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Filed pursuant to Rule 424(b)(1)
Registration Nos. 333-76191 & 333-76191-01.
$22,000,000
HAVEN CAPITAL TRUST II
10.25% Capital Securities
[LOGO]
(Liquidation Amount $10.00 per Capital Security)
Fully and unconditionally guaranteed,
to the extent described herein, by
HAVEN BANCORP, INC.
Haven Capital Trust II is offering capital securities representing preferred
beneficial interests in Haven Capital to the public. Distributions on the
capital securities will be paid quarterly at an annual rate of 10.25% of the
aggregate liquidation amount of the capital securities on March 31, June 30,
September 30 and December 31 of each year beginning June 30, 1999. Haven Capital
has granted the underwriters a 30-day option to purchase up to 330,000
additional capital securities on the same terms set forth below solely to cover
over-allotments.
The capital securities have been approved for quotation on the Nasdaq
National Market under the trading symbol "HAVNP."
THE OFFERING
<TABLE>
<CAPTION>
Per Security Total
------------- ----------
<S> <C> <C>
Public Price (1).................................. $ 10.00 $22,000,000
Underwriting Discounts............................ (2) (2)
Proceeds to Haven Capital......................... $ 10.00 $22,000,000
</TABLE>
- ------------------------
(1) Plus accrued distributions from May 26, 1999 to the date of delivery.
(2) Haven Bancorp will pay the underwriters compensation of $0.30 per capital
security. Haven Bancorp will pay the underwriters a total of $660,000 (or
$759,000 if the over-allotment option is exercised in full).
PLEASE READ THE "RISK FACTORS" SECTION OF THIS PROSPECTUS, BEGINNING ON PAGE
8.
These securities are not deposits or other obligations of a bank and are not
insured by the Federal Deposit Insurance Corporation or any other government
agency.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
FRIEDMAN BILLINGS RAMSEY
FIRST ALBANY CORPORATION
LADENBURG THALMANN & CO. INC.
May 21, 1999
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[MAP OF BANK AND SUBSIDIARY OFFICE LOCATIONS]
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WHERE YOU CAN FIND MORE INFORMATION
Haven Bancorp, Inc. ("Haven," "we," "us" or "our") files annual, quarterly
and current reports, proxy statements and other information with the SEC. You
may read and copy any document in our public files at the SEC's public reference
rooms at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
regional offices at 7 World Trade Center, 13(th) Floor, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Avenue, Suite 1400,
Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from the SEC's web site at http://www.sec.gov through the SEC's
electronic data gathering, analysis and retrieval system, EDGAR. Our common
stock is listed on the Nasdaq National Market under the symbol "HAVN."
Information about us also is available from the NASD, 1735 K Street, N.W.,
Washington, D.C. 20006.
This prospectus is part of a registration statement that we and Haven
Capital Trust II ("Haven Capital") filed with the SEC. Because the SEC allows us
to omit parts of the registration statement from this prospectus, we did not
include all the information in the registration statement in this prospectus.
You should review the registration statement, including the exhibits, for
additional information regarding Haven Capital, the capital securities and us.
The registration statement and its exhibits may be inspected at the SEC's
offices or on the SEC's web site described in the previous paragraph.
ADDITIONAL INFORMATION WE HAVE INCORPORATED IN THE PROSPECTUS
The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents that are considered part of this prospectus. Information
that we file with the SEC after the date of the registration statement will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings made with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 by us
(1) after the date of the filing of our registration statement and prior to its
effectiveness and (2) until our offering of securities has been completed.
- Annual Report on Form 10-K for the year ended December 31, 1998.
- Current Report on Form 8-K filed with the SEC on April 27, 1999.
- Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
For your convenience, we have attached a copy of our Annual Report on Form
10-K for the year ended December 31, 1998 (without exhibits) to this prospectus
as Appendix A. We have also attached our management's discussion and analysis of
our financial condition and results of operations, which was incorporated in our
annual report on Form 10-K for the year ended December 31, 1998, as Appendix B
and our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 as
Appendix C. You may obtain a copy of our filings with the SEC at no cost, by
writing or telephoning us at the following address:
Haven Bancorp, Inc.
Attention: Secretary
615 Merrick Avenue
Westbury, New York 11590
(516) 683-4292
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. This prospectus is an offer to
sell only the capital securities referred to in this prospectus, and only under
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circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of the date of the prospectus.
FORWARD-LOOKING STATEMENTS RELATING TO HAVEN'S, HAVEN CAPITAL'S AND THE CAPITAL
SECURITIES' FUTURE PERFORMANCE OR EXPECTATIONS
We have used and incorporated by reference "forward-looking statements" in
this prospectus. Sentences containing words such as "believes," "expects,"
"may," "will," "should," "projected," "contemplates" or "anticipates" may
constitute forward-looking statements. These statements are within the meaning
of the Private Securities Litigation Reform Act of 1995 and are subject to risks
and uncertainties that could cause our actual results to differ materially. We
have used these statements to describe our expectations and estimates in various
areas, including:
- our overall business conditions particularly in the markets in which we
operate;
- fiscal and monetary policy;
- the market for mortgage originations and purchases;
- year 2000 compliance issues;
- competitive products and pricing;
- credit risk management; and
- changes in regulations affecting financial institutions.
Our actual results could vary materially from the future results covered in our
forward-looking statements. The statements in the "Risk Factors" section are
cautionary statements identifying important factors, including certain risks and
uncertainties, that could cause our results to vary materially from the future
results covered in such forward-looking statements. Other factors, such as the
general state of the United States economy, could also cause actual results to
vary materially from the future results covered in such forward-looking
statements. We disclaim any obligation to announce publicly future events or
developments that affect the forward-looking statements in this prospectus.
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SUMMARY INFORMATION
THE FOLLOWING INFORMATION IS A SUMMARY OF THE MAJOR TERMS OF THE OFFERING OF
CAPITAL SECURITIES. YOU SHOULD READ THE MORE DETAILED DISCUSSION AND FINANCIAL
INFORMATION APPEARING ELSEWHERE OR INCORPORATED IN THIS PROSPECTUS.
HAVEN BANCORP, INC.
We are a Delaware corporation and the savings association holding company
for CFS Bank (the "Bank"), a federally chartered savings bank. We conduct our
operations primarily through the Bank. The Bank is a community-oriented savings
bank, which offers mortgage, insurance and investment products through its
residential lending division, CFS Intercounty, its investment services
subsidiary, CFS Investment Services, and through our insurance agency
subsidiary, CFS Insurance Agency, Inc. The Bank also offers commercial real
estate loans. Our insurance agency subsidiary allows us to offer property and
casualty insurance and business lines of insurance to our customers. With our
acquisitions in 1998 of CFS Intercounty and CFS Insurance, we have complemented
our package of financial products and services to position the Bank as a
comprehensive financial services provider.
The Bank offers these products and services through eight traditional
branches and 59 supermarket branches in the New York City boroughs of Queens,
Brooklyn, Manhattan and Staten Island; the New York counties of Nassau, Suffolk,
Rockland and Westchester; and in New Jersey and Connecticut. In addition, the
Bank operates six full-service residential loan origination offices and six
satellite residential loan origination offices as part of the CFS Intercounty
division in New York, New Jersey, Connecticut and Pennsylvania. CFS Insurance
has three free-standing insurance agency offices in Long Island, New York. Our
principal offices are located at 615 Merrick Avenue, Westbury, New York 11590,
and our telephone number is (516) 683-4100.
As of December 31, 1998, we had on a consolidated basis total assets of
$2.40 billion, total liabilities of $2.28 billion, which included $1.72 billion
of total deposits, and total stockholders' equity of $119.9 million. As of March
31, 1999, we had on a consolidated basis total assets of $2.55 billion, total
liabilities of $2.43 billion, which included $1.80 billion of total deposits,
and total stockholders' equity of $119.1 million. Stockholders' equity for the
first quarter of 1999 reflects net income of $2.6 million, which was offset by a
reduction of $3.4 million in the unrealized gain on securities available for
sale.
HAVEN CAPITAL TRUST II
We organized Haven Capital as a statutory Delaware business trust on March
26, 1999. Haven Capital will sell its capital securities to the public and its
common securities to us. Haven Capital will use all of the proceeds from the
sale of the capital securities and the common securities to buy our 10.25%
junior subordinated deferrable interest debentures due June 30, 2029. The
subordinated debentures have the same financial terms as the capital securities.
We are obligated to make interest payments and other payments under the
subordinated debentures to Haven Capital, which Haven Capital will use to make
distributions and other payments on the capital securities to you. Our
obligations under the subordinated debentures are unsecured and rank junior to
all of our other borrowings, except borrowings that by their terms rank equal or
junior to the capital securities. We will, on a subordinated basis, fully,
irrevocably and unconditionally guarantee the payment by Haven Capital of the
amounts that are required to be paid on the capital securities, to the extent
that Haven Capital has funds available.
Haven Capital intends to maintain its status as an entity that is not
taxable as a corporation for federal income tax purposes. Haven Capital has no
separate financial statements. The statements would not be material to you
because Haven Capital has no independent operations. Haven Capital has a term of
approximately 55 years, but may be dissolved earlier.
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HAVEN'S INVESTMENT OF THE PROCEEDS FROM THE SALE OF THE SUBORDINATED DEBENTURES
We currently intend to use the net proceeds from the sale of the
subordinated debentures, which are estimated to be $22,680,500 ($26,082,500 if
the underwriters exercise their over-allotment option in full), net of
commissions and other estimated offering expenses, to invest in the Bank to
increase its capital level. The increased capital will enable the Bank to expand
its deposit base. The Bank will also invest this additional capital in
residential and commercial real estate loans in our market area and in
investment-grade mortgage-backed securities and investment securities. It is
also possible that, if our board of directors determines that it is in the best
interests of our shareholders, a portion of the net proceeds may be used for
repurchases of our stock. Initially, we will invest the net proceeds in
short-term investment-grade financial securities. For more information about our
use of the proceeds from the sale of the subordinated debentures, you should
read the "Use of Proceeds" section of this prospectus.
We will pay all fees and expenses related to Haven Capital and the offering
of the capital securities, as well as all of the ongoing costs and expenses of
Haven Capital. We will not be responsible for Haven Capital's obligations to pay
you distributions or other amounts under the capital securities, except to the
extent of our guarantee of the capital securities.
THE CAPITAL SECURITIES
Each capital security represents an undivided preferred beneficial interest
in the assets of Haven Capital. Each capital security that you own will entitle
you to receive quarterly distributions as described in this prospectus. The
underwriters are offering 2,200,000 capital securities at a price of $10.00 for
each capital security, plus any accumulated distributions on the capital
securities from May 26, 1999.
DISTRIBUTIONS ON THE CAPITAL SECURITIES
If you purchase any capital securities, you will be entitled to receive
quarterly cash distributions at an annual rate of 10.25% of the liquidation
amount of $10.00 for each capital security. You will be entitled to be paid
distributions on March 31, June 30, September 30 and December 31 of each year,
beginning June 30, 1999. The amount of each distribution will include amounts
accrued up to the date the distribution is due. These payments are identical to
the payments that we are required to make under the subordinated debentures.
HAVEN CAPITAL'S ABILITY TO DEFER PAYMENT OF YOUR DISTRIBUTIONS
We can, on one or more occasions, defer interest payments on the
subordinated debentures for up to 20 consecutive quarters, unless an event of
default exists under the subordinated debentures. We cannot defer interest
payments beyond June 30, 2029, the stated maturity date of the subordinated
debentures.
If we defer interest payments on the subordinated debentures, Haven Capital
will also defer distributions on the capital securities. During this deferral
period, the capital securities will still accumulate distributions at an annual
rate of 10.25% of the liquidation amount of $10.00 for each capital security.
Additionally, any unpaid distributions on the capital securities will accumulate
additional distributions at the same rate, compounded quarterly, to the extent
permitted by law. If Haven Capital defers your distributions, you will still be
required to accrue interest income and include it in your gross income for U.S.
federal income tax purposes, even if you are a cash basis taxpayer.
HAVEN'S GUARANTEE OF THE CAPITAL SECURITIES
We will fully, irrevocably and unconditionally guarantee, on a subordinated
basis, to the extent that Haven Capital has funds legally available to make the
following payment obligations:
- payments of distributions on the capital securities;
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- payments on liquidation of Haven Capital; and
- payments on maturity or earlier redemption of the capital securities.
If we do not make a payment on the subordinated debentures, Haven Capital will
not have sufficient funds to make payments on the capital securities. Our
guarantee does not cover the payment of distributions when Haven Capital does
not have sufficient funds to pay the distributions. Our obligations under the
guarantee and under the subordinated debentures are unsecured and rank junior to
all of our other borrowings, except borrowings that by their terms rank equal or
junior to the subordinated debentures. Our guarantee of the capital securities
issued by Haven Capital Trust I and our 10.46% junior subordinated deferrable
interest debentures that mature February 1, 2027 rank equal to our guarantee of
the capital securities Haven Capital is offering by this prospectus.
REDEMPTION OF THE CAPITAL SECURITIES
Haven Capital will redeem the capital securities when we pay the
subordinated debentures at maturity on June 30, 2029. In addition, if we redeem
some or all of the subordinated debentures before maturity, Haven Capital will
use the cash it receives from the redemption of the subordinated debentures to
redeem proportionately an amount of capital securities and common securities
having an aggregate liquidation amount (the number of securities times $10.00)
equal to the aggregate principal amount of the subordinated debentures that we
redeem.
We can redeem some or all of the subordinated debentures at any time on or
after June 30, 2009 and before June 30, 2029 at their principal amount plus any
accrued and unpaid interest to the date of redemption. If we redeem any
subordinated debentures on or after June 30, 2009, we will pay a premium that
declines each year from 5.125% beginning on June 30, 2009 to 0% on or after June
30, 2019.
We can redeem all of the subordinated debentures at any time before June 30,
2029 at their principal amount plus any accrued and unpaid interest to the date
of redemption if changes in the bank regulatory, investment company or tax laws
occur that would adversely impact the status of Haven Capital, the trust
securities or the subordinated debentures.
We may have to obtain regulatory approvals, including the approval of the
Office of Thrift Supervision, before we redeem any subordinated debentures prior
to maturity.
TRUSTEES OF HAVEN CAPITAL
There are five trustees of Haven Capital. The Chase Manhattan Bank will be
the property trustee, Chase Manhattan Bank Delaware will be the Delaware trustee
and three individuals who are employees of Haven will be the administrative
trustees of Haven Capital.
As the sole holder of the common securities, we can replace or remove any of
the trustees. However, if an event of default exists under the trust agreement
governing Haven Capital, only the holders of a majority in aggregate liquidation
amount of the capital securities would be able to remove and replace the
property trustee and the Delaware trustee. As owner of all of the common
securities, only we can remove or replace the administrative trustees. The
duties and obligations of each trustee are governed by the trust agreement.
FORM OF THE CAPITAL SECURITIES WHEN THEY ARE ISSUED
The capital securities will be represented by one or more global securities
that will be deposited with and registered in the name of The Depository Trust
Company, New York, New York ("DTC") or its nominee. This means that you will not
receive a certificate for the capital securities. We expect that the capital
securities will be ready for delivery through DTC on or about May 26, 1999.
PURCHASES OF THE CAPITAL SECURITIES FOR AN EMPLOYEE BENEFIT PLAN
If you are purchasing the capital securities for an employee benefit plan,
you should read "ERISA Considerations" for a discussion of prohibited
transactions and your fiduciary duties.
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RISK FACTORS
AN INVESTMENT IN THE CAPITAL SECURITIES INVOLVES A NUMBER OF RISKS. SOME OF
THESE RISKS RELATE TO THE CAPITAL SECURITIES AND OTHERS RELATE TO HAVEN. WE URGE
YOU TO CAREFULLY CONSIDER THIS INFORMATION, TOGETHER WITH THE OTHER INFORMATION
IN THIS PROSPECTUS AND IN THE DOCUMENTS THAT WE HAVE INCORPORATED BY REFERENCE
IN THIS PROSPECTUS.
RISKS RELATED TO YOUR INVESTMENT IN THE CAPITAL SECURITIES
HAVEN CANNOT MAKE PAYMENTS UNDER THE GUARANTEE OR THE SUBORDINATED DEBENTURES IF
HAVEN DEFAULTS ON ITS OTHER OBLIGATIONS THAT ARE MORE SENIOR.
Our obligations under the guarantee issued for your benefit are unsecured
and rank
- junior to all of our other borrowings, except those borrowings that by
their terms are equal or junior;
- equal to our 10.46% junior subordinated deferrable interest debentures
that mature February 1, 2027 and our guarantee of the capital securities
of Haven Capital Trust I; and
- senior to our common stock.
This means that we cannot pay under the guarantee if we default on payments
of any of our other borrowings, unless, by their terms, those borrowings are
equal or junior to the guarantee. If we liquidate, go bankrupt or dissolve, we
would be able to pay under the guarantee only after we have paid all our other
liabilities that are senior to the guarantee.
Our obligations under the subordinated debentures are unsecured and rank
junior in priority to all of our senior indebtedness, which includes our
borrowings that are not by their terms equal or junior to the subordinated
debentures. If we default on a payment on our senior indebtedness, we cannot pay
principal or interest on the subordinated debentures. If we liquidate, go
bankrupt or dissolve, we would be able to pay Haven Capital under the
subordinated debentures only after we have made all payments on our senior
indebtedness. These payments to Haven Capital would be made on a PRO RATA basis
with our 10.46% junior subordinated deferrable interest debentures issued to
Haven Capital Trust I. As of March 31, 1999, we had approximately $1.40 million
in senior indebtedness.
If we default on our obligations to pay principal, premium or interest on
the subordinated debentures, Haven Capital will not have sufficient funds to
make distribution payments or liquidation payments on the capital securities. As
a result, you will not be able to rely upon our guarantee for payment of these
amounts. Instead, you or the property trustee may enforce the rights of Haven
Capital under the subordinated debentures against us. For more information,
please refer to "Description of Subordinated Debentures--Enforcement of Certain
Rights by Holders" on page 53.
The capital securities, guarantee, the subordinated debentures and the
indenture do not limit our ability to incur additional debt, including debt that
is senior in priority of payment.
For more information on payments under the guarantee and the subordinated
debentures, you should refer to "Description of Guarantee--Status of the
Guarantee" on page 57 and "Description of Subordinated
Debentures--Subordination" on page 54.
BANKING LAWS AND REGULATIONS LIMIT HAVEN'S ACCESS TO FUNDS, WHICH MAY PREVENT
HAVEN FROM MAKING PAYMENTS UNDER THE SUBORDINATED DEBENTURES.
Because we are a savings association holding company, substantially all of
our operating assets are owned by the Bank. We rely primarily on dividends from
the Bank to pay principal and interest on our outstanding debt obligations and
corporate expenses. The Board of Directors of the Bank has the sole discretion
to declare and pay any dividends to us.
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The Office of Thrift Supervision regulates us, as a savings association
holding company, and the Bank, as a federal stock savings bank. The Office of
Thrift Supervision limits all capital distributions by the Bank directly or
indirectly to us, including dividend payments. Effective April 1, 1999, the
Office of Thrift Supervision amended its capital distribution regulations. Under
the amended regulations, the Bank will have to file a notice with the Office of
Thrift Supervision with respect to each capital distribution that it proposes to
make, unless the specific capital distribution requires an application. An
application would be required if the total amount of all capital distributions
(including the proposed capital distribution) for the applicable calendar year
exceeds net income for that year to date plus the retained net income for the
preceding two years. Under the amended regulations, the Bank would also have to
file an application for a proposed capital distribution that would result in the
Bank's failure to meet any of its minimum capital requirements. If these
regulations governing capital distributions and minimum capital requirements
during 1999 had been in effect during 1998, the Bank could have paid dividends
of $32.6 million without obtaining prior regulatory approval.
The Office of Thrift Supervision and the Federal Deposit Insurance
Corporation have authority to prohibit the Bank or us from engaging in an unsafe
or unsound practice in conducting our business. The payment of dividends,
depending upon the financial condition of the Bank and us, could be deemed an
unsafe or unsound practice.
In addition to regulatory restrictions on the payment of dividends, the Bank
is subject to certain restrictions imposed by federal law on any extensions of
credit it makes to its affiliates and on investments in stock or other
securities of its affiliates. We are considered an affiliate of the Bank. These
restrictions prevent affiliates of the Bank, including us, from borrowing from
the Bank, unless the loans are secured by various types of collateral. Federal
law limits the aggregate amount of loans to and investments in any single
affiliate to 10% of the Bank's capital and surplus and also limits the aggregate
amount of loans to and investments in all affiliates to 20% of the Bank's
capital and surplus. As of March 31, 1999, approximately $13.3 million of credit
was available to us under this limitation.
Under the prompt corrective action provisions of the Federal Deposit
Insurance Act, the Bank is prohibited from making capital distributions,
including the payment of dividends, if, after making any capital distribution,
the Bank would become undercapitalized as defined under the Federal Deposit
Insurance Act. Based on the Bank's current financial condition, we do not expect
that this provision will have any impact on our ability to obtain dividends from
the Bank; however, we cannot be sure that the Bank will be able to pay dividends
in the future.
Also, as a savings association holding company, our right to receive
distributions from the Bank may be limited. If the Bank is liquidated or
reorganized, depositors of the Bank would have the right to receive
distributions from the Bank before us, unless we were considered a creditor of
the Bank. If we did not receive distributions from the Bank, we could not pay
the principal of (or premium, if any) or interest on the subordinated debentures
to Haven Capital, and Haven Capital could not pay you distributions on the
capital securities. At March 31, 1999, the Bank had total liabilities, including
deposits, of $2.43 billion.
HAVEN CAN DEFER INTEREST PAYMENTS ON THE SUBORDINATED DEBENTURES, CAUSING YOUR
PAYMENTS UNDER THE CAPITAL SECURITIES TO STOP, WHICH WILL HAVE TAX
CONSEQUENCES TO YOU AND MAY AFFECT THE MARKET PRICE OF THE CAPITAL SECURITIES.
We have the right, at one or more times, unless an event of default exists
under the subordinated debentures, to defer interest payments on the
subordinated debentures for up to 20 consecutive quarters, but not beyond June
30, 2029. If we defer interest payments, Haven Capital will defer paying
distributions to you on your capital securities during the deferral period.
Additionally, during this period, any unpaid distributions on the capital
securities would accumulate additional distributions at the rate of 10.25% per
year, compounded quarterly, to the extent permitted by law. During any deferral
period, we will be prohibited from declaring or paying cash dividends on our
capital stock or
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from paying on or repaying, repurchasing or redeeming any debt which ranks equal
or junior to the subordinated debentures, including payments with respect to our
10.46% junior subordinated deferrable interest debentures due February 1, 2027
held by Haven Capital Trust I. For more information, please refer to
"Description of Capital Securities--Distributions."
When any deferral period ends and we pay all interest then accrued and
unpaid on the subordinated debentures, we may elect to begin a new deferral
period. There is no limitation on the number of times that we may elect to begin
a deferral period. See "Description of Capital Securities-- Distributions" and
"Description of Subordinated Debentures--Option to Extend Interest Payment
Date."
If we exercise our right to defer payments of interest on the subordinated
debentures, you will be required to accrue income (as original issue discount)
in respect of the deferred stated interest allocable to your capital securities
for U.S. federal income tax purposes, which will be allocated but not
distributed to you. As a result, you will be required to recognize income for
U.S. federal income tax purposes before you receive any cash and will not
receive the cash related to this interest income from Haven Capital if you
dispose of your capital securities prior to the record date for the distribution
payment. For more information, you should read "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount" and "--Sales or
Redemption of Capital Securities."
We do not currently intend to exercise our right to defer interest payments
on the subordinated debentures. However, if we exercise this right in the
future, the market price of the capital securities will probably be affected.
The capital securities may trade at a price that does not fully reflect the
value of accrued but unpaid interest on the subordinated debentures. If you sell
your capital securities during a deferral period, you may not receive the same
return on your investment as someone else who continues to hold the capital
securities.
HAVEN CAPITAL MAY REDEEM THE CAPITAL SECURITIES IF A SPECIAL EVENT OCCURS.
If there are changes in the bank regulatory, investment company or tax laws
that would adversely affect the status of Haven Capital, the trust securities or
the subordinated debentures, we have the right to redeem the subordinated
debentures, in whole but not in part. Our redemption of the subordinated
debentures will cause Haven Capital to redeem the capital securities and the
common securities at a price equal to $10.00 per security plus any accrued and
unpaid distributions. We may have to obtain regulatory approval, including the
approval of Office of Thrift Supervision, before we redeem any subordinated
debentures. For more information, you should refer to "Description of Capital
Securities--Redemption."
IF WE DISTRIBUTE THE SUBORDINATED DEBENTURES, THERE MAY BE AN ADVERSE EFFECT ON
THE TRADING MARKET AND TRADING PRICE OF YOUR INVESTMENT, AND THERE MAY BE
ADVERSE TAX EFFECTS.
We have the right to dissolve Haven Capital at any time if we receive:
- an opinion of counsel stating that a distribution of the subordinated
debentures will not be a taxable event to you; and
- any required regulatory approval.
Upon a dissolution of Haven Capital, and after satisfying the liabilities
owed to Haven Capital's creditors under applicable law, the trustees will
distribute the subordinated debentures to the holders of the capital securities,
and us, as the holder of common securities.
If the trustees distribute the subordinated debentures, we will use our best
efforts to list the subordinated debentures on the Nasdaq National Market. We
cannot be sure that the subordinated debentures will be approved for listing on
Nasdaq or that a trading market will exist for the subordinated debentures.
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Under current U.S. federal income tax law, a distribution of the
subordinated debentures following the dissolution of Haven Capital would not be
a taxable event to you. However, any distributions of cash for the subordinated
debentures would be a taxable event to you. You should refer to "Certain Federal
Income Tax Considerations--Receipt of Subordinated Debentures or Cash Upon
Liquidation of Haven Capital" for more information.
YOU WILL HAVE LIMITED VOTING RIGHTS.
As a holder of capital securities, you will have limited voting rights. You
can vote only to modify the capital securities and to exercise Haven Capital's
rights as a holder of the subordinated debentures. In general, only we can
replace or remove any of the trustees. However, if an event of default exists
under the trust agreement, the holders of the capital securities may replace the
property trustee and the Delaware trustee.
We, along with the property trustee and the administrative trustees, may
amend the trust agreement without your consent even if these actions adversely
affect your interests, to ensure that Haven Capital:
(a) will not be classified as an association taxable as a corporation for
U.S. federal income tax purposes; and
(b) will not be required to register as an "investment company" under the
Investment Company Act of 1940.
You will have no voting rights with respect to any matters submitted to a
vote of our stockholders. For more information on your voting rights, please
refer to "Description of Capital Securities--Voting Rights; Amendment of the
Trust Agreement" and "--Removal of Trustees."
TRADING PRICE MAY NOT REFLECT THE FULL VALUE OF THE CAPITAL SECURITIES.
We cannot predict the market prices for the capital securities or the
subordinated debentures that may be distributed if we dissolve Haven Capital.
The capital securities or the subordinated debentures may trade at a discount
from the price that you paid for the capital securities.
The capital securities may trade at prices that do not fully reflect the
value of any accrued and unpaid interest on the underlying subordinated
debentures.
We have applied for the capital securities to be listed on the Nasdaq
National Market. Although the underwriters of the offering have indicated that
they intend to make a market in the capital securities, they are not obligated
to do so and may stop any market-making activities at any time without notice.
We cannot be sure that there will be a liquid trading market for the capital
securities.
RISKS RELATED TO HAVEN
INTEREST RATE CHANGES MAY REDUCE HAVEN'S PROFITABILITY.
To be profitable, we have to earn more money in interest income and fee
income than we pay as interest on deposits and other interest-bearing
liabilities and as other expenses. If interest rates fall, the amount of
interest we earn on loans, mortgage-backed securities and investment securities
may decrease more quickly than the amount of interest we pay on deposits. This
would result in a decrease in our profitability.
Changes in the general level of interest rates also affect
- our ability to originate loans;
- the value of our loan and securities portfolios;
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<PAGE>
- our ability to realize gains from the sale of loans and securities assets;
- the average life of our deposits; and
- our ability to obtain deposits.
Fluctuations in interest rates will affect both the level of income and expense
we record on a large portion of the Bank's assets and liabilities, and the
market value of all interest-earning assets, other than interest-earning assets
that mature in the short term. The Bank's interest rate management strategy is
designed to stabilize net interest income and preserve capital over a broad
range of interest rate movements by matching the interest rate sensitivity of
assets and liabilities. Although we believe that our current mix of loans,
mortgage-backed securities, investment securities and deposits is reasonable,
significant fluctuations in interest rates may have a negative effect on our
profitability.
For more detailed information on our exposure to changes in interest rates,
please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset/ Liability Management" in our annual report on Form
10-K for the year ended December 31, 1998 that we have incorporated by reference
in this prospectus. For your convenience, we have attached our management's
discussion and analysis of our financial condition and results of operations,
which was incorporated in our annual report on Form 10-K for the year ended
December 31, 1998, as Appendix B.
BECAUSE A MAJORITY OF HAVEN'S SUPERMARKET BRANCHES ARE IN SUPERMARKETS OWNED AND
OPERATED BY PATHMARK STORES, INC., HAVEN'S SUPERMARKET BANKING PROGRAM MAY BE
MATERIALLY ADVERSELY AFFECTED BY THE ACQUISITION OF PATHMARK BY ROYAL AHOLD
N.V.
In 1996, we entered into a fifteen year contract with Pathmark to open
supermarket branches in 44 Pathmark stores that were then existing in New York.
The contract also provides that we will open a branch in all new Pathmark
supermarkets that open in New York (excluding one store in New York City),
Bronx, Queens, Kings, Richmond, Nassau, Suffolk, Westchester and Rockland
counties. We also have a right, but no obligation, to open and operate branches
in any new stores that Pathmark opens in New York State other than the specified
counties through 2011. We currently operate branches in 35 Pathmark stores.
Pathmark has notified us that two stores in which we were originally required to
open branches under the contract would not have space available for a
supermarket branch. We are presently obligated to open branches in seven
additional existing Pathmark stores. In addition, Pathmark is in the process of
building three new stores in New York in which we will be required to open
branches. Under the contract, if Pathmark or a successor to Pathmark sells a
supermarket where the Bank operates a branch, the sale would be subject to our
license related to that supermarket. If Pathmark or a successor to Pathmark
closes a supermarket, the license would be subject to termination, and we would
be entitled to, among other things, a rebate of some of the costs we incurred to
open the branch. Each branch is under a five-year license that gives us an
option to renew the license for three additional five-year terms.
On March 9, 1999, Royal Ahold N.V., a Dutch food retailer, announced that it
intends to acquire Pathmark. By acquiring Pathmark, Royal Ahold would become
subject to, and bound by, our contract with Pathmark with respect to the
Pathmark supermarkets that are part of Royal Ahold's acquisition. Royal Ahold
also owns Edwards supermarkets and has stated that it intends to integrate its
Edwards supermarkets into the Pathmark chain. We do not know if Royal Ahold
intends to close any Pathmark stores, particularly in communities where there is
both a Pathmark and an Edwards store. Our supermarket banking program may be
materially adversely affected if Royal Ahold closes a significant number of
Pathmark stores or decides not to open any additional stores in areas where it
would have been advantageous for us to open supermarket branches.
12
<PAGE>
IF HAVEN CANNOT SUCCESSFULLY MANAGE THE GROWTH IN ITS SUPERMARKET BANKING
PROGRAM, HAVEN'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED.
In 1996, we began our supermarket banking program, and we opened four
supermarket branches. In 1997, we opened 28 new supermarket branches, and in
1998 we opened 25 new supermarket branches. We currently operate 59 supermarket
branches and anticipate opening three additional Pathmark supermarket branches
and one Edwards supermarket branch in the second half of 1999. After we open
these three branches, under the contract with Pathmark, we have the right and
the obligation to open branches in five existing Pathmark stores, two Pathmark
stores that are currently under construction and any other new stores opened by
Pathmark in New York, Bronx, Queens, Kings, Richmond, Nassau, Suffolk,
Westchester and Rockland counties. Although we are currently obligated to open
supermarket branches in seven additional Pathmark stores, we are currently
discussing the timing with respect to such openings with Pathmark. We anticipate
that we will not open branches in most of these Pathmark stores in 1999. We also
have established a relationship with a number of ShopRite operators in New
Jersey and Connecticut where we have the right, but no obligation, to open
supermarket branches in all of their new or renovated stores in New Jersey and
Connecticut. We currently intend that when we reach a total of 63 supermarket
branches, we will not open any additional supermarket branches in 1999, unless
we are obligated, or we determine that it would be in our best interest, to do
so.
Because supermarket banking is a relatively new business strategy for us and
for other financial institutions in New York, New Jersey and Connecticut, there
is little historical data with which to compare our performance and to base our
expectations. We have incurred significant start-up costs with each branch
opening. Non-interest expense directly attributable to these branches accounted
for 28.2% of non-interest expense in 1998 and 26.7% for the first quarter of
1999. As of March 31, 1999, our expansion based on our supermarket banking
program has increased our deposits by approximately 32.0%. The supermarket
branches contributed 51.1% of deposit account fee income and non-traditional
revenue in 1998 and contributed 59.4% of such income and revenue in the first
quarter of 1999.
Based on our experience, we expect that supermarket branches, on average,
will reach profitability after about 18 months of operations. However, we may
encounter unforseen difficulties and complications, including a continued
flattening of the yield curve, that could prevent, or make it more difficult,
for our supermarket branches to reach profitability within our expected time
frame. In addition, the profitability of the supermarket banking program could
be adversely affected by business matters related to the supermarkets that are
not within our control. Specifically, labor issues between a supermarket's
management and its employees, decreased advertising or promotions by the
supermarket or a decline in a supermarket's popularity could reduce the number
of existing customers purchasing our financial products and services and could
make it more difficult for us to attract new customers. We do not know if we
will be able to successfully achieve the anticipated benefits of our growth and
expanded operations through the supermarket banking program.
IF HAVEN CANNOT SUCCESSFULLY INTEGRATE THE OPERATIONS OF CFS INTERCOUNTY
MORTGAGE AND CFS INSURANCE AGENCY, HAVEN'S RESULTS OF OPERATIONS MAY BE
ADVERSELY AFFECTED.
In 1998, we completed two acquisitions. The Bank purchased the assets of
Intercounty Mortgage, Inc. from Resource Bancshares Mortgage Group, Inc. in May
1998, and we purchased Century Insurance Agency, Inc. in November 1998. We are
still in the process of integrating the operations of both of these companies.
We have experienced, or may experience, difficulties combining the technological
systems of the companies, assimilating new employees into our work environment
and coordinating other operational functions that could delay our expected time
to complete the integration of these companies. We will also have to continue to
dedicate management and other employees to facilitate the integration of the
operations of these companies. Although we expect to successfully
13
<PAGE>
integrate these operations in 1999, if we fail to do so, our short-term
financial condition and profitability could be adversely affected.
IF HAVEN CANNOT SUCCESSFULLY ORIGINATE LOANS AND SELL LOANS THAT ARE HELD FOR
SALE, HAVEN'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED.
The future profitability of our CFS Intercounty division depends on our
ability to originate loans and to efficiently sell, directly or through
securitization, loans that are held for sale. In order for us to realize fee
income on loan originations, CFS Intercounty must be able to efficiently
originate loans for portfolio and for sale. We will earn interest income on the
loans held in portfolio. Sales of loans may produce additional non-interest
income if we realize gains on these sales. However, gains on these sales may not
be sufficient to offset our expense of originating the loans and to produce net
gains on sales. If we are unable to sell these loans into the secondary market
efficiently, our expenses of originating the loans may not be offset by any
gains that we realize. Our ability to originate and to sell loans depends on
general economic conditions, real estate market values, interest rates and our
ability to compete with other financial institutions selling loans. Our
regulatory capital and liquidity could be adversely affected if we have
difficulty in selling and securitizing loans. In addition, if we are unable to
sell or securitize loans in an efficient and timely manner, or we must retain a
larger interest in loans than we anticipated, our ability to make and purchase
loans in the future could be adversely affected.
BECAUSE HAVEN PRIMARILY SERVES NEW YORK, NEW JERSEY, CONNECTICUT AND
PENNSYLVANIA, PARTICULARLY THE NEW YORK CITY METROPOLITAN AREA, A DECLINE IN
THE LOCAL ECONOMY COULD LOWER HAVEN'S PROFITABILITY.
We serve New York, New Jersey and Connecticut with 19 branches in New York
City, 33 branches in Westchester, Rockland, Suffolk and Nassau counties in New
York, seven branches in Connecticut and eight branches in New Jersey. In
addition, the Bank operates six full-service residential loan origination
offices and six satellite residential loan origination offices in New York, New
Jersey, Connecticut and Pennsylvania. CFS Insurance Agency has three
free-standing insurance agency offices in Long Island, New York. Our profits
depend on providing products and services to customers in this local region. An
increase in unemployment, a decrease in real estate values or an increase in
interest rates could weaken the local economy. With a weaker local economy,
- customers may not want or need our products and services;
- borrowers may be unable to repay their loans;
- the value of the collateral securing our loans to borrowers may decline;
and
- the overall quality of our loan portfolio may decline.
Making residential mortgage loans is a significant source of our profits. If
customers in the local area do not want residential mortgage loans, our profits
may decrease. Although we could make other investments, we may earn less revenue
on these investments than on residential mortgage loans. Also, our losses on
loans may increase if borrowers are unable to make payments on their loans.
14
<PAGE>
IF HAVEN IS UNABLE TO SUCCESSFULLY COMPETE FOR CUSTOMERS IN ITS MARKET AREA,
HAVEN'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY
AFFECTED.
We face intense and increasing competition in making loans, attracting
deposits and providing other financial products and services. The market area in
which we operate, New York, New Jersey, Connecticut and Pennsylvania, has
numerous financial institutions that we compete with for customers. Our
competition for loans comes principally from:
- commercial banks;
- savings banks;
- savings and loan associations;
- mortgage banking companies;
- finance companies; and
- credit unions.
Our competition for deposits comes principally from:
- commercial banks;
- savings banks;
- savings and loan associations;
- credit unions;
- brokerage firms;
- insurance companies;
- money market mutual funds;
- mutual funds (such as corporate and government securities funds); and
- annuities.
Many of these competitors have greater financial resources and name
recognition, more locations, more advanced technology and more financial
products to offer than we have. We have increased our presence in New York, New
Jersey and Connecticut through our supermarket banking program. We offer a full
range of financial products and services, including annuities, mutual funds,
insurance and electronic banking. Our profitability depends on our continued
ability to attract new customers and compete in New York, New Jersey,
Connecticut and Pennsylvania. If we are unable to successfully compete, our
financial condition and results of operations will be adversely affected.
THE YEAR 2000 PROBLEM COULD HURT HAVEN'S OPERATIONS AND PROFITS
We rely upon computers to conduct our daily business. If our computer
systems fail to recognize a date using "00" as the year 2000, we may be unable
to do our routine business and provide service to our customers. The failure of
the computer systems of parties we do business with or utilities, including the
electric and telephone companies, to recognize the year 2000 may also disrupt
our operations. For example, we may not be able to process withdrawals or
deposits, prepare account statements or engage in any of the transactions that
constitute our normal operations. This could hurt our profits.
We primarily use a third party vendor to process our electronic data. Our
vendor has modified or replaced many of its computer applications and systems
necessary to correct the year 2000 date issue. We have substantially completed
testing the modified systems. We also use a combination of purchased and
contract-based software as well as other third party vendors for many of our
data processing needs.
15
<PAGE>
Our assessment of potential computer issues for the year 2000 has been
substantially completed. Where potential computer issues have been identified,
the vendors have committed to definitive dates to resolve such issues. We have
established contingency plans for systems for which year 2000 issues will not be
corrected. If our vendors do not achieve year 2000 compliance, our operations
could be adversely affected.
The Office of Thrift Supervision, our primary federal bank regulator, along
with the other federal bank regulators, has identified the year 2000 issue as a
substantive area of examination for both regularly scheduled and special bank
examinations. Under regulatory guidelines issued by the federal banking
regulators, we must substantially complete our testing of both internally and
externally supplied systems and all renovations by June 30, 1999. Because of
this oversight by the federal bank regulatory agencies, if we do not become year
2000 compliant, we could become subject to administrative remedies similar to
those imposed on financial institutions otherwise found not to be operating in a
safe and sound manner, including remedies available under prompt corrective
action regulations.
There has been limited litigation filed against corporations regarding the
year 2000 problem and a corporation's compliance efforts. However, the law in
this area will probably continue to develop well into the new millennium. If we
experience a year 2000 failure, our exposure could be significant and material,
unless there is legislative action to limit year 2000 liability. Legislation has
been introduced in several jurisdictions regarding the year 2000 problem.
However, we cannot be sure that legislation will be enacted in jurisdictions
where we do business that will limit any potential liability. Through March 31,
1999, we had incurred approximately $126,000 in costs associated with achieving
year 2000 compliance. We expect to incur approximately $451,000 in additional
costs to achieve year 2000 compliance during the remainder of 1999.
RECENT DEVELOPMENTS
RECENT LITIGATION
On May 18, 1999, the Bank was served with a complaint naming it as a
defendant in a lawsuit. The lawsuit was commenced by the former president of the
Bank's residential mortgage lending division in the Superior Court of New
Jersey, Law Division, Middlesex County. The plaintiff alleges in this complaint
that the Bank terminated his employment without "cause" as defined in his
employment agreement and further alleges that the Bank breached the employment
agreement and its obligation of good faith and fair dealing. The plaintiff
seeks, among other things, unspecified money damages, including severance
benefits, as well as bonus compensation in accordance with the employment
agreement. The plaintiff also seeks a declaratory judgment that certain
post-employment non-compete and non-solicitation covenants should no longer be
effective. We deny these allegations and intend to vigorously defend this
action. Although we cannot assure the outcome of this action, we do not believe
it will have a material adverse effect on our financial condition.
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
At March 31, 1999, we had total assets of $2.55 billion, a 6.5% increase
over total assets of $2.40 billion at December 31, 1998. Total deposits were
$1.80 billion at March 31, 1999, a 4.8% increase over total deposits of $1.72
billion at December 31, 1998. Our average mortgage loans outstanding increased
to $1.38 billion for the three months ended March 31, 1999 from $1.14 billion
for the three months ended March 31, 1998. Stockholders' equity was $119.1
million, or $13.43 per share, at March 31, 1999. The Bank's tangible, core and
risked-based regulatory capital ratios were 5.20%, 5.20% and 11.24%,
respectively at March 31, 1999. These ratios exceeded the minimum regulatory
requirements of 2.00%, 4.00% and 8.00%, respectively. The Bank is considered
well capitalized by regulatory standards because its core capital ratio exceeds
5.00%.
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At March 31, 1999, the Bank had 59 supermarket branches with total deposits
of $578.1 million, an increase of $74.1 million, or 14.7%, from $504.0 million
at December 31, 1998 when we had 57 supermarket branches open. Core deposits
equaled 58.3% of total supermarket branch deposits, compared to a ratio of 45.3%
in traditional branches. Core deposits for the supermarket branches included
$209.3 million of "Liquid Asset" account balances at March 31, 1999. This
account was introduced at the supermarket branches in the second quarter of 1998
and currently pays an initial rate of 4.25% for balances over $2,500. The
supermarket branches added approximately 20,000 new core deposit accounts during
the first quarter of 1999, bringing the total number of core deposit accounts in
the supermarket branches to approximately 153,000.
We reported net income of $2.6 million, or $0.30 per basic common share
($0.29 per share, diluted) for the first quarter of 1999, compared to $2.1
million, or $0.25 per basic common share ($0.24 per share, diluted) in the first
quarter of 1998.
Net interest income for the first quarter of 1999 was $16.2 million, a 20.1%
increase over net interest income of $13.5 million in the first quarter of 1998.
The increase was the result of interest-earning asset growth. Average
interest-earning assets increased by 20.7% in the first quarter of 1999 compared
to the first quarter of 1998, primarily due to a 21.1% increase in average
mortgage loans, as well as a 41.9% increase in average mortgage-backed
securities. The net interest margin in the first quarter of 1999 was 2.80%
compared to 2.82% in the first quarter of 1998.
The provision for loan losses in the first quarter of 1999 was $675,000
compared to $670,000 in the first quarter of 1998. The allowance for loan losses
was $14.6 million, or 1.02% of loans at March 31, 1999 compared to $14.0
million, or 1.05% of loans at December 31, 1998.
Non-interest income increased to $11.1 million in the first quarter of 1999,
a 148.1% increase from $4.5 million in the first quarter of 1998. The growth in
non-interest income reflects the impact of the continued maturation of our
supermarket banking program and significant progress in the integration of our
mortgage banking and insurance businesses. Non-interest income in the first
quarter of 1999 included $4.5 million in servicing released premiums and fees
related to loans sold during the quarter. Deposit fees increased 72.6% in the
first quarter of 1999 to $3.1 million from $1.8 million in the first quarter of
1998. Insurance, annuity and mutual funds fees for the first quarter of 1999
increased 66.4% to $2.0 million from $1.2 million in the first quarter of 1998.
Non-interest income from supermarket branches totaled $3.2 million in the first
quarter of 1999. This compares with non-interest income from supermarket
branches of $1.4 million in the first quarter of 1998 and $3.0 million in the
fourth quarter of 1998.
Non-interest expense increased by 59.2% to $22.4 million in the first
quarter of 1999 compared to $14.1 million for the first quarter of 1998. The
increase was due primarily to the addition of the expenses of the loan
production franchise of CFS Intercounty since its acquisition in May 1998 and
the Bank's expansion of its supermarket banking program from 39 branches at
March 31, 1998 to 59 branches at March 31, 1999. Compensation and benefits
expenses, which accounted for the majority of the increase, rose by 59.1% in the
first quarter of 1999 compared to the prior year due primarily to the increased
number of employees in our supermarket branches and residential loan division.
Equipment and occupancy expenses increased by 50.7% to $3.3 million in the first
quarter of 1999 compared to $2.2 million in the first quarter of 1998.
Non-interest expense directly attributable to the supermarket branches was $6.0
million in the first quarter of 1999. This compares with non-interest expense
directly attributable to the supermarket branches of $4.3 million for the first
quarter in 1998 and $6.0 million for the fourth quarter in 1998.
Real estate loans originated and purchased for our loan portfolio totaled
$166.2 million in the first quarter of 1999. We added another $160.6 million of
residential loans originated for sale in the secondary market for a total of
$326.8 million of real estate loans originated and purchased during the first
quarter of 1999 compared to originations and purchases of $94.5 million in the
first quarter of
17
<PAGE>
1998. Mortgage banking operations added $4.5 million to non-interest income in
the first quarter of 1999.
Non-performing assets at March 31, 1999, declined to $10.3 million, or 0.40%
of total assets from $11.4 million, or 0.57% of total assets at March 31, 1998.
Non-performing loans, comprising non-accrual loans and restructured loans, were
$10.1 million and real estate owned, net, was $0.2 million at March 31, 1999.
Non-performing loans totaled $10.8 million and real estate owned, net, equaled
$0.6 million at March 31, 1998.
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998
At December 31, 1998, we had total assets of $2.40 billion, a 21.3% increase
over total assets of $1.97 billion at December 31, 1997, and a 51.3% increase
over total assets of $1.58 billion at December 31, 1996. Total deposits were
$1.72 billion at December 31, 1998, a 26.2% increase over total deposits of
$1.37 billion at December 31, 1997, and a 51.4% increase over total deposits of
$1.14 billion at December 31, 1996. Our average mortgage loans outstanding
increased to $1.27 billion in 1998 from $956.8 million in 1997 and $647.5
million in 1996. Along with our growth, we have maintained strong credit
quality. At December 31, 1998, non-performing loans were 0.64% of total loans,
and non-performing assets were 0.36% of total assets. Stockholders' equity at
December 31, 1998 was $119.9 million, or 5.00% of total assets. The Bank's
tangible, core and risk-based regulatory capital ratios were 5.43%, 5.43% and
11.96%, respectively. These ratios exceeded the minimum regulatory requirements
of 2.00%, 4.00% and 8.00%, respectively. The Bank is considered well capitalized
by regulatory standards because its core capital ratio exceeds 5.00%.
We reported net income of $8.2 million, or $0.95 per basic share ($0.89 per
share, diluted) for 1998 compared to net income of $11.1 million, or $1.32 per
basic share ($1.24 per share, diluted) for 1997. The $2.9 million decrease in
earnings was primarily due to an increase of $31.5 million in non-interest
expense, which resulted largely from our continuing supermarket banking
expansion and the acquisition of the loan production franchise of CFS
Intercounty. The increase in non-interest expense was partially offset by an
increase of $6.0 million in net interest income, an increase of $19.2 million in
non-interest income and a decrease of $3.2 million in income tax expense.
Net interest income increased by $6.0 million, or 11.6% to $57.9 million in
1998 from $51.9 million in 1997. Total average interest-earning assets increased
by $388.9 million, or 23.0% to $2.08 billion in 1998 from $1.69 billion in 1997,
primarily due to the increase of $309.0 million in the average mortgage loan
balance. The average yield on interest-earning assets decreased to 7.28% in 1998
from 7.46% in 1997, as a result of an overall decline in market indices which
serve as leading indicators for mortgage loan rates and rates on securities. The
average balance of interest-bearing liabilities increased by $408.0 million, or
25.1% between 1997 and 1998 primarily due to the growth in deposit balances in
the supermarket branches. The average cost of liabilities increased by 4 basis
points to 4.61% in 1998 from 4.57% in 1997 primarily due to the growth in
certificate accounts and the introduction of the Liquid Asset savings account in
1998. The Liquid Asset account currently pays 4.25% on account balances of
$2,500 or more. The net interest spread was 2.67% in 1998 compared to 2.89% in
1997.
Non-interest income increased by $19.2 million, or 138.3% from $13.9 million
in 1997 to $33.1 million in 1998. We believe that the growth in non-interest
income reflects the impact of the continued maturation of our supermarket branch
network and significant progress in the integration of our mortgage banking
business. More than half of the increase in non-interest income is attributable
to the $10.3 million in servicing released premiums and fees on loans sold in
the secondary market. We did not purchase CFS Intercounty's loan production
pipeline (loans committed, but not yet closed) as part of the acquisition which
closed on May 1, 1998. We closed these loans and delivered them to CFS
Intercounty's former parent as part of the purchase agreement. Under the
purchase agreement, we did not receive a servicing released premium upon
delivering those loans, which would have offset certain
18
<PAGE>
of our closing costs. Beginning July 1, 1998, we entered into correspondent
agreements with unaffiliated third parties, and began selling loans from our
pipeline on a servicing released basis to these parties. The remainder of the
increase in non-interest income came primarily from retail banking fees and
revenues from CFS Investment Services as a result of our supermarket banking
expansion. Savings and checking fees were $9.8 million in 1998, a $4.3 million,
or 79.3% increase over 1997. Insurance, annuity and mutual fund fees generated
in 1998 were $5.9 million, a $2.1 million, or 56.3% increase over the $3.8
million earned in 1997. Other non-interest income increased by $1.0 million, or
65.2%, to $2.6 million in 1998, from $1.6 million in 1997, primarily as a result
of ATM surcharge fees.
During 1998, we opened 25 new supermarket branches, and through the
acquisition of the loan production franchise of CFS Intercounty, we added six
full-service residential loan origination offices and six satellite residential
loan origination offices to our facilities. Total non-interest expense increased
by $31.5 million, or 68.6%, from $45.8 million in 1997 to $77.3 million in 1998.
Compensation and benefits expense increased by $17.0 million, or 69.9%, from
$24.3 million in 1997 to $41.2 million in 1998. Occupancy and equipment expense
increased by $4.7 million, or 73.7% from $6.3 million in 1997 to $11.0 million
in 1998. The increases in compensation and benefits, occupancy and equipment,
and other general and administrative expenses were due primarily to our
supermarket banking expansion, as well as the expansion of our residential
lending function through CFS Intercounty. Occupancy and equipment expense also
increased as a result of the purchase of our new headquarters, which was
completed in the third quarter of 1998. We believe that since we have opened a
majority of the supermarket branches that we are required to open under our
agreement with Pathmark and have incurred the start-up costs, including the
compensation costs of recruiting and training new personnel and the occupancy
and equipment costs associated with setting up new branches, our non-interest
expense related to supermarket banking should stabilize.
Income tax expense was $2.9 million in 1998, compared to $6.1 million in
1997. The effective tax rate for 1998 was 26.4% compared to 35.6% in 1997. The
decrease in the effective tax rate was primarily due to the establishment of
Columbia Preferred Capital Corp., the Bank's real estate investment trust
subsidiary, during the second quarter of 1997, which has resulted in certain tax
savings. The tax provision for 1998 includes the effect of the real estate
investment trust's operations for the full year of 1998 compared to a portion of
the year in 1997. The lower tax rate was also due to an adjustment of the Bank's
tax accrual upon the filing of our Federal, New York State and City tax returns
for 1997 during September 1998, as well as a state tax credit recognized for
mortgage recording taxes paid on loans originated in certain counties of New
York State.
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SELECTED CONSOLIDATED FINANCIAL DATA
We have selected highlights from our consolidated financial data as of, and
for the years ended, December 31, 1998, 1997, 1996, 1995 and 1994 and our
unaudited consolidated financial statements as of March 31, 1999, and for the
quarters ended March 31, 1999 and 1998. Our management prepared the unaudited
information on the same basis as our audited consolidated financial statements.
In the opinion of our management, this information reflects all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of this data for those dates. You should read this information
together with our consolidated financial statements and related notes included
elsewhere in this prospectus. For your convenience, we have attached our annual
report on Form 10-K as Appendix A to this prospectus, our management's
discussion and analysis of our financial condition and results of operations,
which was incorporated in our Annual Report on Form 10-K for the year ended
December 31, 1998, as Appendix B, and our Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 as Appendix C.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AT MARCH 31,
1999 1998 1997 1996 1995 1994
------------ --------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED BALANCE SHEET
DATA:
Total assets.......................... $2,550,159 $2,395,523 $1,974,890 $1,583,545 $1,472,816 $1,268,774
Loans receivable, net................. 1,409,553 1,296,702 1,138,253 836,882 560,385 512,035
Securities available-for-sale......... 941,027 889,251 499,380 370,105 503,058 48,189
Debt securities held-to-maturity...... -- -- 66,404 97,307 127,796 130,706
Mortgage-backed securities held-to-
maturity............................ -- -- 163,057 197,940 190,714 495,111
Real estate owned, net................ 192 200 455 1,038 2,033 7,844
Deposits.............................. 1,804,795 1,722,710 1,365,012 1,137,788 1,083,446 1,013,162
FHLB advances......................... 397,900 325,200 247,000 178,450 134,175 86,000
Other borrowed funds.................. 188,430 115,146 219,794 147,983 136,408 39,081
Stockholders' equity.................. 119,130 119,867 112,865 99,384 98,519 86,235
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED CONSOLIDATED OPERATING DATA:
Interest income.............................. $ 40,480 $ 34,963 $ 151,685 $ 126,306 $ 109,253 $ 96,434 $ 81,491
Interest expense............................. 24,274 21,469 93,776 74,400 61,368 55,115 40,289
--------- --------- --------- --------- --------- --------- ---------
Net interest income.......................... 16,206 13,494 57,909 51,906 47,885 41,319 41,202
Provision for loan losses.................... 675 670 2,665 2,750 3,125 2,775 13,400
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for loan
losses..................................... 15,531 12,824 55,244 49,156 44,760 38,544 27,802
--------- --------- --------- --------- --------- --------- ---------
Non-interest income:
Loan fees and servicing income............... 505 518 1,627 3,110 1,807 2,241 790
Servicing released premiums and fees on loans
sold....................................... 4,531 -- 10,301 -- -- -- --
Savings/checking fees........................ 3,125 1,811 9,822 5,478 3,378 2,861 2,282
Net gain (loss) on sales of interest-earning
assets..................................... 335 352 2,926 (5) 140 126 372
Insurance, annuity and mutual fund fees...... 1,975 1,187 5,874 3,758 3,114 2,525 2,025
Other........................................ 590 591 2,596 1,571 1,115 1,269 1,060
--------- --------- --------- --------- --------- --------- ---------
Total non-interest income.................. 11,061 4,459 33,146 13,912 9,554 9,022 6,529
--------- --------- --------- --------- --------- --------- ---------
Non-interest expense:
Compensation and benefits.................... 12,055 7,577 41,204 24,251 15,737 14,889 13,605
Occupancy and equipment...................... 3,344 2,219 11,005 6,334 3,478 3,334 3,238
Real estate operations, net.................. (151) 49 8 352 277 1,405 12,253
SAIF recapitalization charge................. -- -- -- -- 6,800 -- --
Federal deposit insurance premiums........... 254 207 870 736 2,327 2,653 2,709
Other........................................ 6,887 4,015 24,227 14,174 9,836 9,511 9,336
--------- --------- --------- --------- --------- --------- ---------
Total non-interest expense................. 22,389 14,067 77,314 45,847 38,455 31,792 41,141
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income tax expense
(benefit).................................. 4,203 3,216 11,076 17,221 15,859 15,774 (6,810)
Income tax expense (benefit)................. 1,603 1,067 2,926 6,138 6,434 7,230 (2,475)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)(1)....................... $ 2,600 $ 2,149 $ 8,150 $ 11,083 $ 9,425 $ 8,544 $ (4,335)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per common share:
Basic(1)..................................... $ 0.30 $ 0.25 $ 0.95 $ 1.32 $ 1.13 $ 0.99 $ (0.48)
Diluted(1)................................... $ 0.29 $ 0.24 $ 0.89 $ 1.24 $ 1.08 $ 0.96 $ (0.47)
</TABLE>
- ------------------------
(1) Net income for 1996, excluding the one-time special assessment charge of
$6.8 million that was imposed to recapitalize the Savings Association
Insurance Fund ("SAIF"), would have been $13.5 million, or $1.62 per basic
share ($1.55 per share, diluted).
21
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS
ENDED
MARCH 31, AT OR FOR THE YEARS ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PERFORMANCE RATIOS:
Return on average assets (1)..... 0.42%(2) 0.43% 0.37% 0.62% 0.62% 0.63% (0.35)%
Return on average equity (3)..... 8.67(2) 7.52 6.92 10.41 9.83 9.27 (4.90)
Stockholders' equity to total 4.67 5.65 5.00 5.72 6.28 6.69 6.80
assets.........................
Net interest spread.............. 2.75(2) 2.67 2.67 2.89 3.12 2.99 3.34
Net interest margin (4).......... 2.80(2) 2.82 2.78 3.06 3.29 3.17 3.48
Average interest-earning assets 101.43 103.17 102.28 104.02 103.95 104.23 104.42
to average interest-bearing
liabilities....................
Operating expenses to average 3.61 2.78 3.49 2.54 2.04 2.18 2.26
assets (5).....................
Stockholders' equity per share... $ 13.43 $ 12.91 $ 13.53 $ 12.85 $ 11.49 $ 10.92 $ 9.47
EARNINGS TO FIXED CHARGES (6):
Excluding interest on deposits... 1.56x 1.48x 1.38x 1.74x 1.94x 2.20x 0.19x
Including interest on deposits... 1.17x 1.15x 1.12x 1.23x 1.26x 1.29x 0.83x
ASSET QUALITY RATIOS:
Non-performing loans to total 0.71% 0.91% 0.64% 1.09% 1.64% 2.97% 5.41%
loans (7)......................
Non-performing assets to total 0.40 0.57 0.36 0.66 0.94 1.28 2.85
assets.........................
Allowance for loan losses to non- 144.37 119.05 166.70 99.97 77.05 50.80 38.33
performing loans (7)...........
Allowance for loan losses to 1.02 1.08 1.07 1.09 1.26 1.51 2.07
total loans....................
BANK CAPITAL RATIOS:
Tangible capital................. 5.20% 6.41% 5.43% 6.42% 6.14% 6.01% 6.27%
Core capital..................... 5.20 6.41 5.43 6.42 6.14 6.01 6.27
Risk-based capital............... 11.24 14.01 11.96 14.04 13.22 14.62 14.47
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Mortgage loans serviced for
others......................... $ 276,403 $ 171,146 $ 269,089 $ 174,866 $ 197,017 $ 219,752 $ 239,844
Loan originations and purchases.. $ 329,921 $ 97,641 $1,221,526 $ 471,338 $ 363,576 $ 143,329 $ 105,219
Number of deposit accounts....... 345,847 260,106 323,794 234,183 171,382 155,424 140,701
Number of shares outstanding..... 8,867,814 8,835,588 8,859,692 8,784,700 8,650,814 9,022,914 9,102,812
FACILITIES:
Full service offices............. 67 47 65 40 14 9 9
</TABLE>
(NOTES ON THE FOLLOWING PAGE)
22
<PAGE>
- ------------------------
(1) Return on average assets for 1996, excluding the one-time special assessment
charge of $6.8 million to recapitalize the SAIF, would have been 0.89%.
(2) Annualized.
(3) Return on average equity for 1996, excluding the one-time special assessment
charge of $6.8 million to recapitalize the SAIF, would have been 14.04%.
(4) Equal to net interest income before provision for loan losses divided by
average interest-earning assets.
(5) For purposes of calculating these ratios, operating expenses equal
non-interest expense less real estate operations, net, non-performing loan
(income) expense, amortization of goodwill, and non-recurring expenses. For
the three months ended March 31, 1999 and 1998, operating expenses equaled
non-interest expense less amortization of goodwill, real estate operations,
net and non-performing loan expenses of $190,000 and $108,000, respectively.
Real estate operations, net was $8,000, $0.4 million, $0.3 million, $1.4
million and $12.3 million for the five years ended December 31, 1998,
respectively. For the five years ended December 31, 1998, non-performing
loan (income) expense was $(1.0) million, $0.2 million, $0.4 million, $0.6
million and $0.9 million, respectively. Amortization of goodwill for the
five years ended December 31, 1998 was $0.8 million, $0.1 million, $0.1
million, $40,000, and $0, respectively. For the year ended December 31,
1996, the SAIF one-time special assessment charge of $6.8 million was also
excluded.
(6) For purposes of computing the ratios of earnings to fixed charges, earnings
represent net income plus total taxes based on income and fixed charges.
Fixed charges, excluding interest on deposits, include interest expense
(other than on deposits) and one-third (the proportion deemed representative
of the interest factor) of rents. Fixed charges, including interest on
deposits, include all interest expense and one-third (the proportion deemed
representative of the interest factor) of rents.
(7) For purposes of calculating these ratios, non-performing loans consist of
all non-accrual loans and restructured loans.
23
<PAGE>
HAVEN BANCORP, INC.
We were organized on March 25, 1993 as the holding company for the Bank in
connection with the Bank's conversion from a federal mutual savings bank to a
federal stock savings bank. We are headquartered in Westbury, New York, and our
principal business currently consists of operating the Bank.
The Bank's principal business is to attract retail deposits from the general
public and invest those deposits, together with funds generated from operations,
primarily in one- to four-family, owner-occupied residential mortgage loans. In
addition, the Bank invests in debt, equity and mortgage-backed securities to
supplement its lending portfolio. The Bank also invests, to a lesser extent, in
multi-family residential mortgage loans, commercial real estate loans and other
marketable securities.
The Bank's profits depend primarily on its net interest income, non-interest
income and its ability to control operating expenses. Net interest income is the
difference between the interest income earned on the Bank's loan and securities
portfolios and its interest expense, which consists of the interest paid on its
deposits and borrowed funds. Non-interest income, which includes the results of
CFS Intercounty's operations beginning May 1998 and CFS Insurance's operations
beginning November 1998, reflects fee income on products and services provided
to customers and gains on sales of loans and loan servicing rights. Operating
expenses include compensation and benefits, occupancy and equipment, real estate
operations, net and federal deposit insurance premiums. The Bank's net income
also is affected by its provision for loan losses and other general and
administrative expenses.
General economic and competitive conditions, particularly changes in market
interest rates, and, to a lesser extent, changes in government policies and
actions of regulatory authorities, also significantly affect the Bank's
earnings. In addition, certain litigation that we are involved in may impact our
operations. Please refer to "Recent Developments--Recent Litigation." For more
detailed information regarding the business of Haven and the Bank, please see
our Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and
our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 that we
have incorporated into this prospectus and attached as Appendix A and Appendix
C, respectively.
OUR STRATEGY
Our mission is to provide our customers outstanding financial products and
services at competitive prices, delivered with expertise and the highest level
of care. We believe the best way to accomplish this is by applying our
traditional banking strengths to supermarket banking. Along with the
conveniences and advantages of supermarket banking, we can deliver to our
customers our traditional banking services and the products and services offered
by the Bank's mortgage banking division, CFS Intercounty, its investment
services subsidiary, CFS Investment Services, Inc., and our insurance agency
subsidiary, CFS Insurance Agency, Inc.
We recently completed several initiatives that we believe form a solid
foundation for our future. The Bank opened 25 new supermarket branches in 1998
and two additional supermarket branches to date in 1999, bringing the total of
supermarket branches to 59. In May 1998, the Bank acquired the loan production
franchise of Intercounty Mortgage, Inc. Through this acquisition, we expect to
improve our loan origination capabilities and increase our net income through
the interest and fee income generated from increased loan volume. Through this
acquisition, we added 12 residential loan origination offices to the Bank and
increased the lending staff from 20 to over 100 loan officers, enabling us to
expand the volume and geographic range of our lending capabilities. In November
1998, we purchased Century Insurance Agency, Inc. to further complement our
package of financial products and services that we offer to customers and to
contribute to our fee income. As a result of this acquisition, we can now offer
automobile, homeowners and casualty insurance in addition to life, health
24
<PAGE>
and disability insurance. The insurance agency has the ability to write policies
for top-rated insurance carriers, such as The Hartford, Metropolitan Life
Assurance Company and The Progressive Corporation.
Both acquisitions fit well with the supermarket banking program. The
expanded residential lending division provides a mechanism for the Bank to
utilize the increased deposits from the supermarket banking program to invest in
high quality residential loans and to expand the customer base to which the Bank
can offer its financial products and services. We believe that the added
insurance capabilities, including the ability to sell insurance underwritten by
nationally recognized insurance providers, are attractive to market to
supermarket customers. Although each of these acquisitions required an initial
investment and had some negative impact on our 1998 earnings, we believe that
the Bank now possesses a high quality distribution platform and a comprehensive
package of financial products and services, which will enable us to better serve
our customer base and to improve our shareholder value.
Our goals are to grow our earnings and achieve a high level of profitability
by focusing on growing fee income from both the supermarket banking program and
the residential lending division and net interest income from our supermarket
banking program, while controlling operating expenses and maintaining strong
credit quality. Over the past three years, our efforts have focused on
establishing a supermarket branch structure by opening branches in New York, New
Jersey and Connecticut. With 59 supermarket branches in operation, our focus has
shifted to growing our existing supermarket branches and realizing the full
potential of marketing our existing and newly acquired financial products and
services to the growing supermarket customer base. We believe that through the
comprehensive package of financial services and products, including our broader
range of residential loans, insurance and investment products, we will continue
to build relationships with, and generate business from, the customers in our
branches that will help us to attain our financial goals and increase our
franchise value. Through these relationships, we believe that we will grow our
customer base and increase fee income and net interest income. Because we
anticipate reduced start-up costs associated with opening a limited number of
new supermarket branches in 1999 as compared to the 25 branches opened in 1998,
we believe we can effectively control our expenses. We intend to continue to
implement this strategy by using the enhanced capital base resulting from this
offering to assist us in expanding our deposit base in our existing supermarket
branches and by continuing to expand our asset base through investments in
residential and commercial real estate loans in our market area and in
investment-grade mortgage-backed securities and investment securities.
SUPERMARKET BANKING PROGRAM
We believe that supermarket banking is the most effective way to expand the
Bank's customer base, extend its banking franchise, improve profitability and
ultimately enhance our shareholder value. Our store locations cover a wide,
attractive geographical area, with a demographic profile that parallels the
Bank's traditional customer base: stable, middle-income families. In addition to
eight traditional branches, the Bank now operates 44 supermarket branches in New
York State, eight in New Jersey and seven in Connecticut. We believe we have
developed an effective marketing program for supermarket banking. The 15,000 to
30,000 customers who visit each store location every week provide marketing
opportunities for our sales force. At December 31, 1998, deposits at our
supermarket branches totaled $504.0 million compared to $157.2 million at
year-end 1997 and $12.1 million at year-end 1996. Core deposits equaled 54.0%
(consisting of 132,540 accounts) of total supermarket branch deposits, compared
to core deposits of 45.5% in traditional branches. Fee income from retail
banking fees and from the sales of our financial products and services through
the supermarket branches was $8.8 million in 1998. Non-interest expense directly
attributable to the supermarket branches was $21.8 million in 1998. At March 31,
1999, deposits at our supermarket branches totaled $578.1 million. Core deposits
were equal to 58.3% of total in-store branch deposits at March 31, 1999. The
supermarket branches generated savings and checking fees of $2.2 million for the
first quarter of 1999.
25
<PAGE>
Total non-interest income from our supermarket branches totaled $3.2 million in
the first quarter of 1999, while non-interest expense directly attributable to
the supermarket branches totaled $6.0 million for the period.
Our supermarket banking philosophy is to build relationships on a continual
basis with our existing customers and prospective customers by marketing to them
the full range of financial products and services that the Bank provides. Each
branch manager and sales associate participates in joint promotions with the
supermarket and talks with prospective customers in the supermarket aisles to
establish an initial relationship. Branch employees telephone customers to
follow-up on information obtained from these initial meetings. Our branch
employees maintain the relationships with the supermarket customers during the
customers' subsequent visits to the store.
We currently have 328 full time employees assigned to our supermarket
banking program. A single branch employee, in addition to establishing deposit
accounts, can respond to customers' needs for a variety of financial products
and services, including mortgages, insurance and investment services. The branch
employee can provide these services either directly or through a referral to the
Bank's residential lending division, the Bank's investment services subsidiary
or our insurance agency. Each manager is licensed to sell term life and whole
life insurance policies, fixed annuity products, mutual funds and variable
annuities. Each sales associate is licensed to sell term life and whole life
insurance policies, and some are also licensed to sell mutual funds and variable
annuities. Branch employees refer customers to teams of dedicated sales agents
from our investment services subsidiary for universal life, health, disability
and long-term care insurance products and mutual funds and annuities. Branch
employees also refer customers to our insurance agency for sales of property and
casualty, business lines and auto insurance products. Each manager and sales
associate has specific individual sales and referral goals and is responsible
for selling all of our products and services.
The supermarket branches are open seven days a week at all locations. All of
the supermarket branches are conveniently located in the front of the
supermarket near the checkout aisles and have both interior and exterior signs
that are easily readable from inside and outside the supermarket. Branches
typically have three teller stations, a new account station and a private office
for investment and loan sales as well as other customer services. Each branch
typically has at least six employees: one branch sales manager, one assistant
sales manager and four sales associates. In addition, some of our busier
locations have dedicated part-time or full-time tellers.
We believe that we have already incurred the major start-up costs of our
supermarket banking program, including the costs related to recruiting staff and
establishing the branches and back-office support functions. With these efforts
behind us, we believe that we are poised to experience substantial revenue
growth on a relatively stable expense platform.
THE BANK'S RESIDENTIAL LENDING DIVISION
The acquisition of the loan production franchise of Intercounty Mortgage,
Inc. presented an opportunity for us to expand our loan production capabilities
so that we can effectively use the strong deposit inflows from the supermarket
branches. Acquiring Intercounty and integrating it into the residential lending
division of the Bank has enhanced our ability to originate loans through the
addition of over 80 loan officers and six full-service and six satellite
residential loan origination offices in New York, New Jersey, Connecticut and
Pennsylvania. We believe that our residential lending division fits well
geographically with our multi-state supermarket program. The acquisition also
provided the Bank with an expanded loan product mix. We have supplemented
Intercounty's prior loan mix of government agency eligible conforming loans with
the Bank's broader range of mortgage products, including adjustable-rate
mortgages and jumbo mortgages. We believe that expanding the product line will
result in increased mortgage origination opportunities. There are currently
approximately 100 loan production officers employed in the residential lending
division.
26
<PAGE>
Total residential loan origination volume was $1.0 billion in 1998. The Bank
originated $68.6 million in loans in the first quarter of 1998 before the
acquisition of the loan production franchise of CFS Intercounty. After the
acquisition of CFS Intercounty, the Bank's loan originations were $307.4 million
in the second quarter, $344.9 million in the third quarter and $324.6 million in
the fourth quarter of 1998. Total loan originations in the first quarter of 1999
were $329.9 million. One of the residential lending division's functions is to
facilitate sales of mortgage loans in the secondary market. If successful, these
sales could produce gains that would increase our non-interest income.
Residential loan originations in 1998 included $570.0 million of loans
originated and purchased for sale in the secondary market.
THE BANK'S INVESTMENT SERVICES SUBSIDIARY
CFS Investment is a wholly owned subsidiary of the Bank established in 1989
to distribute non-FDIC-insured products. This subsidiary is a licensed general
agency for life and health insurance in New York, New Jersey and Connecticut.
Through the investment services subsidiary, we offer fixed annuities to
customers as a tax deferred alternative to a traditional bank account.
Additionally, we offer all forms of life insurance (including term life, whole
life, universal life and variable life) and health insurance (including
disability, long term care and group health). Through a broker-dealer
relationship, we offer customers various mutual funds and variable annuity
products as well as discount brokerage services.
Our investment services subsidiary produced gross revenues of $3.8 million
in 1997 and $5.8 million in 1998. In 1998, this revenue was generated by
investment sales exceeding $100 million of customer assets, with the
preponderance of this increase generated from activities in our supermarket
branches. The supermarket branches contributed 38.4% of total revenue from
investment services in 1998 compared to 12.4% in 1997.
HAVEN'S INSURANCE AGENCY
We acquired CIA Insurance Agency, Inc. on November 2, 1998 to complement the
financial products and services that we can offer to our customers, particularly
in the supermarket branches. Through this agency, we offer property and casualty
insurance, auto insurance and business lines of insurance. We believe that this
business fits well with our life, health and disability insurance business by
providing automobile, homeowners and casualty insurance through numerous
top-rated carriers, including The Hartford, Metropolitan Life Assurance Company
and The Progressive Corporation. This agency obtained approximately $6.0 million
in new and renewal premiums through calendar year 1998 and had $107,000 in
revenues from auto, homeowners and business insurance lines during its first two
full months of operations as our subsidiary. We also intend to offer these
products to the rest of our existing customer base, including residential and
commercial real estate borrowers.
27
<PAGE>
MANAGEMENT OF HAVEN AND THE BANK
DIRECTORS
Our board of directors also serves as the board of directors of the Bank.
Members of each board are divided into three classes, each of which contains
approximately one-third of the directors. Our shareholders elect our directors
for staggered three year terms, or until their successors are elected and
qualified. We, as sole shareholder of the Bank, elect the Bank's directors for
the same terms. The following table sets forth information regarding the boards
of directors of Haven and the Bank.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH DIRECTOR TERM
NAME AGE(1) HAVEN AND THE BANK SINCE(2) EXPIRES
- ------------------------------------------ ----------- ------------------------------------------ ----------- -----------
<S> <C> <C> <C> <C>
Philip S. Messina......................... 55 Chairman, President, Chief Executive 1986 2000
Officer and Director
William J. Jennings II.................... 53 Executive Vice President, Assistant to the 1996 2001
President and Director
Robert M. Sprotte......................... 62 Director 1974 2001
George S. Worgul.......................... 71 Director 1983 2002
Michael J. Fitzpatrick.................... 60 Director 1988 2001
Michael J. Levine......................... 54 Director 1996 2002
Msgr. Thomas J. Hartman................... 52 Director 1997 2000
</TABLE>
- ------------------------
(1) At March 31, 1999.
(2) We were organized on September 23, 1993. All dates prior to 1993 reflect
when a director was first elected to the board of the Bank.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Our executive officers are elected annually and hold office until their
respective successors have been elected and qualified or until death,
resignation or removal by our board. Our executive officers also serve as
executive officers of the Bank and are elected annually. The following table
sets forth information about our executive officers who are not directors.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH HAVEN AND THE BANK
- ---------------------------------------------------- ----------- ----------------------------------------------------
<S> <C> <C>
Thomas J. Seery..................................... 54 Executive Vice President--Operations
Gerard H. McGuirk................................... 56 Executive Vice President--Chief Lending Officer
Catherine Califano.................................. 40 Senior Vice President--Chief Financial Officer
Mark A. Ricca, Esq.................................. 41 Senior Vice President--General Counsel, Secretary
and Chief Compliance Officer
</TABLE>
- ------------------------
(1) At March 31, 1999.
28
<PAGE>
KEY EMPLOYEES
The following lists some key employees of the residential lending division,
the investment services subsidiary and the insurance agency.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S)
- ------------------------------------------ ----------- -------------------------------------------------------------
<S> <C> <C>
Andrew L. Kaplan.......................... 34 President, CFS Investment Services, Inc.
Joseph V. LoBalsamo....................... 43 Executive Vice President, CFS Insurance Agency, Inc.
Robert J. Newell.......................... 36 Executive Vice President, CFS Insurance Agency, Inc.
Mark DiVirgilio........................... 42 Executive Vice President, CFS Insurance Agency, Inc.
Gary B. Johansen.......................... 38 Senior Vice President-Sales Manager, CFS Intercounty Mortgage
Ronald A. Pasquini........................ 59 Senior Vice President-Lending Operations Coordinator, CFS
Intercounty Mortgage
James J. Carpenter........................ 38 First Vice President-Commercial Lending, CFS Bank
Janet Mangafas............................ 31 Vice President, Secondary Marketing Manager, CFS Intercounty
Mortgage
</TABLE>
- ------------------------
(1) At March 31, 1999.
DIRECTORS
PHILIP S. MESSINA began his career at the Bank on April 6, 1964. During the
course of his career, he has held the positions of President and Chief Executive
Officer, Executive Vice President/Secretary, Personnel Officer, Branch
Coordinator, Branch Manager and teller. He was appointed Chairman of the Board
of Haven and Chairman of the Board of the Bank in April 1998. Mr. Messina
attended the City University of New York--Queens College and the Indiana
University Savings & Loan Graduate School.
WILLIAM J. JENNINGS II recently retired as Managing Director, Chief of Staff
to the Chairman of Salomon Smith Barney, Inc., a brokerage firm. He served as a
Managing Director at Salomon Smith Barney, Inc. since 1997, and, prior to that,
he was a Managing Director at Salomon Brothers, Inc. He received a B.B.A. from
the University of Notre Dame and a J.D. from Villanova Law School. As of March
28, 1999, in addition to remaining a Director, Mr. Jennings became Executive
Vice President and Assistant to the President of Haven and the Bank.
ROBERT M. SPROTTE is the President of Schmelz Bros., Inc., a plumbing
contractor, President of RDR Realty Corp., a real estate holding company, and
President of Three Rams Realty. He has a B.A. from Duke University.
GEORGE S. WORGUL retired as Chairman of the Board in April 1998, a position
he held since June 1994. He served as our President and Chairman from September
1993 through June 1994. He served as President and Chairman of the Bank from
June 1989 through June 1994. Mr. Worgul joined the Bank in 1964.
MICHAEL J. FITZPATRICK is a CPA, and is a retired Vice President-National
Thrift Director at E.F. Hutton & Company, Inc., a national securities firm, and
director of the Legal Aid Society of Suffolk County. He received a B.A. in
Accounting and an M.B.A. in taxation from Pace University.
MICHAEL J. LEVINE is a CPA and President of Norse Realty Group, Inc. and
Affiliates, a real estate owner and developer. He also is a partner in Levine
and Schmutter, Certified Public Accountants. He received a B.S. from New York
University in Public Accounting.
MSGR. THOMAS J. HARTMAN is President and Chief Executive Officer of Telecare
Radio and Television for the Diocese of Rockville Centre, New York for Telecare
Television Studios, a cable television station. Msgr. Hartman hosts several
television and radio shows including "God Squad." He
29
<PAGE>
is a regular religion commentator on "Good Morning America" on ABC-TV and "Imus
in the Morning" on WFAN Radio. He received a B.A. from Niagra University, an
M.A. in theology from Niagara University, a Master of Divinity from Our Lady of
Angels Seminary and a Doctorate of Ministry from the Jesuit School of Theology.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
THOMAS J. SEERY has served as Executive Vice President-Operations since
January 1997. Mr. Seery has completed more than 20 years in the banking
industry, the majority of which has been in retail banking and with the Bank.
Mr. Seery joined the Bank in 1974. He received his B.A. from St. Francis College
and his M.B.A. from St. John's University.
GERARD H. MCGUIRK has served as our Executive Vice President-Chief Lending
Officer since January 1997. He joined the Bank as Senior Vice President-Chief
Lending Officer in 1993. Prior to that, he served as the Vice President-Group
Head of Real Estate Workouts for Fleet Bank, N.Y. He worked at Fleet from 1990
to 1993. He received his B.S. from Fairfield University, an M.A. in Banking and
Money Management from Adelphi University and a J.D. from St. John's Law School.
CATHERINE CALIFANO is a CPA and has served as our Senior Vice
President-Chief Financial Officer since February 1994. Prior to that she served
as our Vice-President-Controller since May 1993. She was the Senior Vice
President-Chief Financial Officer of Home Savings Bank, which was located in
Brooklyn, New York from 1987 to 1992. Prior to 1987, she was a Manager at KPMG
LLP from 1985 to 1987. She received a B.S. in Accounting and an M.B.A. in
Finance from St. John's University.
MARK A. RICCA, ESQ. was a partner at Ricca & Donnelly, a general practice
law firm, prior to joining Haven and the Bank in 1998. He has a B.A. from the
University of Notre Dame, a J.D. from St. John's University and an LL.M. from
New York University.
KEY EMPLOYEES
ANDREW L. KAPLAN joined the Bank in 1994 and is President of CFS
Investments, Inc. Prior to joining the Bank, Mr. Kaplan held the position of
Assistant Vice President at Citicorp Investment Services. He received a B.B.A.
in Finance from Pace University. He holds NASD licenses 7, 24 and 63 and is
licensed for life and health insurance in New York, New Jersey and Connecticut.
He is currently enrolled in the National School of Banking offered by America's
Community Bankers.
JOSEPH V. LOBALSAMO joined us in 1998 as Executive Vice President of CFS
Insurance Agency, Inc. Prior to joining us, Mr. LoBalsamo was one of three
principles who co-founded CIA Insurance Agency, Inc. He received a B.B.A. in
Business Management from Dowling College.
ROBERT J. NEWELL joined us in 1998 as Executive Vice President of CFS
Insurance Agency, Inc. Prior to joining us, Mr. Newell was one of three
principles who co-founded CIA Insurance Agency, Inc. He received a B.A. in
Finance from State University of New York at Old Westbury.
MARK DIVIRGILIO joined us in 1998 as Executive Vice President of CFS
Insurance Agency, Inc. Prior to joining us, Mr. DiVirgilio was one of three
principles who co-founded CIA Insurance Agency, Inc. He received a B.A. from the
State University of New York at Oswego.
GARY B. JOHANSEN joined the Bank in 1998 and is currently Senior Vice
President-Sales Manager of CFS Intercounty Mortgage. Prior to joining the Bank,
Mr. Johansen was Vice President-Branch Manager of Intercounty Mortgage, Inc.
from 1995 to 1998 and Vice President-Branch Manager-Fleet Mortgage Corp. from
1991 to 1995. He received a B.A. in Business Administration from Rutgers
University.
RONALD A. PASQUINI joined the Bank in 1993 as Vice President, Mortgage
Officer. He is currently Senior Vice President, Operations Coordinator. Prior to
this, Mr. Pasquini has also held the positions
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of First Vice President, Mortgage Officer and First Vice President, Wholesale
Lending-Banker. He received his Columbia Society of Real Estate Appraisers
Certificate from Adelphi University and his New York State Real Estate Brokers
Certification from Adelphi University. He is a graduate of the American Savings
& Loan Institute.
JAMES J. CARPENTER joined the Bank in 1991 and is currently First Vice
President-Commercial Real Estate. Since joining the Bank, Mr. Carpenter has held
various positions in Commercial Real Estate Lending and Asset Management
including commercial loan origination, workout and the disposition of REO
properties. He received a B.S. in Business Administration-Finance from the
University of Richmond. He received an M.B.A. with a concentration in Accounting
from Fordham University. He is currently enrolled in the National School of
Banking offered by America's Community Bankers.
JANET MANGAFAS joined the Bank in April 1999 as Vice President of Secondary
Marketing. Prior to that, Ms. Mangafas was employed at Long Island Savings Bank
from 1994 to 1998 and held various positions in Secondary Marketing. She has a
B.S. degree in finance from Fairfield University.
HAVEN CAPITAL TRUST II
We organized Haven Capital as a statutory business trust under Delaware law
pursuant to the trust agreement that we, as sponsor, and the trustees executed.
We, together with the trustees, filed a certificate of trust with the Delaware
Secretary of State on March 26, 1999.
Haven Capital exists solely to:
- issue and sell the capital securities to the public and the common
securities to us;
- use the proceeds from the sale of the capital securities and common
securities to purchase our subordinated debentures, which will be the only
assets of Haven Capital;
- maintain its status as a grantor trust for federal income tax purposes;
and
- engage in other activities that are necessary or incidental to these
purposes.
We will purchase all of the common securities of Haven Capital. The common
securities will represent an aggregate liquidation amount equal to at least 3%
of the Haven Capital's total capitalization. The capital securities will
represent the remaining 97% of Haven Capital's total capitalization. The common
securities will have terms substantially identical to the capital securities.
However, if we default on our payments under the subordinated debentures, Haven
Capital will only pay cash distributions and liquidation, redemption and other
amounts payable to us with respect to the common securities after it pays you
these amounts on the capital securities.
Haven Capital has a term of approximately 55 years, but we may dissolve it
earlier as provided in the trust agreement. The trustees conduct Haven Capital's
business and affairs. We appoint each trustee. The trustees are:
- The Chase Manhattan Bank, as property trustee;
- Chase Manhattan Bank Delaware, as Delaware trustee; and
- Three individuals who are our employees, as administrative trustees.
As the sole holder of the common securities, we can replace or remove any of
the trustees. However, if an event of default exists under the trust agreement,
the holders of the capital securities with at least a majority of aggregate
liquidation amount of the capital securities will be able to remove and replace
the property trustee and the Delaware trustee. Only we, as owner of all of the
common securities, can remove or replace the administrative trustees. The duties
and obligations of each trustee are governed by the trust agreement.
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We will pay all fees and expenses related to Haven Capital and the offering
of the capital securities, as well as all of the ongoing costs and expenses of
Haven Capital. We will not be responsible for Haven Capital's obligations under
the capital securities, except as provided by our guarantee of the capital
securities.
Haven Capital has no separate financial statements. The statements would not
be material to you because Haven Capital has no independent operations.
The principal executive office of Haven Capital is c/o Haven Bancorp, Inc.,
615 Merrick Avenue, Westbury, New York 11590 and its telephone number is (516)
683-4100.
USE OF PROCEEDS
Haven Capital will use all of the proceeds from the sale of the capital
securities and the common securities to invest in the subordinated debentures.
We expect to receive an estimated amount of net proceeds equal to $22,680,500
($26,082,500 if the underwriters exercise their over-allotment option in full),
from the sale of the subordinated debentures, net of estimated commissions
($660,000, or $759,000, if the underwriters' over-allotment option is exercised
in full) and other estimated offering expenses of $675,000. The underwriters'
commissions are $0.30 per capital security.
We intend to invest the net proceeds from the sale of the subordinated
debentures in the Bank to increase its capital level. The increased capital will
enable the Bank to expand its deposit base. The Bank will also invest this
additional capital in residential and commercial real estate loans in our market
area and in investment-grade mortgage-backed securities and investment
securities. It is also possible that, if our board of directors determines that
it is in the best interests of our shareholders, a portion of the net proceeds
may be used for repurchases of our stock. Initially, we will invest the net
proceeds in short-term investment grade financial securities.
ACCOUNTING TREATMENT
For financial reporting purposes, we will treat Haven Capital as our
subsidiary. We will include Haven Capital's accounts in our consolidated
financial statements. The capital securities will be presented as a separate
line item in our consolidated balance sheet under the caption "borrowed funds,"
and appropriate disclosures about the capital securities, the guarantee and the
subordinated debentures will be included in the notes to our consolidated
financial statements. For financial reporting purposes, we will record
distributions payable on the capital securities as an expense in our
consolidated statements of income.
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<PAGE>
CAPITALIZATION
The following table presents our consolidated capitalization at March 31,
1999 and as adjusted to show the effect of the completion of the offering of the
capital securities (without giving effect to the underwriters' over-allotment
option) and the issuance of the subordinated debentures to Haven Capital. You
should read this table together with the consolidated financial statements and
related notes, included elsewhere in this prospectus and incorporated by
reference to our Annual Report on Form 10-K for the fiscal year ended December
31, 1998 and to our Quarterly Report on form 10-Q for the quarter ended March
31, 1999, and the "Use of Proceeds" section in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Corporation-obligated mandatorily redeemable capital securities of Haven Capital Trust II
at 10.25% due June 30, 2029 (1)........................................................ $ -- $ 22,000
Corporation-obligated mandatorily redeemable capital securities of Haven Capital Trust I
at 10.46% due February 1, 2027 (2)..................................................... 24,984 24,984
Other long-term debt (3)................................................................. 1,395 1,395
Stockholders' Equity:
Preferred stock, $0.01 par value per share, 2,000,000 shares authorized, none issued... -- --
Common stock, par value $0.01 per share: 30,000,000 shares authorized, 9,918,750 shares
issued and 8,859,692 shares outstanding at March 31, 1999............................ 100 100
Additional paid-in capital............................................................. 51,580 51,580
Retained earnings...................................................................... 81,020 81,020
Accumulated other comprehensive income:
Unrealized loss on securities available for sale, net of tax effect.................. (2,107) (2,107)
Treasury stock, at cost, 1,050,936 shares.............................................. (9,753) (9,753)
Unallocated common stock held by Employee Stock Ownership Plan......................... (1,149) (1,149)
Unearned common stock held by Bank's Recognition Plans and Trusts...................... (262) (262)
Unearned compensation.................................................................. (299) (299)
---------- -----------
Total stockholders' equity............................................................... $ 119,130 $ 119,130
---------- -----------
---------- -----------
Total capitalization..................................................................... $ 145,509 $ 167,509
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) The sole assets of Haven Capital, which we will treat as one of our
subsidiaries, will be $22,680,500 aggregate principal amount of our 10.25%
subordinated debentures, which will mature on June 30, 2029. Haven will own
all of the common securities issued by Haven Capital. Please refer to
"Description of Subordinated Debentures."
(2) The sole assets of Haven Capital Trust I, which we treat as one of our
subsidiaries, are our 10.46% junior subordinated deferrable interest
debentures, which will mature February 1, 2027.
(3) Represents the Bank's Employee Stock Ownership Plan debt (repayable through
September 2003) which is guaranteed by us.
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<PAGE>
DESCRIPTION OF CAPITAL SECURITIES
THIS SUMMARY DESCRIBES THE MATERIAL PROVISIONS OF THE CAPITAL SECURITIES. IT
IS NOT COMPLETE AND IS SUBJECT TO, AND QUALIFIED IN ITS ENTIRETY BY, THE TRUST
AGREEMENT, INCLUDING THE DEFINITIONS USED IN THE TRUST AGREEMENT, AND THE TRUST
INDENTURE ACT. WE HAVE INCORPORATED THE DEFINITIONS USED IN THE TRUST AGREEMENT
IN THIS PROSPECTUS. WE HAVE FILED THE FORM OF THE TRUST AGREEMENT AS AN EXHIBIT
TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
GENERAL
The capital securities of Haven Capital will rank equal to, and payments
made on the capital securities will be made on a PRO RATA basis with, the common
securities of Haven Capital, except as described under "--Subordination of
Common Securities." The property trustee will have legal title to the
subordinated debentures and will hold them in trust for the benefit of you and
the other holders of the capital securities. Our guarantee for the benefit of
the holders of the capital securities will be a guarantee on a subordinated
basis with respect to the capital securities, but will not guarantee payment of
distributions or amounts payable on redemption or liquidation of the capital
securities when Haven Capital does not have funds legally available to pay
distributions or other amounts to the holders of the capital securities. You
should read "Description of Guarantee" for more information about our guarantee.
DISTRIBUTIONS
The capital securities represent beneficial ownership interests in Haven
Capital. Distributions on the capital securities will be cumulative, and will
accumulate from the date that the capital securities are first issued.
Distributions will be made at the annual rate of 10.25% of the stated
liquidation amount of $10.00, payable quarterly in arrears on the distribution
dates, which are March 31, June 30, September 30 and December 31 of each year,
to holders of the capital securities on the relevant record dates. If the
capital securities are in book-entry form, the record dates will be one business
day prior to the relevant distribution date. If the capital securities are not
in book-entry form, record dates will be the 15(th) day of the month in which
the distribution is to be paid.
The first distribution date for the capital securities will be June 30,
1999. The period beginning on and including the date the capital securities are
first issued and ending on but excluding June 30, 1999, and each period
thereafter beginning on and including a distribution date and ending on but
excluding the next distribution date is a distribution period. The amount of
distributions payable for any distribution period will be based on a 360-day
year of twelve 30-day months.
If any distribution date would otherwise fall on a day that is not a
business day, the distribution date will be postponed to the next day that is a
business day without any additional payments for the delay, unless the
distribution would fall in the next calendar year, in which case the
distribution date will be the last business day of the calendar year. A business
day means any day other than a Saturday or a Sunday, or a day on which banks in
New York, New York or Wilmington, Delaware are authorized or required by law or
executive order to remain closed or a day on which the principal corporate trust
office of the property trustee is closed for business.
Haven Capital's revenue available for distribution to holders of the capital
securities will be limited to our payments to Haven Capital under our
subordinated debentures. For more information, please refer to "Description of
Subordinated Debentures--General." If we do not make interest payments on the
subordinated debentures, the property trustee will not have funds available to
pay distributions on the capital securities and on the common securities. We
will guarantee the payment of distributions if and to the extent that Haven
Capital has funds legally available to pay the distributions. You should read
"Description of Guarantee" for more information about the extent of our
guarantee.
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<PAGE>
OPTION TO DEFER INTEREST PAYMENTS
As long as no event of default exists, we have the right under the indenture
to elect to defer the payment of interest on the subordinated debentures, at any
time or from time to time, for no more than 20 consecutive quarters with respect
to each deferral period, provided that no deferral period will end on a date
other than an interest payment date on the subordinated debentures, or extend
beyond June 30, 2029, the maturity date of the debentures. If we defer payments,
Haven Capital will defer quarterly distributions on the capital securities
during a deferral period. During any deferral period distributions will continue
to accrue on the capital securities and on any accrued and unpaid distributions,
compounded quarterly from the relevant distribution date at the applicable
distribution rate, which will be equal to the applicable interest rate on the
subordinated debentures. The term distributions includes any accumulated
additional distributions.
Before the end of any deferral period, we may extend the deferral period, as
long as the extension does not cause the deferral period to exceed 20
consecutive quarters, or, to end on a date other than an interest payment date
or extend beyond June 30, 2029. At the end of any deferral period and upon the
payment of all amounts then due on any interest payment date, we may elect to
begin a new deferral period, subject to the above requirements. No interest
shall be due and payable during a deferral period until the deferral period
ends. We must give the property trustee, the administrative trustees and the
debenture trustee notice of our election to defer interest payments or to extend
a deferral period at least five business days before the earlier of:
- the date the distributions on the capital securities would have been
payable except for the election to begin a deferral period; and
- the date the administrative trustees are required to give notice to any
securities exchange or automated quotation system or to holders of the
capital securities of the record date or the date such distributions are
payable, but in any event not less than five business days prior to such
record date.
There is no limitation on the number of times that we may elect to begin a
deferral period. Please refer to "Description of Subordinated Debentures--Option
to Extend Interest Payment Date" and "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
During any deferral period, we may not:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of our capital
stock;
- make any payment of principal of, or interest or premium, if any, on or
repay, repurchase or redeem any debt securities (including our 10.46%
junior subordinated deferrable interest debentures due 2027 and any other
similar debentures) that rank equal or junior to the subordinated
debentures; or
- make any guarantee payments with respect to any guarantee of the debt
securities of any subsidiary (including our guarantee of the capital
securities issued by Haven Capital Trust I and other similar guarantees)
if such guarantee ranks equal or junior to the subordinated debentures.
Notwithstanding the foregoing, during a deferral period we may make the
following payments:
(1) dividends or distributions in shares of, or options, warrants or rights
to subscribe for or purchase shares of, our common stock;
(2) any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan
in the future, or the redemption or repurchase of any such rights
pursuant thereto;
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<PAGE>
(3) payments under the guarantee;
(4) as a result of a reclassification of our capital stock or the exchange
or conversion of one class or series of our capital stock for another
class or series of our capital stock;
(5) the purchase of fractional interests in shares of our capital stock
pursuant to the conversion or exchange provisions of such capital stock
or the security being converted or exchanged; and
(6) purchases of common stock related to the issuance of common stock or
rights under any of our benefit plans for our directors, officers or
employees or any of our dividend reinvestment plans.
We do not currently intend to exercise our right to defer payments of
interest on the subordinated debentures. Our obligations under the guarantee to
make payments of distributions is limited (to the extent that Haven Capital has
funds legally available to pay distributions, You should read "Description of
Guarantee" for more information about the extent of our guarantee.
REDEMPTION
Upon repayment on June 30, 2029 or prepayment, in whole or in part prior to
June 30, 2029, of the subordinated debentures (other than following the
distribution of the subordinated debentures to you as a holder of the capital
securities and us, as the holder of the common securities), the property trustee
will apply the proceeds from the repayment or prepayment of the subordinated
debentures (as long as the property trustee has received written notice no later
than 45 days before the repayment) to redeem at the applicable redemption price
(which may include a premium) an amount of trust securities having an aggregate
liquidation amount equal to the principal amount of the subordinated debentures
paid to Haven Capital. We will give notice of any redemption between 30 and 60
days prior to the redemption date.
If we prepay less than all of the subordinated debentures on a redemption
date, then the property trustee will allocate the proceeds of the prepayment on
a PRO RATA basis among the capital securities and the common securities. If a
court of competent jurisdiction enters an order to dissolve Haven Capital, the
subordinated debentures will be subject to optional prepayment in whole, but not
in part, on or after June 30, 2009.
We will have the right to prepay the subordinated debentures:
(1) in whole or in part, on or after June 30, 2009; and
(2) in whole but not in part, at any time, if there are changes in the bank
regulatory, investment company or tax laws that would adversely affect the
status of Haven Capital, the trust securities or the subordinated debentures.
We may have to obtain regulatory approval, including the approval of the
Office of Thrift Supervision, before we redeem any subordinated debentures.
Please refer to "Description of Subordinated Debentures--Optional
Prepayment" and "--Special Event Prepayment" for information on prepayment of
the subordinated debentures.
LIQUIDATION OF HAVEN CAPITAL AND DISTRIBUTION OF SUBORDINATED DEBENTURES
We will have the right at any time to dissolve Haven Capital and, after
satisfying the liabilities owed to Haven Capital's creditors as required by
applicable law, we will have the right to distribute the
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<PAGE>
subordinated debentures to the holders of the capital securities and to us as
holder of the common securities. Our right to dissolve Haven Capital is subject
to our receiving:
- an opinion of counsel to the effect that if we distribute the subordinated
debentures, the holders of the capital securities will not experience a
taxable event; and
- any required regulatory approval.
Haven Capital will automatically dissolve if:
(1) certain bankruptcy events occur, or we dissolve or liquidate;
(2) we distribute subordinated debentures having a principal amount equal to
the liquidation amount of the trust securities to holders of the trust
securities and we, as sponsor, have given written directions to the property
trustee to dissolve Haven Capital (which direction is at our option and, except
as described above, wholly within our discretion, as sponsor);
(3) Haven Capital redeems all of the trust securities as described under
"--Redemption;"
(4) Haven Capital's term expires; or
(5) a court of competent jurisdiction enters an order for the dissolution of
Haven Capital.
If Haven Capital is dissolved as described in clause (1), (2), (4), or (5)
above, Haven Capital will be liquidated by the trustees as quickly as the
trustees determine to be possible by distributing to holders of the trust
securities, after satisfying the liabilities owed to Haven Capital's creditors
as provided by applicable law, subordinated debentures having a principal amount
equal to the liquidation amount of the trust securities, unless the property
trustee determines that this distribution is not practicable. If the property
trustee determines that this distribution is not practicable, the holders of the
trust securities will be entitled to receive an amount equal to the aggregate of
the liquidation amount plus accumulated and unpaid distributions on the trust
securities to the date of payment (such amount being the "liquidation
distribution") out of the assets of Haven Capital legally available for
distribution to holders, after satisfying the liabilities owed to Haven
Capital's creditors as provided by applicable law. If the liquidation
distribution can be paid only in part because Haven Capital has insufficient
assets legally available to pay the full amount of the liquidation distribution,
or if a debenture event of default exists, the capital securities will have a
priority over the common securities. For more information, please refer to
"--Subordination of Common Securities."
After the liquidation date is fixed for any distribution of subordinated
debentures to holders of the trust securities:
(1) the trust securities will no longer be deemed to be outstanding;
(2) DTC or its nominee will receive in respect of each registered global
certificate representing trust securities a registered global certificate
representing the subordinated debentures to be delivered upon this distribution;
and
(3) any certificates representing trust securities not held by DTC or its
nominee will be deemed to represent subordinated debentures having a principal
amount equal to the liquidation amount of those trust securities, and bearing
accrued and unpaid interest in an amount equal to the accumulated and unpaid
distributions on those trust securities until such certificates are presented to
the administrative trustees or their agent for cancellation, in which case we
will issue to those holders, and the debenture trustee will authenticate, a
certificate representing the subordinated debentures.
We cannot assure you of the market prices for the capital securities or the
subordinated debentures that may be distributed to you in exchange for the
capital securities if a dissolution and liquidation of Haven Capital were to
occur. Accordingly, the capital securities that you purchase, or the
subordinated debentures that you may receive upon a dissolution and liquidation
of Haven Capital,
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<PAGE>
may trade at a discount to the price that you paid to purchase the capital
securities offered by this prospectus.
If we elect not to prepay the subordinated debentures prior to maturity and
either elect not to or we are unable to liquidate Haven Capital and distribute
the subordinated debentures to holders of the trust securities, the trust
securities will remain outstanding until the repayment of the subordinated
debentures on June 30, 2029.
REDEMPTION PROCEDURES
If we redeem the subordinated debentures, Haven Capital will redeem trust
securities at the applicable redemption price with the proceeds that it receives
from our redemption of the subordinated debentures. Any redemption of trust
securities will be made and the applicable redemption price will be payable on
the redemption date only to the extent that Haven Capital has funds legally
available to pay the applicable redemption price. For more information, you
should refer to "--Subordination of Common Securities."
If Haven Capital gives a notice of redemption for the capital securities,
then, by 12:00 noon, New York City time, on the redemption date, to the extent
funds legally are available, with respect to:
- the capital securities held by DTC or its nominees, the property trustee
will deposit, or cause the paying agent to deposit, irrevocably with DTC
funds sufficient to pay the applicable redemption price. For more
information, you should refer to "--Depositary Procedures."
- the capital securities held in certificated form, the property trustee
will irrevocably deposit with the paying agent funds sufficient to pay the
applicable redemption price and will give the paying agent irrevocable
instructions and authority to pay the applicable redemption price to the
holders upon surrender of their certificates evidencing the capital
securities. For more information, you should refer to "--Payment and
Paying Agency."
The paying agent will initially be the property trustee and any co-paying
agent chosen by the property trustee and acceptable to the administrative
trustees and us.
Notwithstanding the foregoing, distributions payable on or before the
redemption date will be payable to the holders of the capital securities on the
relevant record dates for the related distribution dates. If Haven Capital gives
a notice of redemption and funds are deposited as required, then upon the date
of the deposit, all rights of the holders of the capital securities called for
redemption will cease, except the right of the holders of the capital securities
to receive the applicable redemption price, without interest, and the capital
securities called to be redeemed will cease to be outstanding.
If any redemption date for the capital securities is not a business day,
then the applicable redemption price, without interest or any other payment in
respect of the delay, will be paid on the next business day, except that, if the
next business day falls in the next calendar year, the payment shall be made on
the last business day of the calendar year. If payment of the applicable
redemption price is improperly withheld or refused and not paid either by Haven
Capital or by us pursuant to the guarantee:
(1) distributions on the capital securities will continue to accumulate at
the rate of 10.25% per year, from the redemption date originally established by
Haven Capital to the date such applicable redemption price is actually paid; and
(2) the actual payment date will be the redemption date for purposes of
calculating the applicable redemption price.
Notice of any redemption will be mailed between 30 and 60 days before the
redemption date to each holder of trust securities at its registered address.
Unless we default in payment of the applicable
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<PAGE>
redemption price on, or in the repayment of, the subordinated debentures, on and
after the redemption date, distributions will cease to accrue on the trust
securities called for redemption.
Subject to applicable law (including, without limitation, U.S. federal
securities laws), we or our subsidiaries may at any time, and from time to time,
purchase outstanding capital securities in the open market or by private
agreement.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the redemption price of, the capital
securities and the common securities, as applicable, will generally be made on a
PRO RATA basis. However, if a debenture event of default exists on any
distribution or redemption date, no payment of any distribution on, or
applicable redemption price of, any of the common securities, and no other
payment on account of the redemption, liquidation or other acquisition of the
common securities, will be made unless payment in full in cash of all
accumulated and unpaid distributions on all of the outstanding capital
securities for all distribution periods terminating on or before the
distribution or redemption date, or payment of the applicable redemption price
is made in full. All funds available to the property trustee will first be
applied to the payment in full in cash of all distributions on, or redemption
price of, the capital securities then due and payable.
In the case of any event of default, we, as holder of all of the common
securities, will be deemed to have waived any right to act with respect to the
event of default until the effect of the event of default has been cured, waived
or otherwise eliminated. Until any event of default has been cured, waived or
otherwise eliminated, the property trustee will act solely on behalf of the
holders of the capital securities and not on our behalf, and only the holders of
the capital securities will have the right to direct the property trustee to act
on their behalf.
EVENTS OF DEFAULT; NOTICE
An event of default under the indenture constitutes an event of default
under the trust agreement. See "Description of Subordinated
Debentures--Debenture Events of Default."
The trust agreement provides that within five (5) business days after any
event of default actually known to the property trustee occurs, the property
trustee will give notice of the event of default to the holders of the capital
securities, the administrative trustees and to us, as sponsor, unless the event
of default has been cured or waived. We, as sponsor, and the administrative
trustees are required to file annually with the property trustee a certificate
as to whether we and the administrative trustees have complied with the
applicable conditions and covenants of the trust agreement.
If a debenture event of default exists, the capital securities will have a
preference over the common securities as described under "--Liquidation of Haven
Capital and Distribution of Subordinated Debentures" and "--Subordination of
Common Securities." An event of default does not entitle the holders of capital
securities to accelerate the maturity date of the capital securities.
REMOVAL OF TRUSTEES
Unless a debenture event of default exists, we may remove the property
trustee and the Delaware trustee at any time. If a debenture event of default
exists, the property trustee and the Delaware trustee may be removed only by the
holders of a majority in liquidation amount of the outstanding capital
securities. In no event will the holders of the capital securities have the
right to vote to appoint, remove or replace the administrative trustees, because
these voting rights are vested exclusively in us as the holder of all of the
common securities. No resignation or removal of the property trustee or the
Delaware trustee and no appointment of a successor trustee shall be effective
until the acceptance of appointment by the successor trustee in accordance with
the trust agreement.
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MERGER OR CONSOLIDATION OF TRUSTEES
If the property trustee, the Delaware trustee or any administrative trustee
that is not a natural person is merged, converted or consolidated into another
entity, or the property trustee is a party to a merger, conversion or
consolidation which results in a new entity, or an entity succeeds to all or
substantially all of the corporate trust business of the property trustee, the
new entity shall be the successor of the respective trustee under the trust
agreement, provided that the entity is otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF HAVEN CAPITAL
Haven Capital may not merge with or into, consolidate, amalgamate or be
replaced by, or convey, transfer or lease substantially all of its properties
and assets to any corporation or other entity, except as described below or as
otherwise described under "--Liquidation of Haven Capital and Distribution of
Subordinated Debentures." Haven Capital may, at our request, as sponsor, and
with the consent of the administrative trustees but without the consent of the
holders of the capital securities, merge with or into, consolidate, amalgamate
or be replaced by or convey, transfer or lease substantially all of its
properties and assets to a trust organized as such under the laws of any state;
provided, that:
(1) the successor either
(a) expressly assumes all of the obligations of Haven Capital with
respect to the trust securities or
(b) substitutes securities for the trust securities that have
substantially the same terms as the trust securities so long as the
substitute securities rank equal to same as the trust securities in priority
with respect to distributions and payments upon liquidation, redemption and
otherwise;
(2) we appoint a trustee of the successor possessing the same powers and
duties as the property trustee with respect to the subordinated debentures;
(3) the substitute securities are listed, or any substitute securities will
be listed upon notification of issuance, on any national securities exchange or
other organization on which the trust securities are then listed or quoted, if
any;
(4) if the capital securities, substitute securities or subordinated
debentures are rated by any nationally recognized statistical rating
organization prior to such transaction, the transaction does not cause any of
those securities to be downgraded by the rating organization;
(5) the transaction does not adversely affect the rights, preferences and
privileges of the holders of the trust securities (including any successor
securities) in any material respect;
(6) the successor has a purpose substantially identical to that of Haven
Capital;
(7) prior to the transaction, we received an opinion from independent
counsel to Haven Capital experienced in such matters to the effect that
(a) the transaction does not adversely affect the rights, preferences
and privileges of the holders of the trust securities (including any
successor securities) in any material respect (other than any dilution of
such holders' interests in the new entity), and
(b) following the transaction, neither Haven Capital nor the successor
will be required to register as an investment company under the Investment
Company Act; and
(8) we, or any permitted successor or assignee owns all of the common
securities of the successor and guarantees the obligations of the successor
under the substituted securities at least to the extent provided by the
guarantee and the common securities guarantee.
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Notwithstanding the foregoing, Haven Capital shall not, except with the
consent of holders of 100% in liquidation amount of the trust securities,
consolidate, amalgamate, merge with or into, or be replaced by or convey,
transfer or lease its properties and assets as an entirety or substantially as
an entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if the transaction would cause
Haven Capital or the successor to be classified as an association taxable as a
corporation for U.S. federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "--Mergers, Consolidations, Amalgamations
or Replacements of Haven Capital" and "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the trust agreement, the
holders of the capital securities will have no voting rights.
We, together with the property trustee and the administrative trustees, may
amend the trust agreement from time to time, without the consent of the holders
of the trust securities:
(1) to cure any ambiguity, correct or supplement any provisions in the trust
agreement that may be inconsistent with any other provision, or to make any
other provisions with respect to matters or questions arising under the trust
agreement, which are not inconsistent with the other provisions of the trust
agreement; or
(2) to modify, eliminate or add to any provisions of the trust agreement as
is necessary to ensure that at all times that any capital securities are
outstanding, Haven Capital will not be classified as an association taxable as a
corporation or to enable Haven Capital to qualify as a grantor trust, in each
case for U.S. federal income tax purposes, or to ensure that Haven Capital will
not be required to register as an investment company under the Investment
Company Act;
PROVIDED, HOWEVER, that in the case of clause (1) the amendment would not
adversely affect in any material respect the interests of the holders of the
capital securities. Any amendments of the trust agreement pursuant to the
foregoing shall become effective when notice of the amendment is given to the
holders of the capital securities.
We, together with the trustees, may amend the trust agreement:
(1) with the consent of holders representing a majority (based upon
liquidation amount) of the outstanding trust securities; and
(2) upon receipt by the trustees of an opinion of counsel experienced in
such matters to the effect that the amendment or the exercise of any power
granted to the trustees in accordance with the amendment will not affect Haven
Capital's classification as an entity that is not taxable as a corporation or as
being a grantor trust for U.S. federal income tax purposes or Haven Capital's
exemption from status as an investment company under the Investment Company Act,
PROVIDED that, without the consent of each holder of trust securities, no
amendment may change the amount or timing of any distribution on the trust
securities or otherwise adversely affect the amount of any distribution required
to be made in respect of the trust securities as of a specified date; or
restrict the right of a holder of trust securities to sue for the enforcement of
any payment on or after the specified date.
So long as any subordinated debentures are held by the property trustee, the
trustees may not:
- direct the time, method and place of conducting any proceeding for any
remedy available to the debenture trustee, or execute any trust or power
conferred on the debenture trustee with respect to the subordinated
debentures;
- waive certain past defaults under the indenture;
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- exercise any right to rescind or annul a declaration accelerating the
maturity of the principal of the subordinated debentures; or
- consent to any amendment, modification or termination of the indenture or
the subordinated debentures, where such consent shall be required,
without, in each case, obtaining the prior consent of the holders of a
majority in liquidation amount of all outstanding capital securities; PROVIDED,
HOWEVER, that where a consent under the indenture would require the consent of
each holder of subordinated debentures affected by the amendment, modification
or termination, the property trustee will not give consent without the prior
approval of each holder of the capital securities.
The trustees shall not revoke any action previously authorized or approved
by a vote of the holders of the capital securities except by subsequent vote of
such holders. The property trustee shall notify each holder of capital
securities of any notice of default with respect to the subordinated debentures.
In addition to obtaining the approvals of the holders of the capital securities,
prior to taking any of the foregoing actions, the trustees shall obtain an
opinion of counsel experienced in such matters to the effect that Haven Capital
will not be classified as an association taxable as a corporation for U.S.
federal income tax purposes on account of such action.
Any required approval of holders of capital securities may be given at a
meeting of the holders convened for the purpose of approving the matter or
pursuant to written consent. The property trustee will cause a notice of any
meeting at which holders of capital securities are entitled to vote, or of any
matter upon which action by written consent of such holders has been taken, to
be given to each holder of record of capital securities in accordance with the
trust agreement.
No vote or consent of the holders of capital securities will be required for
Haven Capital to redeem and cancel the capital securities in accordance with the
trust agreement.
Notwithstanding that holders of the capital securities are entitled to vote
or consent under any of the circumstances described above, any of the capital
securities that are owned by us, the trustees or any of our or any trustee's
affiliates, shall, for purposes of such vote or consent, be treated as if they
were not outstanding.
DEPOSITARY PROCEDURES
DTC has advised Haven Capital and us that it is a limited-purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations (collectively, "participants")
and to facilitate the clearance and settlement of transactions in those
securities between participants through electronic book-entry changes in
accounts of its participants, to eliminate the need for physical movement of
certificates. Participants include securities brokers and dealers (including the
underwriters), banks, trust companies, clearing corporations and certain other
organizations. Indirect access to DTC's system is also available to banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly (collectively,
"indirect participants"). Persons who are not participants may beneficially own
securities held by or on behalf of DTC only through participants or indirect
participants. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of participants and indirect participants.
DTC also has advised Haven Capital and us that, pursuant to procedures
established by it, (1) upon deposit of the global capital securities, DTC will
credit the accounts of participants designated by the underwriters with portions
of the liquidation amount of the global capital securities and
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(2) ownership of interests in the global capital securities will be shown on,
and the transfer of ownership of the global capital securities, will be effected
only through records maintained by DTC (with respect to participants) or by
participants and indirect participants (with respect to other owners of
beneficial interests in the global capital securities).
REGISTRATION OF CAPITAL SECURITIES
The capital securities will be represented by one or more global
certificates registered in the name of DTC or its nominee. Beneficial interests
in the capital securities will be shown on, and transfers of the global capital
securities will be effected only through, records maintained by participants.
Except as described below, capital securities in certificated form will not be
issued in exchange for the global certificates. See "--Exchange of Book-Entry
Capital Securities for Certificated Capital Securities."
You may hold your interests in the global capital security directly through
DTC if you are a participant, or indirectly through organizations that are
participants. All interests in a global capital security will be subject to the
procedures and requirements of DTC. The laws of some states require that certain
persons take physical delivery in certificated form of securities that they own.
Consequently, the ability to transfer beneficial interests in a global capital
security to those persons will be limited to that extent. Because DTC can act
only on behalf of participants, which in turn act on behalf of indirect
participants and certain banks, the ability of a person having beneficial
interests in a global capital security to pledge its interests to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of its interests, may be affected by the lack of a physical certificate
evidencing its interests. For certain other restrictions on the transferability
of the capital securities, see "--Exchange of Book-Entry Capital Securities for
Certificated Capital Securities."
Payments on the global capital security registered in the name of DTC, or
its nominee, will be payable by the property trustee to DTC in its capacity as
the registered holder under the trust agreement. Under the terms of the trust
agreement, the property trustee will treat the persons in whose names the
capital securities, including the global capital securities, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Neither the property trustee nor any agent
thereof has or will have any responsibility or liability for:
- any aspect of DTC's records or any participant's or indirect participant's
records relating to, or payments made on account of, beneficial ownership
interests in the global capital securities, or for maintaining,
supervising or reviewing any of DTC's records or any participant's or
indirect participant's records relating to the beneficial ownership
interests in the global capital securities; or
- any other matter relating to the actions and practices of DTC or any of
its participants or indirect participants.
DTC has advised Haven Capital and us that its current practice, upon receipt
of any payment on the capital securities, is to credit the accounts of the
relevant participants with the payment on the payment date, in amounts
proportionate to their respective holdings in liquidation amount of the capital
securities as shown on the records of DTC unless DTC has reason to believe it
will not receive payment on the payment date. Payments by participants and
indirect participants to the beneficial owners of capital securities will be
governed by standing instructions and customary practices and will be the
responsibility of participants or indirect participants and will not be the
responsibility of DTC, the property trustee, Haven Capital or us. None of Haven
Capital, Haven nor the property trustee will be liable for any delay by DTC or
any of its participants or indirect participants in identifying the beneficial
owners of the capital securities, and Haven Capital, Haven and the property
trustee may conclusively rely on, and will be protected in relying on,
instructions from DTC or its nominee for all purposes.
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Any secondary market trading activity in interests in the global capital
securities will settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its participants. Transfers between
participants in DTC will be effected in accordance with DTC's procedures, and
will settle in same-day funds.
DTC has advised Haven Capital and us that it will take any action permitted
to be taken by a holder of capital securities (including, without limitation,
presenting the capital securities for exchange as described below) only at the
direction of one or more participants who have an interest in DTC's global
capital securities in respect of the portion of the liquidation amount of the
capital securities as to which the participant or participants has or have given
direction. However, if an event of default exists under the trust agreement, DTC
reserves the right to exchange the global capital securities for legended
capital securities in certificated form and to distribute the certificated
capital securities to its participants.
We believe that the information in this section concerning DTC and its
book-entry system has been obtained from reliable sources, but we do not take
responsibility for the accuracy of this information.
Although DTC has agreed to the procedures described in this section to
facilitate transfers of interests in the global capital securities among
participants in DTC, DTC is not obligated to perform or to continue to perform
these procedures, and these procedures may be discontinued at any time. None of
Haven Capital, Haven nor the property trustee will have any responsibility or
liability for any aspect of the performance by DTC or its participants or
indirect participants of any of their respective obligations under the rules and
procedures governing their operations or for maintaining, supervising or
reviewing any records relating to the global capital securities that are
maintained by DTC or any of its participants or indirect participants.
EXCHANGE OF BOOK-ENTRY CAPITAL SECURITIES FOR CERTIFICATED CAPITAL SECURITIES
A global capital security can be exchanged for capital securities in
registered certificated form if:
(1) DTC notifies Haven Capital that it is unwilling or unable to continue as
depositary for the global capital security and Haven Capital fails to appoint a
successor depositary within 90 days of receipt of DTC's notice, or has ceased to
be a clearing agency registered under the Exchange Act and Haven Capital fails
to appoint a successor depositary within 90 days of becoming aware of this
condition;
(2) we, in our sole discretion, elect to cause the capital securities to be
issued in certificated form; or
(3) an event of default, or any event which after notice or lapse of time or
both would be an event of default, exists under the trust agreement.
In addition, beneficial interests in a global capital security may be
exchanged by or on behalf of DTC for certificated capital securities upon
request by DTC, but only upon at least 20 days' prior written notice given to
the property trustee in accordance with DTC's customary procedures. In all
cases, certificated capital securities delivered in exchange for any global
capital security will be registered in the names, and issued in any approved
denominations, requested by or on behalf of DTC (in accordance with its
customary procedures).
PAYMENT AND PAYING AGENCY
Haven Capital will make payments on the capital securities that are held in
global form to DTC, which will credit the relevant accounts at DTC on the
applicable distribution dates. Haven Capital will make payments on the capital
securities that are not held by DTC by mailing a check to the address of
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the holder entitled to the payment as the holder's address appears on the
register. The paying agent will initially be the property trustee and any
co-paying agent chosen by the property trustee and acceptable to the
administrative trustees and us. The paying agent will be permitted to resign as
paying agent upon 30 days' notice to the property trustee, the administrative
trustees and us. In the event that the property trustee is no longer the paying
agent, the administrative trustees will appoint a successor (which must be a
bank or trust company acceptable to the administrative trustees and us) to act
as paying agent.
REGISTRAR AND TRANSFER AGENT
The property trustee will act as registrar and transfer agent for the
capital securities.
Haven Capital will register transfers of the capital securities without
charge, except for any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. Haven Capital will not be required to
have the transfer of the capital securities registered after they have been
called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
Except if an event of default exists, the property trustee will undertake to
perform only the duties specifically set forth in the trust agreement. After an
event of default, the property trustee must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to this provision, the property trustee is not obligated to
exercise any of the powers vested in it by the trust agreement at the request of
any holder of trust securities, unless it is offered reasonable indemnity
against the costs, expenses and liabilities that it might incur. If no event of
default exists and the property trustee is required to decide between
alternative causes of action, construe ambiguous provisions in the trust
agreement or is unsure of the application of any provision of the trust
agreement, and the matter is not one on which holders of the capital securities
or the common securities are entitled under the trust agreement to vote, then
the property trustee shall take such action as directed by us and, if not
directed, shall take such action as it deems advisable and in the best interests
of the holders of the trust securities and will have no liability, except for
its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The administrative trustees are authorized and directed to conduct the
affairs of and to operate Haven Capital in such a way that:
(1) Haven Capital will not be deemed to be an investment company required to
be registered under the Investment Company Act;
(2) Haven Capital will be classified as a grantor trust for U.S. federal
income tax purposes; and
(3) the subordinated debentures will be treated as our indebtedness for U.S.
federal income tax purposes.
We, together with the administrative trustees, are authorized to take any
action, not inconsistent with applicable law, the certificate of trust of Haven
Capital or the trust agreement, that we and the administrative trustees
determine in our discretion is necessary or desirable, as long as it does not
materially adversely affect the interests of the holders of the trust
securities.
The trust agreement provides that holders of the trust securities have no
preemptive or similar rights to subscribe for any additional trust securities
and the issuance of trust securities is not subject to preemptive rights.
Haven Capital may not borrow money, issue debt, execute mortgages or pledge
any of its assets.
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DESCRIPTION OF SUBORDINATED DEBENTURES
THIS SUMMARY DESCRIBES THE MATERIAL PROVISIONS OF THE SUBORDINATED
DEBENTURES. IT IS NOT COMPLETE AND IS SUBJECT TO, AND QUALIFIED IN ITS ENTIRETY
BY, THE INDENTURE AND THE TRUST INDENTURE ACT. WE HAVE INCORPORATED THE
DEFINITIONS USED IN THE INDENTURE IN THIS PROSPECTUS. WE HAVE FILED THE
INDENTURE AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS
IS A PART. THE CHASE MANHATTAN BANK WILL ACT AS DEBENTURE TRUSTEE UNDER THE
INDENTURE. THE INDENTURE IS QUALIFIED UNDER THE TRUST INDENTURE ACT.
GENERAL
Haven Capital will invest the proceeds from the sale of the trust securities
in the subordinated debentures issued by Haven. The subordinated debentures will
bear interest at the annual rate of 10.25% of the principal amount of the
subordinated debentures, payable quarterly in arrears on interest payment dates
of March 31, June 30, September 30 and December 31 of each year and at maturity
to the person in whose name each subordinated debenture is registered at the
close of business on the relevant record date. The first interest payment date
for the subordinated debentures will be June 30, 1999. The period beginning on
and including the date the subordinated debentures are first issued and ending
on but excluding June 30, 1999 and each period beginning on and including an
interest payment date and ending on but excluding the next interest payment date
is an interest period.
We anticipate that, until the liquidation, if any, of Haven Capital, each
subordinated debenture will be held by the property trustee in trust for the
benefit of the holders of the capital securities. The amount of interest payable
for any interest period will be computed on the basis of a 360-day year of
twelve 30-day months. In the event that any interest payment date would
otherwise fall on a day that is not a business day, the interest payment date
will be postponed to the next business day (without any interest or other
payment due to the delay) unless it would fall in the next calendar year, in
which case the interest payment date shall be the last business day of the
calendar year.
Accrued interest that is not paid on the applicable interest payment date
will bear additional interest (to the extent permitted by law) at the rate of
10.25% per year, compounded quarterly from the relevant interest payment date.
The term "interest" as used in this prospectus includes quarterly interest
payments and interest on quarterly interest payments not paid on the applicable
interest payment date.
Notwithstanding anything to the contrary set forth above, if the maturity
date falls on a day that is not a business day, the payment of principal and
interest will be paid on the next business day, with the same force and effect
as if made on the maturity date, and no interest on such payments will accrue
from and after the maturity date.
The subordinated debentures will be issued as a series of junior
subordinated deferrable interest debentures under the indenture.
The subordinated debentures will mature on June 30, 2029.
The subordinated debentures will rank equal to all of our other subordinated
debentures which have been or may be issued to other trusts established by us,
in each case similar to Haven Capital, including, without limitation, our 10.46%
junior subordinated deferrable interest debentures due 2027, and will be
unsecured and rank subordinate and junior to all indebtedness for money that we
borrow to the extent and in the manner set forth in the indenture. See
"--Subordination."
We are a savings and loan holding company regulated by the Office of Thrift
Supervision, and substantially all of our operating assets are owned by the
Bank. We are a legal entity separate and distinct from our subsidiaries. Holders
of subordinated debentures should look only to us for payments on the
subordinated debentures. The principal sources of our income are dividends,
interest and fees from the Bank. We rely primarily on dividends from the Bank to
meet our obligations for payment of principal and interest on our outstanding
debt obligations and corporate expenses. Dividend payments
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from the Bank are subject to regulatory limitations, generally based on current
and retained earnings, imposed by the various regulatory agencies with authority
over the Bank. In addition to regulatory restrictions on the payment of
dividends, the Bank is subject to restrictions imposed by federal law on any
extensions of credit to us and other affiliates of the Bank and on investments
in stock or other securities of affiliates. Also, as a savings association
holding company, our right to receive distributions from the Bank may be limited
if the Bank is liquidated or reorganized. For more information about these
regulatory limits, you should read "Risk Factors--Risks related to your
investment in the capital securities--Banking laws and regulations limit Haven's
access to funds, which may prevent Haven from making payments under the
subordinated debentures."
The subordinated debentures will be effectively subordinated to all existing
and future liabilities of the Bank (including the Bank's deposit liabilities)
and all liabilities of any of our future subsidiaries. The indenture does not
limit us or the Bank from incurring or issuing other secured or unsecured debt,
including senior indebtedness. See "--Subordination."
FORM, REGISTRATION AND TRANSFER
If the subordinated debentures are distributed to the holders of the trust
securities, the subordinated debentures may be represented by one or more global
certificates registered in the name of Cede & Co., as the nominee of DTC. The
depositary arrangements for such subordinated debentures are expected to be
substantially similar to those in effect for the capital securities. For a
description of DTC and the terms of the depositary arrangements relating to
payments, transfers, voting rights, redemptions and other notices and other
matters, you should read "Description of Capital Securities--Depositary
Procedures."
PAYMENT AND PAYING AGENTS
Payment of principal of (and premium, if any) and interest on the
subordinated debentures will be made at the office of the debenture trustee in
New York, New York or at the office of such paying agent or paying agents as we
may designate from time to time, except that, at our option, payment of any
interest may be made, except in the case of subordinated debentures in global
form:
- by check mailed to the address of the person or entity entitled to the
interest payment as such address shall appear in the register for the
subordinated debentures; or
- by transfer to an account maintained by the person or entity entitled to
the interest payment as specified in the register, provided that proper
transfer instructions have been received by the relevant record date.
Payment of any interest on any subordinated debenture will be made to the
person or entity in whose name the subordinated debenture is registered at the
close of business on the record date for the interest payment date, except in
the case of defaulted interest. We may at any time designate additional paying
agents or rescind the designation of any paying agent; however we will always be
required to maintain a paying agent in each place of payment for the
subordinated debentures.
Any moneys deposited with the debenture trustee or any paying agent, or then
held by us, in trust for the payment of the principal of (or premium, if any) or
interest on any subordinated debenture and remaining unclaimed for two years
after such principal (or premium, if any) or interest has become due and payable
shall, at our request, be repaid to us and the holder of the subordinated
debenture shall thereafter look, as a general unsecured creditor, only to us for
payment.
OPTION TO EXTEND INTEREST PAYMENT DATE
So long as no debenture event of default exists, we will have the right
under the indenture to defer the payment of interest on the subordinated
debentures, at any time and from time to time, for no more than 20 consecutive
quarters for each deferral period, provided that no deferral period shall end
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on a date other than an interest payment date or extend beyond June 30, 2029. At
the end of a deferral period, we must pay all interest then accrued and unpaid
(together with interest thereon at the rate of 10.25% per year, compounded
quarterly from the relevant interest payment date, to the extent permitted by
applicable law). During a deferral period, interest will continue to accrue, and
holders of the trust securities or, if the subordinated debentures have been
distributed to holders of the trust securities, holders of subordinated
debentures, will be required to include that deferred interest in gross income
for U.S. federal income tax purposes on an accrual method of accounting
prescribed by the Code and Treasury regulation provisions on original issue
discount prior to the receipt of cash attributable to that income. See "Certain
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
During any such deferral period, we may not:
(1) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of our capital
stock;
(2) make any payment of principal of, or interest or premium, if any, on or
repay, repurchase or redeem any of our debt securities (including our 10.46%
junior subordinated deferrable interest debentures due 2027 and any other
debentures) that rank equal to or junior to the subordinated debentures; or
(3) make any guarantee payments with respect to any guarantee by us of the
debt securities of any of our subsidiaries (including our guarantee of the
capital securities of Haven Capital Trust I and any other guarantees) if such
guarantee ranks equal or junior to the subordinated debentures other than:
(a) dividends or distributions in shares of, or options, warrants or
rights to subscribe for or purchase shares of, our common stock;
(b) any declaration of a dividend in connection with the implementation
of a stockholders' rights plan, or the issuance of stock under any such plan
in the future, or the redemption or repurchase of any rights pursuant
thereto;
(c) payments under the guarantee;
(d) as a result of a reclassification of our capital stock or the
exchange or conversion of one class or series of our capital stock for
another class or series of our capital stock;
(e) the purchase of fractional interests in shares of our capital stock
pursuant to the conversion or exchange provisions of such capital stock or
the security being converted or exchanged; and
(f) purchases of our common stock related to the issuance of common
stock or rights under any of our benefit plans for our directors, officers
or employees or any of our dividend reinvestment plans.
We do not currently intend to exercise our option to defer payments of
interest on the subordinated debentures.
Before the end of any deferral period, we may extend the deferral period, as
long as no event of default exists and the extension does not cause the deferral
period to exceed 20 consecutive quarterly periods, to end on a date other than
an interest payment date or to extend beyond June 30, 2029. At the end of any
deferral period and upon the payment of all then accrued and unpaid interest
(together with interest thereon at the rate of 10.25% per year, compounded
quarterly, to the extent permitted by applicable law), we may elect to begin a
new deferral period, subject to the requirements set forth herein. No interest
shall be due and payable during a deferral period until the deferral period
ends. We
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must give the property trustee, the administrative trustees and the debenture
trustee notice of our election at least five business days before the earlier
of:
- the date the distributions on the trust securities would have been payable
except for the election to begin or extend such deferral period;
- the date the administrative trustees are required to give notice to any
securities exchange or automated quotation system on which the capital
securities are listed or quoted or to holders of capital securities of the
record date for such distributions; or
- the date such distributions are payable, but at least five business days
prior to the record date.
The debenture trustee will notify holders of the capital securities of our
election to begin or extend a new deferral period.
There is no limit on the number of times that we may elect to begin a
deferral period.
OPTIONAL PREPAYMENT
The subordinated debentures will be prepayable, in whole or in part, at our
option on or after June 30, 2009, subject to our receipt of any required
regulatory approval, at an optional prepayment price equal to the percentage of
the outstanding principal amount of the subordinated debentures specified below,
plus, in each case, accrued and unpaid interest on the subordinated debentures,
if any, to the date of prepayment if redeemed during the 12-month period
beginning June 30 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2009.............................................................................. 105.125%
2010.............................................................................. 104.613%
2011.............................................................................. 104.100%
2012.............................................................................. 103.588%
2013.............................................................................. 103.075%
2014.............................................................................. 102.563%
2015.............................................................................. 102.050%
2016.............................................................................. 101.538%
2017.............................................................................. 101.025%
2018.............................................................................. 100.513%
2019 and thereafter............................................................... 100.000%
</TABLE>
SPECIAL EVENT PREPAYMENT
If there are changes in the bank regulatory, investment company or tax laws
that adversely affect the status of Haven Capital, the capital securities or the
subordinated debentures, we may, at our option and at any time, subject to our
receipt of any required regulatory approval, prepay the subordinated debentures,
in whole but not in part, at any time within 90 days of the change in the law,
at the special event prepayment price. If we exercise our option to prepay the
subordinated debentures under these circumstances, then the proceeds of that
prepayment must be applied to redeem the trust securities at a prepayment price
equal to 100% of the principal amount of the subordinated debentures so prepaid,
plus, in each case, accrued and unpaid interest on the subordinated debentures,
if any, to the date of prepayment. See "Description of Capital
Securities--Redemption."
A change in the bank regulatory law means our receipt of an opinion of
independent bank regulatory counsel experienced in such matters to the effect
that, as a result of:
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- any amendment to, or change (including any announced prospective change)
in, any laws or regulations of the United States or any rules, guidelines
or policies of an applicable regulatory agency or authority; or
- any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations,
which amendment or change is effective or which pronouncement or decision is
announced on or after the date the trust securities are first issued, the
capital securities do not constitute, or within 90 days of the opinion will not
constitute, Tier 1 Capital (or its then equivalent if we were subject to such
capital requirement) applied as if we were a bank holding company for purposes
of the capital adequacy guidelines of the Federal Reserve Board (or any
successor regulatory authority with jurisdiction over bank holding companies) or
any capital adequacy guidelines then in effect and applicable to us.
A change in the investment company law means the receipt by us and Haven
Capital of an opinion of independent securities counsel experienced in such
matters to the effect that, as a result of:
- any amendment to, or change (including any announced prospective change)
in, any laws or regulations of the United States or any rules, guidelines
or policies of any applicable regulatory agency or authority; or
- any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations,
which amendment or change is effective or which pronouncement or decision is
announced on or after the date the trust securities are first issued, Haven
Capital is, or within 90 days of the date of the opinion will be, considered an
investment company that is required to be registered under the Investment
Company Act.
A change in tax law means the receipt by us and Haven Capital of an opinion
of independent tax counsel experienced in such matters to the effect that, as a
result of:
- any amendment to, or change (including any announced prospective change)
in, any laws or regulations of the United States or any political
subdivision or taxing authority thereof or therein; or
- any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations,
which amendment or change is effective or which pronouncement or decision is
announced on or after the date the trust securities are first issued, there is
more than an insubstantial risk that:
- Haven Capital is, or will be within 90 days of the date of such opinion,
subject to U.S. federal income tax with respect to any income received or
accrued on the subordinated debentures;
- interest payable by us on the subordinated debentures is not, or within 90
days of the date of such opinion will not be, deductible by us, in whole
or in part, for U.S. federal income tax purposes; or
- Haven Capital is, or will be within 90 days of the date of such opinion,
subject to more than a DE MINIMIS amount of other taxes, duties or other
governmental charges.
We will mail any notice of prepayment between 30 and 60 days before the
prepayment date to each holder of subordinated debentures to be prepaid at its
registered address. Unless we default in payment of the prepayment price, on the
prepayment date interest shall cease to accrue on the subordinated debentures
called for prepayment.
If Haven Capital is required to pay any additional taxes, duties or other
governmental charges as a result of a change in the tax law, we will pay as
additional amounts on the subordinated debentures any amounts as may be
necessary in order that the amount of distributions then due and payable by
Haven
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Capital on the outstanding trust securities shall not be reduced as a result of
any additional sums, including taxes, duties or other governmental charges to
which Haven Capital has become subject as a result of a change in the tax law.
CERTAIN COVENANTS OF HAVEN
We will also covenant that we will not:
(1) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our capital stock;
(2) make any payment of principal of, or interest or premium, if any, on or
repay, repurchase or redeem any of our debt securities (including our 10.46%
junior subordinated deferrable interest debentures due 2027) that rank equal or
junior to the subordinated debentures; or
(3) make any guarantee payments with respect to any of our guarantees of the
debt securities of any of our subsidiaries (including our guarantee of payments
on the capital securities issued by Haven Capital Trust I) if such guarantee
ranks equal or junior to the subordinated debentures; other than:
(a) dividends or distributions in shares of, or options, warrants or
rights to subscribe for or purchase shares of, our common stock;
(b) any declaration of a dividend in connection with the implementation
of a stockholders' rights plan, or the issuance of stock under any such plan
in the future, or the redemption or repurchase of any such rights pursuant
thereto;
(c) payments under the guarantee;
(d) as a result of a reclassification of our capital stock or the
exchange or conversion of one class or series of our capital stock for
another class or series of our capital stock;
(e) the purchase of fractional interests in shares of our capital stock
pursuant to the conversion or exchange provisions of such capital stock or
the security being converted or exchanged; and
(f) purchases of our common stock related to the issuance of common
stock or rights under any of our benefit plans for its directors, officers
or employees or any of our dividend reinvestment plans,
if at such time:
- we have actual knowledge that there is any event that is, or with the
giving of notice or the lapse of time, or both, would be, a debenture
event of default and that we have not taken reasonable steps to cure;
- we are in default with respect to our payment of any obligations under the
guarantee; or
- we have given notice of our election to exercise our right to defer
interest payments on the subordinated debentures as provided in the
indenture and the deferral period, or any extension of the deferral
period, is continuing.
So long as the trust securities remain outstanding, we also will covenant:
- to directly or indirectly maintain 100% direct or indirect ownership of
the common securities; PROVIDED, HOWEVER, that any of our permitted
successors under the indenture may succeed to our ownership of the common
securities;
- to use commercially reasonable efforts to cause Haven Capital to remain a
business trust, except in connection with the distribution of subordinated
debentures to the holders of trust securities in liquidation of Haven
Capital, the redemption of all of the trust securities, or certain
mergers, consolidations or amalgamations, each as permitted by the trust
agreement;
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- to use commercially reasonable efforts to cause Haven Capital to otherwise
continue not to be classified as an association taxable as a corporation
and to be classified as a grantor trust for U.S. federal income tax
purposes;
- to use commercially reasonable efforts to cause each holder of trust
securities to be treated as owning an undivided beneficial interest in the
subordinated debentures; and
- to not cause, as sponsor of Haven Capital, or permit, as holder of the
common securities, the dissolution, winding-up or liquidation of Haven
Capital, except as provided in the trust agreement.
MODIFICATION OF INDENTURE
From time to time, we, together with the debenture trustee, may, without the
consent of the holders of subordinated debentures, amend the indenture for
specified purposes, including, among other things, curing ambiguities, defects
or inconsistencies, provided that any amendment in the indenture does not
materially adversely affect the interest of the holders of subordinated
debentures, and qualifying, or maintaining the qualification of, the indenture
under the Trust Indenture Act.
The indenture permits us and the debenture trustee, with the consent of the
holders of a majority in aggregate principal amount of subordinated debentures,
to modify the indenture in a manner affecting the rights of the holders of the
subordinated debentures; provided that no modification may, without the consent
of the holders of each outstanding subordinated debenture affected:
- change the stated maturity date, or reduce the principal amount, of the
subordinated debentures;
- reduce the amount payable on prepayment or reduce the rate or extend the
time of payment of interest except pursuant to our right under the
indenture to defer the payment of interest (see "--Option to Extend
Interest Payment Date");
- make the principal of, (or premium, if any) or interest on, the
subordinated debentures payable in any coin or currency other than that
provided in the subordinated debentures;
- impair or affect the right of any holder of subordinated debentures to
institute suit for the payment thereof; or
- reduce the percentage of the principal amount of the subordinated
debentures, the holders of which are required to consent to any such
modification.
DEBENTURE EVENTS OF DEFAULT
A "debenture event of default" is:
- our failure for 30 days to pay any interest (including compounded interest
and additional sums, if any) on the subordinated debentures or any other
debentures (including our 10.46% junior subordinated deferrable interest
debentures due 2027) when due (subject to the deferral of any interest due
date in the case of a deferral period with respect to the subordinated
debentures or other debentures as the case may be); or
- our failure to pay any principal or premium, if any, on the subordinated
debentures or any other debentures when due whether at maturity, upon
prepayment, by accelerating the maturity or otherwise; or
- our failure to observe or perform, in any material respect, any other
covenant contained in the indenture for 90 days after written notice to us
from the debenture trustee or to us and the debenture trustee from the
holders of at least 25% in aggregate outstanding principal amount of
subordinated debentures; or
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- certain events related to our bankruptcy, insolvency or reorganization.
The holders of a majority in aggregate outstanding principal amount of the
subordinated debentures have, subject to certain exceptions, the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the debenture trustee. The debenture trustee or the holders of not less than
25% in aggregate outstanding principal amount of the subordinated debentures may
declare the principal due and payable immediately upon a debenture event of
default. The holders of a majority in aggregate outstanding principal amount of
the subordinated debentures may annul this declaration and waive the default if
the default (other than the non-payment of the principal of the subordinated
debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the debenture trustee.
The holders of a majority in aggregate outstanding principal amount of the
subordinated debentures affected may, on behalf of the holders of all the
subordinated debentures, waive any past default, except a default in the payment
of principal (or premium, if any) or interest (unless such default has been
cured and a sum sufficient to pay all matured installments of interest and
principal (and premium, if any) due otherwise than by acceleration has been
deposited with the debenture trustee) or a default in respect of a covenant or
provision which under the indenture cannot be modified or amended without the
consent of the holder of each outstanding subordinated debenture.
The indenture requires that we file with the debenture trustee a certificate
annually as to the absence of defaults specified under the indenture.
The indenture provides that the debenture trustee may withhold notice of a
debenture event of default from the holders of the subordinated debentures if
the debenture trustee considers it in the interest of the holders to do so.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES
If a debenture event of default exists that is attributable to our failure
to pay the principal of (or premium, if any) or interest (including compounded
interest and additional sums, if any) on the subordinated debentures on the due
date, a holder of capital securities may institute a direct action. We may not
amend the indenture to remove this right to bring a direct action without the
prior written consent of the holders of all of the capital securities.
Notwithstanding any payments that we make to a holder of capital securities in
connection with a direct action, we shall remain obligated to pay the principal
of (or premium, if any) or interest (including compounded interest and
additional sums, if any) on the subordinated debentures, and we shall be
subrogated to the rights of the holder of the capital securities with respect to
payments on the capital securities to the extent that we make any payments to a
holder in any direct action.
The holders of the capital securities will not be able to exercise directly
any remedies, other than those described in the above paragraph, available to
the holders of the subordinated debentures, unless an event of default exists
under the trust agreement. See "Description of Capital Securities--Events of
Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The indenture provides that we will not consolidate with or merge into any
other person or convey, transfer or lease all or substantially all of our
properties to any person, and no person shall consolidate with or merge into us
or convey, transfer or lease all or substantially all of its properties to us,
unless:
- in case we consolidate with or merge into another person or convey or
transfer all or substantially all of our properties to any person, the
successor is organized under the laws of the
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United States or any state or the District of Columbia, and the successor
expressly assumes our obligations under the indenture with respect to the
subordinated debentures;
- immediately after giving effect to the transaction, no debenture event of
default, and no event which, after notice or lapse of time or both, would
become a debenture event of default, exists; and
- certain other conditions as prescribed in the indenture are met.
The general provisions of the indenture do not afford holders of the
subordinated debentures protection in the event of a highly leveraged or other
transaction that we may become involved in that may adversely affect holders of
the subordinated debentures.
SATISFACTION AND DISCHARGE
The indenture provides that when, among other things,
- all subordinated debentures not previously delivered to the debenture
trustee for cancellation have become due and payable or will become due
and payable at maturity or called for prepayment within one year, and
- we deposit or cause to be deposited with the debenture trustee funds, in
trust, for the purpose and in an amount sufficient to pay and discharge
the entire indebtedness on the subordinated debentures not previously
delivered to the debenture trustee for cancellation, for the principal
(and premium, if any) and interest (including compounded interest and
additional sums, if any) to the date of the prepayment or to June 30,
2029, as the case may be,
then the indenture will cease to be of further effect (except as to our
obligations to pay all other sums due pursuant to the indenture and to provide
the officers' certificates and opinions of counsel), and we will be deemed to
have satisfied and discharged the indenture.
SUBORDINATION
We have promised that any subordinated debentures issued under the indenture
will be ranked junior to all senior indebtedness to the extent provided in the
indenture. Upon any payment or distribution of our assets to creditors upon our
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of our creditors, marshaling of our assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of us, the senior indebtedness must be paid in full before
the holders of the subordinated debentures will be entitled to receive or retain
any payment in respect thereof.
If the maturity of subordinated debentures is accelerated, the holders of
all senior indebtedness outstanding at such time will first be entitled to
receive payment in full of such senior indebtedness before the holders of
subordinated debentures will be entitled to receive or retain any payment in
respect of the principal of (or premium, if any) or interest, if any, on the
subordinated debentures.
No payments on account of principal (or premium, if any) or interest, if
any, in respect of the subordinated debentures may be made if there is a default
in any payment with respect to senior indebtedness, or an event of default
exists with respect to any senior indebtedness that accelerates the maturity of
the senior indebtedness, or if any judicial proceeding shall be pending with
respect to the default.
Indebtedness for money borrowed means any obligation of or any obligation
guaranteed by us, to repay borrowed money, whether or not evidenced by bonds,
debentures, notes or other written instruments; except that indebtedness for
money borrowed does not include trade accounts payable or accrued liabilities
arising in the ordinary course of business.
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Indebtedness ranking on a parity with the subordinated debentures means:
- indebtedness for money borrowed, whether outstanding on the date the
indenture is executed or created, assumed or incurred after the date that
the indenture is executed, to the extent the indebtedness for money
borrowed by its terms ranks equal to and not prior to the subordinated
debentures in the right of payment upon the happening of our dissolution,
winding-up, liquidation or reorganization; and
- all other debt securities, and guarantees in respect of those debt
securities, issued to any trust other than Haven Capital, or a trustee of
the trust, partnership or other entity affiliated with us, that is our
financing vehicle (a "financing entity"), in connection with the issuance
by the financing entity of equity securities or other securities
guaranteed by us pursuant to an instrument that ranks equal to, with or
junior to the guarantee, including, without limitation, our 10.46% junior
subordinated deferrable interest debentures due 2027 and the guarantee
issued with respect to the capital securities of Haven Capital Trust I.
The securing of any indebtedness otherwise constituting indebtedness
ranking on a parity with the subordinated debentures shall not be deemed
to prevent such indebtedness from constituting indebtedness ranking on a
parity with the subordinated debentures.
Indebtedness ranking junior to the subordinated debentures means any
indebtedness for money borrowed, whether outstanding on the date the indenture
is executed or created, assumed or incurred after the date the indenture is
executed, to the extent the indebtedness for money borrowed by its terms ranks
junior to and not equal to or prior to the subordinated debentures (and any
other indebtedness ranking on a parity with the subordinated debentures) in
right of payment upon the happening of our dissolution or winding-up or
liquidation or reorganization. The securing of any indebtedness for money
borrowed otherwise constituting indebtedness ranking junior to the subordinated
debentures shall not be deemed to prevent the indebtedness for money borrowed
from constituting indebtedness ranking junior to the subordinated debentures.
Senior indebtedness means all indebtedness for money borrowed, whether
outstanding on the date the indenture is executed or created, assumed or
incurred after the date the indenture is executed, except indebtedness ranking
on a parity with the subordinated debentures or indebtedness ranking junior to
the subordinated debentures, and any deferrals, renewals or extensions of the
senior indebtedness.
For information regarding the regulatory limitations applicable to dividends
and other payments by the Bank, you should read "Risk Factors--Risks related to
your investments in the capital securities-- Banking laws and regulations limit
Haven's access to funds, which may prevent Haven from making payments under the
subordinated debentures."
GOVERNING LAW
The indenture and the subordinated debentures will be governed by and
construed in accordance with the laws of the State of New York, without regard
to conflict of law principles.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The debenture trustee will have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to these provisions, the debenture trustee is not
obligated to exercise any of the powers vested in it by the indenture at the
request of any holder of subordinated debentures, unless offered reasonable
indemnity by the holder against the costs, expenses and liabilities which might
be incurred thereby. The debenture trustee is not required to expend or risk its
own funds or otherwise incur personal financial liability in the performance of
its duties under the indenture if the debenture trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
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DESCRIPTION OF GUARANTEE
THE GUARANTEE WILL BE EXECUTED AND DELIVERED BY HAVEN AT THE SAME TIME AS
THE CAPITAL SECURITIES. THE CHASE MANHATTAN BANK WILL ACT AS GUARANTEE TRUSTEE
UNDER THE GUARANTEE TO COMPLY WITH THE TRUST INDENTURE ACT. THE GUARANTEE WILL
BE QUALIFIED AS AN INDENTURE UNDER THE TRUST INDENTURE ACT. THIS SUMMARY OF THE
MATERIAL PROVISIONS OF THE GUARANTEE IS NOT COMPLETE AND IS SUBJECT TO, AND
QUALIFIED IN ITS ENTIRETY BY, THE GUARANTEE AND THE TRUST INDENTURE ACT. THE
FORM OF THE GUARANTEE HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT
OF WHICH THIS PROSPECTUS IS PART. THE GUARANTEE TRUSTEE WILL HOLD THE GUARANTEE
FOR THE BENEFIT OF THE HOLDERS OF THE CAPITAL SECURITIES.
GENERAL
We will irrevocably agree to pay in full on a subordinated basis, to the
extent set forth herein, the payments with respect to the capital securities to
the extent not paid by Haven Capital. The payments that will be subject to the
guarantee are:
- any accumulated and unpaid distributions required to be paid on the
capital securities, to the extent that Haven Capital has funds legally
available at that time;
- the applicable redemption price with respect to the capital securities
called for redemption, to the extent that Haven Capital has funds legally
available at that time; and
- upon a voluntary or involuntary dissolution, winding-up or liquidation of
Haven Capital (other than in connection with the distribution of the
subordinated debentures to holders of the capital securities or the
redemption of all capital securities), the lesser of (a) the liquidation
distribution, to the extent Haven Capital has funds legally available at
that time, and (b) the amount of assets of Haven Capital remaining
available for distribution to holders of capital securities after
satisfying the liabilities owed to Haven Capital's creditors as required
by applicable law.
The guarantee will rank subordinate and junior to all senior indebtedness to
the extent provided in the guarantee. See "--Status of the Guarantee." Our
obligation to make a guarantee payment may be satisfied by our direct payment of
the required amounts to the holders of the capital securities or by causing
Haven Capital to pay these amounts to the holders of the capital securities.
The guarantee will be an irrevocable guarantee on a subordinated basis of
Haven Capital's obligations under the capital securities, but will apply only to
the extent that Haven Capital has funds sufficient to make these payments. If we
do not make interest payments on the subordinated debentures held by Haven
Capital, Haven Capital will not be able to pay you distributions on the capital
securities and will not have funds legally available. Please refer to the
"Relationship among the Capital Securities, the Subordinated Debentures and the
Guarantee" section of this prospectus. The guarantee does not limit us from
incurring or issuing other secured or unsecured debt, including senior
indebtedness, whether under the indenture, any other indenture that we may enter
into in the future or otherwise.
The holders of at least a majority in aggregate liquidation amount of the
capital securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the guarantee trustee in
respect of our guarantee or to direct the exercise of any trust power conferred
upon the guarantee trustee under our guarantee. Any holder of the capital
securities may institute a legal proceeding directly against us to enforce their
rights under the guarantee without first instituting a legal proceeding against
Haven Capital, the guarantee trustee or any other person or entity.
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If we default on our obligation to pay amounts payable under the
subordinated debentures, Haven Capital will lack funds for the payment of
distributions or amounts payable on redemption of the capital securities or
otherwise, and the holders of the capital securities will not be able to rely
upon the guarantee for payment of such amounts. Instead, if a debenture event of
default exists that is attributable to our failure to pay principal of (or
premium, if any) or interest on the subordinated debentures on a payment date,
then any holder of capital securities may institute a direct action against us
pursuant to the terms of the indenture for enforcement of payment to that holder
of the principal of (or premium, if any) or interest on such subordinated
debentures having a principal amount equal to the aggregate liquidation amount
of the capital securities of that holder. In connection with a direct action, we
will have a right of set-off under the indenture to the extent that we made any
payment to the holder of capital securities in the direct action. Except as
described herein, holders of capital securities will not be able to exercise
directly any other remedy available to the holders of the subordinated
debentures or assert directly any other rights in respect of the subordinated
debentures. The trust agreement provides that each holder of trust securities by
accepting the trust securities agrees to the provisions of the guarantee and the
indenture.
We will, through our guarantee, the trust agreement, the subordinated
debentures and the indenture, taken together, fully, irrevocably and
unconditionally guarantee all of Haven Capital's obligations under the capital
securities. No single document standing alone, or operating in conjunction with
fewer than all of the other documents, constitutes that guarantee. Only the
combined operation of these documents provides a full, irrevocable and
unconditional guarantee of Haven Capital's obligations under the capital
securities. You should refer to "Relationship among the Capital Securities, the
Subordinated Debentures and the Guarantee" for more information about our
guarantee.
STATUS OF THE GUARANTEE
Our guarantee will constitute an unsecured obligation and will rank
subordinate and junior to all senior indebtedness in the same manner as the
subordinated debentures. See "Description of Subordinated
Debentures--Subordination." In addition, because we are a holding company, our
right to participate in any distribution of the Bank's assets upon the Bank's
liquidation or reorganization or otherwise is subject to the prior claims of the
Bank's creditors (including its depositors), except to the extent we may be
recognized as a creditor of the Bank. Accordingly, our obligations under the
guarantee effectively will be subordinated to all existing and future
liabilities of our present and future subsidiaries (including depositors of the
Bank). As a result, claimants should look only to our assets for payments under
the guarantee. See "Description of Subordinated Debentures--General."
Our guarantee will rank equal to all of our other guarantees with respect to
preferred beneficial interests issued by other trusts, including our guarantee
of the capital securities issued by Haven Capital Trust I. Our guarantee of
Haven Capital's capital securities does not limit the amount of secured or
unsecured debt, including senior indebtedness, that we or any of our
subsidiaries may incur. We expect from time to time that we will incur
additional indebtedness and that our subsidiaries will also incur additional
liabilities. Our guarantee will constitute a guarantee of payment and not of
collection, enabling the guaranteed party to institute a legal proceeding
directly against us to enforce their rights under the guarantee without first
instituting a legal proceeding against any other person or entity. Our guarantee
will be held for the benefit of the holders of the capital securities. Our
guarantee will not be discharged, except by payment of the guarantee payments in
full to the extent that Haven Capital has not paid, or upon distribution of the
subordinated debentures to, the holders of the capital securities.
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EVENTS OF DEFAULT
There will be an event of default under the guarantee if we fail to perform
any of our payment or other obligations under the guarantee; except that with
respect to a default in payment of any guarantee payment, we shall have received
notice of default and shall not have cured the default within 60 days after
receipt of the notice. The holders of at least a majority in liquidation amount
of the capital securities will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the guarantee
trustee in respect of our guarantee or to direct the exercise of any trust or
power conferred upon the guarantee trustee under our guarantee.
Any holder of the capital securities may institute a legal proceeding
directly against us to enforce the rights of the holders of the capital
securities under the guarantee without first instituting a legal proceeding
against Haven Capital, the guarantee trustee or any other person or entity.
We, as guarantor, will be required to file annually with the guarantee
trustee a certificate regarding our compliance with the applicable conditions
and covenants under our guarantee.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the capital securities (in which case no vote will be
required), the guarantee may not be amended without the prior approval of the
holders of a majority of the liquidation amount of such outstanding capital
securities. You should read "Description of Capital Securities--Voting Rights;
Amendment of the Trust Agreement" for more information about the manner of
obtaining the holders' approval. All guarantees and agreements contained in the
guarantee agreement shall bind our successors, assigns, receivers, trustees and
representatives and shall inure to the benefit of the holders of the capital
securities then outstanding.
TERMINATION OF THE GUARANTEE
Our guarantee will terminate and be of no further force and effect upon:
- full payment of the applicable redemption price of all outstanding capital
securities;
- full payment of the liquidation amount payable upon liquidation of Haven
Capital; or
- distribution of subordinated debentures to the holders of the capital
securities.
Our guarantee will continue to be effective or will be reinstated, as the
case may be, if at any time any holder of the capital securities must restore
payment of any sums paid under the capital securities or the guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, except if we default under the guarantee, will
undertake to perform only such duties as are specifically set forth in the
guarantee and, in case a default with respect to the guarantee has occurred,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the guarantee trustee will not be obligated to exercise any of the
powers vested in it by the guarantee at the request of any holder of the capital
securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that it might incur.
GOVERNING LAW
The guarantee will be governed by and construed in accordance with the laws
of the State of New York, without regard to conflict of law principles.
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RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE TO THE EXTENT THAT HAVEN CAPITAL HAS FUNDS
LEGALLY AVAILABLE TO PAY DISTRIBUTIONS
We will irrevocably guarantee payments of distributions and other amounts
due on the capital securities to the extent Haven Capital has funds legally
available to pay distributions as and to the extent set forth under "Description
of Guarantee." Taken together, our obligations under the subordinated
debentures, the indenture, the trust agreement and the guarantee will provide, a
full, irrevocable and unconditional guarantee of Haven Capital's payments of
distributions and other amounts due on the capital securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes this guarantee. Only the combined operation of these
documents effectively provides a full, irrevocable and unconditional guarantee
of Haven Capital's obligations under the capital securities.
If and to the extent that we do not make the required payments on the
subordinated debentures, Haven Capital will not have sufficient funds to make
its related payments, including distributions on the capital securities. Our
guarantee will not cover any payments when Haven Capital does not have
sufficient funds legally available to make those payments. Your remedy, as a
holder of capital securities, is to institute a direct action. Our obligations
under the guarantee will be subordinate and junior to all senior indebtedness.
SUFFICIENCY OF PAYMENTS
As long as we pay the interest and other payments when due on the
subordinated debentures, Haven Capital will have sufficient funds to cover
distributions and other payments due on the capital securities, primarily
because:
- the aggregate principal amount or prepayment price of the subordinated
debentures will equal the sum of the liquidation amount or redemption
price, as applicable, of the trust securities;
- the interest rate and interest payment dates and other payment dates on
the subordinated debentures will match the distribution rate and
distribution payment dates and other payment dates for the trust
securities;
- as sponsor, we will pay for all and any costs, expenses and liabilities of
Haven Capital, except for Haven Capital's obligations to holders of trust
securities; and
- the trust agreement also provides that Haven Capital is not authorized to
engage in any activity that is not consistent with its limited purposes.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
You, as holder of capital securities, may institute a legal proceeding
directly against us to enforce your rights under our guarantee without first
instituting a legal proceeding against the guarantee trustee, Haven Capital or
any other person or entity.
A default or event of default under any senior indebtedness would not
constitute a default or event of default under the trust agreement. However, if
there are payment defaults under, or accelerations of, senior indebtedness, the
subordination provisions of the indenture provide that we cannot make payments
in respect of the subordinated debentures until we have paid the senior
indebtedness in full or we have cured any payment default or a payment default
has been waived. Our
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failure to make required payments on subordinated debentures would constitute an
event of default under the trust agreement.
LIMITED PURPOSE OF HAVEN CAPITAL
The capital securities will represent beneficial interests in Haven Capital,
and Haven Capital exists for the sole purpose of issuing and selling the trust
securities, using the proceeds from the sale of the trust securities to acquire
our subordinated debentures and engaging in only those other activities
necessary, advisable or incidental thereto. A principal difference between the
rights of a holder of a capital security and a holder of a subordinated
debenture is that a holder of a subordinated debenture will be entitled to
receive from us the principal amount of (and premium, if any) and interest on
subordinated debentures held, while a holder of capital securities is entitled
to receive distributions from Haven Capital (or, in certain circumstances, from
us under our guarantee) if and to the extent Haven Capital has funds legally
available to pay the distributions.
RIGHTS UPON DISSOLUTION
Unless the subordinated debentures are distributed to holders of the trust
securities, if Haven Capital is voluntarily or involuntarily dissolved, wound-up
or liquidated, after satisfying the liabilities owed to Haven Capital's
creditors as required by applicable law, the holders of the trust securities
will be entitled to receive, out of assets held by Haven Capital, the
liquidation distribution in cash. See "Description of Capital
Securities--Liquidation of Haven Capital and Distribution of Subordinated
Debentures."
If we are voluntarily or involuntarily liquidated or bankrupted, the
property trustee, as holder of the subordinated debentures, would be one of our
subordinated creditors, subordinated in right of payment to all senior
indebtedness, but entitled to receive payment in full of principal (and premium,
if any) and interest, before any of our stockholders receive payments or
distributions. Since we will be the guarantor under the guarantee and will agree
to pay all costs, expenses and liabilities of Haven Capital (other than Haven
Capital's obligations to the holders of its trust securities), the positions of
a holder of capital securities and a holder of subordinated debentures relative
to other creditors and to our stockholders in the event of our liquidation or
bankruptcy are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Thacher Proffitt & Wood, special federal income tax
counsel to us and Haven Capital, the following describes the material U.S.
federal income tax consequences of the purchase, ownership and disposition of a
capital security.
This summary addresses only the tax consequences to a person that acquires a
capital security on its original issuance at its original issue price and that
holds the security as a capital asset. This summary does not address all tax
consequences that may be applicable to a beneficial owner of a capital security
and does not address the tax consequences to holders subject to special tax
regimes (like banks, thrifts, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currencies,
tax-exempt investors or persons that will hold a capital security as a position
in a "straddle," as part of a "synthetic security" or "hedge" or as part of a
"conversion transaction" or other integrated investment). This summary does not
include any description of any alternative minimum tax consequences or the tax
laws of any state or local government or of any foreign government that may
apply to a capital security. Except as noted below in the discussion of Non-U.S.
Holders, this discussion is addressed to a U.S. Holder, which is defined as a
beneficial owner of a capital security that, for U.S. federal income tax
purposes, is (or is treated as):
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(1) a citizen or individual resident of the United States;
(2) a corporation or partnership (or entity treated for federal income tax
purposes as a corporation or partnership) created or organized in or
under the laws of the United States or any political subdivision
thereof;
(3) an estate the income of which is includible in gross income for U.S.
federal income tax purposes without regard to its source; or
(4) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have the ability to control all substantial decisions of the
trust.
This summary does not address the tax consequences to any shareholder,
partner or beneficiary of a holder of a capital security. This summary is based
on the Code, Treasury regulations thereunder and the administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. An opinion of Thacher Proffitt & Wood
is not binding on the IRS or the courts. No rulings have been or are expected to
be sought from the IRS with respect to any of the matters described herein. We
can give no assurance that the opinions expressed herein will not be challenged
by the IRS or, if challenged, that the challenge will not be successful.
CLASSIFICATION OF THE SUBORDINATED DEBENTURES
We intend to take the position that the subordinated debentures will be
classified for U.S. federal income tax purposes as our indebtedness. Thacher
Proffitt & Wood will render its opinion that, under then current law, based on
the representations, facts and assumptions set forth in this prospectus and
certain assumptions and qualifications referenced in the opinion, and assuming
full compliance with the terms of the indenture (and other relevant documents),
the subordinated debentures will be characterized for U.S. federal income tax
purposes as our indebtedness. We, together with Haven Capital and the holders of
the capital securities (by acceptance of a beneficial interest in a capital
security) will agree to treat the subordinated debentures as our indebtedness
for all U.S. federal income tax purposes. We cannot be sure that this position
will not be challenged by the IRS or, if challenged, that the challenge will not
be successful. The remainder of this discussion assumes that the subordinated
debentures will be classified as our indebtedness for U.S. federal income tax
purposes.
CLASSIFICATION OF HAVEN CAPITAL
In connection with the issuance of the capital securities, Thacher Proffitt
& Wood will render its opinion that, under then current law and assuming full
compliance with the terms of the trust agreement and the indenture (and certain
other documents), and based on certain facts and assumptions contained in that
opinion, Haven Capital will not be classified for U.S. federal income tax
purposes as an association taxable as a corporation. Accordingly, for U.S.
federal income tax purposes, Haven Capital will not be subject to U.S. federal
income tax, and each holder of a capital security will be required to include in
its gross income any interest (or accrued original issue discount) with respect
to its allocable share of the subordinated debentures.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under the indenture, we have the right to defer the payment of interest on
the subordinated debentures at any time or from time to time for one or more
deferral periods not exceeding 20 consecutive quarterly periods each, provided
that no deferral period shall end on a date other than an interest payment date
or extend beyond June 30, 2029. By reason of that right, the Treasury
regulations will subject the subordinated debentures to the rules in the Code
and Treasury regulations on debt
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instruments issued with original issue discount, unless the indenture or
subordinated debentures contain terms or conditions that make the likelihood of
exercise of the deferral option remote. Under the Treasury regulations, a
"remote" contingency that stated interest will not be timely paid will be
ignored in determining whether a debt instrument is issued with original issue
discount. Although the answer is not clear, we believe that the likelihood that
we would exercise our option to defer payments of interest is "remote" since
exercising that option would, among other things, prevent us from declaring
dividends on any class of our equity securities. Accordingly, we intend to take
the position that the subordinated debentures will not be considered to be
issued with original issue discount and, accordingly, stated interest on the
subordinated debentures generally will be taxable to a holder as ordinary income
at the time it is paid or accrued in accordance with such holder's method of
accounting.
Under the Treasury regulations, if we were to exercise our option to defer
payments of interest, the subordinated debentures would at that time be treated
as issued with original issue discount, and all stated interest on the
subordinated debentures would thereafter be treated as original issue discount
as long as the subordinated debentures remain outstanding. If this occurred, all
of a holder's interest income with respect to the subordinated debentures would
thereafter be accounted for on an economic accrual basis regardless of such
holder's method of tax accounting, and actual distributions of stated interest
would not be reported as taxable income. Consequently, a holder of a capital
security would be required to include in gross income original issue discount
even though we would not make actual cash payments during a deferral period. The
amount of such includible original issue discount could be significant. Also,
under the Treasury regulations, if the option to defer the payment of interest
were determined not to be "remote," the subordinated debentures would be treated
as having been originally issued with original issue discount. In such event, a
holder would be required to include in gross income an amount of original issue
discount each taxable year that approximates the amount of interest that accrues
on the subordinated debentures at the stated interest rate, regardless of such
holder's method of tax accounting, and actual cash payments of interest on the
subordinated debentures would not be separately includible in gross income.
These Treasury regulations have not yet been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take a
position contrary to the interpretation described herein.
Because income on the capital securities will constitute interest or
original issue discount, corporate holders of the capital securities will not be
entitled to a dividends-received deduction with respect to any income recognized
with respect to the capital securities.
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF HAVEN CAPITAL
We will have the right at any time to liquidate Haven Capital and cause the
subordinated debentures to be distributed to the holders of the trust
securities. Under current law, the liquidation of Haven Capital and the
distribution of the subordinated debentures to trust security holders, for U.S.
federal income tax purposes, would be treated as a nontaxable event to each
holder, and the aggregate tax basis of each holder in the subordinated
debentures received by such holder would be equal to the holder's aggregate tax
basis in those capital securities surrendered. A holder's holding period in the
subordinated debentures received in liquidation of Haven Capital would be no
shorter than the period during which the capital securities were held by that
holder.
The subordinated debentures may be prepaid in cash, and the proceeds of that
prepayment would be distributed to holders in redemption of their capital
securities. Under current law, that redemption would constitute, for U.S.
federal income tax purposes, a taxable disposition of the redeemed capital
securities, the tax consequences of which are described below under "--Sales or
Redemptions of Capital Securities."
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SALES OR REDEMPTIONS OF CAPITAL SECURITIES
On a sale or redemption of a capital security for cash, a holder will
recognize gain or loss equal to the difference between its adjusted tax basis in
the capital security and the amount realized on the sale or redemption of that
capital security. If the rules regarding original issue discount do not apply, a
holder's adjusted basis in a capital security generally will be its initial
purchase price, and if the holder uses an accrual method of accounting, the
holder will have a basis in any accrued but unpaid interest. If the rules
regarding original issue discount apply, a holder's adjusted basis in a capital
security generally will be its initial purchase price increased by any original
issue discount previously included in the holder's gross income to the date of
disposition and decreased by any payments received on the capital security. Gain
or loss recognized on a sale or redemption of a capital security will be capital
gain or loss. Capital gain recognized by an individual in respect of a capital
security held for more than one year as of the date of sale or redemption is
subject to a maximum U.S. federal income tax rate of 20 percent.
The capital securities may trade at a price that discounts any accrued but
unpaid interest on the subordinated debentures. Therefore, the amount realized
by a holder who disposes of a capital security between distribution payment
dates and whose adjusted basis in the capital security has been increased by the
amount of any accrued but unpaid original issue discount (or interest) may be
less than the holder's adjusted basis in the capital security. A holder's basis
in a capital security could be increased either under the rules regarding
original issue discount or, if those rules do not apply, in the case of a holder
that uses an accrual method of accounting, under the accrual accounting rules.
In that case, the holder will recognize a capital loss. Subject to a limited
exception in the case of individual taxpayers, capital losses cannot be applied
to offset ordinary income for U.S. federal income tax purposes.
NON-U.S. HOLDERS
For purposes of this discussion, a "Non-U.S. Holder" generally is any
corporation, individual, partnership, estate or trust that is not a U.S. Holder
for U.S. federal income tax purposes.
Under current U.S. federal income tax laws, subject to the discussion below
of backup withholding, payments by Haven Capital or any of its paying agents to
a Non-U.S. Holder will not be subject to U.S. federal withholding tax, provided
that (a) the Non-U.S. Holder does not own, actually or constructively, ten
percent or more of the total combined voting power of all classes of our stock
entitled to vote, (b) the Non-U.S. Holder is not a controlled foreign
corporation that is related to us through stock ownership, (c) the Non-U.S.
Holder is not a bank whose receipt of interest on the subordinated debentures is
described in Section 881(c)(3)(A) of the Code, and (d) either (A) the Non-U.S.
Holder certifies to Haven Capital or its agent, under penalties of perjury, that
it is not a U.S. Holder and provides its name and address or (B) a securities
clearing organization, bank or other financial institution that holds customers'
securities in the ordinary course of business (a "Financial Institution") and
holds the capital security in that capacity certifies to Haven Capital or its
agent, under penalties of perjury, that the statement has been received from the
Non-U.S. Holder by it or by a Financial Institution between it and the Non-U.S.
Holder and furnishes Haven Capital or its agent with a copy thereof. New
Treasury regulations provide alternative methods for satisfying the
certification requirements described in clause (d), effective for certain
payments made after December 31, 1999.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the capital securities (or the subordinated debentures) is
effectively connected with the conduct of that trade or business, the Non-U.S.
Holder, although exempt from the withholding tax discussed above, will be
subject to U.S. federal income tax on that interest on a net income basis in
generally the same manner as if it were a U.S. Holder. In addition, if such
Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30% of its effectively connected earnings and profits that are
repatriated or treated as repatriated. For this purpose, the interest income
would be included
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in the foreign corporation's earnings and profits. In the case of a Non-U.S.
Holder entitled to the benefits of a tax treaty with the United States, the
foregoing discussion generally applies only if the Non-U.S. Holder is engaged in
business in the United States through a U.S. permanent establishment and the
income on the subordinated debentures is attributable to that permanent
establishment within the meaning of the treaty, and the rate of the branch
profits tax may be limited to a rate prescribed by the treaty for the
withholding of tax on dividends. New final Treasury regulations generally
prescribe new methods for certifying that a Non-U.S. Holder is exempt from the
withholding of U.S. federal income tax by reason of being engaged in trade or
business in the United States.
Any gain recognized upon a sale or other disposition of capital securities
(or subordinated debentures) generally will not be subject to U.S. federal
income tax unless (1) the gain is, or is treated as, effectively connected with
a U.S. trade or business of the Non-U.S. Holder or (2) in the case of a Non-U.S.
Holder who is an individual, that individual is present in the United States for
183 days or more in the taxable year of the sale or other disposition, and
certain other conditions are met.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of interest, including original issue discount, accrued on
capital securities held of record by U.S. persons (other than corporations and
other exempt holders) will be reported to the IRS. "Backup" withholding at a
rate of 31% will apply to payments of interest to non-exempt U.S. persons unless
the holder furnishes its taxpayer identification number in the manner prescribed
in applicable Treasury regulations, certifies that the number is correct,
certifies as to no loss of exemption from backup withholding and meets certain
other conditions.
Payment of the proceeds from the disposition of capital securities to or
through the United States office of a broker is subject to information reporting
and backup withholding unless the holder or beneficial owner establishes an
exemption from information reporting and backup withholding.
Non-U.S. Holders are generally exempt from the information reporting and
backup withholding rules but may be required to comply with certain
certification and identification requirements to prove their exemption.
Any amount withheld from a holder under the backup withholding rules will be
allowed as a refund or a credit against such holder's U.S. federal income tax
liability, provided the required information is furnished to the IRS.
It is anticipated that income on capital securities will be reported to
holders on Form 1099 and mailed to holders of capital securities by January 31
following each calendar year.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISER WITH RESPECT TO THE
TAX CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF A CAPITAL
SECURITY, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN U.S. FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The primary purpose of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") is to protect the interests of participants in employee
benefit plans by mandating standards of conduct, obligations and
responsibilities for the people who serve as the fiduciaries of these plans. A
person is a fiduciary with respect to an employee benefit plan under ERISA to
the extent that he or she exercises discretionary authority over the management
or the investment of the plan's assets.
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Accordingly, before investing the assets of an employee benefit plan in capital
securities, a fiduciary must determine whether the investment satisfies the
prudence and diversification requirements of ERISA and whether the investment,
itself, is permitted under the plan's governing documents.
Section 406 of ERISA and Section 4975 of the Code prohibit plans, as well as
individual retirement accounts and Keogh plans subject to Section 4975 of the
Code, from engaging in certain transactions involving "plan assets" with persons
who are "parties-in-interest" under ERISA or "disqualified persons" under the
Code with respect to the plan. Violation of the "prohibited transaction" rules
will result in the imposition of an excise tax or other liabilities on the
"parties-in-interest" or the "disqualified persons," as applicable, unless
exemptive relief is available under a statutory or administrative exemption.
Employee benefit plans that are governmental plans (as defined in Section 3(32)
of ERISA), certain church plans (as defined in Section 3(33) of ERISA) and
foreign plans (as described in Section 4(b)(4) of ERISA) are not subject to the
requirements of ERISA or Section 4975 of the Code; however, governmental plans
may be subject to similar provisions under applicable state laws.
The U.S. Department of Labor has issued special regulations governing
certain investments by employee benefits plans covered by ERISA. These
regulations are known as the "Plan Asset Regulations." Under these Regulations,
the assets of Haven Capital will be deemed to be the assets of the employee
benefit plan for purposes of ERISA and Section 4975 of the Code if the plan's
assets are used to acquire an equity interest in Haven Capital and no exception
under the Plan Asset Regulations applies to the transaction. An "equity
interest" is defined in the Plan Asset Regulations to specifically include a
beneficial interest in a trust such as Haven Capital.
The Plan Asset Regulations do, however, contain certain exceptions to this
general rule. Under one exception, the assets of Haven Capital will not be
deemed to be the "plan assets" of the investing plans if, at all times, less
than 25% of the value of each class of equity interest in Haven Capital is held
by all employee benefit plans, including, for this purpose, employee benefit
plans not subject to ERISA or Section 4975 of the Code, such as governmental,
church and foreign plans, and any other plans whose assets qualify as "plan
assets" under the Plan Asset Regulations (collectively, the "Benefit Plan
Investors"). Alternatively, the assets of Haven Capital will not be deemed to be
"plan assets" of the investing plans if the capital securities constitute
"publicly-offered securities" within the meaning of the Plan Asset Regulations.
Potential employee benefit plan investors should be aware that although these
exceptions exist, we cannot give plan investors any assurance that the capital
securities held by Benefit Plan Investors will be less than 25% of the total
value of the capital securities either at the completion of this offering or at
any subsequent time. In addition, no assurance can be given that the capital
securities offered in this Prospectus constitute "publicly-offered securities"
within the meaning of the Plan Asset Regulations. We will purchase and initially
hold all of the common securities of Haven Capital.
By operation of the Plan Asset Regulations, certain transactions involving
Haven Capital and an employee benefit plan may be deemed to constitute direct or
indirect prohibited transactions under ERISA and Section 4975 of the Code. A
direct or indirect prohibited transaction may occur if the assets of Haven
Capital are deemed to be the "plan assets" of the plan investing in Haven
Capital. For example, if we were a party-in-interest with respect to a plan
(either directly or by reason of its ownership of the Bank or other
subsidiaries), an extension of credit between us and Haven Capital (as
represented by the subordinated debentures and the guarantee) would occur which
is likely to be prohibited by Section 406(a)(1)(B) of ERISA and Section
4975(c)(1)(B) of the Code, unless exemptive relief is available. In addition, if
we qualify as a fiduciary with respect to Haven Capital as a result of certain
powers we hold under the trust agreement (such as the powers to remove and
replace the property trustee and the administrative trustees), it is possible
that the optional redemption or acceleration of the subordinated debentures
would be considered to be prohibited transactions under
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Section 406(b) of ERISA and Section 4975(c)(1)(E) of the Code. In order to avoid
engaging in these prohibited transactions, each investing plan, by purchasing
capital securities, will be deemed to have directed Haven Capital to invest in
the subordinated debentures and to have appointed the property trustee.
The U.S. Department of Labor has issued five separate prohibited transaction
class exemptions ("PTCEs") that may provide exemptive relief to an employee
benefit plan for direct or indirect prohibited transactions that may arise from
the purchase or holding of the capital securities. The available PTCE's include:
- PTCE 96-23 which may be applicable for certain transactions involving
in-house asset managers;
- PTCE 95-60 which may be applicable for certain transactions involving
insurance company general accounts;
- PTCE 91-38 which may be applicable for certain transactions involving bank
collective investment funds;
- PTCE 90-1 which may be applicable for certain transactions involving
insurance company separate accounts; and
- PTCE 84-14 which may be applicable for certain transactions involving
qualified professional asset managers.
Because the capital securities may be deemed to be equity interests in Haven
Capital for purposes of applying ERISA and Section 4975 of the Code, the capital
securities may not be purchased or held by any employee benefit plan ("Plan"),
any entity whose underlying assets include "plan assets" by reason of any plan's
investment in the entity (a "Plan Asset Entity") or any person investing the
"plan assets" of any plan, unless the purchaser or holder is exempt from all of
ERISA's prohibited transaction rules because of the relief provided under one of
the PTCE's identified above or another applicable exemption. Any purchaser or
holder of capital securities (or any interest in such securities) will be deemed
to have represented, through the fact of the purchase and holding of the capital
securities, that the purchaser either (a) is not a Plan or a Plan Asset Entity
and is not purchasing the capital securities on behalf of, or with the "plan
assets" of, any Plan or (b) is exempt from ERISA's prohibited transaction rules
because of the relief provided under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or
another applicable exemption. If a Plan or Plan Asset Entity purchases or holds
capital securities and elects to rely on an exemption other than PTCE 96-23,
95-60, 91-38, 90-1 or 84-14, we, together with Haven Capital, may require an
opinion of legal counsel or other satisfactory evidence that such exemption is
available.
Due to the complexity of these rules and the penalties that may be imposed
on persons involved in non-exempt prohibited transactions, it is critical that
Plan fiduciaries consult with legal counsel regarding the consequences that may
result if the assets of Haven Capital are deemed to be the "plan assets" of the
Plan by operation of the Plan Asset Regulations and the exemptive relief,
described above, is not available.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement,
dated May 20, 1999, we, together with Haven Capital, have agreed that Haven
Capital will sell to each of the underwriters named below, and each of such
underwriters has severally agreed to purchase from Haven Capital, the respective
number of capital securities set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
CAPITAL
SECURITIES
----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc....................................... 912,500
First Albany Corporation.................................................... 547,500
Ladenburg Thalmann & Co. Inc................................................ 365,000
Advest Inc.................................................................. 62,500
Fahnestock & Co. Inc........................................................ 62,500
Howe Barnes Investments, Inc................................................ 62,500
Janney Montgomery Scott Inc................................................. 62,500
Ryan, Beck & Co............................................................. 62,500
Wedbush Morgan Securities Inc............................................... 62,500
----------------
Total................................................................... 2,200,000
----------------
----------------
</TABLE>
Under the terms and conditions of the underwriting agreement, the
underwriters are committed to take and pay for all of the capital securities if
any are taken.
The underwriters propose initially to offer the capital securities in part
directly to the public at the initial public offering price set forth on the
cover page of this prospectus. In addition, we anticipate that no more than
100,000 capital securities will be sold to our directors and executive officers.
The underwriters also propose to offer the capital securities in part to several
securities dealers at the initial public offering price less a concession of no
more than $0.20 for each capital security. The underwriters and dealers may
allow and reallow, a concession of no more than $0.10 for each capital security
to other brokers and dealers. After the capital securities are released for sale
to the public, the initial public offering price and other selling terms may
from time to time be varied by the underwriters. No underwriter will execute any
transaction in a discretionary account without prior approval of the customer.
Because the proceeds from the sale of the capital securities will be used to
purchase our subordinated debentures, the underwriting agreement provides that
we will pay the underwriters compensation for arranging Haven Capital's
investment in our subordinated debentures of $0.30 for each capital security
sold in the offering.
We and Haven Capital have granted the underwriters an option, exercisable
for 30 days from the date of this prospectus, to purchase up to an additional
330,000 capital securities at the initial public offering price set forth on the
cover page hereof less underwriting discounts. The underwriters may exercise
such option to purchase additional capital securities solely for the purpose of
covering over-allotments, if any, incurred in the sale of the capital
securities. If this option is exercised in full, total proceeds from the sale of
the capital securities to Haven Capital will be $25,300,000.
To the extent that the underwriters exercise their option to purchase
additional capital securities, Haven Capital will issue and sell to us
additional capital securities and we will issue and sell to Haven Capital our
subordinated debentures in an aggregate principal amount equal to the total
liquidation amount of the additional capital securities being purchased pursuant
to the option and the additional capital securities.
We, together with Haven Capital, have agreed that, for a period of 180 days
from the date of the underwriting agreement, we together with Haven Capital,
will not offer, sell, contract to sell or
67
<PAGE>
otherwise dispose of, any other beneficial interests in the assets of Haven
Capital, or any preferred securities or any other securities of Haven Capital or
of us which are substantially similar to the capital securities, including any
guarantee of these securities, or any securities convertible into or
exchangeable for or representing the right to receive preferred securities or
any such substantially similar securities of either Haven Capital or of us,
without the prior written consent of the underwriters, except for the capital
securities offered in connection with this offering.
Prior to the offering, there has been no public market for the capital
securities. Although the underwriters have indicated to us and to Haven Capital
that they intend to make a market in the capital securities, they are not
obligated to do so and may discontinue any such market-making activities at any
time without notice. No assurance can be given as to the liquidity of the
trading markets for the capital securities.
We, together with Haven Capital, have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act.
It is expected that delivery of the capital securities will be made in
book-entry form only through the facilities of DTC in New York, New York against
payment therefor on or about May 26, 1999, as agreed upon by us, Haven Capital
and the underwriters in accordance with Rule 15c6-1 under the Exchange Act.
Certain of the underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment services to us and our
affiliates, for which such underwriters or their affiliates have received or
will receive customary fees and commissions.
VALIDITY OF SECURITIES
The validity of the capital securities, the guarantee and the subordinated
debentures will be passed upon for us by Thacher Proffitt & Wood and for the
underwriters by Greenberg Traurig, P.A. Certain matters relating to U.S. federal
income tax considerations described in this prospectus will be passed upon for
us by Thacher Proffitt & Wood.
EXPERTS
The consolidated financial statements of Haven as of December 31, 1998 and
1997, and for each of the years in the three year period ended December 31,
1998, have been included in this prospectus in reliance upon the report of KPMG
LLP, independent auditors, whose report is included herein, and upon their
authority as experts in accounting and auditing.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF
HAVEN BANCORP, INC.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Unaudited Consolidated Financial Statements as of, and for the quarters ended March 31, 1999 and 1998...... *
Independent Auditors' Report............................................................................... F-2
Consolidated Statements of Financial Condition as of December 31, 1998 and 1997............................ F-3
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996..................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996............................................................................................ F-7
Notes to Consolidated Financial Statements................................................................. F-9
</TABLE>
- ------------------------
* Included in our Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, attached to this prospectus as Appendix C.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Haven Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Haven Bancorp, Inc. (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
January 28, 1999
Melville, New York
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT FOR SHARE DATA)
<S> <C> <C>
ASSETS
Cash and due from banks.............................................................. $ 43,088 35,745
Money market investments............................................................. 1,720 4,561
Securities available for sale (notes 3 and 11)....................................... 889,251 499,380
Loans held for sale (note 6)......................................................... 54,188 --
Debt securities held to maturity (estimated fair value of $66,372 in 1997) (note
4)................................................................................. -- 66,404
Federal Home Loan Bank of NY Stock, at cost.......................................... 21,990 12,885
Mortgage-backed securities held to maturity (estimated fair value of $163,326 in
1997) (notes 5 and 11)............................................................. -- 163,057
Loans receivable (note 6):
First mortgage loans............................................................... 1,271,784 1,098,894
Cooperative apartment loans........................................................ 3,970 19,596
Other loans........................................................................ 34,926 32,291
------------ ------------
Total loans receivable............................................................... 1,310,680 1,150,781
Less allowance for loan losses (note 7)............................................ (13,978) (12,528)
------------ ------------
Loans receivable, net................................................................ 1,296,702 1,138,253
Premises and equipment, net (note 8)................................................. 39,209 27,062
Accrued interest receivable (notes 3, 4, 5 and 6).................................... 12,108 12,429
Other assets (note 9)................................................................ 37,267 15,114
------------ ------------
Total assets......................................................................... $2,395,523 1,974,890
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 10)................................................................... $1,722,710 1,365,012
Borrowed funds (note 11)............................................................. 440,346 466,794
Due to broker........................................................................ 97,458 10,000
Other liabilities.................................................................... 15,142 20,219
------------ ------------
Total liabilities.................................................................... 2,275,656 1,862,025
------------ ------------
Commitments and contingencies (notes 7 and 16)
Stockholders' Equity (note 17):
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued............ -- --
Common stock, $.01 par value, 30,000,000 shares authorized, 9,918,750 issued;
8,859,692 and 8,784,700 shares outstanding in 1998 and 1997, respectively.......... 100 100
Additional paid-in capital........................................................... 51,383 50,065
Retained earnings, substantially restricted (note 17)................................ 79,085 73,567
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net of tax effect (note 3)....... 945 1,671
Treasury stock, at cost (1,059,058 and 1,134,050 shares in 1998 and 1997,
respectively)...................................................................... (9,800) (10,246)
Unallocated common stock held by ESOP (note 14)...................................... (1,222) (1,529)
Unearned common stock held by Bank's Recognition
Plans and Trusts (note 14)......................................................... (263) (364)
Unearned compensation (note 14)...................................................... (361) (399)
------------ ------------
Total stockholders' equity........................................................... 119,867 112,865
------------ ------------
Total liabilities and stockholders' equity........................................... $2,395,523 1,974,890
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
INTEREST INCOME:
Mortgage loans................................................................. $ 96,146 75,266 53,110
Other loans.................................................................... 3,303 3,220 3,638
Mortgage-backed securities..................................................... 42,040 32,755 37,517
Money market investments....................................................... 186 343 176
Debt and equity securities..................................................... 10,010 14,722 14,812
--------- ---------- ----------
Total interest income.......................................................... 151,685 126,306 109,253
--------- ---------- ----------
INTEREST EXPENSE:
Deposits:
Savings accounts............................................................. 12,415 9,338 9,314
NOW accounts................................................................. 1,364 1,130 999
Money market accounts........................................................ 2,041 1,823 1,929
Certificate accounts......................................................... 49,965 39,309 32,436
Borrowed funds................................................................. 27,991 22,800 16,690
--------- ---------- ----------
Total interest expense......................................................... 93,776 74,400 61,368
--------- ---------- ----------
Net interest income before provision for loan losses........................... 57,909 51,906 47,885
Provision for loan losses (note 7)............................................. 2,665 2,750 3,125
--------- ---------- ----------
Net interest income after provision for loan losses............................ 55,244 49,156 44,760
--------- ---------- ----------
NON-INTEREST INCOME:
Loan fees and servicing income................................................. 1,627 3,110 1,807
Servicing released premiums and fees on loans sold............................. 10,301 -- --
Savings/checking fees.......................................................... 9,822 5,478 3,378
Net gain (loss) on sales of interest-earning assets............................ 2,926 (5) 140
Insurance, annuity and mutual funds fees....................................... 5,874 3,758 3,114
Other.......................................................................... 2,596 1,571 1,115
--------- ---------- ----------
Total non-interest income...................................................... 33,146 13,912 9,554
--------- ---------- ----------
NON-INTEREST EXPENSE:
Compensation and benefits (notes 13 and 14).................................... 41,204 24,251 15,737
Occupancy and equipment (notes 8 and 16)....................................... 11,005 6,334 3,478
Real estate owned operations, net.............................................. 8 352 277
SAIF recapitalization charge (note 10)......................................... -- -- 6,800
Federal deposit insurance premiums............................................. 870 736 2,327
Other.......................................................................... 24,227 14,174 9,836
--------- ---------- ----------
Total non-interest expense..................................................... 77,314 45,847 38,455
--------- ---------- ----------
Income before income tax expense............................................... 11,076 17,221 15,859
Income tax expense (note 12)................................................... 2,926 6,138 6,434
--------- ---------- ----------
Net income..................................................................... $ 8,150 11,083 9,425
--------- ---------- ----------
--------- ---------- ----------
NET INCOME PER COMMON SHARE:
Basic........................................................................ $ 0.95 1.32 1.13
--------- ---------- ----------
--------- ---------- ----------
Diluted...................................................................... $ 0.89 1.24 1.08
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED UNALLOCATED
ADDITIONAL OTHER COMMON
COMMON PAID-IN RETAINED COMPREHEN- TREASURY STOCK HELD
TOTAL STOCK CAPITAL EARNINGS SIVE INCOME STOCK BY ESOP
--------- ------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE DATA)
Balance at December 31,
1995...................... $ 98,519 100 47,281 57,919 2,083 (6,023) (2,197)
Comprehensive income:
Net income................ 9,425 -- -- 9,425 -- -- --
Other comprehensive
income, net of tax
Net unrealized
depreciation on
securities available for
sale, net of
reclassification
adjustment (1).......... (2,923) -- -- -- (2,923) -- --
---------
Comprehensive income........ 6,502
Dividends declared.......... (2,229) -- -- (2,229) -- -- --
Purchase of treasury stock
(451,074 shares).......... (5,516) -- -- -- -- (5,516) --
Treasury stock issued for
deferred compensation plan
(60,162 shares)........... -- -- 410 -- -- 372 --
Stock options exercised and
related tax effect (18,812
shares)................... 199 -- 104 (23) -- 118 --
Allocation of ESOP stock and
amortization of award of
RRP stock and related tax
benefits.................. 1,719 -- 999 -- -- -- 343
Amortization of deferred
compensation plan......... 190 -- -- -- -- -- --
--------- --- ----------- ----------- ------ ----------- ------
Balance at December 31,
1996...................... 99,384 100 48,794 65,092 (840) (11,049) (1,854)
Comprehensive income:
Net income................ 11,083 -- -- 11,083 -- -- --
Other comprehensive
income, net of tax......
Net unrealized
appreciation on
securities available for
sale, net of
reclassification
adjustment (1).......... 2,511 -- -- -- 2,511 -- --
---------
Comprehensive income........ 13,594
Dividends declared.......... (2,608) -- -- (2,608) -- -- --
Treasury stock issued for
RRP and deferred
compensation plan (18,904
shares)................... -- -- 236 -- -- 113 --
Stock options exercised and
related tax effect
(114,982 shares).......... 806 -- 116 -- -- 690 --
Allocation of ESOP stock and
amortization of award of
RRP stock and related tax
benefits.................. 1,353 -- 919 -- -- -- 325
Amortization of deferred
compensation plan......... 336 -- -- -- -- -- --
--------- --- ----------- ----------- ------ ----------- ------
Balance at December 31,
1997...................... 112,865 100 50,065 73,567 1,671 (10,246) (1,529)
<CAPTION>
UNEARNED
COMMON UNEARNED
STOCK HELD COMPEN-
BY RRPS SATION
------------- -------------
<S> <C> <C>
Balance at December 31,
1995...................... (644) --
Comprehensive income:
Net income................ -- --
Other comprehensive
income, net of tax
Net unrealized
depreciation on
securities available for
sale, net of
reclassification
adjustment (1).......... -- --
Comprehensive income........
Dividends declared.......... -- --
Purchase of treasury stock
(451,074 shares).......... -- --
Treasury stock issued for
deferred compensation plan
(60,162 shares)........... -- (782)
Stock options exercised and
related tax effect (18,812
shares)................... -- --
Allocation of ESOP stock and
amortization of award of
RRP stock and related tax
benefits.................. 377 --
Amortization of deferred
compensation plan......... -- 190
--- ---
Balance at December 31,
1996...................... (267) (592)
Comprehensive income:
Net income................ -- --
Other comprehensive
income, net of tax......
Net unrealized
appreciation on
securities available for
sale, net of
reclassification
adjustment (1).......... -- --
Comprehensive income........
Dividends declared.......... -- --
Treasury stock issued for
RRP and deferred
compensation plan (18,904
shares)................... (206) (143)
Stock options exercised and
related tax effect
(114,982 shares).......... -- --
Allocation of ESOP stock and
amortization of award of
RRP stock and related tax
benefits.................. 109 --
Amortization of deferred
compensation plan......... -- 336
--- ---
Balance at December 31,
1997...................... (364) (399)
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED UNALLOCATED
ADDITIONAL OTHER COMMON
COMMON PAID-IN RETAINED COMPREHEN- TREASURY STOCK HELD
TOTAL STOCK CAPITAL EARNINGS SIVE INCOME STOCK BY ESOP
--------- ------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE DATA)
Balance at December 31,
1997..................... 112,865 100 50,065 73,567 1,671 (10,246) (1,529)
Comprehensive income:
Net income................. 8,150 -- -- 8,150 -- -- --
Other comprehensive income,
net of tax
Net unrealized
depreciation on
securities available
for sale, net of
reclassification
adjustment (1)......... (1,607) -- -- -- (1,607) -- --
Net unrealized
appreciation on
securities transferred
from held to maturity
to available for sale
(note 3)............... 881 -- -- -- 881 -- --
---------
Comprehensive income....... 7,424
Dividends declared......... (2,632) -- -- (2,632) -- -- --
Treasury stock issued for
deferred compensation
plan (14,384 shares)..... -- -- 280 -- -- 86 --
Stock options exercised and
related tax effect
(60,608 shares).......... 516 -- 156 -- -- 360 --
Allocation of ESOP stock
and amortization of award
of RRP stock and related
tax benefits............. 1,290 -- 882 -- -- -- 307
Amortization of deferred
compensation plan........ 404 -- -- -- -- -- --
--------- --- ----------- ----------- ------ ----------- ------
Balance at December 31,
1998..................... $ 119,867 100 51,383 79,085 945 (9,800) (1,222)
--------- --- ----------- ----------- ------ ----------- ------
--------- --- ----------- ----------- ------ ----------- ------
<CAPTION>
UNEARNED
COMMON UNEARNED
STOCK HELD COMPEN-
BY RRPS SATION
------------- -------------
<S> <C> <C>
Balance at December 31,
1997..................... (364) (399)
Comprehensive income:
Net income................. -- --
Other comprehensive income,
net of tax
Net unrealized
depreciation on
securities available
for sale, net of
reclassification
adjustment (1)......... -- --
Net unrealized
appreciation on
securities transferred
from held to maturity
to available for sale
(note 3)............... -- --
Comprehensive income.......
Dividends declared......... -- --
Treasury stock issued for
deferred compensation
plan (14,384 shares)..... -- (366)
Stock options exercised and
related tax effect
(60,608 shares).......... -- --
Allocation of ESOP stock
and amortization of award
of RRP stock and related
tax benefits............. 101 --
Amortization of deferred
compensation plan........ -- 404
--- ---
Balance at December 31,
1998..................... (263) (361)
--- ---
--- ---
</TABLE>
- ------------------------
(1) Disclosure of reclassification adjustment:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Net unrealized holding (losses) gains arising during the year.............. $ (10) 2,499 (2,707)
Reclassificaton adjustment for net gains (losses) included in net income... 716 (12) 216
--------- --------- ---------
Net unrealized (losses) gains on securities available for sale............. (726) 2,511 (2,923)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 8,150 11,083 9,425
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of cost of stock benefit plans................. 1,526 1,689 1,909
Amortization of net deferred loan origination fees.......... (1,546) (231) (245)
Premiums and discounts on loans, mortgage-backed and debt
securities................................................ (1,503) 210 233
Provision for loan losses................................... 2,665 2,750 3,125
Provision for losses on real estate owned................... 35 251 291
Deferred income taxes....................................... 1,139 (1,540) 230
Origination and purchases of loans held for sale, net of
proceeds from sales....................................... (54,188) -- --
Net (gain) loss on sales of interest-earning assets......... (2,926) 5 (140)
Depreciation and amortization............................... 3,087 1,592 878
Decrease (increase) in accrued interest receivable.......... 321 (257) (1,436)
Increase (decrease) in due to broker........................ 87,458 9,000 (4,000)
(Decrease) increase in other liabilities.................... (5,077) 1,315 3,672
Increase in other assets.................................... (22,930) (1,265) (1,804)
--------- --------- ---------
Net cash provided by operating activities................... 16,211 24,602 12,138
--------- --------- ---------
Cash flows from investing activities:
Net increase in loans receivable............................ (264,136) (306,328) (269,343)
Proceeds from disposition of assets (including REO)......... 721 2,785 4,313
Purchases of securities available for sale.................. (749,013) (511,075) (321,162)
Principal repayments on securities available for sale....... 195,118 48,377 73,472
Proceeds from sales of securities available for sale........ 454,971 337,696 374,840
Purchases of debt securities held to maturity............... -- -- (6,989)
Principal repayments, maturities and calls on debt
securities held to maturity............................... 21,020 30,954 37,511
Purchases of mortgage-backed securities held to maturity.... -- -- (38,357)
Principal repayment on mortgage-backed securities held to
maturity.................................................. 24,834 34,660 32,004
Purchases of Federal Home Loan Bank Stock, net.............. (9,105) (2,995) (1,752)
Net increase in premises and equipment...................... (15,102) (19,834) (2,108)
--------- --------- ---------
Net cash used in investing activities....................... (340,692) (385,760) (117,571)
--------- --------- ---------
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits.................................... 357,698 227,224 54,342
Net (decrease) increase in borrowed funds................... (26,448) 140,361 55,850
Purchase of treasury stock.................................. -- -- (5,516)
Payment of common stock dividends........................... (2,627) (2,598) (2,475)
Stock options exercised..................................... 360 760 95
--------- --------- ---------
Net cash provided by financing activities................... 328,983 365,747 102,296
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 4,502 4,589 (3,137)
Cash and cash equivalents at beginning of year.............. 40,306 35,717 38,854
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 44,808 40,306 35,717
--------- --------- ---------
--------- --------- ---------
Supplemental information:
Cash paid during the year for:
Interest.................................................. $ 93,751 73,757 60,187
Income taxes.............................................. 1,699 5,893 7,824
Additions to real estate owned.............................. 623 1,695 3,470
Loans transferred from loans held for sale.................. -- -- (10,594)
Securities purchased not yet received, net.................. 97,458 10,000 1,000
Loans securitized........................................... 105,691 -- --
Mortgage-backed securities and debt securities held to
maturity transferred to securities available for sale..... 183,639 -- --
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Haven Bancorp, Inc. (the "Holding Company") was formed on March 25, 1993, as
the holding company for CFS Bank, (the "Bank"). On September 23, 1993, the
Holding Company completed its initial public offering of 9,918,750 shares of
common stock in connection with the Bank's conversion from a federally chartered
mutual savings bank to a federally chartered stock savings bank (the
"Conversion"). Concurrent with the conversion process, the Holding Company
acquired all of the issued and outstanding stock of the Bank with a portion of
the net proceeds.
The accounting and reporting policies of the Holding Company and the Bank
and its subsidiaries (the "Company") conform to generally accepted accounting
principles and to general practices within the banking industry. The following
summarizes the significant policies and practices:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Holding Company and its subsidiary, the Bank, and its wholly owned
subsidiaries. All significant intercompany transactions and balances are
eliminated in consolidation. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of each consolidated
statement of financial condition and revenues and expenses for the year then
ended. Actual results could differ from those estimates. Certain
reclassification adjustments have been made to prior year amounts to conform to
the current year presentation.
On October 23, 1997, the Company's Board of Directors approved a two-for-one
common stock split. The additional shares were issued on November 28, 1997 to
shareholders of record on October 31, 1997. The par value of the Company's
common stock remains unchanged at $.01. Accordingly, all information with
respect to shares of common stock fully reflects the stock split.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and money market investments. Money market investments
represent instruments with maturities of ninety days or less. These investments
are carried at cost, adjusted for premiums and discounts which are recognized in
interest income over the period to maturity.
DEBT, EQUITY AND MORTGAGE-BACKED SECURITIES
Debt and mortgage-backed securities ("MBSs") which the Company has the
positive intent and ability to hold until maturity are carried at cost, adjusted
for amortization of premiums and accretion of discounts on a level yield method
over the remaining period to contractual maturity, adjusted, in the case of
MBSs, for actual prepayments. Debt and equity securities and MBSs to be held for
indefinite periods of time and not intended to be held to maturity are
classified as available for sale securities and are recorded at fair value, with
unrealized gains (losses), net of tax, reported as accumulated other
comprehensive income, a separate component of stockholders' equity. Gains and
losses on the sale of securities are determined using the specific
identification method and are included in non-interest income.
LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable are carried at their unpaid principal balances, less
unearned discounts, net deferred loan origination fees and the allowance for
loan losses. Loans held for sale are carried at the aggregate lower of cost or
market value. Loan origination fees, less certain direct loan origination costs,
are deferred and amortized as an adjustment of the loan's yield over the life of
the loan by the interest method. When loans are sold, any remaining unaccreted
net deferred fees (costs) are recognized as income at the time of sale.
Purchased loans are recorded at cost. Related premiums or discounts are
amortized (accreted) to interest income using the level-yield method over the
estimated life of the loans.
F-9
<PAGE>
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and the amendment thereof, SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures" require that impaired loans that are within their scope be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or as a practical expedient, at the loan's
current observable market price, or the fair value of the collateral if the loan
is collateral dependent. The amount by which the recorded investment of an
impaired loan exceeds the measurement value is recognized by creating a
valuation allowance through a charge to the provision for loan losses. SFAS No.
114 does not apply to those large groups of smaller-balance homogeneous loans
that are collectively evaluated for impairment, which, for the Company, include
one- to four-family first mortgage loans and cooperative apartment loans
("residential loans") and consumer loans.
Loans individually reviewed for impairment by the Company within the scope
of SFAS No. 114 are limited to loans modified in a troubled debt restructuring
("TDR") and commercial and multi-family first mortgage loans. The measurement
value of the Company's impaired loans was based on the fair value of the
underlying collateral. The Company's impaired loan identification and
measurement process are conducted in conjunction with the Company's review of
the adequacy of its allowance for loan losses. Specific factors utilized in the
impaired loan identification process include, but are not limited to,
delinquency status, loan-to-value ratio, the condition of the underlying
collateral, credit history and debt coverage. At a minimum, such loans are
classified as impaired by the Company when they become 90 days past due.
The Company places loans, including impaired loans, on non-accrual status
when they become 90 days past due. All interest previously accrued and not
collected is reversed against interest income and income is subsequently
recognized only to the extent cash is received until, in management's judgement,
a return to accrual status is warranted.
Cash receipts on impaired loans are applied to principal and interest in
accordance with the contractual terms of the loan unless full payment of
principal is not expected, in which case, both principal and interest payments
received are applied as a reduction of the carrying value of the loan. For non-
performing impaired loans, interest income is recognized to the extent received
in cash and not otherwise utilized to reduce the carrying value of the loan. For
impaired loans not classified as non-performing by the Company, interest income
is recognized on an accrual basis as the Company anticipates the full payment of
principal and interest due. The Company's policy is to recognize income on a
cash basis for TDRs for a period of six months, after which such loans are
returned to an accrual status.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Impaired loans and related
reserves have been identified and calculated in accordance with the provisions
of SFAS No. 114. The total allowance for loan losses has been determined in
accordance with the provisions of SFAS No. 5, "Accounting for Contingencies."
The Company's allowance for loan losses is intended to be maintained at a level
sufficient to absorb all estimable and probable losses inherent in the loan
portfolio. The Company reviews the adequacy of the allowance for loan losses on
a monthly basis taking into account past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
current and prospective economic conditions and current regulatory guidance.
Management believes that the allowance for loan losses is adequate. While
Management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions and the reviews of various regulatory agencies.
The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," effective January 1, 1997.
Under this statement, after transfers of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, if any, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished.
F-10
<PAGE>
In accordance with SFAS No. 125, the Company recognizes servicing assets on
loans that have been originated or purchased, and where the loans are
subsequently sold or securitized with the servicing rights retained. The total
cost of the mortgage loans is allocated between the loans and the servicing
assets based on their relative fair values. The statement also requires that
servicing assets be assessed for impairment based on the current fair values of
those assets with any impairment recognized through a valuation allowance.
Fees earned for servicing loans for others are reported as income when the
related mortgage loan payments are collected. Servicing assets are amortized as
a reduction to loan servicing fee income using the interest method over the
estimated remaining life of the underlying mortgage loans.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements, furniture,
fixtures and equipment are carried at cost, less accumulated depreciation and
amortization. Premises and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets except for
leasehold improvements which are amortized over the related lease term or
estimated useful life.
REAL ESTATE OWNED
Real estate properties acquired through loan foreclosure are recorded at the
lower of cost or estimated fair value less estimated selling costs at the time
of foreclosure. Subsequent valuations are periodically performed by management
and the carrying value may be adjusted by a valuation allowance, established
through charges to income and included in real estate operations, net to reflect
subsequent declines in the estimated fair value of the real estate. Real estate
owned ("REO") is shown net of the allowance. Operating results of REO, including
rental income, operating expenses, and gains and losses realized from the sales
of properties owned, are also recorded in real estate operations, net.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements are accounted for as financing transactions.
Accordingly, the collateral securities continue to be carried as assets and a
borrowing liability is established for the transaction proceeds.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Additionally, the recognition of net deferred tax assets is based upon the
likelihood of realization of tax benefits in the future. A valuation allowance
would be provided for deferred tax assets which are determined more than likely
not to be realized.
BENEFIT PLANS
The Company maintains various pension, savings, employee stock ownership and
other benefit plans and programs for its employees, including the Bank's
Retirement Plan covering substantially all employees who have attained minimum
service requirements. The Bank's funding policy is to make contributions to the
plan at least equal to the amounts required by applicable Internal Revenue
Service regulations. The Bank periodically evaluates the overall effectiveness
and economic value of such programs, in the interest of maintaining a
comprehensive benefit package for employees. Based on an evaluation of the
Retirement Plan in 1996, the Bank concluded that future benefit accruals under
the Retirement Plan would cease, or "freeze" on July 1, 1996. Although the
benefit accruals are frozen, the Bank will continue to maintain and provide
benefits under its Employee Stock Ownership Plan ("ESOP") and Employee 401(k)
Thrift
F-11
<PAGE>
Incentive Savings Plan ("401(k) Plan"). In connection with the Retirement Plan
"freeze," the Bank resumed its matching of contributions to the 401(k) Plan on
July 1, 1996.
Post-retirement and post-employment benefits are recorded on an accrual
basis with an annual provision that recognizes the expense over the service life
of the employee, determined on an actuarial basis.
Effective January 1998, the Company adopted SFAS No. 132, "Employers
Disclosures about Pensions and Other Post Retirement Benefits". SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans, but does not change the measurement or recognition of those plans. SFAS
No. 132 also standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer useful. As the requirements of SFAS No. 132 are disclosure
related, its implementation did not have any impact on the Company's financial
condition or results of operations.
STOCK COMPENSATION PLANS
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 permits either the recognition of
compensation cost for the estimated fair value of employee stock-based
compensation arrangements on the date of grant, or the continued application of
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") in
accounting for its plans with disclosure in the notes to the financial
statements of the pro forma effects on net income and earnings per share,
determined as if the fair value-based method had been applied in measuring
compensation cost. The Company has adopted the disclosure option. Accordingly,
no compensation cost has been recognized for the Company's stock option plans.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company has utilized interest rate caps to manage its interest rate
risk. Generally, the net settlements on such transactions used as hedges of
non-trading liabilities are accrued as an adjustment to interest expense over
the life of the agreements.
EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Accounting for Earnings Per Share"
effective December 15, 1997 and restated all prior-period earnings per share
("EPS") data. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the relevant period. The weighted average number of shares
outstanding does not include shares which are unallocated by the ESOP in
accordance with American Institute of CPAs ("AICPA") Statement of Position
("SOP") 93-6, "Employers Accounting for ESOPs." Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock that then shares in
the earnings of the entity.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. The Statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. Under SFAS No. 130 the Company is required to: (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position; and (c) reclassify all prior periods presented.
F-12
<PAGE>
SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Statement establishes standards for the
way an enterprise reports information about operating segments in annual
financial statements and requires that enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
Operating segments are components of an enterprise that engage in business
activities from which it may earn revenues and incur expenses, whose operating
results are regularly reviewed by the enterprise's chief operating decision
maker in deciding how to allocate resources and in assessing performance, and
for which discrete financial information is available. The Statement requires a
reconciliation of total segment revenue and expense items and segment assets to
the amounts in the enterprise's financial statements. The Statement also
requires a descriptive report on how the operating segments were determined, the
products and services provided by the operating segments, and any measurement
differences used for segment reporting and financial statement reporting. SFAS
No. 131 is effective for fiscal years beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The Company currently does not manage its various business activities
as separate operating segments and does not readily produce meaningful discrete
financial information for any such business activity. Therefore, under the
Company's current operating and reporting structure, SFAS No. 131 disclosures
are not applicable.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and does not require restatement of prior
periods. Management of the Company currently believes the implementation of SFAS
No. 133 will not have a material impact on the Company's financial condition or
results of operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". SFAS No. 134 changes the way
mortgage banking firms account for certain securities and other interests they
retain after securitizing mortgage loans that were held for sale. Under current
practice, a bank that securitizes credit card receivables has a choice in how it
classifies any retained securities based on its intent and ability to hold or
sell those investments. SFAS No. 134 gives the mortgage banking firms the
opportunity to apply the same intent-based accounting that is applied by other
companies. SFAS No. 134 is effective for the fiscal quarter beginning after
December 15, 1998. Management of the Company anticipates that the implementation
of SFAS No. 134 will not have a material impact on the Company's financial
condition or results of operations.
2. BUSINESS COMBINATIONS
ACQUISITION OF INTERCOUNTY MORTGAGE, INC.
On May 1, 1998, the Bank completed the purchase of the production franchise
of Intercounty Mortgage, Inc. ("IMI") from Resource Bancshares Mortgage Group,
Inc. The Bank paid approximately $5.6 million for IMI's production franchise and
fixed assets. The business operates as a division of the Bank under the name CFS
Intercounty Mortgage Company originating and purchasing residential loans for
the Bank's portfolio and for sale in the secondary market, primarily through six
loan origination offices located in New York, New Jersey, and Pennsylvania. Loan
sales in the secondary market are primarily on a servicing-released basis, for
which the Company earns servicing released premiums.
F-13
<PAGE>
The transaction was accounted for under the purchase method. The excess of
cost over the fair value of net assets acquired (goodwill) of approximately $5.1
million is being amortized over 5 years. The Company will assess the
recoverability of goodwill by determining whether the amortization of the
goodwill over its remaining life can be recovered through future operating cash
flow of the production franchise. The unamortized balance of goodwill relating
to the acquisition of IMI was approximately $4.4 million at December 31, 1998.
ACQUISITION OF CENTURY INSURANCE AGENCY
On November 2, 1998 the Company completed the purchase of 100% of the
outstanding common stock of Century Insurance Agency, Inc. ("CIA") for
approximately $1.2 million. CIA, which is headquartered in Centereach, New York,
provides automobile, homeowners and casualty insurance to individuals and
various lines of commercial insurance to businesses. CIA operates as a wholly
owned subsidiary of the Company. The transaction was accounted for under the
purchase method. Goodwill of approximately $1.6 million is being amortized over
10 years. The Company will assess the recoverability of goodwill by determining
whether the amortization of the goodwill over its remaining life can be
recovered through future operating cash flow of CIA. The unamortized balance of
goodwill relating to the acquisition of CIA was approximately $1.6 million at
December 31, 1998.
3. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair values of securities available for
sale at December 31, are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Debt and equity securities available for sale:
U.S. Government and agency obligations................................ $ 78,017 141 (453) 77,705
Preferred stock....................................................... 11,700 30 (140) 11,590
Corporate debt securities............................................. 19,850 -- (166) 19,684
---------- ----- ----------- -----------
109,567 171 (759) 108,979
---------- ----- ----------- -----------
MBSs available for sale:
GNMA Certificates..................................................... 430 4 -- 434
FNMA Certificates..................................................... 177,495 1,530 (258) 178,767
FHLMC Certificates.................................................... 51,590 689 (112) 52,167
CMOs and REMICs....................................................... 548,644 2,218 (1,958) 548,904
---------- ----- ----------- -----------
778,159 4,441 (2,328) 780,272
---------- ----- ----------- -----------
Total................................................................... $ 887,726 4,612 (3,087) 889,251
---------- ----- ----------- -----------
---------- ----- ----------- -----------
1997
Debt and equity securities available for sale:
U.S. Government and agency obligations................................ $ 115,466 285 (1,093) 114,658
Preferred stock....................................................... 4,095 38 (10) 4,123
---------- ----- ----------- -----------
119,561 323 (1,103) 118,781
---------- ----- ----------- -----------
MBSs available for sale:
GNMA Certificates..................................................... 943 39 -- 982
FNMA Certificates..................................................... 45,860 556 (531) 45,885
FHLMC Certificates.................................................... 62,649 1,074 (85) 63,638
CMOs and REMICs....................................................... 267,754 3,228 (888) 270,094
---------- ----- ----------- -----------
377,206 4,897 (1,504) 380,599
---------- ----- ----------- -----------
Total................................................................... $ 496,767 5,220 (2,607) 499,380
---------- ----- ----------- -----------
---------- ----- ----------- -----------
</TABLE>
F-14
<PAGE>
Gross gains of approximately $1,737,000, $1,044,000 and $1,948,000 for the
years ended December 31, 1998, 1997 and 1996, respectively, were realized on
sales of securities available for sale. Gross losses amounted to approximately
$505,000, $1,064,000 and $1,577,000 for the years ended December 31, 1998, 1997,
and 1996 respectively.
The Company's portfolio of MBSs available for sale has an estimated weighted
average expected life of approximately 5.5 years at December 31, 1998. At
December 31, 1998, $242.6 million of MBSs available for sale were
adjustable-rate securities.
The Company's privately-issued CMOs and REMICs have generally been
underwritten by large investment banking firms with the timely payment of
principal and interest on these securities supported (credit enhanced) in
varying degrees by either insurance issued by a financial guarantee insurer,
letters of credit or subordination techniques. Substantially all such securities
are rated AAA by one or more of the nationally recognized securities rating
agencies. These securities are subject to certain credit-related risks normally
not associated with U.S. Government and agency mortgage-backed securities. Among
such risks is the limited loss protection generally provided by the various
forms of credit enhancements as losses in excess of certain levels are not
protected. Furthermore, the credit enhancement itself is subject to the credit
worthiness of the enhancer. Thus, in the event a credit enhancer does not
fulfill its obligations, the MBS holder could be subject to risk of loss similar
to the purchaser of a whole loan pool. Management believes that the credit
enhancements are adequate to protect the Company from losses, and therefore the
Company has not provided an allowance for losses on its privately issued MBSs.
U.S. Government and agency obligations at December 31, 1998 had contractual
maturities between April 30, 1999 and June 25, 2024. Accrued interest receivable
on securities available for sale amounted to approximately $4,901,000 and
$4,286,000 at December 31, 1998 and 1997, respectively.
Corporate debt securities at December 31, 1998 had contractual maturities
between March 22, 1999 and July 26, 1999.
On June 30, 1998, the Company transferred the then remaining $138.2 million
of MBSs and $45.4 million of debt securities held to maturity to securities
available for sale.
In August 1998, the Company securitized $105.7 million of residential
mortgage loans with FNMA. The resulting MBSs were retained and are included in
securities available for sale as of December 31, 1998.
4. DEBT SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains and losses and estimated fair
values of debt securities held to maturity at December 31, 1997 are summarized
as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations............................. $ 21,014 70 (27) 21,057
Corporate debt securities.......................................... 45,390 31 (106) 45,315
----------- --- --- -----------
Total.............................................................. $ 66,404 101 (133) 66,372
----------- --- --- -----------
----------- --- --- -----------
</TABLE>
Accrued interest receivable on debt securities held to maturity amounted to
approximately $667,000 at December 31, 1997.
F-15
<PAGE>
5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains and losses and estimated fair
values of MBSs held to maturity at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FNMA Certificates................................................. $ 61,492 258 (657) 61,093
FHLMC Certificates................................................ 27,472 465 (168) 27,769
CMOs and REMICs................................................... 74,093 821 (450) 74,464
---------- ----- ----------- -----------
Total............................................................. $ 163,057 1,544 (1,275) 163,326
---------- ----- ----------- -----------
---------- ----- ----------- -----------
</TABLE>
At December 31, 1997, $8.8 million, of the MBSs held to maturity portfolio
consists of adjustable-rate securities. Such securities had an estimated fair
value of $8.8 million.
Accrued interest receivable on MBSs held to maturity amounted to
approximately $1,025,000 at December 31, 1997.
6. LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable, net at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans:
Principal balances:
One- to four-family................................................................... $ 886,405 802,766
Multi-family.......................................................................... 215,542 143,559
Commercial............................................................................ 163,935 148,745
Construction.......................................................................... 2,731 2,263
Partially guaranteed by VA or insured by FHA.......................................... 2,205 2,924
------------ ------------
1,270,818 1,100,257
Less net deferred loan origination fees, unearned discounts and
unamortized premiums................................................................ 966 (1,363)
------------ ------------
Total first mortgage loans............................................................ 1,271,784 1,098,894
------------ ------------
Cooperative apartment loans, net...................................................... 3,970 19,596
------------ ------------
Other loans:
Consumer loans........................................................................ 17,473 14,413
Home equity loans..................................................................... 15,173 15,449
Other................................................................................. 2,280 2,429
------------ ------------
Total other loans..................................................................... 34,926 32,291
------------ ------------
1,310,680 1,150,781
Less allowance for loan losses........................................................ (13,978) (12,528)
------------ ------------
Total................................................................................. $ 1,296,702 1,138,253
------------ ------------
------------ ------------
</TABLE>
F-16
<PAGE>
Included in total loans are loans on which interest is not being accrued and
loans which have been restructured and for which interest has been reduced or
foregone. The principal balances of these loans at December 31 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Non-accrual loans.............................................................................. $ 6,528 10,396
Restructured loans............................................................................. 1,857 2,136
--------- ---------
Total.......................................................................................... $ 8,385 12,532
--------- ---------
--------- ---------
</TABLE>
If interest income on non-accrual loans had been current in accordance with
the original terms, approximately $425,000, $736,000 and $688,000 of interest
income would have been recorded for the years ended December 31, 1998, 1997 and
1996, respectively. Approximately $117,000, $146,000 and $220,000 of interest
income was recognized on non-accrual loans for the years ended December 31,
1998, 1997 and 1996, respectively. The Bank has no obligation to fund any
additional monies on these loans.
The amount of interest income that would have been recorded if restructured
loans had been performing in accordance with their original terms (prior to
being restructured) was approximately $396,000, $197,000 and $305,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
In 1998, the Company sold $83.3 million of adjustable-rate mortgage (ARM)
loans previously held in portfolio in two separate bulk sale transactions, which
settled on December 30, 1998. The Company recognized a net gain of $670,000 as a
result of these transactions. The Company sold $68.6 million of the ARM loans
servicing released, while $14.7 million of the ARM loans were sold servicing
retained. In connection with the latter transaction, the Company recognized a
servicing asset of $168,000, which is included in other assets at December 31,
1998. The servicing asset will be amortized in proportion to and over the period
of estimated net servicing income. The servicing asset will be periodically
assessed for impairment based on its fair value.
In 1998, the Company securitized $105.7 million of residential mortgage
loans with FNMA. The Company retained all of the securities in its available for
sale portfolio, and is servicing the underlying loans for FNMA. In 1998, the
Company also sold $14.0 million of cooperative apartment loans as part of its
ongoing efforts to dispose of this portion of its portfolio. The Company
recognized a $968,000 gain as a result of this transaction.
Loans held for sale, which consisted of, primarily fixed-rate, one- to
four-family loans, were $54.2 million at December 31, 1998. The Bank originates
most fixed-rate loans for immediate sale, primarily to private investors on a
servicing released basis. Generally, the sale of such loans is arranged at the
time of
application through best effort commitments. During 1998, the Company sold
$515.8 million in residential mortgage loans to third party investors on a
servicing released basis. The Company recognized $10.3 million in servicing
released premiums, fees, and net gains, related to these sales.
The Bank services for investors first mortgage loans which are not included
in the accompanying consolidated statements of financial condition. The unpaid
principal balances of such loans were approximately $269.1 million and $174.9
million at December 31, 1998 and 1997, respectively.
The geographical location of the Bank's loan portfolio is primarily within
the New York metropolitan area.
Accrued interest receivable on loans amounted to approximately $7,207,000
and $6,443,000 at December 31, 1998 and 1997, respectively.
F-17
<PAGE>
7. ALLOWANCE FOR LOAN LOSSES
Impaired loans and related reserves have been identified and calculated in
accordance with the provisions of SFAS No. 114. The total allowance for loan
losses has been determined in accordance with the provisions of SFAS No. 5,
"Accounting for Contingencies." As such, the Company has provided amounts for
anticipated losses that exceed the immediately identified losses associated with
loans that have been deemed impaired. Provisions have been made and reserves
established accordingly, based upon experience and expectations, for losses
associated with the general population of loans, specific industry and loan
types, including residential and consumer loans which are not subject to the
provisions of SFAS No. 114.
The following table summarizes information regarding the Company's impaired
loans at December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
RELATED RELATED
ALLOWANCE ALLOWANCE
RECORDED FOR LOAN NET RECORDED FOR LOAN NET
INVESTMENT LOSSES INVESTMENT INVESTMENT LOSSES INVESTMENT
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential loans:
With a related allowance................ $ 982 51 931 -- -- --
Without a related allowance............. 3,164 -- 3,164 4,232 -- 4,232
----------- --- ----- ----------- --- -----------
Total residential loans................. 4,146 51 4,095 4,232 -- 4,232
----------- --- ----- ----------- --- -----------
Multi-family and non-residential loans:
With a related allowance................ 1,128 247 881 970 207 763
Without a related allowance............. 1,254 -- 1,254 5,194 -- 5,194
----------- --- ----- ----------- --- -----------
Total multi-family and non-residential
loans................................. 2,382 247 2,135 6,164 207 5,957
----------- --- ----- ----------- --- -----------
Total impaired loans.................... $ 6,528 298 6,230 10,396 207 10,189
----------- --- ----- ----------- --- -----------
----------- --- ----- ----------- --- -----------
</TABLE>
The Company's average recorded investment in impaired loans for the years
ended December 31, 1998 and 1997 was $7.9 million and $10.3 million,
respectively. Interest income recognized on impaired loans, which was not
materially different from cash-basis interest income, amounted to approximately
$117,000, $146,000 and $220,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Activity in the allowance for loan losses for the years ended December 31,
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year..................................................... $ 12,528 10,704 8,573
Charge-offs:
One- to four-family.............................................................. (435) (964) (771)
Cooperative...................................................................... (256) (370) (524)
Multi-family..................................................................... (708) -- (30)
Non-residential and other........................................................ (935) (352) (560)
--------- --------- ---------
Total charge-offs................................................................ (2,334) (1,686) (1,885)
Recoveries....................................................................... 1,119 760 891
--------- --------- ---------
Net charge-offs.................................................................. (1,215) (926) (994)
Provision for loan losses........................................................ 2,665 2,750 3,125
--------- --------- ---------
Balance at end of year........................................................... $ 13,978 12,528 10,704
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
8. PREMISES AND EQUIPMENT
Premises and equipment at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land......................................................................................... $ 1,720 720
Buildings and improvements................................................................... 18,679 7,234
Leasehold improvements....................................................................... 17,136 19,921
Furniture, fixtures and equipment............................................................ 13,128 7,554
Accumulated depreciation..................................................................... (11,454) (8,367)
---------- ---------
Total........................................................................................ $ 39,209 27,062
---------- ---------
---------- ---------
</TABLE>
In December 1997, the Company purchased an office building and land in
Westbury, New York for its new administrative headquarters. The purchase was
consummated under the terms of a lease agreement and Payment-in-lieu-of-Tax
("PILOT") agreement with the Town of Hempstead Industrial Development Agency
("IDA") (see note 16). The Company completed improvements to the building and
began using the building as its corporate headquarters in July 1998. The cost of
the land and building, including improvements was $12.8 million. The building
and improvements are being depreciated on a straight-line basis over thirty-nine
years.
In December 1998 the Bank entered into a contract of sale for its former
administrative headquarters, located in Woodhaven, New York. The sale is
expected to close in the first quarter of 1999. Concurrent with the sale of the
property, which consists of land, buildings and building improvements, the Bank
will lease back a portion of the building to continue its current use as a
traditional retail banking branch office and certain administrative functions.
Upon consummation, the transaction will be accounted for as a sale-leaseback,
and the lease is expected to be accounted for as an operating lease. At December
31, 1998, the carrying amount of the land, buildings and building improvements
was approximately $1.7 million.
In January 1999 the Bank also entered into a contract of sale for another
administrative office, consisting of land, buildings, and building improvements,
located in Woodhaven, New York. The sale is also expected to close in the first
quarter of 1999. At December 31, 1998, the carrying amount of the land,
buildings and building improvements was approximately $768,000.
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expense, was approximately $3.1 million, $1.6 million,
and $878,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
9. OTHER ASSETS
Other assets at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Remittances due from custodians.............................................................. $ 10,037 2
Net deferred tax asset (note 12)............................................................. 5,424 6,201
Excess of cost over the fair value of net assets acquired.................................... 6,193 321
Other........................................................................................ 15,613 8,590
--------- ---------
Total........................................................................................ $ 37,267 15,114
--------- ---------
--------- ---------
</TABLE>
F-19
<PAGE>
10. DEPOSITS
Deposits at December 31, are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMOUNT PERCENT RATES
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1998
Savings accounts................................................................ $ 547,264 31.8% 3.30%
Money market.................................................................... 58,984 3.4 3.21
NOW............................................................................. 130,288 7.6 1.28
Demand.......................................................................... 84,425 4.9 --
------------ -----
820,961 47.7 2.63
Certificates of deposit......................................................... 901,749 52.3 5.60
------------ -----
Total........................................................................... $ 1,722,710 100.0% 4.18%
------------ ----- ---
------------ ----- ---
1997
Savings accounts................................................................ $ 378,745 27.7% 2.58%
Money market.................................................................... 51,128 3.7 3.44
NOW............................................................................. 98,108 7.2 1.40
Demand.......................................................................... 55,448 4.1 --
------------ -----
583,429 42.7 2.21
Certificates of deposit......................................................... 781,583 57.3 6.05
------------ -----
Total........................................................................... $ 1,365,012 100.0% 4.41%
------------ ----- ---
------------ ----- ---
</TABLE>
The aggregate amount of certificates of deposit in denominations of $100,000
or more amounted to approximately $84,509,000 and $64,544,000 at December 31,
1998 and 1997, respectively.
Scheduled maturities of certificates of deposit at December 31, are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Within six months........................................ $ 553,835 61.4% $ 345,302 44.2%
Six months to one year................................... 214,041 23.7 250,405 32.0
One to two years......................................... 62,756 7.0 105,903 13.6
Over two years........................................... 71,117 7.9 79,973 10.2
--------- ----- --------- -----
Total.................................................... $ 901,749 100.0% $ 781,583 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
The deposits of the Bank are insured up to $100,000 per depositor (as
defined by law and regulation) by the Savings Association Insurance Fund
("SAIF") which is administered by the Federal Deposit Insurance Corporation
("FDIC"). Deposits of certain other financial institutions are insured by the
Bank Insurance Fund ("BIF"). On September 30, 1996, Congress passed and the
President signed legislation that recapitalized the SAIF. The legislation
required SAIF-insured institutions to pay a special one-time assessment to
recapitalize the SAIF. The Bank's special one-time insurance assessment amounted
to $6.8 million. Beginning January 1, 1997, the schedule of SAIF assessment
rates became the same as the schedule of BIF assessment rates. The Act also
required BIF-insured institutions to pay a portion of the interest due on
Financial Corporation ("FICO") bonds beginning January 1, 1997. Beginning
January 1, 2000, or the date at which no thrift institution continues to exist,
BIF-insured institutions will be required to pay their full pro rata share of
FICO payments.
F-20
<PAGE>
11. BORROWED FUNDS
Borrowed funds at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Fixed-rate advances from the FHLB of New York:
5.74% to 6.19% due in 1998................................................................. $ -- 227,000
4.25% to 5.36% due in 1999................................................................. 104,200 20,000
5.17% to 5.74% due in 2000................................................................. 62,000 --
5.29% due in 2001.......................................................................... 20,000 --
5.66% due in 2002.......................................................................... 20,000 --
5.62% due in 2003.......................................................................... 20,000 --
5.00% to 5.38% due in 2008................................................................. 99,000 --
---------- ---------
325,200 247,000
---------- ---------
Securities sold under agreements to repurchase:
Fixed rate agreements:
5.72% to 6.250% due in 1998................................................................ -- 176,628
5.25% to 5.45% due in 1999................................................................. 72,290 --
6.27% due in 2002.......................................................................... 16,400 16,400
---------- ---------
88,690 193,028
---------- ---------
Holding Company Obligated Mandatorily Redeemable Capital Securities of Haven Capital Trust
I at 10.46% due 02/01/27................................................................. 24,984 24,984
---------- ---------
Debt of Employee Stock Ownership
Plan (note 14)........................................................................... 1,472 1,782
---------- ---------
Total...................................................................................... $ 440,346 466,794
---------- ---------
---------- ---------
</TABLE>
At December 31, 1998 and 1997, pursuant to a physical pledge collateral
agreement, advances from the FHLB of New York were collateralized by MBSs with
an estimated fair value of approximately $467,626,000 and $231,131,000,
respectively. At December 31, 1998 and 1997, advances from the FHLB of New York
were also collateralized by U.S. Government and agency obligations with an
estimated fair value of approximately $6,241,000 and $81,446,000, respectively.
At December 31, 1998 the Bank has unused lines of credit totalling $106.8
million with the FHLB of New York.
At December 31, 1998, all securities sold under agreements to repurchase
were delivered to primary dealers who arranged the transactions. The securities
will remain registered in the name of the Bank and will be returned at maturity.
During the years ended December 31, 1998 and 1997, securities sold under
agreements to repurchase averaged $142,348,000 and $172,310,000, respectively.
The maximum amounts outstanding at any month-end were $191,291,000 and
$229,280,000, respectively. The average interest rate paid during the years
ended December 31, 1998 and 1997 were 5.71% and 5.68%, respectively. MBSs with
an estimated fair value of approximately $99,966,000 and $194,227,000 were
pledged as collateral at December 31, 1998 and 1997, respectively.
On February 12, 1997, Haven Capital Trust I, a trust formed under the laws
of the State of Delaware (the "Trust"), issued $25 million of 10.46% capital
securities. The Holding Company is the owner of all the beneficial interests
represented by common securities of the Trust. The Trust exists for the sole
purpose of issuing the Trust securities (comprised of the capital securities and
the common securities) and investing the proceeds thereof in the 10.46% junior
subordinated deferrable interest debentures issued by the Holding Company on
February 12, 1997, which are scheduled to mature on February 1, 2027. Interest
on the capital securities is payable in semiannual installments, commencing on
August 2, 1997. The Trust securities are subject to mandatory redemption (i) in
whole, but not in part upon repayment in full, at the
F-21
<PAGE>
stated maturity of the junior subordinated debentures at a redemption price
equal to the principal amount of, plus accrued interest on, the junior
subordinated debentures, (ii) in whole but not in part, at any time prior to
February 1, 2007, contemporaneously with the occurrence and continuation of a
special event, defined as a tax event or regulatory capital event, at a special
event redemption price equal to the greater of 100% of the principal amount of
the junior subordinated debentures or the sum of the present values of the
principal amount and premium payable with respect to an optional redemption of
the junior subordinated debentures on the initial optional repayment date to and
including the initial optional prepayment date, discounted to the prepayment
date plus accrued and unpaid interest thereon, and (iii) in whole or in part, on
or after February 1, 2007, contemporaneously with the optional prepayment by the
Holding Company of the junior subordinated debentures at a redemption price
equal to the optional prepayment price. Subject to prior required regulatory
approval, the junior subordinated debentures are redeemable during the 12-month
periods beginning on or after February 1, 2007, at 105.230% of the principal
amounts outstanding, declining ratably each year thereafter to 100%, plus
accrued and unpaid interest thereon to the date of redemption. Deferred issuance
costs are being amortized over ten years.
12. FEDERAL, STATE AND LOCAL TAXES
FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return on a calendar-year basis. Under Section 593 of the Internal Revenue Code
of 1986, as amended ("Code"), prior to January 1, 1997 thrift institutions such
as the Bank which met certain definitional tests primarily relating to their
assets and the nature of their business, were permitted to establish a tax
reserve for bad debts. Such thrift institutions were also permitted to make
annual additions to the reserve, to be deducted in arriving at their taxable
income within specified limitations. The Bank's deduction was computed using an
amount based on the Bank's actual loss experience ("experience method"), or a
percentage equal to 8% of the Bank's taxable income ("PTI method"). Similar
deductions for additions to the Bank's bad debt reserve were also permitted
under the New York State Bank Franchise Tax and the New York City Banking
Corporation Tax; however, for purposes of these taxes, the effective allowable
percentage under the PTI method was 32% rather than 8%.
Under the Small Business Job Protection Act of 1996 ("1996 Act"), signed
into law in August 1996, Section 593 of the Code was amended. The Bank will be
unable to make additions to the tax bad debt reserves but will be permitted to
deduct bad debts as they occur. Additionally, the 1996 Act required institutions
to recapture (that is, include in taxable income) the excess of the balance of
its bad debt reserves as of December 31, 1995 over the balance of such reserves
as of December 31, 1987 ("base year"). The Bank's federal tax bad debt reserves
at December 31, 1995 exceeded its base year reserves by $2.7 million which will
be recaptured into taxable income ratably over a six year period. This recapture
was frozen for 1996 and 1997, whereas, one-sixth of the excess reserves was
recaptured into taxable income for 1998. The base year reserves will be subject
to recapture, and the Bank could be required to recognize a tax liability, if
(i) the Bank fails to qualify as a "bank" for Federal income tax purposes; (ii)
certain distributions are made with respect to the stock of the Bank; (iii) the
Bank uses the bad debt reserves for any purpose other than to absorb bad debt
losses; and (iv) there is a change in Federal tax law. Management is not aware
of the occurrence of any such event.
In response to the Federal legislation, the New York State and New York City
tax law has been amended to prevent the recapture of existing tax bad debt
reserves and to allow for the continued use of the PTI method to determine the
bad debt deduction in computing New York State and City tax liability.
F-22
<PAGE>
The components of the net deferred tax assets at December 31, are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Difference between financial statement credit loss provision and tax bad-debt deduction........ $ 5,952 5,872
Non-accrual interest and non-performing loan expense........................................... 762 1,268
Other.......................................................................................... 2,128 1,211
--------- ---------
Total deferred tax assets...................................................................... 8,842 8,351
--------- ---------
Deferred tax liabilities:
Recapture of Tax Bad Debt Reserve.............................................................. (781) (937)
Securities marked to market for financial statement purposes................................... (580) (942)
Basis difference of fixed assets............................................................... (131) (145)
Other.......................................................................................... (1,926) (126)
--------- ---------
Total deferred tax liabilities................................................................. (3,418) (2,150)
--------- ---------
Net deferred tax assets........................................................................ $ 5,424 6,201
--------- ---------
--------- ---------
</TABLE>
Income tax expense for the years ended December 31, are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................................................... $ 1,486 6,433 3,391
State and local....................................................................... 301 1,245 2,813
--------- --------- ---------
1,787 7,678 6,204
--------- --------- ---------
Deferred:
Federal............................................................................... 741 (760) 906
State and local....................................................................... 398 (780) (676)
--------- --------- ---------
1,139 (1,540) 230
--------- --------- ---------
Total income tax expense.............................................................. $ 2,926 6,138 6,434
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following is a reconciliation of statutory Federal income tax expense to the
combined effective tax expense for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory Federal income tax expense................................................... $ 3,877 6,027 5,392
State and local income taxes, net of
Federal income tax benefit........................................................... 455 301 1,410
Change in deferred tax asset valuation allowance....................................... -- -- (800)
Reversal of prior years taxes.......................................................... (785) -- --
Other, net............................................................................. (621) (190) 432
--------- --------- ---------
Total income tax expense............................................................... $ 2,926 6,138 6,434
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company had an $800,000 valuation allowance for its deferred tax asset
as of December 31, 1995, related to potential New York State and New York City
deferred tax assets. Upon review of the Company's deferred tax assets as of
December 31, 1996, the Company determined that the valuation allowance was no
longer required. The Company will continue to review the recognition criteria as
set forth in SFAS No. 109, "Accounting for Income Taxes" on a quarterly basis
and determine the need for a valuation allowance accordingly.
F-23
<PAGE>
STATE AND LOCAL TAXES
The Company and subsidiaries file combined New York State franchise tax and
New York City financial corporation tax returns on a calendar-year basis. The
Company's annual tax liability for each year is the greater of a tax on (i)
allocated entire net income; (ii) located alternative entire net income; (iii)
allocated assets to New York State and/or New York City; or (iv) a minimum tax.
Operating losses cannot be carried back or carried forward for New York State or
New York City tax purposes.
The Company expects to determine its 1998 New York State and New York City
tax liability based on alternative entire net income. The Company has provided
for New York State and New York City taxes based on entire net income for the
years ended December 31, 1997 and 1996. The Company will also file a New Jersey
and Connecticut tax return for 1998 due to the opening of in-store supermarket
branches.
13. EMPLOYEE BENEFIT PLANS AND POST-RETIREMENT BENEFITS
RETIREMENT PLAN
The Company has a qualified, non-contributory defined benefit pension plan
covering substantially all of its eligible employees. The Company's policy is to
fund pension costs in accordance with the minimum funding requirements of the
Employee Retirement Income Security Act of 1974, and to provide the plan with
sufficient assets with which to pay pension benefits to plan participants. Based
on an evaluation of the Retirement Plan in 1996, the Bank concluded that future
benefit accruals under the Retirement Plan would cease or "freeze" effective
July 1, 1996. The Bank recognized a curtailment gain of approximately $266,000
as of July 1, 1996. The Bank made a cash contribution of $352,000 to the plan in
1997. There were no contributions to the Plan in 1998.
The following are disclosures related to the Plan as determined by the
Plan's actuary in accordance with SFAS No. 87 and SFAS No. 132.
The following is a reconciliation of the projected benefit obligation for
the years ended December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Projected benefit obligation, beginning of year............................. $ 8,519 7,649
Interest cost............................................................... 569 557
Actuarial loss.............................................................. 202 761
Benefits paid............................................................... (532) (448)
--------- ---------
Projected benefit obligation, end of year................................... $ 8,758 8,519
--------- ---------
--------- ---------
</TABLE>
The following is a reconciliation of the change in fair value of plan assets
for the years ended December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Fair value of plan assets, beginning of year................................ $ 8,819 8,169
Actual return on plan assets................................................ 1,228 747
Contributions............................................................... -- 351
Benefits paid............................................................... (532) (448)
--------- ---------
Fair value of plan assets, end of year...................................... $ 9,515 8,819
--------- ---------
--------- ---------
</TABLE>
F-24
<PAGE>
The following is a reconciliation of the funded status of the plan as of
December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Pension benefit obligation
Accumulated benefit obligation............................................ $ 8,758 8,519
Additional benefits based on estimated future salary levels............... -- --
--------- ---------
Projected benefit obligation.............................................. 8,758 8,519
Fair value of plan assets................................................... 9,515 8,819
--------- ---------
Funded status............................................................... 757 300
Unrecognized net gain....................................................... (261) (4)
--------- ---------
Prepaid pension cost........................................................ $ 496 296
--------- ---------
--------- ---------
</TABLE>
The following is a reconciliation of net periodic pension (benefit) cost for
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.......................................................... $ -- -- 211
Interest cost......................................................... 569 557 597
Expected return on plan assets........................................ (768) (746) (714)
Net amortization and deferral......................................... -- -- 2
--------- --- ---
Net periodic pension (benefit) cost................................... $ (199) (189) 96
--------- --- ---
--------- --- ---
</TABLE>
Actuarial assumptions used to account for the plan include the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Discount rate........................................................ 6.75% 6.75% 7.00%
Expected long-term rate of return.................................... 9.00% 9.00% 9.00%
Rate of increase in compensation levels.............................. NA NA 5.00%
</TABLE>
THRIFT INCENTIVE SAVINGS PLAN
The Bank maintains a 401(k) thrift incentive savings plan which provides for
employee contributions on a pre-tax basis up to a maximum of 16% of total
compensation, with matching contributions to be made by the Bank equal to 25% of
employee contributions, not to exceed employee contributions greater than 6% of
total compensation. The Bank matched employee contributions which totaled
$234,000 and $199,000 for the years ended December 31, 1998 and 1997, and
$120,000 for the period July 1, 1996 (resumption of employer match) to December
31,1996.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In 1996, the Bank implemented a non-qualified supplemental executive
retirement plan ("SERP") for the President and Chief Executive Officer. This
plan provides supplemental benefits for the President and Chief Executive
Officer equal to the benefits he would have received under the Bank's Retirement
Plan, 401(k) Plan and ESOP, had the federal income tax law limitations on the
accrual of benefits under these plans not been applicable. The SERP is an
unfunded plan. During 1998, 1997 and 1996, the Bank accrued $180,000, $50,000
and $132,000, respectively, for the SERP. At January 1, 1998 and 1997, the
accumulated
F-25
<PAGE>
benefit obligation was $332,000 and $245,000, respectively. At January 1, 1998
and 1997, the projected benefit obligation of the plan was $1,320,000 and
$1,233,000, respectively.
The Bank also maintains a non-qualified defined benefit SERP for the former
Chairman of the Board. The SERP is an unfunded plan. The SERP provides for an
annual retirement benefit of $120,000 for 10 years after retirement which
occurred in 1995. The SERP also provides for a lump sum benefit of $1.2 million
payable to the estate of the former Chairman of the Board in the event of his
death prior to retirement, or in the event of a hostile change in control after
retirement but prior to the payment of the entire benefit; any unpaid benefit
shall be paid in a lump sum. The Company had accrued the entire $1.2 million
liability under the unfunded plan through December 31, 1995.
POST-RETIREMENT LIFE INSURANCE BENEFITS
The Company provides life insurance coverage to retirees under an unfunded
plan. Life insurance coverage in the first year of retirement is equal to three
times annual pay at retirement, reduced by 10% (the "reduction amount"). For the
next four consecutive years, life insurance coverage will be reduced each year
by the reduction amount. The maximum benefit will be $50,000 on the earlier of:
a) the fifth anniversary of retirement; or b) attaining age 70.
The following are disclosures related to the Company's post-retirement plan
as provided by the Plan's actuary in accordance with SFAS No.s 106 and 132.
The following is a reconciliation of the accumulated post-retirement benefit
obligation ("APBO") for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
APBO, beginning of year..................................................... $ 1,268 852
Service cost................................................................ 63 55
Interest cost............................................................... 85 77
Actuarial loss.............................................................. 38 293
Benefits paid............................................................... (9) (9)
--------- ---------
APBO, end of year........................................................... $ 1,445 1,268
--------- ---------
--------- ---------
</TABLE>
The following is a reconciliation of the funded status of the plan as of
December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
APBO--Retirees and dependents............................................. $ 632 598
APBO--Actives fully eligible to retire.................................... 278 251
APBO--Actives not yet fully eligible to retire............................ 535 419
--------- ---------
Projected benefit obligation.............................................. 1,445 1,268
Fair value of plan assets................................................. -- --
--------- ---------
Funded status............................................................. (1,445) (1,268)
Unrecognized transition liability......................................... 278 303
Unrecognized net loss..................................................... 563 555
Unrecognized prior service cost........................................... (78) (88)
--------- ---------
Accrued post-retirement benefit liability................................. $ (682) (498)
--------- ---------
--------- ---------
</TABLE>
F-26
<PAGE>
The following is a reconciliation of net periodic post-retirement benefit
cost for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............................................................ $ 63 55 29
Interest cost........................................................... 85 77 59
Amortization of transition obligation................................... 25 25 25
Amortization of unrecognized gain or loss............................... 31 28 9
Amortization of unrecognized prior service liability.................... (10) (4) --
--------- --- ---
Net periodic post-retirement cost....................................... $ 194 181 122
--------- --- ---
--------- --- ---
</TABLE>
Actuarial assumptions used to account for the plan include the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Discount rate.................................................... 6.50% 6.75% 7.50%
Rate of increase in compensation levels.......................... 4.50% 4.50% 5.00%
</TABLE>
14. STOCK PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Bank established for eligible employees an Employee Stock Ownership Plan
("ESOP") in connection with the Conversion. The ESOP borrowed $3.5 million from
an unrelated third party lender and purchased 694,312 common shares issued in
the Conversion. The Bank is expected to make scheduled cash contributions to the
ESOP sufficient to service the amount borrowed over a period not to exceed 10
years. The unpaid balance of the ESOP loan is included in borrowed funds and the
unamortized balance of unearned compensation is shown as unallocated common
stock held by the ESOP reflected as a reduction of stockholders' equity. As of
December 31, 1998, total contributions to the ESOP which were used to fund
principal and interest payments on the ESOP debt totaled approximately
$2,967,000. At December 31, 1998, the loan had an outstanding balance of
$1,472,000 and an interest rate of 7.06%. The loan, as amended on December 29,
1995, is payable in thirty-two equal quarterly installments beginning December
1995 and ending September 2003. The loan bears interest at a floating rate based
on the federal funds rate plus 250 basis points. Dividends declared on common
stock held by the ESOP which have been allocated to the account of a participant
are allocated to the account of such participant. Dividends declared on common
stock held by the ESOP and not allocated to the account of a participant are
used to repay the ESOP loan. The Company recorded $922,000, $1,184,000 and
$983,000 of ESOP expense for the years ended December 31, 1998, 1997 and 1996,
respectively. For the years ended December 31, 1998, 1997 and 1996, ESOP expense
was based on the fair market value of the shares allocated in accordance with
the AICPA SOP 93-6. At December 31, 1998, there were 305,810 shares remaining
for future allocation, of which 61,445 shares will be allocated for the 1998
year in the first quarter of 1999.
RECOGNITION AND RETENTION PLANS
The Bank has established several Recognition and Retention Plans ("RRPs")
which purchased in the aggregate 297,562 shares of common stock in the
Conversion. The Bank contributed $1.5 million to fund the purchase of the RRP
shares. In 1995, the RRP for officers and other key employees was amended to
increase the number of shares of common stock which may be granted by 19,836
shares and such shares were contributed to the RRP from treasury stock. During
1996, the remaining previously unallocated shares totaling 17,202 were awarded
to directors and officers. In 1997, the RRP for directors was amended to
increase the number of shares of common stock which may be granted by 9,916
shares and such shares were contributed to the RRP from treasury stock. The fair
market value of these shares at the dates of the
F-27
<PAGE>
awards will be amortized as compensation expense as participants become vested.
Participants generally become vested over a three or five year period beginning
on the date of the award. The unamortized cost, which is comparable to deferred
compensation, is reflected as a reduction of stockholders' equity. For the years
ended December 31, 1998, 1997 and 1996, respectively, $200,000, $168,000 and
$409,000 of expense has been recognized.
STOCK OPTION AND INCENTIVE PLANS
In 1993, the Holding Company adopted stock option plans for the benefit of
directors (the "1993 Directors Plan") and for officers and other key employees
(the "1993 Stock Plan") of the Bank. The number of shares of common stock
reserved for issuance under the stock option plans was equal to 10% of the total
number of shares of common stock issued pursuant to the Bank's Conversion to the
stock form of ownership. In 1995, the 1993 Stock Plan was amended to increase
the number of shares for which stock options may be granted by 69,430 shares.
All options awarded to employees vest over a three year period beginning one
year from the date of grant. The option exercise price cannot be less than the
fair market value of the underlying common stock as of the date of the option
grant, and the maximum option term cannot exceed ten years. The stock options
awarded to directors become exercisable one year from the date of grant. In
1996, the remaining 11,770 options were granted from the 1993 Stock Plan and the
remaining 37,204 options were granted from the 1993 Directors Plan. In 1997, the
1993 Directors Plan was amended to increase the number of shares for which stock
options may be granted by 29,754 shares. None of these shares have been granted
as of December 31, 1998.
In 1996, the Holding Company adopted the 1996 Stock Incentive Plan which
provided 420,000 shares for the grant of options and restricted stock awards. On
April 24, 1996, an aggregate of 3,952 shares of restricted stock were granted to
directors which vested six months from the date of grant and an aggregate of
55,978 shares were granted to officers and employees on May 23, 1996, which vest
over a three year period beginning one year from the date of grant. In addition,
an aggregate of 232 shares were granted to two new directors on October 1, 1996
which vested on December 31, 1996. In 1997, an aggregate of 3,648 shares of
restricted stock were granted to directors which vested six months from the date
of grant and an aggregate of 5,340 shares were granted to officers and employees
which vest over a three year period beginning one year from the date of grant.
In 1998, an aggregate of 14,384 shares were granted to officers and employees
which vest over a three-year period beginning one year from the date of grant.
Such shares were recorded as unearned compensation at their fair market value on
the date of the award (which is reflected as a reduction of stockholders'
equity), to be amortized to expense over the vesting period. During 1998, 1997
and 1996, an aggregate of 134,200, 34,100 and 321,600 options, respectively,
were granted to directors and officers under the 1996 Stock Incentive Plan,
which vest over a three year period beginning one year from the date of grant.
In 1997, effective upon shareholder approval, the 1996 Stock Incentive Plan was
amended to increase the number of shares for which options and restricted stock
awards may be granted by 41,998 shares.
F-28
<PAGE>
The following table summarizes certain information regarding the stock
option plans:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
------------------------------------------------
NON- NON- WEIGHTED
INCENTIVE STATUTORY QUALIFIED AVERAGE
STOCK STOCK OPTIONS TO EXERCISE
OPTIONS OPTIONS DIRECTORS PRICE
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance outstanding at December 31, 1995............................ 252,236 448,332 260,358 5.42
Granted............................................................. 182,470 38,900 149,204 12.92
Forfeited........................................................... -- -- -- --
Exercised........................................................... (18,812) -- -- 5.00
--------- ----------- ----------- -----
Balance outstanding at December 31, 1996............................ 415,894 487,232 409,562 7.54
Granted............................................................. 14,100 -- 20,000 17.09
Forfeited........................................................... -- -- (12,000) 12.14
Exercised........................................................... (16,594) -- (98,388) 6.61
--------- ----------- ----------- -----
Balance outstanding at December 31, 1997............................ 413,400 487,232 319,174 7.90
Granted............................................................. 134,200 -- -- 22.91
Forfeited........................................................... -- -- -- --
Exercised........................................................... (23,414) -- (37,194) 8.01
--------- ----------- ----------- -----
Balance outstanding at December 31, 1998............................ 524,186 487,232 281,980 9.44
--------- ----------- ----------- -----
--------- ----------- ----------- -----
Shares exercisable at December 31, 1998............................. 327,672 487,232 217,943 7.12
--------- ----------- ----------- -----
--------- ----------- ----------- -----
</TABLE>
The fair value of each share grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 2.14% in 1998, 1.45% in 1997 and 1.93% in 1996; expected volatility rates of
28.05% to 39.24% in 1998, 26.95% in 1997 and 16.85% in 1996; risk-free interest
rates of 4.59% in 1998, 5.68% to 5.81% in 1997 and 6.38% in 1996; and expected
lives of 3 years for the 1993 Stock Plan, 8 years for the 1993 Directors Plan, 3
years for grants to officers and employees under the 1996 Stock Incentive Plan
and 8 years for grants to directors under that plan.
Had compensation cost for the Company's three stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net income and net
income per common share would have been reduced to the pro forma amounts
indicated below for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net income:
As reported..................................................................... $ 8,150 11,083 9,425
Pro forma....................................................................... 7,560 10,557 9,135
Net income per common share:
Basic
As reported..................................................................... $ 0.95 1.32 1.13
Pro forma....................................................................... 0.88 1.25 1.10
Diluted
As reported..................................................................... $ 0.89 1.24 1.08
Pro forma....................................................................... 0.83 1.18 1.05
</TABLE>
F-29
<PAGE>
15. EARNINGS PER SHARE
The computation of basic and diluted EPS for the years ended December 31,
are presented in the following table.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share-net
income................................................................ $ 8,150 $ 11,083 $ 9,425
------------ ------------ ------------
Denominator for basic earnings per share-weighted-
average shares........................................................ 8,596,884 8,420,321 8,310,178
Effect of dilutive options.............................................. 561,919 493,437 378,502
------------ ------------ ------------
Denominator for diluted earnings per share-weighted-average number of
common shares and dilutive potential common
shares................................................................ 9,158,803 8,913,758 8,688,680
------------ ------------ ------------
Basic earnings per share................................................ $ 0.95 $ 1.32 $ 1.13
Diluted earnings per share.............................................. $ 0.89 $ 1.24 $ 1.08
</TABLE>
16. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At December 31, 1998, the Company was obligated under several noncancelable
operating leases on property used for office space and banking purposes. Several
of the leases contain escalation clauses which provide for increased rentals,
primarily based upon increases in real estate taxes. Rent expense under these
leases was approximately $4,168,000 , $1,742,000 and $404,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. The projected minimum
rental payments under the terms of the noncancelable leases at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------------------------------------------------------ --------------
<S> <C>
1999.......................................................................... $ 5,018
2000.......................................................................... 4,982
2001.......................................................................... 4,308
2002.......................................................................... 4,163
2003.......................................................................... 2,404
Thereafter.................................................................... 1,062
-------
$ 21,937
-------
-------
</TABLE>
In September 1996, the Bank entered into an agreement to open approximately
44 full-service bank branches in Pathmark supermarkets throughout New York City,
Long Island, Westchester and Rockland counties by mid-1998. In September 1997,
the Bank announced that it had entered into licensing agreements with ShopRite
Stores under which it will have the right to open in-store branches in all new
or renovated ShopRite supermarkets in New Jersey and Connecticut. Fifty-seven
supermarket branches have opened through December 31, 1998, and the leases
related thereto are reflected in the table above.
Under the IDA and PILOT agreements discussed in note 8, the Bank assigned
the building and land at its Westbury headquarters to the IDA, is subleasing it
for $1 per year for a 10 year period and will repurchase the building for $1
upon expiration of the lease term in exchange for IDA financial assistance.
F-30
<PAGE>
LOAN COMMITMENTS
The Company had outstanding commitments totaling $164.6 million to originate
loans at December 31, 1998, of which $61.3 million were fixed-rate loans and
$103.3 million were variable rate loans. For fixed-rate loan commitments at
December 31, 1998, the interest rates on mortgage loans ranged from 6.13% to
10.25%. The standard commitment term for these loans is 45 days. For other
consumer fixed-rate loan commitments, interest rates ranged from 7.00% to 9.75%
with the standard term of the commitment of 30 days. Loan commitments are made
at current rates and no material difference exists between book and market
values of such commitments.
For commitments to originate loans, the Company's maximum exposure to credit
risk is represented by the contractual amount of those instruments. Those
commitments represent ultimate exposure to credit risk only to the extent that
they are subsequently drawn upon by customers. The Company uses the same credit
policies and underwriting standards in making loan commitments as it does for
on-balance-sheet instruments. For loan commitments, the Company would generally
be exposed to interest rate risk from the time a commitment is issued with a
defined contractual interest rate.
The Company delivers, primarily fixed-rate, one- to four-family mortgage
loans to investors in the secondary market under "best efforts" commitments.
Loans to be sold are generally committed at the time the borrower's mortgage
interest rate is "locked-in". At December 31, 1998, the Company had $45.3
million of "locked-in" fixed rate one- to four-family mortgage loans. The best
efforts commitment term is generally 70 days from the "lock-in" date.
In connection with the securitization and sale of $48.6 million of
cooperative apartment loans in 1994, a letter of credit totaling $6.8 million
was established with the FHLB. The letter of credit provides a level of
protection of approximately 14% to the buyer against losses on the cooperative
apartment loans sold behind a pool insurance policy the Bank purchased which
provides a level of protection of approximately 20%. The letter of credit
totalled $6.8 million at December 31, 1998.
INTEREST RATE CAPS
During the year ended December 31, 1995, the Company, in order to hedge a
portion of the borrowings to fund a $75 million leverage transaction, purchased
an interest rate cap on a $25.0 million notional principal amount on which it
received a payment, based on the notional principal amount, equal to the three
month LIBOR rate in excess of 8% on any reset date for a three year period,
which ended on September 30, 1998. The premium paid for the cap, $133,000, was
carried in other assets and was fully amortized to interest expense over the
term of the contract. At December 31, 1997 and 1996, the three month LIBOR was
5.81% and 5.56%, respectively. Interest expense on borrowed funds was increased
by approximately $34,000, $44,000 and $44,000 during the years ended December
31, 1998, 1997 and 1996, respectively, as a result of this agreement.
LITIGATION AND LOSS CONTINGENCY
In February, 1983, a burglary of the contents of safe deposit boxes occurred
at a branch office of the Bank. At December 31, 1998, the Bank has a class
action lawsuit related thereto pending, whereby the plaintiffs are seeking
recovery of approximately $12,900,000 in actual damages and an additional
$12,900,000 of unspecified damages. The Bank's ultimate liability, if any, which
might arise from the disposition of these claims cannot presently be determined.
Management believes it has meritorious defenses against these actions and has
and will continue to defend its position. Accordingly, no provision for any
liability that may result upon adjudication has been recognized in the
accompanying consolidated financial statements.
The Company is involved in various legal actions arising in the ordinary
course of business, which in the aggregate, are believed by management to be
immaterial to the financial position of the Company.
F-31
<PAGE>
17. STOCKHOLDERS' EQUITY
At the time of its conversion to a stock savings bank, the Bank established
a liquidation account in an amount equal to its total retained earnings as of
June 30, 1993. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their accounts at the Bank,
after the conversion. The liquidation account will be reduced annually to the
extent that eligible account holders have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The balance of the liquidation account was approximately
$15.0 million at December 31, 1998.
Subsequent to the conversion, the Bank may not declare or pay cash dividends
on or repurchase any of its shares of common stock, if the effect would cause
stockholders' equity to be reduced below the amount required for the liquidation
account, applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements. Office
of Thrift Supervision ("OTS") regulations provide that an institution that
exceeds all fully phased-in capital requirements, before and after a proposed
capital distribution could, after prior notice but without prior approval of the
OTS, make capital distributions during the calendar year up to 100% of net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year period.
Any additional capital distributions would require prior regulatory approval.
Unlike the Bank, the Company is not subject to these regulatory restrictions on
the payment of dividends to its stockholders. However, the source of future
dividends may depend upon dividends from the Bank.
STOCK SPLIT
The Company declared a 2-for-1 common stock split which was distributed on
November 28, 1997 in the form of a stock dividend to holders of record as of
October 23, 1997.
REGULATORY CAPITAL
As required by regulation of the OTS, savings institutions are required to
maintain regulatory capital in the form of a "tangible capital requirement," a
"core capital requirement," and a "risk- based capital requirement."
The Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
F-32
<PAGE>
As of December 31, 1998, the Bank has been categorized as "well capitalized"
by the OTS under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that management believes
have changed the institution's category. The following table sets forth the
required ratios and amounts, and the Bank's actual capital amounts, and ratios
at December 31:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY PURPOSES CORRECTIVE
ACTUAL ACTION PROVISIONS
---------------------- ---------------------- --------------------
AMOUNT RATIO(3) AMOUNT RATIO AMOUNT RATIO
--------- ----------- --------- ----- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1998
Tangible Capital.......................... $ 130,597 5.43% $ 48,087 2.00% N/A N/A
Core Capital (1).......................... 130,597 5.43 96,173 4.00 $ 120,216 5.00%
Risk-based Capital (2).................... 144,104 11.96 96,404 8.00 120,505 10.00
1997
Tangible Capital.......................... $ 125,573 6.42% $ 29,333 1.50% N/A N/A
Core Capital (1).......................... 125,573 6.42 58,667 3.00 $ 97,778 5.00%
Risk-based Capital (2).................... 136,860 14.04 77,964 8.00 97,455 10.00
</TABLE>
- ------------------------
(1) Under the OTS's prompt corrective action regulations, the core capital
requirement was effectively increased to 4.00% since OTS regulations
stipulate that as of that date an institution with less than 4.00% core
capital will be deemed to be classified as "undercapitalized."
(2) The OTS adopted a final regulation which incorporates an interest rate risk
component into its existing risk-based capital standard. The regulation
requires certain institutions with more than a "normal level" of interest
rate risk to maintain capital in addition to the 8.0% risk-based capital
requirement. The Bank does not anticipate that its risk-based capital
requirement will be materially affected as a result of the new regulation.
(3) For tangible and core capital, the ratio is to adjusted total assets. For
risk-based capital, the ratio is to total risk-weighted assets.
STOCKHOLDER RIGHTS PLAN
On January 26, 1996, the Board of Directors of the Holding Company adopted a
Stockholder Rights Plan (the "Rights Plan"). Under the Rights Plan, which
expires in February, 2006, the Board declared a dividend of one right on each
outstanding share of the Holding Company's common stock, which was paid on
February 5, 1996 to stockholders of record on that date (the "Rights"). Until it
is announced that a person or group has acquired 10% or more of the outstanding
common stock of the Holding Company (an "Acquiring Person") or has commenced a
tender offer that could result in their owning 10% or more of such common stock,
the Rights are initially redeemable for $.01 each, are evidenced solely by the
Holding Company's common stock certificates, automatically trade with the
Holding Company's common stock and are not exercisable. Following any such
announcement, separate Rights would be distributed, with each Right entitling
its owner to purchase participating preferred stock of the Holding Company
having economic and voting terms similar to those of one share of the Holding
Company's common stock for an exercise price of $45.
Upon announcement that any person or group has become an Acquiring Person
and unless the Board acts to redeem the Rights, then twenty business days
thereafter (the "Flip-in Date"), each Right (other than Rights beneficially
owned by any Acquiring Person or transferee thereof, which become void) will
entitle the holder to purchase, for the $45 exercise price, a number of shares
of the Holding Company's common stock having a market value of $90. In addition,
if after an Acquiring Person gains control of the
F-33
<PAGE>
Board, the Holding Company is involved in a merger or sells more than 50% of its
assets or assets generating more than 50% of its operating income or cash flow,
or has entered into an agreement to do any of the foregoing (or an Acquiring
Person is to receive different treatment than all other stockholders), each
Right will entitle its holder to purchase, for the $45 exercise price, a number
of shares of common stock of the Acquiring Person having a market value of $90.
If any person or group acquires more than 50% of the outstanding common stock of
the Holding Company, the Board may, at its option, exchange one share of such
common stock for each Right. The Rights may also be redeemed by the Board for
$0.01 per Right prior to the Flip-in Date.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires the Company to disclose estimated fair values for substantially all of
its financial instruments. The fair value of a financial instrument is the
amount at which the asset or obligation could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire holdings of a particular financial instrument.
Because no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature, involve uncertainties and matters of judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are determined for on and off-balance sheet financial
instruments, without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in many of the estimates.
F-34
<PAGE>
The following table summarizes the carrying values and estimated fair values
of the Company's on-balance-sheet financial instruments at December 31:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------ ------------ ------------ ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents................................ $ 44,808 44,808 40,306 40,306
Securities available for sale............................ 889,251 889,251 499,380 499,380
Loans held for sale...................................... 54,188 54,188 -- --
Debt securities held to maturity......................... -- -- 66,404 66,372
FHLB-NY stock............................................ 21,990 21,990 12,885 12,885
Mortgage-backed securities held to maturity.............. -- -- 163,057 163,326
Loans receivable, net.................................... 1,296,702 1,313,057 1,138,253 1,152,100
Accrued interest receivable.............................. 12,108 12,108 12,429 12,429
Financial Liabilities:
Deposits................................................. 1,722,710 1,727,676 1,365,012 1,368,782
Borrowed funds........................................... 440,346 446,813 466,794 467,565
Due to broker............................................ 97,458 97,458 10,000 10,000
Accrued interest payable................................. 1,670 1,670 1,645 1,645
</TABLE>
The methods and significant assumptions used to estimate fair values for
different categories of financial instruments are as follows:
CASH AND CASH EQUIVALENTS--The estimated fair values of cash and cash
equivalents are assumed to equal the carrying values as these financial
instruments are either due on demand or mature within 90 days.
SECURITIES AVAILABLE FOR SALE, DEBT SECURITIES AND MORTGAGE-BACKED
SECURITIES HELD TO MATURITY--Estimated fair value for substantially all of the
Company's bonds, notes and equity securities, both available for sale and held
to maturity are based on market quotes as provided by an independent pricing
service. For MBSs, the Company obtains bids from broker dealers to estimate fair
value. For those occasional securities for which a market price cannot be
obtained, market prices of comparable securities are used.
LOANS HELD FOR SALE--The estimated fair value is based on current prices
established in the secondary market.
FHLB-NY STOCK--The estimated fair value of the Company's investment in
FHLB-NY stock is deemed to be equal to its carrying value which represents the
price at which it may be redeemed.
RESIDENTIAL LOANS--Residential loans include one- to four-family mortgages
and individual cooperative apartment loans. Estimated fair value is based on
discounted cash flow analysis. The residential loan portfolio is segmented by
loan type (fixed conventional, adjustable products, etc.) with weighted average
coupon rate, remaining term, and other pertinent information for each segment. A
discount rate is determined based on the U.S. Treasury yield curve plus a
pricing spread. The discount rate for fixed rate products is based on the FNMA
yield curve plus a pricing spread. Expected principal prepayments, consistent
with empirical evidence and management's future expectations, are used to modify
the future cash flows. For potential problem loans, the present value result is
separately adjusted downward consistent with management's assumptions in
evaluating the adequacy of the allowance for loan losses.
COMMERCIAL REAL ESTATE AND OTHER LOANS--Estimated fair value is based on
discounted cash flow analysis which take into account the contractual coupon
rate and maturity date of each loan. A discount rate is determined based on the
U.S. Treasury yield curve, the prime rate or LIBOR plus a pricing spread,
F-35
<PAGE>
depending on the index to which the product is tied. For potential problem
loans, the present value result is separately adjusted downward consistent with
management's assumptions regarding the value of any collateral underlying the
loans.
DEPOSITS--Certificates of deposit are valued by performing a discounted cash
flow analysis of the remaining contractual maturities of outstanding
certificates. The discount rates used are wholesale secondary market rates as of
the valuation date. For all other deposits, fair value is deemed to be
equivalent to the amount payable on demand as of the valuation date.
BORROWED FUNDS--Borrowings are fair valued based on rates available to the
Company in either public or private markets for debt with similar terms and
remaining maturities.
ACCRUED INTEREST RECEIVABLE, ACCRUED INTEREST PAYABLE, AND DUE TO
BROKER--The fair values are estimated to equal the carrying values of short-term
receivables and payables, including accrued interest, mortgage escrow funds and
due to broker.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS--The fair value of the interest rate
cap was obtained from dealer quotes and represents the cost of terminating the
agreement. The estimated fair value of open off-balance sheet financial
instruments results in an unrealized loss of $31,000 at December 31, 1997.
The estimated fair value of commitments to extend credit is estimated using
the fees charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparties. Generally, for fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed interest rates. The estimated fair value of these off-balance sheet
financial instruments resulted in no unrealized gain or loss at December 31,
1998 and 1997.
F-36
<PAGE>
19. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of the Holding Company (parent company
only) are as follows:
PARENT COMPANY CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash...................................................................................... $ 10 656
Money market investments.................................................................. 1,720 4,561
Securities available for sale............................................................. 2,569 4,123
Accrued interest receivable............................................................... 71 42
Accrued income taxes receivable........................................................... 3,755 3,781
Investment in net assets of Bank.......................................................... 137,217 128,522
Investment in net assets of other subsidiaries............................................ 2,073 790
---------- ----------
Total assets.............................................................................. 147,415 142,475
---------- ----------
---------- ----------
Liabilities:
Junior subordinated debt issued to Haven Capital Trust I.................................. 25,774 25,774
Other liabilities, net.................................................................... 1,774 3,836
---------- ----------
Total liabilities......................................................................... 27,548 29,610
---------- ----------
Stockholders' equity:
Common stock.............................................................................. 100 100
Additional paid-in capital................................................................ 51,383 50,065
Retained earnings, substantially restricted............................................... 79,085 73,567
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net of tax effect..................... 945 1,671
Treasury stock, at cost................................................................... (9,800) (10,246)
Unallocated common stock held by ESOP..................................................... (1,222) (1,529)
Unearned common stock held by RRPs........................................................ (263) (364)
Unearned compensation..................................................................... (361) (399)
---------- ----------
Total stockholders' equity................................................................ 119,867 112,865
---------- ----------
Total liabilities and stockholders' equity................................................ $ 147,415 142,475
---------- ----------
---------- ----------
</TABLE>
F-37
<PAGE>
PARENT COMPANY ONLY CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- ---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Dividend from Bank............................................................... $ 2,500 -- 2,000
Dividend from Trust.............................................................. 81 72 --
Interest income.................................................................. 345 514 178
Interest expense................................................................. (2,697) (2,389) --
Other operating expenses, net.................................................... (1,148) (935) (961)
--------- ---------- ---------
(Loss) income before income tax benefit and equity in undistributed net income of
Bank........................................................................... (919) (2,738) 1,217
Income tax benefit............................................................... (1,403) (1,277) (360)
--------- ---------- ---------
Net income (loss) before equity in undistributed net income of Bank.............. 484 (1,461) 1,577
Equity in undistributed net income of Bank....................................... 7,666 12,544 7,848
--------- ---------- ---------
Net income....................................................................... $ 8,150 11,083 9,425
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
PARENT COMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- ---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income....................................................................... $ 8,150 11,083 9,425
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Equity in undistributed net income of the Bank................................... (7,666) (12,544) (7,848)
Gain on sale of interest earning assets.......................................... (109) -- --
(Increase) decrease in accrued interest receivable............................... (29) (40) 23
Decrease (increase) in accrued income tax receivable............................. 26 (3,422) (175)
(Decrease) increase in other liabilities......................................... (1,878) 3,189 219
--------- ---------- ---------
Net cash (used in) provided by operating activities.............................. (1,506) (1,734) 1,644
--------- ---------- ---------
Investing activities:
Purchases of securities available for sale....................................... (2,135) (4,095) --
Proceeds from sales of securities available for sale............................. 3,704 -- --
Additional investment in the Bank................................................ -- (14,007) --
Investment in net assets of other subsidiaries................................... (1,283) -- --
--------- ---------- ---------
Net cash provided by (used in) investing activities.............................. 286 (18,102) --
--------- ---------- ---------
Financing activities:
Proceeds from issuance of debt................................................... -- 24,984 --
Purchase of treasury stock....................................................... -- -- (5,516)
Payment of common stock dividends................................................ (2,627) (2,598) (2,475)
Exercise of stock options........................................................ 360 760 95
--------- ---------- ---------
Net cash (used in) provided by financing activities.............................. (2,267) 23,146 (7,896)
--------- ---------- ---------
Net (decrease) increase in cash.................................................. (3,487) 3,310 (6,252)
Cash at beginning of year........................................................ 5,217 1,907 8,159
--------- ---------- ---------
Cash at end of year.............................................................. $ 1,730 5,217 1,907
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
F-38
<PAGE>
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table is a summary of financial data by quarter for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS,
EXCEPT FOR SHARE DATA AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income........... $ 34,963 36,732 39,979 40,011 28,797 31,616 32,575 33,318
Interest expense.......... 21,469 22,582 25,041 24,684 16,372 18,234 19,345 20,449
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income before
provision for loan
losses.................. 13,494 14,150 14,938 15,327 12,425 13,382 13,230 12,869
Provision for loan
losses.................. 670 650 670 675 700 750 700 600
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses.................. 12,824 13,500 14,268 14,652 11,725 12,632 12,530 12,269
Non-interest income....... 4,459 5,583 11,015 12,089 2,327 2,827 3,211 5,547
Non-interest expense...... 14,067 17,381 22,641 23,225 9,069 11,538 12,014 13,226
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income tax
expense................. 3,216 1,702 2,642 3,516 4,983 3,921 3,727 4,590
Income tax expense........ 1,067 471 402 986 1,678 1,621 1,276 1,563
--------- --------- --------- --------- --------- --------- --------- ---------
Net income................ $ 2,149 1,231 2,240 2,530 3,305 2,300 2,451 3,027
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net income per common
share:
Basic................... $ 0.25 0.14 0.26 0.29 0.40 0.28 0.29 0.36
Diluted................. $ 0.24 0.13 0.24 0.28 0.38 0.26 0.27 0.34
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted average number of
shares outstanding:
Basic................... 8,526,864 8,567,111 8,590,777 8,611,172 8,301,766 8,357,213 8,445,829 8,382,509
Diluted................. 9,129,745 9,247,139 9,207,719 9,014,489 8,770,901 8,816,488 8,960,366 8,973,295
</TABLE>
F-39
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
---------------
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO.: 0-21628
------------------------
HAVEN BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
11-3153802
(I.R.S. Employer I.D. No.)
615 MERRICK AVENUE, WESTBURY, NEW YORK 11590
(Address of principal executive offices)
(516) 683-4100
(Registrant's telephone number, including area code)
------------------------
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 $0.01 PER SHARE
(Title of class)
------------------------
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. /X/
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I
Item 1. Description of Business....................................................................... A-4
Business.................................................................................. A-4
Market Area and Competition............................................................... A-5
Lending Activities........................................................................ A-5
Delinquencies and Classified Assets....................................................... A-12
Allowances for Loan and REO Losses........................................................ A-14
Investment Activities..................................................................... A-16
Mortgage-Backed Securities................................................................ A-17
Sources of Funds.......................................................................... A-21
Borrowings................................................................................ A-23
Subsidiary Activities..................................................................... A-24
Personnel................................................................................. A-25
Regulation and Supervision................................................................ A-25
Federal and State Taxation................................................................ A-32
Item 2. Properties.................................................................................... A-34
Item 3. Legal Proceedings............................................................................. A-36
Item 4. Submission of Matters to a Vote of Security Holders........................................... A-36
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... A-37
Item 6. Selected Financial Data....................................................................... A-37
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... A-37
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................... A-38
Item 8. Financial Statements and Supplementary Data................................................... A-38
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure........... A-38
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ A-38
Item 11. Executive Compensation........................................................................ A-38
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ A-38
Item 13. Certain Relationships and Related Transactions................................................ A-38
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................. A-39
</TABLE>
A-2
<PAGE>
EXHIBIT INDEX
The following exhibits are physically filed with this report:
<TABLE>
<S> <C>
Exhibit Change in Control Agreement between Haven Bancorp, Inc. and Mark A. Ricca
10.2(F)
Exhibit Change in Control Agreement between CFS Bank and Mark A. Ricca
10.2(G)
Exhibit 11.0 Computation of earnings per share
Exhibit 13.0 Portions of the 1998 Annual Report to Stockholders
Exhibit 23.0 Consent of Independent Auditors
Exhibit 27.0 Financial Data Schedule
Exhibit 99 Proxy Statement for 1999 Annual Meeting
</TABLE>
Additional exhibits are incorporated herein by reference from prior filings
of Haven Bancorp, Inc. set forth in Item 14.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1998, are incorporated by reference into Parts I and II of this
Form 10-K.
Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
A-3
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") was incorporated
under Delaware law on March 25, 1993 as the holding company for CFS Bank ("CFS"
or the "Bank") in connection with the Bank's conversion from a federally
chartered mutual savings bank to a federally chartered stock savings bank. The
Company is a savings and loan holding company and is subject to regulation by
the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance
Corporation ("FDIC") and the Securities and Exchange Commission ("SEC"). The
Company is headquartered in Westbury, New York and its principal business
currently consists of the operation of its wholly owned subsidiary, the Bank. At
December 31, 1998, the Company had consolidated total assets of $2.4 billion and
stockholders' equity of $119.9 million.
Currently, the Company does not transact any material business other than
through its subsidiary, the Bank.
The Bank was established in 1889 as a New York-chartered building and loan
association and converted to a New York-chartered savings and loan association
in 1940. The Bank converted to a federally chartered mutual savings bank in
1983. As the Bank expanded its presence in the New York tri-state area it
changed its name to CFS Bank in 1997. The Bank is a member of the Federal Home
Loan Bank ("FHLB") System, and its deposit accounts are insured to the maximum
allowable amount by the FDIC. At December 31, 1998, the Bank had total assets of
$2.4 billion and stockholders' equity of $137.2 million.
The Bank's principal business has been and continues to be attracting retail
deposits from the general public and investing those deposits, together with
funds generated from operations and borrowings, primarily in one- to
four-family, owner-occupied residential mortgage loans. Since 1994, the Bank has
gradually increased its activity in multi-family and commercial real estate
lending. In addition, the Bank will invest in debt, equity and mortgage-backed
securities to supplement its lending portfolio. Although the Bank has
discontinued offering certain consumer loans, during 1998 the Bank also invested
in home equity loans, home equity lines of credit and other marketable
securities.
On May 1, 1998, the Bank completed the purchase of the loan production
franchise of Intercounty Mortgage, Inc. The business operates as a division of
the Bank under the name CFS Intercounty Mortgage ("IMI") originating and
purchasing residential loans for the Bank's portfolio and for sale in the
secondary market, primarily through six loan origination offices located in New
York, New Jersey and Pennsylvania. Loan sales in the secondary market are
primarily on a servicing-released basis, for which the Bank earns
servicing-released premiums.
On November 2, 1998, the Company purchased 100% of the outstanding common
stock of Century Insurance Agency, Inc. The insurance agency operates as a
wholly owned subsidiary of the Company under the name CFS Insurance Agency, Inc.
("CIA"), providing automobile, homeowners and casualty insurance to individuals,
and various lines of commercial insurance to individuals.
The Bank's results of operations are dependent primarily on its net interest
income, which is the difference between the interest income earned on its loan
and securities portfolios and its cost of funds, which consists of the interest
paid on its deposits and borrowed funds. The Bank's net income is also affected
by its non-interest income, including, beginning May 1, 1998, the results of the
acquisition of the loan production franchise of CFS Intercounty Mortgage, its
provision for loan losses and its operating expenses consisting primarily of
compensation and benefits, occupancy and equipment, real estate operations, net,
federal deposit insurance premiums and other general and administrative
expenses. The earnings of the Bank are significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, and to a lesser extent by government policies and actions of regulatory
authorities.
A-4
<PAGE>
MARKET AREA AND COMPETITION
The Bank has been, and continues to be, a community oriented savings
institution offering a variety of traditional financial services to meet the
needs of the communities in which it operates. Management considers the Bank's
reputation and customer service as its major competitive advantage in attracting
and retaining customers in its market area.
The Bank's primary market area is concentrated in the neighborhoods
surrounding its eight full service banking and fifty-nine supermarket banking
facilities located in the New York City boroughs of Queens, Brooklyn, Manhattan
and Staten Island, the New York counties of Nassau, Suffolk, Rockland and
Westchester and in New Jersey and Connecticut. During 1998, the Bank opened
twenty-five supermarket branches. Management believes that supermarket branching
is a cost effective way to extend the Bank's franchise and put its sales force
in touch with more prospective customers than possible through conventional bank
branches. Management believes that all of its branch offices are located in
communities that can generally be characterized as stable, residential
neighborhoods of predominantly one- to four-family residences and middle income
families.
During the past five years, the Bank's expanded loan work-out and resolution
efforts have successfully contributed toward reducing non-performing assets to
manageable levels. Although there are encouraging signs in the local economy and
the Bank's real estate markets, it is unclear how these factors will affect the
Bank's asset quality in the future. See "Delinquencies and Classified Assets."
The New York City metropolitan area has a large number of financial
institutions, many of which are significantly larger and 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 and deposits comes principally from
savings and loan associations, savings banks, commercial banks, mortgage banking
companies, insurance companies and credit unions. In addition, the Bank faces
increasing competition for deposits from non-bank institutions such as brokerage
firms and insurance companies in such areas as short-term money market funds,
corporate and government securities funds, mutual funds and annuities and
insurance. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by owner occupied one- to four-family
residences, and, to a lesser extent, multi-family residences, commercial real
estate and construction and land loans. Also, the Bank's loan portfolio includes
cooperative loans, which the Bank has not originated since 1990 except to
facilitate the sale of real estate owned ("REO") or to restructure a problem
asset. During 1998, loan originations and purchases totaled $1.22 billion
(comprised of $1.04 billion of residential one- to four-family mortgage loans,
$156.8 million of commercial and multi-family real estate loans, $2.8 million of
construction loans and $16.4 million of consumer loans). One- to four-family
mortgage loan originations included $570.0 million of loans originated and
purchased for sale in the secondary market. During 1998, the Bank sold $515.8
million of one- to four-family mortgage loans in the secondary market on a
servicing-released basis.
At December 31, 1998, the Bank had total mortgage loans outstanding of $1.27
billion, of which $888.6 million were one- to four-family residential mortgage
loans, or 67.9% of the Bank's total loans. At that same date, multi-family
residential mortgage loans totaled $215.5 million, or 16.5% of total loans. The
remainder of the Bank's mortgage loans, included $163.9 million of commercial
real estate loans, or 12.5% of total loans, $4.0 million of cooperative
apartment loans, or 0.3% of total loans and $2.7 million of construction and
land loans, or 0.2% of total loans. Other loans in the Bank's portfolio
principally consisted of home equity lines of credit and consumer loans totaling
$34.9 million, or 2.7% of total loans at December 31, 1998.
A-5
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio,
excluding loans held for sale, in dollar amounts and in percentages of the
respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ---------------------- ---------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
--------- ----------- --------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family... $ 888,610 67.85% $ 805,690 69.93% $ 556,818 65.63% $ 325,050 57.03% $ 258,698
Multi-family.......... 215,542 16.46 143,559 12.46 105,341 12.42 79,008 13.86 94,259
Commercial............ 163,935 12.52 148,745 12.91 127,956 15.08 111,038 19.48 102,415
Cooperative........... 3,970 0.30 19,596 1.70 19,936 2.35 10,187 1.79 24,369
Construction and
land................ 2,731 0.20 2,263 0.20 4,227 0.50 5,737 1.01 3,491
--------- ----------- --------- ----------- --------- ----------- --------- ----------- ---------
Total mortgage loans.... 1,274,788 97.33 1,119,853 97.20 814,278 95.98 531,020 93.17 483,232
Other loans:
Home equity lines of
credit.............. 15,173 1.16 15,449 1.34 15,677 1.85 16,454 2.89 17,802
Property improvement
loans............... 2,634 0.20 4,392 0.38 6,957 0.82 10,248 1.80 11,814
Loans on deposit
accounts............ 957 0.07 895 0.08 809 0.10 821 0.14 940
Commercial loans...... 445 0.03 453 0.04 351 0.04 479 0.08 605
Guaranteed student
loans............... 774 0.06 882 0.08 985 0.12 1,181 0.21 1,761
Unsecured consumer
loans............... 2,029 0.16 450 0.04 809 0.10 1,950 0.34 2,366
Other loans........... 12,914 0.99 9,770 0.84 8,506 0.99 7,834 1.37 5,737
--------- ----------- --------- ----------- --------- ----------- --------- ----------- ---------
Total other loans....... 34,926 2.67 32,291 2.80 34,094 4.02 38,967 6.83 41,025
--------- ----------- --------- ----------- --------- ----------- --------- ----------- ---------
Total loans............. 1,309,714 100.00% 1,152,144 100.00% 848,372 100.00% 569,987 100.00% 524,257
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Less:
Unearned discounts,
premiums and
deferred loan fees,
net................. 966 (1,363) (786) (1,029) (1,375)
Allowance for loan
losses.............. (13,978) (12,528) (10,704) (8,573) (10,847)
--------- --------- --------- --------- ---------
Loans, net.............. $1,296,702 $1,138,253 $ 836,882 $ 560,385 $ 512,035
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
PERCENT
OF
TOTAL
-----------
<S> <C>
Mortgage loans:
One- to four-family... 49.34%
Multi-family.......... 17.98
Commercial............ 19.54
Cooperative........... 4.65
Construction and
land................ 0.67
-----------
Total mortgage loans.... 92.17
Other loans:
Home equity lines of
credit.............. 3.39
Property improvement
loans............... 2.26
Loans on deposit
accounts............ 0.18
Commercial loans...... 0.12
Guaranteed student
loans............... 0.34
Unsecured consumer
loans............... 0.45
Other loans........... 1.09
-----------
Total other loans....... 7.83
-----------
Total loans............. 100.00%
-----------
-----------
Less:
Unearned discounts,
premiums and
deferred loan fees,
net.................
Allowance for loan
losses..............
Loans, net..............
</TABLE>
A-6
<PAGE>
The following table shows the estimated contractual maturity of the Bank's
loan portfolio at December 31, 1998, assuming no prepayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------------------
MORTGAGE OTHER TOTAL
LOANS LOANS LOANS
------------ --------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Amounts due:
Within one year...................................... $ 42,933 $ 4,517 $ 47,450
------------ --------- ------------
After one year:
One to three years................................. 67,251 3,847 71,098
Three to five years................................ 20,807 3,048 23,855
Five to ten years.................................. 283,909 12,167 296,076
Ten to twenty years................................ 359,518 11,347 370,865
Over twenty years.................................. 500,370 -- 500,370
------------ --------- ------------
Total due after one year......................... 1,231,855 30,409 1,262,264
------------ --------- ------------
Total............................................ $ 1,274,788 $ 34,926 $ 1,309,714
------------ --------- ------------
------------ --------- ------------
</TABLE>
The following table sets forth at December 31, 1998, the dollar amount of
all loans due after December 31, 1999, and whether such loans have fixed
interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1999
------------------------------------
FIXED ADJUSTABLE TOTAL
---------- ---------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Mortgage loans:
One- to four-family.................................. $ 474,056 $ 388,921 $ 862,977
Multi-family......................................... 34,708 167,195 201,903
Commercial real estate............................... 62,230 101,653 163,883
Cooperative.......................................... 804 2,288 3,092
Other loans............................................ 9,643 20,766 30,409
---------- ---------- ------------
Total................................................ $ 581,441 $ 680,823 $ 1,262,264
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
A-7
<PAGE>
The following table sets forth the Bank's loan originations, loan purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Mortgage loans (gross):
At beginning of year............................ $ 1,119,853 $ 814,278 $ 531,020 $ 483,232 $ 648,321
Mortgage loans originated:
One- to four-family......................... 177,544 121,498 98,783 64,139 77,499
Multi-family................................ 88,504 64,181 46,310 11,726 --
Commercial real estate...................... 68,319 69,495 35,886 26,047 4,688
Cooperative (1)............................. 34 -- -- 63 499
Construction and land loans................. 2,806 3,773 1,562 4,367 1,000
------------ ------------ ---------- ---------- -----------
Total mortgage loans originated........... 337,207 258,947 182,541 106,342 83,686
Mortgage loans purchased...................... 297,906 200,900 172,300 26,241 --
Transfer of mortgage loans to REO............. (623) (1,695) (3,470) (4,638) (10,998)
Transfer of mortgage loans from/(to) loans
held for sale............................... -- -- 10,594 (12,038) --
Principal repayments.......................... (269,164) (151,215) (78,209) (67,274) (64,686)
Sales of mortgage loans (2)................... (104,700) (1,362) (498) (845) (173,091)
Transfer of loans to MBSs (3)................. (105,691) -- -- -- --
------------ ------------ ---------- ---------- -----------
At end of year.................................. $ 1,274,788 $ 1,119,853 $ 814,278 $ 531,020 $ 483,232
------------ ------------ ---------- ---------- -----------
------------ ------------ ---------- ---------- -----------
Other loans (gross):
At beginning of year............................ $ 32,291 $ 34,094 $ 38,967 $ 41,025 $ 33,898
Other loans originated........................ 16,413 11,491 8,735 10,746 21,533
Principal repayments.......................... (13,778) (13,294) (13,608) (12,804) (14,406)
------------ ------------ ---------- ---------- -----------
At end of year.................................. $ 34,926 $ 32,291 $ 34,094 $ 38,967 $ 41,025
------------ ------------ ---------- ---------- -----------
------------ ------------ ---------- ---------- -----------
</TABLE>
- ------------------------
(1) Cooperative loans originated in the five years ended December 31, 1998 were
done solely to facilitate the restructuring and the sale of delinquent
cooperative loans and cooperative units held by the Bank as REO.
(2) During 1998, the Bank sold $83.3 million of adjustable-rate mortgage loans
in several bulk sales transactions. Also during 1998, the Bank sold $14.0
million of cooperative apartment loans. As part of a major bulk sales
program in 1994, the Bank sold $170.5 million of loans.
(3) During 1998, the Bank securitized $105.7 million in loans with Fannie Mae
("FNMA"). The resulting securities were retained and transferred to the
Bank's securities available for sale portfolio.
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Bank offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans secured by one- to four-family residences
located primarily in Long Island (in the New York counties of Nassau and Suffolk
Counties), the New York City boroughs of Queens, Manhattan, Brooklyn and Staten
Island, the New York counties of Rockland and Westchester Counties, as well as
in Albany and Rochester, New York, New Jersey, Pennsylvania and Connecticut.
Loan originations are generally obtained from existing or past customers,
members of the local communities, local real estate brokers and attorney
referrals. The substantial majority of the Bank's loans are originated through
efforts of Bank-employed sales representatives who solicit loans from the
communities served by the Bank by calling on real estate attorneys, brokers and
individuals who have expressed an interest in obtaining a mortgage loan. The
Bank also originates loans from its customer base in its branch
A-8
<PAGE>
offices. In 1995, the Bank also began purchasing loans on a flow basis from
correspondent mortgage bankers in New York, New Jersey and Connecticut to
supplement its one- to four-family loan originations.
The Bank generally originates one- to four-family residential mortgage loans
in amounts up to 95% of the lower of the appraised value or selling price of the
property securing the loan. Properties securing such loans are primarily
owner-occupied principal residences. One- to four-family mortgage loans may be
originated with loan-to-value ratios of up to 97% of the appraised value of the
property under the FNMA Community Home Buyers Program, which targets low to
low/moderate income borrowers. Residential condominium loans are originated in
amounts up to a maximum of 95% of the appraised value of the condominium unit.
Private Mortgage Insurance ("PMI") is required whenever loan-to-value ratios
exceed 80% of the price or appraised value of the property securing the loan.
Loan amounts generally conform to Freddie Mac ("FHLMC") limits. Mortgage loans
originated by the Bank generally include due-on-sale clauses that provide the
Bank with the contractual right to deem the loan immediately due and payable in
the event that the borrower transfers ownership of the property without the
Bank's consent. Due-on-sale clauses are an important means of enabling the Bank
to redeploy funds at current rates thereby causing the Bank's loan portfolio to
be more interest rate sensitive. The Bank has generally exercised its rights
under these clauses.
The Bank currently offers fixed-rate loans up to $1,000,000 on one- to
four-family residences with terms up to 30 years. During 1996, the Bank
introduced 30 year and 15 year fixed-rate bi-weekly loans. Interest rates
charged on fixed-rate mortgage loans are competitively priced based on market
conditions and the Bank's cost of funds. Origination fees on fixed-rate loans
typically range from 0% to 3% of the principal amount of the loan. Generally,
the Bank's standard underwriting guidelines conform to the FNMA/FHLMC
guidelines.
The Bank currently offers ARM loans up to $1,000,000 which adjust either
annually, or in 3, 5, 7, 10 or 15 years with maximum loan terms of 30 years. The
Bank's ARM loans typically carry an initial interest rate below the
fully-indexed rate for the loan. For one year ARMs, the Bank qualifies borrowers
based upon a rate of 2% over the initial rate. The initial discounted rate is
determined by the Bank in accordance with market and competitive factors and, as
of December 31, 1998, the discount offered by the Bank on the one year ARM loan
ranged from 126 basis points (with 0% origination fees) to 176 basis points
(with 2% origination fees) below the fully-indexed rate, which was 7.38% as of
such date. The discount offered by the Bank on the three year ARM loan ranged
from 88 basis points (with 0% origination fees) to 130 basis points (with 2%
origination fees) below the fully-indexed rate, which was 7.38% as of December
31, 1998. The discount offered by the Bank on the five year ARM loan ranged from
100 basis points (with 0% origination fees) to 150 basis points (with 2%
origination fees) below the fully-indexed rate, which was 7.38% as of December
31, 1998. As of December 31, 1998, the discount offered by the Bank on the seven
year ARM loan ranged from 88 basis points (with 0% origination fees) to 138
basis points (with 2% origination fees) below the fully-indexed rate, which was
7.38% as of such date. As of December 31, 1998, the discount offered by the Bank
on the ten year ARM loan ranged from 63 basis points (with 0% origination fees)
to 113 basis points (with 2% origination fees) below the fully indexed rate,
which was 7.38% as of such date. Finally, as of December 31, 1998, the discount
offered by the Bank on the fifteen year ARM loan ranged from 13 basis points
(with 0% origination fees) to 63 basis points (with 2% origination fees) below
the fully-indexed rate which was 7.38%. As of December 31, 1998, the Bank's ARM
loans, with the exception of the seven, ten and fifteen year ARM loans, adjust
by a maximum of 2.0% each adjustment period, with a life-time cap of 6% over the
initial note rate. The maximum periodic rate adjustment on the seven year, ten
year and fifteen year ARM loans for the first adjustment period are 5% which
defaults to 2% for all adjustment periods thereafter. The Bank currently charges
origination fees ranging from 0% to 2.0% for its one- to four-family ARM loans.
ARM loans generally pose a risk that as interest rates rise, the amount of a
borrower's monthly loan payment also rises, thereby increasing the potential for
delinquencies and loan losses. This potential risk is mitigated by the Bank's
policy of originating ARM loans with annual and lifetime interest rate caps that
limit the amount that a borrower's
A-9
<PAGE>
monthly payment may increase. During 1998, the Bank originated or purchased
$363.3 million of one- to four-family ARM loans for portfolio.
The Bank originates 30 year and 15 year fixed-rate loans for immediate sale,
primarily to private investors while generally retaining ARM loans, 10, and 20
year fixed-rate loans, and 15 and 30 year bi-weekly fixed-rate loans for
portfolio. The Bank arranges for the sale of such loans at the acceptance of the
commitment by the applicant to the investor through "best efforts" commitments.
The Bank sells loans on a servicing-released basis. For the year ended December
31, 1998, the Bank originated and purchased approximately $570.0 million of
primarily fixed-rate, one- to four-family loans for sale in the secondary
market, $515.8 million of which were sold in 1998.
COOPERATIVE APARTMENT LOANS. Until 1990, the Bank originated loans secured
by cooperative units. Since 1990, the Bank has not originated any loans secured
by cooperative units with the exception of loans to facilitate the restructuring
of a classified asset or sale of REO. In 1994, the Bank was approved as a
seller/servicer in a FNMA pilot program, enabling it to originate cooperative
apartment loans for immediate sale to FNMA.
MULTI-FAMILY LENDING. The Bank originates multi-family loans with
contractual terms of up to 15 years where the interest rate generally reprices
during the term of the loan and is tied to matching U.S. Treasury Notes plus a
margin. These loans are generally secured by apartment and mixed-use (commercial
and residential, with the majority of income coming from the residential units)
properties, located in the Bank's primary market area and are made in amounts of
up to 75% of the appraised value of the property. In making such loans, the Bank
bases its underwriting decision primarily on the net operating income generated
by the real estate to support the debt service, the financial resources credit
history and ownership/management experience of the principals/guarantors, and
the marketability of the property. The Bank generally requires a debt service
coverage ratio of at least 1.20x and sometimes requires personal guarantees from
borrowers. As of December 31, 1998, $215.5 million, or 16.4% of the Bank's total
loan portfolio, consisted of multi-family residential loans.
Multi-family, commercial real estate and construction and land lending are
generally believed to involve a higher degree of credit risk than one- to
four-family lending because such loans typically involve higher principal
amounts and the repayment of such loans generally is dependent on income
produced by the property to cover operating expenses and debt service. Economic
events that are outside the control of the borrower or lender could adversely
impact the value of the security for the loan or the future cash flows from the
borrower's property. In recognition of these risks, the Bank applies stringent
underwriting criteria for all of its loans. The Bank originates multi-family,
commercial real estate and construction and land loans on a conservative basis.
See "Commercial Real Estate Lending" and "Construction and Land Lending".
COMMERCIAL REAL ESTATE LENDING. The Bank originates commercial real estate
loans that are generally secured by properties used exclusively for business
purposes such as retail stores, mixed-use properties (residential and retail or
professional offices combined where the majority of the income from the property
comes from the commercial business), light industrial and small office buildings
located in the Bank's primary market area. The Bank's commercial real estate
loans are generally made in amounts up to the lesser of 70% of the appraised
value of the property or 65% for owner occupied properties. Commercial real
estate loans are made on a negotiated basis for terms of up to 15 years where
the interest rate generally reprices during the term of the loan and is tied to
the prime rate or the U.S. Treasury Note rate matched to the repricing frequency
of the loan. The Bank's underwriting standards and procedures are similar to
those applicable to its multi-family loans, whereby the Bank considers the net
operating income of the property and the borrower's expertise, credit history
and profitability. The Bank generally requires that the properties securing
commercial real estate loans have debt service coverage ratios of not less than
1.30x and also generally requires personal guarantees from the borrowers or the
principals of the
A-10
<PAGE>
borrowing entity. At December 31, 1998, the Bank's commercial real estate loan
portfolio totaled $163.9 million, or 12.5% of the Bank's total loan portfolio.
CONSTRUCTION AND LAND LENDING. The Bank's construction loans primarily have
been made to finance the construction of one- to four-family residential
properties, multi-family residential properties and retail properties. The
Bank's policies provide that construction and land development loans may
generally be made in amounts up to 70% of the value when completed for
commercial properties and 75% for multi-family. The Bank generally requires
personal guarantees and evidence that the borrower has invested an amount equal
to and not less than 20% of the estimated cost of the land and improvements.
Construction loans generally are made on a floating rate basis (subject to daily
adjustment) and a maximum term of 18 months, subject to renewal. Construction
loans are generally made based on pre-sales or pre-leasing. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
As of December 31, 1998, the Bank had $2.7 million, or 0.2% of its total loan
portfolio invested in construction and land loans.
OTHER LOANS. During 1998, the Bank also offered home equity loans, equity
lines of credit, business lines of credit and Government-guaranteed student
loans. As of December 31, 1998, other loans totaled $34.9 million, or 2.7% of
the Bank's total loan portfolio. Effective January 1, 1999, the Bank
indefinitely discontinued offering consumer loan products, including home equity
loans and home equity lines of credit due to shrinking volume and spreads
coupled with high origination costs.
LOAN APPROVAL PROCEDURES AND AUTHORITY. For one- to four-family real estate
loans each loan is reviewed and approved by an underwriter and another
departmental officer with credit authority appropriate for the loan amount and
type in accordance with the policies approved by the Board of Directors.
Multi-family, commercial and construction loans are approved by designated
lending officers respective of the amounts within their lending authorities
which are approved by the Board of Directors. Commercial loans up to $3,000,000
must be approved by the Officers Loan Committee, whereas, loans between
$3,000,000 and $5,000,000 must be approved by the Loan Committee of the Board of
Directors. Loans exceeding $5,000,000 must be approved by the Board. Loans not
secured by real estate as well as unsecured loans, depending on the amount of
the loan and the loan-to-value ratio, where applicable, require the approval of
at least one lending officer and/or underwriter designated by the Board.
For 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 the Bank's loan underwriters and, if necessary,
additional financial information is required. An appraisal of the real estate
intended to secure the proposed loan is performed, as required by OTS
regulations and prepared by an independent appraiser designated and approved by
the Bank. The Board annually approves the independent appraisers used by the
Bank and approves the Bank's appraisal policy. It is the Bank's policy to obtain
title insurance on all real estate first mortgage loans. Borrowers must also
obtain hazard insurance prior to closing and flood insurance and PMI where
required. Borrowers generally are required to advance funds on a monthly basis
together with each payment of principal and interest to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes, and in some cases, hazard insurance premiums.
LOAN CONCENTRATIONS. As a result of OTS regulations, the Bank may not
extend credit to a single borrower or related group of borrowers in an amount
greater than 15% of the Bank's unimpaired capital and surplus. An additional
amount of credit may be extended, equal to 10% of unimpaired capital and
surplus, if the loan is secured by readily marketable collateral, which does not
include real estate.
At December 31, 1998, the Bank's loans-to-one borrower limit was $22.7
million. None of the Bank's borrowers exceeded this limit in accordance with
applicable regulatory requirements.
A-11
<PAGE>
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENT LOANS. The Bank entered into a sub-servicing agreement with
Norwest Mortgage, Inc. ("Norwest"), commencing on November 16, 1998, under which
Norwest performs all residential mortgage loan servicing functions on behalf of
the Bank for the Bank's portfolio loans, as well as for loans serviced for third
party investors. Norwest's collection procedures for mortgage loans include
sending a notice after the loan is 16 days past due. In the event that payment
is not received after the late notice, phone calls are made to the borrower by
Norwest's collection department. When contact is made with the borrower at any
time prior to foreclosure, the collection department attempts to obtain full
payment or the loss mitigation department attempts to work out a repayment
schedule with the borrower to avoid foreclosure. Generally, foreclosure
procedures are initiated when a loan is over 95 days delinquent. Loss mitigation
efforts continue throughout the foreclosure process.
CLASSIFIED ASSETS. Federal regulations and the Bank's Classification of
Assets Policy provide for the classification of loans and other assets
considered by the Bank to be of lesser quality as "substandard", "doubtful" or
"loss" assets. An asset is considered substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor and/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. Pursuant
to OTS guidelines, the Bank is no longer required to classify assets as "special
mention" if such assets possess weaknesses but do not expose the Bank to
sufficient risk to warrant classification in one of the aforementioned
categories. However, the Bank continues to classify assets as "special mention"
for internal monitoring purposes.
Non-performing loans (consisting of non-accrual loans and restructured
loans) decreased from $28.3 million at December 31, 1994 to $16.9 million at
December 31, 1995, $13.9 million at December 31, 1996, $12.5 million at December
31, 1997 and $8.4 million at December 31, 1998. The continued decline in the
balance of non-performing loans during the five year period was due to the
Bank's ongoing efforts to reduce non-performing assets, as well as to an
improved economy. REO decreased each year during the five years ended December
31, 1998 from $7.8 million at December 31, 1994 (net of an allowance for REO of
$717,000) to a balance at December 31, 1998 of $200,000 (net of an allowance for
REO of $25,000). The Bank intends to continue its efforts to reduce
non-performing assets in the normal course of business, but it may continue to
seek opportunities to dispose of its non-performing assets through sales to
investors or otherwise. The Bank also has restructured loans, which has enabled
the Bank to avoid the costs involved with foreclosing on the properties securing
such loans while continuing to collect payments on the loans under their
modified terms. Troubled debt restructurings ("TDRs") are loans for which
certain concessions, such as the reduction of interest rates or the deferral of
interest or principal payments, have been granted due to the borrower's
financial condition.
At December 31, 1998, the Bank had 13 restructured loans with aggregate
principal balances of $1.9 million. Of this amount, 34.7% were residential loans
(including cooperative apartment loans) and 65.3% were multi-family loans.
Management is able to avoid the costs of foreclosing on loans that it has
restructured. However, restructured loans have a higher probability of becoming
delinquent than loans that have no previous history of delinquency. To the
extent that the Bank is unable to return these loans to performing status, the
Bank will have to foreclose on such loans, which will increase the Bank's REO.
The Bank's policy is to recognize income on a cash basis for restructured
loans for a period of six months, after which such loans are returned to an
accrual basis if they are performing in accordance with their modified terms. At
December 31, 1998, the Bank had 11 restructured loans with principal balances of
$1.9 million that were on accrual status. For restructured loans that are 90
days or more past due, the loan is returned to non-accrual status and previously
accrued but uncollected interest is reversed.
A-12
<PAGE>
At December 31, 1998, the Bank's classified assets consisted of $6.6 million
of loans and REO of which $55,000 was classified as doubtful. The Bank's assets
classified as substandard at December 31, 1998 consisted of $5.7 million of
loans and $202,000 of gross REO. Classified assets in total declined $4.6
million, or 41.1% since December 31, 1997. At December 31, 1998, the Bank also
had $5.6 million of commercial real estate loans that it had designated special
mention. The loans were performing in accordance with their terms at December
31, 1998 but were deemed to warrant close monitoring by management due to one or
more factors, such as the absence of current financial information relating to
the borrower and/or the collateral, financial difficulties of the borrower or
inadequate cash flow from the security property.
At December 31, 1998, 1997 and 1996, delinquencies in the Bank's loan
portfolio were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
-------------------------------------------------- -----------------------------------------
90 DAYS OR
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS MORE
------------------------ ------------------------ -------------------------- -------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER
OF BALANCE OF BALANCE OF BALANCE OF
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS
----------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
One- to four-family........... 50 $ 5,201 40 $ 3,843 8 $ 1,339 42
Multi-family.................. 2 591 -- -- -- -- 9
Commercial.................... 2 306 7 2,175 1 33 9
Cooperative................... -- -- 26 303 3 128 8
Construction and land
loans....................... -- -- -- -- -- -- 1
Other loans................... 94 1,177 47 207 26 452 19
-- --
--- ----------- --- ----------- -----------
Total loans............... 148 $ 7,275 120 $ 6,528 38 $ 1,952 88
-- --
-- --
--- ----------- --- ----------- -----------
--- ----------- --- ----------- -----------
Delinquent loans to total
loans (1)............... 0.56% 0.50% 0.17%
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
-------------------------- --------------------------
PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
BALANCE OF BALANCE OF BALANCE
OF LOANS LOANS OF LOANS LOANS OF LOANS
----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
One- to four-family........... $ 3,534 9 $ 950 47 $ 4,083
Multi-family.................. 2,362 -- -- 6 1,463
Commercial.................... 3,305 -- -- 11 4,321
Cooperative................... 699 5 281 9 431
Construction and land
loans....................... 100 -- -- 1 60
Other loans................... 396 26 171 21 375
-- --
----------- ----------- -----------
Total loans............... $ 10,396 40 $ 1,402 95 $ 10,733
-- --
-- --
----------- ----------- -----------
----------- ----------- -----------
Delinquent loans to total
loans (1)............... 0.90% 0.17% 1.27%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) Restructured loans that have become seasoned for the required six month
period and are currently performing in accordance with their restructured
terms are not included in delinquent loans. There was 1 residential
restructured loan for $183,000 that was included in loans delinquent 90 days
or more at December 31, 1998. At December 31, 1996, there was 1 restructured
loan for $77,000 that was included in loans delinquent 90 days or more
because it had not yet performed in accordance with its modified terms for
the required six-month seasoning period.
NON-PERFORMING ASSETS. The Bank does not accrue interest on loans 90 days
past due and restructured loans that have not yet performed in accordance with
their modified terms for at least six months. If non-accrual loans had been
performing in accordance with their original terms, the Bank would have recorded
interest income from such loans of approximately $425,000, $736,000 and $688,000
for the years ended December 31, 1998, 1997 and 1996, respectively, compared to
$117,000, $146,000 and $220,000, which was recognized on non-accrual loans for
such periods, respectively. If all restructured loans, as of December 31, 1998,
1997 and 1996, had been performing in accordance with their original loan terms
(prior to being restructured), the Bank would have recognized interest income
from such loans of approximately $396,000, $197,000 and $305,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. The following table sets
forth information regarding all non-accrual loans (which consist of
A-13
<PAGE>
loans 90 days or more past due and restructured loans that have not yet
performed in accordance with their modified terms for the required six-month
seasoning period), restructured loans and REO.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Non-accrual mortgage loans.................................. $ 6,321 $ 10,000 $ 10,358 $ 9,116 $ 18,474
Restructured mortgage loans................................. 1,857 2,136 3,160 7,072 9,550
Non-accrual other loans..................................... 207 396 375 689 275
--------- --------- --------- --------- ---------
Total non-performing loans................................ 8,385 12,532 13,893 16,877 28,299
Real estate owned, net of related reserves.................. 200 455 1,038 2,033 7,844
--------- --------- --------- --------- ---------
Total non-performing assets............................... $ 8,585 $ 12,987 $ 14,931 $ 18,910 $ 36,143
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Non-performing loans to total loans......................... 0.64% 1.09% 1.64% 2.97% 5.41%
Non-performing assets to total assets....................... 0.36 0.66 0.94 1.28 2.85
Non-performing loans to total assets........................ 0.35 0.63 0.88 1.15 2.23
</TABLE>
ALLOWANCES FOR LOAN AND REO LOSSES
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Impaired loans and related
reserves have been identified and calculated in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan", and the amendment thereof, SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures". The total allowance for loan losses has been determined in
accordance with the provisions of SFAS No. 5, "Accounting for Contingencies".
The Bank's allowance for loan losses is intended to be maintained at a level
sufficient to absorb all estimable and probable losses inherent in the loan
portfolio. The Bank reviews the adequacy of the allowance for loan losses on a
monthly basis taking into account past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, current and
prospective economic conditions and current regulatory guidance.
During the five years ended December 31, 1998, the allowance for loan losses
as a percentage of non-performing loans increased steadily to 166.7% at December
31, 1998. The increase is a direct result of the steady decline in
non-performing loans during that five year period. Non-performing loans as a
percentage of total loans declined steadily from 5.41% at December 31, 1994 to
0.64% at December 31, 1998. The decline is due to the decrease in non-performing
loans, as well as an increase in total loans.
The Bank's provisions for loan losses has remained relatively stable over
the last three years. Specifically, the Bank made provisions for loan losses of
$13.4 million, $2.8 million, $3.1 million, $2.8 million and $2.7 million for the
five years ended December 31, 1998, respectively.
The Bank will continue to monitor and modify its allowances for loan and REO
losses as conditions dictate. Although the Bank maintains its allowances at
levels that it considers adequate to provide for potential losses, there can be
no assurance that such losses will not exceed the estimated amounts.
A-14
<PAGE>
The following table sets forth the changes in the Bank's allowance for loan
losses at the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of year............................... $ 12,528 $ 10,704 $ 8,573 $ 10,847 $ 21,606
Charge-offs:
One- to four-family...................................... (435) (964) (771) (472) (264)
Cooperative.............................................. (256) (370) (524) (2,142) (8,747)
Multi-family............................................. (708) -- (30) (1,299) (7,932)
Non-residential and other................................ (935) (352) (560) (1,541) (7,798)
--------- --------- --------- --------- ---------
Total charge-offs (1).................................. (2,334) (1,686) (1,885) (5,454) (24,741)
Recoveries................................................. 1,119 760 891 405 582
--------- --------- --------- --------- ---------
Net charge-offs............................................ (1,215) (926) (994) (5,049) (24,159)
Provision for loan losses.................................. 2,665 2,750 3,125 2,775 13,400
--------- --------- --------- --------- ---------
Balance at end of year..................................... $ 13,978 $ 12,528 $ 10,704 $ 8,573 $ 10,847
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net charge-offs during the year to average loans
outstanding during the year.............................. 0.09% 0.09% 0.15% 0.93% 3.83%
Ratio of allowance for loan losses to total loans at the
end of year (2).......................................... 1.07 1.09 1.26 1.51 2.07
Ratio of allowance for loan losses to non-performing loans
at the end of the year (3)............................... 166.70 99.97 77.05 50.80 38.33
</TABLE>
- ------------------------
(1) Total charge-offs for the year ended 1994 were attributable to bulk sale
transactions.
(2) The steady decline in the ratio of allowance for loan losses to total loans
is attributable to a decline in non-performing loans as previously mentioned
coupled with growth in the Bank's total loans outstanding.
(3) The ratio of allowance for loan losses to non-performing loans has increased
significantly over the last five years as non-performing loans have
declined.
The following table sets forth the Bank's allocation of its allowance for
loan losses to the total amount of loans in each of the categories listed.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------------ ------------------------ ------------------------ ------------------------
% OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential (1)....... $ 10,139 84.62% $ 7,039 84.09% $ 5,929 80.40% $ 3,838 72.67%
Commercial............ 3,579 12.51 5,201 12.91 4,340 15.08 4,175 19.48
Construction.......... -- 0.21 -- 0.20 -- 0.50 69 1.00
Other loans............. 260 2.66 288 2.80 435 4.02 491 6.85
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total allowance for loan
losses (2)............ $ 13,978 100.00% $ 12,528 100.00% $ 10,704 100.00% $ 8,573 100.00%
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
1994
------------------------
% OF
LOANS IN
CATEGORY
TO TOTAL
AMOUNT LOANS
----------- -----------
<S> <C> <C>
Mortgage loans:
Residential (1)....... $ 5,685 71.97%
Commercial............ 4,308 19.53
Construction.......... 248 0.66
Other loans............. 606 7.84
----------- -----------
Total allowance for loan
losses (2)............ $ 10,847 100.00%
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) Includes one- to four-family, multi-family and cooperative loans.
(2) In order to comply with certain regulatory reporting requirements,
management has prepared the above allocation of the Bank's allowance for
loan losses among various categories of the loan portfolio for each of the
years in the five-year period ended December 31, 1998. In management's
opinion, such allocation has, at best, a limited utility. It is based on
management's assessment as of a given point in time of the risk
characteristics of each of the component parts of the total loan portfolio
and is subject to changes as and when the risk factors of each such
component changes. Such allocation is not indicative of either the specific
amounts or the loan categories in which future charge-offs may be taken, nor
should it be taken as an indicator of future loss trends. In addition, by
presenting such allocation, management does not mean to imply that the
allocation is exact or that the allowance has been precisely determined from
such allocation.
A-15
<PAGE>
INVESTMENT ACTIVITIES
The investment policy of the Bank, which is established by the Board of
Directors and implemented by the Bank's Asset/Liability Committee, is designed
primarily to provide and maintain liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risks, and to
complement the Bank's lending activities. Federally chartered savings
institutions have the authority to invest in various types of liquid assets,
including U.S. Treasury obligations, securities of various federal agencies,
certain certificates of deposit of insured banks and savings institutions,
certain bankers' acceptances, repurchase agreements and federal funds. Subject
to various restrictions, federally chartered savings institutions may also
invest their assets in commercial paper, investment grade corporate debt
securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly. Additionally, the Bank must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. See "Regulation and
Supervision--Federal Savings Institution Regulation--Liquidity." Historically,
the Bank has maintained liquid assets above the minimum OTS requirements and at
a level believed to be adequate to meet its normal daily activities. At December
31, 1998, the Bank had money market investments and debt and equity securities
available for sale in the aggregate amount of $1.7 million and $109.6 million,
respectively, with fair values of $1.7 million and $109.0 million, respectively.
On June 30, 1998, the Company transferred the then remaining $138.2 million
of MBSs and $45.4 million of debt securities held to maturity to securities
available for sale ("AFS"). The transfer was done to enhance liquidity and take
advantage of market opportunities. At December 31, 1998, the securities AFS
portfolio totaled $889.3 million of which $266.3 million were adjustable-rate
securities and $623.0 million were fixed-rate securities.
The following table sets forth certain information regarding the carrying
and market values of the Company's money market investments, debt and equity
securities and FHLB-NY stock at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Debt and Equity Securities:
U.S. Government and agency obligations..... $ 77,705 $ 77,705 $ 135,672 $ 135,715 $ 170,709 $ 169,849
Corporate debt securities.................. 19,684 19,684 45,390 45,315 45,350 45,227
Preferred stock............................ 11,590 11,590 4,123 4,123 27,329 27,329
---------- ---------- ---------- ---------- ---------- ----------
Subtotal................................. 108,979 108,979 185,185 185,153 243,388 242,405
---------- ---------- ---------- ---------- ---------- ----------
Federal Funds sold......................... -- -- -- -- 5,000 5,000
FHLB-NY stock.............................. 21,990 21,990 12,885 12,885 9,890 9,890
Money market investments................... 1,720 1,720 4,561 4,561 1,869 1,869
---------- ---------- ---------- ---------- ---------- ----------
Total.................................... $ 132,689(1) $ 132,689(1) $ 202,631(1) $ 202,599(1) $ 260,147(1) $ 259,164(1)
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Includes debt and equity securities AFS totaling $109.0 million, $118.8
million and $146.1 million at December 31, 1998, 1997 and 1996,
respectively, carried at fair value.
A-16
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities of the Company's money market investments
and debt and equity securities at December 31, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
MORE THAN MORE THAN FIVE DUE AFTER
ONE YEAR OR LESS ONE TO FIVE YEARS TO TEN YEARS 10 YEARS
------------------------ -------------------------- -------------------------- -----------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING
VALUE YIELD VALUE YIELD VALUE YIELD VALUE
----------- ----------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Government
securities and agency
obligations........... $ 5,030 6.5% $ 9,944 5.4% $ -- --% $ 62,731
Corporate debt
securities............ 18,670 5.3 -- -- -- -- 1,014
Money market
investments........... 1,720 4.4 -- -- -- -- --
----------- ----------- ----- -----------
Total................... $ 25,420 5.5% $ 9,944 5.4% $ -- --% $ 63,745
----------- ----------- ----- -----------
----------- ----------- ----- -----------
Preferred Stock.........
FHLB-NY stock...........
<CAPTION>
TOTAL MONEY MARKET INVESTMENTS
AND DEBT AND EQUITY SECURITIES
------------------------------------------------------
AVERAGE
WEIGHTED REMAINING ESTIMATED WEIGHTED
AVERAGE YEARS TO CARRYING FAIR AVERAGE
YIELD MATURITY VALUE VALUE YIELD
------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
U.S. Government
securities and agency
obligations........... 7.0% 17.1 $ 77,705 $ 77,705 6.7%
Corporate debt
securities............ 8.7 1.9 19,684 19,684 5.5
Money market
investments........... -- -- 1,720 1,720 4.4
----------- -----------
Total................... 7.0% 13.8 $ 99,109 $ 99,109 6.4%
----------- -----------
----------- -----------
Preferred Stock......... $ 11,590 $ 11,590 5.0%
FHLB-NY stock........... $ 21,990 $ 21,990 7.0%
----------- -----------
----------- -----------
</TABLE>
MORTGAGE-BACKED SECURITIES
The Bank also invests in mortgage-backed securities ("MBSs"). At December
31, 1998, total MBSs, net, aggregated $780.3 million, or 32.6% of total assets.
At December 31, 1998, 43.3% of the MBS portfolio, including Collateralized
Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits
("REMICs"), were insured or guaranteed by either FNMA, FHLMC or the Ginnie Mae
("GNMA"). At December 31, 1998, $242.6 million, or 31.1% of total MBSs were
adjustable-rate and $537.7 million, or 68.9% of total MBSs were fixed-rate.
The following table sets forth the carrying amount of the Company's MBS
portfolio in dollar amounts and in percentages at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
CARRYING PERCENT CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL VALUE OF TOTAL
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
MBSs(1):
CMOs and REMICS--
Agency-backed(2)....................... $ 106,552 13.66% $ 174,707 32.14% $ 117,969 27.96%
CMOs and REMICS--
Non-agency(2).......................... 442,352 56.69 169,480 31.17 94,877 22.48
FHLMC.................................... 52,167 6.69 91,110 16.76 97,953 23.21
FNMA..................................... 178,767 22.91 107,377 19.75 110,182 26.12
GNMA..................................... 434 0.05 982 0.18 983 0.23
---------- --------- ---------- --------- ---------- ---------
Net MBSs................................... $ 780,272 100.00% $ 543,656 100.00% $ 421,964 100.00%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
</TABLE>
- ------------------------
(1) Includes MBSs AFS of $780.3 million, $380.6 million and $224.0 million at
December 31, 1998, 1997 and 1996, respectively.
(2) Included in total MBSs are CMOs and REMICs, which, at December 31, 1998, had
a gross carrying value of $548.9 million. A CMO is a special type of
pass-through debt in which the stream of principal and interest payments on
the underlying mortgages or MBSs is used to create classes with different
maturities and, in some cases, amortization schedules, as well as a residual
interest, with each such class possessing different risk characteristics.
The Bank has in recent periods increased its investment in REMICs and CMOs
because these securities generally exhibit a more predictable cash flow than
mortgage pass-through securities. The Bank's policy is to limit its
purchases of REMICs to non high-risk securities as defined by the OTS.
A-17
<PAGE>
The following tables set forth certain information regarding the carrying
and market values and percentage of total carrying values of the Bank's
mortgage-backed and related securities portfolio.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- --------------------------------- ----------------------
CARRYING % OF MARKET CARRYING % OF MARKET CARRYING % OF
VALUE TOTAL VALUE VALUE TOTAL VALUE VALUE TOTAL
----------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Held to maturity:
MBSs:
FHLMC.......................... $ -- --% $ -- $ 27,472 5.05% $ 27,769 $ 39,889 9.45%
FNMA........................... -- -- -- 61,492 11.31 61,093 71,460 16.94
----------- --------- --------- ----------- --------- --------- ----------- ---------
Total MBSs....................... -- -- -- 88,964 16.36 88,862 111,349 26.39
----------- --------- --------- ----------- --------- --------- ----------- ---------
Mortgage-related securities:
CMOs and REMICS--
Agency backed................ -- -- -- 21,217 3.90 21,101 24,449 5.79
CMOs and REMICS--
Non-agency................... -- -- -- 52,876 9.73 53,363 62,142 14.73
----------- --------- --------- ----------- --------- --------- ----------- ---------
Total mortgage-related
securities..................... -- -- -- 74,093 13.63 74,464 86,591 20.52
----------- --------- --------- ----------- --------- --------- ----------- ---------
Total mortgage-backed and related
securities held to maturity.... -- -- -- 163,057 29.99 163,326 197,940 46.91
----------- --------- --------- ----------- --------- --------- ----------- ---------
Available for sale:
MBSs:
GNMA........................... 434 0.05 434 982 0.18 982 983 0.23
FHLMC.......................... 52,167 6.69 52,167 63,638 11.71 63,638 58,064 13.76
FNMA........................... 178,767 22.91 178,767 45,885 8.44 45,885 38,722 9.18
----------- --------- --------- ----------- --------- --------- ----------- ---------
Total MBSs....................... 231,368 29.65 231,368 110,505 20.33 110,505 97,769 23.17
----------- --------- --------- ----------- --------- --------- ----------- ---------
Mortgage-related securities:
CMOs and REMICs--
Agency backed................ 106,552 13.66 106,552 153,490 28.23 153,490 93,520 22.16
CMOs and REMICs--
Non-agency................... 442,352 56.69 442,352 116,604 21.45 116,604 32,735 7.76
----------- --------- --------- ----------- --------- --------- ----------- ---------
Total mortgage-related
securities..................... 548,904 70.35 548,904 270,094 49.68 270,094 126,255 29.92
----------- --------- --------- ----------- --------- --------- ----------- ---------
Total mortgage-backed and
mortgage-related securities
available for sale............. 780,272 100.00 780,272 380,599 70.01 380,599 224,024 53.09
----------- --------- --------- ----------- --------- --------- ----------- ---------
Total mortgage-backed and related
securities..................... $ 780,272 100.00% $ 780,272 $ 543,656 100.00% $ 543,925 $ 421,964 100.00%
----------- --------- --------- ----------- --------- --------- ----------- ---------
----------- --------- --------- ----------- --------- --------- ----------- ---------
<CAPTION>
MARKET
VALUE
---------
<S> <C>
Held to maturity:
MBSs:
FHLMC.......................... $ 39,594
FNMA........................... 69,914
---------
Total MBSs....................... 109,508
---------
Mortgage-related securities:
CMOs and REMICS--
Agency backed................ 24,142
CMOs and REMICS--
Non-agency................... 62,032
---------
Total mortgage-related
securities..................... 86,174
---------
Total mortgage-backed and related
securities held to maturity.... 195,682
---------
Available for sale:
MBSs:
GNMA........................... 983
FHLMC.......................... 58,064
FNMA........................... 38,722
---------
Total MBSs....................... 97,769
---------
Mortgage-related securities:
CMOs and REMICs--
Agency backed................ 93,520
CMOs and REMICs--
Non-agency................... 32,735
---------
Total mortgage-related
securities..................... 126,255
---------
Total mortgage-backed and
mortgage-related securities
available for sale............. 224,024
---------
Total mortgage-backed and related
securities..................... $ 419,706
---------
---------
</TABLE>
A-18
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities of the Company's mortgage-backed and
related securities at December 31, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------------------------------------------------------------------------
OVER ONE TO OVER FIVE TO OVER TEN
ONE YEAR OR LESS FIVE YEARS TEN YEARS YEARS
-------------------------- -------------------------- -------------------------- -----------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING
VALUE YIELD VALUE YIELD VALUE YIELD VALUE
----------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Available for sale:
FNMA..................... $ 797 7.50% $ -- --% $ 10,417 5.80% $ 167,553
FHLMC.................... 203 6.38 1,170 6.02 6,137 6.44 44,657
GNMA..................... -- -- -- -- -- -- 434
CMOs and REMICs.......... -- -- 3,534 5.84 -- -- 545,370
----------- --- ----------- --- ----------- --- -----------
Total mortgage-backed and
related securities....... $ 1,000 7.27 $ 4,704 5.89% $ 16,554 6.03% $ 758,014
----------- --- ----------- --- ----------- --- -----------
----------- --- ----------- --- ----------- --- -----------
<CAPTION>
MORTGAGE-BACKED
AND RELATED SECURITIES TOTALS
------------------------------------------------------
AVERAGE
WEIGHTED REMAINING ESTIMATED WEIGHTED
AVERAGE YEARS TO CARRYING MARKET AVERAGE
YIELD MATURITY VALUE VALUE YIELD
------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Available for sale:
FNMA..................... 6.50% 18.1 $ 178,767 $ 178,767 6.46%
FHLMC.................... 6.63 22.0 52,167 52,167 6.60
GNMA..................... 6.33 25.3 434 434 6.33
CMOs and REMICs.......... 6.50 27.1 548,904 548,904 6.50
--- --- ----------- ----------- ---
Total mortgage-backed and
related securities....... 6.51% 24.7 $ 780,272 $ 780,272 6.50%
--- --- ----------- ----------- ---
--- --- ----------- ----------- ---
</TABLE>
At December 31, 1998, the weighted average contractual maturity of the
Bank's mortgage-backed and related securities portfolio was 24.7 years.
The following table shows the carrying value, maturity or period to
repricing of the Company's mortgage-backed and related securities portfolio at
December 31, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------------------------------------
TOTAL
FIXED- MORTGAGE-
ARM RATE BACKED
FIXED-RATE MBSS & CMOS & ARM AND RELATED
MBSS REMICS REMICS CMOS SECURITIES
----------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Amounts due or repricing:
Within one year.................................... $ 990 $ 39,559 $ -- $ 181,314 $ 221,863
----------- --------- ---------- ---------- -----------
After one year:
One to three years................................. 6 20,671 3,521 -- 24,198
Three to five years................................ 4,973 -- -- -- 4,973
Five to 10 years................................... 12,563 -- -- -- 12,563
10 to 20 years..................................... 99,266 -- 14,365 -- 113,631
Over 20 years...................................... 50,173 -- 350,766 -- 400,939
----------- --------- ---------- ---------- -----------
Total due or repricing after one year................ 166,981 20,671 368,652 -- 556,304
----------- --------- ---------- ---------- -----------
Total................................................ 167,971 60,230 368,652 181,314 778,167
Adjusted for:
Unamortized yield adjustment....................... 753 561 (1,752) 430 (8)
Unrealized gain(loss).............................. 1,492 361 566 (306) 2,113
----------- --------- ---------- ---------- -----------
Total mortgage-backed and related securities......... $ 170,216 $ 61,152 $ 367,466 $ 181,438 $ 780,272
----------- --------- ---------- ---------- -----------
----------- --------- ---------- ---------- -----------
</TABLE>
A-19
<PAGE>
The following table sets forth the carrying value and the activity in the
Company's mortgage-backed and related securities portfolio during the periods
indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed and related securities:
At beginning of period....................................................... $ 543,656 $ 421,964 $ 629,889
Loans securitized.......................................................... 105,691 -- --
MBSs purchased............................................................. -- 56,941 41,647
MBSs sold.................................................................. (6,618) (18,932) (101,604)
CMOs and REMICs purchased.................................................. 687,923 365,002 158,654
CMOs and REMICs sold....................................................... (349,464) (206,901) (205,760)
Amortization and repayments................................................ (199,636) (76,771) (97,969)
Change in unrealized gain (loss)............................................. (1,280) 2,353 (2,893)
---------- ---------- ----------
Balance of mortgage-backed and related securities at
end of period (1).......................................................... $ 780,272 $ 543,656 $ 421,964
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Includes $780.3 million, $380.6 million and $224.0 million of
mortgage-backed and related securities AFS at December 31, 1998, 1997 and
1996, respectively, carried at fair value.
The Asset/Liability Committee determines when to make substantial changes in
the MBS portfolio. In 1998, the Company purchased $687.9 million of CMOs and
REMICs, of which $106.3 million were adjustable-rate and $581.6 million were
fixed-rate securities. During 1998, the Bank continued to emphasize MBSs
reflecting management's strategy to improve duration and yield of the AFS
portfolio. Adjustable-rate securities as a percentage of total MBSs was 31%, 48%
and 42% at December 31, 1998, 1997 and 1996, respectively. At December 31, 1998,
$337.9 million, or 43.3% of the Bank's MBS portfolio, was directly insured or
guaranteed by the FNMA, FHLMC or GNMA. FNMA and FHLMC provide the certificate
holder a guarantee of timely payments of interest and scheduled principal
payments, whether or not they have been collected. The GNMA MBSs provide a
guarantee to the holder of timely payments of principal and interest and is
backed by the full faith and credit of the U.S. Government. The privately-issued
CMOs and REMICs contained in the Bank's AFS portfolio at December 31, 1998
totaling $442.4 million, or 56.7% of MBSs have generally been underwritten by
large investment banking firms with the timely payment of principal and interest
on these securities supported (credit enhanced) in varying degrees by either
insurance issued by a financial guarantee insurer, letters of credit or
subordination techniques. Substantially all such securities are rated AAA by one
or more of the nationally recognized securities rating agencies.
MBSs generally yield less than the loans that underlie such securities,
because of the cost of payment guarantees or credit enhancements that result in
nominal credit risk. The MBS portfolio had a weighted average yield of 6.50% for
the year ended December 31, 1998. In addition, MBSs are more liquid than
individual mortgage loans and may be used to collateralize obligations of the
Bank. In general, MBSs issued or guaranteed by FNMA and FHLMC and certain
AA-rated mortgage-backed pass-through securities are weighted at no more than
20% for risk-based capital purposes, and MBSs issued or guaranteed by GNMA are
weighted at 0% for risk-based capital purposes, compared to an assigned risk
weighting of 50% to 100% for whole residential mortgage loans. These types of
securities thus allow the Bank to optimize regulatory capital to a greater
extent than non-securitized whole loans.
A-20
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, loans, mortgage-backed and debt securities repayments,
retained earnings and, to a lesser extent, FHLB advances are the primary source
of the Company's and the Bank's funds for use in lending, investing and for
other general purposes.
DEPOSITS. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of savings, NOW, checking,
money market and certificate accounts. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition.
During 1996, the Bank implemented its supermarket banking program. During
September of 1996, the Bank and Pathmark Stores, Inc. entered into an agreement
to open approximately 44 full-service bank branches in Pathmark supermarkets
throughout New York City, Long Island, Westchester and Rockland counties by
early 1999. By the end of 1996, the Bank had opened four supermarket branches
with deposits totaling $12.1 million. During 1997, the Bank opened twenty-eight
supermarket branches resulting in a total of thirty-two locations at December
31, 1997 with deposits totaling $157.2 million. During 1998, the Bank opened an
additional twenty-five supermarket branches resulting in a total of fifty-seven
locations at December 31, 1998 with deposits totaling $504.0 million. The
supermarket branches are located in the New York City boroughs of Queens,
Brooklyn, Manhattan and Staten Island, the New York counties of Nassau, Suffolk,
Rockland and Westchester and in New Jersey and Connecticut. At December 31,
1998, the Bank had 35 branches in Pathmark Stores, Inc., 14 in ShopRite
Supermarket, Inc., 4 in Edward Super Food Stores, 2 in Big Y Food Stores, 1 in
Shaws and 1 mini-branch in The Grand Union Co. Core deposits equaled 54.0% of
total in-store branch deposits, compared to 45.5% in traditional branches.
Overall core deposits represented 47.7% of total deposits at December 31, 1998
compared to 42.7% at December 31, 1997. The Bank believes that supermarket
branching is a cost-effective way to extend its franchise and put its sales
force in touch with a significant number of prospective customers. The branches
are open seven days a week and provide a broad range of traditional banking
services, as well as the full package of financial services offered by CFS
Investments, Inc. ("CFSI"). In 1999, the Bank has opened two additional
supermarket branches and is scheduled to open one more. The Bank has established
a relationship with ShopRite Stores under which the Bank has the right to open
in-store branches in all new or renovated ShopRite Stores in New Jersey and
Connecticut.
The Bank's deposits are obtained primarily 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.
Certificate accounts in excess of $100,000 are not actively solicited by the
Bank nor does the Bank use brokers to obtain deposits. During 1998, the Bank
continued to offer competitive rates without jeopardizing the value of existing
core deposits. During 1997, the Bank experienced a shift in deposits from
certificate of deposit accounts into savings and checking accounts which
continued in 1998. Certificates of deposit decreased from 57.3% of deposits at
December 31, 1997 to 52.3% of deposits at December 31, 1998. During 1998, the
Bank introduced a "Liquid Asset" savings account in all supermarket branches
which pays the account holder a fixed-rate of interest in the first year on
account balances of $2,500 or more. The Liquid Asset account currently pays
4.25% for the first year. The Company has been able to maintain a substantial
level of core deposits which the Company believes helps to limit interest rate
risk by providing a relatively stable, low cost long-term funding base. The
Company expects to attract a higher percentage of core deposits from its
supermarket branch locations as these locations continue to grow and mature.
A-21
<PAGE>
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits............................................ $ 5,753,644 $ 3,208,355 $ 2,441,295
Withdrawals......................................... 5,458,274 3,031,457 2,428,315
------------ ------------ ------------
Net deposits........................................ 295,370 176,898 12,980
Interest credited on deposits....................... 62,328 50,326 41,362
------------ ------------ ------------
Total increase in deposits.......................... $ 357,698 $ 227,224 $ 54,342
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Time deposits by maturity at December 31, 1998 over $100,000 are as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
- ------------------------------------------------------------------------------ --------------
<S> <C>
(IN THOUSANDS)
Three months or less.......................................................... $ 24,244
Over three through six months................................................. 27,618
Over six through 12 months.................................................... 18,605
Over 12 months................................................................ 14,042
-------
Total..................................................................... $ 84,509
-------
-------
</TABLE>
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated and the weighted average nominal interest
rates for each category of deposits presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------- ------------------------------------- ----------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT
OF AVERAGE OF AVERAGE OF
AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL AVERAGE TOTAL
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS
--------- ----------- ------------- --------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Savings accounts.... $ 441,759 28.22% 2.81% $ 371,872 30.01% 2.51% $ 373,337 33.46%
Checking accounts... 187,297 11.96 0.73 134,546 10.86 1.31 111,425 9.99
--------- ----------- --- --------- ----------- --- --------- -----------
Total savings and
checking
accounts.......... 629,056 40.18 2.19 506,418 40.87 2.07 484,762 43.45
--------- ----------- --- --------- ----------- --- --------- -----------
Money market
accounts.......... 57,597 3.68 3.54 54,107 4.37 3.37 58,108 5.21
--------- ----------- --- --------- ----------- --- --------- -----------
Certificate
accounts:
91 days........... 5,620 0.36 3.87 5,799 0.47 3.83 7,783 0.70
6 months.......... 164,647 10.52 5.33 85,558 6.90 5.37 85,768 7.69
7 months.......... 4,519 0.29 3.93 13,116 1.06 5.26 2,228 0.20
One year.......... 382,497 24.43 5.62 265,891 21.45 5.69 203,259 18.22
13 months......... 27,514 1.76 5.53 21,314 1.72 5.79 11,036 0.99
18 months......... 33,985 2.17 5.77 34,321 2.77 5.79 23,407 2.10
2 to 4 years...... 160,667 10.26 5.99 145,081 11.71 6.04 131,931 11.82
Five years........ 93,898 5.99 6.23 101,972 8.23 6.23 101,690 9.11
7 to 10 years..... 5,644 0.36 6.31 5,547 0.45 6.31 5,666 0.51
--------- ----------- --- --------- ----------- --- --------- -----------
Total certificate
accounts.......... 878,991 56.14 5.68 678,599 54.76 5.79 572,768 51.34
--------- ----------- --- --------- ----------- --- --------- -----------
Total deposits...... $1,565,644 100.00% 4.20% $1,239,124 100.00% 4.16% $1,115,638 100.00%
--------- ----------- --- --------- ----------- --- --------- -----------
--------- ----------- --- --------- ----------- --- --------- -----------
<CAPTION>
WEIGHTED
AVERAGE
NOMINAL
RATE
-------------
<S> <C>
Savings accounts.... 2.49%
Checking accounts... 1.01
---
Total savings and
checking
accounts.......... 2.13
---
Money market
accounts.......... 3.32
---
Certificate
accounts:
91 days........... 3.92
6 months.......... 5.12
7 months.......... 2.99
One year.......... 5.51
13 months......... 5.12
18 months......... 5.98
2 to 4 years...... 5.87
Five years........ 6.30
7 to 10 years..... 6.28
---
Total certificate
accounts.......... 5.66
---
Total deposits...... 4.00%
---
---
</TABLE>
A-22
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1998, 1997 and 1996 and the
periods to maturity of the certificate accounts outstanding at December 31,
1998.
<TABLE>
<CAPTION>
PERIOD OF MATURITY FROM DECEMBER 31, 1998
------------------------------------------
AT DECEMBER 31, WITHIN ONE TO TWO TO OVER
------------------------------- ONE TWO THREE THREE
1998 1997 1996 YEAR YEARS YEARS YEARS
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Certificate accounts:
3.99% or less.............................. $ 31,712 $ 6,682 $ 10,396 $ 26,493 $ 3,592 $ 77 $ 1,550
4.00% to 4.99%............................. 131,330 6,942 18,545 121,015 7,774 1,467 1,074
5.00% to 5.99%............................. 610,219 548,849 456,789 557,808 27,230 9,528 15,658
6.00% to 6.99%............................. 123,436 211,302 104,732 62,068 19,600 41 41,727
7.00% to 7.99%............................. 5,052 7,808 10,637 492 4,560 -- --
--------- --------- --------- --------- --------- --------- ---------
Total.................................... $ 901,749 $ 781,583 $ 601,099 $ 767,876 $ 62,756 $ 11,108 $ 60,009
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
TOTAL
---------
<S> <C>
Certificate accounts:
3.99% or less.............................. $ 31,712
4.00% to 4.99%............................. 131,330
5.00% to 5.99%............................. 610,219
6.00% to 6.99%............................. 123,436
7.00% to 7.99%............................. 5,052
---------
Total.................................... $ 901,749
---------
---------
</TABLE>
BORROWINGS
Although deposits are the Bank's primary source of funds, the Bank has from
time to time utilized borrowings as an alternative or less costly source of
funds. The Bank's primary source of borrowing is advances from the FHLB-NY.
These advances are collateralized by the capital stock of the FHLB-NY held by
the Bank and certain of the Bank's MBSs. See "Regulation and
Supervision--Federal Home Loan Bank System." Such advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. The maximum amount that the FHLB-NY will advance to member
institutions, including the Bank, for purposes other than meeting withdrawals,
fluctuates from time to time in accordance with the policies of the OTS and the
FHLB-NY. At December 31, 1998, the Bank had $325.2 million of advances
outstanding from the FHLB-NY.
In addition, the Bank may, from time to time, enter into sales of securities
under agreements, generally for up to 30 days, to repurchase ("reverse
repurchase agreements") with nationally recognized investment banking firms.
Reverse repurchase agreements are accounted for as borrowings by the Bank and
are secured by designated securities. The proceeds of these transactions are
used to meet cash flow or asset/liability needs of the Bank. At December 31,
1998, the Bank had $88.7 million of reverse repurchase agreements outstanding.
On February 12, 1997, Haven Capital Trust I, a trust formed under the laws
of the State of Delaware, issued $25 million of 10.46% capital securities. The
Company is the owner of all the beneficial interests represented by common
securities of the Trust. The Trust used the proceeds from the sale of the
capital securities to purchase the Company's 10.46% junior subordinated
deferrable interest debentures due 2027. See Note 11 of Notes to Consolidated
Financial Statements in the Registrant's 1998 Annual Report to Stockholders on
page 37 which is incorporated herein by reference.
The Bank has an ESOP loan from an unrelated third party lender with an
outstanding balance of $1.5 million and an interest rate of 7.06% at December
31, 1998. See Note 14 of Notes to Consolidated Financial Statements in the
Registrant's 1998 Annual Report to Stockholders on page 42 which is incorporated
herein by reference. The loan, as amended on December 29, 1995, is payable in
thirty-two equal quarterly installments beginning December 1995 through
September 2003. The loan bears interest at a floating rate based on the federal
funds rate plus 250 basis points.
A-23
<PAGE>
The following table sets forth certain information regarding borrowed funds
for the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLB-NY Advances:
Average balance outstanding................................................ $ 301,557 $ 191,550 $ 152,005
Maximum amount outstanding at any month-end during the period.............. 431,000 247,000 195,000
Balance outstanding at end of period....................................... 325,200 247,000 178,450
Weighted average interest rate during the period........................... 5.19% 5.69% 5.54%
Weighted average interest rate at end of period............................ 5.13% 5.86% 4.72%
Securities Sold under Agreements to Repurchase:
Average balance outstanding................................................ $ 142,348 $ 172,310 $ 128,677
Maximum amount outstanding at any month-end during the period.............. 191,291 229,280 142,906
Balance outstanding at end of period....................................... 88,690 193,028 142,906
Weighted average interest rate during the period........................... 5.71% 5.68% 5.65%
Weighted average interest rate at end of period............................ 5.50% 5.94% 5.09%
Other Borrowings (1):
Average balance outstanding................................................ $ 26,626 $ 25,231 $ 7,667
Maximum amount outstanding at any month-end during the period.............. 26,766 30,120 10,725
Balance outstanding at end of period....................................... 26,456 26,766 5,077
Weighted average interest rate during the period........................... 10.32% 8.15% 6.38%
Weighted average interest rate at end of period............................ 10.20% 10.29% 9.63%
Total Borrowings:
Average balance outstanding................................................ $ 470,531 $ 389,091 $ 285,951
Maximum amount outstanding at any month-end during the period.............. 649,057 466,794 348,631
Balance outstanding at end of period....................................... 440,346 466,794 326,433
Weighted average interest rate during the period........................... 5.95% 5.86% 5.84%
Weighted average interest rate at end of period............................ 5.51% 6.15% 5.11%
</TABLE>
- ------------------------
(1) Includes the CMO, ESOP loan and Holding Company Obligated Mandatorily
Redeemable Capital Securities.
SUBSIDIARY ACTIVITIES
COLUMBIA RESOURCES CORP. ("COLUMBIA RESOURCES"). Columbia Resources is a
wholly owned subsidiary of the Bank and was formed in 1984 for the sole purpose
of acting as a conduit for a partnership to acquire and develop a parcel of
property in New York City. Columbia Resources acquired the property, but never
developed it. The property was later sold. During 1996, two REO commercial
properties totaling $524,000 were transferred from the Bank to Columbia
Resources to limit exposure to the Bank from unknown creditors. By December 31,
1996 the properties were written down to a combined value of $440,000. The
properties were subsequently sold during 1997.
CFS INVESTMENTS, INC. ("CFSI"). CFSI is a wholly owned subsidiary of the
Bank organized in 1989 that is engaged in the sale of tax deferred annuities,
securities brokerage activities and insurance. CFSI participates with FISERV
Investor Services, Inc., which is registered as a broker-dealer with the SEC,
NASD, and state securities regulatory authorities. All employees of CFSI engaged
in securities brokerage activities are dual employees of FISERV. Products
offered through FISERV include debt and equity securities, mutual funds, unit
investment trusts and variable annuities. Fixed annuities, life and health
insurance, and long term nursing care products are offered through CFSI; a
licensed general agent with the New York State Department of Insurance.
A-24
<PAGE>
HAVEN CAPITAL TRUST I. On February 12, 1997, Haven Capital Trust I, a
statutory business trust formed under the laws of the State of Delaware issued
$25 million of 10.46% capital securities. See Note 11 of Notes to Consolidated
Financial Statements in the Registrant's 1998 Annual Report to Stockholders on
page 37 which is incorporated herein by reference.
COLUMBIA PREFERRED CAPITAL CORPORATION ("CPCC"). On June 9, 1997, the Bank
established a real estate investment trust ("REIT") subsidiary, CPCC. At
December 31, 1998, the REIT held $334.0 million of the Bank's residential loan
portfolio. The establishment of the REIT enables the Bank to achieve certain
business goals including providing the Bank with a contingency funding mechanism
without disrupting its investment policies and enhancing the Bank's ability to
track and manage the mortgage portfolio transferred to CPCC since the
transferred portion of its mortgage loan portfolio is segregated into a separate
legal entity.
CFS TRAVEL SERVICES, INC. The Company, through its wholly owned subsidiary,
CFS Travel Services, Inc. ("CFS Travel"), established February 28, 1998 offered
customers and their families and friends, organized, escorted day long
excursions and overnight trips. This subsidiary was subsequently dissolved on
March 31, 1999.
CFS INSURANCE AGENCY, INC. On November 2, 1998, the Company completed the
purchase of 100% of the oustanding common stock of CIA. CIA, headquartered in
Centereach, New York, provides automobile, homeowners and casualty insurance to
individuals and various lines of commercial insurance to businesses. CIA
operates as a wholly-owned subsidiary of the Company.
PERSONNEL
As of December 31, 1998, the Bank had 941 full-time employees and 65
part-time employees. Even though the employees are not represented by a
collective bargaining unit, the Bank considers its relationship with its
employees to be good.
REGULATION AND SUPERVISION
GENERAL
The Bank is subject to regulation, examination and supervision by the OTS,
as its chartering agency, and the FDIC, as the deposit insurer. The Bank is a
member of the FHLB System and its deposit accounts are insured up to applicable
limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC.
The Bank must file reports with the OTS and the FDIC concerning its activities
and financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. Periodic examinations by the OTS and the FDIC
monitor the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors.
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, (e.g., commercial, non-residential real property loans, consumer
loans), are limited to a specified percentage of the institutions's capital or
assets.
A-25
<PAGE>
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus plus an additional 10%
of unimpaired capital and surplus if such loan is secured by readily-marketable
collateral, which is defined to include certain financial instruments and
bullion. At December 31, 1998, the Bank's unimpaired capital and surplus was
$151.1 million and its limit on loans to one borrower was $22.7 million. At
December 31, 1998, the Bank's largest aggregate amount of loans to one borrower
had an aggregate balance of $13.0 million.
QTL TEST. The HOLA requires savings institutions to meet a Qualified Thrift
Lender ("QTL") test. Under the QTL test, a savings association is required to
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) 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 9 months out of each 12 month period. A savings association that fails the
QTL test must either convert to a bank charter or operate under certain
restrictions. As of December 31, 1998, the Bank maintained 72.06% of its
portfolio assets in qualified thrift investments and had more than 65% of its
portfolio assets in qualified thrift investments in each of the prior 12 months.
Therefore, the Bank met the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. Effective April 1, 1999, the OTS amended its capital
distribution regulations to reduce regulatory burdens on savings associations.
The regulations being replaced, which were effective throughout 1998,
established three tiers of institutions, which are based primarily on an
institution's capital level. An institution that exceeded all fully phased-in
regulatory capital requirements before and after a proposed capital distribution
("Tier 1 Bank") and had not been advised by the OTS that it was in need of more
than normal supervision, could, after prior notice to, but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of: (i) 100% of its net earnings to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year; or (ii) 75% of its net earnings for the previous four quarters.
Any additional capital distributions would have required prior OTS approval. In
the event the Bank's capital fell below its capital requirements or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. Under the
amendments adopted by the OTS, certain savings associations will be permitted to
pay capital distributions during a calendar year that do not exceed the
association's net income for that year plus its retained net income for the
prior two years, without notice to, or the approval of, the OTS.
If adopted as proposed, certain savings associations will be permitted to
pay capital distributions within the amounts described above for Tier 1
institutions without notice to, or the approval of, the OTS. However, a savings
association subsidiary of a savings and loan holding company, such as the Bank,
will continue to have to file a notice unless the specific capital distribution
requires an application.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
short-term borrowings. Monetary penalties may be imposed for failure to meet the
liquidity requirements. The Bank's average liquidity ratio for December 31, 1998
was 4.24% which exceeded the then applicable requirement. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
A-26
<PAGE>
ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is computed upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report. The assessments paid by the Bank for the
years ended December 31, 1998 and 1997, totaled $322,000 and $285,000,
respectively. The OTS has adopted amendments to its regulations, effective
January 1, 1999, that are intended to assess savings associations on a more
equitable basis. The new regulations will base the assessment for an individual
savings association on three components: the size of the association, on which
the basic assessment would be based; the association's supervisory condition,
which would result in an additional assessment based on a percentage of the
basic assessment for any savings institution with a composite rating of 3, 4 or
5 in its most recent safety and soundness examination; and the complexity of the
association's operations, which would result in an additional assessment based
on a percentage of the basic assessment for any savings association that managed
over $1 billion in trust assets, serviced for others loans aggregating more than
$1 billion, or had certain off-balance sheet assets aggregating more than $1
billion. In order to avoid a disproportionate impact on the smaller savings
institutions, which are those whose total assets never exceeded $100 million,
the new regulations provide that the portion of the assessment based on assets
size will be the lesser of the assessment under the amended regulations or the
regulations before the amendment. Management believes that any change in its
rate of OTS assessments under the amended regulations will not be material.
BRANCHING. OTS regulations permit federally chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution and also limits the aggregate amount of
transactions with all affiliates to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A, and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally requires that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
underwriting standards, that are substantially the same or at least as favorable
to the institution as those prevailing at the time for comparable transactions
with non-affiliated companies. Notwithstanding Sections 23A and 23B, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the Bank Holding Company Act ("BHC Act"). Further, no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to its executive officers, directors
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations require that such loans to be
made on terms and conditions, including credit underwriting standards,
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Bank may make to such
persons based, in part, on the Bank's capital position, and requires that
certain board approval procedures be followed. HOLA and the OTS regulations,
with certain minor variances, apply Regulation O to savings institutions.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including
A-27
<PAGE>
controlling stockholders, and any stockholders, attorneys, appraisers and
accountants who knowingly or recklessly participate in any violation of
applicable law or regulation or breach of fiduciary duty or certain other
wrongful actions that causes or is likely to cause a more than a minimal loss or
other significant adverse effect on an insured savings association. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $5,000 per day for less serious
violations, and up to $1 million per day in more egregious cases. Under the FDI
Act, the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director of the OTS, the FDIC has authority to take
such action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The OTS
and the federal banking agencies have adopted a final rule and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("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 FDI Act. The final rule
establishes deadlines for the submission and review of such safety and soundness
compliance plans, when such plans are required.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a tangible capital ratio
requirement of 1.5% of total assets as adjusted under the OTS regulations, a
core capital ratio requirement of 3.0% of core capital to such adjusted total
assets, which ratio requirement will, effective April 1, 1999, be 3% only for
those savings institutions who been assigned a composite rating of 1 under the
Uniform Financial Institutions Rating System, and will be 4% for all other
savings institutions, and a risk-based capital ratio requirement of 8.0% of core
and supplementary capital to total risk-based assets. Tangible capital is
defined, generally, as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related earnings,
minority interests in equity accounts of fully consolidated subsidiaries, less
intangibles other than certain mortgage servicing rights and investments in and
loans to subsidiaries engaged in activities not permissible for a national bank.
Core capital (also called "Tier 1" capital) is defined similarly to tangible
capital, but core capital also includes certain qualifying supervisory goodwill
and certain purchased credit card relationships. In addition, the OTS prompt
corrective action regulation provides that a savings institution that has a core
capital ratio of less than 4% (3% for institutions receiving the highest rating
under the Uniform Financial Institutions Rating System, will be deemed to be
"undercapitalized" and may be subject to certain restrictions). See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of at least 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible debt
A-28
<PAGE>
securities, subordinated debt and intermediate preferred stock and, within
specified limits, the allowance for loan and lease losses. Overall, the amount
of supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-weighting
for certain mortgage derivative securities. Under the rule, savings associations
with "above normal" interest rate risk exposure would be subject to a deduction
from total capital for purposes of calculating their risk-based capital
requirements. A savings association's interest rate risk is measured by the
decline in the net portfolio value of its assets (i.e., the difference between
incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts) that would result from a hypothetical 200-basis
point increase or decrease in market interest rates divided by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the OTS. A savings association whose measured interest
rate risk exposure exceeds 2% must deduct an interest rate component in
calculating its total capital under the risk-based capital rule. The interest
rate risk component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted from
an association's total capital in calculating compliance with its risk-based
capital requirement. Under the rule, there is a two quarter lag between the
reporting date of an institution's financial data and the effective date for the
new capital requirement based on that data. A savings association with assets of
less than $300 million and risk-based capital ratios in excess of 12% is not
subject to the interest rate risk component, unless the OTS determines
otherwise. The rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a case-by-case basis. The
OTS has indefinitely deferred the implementation of the interest rate risk
component in the computation of an institution's risk-based capital requirement.
The OTS continues to monitor the interest rate risk of individual institutions
and retains the right to impose additional capital on individual institutions.
If the Bank had been subject to an interest rate risk capital component as of
December 31, 1998, there would have been no material effect on the Bank's
risk-weighted capital.
At December 31, 1998, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. A chart which sets forth the Bank's compliance
with its capital requirements appears in Note 17 to Notes to Consolidated
Financial Statements in the Registrant's 1998 Annual Report to Stockholders on
page 46, and is incorporated herein by reference.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or either a leverage ratio or a Tier 1 risk-based capital ratio that
is less than 4.0% is considered to be undercapitalized. A savings institution
that has a total risk-based capital less than 6.0%, a Tier 1 risk-based capital
ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered
to be "significantly undercapitalized" and a savings institution that has a
tangible capital to assets ratio equal to or less than 2.0% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "under-capitalized", "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to the institution
depending upon its category, including, but not limited to, increased monitoring
by regulators, restrictions on growth, and capital distributions and limitations
on expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
A-29
<PAGE>
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 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 currently range from 0.0% of deposits for an institution in
the highest category (i.e., well-capitalized and financially sound, with no more
than a few minor weaknesses) to 0.27% of deposits for an institution in the
lowest category (i.e., undercapitalized and substantial supervisory concern).
The FDIC is authorized to raise the assessment rates as necessary to maintain
the required reserve ratio of 1.25%. As a result of the Deposit Insurance Funds
Act of 1996 (the "Funds Act"), both the BIF and the SAIF currently satisfy the
reserve ratio requirement. If the FDIC determines that assessment rates should
be increased, institutions in all risk categories could be affected. The FDIC
has exercised this authority several times in the past and could raise insurance
assessment rates in the future. If such action is taken by the FDIC, it could
have an adverse effect on the earnings of the Bank.
The Funds Act also amended the FDI Act to expand the assessment base for the
payments on the Financing Corporation ("FICO") obligations. Beginning January 1,
1997, the assessment base included the deposits of both BIF- and SAIF-insured
institutions. Until December 31, 1999, or any earlier date on which the last
savings association ceases to exist, the rate of assessment for BIF-assessable
deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The
annual rate of assessments for the payments on the FICO obligations for the
quarterly semi-annual period beginning on January 1, 1998 was 0.0156% for
BIF-assessable deposits and 0.0628% for SAIF-assessable deposits. For the
quarterly period beginning on July 1, 1998, the rates of assessment for the FICO
obligations are 0.0122% for BIF-assessable deposits and 0.0610% for
SAIF-assessable deposits. Accordingly, as a result of the Funds Act, the Bank
has seen a decrease in the deposit assessments paid to the FDIC.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is 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 of New York, 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. The Bank was in compliance
with this requirement with an investment in FHLB stock at December 31, 1998 of
$22.0 million. 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. For the years ended December 31, 1998, 1997 and 1996,
dividends from the FHLB to the Bank amounted to $1.2 million, $710,000 and
$571,000, respectively. If dividends were reduced or interest on future FHLB
advances increased, the Bank's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of recent legislation on the
FHLBs will not also cause a decrease in the value of the FHLB stock held by the
Bank.
A-30
<PAGE>
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require depository institutions,
including savings institutions, to maintain non-interest-earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts). The current Federal Reserve Board regulations generally require that
reserves be maintained against aggregate transaction accounts as follows: for
accounts aggregating $46.5 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts greater than
$46.5 million, the reserve requirement is $1,395,000 plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $46.5 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.
HOLDING COMPANY REGULATION
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA. As such, the Company is required to be
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.
The Bank must notify the OTS 30 days before declaring any dividend to the
Company.
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to be a QTL. See "--Federal
Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
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 BHC Act, subject to the prior approval of the OTS,
and to other activities authorized by OTS regulation.
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,
without prior written approval of the OTS; and 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; or acquiring or retaining control of a depository institution that is not
insured by the FDIC. 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: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) 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.
A-31
<PAGE>
LEGISLATIVE DEVELOPMENTS
Congress continues to work toward passage of legislation to modernize the
financial services industries. Proposed legislation being considered by
committees of the House of Representatives and of the Senate would permit
affiliations between banking, insurance and securities companies and, thereby,
expand significantly the financial services that could be offered by bank
holding companies. Such expanded financial activities would be permissible for
financial holding companies that controlled subsidiary depository institutions
that qualified as well capitalized and well managed and that had satisfactory
CRA ratings. The proposed legislation would grandfather unitary savings and loan
holding companies in activities currently permitted such holding companies. The
outcome of such proposed legislation is uncertain. Therefore, the Company is
unable to determine the extent to which such legislation, if enacted, would
affect the Company's business.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the Securities and Exchange
Commission 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.
The registration, under the Securities Act of 1933, as amended (the
"Securities Act") of shares of the Common Stock issued in the 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 (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Shares acquired through the Company's option
plans have been registered under the Securities Act and, therefore, are not
subject to resale restrictions. 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.
THE YEAR 2000 PROBLEM
The information related to the Year 2000 problem is incorporated herein by
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Computer Issues for the Year 2000" in the Registrant's
1998 Annual Report to Stockholders on page 21.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank report their income on a calendar year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions.
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 Company and its subsidiaries file a consolidated
Federal income tax return on a calendar-year basis. The Bank and the Company
have not been audited by the Internal Revenue Service during the last five
fiscal years.
A-32
<PAGE>
Under the Small Business Job Protection Act of 1996 ("1996 Act"), signed
into law in August 1996, the special rules for bad debt reserves of thrift
institutions no longer apply and, therefore, the Bank cannot make additions to
the tax bad debt reserves but is permitted to deduct bad debts as they occur.
Additionally, under the 1996 Act, the Bank is required to recapture (that is,
include in taxable income) the excess of the balance of its bad debt reserves as
of December 31, 1995 over the balance of such reserves as of December 31, 1987
("base year"). The Bank's federal tax bad debt reserves at December 31, 1995
exceeded its base year reserves by $2.7 million which will be recaptured into
taxable income ratably over a six year period. This recapture was suspended for
1996 and 1997, whereas, one-sixth of the excess reserves was recaptured into
taxable income for 1998. The base year reserves will be subject to recapture,
and the Bank could be required to recognize a tax liability, if (i) the Bank
fails to qualify as a "bank" for Federal income tax purposes; (ii) certain
distributions are made with respect to the stock of the Bank (see
"Distributions"); (iii) the Bank uses the bad debt reserves for any purpose
other than to absorb bad debt losses; or (iv) there is a change in Federal tax
law. Management is not aware of the occurrence of any such event.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to stockholders, such distributions will be considered as made
from the Bank's base year reserve to the extent thereof, and then from the
supplemental reserve for losses on loans and an amount based on the amount
distributed will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Bank's bad debt reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986, as
amended, imposes a tax on alternative minimum taxable income ("AMTI") at a rate
of 20%. AMTI is increased by 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).
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 or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, 80% of any dividends received may be
deducted.
STATE AND LOCAL TAXATION
NEW YORK STATE AND NEW YORK CITY TAXATION. The Bank and the Company are
subject to New York State and City franchise taxes on net income or one of
several alternative bases, whichever results in the highest tax. "Net income"
means Federal taxable income with adjustments. The Company's annual tax
liability for each year is the greatest of a tax on allocated entire net income;
allocated alternative entire net income; allocated assets to New York State
and/or New York City; or a minimum tax. Operating losses cannot be carried back
or carried forward for New York State or New York City tax purposes. The Bank is
also subject to the 17% Metropolitan Commuter District Surcharge on its New York
State tax after the deduction of credits. The Company is also subject to taxes
in New Jersey and Connecticut due to the establishment of in-store branches.
In response to the 1996 Act, the New York State and New York City tax laws
have been amended to prevent the recapture of existing tax bad debt reserves and
to allow for the continued use of the PTI method to determine the bad debt
deduction in computing New York City and New York State tax liability.
A-33
<PAGE>
DELAWARE 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.
ITEM 2. PROPERTIES
The Bank conducts its business through eight full-service banking and
fifty-nine supermarket banking facilities (two of which were opened during the
first quarter of 1999) located in the New York City boroughs of Queens,
Brooklyn, Manhattan and Staten Island, the New York counties of Nassau, Suffolk,
Rockland and Westchester and in New Jersey and Connecticut. The Bank provides
residential mortgage banking services through its CFS Intercounty Mortgage
division operating from six loan origination offices in New York, New Jersey and
Pennsylvania. The Company provides casualty insurance through its subsidiary,
CIA, from three offices located in Long Island, New York. In December 1997, the
Company purchased an office building and land in Westbury, New York for its new
administrative headquarters. The purchase was consummated under the terms of a
lease agreement and Payment-in-lieu-of-Tax ("PILOT") agreement with the Town of
Hempstead Industrial Development Agency ("IDA"). The Company completed
improvements to the building and began using the building as its corporate
headquarters in July 1998. The cost of the land and building, including
improvements was $12.8 million. The total net book value of the Company's and
the Bank's premises and equipment was $39.2 million at December 31, 1998, which
included fifty-seven supermarket branches. The Company believes that the Bank's
current facilities are adequate to meet the present and immediately foreseeable
needs of the Bank and the Company.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD
DATE IMPROVEMENTS
LEASED OR LEASED OR DATE OF LEASE AT DECEMBER 31,
LOCATION OWNED ACQUIRED EXPIRATION(1) 1998
- ---------------------------------------------------------- ----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Main Office Complex(2):
93-22/93-30 & 94-09/94-13 Jamaica Avenue
& 87-14/86-35 94th St. Woodhaven, NY 11421............ Owned 1957 -- $ 2,208
Traditional Branches:
80-35 Jamaica Avenue, Woodhaven, NY 11421............... Owned 1979 -- 251
82-10 153rd Avenue, Howard Beach, NY 11414.............. Owned 1971 -- 561
98-16 101st Avenue, Ozone Park, NY 11416................ Owned 1976 -- 451
244-19 Braddock Avenue, Bellerose, NY 11426(3).......... Leased 1973 2003 117
106-17 Continental Ave, Forest Hills, NY 11375.......... Leased 1959 1999 13
343 Merrick Road, Amityville, NY 11701.................. Leased 1977 2001 416
104-08 Rockaway Beach Blvd., Rockaway Beach, NY 11693... Leased 1996 1999 34
Supermarket Branches:
700-60 Patchogue Rd., Medford, NY 11763................. Leased 1996 2001 173
1121 Jerusalem Avenue, Uniondale, NY 11553.............. Leased 1996 2001 192
533 Montauk Highway, Bayshore, NY 11708................. Leased 1996 2001 223
625 Atlantic Avenue, Brooklyn, NY 11217................. Leased 1996 2001 198
575 Montauk Highway, W. Babylon, NY 11704............... Leased 1997 2002 203
2335 New Hyde Park Rd, New Hyde Park, NY 11040.......... Leased 1997 2002 223
1251 Deer Park Ave., N. Babylon, NY 11703............... Leased 1997 2002 212
101 Wicks Road, Brentwood, New York 11717............... Leased 1997 2002 222
3635 Hempstead Turnpike, Levittown, NY 11756............ Leased 1997 2002 228
6070 Jericho Turnpike, Commack, NY 11726................ Leased 1997 2002 226
</TABLE>
A-34
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD
DATE IMPROVEMENTS
LEASED OR LEASED OR DATE OF LEASE AT DECEMBER 31,
LOCATION OWNED ACQUIRED EXPIRATION(1) 1998
- ---------------------------------------------------------- ----------- ------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
2150 Middle Country Rd., Centereach, NY 11720........... Leased 1997 2002 227
1897 Front Street, East Meadow, NY 11554................ Leased 1997 2002 235
8101 Jericho Turnpike, Woodbury, NY 11796............... Leased 1997 2002 227
92-10 Atlantic Avenue, Ozone Park, NY 11416............. Leased 1997 2002 230
395 Route 112, Patchogue, NY 11772...................... Leased 1997 2002 219
1764 Grand Avenue, Baldwin, NY 11510.................... Leased 1997 2002 226
5145 Nesconset Hwy., Port Jefferson, NY 11776........... Leased 1997 2002 248
31-06 Farrington Street, Whitestone, NY 11357........... Leased 1997 2002 226
5801 Sunrise Highway, Sayville, NY 11741................ Leased 1997 2002 220
531 Montauk Highway, W. Babylon, NY 11776............... Leased 1997 2002 229
155 Islip Avenue, Islip, NY 11751....................... Leased 1997 2002 232
800 Montauk Highway, Shirley, NY 11967.................. Leased 1997 2002 237
253-01 Rockaway Turnpike, Woodmere, NY 11422............ Leased 1997 2002 227
227 Cherry Street, New York, NY 10002................... Leased 1997 2002 227
45 Route 59 Monsey, NY 10952............................ Leased 1997 2002 233
195 Rockland Center, Rte. 59, Nanuet, NY 10954.......... Leased 1997 2002 244
1905 Sunrise Highway, Bayshore, NY 11708................ Leased 1997 2002 243
941 Carmens Road, Massapequa, NY 11758.................. Leased 1997 2002 84
500 South River Street, Hackensack, NJ 07470............ Leased 1997 2002 180
1 Pathmark Plaza, Mount Vernon, NY...................... Leased 1997 2002 268
2875 Richmond Avenue, Staten Island, NY 10306........... Leased 1997 2002 257
111-10 Flatlands Avenue, Brooklyn, NY 11230............. Leased 1997 2002 236
1245 61st Street, Boro Park, NY 11219................... Leased 1998 2003 257
2650 Sunrise Highway, East Islip, NY 11730.............. Leased 1998 2003 172
492 E. Atlantic Avenue, E. Rockaway, NY 11554........... Leased 1998 2003 245
1-37 12th Street, Brooklyn, NY 11205.................... Leased 1998 2003 243
130 Wheatley Plaza, Greenvale, NY 11548................. Leased 1998 2003 258
335 Nesconset Highway, Hauppauge, NY 11788.............. Leased 1998 2003 162
360 No. Broadway, Jericho, NY 11753..................... Leased 1998 2003 244
42-02 Northern Blvd., L.I.C., NY 11100.................. Leased 1998 2003 237
2540 Central Park Ave, No. Yonkers, NY 10710............ Leased 1998 2003 222
130 Midland Avenue, Portchester, NY 10573............... Leased 1998 2003 285
1351 Forest Avenue, Staten Island, NY 10302............. Leased 1998 2003 247
2424 Hylan Blvd., Staten Island, NY 10306............... Leased 1998 2003 24
1757 Central Park Ave, Yonkers, NY 10710................ Leased 1998 2003 293
Route 28 and Union Ave, Bound Brook, NJ 08805........... Leased 1998 2003 201
Rte 70 & Chambers Bridge Rd, Bricktown, NJ 08723........ Leased 1998 2003 213
367 Highway 22 West, Hillside, NJ 07205................. Leased 1998 2003 327
201 Roosevelt Place, Palisades Park, NJ 07650........... Leased 1998 2003 211
625 Hamburg Turnpike, Wayne, NJ 07470................... Leased 1998 2003 189
145 Highway 36 West, Long Branch, NJ 07764.............. Leased 1998 2003 202
23 Marshall Hill Road, West Milford, NJ 07480........... Leased 1998 2003 210
404 Main Street, Ansonia, CT 06401...................... Leased 1998 2003 173
500 Sylvan Avenue, Bridgeport, CT 06610................. Leased 1998 2003 238
</TABLE>
A-35
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD
DATE IMPROVEMENTS
LEASED OR LEASED OR DATE OF LEASE AT DECEMBER 31,
LOCATION OWNED ACQUIRED EXPIRATION(1) 1998
- ---------------------------------------------------------- ----------- ------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
533 South Broad Street, Meridan, CT 06450............... Leased 1998 2003 254
157 Cherry Street, Milford, CT 06460.................... Leased 1998 2003 177
6 Queen Street, Newtown, CT 06460....................... Leased 1998 2003 201
650 Wolcott Street, Waterbury, CT 06705................. Leased 1998 2003 260
131 Campbell Avenue, West Haven, CT 06516............... Leased 1998 2003 176
Corporate Headquarters:
615 Merrick Avenue, Westbury, NY........................ Owned 1997 -- 11,419
</TABLE>
- ------------------------
(1) Rent expense for the year ended December 31, 1998 was $1.7 million.
(2) On March 25, 1999, the Bank sold the properties, consisting of land,
buildings and building improvements located at 93-22 and 93-30 Jamaica
Avenue, Woodhaven, New York. As of December 31, 1998, the Bank entered into
a contract of sale for its properties located at 94-09 and 94-13 Jamaica
Avenue and 87-14 and 86-35 94th Street, Woodhaven, New York. These
properties are expected to be sold in the second quarter of 1999.
(3) Includes land that is adjacent to the branch office that was acquired by the
Bank in 1973.
ITEM 3. LEGAL PROCEEDINGS
In February, 1983, a burglary of the contents of safe deposit boxes occurred
at a branch office of the Bank. At December 31, 1998 and currently, the Bank has
a class action lawsuit related thereto pending, whereby the plaintiffs are
seeking recovery of approximately $12,900,000 in actual damages and an
additional $12,900,000 in unspecified damages. The Bank's ultimate liability, if
any, which might arise from the disposition of these claims cannot presently be
determined. Management believes it has meritorious defenses against this action
and has and will continue to defend its position. Accordingly, no provision for
any liability that may result upon adjudication of this action has been
recognized in the accompanying consolidated financial statements.
The Company is involved in various legal actions arising in the ordinary
course of business, which in the aggregate, are believed by management to be
immaterial to the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
A-36
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Common Stock Information" in the
Registrant's 1998 Annual Report to Stockholders on page 53, and is incorporated
herein by reference.
Information relating to the payment of dividends by the Registrant appears
in Note 17 to Notes to Consolidated Financial Statements in the Registrant's
Annual Report on page 45 and is incorporated herein by reference.
The Company initiated a quarterly cash dividend of $0.05 per share in the
third quarter of 1995 paid on October 20, 1995. The following schedule
summarizes the cash dividends paid for 1996, 1997 and 1998:
<TABLE>
<CAPTION>
DIVIDEND PAID
DIVIDEND PAYMENT DATE PER SHARE (1) RECORD DATE
- --------------------------------------------- ----------------- ----------------------
<S> <C> <C>
January 19, 1996............................. .05 January 2, 1996
April 29, 1996............................... .05 April 8, 1996
July 12, 1996................................ .075 June 27, 1996
October 28, 1996............................. .075 October 7, 1996
January 17, 1997............................. .075 December 30, 1996
April 24, 1997............................... .075 April 4, 1997
July 18, 1997................................ .075 June 30, 1997
October 17, 1997............................. .075 September 29, 1997
January 1998................................. .075 December 1998
April 1998................................... .075 March 1998
July 1998.................................... .075 June 1998
October 1998................................. .075 September 1998
</TABLE>
- ------------------------
(1) As adjusted to reflect the 2-for-1 stock split effective November 1997
("stock split").
The following schedule summarizes the dividend payout ratio (dividends
declared per share divided by net income per share):
<TABLE>
<CAPTION>
DIVIDENDS NET INCOME
YEAR PAID PER SHARE PER SHARE PAYOUT RATIO
- ------------------------------------------ --------------- ------------- ---------------
<S> <C> <C> <C>
1996...................................... $ 0.25 $ 1.13 .221%
1997...................................... 0.30 1.32 .227
1998...................................... 0.30 0.95 .316
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The above-captioned information appears in the Registrant's 1998 Annual
Report to Stockholders on pages 6 and 7 and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1998 Annual Report to Stockholders on pages 8 through 22 and is incorporated
herein by reference.
A-37
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset/Liability
Management" and "--Interest Rate Sensitivity Analysis" in the Registrant's 1998
Annual Report to Stockholders on pages 9 through 11 and is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Haven Bancorp, Inc. and its
subsidiaries, and the notes related thereto together with the report thereon by
KPMG LLP appears in the Registrant's 1998 Annual Report to Stockholders on pages
23 through 51 and are incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 21, 1999,
on pages 5 through 8.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 21, 1999, on pages 9 through 22 (excluding the
Report of the Compensation Committee on pages 12 through 14 and the Stock
Performance Graph on page 15).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 21, 1999,
on pages 3 through 4 and pages 6 through 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 21, 1999, on pages 22 and 23.
A-38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1998 Annual Report to
Stockholders.
<TABLE>
<CAPTION>
PAGES
---------
<S> <C>
Consolidated Statements of Financial Condition as of December 31, 1998 and 1997....... 23
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................................ 24
Consolidated Statements of Changes In Stockholders' Equity for the Three Years Ended
December 31, 1998................................................................... 25
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................................ 26
Notes to Consolidated Financial Statements............................................ 27-50
Independent Auditors' Report.......................................................... 51
</TABLE>
The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated
financial statements or the notes thereto.
(3) Exhibits (filed herewith unless otherwise noted)
(a) The following exhibits are filed as part of this report:
<TABLE>
<C> <S>
3.1 Amended Certificate of Incorporation of Haven Bancorp, Inc.(1)
3.2 Certificate of Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock(2)
3.3 Bylaws of Haven Bancorp, Inc.(3)
4.0 Rights Agreement between Haven Bancorp, Inc. and Chase Manhattan Bank (formerly
Chemical Bank)(2)
10.1(A) Employment Agreement between Haven Bancorp, Inc. and Philip S. Messina(4)
10.1(B) Amendatory Agreement to the Employment Agreement between Haven Bancorp, Inc. and
Philip S. Messina(5)
10.1(C) Employment Agreement between CFS Bank and Philip S. Messina(5)
10.2(A) Form of Change in Control Agreement between Columbia Federal Savings Bank and
certain executive officers, as amended(4)
10.2(B) Form of Amendment to Change in Control Agreement between CFS Bank and certain
executive officers(5)
10.2(C) Form of Change in Control Agreement between Haven Bancorp, Inc. and certain
executive officers, as amended(4)
10.2(D) Form of Amendment to Change in Control Agreement between Haven Bancorp, Inc. and
certain executive officers(5)
10.2(E) Employment Agreement between Columbia Federal Savings Bank and Andrew L. Kaplan(5)
</TABLE>
A-39
<PAGE>
<TABLE>
<C> <S>
10.2(F) Change in Control Agreement between Haven Bancorp, Inc. and Mark A. Ricca dated as
of April 10, 1998 (filed herewith)
10.2(G) Change in Control Agreement between CFS Bank and Mark A. Ricca dated as of April
10, 1998 (filed herewith)
10.4 (a) Amended and Restated Columbia Federal Savings Bank Recognition and Retention
Plans and Trusts for Officers and Employees(6)
10.4 (b) Amended and Restated Recognition and Retention Plan and Trusts for Outside
Directors(6)
10.5 Haven Bancorp, Inc. 1993 Incentive Stock Option Plan(6)
10.6 Haven Bancorp, Inc. 1993 Stock Option Plan for Outside Directors(6)
10.7 Columbia Federal Savings Bank Employee Severance Compensation Plan, as amended(4)
10.8 Columbia Federal Savings Bank Consultation and Retirement Plan for Non-Employee
Directors(6)
10.9 Form of Supplemental Executive Retirement Plan(3)
10.10 Haven Bancorp, Inc. 1996 Stock Incentive Plan(4)
10.11 Purchase and Assumption Agreement, dated as of March 11, 1998, by and among
Intercounty Mortgage, Inc., CFS Bank and Resource Bancshares Mortgage Group,
Inc.(7)
11.0 Computation of earnings per share (filed herewith)
13.0 1998 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by reference to "Part
I--Subsidiaries"
23.0 Consent of Independent Auditors (filed herewith)
27.0 Financial Data Schedule (filed herewith)
99 Proxy Statement for 1999 Annual Meeting (filed herewith)
</TABLE>
- ------------------------
(1) Incorporated by reference into this document from the Exhibits to Form 10-Q
for the quarter ended September 30, 1998, filed on November 16, 1998.
(2) Incorporated by reference into this document from the Exhibits to Form 8-K,
Current Report, filed on January 30, 1996.
(3) Incorporated by reference into this document from the Exhibits to Form S-1,
Registration Statement and any amendments thereto, filed on April 14, 1993,
Registration No. 33-61048.
(4) Incorporated by reference into this document from the Exhibits to Form 10-K
for the year ended December 31, 1995, filed on March 29, 1996.
(5) Incorporated by reference into this document from the Exhibits to Form 10-K
for the year ended December 31, 1997, filed on March 31, 1998.
(6) Incorporated by reference into this document from the Exhibits to Form 10-K
for the year ended December 31, 1994, filed on March 30, 1995.
(7) Incorporated by reference into this document from the Exhibits to Form 8-K,
Current Report, filed on July 2, 1998.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the Company dated October 9, 1998 relating
to the Company's execution of a definitive purchase agreement in connection with
the purchase of Century Insurance Agency, Inc.
A-40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HAVEN BANCORP, INC.
By: /s/ PHILIP S. MESSINA
-----------------------------------------
Philip S. Messina
Chairman of the Board
Dated: March 30, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ PHILIP S. MESSINA Chairman of the Board,
- ------------------------------ President and Chief March 30, 1999
Philip S. Messina Executive Officer
/s/ GEORGE S. WORGUL Director
- ------------------------------ March 30, 1999
George S. Worgul
/s/ ROBERT M. SPROTTE Director
- ------------------------------ March 30, 1999
Robert M. Sprotte
/s/ MICHAEL J. FITZPATRICK Director
- ------------------------------ March 30, 1999
Michael J. Fitzpatrick
/s/ WILLIAM J. JENNINGS II Director
- ------------------------------ March 30, 1999
William J. Jennings II
/s/ MICHAEL J. LEVINE Director
- ------------------------------ March 30, 1999
Michael J. Levine
/s/ MSGR. THOMAS J. HARTMAN Director
- ------------------------------ March 30, 1999
Msgr. Thomas J. Hartman
/s/ CATHERINE CALIFANO Senior Vice President and
- ------------------------------ Chief Financial Officer March 30, 1999
Catherine Califano
A-41
<PAGE>
APPENDIX B
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FROM HAVEN BANCORP, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1998
GENERAL
Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") was formed on March
25, 1993 as the Holding Company for CFS Bank ("CFS" or the "Bank") in connection
with the Bank's conversion from a federally chartered mutual savings bank to a
federally chartered stock savings bank. The Company is headquartered in
Westbury, New York and its principal business currently consists of the
operation of its wholly owned subsidiary, CFS Bank.
The Bank's principal business has been and continues to be attracting retail
deposits from the general public and investing those deposits, together with
funds generated from operations primarily in one- to four-family, owner occupied
residential mortgage loans. In addition, the Bank will invest in debt, equity
and mortgage-backed securities to supplement its lending portfolio. The Bank
also invests, to a lesser extent, in multi-family residential mortgage loans,
commercial real estate loans and other marketable securities.
The Bank's results of operations are dependent primarily on its net interest
income, which is the difference between the interest income earned on its loan
and securities portfolios and its cost of funds, which consist of the interest
paid on its deposits and borrowed funds. The Bank's net income also is affected
by its non-interest income, including, beginning May 1, 1998, the results of the
acquisition of the loan production franchise of Intercounty Mortgage, Inc., its
provision for loan losses and its operating expenses consisting primarily of
compensation and benefits, occupancy and equipment, real estate operations, net,
federal deposit insurance premiums and other general and administrative
expenses. The earnings of the Bank are significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, and to a lesser extent by government policies and actions of regulatory
authorities.
FINANCIAL CONDITION
The Company had total assets of $2.40 billion at December 31, 1998 compared
to $1.97 billion at December 31, 1997, an increase of $420.6 million, or 21.3%.
The Company's portfolio of debt and equity securities and mortgage-backed
securities ("MBSs") available for sale ("AFS") totaled $889.3 million, an
increase of $389.9 million, or 78.1% at December 31, 1998 compared to $499.4
million at December 31, 1997. At December 31, 1998, $266.3 million of the AFS
securities portfolio were adjustable-rate securities and $623.0 million were
fixed-rate securities. At June 30, 1998, the Company transferred its remaining
debt and MBSs held to maturity portfolios totaling $183.6 million to securities
AFS. The transfer was done to enhance liquidity and take advantage of market
opportunities. In the third quarter of 1998, the Bank completed the
securitization of $105.7 million of residential mortgages with the Fannie Mae
("FNMA") and the underlying securities were transferred to securities available
for sale. This provided the Bank with additional collateral for borrowings, and
the ability to sell the securitized loans. The remaining growth in the AFS
portfolio in 1998 was primarily due to securities purchased with the investment
of deposit flows during the year not utilized for portfolio loan originations.
During 1998, the Company purchased $749.0 million of debt and equity securities
and MBSs for its AFS portfolio, of which $106.3 million were adjustable-rate and
$642.7 million were fixed-rate. Principal repayments, calls and proceeds from
sales of AFS securities totaled $650.1 million.
Net loans increased by $158.4 million, or 13.9% during 1998 to $1.30 billion
at December 31, 1998 from $1.14 billion at December 31, 1997. Loan originations
and purchases during 1998 totaled $1.22 billion
B-1
<PAGE>
(comprised of $1.04 billion of residential one- to four-family mortgage loans,
$156.8 million of commercial and multi-family real estate loans, $2.8 million of
construction loans and $16.4 million of consumer loans). One- to four-family
mortgage loan originations included $570.0 million of loans originated and
purchased for sale in the secondary market during 1998. During 1998, the Bank
sold $515.8 million of one- to four-family mortgage loans in the secondary
market on a servicing released basis. At December 31, 1998, loans held for sale
were $54.2 million. Commercial and multi-family real estate loan originations
increased by $23.2 million to $156.8 million in 1998 from $133.6 million in
1997, or 17.4% comprised of $88.5 million of multi-family loans and $68.3
million of commercial real estate loans. Total loans increased substantially
while the Company continued towards its objective to invest in adjustable-rate
loans. At December 31, 1998, total loans were comprised of $708.7 million
adjustable-rate loans and $602.0 million fixed-rate loans. During 1998,
principal repayments and satisfactions totaled $279.4 million and $0.6 million
was transferred to real estate owned ("REO"). In the third quarter of 1998, the
Company securitized $105.7 million in one- to four-family mortgage loans with
the FNMA. The resulting securities were retained and are included in the
Company's securities AFS portfolio. Notwithstanding the Company's objective of
investing in adjustable-rate loans, the Company, during the fourth quarter of
1998, sold $83.3 million of adjustable-rate mortgage loans previously held in
portfolio in several bulk-sale transactions. These loans had become less
desireable in the current market due to their high level of prepayments.
In 1998, the Company also sold $14.0 million of cooperative apartment loans
as part of its ongoing efforts to dispose of this portion of its portfolio.
Deposits totaled $1.72 billion at December 31, 1998, an increase of $357.7
million, or 26.2% from $1.37 billion at December 31, 1997. Interest credited
totaled $65.2 million in addition to deposit growth of $292.5 million. As of
December 31, 1998, the Bank had fifty-seven supermarket branches with total
deposits of $504.0 million compared to thirty-two locations with deposits
totaling $157.2 million at December 31, 1997. The supermarket branches are
located in the New York City boroughs of Queens, Brooklyn, Manhattan, Staten
Island, the New York counties of Nassau, Suffolk, Rockland and Westchester and
in Connecticut and New Jersey. Core deposits equaled 54.0% of total in-store
branch deposits, compared to 45.5% in traditional branches. Overall, core
deposits represented 47.7% of total deposits at December 31, 1998 compared to
42.7% at December 31, 1997.
Borrowed funds decreased 5.7% to $440.3 million at December 31, 1998 from
$466.8 million at December 31, 1997. The decrease in borrowings resulted from
the pay-down of short-term borrowings as a result of deposit growth during 1998.
In addition, at December 31, 1998 and 1997, the Company had $97.5 million and
$10.0 million, respectively, in securities purchased, net of securities sold,
against commitments to brokers. At December 31, 1998 and 1997, these respective
amounts were reflected as due to broker in the statements of financial
condition, with the related securities included in securities AFS. These
transactions settled in January 1999 and 1998, respectively, and the Company
utilized borrowed funds to repay the obligations to brokers. Including the
effect of these transactions, borrowed funds and due to broker increased by
$61.0 million, or 12.8%, from December 31, 1997 to December 31, 1998.
Stockholders' equity totaled $119.9 million, or 5.0% of total assets at
December 31, 1998, an increase of $7.0 million, or 6.2% from $112.9 million, or
5.7% of total assets at December 31, 1997. The increase reflects net income of
$8.2 million, an increase of $1.7 million related to the allocation of ESOP
stock, amortization of awards of shares of common stock by the Bank's
Recognition and Retention Plans and Trusts ("RRPs") and amortization of deferred
compensation plan and $0.5 million related to stock options exercised, and
related tax effect. These were partially offset by dividends declared of $2.6
million and a decrease in unrealized gains on securities AFS, net of tax effect,
of $0.7 million.
ASSET/LIABILITY MANAGEMENT
As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on a
B-2
<PAGE>
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets, other than those which possess a short term to
maturity. Since virtually all of the Company's interest-bearing liabilities and
interest-earning assets are at the Bank, virtually all of the Company's
interest-rate risk exposure lies at the Bank level. As a result, all significant
interest rate risk management procedures are performed at the Bank level. Based
upon the Bank's nature of operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The Bank's real estate loan
portfolio, concentrated primarily within the New York metropolitan area, is
subject to risks associated with the local economy. The Bank does not own any
trading assets. The Bank's interest rate management strategy is designed to
stabilize net interest income and preserve capital over a broad range of
interest rate movements.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within the same period. A gap
is considered positive when the amount of interest-earning assets maturing or
repricing exceeds the amount of interest-bearing liabilities maturing or
repricing within the same period. A gap is considered negative when the amount
of interest-bearing liabilities maturing or repricing exceeds the amount of
interest-earning assets maturing or repricing within the same period.
Accordingly, in a rising interest rate environment, an institution with a
positive gap would be in a better position to invest in higher yielding assets
which would result in the yield on its assets increasing at a pace closer to the
cost of its interest-bearing liabilities, than would be the case if it had a
negative gap. During a period of falling interest rates, an institution with a
positive gap would tend to have its assets repricing at a faster rate than one
with a negative gap, which would tend to restrain the growth of its net interest
income.
The Company closely monitors its interest rate risk as such risk relates to
its operational strategies. The Company's Board of Directors has established an
Asset/Liability Committee, responsible for reviewing its asset/liability
policies and interest rate risk position, which generally meets weekly and
reports to the Board on interest rate risk and trends on a quarterly basis.
B-3
<PAGE>
The following table ("gap table") sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at December 31, 1998 which
are anticipated by the Company, based upon certain assumptions described below,
to reprice or mature in each of the future time periods shown. Adjustable-rate
assets and liabilities are included in the table in the period in which their
interest rates can next be adjusted. For purposes of this table, prepayment
assumptions for fixed interest-rate assets are based upon industry standards as
well as the Company's historical experience and estimates. The Company has
assumed an annual prepayment rate of approximately 24% for its fixed-rate MBS
portfolio. The computation of the estimated one-year gap assumes that the
interest rate on savings account deposits is variable and, therefore, interest
sensitive. During the falling interest rate environment throughout 1998, these
funds were maintained at an average rate of 2.81%. The Company has assumed that
its savings, NOW and money market accounts, which totaled $736.5 million at
December 31, 1998, are withdrawn at the annual percentages of approximately 9%,
5% and 15%, respectively.
<TABLE>
<CAPTION>
MORE THAN MORE THAN MORE THAN MORE THAN
THREE ONE YEAR THREE FIVE YEARS TEN YEARS
MONTHS THREE TO TO YEARS TO TO TO MORE THAN
OR LESS TWELVE MONTHS THREE YEARS FIVE YEARS TEN YEARS TWENTY YEARS TWENTY YEARS TOTAL
--------- -------------- ----------- ----------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING
ASSETS:
Mortgage loans (1)..... $ 164,423 185,609 465,865 450,661 1,273 636 -- 1,268,467
Other loans (1)........ 12,434 9,042 1,885 2,438 4,138 4,782 -- 34,719
Loans held for sale.... 54,188 -- -- -- -- -- -- 54,188
Securities available
for sale............. 889,251 -- -- -- -- -- -- 889,251
Money market
investments.......... 1,720 -- -- -- -- -- -- 1,720
--------- -------------- ----------- ----------- ----------- ------------- ------------- ---------
Total interest-earning
assets............... 1,122,016 194,651 467,750 453,099 5,411 5,418 -- 2,248,345
Premiums, net of
unearned discount and
deferred fees (2).... 852 148 355 344 4 5 -- 1,708
--------- -------------- ----------- ----------- ----------- ------------- ------------- ---------
Net interest-earning
assets............... 1,122,868 194,799 468,105 453,443 5,415 5,423 -- 2,250,053
--------- -------------- ----------- ----------- ----------- ------------- ------------- ---------
INTEREST-BEARING
LIABILITIES:
Savings accounts....... 12,040 36,557 155,204 101,244 128,498 88,821 24,900 547,264
NOW accounts........... 1,511 4,521 66,786 17,862 23,817 13,315 2,476 130,288
Money market
accounts............. 2,177 6,524 26,348 12,387 9,691 1,757 100 58,984
Certificate accounts... 296,671 471,205 74,786 57,598 1,489 -- -- 901,749
Borrowed funds......... 151,567 25,233 82,620 56,942 99,000 -- 24,984 440,346
Due to broker.......... 97,458 -- -- -- -- -- -- 97,458
--------- -------------- ----------- ----------- ----------- ------------- ------------- ---------
Total interest-bearing
liabilities.......... $ 561,424 544,040 405,744 246,033 262,495 103,893 52,460 2,176,089
--------- -------------- ----------- ----------- ----------- ------------- ------------- ---------
Interest sensitivity
gap.................. $ 561,444 (349,241) 62,361 207,410 (257,080) (98,470) (52,460) 73,964
--------- -------------- ----------- ----------- ----------- ------------- ------------- ---------
Cumulative interest
sensitivity gap...... $ 561,444 212,203 274,564 481,974 224,894 126,424 73,964
--------- -------------- ----------- ----------- ----------- ------------- -------------
Cumulative interest
sensitivity gap as a
percentage of total
assets............... 23.44% 8.86% 11.46% 20.12% 9.39% 5.28% 3.09%
Cumulative net
interest-earning
assets as a
percentage of
interest-sensitive
liabilities.......... 200.00% 119.20% 118.17% 127.43% 111.13% 105.95% 103.40%
</TABLE>
- ------------------------------
(1) For purposes of the gap analysis, mortgage and other loans are reduced for
non-accural loans but are not reduced for the allowance for loan losses.
(2) For purposes of the gap analysis, premiums, unearned discount and deferred
fees are pro-rated.
B-4
<PAGE>
At December 31, 1998, the Company's total interest-earning assets maturing
or repricing within one year exceeded its total interest-bearing liabilities
maturing or repricing within the same time period by $212.2 million,
representing a one year cumulative gap ratio of 8.86%.
In order to reduce its sensitivity to interest rate risk, the Company's
current strategy includes emphasizing the origination or purchase for portfolio
of adjustable-rate loans, debt securities and MBSs and maintaining an AFS
securities portfolio. During 1998, the Company purchased $106.3 million of
adjustable-rate MBSs which are expected to help protect net interest margins
during periods of rising interest rates. In 1998, the Company originated or
purchased $363.3 million of adjustable-rate mortgage loans for portfolio.
Historically, the Company has been able to maintain a substantial level of core
deposits which the Company believes helps to limit interest rate risk by
providing a relatively stable, low cost long-term funding base. At December 31,
1998, core deposits represented 47.7% of deposits compared to 42.7% of deposits
at December 31, 1997. Core deposits included $158.8 million of "liquid asset"
account balances at December 31, 1998. This account was introduced in the second
quarter of 1998 and currently pays an initial rate of 4.25% for balances over
$2,500. The Company expects to attract a higher percentage of core deposits from
its supermarket branch locations as these locations continue to grow and mature.
The Company's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the change in
net portfolio value ("NPV") over a range of interest rate change scenarios. NPV
is the present value of expected cash flows from assets, liabilities, and off-
balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. The Office of Thrift Supervision ("OTS") also produces a similar
analysis using its own model, based upon data submitted on the Bank's quarterly
Thrift Financial Reports, the results of which may vary from the Company's
internal model primarily due to differences in assumptions utilized between the
Company's internal model and the OTS model, including estimated loan prepayment
rates, reinvestment rates and deposit decay rates. For purposes of the NPV
table, prepayment speeds similar to those used in the Gap table were used. The
following table sets forth the Company's NPV as of December 31, 1998.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
NET PORTFOLIO VALUE AS A % OF ASSETS
----------------------------------- ------------------------
DOLLAR PERCENTAGE NPV PERCENTAGE
CHANGES IN RATES IN BASIS POINTS AMOUNT CHANGE CHANGE RATIO CHANGE(1)
- ------------------------------------------------ ---------- ---------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
200............................................. $ 96,950 $ (71,307) (42.38)% 4.43% (38.64 )%
100............................................. 143,950 (24,307) (14.45 ) 6.36 (11.91 )
Base case....................................... 168,257 -- -- 7.22 --
(100)........................................... 209,554 41,297 24.54 8.76 21.33
(200)........................................... 242,294 74,037 44.00 9.91 37.26
</TABLE>
(1) Based on the portfolio value of the Company's assets in the base case
scenario.
As in the case with the Gap table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV requires the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Company's interest-sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements
provide an indication of the Company's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Company's net portfolio value and will differ from actual results.
B-5
<PAGE>
ANALYSIS OF CORE EARNINGS
The Company's profitability is primarily dependent upon net interest income,
which represents the difference between income on interest-earning assets and
expense on interest-bearing liabilities. Net interest income is dependent on the
average balances and rates received on interest-earning assets, and the average
balances and rates paid on interest-bearing liabilities. Net income is further
affected by non-interest income, non-interest expense, the provision for loan
losses, and income taxes.
The following table sets forth certain information relating to the Company's
average consolidated statements of financial condition and consolidated
statements of income for the three years ended December 31, 1998 and reflects
the average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average daily balances. The average
balance of loans includes loans on which the Company has discontinued accruing
interest. The yields and costs include fees which are considered adjustments to
yields.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- --------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
--------- --------- ----------- --------- --------- ----------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans.......... $1,265,803 $ 96,146 7.60% $ 956,819 $ 75,266 7.87% $ 647,516 $ 53,110 8.20%
Other loans............. 33,444 3,303 9.88 32,639 3,220 9.87 35,952 3,638 10.12
MBSs(1)................. 628,556 42,040 6.69 482,523 32,755 6.79 543,810 37,517 6.90
Money market
investments........... 3,499 186 5.32 5,743 343 5.97 2,175 176 8.09
Debt and equity
securities (1)........ 151,217 10,010 6.62 215,926 14,722 6.82 227,521 14,812 6.51
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets................ 2,082,519 151,685 7.28 1,693,650 126,306 7.46 1,456,974 109,253 7.50
Non-interest earning
assets................ 133,494 88,231 61,120
--------- --------- ---------
Total assets............ 2,216,013 1,781,881 1,518,094
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Savings accounts........ 441,759 12,415 2.81 371,872 9,338 2.51 373,337 9,314 2.49
Certificate accounts.... 878,991 49,965 5.68 678,599 39,309 5.79 572,768 32,436 5.66
NOW accounts............ 187,297 1,364 0.73 134,546 1,130 0.84 111,425 999 0.90
Money market accounts... 57,597 2,041 3.54 54,107 1,823 3.37 58,108 1,929 3.32
Borrowed funds.......... 470,531 27,991 5.95 389,091 22,800 5.86 285,951 16,690 5.84
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities........... 2,036,175 93,776 4.61 1,628,215 74,400 4.57 1,401,589 61,368 4.38
Other liabilities....... 62,121 47,247 20,628
--------- --------- ---------
Total liabilities....... 2,098,296 1,675,462 1,422,217
Stockholders' equity.... 117,717 106,419 95,877
--------- --------- ---------
Total liabilities and
stockholders'
equity................ $2,216,013 $1,781,881 $1,518,094
--------- --------- ---------
--------- --------- ---------
Net interest income/net
interest rate spread
(2)................... $ 57,909 2.67% $ 51,906 2.89% $ 47,885 3.12%
--------- --- --------- --- --------- ---------
Net interest-earning
assets/net interest
margin (3)............ $ 46,344 2.78% $ 65,435 3.06% $ 55,385 3.29%
--------- --- --------- --- --------- ---------
Ratio of
interest-earning
assets to interest-
bearing liabilities... 102.28% 104.02% 103.95%
--------- --------- ---------
</TABLE>
- ------------------------------
(1) Includes AFS securities and securities held to maturity.
(2) Net interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income before provision for loan
losses divided by average interest-earning assets.
B-6
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
GENERAL
The Company reported net income of $8.2 million, or $0.95 per basic share
for 1998 compared to net income of $11.1 million, or $1.32 per basic share for
1997. The $2.9 million decrease in earnings was primarily attributable to an
increase of $31.5 million in non-interest expense and an increase of $19.4
million in interest expense. These factors were substantially offset by interest
income which increased by $25.4 million and non-interest income which increased
by $19.2 million, combined with decreases of $3.2 million in income tax expense
and $85,000 in the provision for loan losses.
INTEREST INCOME
Interest income increased by $25.4 million, or 20.1% to $151.7 million in
1998 from $126.3 million in 1997. The increase in interest income was primarily
attributable to a $388.9 million increase in average interest-earning assets,
partially offset by an 18 basis point decrease in the overall average yield on
interest-earning assets.
Interest income on mortgage loans increased by $20.9 million, or 27.7% to
$96.1 million in 1998 from $75.3 million in 1997 primarily as a result of an
increase in the average mortgage loan balance of $309.0 million, partially
offset by a decrease in the average yield on mortgage loans of 27 basis points.
During 1998, the Bank originated or purchased $635.1 million of mortgage loans
for portfolio. Mortgage loans were originated at an average rate of 7.08% for
1998 compared to 7.52% for 1997. The decline in the average rate for
originations was primarily due to decreases in the rate indices used for
residential and commercial real estate loans and the increasing percentage of
relatively lower yielding residential mortgages. These indices, which are the 30
year treasury bond and the 5 year treasury note, declined 83 and 116 basis
points, respectively, during 1998 when compared to December 31, 1997. In
addition, loan principal repayments and satisfactions during 1998 totaled $265.7
million in 1998 compared to $151.2 million in 1997. Also during 1998, the Bank
sold approximately $104.7 million in loans previously held in portfolio,
including $83.3 million of adjustable-rate mortgage loans in several bulk sale
transactions, and $14.0 million of cooperative apartment loans, and securitized
$105.7 million of one- to four-family mortgage loans with FNMA. Interest income
on other loans increased by $83,000, or 2.6% to $3.3 million in 1998 from $3.2
million in 1997 due to an increase of $0.8 million in average balance and an
increase of 1 basis point in the average yield.
B-7
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------- -------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
IN NET INTEREST INCOME IN NET INTEREST INCOME
DUE TO DUE TO
VOLUME RATE NET VOLUME RATE NET
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans................................ $ 23,545 (2,665) 20,880 24,376 (2,220) 22,156
Other loans................................... 80 3 83 (329) (89) (418)
MBSs(1)....................................... 9,775 (490) 9,285 (4,172) (590) (4,762)
Money market investments...................... (123) (34) (157) 223 (56) 167
Debt and equity securities(1)................. (4,292) (420) (4,712) (776) 686 (90)
--------- --------- --------- --------- --------- ---------
Total......................................... 28,985 (3,606) 25,379 19,322 (2,269) 17,053
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Savings accounts.............................. 1,880 1,197 3,077 (41) 65 24
Certificate accounts.......................... 11,414 (758) 10,656 6,113 760 6,873
NOW accounts.................................. 397 (163) 234 200 (69) 131
Money market accounts......................... 123 95 218 (135) 29 (106)
Borrowed funds................................ 4,836 355 5,191 6,053 57 6,110
--------- --------- --------- --------- --------- ---------
Total......................................... 18,650 726 19,376 12,190 842 13,032
--------- --------- --------- --------- --------- ---------
Net change in net interest income............. $ 10,335 (4,332) 6,003 7,132 (3,111) 4,021
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Includes AFS securities and securities held to maturity.
Interest income on MBSs was $42.0 million for 1998, an increase of $9.3
million, or 28.3% over the $32.8 million earned in 1997. This reflects a $146.0
million increase in the average balance of MBSs for 1998 to $628.6 million from
$482.5 million for 1997, partially offset by a decrease in the average yield on
the MBS portfolio of 10 basis points to 6.69% for 1998 from 6.79% in 1997.
During 1998, the Company purchased $687.9 million of MBSs for its AFS portfolio
which were partially offset by sales totaling $357.3 million and principal
repayments of $199.6 million. Also during 1998, the Bank securitized $105.7
million in residential real estate loans and retained the underlying securities
in its AFS portfolio.
Interest income on money market investments decreased by $157,000, or 45.8%
to $186,000 in 1998 from $343,000 in 1997, primarily as a result of a decrease
in average balances of $2.2 million from $5.7 million in 1997 to $3.5 million in
1998. Interest on debt and equity securities decreased by $4.7 million, or 32.0%
to $10.0 million in 1998 from $14.7 million in 1997, primarily as a result of a
decrease in the average balance of $64.7 million, coupled with a decrease in the
average yield of 20 basis points. The decrease in the average balance of debt
and equity securities during 1998 is due primarily to sales of $97.7 million,
partially offset by purchases fo $36.1 million.
B-8
<PAGE>
INTEREST EXPENSE
Interest expense increased by $19.4 million, or 26.0% to $93.8 million in
1998 from $74.4 million in 1997. The increase was primarily attributable to an
increase in interest on deposits of $14.2 million, or 27.5% to $65.8 million in
1998 from $51.6 million in 1997. The increase in interest on deposits was due to
an increase of $326.5 million, or 26.3% in average deposits to $1.57 billion in
1998 from $1.24 billion in 1997, coupled with a 4 basis point increase in the
average cost of deposits. Interest expense on borrowed funds increased by $5.2
million, or 22.8% during 1998, due to an increase of $81.4 million in the
average balance, coupled with a 9 basis point increase in the average cost of
borrowed funds.
The increase in the average balance of deposits is primarily attributable to
the Bank's continuing expansion of the in-store banking program. As of December
31, 1998, the Bank had fifty-seven in-store branches with deposits totaling
$504.0 million, as compared to thirty-two branches with deposits totaling $157.2
million as of December 31, 1997. Interest expense on certificate accounts
increased by $10.7 million, or 27.1% from 1997 to 1998. The in-store banking
expansion contributed to the increase in the average balance of certificate
accounts of $200.4 million, or 29.5%, partially offset by a 11 basis point
decrease in the average cost of certificate accounts. Interest expense on
savings accounts increased by $3.1 million, or 33.0%, from 1997 to 1998. The
increase was also due to the in-store banking expansion, as well as the
introduction of a "Liquid Asset" account in the in-store branches during the
second quarter of 1998. As of December 31, 1998, the balance of these accounts
was $158.8 million. This account currently pays 4.25% for the first year on
account balances of $2,500 or more. Overall, the average balance of savings
accounts experienced a net increase of $69.9 million, or 18.8%, coupled with a
30 basis point increase in the average cost, which is attributable to the
aforementioned Liquid Asset account. Interest expense on NOW accounts and money
market accounts increased by $234,000 and $218,000, respectively, in 1998 over
1997, primarily as a result of the increase in the average balance of such
accounts. The average yield paid on money market accounts increased by 17 basis
points to 3.54% for 1998, primarily as a result of a shift in the average
balance of such deposits from traditional branches to the in-store locations,
which paid comparatively higher money market rates.
Interest expense on borrowed funds increased by $5.2 million, or 22.8%,
primarily as a result of the increase in the average balance of borrowed funds
of $81.4 million, or 20.9%, coupled with a 9 basis point increase in the average
cost of borrowed funds from 5.86% in 1997 to 5.95% in 1998. The increase in the
average balance of borrowed funds is due primarily to fund the increase in
residential loan originations and purchases by CFS Intercounty Mortgage, the
Bank's residential lending division, as well as to fund purchases of securities
for the Company's AFS portfolio.
NET INTEREST INCOME
Net interest income increased by $6.0 million, or 11.6% to $57.9 million in
1998 from $51.9 million in 1997. The average yield on interest-earning assets
decreased to 7.28% in 1998 from 7.46% in 1997, as a result of an overall decline
in market indices which serve as leading indicators for mortgage loan rates and
rates on securities. The average cost of liabilities increased by 4 basis points
to 4.61% in 1998 from 4.57% in 1997 primarily due to the growth in certificate
accounts and the introduction of the Liquid Asset savings account in 1998. The
net interest rate spread was 2.67% in 1998 compared to 2.89% in 1997.
PROVISION FOR LOAN LOSSES
The Bank provided $2.7 million for loan losses in 1998, which was virtually
flat as compared to 1997. The provision for loan losses reflects management's
periodic review and evaluation of the loan portfolio. The slight decrease in the
provision for loan losses was mainly due to the continued decline in non-
performing loans to $8.4 million at December 31, 1998 from $12.5 million at
December 31, 1997. As of December 31, 1998, the allowance for loan losses was
$14.0 million compared to $12.5 million at December 31, 1997. As of December 31,
1998, the allowance for loan losses was 1.07% of total loans
B-9
<PAGE>
compared to 1.09% of total loans at December 31, 1997. The slight decrease was
attributable to the substantial growth in the loan portfolio. The allowance for
loan losses was 166.70% of non-performing loans at December 31, 1998 compared to
99.97% at December 31, 1997. The increase is the result of the significant
decline in non-performing loans from December 31, 1997 to December 31, 1998.
NON-INTEREST INCOME
Non-interest income increased by $19.2 million, or 138.3%, from $13.9
million in 1997 to $33.1 million in 1998. More than half of the increase in
non-interest income is attributable to the $10.3 million in servicing released
premiums and fees on loans sold in the secondary market. Savings and checking
fees were $9.8 million in 1998, a $4.3 million, or 79.3% increase over 1997. Net
gains on sales of interest-earning assets were $2.9 million in 1998. In 1997,
the Company reported a net loss on such sales of $5,000. Insurance, annuity and
mutual fund fees generated in 1998 were $5.9 million, a $2.1 million, or 56.3%
increase over the $3.8 million earned in 1997. Other non-interest income
increased by $1.0 million, or 65.2%, to $2.6 million in 1998, from $1.6 million
in 1997, primarily as a result of the Bank's in-store banking expansion.
On May 1, 1998 the Bank completed the purchase of the loan production
franchise of Intercounty Mortgage, Inc. ("IMI"). The Bank's prior residential
lending operations and the newly acquired production franchise of IMI operate
under the name CFS Intercounty Mortgage Company, originating and purchasing
residential loans for the Bank's portfolio and for sale in the secondary market.
In 1998 the Bank originated $1.04 billion in residential mortgage loans, $570.0
million of which were originated for sale in the secondary market. During 1998,
the Bank sold $515.8 million to investors in the secondary market on a servicing
released basis, and recognized $10.3 million in related servicing released
premiums and fees.
The increase in savings and checking fees and fees generated from the sale
of insurance, annuities, and mutual funds were primarily a result of the Bank's
in-store banking expansion. During 1998, the Bank opened twenty-five in-store
branches, contributing to the increase in in-store deposits of $346.8 million,
or 220.6% from December 31, 1997 to December 31, 1998. During 1998, the Company
sold $453.7 million in securities available for sale, resulting in net gains of
$1.2 million. During the third quarter of 1998, the Bank sold $14.0 million of
cooperative apartment loans in a bulk transaction as part of its ongoing effort
to divest itself of this portion of the portfolio, resulting in a $1.0 million
gain. During the fourth quarter of 1998, the Bank realized $0.7 million in gains
on bulk sales of adjustable-rate residential mortgage loans previously held in
portfolio. The loans were sold in response to the high level of prepayments
experienced with these loans. Other non-interest income increased primarily as a
result of ATM surcharge fees which increased by $0.9 million, or 517.9% from
$0.2 million in 1997, to $1.1 million in 1998. ATM surcharge fees, which are
fees charged to non-customers who use the Bank's ATM network, increased
primarily as a result of the Bank's in-store branch expansion, as well as
increases in the fees charged for such transactions.
NON-INTEREST EXPENSE
Non-interest expense increased by $31.5 million, or 68.6%, from $45.8
million in 1997 to $77.3 million in 1998. Compensation and benefits expense
increased by $17.0 million, or 69.9%, from $24.3 million in 1997 to $41.2
million in 1998. Occupancy and equipment expense increased by $4.7 million, or
73.7% from $6.3 million in 1997 to $11.0 million in 1998. The increases in
compensation and benefits, occupancy and equipment, and advertising and
promotion expenses were due primarily to the Bank's in-store banking expansion,
as well as the expansion of the Bank's residential lending function with the
acquisition of the loan production franchise of IMI. During 1998, the Bank
opened twenty-five new in-store branches, while the acquisition of the loan
production franchise of IMI added 6 primary loan origination offices and several
smaller satellite offices to the Company's facilities. Occupancy and equipment
expense also increased as a result of the purchase of the Company's new
headquarters, which was completed in the third quarter of 1998.
B-10
<PAGE>
Federal deposit insurance premiums increased by $134,000, or 18.2%, from
$736,000 in 1997 to $870,000 in 1998, due to the increase in insurable deposits
as a result of the in-store banking expansion. Other non-interest expenses
increased by $10.0 million, or 70.9%, from $14.2 million in 1997 to $24.2
million in 1998. $1.4 million of the increase is due to the increase in data
processing expenses which increased as a result of the in-store banking
expansion and the increase in the number of transactions processed. Advertising
and promotion expense increased by $1.1 million, or 64.7% from $1.7 million in
1997 to $2.8 million in 1998. Other items that contributed to the increase in
other non-interest expense were telephone expense, which increased by $925,000,
stationery, printing, and office supplies expense, which increased by $570,000,
and ATM transaction expenses, which increased by $540,000. These increases were
directly related to the in-store banking expansion and the operations of CFS
Intercounty Mortgage. Amortization of goodwill increased by $710,000, primarily
as a result of the acquisition of IMI, while mortgage tax expense and appraisal
expenses related to loans sold in the secondary market increased by $540,000 and
$820,000, respectively. The balance of the increase in other non-interest
expenses were generally related to the Bank's in-store branch expansion and the
expansion of the residential lending operations as a result of the acquisition
of IMI. These increases were partially offset by a $1.2 million reduction in
non-performing loan expense due to the recapture of reserves established for the
bulk sales on REO and non-performing loans in 1994. The increase in non-interest
expense was partially offset by a $344,000 decrease in REO operations, net.
INCOME TAX EXPENSE
Income tax expense was $2.9 million in 1998, compared to $6.1 million in
1997. The effective tax rate for 1998 was 26.4% compared to 35.6% in 1997. The
decrease in the effective tax rate was primarily due to the establishment of
Columbia Preferred Capital Corp. ("CPCC"), the Bank's real estate investment
trust ("REIT") subsidiary, during the second quarter of 1997. The tax provision
for 1998 includes the effect of CPCC's operations for the full year of 1998
compared to one quarter in 1997. The lower tax rate was also due to an
adjustment of the Bank's tax accrual upon the filing of the Company's Federal,
New York State and City tax returns for 1997 during September 1998, as well as a
state tax credit recognized for mortgage recording taxes paid on loans
originated in certain counties of New York State.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
GENERAL
The Company reported net income of $11.1 million for 1997 compared to net
income of $9.4 million for 1996. The $1.7 million increase in earnings was
primarily attributable to an increase of $17.1 million in interest income, an
increase of $4.4 million in non-interest income, a decrease of $0.4 million in
the provision for loan losses and a decrease of $0.3 million in income tax
expense. These factors were mainly offset by interest expense which increased by
$13.0 million and non-interest expense which increased by $7.4 million primarily
due to the Bank's in-store branch expansion.
INTEREST INCOME
Interest income increased by $17.1 million, or 15.6% to $126.3 million in
1997 from $109.3 million in 1996. The increase was primarily the result of an
increase in interest income on mortgage loans which was partially offset by a
decrease in interest income on MBSs and other loans.
Interest income on mortgage loans increased by $22.2 million, or 41.7% to
$75.3 million in 1997 from $53.1 million in 1996 primarily as a result of an
increase in the average mortgage loan balance of $309.3 million partially offset
by a decrease in average yield on mortgage loans of 33 basis points. During
1997, the Bank originated or purchased $459.8 million of mortgage loans.
Mortgage loans were originated at an average rate of 7.52% for 1997 compared to
7.56% for 1996. The decline in the average rate for
B-11
<PAGE>
originations was primarily due to decreases in the rate indices used for
residential and commercial real estate loans and the increasing percentage of
relatively lower yielding residential mortgages. These indices which are the 30
year treasury bond and the 5 year treasury note declined 71 and 50 basis points,
respectively, during 1997 when compared to December 31, 1996. In addition, loan
satisfactions during 1997 totaled $134.1 million, some of which were at higher
interest rates than current originations. Principal repayments totaled $151.2
million in 1997 compared to $78.2 million in 1996.
Interest income on other loans decreased by $418,000, or 11.5% to $3.2
million in 1997 from $3.6 million in 1996 due to a decrease of $3.3 million in
average balances and a decline of 25 basis points in the average yield. The
Bank's consumer loan products with the exception of equity loan/lines were
discontinued in November 1996. However, during the fourth quarter of 1997, the
Bank added unsecured loans to its list of consumer loan products to expand the
array of products available to its customers.
Interest income on MBSs was $32.8 million for 1997 compared to $37.5 million
in 1996. The average balance for 1997 decreased by $61.3 million, or 11.3% to
$482.5 million from $543.8 for 1996. In addition, the average yield on the MBS
portfolio decreased by 11 basis points to 6.79% for 1997 from 6.90% in 1996.
During 1997, the Bank purchased $421.9 million of MBSs for its AFS portfolio
which were partially offset by sales totaling $226.3 million. The MBS securities
purchased for the AFS portfolio during 1997 represented 82.5% of total purchases
for the AFS portfolio because these securities allow the Bank to shorten its
duration exposure for net interest margin purposes and also provide a better
cash flow for reinvestment purposes. The sales from the AFS portfolio were used
to fund mortgage loan originations, purchases of loans in the secondary market
and also for managing the AFS portfolio to improve overall yield and shorten
duration of various securities.
Interest income on money market investments increased by $167,000, or 94.9%
to $343,000 in 1997 from $176,000 in 1996 primarily as a result of an increase
in average balances of $3.6 million in 1997.
Interest on debt and equity securities decreased by $90,000, or 0.6% to
$14.7 million in 1997 from $14.8 million in 1996 primarily as a result of a
decrease in the average balance of $11.6 million partially offset by an increase
in average yield of 31 basis points. During 1997, the Company purchased $89.2
million of debt and equity securities for its AFS portfolio which were offset by
sales totaling $111.4 million. The increase in the overall yield to 6.82% from
6.51% was due to the purchase of callable agency securities and sales of FNMA
preferred stock.
INTEREST EXPENSE
Interest expense increased by $13.0 million, or 21.2% to $74.4 million in
1997 from $61.4 million in 1996. The increase was partially attributable to an
increase in interest on deposits of $6.9 million, or 15.5% to $51.6 million in
1997 from $44.7 million in 1996. The increase in interest on deposits was due to
an increase of $123.5 million, or 11.1% in average deposits to $1.24 billion in
1997 from $1.12 billion in 1996. The increase in average deposits was due to
inflows of $145.1 million in the supermarket branches and $104.4 million in the
traditional branches. The overall cost of deposits was 4.16% in 1997 compared to
4.00% in 1996.
Interest expense on certificate accounts increased by $6.9 million, or 21.2%
to $39.3 million in 1997 from $32.4 million in 1996. The average balance of
certificate accounts increased by $105.8 million, or 18.5% to $678.6 million in
1997 from $572.8 million in 1996. The increase in average balances of
certificate accounts was primarily due to inflows of $98.4 million in the
supermarket branches and $82.1 million in the traditional branches. The average
cost of certificates increased to 5.79% in 1997 from 5.66% in 1996. In 1997,
passbook accounts experienced an excess of deposits over withdrawals of $14.0
million primarily due to inflows into the supermarket branches of $28.7 million.
Certificates of deposit experienced an excess of deposits over withdrawals of
$141.3 million. The Company's in-store branch program accounted for $98.4
million of the increase in deposit balances for certificates of deposit. Money
market accounts decreased by $3.9 million during 1997.
B-12
<PAGE>
Interest on borrowed funds increased by $6.1 million, or 36.6% to $22.8
million in 1997 compared to $16.7 million in 1996. Borrowed funds on an average
basis increased by $103.1 million in 1997 due to the addition of $25.0 million
of capital securities issued by Haven Capital Trust I and the addition of an
$85.0 million leverage program which was implemented during the first quarter to
offset the additional interest expense resulting from the issuance of the
capital securities. The average cost of borrowings increased to 5.86% in 1997
from 5.84% in 1996.
NET INTEREST INCOME
Net interest income increased by $4.0 million, or 8.4% to $51.9 million in
1997 from $47.9 million in 1996. The average yield on interest-earning assets
decreased to 7.46% in 1997 from 7.50% in 1996, and the average cost of
liabilities increased by 19 basis points to 4.57% in 1997 from 4.38% in 1996
primarily due to the growth in certificate of deposit accounts and the issuance
of the trust preferred securities. The net interest rate spread was 2.89% in
1997 compared to 3.12% in 1996.
PROVISION FOR LOAN LOSSES
The Bank provided $2.7 million for loan losses in 1997 compared to $3.1
million in 1996. The provision for loan losses reflects management's periodic
review and evaluation of the loan portfolio. The decrease in the provision for
loan losses was mainly due to the continued decline in non-performing loans to
$12.5 million at December 31, 1997 from $13.9 million at December 31, 1996. As
of December 31, 1997, the allowance for loan losses was $12.5 million compared
to $10.7 million at December 31, 1996. As of December 31, 1997, the allowance
for loan losses was 1.09% of total loans compared to 1.26% of total loans at
December 31, 1996. The decrease was attributable to the growth in the loan
portfolio and a decline in non-performing loans. The allowance for loan losses
was 99.97% of non-performing loans at December 31, 1997 compared to 77.05% at
December 31, 1996.
NON-INTEREST INCOME
Non-interest income increased by $4.4 million, or 45.6% to $13.9 million in
1997 from $9.6 million in 1996. Fee income on savings and checking accounts
increased by $2.1 million, or 62.2% primarily due to an increase of
approximately 53,000 in the number of savings and checking accounts. This growth
was primarily due to the Company's in-store branch program which added
approximately 48,000 savings and checking accounts during 1997. Insurance,
annuity and mutual fund fees increased by $644,000, or 20.7% due to an increase
of $185,000 in annuity income and an increase of $471,000 in mutual fund income.
The increase in sales of annuity and mutual fund products by CFS Investment
Services, Inc. (formerly Columbia Investment Services, Inc.) ("CFSI"), the
Bank's wholly-owned subsidiary, is partially due to the increased demand for
alternative sources of investments by the Bank's depositors and the addition of
the supermarket branches. Approximately 63% of CFSI sales were external. Loan
fees and servicing income increased by $1.3 million, or 72.1% to $3.1 million in
1997 from $1.8 million in 1996. The increase was attributable to a prepayment
fee of $2.0 million on a commercial real estate loan during the fourth quarter
of 1997. During 1997, the Company realized a net loss of $5,000 on the sales of
interest-earning assets. Miscellaneous income increased by $456,000, or 40.9% to
$1.6 million in 1997 from $1.1 million in 1996. The increase is primarily due to
an increase of $186,000 in fees on ATM surcharges and $142,000 due to the
close-out of CFSB Funding, Inc., the Bank's finance subsidiary during 1997.
Also, fee income on refinance transactions increased by $67,000 from 1996.
NON-INTEREST EXPENSE
Non-interest expense increased by $7.4 million, or 19.2% to $45.8 million in
1997 from $38.5 million in 1996. Non-interest expense for 1996 included a
one-time SAIF recapitalization charge of $6.8 million which was paid during the
fourth quarter of 1996. Excluding this special assessment, non-interest expense
increased by $14.2 million, or 44.8% in 1997. The Company's in-store branch
expansion program accounted for $11.5 million of the increase in 1997.
Compensation and benefit costs increased by $8.5
B-13
<PAGE>
million, or 54.1% to $24.3 million in 1997 from $15.7 million in 1996. The
in-store branch expansion accounted for $5.3 million of the increase in
compensation costs since the Bank added 226 employees for its supermarket
branches in 1997. Salary costs for the Bank's subsidiary, CFSI, also increased
by $540,000 due to higher sales volume. Federal social security taxes increased
by $537,000 and the cost incurred for hospitalization, group life insurance,
federal and NYS unemployment insurance increased by $431,000 from the prior year
due to the increase in staff. ESOP compensation increased by $201,000 from 1996
due to the increase in the average price of Haven Bancorp common stock for the
year. Occupancy and equipment costs increased by $2.9 million, or 82.1% to $6.3
million in 1997 from $3.5 million in 1996 primarily due to the addition of 28
supermarket branches during 1997 and a $150,000 charge for obsolete signage in
connection with the name change to CFS Bank. REO operations, net increased by
$75,000, or 27.1% to $352,000 for 1997 from $277,000 for 1996. The increase is
due to a decline in profits realized on the sale of REO properties since the REO
portfolio, exclusive of reserves, decreased to $542,000 at December 31, 1997
from $1.1 million at December 31, 1996. The significant decrease in the federal
deposit insurance premium costs of $1.6 million was due to a decrease in the
assessment rate from 23 basis points in 1996 to 6.48 basis points in 1997.
Miscellaneous operating costs increased by $4.3 million, or 44.1% to $14.2
million in 1997 from $9.8 million in 1996. Operating expenses including
stationery, telephone, postage and insurance increased by $1.6 million and
professional consulting fees increased by $555,000 from 1996 primarily due to
the in-store branch program and services related to the formation of CPCC. In
addition, the Bank incurred staff placement costs of $184,000 primarily for
in-store branches in New Jersey and Connecticut. Advertising costs increased by
$430,000 due to the growth in both the loan portfolio and deposit base. NYCE and
PLUS fees increased by $122,000 also due to the growth in the deposit base.
Appraisal and credit costs increased by $162,000 during 1997 due to the growth
in the loan portfolio. Miscellaneous operating losses increased by $416,000
because the results for 1996 included the reversal of a reserve regarding claims
subsequently paid by a check collection service. Operating expenses for CFSI
increased by $209,000 due to higher sales volume.
INCOME TAX EXPENSE
Income tax expense was $6.1 million in 1997 compared to $6.4 million in
1996. The effective tax rate for 1997 was 35.6% compared to 40.6% for 1996. The
decrease in the effective tax rate is due to several factors: first, during the
first quarter of 1996, a deferred tax liability of $330,000 was reversed related
to the potential recapture of the New York City tax bad debt reserve which was
no longer necessary due to New York City tax legislation enacted earlier this
year. The New York City tax law was amended in the first quarter of 1996 to
conform to the New York State tax treatment for bad debt reserve. The
legislation "decouples" New York State's and New York City's thrift bad debt
provisions from the federal tax law and allows for the use of the percentage of
taxable income method ("PTI") for computing the tax bad debt reserves. The
second factor which contributed to the tax savings when compared to the prior
period was the switch to the PTI method for calculating the bad debt deduction
for New York City. The final factor contributing to the decline in the effective
tax rate for 1997 was the establishment of CPCC during the second quarter of
1996 which resulted in certain tax savings. (See Note 12 to Notes to
Consolidated Financial Statements.)
B-14
<PAGE>
NON-PERFORMING ASSETS
The following table sets forth information regarding non-performing assets
which include all non-accrual loans (which consist of loans 90 days or more past
due and restructured loans that have not yet performed in accordance with their
modified terms for the required six-month seasoning period), accruing
restructured loans and real estate owned.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Non accrual loans:
One- to four-family.................................................................. $ 3,779 3,534 4,083
Cooperative.......................................................................... 367 698 431
Multi-family......................................................................... 308 2,531 1,463
Non-residential and other............................................................ 2,074 3,633 4,756
--------- --------- ---------
Total non-accrual loans.............................................................. 6,528 10,396 10,733
--------- --------- ---------
Restructured loans:
One- to four-family.................................................................. 544 679 887
Cooperative.......................................................................... 183 290 486
Multi-family......................................................................... 1,130 1,167 1,427
Non-residential and other............................................................ -- -- 360
--------- --------- ---------
Total restructured loans............................................................. 1,857 2,136 3,160
--------- --------- ---------
Total non-performing loans........................................................... 8,385 12,532 13,893
--------- --------- ---------
REO, net:
One- to four-family.................................................................. 66 126 266
Cooperative.......................................................................... 38 295 292
Non-residential and other............................................................ 121 121 561
--------- --------- ---------
Total REO............................................................................ 225 542 1,119
Less allowance for REO............................................................... (25) (87) (81)
--------- --------- ---------
REO, net............................................................................. 200 455 1,038
--------- --------- ---------
Total non-performing assets.......................................................... $ 8,585 12,987 14,931
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's expanded loan workout/resolution efforts have successfully
contributed toward reducing non-performing assets to manageable levels. Since
year-end 1996, non-performing assets have declined by $6.3 million, or 42.5%,
from a level of $14.9 million to $8.6 million at year-end 1998. The decrease in
non-performing assets is reflected in the following ratios: the ratio of
non-performing loans to total loans ratio was 0.64% for 1998 compared to 1.09%
for 1997 and 1.64% for 1996; the ratio of non-performing assets to total assets
was 0.36% for 1998 compared to 0.66% for 1997 and 0.94% for 1996; and, the ratio
of non-performing loans to total assets was 0.35% for 1998 compared to 0.63% for
1997 and 0.87% for 1996. There can be no assurance that non-performing assets
will continue to decline.
The decrease in non-performing assets in 1998 was primarily due to the
continued decline in non-performing loans and sales of REO properties. During
1998, the Company sold 21 REO properties with a fair value of $0.7 million.
Total restructured loans decreased by $0.3 million during 1998 due to transfers
to classified loan status and the REO portfolio. Total non-accrual loans
decreased by $3.9 million during 1998.
The decrease in non-performing assets in 1997 was primarily due continued
sales of REO properties and a the continued decline in non-performing loans.
During 1997, the Company sold 37 REO properties with a fair value of $1.4
million. Total restructured loans decreased by $1.0 million during 1997 due to
transfers to classified loan status and the REO portfolio. Total non-accrual
loans decreased by $337,000 during 1997.
B-15
<PAGE>
LIQUIDITY
The Bank is required to maintain minimum levels of liquid assets as defined
by the OTS regulations. This requirement, which may be varied by the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of withdrawable deposits and short-term borrowings. The required ratio is
currently 4%. The Bank's ratio was 4.24% at December 31, 1998 compared to 8.94%
at December 31, 1997.
The Company's primary sources of funds are deposits, principal and interest
payments on loans, debt securities and MBSs, retained earnings and advances from
FHLB and other borrowings. Proceeds from the sale of AFS securities and loans
held for sale are also a source of funding, as are, to a lesser extent, the
sales of annuities, insurance products and securities brokerage activities
conducted by the Bank's wholly owned subsidiary, CFSI and the Company's wholly
owned subsidiary, CIA. While maturities and scheduled amortization of loans and
securities are somewhat predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, competition and regulatory changes.
The Company's most liquid assets are cash and short term investments. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At December 31, 1998
and December 31, 1997, cash and short term investments totaled $44.8 million and
$40.3 million, respectively.
The Company and the Bank have other sources of liquidity which include debt
securities maturing within one year and AFS securities. Other sources of funds
include FHLB advances, which at December 31, 1998, totaled $325.2 million. If
needed, the Bank may borrow an additional $106.8 million from the FHLB.
The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities; investing activities and financing
activities. Net cash provided by operating activities, consisting primarily of
interest and dividends received less interest paid on deposits were $16.2
million, $24.6 million and $12.1 million for the years ended December 31, 1998,
1997 and 1996, respectively. Net cash used in investing activities, consisting
primarily of disbursements of loan originations and securities purchases, offset
by principal collections on loans and proceeds from maturities of securities
held to maturity or sales of AFS securities or disposition of assets including
REO were $340.7 million, $385.8 million and $117.6 million for the years ended
December 31, 1998, 1997 and 1996, respectively. Net cash provided by financing
activities, consisting primarily of net activity in deposits and borrowings,
purchases of treasury stock, payments of common stock dividends and proceeds
from stock options exercised was $329.0 million, $365.7 million and $102.3
million for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the Bank had outstanding commitments to originate
$164.6 million of loans. In addition, at December 31, 1998, the Bank had a $97.5
million due to brokers. The Bank believes that it will have sufficient funds
available to meet these commitments. At December 31, 1998, certificates of
deposit which are scheduled to mature in one year or less totaled $767.9
million.
CAPITAL RESOURCES
See Note 17 to Notes to Consolidated Financial Statements.
INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time and changes due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
B-16
<PAGE>
COMPUTER ISSUES FOR THE YEAR 2000
Many of the Company's existing computer systems use two digits to identify
the year in the date fields. As a result, these systems may not be able to
distinguish the year 2000 from the year 1900. Software, hardware and equipment
both within and outside the Company's direct control and with which the Company
electronically or operationally interfaces (e.g. third party vendors providing
data processing, information system management, maintenance of computer systems,
and credit bureau information) are likely to be affected. Further, if computer
systems are not adequately changed to identify the year 2000, many computer
applications could fail or create erroneous results. As a result, many
calculations which rely on the date field information, such as interest, payment
or due dates and other operating functions, could generate results which could
be significantly misstated, and the Company could experience a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. If not corrected, these computer systems could fail by or
at the year 2000.
The Company primarily uses a third party vendor to process its electronic
data. This vendor has made modifications or replacements of its computer
applications and systems necessary to correct the year 2000 date issue.
Management has substantially completed the testing of the modifications to these
systems and applications. The Company also utilizes a combination of purchased
and contract-based software as well as other third party vendors for a variety
of data processing needs. The Company's assessment of potential computer issues
for the year 2000 have been substantially completed. Where potential computer
issues have been identified, the vendors have committed to definitive dates to
resolve such issues. Under regulatory guidelines issued by the federal banking
regulators, the Bank and the Company must substantially complete testing of both
internally and externally supplied systems and all renovations, by June 30,
1999. In the event that the Company's significant vendors do not achieve year
2000 compliance, the Company's operations could be adversely affected.
The Company has established contingency plans for these systems for which
year 2000 issues will not be corrected. The OTS, the Company's primary federal
bank regulatory agency, along with the other federal bank regulatory agencies
has published guidance on the year 2000 compliance and has identified the year
2000 issue as a substantive area of examination for both regularly scheduled and
special bank examinations. These publications, in addition to providing guidance
as to examination criteria, have outlined requirements for creation and
implementation of a compliance plan and target dates for testing and
implementation of corrective action, as discussed above. As a result of the
oversight by and authority vested in the federal bank regulatory agencies, a
financial institution that does not become year 2000 compliant could become
subject to administrative remedies similar to those imposed on financial
institutions otherwise found not to be operating in a safe and sound manner,
including remedies available under prompt corrective action regulations.
There has been limited litigation filed against corporations regarding the
year 2000 problem and such corporations' compliance efforts. To date, no such
litigation has resulted in a decided case imposing liability on the corporate
entity. Nonetheless, the law in this area will likely continue to develop well
into the new millennium. Should the Company experience a year 2000 failure,
exposure of the Company could be significant and material, unless there is
legislative action to limit such liability. Legislation has been introduced in
several jurisdictions regarding the year 2000 problem. However, no assurance can
be given that legislation will be enacted in jurisdictions where the Company
does business that will have the effect of limiting any potential liability.
Through December 31, 1998, the Company had incurred approximately $126,000 in
costs associated with achieving year 2000 compliance. The Company expects to
incur approximately $450,000 in additional costs to achieve year 2000 compliance
during 1999.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 to Notes to Consolidated Financial Statements.
STOCK DATA
Haven common stock, listed under the symbol HAVN is publicly traded on the
Nasdaq Stock Market. As of March 3, 1999, the Company had approximately 428
stockholders of record (not including the number of persons or entities holding
stock in nominee or street name through various brokerage firms) and 8,861,184
outstanding shares of common stock (excluding treasury shares). The common stock
traded in a high and low range of $29.75 and $9.125 during the year ended
December 31, 1998.
B-17
<PAGE>
APPENDIX C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-21628
------------------------
HAVEN BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3153802
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
615 MERRICK AVENUE, WESTBURY, NEW YORK 11590
(Address of principal executive offices) (Zip Code)
(516) 683-4100
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
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 / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. ______
There were 8,918,542 shares of the Registrant's common stock outstanding as
of May 12, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
C-1
<PAGE>
HAVEN BANCORP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)................................................................ C-3
Consolidated Statements of Financial Condition as of March 31, 1999 and
December 31, 1998............................................................................... C-3
Consolidated Statements of Income for the Three Months ended March 31, 1999 and 1998............ C-4
Consolidated Statement of Changes in Stockholders' Equity for the Three Months ended March 31,
1999............................................................................................ C-5
Consolidated Statements of Cash Flows for the Three Months ended March 31, 1999 and 1998........ C-6
Notes to Consolidated Financial Statements...................................................... C-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... C-9
Item 3. Quantitative and Qualitative Disclosure About Market Risk....................................... C-18
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... C-18
Item 2. Changes in Securities and Use of Proceeds....................................................... C-18
Item 3. Defaults Upon Senior Securities................................................................. C-18
Item 4. Submission of Matters to a Vote of Security Holders............................................. C-18
Item 5. Other Information............................................................................... C-19
Item 6. Exhibits and Reports on Form 8-K................................................................ C-19
</TABLE>
C-2
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
HAVEN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks.............................................................. $ 31,759 $ 43,088
Money market investments............................................................. 1,421 1,720
Securities available for sale (note 2)............................................... 941,027 889,251
Loans held for sale.................................................................. 59,440 54,188
Federal Home Loan Bank of NY stock, at cost.......................................... 22,255 21,990
Loans receivable:
First mortgage loans............................................................... 1,384,483 1,271,784
Cooperative apartment loans........................................................ 3,432 3,970
Other loans........................................................................ 36,211 34,926
------------ ------------
Total loans receivable............................................................... 1,424,126 1,310,680
Less allowance for loan losses................................................. (14,573) (13,978)
------------ ------------
Loans receivable, net................................................................ 1,409,553 1,296,702
Premises and equipment, net.......................................................... 37,772 39,209
Accrued interest receivable.......................................................... 13,586 12,108
Other assets......................................................................... 33,346 37,267
------------ ------------
Total assets................................................................... $ 2,550,159 $2,395,523
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits........................................................................... $ 1,804,795 $1,722,710
Borrowed funds..................................................................... 586,330 440,346
Due to broker...................................................................... 10,000 97,458
Other liabilities.................................................................. 29,904 15,142
------------ ------------
Total liabilities.............................................................. 2,431,029 2,275,656
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued (note
7)............................................................................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized, 9,918,750 issued;
8,867,814 and 8,859,692 shares outstanding in 1999 and 1998, respectively (note
7)............................................................................... 100 100
Additional paid-in capital......................................................... 51,580 51,383
Retained earnings, substantially restricted........................................ 81,020 79,085
Accumulated other comprehensive income:
Unrealized (loss) gain on securities available for sale, net of tax effect....... (2,107) 945
Treasury stock, at cost (1,050,936 and 1,059,058 shares in 1999 and 1998,
respectively).................................................................... (9,753) (9,800)
Unallocated common stock held by Bank's ESOP....................................... (1,149) (1,222)
Unearned common stock held by Bank's Recognition Plans and Trusts.................. (262) (263)
Unearned compensation.............................................................. (299) (361)
------------ ------------
Total stockholders' equity..................................................... 119,130 119,867
------------ ------------
Total liabilities and stockholders' equity..................................... $ 2,550,159 $2,395,523
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
C-3
<PAGE>
HAVEN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Interest income:
Mortgage loans............................................................................ $ 24,885 $ 21,739
Other loans............................................................................... 850 787
Mortgage-backed securities................................................................ 12,650 8,931
Money market investments.................................................................. 30 104
Debt and equity securities................................................................ 2,065 3,402
--------- ---------
Total interest income................................................................. 40,480 34,963
--------- ---------
Interest expense:
Deposits:
Savings accounts.......................................................................... 4,669 2,416
NOW accounts.............................................................................. 324 261
Money market accounts..................................................................... 419 423
Certificate accounts...................................................................... 11,753 11,863
Borrowed funds............................................................................ 7,109 6,506
--------- ---------
Total interest expense................................................................ 24,274 21,469
--------- ---------
Net interest income before provision for loan losses........................................ 16,206 13,494
Provision for loan losses................................................................... 675 670
--------- ---------
Net interest income after provision for loan losses......................................... 15,531 12,824
--------- ---------
Non-interest income:
Loan fees and servicing income............................................................ 505 518
Sevicing released premiums and fees on loans sold......................................... 4,531 --
Savings/checking fees..................................................................... 3,125 1,811
Net gain on sales of interest-earning assets.............................................. 335 352
Insurance annuity and mutual fund fees.................................................... 1,975 1,187
Other..................................................................................... 590 591
--------- ---------
Total non-interest income............................................................. 11,061 4,459
--------- ---------
Non-interest expense:
Compensation and benefits................................................................. 12,055 7,577
Occupancy and equipment................................................................... 3,344 2,219
Real estate owned operations, net......................................................... (151) 49
Federal deposit insurance premiums........................................................ 254 207
Other..................................................................................... 6,887 4,015
--------- ---------
Total non-interest expense............................................................ 22,389 14,067
--------- ---------
Income before income tax expense............................................................ 4,203 3,216
Income tax expense.......................................................................... 1,603 1,067
--------- ---------
Net income.................................................................................. $ 2,600 $ 2,149
--------- ---------
--------- ---------
Net income per common share:
Basic..................................................................................... $ 0.30 $ 0.25
--------- ---------
--------- ---------
Diluted................................................................................... $ 0.29 $ 0.24
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
C-4
<PAGE>
HAVEN BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED UNALLOCATED
ADDITIONAL OTHER COMMON
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCK HELD
(DOLLARS IN THOUSANDS) TOTAL STOCK CAPITAL EARNINGS INCOME STOCK BY ESOP
- ----------------------------- --------- ------------- ----------- ----------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998....................... $ 119,867 100 51,383 79,085 945 (9,800) (1,222)
Comprehensive Income:
Net income................. 2,600 -- -- 2,600 -- -- --
Other comprehensive income,
net of tax
Net unrealized
depreciation on certain
securities, net of
reclassification
adjustment (1)......... (3,052) -- -- -- (3,052) -- --
---------
Comprehensive Loss........... (452) -- -- -- -- -- --
Dividends declared (note
5)......................... (665) -- -- (665) -- -- --
Treasury stock issued for RRP
and deferred compensation
plan (3,630 shares)........ -- -- 35 -- -- 21 --
Stock options exercised, net
of tax effect (4,492
shares) (note 4)........... 22 -- (4) -- -- 26 --
Allocation of ESOP stock and
amortization of award of
RRP stock and related tax
benefits................... 260 -- 166 -- -- -- 73
Amortization of deferred
compensation plan.......... 98 -- -- -- -- -- --
--------- --- ----------- ----------- ------ ----------- ------
Balance at March 31, 1999.... $ 119,130 100 51,580 81,020 (2,107) (9,753) (1,149)
--------- --- ----------- ----------- ------ ----------- ------
--------- --- ----------- ----------- ------ ----------- ------
<CAPTION>
UNEARNED
COMMON
STOCK HELD UNEARNED
(DOLLARS IN THOUSANDS) BY RRP COMPENSATION
- ----------------------------- ------------- -----------------
<S> <C> <C>
Balance at December 31,
1998....................... (263) (361)
Comprehensive Income:
Net income................. -- --
Other comprehensive income,
net of tax
Net unrealized
depreciation on certain
securities, net of
reclassification
adjustment (1)......... -- --
Comprehensive Loss........... -- --
Dividends declared (note
5)......................... -- --
Treasury stock issued for RRP
and deferred compensation
plan (3,630 shares)........ (20) (36)
Stock options exercised, net
of tax effect (4,492
shares) (note 4)........... -- --
Allocation of ESOP stock and
amortization of award of
RRP stock and related tax
benefits................... 21 --
Amortization of deferred
compensation plan.......... -- 98
--- ---
Balance at March 31, 1999.... (262) (299)
--- ---
--- ---
</TABLE>
(1) DISCLOSURE OF RECLASSIFICATION ADJUSTMENT:
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
---------------------
<S> <C>
Net unrealized holding loss arising during period............................................................ (2,844)
Less: reclassification adjustment for net gains included in net income....................................... 208
------
Net unrealized loss on securities available for sale......................................................... (3,052)
------
------
</TABLE>
See accompanying notes to consolidated financial statements.
C-5
<PAGE>
HAVEN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................................. $ 2,600 2,149
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Amortization of cost of stock benefit plans............................................. 358 490
Amortization of net deferred loan origination fees...................................... (23) (10)
Amortization of premiums and accretion of discounts on loans, mortgage-backed and debt
securities............................................................................ (70) (473)
Provision for loan losses............................................................... 675 670
Provision for losses on real estate owned............................................... -- 5
Deferred income taxes................................................................... (404) (389)
Net gain on sales of interest-earning assets............................................ (335) (352)
Loans originated and purchased for sale, net of proceeds from sale...................... (5,252) --
Depreciation and amortization........................................................... 1,178 625
(Increase) decrease in accrued interest receivable...................................... (1,478) 524
Decrease in due to broker............................................................... (87,458) (10,000)
Increase in other liabilities........................................................... 14,762 8,715
Decrease (increase) in other assets..................................................... 6,187 (930)
---------- ----------
Net cash (used in) provided by operating activities....................................... (69,260) 1,024
---------- ----------
Cash flows from investing activities:
Net increase in loans................................................................... (113,517) (45,347)
Proceeds from disposition of assets (including REO)..................................... 22 1,876
Purchases of securities available for sale.............................................. (191,880) (186,510)
Principal repayments and maturities on securities available for sale.................... 64,373 50,366
Proceeds from sales of securities available for sale.................................... 71,214 123,249
Principal repayments, maturities and calls on debt securities held to maturity.......... -- 16,020
Principal repayments on mortgage-backed securities held to maturity..................... -- 10,580
Purchases of FHLB stock, net............................................................ (265) --
Net decrease (increase) in premises and equipment....................................... 259 (2,191)
---------- ----------
Net cash used in investing activities..................................................... (169,794) (31,957)
---------- ----------
Cash flows from financing activities:
Net increase in deposits................................................................ 82,085 109,816
Net increase (decrease) in borrowed funds............................................... 145,984 (66,877)
Payment of common stock dividends....................................................... (665) (546)
Stock options exercised................................................................. 22 418
---------- ----------
Net cash provided by financing activities................................................. 227,426 42,811
---------- ----------
Net (decrease) increase in cash and cash equivalents...................................... (11,628) 11,878
Cash and cash equivalents at beginning of period.......................................... 44,808 40,306
---------- ----------
Cash and cash equivalents at end of period................................................ $ 33,180 $ 52,184
---------- ----------
---------- ----------
Supplemental information:
Cash paid during the period for:
Interest.............................................................................. $ 24,011 $ 20,523
Income taxes.......................................................................... 1 1
Additions to real estate owned.......................................................... -- 310
Securities purchased, not yet received.................................................. 10,000 --
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
C-6
<PAGE>
HAVEN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION.
The accompanying unaudited consolidated financial statements include the
accounts of Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") and its
wholly-owned subsidiaries, including CFS Bank ("CFS" or the "Bank") as of March
31, 1999 and December 31, 1998 and for the three-month period ended March 31,
1999 and 1998, respectively. Material intercompany accounts and transactions
have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments,
consisting only of normal recurring accruals necessary for a fair presentation
have been included. The results of operations for the three-month period ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's Annual Report to Stockholders for the fiscal year ended December 31,
1998.
NOTE 2--DEBT, EQUITY AND MORTGAGE-BACKED SECURITIES ("MBSS").
Debt securities and MBSs which the Company has the ability and the intent to
hold until maturity, are carried at cost adjusted for amortization of premiums
and accretion of discounts. Debt and equity securities and MBSs to be held for
indefinite periods of time and not intended to be held to maturity or on a
long-term basis are classified as available for sale securities which are
recorded at fair value, with unrealized gains (losses), net of tax, reported as
accumulated other comprehensive income, a separate component of stockholders'
equity. At March 31, 1999 and December 31, 1998, all of the Company's debt,
equity and mortgage-backed securities were classified as available for sale.
SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair values of securities available for
sale at March 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Debt and equity securities available for sale:
U.S. Government and Agency obligations......................... $ 81,699 6 (909) 80,796
Preferred Stock................................................ 10,992 -- (277) 10,715
Corporate debt securities...................................... 46,025 -- -- 46,025
---------- ----- ----------- -----------
138,716 6 (1,186) 137,536
---------- ----- ----------- -----------
</TABLE>
C-7
<PAGE>
NOTE 2--DEBT, EQUITY AND MORTGAGE-BACKED SECURITIES ("MBSS"). (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MBSs available for sale:
GNMA Certificates.............................................. 428 8 -- 436
FNMA Certificates.............................................. 167,589 1,105 (797) 167,897
FHLMC Certificates............................................. 45,422 606 (58) 45,970
CMOs and REMICS................................................ 592,269 1,166 (4,247) 589,188
---------- ----- ----------- -----------
805,708 2,885 (5,102) 803,491
---------- ----- ----------- -----------
Total...................................................... $ 944,424 2,891 (6,288) 941,027
---------- ----- ----------- -----------
---------- ----- ----------- -----------
</TABLE>
The net unrealized loss on securities available for sale at March 31, 1999,
was reported as a separate component of stockholders' equity, in the amount of
$2.1 million which is net of a tax effect of $1.3 million.
NOTE 3--CAPITAL SECURITIES.
On April 13, 1999, Haven Bancorp, Inc. filed a registration statement with
the Securities and Exchange Commission to issue $35.0 million of capital
securities through Haven Capital Trust II. The registration statement relating
to these securities has been filed with the Securities and Exchange Commission
but has not yet become effective. The Company currently intends to use the net
proceeds from the sale of the capital securities to invest in the Bank to
increase its capital level. The increased capital will enable the Bank to expand
its deposit base and also invest in residential and commercial real estate loans
in its market area and in investment-grade mortgage-backed and investment
securities. It is also possible that, if the Company's Board of Directors
determines that it is in the best interest of its shareholders, a portion of the
net proceeds may be used for repurchases of the Company's stock.
NOTE 4--STOCK PLANS.
Changes in outstanding options for the benefit of directors, officers and
other key employees of the Bank for the three months ended March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Balance at December 31, 1998................................... 1,305,268 9.44
Granted...................................................... 176,500 13.77
Forfeited.................................................... (10,000) 25.70
Exercised.................................................... (4,492) 5.00
---------- -----
Balance at March 31, 1999...................................... 1,467,276 9.86
---------- -----
---------- -----
Shares exercisable at March 31, 1999........................... 1,035,022 7.20
---------- -----
---------- -----
</TABLE>
NOTE 5--DIVIDENDS PAYABLE.
On March 24, 1999, the Company's Board of Directors approved a regular
quarterly cash dividend of $0.075 per share, payable on April 23, 1999, to
shareholders of record as of April 3, 1999.
C-8
<PAGE>
NOTE 6--RECENT ACCOUNTING/REGULATORY PRONOUNCEMENTS.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and does not require restatement of prior
periods. Management of the Company currently believes the implementation of SFAS
No. 133 will not have a material impact on the Company's financial condition or
results of operations.
NOTE 7--NET INCOME PER SHARE OF COMMON STOCK.
There were 8,634,171 basic shares outstanding and 9,021,614 diluted shares
outstanding for the three months ended March 31, 1999. The weighted average
number of shares outstanding does not include 229,769 shares which are
unallocated by the Employee Stock Ownership Plan ("ESOP") as of March 31, 1999
in accordance with American Institute of CPAs ("AICPA") Statement of Position
("SOP") 93-6, "Employers' Accounting for ESOPs". Basic EPS excludesdilution and
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the relevant period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity.
NOTE 8--COMPREHENSIVE (LOSS) INCOME.
Comprehensive (loss) income was $(452,000) and $878,000 for the three month
periods ended March 31, 1999 and 1998, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Haven Bancorp, Inc. ("Haven Bancorp" or the "Company") is the holding
company for CFS Insurance Agency, Inc. and CFS Bank ("CFS" or the "Bank"), a
federally chartered stock savings bank. CFS converted from a mutual to a stock
savings bank on September 23, 1993 in conjunction with the issuance of the
Bank's capital stock to Haven Bancorp.
Haven Bancorp's business currently consists primarily of the business of the
Bank. The Bank's principal business has been and continues to be attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations primarily in one- to four-family, owner
occupied residential mortgage loans. In addition, the Bank will invest in debt,
equity and mortgage-backed securities ("MBSs") to supplement its lending
portfolio. The Bank also invests, to a lesser extent, in multi-family
residential mortgage loans, commercial real estate loans and other marketable
securities. The Bank's results of operations are dependent primarily on its net
interest income, which is the difference between the interest income earned on
its loan and securities portfolios and its cost of funds, which primarily
consists of the interest paid on its deposits and borrowed funds. The Bank's net
income also is affected by its non-interest income, including servicing released
premiums and fees on loans sold in the secondary market, its provision for loan
losses and operating expenses consisting primarily of compensation and benefits,
occupancy and equipment, real estate owned operations, net, federal deposit
insurance premiums and other general and administrative expenses. The earnings
of the Bank are significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, and to a lesser
extent by government policies and actions of regulatory authorities.
C-9
<PAGE>
ASSETS
Total assets increased by $154.6 million, or 6.5% to $2.55 billion at March
31, 1999 from $2.40 billion at December 31, 1998. Securities available for sale
("AFS") increased by $51.8 million, or 5.8% to $941.0 million at March 31, 1999
from $889.2 million at December 31, 1998 resulting primarily due to purchases
during the quarter for the AFS portfolio. During the quarter ended March 31,
1999, the Bank purchased $136.9 million of MBSs and $55.0 million of debt and
equity securities for its AFS portfolio. The emphasis on MBS securities was due
to the availability of more favorable rates and shorter durations. These
increases were partially offset by sales and principal repayments of $71.2
million and $64.4 million, respectively.
Net loans increased by $112.9 million, or 8.7% to $1.41 billion at March 31,
1999 from $1.30 billion at December 31, 1998. Loan originations during the
quarter totaled $329.9 million (comprised of $292.8 million of residential one-
to four-family mortgage loans, $3.0 million of equity loans and lines of credit,
$26.8 million of multi-family loans and $7.3 million of commercial real estate
loans). Originations of residential one- to four-family mortgage loans included
purchases of $112.6 million of residential loans in the secondary market.
Residential loans originated or purchased for sale in the secondary market for
the three months ended March 31, 1999 totaled $160.6 million. During the first
quarter of 1999, the Bank sold $155.4 million of residential loans on a
servicing released basis to third party investors. During the first quarter of
1999, principal repayments totaled $53.6 million.
LIABILITIES
Deposits increased by $82.1 million, or 4.8% to $1.80 billion at March 31,
1999 from $1.72 billion at December 31, 1998 primarily due to deposit inflows in
the Bank's supermarket branches. Deposits in the supermarket branches totaled
$578.1 million at March 31, 1999 compared to $504.0 million at December 31,
1998. The Bank had fifty-nine supermarket bank branches as of March 31, 1999
compared to fifty-seven supermarket branches at December 31, 1998. The Bank
expects to open one additional in-store branch during May of 1999. Core deposits
(comprised of checking, savings and money market accounts) were equal to 58.3%
of total in-store branch deposits at March 31, 1999 compared to 45.3% in the
Bank's eight traditional branches. Core deposits for the supermarket branches
included $209.3 million of "Liquid Asset" account balances at March 31, 1999.
Overall, core deposits represented 53.6% of total deposits at March 31, 1999
compared to 47.7% at December 31, 1998. Borrowed funds increased by $146.0
million, or 33.2% to $586.3 million at March 31, 1999 from $440.3 million at
December 31, 1998 primarily due to the funding requirements for loan origination
volume and wholesale purchases of CFS Intercounty, the Bank's residential
lending division.
STOCKHOLDERS' EQUITY
Haven Bancorp's stockholders' equity decreased to $119.1 million at March
31, 1999 from $119.9 million at December 31, 1998. The decrease in stockholders'
equity was due to a reduction of $3.1 million in the unrealized gain on
securities available for sale and dividends declared totaling $665,000. These
decreases were partially offset by net income of $2.6 million for the quarter
and $380,000 related to the amortization of awards of shares of stock by the
Bank's RRPs, and amortization of the deferred compensation plan, and stock
options exercised.
C-10
<PAGE>
NON-PERFORMING ASSETS
The following table sets forth information regarding all non-accrual loans
(which consist of loans 90 days or more past due and restructured loans that
have not yet performed in accordance with their modified terms for the required
six-month seasoning period), restructured loans and real estate owned ("REO").
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Non-accrual loans
One- to four-family................................................................... $ 5,374 3,779
Cooperative........................................................................... 387 367
Multi-family.......................................................................... 620 308
Non-residential and other............................................................. 2,215 2,074
----------- -----
Total non-accrual loans............................................................. 8,596 6,528
----------- -----
Restructured loans
One- to four-family................................................................... 193 544
Cooperative........................................................................... 182 183
Multi-family.......................................................................... 1,123 1,130
----------- -----
Total restructured loans............................................................ 1,498 1,857
----------- -----
Total non-performing loans.......................................................... 10,094 8,385
----------- -----
REO, net
One- to four-family................................................................... 44 66
Cooperative........................................................................... 38 38
Non-residential and other............................................................. 121 121
----------- -----
Total REO........................................................................... 203 225
Less allowance for REO................................................................ (12) (25)
----------- -----
REO, net............................................................................ 191 200
----------- -----
Total non-performing assets......................................................... $ 10,285 8,585
----------- -----
----------- -----
Non-performing loans to total loans..................................................... 0.71% 0.64%
Non-performing assets to total assets................................................... 0.40 0.36
Non-performing loans to total assets.................................................... 0.40 0.35
</TABLE>
The increase in non-performing assets was primarily due to an increase of
$1.7 million in non-performing loans from December 31, 1998 to March 31, 1999.
The ratios of non-performing loans to total loans, non-performing assets to
total assets and non-performing loans to total assets all increased primarily
due to the increase of $1.7 million in non-performing loans during the quarter.
The Bank maintains an allowance for loan losses and an allowance for REO,
which it believes are adequate for potential losses at each period end.
Management's judgment as to potential losses is based on its review of the loan
and REO portfolios and its judgment regarding prevailing and anticipated
economic conditions and a variety of other factors which have an impact on those
portfolios. Although management believes that the allowances are adequate as of
the period end, additional provisions may be required in the future.
C-11
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The following table sets forth the changes in the allowance for loan losses
for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period......................................................... $ 13,978 12,528
Charge-offs:
Residential.......................................................................... (324) (84)
Cooperative.......................................................................... -- (56)
Multi-family......................................................................... -- (708)
Non-residential and other............................................................ -- (291)
--------------- ---------
Total charge-offs.................................................................. (324) (1,139)
--------------- ---------
Recoveries........................................................................... 244 857
--------------- ---------
Net charge-offs...................................................................... (80) (282)
Provision for loan losses............................................................ 675 670
--------------- ---------
Balance at end of period............................................................... $ 14,573 12,916
--------------- ---------
--------------- ---------
Ratio of net charge-offs during the period to average loans outstanding during the
period............................................................................... 0.02% 0.10%
Ratio of allowance for loan losses to total loans at the end of the period............. 1.02 1.08
Ratio of allowance for loan losses to non-performing loans at the end of the period.... 144.37 119.05
</TABLE>
The ratio of net charge-offs to average loans outstanding during the first
quarter of 1999 decreased compared to the same period in 1998 primarily due to
the decrease in net charge-offs for the first quarter of 1999 compared to the
first quarter of 1998, as well as the increase in average loans outstanding. The
ratio of allowance for loan losses to total loans decreased for the quarter due
to the increase in loans outstanding at March 31, 1999. The ratio of allowance
for loan losses to non-performing loans increased between the periods due to an
increase of $1.7 million in the allowance for loan losses. The Bank's allowance
for loan losses was $14.6 million and $12.9 million at March 31, 1999 and March
31, 1998, respectively, whereas non-performing loans totaled $10.1 million and
$10.8 million, respectively, at those dates.
ASSET/LIABILITY MANAGEMENT
The Company has attempted to reduce its exposure to interest rate risk
through the origination and purchase of ARM loans, debt securities and MBSs and
maintaining an AFS securities portfolio. During the first quarter of 1999, the
Bank originated or purchased for its portfolio $77.7 million of residential
adjustable-rate mortgages and $34.1 million of adjustable-rate multi-family,
commercial real estate and construction loans which are expected to help protect
net interest margins during periods of rising interest rates. During the same
period, the Bank purchased $176.6 million of fixed rate debt securities and MBSs
to take advantage of higher yields compared to rates offered on adjustable-rate
securities. At March 31, 1999, $240.5 million, or 25.6% of the Company's AFS
portfolio were adjustable-rate securities and $700.5 million, or 74.4% of the
portfolio were fixed rate securities.
Historically, the Company has been able to maintain a substantial level of
core deposits (comprised of checking, savings and money market accounts) which
the Company believes helps to limit interest rate risk by providing a relatively
stable, low cost, long-term funding base. At March 31, 1999, core deposits
represented 53.6% of deposits compared to 47.7% of deposits at December 31,
1998. Core deposits included $209.3 million of "Liquid Asset" account balances
at March 31, 1999. This account was
C-12
<PAGE>
introduced at the supermarket branches in the second quarter of 1998 and
currently pays an initial rate of 4.25% for balances over $2,500. During the
first quarter of 1999, savings accounts increased by $62.6 million, net of
interest, whereas, certificates of deposit decreased by $10.8 million, net of
interest. The number of checking accounts increased by 14,997, or 9.9% to
166,436 at March 31, 1999 from 151,439 at December 31, 1998. Most of the
increase, 13,678 accounts, is attributable to the Bank's supermarket bank
branches. The Company expects to attract a higher percentage of core deposits
from its supermarket branch locations as the supermarket branching program
continues to grow and mature.
LIQUIDITY AND CAPITAL
The Bank is required to maintain minimum levels of liquid assets as defined
by the Office of Thrift Supervision ("OTS") regulations. This requirement, which
may be varied by the OTS depending upon economic conditions and deposit flows,
is based upon a percentage of withdrawable deposits and short-term borrowings.
The required ratio is currently 4%. The Bank's ratio was 5.43% at March 31, 1999
compared to 4.24% at December 31, 1998.
The Company's primary sources of funds are deposits, advances from Federal
Home Loan Bank of New York ("FHLB-NY"), principal and interest payments on loans
and MBSs and retained earnings. Proceeds from the sale of AFS securities and
loans held for sale are also a source of funding, as are, to a lesser extent,
the sales of insurance, annuities and securities brokerage activities conducted
by the Company's subsidiary, CFS Insurance Agency, Inc. and the Bank's
subsidiary, CFS Investments, Inc. ("CFSI"). While maturities and scheduled
amortization of loans and MBSs are somewhat predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, competition and regulatory changes.
The Company's most liquid assets are cash and short term investments. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At March 31, 1999 and
December 31, 1998, cash and short and intermediate-term investments totaled
$33.2 million and $44.8 million, respectively.
The Company and the Bank have other sources of liquidity which include debt
securities maturing within one year, loans held for sale and AFS securities.
Other sources of funds include FHLB advances, which at March 31, 1999, totaled
$397.9 million. At March 31, 1999, the Bank had unused lines of credit totaling
$39.4 million with the FHLB-NY.
As of March 31, 1999, the Bank exceeded all regulatory capital requirements
as detailed in the following table:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL(2)
TANGIBLE CAPITAL CORE CAPITAL(1)
----------------------- ----------------------- -----------------------
AMOUNT RATIO (3) AMOUNT RATIO (3) AMOUNT RATIO (3)
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Capital for regulatory purposes................. $ 133,259 5.20% $ 133,259 5.20% $ 146,565 11.24%
Minimum regulatory requirement.................. 51,212 2.00 102,423 4.00(3) 104,359 8.00
---------- --- ---------- --- ---------- -----
Excess.......................................... $ 82,047 3.20% $ 30,836 1.20% $ 42,206 3.24%
---------- --- ---------- --- ---------- -----
---------- --- ---------- --- ---------- -----
</TABLE>
- ------------------------
(1) Under the OTS's prompt corrective action regulations, the core capital
requirement was effectively increased to 4.00% since OTS regulations
stipulate that as of that date an institution with less than 4.00% core
capital will be deemed to be classified as "undercapitalized".
(2) The OTS regulations require that certain institutions with more than a
"normal level" of interest rate risk to maintain capital in addition to the
8.0% risk-based capital requirement. The Bank currently is not, and does not
anticipate that its risk-based capital requirement will be materially
affected as a result of this OTS requirement.
C-13
<PAGE>
(3) For tangible and core capital, the ratio is to adjusted total assets. For
risk-based capital, the ratio is to total risk-weighted assets.
ANALYSIS OF CORE EARNINGS
The Company's profitability is primarily dependent upon net interest income,
which represents the difference between income on interest-earning assets and
expenses on interest-bearing liabilities. Net interest income is dependent on
the average balances and rates received on interest-earning assets and the
average balances and rates paid on interest-bearing liabilities. Net income is
further affected by non-interest income, non-interest expense and income taxes.
The following table sets forth certain information relating to the Company's
average consolidated statements of financial condition and consolidated
statements of income for the three months ended March 31, 1999 and 1998,
respectively, and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense annualized by the average balance of assets or
liabilities, respectively, for the periods shown. Average balances were derived
from average daily balances. The average balance of loans includes loans on
which the Company has discontinued accruing interest. The yields and costs
include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------- --------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans................... $1,377,235 $ 24,885 7.23% $1,136,919 $ 21,739 7.65%
Other loans...................... 37,178 850 9.15 32,833 787 9.59
Mortgage-backed securities....... 762,234 12,650 6.64 537,116 8,931 6.65
Money market investments......... 1,516 30 7.92 8,175 104 5.09
Debt and equity securities....... 133,067 2,065 6.21 200,415 3,402 6.79
--------- --------- ---------
Total interest-earning assets...... 2,311,230 40,480 7.01 1,915,458 34,963 7.30
Non-interest-earning assets........ 147,604 93,488
--------- ---------
Total assets..................... 2,458,834 2,008,946
--------- ---------
--------- ---------
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Savings accounts................. 576,044 4,669 3.24 384,701 2,416 2.51
Certificate accounts............. 892,050 11,753 5.27 824,774 11,863 5.75
NOW accounts..................... 222,499 324 0.58 159,088 261 0.66
Money market accounts............ 57,986 419 2.89 55,260 423 3.06
Borrowed funds................... 530,099 7,109 5.36 432,750 6,506 6.01
--------- --------- --------- --------- --------- ---
Total interest-bearing
liabilities...................... 2,278,678 24,274 4.26 1,856,573 21,469 4.63
Other liabilities.................. 60,133 38,074
--------- ---------
Total liabilities................ 2,338,811 1,894,647
Stockholders' equity............... 120,023 114,299
--------- ---------
Total liabilities and stockholders'
equity........................... $2,458,834 2,008,946
--------- ---------
--------- ---------
Net interest income/net interest
rate spread...................... $ 16,206 2.75% $ 13,494 2.67%
--------- --------- --------- ---
--------- --------- --------- ---
Net interest earning assets/net
interest margin.................. $ 32,552 2.80% $ 58,885 2.82%
--------- --------- --------- ---
--------- --------- --------- ---
Ratio of interest-earning assets to
interest-bearing liabilities..... 101.43% 103.17%
--------- ---------
--------- ---------
</TABLE>
C-14
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998
GENERAL. The Company reported net income of $2.6 million for the three
months ended March 31, 1999 compared to net income of $2.1 million for the three
months ended March 31, 1998. The increase was primarily attributable to an
increase of $2.7 million in net interest income and an increase of $6.6 million
in non-interest income. These increases were partially offset by an increase of
$8.3 million in non-interest expense from the prior year period. Income tax
expense increased $536,000 from the same period last year due to an increase of
$1.0 million in pre-tax income.
INTEREST INCOME. Interest income increased by $5.5 million, or 15.8% to
$40.5 million for the three months ended March 31, 1999 from $35.0 million for
the three months ended March 31, 1998. The increase was primarily the result of
a $3.1 million increase in interest income on mortgage loans and an increase of
$3.7 million in interest income on MBS securities. These increases were
partially offset by decreases in interest income on debt and equity securities
and money market investments of $1.3 million and $74,000, respectively.
Interest income on mortgage loans increased by $3.1 million, or 14.5% to
$24.9 million for the three months ended March 31, 1999, from $21.7 million for
the comparable three-month period in 1998. The increase was primarily the result
of an increase in the average balance of mortgage loans of $240.3 million,
partially offset by a decline in the average yield on mortgage loans of 42 basis
points from the first quarter of 1998. The increase in the average balance of
mortgage loans between the periods was primarily due to mortgage originations,
including purchases, for the entire year of 1998 and the first quarter of 1999
which totaled $1.22 billion and $326.8 million, respectively. The increased
originations reflect the addition of the loan production franchise of CFS
Intercounty. The originations for both periods were partially offset by
prin-cipal payments of $279.7 million and $51.8 million, respectively. The
decline in the average yield from the prior year was primarily due to the
general decline in market interest rates in 1998.
Interest income on MBSs increased by $3.7 million, or 41.6% to $12.6 million
for the three months ended March 31, 1999 from $8.9 million for the comparable
three-month period in 1998 primarily due to an increase of $225.1 million in the
average balance of MBSs at March 31, 1999 compared to March 31, 1998. During the
first quarter of 1999, the Bank purchased $136.9 million of MBSs for its AFS
portfolio which were partially offset by sales of MBSs totaling $54.3 million.
Interest income on debt and equity securities decreased by $1.3 million, or
39.3% to $2.1 million for the three months ended March 31, 1999 from $3.4
million for the comparable three-month period in 1998 primarily as a result of a
decrease in average balances of $67.3 million coupled with a 58 basis point
decrease in the average yield. During the first quarter of 1999, the Bank
purchased $55.0 million of debt and equity securities for the AFS portfolio,
partially offset by sales totaling $16.9 million. The emphasis on MBS securities
over debt and equity securities was due to the availability of competitive rates
along with shorter durations.
INTEREST EXPENSE. Interest expense increased by $2.8 million, or 13.1% to
$24.3 million for the three months ended March 31, 1999 from $21.5 million for
the three months ended March 31, 1998. The increase was primarily the result of
a $2.2 million increase in interest expense on deposits and an increase of $0.6
million in interest expense on borrowed funds.
Interest on deposits increased by $2.2 million, or 14.7% to $17.2 million
for the three months ended March 31, 1999 from $15.0 million for the comparable
three-month period in 1998. The increase in interest on deposits was primarily
due to the increased average balance of $324.8 million. The deposit growth is
primarily attributable to the Bank's supermarket banking program. At March 31,
1999, the Bank had fifty-nine supermarket bank branches with deposits totaling
$578.1 million, compared to thirty-nine supermarket branches with deposits of
$238.2 million at March 31, 1998. The increase in average balance
C-15
<PAGE>
was primarily due to savings account balances which increased by $191.3 million,
or 49.7% to $576.0 million for the three months ended March 31, 1999 from $384.7
million for the comparable three-month period in 1998. Interest expense on
savings accounts increased by $2.3 million, or 93.3% to $4.7 million for the
three months ended March 31, 1999 from $2.4 million in the same period in 1998.
The average cost of savings accounts was 3.24% for the first quarter of 1999
compared to 2.51% for the first quarter of 1998. The increase in the average
cost of savings accounts was due to the "Liquid Asset" account which was
introduced at the supermarket bank branches during the second quarter of 1998.
This account currently pays an initial rate of 4.25% for balances over $2,500.
The Bank's supermarket branches had $267.1 million in savings balances as of
March 31, 1999 compared to $45.6 million as of March 31, 1998. Interest expense
on certificate accounts decreased by $110,000, or 0.9% to $11.8 million for the
three months ended March 31, 1999 from $11.9 million in the same period in 1998.
This was primarily due to the decline in the average cost of these deposits to
5.27% for the period ended March 31, 1999 from 5.75% for the same period last
year. The average cost of all deposits was 3.92% for the three months ended
March 31, 1999 compared to 4.20% for the first quarter of 1998 reflecting the
general decline in market interest rates.
Interest on borrowed funds increased by $603,000, or 9.3% to $7.1 million
for the three months ended March 31, 1999 from $6.5 million for the comparable
three-month period in 1998. Borrowed funds on an average basis increased by
$97.3 million between the periods primarily due to the addition of short-term
FHLB advances and
securities sold under agreements to repurchase during 1999 in order to
complement deposit growth as a funding mechanism for mortgage loan originations.
The average rate paid on borrowings decreased to 5.36% for the three months
ended March 31, 1999 from 6.01% for the comparable prior-year period primarily
due to a decline in market rates in 1998.
NET INTEREST INCOME. Net interest income increased by $2.7 million, or 20.1%
to $16.2 million for the three months ended March 31, 1999 from $13.5 million
for the three months ended March 31, 1998. The increase is primarily due to the
total average balance of interest-earning assets which increased by $395.8
million, or 20.7% to $2.31 billion for the three months ended March 31, 1999
from $1.92 billion for the same period last year. This growth is mainly due to
growth in the Bank's residential mortgage loan and mortgage-backed securities
portfolios. This increase was partially offset by the average yield on interest-
earning assets which decreased to 7.01% for the three month period ended March
31, 1999 from 7.30% for the three-month period in 1998. However, the average
cost of interest-bearing liabilities decreased to 4.26% from 4.63% for the three
months ended March 31, 1999 and 1998, respectively, reflecting the general
decline in market interest rates in 1998. Therefore, the net interest spread was
2.75% for the three months ended March 31, 1999 compared to 2.67% for the
comparable period in 1998.
PROVISION FOR LOAN LOSSES. The Bank provided $675,000 for loan losses for
the three months ended March 31, 1999 compared to $670,000 for the comparable
three-month period in 1998. The provision for loan losses is established based
on management's periodic review and evaluation of the loan portfolio.
NON-INTEREST INCOME. Non-interest income increased by $6.6 million, or
148.1% for the three months ended March 31, 1999 to $11.1 million from $4.5
million for the comparable three-month period in 1998. Non-interest income for
the first quarter of 1999 included $4.5 million in servicing released premiums
and fees related to loans sold in the secondary market in the quarter. The Bank
generally recognizes fee income, including servicing released premiums, from its
mortgage banking activities as loan sales are settled. Savings and checking fees
increased by $1.3 million, or 72.6% to $3.1 million for the first quarter of
1999 compared to $1.8 million for the same period last year. The significant
increase in savings and checking fees is primarily due to the number of checking
accounts which increased by 54,902, or 49.2% to 166,436 accounts at March 31,
1999 from 111,534 accounts at March 31, 1998. A significant portion of this
growth is attributable to the Bank's supermarket banking program. The
supermarket branches generated savings and checking fees of $2.2 million for the
first quarter of 1999 compared to $1.0 million for the first quarter of last
year. Insurance, annuity and mutual fund fees for the first quarter of 1999
increased by
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<PAGE>
$788,000, or 66.4% to $2.0 million from $1.2 million for the same period last
year which included $946,000 in revenue from sales originating from supermarket
branches compared to $330,000 for the three months ended March 31, 1998.
NON-INTEREST EXPENSE. Non-interest expense increased by $8.3 million, or
59.2% for the three months ended March 31, 1999 to $22.4 million from $14.1
million for the comparable three-month period in 1998. The increase was due
primarily to the addition of the expenses of the loan production franchise of
CFS Intercounty and the Bank's expansion of its supermarket banking program from
thirty-nine branches at March 31, 1998 to fifty-nine branches at March 31, 1999.
As a result of the increased headcount, compensation and benefits costs
increased by $4.5 million, or 59.1% to $12.1 million for the three months ended
March 31, 1999 from $7.6 million for the same period last year. Occupancy and
equipment costs increased by $1.1 million, or 50.7% to $3.3 million for the
first quarter of 1999 from $2.2 million for the same period last year primarily
due to the addition of twenty supermarket branches as well as the expansion of
the Bank's residential lending function through CFS Intercounty. Occupancy and
equipment expense also increased as a result of the purchase of the Company's
new headquarters, which was completed in the third quarter 1998. Other operating
costs increased by $2.9 million, or 71.5% to $6.9 million for the three months
ended March 31, 1999 from $4.0 million for the same period last year primarily
due to the addition of CFS Intercounty and the additional supermarket branches.
INCOME TAX EXPENSE. Income tax expense was $1.6 million for an effective tax
rate of 38.1% for the three months ended March 31, 1999 compared to income tax
expense of $1.1 million for an effective tax rate of 33.2% for the comparable
period in 1998. The 1998 quarter included a reversal of previously provided
income taxes.
COMPUTER ISSUES FOR THE YEAR 2000. Many of the Company's existing computer
systems use two digits to identify the year in the date fields. As a result,
these systems may not be able to distinguish the year 2000 from the year 1900.
Software, hardware and equipment both within and outside the Company's direct
control and with which the Company electronically or operationally interfaces
(e.g. third party vendors providing data processing, information system
management, maintenance of computer systems, and credit bureau information) are
likely to be affected. Further, if computer systems are not adequately changed
to identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on the date field
information, such as interest, payment or due dates and other operating
functions, could generate results which could be significantly misstated, and
the Company could experience a temporary inability to process transactions, send
invoices or engage in similar normal business activities. If not corrected,
these computer systems could fail by or at the year 2000.
The Company primarily uses a third party vendor to process its electronic
data. This vendor has made modifications or replacements of its computer
applications and systems necessary to correct the year 2000 date issue.
Management has substantially completed the testing of the modifications to these
systems and applications. The Company also utilizes a combination of purchased
and contract-based software as well as other third party vendors for a variety
of data processing needs. The Company's assessment of potential computer issues
for the year 2000 have been substantially completed. Where potential computer
issues have been identified, the vendors have committed to definitive dates to
resolve such issues. Under regulatory guidelines issued by the federal banking
regulators, the Bank and the Company must substantially complete testing of both
internally and externally supplied systems and all renovations, by June 30,
1999. In the event that the Company's significant vendors do not achieve year
2000 compliance, the Company's operations could be adversely affected.
The Company has established contingency plans for these systems for which
year 2000 issues will not be corrected. The OTS, the Company's primary federal
bank regulatory agency, along with the other federal bank regulatory agencies
has published guidance on the year 2000 compliance and has identified the year
2000 issue as a substantive area of examination for both regularly scheduled and
special bank examinations. These publications, in addition to providing guidance
as to examination criteria, have
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<PAGE>
outlined requirements for creation and implementation of a compliance plan and
target dates for testing and implementation of corrective action, as discussed
above. As a result of the oversight by and authority vested in the federal bank
regulatory agencies, a financial institution that does not become year 2000
compliant could become subject to administrative remedies similar to those
imposed on financial institutions otherwise found not to be operating in a safe
and sound manner, including remedies available under prompt corrective action
regulations.
There has been limited litigation filed against corporations regarding the
year 2000 problem and such corporations' compliance efforts. To date, no such
litigation has resulted in a decided case imposing liability on the corporate
entity. Nonetheless, the law in this area will likely continue to develop well
into the new millennium. Should the Company experience a year 2000 failure,
exposure of the Company could be significant and material, unless there is
legislative action to limit such liability. Legislation has been introduced in
several jurisdictions regarding the year 2000 problem. However, no assurance can
be given that legislation will be enacted in jurisdictions where the Company
does business that will have the effect of limiting any potential liability.
Through March 31, 1999, the Company did not incur any costs associated with
achieving year 2000 compliance. However, the Company expects to incur
approximately $451,000 in costs to achieve year 2000 compliance during the
remainder of 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In management's opinion, there has not been a material change in market risk
from December 31, 1998 as reported in item 7A of the Company's Form 10-K.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February, 1983, a burglary of the contents of safe deposit boxes occurred
at a branch office of the Bank. At March 31, 1999, the Bank has a class action
lawsuit related thereto pending, whereby the plaintiffs are seeking recovery of
approximately $12.9 million in actual damages and an additional $12.9 million of
unspecified damages. The Banks ultimate liability, if any, which might arise
from the disposition of these claims cannot presently be determined. Management
believes it has meritorious defenses against these actions and has and will
continue to defend its position. Accordingly, no provision for any liability
that may result upon adjudication has been recognized in the accompanying
consolidated financial statements.
The Company is involved in various other legal actions arising in the
ordinary course of business, which in the aggregate, are believed by management
to be immaterial to the financial position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on April 21, 1999.
(b) Not applicable.
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<PAGE>
(c) At such meeting, the shareholders approved the following matters:
1. The election of the following individuals as Directors for a term of 3
years each:
<TABLE>
<CAPTION>
VOTES BROKER
VOTES FOR WITHHELD ABSTENTIONS NON-VOTES
---------- --------- --------------- -------------
<S> <C> <C> <C> <C>
George S. Worgul................................................. 7,103,456 914,489 -0- -0-
Michael J. Levine................................................ 7,113,320 904,625 -0- -0-
</TABLE>
2. The ratification of KPMG LLP as independent auditors of the Company for
the fiscal year ending December 31, 1999, as reflected by 7,863,457 votes for,
134,216 votes against, 20,272 abstentions and no broker non-votes.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) 3.1 Bylaws of Haven Bancorp, Inc., as amended on April 21, 1999.
27.1 Financial Data Schedule.
b) The Company filed a Form 8-K on April 29, 1999 regarding the press
release announcing its 1999 first quarter earnings.
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
HAVEN BANCORP INC
(REGISTRANT)
By: /s/ PHILIP S. MESSINA
-----------------------------------------
Philip S. Messina
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
Date: May 13, 1999 OFFICER
By: /s/ CATHERINE CALIFANO
-----------------------------------------
Catherine Califano
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
Date: May 13, 1999 OFFICER
</TABLE>
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<PAGE>
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No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the securities offered hereby, but only under circumstances where it
is lawful to do so. The information contained in this prospectus is current only
as of its date. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of Haven Capital Trust II or Haven Bancorp, Inc.
since the date hereof or that the information contained herein is correct as of
any time subsequent to the date of this prospectus.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Where You Can Find More Information............. 3
Additional Information We Have Incorporated in
the Prospectus................................ 3
Forward-looking Statements Relating to Haven's,
Haven Capital's and the Capital Securities'
Future Performance or Expectations............ 4
Summary Information............................. 5
Risk Factors.................................... 8
Recent Developments............................. 16
Selected Consolidated Financial Data............ 20
Haven Bancorp, Inc.............................. 24
Management of Haven and the Bank................ 28
Haven Capital Trust II.......................... 31
Use of Proceeds................................. 32
Accounting Treatment............................ 32
Capitalization.................................. 33
Description of Capital Securities............... 34
Description of Subordinated Debentures.......... 46
Description of Guarantee........................ 56
Relationship among the Capital Securities, the
Subordinated Debentures and the Guarantee..... 59
Certain Federal Income Tax Consequences......... 60
ERISA Considerations............................ 64
Underwriting.................................... 67
Validity of Securities.......................... 68
Experts......................................... 68
Index to Financial Statements................... F-1
Annual Report on Form 10-K...................... A-1
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... B-1
Quarterly Report on Form 10-Q................... C-1
</TABLE>
[LOGO]
HAVEN CAPITAL TRUST II
$22,000,000
10.25% Capital Securities
Liquidation Amount $10.00 per Capital Security
Fully and unconditionally guaranteed,
to the extent described herein, by
HAVEN BANCORP, INC.
------------------------
PROSPECTUS
------------------------
FRIEDMAN BILLINGS RAMSEY
FIRST ALBANY CORPORATION
LADENBURG THALMANN
& CO. INC.
MAY 21, 1999
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