<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number 0-23229
INDEPENDENCE COMMUNITY BANK CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3387931
- - - -------------------------------------------------------------- ----------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
195 Montague Street
Brooklyn, New York 11201
- - - -------------------------------------------------------------- ----------------------
(Address of principal executive office) (Zip Code)
</TABLE>
(718) 722-5300
(Registrant's telephone number, including are code)
Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. At July 31, 1998,
the registrant had 76,043,750 shares of common stock ($.01 par value per share)
outstanding.
<PAGE> 2
INDEPENDENCE COMMUNITY BANK CORP.
Table of Contents PAGE
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Condition 3
as of June 30, 1998 (unaudited)
and March 31, 1998
Consolidated Statements of Income for 4
the three months ended June 30, 1998
and 1997 (unaudited)
Consolidated Statements of Changes in 5
Stockholders' Equity for the three
months ended June 30, 1998 (unaudited)
Consolidated Statements of Cash Flows 6
for the three months ended June 30,
1998 and 1997(unaudited)
Notes to Consolidated Financial 7
Statements (unaudited)
Item 2 Management's Discussion and Analysis 14
of Financial Condition and Results of
Operations
Item 3 Quantitative and Qualitative Disclosures 25
About Market Risk
Part II Other Information
Item 1 Legal Proceedings 26
Item 2 Changes in Securities 26
Item 3 Defaults upon Senior Securities 26
Item 4 Submission of Matters to a Vote of 26
Security Holders
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 26
Signatures 27
2
<PAGE> 3
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
----------- -----------
(Unaudited)
ASSETS:
<S> <C> <C>
Cash and due from banks $ 462,788 $ 747,868
Commercial paper 47,252 37,676
Federal funds sold 19,362 71,707
----------- -----------
Total cash and cash equivalents 529,402 857,251
----------- -----------
Securities available-for-sale:
Investment securities 847,006 1,282,072
Mortgage-backed and mortgage-related 314,639 84,610
----------- -----------
Total securities available for sale 1,161,645 1,366,682
----------- -----------
Mortgage loans on real estate 2,385,970 2,279,169
Other loans 514,978 502,718
----------- -----------
Total loans 2,900,948 2,781,887
Less: Allowance for possible loan losses (38,870) (36,347)
----------- -----------
Total loans, net 2,862,078 2,745,540
----------- -----------
Premises, furniture and equipment, net 62,545 61,443
Accrued interest receivable 25,685 24,395
Intangible assets, net 53,709 55,873
Other assets 91,092 111,812
----------- -----------
Total assets $ 4,786,156 $ 5,222,996
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 3,280,403 $ 3,393,839
Borrowings on securities loaned 383,241 701,160
Other borrowings 16,226 16,681
Escrow and other deposits 35,641 45,868
Accrued expenses and other liabilities 110,026 116,324
----------- -----------
Total liabilities 3,825,537 4,273,872
----------- -----------
Stockholders' equity
Common stock ($.01 par value, 125,000,000
shares authorized, 76,043,750 shares
outstanding) 760 760
Additional paid-in-capital 740,951 741,277
Unallocated common stock held by ESOP (96,400) (97,636)
Retained earnings-substantially restricted 309,785 298,876
Accumulated other comprehensive income:
Net unrealized gain on securities available-
for-sale, net of tax 5,523 5,847
----------- -----------
Total stockholders' equity 960,619 949,124
----------- -----------
Total liabilities and stockholders' equity $ 4,786,156 $ 5,222,996
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
JUNE 30,
---------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
INTEREST INCOME:
Mortgage loans on real estate $ 45,439 $ 41,908
Other loans 9,641 9,150
Investment securities 12,542 10,391
Mortgage-backed and mortgage-related
securities 2,153 3,223
Other 9,747 1,919
------ ------
Total interest income 79,522 66,591
------ ------
INTEREST EXPENSE:
Deposits 33,715 35,380
Borrowings 4,525 300
------ ------
Total interest expense 38,240 35,680
------ ------
Net interest income 41,282 30,911
Provision for loan losses 2,332 2,230
------ ------
Net interest income after provision
for loan losses 38,950 28,681
NON-INTEREST INCOME:
Net gain on sales of loans and securities 18 11
Service fees 1,264 1,734
Other 1,488 438
------ ------
Total non-interest income 2,770 2,183
NON-INTEREST EXPENSE:
Compensation and employee benefits 9,285 7,317
Occupancy costs 3,400 2,805
Data processing fees 2,963 2,808
Advertising 1,129 950
FDIC insurance premiums 299 314
Amortization of intangible assets 2,164 2,232
Other 4,141 4,412
------ ------
Total non-interest expense 23,381 20,838
------ ------
Income before provision for income taxes 18,339 10,026
Provision for income taxes 7,430 2,956
------ ------
Net income $ 10,909 $ 7,070
====== ======
Basic earnings per share $ 0.15 N/A
====== ======
Diluted earnings per share $ 0.15 N/A
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(In Thousands, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Unallocated Other
Paid in Common Stock Retained Comprehensive
Common Stock Capital Held by ESOP Earnings Income Total
- - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance-March 31, 1998 $760 $ 741,277 $(97,636) $298,876 $ 5,847 $ 949,124
Comprehensive income:
Net income for the three months ended
June 30, 1998 -- -- -- 10,909 -- 10,909
Other comprehensive income, net of tax of $256
Change in net unrealized gains on securities
available-for-sale, net of reclassification
adjustment of $0 -- -- -- -- (324) (324)
---- --------- -------- -------- ------- ---------
Comprehensive income -- -- -- 309,785 5,523 10,585
ESOP shares committed to be released -- (9) 1,236 -- -- 1,227
Other conversion related costs -- (317) -- -- -- (317)
---- --------- -------- -------- ------- ---------
Balance-June 30, 1998 $760 $ 740,951 $(96,400) $309,785 $ 5,523 $ 960,619
==== ========= ======== ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,909 $ 7,070
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,332 2,230
Net gain on sale of loans and securities (18) (11)
Amortization of deferred income and premiums (1,666) (2,765)
Amortization of intangibles 2,164 2,232
Depreciation and amortization 1,787 1,655
Deferred income tax benefit (2,720) (1,754)
Increase in accrued interest receivable (1,290) (7,529)
Decrease in accounts receivable-securities
transactions 13,906 107,623
(Decrease) increase in accrued expenses
and other liabilities (6,298) 11,764
Other, net 12,263 (1,822)
--------- ---------
Net cash provided by operating activities 31,369 118,693
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Loan originations and purchases (254,608) (208,816)
Principal payments on loans 120,715 100,252
Proceeds from sale of loans 14,263 818
Proceeds from sale of securities available-for-sale 158,410 109,416
Proceeds from maturities of securities
available-for-sale 555,158 72,613
Principal collected on securities
available-for-sale 19,432 14,701
Purchases of securities available-for-sale (527,662) (466,898)
Proceeds from sales of other real estate -- 217
Net additions to premises, furniture and equipment (2,889) (2,161)
--------- ---------
Net cash provided by (used in) investing activities 82,819 (379,858)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits purchased, net of premium -- 65,972
Net decrease in demand and savings deposits (92,632) (17,185)
Net (decrease) increase in time deposits (20,804) 10,455
Net decrease in other borrowings (318,374) (73)
Net decrease in escrow and other deposits (10,227) (9,313)
--------- ---------
Net cash (used in) provided by financing activities (442,037) 49,856
--------- ---------
Net decrease in cash and cash equivalents (327,849) (211,309)
Cash and cash equivalents at beginning of period 857,251 374,636
--------- ---------
Cash and cash equivalents at end of period $ 529,402 $ 163,327
========= =========
SUPPLEMENTAL INFORMATION
Income taxes paid $ 10,302 $ 6,000
========= =========
Interest paid $ 38,207 $ 35,680
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO FINANCIAL STATEMENTS
1.ORGANIZATION/FORM OF OWNERSHIP
Independence Savings Bank ("Bank") was originally founded as a New York
chartered savings bank in 1850. In April 1992, the Bank organized into the
mutual holding company form of organization pursuant to which the Bank became a
wholly-owned stock savings bank subsidiary of a mutual holding company ("Mutual
Holding Company").
On April 18, 1997, the Board of Directors of the Bank and the Board of
Trustees of the Mutual Holding Company adopted the Plan of Conversion pursuant
to which the Mutual Holding Company would convert to the stock form of
organization and simultaneously merge with and into the Bank with all of the
outstanding shares of Bank common stock held by the Mutual Holding Company being
cancelled in connection therewith.
As part of the conversion, Independence Community Bank Corp.
("Company") was incorporated under Delaware law in June 1997. The Company is
regulated by the Office of Thrift Supervision ("OTS"). The Company completed its
initial public offering on March 13, 1998 in connection with the reorganization
of the Mutual Holding Company and the Bank and issued 70,410,880 shares of stock
resulting in proceeds of $685.7 million, net of expenses which totaled $18.4
million. The Company used $343.0 million or approximately 50% of the net
proceeds to purchase all of the outstanding stock of the Bank. The Company also
loaned $98.9 million to the Employee Stock Ownership Plan ("ESOP") which
purchased 5,632,870 shares of the Company's stock in the open market.
As part of the Plan of Conversion, the Company formed the Independence
Community Foundation ("Foundation") and donated 5,632,870 shares of common stock
of the Company. The establishment of the Foundation was in furtherance of the
Company's commitment to the communities that it serves.
Additionally, the Bank established, in accordance with the requirements
of the OTS, a liquidation account for the benefit of depositors of the Bank as
of March 31, 1996 and September 30, 1997 in the amount of $319.7 million which
was equal to its capital as of the date of the latest consolidated statement of
financial condition (August 31, 1997) appearing in the final prospectus used in
connection with the reorganization and conversion of the Bank and the Mutual
Holding Company.
The Company may not declare or pay cash dividends on or repurchase any
of its shares of common stock if the effect thereof would cause stockholders'
equity to be reduced below applicable regulatory capital maintenance
requirements or if such declaration and payment would otherwise violate
regulatory requirements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying financial statements were prepared in accordance with
instructions to Form-10Q and therefore do not include all the information or
footnotes necessary for a complete presentation of financial condition, results
of operations and cash flows in conformity with generally accepted accounting
principles. All normal, recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the consolidated financial
statements have been included. The results of operations for the three months
7
<PAGE> 8
ended June 30, 1998 are not necessarily indicative of the results to be expected
for the year ending March 31, 1999. These interim financial statements should be
read in conjunction with the Company's audited financial statements and footnote
disclosures contained in the Company's Annual Report on Form 10-K for the year
ended March 31, 1998.
Business
The Company's principal business is conducted through the Bank which is
a traditional, full service, community oriented savings bank headquartered in
Brooklyn, New York. The Bank operates 33 full service offices located within the
greater New York City metropolitan area of which 27 are located in the boroughs
of Brooklyn and Queens with the remaining offices located in Manhattan, the
Bronx, Staten Island and Nassau County, New York. The Bank's deposits are
insured by the Bank Insurance Fund ("BIF") and the Savings Association Insurance
Fund ("SAIF") to the maximum extent permitted by law. The Bank is subject to
examination and regulation by the Federal Deposit Insurance Corporation
("FDIC"), which is the Bank's primary federal regulator, and the New York State
Banking Department ("Department"), which is the Bank's chartering authority and
its primary state regulator. The Bank is also subject to certain reserve
requirements established by the Board of Governors of the Federal Reserve System
("FRB") and is a member of the Federal Home Loan Bank ("FHLB") of New York,
which is one of the 12 regional banks comprising the FHLB system.
3. EARNINGS PER SHARE.
Earnings per share ("EPS")is computed in accordance with the provisions
of SFAS No. 128, "Earnings per Share." Basic earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding.
Diluted EPS is computed using the same method as basic EPS, but reflects the
potential dilution of common stock equivalents. There were no dilutive common
stock equivalents for the quarter ended June 30, 1998. ESOP shares that have
been allocated to participants' accounts or are committed to be released for
allocation are considered outstanding for EPS calculation. Basic and diluted
weighted average common shares outstanding was 70,482,065 shares (adjusted for
unallocated ESOP shares) for the first quarter of fiscal 1999.
4. EMPLOYEE STOCK OWNERSHIP PLAN.
To fund the purchase in the open market of 5,632,870 shares of the
Company's common stock, the ESOP borrowed funds from the Company. The loan to
the ESOP is being repaid principally from the Bank's contributions to the ESOP
over a period of 20 years. The collateral for the loan is the common stock of
the Company purchased by the ESOP.
Shares held by the ESOP are held by a trustee for allocation among
participants as the loan is repaid. The number of shares released annually is
based upon the ratio that the current principal and interest payments bears to
the current and all remaining scheduled future principal and interest payments.
Shares allocated will first be used for the employer matching contribution for
the 401(k) Plan with the remaining shares allocated to the ESOP participants
based upon compensation in the year of allocation. ESOP participants will become
100% vested in the plan after three years of service. Forfeitures from the
401(k) Plan match portions will be used to reduce the employer 401(k) Plan match
expense while forfeitures from shares allocated to the participants will be
allocated among the participants. The compensation expense related to the 70,411
shares committed to be released during the first quarter was $1.2 million.
8
<PAGE> 9
5. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that all items that are recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial condition. Under
existing accounting standards other comprehensive income is separately
classified into foreign currency items, minimum pension liability adjustments
and unrealized gains and losses on certain investments in debt and equity
securities. Only the last of these items, however is currently applicable to the
Company. The Company adopted SFAS No. 130 in the first quarter of fiscal 1999.
All comparative financial statements provided for earlier periods have been
restated to reflect application of the provisions. As the requirements of SFAS
No. 130 are disclosure related, its implementation had no impact on the
Company's financial condition or results of operations.
9
<PAGE> 10
6. SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of securities available-for-sale at
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Investment securities:
Debt securities:
<S> <C> <C> <C> <C>
U.S. government and agencies $ 741,526 $ 2,386 $(118) $ 743,794
Municipals 702 -- -- 702
Corporate 226 -- (2) 224
---------- ------- ----- ----------
Total debt securities 742,454 2,386 (120) 744,720
---------- ------- ----- ----------
Equity securities:
Preferred 59,600 -- -- 59,600
Common 37,290 5,815 (419) 42,686
---------- ------- ----- ----------
Total equity securities 96,890 5,815 (419) 102,286
---------- ------- ----- ----------
Total investment securities 839,344 8,201 (539) 847,006
---------- ------- ----- ----------
Mortgage-backed and mortgage-related securities:
FNMA Pass Through Certificates 4,677 123 -- 4,800
GNMA Pass Through Certificates 10,087 159 (57) 10,189
FHLMC Pass Through
Certificates 235,531 26 (12) 235,545
Collateralized Mortgage
Obligation Bonds 61,566 2,565 (26) 64,105
---------- ------- ----- ----------
Total mortgage-backed and
mortgage-related securities 311,861 2,873 (95) 314,639
---------- ------- ----- ----------
Total securities available-
for-sale $1,151,205 $11,074 $(634) $1,161,645
========== ======= ===== ==========
</TABLE>
The amortized cost and estimated fair value of securities available-for-sale at
March 31, 1998 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities:
Debt securities:
U.S. government and agencies $1,087,219 $ 2,906 $(173) $ 1,089,952
Municipals 1,104 -- -- 1,104
Corporate 226 -- (2) 224
---------- ------- ----- -----------
Total debt securities 1,088,549 2,906 (175) 1,091,280
---------- ------- ----- -----------
Equity securities:
Preferred 168,100 -- -- 168,100
Common 17,533 5,265 (106) 22,692
---------- ------- ----- -----------
Total equity securities 185,633 5,265 (106) 190,792
---------- ------- ----- -----------
Total investment securities 1,274,182 8,171 (281) 1,282,072
---------- ------- ----- -----------
Mortgage-backed and mortgage-
related securities:
FNMA Pass Through Certificates 5,294 124 (3) 5,415
GNMA Pass Through Certificates 63,566 2,939 (32) 66,473
FHLMC Pass Through
Certificates 11,500 179 (68) 11,611
Collateralized Mortgage
Obligation Bonds 1,090 21 -- 1,111
---------- ------- ----- -----------
Total mortgage-backed and
mortgage related securities 81,450 3,263 (103) 84,610
---------- ------- ----- -----------
Total securities available-
for-sale $1,355,632 $11,434 $(384) $ 1,366,682
========== ======= ===== ===========
</TABLE>
10
<PAGE> 11
7. LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
the Company's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT AT
JUNE 30, MARCH 31,
1998 1998
-----------------------------------------------------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $ 499,034 17.2% $ 505,051 18.2%
Multi-family residential 1,720,487 59.3 1,605,058 57.6
Commercial and other
real estate 176,232 6.0 178,463 6.4
---------- -------- ---------- --------
Total principal balance
mortgage loans 2,395,753 82.5 2,288,572 82.2
Less net deferred fees 9,783 0.3 9,403 0.3
---------- -------- ---------- --------
Total mortgage loans 2,385,970 82.2 2,279,169 81.9
Other loans:
Cooperative apartment loans 393,773 13.6 380,866 13.7
Student loans (guaranteed) 42,640 1.5 43,946 1.6
Home equity loans and lines 14,513 0.5 15,625 0.6
Commercial business loans 32,945 1.1 31,550 1.1
Consumer and other loans 31,281 1.1 30,869 1.1
---------- -------- ---------- --------
Total principal balance
other loans 515,152 17.8 502,856 18.1
Less:
Unearned discount and
deferred fees 174 0.0 138 0.0
---------- -------- ---------- --------
Total other loans 514,978 17.8 502,718 18.1
Total loans receivable 2,900,948 100.0% 2,781,887 100.0%
---------- ======== ---------- ========
Less: Allowance for loan losses 38,870 36,347
---------- ----------
Loans receivable, net $2,862,078 $2,745,540
========== ==========
</TABLE>
11
<PAGE> 12
8. NON-PERFORMING ASSETS. The following table sets forth information with
respect to non-performing assets identified by the Company, including
non-performing loans and other real estate owned at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT MARCH 31, 1998
---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans
Mortgage loans:
Single-family residential $ 3,693 $ 4,423
Multi-family residential 869 1,190
Commercial and other 4,712 4,782
Other loans:
Cooperative apartment loans 344 509
Consumer and commercial
business loans(1) 447 431
------- -------
Total non-accruing loans 10,065 11,335
------- -------
Loans past due 90 days or more as to:
Interest and accruing 1,467 1,607
Principal and accruing(2) 16,837 16,804
------- -------
Total past due loans and
accruing 18,304 18,411
------- -------
Total non-performing loans 28,369 29,746
------- -------
Other real estate owned, net(3) 273 192
------- -------
Total non-performing assets(4) $28,642 $29,938
======= =======
Allowance for loan losses as a
percent of total loans 1.34% 1.31%
Allowance for loan losses as a
percent of non-performing loans 137.02 122.19
Non-performing loans as a percent of
total loans 0.98 1.07
Non-performing assets as a percent
of total assets 0.60 0.57
</TABLE>
(1) Consists primarily of commercial business loans and home equity lines
of credit.
(2) Reflects loans that are 90 days or more past maturity which continue to
make payments on a basis consistent with the original repayment
schedule.
(3) Net of related loss allowances.
(4) Non-performing assets consist of non-performing loans and other real
estate owned. Non-performing loans consist of non-accrual loans, loans
90 days or more past due as to interest and principal and other loans
which have been identified by the Company as presenting uncertainty
with respect to the collectiblity of interest or principal.
12
<PAGE> 13
5. 9. ALLOWANCE FOR LOAN LOSSES.
It is management's policy to maintain an allowance for loan losses
based on total loans outstanding, the volume of loan originations, the type,
size and geographic concentration of loans held by the Company, general economic
conditions, the level of past due and non-accrual loans, and the number of loans
requiring heightened management oversight. While management believes that based
on information currently available, the Company's allowance for possible loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time. However, no assurances will be given that the Company's level of allowance
for loan losses will be sufficient to absorb future possible loan losses
incurred by the Company or that future adjustments to the allowance for possible
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for possible loan losses.
The following table sets forth the activity in the Company's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allowance at beginning of period $36,347 $27,024
------- -------
Provision:
Mortgage loans(1) 1,800 1,700
Consumer and commercial business loans 532 530
------- -------
Total provisions 2,332 2,230
------- -------
Charge-offs:
Mortgage loans(1) 25 65
Consumer and commercial business loans(2) 59 51
------- -------
Total charge-offs 84 116
------- -------
Recoveries:
Mortgage loans(1) 237 296
Consumer and commercial business loans 38 128
------- -------
Total recoveries 275 424
------- -------
Net recoveries 191 308
------- -------
Allowance at end of period $38,870 $29,562
======= =======
Allowance for possible loan
losses as a percent of total loans 1.34% 1.12%
Allowance for possible loan
losses as a percent of total
non-performing loans(3) 137.02% 81.00%
</TABLE>
(1) Includes individual cooperative apartment loans.
(2) Includes student loans, home equity loans and lines of credit,
automobile loans, secured and unsecured personal loans, and commercial
business loans.
(3) Non-performing loans consist of non-accrual loans and loans 90 days or
more past due as to interest or principal and other loans which have
been identified by the Company as presenting uncertainty with respect
to the collectibility of interest or principal.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's results of operations depend primarily on its net
interest income, which is the difference between interest income on
interest-earning assets, which principally consist of loans, mortgage-backed and
mortgage-related securities and debt and equity securities, and interest expense
on interest-bearing liabilities, which principally consist of deposits and
borrowings. Net interest income represents the difference between interest
income on interest-earning assets and interest expense on interest-bearing
liabilities. Net interest income depends upon the relative amount of
interest-earning assets and interest-bearing liabilities and the associated
interest rate earned or paid on them.
The Company's results of operations also are affected by the provision
for loan losses, resulting from management's assessment of the adequacy of the
allowance for loan losses, the level of its non-interest income, including
service fees and related income, gains and losses from the sales of loans and
securities, the level of its non-interest expense, including compensation and
employee benefits, occupancy expense, data processing services and income tax
expense.
The Bank is a community-oriented savings bank which emphasizes customer
service and convenience. As part of this strategy, the Company offers products
and services designed to meet the needs of its customers. The Company generally
has sought to achieve long-term financial strength by increasing the amount and
stability of its net interest income and non-interest income and by maintaining
a high level of asset quality. In pursuit of these goals, the Company has
adopted a business strategy emphasizing controlled growth, residential lending,
retail deposit products and customer service while maintaining asset quality and
stable liquidity.
Certain information in this Form 10-Q may constitute forward-looking
information that involves risks and uncertainties that could cause actual
results to differ materially from those estimated. Persons are cautioned that
such forward-looking statements are not guarantees of future performance and are
subject to various factors which could cause actual results to differ materially
from those estimated. These factors include, but are not limited to, changes in
general economic and market conditions and the development of an interest rate
environment that adversely affects the interest rate spread or other income from
the Company's and the Bank's investments and operations.
CHANGES IN FINANCIAL CONDITION
GENERAL.
Total assets at June 30, 1998 were $4.79 billion, a decrease of $436.8
million, or 8.4%, from $5.22 billion at March 31, 1998. The decrease in total
assets was primarily the result of a $327.8 million decrease in cash and cash
equivalents principally due to a $318.0 million decrease in securities lending
activities. In addition, total securities were reduced by $205.0 million in the
first quarter of fiscal 1999 compared to the same quarter in the prior year in
order to fund a $119.1 million increase in the loan portfolio as well as satisfy
a $113.4 million outflow in deposits.
14
<PAGE> 15
CASH, CERTIFICATES OF DEPOSIT, COMMERCIAL PAPER AND FEDERAL FUNDS SOLD
(COLLECTIVELY "CASH AND CASH EQUIVALENTS").
Cash and cash equivalents decreased from $857.3 million at March 31,
1998 to $529.4 million at June 30, 1998. The $327.8 million decrease was
principally due to a $318.0 million decrease in securities lending activities
from $701.2 million at March 31, 1998 to $383.2 million at June 30, 1998. At the
completion of the conversion to a public company, the organization initially
invested in U.S. Treasury Notes and Bills pending deployment of the conversion
proceeds into loans and other higher earning assets. The Bank has for many years
"lent" a portion of its U.S. Treasury securities to money center banks receiving
cash as collateral. Under new accounting rules effective January 1, 1998, the
obligation to return the cash upon receipt of the lent securities is deemed a
borrowing while the cash, which is invested in cash equivalents, is reflected as
an asset. During the first quarter of fiscal 1999, the Company has
systematically shifted its investment from U.S. Treasury securities into higher
yielding mortgage loans and mortgage-related securities, and, as a result,
reduced its securities lending activities.
SECURITIES AVAILABLE-FOR-SALE.
The aggregate securities available for sale portfolio (which includes
investment securities and mortgage-backed and mortgage-related securities)
decreased from $1.37 billion at March 31, 1998 to $1.16 billion at June 30,
1998. As of June 30, 1998 and March 31, 1998, the Company's investment
securities totaled $847.0 million and $1.28 billion, respectively, all of which
were classified as available for sale. Total securities were reduced during the
quarter in order to fund a $119.1 million increase in the loan portfolio as well
as satisfy a $113.4 million outflow in deposits.
The Company's mortgage-backed and mortgage-related securities, a
substantial portion of which at June 30, 1998 consisted of collateralized
mortgage obligations secured by mortgage-backed securities issued by Fannie Mae
("FNMA") or Freddie Mac ("FHLMC"), increased from $84.6 million at March 31,
1998 to $314.6 million (all of which were classified as available for sale) at
June 30, 1998. During the first quarter of fiscal 1999, the Company shifted its
investment from U.S. Treasury securities into higher yielding mortgage loans and
mortgage-related securities.
At June 30, 1998, the Company had a $10.4 million net unrealized gain
on available-for-sale investment and mortgage-backed and mortgage-related
securities.
LOANS RECEIVABLE, NET.
Loans receivable, net, increased by $116.5 million or 4.2% to $2.86
billion at June 30, 1998 from $2.75 billion at March 31, 1998 due to the
continued emphasis by the Company on the origination of multi-family residential
mortgage loans. Such loans increased 7.2% from $1.61 billion at March 31, 1998
to $1.72 billion at June 30, 1998.
NON-PERFORMING ASSETS.
The Company's non-performing assets, which consist of non-accrual
loans, loans past due 90 days or more as to interest or principal and accruing
and other real estate owned acquired through foreclosure or deed-in-lieu thereof
decreased by $1.3 million or 4.3% to $28.6 million at June 30, 1998 from $29.9
million at March 31, 1998. At June 30, 1998, the Company's non-performing assets
amounted to
15
<PAGE> 16
.60% of total assets and consisted of $10.1 million of non-accrual loans, $1.5
million of loans past due 90 days or more as to interest and accruing, $16.8
million of loans past due 90 days or more as to principal and accruing ($12.2
million of which were multi-family loans and $4.6 million of which were
commercial and other real estate loans) and $273,000 of other real estate owned.
ALLOWANCE FOR LOAN LOSSES.
The Company's allowance for loan losses amounted to $38.9 million at
June 30, 1998 as compared to $36.3 million at March 31, 1998. At June 30, 1998,
the Company's allowance amounted to 1.34% of total loans and 137.0% of total
non-performing loans compared to 1.31% and 122.2%, at March 31, 1998,
respectively. It is management's policy to maintain an allowance for loan losses
based upon total loans outstanding, the volume of loan originations, the type,
size and geographic concentration of loans held by the Company, general economic
conditions, the level of past due and non-accrual loans and the number of loans
requiring heightened management oversight.
The Company's allowance for loan losses increased $2.6 million from
March 31, 1998 to June 30, 1998 due to provisions of $2.3 million, and net
recoveries of $.3 million. The increase during the period was due to several
factors, including the Company's increased investment in multi-family
residential and commercial real estate loans, all of which were concentrated in
the New York City metropolitan area, an increase in the number of larger
multi-family residential and individual cooperative apartment loans as compared
to prior years and an increase in the number of commercial business loans which
though conservatively underwritten in management's view are considered to have a
greater risk of loss.
INTANGIBLE ASSETS.
The Company's intangible assets consist of goodwill and other
intangibles resulting primarily from (i)the acquisition of Bay Ridge Bancorp,
Inc. and its wholly owned subsidiary Bay Ridge Federal Savings Bank
(collectively, "Bay Ridge") in January 1996 and (ii)the completion in fiscal
1996 of two branch purchase transactions (the "Branch Acquisitions"). At June
30, 1998, intangibles totaled $53.7 million and consisted primarily of $21.4
million related to the acquisition of Bay Ridge and $32.3 million primarily
related to the Branch Acquisitions. The Company's intangible assets decreased by
$2.2 million to $53.7 million at June 30, 1998 from $55.9 million at March 31,
1998 as a result of the amortization of the intangible assets during the three
months ended June 30, 1998. Amortization of such intangibles will continue to
reduce net income until such intangible assets are fully amortized.
DEPOSITS.
Deposits decreased $113.4 million or 3.3% to $3.28 billion at June 30,
1998 from $3.39 billion at March 31, 1998. The decrease was due to a $147.1
million outflow of deposits partially offset by interest credited of $33.7
million. The deposit outflows reflect disintermediation primarily as a result of
transfers to equities markets and, to a lesser extent, to other financial
institutions conducting deposit gathering campaigns by paying above market
rates.
16
<PAGE> 17
BORROWINGS.
Borrowings decreased $318.3 million or 44.4% to $399.5 million at June
30, 1998 compared to $717.8 million at March 31, 1998. The decrease was
primarily due to a $318.0 million decrease in securities lending activities from
$701.2 million at March 31, 1998 to $383.2 million at June 30, 1998. (See
discussion in "Cash, Certificates of Deposit, Commercial Paper and Federal Funds
Sold" regarding decline in securities lending activity.) The remainder of the
borrowings at June 30, 1998 consisted primarily of $14.3 million of FHLB
advances. The Company in the future may utilize other forms of borrowings such
as repurchase agreements as an additional source of funds.
EQUITY.
At June 30, 1998, total equity amounted to $960.6 million, compared to
$949.1 million at March 31, 1998. This $11.5 million increase was primarily the
result of net income of $10.9 million for the quarter ended June 30, 1998.
Tangible book value per share was $11.93 and the tangible equity to assets ratio
was 18.95% at June 30, 1998.
17
<PAGE> 18
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID.
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) the interest rate spread; and (v)
the net interest margin. Information is based on average daily balances during
the indicated periods and is annualized where appropriate.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
-------------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS)
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- ------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1):
Mortgage loans $2,323,455 $45,439 7.82% $2,097,441 $41,908 7.99%
Other loans:
Cooperative apartment
loans 385,975 6,985 7.24 357,776 6,520 7.29
Consumer and commercial
business loans(2) 121,185 2,656 8.77 119,479 2,630 8.80
---------- ------- ---------- -------
Total loans 2,830,615 55,080 7.78 2,574,696 51,058 7.93
Mortgage-backed and mortgage-
related securities 118,249 2,153 7.28 180,615 3,223 7.14
Investment securities
951,422 12,542 5.27 698,874 10,391 5.95
Other interest-earning
assets(3) 671,221 9,747 5.81 167,861 1,919 4.57
---------- ------- ---------- -------
Total interest-earning assets 4,571,507 79,522 6.96 3,622,046 66,591 7.35
---- ------ ----
Non-interest-earning assets 208,276 187,909
---------- ----------
Total assets $4,779,783 $3,809,955
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 524,015 $ 3,469 2.66 $ 500,177 $ 3,299 2.65
Savings deposits 989,204 6,644 2.69 1,024,739 7,364 2.88
Certificates of deposits 1,759,776 23,602 5.38 1,776,713 24,717 5.58
---------- ------- ---------- -------
Total deposits 3,272,995 33,715 4.13 3,301,629 35,380 4.30
---------- ------- ---------- -------
Total borrowings 324,404 4,525 5.57 17,199 300 7.00
---------- ------- ---------- -------
Total interest-bearing
liabilities 3,597,399 38,240 4.26 3,318,828 35,680 4.31
------- ---- ------- ----
Non-interest-bearing
liabilities 229,887 178,342
---------- ----------
Total liabilities 3,827,286 3,497,170
Total equity 952,497 312,785
---------- ----------
Total liabilities and equity $4,779,783 $3,809,955
========== ==========
Net interest-earning assets $ 974,108 $ 303,218
========== ==========
Net interest income/interest
rate spread $41,282 2.70% $30,911 3.04%
======= ==== ======= ====
Net interest margin 3.61% 3.41%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.27x 1.09x
==== ====
</TABLE>
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Includes home equity lines of credit and improvement loans, student
loans, automobile loans, passbook loans credit card loans, personal
loans and commercial business loans.
(3) Includes federal funds sold, interest-earning bank deposits, FHLB
stock, overnight commercial paper and certificates of deposit.
(4) Includes NOW and money market accounts.
18
<PAGE> 19
RATE/VOLUME ANALYSIS.
The following table sets forth the effects of changing rates and
volumes on net interest income of the Company. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate) and (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume).
The combined effect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
THREE MONTHS ENDED JUNE 30, 1998
COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Increase Total Net
(Decrease) due to Increase
Rate Volume (Decrease)
------- ------- ---------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans (5,374) 8,905 3,531
Co-op apartment loans (292) 757 465
Consumer and commercial
business loans (1) (53) 79 26
------- ------- -------
Total loans receivable (5,719) 9,741 4,022
Mortgage-backed securities 421 (1,491) (1,070)
Investment securities (6,704) 8,855 2,151
Other interest-earning assets 649 7,179 7,828
------- ------- -------
Total net change in income
on interest-earning assets (11,353) 24,284 12,931
Interest-bearing liabilities:
Deposits
Demand deposits 12 158 170
Savings deposits (470) (250) (720)
Certificates of deposit (881) (234) (1,115)
------- ------- -------
Total deposits (1,339) (326) (1,665)
Borrowings (430) 4,655 4,225
------- ------- -------
Total net change in expense
on interest-bearing liabilities (1,769) 4,329 2,560
------- ------- -------
Net change in net
interest income (9,584) 19,955 10,371
======= ======= =======
</TABLE>
(1) Includes home equity lines of credit and improvement loans, student
loans, automobile loans, passbook loans, personal loans, credit card
loans, and commercial business loans.
19
<PAGE> 20
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
1997
GENERAL.
The Company reported net income of $10.9 million and $7.1 million for
the three months ended June 30, 1998 and 1997, respectively. The $3.8 million
increase in net income during the three months ended June 30, 1998 compared to
the same period in the prior year was primarily due to a $10.4 million increase
in net interest income combined with a $0.6 million increase in non-interest
income, partially offset by a $2.5 million increase in non-interest expense and
a $4.5 million increase in the provision for income taxes.
NET INTEREST INCOME.
Net interest income represents the difference between interest income
on interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income depends upon the relative amount of interest-earning assets
and interest-bearing liabilities and the associated interest rate earned or paid
on them. The Company's net interest margin was 3.61% and 3.41% for the three
months ended June 30, 1998 and 1997, respectively. The 20 basis point increase
in net interest margin is due to the increase in the ratio of average
interest-earning assets to average interest-bearing liabilities as a direct
result of the investment of the net proceeds received from the Company's
subscription offering.
Net interest income increased by $10.4 million or 33.6% to $41.3
million for the three months ended June 30, 1998 as compared to the period ended
June 30, 1997. The increase was due to a $12.9 million increase in interest
income offset in part by a $2.5 million increase in interest expense. The growth
in net interest income reflects primarily the $949.5 million increase in average
interest-earning assets during the three months ended June 30, 1998 compared to
the three months ended June 30, 1997. The increase in average earning assets was
primarily due to the investment of the proceeds from the completion of the
Company's offering during the fourth quarter of fiscal 1998 as well as, the new
accounting treatment for securities lending activity.
Interest income increased by $12.9 million for the three months ended
June 30, 1998 as compared to the three months ended June 30, 1997 primarily due
to an increase in the average balance of the Company's interest-earning assets,
offset in part by a decline in the weighted average yield earned thereon from
7.35% to 6.96%. Interest income on loans increased $4.0 million due to a $255.9
million increase in the average balance of loans partially offset by a 15 basis
point decline in the yield earned on loans from 7.93% for the fiscal 1998 period
to 7.78% for the fiscal 1999 period. The decline in yield reflects the effects
of originations at lower current interest rates combined with a lower repricing
rate with respect to some of the Company's adjustable-rate loans. Income on
investment securities increased $2.2 million due to a $252.5 million increase in
average investment securities partially offset by a decrease in the yield earned
from 5.95% for the quarter ended June 30, 1997 to 5.27% for the quarter ended
June 30, 1998. The decline in yield is primarily attributable to a downward
shift in the Treasury yield curve from the prior year quarter, which a
significant portion of the Company's investment portfolio is indexed. Income on
other interest-earning assets increased $7.8 million in the current quarter
compared to the prior year quarter due to $4.3 million of interest income earned
from securities lending activities, which in fiscal 1998 was recorded net of its
associated interest expense as fee income in other non-interest income, along
with a $2.2 million
20
<PAGE> 21
increase in interest on federal funds. This increase was due to the temporary
short-term investment of the proceeds received in connection with the stock
subscription offering which was completed in the fourth quarter of fiscal 1998.
Interest income on mortgage-backed and mortgage-related securities declined $1.1
million during the first quarter of fiscal 1999 compared to the same period in
fiscal 1998 as a result of a $62.4 million decline in the average balance of
these securities.
Interest expense increased $2.6 million or 7.2% for the three months
ended June 30, 1998 as compared to the three months ended June 30, 1997, with
the increase due primarily to a $4.2 million increase in interest paid on
borrowing related to securities lending activities, which in the prior year was
reflected net of its associated interest income as fee income in other
non-interest income. This increase was partially offset by a decrease of $1.7
million in interest paid on deposits due to a $28.6 million decrease in the
average balance of deposits combined with a 17 basis point decline in the
average rate paid on deposits to 4.13% for the quarter ended June 30, 1998
compared to 4.30% for the quarter ended June 30, 1997.
PROVISION FOR LOAN LOSSES.
The Company's provision for loan losses increased slightly from $2.2
million for the three months ended June 30, 1997 to $2.3 million for the three
months ended June 30, 1998. The Company continues to provide for loan losses due
to its ongoing and increasing investment in multi-family residential and
commercial real estate loans, which while not delinquent may be subject to
greater risk of loss.
NON-INTEREST INCOME.
Non-interest income increased $0.6 million or 26.9% from $2.2 million
for the three months ended June 30, 1997 to $2.8 million for the three months
ended June 30, 1998. The increase was primarily due to a $1.1 million increase
in other non-interest income partially offset by a $0.5 million decline in
service fee income. The rise in other non-interest income was principally due to
a $0.7 million increase in mortgage prepayment fees for the current quarter
compared to the prior year quarter. The $0.5 million decline in service fee
income is attributable to a $176,000 decline in fees associated with the sales
of annuities and mutual funds during the current quarter. The contract with a
third party provider to sell these products expired in January 1998 and the
Company is currently negotiating a contract with another provider. Sales of
these products are expected to resume during fiscal 1999. Service fee income is
also lower due to the new accounting rules effective January 1, 1998 regarding
the recording of securities lending. For the quarter ended June 30, 1997 income
from securities lending was recorded as non-interest income while in the current
quarter ended June 30, 1998 it was included as part of net interest income. For
the quarter ended June 30, 1997 the Company recorded $177,000 as income relating
to securities lending. The remainder of the decline in service fee income is due
to lower deposit-based fees.
NON-INTEREST EXPENSES.
Non-interest expense amounted to $23.4 million for the quarter ended
June 30, 1998 compared to $20.8 million for the quarter ended June 30, 1997. The
$2.6 million growth in expenses was attributable to increases in personnel costs
of
21
<PAGE> 22
$2.0 million, occupancy costs of $0.6 million and data processing service
expenses of $0.2 million partially offset by a $0.3 million decrease in other
non-interest expenses.
Compensation and employee benefits expense increased by $2.0 million or
26.9% to $9.3 million during the three months ended June 30, 1998 as compared to
the same period in the prior year. The increase was due to the combined effect
of $1.2 million of benefits related to the ESOP as well as staff additions and
normal merit increases.
Occupancy costs increased $0.6 million to $3.4 for the three months
ended June 30, 1998 compared to the same period in the prior year due to
increased costs related to branch renovations and improvements.
Data processing service expenses increased by $0.2 million or 5.5% to
$3.0 million during the three months ended June 30, 1998 as compared to the
three months ended June 30, 1997. The increase is primarily due to costs
associated with Year 2000 compliance issues along with costs associated with the
second (and final) phase of the data conversion which is expected to be
completed by the end of fiscal 1999.
The Company's advertising expenses amounted to $1.1 million and $1.0
million for the three months ended June 30, 1998 and 1997, respectively. The
increase reflects the Company's determination to increase its market presence
through, in part, increased advertising in print media and radio.
Other non-interest expenses, including miscellaneous items such as
equipment expenses, office supplies, postage, telephone expenses, maintenance
and security services contracts and professional fees, decreased $0.3 million
for the three months ended June 30, 1998 compared to the same period in the
prior year.
INCOME TAXES.
Income tax expense amounted to $7.4 million and $3.0 million for the
three months ended June 30, 1998 and 1997, respectively. The increase
experienced in the fiscal 1999 period reflected in part the increase in the
Company's income before income taxes. In addition, the Company's effective tax
rate for the three months ended June 30, 1998 was 40.5% compared to 29.5% for
the three months ended June 30, 1997.
As of June 30, 1998, the Company had a net deferred tax asset of $39.8
million. No valuation allowance was deemed necessary with respect to such asset.
22
<PAGE> 23
REGULATORY CAPITAL REQUIREMENTS
The following table sets forth the Bank's compliance with applicable
regulatory capital requirements at June 30, 1998.
<TABLE>
<CAPTION>
REQUIRED ACTUAL EXCESS
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
------- -------- ------- ------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier I leverage capital
ratio(1) 4.0% $188,531 13.5% $635,702 9.5% $447,171
Risk-based capital
ratios:
Tier I 4.0 113,140 22.5 635,702 18.5 522,562
Total 8.0 226,280 23.7 671,102 15.7 444,822
</TABLE>
(1) Reflects the 4.0% requirement to be met in order for an institution
to be "adequately capitalized" under applicable laws and regulations.
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, the amortization, prepayment and maturity
of outstanding loans, mortgage-backed and mortgage-related securities, the
maturity of debt securities and other short-term investments and funds provided
from operations. While scheduled payments from the amortization of loans,
mortgage-backed and mortgage-related securities and maturing debt securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Company invests excess
funds in federal funds sold and other short-term interest-earning assets which
provide liquidity to meet lending requirements. The Company has been able to
generate sufficient cash through its deposits and has only utilized borrowings,
consisting primarily of advances from the FHLB of New York, to a limited degree
as a source of funds during the past five years. Such advances amounted to $14.3
million at June 30, 1998.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds sold or U.S. Treasury securities. On a longer term basis,
the Company maintains a strategy of investing in various lending products. The
Company uses its sources of funds primarily to meet its ongoing commitments, to
pay maturing certificates of deposit and savings withdrawals, fund loan
commitments and maintain a portfolio of mortgage-backed and mortgage-related
securities and debt and equity securities. At June 30, 1998, there were
outstanding commitments and unused lines of credit by the Company to originate
or acquire mortgage loans and other loans aggregating $223.5 million and $16.4
million, respectively, consisting primarily of fixed and adjustable-rate
residential loans and fixed-rate commercial real estate loans that are expected
to close during the twelve months ended June 30, 1999. Certificates of deposit
scheduled to mature in one year or less at June 30, 1998, totaled $1.3 billion.
Based on historical experience, management believes that a significant portion
of maturing deposits will remain with the Company. The Company anticipates that
it
23
<PAGE> 24
will continue to have sufficient funds, together with borrowings, to meet its
current commitments.
THE YEAR 2000 ISSUE
The Company's banking operations are, by their nature, dependent upon
its own computer systems as well as those of other companies. The Company has
conducted a review of its computer systems to identify systems that could be
affected by the "Year 2000" issue and management has developed an implementation
plan to respond to this issue. The Year 2000 issue is the result of computer
programs which were written using two digits rather than four to define the
applicable year. As a result, such programs may recognize a date using "00" as
the year 1900 instead of the year 2000 which could result in system failures or
miscalculations.
The Company utilizes a third party computer service bureau for most of
its computer processing. All other computer systems used by the Company are PC
based systems which operate using industry standard software systems that have
been developed and are supported by third party software companies. Accordingly,
the Company's costs to resolve Year 2000 issues are currently estimated at $3.0
million and are not considered material. The Year 2000 issue, however, creates
risk for the Company from unforeseen problems in its computer processing and
from the computer processing problems of other third parties with whom the
Company conducts financial transactions. As a result, incomplete or untimely
resolution of such Year 2000 problems may have an adverse impact on the
operations of the Company.
The FDIC and other federal banking regulators have issued safety and
soundness guidelines to be followed by insured depository institutions, such as
the Bank, to assure resolution of any Year 2000 problems. Any institution's
failure to address appropriately the Year 2000 problem could result in
supervisory action.
As part of its implementation plan, management is monitoring the Year
2000 progress of its vendors and will be participating in the testing of systems
during 1998. Management is also developing appropriate contingency plans to deal
with problems as they may arise. There can be no assurance, however, that the
systems of other companies on which the Company's systems rely will also be
timely converted or that any such failure to convert by another company would
not have an adverse effect on the Company's systems.
24
<PAGE> 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management
policies as well as the potential impact of interest rate changes upon the
market value of the Bank's portfolio equity, see "Management's Discussion and
Analysis of Financial Condition and Results of Operation" in the Company's
Annual Report on Form 10-K for the year ended March 31, 1998, which was filed
with the Securities and Exchange Commission on June 26, 1998. There has been no
material change in the Company's asset and liability position or the market
value of the Bank's portfolio equity since March 31, 1998.
25
<PAGE> 26
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Not applicable
Item 2 Changes in Securities
Not applicable
Item 3 Defaults upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
a) Not applicable
b) No Form 8-K reports were filed during the quarter.
26
<PAGE> 27
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.
INDEPENDENCE COMMUNITY BANK CORP.
Date: August 12, 1998 By:/s/ Charles J. Hamm
----------------- --------------------
Charles J. Hamm
Chairman, President and
Chief Executive Officer
Date: August 12, 1998 By:/s/ John B. Zurell
---------------- -------------------
John B. Zurell
Executive Vice President and
Chief Financial Officer
27
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