<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 December 31, 1997
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)
Delaware 13-3387931
- - ------------------------------------------------- -------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
195 Montague Street
Brooklyn, New York 11201
- - ------------------------------------------------- ------------------------
(Address of principal executive office) (Zip Code)
(718) 722-5300
---------------------------------------------------
(Registrant's telephone number, including area 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 No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of December 31,
1997, and as of the date hereof. Independence Savings Bank, the registrant's
to-be wholly owned subsidiary, had not yet completed the second step
mutual-to-stock conversion of its parent mutual holding company and
reorganization into a stock holding company structure. Accordingly, there are
no shares of the Registrant's Common Stock, par value $.01 share, held
publicly. The financial information presented herein is for Independence
Savings Bank as the registrant has not yet commenced operations.
<PAGE> 2
INDEPENDENCE COMMUNITY BANK CORP.
<TABLE>
<CAPTION>
Table of Contents PAGE
------------------------------------------------------------- --------
<S> <C> <C>
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of 3
Condition as of December 31, 1997
(unaudited) and March 31, 1997
Consolidated Statements of Income 4
(for the three months and nine
months ended December 31, 1997
and 1996)(unaudited)
Consolidated Statements of 5
Changes in Stockholder's Equity
(for the nine months ended
December 31, 1997 and
1996)(unaudited)
Consolidated Statements of Cash 6
Flows (for the nine months ended
December 31, 1997 and
1996)(unaudited)
Notes to Consolidated Financial 7
Statements (unaudited)
Item 2 Management's Discussion and 11
Analysis of Financial Condition and
Results of Operations
Part II Other Information
Item 1 Legal Proceedings 23
Item 2 Changes in Securities 23
Item 3 Defaults upon Senior Securities 23
Item 4 Submission of Matters to a Vote of 23
Security Holders
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
2
<PAGE> 3
INDEPENDENCE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
-------------- --------------
(Unaudited)
(In Thousands)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 64,189 $ 310,429
Certificates of deposit 45,510 --
Commercial paper -- 39,866
Federal funds sold 28,192 24,341
---------- ---------
Total cash and cash equivalents 137,891 374,636
---------- ---------
Securities available for sale:
Debt and equity 618,777 357,487
Mortgage-backed and mortgage related 141,680 190,979
---------- ---------
Total securities available for sale 760,457 548,466
---------- ---------
Mortgage loans on real estate 2,245,020 2,065,153
Other loans 514,972 464,960
---------- ---------
Total loans 2,759,992 2,530,113
Less: Allowance for possible loan losses (34,126) (27,024)
---------- ---------
Total loans, net 2,725,866 2,503,089
---------- ---------
Premises, furniture and equipment, net 61,100 60,367
Accrued interest receivable 23,747 17,384
Intangible assets, net 58,043 60,499
Other assets 90,677 168,875
----------- ---------
Total assets $ 3,857,781 $3,733,316
========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Deposits:
Savings accounts $ 1,013,480 $1,018,199
Money market accounts 217,216 218,230
Demand deposit accounts 382,916 345,373
Time deposit accounts 1,793,250 1,743,756
---------- ---------
Total deposits 3,406,862 3,325,558
Borrowings 16,758 17,232
Escrow and other deposits 23,216 41,034
Accrued expenses and other liabilities 76,462 40,378
---------- ---------
Total liabilities 3,523,298 3,424,202
Stockholder's equity
Common stock ($1.00 par value, 100
shares authorized, issued and outstanding) -- --
Contributed capital 52,670 52,670
Surplus 57,552 55,812
Undivided profits 219,532 200,264
Net unrealized gain on securities available-
for-sale, net of tax 4,729 368
----------- ---------
Total stockholder's equity 334,483 309,114
---------- ---------
Total liabilities and stockholder's equity $3,857,781 $3,733,316
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
INDEPENDENCE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Year
December 31, Ended December 31,
------------------------- -------------------------------
1997 1996 1997 1996
---------- ------------ -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans on real estate $43,849 $ 42,099 $130,538 $123,095
Other loans 9,579 9,136 28,749 27,464
Debt and equity securities 8,660 5,452 27,734 16,505
Mortgage-backed and mortgage-related 2,656 7,042 8,888 23,674
securities
Other 2,464 1,611 6,901 4,814
------- ------- -------- --------
Total interest income 67,208 65,340 202,810 195,552
------- ------- ------- -------
Interest expense:
Savings accounts 7,142 7,535 21,863 23,605
Money market accounts 1,601 1,652 4,808 4,944
Demand deposit accounts 1,823 1,647 5,239 4,319
Time deposit accounts 25,411 23,868 75,903 71,672
Borrowings 293 308 891 1,037
------- ------- -------- --------
Total interest expense 36,270 35,010 108,704 105,577
------- ------- ------- -------
Net interest income 30,938 30,330 94,106 89,975
Provision for loan losses 2,327 909 7,680 2,785
------- ------- -------- --------
Net interest income after provision
for loan losses 28,611 29,421 86,426 87,190
------- ------- ------- -------
Non-interest income:
Net gain on sales of loans and securities 32 1,076 63 784
Service fees 1,581 1,372 5,003 4,279
Other 1,057 585 2,030 132
------- --------- -------- --------
Total non-interest income 2,670 3,033 7,096 5,195
------- --------- -------- ---------
Non-interest expense:
Compensation and employee benefits 7,068 7,172 22,147 20,556
Occupancy costs 3,229 2,896 9,376 8,196
Data processing fees 2,844 1,140 8,684 3,265
Advertising 1,250 1,125 3,150 2,675
FDIC insurance premiums 292 (13) 913 1,894
SAIF assessment -- (1,447) -- 8,553
Amortization of intangible assets 2,170 1,801 6,571 6,055
Other 4,275 4,297 12,665 10,212
----- ----- -------- --------
Total non-interest expense 21,128 16,971 63,506 61,406
------ ------ -------- --------
Income before provision for income taxes 10,153 15,483 30,016 30,979
Provision for income tax 2,708 3,111 9,008 10,189
----- ----- -------- --------
Net income $7,445 $ 12,372 $ 21,008 $ 20,790
===== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
INDEPENDENCE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
For the Nine Months Ended December 31, 1997 and 1996
(Unaudited)
---------------------------------------------------------------------------------
Net Unrealized
Gains (Losses) on
Common Contributed Undivided Securities
Stock (a) Capital Surplus Profits Available-for-Sale Total
------------- ----------- ----------- --------- ------------------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance-March 31, 1996 $ -- $52,670 $53,791 $185,105 $ (1,747) $289,819
Changes in net unrealized gains in securities
available-for-sales, net of tax -- -- -- -- 552 552
Net income for the nine months ended December
31, 1996 -- -- 2,021 18,769 -- 20,790
--------- --------- --------- --------- ------- --------
Balance-December 31, 1996 $ -- $52,670 $55,812 $203,874 $ (1,195) $311,161
========= ======== ========= ========= ======== ========
Balance-March 31, 1997 $ -- $52,670 $55,812 $200,264 $ 368 $309,114
Change in net unrealized gains in securities
available-for-sales, net of tax -- -- -- -- 4,361 4,361
Net income for the nine months ended December
31, 1997 -- -- 1,740 19,268 -- 21,008
--------- --------- --------- --------- --------- --------
Balance-December 31, 1997 $ -- $52,670 $57,552 $219,532 $ 4,729 $334,483
======== ====== ======== ======= ====== =======
</TABLE>
(a) $1.00 par value, 100 shares common stock authorized, issued and
outstanding.
See accompanying notes to consolidated financial statements
5
<PAGE> 6
INDEPENDENCE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
------------------------------
1997 1996
-------------- --------------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 21,008 $ 20,790
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 7,680 2,785
Net gain on sale of loans and securities (63) (784)
Amortization of deferred income and premiums (3,312) (10,175)
Amortization of intangibles 6,571 6,055
Depreciation and amortization 5,078 4,372
Deferred income tax benefit (5,235) (4,331)
Increase in accrued interest receivable (6,363) (2,394)
Decrease in accounts receivable-securities
transactions 104,451 22
Decrease in due to banks --- (215)
Increase (decrease) in accrued expenses
and other liabilities 36,084 (55,043)
Other, net (25,702) 293
--------- ----------
Net cash provided by (used in) operating
activities 140,197 (38,625)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and purchases (495,529) (422,796)
Principal payments on loans 252,113 192,231
Proceeds from sale of loans 11,141 74,501
Proceeds from sale of securities
available-for-sale 200,774 252,312
Proceeds from maturities of securities
available-for-sale 164,089 787,800
Principal collected on securities
available-for-sale 50,137 116,789
Purchases of securities available-for-sale (613,116) (793,610)
Proceeds from sales of other real estate 273 768
Redemption of Federal Home Loan Bank stock -- 2,110
Net additions to premises, furniture and
equipment (5,811) (10,632)
----------- ----------
Net cash (used in) provided by investing
activities (435,929) 199,473
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits sold, net of premium -- (47,661)
Deposits purchased, net of premium 65,972 --
Net increase (decrease) in demand and savings
deposits 8,527 (15,838)
Net increase (decrease) in time deposits 2,780 (33,622)
Net decrease in other borrowings (474) (39,304)
Net decrease in escrow and other deposits (17,818) (22,685)
---------- ----------
Net cash provided by (used in) financing
activities 58,987 (159,110)
-------- ----------
Net (decrease) increase in cash and cash
equivalents (236,745) 1,738
Cash and cash equivalents at beginning of
period 374,636 103,192
-------- --------
Cash and cash equivalents at end of period $137,891 $104,930
======= =======
Income taxes paid $ 14,962 $ 23,600
======= =======
Interest paid $108,542 $105,534
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
INDEPENDENCE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
Independence Community Bank Corp. (the "Company") is a Delaware corporation
organized in June 1997 by Independence Savings Bank (the "Bank") in connection
with the reorganization of the Bank and its mutual holding company parent to
the stock holding company form of organization (the "Conversion"). For purposes
of this Form 10-Q, the financial statements of the Company have been omitted
because as of December 31, 1997, the Company had not yet issued any stock
to the public, had no assets (other than advance subscription proceeds) or
liabilities, and had not yet conducted any business other than of an
organizational nature. In addition, the unaudited financial statements and
the Management's Discussion and Analysis of Financial Condition and Results of
Operations presented herein are for the Bank as a predecessor entity to the
Company. No pro forma effect has been given to the sale of the Company's
common stock in the Conversion.
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 and
nine months ended December 31, 1997 are not necessarily indicative of the
results to be expected for the year ending March 31, 1998. These interim
financial statements should be read in conjunction with the Bank's audited
financial statements and note disclosures contained in the Company's Prospectus
dated December 31, 1997.
Business
The Company's principal business is conducted through the Bank which is a
traditional, full service, community oriented savings bank located in Brooklyn,
New York. The Bank operates 34 full service offices located within the greater
New York City metropolitan area of which 28 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") to the maximum extent permitted by law. The
Bank is subject to examination and regulation by the Federal Deposit Insurance
Corporation (the "FDIC"), which is the Bank's primary federal regulator, and
the New York State Banking Department (the "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 (the "FRB") and is a member of the Federal Home Loan
Bank (the "FHLB") of New York, which is one of the 12 regional banks comprising
the FHLB system.
7
<PAGE> 8
2. LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
At At
December 31, March 31,
1997 1997
--------------------------------- ---------------------------------
Percent of Percent of
Amount Total Amount Total
------------ ------------- ------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $ 519,308 18.7% $ 552,745 21.8%
Multi-family residential 1,567,361 56.6 1,365,124 53.7
Commercial and other real
estate 168,201 6.1 158,336 6.2
---------- ----- --------- ---
Total mortgage loans 2,254,870 81.4 2,076,205 81.7
Other loans:
Cooperative apartment loans 386,756 14.0 348,029 13.7
Student loans (guaranteed) 43,421 1.6 45,262 1.8
Home equity loans and lines 16,729 0.6 19,545 0.7
Commercial business loans 36,994 1.3 25,249 1.0
Consumer and other loans 31,152 1.1 27,005 1.1
------ ---- ------ ---
Total other loans 515,052 18.6 465,090 18.3
---------- ---- ----------- ----
Total loans receivable 2,769,922 100.0% 2,541,295 100.0%
===== =====
Less:
Discount on loans purchased
and deferred fees 9,930 11,182
Allowance for loan losses 34,126 27,024
--------- ---------
Total loans, net $2,725,866 $2,503,089
========= =========
</TABLE>
8
<PAGE> 9
3. NON-PERFORMING ASSETS. The following table sets forth information with
respect to non-performing assets identified by the Bank, including
non-performing loans and other real estate owned at the dates indicated.
<TABLE>
<CAPTION>
At December 31, 1997 At March 31, 1997
----------------------- ---------------------
(Dollars in Thousands)
<S> <C> <C>
Non-accrual loans
Mortgage loans:
Single-family residential............. $4,531 $2,474
Multi-family residential.............. 991 1,918
Commercial and other.................. 4,756 11,155
Other loans:
Cooperative apartment loans............. 384 427
Consumer and commercial
business loans(1).................... 437 956
------- -------
Total non-accruing loans........... 11,099 16,930
------ ------
Loans past due 90 days or more as to:
Interest and accruing................... 1,806 1,718
Principal and accruing(2)............... 13,919 8,442
------ ------
Total past due loans and
accruing........................ 15,725 10,160
------ ------
Total non-performing loans........ 26,824 27,090
------ ------
Other real estate owned, net(3)........... 192 540
------ ------
Total non-performing assets(4)............ $27,016 $27,630
====== ======
Allowance for loan losses as a
percent of total loans.................. 1.23% 1.06%
Allowance for loan losses as a
percent of non-performing loans......... 127.22 99.76
Non-performing loans as a percent of
total loans............................. 0.97 1.07
Non-performing assets as a percent
of total assets......................... 0.70 0.74
</TABLE>
- - --------------------
(1) Consists primarily of commercial business loans and home equity lines of
credit.
(2) Reflects loans more than 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 Bank as presenting uncertainty with respect to
the collectibility of interest or principal.
9
<PAGE> 10
4. ALLOWANCE FOR LOAN LOSSES. 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 Bank, general economic conditions, the level of past due and non- accrual
loans, and the number of loans requiring heightened management oversight. The
Bank will continue to monitor and modify its allowance for possible loan losses
as conditions dictate. While management believes that, based on information
currently available, the Bank's allowance for possible loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances will be given that the Bank's level of allowance for loan losses
will be sufficient to absorb future possible loan losses incurred by the Bank
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. Management may in the future
further increase the level of its allowance for loan losses as a percentage of
total loans and non-performing loans in the event the level of multi-family
residential and commercial real estate loans (which generally are considered to
have a greater risk of loss than single-family residential mortgage loans) as a
percentage of its total loan portfolio continues to increase. In addition, the
FDIC and the Department as an integral part of their examination process
periodically review the Bank's allowance for possible loan losses. Such
agencies may require the Bank to make additional provisions for estimated
possible loan losses based upon judgments different from those of management.
5. EARNINGS PER SHARE. Earnings per share for the three and nine months
ended December 31, 1997 has not been presented since the Conversion has not
been completed.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The Bank'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 is determined by an institution's interest rate spread (i.e.,
the difference between the yields earned on its interest-earning assets and the
rates paid on its interest-bearing liabilities) and the relative amount of
interest-earning assets and interest-bearing liabilities.
The Bank'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 Bank offers products and
services designed to meet the needs of its customers. The Bank generally has
sought to achieve long-term financial strength and stability 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 Bank
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 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 increased $124.5 million, or 3.3%, from $3.73 billion at
March 31, 1997 to $3.86 billion at December 31, 1997. Increases in net loans
and securities available for sale were offset partially by decreases in cash
and cash equivalents and other assets. The $222.8 million increase in the net
loan portfolio consisted primarily of a $212.1 million increase in multi-family
residential and commercial real estate loans. The restructuring of the Bank's
securities available for sale portfolio which began in March 1997 was completed
with the investment of the proceeds of the sales undertaken in March. As a
result, the Bank's debt and equity securities increased from $357.5 million at
March 31, 1997 to $618.8 million at December 31, 1997. Such increase was
accompanied by a $236.7 million decrease in cash and cash equivalents and
$104.5 million decrease in accounts receivable-securities as the funds received
or to be received from such sales were reinvested in debt and equity
securities, primarily U.S. Treasury notes and bills.
11
<PAGE> 12
CASH, CERTIFICATES OF DEPOSIT, COMMERCIAL PAPER AND FEDERAL FUNDS SOLD
(COLLECTIVELY "CASH AND CASH EQUIVALENTS"). Cash and cash equivalents
decreased from $374.6 million at March 31, 1997 to $137.9 million at December
31, 1997 reflecting primarily the investment in April 1997 of a substantial
portion of the remaining proceeds received from the sales of investment and
mortgage-backed and mortgage-related securities effected in March 1997. In
addition, at March 31, 1997, the Bank had receivables totaling $107.6 million
relating to securities transactions executed in connection with the
restructuring which had not settled as of such date. Substantially all of
these funds were invested in early April 1997, primarily in U.S. Treasury notes
and bills with maturities of two years or less.
SECURITIES AVAILABLE FOR SALE. The aggregate securities available for sale
portfolio (which includes debt and equity securities and mortgage-backed and
mortgage-related securities) increased from $548.5 million at March 31, 1997 to
$760.5 million at December 31, 1997 reflecting primarily the investment of the
proceeds from the sales effected in connection with the restructuring of these
portfolios. The Bank determined in fiscal 1997 to restructure these portfolios
in order to improve the overall yield and reduce the Bank's exposure to
interest rate risk. In connection with this restructuring, the Bank sold
approximately $397.3 million of its securities available for sale (including
collateralized mortgage obligations ("CMOs")) in March 1997. The Bank
reinvested substantially all of the proceeds of the sales in U.S. Treasury
notes and bills, most of which have maturities of two years or less. As of
December 31, 1997 and March 31, 1997, the Bank's debt and equity securities
totaled $618.8 million and $357.5 million, respectively, all of which were
classified as available for sale.
The Bank's mortgage-backed and mortgage-related securities, a substantial
portion of which at December 31, 1997 consisted of CMOs secured by
mortgage-backed securities issued by Fannie Mae ("FNMA") or Freddie Mac
("FHLMC"), decreased from $191.0 million at March 31, 1997 to $141.7 million
(all of which were classified as available for sale) at December 31, 1997. The
reduction from March 31, 1997 to December 31, 1997 reflected repayments and
prepayments. The Bank has not reinvested the proceeds from such repayments and
prepayments in mortgage-backed and mortgage-related securities in order to
maintain liquidity and due to a desire to reinvest such funds in generally
shorter term debt securities.
At December 31, 1997, the Bank had a $10.2 million net unrealized gain on
available-for-sale investment and mortgage-backed and mortgage-related
securities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115.
LOANS RECEIVABLE, NET. Loans receivable, net, increased by $222.8 million or
8.9% from March 31, 1997 to December 31, 1997 due to the continued emphasis by
the Bank on the origination of multi-family residential mortgage loans. Such
loans increased 14.8% from $1.37 billion at March 31, 1997 to $1.57 billion at
December 31, 1997.
NON-PERFORMING ASSETS. The Bank'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 $614,000 or 2.2% to $27.0 million at December
31, 1997 from $27.6 million at March 31, 1997. The decrease in non-performing
assets from March 31, 1997 to December 31, 1997 was primarily due to the
repayment in full of two non-accrual commercial real estate loans aggregating
$6.7 million. As a result, non-accrual commercial real estate loans declined
to $4.8 million at December 31, 1997. However, offsetting such decrease was a
$5.5 million increase to $13.9 million in loans contractually past due maturity
but which are continuing to pay interest in accordance with their original
repayment schedule. At December 31, 1997, the Bank's non-performing assets
amounted to
12
<PAGE> 13
.70% of total assets and consisted of $11.1 million of non-accrual loans, $1.8
million of loans past due 90 days or more as to interest and accruing, $13.9
million of loans past due 90 days or more as to principal and accruing ($1.8
million of which were multi-family loans and $12.1 million of which were
commercial and other real estate loans) and $192,000 of other real estate
owned.
ALLOWANCE FOR LOAN LOSSES. The Bank's allowance for loan losses amounted to
$34.1 million at December 31, 1997 as compared to $27.0 million at March 31,
1997. It is management's policy to maintain an allowance for estimated losses
on loans based upon an assessment of prior loss experience, the volume and type
of lending conducted by the Bank, industry standards, past due loans (as to
either interest or principal), general economic conditions and other factors
related to the collectibility of the loan portfolio. The Bank's allowance
increased during the nine months ended December 31, 1997 primarily due to a
$7.7 million provision for loan losses made in the nine month period. The Bank
increased its provisions for loan losses in the nine months ended December 31,
1997 as a result of, among other factors, the increased investment in
multi-family residential loans (all of which are secured by properties in the
New York City metropolitan area) and the increased number of larger multi-family
and individual cooperative apartment loans. At December 31, 1997, the Bank's
allowance for loan losses amounted to 127.2% of total non-performing loans as
compared to 99.8% of total non-performing loans at March 31, 1997. The Bank
utilizes these percentages as only one of the factors in assessing the adequacy
of the allowance for loan losses at various points in time.
INTANGIBLE ASSETS. The Bank's intangible assets consist of goodwill and other
intangibles resulting primarily from the acquisition of Bay Ridge Bancorp, Inc.
and its wholly owned subsidiary Bay Ridge Federal Savings Bank (collectively,
"Bay Ridge") in January 1996 and the completion in fiscal 1996 of two branch
purchase transactions (the "Branch Acquisitions"). At December 31, 1997,
intangibles totaled $58.0 million and consisted primarily of $22.3 million
related to the acquisition of Bay Ridge and $32.1 million primarily related to
the Branch Acquisitions. The Bank's intangible assets decreased by $2.5
million to $58.0 million at December 31, 1997 from $60.5 million at March 31,
1997 as a result of the amortization of $6.6 million of expense related to
intangible assets during the nine months ended December 31,1997 which was
partially offset by approximately $4.0 million of premium resulting from the
completion of a branch acquisition in April 1997. Amortization of such
intangibles will continue to reduce net income until such intangible assets are
fully amortized.
DEPOSITS. Deposits increased $81.3 million or 2.4% to $3.41 billion at
December 31, 1997 from $3.33 billion at March 31, 1997 primarily as a result of
the assumption of $70.0 million of deposits in the branch purchase completed in
April 1997 combined with interest credited of $106.7 million, offset partially
by $95.4 million of deposit outflows. The deposit outflows reflect
disintermediation as a result of the performance of the equities markets during
the nine month period.
BORROWINGS. The Bank has historically used borrowing only to a limited extent
although it may increase such use in the future. The Bank's borrowings consist
primarily of advances from the FHLB of New York. At December 31, 1997, FHLB
advances totaled $14.3 million, compared to $14.6 million at March 31, 1997.
13
<PAGE> 14
EQUITY. At December 31, 1997, total equity amounted to $334.5 million,
compared to $309.1 million at March 31, 1997. This $25.4 million or 8.2%
increase was primarily the result of net income of $21.0 million for the nine
months ended December 31, 1997 combined with a $4.4 million increase in the
unrealized gain on securities available for sale, net of tax.
14
<PAGE> 15
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 Bank from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) 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 December 31,
-------------------------------------------------------------------------
1997 1996
------------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1):
Mortgage loans $2,229,176 $43,849 7.87% $2,045,037 $ 42,099 8.23%
Other loans:
Cooperative apartment loans 391,987 6,892 7.03 366,655 6,702 7.31
Consumer and commercial
business loans (2) 125,581 2,687 8.56 106,673 2,434 9.13
------- ----- ------- -----
Total loans 2,746,744 53,428 7.78 2,518,365 51,235 8.14
Mortgage-backed and mortgage-related
securities 158,762 2,656 6.69 440,895 7,042 6.39
Debt and equity securities 540,753 8,660 6.41 394,583 5,452 5.53
Other interest-earning assets (3) 189,249 2,464 5.21 118,107 1,611 5.46
--------- ------ --------- -----
Total interest-earning assets 3,635,508 67,208 7.39 3,471,950 65,340 7.53
------- ---- ------- ----
Non-interest-earning assets 163,927 211,397
--------- ---------
Total assets $3,799,435 $3,683,347
========= =========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 501,716 $ 3,424 2.73 $ 476,968 $ 3,299 2.77
Savings deposits 1,012,001 7,142 2.82 1,027,541 7,535 2.93
Certificates of deposit 1,790,662 25,411 5.68 1,720,272 23,868 5.55
--------- ------ --------- ------
Total deposits 3,304,379 35,977 4.36 3,224,781 34,702 4.30
--------- ------ --------- ------
Total borrowings 15,683 293 7.47 17,889 308 6.89
------ --- ------ ---
Total interest-bearing
liabilities 3,320,062 36,270 4.37 3,242,670 35,010 4.32
--------- ------ ---- ------ ----
Non-interest-bearing
liabilities(5) 154,533 138,229
--------- --------
Total liabilities 3,474,595 3,380,899
Total equity 324,840 302,448
--------- ---------
Total liabilities and
equity $3,799,435 $3,683,347
========= =========
Net interest-earning assets $ 315,446 $ 229,280
========= =========
Net interest income/interest rate
spread $30,938 3.02% $30,330 3.21%
====== ==== ====== ====
Net interest margin 3.40% 3.49%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.10x 1.07x
==== ====
<CAPTION>
For the Nine Months Ended December 31,
-------------------------------------------------------------------------
1997 1996
------------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1):
Mortgage loans $ 2,172,579 $ 130,538 8.01% $1,995,755 $123,095 8.22%
Other loans:
Cooperative apartment loans 379,866 20,472 7.19 366,163 20,409 7.43
Consumer and commercial
business loans (2) 122,585 8,277 9.00 106,787 7,055 8.81
--------- --------- ---------- -------
Total loans 2,675,030 159,287 7.94 2,468,705 150,559 8.13
Mortgage-backed and mortgage-related
securities 169,221 8,888 7.00 503,696 23,674 6.27
Debt and equity securities 607,430 27,734 6.09 408,197 16,505 5.39
Other interest-earning assets (3) 185,504 6,901 4.96 120,471 4,814 5.33
----------- --------- ---------- -------
Total interest-earning assets 3,637,185 202,810 7.43 3,501,069 195,552 7.45
--------- ---- ------- ----
Non-interest-earning assets 169,020 181,733
----------- ----------
Total assets $ 3,806,205 $3,682,802
========== =========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 497,693 10,047 2.69 $ 462,952 9,263 2.67
Savings deposits 1,025,395 21,863 2.84 1,068,418 23,605 2.95
Certificates of deposit 1,786,463 75,903 5.67 1,731,849 71,672 5.52
---------- --------- --------- -------
Total deposits 3,309,551 107,813 4.34 3,263,219 104,540 4.27
---------- -------- --------- -------
Total borrowings 16,293 891 7.29 18,777 1,037 7.36
---------- --------- --------- -------
Total interest-bearing
liabilities 3,325,844 108,704 4.36 3,281,996 105,577 4.29
--------- ---- ------- ----
Non-interest-bearing
liabilities(5) 158,644 102,937
--------- ---------
Total liabilities 3,484,488 3,384,933
Total equity 321,717 297,869
----------- ---------
Total liabilities and
equity $3,806,205 $3,682,802
========= =========
Net interest-earning assets $ 311,341 $ 219,073
========= =========
Net interest income/interest rate
spread $ 94,106 3.07% $89,975 3.16%
======= ==== ====== ====
Net interest margin 3.45% 3.43%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.09x 1.07x
==== ====
</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.
(5) Includes escrow accounts for the payment of taxes.
15
<PAGE> 16
RATE/VOLUME ANALYSIS. The following table sets forth the effects of changing
rates and volumes on net interest income of the Bank. 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.
<TABLE>
<CAPTION>
Three Months Ended December 31, 1997 Compared Nine Months Ended December 31,1997 Compared
to Three Months Ended December 31, 1996 to Nine Months Ended December 31, 1996
--------------------------------------------- -------------------------------------------
Increase (decrease) due to Total Net Increase (decrease) due to Total Net
---------------------------- Increase ---------------------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ---------- ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $(9,338) $11,088 $1,750 $(4,840) $12,283 $7,443
Other loans:
Cooperative apartment
loans (1,254) 1,444 190 (914) 977 63
Consumer and commercial
business loans (1) (833) 1,086 253 156 1,066 1,222
--------- ------- ------- ------- ----- -------
Total loans receivable (11,425) 13,618 2,193 (5,598) 14,326 8,728
Mortgage-backed and
mortgage-related securities 2,165 (6,551) (4,386) 4,051 (18,837) (14,786)
Debt and equity securities 964 2,244 3,208 2,360 8,869 11,229
Other interest-earning assets (488) 1,341 853 (552) 2,639 2,087
--------- ------- ------- -------- ----- -------
Total net change in income on
interest-earning assets (8,784) 10,652 1,868 261 6,997 7,258
Interest-bearing liabilities:
Deposits:
Demand deposits (272) 397 125 71 713 784
Savings deposits (280) (113) (393) (838) (904) (1,742)
Certificates of deposit 562 981 1,543 1,958 2,273 4,231
------- ------- ------- ------- ----- -------
Total deposits 10 1,265 1,275 1,191 2,082 3,273
Borrowings 117 (132) (15) (10) (136) (146)
------- -------- ------ ------- ----- -------
Total net change in expense on
interest-bearing liabilities 127 1,133 1,260 1,181 1,946 3,127
------- ------- ------ ------- ------ -------
Net change in net interest income $(8,911) $9,519 $ 608 $ (920) $5,051 $4,131
- - ------------- ======= ===== ====== ====== ===== =====
</TABLE>
(1) Includes home equity lines of credit and improvement loans, student
loans, automobile loans, passbook loans, credit card loans, personal
loans, and commercial business loans.
16
<PAGE> 17
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
DECEMBER 31, 1997 AND 1996
GENERAL. The Bank reported net income of $7.4 million and $12.4 million for
the three months ended December 31, 1997 and 1996, respectively, and $21.0
million and $20.8 million for the nine months ended December 31, 1997 and 1996,
respectively. The $4.9 million decrease in net income during the three months
ended December 31, 1997 compared to the same period in the prior year was
primarily due to a $4.2 million increase in non-interest expense combined with
a $1.4 million increase in the provision for loan losses, partially offset by a
$608,000 increase in net interest income. The primary component of the
increase in non-interest expense was a $1.7 million increase in data processing
fees related primarily to expenses incurred in connection with the conversion
of the Bank's data processing systems. The increase in the provision for loan
losses in the 1997 period compared to the same quarter in 1996 reflected the
Bank's determination to increase its allowance for loan losses in view of,
among other things, increased emphasis on originating multi-family residential
loans, the increased number of larger multi-family residential and individual
cooperative loans as well as the increased amount of loans contractually past
due 90 days or more as to principal (but which continue to pay interest in
accordance with their terms), the substantial majority of which consist of
multi-family residential and commercial real estate loans. The slight increase
in net income for the nine months ended December 31, 1997 as compared to the
same period in 1996 was primarily due to a $4.1 million increase in net
interest income and a $1.9 million increase in non- interest income offset
partially by a $4.9 million increase in the provision for loan losses combined
with a $2.1 million increase in non-interest expense.
NET INTEREST INCOME. The Bank's net interest income is determined by its
interest rate spread (i.e., the difference between yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities
and the relative amounts of interest-earning assets and interest-bearing
liabilities). The Bank's interest rate spread was 3.02% and 3.21% for the
three months ended December 31, 1997 and 1996, respectively, and was 3.07% and
3.16% for the nine months ended December 31, 1997 and 1996, respectively. The
Bank's net interest margin for the three months ended December 31, 1997 and
1996 was 3.40% and 3.49%, respectively, while such figures were 3.45% and 3.43%
for the nine months ended December 31, 1997 and 1996, respectively.
Net interest income increased by $608,000 or 2.0% to $30.9 million for the
three months ended December 31, 1997 as compared to the same period in 1996.
The increase was due to a $1.9 million increase in interest income offset in
part by a $1.3 million increase in interest expense. The modest growth in net
interest income reflected primarily the continued growth in the Bank's
interest-earning assets, in particular, loans, and, to a lesser degree, an
increase in the yield earned on its debt, mortgage-backed and mortgage- related
securities. Net interest income increased by $4.1 million or 4.6% to $94.1
million for the nine month period ended December 31, 1997 as compared to the
same period in 1996. As with the quarterly results, such increase reflected
the effects of a $7.3 million increase in interest income partially offset by a
$3.1 million increase in interest expense. The increase in interest income in
the 1997 period was the result of the growth in the Bank's interest-earning
assets, primarily loans, combined with improvements in the yield earned on its
debt, mortgage-backed and mortgage-related securities.
Interest income increased by $1.9 million for the three months ended December
31, 1997 as compared to the same period in 1996 primarily due to an increase in
the average balance of the Bank's interest-earning assets, offset in large part
by a decline in the weighted average yield earned thereon from 7.53% to 7.39%.
The composition of the Bank's interest income for the quarter ended December
31, 1997 reflected the changes in the Bank's asset structure effected
17
<PAGE> 18
during fiscal 1997. Interest income on loans and debt and equity securities
increased $2.2 million and $3.2 million, respectively, while interest income on
mortgage-backed and mortgage-related securities declined $4.4 million during
the 1997 period as compared to the same period in 1996. The increase in
interest income on loans and debt and equity securities reflected both the
effect of the asset restructuring (which increased the Bank's yield on its debt
securities) effected in the later part of fiscal 1997 as well as the Bank's
continued emphasis on multi-family and commercial real estate lending.
However, offsetting the increased average balances was a decline in the yield
earned on loans from 8.14% for the 1996 period to 7.78% for the 1997 period
reflecting the effects of originations at lower current interest rates combined
with a lower repricing rate with respect to some of the Bank's adjustable-rate
loans. Likewise, interest income for the nine month period ended December 31,
1997 increased by comparison to the same period in 1996, increasing $7.3
million to $202.8 million for the 1997 period. As with the quarterly period,
the improvement in net interest income was primarily the result of increases in
the average balances of loans and debt and equity securities offset in part by
decline in the average balance of mortgage-backed and mortgage-related
securities which reflected the asset restructuring and the Bank's continued
emphasis on expanding its loan portfolio.
Interest expense increased modestly by $1.3 million or 3.6% for the three months
ended December 31, 1997 as compared to the same period in the prior year, with
the increase due primarily to a $1.3 million increase in interest paid on
deposits. The increase in interest expense reflected primarily the effects of a
$79.6 million increase in the average balance of the Bank's deposits, which
increase reflected, in part, the assumption of approximately $70.0 million of
deposits in April 1997 upon consummation of a branch office acquisition.
Interest expense increased by $3.1 million or 3.0% to $108.7 million for the
nine months ended December 31, 1997 as compared to the nine months ended
December 31, 1996 primarily due to a $46.3 million increase in the average
balance of deposits combined with a 7 basis point increase in the average rate
paid thereon to 4.34%. The increase in the average balance of deposits during
the nine-month period reflected, in part, the effects of the branch office
acquisition effected in April 1997.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased by
$1.4 million or 156.0% from $909,000 for the three months ended December 31,
1996, to $2.3 million for the three months ended December 31, 1997. For the
nine months ended December 31, 1997, the Bank's provision for possible loan
losses increased by $4.9 million or 175.8% to $7.7 million as compared to $2.8
million for the same period in 1996. The increase in the provision primarily
reflected the Bank's determination in fiscal 1997 to increase its allowance for
loan losses. In management's judgment it was prudent to increase the allowance
for loan losses based upon, among other factors, the Bank's continuing emphasis
on multi-family residential loans secured by properties located in the New York
City metropolitan area and the increased number of larger multi-family
residential and individual cooperative apartment loans. At December 31, 1997,
the allowance for loan losses represented 1.2% of total loans and 127.2% of
total non-performing loans as compared to 1.1% and 99.8%, respectively, at
March 31, 1997.
NON-INTEREST INCOME. Non-interest income decreased $363,000 or 12.0% from $3.0
million for the three months ended December 31, 1996 to $2.7 million for the
same period in 1997. The decline reflected a $32,000 gain received on the
sale of loans and securities during the 1997 period as compared to a $1.1
million gain experienced with respect to such sales during the 1996 period
offset in part by increases of $209,000 and $472,000 in service fees and other
non-interest income, respectively. The increase in service fees reflected
primarily the increased volume of deposits resulting from the Branch
Acquisition combined with increased fees. For the nine
18
<PAGE> 19
months ended December 31, 1997, non-interest income increased $1.9 million or
36.6% to $7.1 million from $5.2 million for the same period in 1996. The
increase reflected primarily the effects of a $1.9 million increase in other
non-interest income combined with a $724,000 increase in service fees partially
offset by a $721,000 decline in gain on sale of loans and securities. The
increase in other non-interest income during the 1997 period reflected the
recognition during the 1996 period of the $1.7 million loss incurred on the
transfer of deposits related to a branch office acquired in the Branch
Acquisitions.
NON-INTEREST EXPENSES. Non-interest expenses increased $4.2 million or 24.5%
to $21.1 million for the three months ended December 31, 1997 from $17.0
million for the same period in 1996. Such increase was primarily due to
increased data processing fees ($1.7 million), primarily due to costs incurred
in connection with the Bank's conversion of its data processing systems, and
increased occupancy expense ($333,000) reflecting the increase in the Bank's
branch network resulting primarily from the Bay Ridge acquisition and the
Branch Acquisition. In addition, the Bank had accrued in fiscal 1997 $10.0
million in anticipation of the imposition of the SAIF special assessment, which
assessment was determined to be $8.6 million upon enactment of legislation,
thus resulting in a reversal in part of the prior accrual. Such reversal
reduced non-interest expense during the three months ended December 31, 1996 by
$1.4 million. For the nine months ended December 31, 1997, non-interest
expense increased by $2.1 million or 3.4% to $63.5 million primarily due to
increases in compensation and employee benefits expense ($1.6 million), data
processing fees ($5.4 million), and occupancy expense ($1.2 million), offset
partially by a $981,000 decrease in FDIC insurance premiums. In addition,
non-interest expense was substantially increased during the 1996 period as a
result of the imposition of the one-time SAIF special assessment which totaled
$8.6 million. It is expected that non-interest expenses will increase due to
the increased costs involved in operating as a public company as well as to the
expenses related to the various proposed stock benefit plans expected to be
implemented subsequent to completion of the conversion, subject to receipt of
stockholder approval.
Compensation and employee benefits expense decreased by $104,000 or 1.5% to
$7.1 million during the three months ended December 31, 1997 as compared to the
same period in 1996 but increased $1.6 million or 7.7% to $22.1 million for the
nine months ended December 31, 1997 as compared to the same period in 1996.
The increase in the nine months ended December 31, 1997 reflected primarily
expenses incurred from increased staffing resulting from the pending Conversion
and data processing systems conversion.
Occupancy costs increased $333,000 to $3.2 million and $1.2 million to $9.4
million for the three and nine months ended December 31, 1997, respectively,
from $2.9 million and $8.2 million for the same periods in 1996 due to both the
expanded branch network resulting from the acquisitions effected in fiscal 1996
as well as the Bank's on-going branch renovation and improvement program.
Data processing service expenses increased by $1.7 million or 149.5% to $2.8
million during the three months ended December 31, 1997 as compared to the
three months ended December 31, 1996. Such expenses increased $5.4 million or
166.0% to $8.7 million during the nine months ended December 31, 1997 as
compared to the same period in 1996. These increases reflected primarily
expenses being incurred in connection with the conversion of the Bank's data
processing systems. Such expenses amounted to $1.2 million and $4.7 million
during the three and nine months ended December 31, 1997, respectively. The
Bank has recognized substantially all the expenses expected to be incurred in
connection with completion of the first phase of the conversion of the Bank's
data processing systems which was completed in the third quarter of fiscal
1998. However, additional expenses will be incurred in connection with the
second (and
19
<PAGE> 20
final) phase of the conversion which is not expected to be completed until
fiscal 1999. In connection with the data processing systems conversion, the
Bank is in the process of planning the program changes necessary in order to be
ready for the year 2000 (the "Year 2000 Issue). The Bank's operating,
processing and accounting operations are computer reliant and could be affected
by the Year 2000 Issue. The Bank is primarily reliant on third party vendors
for its computer output and processing, as well as other significant functions
and services (i.e. securities safekeeping services, securities pricing
information, et cetera). The Bank is currently working with these third party
vendors to assess their year 2000 readiness. Based upon the initial assessment,
the Bank presently believes that with planned modifications to existing
software and planned conversions to new software, the Bank's third party
vendors are taking the appropriate steps to ensure critical systems will
function properly. The Bank currently expects such modifications and
conversions and related testing to be completed by December 31, 1998. However,
if such modifications and conversions are not made, or are not completed
timely, the Year 2000 Issue could have a material impact on the operations of
the Bank. The cost of such modifications and conversions is being absorbed by
the third party vendors. The Bank's cost is not anticipated to be material.
The Bank's advertising expenses amounted to $1.3 million and $1.1 million for
the three months ended December 31, 1997 and 1996, respectively, and to $3.2
million and $2.7 million for the nine months ended December 31, 1997 and 1996,
respectively. The increase in the 1997 periods reflected the Bank's
determination to increase its market presence through, in part, increased
advertising in print media and radio.
FDIC insurance premiums declined in the nine months ended December 31, 1997
from the level experienced in same period in 1996 even though the level of
insurable deposits increased during the period. For the nine months ended
December 31, 1997, such expenses amounted to $913,000 as compared to $1.9
million for the same period in the prior year. The decrease reflects the
reduction in the rate paid to the FDIC for deposit insurance premiums combined
with a refund from the FDIC in the third quarter of fiscal 1997 totaling
$961,000 related to the recapitalization of the SAIF. The Bank's FDIC
insurance premiums increased during the three months ended December 31, 1997 as
compared to the same period in 1996. However, the 1996 period included a
$961,000 refund of previously paid FDIC insurance premiums as a result of the
SAIF recapitalization. Excluding such refund, FDIC insurance premiums for the
three months ended December 31, 1996 would have been $948,000 as compared to
$292,000 for the same period in 1997.
As a result of certain of its past acquisitions, the Bank is deemed to have
SAIF-insured deposits. During fiscal 1997, the FDIC imposed a one-time special
assessment in order to recapitalize the SAIF fund which, for BIF-insured
institutions like the Bank which also have deposits deemed to be SAIF-insured,
amounted to 65.7 basis points on the balance of SAIF deposits as of March 31,
1995. As a result, the Bank was assessed $8.6 million in the third quarter of
fiscal 1997. The level of deposit insurance expense for the Bank is and will
remain higher than that of an insured institution with a comparable amount of
BIF-only insured deposits due to the significant amount of the Bank's deposits
deemed to be SAIF-insured. The Bank's deposits deemed SAIF-insured are
assessed at a rate of 6.3 basis points compared to 1.3 basis points for the
Bank's BIF-insured deposits. At December 31, 1997 and at March 31, 1997, $1.61
billion of the Bank's deposits were deemed to be SAIF insured.
During the three and nine months ended December 31, 1997, the amortization of
intangibles increased by $369,000 and $516,000, respectively, from the same
periods in 1996. Amortization
20
<PAGE> 21
expense increased during the 1997 periods due to the completion of a branch
purchase transaction in April 1997 which resulted in a $4.0 million premium.
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 slightly for the
three months ended December 31, 1997 compared to the same period in 1996.
However, during the nine month period ended December 31, 1997, such expenses
increased by $2.5 million or 24.0% primarily as a result of the significantly
expanded branch operations resulting from the purchase transactions completed
in 1996.
INCOME TAXES. Income tax expense amounted to $2.7 million and $3.1 million for
the three months ended December 31, 1997 and 1996, respectively, and $9.0
million and $10.2 million during the nine months ended December 31, 1997 and
1996, respectively. The decrease experienced in the 1997 periods reflected in
part the decrease in the Bank's income before income taxes. In addition, the
Bank's effective tax rate was substantially reduced due to the establishment of
a real estate investment trust, Independence Community Realty Corp. during
fiscal 1997. The Bank's effective tax rate for the nine months ended December
31, 1997 was 30.0%.
As of December 31, 1997, the Bank had a net deferred tax asset of $17.9
million. No valuation allowance was deemed necessary with respect to such
asset.
REGULATORY CAPITAL REQUIREMENTS
The following table sets forth the Bank's compliance with applicable
regulatory capital requirements at December 31, 1997.
<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% $149,656 7.3% $271,450 3.3% $121,794
Risk-based capital
ratios:
Tier I 4.0 101,897 10.7 271,450 6.7 169,553
Total 8.0 203,794 11.9 303,321 3.9 99,527
</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 Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's
primary sources of funds are deposits, the amortization, prepayment and
maturity of outstanding loans, mortgage-backed and mortgage-
21
<PAGE> 22
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
Bank invests excess funds in federal funds sold and other short-term interest-
earning assets which provide liquidity to meet lending requirements. The Bank
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 December 31, 1997.
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 Bank maintains a strategy of investing in various
lending products. The Bank 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 December
31, 1997, there were outstanding commitments and unused lines of credit by the
Bank to originate or acquire mortgage loans and other loans aggregating $93.9
million and $14.7 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 December 31, 1998.
Certificates of deposit scheduled to mature in one year or less at December 31,
1997, totaled $1.43 billion. Based on historical experience, management
believes that a significant portion of maturing deposits will remain with the
Bank. The Bank anticipates that it will continue to have sufficient funds,
together with borrowings, to meet its current commitments.
22
<PAGE> 23
<TABLE>
<CAPTION>
Part II OTHER INFORMATION
<S> <C>
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.
</TABLE>
23
<PAGE> 24
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: February 13, 1998 By:/s/Charles J. Hamm
----------------------------------
Charles J. Hamm
Chairman, President and
Chief Executive Officer
Date: February 13, 1998 By:/s/John B. Zurell
----------------------------------
John B. Zurell
Executive Vice President and Chief
Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 64,189
<INT-BEARING-DEPOSITS> 45,510
<FED-FUNDS-SOLD> 28,192
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 760,457
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,759,992
<ALLOWANCE> 34,126
<TOTAL-ASSETS> 3,857,781
<DEPOSITS> 3,406,862
<SHORT-TERM> 16,758
<LIABILITIES-OTHER> 99,678
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 334,483
<TOTAL-LIABILITIES-AND-EQUITY> 3,857,781
<INTEREST-LOAN> 159,287
<INTEREST-INVEST> 36,622
<INTEREST-OTHER> 6,901
<INTEREST-TOTAL> 202,810
<INTEREST-DEPOSIT> 107,813
<INTEREST-EXPENSE> 108,704
<INTEREST-INCOME-NET> 94,106
<LOAN-LOSSES> 7,680
<SECURITIES-GAINS> 63
<EXPENSE-OTHER> 63,506
<INCOME-PRETAX> 30,016
<INCOME-PRE-EXTRAORDINARY> 30,016
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,008
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.43
<LOANS-NON> 11,099
<LOANS-PAST> 15,725
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 27,024
<CHARGE-OFFS> 1,082
<RECOVERIES> 504
<ALLOWANCE-CLOSE> 34,126
<ALLOWANCE-DOMESTIC> 34,126
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
