.0 million each.
At such date, the Bank had $11.0 million of unadvanced commercial lines of
credit.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other income
and secured by real property whose value tends to be more easily ascertainable,
commercial loans are of higher risk and typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
loans may be substantially dependent upon the success of the business itself.
Further, any collateral securing such loans may depreciate over time, may be
difficult to appraise or may fluctuate in value based on the success of the
business.
<PAGE>9
Consumer and Student Lending. The Bank's portfolio of consumer loans
consists primarily of unsecured personal loans and overdraft lines of credit. As
of June 30, 2000, consumer loans amounted to $5.5 million, or 0.4% of the Bank's
total loan portfolio.
Consumer loans may entail a greater degree of credit risk than do
residential mortgage loans, particularly in the case of consumer loans that are
unsecured. Consumer loan collections are dependent upon the borrower's
continuing financial stability and are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Finally, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans in
the event of a default.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and loan approval limits of the Bank. The Board of
Directors has established an Officer Loan Committee, which is comprised of
members of senior management, including the Chairman and Chief Executive Officer
and the President and Chief Operating Officer of the Bank, whom are also
Directors of the Bank. The Officer Loan Committee has the authority to approve
all loans greater than $100,000, but less than $500,000, with the exception of
multifamily loans. The Officer Loan Committee approves all multifamily loans
greater than $1.5 million but less than $2.0 million. The Board has also
established a Directors' Loan Committee, comprised of five members of the Board
of Directors, whom are not employees of the Bank, to review and approve all
loans in amounts greater than the Officer Loan Committee approval limits up to
the Bank's lending limit. The Directors' Loan Committee discusses and approves
all loans and lines of credit in amounts greater than management has authority
to approve, within the Committee's designated authority as established from time
to time by the Board of Directors. Individual loans over $3 million are to be
approved or denied by the Board of Directors and all aggregate lending
relationships with a single borrower that exceeds $3 million must be reported to
the Board of Directors. In addition, the Board has established lending authority
for individual officers as to its various types of loan products.
The Board of Directors has authorized the following persons to approve
loans up to the amounts indicated: multifamily loans can be approved by two
members of the Multifamily Lending Division, requiring the Multifamily Division
Head and one Vice President of the Multifamily Division for up to $1.5 million;
residential mortgage loans of up to $250,000 and home equity loans of up to
$250,000 can be approved by the Senior Real Estate Officer, construction loans
of up to $250,000 can be approved by the Senior Construction Loan Officer;
commercial mortgages of up to $250,000, secured commercial loans up to $250,000
and unsecured commercial loans and lines of credit up to $100,000 can be
approved by the Senior Commercial Loan Officer. Additionally, individual loans
to one borrower may not exceed $3.0 million and aggregate loans to one borrower
may not exceed $3.0 million for all loans, with the exception of multifamily
loans in which the aggregate loan limit is $12 million, without Board
involvement. Total aggregate loans are also subject to the Bank's regulatory
loans-to-one-borrower limit, which at June 30, 2000, was 15% of total capital.
With respect to all loans originated by the Bank, upon receipt of a
completed loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by an independent credit
agency. If necessary, additional financial information may be required. An
appraisal of real estate intended to secure a proposed loan generally is
required to be performed by appraisers approved by the Bank. For proposed
mortgage loans, the Board annually approves independent appraisers used by the
Bank and approves the Bank's appraisal policy. The Bank's policy is to obtain
title and hazard insurance on all mortgage loans and the Bank may require
borrowers to make payments to a mortgage escrow account for the payment of
property taxes.
<PAGE>10
Delinquent Loans, Real Estate Owned and Classified Assets
Management and the Board of Directors perform a monthly review of all
delinquent loans. The Bank's procedures with respect to delinquencies vary,
depending upon the nature of the loan and period of delinquency. The Bank
generally requires that delinquent mortgage loans be reviewed, that a
delinquency notice be mailed no later than the thirtieth day of delinquency and
that a late charge be assessed after 15 days. The Bank's policies provide that
telephone contact will be attempted to ascertain the reasons for delinquency and
the prospects of repayment. When contact is made with the borrower at any time
prior to foreclosure, the Bank will attempt to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure. Mortgage loans, which
are more than 45 days delinquent, are referred to the Bank's attorneys for
collection. If the loan becomes 75 days delinquent, the Bank's attorneys are
instructed to commence foreclosure proceedings.
It was the Bank's policy to discontinue accruing interest on all
commercial real estate, construction and commercial loans which were past due 90
days, on all consumer loans which were past due 120 days, and on all one- to
four-family residential mortgage loans which were past due 180 days, or, when in
the opinion of management, such suspension was warranted. Effective July 1,
1997, the Bank revised this policy such that it does not accrue interest on any
loans, including one- to four-family loans secured by real estate, which are
more than 90 days delinquent unless, in the opinion of management, collection is
probable. Property acquired by the Bank as a result of foreclosure on a mortgage
loan is classified as "real estate owned" ("REO") and is recorded at the lower
of the unpaid principal balance or fair value, less costs to sell at the date of
acquisition and thereafter. For loans in excess of $25,000, fair value must be
substantiated by an appraisal of the property and, thereafter, appraisal of the
property on an as-needed basis. At June 30, 2000, the Bank had $5.2 million of
non-performing assets (defined as non-accruing loans and REO).
At June 30, 2000, the Bank's REO net, consisting of foreclosed assets,
totaled $509,000, which was comprised of three one- to four-family properties
and one mixed use commercial property. Bank personnel generally conduct periodic
external inspections on all properties securing loans in foreclosure and
generally conduct external appraisals on all properties prior to taking
ownership of the property. Based upon such inspections and appraisals, the Bank
will charge off any loan principal it deems appropriate at such time. Bank
personnel conduct monthly reviews of foreclosed real estate and periodically
adjust valuation allowance for possible declines in the value of real estate
owned. The Bank is currently offering for sale all REO as a result of
foreclosure through brokers and through its own personnel. The Bank's policies
generally permit the financing of the sale of its foreclosed real estate on
substantially the same terms applicable to its other real estate mortgage loans.
Federal regulations and the Bank's Classification of Assets Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank currently classifies
problem and potential problem assets as "Substandard," "Doubtful" or "Loss"
assets. An asset is considered Substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Assets classified as Doubtful have all of the
weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that their continuance as assets, without
the establishment of a specific loss reserve, is not warranted. Assets which do
not currently expose the insured institution to a sufficient degree of risk to
warrant classification in one of the aforementioned categories, but possess
weaknesses, are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for possible loan losses in an amount deemed prudent by
management, unless the loss of principal appears to be remote. General valuation
allowances represent loss allowances, which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies one or more assets or portions thereof as Loss,
it is required either to establish a specific allowance for losses equal to 100%
of the amount of the assets so classified or to charge off such amount.
<PAGE>11
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
FDIC and NYSBD, which can order the establishment of additional general or
specific loss allowances. The FDIC, in conjunction with the other federal
banking agencies, recently adopted an interagency policy statement on the
allowance for loan and lease losses. The policy statement provides guidance for
financial institutions on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management has
established acceptable allowance evaluation processes that meet the objectives
set forth in the policy statement. While the Bank believes that it has
established an adequate allowance for possible loan losses, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to materially increase at that time, its allowance for possible
loan losses, thereby negatively affecting the Bank's financial condition and
earnings at that time. Although management believes that adequate specific and
general loan loss allowances have been established, actual losses are dependent
upon future events and, as such, further additions to the level of specific and
general loan loss allowances may become necessary.
All residential real estate loans with loan balances in excess of $500,000
are reviewed annually. Commercial real estate and construction loans with a
balance in excess of $500,000 are also reviewed annually. Additionally, loans
with balances of $1.0 million or more will be reviewed semi-annually, if
conditions warrant. Loan reviews are performed by the loan reviewer, a person
not directly involved in the lending or loan administration process. The loan
reviewer's findings are submitted to the Directors' Loan Committee, composed of
five members of the Board of Directors. Meetings are held on a quarterly or on
an as-needed basis. Upon review, the Committee will classify the loan and
comment as to any corrective action needed. The findings of the Directors' Loan
Committee will be reported to the Board of Directors on an ongoing basis.
At June 30, 2000, the Bank had $2.6 million of assets designated as
Substandard, consisting of 22 loans; there were no loans classified as Doubtful;
and $13,000, consisting of seven consumer loans classified as Loss. At June 30,
2000, the Bank had $2.1 million of assets designated as Special Mention,
consisting of 27 loans which were due to past loan delinquencies.
<PAGE>12
The following tables set forth delinquencies in the Bank's loan portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
At June 30, 2000
60-89 Days 90 Days or More
------------------- -------------------
Number Principal Number Principal
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family 16 $2,187 40 $3,411
Multifamily -- -- -- --
Commercial real estate -- -- 3 738
Construction and development 2 123 3 437
Home equity 3 89 2 72
Commercial loans 7 454 1 48
Consumer and student loans 11 9 7 13
--------- --------- --------- ---------
Total 39 $2,862 56 $4,719
========= ========= ========= =========
Delinquent loans to total loans(1) 0.18% 0.30%
========= =========
<CAPTION>
At June 30, 1999
60-89 Days 90 Days or More
------------------- -------------------
Number Principal Number Principal
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family 14 $1,201 58 $3,816
Multifamily -- -- -- --
Commercial real estate 1 639 5 1,461
Construction and development -- -- 1 90
Home equity 3 96 5 143
Commercial loans 8 610 8 329
Consumer and student loans 10 40 11 18
--------- --------- --------- ---------
Total 36 $2,586 88 $5,857
========= ========= ========= =========
Delinquent loans to total loans(1) 0.19% 0.45%
========= =========
<CAPTION>
At June 30, 1998
60-89 Days 90 Days or More
------------------- -------------------
Number Principal Number Principal
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family 4 $ 481 24 $3,162
Multifamily -- -- -- --
Commercial real estate -- -- 5 1,619
Construction and development 4 612 2 606
Home equity 1 33 1 144
Commercial loans 3 134 -- --
Consumer and student loans 88 273 1 3
--------- --------- --------- ---------
Total 100 $1,533 33 $5,534
========= ========= ========= =========
Delinquent loans to total loans(1) 0.24% 0.85%
========= =========
</TABLE>
-----------------------------------
(1) Total loans include loans receivable held-for-investment, plus deferred loan
costs, deferred mortgage interest and unamortized discounts, net.
<PAGE>13
Non-Performing Assets. The following table sets forth information
regarding the Bank's non-performing assets.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family $3,483 $3,959 $3,306 $1,676 $1,695
Multifamily -- -- -- -- --
Commercial real estate 738 1,461 1,619 876 939
Construction and development 437 90 606 120 120
Commercial 48 329 -- -- --
Consumer and student 13 18 3 -- --
-------- -------- -------- -------- --------
Total non-accrual loans 4,719 5,857 5,534 2,672 2,754
Loans contractually past due 90 days or
more and still accruing interest(1) -- -- -- 1,205 1,066
-------- -------- -------- -------- --------
Total non-performing loans 4,719 5,857 5,534 3,877 3,820
Real estate owned 509 997 322 662 612
-------- -------- -------- -------- --------
Total non-performing assets $5,228 $6,854 $5,856 $4,539 $4,432
======== ======== ======== ======== ========
Allowance for possible loan losses as a
percent of loans(2) 0.93% 1.05% 1.12% 1.10% 1.14%
Allowance for possible loan losses as a
percent of total non-performing loans(3) 311.53 237.07 131.50 141.09 125.55
Non-performing loans as a
percent of loans(2)(3) 0.30 0.45 0.85 0.78 0.91
Non-performing assets as a
percent of total assets(3) 0.18 0.25 0.37 0.46 0.48
</TABLE>
-------------------------------
(1) Includes consumer and student loans.
(2)Loans include loans receivable held for investment, net, excluding the
allowance for possible loan losses.
(3)It was the Bank's policy to generally cease accruing interest on all
commercial real estate, construction and commercial loans 90 days or more
past due, on all consumer loans which were 120 days or more past due, and on
all one- to four-family residential mortgage loans which were 180 days or
more past due. Effective July 1, 1997, the Bank revised this policy such that
it does not accrue interest on any loans, including one- to four- family
loans secured by real estate, which are more than 90 days delinquent as to
principal and interest unless, in the opinion of management, collection is
probable.
Non-accrual loans totaled $4.7 million as of June 30, 2000, which included
42 one- to four-family loans, with an aggregate balance of $3.5 million and six
commercial real estate loans and construction loans with an aggregate balance of
$1.2 million.
Allowance for Loan Losses
The allowance for possible loan losses is maintained through provisions
for possible loan losses based on management's on-going evaluation of the risks
inherent in its loan portfolio in consideration of the trends in its loan
portfolio, the national and regional economies and the real estate market in the
Bank's primary lending area. The allowance for possible loan losses is
maintained at an amount management considers adequate to cover estimated losses
in its loan portfolio that are deemed probable and estimable, based on
information currently known to management. The Bank's loan loss allowance
determinations also incorporate factors and analyses which consider the
potential principal loss associated with the loan, costs of acquiring the
property securing the loan through foreclosure or deed in lieu thereof, the
periods of time involved with the acquisition and sale of such property, costs
and expenses associated with maintaining and holding the property until sale,
and the costs associated with the Bank's inability to utilize funds for other
income producing activities during the estimated holding period of the property.
As of June 30, 2000, the Bank's allowance for possible loan losses was
$14.7 million, or 0.9% of total loans, and 311.5% of non-performing loans as
compared to $13.9 million, or 1.1% of total loans, and 237.1% of non-performing
loans, as of June 30, 1999. The Bank had total non-performing loans of $4.7
million and $5.9 million at June 30, 2000 and June 30, 1999, respectively, and
non-performing loans to total loans of 0.3% and 0.5%, respectively. The Bank
will continue to monitor and modify its allowance for possible loan losses as
conditions dictate. The Board of Directors reviews the adequacy of the allowance
for possible loan losses quarterly. While
<PAGE>14
management believes that, based on information currently available, the Bank's
allowance for possible loan losses is sufficient to cover losses inherent in its
loan portfolio at this time, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover future loan losses
incurred by the Bank or that future adjustments to the allowance for loan losses
will not be necessary if economic and other conditions differ substantially from
the economic and other conditions used by management to determine the current
level of the allowance for loan losses. Management may, in the future, increase
its level of loan loss allowance as a percentage of total loans and
non-performing loans in the event it increases the level of multifamily,
commercial real estate, construction and development or other lending as a
percentage of its total loan portfolio. In addition, the FDIC and NYSBD, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to make additional
provisions for estimated loan losses based upon judgments different from those
of management.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the table.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $13,885 $ 7,276 $5,470 $4,796 $3,275
-------- -------- -------- -------- --------
Allowance of acquired institutions -- 4,357 -- -- --
Provision for loan losses 1,200 2,550 2,200 1,080 1,600
Charge-offs:
Real estate loans 67 60 110 174 166
Commercial real estate 315 50 142 15 --
Consumer loans 109 235 281 286 186
-------- -------- -------- -------- --------
Total charge-offs 491 345 533 475 352
Recoveries:
Real estate loans 17 -- -- 45 97
Commercial real estate 34 -- 88 -- 122
Consumer loans 53 47 51 24 54
-------- -------- -------- -------- --------
Total recoveries 104 47 139 69 273
Net charge-offs 387 298 394 406 79
-------- -------- -------- -------- --------
Balance at end of period $14,698 $13,885 $7,276 $5,470 $4,796
======== ======== ======== ======== ========
</TABLE>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance and the percent of loans to total loans in each of the
categories listed at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance Each Allowance Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
--------- ----------- ------------ --------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate(1) $ 8,280 56% 99% $ 6,966 50% 98%
Commercial 247 2 1 230 2 1
Consumer 95 1 -- 195 1 1
Unallocated 6,076 41 -- 6,494 47 --
--------- ----------- ------------ --------- ----------- ------------
Total allowance for
possible loan losses $14,698 100% 100% $13,885 100% 100%
========= =========== ============ ========= =========== ============
</TABLE>
<PAGE>15
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance Each Allowance Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
--------- ----------- ------------ --------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate(1) $3,581 49% 96% $2,619 48% 94%
Commercial 156 2 1 355 6 1
Consumer and student 325 5 3 321 6 5
Unallocated 3,214 44 -- 2,175 40 --
--------- ----------- ------------ --------- ----------- ------------
Total allowance for
possible loan losses $7,276 100% 100% $5,470 100% 100%
========= =========== ============ ========= =========== ============
</TABLE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------
1996
------------------------------------
Percent of
Percent of Loans in
Allowance Each
to Total Category to
Amount Allowance Total Loans
--------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Real estate(1) $2,173 45% 93%
Commercial 380 8 3
Consumer and student 315 7 4
Unallocated 1,928 40 --
--------- ----------- ------------
Total allowance for
possible loan losses $4,796 100% 100%
========= =========== ============
</TABLE>
--------------------------
(1) Real estate includes one- to four-family, multifamily, commercial real
estate, construction and development, and home equity loans.
Securities Investment Activities
The investment policy of the Company and the Bank, as approved by the
Board of Directors, is designed primarily to manage the interest rate
sensitivity of its overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement the
Bank's lending activities and to provide and maintain liquidity. In establishing
its investment strategies, the company considers its business and growth
position, the economic environment, its interest rate sensitivity position, the
types of securities to be held and other factors.
While the Board of Directors has final authority and responsibility for
the securities investment portfolio, the Bank has established a Management
Investment Committee comprised of four senior officers, including the Investment
Officer, to supervise the Bank's securities investment program. The Management
Investment Committee meets at least quarterly and evaluates all investment
activities for safety and soundness, adherence to the Bank's investment policy
and assurance that authority levels are maintained. The Bank's policies provide
that all investment transactions must be authorized by two senior executive
officers and reported to the Board of Directors on a monthly basis and reviewed
by the Asset/Liability Committee on an ongoing basis.
The Company's current securities investment policy permits investments in
various types of liquid assets, including obligations of the U.S. Treasury and
federal agencies, investment and non-investment grade corporate obligations,
various types of mortgage-backed and mortgage-related securities, including
collateralized mortgage obligations ("CMOs"), corporate equities, commercial
paper and insured certificates of deposit.
The Company currently does not participate in hedging programs, interest
rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. Similarly, the Company does not invest in
mortgage-related securities, deemed to be "high risk" by the federal banking
regulators.
As of June 30, 2000, the Company's securities portfolio totaled $1.0
billion, or 35.5% of total assets, with $964.9 million classified as available
for sale and $57.2 million classified as held to maturity.
Mortgage-Backed and Mortgage-Related Securities. The Bank purchases
mortgage-backed and mortgage-related securities in order to: (1) generate
positive interest rate spreads with minimal administrative expense; (2) lower
its credit risk as a result of the guarantees provided by GNMA, FHLMC and FNMA;
(3) utilize these securities as collateral for borrowings; and (4) maintain
sufficient liquidity levels for the Bank. The Bank has primarily invested in
mortgage-backed and mortgage-related securities issued or sponsored by GNMA,
FHLMC and FNMA and private issuers.
The Bank also invests in CMOs issued or sponsored by FNMA and FHLMC, as
well as private issuers. At June 30, 2000, mortgage-backed and mortgage-related
securities totaled $764.6 million, or 26.5% of total assets, with a weighted
average yield of 6.63%. The increase in such securities reflects management's
recent revisions to its investment strategy, placing greater emphasis on
mortgage-backed and mortgage-related securities, the investment of conversion
proceeds and the leverage strategy conducted. At June 30, 2000, the Company's
CMO portfolio totaled $306.8 million, or 10.6% of total assets, consisting of
$247.0 million of CMOs issued by private issuers and $59.8 million issued by the
government sponsored agencies. The Company policy limits its privately issued
CMOs to
<PAGE>16
non-high risk securities rated "AAA" by two rating agencies, with an average
life of seven years or less and limits the amount of such investment to 40% of
total assets. For government sponsored CMOs, the policy limits such investments
to non-high risk securities that have an average life of ten years or less. The
credit rating of the specific CMOs owned are monitored on a regular basis. The
current investment policy prohibits the purchase of higher risk CMOs, which are
defined as those securities exhibiting significantly greater volatility of
estimated average life and price relative to interest rates than do standard
30-year fixed-rate securities. At such date, the Company's CMO portfolio had an
estimated average life of 5.1 years and a weighted average yield of 6.52%.
Debt Securities. The Company's investment in debt securities consists
primarily of investments in debt securities issued by government sponsored
agencies such as FNMA, Federal Home Bank Loan ("FHLB") and FHLMC and
creditworthy financial companies. Like the prior year, the Company either sold
or allowed to mature its U. S. government obligations, government sponsored
agency debt, corporate and public utility bonds in conjunction with its
asset/liability management strategy.
U.S. Agency Obligations. At June 30, 2000, the Company's U.S.
government agency securities portfolio totaled $29.6 million, with a weighted
average yield of 7.15%. It consists of $20.4 million of callable agency
zero-coupon medium term notes and $9.2 million of short-term callable notes.
Financial Bonds. At June 30, 2000, the financial bond portfolio totaled
$187.7 million with a weighted average yield of 8.28%, consisting of $122.2
million fixed-rate and $65.5 million floating-rate issues. The majority of the
issues are long term and generally issued by investment grade U. S. banks and
savings and loan holding companies. All of the Company's financial bonds are
callable by the respective issuers pursuant to the terms of the bonds, generally
after an initial ten year holding period. The floating-rate bonds have a
weighted average coupon of 6.98% and reset quarterly, based on the Three Month
LIBOR (London Interbank Offer Rate) Index plus margins ranging from 0.50% to
2.50%. The current policy of the Company limits the purchases of financial bonds
to a maturity of 30 years or less, a total investment of 10% of total assets,
with a 1% limitation for any single issuer.
Equity Securities. At June 30, 2000, the Company's equity securities
portfolio totaled $40.2 million, all of which was classified as available for
sale. Such portfolio consisted of investments of $28.1 million of investments in
preferred stock and $12.1 million of investments in common stock primarily of
financial institutions. The Company's policy limit for its common and preferred
stock investments is 5% and 7.5% respectively, of its total assets. Current
policy permits the purchase of preferred stock rated investment grade. The
substantial majority of the preferred stock holdings are redeemable by issuers
after five years.
<PAGE>17
The following table sets forth the composition of the Company's debt and
equity and mortgage-backed and mortgage-related securities portfolios in dollar
amounts and percentages at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
----------- --------- ----------- --------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
Corporate bonds $ -- --% $ -- --% $ 5,213 0.62%
U.S. Government obligations -- -- 300 0.03 8,989 1.07
Agency securities 29,615 2.90 39,312 3.37 24,675 2.93
Public utilities -- -- -- -- 14,385 1.70
Municipal bonds -- -- 1,572 0.14 1,182 0.14
Other debt obligations (1) -- -- 1,763 0.15 2,249 0.27
Asset-backed notes -- -- 9,963 0.86 9,988 1.18
Financial bonds 187,687 18.36 198,246 17.02 115,863 13.74
----------- --------- ----------- --------- ----------- ---------
Total debt securities 217,302 21.26 251,156 21.57 182,544 21.65
----------- --------- ----------- --------- ----------- ---------
Equity securities:
Preferred stock 28,113 2.75 30,097 2.59 28,448 3.37
Common stock 12,070 1.18 16,358 1.40 27,056 3.21
Mutual funds -- -- -- -- 842 0.10
----------- --------- ----------- --------- ----------- ---------
Total equity securities 40,183 3.93 46,455 3.99 56,346 6.68
----------- --------- ----------- --------- ----------- ---------
Mortgage-backed and mortgage-related
securities:
FHLMC pass-through 118,841 11.63 161,472 13.86 97,362 11.55
GNMA pass-through 135,389 13.25 159,247 13.68 185,023 21.94
FNMA pass-through 124,655 12.20 97,055 8.33 76,451 9.07
Private issuer pass-through 78,867 7.71 89,734 7.71 18,208 2.16
Agency CMOs 59,829 5.85 54,922 4.72 39,125 4.64
Private issuer CMOs 247,026 24.17 304,414 26.14 188,135 22.31
----------- --------- ----------- --------- ----------- ---------
Total mortgage-backed and
mortgage-related securities 764,607 74.81 866,844 74.44 604,304 71.67
----------- --------- ----------- --------- ----------- ---------
Total securities $1,022,092 100.00% $1,164,455 100.00% $843,194 100.00%
=========== ========= =========== ========= =========== =========
Total debt and equity securities
available for sale $ 257,485 25.19% $ 297,611 25.56% $238,890 28.33%
----------- --------- ----------- --------- ----------- ---------
Mortgage-backed and mortgage-related
securities available for sale 707,446 69.22 866,844 74.44 604,304 71.67
Mortgage-backed and mortgage-related
securities held to maturity 57,161 5.59 -- -- -- --
----------- --------- ----------- --------- ----------- ---------
Total mortgage-backed and
mortgage-related securities 764,607 74.81 866,844 74.44 604,304 71.67
----------- --------- ----------- --------- ----------- ---------
Total securities $1,022,092 100.00% $1,164,455 100.00% $843,194 100.00%
=========== ========= =========== ========= =========== =========
----------------------------------
</TABLE>
(1) Consists of railroad, foreign and other bonds.
<PAGE>18
The following table sets forth the Company's securities activities for the
periods indicated:
<TABLE>
<CAPTION>
For the Year
Ended June 30,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Beginning balance $1,164,455 $843,194 $437,427
============ ============ ============
Add:
Debt and equity securities purchased available for sale 49,156 96,028 173,260
Mortgage-backed and mortgage-related securities
purchased available for sale 39,273 384,631 608,059
Securitization 93,427 77,159 --
Investments of acquired institutions, net -- 233,150 --
Change in net unrealized gains on
available for sale securities (38,718) (34,671) 6,179
Less:
Maturities and redemptions of debt and equity securities
held to maturity -- -- 55,972
Sales and redemptions of debt and equity securities
available for sale 67,787 107,141 108,936
Maturities and redemptions of mortgage-backed and
mortgage-related securities held to maturity -- -- 29,237
Principal repayments on mortgage-backed and
mortgage-related securities held to maturity 402 -- 31,987
Sales and redemptions of mortgage-backed and
mortgage-related securities available for sale 94,521 63,931 69,074
Principal repayments on mortgage-backed and
mortgage-related securities available for sale 117,255 264,460 86,073
Realized losses/(gains) on sales of mortgage-backed and
mortgage-related securities 6,901 (272) 287
Realized gains on debt and equity securities (892) (2,800) (317)
Amortization of investment premiums, net,
accretion of discount (473) 2,576 482
------------ ------------ ------------
Ending balance $1,022,092 $1,164,455 $843,194
============ ============ ============
</TABLE>
<PAGE>19
The following table sets forth certain information regarding the amortized
cost and market values of the Company's debt and equity and mortgage-backed and
mortgage-related securities, at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------
Amortized Market Amortized Market Amortize Market
Cost Value Cost Value Cost Value
------------ ------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities available for sale:
U.S. Government obligations $ -- $ -- $ 300 $ 300 $ 8,960 $ 8,989
Agency securities 34,406 29,615 41,564 39,312 24,484 24,675
Municipal bonds -- -- 1,575 1,572 1,119 1,182
Corporate bonds -- -- -- -- 19,425 19,598
Other debt obligations (1) -- -- 1,762 1,763 2,218 2,249
Asset-backed notes -- -- 9,981 9,963 9,954 9,988
Financial bonds 211,900 187,687 204,447 198,246 114,153 115,863
------------ ------------ ------------ ------------ ------------ ------------
Total debt securities
available for sale 246,306 217,302 259,629 251,156 180,313 182,544
------------ ------------ ------------ ------------ ------------ ------------
Equity securities available for sale:
Mutual funds -- -- -- -- 605 842
Preferred stock 29,629 28,113 29,687 30,097 27,146 28,448
Common stock 13,908 12,070 16,218 16,358 24,786 27,056
------------ ------------ ------------ ------------ ------------ ------------
Total equity securities
available for sale 43,537 40,183 45,905 46,455 52,537 56,346
------------ ------------ ------------ ------------ ------------ ------------
Mortgage-backed and mortgage-related
securities:
Held to maturity:
FNMA pass-through 57,161 54,068 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total mortgage-backed and mortgage-
related securities held to maturity 57,161 54,068 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Available for sale:
FHLMC pass-through 124,736 118,841 166,129 161,472 96,970 97,362
GNMA pass-through 140,365 135,389 162,446 159,247 185,098 185,023
FNMA pass-through 70,121 67,494 98,465 97,055 76,616 76,451
Private issuer pass-through 83,095 78,867 92,664 89,734 18,143 18,208
Agency CMOs 63,977 59,829 55,849 54,922 39,165 39,125
Private issuer CMOs 260,081 247,026 311,274 304,414 187,587 188,135
------------ ------------ ------------ ------------ ------------ ------------
Total mortgage-backed and mortgage-
related securities available for sale 742,375 707,446 886,827 866,844 603,579 604,304
Net unrealized (loss) gain on available
for sale securities (67,287) -- (27,906) -- 6,765 --
------------ ------------ ------------ ------------ ------------ ------------
Total securities $1,022,092 $1,018,999 $1,164,455 $1,164,455 $ 843,194 $ 843,194
============ ============ ============ ============ ============ ============
</TABLE>
--------------------------------------
(1) Consists of railroad, foreign and other bonds.
<PAGE> 20
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
securities portfolio as of June 30, 2000.
<TABLE>
<CAPTION>
At June 30, 2000
------------------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years More than Ten Years
----------------- ------------------ ---------------------------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- --------- -------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
Mortgage-backed and
mortgage-related securities:
FNMA pass-through $ -- --% $ -- --% $ -- --% $ 57,161 6.61%
Total mortgage-backed
and mortgage-related
securities held to maturity -- -- -- -- -- -- $ 57,161 6.61
-------- -------- -------- ---------
Total securities held to maturity $ -- -- $ -- -- $ -- -- $ 57,161 6.61
======== ======== ======== =========
Available for sale:
Debt securities:
Agency securities $ -- --% $ -- --% $ 9,200 6.45% $ 20,415 7.44%
Financial bonds -- -- 11,432 10.15 3,888 8.65 172,367 8.16
-------- -------- -------- ---------
Total debt securities
available for sale -- -- 11,432 10.15 13,088 7.08 192,782 8.08
-------- -------- -------- ---------
Mortgage-backed and
mortgage-related securities:
FHLMC pass-through 1,071 6.19 -- -- -- -- 117,770 6.64
GNMA pass-through -- -- -- -- -- -- 135,389 7.00
FNMA pass-through 1,958 4.63 10,771 6.66 -- -- 54,765 6.71
Private issuer pass-through -- -- -- -- 1,856 6.68 77,011 6.40
Agency CMOs -- -- -- -- -- -- 59,829 6.49
Private issuer CMOs -- -- -- -- -- -- 247,026 6.53
-------- -------- -------- ---------
Total mortgage-backed
and mortgage-related
securities available for sale 3,029 5.18 10,771 6.66 1,856 6.68 691,790 6.64
-------- -------- -------- ---------
Equity securities:
Preferred stock -- -- 4,359 5.09 11,847 6.19 11,907 6.19
Common stock -- -- -- -- -- -- 12,070 3.24
-------- -------- -------- ---------
Total equity securities -- -- 4,359 5.09 11,847 6.19 23,977 4.67
-------- -------- -------- ---------
Total securities available for sale $ 3,029 5.18 $ 26,562 7.91 $ 26,791 6.67 $ 908,549 6.91
======== ======== ======== =========
Total securities $ 3,029 5.18 $ 26,562 7.91 $ 26,791 6.67 $ 965,710 6.89
======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
At June 30, 2000
---------------------
Total
---------------------
Weighted
Carrying Average
Value Yield
-------- ------------
(Dollars in thousands)
<S> <C> <C>
Held to maturity:
Mortgage-backed and
mortgage-related securities:
FNMA pass-through $ 57,161 6.61%
Total mortgage-backed
and mortgage-related
securities held to maturity 57,161 6.61
----------
Total securities held to maturity $ 57,161 6.61
==========
Available for sale:
Debt securities:
Agency securities $ 29,615 7.15%
Financial bonds 187,687 8.28
----------
Total debt securities
available for sale 217,302 8.12
----------
Mortgage-backed and
mortgage-related securities:
FHLMC pass-through 118,841 6.63
GNMA pass-through 135,389 7.00
FNMA pass-through 67,494 6.65
Private issuer pass-through 78,867 6.41
Agency CMOs 59,829 6.49
Private issuer CMOs 247,026 6.53
----------
Total mortgage-backed
and mortgage-related
securities available for sale 707,446 6.63
----------
Equity securities:
Preferred stock 28,113 6.02
Common stock 12,070 3.24
----------
Total equity securities 40,183 5.13
----------
Total securities available for sale $ 964,931 6.92
==========
Total securities $1,022,092 6.91
==========
</TABLE>
Sources of Funds
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, proceeds from maturing securities
and cash flows from operations are the primary sources of the Bank's funds for
use in lending, investing and for other general purposes. The Bank also utilizes
borrowed funds, primarily FHLB advances and reverse-repurchase agreements, to
fund its operations.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings, retail
checking/N.O.W. accounts, commercial checking accounts, money market accounts,
club accounts and certificates of deposit accounts. The Bank offers jumbo
certificate of deposit accounts and Individual Retirement Accounts ("IRAs") and
other qualified plan accounts. While jumbo certificate accounts are accepted by
the Bank and may be subject to preferential rates, the Bank does not actively
solicit such deposits, as such deposits are more difficult to retain than core
deposits.
At June 30, 2000, the Bank's deposits totaled $1.8 billion, of which 88.3%
were interest-bearing deposits. For the year ended June 30, 2000, the average
balance of core deposits totaled $1.1 billion, or 62.6% of total average
<PAGE>21
deposits. At June 30, 2000, the Bank had a total of $693.3 million in
certificates of deposit, of which $550.5 million had maturities of less than one
year. For the year ended June 30, 1999, the average balance of core deposits
represented approximately 63.7% of total deposits and certificate accounts
represented 36.3%, as compared to core deposits representing 62.6% of total
deposits and certificate accounts representing 37.4% of deposits for the year
ended June 30, 2000. Although the Bank has a significant portion of its deposits
in savings accounts, management monitors activity on the Bank's savings accounts
and, based on historical experience and the Bank's current pricing strategy,
believes it will continue to retain a large portion of such accounts. The Bank
is not limited with respect to the rates it may offer on deposit products.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its branch offices are located. The Bank relies primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions affect the Bank's ability to attract and retain deposits.
The Bank uses traditional means of advertising its deposit products, including
television and print media, and generally does not solicit deposits from outside
its market area. While the Bank has historically not accepted brokered deposits,
the Bank is currently in the process of establishing relationships with deposit
brokers and may, in the future, utilize brokered deposits as a funding source,
depending on market conditions.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
For the Year Ended June 30,
----------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net deposits $115,696 $108,989 $ 34,168
Deposits of acquired institutions,net -- 523,742 --
Interest credited on deposit accounts 54,710 35,931 30,822
-------- -------- --------
Total increase in deposit accounts $170,406 $668,662 $64,990
======== ======== ========
</TABLE>
At June 30, 2000 the Bank had outstanding $91.7 million in certificate of
deposit accounts in amounts of $100,000 or more, maturing as follows:
<TABLE>
<CAPTION>
Weighted
Average
Maturity Period Amount Rate
--------------- -------- --------
(Dollars in thousands)
<S> <C> <C>
Three months or less $17,494 4.87%
Over three through six months 16,702 5.27
Over six through 12 months 38,360 5.91
Over 12 months 19,109 6.08
--------
Total $91,665 5.63
========
</TABLE>
<PAGE>22
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the period ended June
30, 1998 presented utilize average month-end balances. The periods ended June
30, 2000 and 1999 utilized daily average balances.
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------
Percent Percent Percent
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
---------- --------- -------- ---------- --------- -------- ---------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market accounts $ 48,766 2.88% 3.25% $ 42,973 3.79% 3.22% $ 39,075 4.23% 3.46%
Savings accounts 747,253 44.19 2.62 510,476 45.00 2.48 445,057 48.19 2.73
N.O.W. accounts 73,671 4.36 1.48 35,004 3.08 1.70 19,089 2.07 2.34
Non-interest-bearing accounts 189,072 11.18 -- 133,707 11.79 -- 106,189 11.50 --
---------- --------- ---------- --------- ---------- ---------
Total 1,058,762 62.61 2.03 722,160 63.66 2.03 609,410 65.99 2.29
---------- --------- ---------- --------- ---------- ---------
Certificates of deposit:
Less tan six months 57,436 3.40 4.21 43,366 3.82 4.37 21,096 2.28 4.42
Over six through 12 months 134,474 7.95 4.83 84,035 7.41 4.87 57,081 6.18 5.09
Over 12 through 24 months 289,045 17.10 5.32 172,659 15.23 5.14 152,047 16.47 5.59
Over 24 months 69,045 4.08 5.74 58,647 5.17 5.89 51,293 5.55 5.81
Certificates over $100,000 82,258 4.86 5.26 53,459 4.71 5.28 32,589 3.53 5.46
---------- --------- ---------- --------- ---------- ---------
Total certificates of deposit 632,258 37.39 5.15 412,166 36.34 5.17 314,106 34.01 5.44
---------- --------- ---------- --------- ---------- ---------
Total average deposits $1,691,020 100.00% 3.17 $1,134,326 100.00% 3.17 $ 923,516 100.00% 3.36
========== ========= ========== ========= ========== =========
</TABLE>
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated.
<TABLE>
<CAPTION>
Period of Maturity from June 30, 2000 At June 30,
----------------------------------------------------------------- --------------------------------
Less than One to Two to Three to Four to Five Years
One Year Two Years Three Years Four Years Five Years or More 2000 1999 1998
--------- --------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit:
0 to 4.00% $ 4,009 $ 469 $ 20 $ -- $ -- $ 8 $ 4,506 $ 8,954 $ 4,871
4.01 to 5.00% 190,025 23,541 1,486 2,168 859 -- 218,079 372,454 42,512
5.01 to 6.00% 284,556 9,207 10,539 7,749 2,560 5,325 319,936 198,192 266,741
6.01 to 7.00% 71,158 71,069 2,554 56 1,128 125 146,090 8,140 6,950
7.01 to 8.00% 678 3,944 -- -- -- -- 4,622 10,730 4,274
8.01 to 9.00% 43 -- -- -- -- -- 43 -- --
--------- --------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
Total $550,469 $108,230 $ 14,599 $ 9,973 $ 4,547 $ 5,458 $693,276 $598,470 $325,348
========= ========= =========== ========== ========== =========== ========== ========== ==========
</TABLE>
Borrowed Funds. During fiscal year 2000, the Bank continued to leverage
its capital by utilizing borrowings as an additional source of funds for asset
growth. At June 30, 2000, the Bank had total borrowings of $773.7 million, which
consisted of repurchase agreements with established brokerage firms and advances
with the FHLB of New York. These borrowings are collateralized primarily by the
Bank's mortgage-backed securities. The Bank had $757.8 million and $306.0
million in borrowings at June 30, 1999 and 1998, respectively.
The Bank may continue to utilize borrowings in fiscal year 2001, which may
result in an increase in the Bank's overall cost of funds. The Bank's current
strategy is to invest such borrowed funds primarily in mortgage-backed and
mortgage-related securities. This strategy is intended to incrementally increase
net interest income, although it may have the effect of incrementally decreasing
net interest rate spread. The maximum amount that the FHLB will advance to
member institutions fluctuates from time-to-time, in accordance with the
policies of the OTS and the FHLB.
<PAGE>23
Other Activities
In addition to its traditional lending and deposit products, the Bank also
offers certain merchant banking services. These include providing credit card
deposit accounts to local merchants. The Bank receives a processing fee from the
customer for each credit card transaction processed. The Bank also receives
monthly income from terminal and printer sales and rentals. For the years ended
June 30, 2000 and 1999, $77,000 and $80,000, or 0.8% and 6.7%, respectively, of
total fee income was attributable to credit card processing fees. In addition,
the Bank has endorsed and promotes a credit card through a national affinity
credit card bank. Under the program, the affinity credit card bank receives and
underwrites all credit card applications. The Bank receives royalty payments
based on new accounts and renewal accounts, as well as a portion of finance
charges assessed. For the years ended June 30, 2000 and 1999, the Bank received
$62,000 and $51,000, or 0.6% and 1.4%, respectively, of total fee income through
the affinity credit card program.
Subsidiary Activities
RCSB Corp. RCSB Corp. ("RCSB"), a wholly owned subsidiary of the Bank
incorporated in the State of New York in 1976, was formed to purchase three
branch buildings from the Bank, which are leased back to the Bank. This is
currently the only business activity conducted by RCSB. The assets of RCSB
totaled $743,012 at June 30, 2000.
Richmond Enterprises, Inc. Richmond Enterprises, Inc., a wholly owned
subsidiary of the Bank incorporated in the State of New York in 1983,
previously was a partner in a joint-venture real estate development project
with a local developer. The development was completed in 1986, and Richmond
Enterprises, Inc. has been inactive since that date. Its total assets as of
June 30, 2000, were $4,021.
Richmond County Capital Corp. Richmond County Capital Corp. ("RCCC"), a
wholly owned subsidiary of the Richmond Investment Corporation, and was
incorporated in the State of New York on February 27, 1998, for the purpose of
establishing a Real Estate Investment Trust ("REIT"). On April 5, 1999, the Bank
exchanged its ownership in RCCC for full ownership in Richmond Investment Corp.
Total assets of RCCC as of June 30, 2000 were $455.3 million.
Richmond Investment Corporation. Richmond Investment Corporation ("RIC"),
a wholly owned subsidiary of the Bank, was incorporated in the State of Delaware
on March 19, 1999, as the holding company for RCCC. On April 5, 1999, the Bank
transferred its ownership of RCCC to RIC. In return, the Bank received full
ownership of RIC. As of June 30, 2000, the assets of RIC totaled $419.0 million.
RCBK Mortgage Corp. RCBK Mortgage Corp., a wholly owned subsidiary of
the Bank, was incorporated in New York State on July 9, 1998, and is licensed
to conduct business in the states of New Jersey and Pennsylvania. Total
assets of RCBK Mortgage Corp. as of June 30, 2000 were $42.6 million.
Bayonne Service Corp. Bayonne Service Corp. ("BSC), a wholly owned
subsidiary of the Bank, was incorporated in the state of New Jersey on November
11, 1982. The Bank assumed ownership of BSC with the acquisition of First
Savings Bank of New Jersey, SLA on March 22, 1999. BSC offered brokerage
services in the City of Bayonne, New Jersey. Total assets of BSC as of June 30,
2000 were $204,133. On August 9, 2000, BSC was sold.
Pacific Urban Renewal Corp. Pacific Urban Renewal Corp. ("PURC"), a wholly
owned subsidiary of the Bank was incorporated on February 2, 1988, in the State
of New Jersey. PURC owns a commercial rental property and is qualified to do
business under the provisions of the Urban Renewal Corporation and Association
Law of New Jersey. It was a wholly owned subsidiary of Ironbound Bank and the
Bank assumed ownership when it acquired Ironbound Bank on March 5, 1999. Total
assets of PURC as of June 30, 2000 were $2.2 million.
Ironbound Investment Company. Ironbound Investment Company ("IIC"), is a
wholly owned subsidiary of the Bank and was incorporated in New Jersey on April
1, 1996. The Bank assumed ownership of IIC when it acquired Ironbound Bank on
March 5, 1999. Total assets of IIC as of June 30, 2000 were $28.9 million.
<PAGE>24
Personnel
As of June 30, 2000, the Bank had 465 full-time employees and 159
part-time employees. The employees are not represented by a collective
bargaining agreement and the Bank considers its relationship with its employees
to be good.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports and otherwise comply with the rules and regulations of the OTS
under the Home Owner's Loan Act, as amended ("HOLA").
The Bank is a New York State chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the Bank
Insurance Fund ("BIF"). The Bank is subject to extensive regulation by the
Superintendent, the NYBB, the NYSBD, as its chartering agency, and by the FDIC,
as the deposit insurer. The Bank must file reports with the NYSBD and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as
establishing branches and mergers with, or acquisitions of, other depository
institutions. There are periodic examinations by the NYSBD and the FDIC to
assess the Bank's compliance with various regulatory requirements and financial
condition. This regulation and supervision establishes a framework of activities
in which a savings bank can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the NYSBD, the FDIC or through legislation, could have a material adverse impact
on the Company and the Bank and their operations and stockholders. The Company
is also required to file certain reports with, and otherwise comply with the
rules and regulations, of the OTS, the NYSBD and the SEC under the federal
securities laws. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings banks and their
holding companies set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effect upon the Bank and
the Company.
New York State Law
The Bank derives its lending, investment and other authority primarily
from the applicable provisions of New York State Banking Law and the regulations
of the NYBB, as limited by FDIC regulations. Under these laws and regulations,
savings banks, including the Bank, may invest in real estate mortgages, consumer
and commercial loans, certain types of debt securities, including certain
corporate debt securities and obligations of federal, state and local
governments and agencies, certain types of corporate equity securities and
certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may directly invest up to 7.5% of its assets in
certain corporate stock and may also invest up to 7.5% of its assets in certain
mutual fund securities. Investment in the stock of a single corporation is
limited to the lesser of 2% of the outstanding stock of such corporation or 1%
of the savings bank's assets, except as set forth below. Such equity securities
must meet certain tests of financial performance. A savings bank's lending
powers are not subject to percentage of asset limitations, although there are
limits applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" authority, make investments, not otherwise authorized, under the New
York State Banking Law. This authority permits investments not otherwise
authorized of up to 1% of the savings bank's assets in any single investment,
subject to certain restrictions and to an aggregate limit for all such
investments of up to 5% of assets. Additionally, in lieu of investing in such
securities in accordance with, and reliance upon, the specific investment
authority set forth in the New York State Banking Law, savings banks are
authorized to elect to invest under a "prudent person" standard in a wider range
of debt and equity securities as compared to the types of investments
permissible under such specific investment authority. However, in the event a
savings bank elects to utilize the "prudent person" standard, it will be unable
to avail itself of the other provisions of the New York State Banking Law and
regulations which set forth specific investment authority. A New York State
chartered stock savings bank may also exercise trust powers upon approval of the
NYBB.
<PAGE>25
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment power. A savings bank may use this
power to invest in corporations that engage in various activities authorized for
savings banks, plus any additional activities which may be authorized by the
NYBB. Investment by a savings bank in the stock, capital notes and debentures of
its service corporations is limited to 3% of the bank's assets, and such
investments, together with the bank's loans to its service corporations, may not
exceed 10% of the savings bank's assets.
The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New York State Banking Law is limited by FDIC
regulations and other federal law and regulations. In particular, the applicable
provisions of New York State Banking Law and regulations governing the
investment authority and activities of an FDIC insured state-chartered savings
bank have been effectively limited by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued pursuant
thereto.
With certain limited exceptions, a New York State chartered savings bank
may not make loans or extend unsecured credit for commercial, corporate or
business purposes (including lease financing) to a single borrower, the
aggregate amount of which would be in excess of 15% of the bank's net worth. The
Bank currently complies with all applicable loans-to-one-borrower limitations.
Under New York State Banking Law, a New York State chartered stock savings
bank may declare and pay dividends out of its net profits, unless there is an
impairment of capital, but approval of the Superintendent is required if the
total of all dividends declared in a calendar year would exceed the total of its
net profits for that year combined with its retained net profits of the
preceding two years, subject to certain adjustments.
Under the New York State Banking Law, the Superintendent may issue an
order to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the NYBB that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization, after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office by the NYBB after notice and an opportunity to be heard. The Bank
does not know of any past or current practice, condition or violation that might
lead to any proceeding by the Superintendent or the NYBB against the Bank or any
of its Directors or Officers. The Superintendent also may take possession of a
banking organization under specified statutory criteria.
FDIC Regulations
Capital Requirements. The FDIC has adopted risk-based capital guidelines
to which the Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. The Bank is required
to maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. The ratio of such regulatory capital to regulatory
risk-weighted assets is referred to as the Bank's "risk-based capital ratio."
Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet items to four risk-weighted categories, ranging from 0% to
100%, with higher levels of capital being required for the categories perceived
as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues), and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations) and deferred
tax assets. Supplementary ("Tier II") capital includes, among other items,
cumulative perpetual and long-term limited-life preferred stock, mandatory
convertible securities, certain hybrid capital instruments, term subordinated
debt and the allowance for loan and lease losses, subject to certain
limitations, less required deductions. Savings banks are required to maintain a
total risk-based capital ratio of 8%, of which at least 4% must be Tier I
capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of
<PAGE>26
at least 4%. The FDIC may, however, set higher leverage and risk-based
capital requirements on individual institutions when particular circumstances
warrant. Savings banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
The following is a summary of the Bank's regulatory capital at June 30,
2000:
<TABLE>
<CAPTION>
<S> <C>
GAAP Capital to Total Assets 8.84%
Total Capital to Risk-Weighted Assets 14.77%
Tier 1 Leverage Ratio 7.71%
</TABLE>
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate risk
in assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies also
have issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
The agencies have determined not to proceed with a previously issued proposal to
develop a supervisory framework for measuring interest rate risk and an explicit
capital component for interest rate risk.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for depository institutions under its jurisdiction
standards relating to, among other things, internal controls; information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; compensation; fees and benefits; and such
other operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings and compensation; fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the Federal Deposit
Insurance Act, as amended, ("FDIC Act").
Real Estate Lending Standards. The FDIC and the other federal banking
agencies have adopted regulations that prescribe standards for extensions of
credit that (1) are secured by real estate or (2) are made for the purpose of
financing the construction or improvements on real estate. The FDIC regulations
require each institution to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the institution and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying FDIC guidelines, which include loan-to-value limitations for the
different types of real estate loans. Institutions are also permitted to make a
limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standard are justified.
Dividend Limitations. The FDIC has authority to use its enforcement powers
to prohibit a savings bank from paying dividends if, in its opinion, the payment
of dividends would constitute an unsafe or unsound practice. Federal law
prohibits the payment of dividends by a bank that will result in the bank
failing to meet applicable capital requirements on a pro forma basis.
Additionally, the Bank, as a subsidiary of a savings and loan holding company,
is required to provide the OTS with 30 days prior written notice before
declaring any dividend. The savings banks conversion plan also restricts the
Bank's ability to pay a dividend, if payment of the dividend would impair the
liquidation account established in connection with the conversion.
<PAGE>27
Investment Activities
Since the enactment of FDICIA, all state-chartered banks, including savings
banks and their subsidiaries, have generally been limited to activities as
principal and equity investments of the type and in the amount authorized for
national banks, notwithstanding state law. FDICIA and the FDIC regulations,
thereunder, permit certain exceptions to these limitations. For example, certain
state chartered banks, such as the Bank, may, with FDIC approval, continue to
exercise state authority to invest in common or preferred stocks listed on a
national securities exchange or the Nasdaq National Market and in the shares of
an investment company registered under the Investment Company Act of 1940, as
amended. Such banks may also continue to sell savings bank life insurance. In
addition, the FDIC is authorized to permit such institutions to engage in state
authorized activities or investments that do not meet this standard (other than
non-subsidiary equity investments) for institutions that meet all applicable
capital requirements, if it is determined, that such activities or investments
do not pose a significant risk to the BIF. The FDIC has recently adopted
revisions to its regulations governing the procedures for institutions seeking
approval to engage in such activities or investments. These revisions, among
other things, streamline certain application procedures for healthy banks and
impose certain quantitative and qualitative restrictions on a bank's dealings
with its subsidiaries engaged in activities not permitted for national bank
subsidiaries. All non-subsidiary equity investments, unless otherwise authorized
or approved by the FDIC, must have been divested by December 19, 1996, pursuant
to a FDIC-approved divestiture plan unless such investments were grandfathered
by the FDIC. The Bank received grandfathering authority from the FDIC in
February, 1993, to invest in listed stocks and/or registered shares subject to
the maximum permissible investment of 100% of Tier I capital, as specified by
the FDIC's regulations, or the maximum amount permitted by New York State
Banking Law, whichever is less. Such grandfathering authority is subject to
termination upon the FDIC's determination that such investments pose a safety
and soundness risk to the Bank, or in the event the Bank converts its charter or
undergoes a change in control. As of June 30, 2000, the Bank had $36.0 million
of securities, which were subject to such grandfathering authority.
The Graham-Leach-Bliley Act of 1999 authorizes state chartered banks that
meet specified conditions to invest in "financial subsidiaries" which engage as
principal in activities deemed financial in nature and incidental to financial
activities. A "financial subsidiary" may not engage in insurance underwriting or
real estate investment.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action
legislation. Among other things, the regulations define the relevant capital
measures for the five capital categories. An institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and is not subject to a regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of
4% or greater, and generally a leverage ratio of 4% or greater. An institution
is deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a
leverage ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less
than 3%. An institution is deemed to be "critically undercapitalized" if it has
a ratio of tangible equity (as defined in the regulations) to total assets that
is equal to or less than 2%.
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institutions in an
amount equal to the lesser of 5.0% of the bank's total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately
capitalized. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks are subject to one or more of a number of additional
<PAGE>28
restrictions, including but not limited to an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks or dismiss
directors or officers, and restrictions on interest rates paid on deposits,
compensation of executive officers and capital distributions by the parent
holding company. "Critically undercapitalized" institutions also may not,
beginning 60 days after becoming "critically undercapitalized," make any payment
of principal or interest on certain subordinated debt or extend credit for a
highly leveraged transaction or enter into any material transaction outside the
ordinary course of business. In addition, "critically undercapitalized"
institutions are subject to appointment of a receiver or conservator. Generally,
subject to a narrow exception, the appointment of a receiver or conservator is
required for a "critically undercapitalized" institution within 270 days after
it obtains such status.
Transactions with Affiliates
Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank other than
certain nonbanking subsidiaries of the bank. In a holding company context, at a
minimum, the parent holding company of a savings bank and any companies which
are controlled by such parent holding company are affiliates of the savings
bank. The Federal Reserve Board has proposed regulations that would treat as an
affiliate, any subsidiary of a savings bank that engages in activities not
permissible for the parent savings bank to engage in directly. Generally,
Section 23A limits the extent to which the savings bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such savings bank's capital stock and surplus, and contains an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus. The term, "covered transaction," includes the
making of loans or other extensions of credit to an affiliate; the purchase of
assets from an affiliate; the purchase of, or an investment in, the securities
of an affiliate; the acceptance of securities of an affiliate as collateral for
a loan or extension of credit to any person; or issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. Section 23A also
establishes specific collateral requirements for loans or extensions of credit
to, or guarantees of, acceptances on letters of credit issued on behalf of an
affiliate. Section 23B requires that covered transactions and a broad list of
other specified transactions be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with
nonaffiliates. In addition, the savings bank may not lend to any affiliate
engaged in activities not permitted for hank holding companies and may not
purchase the securities of an affiliate, other than a subsidiary.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000, or 5% of capital and surplus,
or any loans over $500,000. Further, pursuant to Section 22(h), loans to
directors, executive officers and principal shareholders must be made on terms
substantially the same as offered in comparable transactions to other persons,
except for extensions of credit made pursuant to a benefit or compensation
program that is widely available to the institution's employees and does not
give preference to insiders over other employees. Section 22(g) of the Federal
Reserve Act places additional limitations on loans to executive officers.
Enforcement
The FDIC has extensive enforcement authority over insured savings banks,
including the Bank. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease and desist orders and to
remove directors and officers. In general, these enforcement actions may be
initiated in response to violations of laws and regulations and to unsafe or
unsound practices.
The FDIC has authority, under federal law, to appoint a conservator or
receiver for an insured savings bank under certain circumstances. The FDIC is
required, with certain exceptions, to appoint a receiver or conservator for
<PAGE>29
an insured state savings bank if that savings bank was "critically
undercapitalized," on average, during the calendar quarter beginning 270 days
after the date on which the savings bank became "critically undercapitalized."
For this purpose, "critically undercapitalized" means having a ratio of tangible
equity to total assets that is equal to or less than 2%. See "--Prompt
Corrective Regulatory Action." The FDIC may also appoint a conservator or
receiver for a state savings bank on the basis of the institution's financial
condition or upon the occurrence of certain events, including: (1) insolvency
(whereby the assets of the savings bank are less than its liabilities to
depositors and others); (2) substantial dissipation of assets or earnings
through violations of law or unsafe or unsound practices; (3) existence of an
unsafe or unsound condition to transact business; (4) likelihood that the
savings bank will be unable to meet the demands of its depositors or to pay its
obligations in the normal course of business; and (5) insufficient capital, or
the incurring or likely incurring of losses that will deplete substantially all
of the institution's capital with no reasonable prospect of replenishment of
capital without federal assistance.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and additional information
which the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance funds. An institution's
assessment rate depends on the capital category and supervisory category to
which it is assigned. Assessment rates for BIF and Savings Association Insurance
Fund ("SAIF") deposits currently range from zero basis points to 27 basis
points, and the FDIC has determined to retain such range of assessment rates for
the first half of 2000. The FDIC is authorized to raise the assessment rates in
certain circumstances, including to maintain or achieve the designated reserve
ratio of 1.25%, which requirement the BIF and the SAIF currently meet. The FDIC
has exercised its authority to raise rates in the past and may raise insurance
premiums in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Bank. In addition, recent legislation
requires BIF-insured institutions, such as the Bank, to assist in the payment of
Financing Corporation bonds.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
Division. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $44.3 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $44.3
million, the reserve requirement is $1.329 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $44.3 million. The first $4.9 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Community Reinvestment Act
Federal Regulation. Under the Community Reinvestment Act, as amended
("CRA"), as implemented by FDIC regulations, a savings bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods.
<PAGE>30
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the FDIC, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The Financial Institutions Reform, Recovery, and Enforcement
Act("FIRREA") amended the CRA to require, effective July 1, 1990, public
disclosure of an institution's CRA rating and requires the FDIC to provide a
written evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system, which replaced the five-tiered numerical rating
system. The Bank's latest CRA rating received from the FDIC was "Satisfactory."
New York State Regulation. The Bank is also subject to provisions of the
New York State Banking Law, which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit needs
of its local community ("NYCRA"), which are substantially similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file copies of all
federal CRA reports with the NYSBD. The NYCRA also requires the Superintendent
to consider a bank's NYCRA rating when reviewing a bank's application to engage
in certain transactions, including mergers, asset purchases and the
establishment of branch offices or automated teller machines, and provides that
such assessment may serve as a basis for the denial of any such application. The
NYSBD has adopted, effective December 3, 1997, new regulations to implement the
NYCRA. The NYSBD replaced its process-focused regulations with
performance-focused regulations that are intended to parallel current CRA
regulations of federal banking agencies and to promote consistency in CRA
evaluations by considering more objective criteria. The new regulations require
a biennial assessment of a bank's compliance with the NYCRA, utilizing a
four-tiered rating system, and require the NYSBD to make available to the public
such rating and a written summary of the results. The Bank's latest NYCRA rating
received from the NYSBD was "Satisfactory."
Federal Home Loan Bank System
On October 24, 1997, the Bank became a member of the FHLB System, which
consists of 12 regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. The Bank, as a member of the FHLB, is
required to acquire and hold shares of capital stock in the FHLB in an amount at
least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the FHLB, whichever is greater. FHLB advances
must be secured by specified types of collateral and all long-term advances may
only be obtained for the purpose of providing funds for residential housing
finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. If dividends were reduced, the Bank's net interest
income will likely also be reduced. Further, there can be no assurance that the
impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of the FHLB stock that will be held by the Bank.
Holding Company Regulation
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" ("QTL"), discussed below, to elect to be treated as a "savings
association" for purposes of the savings and loan holding company provisions of
the HOLA. Such election results in its holding company being regulated as a
savings and loan holding company by the OTS, rather than as a bank holding
company by the Federal Reserve Board. The Bank made such election and received
approval from the OTS to become a savings and loan holding company. The Company
is regulated as a non-diversified unitary savings and loan holding company,
within the meaning of the HOLA. As such, the Company registered with the OTS and
is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution. Additionally, the Bank is
required to notify the OTS at least 30 days before declaring any dividend to the
Company.
Under prior law, a unitary savings and loan holding company, such as the
Company, was not generally restricted as to the types of business activities in
which it may engage, provided that the Savings Bank continued to be a QTL as
described below. The Gramm-Leach-Bliley Act of 1999 provides that no company may
acquire control
<PAGE>31
of a "savings association" after May 4, 1999 unless the company governing
engages only in the activities permitted for "financial holding companies" under
Federal law and for multiple savings and loan holding companies as described
below. Further, the Gramm-Leach-Bliley Act specifies that existing savings and
loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, such as the company, so long as the Savings Bank continues
to comply with the QTL Test. Upon any non-supervisory acquisition by the Company
of another savings association as a separate subsidiary, the Company would
become a multiple savings and loan holding company and would be subject to
extensive limitations on the types of business activities in which it could
engage. The HOLA limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, as amended ("BHC Act"), subject to the prior approval of the OTS,
and to other activities authorized by OTS regulations. Multiple savings and loan
holding companies are prohibited from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA. Legislation under consideration in Congress would impose restrictions on
the activities of unitary savings and loan holding companies subject to
grandfathering of existing unitary savings and loan holding companies.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof or
from acquiring such an institution or company by merger, consolidation or
purchase of its assets, without prior written approval of the OTS. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, except: (1) interstate supervisory acquisitions by savings
and loan holding companies, and (2) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
In order to elect and continue to be regulated as a savings and loan
holding company by the OTS (rather than as a bank holding company by the Federal
Reserve Board), the Bank must continue to qualify as a QTL. In order to qualify
as a QTL, the Bank must maintain compliance with a Qualified Thrift Lender Test
("QTL Test"). Under the QTL Test, a savings institution is required to maintain
at least 65% of its "portfolio assets" (total assets less: (1) specified liquid
assets up to 20% of total assets; (2) intangibles, including goodwill; and (3)
the value of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments, including
certain mortgage-backed and related securities) in at least nine months out of
each 12 month period. A holding company of a savings institution that fails the
QTL Test must either convert to a bank holding company and thereby become
subject to the regulation and supervision of the Federal Reserve Board or
operate under certain restrictions. As of June 30, 2000, the Bank maintained in
excess of 69.02% of its portfolio assets in qualified thrift investments. The
Bank also met the QTL Test in each of the prior 12 months. Recent legislation
amendments have broadened the scope of "qualified thrift investments" that go
toward meeting the QTL Test to fully include credit card loans, student loans
and small business loans. A savings association may also satisfy the QTL Test by
qualifying as a "domestic building and loan association" as defined in the
Internal Revenue Code of 1986 (the "Code").
New York State Holding Company Regulation. In addition to the federal
holding company regulations, a bank holding company organized or doing business
in New York State may be also subject to regulation under the New York State
Banking Law. The term "bank holding company," for the purposes of the New York
State Banking Law, is defined generally to include any person, company or trust
that directly or indirectly either controls the election of a majority of the
directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions, including commercial banks and state
savings banks and savings and loan associations organized in stock form. In
general, a holding company controlling, directly or indirectly, only one banking
institution will not be deemed to be a bank holding company for the purposes of
the New York State Banking Law. Under New York State Banking Law, the prior
approval of the NYSBD is required
<PAGE>32
before: (1) any action is taken that causes any company to become a bank holding
company; (2) any action is taken that causes any banking institution to become
or to be merged or consolidated with a subsidiary of a bank holding company; (3)
any bank holding company acquires direct or indirect ownership or control of
more than 5% of the voting stock of a banking institution; (4) any bank holding
company or subsidiary thereof acquires all or substantially all of the assets of
a banking institution; or (5) any action is taken that causes any bank holding
company to merge or consolidate with another bank holding company. Additionally,
certain restrictions apply to New York State bank holding companies regarding
the acquisition of banking institutions which have been chartered five years or
less and are located in smaller communities. Officers, directors and employees
of New York State bank holding companies are subject to limitations regarding
their affiliation with securities underwriting or brokerage firms and other bank
holding companies and limitations regarding loans obtained from its
subsidiaries. Although the Company is not a bank holding company for purposes of
New York State law, any future acquisition of ownership, control, or the power
to vote 10% or more of the voting stock of another New York banking institution
or bank holding company would cause it to become such.
Interstate Banking and Branching
The Company, as a savings and loan holding company, is limited under HOLA
with respect to its acquisition of a savings association located in a state
other than New York. In general, a savings and loan holding company may not
acquire an additional savings association subsidiary that is located in a state
other than the home state of its first savings association subsidiary, unless
such an interstate acquisition is permitted by the statutes of such other state.
Many states permit such interstate acquisitions if the statutes of the home
state of the acquiring savings and loan holding company satisfy various
reciprocity conditions. New York is one of a number of states that permit,
subject to the reciprocity conditions of the New York Banking Law, out-of-state
bank and savings and loan holding companies to acquire New York savings
associations.
In contrast, bank holding companies are generally authorized to acquire
banking subsidiaries in more than one state, irrespective of any state law
restrictions on such acquisitions. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Banking Act"), which was enacted
on September 29, 1994, permits approval under the BHC Act of the acquisition of
a bank located outside of the holding company's home state, regardless of
whether the acquisition is permitted under the law of the state of the acquired
bank. The Federal Reserve Board may not approve an acquisition under the BHC Act
that would result in the acquiring holding company controlling more than 10% of
the deposits in the United States or more than 30% of the deposits in any
particular state.
The Interstate Banking Act permitted, beginning June 1, 1997, the
responsible federal banking agencies to approve merger transactions between
banks located in different states, regardless of whether the merger would be
prohibited under the law of the two states. The Interstate Banking Act also
permitted a state to "opt in" to the provisions of the Interstate Banking Act
prior to June 1, 1997, and permitted a state to "opt out" of the provisions of
the Interstate Banking Act by adopting appropriate legislation before that date.
Accordingly, the Interstate Banking Act, beginning June 1, 1997, permitted a
bank, such as the Bank, to acquire branches in a state other than New York
unless the other state had opted out of the Interstate Banking Act. The
Interstate Banking Act also authorizes de novo branching into another state if
the host state enacts a law expressly permitting out of state banks to establish
such branches within its borders.
The Bank has exercised the branching authority provided by the Interstate
Banking Act to acquire institutions in New Jersey and establish branches at the
offices of the acquired institutions. The Interstate Banking Act provides that
the laws of the host state, i.e., New Jersey, regarding community reinvestment,
consumer protection, fair lending and establishing interstate branches apply to
any branch in the host state to the same extend that such laws could apply to a
branch of an out of state national bank. The laws of the home state, i.e., New
York, apply to the extent host state law is inapplicable.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
<PAGE>33
The registration, under the Securities Act of 1933, as amended (the
"Securities Act"), of shares of the Common Stock that were issued in the Bank's
Conversion does not cover the resale of such shares. Shares of the Common Stock
purchased by persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company will be subject to
the resale restrictions of Rule 144 under the Securities Act. If the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (1) 1% of the outstanding shares of the
Company or (2) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank will report their income on a
consolidated basis, using a calendar year and the accrual method of accounting,
and will be subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Bank's treatment
of its reserve for bad debts discussed below. The following discussion of tax
matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Company. The Bank had
been audited by the IRS for the years ended December 31, 1993, 1994 and 1995.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the
"1996 Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Code relating to a savings institution's use of bad debt
reserves for federal income tax purposes and requires such institutions to
recapture (i.e., take into income) certain portions of their accumulated bad
debt reserves. The effect of the 1996 Act on the Bank is discussed below. Prior
to the enactment of the 1996 Act, the Bank was permitted to establish tax
reserves for bad debts and to make annual additions thereto, which additions,
within specified formula limits, were deducted in arriving at the Bank's taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, could be computed
using an amount based on a six-year moving average of 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 non-qualifying reserve. The Bank's deduction with respect to
non-qualifying loans was required to be computed under the Experience Method.
The 1996 Act. Under the 1996 Act, for its current and future taxable
years, the Bank is not permitted to make additions to its tax bad debt reserves.
In addition, the Bank is required to recapture (i.e., take into income) over a
six year period, the excess of the balance of its tax bad debt reserves as of
December 31, 1995, over the balance of such reserves as of December 31, 1987. As
of December 31, 1995, $2.5 million of the Bank's bad debt reserve was subject to
recapture for which deferred taxes have been provided.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. The term "non-dividend
distributions" is defined as distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not cause this pre-1988 reserve to be included in the Bank's
income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be includable in income for federal income tax purposes,
assuming a 35% federal corporate income tax rate. See "REGULATION AND
SUPERVISION" for limits on the
<PAGE>34
payment of dividends by the Bank. The Bank does not intend to pay dividends that
would result in a recapture of any portion of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset
by net operating loss carryforwards. The adjustment to AMTI, based on book
income, will be an amount equal to 75% of the amount by which a corporation's
adjusted current earnings exceeds its AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses). Certain payments of
AMTI may be used as credits against regular tax liabilities in future years. For
tax years prior to the 1996 tax year, the excess of the bad debt reserve
deduction using the percentage of taxable income method over the deduction that
would have been allowable under the Experience Method is treated as a preference
item for purposes of computing the AMTI. In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2 million,
was imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank has not been subject to the AMT and no
such amounts have been accrued for carryover.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income, 100% of dividends received from the Bank as a member of the
same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company and the Bank own more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be excluded.
State and Local Taxation
New York State and New York City Taxation. The Bank is subject to the New
York State Franchise Tax on Banking Corporations in an annual amount equal to
the greater of (1) 9% of the Bank's "entire net income" allocable to New York
State during the taxable year, or (2) the applicable alternative minimum tax.
The alternative minimum tax is generally the greatest of (a) .01% of the average
value of the taxable assets allocable to New York State with certain
modifications, (b) 3% of the Bank's "alternative entire net income" allocable to
New York State or (c) $250. Entire net income is similar to federal taxable
income, subject to certain modifications (including that net operating losses
cannot be carried back or carried forward) and alternative entire net income is
equal to entire net income without certain adjustments. The Bank is also subject
to New York City Corporation Tax, which is imposed using SMTI or alternative
taxable income method. For purposes of computing its entire net income, the Bank
is permitted a deduction for an addition to the reserve for losses on qualifying
real property loans. For New York State and City purposes, the applicable
percentage to calculate bad debt deduction under the percentage of taxable
income method is 32%. The New York State and New York City tax laws were
recently amended to prevent the recapture of tax bad debt reserves that would
otherwise occur as a result of the enactment of the 1996 Act for both New York
State and City tax purposes. However, the New York bad debt reserve is subject
to recapture for "non-dividend distributions" in a manner similar to the
recapture of the federal bad debt reserves for such distributions. Also, the New
York bad debt reserve is subject to recapture in the event that the Bank fails
to satisfy certain definitional tests relating to its assets and the nature of
its business. The Bank's deduction with respect to non-qualifying loans must be
computed under the Experience Method which is based on the Bank's actual
charge-offs.
A Temporary Metropolitan Transportation Business Tax Surcharge on banking
corporations doing business in the metropolitan district has been applied since
1982. Through December 31, 1999, the Bank did a substantial portion of its
business within this District and is subject to this surcharge. For the tax year
ended December 31, 1999, the surcharge rate is 17% of the New York State
Franchise Tax liability.
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
New Jersey State Taxation. For New Jersey tax purposes, there is imposed
on every savings institution doing business within the state an excise tax at
the rate of 3% on its net income. Net income means total income derived from all
New Jersey sources, and the amount of net income is presumed to be equal to the
taxable income, before net operating loss deduction and special deductions,
which are reported for the purpose of computing Federal income tax. However,
"net income" shall exclude 100% of dividends which were included in computing
such taxable income which were paid to the Company by one or more qualified
subsidiaries owned by it.
<PAGE>35
The Company may be required to file a New Jersey income tax return if it
derives income from sources within New Jersey. For New Jersey tax purposes, the
Company would be taxed at a rate equal to 7.25% of its entire net income
allocable to New Jersey if such entire net income is less than $100,000 or 9.00%
if entire net income allocable to New Jersey is $100,000 or greater. For this
purpose, "entire net income" means total net income from all sources and shall
be deemed to equal in amount to the taxable income, before net operating loss
deduction and special deductions, which the taxpayer is required to report to
the United States Treasury Department for the purpose of computing its Federal
Income Tax. However, "entire net income" shall exclude 100% of dividends which
were included in computing such taxable income which were paid to the Company by
one or more qualified subsidiaries owned by it.
<PAGE>36
Item 2. Properties
-------------------
Properties
The Bank currently conducts its business through 24 full service banking
offices. The following table sets forth the Bank's offices as of June 30, 2000.
<TABLE>
<CAPTION>
Net Book Value
Original of Property or
Leased Year Date of Leasehold
or Leased or Lease Improvements at
Location Owned Acquired Expiration June 30, 2000
-------- ------ --------- ---------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Administrative/Home Office:
West New Brighton Office (1):
1214 Castleton Avenue
Staten Island, NY 10310 Owned 1916 -- $1,406
Branch Offices:
Port Richmond Office:
282 Port Richmond Avenue
Staten Island, NY 10302 Owned 1951 -- 112
Great Kills Office:
3879 Amboy Road
Staten Island, NY 10308 Owned 1975 -- 1,346
Annadale Office:
820 Annadale Road
Staten Island, NY 10312 Owned 1967 -- 310
Bull's Head Office (2)
1460 Richmond Avenue
Staten Island, NY 10314 Owned 1971 -- 716
Dongan Hills Office:
1833 Hylan Boulevard
Staten Island, NY 10305 Owned 1974 -- 1,146
New Springville Office:
2555 Richmond Avenue
Staten Island, NY 10314 Leased 1976 2005 304
Woodrow Plaza Office:
645-100 Rossville Avenue
Staten Island, NY 10309 Leased 1983 2013 329
Tottenville Office:
179 Main Street
Staten Island, NY 10307 Owned 1988 -- 346
Westerleigh Office:
832 Jewett Avenue
Staten Island, NY 10314 Owned 1992 -- 642
Eltingville Office (3):
4523 Amboy Road
Staten Island, NY 10312 Owned 1992 -- 2,402
</TABLE>
<PAGE>37
<TABLE>
<CAPTION>
Net Book Value
Original of Property or
Leased Year Date of Leasehold
or Leased or Lease Improvements at
Location Owned Acquired Expiration June 30, 2000
-------- ------ --------- ---------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Grasmere Office (4):
1100 Hylan Boulevard
Staten Island, NY 10305 Leased 1992 2005 418
Brooklyn Office(5):
132 Avenue U
Brooklyn, NY 11223 Leased 1977 2007 296
New Dorp Office:
2595 Hylan Boulevard
Staten Island, NY 10306 Leased 1998 2013 1,798
Sunnyside Office:
1270 Clove Road
Staten Island, NY 10301 Leased 1998 2013 440
Jericho Office:
100 Jericho Quadrangle, Suite 334
Jericho, NY 11753 Leased 1998 2005 --
Pacific Street Office:
36 Pacific Street
Newark, NJ 07105 Owned 1999 -- 1,156
Ferry Street Office:
120-122 Ferry Street
Newark, NJ 07105 Leased 1999 2005 1,258
Elizabeth Office:
715 Elizabeth Street
Elizabeth, NJ 07201 Owned 1999 -- 464
Union Office:
I000 Pine Avenue
Union, NJ 07083 Owned 1999 -- 1,743
26th Street Office:
568 Broadway
Bayonne, NJ 07002 Owned 1999 -- 390
6th Street Office:
171-173 Broadway
Bayonne, NJ 07002 Owned 1999 -- 1,171
20th Street Office:
441 Broadway
Bayonne, NJ 07002 Owned 1999 -- 744
46th Street Office:
949 Broadway
Bayonne, NJ 07002 Owned 1999 -- 1,164
Financial Center:
447 Broadway
Bayonne, NJ 07002 Owned 1999 -- 629
</TABLE>
<PAGE>38
<TABLE>
<CAPTION>
Net Book Value
Original of Property or
Leased Year Date of Leasehold
or Leased or Lease Improvements at
Location Owned Acquired Expiration June 30, 2000
-------- ------ --------- ---------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Public Accommodation Offices:
Staten Island Public
Accommodation Office:
1445 Richmond Avenue Leased 1998 2013 --
Staten Island, NY 10314
Other Properties:
Garwood:
Undeveloped Building Lot
358 North Avenue
Garwood, NJ 07027 Owned 1999 -- 475
Staten Island:
Seguine Avenue (Denovo Branch)
Staten Island, NY Leased 2000 -- 144
</TABLE>
(1) Certain portions of the Bank's administrative operations are located at
properties not included in the table.
(2) Includes the Staten Island Public Accommodation Office.
(3) The Eltingville office includes the Bank's lending center.
(4) The Bank owns the parking area of the Grasmere Office and it leases
the Grasmere Office building.
(5) The Bank has the option to extend the lease on the Brooklyn office for two
five-year periods.
Item 3. Legal Proceedings
--------------------------
The Company is not involved in any pending legal proceedings, other than
routine legal proceedings occurring in the ordinary course of business, which,
in the aggregate, involve amounts which are believed by management to be
immaterial to the financial condition and results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None.
<PAGE>39
PART II
Item 5. Market For Registrant's Common Stock And Related Stockholder Matters
-----------------------------------------------------------------------------
Richmond County Financial Corp. became a publicly traded company on
February 18, 1998. The Company's common stock is traded on the Nasdaq National
Market under the symbol "RCBK." Information regarding the market for the
Company's common equity and related stockholder matters appears in the 2000
Annual Report to Shareholders under the caption "Market Price of Common Stock"
and is incorporated herein by reference.
As of September 22, 2000, the Company had 27,087,709 shares of common
stock outstanding and entitled to vote and approximately 8,466 shareholders of
record, not including persons or entities holding stock in nominee or street
name through brokers or banks.
Item 6. Earnings Summary And Selected Financial Data
-----------------------------------------------------
That section of the Company's Annual Report to Shareholders for the fiscal
year ended June 30, 2000 entitled "Selected Consolidated Financial and Other
Data of the Company," pages 13 through 14, is incorporated herein by reference.
This section of the Company's Annual Report to Shareholders for the fiscal
year ended June 30, 2000 entitled "Selected Quarterly Financial Data," page 51,
is incorporated herein by reference. Richmond County Financial Corp. became a
public company on February 18, 1998. Richmond County Financial Corp. Common
Stock is traded on The Nasdaq National Market under the symbol "RCBK."
Item 7. Management's Discussion And Analysis of Financial Condition And
-----------------------------------------------------------------------------
Results of Operations
---------------------
That section of the Company's Annual Report to shareholders for the fiscal
year ended June 30, 2000 entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," pages 15 through 30, is
incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
--------------------------------------------------------------------
That section of the Company's Annual Report to Shareholders for the fiscal
year ended June 30, 2000 entitled "Asset and Liability Management and the
Management of Interest Rate Risk," pages 24 through 26, is incorporated herein
by reference.
Item 8. Financial Statements
-----------------------------
Those sections of the Company's Annual Report to Shareholders for the
fiscal year ended June 30, 2000 entitled "Report of Independent Auditors," page
52, "Consolidated Statements of Financial Condition," page 28, "Consolidated
Statements of Operation, page 29, "Consolidated Statements of changes in
Stockholders' Equity," page 30, "Consolidated Statements of Cash Flows," pages
31 through 32, "Notes to Consolidated Financial Statements," pages 33 through
51, inclusive, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------------
Financial Disclosure
--------------------
None
<PAGE>40
PART III
Item 10. Directors and Executive Officers of the Company
----------------------------------------------------------
EXECUTIVE OFFICERS OF THE REGISTRANT AND THE BANK
Information regarding the directors and executive officers of the Company
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on November 3, 2000 under the caption
"Information with Respect to the Nominees, Continuing Directors, and Certain
Executive Officers of the Company." Pursuant to General Instruction G(3) to the
Form 10-K, the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on November 3, 2000 will be filed with the Commission not later than
120 days after the end of the fiscal year covered by this Form 10-K.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of any registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Executive
officers, directors and greater than 10% shareholders are required by regulation
to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it has received, as
provided to the Company from the individuals required to file the reports, the
reports, the Company believes that, with the exception of Thomas Lupo, a Senior
Vice President of Richmond County Savings who filed a Form 4 one day late due to
a clerical oversight, each of the Company's executive officers and directors has
complied with applicable reporting requirements for transactions in Richmond
County's common stock during the fiscal year ended June 30, 2000.
Item 11. Executive Compensation
--------------------------------
Information regarding executive compensation appears on pages 9 through 11
and 13 through 15 Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 3, 2000, and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
Information regarding security ownership of certain beneficial owners
appears on page 4 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held November 3, 2000, under the caption "Stock Ownership"
and is incorporated herein by this reference.
Information regarding security ownership of management appears on page 5 of
the Company's Proxy Statement for the Annual Meeting of Shareholders to be held
November 3, 2000, under the caption "Stock Ownership and is incorporated herein
by this reference.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
Information regarding certain relationships and related transactions
appears on page 17 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on November 3, 2000 under the caption "Transactions With
Certain Related Persons" and is incorporated by this reference.
<PAGE>41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
-------------------------------------------------------------------------
(a) Financial Statements:
See "Part II - Item 8. Financial Statements"
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Plan of Conversion (including the Restated Organization
Certificate and Stock Bylaws of Richmond County Savings Bank).*
2.2 Agreement and Plan of Merger, dated as of July 17, 1998, by and
between Richmond County Financial Corp. and Ironbound Bankcorp,
NJ.**
2.3 Agreement and Plan of Merger, amended and restated as of
October 14, 1998, by and between Richmond County Financial Corp.
and Bayonne Bancshares, Inc.***
2.4 Agreement and Plan of Merger, dated March 15, 2000, by and
among Richmond County Financial Corp., Richmond County
Acquisition, Inc. and South Jersey Financial Corporation,Inc.******
3.1 Certificate of Incorporation of Richmond County Financial Corp.*
3.2 Amended and Restated Bylaws of Richmond County Financial Corp.
10.1 Form of Richmond County Savings Bank Employee Stock Ownership
Plan and Trust.*
10.2 Form of ESOP Loan Commitment Letter and ESOP Loan Documents.*
10.3 Employment Agreement between Richmond County Financial Corp. and
Michael F. Manzulli (As Amended and Restated).*****
10.4 Employment Agreement between Richmond County Savings Bank and
Michael F. Manzulli.*
10.5 Employment Agreement between Richmond County Financial Corp. and
Anthony E. Burke (As Amended and Restated).*****
10.6 Employment Agreement between Richmond County Savings Bank and
Anthony E. Burke.*****
10.7 Employment Agreement between Richmond County Financial Corp. and
Thomas R. Cangemi (As Amended and Restated).*****
10.8 Employment Agreement between Richmond County Savings Bank and
Thomas R. Cangemi.*****
10.12 Form of Change in Control Agreement between Richmond County
Savings Bank and certain executive officers.*
10.13 Form of Proposed Richmond County Savings Bank Employee Severance
Compensation Plan.*
10.14 Richmond County Financial Corp. Supplemental Executive Retirement
Plan (As Amended and Restated).
10.15 Richmond County Financial Corp. 1998 Stock-Based Incentive
Plan.****
11.0 Statement re: Computation of Per Share Earnings.
13.0 2000 Annual Report to Shareholders.
21.0 Subsidiaries Information included in Part I.
23.0 Consent of Independent Auditors.
27.0 Financial Data Schedule (EDGAR version only).
* Incorporated by reference from the Form S-1 (Registration No.
333-37009), as amended, filed on October 2,1997.
** Incorporated by reference from the Form 8-K (File No.
0-23271), filed with the SEC on July 27,1998.
*** Incorporated by reference from the Form 8-K (File No.
0-23271), filed with the SEC on October 16,1998.
**** Incorporated by reference from the DEF 14A (File No. 0-23271),
filed with the SEC on August 28,1998.
<PAGE>42
***** Incorporated by reference from the Form 10-K (File No. 0-23271),
filed with the SEC on September 29, 1999.
****** Incorporated by reference from the Form 8-K (File No. 0-24997),
filed with the SEC on March 22, 2000.
(b) Reports on Form 8-K
(i) The Company filed a report on Form 8-K with the SEC (File No.
0-24997) on August 1, 2000, which report announced that the Company
had consummated its acquisition of South Jersey Financial
Corporation, Inc.
<PAGE>43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RICHMOND COUNTY FINANCIAL CORP.
-------------------------------
(Registrant)
/s/ Michael F. Manzulli
-----------------------
Michael F. Manzulli
Chairman of the Board and
Chief Executive Officer
Date: September 28, 2000
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on September 28, 2000.
<TABLE>
<CAPTION>
NAME TITLE DATE
------ ------- -------
<S> <C> <C> <C>
/s/ Michael F. Manzulli Chairman of the Board, Chief September 28, 2000
------------------------------ Executive Officer and Director ------------------
Michael F. Manzulli
/s/ Anthony E. Burke President, Chief Operating Officer September 28, 2000
------------------------------ and Director ------------------
Anthony E. Burke
/s/ Thomas R. Cangemi Executive Vice President, Chief September 28, 2000
------------------------------ Financial Officer and Treasurer ------------------
Thomas R. Cangemi
/s/ Godfrey H. Carstens, Jr. Director September 28, 2000
------------------------------ ------------------
Godfrey H. Carstens, Jr.
/s/ Robert S. Farrell Director September 28, 2000
------------------------------ ------------------
Robert S. Farrell
/s/ William C. Frederick Director September 28, 2000
------------------------------ ------------------
William C. Frederick
/s/ James L. Kelley Director September 28, 2000
------------------------------ ------------------
James L. Kelley
/s/ Patrick F.X. Nilan Director September 28, 2000
------------------------------ ------------------
Patrick F.X. Nilan
/s/ T. Ronald Quinlan, Jr. Director September 28, 2000
------------------------------ ------------------
T. Ronald Quinlan, Jr.
/s/ Maurice K. Shaw Director September 28, 2000
------------------------------ ------------------
Maurice K. Shaw
</TABLE>