SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
For Annual and Transition reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999 [ ] Transition report
pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.
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)
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. [x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant is $134,843,707 and is based upon the last sales price as quoted on
the Nasdaq Stock Market for March 29, 2000.
The registrant had 9,026,661 shares outstanding as of March 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended December
31, 1999, are incorporated by reference into Parts I and II of this Form 10-K.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Statements made herein that are forward-looking in nature within the meaning of
the Private Securities Litigation Reform Act of 1995, are subject to risks and
uncertainties that could cause actual results to differ materially. Such risks
and uncertainties include, but are not limited to, estimates with respect to the
financial condition, results of operations and business of Haven Bancorp, Inc.
that are subject to various factors which could cause actual results to differ
materially from these estimates. These factors include, but are not limited to,
those related to overall business conditions, particularly in the consumer
financial services, mortgage and insurance markets in which Haven Bancorp, Inc.
operates, fiscal and monetary policy, competitive products and pricing, credit
risk management, the ability of Haven Bancorp, Inc. to undertake a suitable
transaction with respect to its residential mortgage lending division and
changes in regulations affecting financial institutions.
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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, 1999, the
Company had consolidated total assets of $2.97 billion and stockholders' equity
of $105.6 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, 1999, the Bank had total assets of
$2.96 billion and stockholders' equity of $147.0 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 and other marketable securities to supplement its lending portfolio.
Effective January 1, 1999, the Bank indefinitely discontinued offering certain
consumer loans, including home equity loans and home equity lines of credit.
On May 1, 1998, the Bank completed the purchase of the loan production franchise
of Intercounty Mortgage, Inc. ("IMI"). The business operates as a division of
the Bank under the name CFS Mortgage 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
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Jersey and Pennsylvania. Loan sales in the secondary market are primarily on a
servicing-released basis, for which the Bank earns servicing-released premiums.
The Company has retained an investment banking firm to pursue various strategic
alternatives for the Company including the sale of parts of CFS Mortgage, which
the Company expects to complete in early 2000.
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, its provision for loan losses and its operating
expenses consisting primarily of compensation and benefits, occupancy and
equipment, 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.
RECENT DEVELOPMENTS
On March 24, 2000, the Company announced that it retained the investment banking
firm of Lehman Brothers Inc. to advise the Board of Directors on strategic
alternatives for the Company. In addition, the Company formed a three-person
committee of outside Board members to work with Lehman Brothers in these
efforts. Chaired by Michael A. McManus, Jr., the committee includes Hanif Dahya
and Robert M. Sprotte. The Company had previously announced that it had engaged
Lehman Brothers to assist in evaluating options with respect to the Company's
residential mortgage origination division. The Company expects a resolution
regarding its residential mortgage division in the near future, which will
result in the Company recording a restructuring charge, the amount of which
cannot be determined at this time. In addition, the Board approved a plan to
reduce operating expenses through a reduction in the Company's workforce and
elimination of certain other expenses across all departments and divisions. The
Company expects to realize approximately $7 million in annualized savings as a
result of these measures. The Company started to implement these initiatives as
of March 24, 2000.
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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 sixty-three in-store 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 1999, the Bank opened six in-store
branches. Management believes that in-store 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 and the
recent passage of the Gramm-Leach-Bliley Act. See "Regulation and Supervision."
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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 1999, loan originations and purchases totaled $1.38 billion
(comprised of $1.20 billion of residential one- to four-family mortgage loans,
$158.7 million of commercial and multi-family real estate loans, $11.2 million
of construction loans and $8.9 million of consumer loans). One- to four-family
mortgage loan originations and purchases included $634.8 million of loans
originated and purchased for sale in the secondary market. During 1999, the Bank
sold $561.7 million of one- to four-family mortgage loans in the secondary
market on a servicing-released basis.
At December 31, 1999, the Bank had total mortgage loans outstanding of $1.77
billion, of which $1.33 billion were one- to four-family residential mortgage
loans, or 74.0% of the Bank's total loans. At that same date, multi-family
residential mortgage loans totaled $268.4 million, or 14.9% of total loans.
The remainder of the Bank's mortgage loans, included $167.5 million of
commercial real estate loans, or 9.3% of total loans, $3.7 million of
cooperative apartment loans, or 0.2% of total loans and $3.2 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 $25.9 million, or 1.4% of total loans at December 31, 1999.
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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,
---------------
1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $1,332,169 73.98% $888,610 67.85% $805,690 69.93% $556,818 65.63% $325,050 57.03%
Multi-family 268,358 14.90 215,542 16.46 143,559 12.46 105,341 12.42 79,008 13.86
Commercial 167,518 9.30 163,935 12.52 148,745 12.91 127,956 15.08 111,038 19.48
Cooperative 3,669 0.20 3,970 0.30 19,596 1.70 19,936 2.35 10,187 1.79
Construction and land 3,168 0.18 2,731 0.20 2,263 0.20 4,227 0.50 5,737 1.01
--------- ----- --------- ----- ------- ----- ------- ----- ------- -----
Total mortgage loans 1,774,882 98.56 1,274,788 97.33 1,119,853 97.20 814,278 95.98 531,020 93.17
Other loans:
Home equity lines of
credit 11,328 0.63 15,173 1.16 15,449 1.34 15,677 1.85 16,454 2.89
Property improvement
loans 1,502 0.08 2,634 0.20 4,392 0.38 6,957 0.82 10,248 1.80
Loans on deposit
accounts 749 0.04 957 0.07 895 0.08 809 0.10 821 0.14
Commercial loans 422 0.02 445 0.03 453 0.04 351 0.04 479 0.08
Guaranteed student loans 667 0.04 774 0.06 882 0.08 985 0.12 1,181 0.21
Unsecured consumer loans 978 0.05 2,029 0.16 450 0.04 809 0.10 1,950 0.34
Other loans 10,302 0.58 12,914 0.99 9,770 0.84 8,506 0.99 7,834 1.37
--------- ------ --------- ------ ------- ------ ------- ------ ------- ------
Total other loans 25,948 1.44 34,926 2.67 32,291 2.80 34,094 4.02 38,967 6.83
--------- ------ --------- ------ ------- ------ ------- ------ ------- ------
Total loans 1,800,830 100.00% 1,309,714 100.00% 1,152,144 100.00% 848,372 100.00% 569,987 100.00%
====== ====== ====== ====== ======
Less:
Unearned discounts,
premiums and deferred
loan fees, net 5,995 966 (1,363) (786) (1,029)
Allowance for loan
losses (16,699) (13,978) (12,528) (10,704) (8,573)
--------- --------- ------- ------- -------
Loans, net $1,790,126 $1,296,702 $1,138,253 $836,882 $560,385
========= ========= ======= ======= =======
</TABLE>
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The following table shows the estimated contractual maturity of the Bank's loan
portfolio at December 31, 1999, assuming no prepayments.
<TABLE>
<CAPTION>
At December 31, 1999
Mortgage Other Total
Loans Loans Loans
-------- ----- -------
(In thousands)
<S> <C> <C> <C>
Amounts due:
Within one year $ 75,797 $16,497 92,294
------- ------ -------
After one year:
One to three years 171,079 1,390 172,469
Three to five years 335,096 1,652 336,748
Five to ten years 595,617 2,337 597,954
Ten to twenty years 354,481 4,072 358,553
Over twenty years 242,812 - 242,812
--------- ------ ---------
Total due after one year 1,699,085 9,451 1,708,536
--------- ------ ---------
Total $1,774,882 $25,948 $1,800,830
========= ====== =========
</TABLE>
The following table sets forth at December 31, 1999, the dollar amount of all
loans due after December 31, 2000, and whether such loans have fixed interest
rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 2000
Fixed Adjustable Total
----- ---------- -----
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family $534,265 $ 759,164 $1,293,429
Multi-family 38,586 217,360 255,946
Commercial 28,475 117,566 146,041
Cooperative 954 2,715 3,669
Other loans 7,466 1,985 9,451
------- --------- ---------
Total $609,746 $1,098,790 $1,708,536
======= ========= =========
</TABLE>
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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,
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans (gross):
At beginning of year $1,274,788 $1,119,853 $814,278 $531,020 $483,232
Mortgage loans originated(1):
One- to four-family 568,072 177,544 121,498 98,783 64,139
Multi-family 102,305 88,504 64,181 46,310 11,726
Commercial real estate 56,395 68,319 69,495 35,886 26,047
Cooperative - 34 - - 63
Construction and land loans 11,188 2,806 3,773 1,562 4,367
--------- ------- ------- ------- -------
Total mortgage loans
originated 737,960 337,207 258,947 182,541 106,342
Mortgage loans purchased - 297,906 200,900 172,300 26,241
Transfer of mortgage loans
to REO (622) (623) (1,695) (3,470) (4,638)
Transfer of mortgage loans from/
(to) loans held for sale 44,569 - - 10,594 (12,038)
Principal repayments (259,143) (269,164) (151,215) (78,209) (67,274)
Sales of mortgage loans (2) (22,670) (104,700) (1,362) (498) (845)
Transfer of loans to MBSs - (105,691) - - -
--------- --------- --------- ------- -------
At end of year $1,774,882 $1,274,788 $1,119,853 $814,278 $531,020
========= ========= ========= ======= =======
Other loans (gross):
At beginning of year $ 34,926 $ 32,291 $ 34,094 $ 38,967 $ 41,025
Other loans originated 8,874 16,413 11,491 8,735 10,746
Principal repayments (17,852) (13,778) (13,294) (13,608) (12,804)
------- ------- ------- ------- -------
At end of year $ 25,948 $ 34,926 $ 32,291 $ 34,094 $ 38,967
======= ======= ======= ======= =======
</TABLE>
(1) Includes wholesale loan purchases.
(2) During 1999, the Bank sold $20.5 million of adjustable-rate mortgage loans
previously held in the Bank's portfolio. During 1998, the Bank sold $83.3
million of adjustable-rate mortgage loans in several bulk sale transactions.
Also during 1998, the Bank sold $14.0 million of cooperative apartment loans.
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), the New York City boroughs of Queens, Manhattan, Brooklyn and Staten
Island, the New York counties of Rockland and Westchester, as well as in Albany
and Rochester, New York, New Jersey, Pennsylvania and Connecticut.
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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 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 Fannie Mae ("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 Federal Home Loan Mortgage
Corporation ("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 $1.0 million on one- to
four-family residences with terms up to 30 years, as well as 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 $1.0 million 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
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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. 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 monthly payment may increase and by
qualifying borrowers based upon a rate of 2% over the initial rate. During 1999,
the Bank originated or purchased $443.6 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 it generally retains 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 "assignments of trade" or
"best efforts" commitments. The Bank sells loans on a servicing-released basis.
For the year ended December 31, 1999, the Bank originated and purchased
approximately $634.8 million of primarily fixed rate, one- to four-family loans
for sale in the secondary market, $561.7 million of which were sold in 1999 and
$44.6 million of which were transferred to portfolio. 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
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guarantees from borrowers. As of December 31, 1999, $268.4 million, or 14.9% 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. 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 office 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 borrowing entity. At December 31, 1999, the Bank's commercial
real estate loan portfolio totaled $167.5 million, or 9.3% 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 at least 20% of the
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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, 1999, the
Bank had $3.2 million, or 0.2% of its total loan portfolio invested in
construction and land loans.
OTHER LOANS. As of December 31, 1999, other loans totaled $25.9 million, or 1.4%
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 $3.0
million must be approved by the Officers Loan Committee, whereas, loans
exceeding $3.0 million must be approved by the Board of Directors Loan
Committee. 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 of Directors.
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 requested. 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 of Directors 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.
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LOAN CONCENTRATIONS. Under 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, 1999, the Bank's loans-to-one borrower limit was $24.6 million.
None of the Bank's borrowers exceeded this limit in accordance with applicable
regulatory requirements.
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
12
<PAGE>
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 each year during the five-year period ended December 31, 1999 from
$16.9 million at December 31, 1995 to $7.7 million at December 31, 1999. The
continued decline in the balance of non-performing loans during this 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 this period from $2.0
million at December 31, 1995 (net of an allowance for REO of $178,000) to a
balance at December 31, 1999 of $324,000. 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, 1999, the Bank had 8 restructured loans with an aggregate
principal balance of $0.7 million. Of this amount, 68.6% were residential loans
(including cooperative apartment loans) and 31.4% 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 would have to foreclose on such loans, which would 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, 1999, the Bank had 7 restructured loans with an aggregate principal
balance of $0.6 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.
At December 31, 1999, the Bank's classified assets consisted of $6.5 million of
loans and REO of which $133,000 were classified as a loss or doubtful. The
Bank's assets classified as substandard at December 31, 1999 consisted of $6.1
million of loans and $324,000 of gross REO. Classified assets in total
13
<PAGE>
declined $4.6 million, or 41.1% since December 31, 1997. At December 31, 1999,
the Bank also had $6.1 million of commercial real estate loans that it had
designated special mention. These loans were performing in accordance with their
terms at December 31, 1999 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, 1999, 1998 and 1997, delinquencies in the Bank's loan portfolio
were as follows:
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
-------------------------------- ---------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
---------------- --------------- ---------------- ----------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ -------- ------ --------- ------ -------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family 28 $ 991 31 $ 3,485 50 $ 5,201 40 $ 3,843
Multi-family - - 2 1,139 2 591 - -
Commercial - - 5 1,365 2 306 7 2,175
Cooperative 11 36 10 384 - - 26 303
Construction and
land loans - - - - - - - -
Other loans 30 104 52 621 94 1,177 47 207
-- ------ --- ------ --- ------ --- ------
Total loans 69 $ 1,131 100 $ 6,994 148 $ 7,275 120 $ 6,528
== ====== === ====== === ====== === ======
Delinquent loans
to total loans (1) 0.06% 0.39% 0.56% 0.50%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1997
---------------------------------
60-89 Days 90 Days or More
---------------- ----------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
------ --------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family 8 $ 1,339 42 $ 3,534
Multi-family - - 9 2,362
Commercial 1 33 9 3,305
Cooperative 3 128 8 699
Construction and
land loans - - 1 100
Other loans 26 452 19 396
--- ------ --- ------
Total loans 38 $ 1,952 88 $10,396
=== ====== === ======
Delinquent loans
to total loans (1) 0.17% 0.90%
==== ====
</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 were no restructured loans included
in
14
<PAGE>
loans delinquent 90 days or more at December 31, 1999. At December 31, 1998,
there was 1 restructured loan for $183,000 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 $468,000, $425,000 and $736,000 for the
years ended December 31, 1999, 1998 and 1997, respectively, compared to
$144,000, $117,000 and $146,000, which was recognized on non-accrual loans for
such periods, respectively. If all restructured loans, as of December 31, 1999,
1998 and 1997, 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 $180,000, $396,000 and $197,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. 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 REO.
<TABLE>
<CAPTION>
At December 31,
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans $ 6,373 $ 6,321 $ 10,000 $ 10,358 $ 9,116
Restructured mortgage loans 717 1,857 2,136 3,160 7,072
Non-accrual other loans 621 207 396 375 689
------- ------- ------- ------- -------
Total non-performing loans 7,711 8,385 12,532 13,893 16,877
Real estate owned, net of
related reserves 324 200 455 1,038 2,033
------- ------- ------- ------- -------
Total non-performing assets $ 8,035 $ 8,585 $ 12,987 $ 14,931 $ 18,910
======= ======= ======= ======= =======
Non-performing loans to total loans 0.42% 0.64% 1.09% 1.64% 2.97%
Non-performing assets to total assets 0.27 0.36 0.66 0.94 1.28
Non-performing loans to total assets 0.26 0.35 0.63 0.88 1.15
</TABLE>
ALLOWANCES FOR LOAN AND REO LOSSES
The allowance for loan losses ("ALL") is increased by charges to income and
decreased by charge-offs (net of recoveries). The Bank's ALL is comprised of
four major categories corresponding to a specific loan type as disclosed on page
18. In determining each of the corresponding portions of the ALL, as well as the
overall ALL, in accordance with generally accepted accounting principles, the
Bank's policies and procedures consider two major
15
<PAGE>
elements: (1) determining and measuring loan impairment under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and (2) determining and
measuring impairment by applying historical loss rates to loan categories under
SFAS No. 5, "Accounting for Contingencies."
Under SFAS No. 114 the overall loan portfolio is evaluated and, for loans
considered impaired, related reserves are identified and calculated in
accordance with SFAS No. 114. At December 31, 1999 the SFAS No. 114 portion of
the ALL was estimated at $78 thousand. Loans not individually evaluated for
impairment under SFAS No. 114, as well as the loans which are individually
evaluated under SFAS No. 114, but not considered impaired, are grouped with
other loans which share similar characteristics for impairment evaluation under
SFAS No. 5.
Under SFAS No. 5, loans with similar characteristics are grouped by loan type,
past due status and risk and are evaluated for collectibility. Based on the
historical loss rates and other factors contributing to the overall loss
experience, each category is assigned a risk weighting which generally ranges
from 50 to 100 basis points. Additional considerations in determining the risk
weighting is given to qualitative factors such as economic conditions and
business environment and strategy, which may result in additional basis points
being applied to a particular category of loans. At December 31, 1999, the SFAS
No. 5 element of the ALL was estimated at $16.6 million.
During the five years ended December 31, 1999, the allowance for loan losses as
a percentage of non-performing loans increased steadily to 216.56% at December
31, 1999. 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 2.97% at December 31, 1995 to
0.42% at December 31, 1999. The decline is due to the decrease in non-performing
loans, as well as an increase in total loans.
The Bank's provision for loan losses has remained relatively stable over the
last five years. Specifically, the Bank made provisions for loan losses of $3.6
million, $2.7 million, $2.8 million, $3.1 million and $2.8 million for December
31, 1999, 1998, 1997, 1996 and 1995, 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 probable losses, there can be
no assurance that such losses will not exceed the estimated amounts.
16
<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,
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $13,978 $12,528 $10,704 $ 8,573 $10,847
Charge-offs:
One- to four-family (314) (435) (964) (771) (472)
Cooperative (34) (256) (370) (524) (2,142)
Multi-family - (708) - (30) (1,299)
Non-residential and other (1,002) (935) (352) (560) (1,541)
------ ------ ------ ------ ------
Total charge-offs (1,350) (2,334) (1,686) (1,885) (5,454)
Recoveries 446 1,119 760 891 405
------ ------ ------ ------ ------
Net charge-offs (904) (1,215) (926) (994) (5,049)
Provision for loan losses 3,625 2,665 2,750 3,125 2,775
------ ------ ------ ------ ------
Balance at end of year $16,699 $13,978 $12,528 $10,704 $ 8,573
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans out-
standing during the year 0.06% 0.09% 0.09% 0.15% 0.93%
Ratio of allowance for loan
losses to total loans at
the end of year (1) 0.92 1.07 1.09 1.26 1.51
Ratio of allowance for loan
losses to non-performing loans
at the end of the year (2) 216.56 166.70 99.97 77.05 50.80
</TABLE>
(1) 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.
(2) 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.
17
<PAGE>
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,
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential (1) $12,112 89.08% $10,139 84.62% $7,039 84.09% $5,929 80.40% $3,838 72.67%
Commercial 4,372 9.30 3,579 12.51 5,201 12.91 4,340 15.08 4,175 19.48
Construction - 0.18 - 0.21 - 0.20 - 0.50 69 1.00
Other loans 215 1.44 260 2.66 288 2.80 435 4.02 491 6.85
------ ------ ------ ------ ----- ------ ------ ------ ------ ------
Total allowance for
loan losses (2) $16,699 100.00% $13,978 100.00% $12,528 100.00% $10,704 100.00% $8,573 100.00%
====== ====== ====== ====== ===== ====== ====== ====== ====== ======
</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, 1999. 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 change. 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.
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 ("ALCO"), 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
18
<PAGE>
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, 1999, the Bank had money market investments and debt
and equity securities available for sale with aggregate carrying amounts of $1.2
million and $195.4 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, 1999, the securities AFS
portfolio totaled $937.3 million, of which $184.5 million were adjustable-rate
securities and $752.8 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,
1999 1998 1997
------ ------ ------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt and Equity Securities:
U.S. Government and
agency obligations $ 92,142 $ 92,142 $ 77,705 $ 77,705 $135,672 $135,715
Corporate debt securities 93,798 93,798 19,684 19,684 45,390 45,315
Preferred stock 9,453 9,453 11,590 11,590 4,123 4,123
------- ------- ------- ------- ------- -------
Subtotal 195,393 195,393 108,979 108,979 185,185(1) 185,153(1)
------- ------- ------- ------- ------- -------
Federal Funds sold - - - - - -
FHLB-NY stock 27,865 27,865 21,990 21,990 12,885 12,885
Money market investments 1,238 1,238 1,720 1,720 4,561 4,561
------- ------- ------- ------- ------- -------
Total $224,496 224,496 $132,689 $132,689 $202,631 $202,599
======= ======= ======= ======= ======= =======
</TABLE>
(1) Includes debt and equity securities held to maturity at December 31, 1997,
with a carrying value and market value of $66.4 million.
19
<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, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
----------------------------------------------------------------------------------------------------------------
Total Money Market Investments
More than More than Five and Debt and Equity Securities
One Year or Less One to Five Years to Ten Years Due After 10 Years ---------------------------------------
----------------- ----------------- --------------- ------------------ Average
Weighted Weighted Weighted Weighted Remaining Estimated Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Fair Average
Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities and
agency
obligations $ 15 8.13% $ 38,665 5.59% $ 22,803 6.00% $ 30,659 7.60 10.3 $ 92,142 $ 92,142 6.36%
Corporate debt
securities - - 19,943 7.50 - - 73,855 7.85 23.9 93,798 93,798 7.78
Money market
investments 1,238 4.08 - - - - - - - 1,238 1,238 -
------- ------- ------- ------- ------- -------
Total $ 1,253 4.13% $ 58,608 6.24% $ 22,803 6.00% $104,514 7.78% 17.1 $187,178 $187,178 7.06%
======= ======= ======= =======
Preferred Stock $ 9,453 $ 9,453 5.00%
FHLB-NY stock $ 27,865 $ 27,865 7.00%
------- -------
Total 224,496 224,496
======= =======
</TABLE>
20
<PAGE>
MORTGAGE-BACKED SECURITIES
The Bank also invests in mortgage-backed securities ("MBSs"). At December 31,
1999, total MBSs, net, aggregated $741.9 million, or 25.0% of total assets. At
December 31, 1999, 42.8% 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 Government National
Mortgage Association ("GNMA"). At December 31, 1999, $184.5 million, or 24.9% of
total MBSs were adjustable-rate and $557.4 million, or 75.1% 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,
1999 1998 1997
------ ------ ------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value Total Value Total Value Total
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
MBSs(1):
CMOs and REMICS - Agency-backed(2) $164,272 22.14% $106,552 13.66% $174,707 32.14%
CMOs and REMICS - Non-agency(2) 424,709 57.25 442,352 56.69 169,480 31.17
FHLMC 32,509 4.38 52,167 6.69 91,110 16.76
FNMA 120,178 16.20 178,767 22.91 107,377 19.75
GNMA 238 0.03 434 0.05 982 0.18
------- ------ ------- ------ ------- ------
Net MBSs $741,906 100.00% $780,272 100.00% $543,656 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
(1) Includes MBSs held to maturity at December 31, 1997, with an aggregate
carrying value of $163.1 million and an aggregate fair value of $163.3 million.
(2) Included in total MBSs are CMOs and REMICs, which, at December 31, 1999, had
a gross carrying value of $589.0 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.
21
<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,
1999 1998 1997
------ ------ ------
Carrying % of Market Carrying % of Market Carrying % of Market
Value Total Value Value Total Value Value Total Value
-------- ----- ------ -------- ----- ------ -------- ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
MBSs:
FHLMC $ - - % $ - $ - - $ - $ 27,472 5.05% $ 27,769
FNMA - - - - - - 61,492 11.31 61,093
------- ----- ------- ------- ----- ------- ------- ----- -------
Total MBSs - - - - - - 88,964 16.36 88,862
------- ----- ------- ------- ----- ------- ------- ----- -------
Mortgage-related securities:
CMOs and REMICS-Agency
backed - - - - - - 21,217 3.90 21,101
CMOs and REMICS-
Non-agency - - - - - - 52,876 9.73 53,363
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-related
securities - - - - - - 74,093 13.63 74,464
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed and
related securities
held to maturity - - - - - - 163,057 29.99 163,326
------- ----- ------- ------- ----- ------- ------- ----- -------
Available for sale:
MBSs:
GNMA 238 0.03 238 434 0.05 434 982 0.18 982
FHLMC 32,509 4.38 32,509 52,167 6.69 52,167 63,638 11.71 63,638
FNMA 120,178 16.20 120,178 178,767 22.91 178,767 45,885 8.44 45,885
------- ----- ------- ------- ----- ------- ------- ----- -------
Total MBSs 152,925 20.61 152,925 231,368 29.65 231,368 110,505 20.33 110,505
------- ----- ------- ------- ----- ------- ------- ----- -------
Mortgage-related securities:
CMOs and REMICs-Agency
backed 164,272 22.14 164,272 106,552 13.66 106,552 153,490 28.23 153,490
CMOs and REMICs-
Non-agency 424,709 57.25 424,709 442,352 56.69 442,352 116,604 21.45 116,604
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-related
securities 588,981 79.39 588,981 548,904 70.35 548,904 270,094 49.68 270,094
------- ------ ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed
and mortgage-related
securities available
for sale 741,906 100.00 741,906 780,272 100.00 780,272 380,599 70.01 380,599
------- ------ ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed and
related securities $741,906 100.00% $741,906 $780,272 100.00% $780,272 $543,656 100.00% $543,925
======= ====== ======= ======= ====== ======= ======= ====== =======
</TABLE>
22
<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, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
Over One to Over Five to Mortgage-Backed
One Year or Less Five Years Ten Years Over Ten Years and Related Securities Totals
---------------- ----------- ------------ -------------- -----------------------------
Average
Weighted Weighted Weighted Weighted Remaining Estimated Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
FNMA $ - - % $ 3,014 6.00% $ 4,912 6.21% $112,252 6.71% 18 $120,178 $120,178 6.68%
FHLMC - - 3,331 6.85 3,813 7.64 25,365 6.96 21 32,509 32,509 7.03
GNMA - - - - - - 238 6.88 24 238 238 6.88
CMOs and REMICs 12,084 6.81 - - 15,028 6.65 561,869 6.44 26 588,981 588,981 6.45
------ ---- ------ ---- ------ ---- ------- ---- ---- ------- ------- ----
Total mortgage-
backed and
related
securities $12,084 6.81 $ 6,345 6.45% $23,753 6.72% $699,724 6.50% 24 $741,906 $741,906 6.51%
====== ==== ====== ==== ====== ==== ======= ==== ==== ======= ======= ====
</TABLE>
At December 31, 1999, the weighted average contractual maturity of the Bank's
mortgage-backed and related securities portfolio was 24.5 years.
23
<PAGE>
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,
1999.
<TABLE>
<CAPTION>
At December 31, 1999
Total
Adjustable Fixed- Adjust- Mortgage-
Rate Rate able Backed
Fixed-Rate MBSs & CMOs & Rate and Related
MBSs REMICs REMICs CMOs Securities
---------- ---------- ------ ---- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due or repricing:
Within one year $ - $ 38,962 $ - $140,812 $179,774
------- ------- ------ ------- -------
After one year:
One to three years 19 - 12,770 - 12,789
Three to five years 6,532 - - - 6,532
Five to 10 years 8,987 - - - 8,987
10 to 20 years 58,922 - 12,582 - 71,504
Over 20 years 43,751 - 452,012 - 495,763
------- ------- ------- ------- -------
Total due or repricing
after one year 118,211 - 477,364 - 595,575
------- ------- ------- ------- -------
Total
Adjusted for:
Unrealized gain(loss) (4,510) 360 (28,618) (675) (33,443)
------- ------- ------- ------- -------
Total mortgage-backed and
related securities $113,701 $ 39,322 $448,746 $140,137 $741,906
======= ======= ======= ======= =======
</TABLE>
24
<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,
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Mortgage-backed and related
securities:
At beginning of period $780,272 $543,656 $421,964
Loans securitized - 105,691 -
MBSs purchased - - 56,941
MBSs sold - (6,618) (18,932)
CMOs and REMICs purchased 403,658 687,923 365,002
CMOs and REMICs sold (156,203) (349,464) (206,901)
Amortization and repayments (250,264) (199,636) (76,771)
Change in unrealized gain (loss) (35,557) (1,280) 2,353
-------- ------- -------
Balance of mortgage-backed and
related securities at end
of period $741,906 $780,272 $543,656(1)
======= ======= =======
</TABLE>
(1) Includes mortgage-backed and related securities held to maturity at December
31, 1997, with a carrying amount and fair value of $163.1 million and $163.3
million, respectively.
The Banks ALCO Committee determines when to make substantial changes in the MBS
portfolio. In 1999, the Company purchased $403.7 million of CMOs and REMICs, of
which $55.2 million were adjustable-rate and $348.4 million were fixed-rate
securities. During 1999, the Bank continued to emphasize MBSs reflecting
management's strategy to improve duration and yield of the AFS portfolio. At
December 31, 1999, $152.9 million, or 20.6% 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 are 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, 1999 totaling $589.0 million, or 79.4% 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
25
<PAGE>
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 6.51% for the
year ended December 31, 1999. 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.
SOURCES OF FUNDS
GENERAL. Deposits, loan, 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 in-store banking program. During September
of 1996, the Bank and Pathmark Stores, Inc. entered into a fifteen year contract
to open approximately 44 full-service bank branches in Pathmark supermarkets
then existing in New York by early 1999. The contract also provides that the
Bank will open a branch in all new Pathmark supermarkets that open in the
counties of New York (excluding one store in New York City), Bronx, Queens,
Kings, Richmond, Nassau, Suffolk, Westchester and Rockland. By the end of 1996,
the Bank had opened four in-store branches with deposits totaling $12.1 million.
During 1998, the Bank opened twenty-eight in-store branches resulting in a total
of thirty-two locations at December 31, 1998 with deposits totaling $157.2
million. During 1999, the Bank opened an additional six in-store branches
resulting in a total
26
<PAGE>
of sixty-three locations at December 31, 1999 with deposits totaling $842.3
million. The in-store 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, 1999, the Bank had 39 branches in Pathmark Stores, Inc., 15 in ShopRite
Supermarket, Inc., 5 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 46.7% of
total in-store branch deposits, compared to 44.1% in traditional branches.
Overall core deposits represented 45.4% of total deposits at December 31, 1999
compared to 47.7% at December 31, 1998. The Bank believes that in-store
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"). 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. In 2000, the
Bank anticipates opening one additional in-store branch in a new Pathmark
location. Pathmark, has, however, announced that it recently initiated
discussions with its bondholders toward developing consensual restructuring plan
to reduce its debt. The restructuring could take a variety of forms, including,
without limitation, a consensual out-of-court restructuring of Pathmark or an
in-court restructuring under a bankruptcy proceeding. If, as part of any
restructuring, Pathmark sells a supermarket where the Bank operates a branch,
the sale would be subject to the Bank's license related to that supermarket. If
Pathmark closes a supermarket where the Bank operates a branch, the license
would be subject to termination, and the Bank would be entitled to, among other
things, a rebate of some of the costs it incurred to open the branch. Management
cannot predict to what extent any restructuring of Pathmark will affect the
Bank's in-store branches.
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 1999, 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. However, during the second half of 1999 market interest rates
increased, therefore, certificates of deposit increased from 52.3% of total
deposits at December 31,
27
<PAGE>
1998 to 54.6% of total deposits at December 31, 1999. During 1998, the Bank
introduced a "Liquid Asset" savings account in all in-store 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 in-store branch
locations as these locations continue to grow and mature.
The following table presents the deposit activity of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Deposits $7,667,241 $5,753,644 $3,208,355
Withdrawals 7,380,765 5,458,274 3,031,457
--------- --------- ---------
Net deposits 286,476 295,370 176,898
Interest credited on deposits 71,427 62,328 50,326
--------- --------- ---------
Total increase in deposits $ 357,903 $ 357,698 $ 227,224
========= ========= =========
</TABLE>
Time deposits by maturity at December 31, 1999 over $100,000 are as follows:
Maturity Period Amount
--------------- ------
(In thousands)
Three months or less $27,007
Over three through six months 36,213
Over six through 12 months 34,653
Over 12 months 15,927
-------
Total $113,800
=======
28
<PAGE>
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,
1999 1998 1997
------ ------ ------
Percent Weighted Percent Weighted Percent Weighted
of Average of Average of Average
Average Total Nominal Average Total Nominal Average Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts $626,428 32.77% 3.14% $441,759 28.22% 2.81% $371,872 30.01% 2.51%
Checking accounts 239,614 12.53 0.70 187,297 11.96 0.73 134,546 10.86 1.31
------- ----- ---- ------- ----- ----- ------- ----- -----
Total savings and checking
accounts 866,042 45.30 2.46 629,056 40.18 2.19 506,418 40.87 2.07
------- ----- ---- ------- ----- ----- ------- ----- -----
Money market accounts 57,132 2.99 3.21 57,597 3.68 3.54 54,107 4.37 3.37
------- ----- ---- ------- ----- ----- ------- ----- -----
Certificate accounts:
91 days 5,022 0.26 3.40 5,620 0.36 3.87 5,799 0.47 3.83
6 months 192,686 10.09 4.91 164,647 10.52 5.33 85,558 6.90 5.37
7 months 9,062 0.47 4.14 4,519 0.29 3.93 13,116 1.06 5.26
One year 508,995 26.63 5.26 382,497 24.43 5.62 265,891 21.45 5.69
13 months 59,361 3.10 5.15 27,514 1.76 5.53 21,314 1.72 5.79
18 months 9,050 0.47 4.50 33,985 2.17 5.77 34,321 2.77 5.79
2 to 4 years 115,928 6.06 5.63 160,667 10.26 5.99 145,081 11.71 6.04
Five years 82,684 4.32 6.22 93,898 5.99 6.23 101,972 8.23 6.23
7 to 10 years 5,831 0.31 6.31 5,644 0.36 6.31 5,547 0.45 6.31
--------- ------ ---- -------- ------ ---- ------- ------ ----
Total certificate accounts 988,619 51.71 5.29 878,991 56.14 5.68 678,599 54.76 5.79
--------- ------ ---- --------- ------ ---- --------- ------ ----
Total deposits $1,911,793 100.00% 3.95% $1,565,644 100.00% 4.20% $1,239,124 100.00% 4.16%
========= ====== ==== ========= ====== ==== ========= ====== ====
</TABLE>
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1999, 1998 and 1997 and the
periods to maturity of the certificate accounts outstanding at December 31,
1999.
<TABLE>
<CAPTION>
Period of Maturity from December 31, 1999
-----------------------------------------
Within One to Two to Over
At December 31, One Two Three Three
1999 1998 1997 Year Years Years Years Total
------ ------ ------ ------ ------ ------ ----- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.99% or less $ 34,563 $ 31,712 $ 6,682 $ 24,581 $ 4,973 $ 732 $ 4,277 $ 34,563
4.00% to 4.99% 78,062 131,330 6,942 74,311 2,916 393 442 78,062
5.00% to 5.99% 911,169 610,219 548,849 835,255 61,808 2,036 12,070 911,169
6.00% to 6.99% 107,204 123,436 211,302 37,513 23,800 41,943 3,948 107,204
7.00% to 7.99% 4,435 5,052 7,808 4,435 - - - 4,435
--------- ------- ------- ------- ------- ------ ------ ---------
Total $1,135,433 $901,749 $781,583 $976,095 $93,497 $45,104 $20,737 $1,135,433
========= ======= ======= ======= ======= ====== ====== =========
</TABLE>
29
<PAGE>
BORROWINGS
Although deposits are the Bank's primary source of funds, the Bank has from time
to time utilized borrowed funds as an alternative or less costly source of
funds. The Bank's primary source of borrowed funds 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, 1999, the Bank had $537.0 million of advances
outstanding from the FHLB-NY.
In addition, the Bank may, from time to time, enter into sales of securities
under agreements to repurchase ("reverse repurchase agreements") with terms
generally up to 30 days with nationally recognized investment banking firms.
Reverse repurchase agreements are accounted for as borrowed funds 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,
1999, the Bank had $160.8 million of reverse repurchase agreements outstanding.
On February 12, 1997, Haven Capital Trust I ("Trust I"), a trust formed under
the laws of the State of Delaware, issued $25.0 million of 10.46% capital
securities. The Company is the owner of all the beneficial interests represented
by common securities of Trust I. Trust I used the proceeds from the sale of
capital securities and the common securities to purchase the Company's 10.46%
junior subordinated deferrable interest debentures due in 2027. See Note 9 of
Notes to Consolidated Financial Statements in the Registrant's 1999 Annual
Report to Stockholders on page 35 which is incorporated herein by reference.
On May 26, 1999, Haven Capital Trust II, a trust formed under the laws of the
State of Delaware ("Trust II"), issued $22.0 million of 10.25% capital
securities. On June 18, 1999, an additional $3.3 million of capital securities
were issued in connection with the exercise of the over-allotment option by the
underwriters. The Company is the owner of all of the beneficial interests
represented by common securities of the Trust II. The Trust II used the proceeds
from the sale of the capital securities and the common securities to purchase
the Company's 10.25% junior subordinated deferrable interest debentures due in
2029. See Note 9 of the Notes to Consolidated Financial Statements in the
Registrant's 1999 Annual Report to Stockholders on page 35 which is incorporated
herein by reference.
30
<PAGE>
The Bank has an ESOP loan from an unrelated third party lender with an
outstanding balance of $1.2 million and an interest rate of 7.81% at December
31, 1999. See Note 12 of Notes to Consolidated Financial Statements in the
Registrant's 1999 Annual Report to Stockholders on page 40 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.
31
<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,
1999 1998 1997
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB-NY Advances:
Average balance outstanding $445,926 $301,557 $191,550
Maximum amount outstanding at any
month-end during the period 537,000 431,000 247,000
Balance outstanding at end of period 537,000 325,200 247,000
Weighted average interest rate
during the period 5.28% 5.19% 5.69%
Weighted average interest rate
at end of period 5.42% 5.13% 5.86%
Securities Sold under Agreements to
Repurchase:
Average balance outstanding $180,298 $142,348 $172,310
Maximum amount outstanding at any
month-end during the period 242,429 191,291 229,280
Balance outstanding at end of period 160,786 88,690 193,028
Weighted average interest rate
during the period 5.40% 5.71% 5.68%
Weighted average interest rate
at end of period 6.42% 5.50% 5.94%
Other Borrowings (1):
Average balance outstanding $ 41,029 $ 26,626 $ 25,231
Maximum amount outstanding at any
month-end during the period 51,543 26,766 30,120
Balance outstanding at end of period 51,446 26,456 26,766
Weighted average interest rate
during the period 10.35% 10.32% 8.15%
Weighted average interest rate
at end of period 10.24% 10.20% 10.29%
Total Borrowings:
Average balance outstanding $667,253 $470,531 $389,091
Maximum amount outstanding at any
month-end during the period 780,478 649,057 466,794
Balance outstanding at end of period 749,232 440,346 466,794
Weighted average interest rate
during the period 5.61% 5.95% 5.86%
Weighted average interest rate
at end of period 5.97% 5.51% 6.15%
</TABLE>
(1) Includes the CMO, ESOP loan and Capital Securities issued by Haven Capital
Trust I and Haven Capital Trust II.
32
<PAGE>
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 1998 and the subsidiary is inactive.
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, which
is a licensed general agent with the New York State Department of Insurance.
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 9 of Notes to Consolidated Financial
Statements in the Registrant's 1999 Annual Report to Stockholders which is
incorporated herein by reference.
HAVEN CAPITAL TRUST II. On May 26, 1999, Haven Capital Trust II, a trust formed
under the laws of the State of Delaware, issued $22.0 million of 10.25% capital
securities. On June 18, 1999, an additional $3.3 million of capital securities
were issued in connection with exercise of the over-allotment option by the
underwriters. See Note 9 of Notes to Consolidated Financial Statements in the
Registrant's Annual Report to Stockholders.
COLUMBIA PREFERRED CAPITAL CORPORATION ("CPCC"). On June 9, 1997, the Bank
established a real estate investment trust ("REIT") subsidiary, CPCC. At
December 31, 1999, the REIT held $414.3 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
33
<PAGE>
portfolio transferred to CPCC since the transferred portion of its mortgage loan
portfolio is segregated into a separate legal entity.
CFS INVESTMENTS NEW JERSEY, INC. ("CFSI NJ"). On December 23, 1999, the Bank
established a New Jersey Investment Company, a Delaware corporation. CFSI NJ is
a wholly owned subsidiary of the Bank. The Bank contributed 100% of its interest
in CPCC to CFSI NJ in exchange for 100% of CFSI NJ's voting common stock. CFSI
NJ was established to provide the Bank with the opportunity to expand its
current New Jersey operations. CFSI NJ will primarily engage in investment
activities in which the Bank may currently engage, including the investment in
CPCC, whose primary investment activity is the purchase of residential and
commercial real estate loans originated by the Bank. CFSI NJ will also enhance
the Bank's income through the recognition of certain income tax benefits.
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 outstanding 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, 1999, the Bank had 985 full-time employees and 41 part-time
employees. Although 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
34
<PAGE>
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.
IMPACT OF ENACTMENT OF THE GRAMM-LEACH-BLILEY ACT
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act (the
"GLB Act"), which, among other things, establishes a comprehensive framework to
permit affiliations among commercial banks, insurance companies and securities
firms. Generally, the new law (i) repeals the historical restrictions and
eliminates many federal and state law barriers to affiliations among banks and
securities firms, insurance companies and other financial service providers,
(ii) provides a uniform framework for the activities of banks, savings
institutions and their holding companies, (iii) broadens the activities that may
be conducted by subsidiaries of national banks and state banks, (iv) provides an
enhanced framework for protecting the privacy of information gathered by
financial institutions regarding their customers and consumers, (v) adopts a
number of provisions related to the capitalization, membership, corporate
governance and other measures designed to modernize the Federal Home Loan Bank
System, (vi) requires public disclosure of certain agreements relating to funds
expended in connection with an institution's compliance with the Community
Reinvestment Act, and (vii) addresses a variety of other legal and regulatory
issues affecting both day-to-day operations and long-term activities of
financial institutions, including the functional regulation of bank securities
and insurance activities.
The GLB Act also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan holding companies that
are "grandfathered," i.e., unitary savings and loan holding companies in
existence or with applications filed with the OTS on or before May 4, 1999, such
as the Company, retain their authority under the prior law. All other unitary
savings and loan holding companies are limited to financially related activities
permissible for bank holding companies, as defined under the GLB Act. The GLB
Act also prohibits non-financial companies from acquiring grandfathered unitary
savings and loan association holding companies, such as the Company.
The GLB Act also requires financial institutions to disclose on ATM machines any
non-customer fees and to disclose to their customers upon the issuance of an ATM
card any fees that may be imposed by the institutions on ATM users. For older
ATMs, financial institutions will have until December 31, 2004 to provide such
notices.
35
<PAGE>
Banking holding companies are permitted to engage in a wider variety of
financial activities than permitted under the prior law, particularly with
respect to insurance and securities activities. In addition, in a change from
the prior law, bank holding companies are in a position to be owned, controlled
or acquired by any company engaged in financially related activities.
We do not believe that the new law will have a material adverse affect upon our
operations in the near term. However, to the extent that the new law permits
banks, securities firms and insurance companies to affiliate, the financial
services industry may experience further consolidation. This type of
consolidation could result in a growing number of larger financial institutions
that offer a wider variety of financial services than we currently offer and
that can aggressively compete in the markets we currently serve.
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.
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, 1999, the Bank's unimpaired capital and
surplus was $163.7 million and its limit on loans to one borrower was $24.6
million. At December 31, 1999, the Bank's largest aggregate amount of loans to
one borrower had an aggregate balance of $12.7 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
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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, 1999, the Bank
maintained 75.07% 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. Under these regulations, as the subsidiary of a savings and loan
holding company, the Bank currently must file a notice with the OTS for each
capital distribution. However, if the total amount of all capital distributions
(including a 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, then the Bank must file an application to receive the
approval of the OTS for the proposed capital distribution.
In addition to the OTS limits, the Bank may not pay dividends if, after paying
those dividends, it would fail to meet the required minimum levels under
risk-based capital guidelines and the minimum leverage and tangible capital
ratio requirements or the OTS notified the Bank that it was in need of more than
normal supervision. Under the Federal Deposit Insurance Act ("FDIA"), an insured
depositary institution such as the Bank is prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
used in the FDIA). Payment of dividends by the Bank also may be restricted at
any time at the discretion of the appropriate regulator if it deems the payment
to constitute an unsafe and unsound banking practice.
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, 1999
was 4.31% which exceeded the then applicable requirement. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
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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, 1999 and 1998, totaled $371,000 and $322,000, respectively. The OTS
adopted amendments to its regulations, effective January 1, 1999, that are
intended to assess savings associations on a more equitable basis. The new
regulations base the assessment for an individual savings association on three
components: the size of the association on which the basic assessment is based;
the association's supervisory condition, which results in 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
results 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 smaller savings institutions, which are those
whose total assets never exceeded $100 million, the regulations provide that the
portion of the assessment based on asset size will be the lesser of the
assessment under the amended regulations or the regulations before the
amendment. 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
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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 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 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.
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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, a
core capital ratio requirement and a risk-based capital ratio requirement.
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; (i) the core capital ratio was effectively increased from
3.0% to 4.0% because under these regulations an institution with less than 4%
core capital is classified as "undercapitalized" (the core capital ratio may be
reduced to 3.0% for a depository institution that has been assigned the highest
composite rating of 1 under the Uniform Financial Institution Rating System) and
(ii) the tangible capital requirement was effectively increased from 1.5% to
2.0% because under these regulations an institution with less than 2.0% tangible
capital is classified as "critically undercapitalized."
See "- Prompt Corrective Regulatory Action."
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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
regulations based on the risks OTS believes are inherent in the type of asset.
The components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible debt
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 risk-based
capital rule. 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 requirements on individual
institutions. If the Bank had been subject to an interest rate risk capital
component as of
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December 31, 1999, there would have been no material effect on the Bank's
risk-weighted capital.
At December 31, 1999, the Bank met each of its capital requirements. A chart
which sets forth the Bank's compliance with its capital requirements appears in
Note 15 to Notes to Consolidated Financial Statements in the Registrant's 1999
Annual Report to Stockholders 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 ratio 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 ratio of 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 institutions
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.
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
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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. As of December 31, 1999, the rate of assessment for BIF-assessable
deposits is 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 period beginning on January 1, 2000 is 0.0212% for BIF-assessable
deposits and 0.0212% for SAIF-assessable deposits.
The OTS has recently proposed regulations implementing the privacy protection
provisions of the GLB Act. The proposed regulations would require each financial
institution to adopt procedures to protect their customers' and consumers'
"nonpublic personal information" by November 13, 2000. The Bank would be
required to disclose its privacy policy, including identifying with whom it
shares "nonpublic personal information," to customers at the time of
establishing the customer relationship and annually thereafter. In addition, the
Bank would be required to provide its customers with the ability to "opt-out" of
having their personal information shared with unaffiliated third parties. The
Bank currently has a privacy protection policy in place and intends to review
and amend that policy, if necessary, for compliance with the regulations when
they are adopted in final form.
The GLB Act also provides for the ability of each state to enact legislation
that is more protective of consumers' personal
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information. Currently, there are a number of privacy bills pending in the New
York State Assembly. No action has been taken on any of these bills, and the
Company cannot predict what impact, if any, these bills would have.
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, 1999 of $27.9
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, 1999, 1998 and 1997, dividends
from the FHLB to the Bank amounted to $1.6 million, $1.2 million and $710,000,
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.
Pursuant to the GLB Act, the foregoing minimum share ownership requirements will
be replaced by regulations to be promulgated by FHLB. The GLB Act specifically
provides that the minimum requirements in existence immediately prior to
adoption of the GLB Act shall remain in effect until such regulations are
adopted. Formerly, federal savings associations were required to be members of
the FHLB Bank System. The new law removed the mandatory membership requirement
and authorized voluntary membership for federal savings associations, as is the
case for all other eligible institutions.
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
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be maintained against aggregate transaction accounts as follows: for accounts
aggregating $44.3 million (subject to adjustment by the Federal Reserve Board)
the reserve requirement is 3%; and for accounts greater than $44.3 million, the
reserve requirement is $1,329,000 plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $44.3 million. The first $5.0 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.
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
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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.
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.
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.
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,
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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 both 1998 and 1999. 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
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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.
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.
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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 1999 Annual Report to
Stockholders.
Pages
Consolidated Statements of Financial Condition
as of December 31, 1999 and 1998 ................... 25
Consolidated Statements of Income for the Years
Ended December 31, 1999, 1998 and 1997 ............. 26
Consolidated Statements of Changes In Stockholders'
Equity for the Three Years Ended December 31, 1999 . 27
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 ............. 28
Notes to Consolidated Financial Statements ......... 29 - 53
Independent Auditors' Report ....................... 54
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:
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)
3.3(A) Fifth Amendment to the Bylaws of Haven Bancorp,
Inc. (9)
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 dated as of 9/21/95(4)
10.1(B) Amendatory Agreement to the Employment Agreement
between Haven Bancorp, Inc. and Philip S. Messina
dated as of 5/28/97(5)
10.1(C) Employment Agreement between CFS Bank and Philip S.
Messina dated as of 5/28/97(5)
10.1(D) Employment Agreement between Haven Bancorp, Inc. and
Philip S. Messina dated as of November 22, 1999 (9)
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10.1(E) Termination of the Bank Employment Agreement between
Haven Bancorp, Inc. and Philip S. Messina dated as
of November 22, 1999 (9)
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) Change in Control Agreement between Haven Bancorp,
Inc. and Mark A. Ricca dated as of April 10, 1998(8)
10.2(F) Change in Control Agreement between CFS Bank
and Mark A. Ricca dated as of April 10, 1998(8)
10.4 (a) Amended and Restated Columbia Federal Savings
Bank Recognition and Retention Plans for Officers
and Employees(6)
10.4 (b) Amended and Restated Columbia Federal Savings
Bank Recognition and Retention Plan 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
Agreement(3)
10.10 Haven Bancorp, Inc. 1996 Stock Incentive Plan(4)
10.11 Haven Bancorp, Inc. Key Executive Deferred
Compensation Plan (9)
10.12 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 (9)
13.0 Portions of 1999 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 (9)
27.0 Financial Data Schedule (9)
99 Proxy Statement for 2000 Annual Meeting of
Stockholders to be held on May 17, 2000, which will be filed with
the SEC within 120 days after December
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31, 1999, is incorporated herein by reference.
---------------
(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 10-Q
for the quarter ended March 31, 1999, filed on May 13, 1999.
(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.
(8) Incorporated by reference into this document from the Exhibits to Form 10-K
for the year ended December 31, 1998, filed on March 31, 1999.
(9) Incorporated by reference into this document from the Exhibits to Form 10-K
for the year ended December 31, 1999, filed on March 31, 2000.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the Company dated November 30, 1999,
which includes under Item 5 (Other Events) portions of the Company's
presentation to analysts on December 1, 1999.
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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.
HAVEN BANCORP INC.
(Registrant)
Date: October 12, 2000 By: /s/ Catherine Califano
---------------------------
Catherine Califano
Senior Vice President
and Chief Financial Officer
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