<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, 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)
Delaware 13-3387931
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or 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 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 February 8, 1999, the
registrant had 71,421,563 shares of common stock ($.01 par value per share)
outstanding.
<PAGE> 2
INDEPENDENCE COMMUNITY BANK CORP.
<TABLE>
<CAPTION>
Table of Contents PAGE
- - ----------------- ----
<S> <C> <C> <C>
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Condition 3
as of December 31, 1998 (unaudited)
and March 31, 1998
Consolidated Statements of Income for 4
the three and nine months ended
December 31, 1998 and 1997 (unaudited)
Consolidated Statements of Changes in 5
Stockholders' Equity for the nine months
ended December 31, 1998(unaudited)
Consolidated Statements of Cash Flows 6
for the nine months ended
December 31, 1998 and 1997(unaudited)
Notes to Consolidated Financial 7
Statements (unaudited)
Item 2 Management's Discussion and Analysis 16
of Financial Condition and Results of
Operations
Item 3 Quantitative and Qualitative Disclosures 32
About Market Risk
Part II Other Information
Item 1 Legal Proceedings 33
Item 2 Changes in Securities 33
Item 3 Defaults upon Senior Securities 33
Item 4 Submission of Matters to a Vote of 33
Security Holders
Item 5 Other Information 33
Item 6 Exhibits and Reports on Form 8-K 34
Signatures 35
</TABLE>
2
<PAGE> 3
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 164,658 $ 747,868
Commercial paper 18,547 37,676
Federal funds sold 96,265 71,707
----------- -----------
Total cash and cash equivalents 279,470 857,251
----------- -----------
Securities available-for-sale:
Investment securities 783,677 1,282,072
Mortgage-backed and mortgage-related 736,959 84,610
----------- -----------
Total securities available for sale 1,520,636 1,366,682
----------- -----------
Mortgage loans on real estate 2,758,826 2,279,169
Other loans 543,707 502,718
----------- -----------
Total loans 3,302,533 2,781,887
Less: Allowance for possible loan losses 44,140 36,347
----------- -----------
Total loans, net 3,258,393 2,745,540
----------- -----------
Premises, furniture and equipment, net 65,845 61,443
Accrued interest receivable 30,341 24,395
Intangible assets, net 49,399 55,873
Other assets 109,287 111,812
----------- -----------
Total assets $ 5,313,371 $ 5,222,996
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 3,412,226 $ 3,393,839
Borrowings on securities loaned 55,620 701,160
Other borrowings 738,446 16,681
Escrow and other deposits 33,466 45,868
Accrued expenses and other liabilities 159,671 116,324
----------- -----------
Total liabilities 4,399,429 4,273,872
----------- -----------
Stockholders' equity
Common stock ($.01 par value, 125,000,000
shares authorized, 76,043,750 shares issued;
74,124,350 shares and 76,043,750 shares
outstanding at December 31, 1998 and
March 31, 1998, respectively) 760 760
Additional paid-in-capital 739,173 741,277
Treasury stock at cost; 1,919,400 shares (29,919) --
Unallocated common stock held by ESOP (93,928) (97,636)
Unearned common stock held by RRP (35,366) --
Retained earnings-substantially restricted 329,654 298,876
Accumulated other comprehensive income:
Net unrealized gain on securities available-
for-sale, net of tax 3,568 5,847
----------- -----------
Total stockholders' equity 913,942 949,124
----------- -----------
Total liabilities and stockholders' equity $ 5,313,371 $ 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)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Mortgage loans on real estate $ 51,227 $ 43,849 $144,665 $130,538
Other loans 9,953 9,579 29,446 28,749
Investment securities 12,574 8,660 37,158 27,734
Mortgage-backed and mortgage-related
securities 7,477 2,656 14,994 8,888
Other 4,719 2,464 20,784 6,901
-------- -------- -------- --------
Total interest income 85,950 67,208 247,047 202,810
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits 33,622 35,977 100,274 107,813
Borrowings 9,862 293 21,180 891
-------- -------- -------- --------
Total interest expense 43,484 36,270 121,454 108,704
-------- -------- -------- --------
Net interest income 42,466 30,938 125,593 94,106
Provision for loan losses 3,107 2,327 7,764 7,680
-------- -------- -------- --------
Net interest income after
provision for loan losses 39,359 28,611 117,829 86,426
NON-INTEREST INCOME:
Net gain on sales of loans
and securities 37 32 47 63
Service fees 1,374 1,581 3,936 5,003
Other 1,304 1,057 4,118 2,030
-------- -------- -------- --------
Total non-interest income 2,715 2,670 8,101 7,096
-------- -------- -------- --------
NON-INTEREST EXPENSE:
Compensation and employee benefits 10,094 7,068 29,044 22,147
Occupancy costs 3,593 3,229 10,580 9,376
Data processing fees 3,075 2,844 9,249 8,684
Advertising 1,041 1,250 3,487 3,150
FDIC insurance premiums 279 292 887 913
Amortization of intangible assets 2,155 2,170 6,474 6,571
Other 4,865 4,275 14,065 12,665
-------- -------- -------- --------
Total non-interest expense 25,102 21,128 73,786 63,506
-------- -------- -------- --------
Income before provision for income taxes 16,972 10,153 52,144 30,016
Provision for income taxes 5,509 2,708 19,253 9,008
-------- -------- -------- --------
Net income $ 11,463 $ 7,445 $ 32,891 $ 21,008
======== ======== ======== ========
Basic earnings per share $ 0.17 N/A $ 0.47 N/A
======== ======== ======== ========
Diluted earnings per share $ 0.17 N/A $ 0.47 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 NINE MONTHS ENDED DECEMBER 31, 1998
(In Thousands, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional Unallocated
Common Paid in Treasury Common Stock
Stock Capital Stock Held by ESOP
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance-March 31,1998 $ 760 $ 741,277 $ -- $ (97,636)
Comprehensive income:
Net income for the nine months ended
December 31, 1998 -- -- -- --
Other comprehensive income, net of tax of $3,174
Change in net unrealized gains on
securities available-for-sale, net of
reclassification adjustment of $0 -- -- -- --
--------- --------- --------- ---------
Comprehensive income -- -- -- --
Repurchase of common stock (1,919,400 shares) -- -- (29,919) --
Dividends paid -- -- -- --
ESOP shares committed to be released -- (485) -- 3,708
Other conversion related costs -- (372) -- --
Issuance of grants and purchase of shares
under Recognition and Retention
Plan (2,816,435 shares) -- (1,247) -- --
Amortization of earned portion of Recognition
and Retention Plan -- -- -- --
--------- --------- --------- ---------
Balance-December 31, 1998 $ 760 $ 739,173 $ (29,919) $ (93,928)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Unearned Other
Common Stock Retained Comprehensive
Held by RRP Earnings Income Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance-March 31,1998 $ -- $ 298,876 $ 5,847 $ 949,124
Comprehensive income:
Net income for the nine months ended
December 31, 1998 -- 32,891 -- 32,891
Other comprehensive income, net of tax of $3,174
Change in net unrealized gains on
securities available-for-sale, net of
reclassification adjustment of $0 -- -- (2,279) (2,279)
--------- --------- --------- ---------
Comprehensive income -- 331,767 3,568 30,612
Repurchase of common stock (1,919,400 shares) -- -- -- (29,919)
Dividends paid -- (2,113) -- (2,113)
ESOP shares committed to be released -- -- -- 3,223
Other conversion related costs -- -- -- (372)
Issuance of grants and purchase of shares
under Recognition and Retention
Plan (2,816,435 shares) (36,919) -- -- (38,166)
Amortization of earned portion of Recognition
and Retention Plan 1,553 -- -- 1,553
--------- --------- --------- ---------
Balance-December 31, 1998 $ (35,366) $ 329,654 $ 3,568 $ 913,942
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,891 $ 21,008
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 7,764 7,680
Net gain on sale of loans and securities (47) (63)
Amortization of deferred income and premiums (4,673) (3,312)
Amortization of intangibles 6,474 6,571
Depreciation and amortization 5,633 5,078
Deferred income tax benefit (3,985) (5,235)
Amortization of unearned compensation of
ESOP and RRP 4,776 --
Increase in accrued interest receivable (5,946) (6,363)
Decrease in accounts receivable-securities
transactions 5,029 104,451
Increase in accrued expenses and other
liabilities 43,347 36,084
Other, net 18,485 (25,702)
----------- ---------
Net cash provided by operating activities 109,748 140,197
----------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Loan originations and purchases (959,531) (495,529)
Principal payments on loans 401,006 252,113
Proceeds from sale of loans 35,317 11,141
Proceeds from sale of securities available-for-sale 213,000 200,774
Proceeds from maturities of securities
available-for-sale 802,983 164,089
Principal collected on securities
available-for-sale 145,006 50,137
Purchases of securities available-for-sale (1,317,345) (613,116)
Purchase of FHLB stock (10,071) --
Proceeds from sales of other real estate 128 273
Net additions to premises, furniture and equipment (10,035) (5,811)
----------- ---------
Net cash used in investing activities (699,542) (435,929)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits purchased, net of premium -- 65,972
Net decrease in demand and savings deposits (72,698) 8,527
Net increase in time deposits 91,086 2,780
Net increase (decrease) in other borrowings 76,225 (474)
Net decrease in escrow and other deposits (12,402) (17,818)
Purchase of RRP shares (38,166) --
Repurchase of common stock (29,919) --
Dividends paid (2,113) --
----------- ---------
Net cash provided by financing activities 12,013 58,987
----------- ---------
Net decrease in cash and cash equivalents (577,781) (236,745)
Cash and cash equivalents at beginning of period 857,251 374,636
----------- ---------
Cash and cash equivalents at end of period $ 279,470 $ 137,891
=========== =========
SUPPLEMENTAL INFORMATION
Income taxes paid $ 26,433 $ 14,962
=========== =========
Interest paid $ 115,841 $ 108,542
=========== =========
</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 Community Bank (the "Bank"), formerly known as Independence
Savings 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 (the "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 a 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. (the
"Company") was incorporated under Delaware law in June 1997. The Company is
regulated by the Office of Thrift Supervision ("OTS"). In connection with the
reorganization of the Mutual Holding Company and the Bank, the Company completed
its initial public offering on March 13, 1998 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
used a portion of the net proceeds to loan $98.9 million to the Company's
Employee Stock Ownership Plan (the "ESOP") which purchased 5,632,870 shares of
the Company's common stock in the open market subsequent to the completion of
the conversion.
As part of the Plan of Conversion, the Company formed the Independence
Community Foundation (the "Foundation") and donated 5,632,870 shares of the
Company's common stock. The Foundation was established in order to further the
Company's and the Bank's commitment to the communities that they serve.
Additionally, in accordance with the requirements of the New York State
Banking Department ("Department"), 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 the Bank's total equity 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 Board of Directors declared the Company's second consecutive quarterly
cash dividend on January 29, 1999. The dividend amounted to $0.03 per share of
common stock and is payable on February 24, 1999 to shareholders of record on
February 10, 1999.
On December 7, 1998 the Company announced that its Board of Directors
authorized an initial stock repurchase plan for up to five percent of common
shares outstanding or 3,802,187 shares. As of December 31, 1998, 1,919,400
shares had been purchased at a cost of $29.9 million. As of January 14, 1999,
the Company completed the repurchase of all such shares at a cost of $60.1
million.
On January 19, 1999, the Company announced that a second stock repurchase
plan was authorized by the Board of Directors for an additional 3.8 million
shares, or approximately five percent of the Company's outstanding common stock
before the effect of the initial stock repurchase plan. The repurchase program
began on January 21, 1999 and may continue through March 13, 1999, the first
anniversary of the Company's conversion to stock form, unless extended. The
repurchased shares will be held as treasury stock and will be available for
7
<PAGE> 8
issuance pursuant to the Company's benefit plans, including its recently adopted
stock option plan, and for general corporate purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying financial statements were prepared in accordance with
instructions to Form 10-Q 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 nine months
ended December 31, 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 consolidated audited financial
statements and the notes thereto contained in the Company's Annual Report to
shareholders 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 - twenty seven branch offices 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
Department, which is the Bank's chartering authority and its primary state
regulator. The Bank also is 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.
Basic earnings per share ("EPS") 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. Shares of common stock held by the ESOP that have not
been allocated to participants' accounts or are not committed to be released for
allocation and non-vested 1998 Recognition and Retention Plan and Trust
Agreement (the "RRP") shares are not considered to be outstanding for the
calculation of basic EPS, however, a portion of which are considered in the
calculation of diluted EPS as common stock equivalents of basic EPS. Basic and
diluted weighted-average common shares outstanding were 67,609,747 and
67,978,508 shares, respectively, for the quarter ended December 31, 1998. For
the nine months ended December 31, 1998 basic and diluted weighted average
common shares outstanding were 69,544,260 and 69,675,626 shares, respectively.
8
<PAGE> 9
4. BENEFIT PLANS
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 are the shares of common
stock of the Company purchased by the ESOP.
Shares held by the ESOP are held by an independent 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. ESOP participants will become 100% vested in the ESOP after three
years of service. The compensation expense related to the 70,411 shares
committed to be released during the third quarter was $1.0 million and was $3.2
million with respect to the 211,233 shares committed to be released during the
nine months ended December 31, 1998. Effective December 31, 1998, 281,644 shares
were allocated to participant accounts. These shares were committed for release
in Fiscal 1998 and 1999, for 70,411 and 211,233 shares, respectively.
Recognition and Retention Plan
The RRP was approved at the Annual Shareholders' Meeting held on September
25, 1998. The RRP may grant up to 4% of the Common Stock sold in the conversion,
or 2,816,435 shares, to Officers, key employees and non-employee directors of
the Company. On September 25, 1998 (the "anniversary date"), the Board of
Directors issued grants of 2,188,517 shares of stock payable over a five year
period at a rate of 20% per year, beginning one year from the anniversary date.
All of the shares available to be granted were acquired through open market
purchases. As a result of the issuance of grants and purchase of shares,
unearned compensation was recorded as an adjustment to equity for $36.9 million.
The compensation expense related to the RRP was $1.5 million and $1.6 million
for the three months and nine months ended December 31, 1998, respectively.
Option Plan
The 1998 Stock Option Plan (the "Option Plan") also was approved at the
September 25, 1998 Annual Shareholders' Meeting. The Option Plan may grant up to
10% of the Common Stock sold in the conversion, or 7,041,088 shares, to
Officers, key employees and non-employee directors of the Company. On September
25, 1998 (the "anniversary date"), the Board of Directors issued options of
6,101,608 shares of stock vesting over a five year period at a rate of 20% per
year, beginning one year from the anniversary date. The option price of $13.3125
per share was the fair market value of the Company's common stock on the date of
grant. Each stock option or portion thereof shall be exercisable at any time on
or after it vests and generally is exercisable until the earlier of ten years
after its date of grant or six months after the date on which the optionee's
employment terminates (three years after termination of service in the case of
non-employee directors), unless extended by the Board of Directors to a period
not to exceed five years from such termination. The granting of these options
did not affect the Company's results of operations for the nine months ended
December 31, 1998 or its statement of condition at December 31, 1998.
9
<PAGE> 10
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 solely disclosure related, its implementation had no affect on
the Company's financial condition or results of operations.
10
<PAGE> 11
6. SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of securities available-for-sale at
December 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 $ 595,415 $ 1,277 $(1,953) $ 594,739
Municipals 699 -- -- 699
Corporate 154 -- (1) 153
---------- ------- ------- ----------
Total debt securities 596,268 1,277 (1,954) 595,591
---------- ------- ------- ----------
Equity securities:
Preferred 135,000 -- -- 135,000
Common 47,489 7,070 (1,473) 53,086
---------- ------- ------- ----------
Total equity securities 182,489 7,070 (1,473) 188,086
---------- ------- ------- ----------
Total investment securities 778,757 8,347 (3,427) 783,677
---------- ------- ------- ----------
Mortgage-backed and mortgage-related securities:
FNMA Pass Through Certificates 4,049 109 (5) 4,153
GNMA Pass Through Certificates 51,463 2,108 (18) 53,553
FHLMC Pass Through
Certificates 7,708 124 (36) 7,796
Collateralized Mortgage
Obligation Bonds 671,917 406 (866) 671,457
---------- ------- ------- ----------
Total mortgage-backed and
mortgage-related securities 735,137 2,747 (925) 736,959
---------- ------- ------- ----------
Total securities available-
for-sale $1,513,894 $11,094 $(4,352) $1,520,636
========== ======= ======= ==========
</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>
11
<PAGE> 12
7. LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Company's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT MARCH 31, 1998
-------------------------- --------------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $ 491,299 14.9% $ 505,051 18.2%
Multi-family residential 2,058,594 62.3 1,605,058 57.6
Commercial and other
real estate 220,564 6.7 178,463 6.4
---------- ----- ---------- -----
Total principal balance
mortgage loans 2,770,457 83.9 2,288,572 82.2
Less net deferred fees 11,631 0.4 9,403 0.3
---------- ----- ---------- -----
Total mortgage loans 2,758,826 83.5 2,279,169 81.9
---------- ---------- -----
Other loans:
Cooperative apartment loans 425,374 12.9 380,866 13.7
Student loans (guaranteed) 41,824 1.3 43,946 1.6
Home equity loans and lines 13,154 0.4 15,625 0.6
Commercial business loans 33,700 0.9 31,550 1.1
Consumer and other loans 29,896 1.0 30,869 1.1
---------- ----- ---------- -----
Total principal balance
other loans 543,948 16.5 502,856 18.1
Less unearned discount and
deferred fees 241 0.0 138 0.0
---------- ----- ---------- -----
Total other loans 543,707 16.5 502,718 18.1
Total loans receivable 3,302,533 100.0% 2,781,887 100.0%
---------- ===== ---------- =====
Less: allowance for loan losses 44,140 36,347
---------- ----------
Loans receivable, net $3,258,393 $2,745,540
========== ==========
</TABLE>
12
<PAGE> 13
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.
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 collectibility of
interest or principal.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT MARCH 31, 1998
-------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans
Mortgage loans:
Single-family residential $ 3,360 $ 4,423
Multi-family residential 1,128 1,190
Commercial and other 2,202 4,782
Other loans:
Cooperative apartment loans 450 509
Consumer and commercial
business loans(1) 473 431
------- -------
Total non-accrual loans 7,613 11,335
------- -------
Loans past due 90 days or more as to:
Interest and accruing 1,512 1,607
Principal and accruing(2) 30,738 16,804
------- -------
Total past due loans and
accruing 32,250 18,411
------- -------
Total non-performing loans 39,863 29,746
------- -------
Other real estate owned, net(3) 319 192
------- -------
Total non-performing assets $40,182 $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 110.73 122.19
Non-performing loans as a percent of
total loans 1.21 1.07
Non-performing assets as a percent
of total assets 0.76 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.
13
<PAGE> 14
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. 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 can 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>
NINE MONTHS ENDED DECEMBER 31,
1998 1997
-------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allowance at beginning of period $ 36,347 $27,024
-------- -------
Provision:
Mortgage loans(1) 6,675 6,094
Consumer and commercial business loans 1,089 1,586
-------- -------
Total provisions 7,764 7,680
-------- -------
Charge-offs:
Mortgage loans(1) 162 896
Consumer and commercial business loans(2) 175 186
-------- -------
Total charge-offs 337 1,082
-------- -------
Recoveries:
Mortgage loans(1) 237 322
Consumer and commercial business loans (2) 129 182
-------- -------
Total recoveries 366 504
-------- -------
Net (recoveries) charge-offs (29) 578
-------- -------
Allowance at end of period $ 44,140 $34,126
======== =======
Allowance for possible loan
losses as a percent of total loans 1.34% 1.24%
Allowance for possible loan
losses as a percent of total
non-performing loans(3) 110.73% 127.22%
</TABLE>
(1) Includes cooperative apartment loans.
(2) Includes student loans, home equity loans and lines of credit, automobile
loans, secured and unsecured personal loans, and commercial business loans.
(3) Non-performing loans consist of non-accrual loans and loans 90 days or more
past due as to interest or principal and other loans which have been
identified by the Company as presenting uncertainty with respect to the
collectibility of interest or principal.
10. RECENT DEVELOPMENTS.
Stock Repurchase Program:
On January 19, 1999, the Company announced that a second stock repurchase
plan was authorized by the Board of Directors for up to an additional 3.8
million shares, or approximately five percent of the Company's issued and
outstanding common stock before the effect of the initial stock repurchase plan.
Repurchases are authorized to be made by the Company from time to time as, in
the opinion of
14
<PAGE> 15
management, market conditions warrant. The repurchase program began on January
21, 1999 and may continue through March 13, 1999, the first anniversary of the
completion of the Company's conversion and reorganization, unless extended. The
repurchased shares will be held as treasury stock and will be available for
issuance pursuant to the Company's benefit plans, including its recently adopted
stock option plan, and for general corporate purposes.
Quarterly Cash Dividend:
On January 29, 1999, the Company announced that its Board of Directors
declared a quarterly cash dividend of three cents ($.03) per common share. The
dividend is payable on February 24, 1999 to shareholders of record as of
February 10, 1999.
Proposed Acquisition of Broad National Bancorporation, Newark, New
Jersey:
On February 1, 1999, the Company announced that it had signed a definitive
agreement to acquire Broad National Bancorporation. Reference is made to Part
II, Item 5, "Other Information".
15
<PAGE> 16
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 consist of deposits and borrowings. The
Company's results of operations also are affected by the amount of 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, and the level of its non-interest expenses, including among other
things 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 asset growth, capital
management and effective cost control practices while maintaining superior
customer service.
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 December 31, 1998 were $5.31 billion, an increase of $90.4
million, or 1.7%, from $5.22 billion at March 31, 1998. During the first nine
months of fiscal 1999, Management realigned the balance sheet by re-deploying
shorter term investments (reflecting in a large part the initial investment of
the conversion proceeds) into higher yielding assets while continuing to
strategically leverage the balance sheet to fund asset growth. This realignment
and leveraging was evidenced by decreases during the nine month period of $577.8
million in cash and cash equivalents and $498.4 million in investment securities
available-for-sale while the Company's total loan portfolio increased $520.6
million and its mortgage-backed and mortgage-related securities
available-for-sale increased $652.3 million during the same period.
16
<PAGE> 17
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 $279.5 million at December 31, 1998. The $577.8 million decrease was
principally due to a $645.5 million decrease in securities lending activities
from $701.2 million at March 31, 1998 to $55.6 million at December 31, 1998.
This decrease was partially offset by an increase of $24.6 million in Federal
funds sold from $71.7 million at March 31, 1998 to $96.3 million at December 31,
1998. At the completion of the conversion and reorganization, the Bank initially
invested the proceeds of the conversion in U.S. Treasury Notes and Bills pending
deployment of the conversion proceeds into loans and other higher earning
assets. The Company 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 nine
months of fiscal 1999, the Company has systematically shifted a portion of its
investments from U.S. Treasury securities into higher yielding mortgage loans
and mortgage-related securities, and, as a result, reduced its securities
lending activities. The increase in Federal funds sold is due to increased FHLB
advances which will be used to fund mortgage loan and mortgage-related security
commitments.
SECURITIES AVAILABLE-FOR-SALE.
The aggregate securities available-for-sale portfolio (which includes
investment securities and mortgage-backed and mortgage-related securities)
increased $154.0 million from $1.37 billion at March 31, 1998 to $1.52 billion
at December 31, 1998. As of December 31, 1998 and March 31, 1998, the Company's
investment securities totaled $783.6 million and $1.28 billion, respectively,
all of which were classified as available for sale. Total securities were
reduced during the nine months as a result of the Company's determination to
shift a portion of its investments from U.S. Treasury securities into higher
yielding mortgage loans and mortgage-related securities.
The Company's mortgage-backed and mortgage-related securities, a
substantial portion of which at December 31, 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 $737.0 million (all of which were classified as available for sale) at
December 31, 1998.
At December 31, 1998, the Company had a $6.7 million net unrealized gain
on available-for-sale investment and mortgage-backed and mortgage-related
securities.
LOANS, NET.
Loans, net increased by $512.9 million or 18.7% to $3.26 billion at
December 31, 1998 from $2.75 billion at March 31, 1998. During the first nine
months of fiscal 1999 the Company originated approximately $880.0 million of
mortgage loans, compared to $436.9 million in the corresponding period of last
year. These mortgage loans, primarily multi-family residential loans, were
originated primarily for retention in its loan portfolio. This increased loan
production is partially attributable to the current refinance market. The
Company's continued emphasis on multi-family residential mortgage loans resulted
in a net increase of $453.5 million, or 28.3%, in multi-family loans from $1.61
billion at March 31,
17
<PAGE> 18
1998 to $2.06 billion at December 31, 1998. These loans currently comprise 62.3%
of the loan portfolio compared to 57.6% at March 31, 1998.
NON-PERFORMING ASSETS.
The overall quality of the Company's assets remained strong with
non-performing assets as a percentage of total assets amounting to 76 basis
points at December 31, 1998 compared to 57 basis points at March 31, 1998. At
December 31, 1998, the Company's non-performing assets consisted of $7.6 million
of non-accrual loans, $1.5 million of loans past due 90 days or more as to
interest and accruing, $30.7 million of loans past due 90 days or more as to
principal and accruing ($25.2 million of which were multi-family loans and $4.7
million of which were commercial and other real estate loans) and $319,000 of
other real estate acquired through foreclosure or deed-in-lieu thereof.
Non-performing assets increased by $10.2 million to $40.2 million at December
31, 1998 from $29.9 million at March 31, 1998. This increase was primarily due
to an increase in loans which are 90 days or more past maturity which continue
to make payments on a basis consistent with the original repayment schedule.
ALLOWANCE FOR LOAN LOSSES.
The Company's allowance for loan losses amounted to $44.1 million at
December 31, 1998 as compared to $36.3 million at March 31, 1998. At December
31, 1998, the Company's allowance amounted to 1.34% of total loans and 110.7% 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 $7.8 million from March
31, 1998 to December 31, 1998 due to provisions of $7.8 million, and net
recoveries of $29,000. The increase during the period was due to several
factors, including growth in the size of the Company's loan portfolio, 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, which loans as a general matter are considered to involve a greater risk
of loss than single family residential loans, and an increase in the number of
larger multi-family residential and individual cooperative apartment loans as
compared to prior years.
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 December 31, 1998,
intangibles totaled $49.4 million and consisted primarily of $20.4 million
related to the acquisition of Bay Ridge and $29.0 million primarily related to
the Branch Acquisitions. The Company's intangible assets decreased by $6.5
million to $49.4 million at December 31, 1998 from $55.9 million at March 31,
1998 as a result of the amortization of the intangible assets during the nine
months ended December
18
<PAGE> 19
31, 1998. Amortization of such intangibles will continue to reduce net income
until such intangible assets are fully amortized.
DEPOSITS.
Deposits increased $18.4 million or 0.5% to $3.41 billion at December 31,
1998. The increase was due to interest credited of $105.1 million which was
partially offset by deposit outflows totaling $86.7 million. The deposit
outflows in the first quarter of the fiscal year were attributable to
disintermediation primarily as a result of customer transfers of funds to the
equities markets and, to a lesser extent, to other financial institutions
conducting deposit gathering campaigns by paying above market rates. The rate of
deposit outflow in the second quarter lessened and the Bank experienced a
deposit inflow during the third quarter due to the instability that has arisen
in the equities market as well as special deposit programs instituted by the
Bank.
BORROWINGS.
Borrowings increased $76.3 million or 10.6% to $794.1 million at December
31, 1998 compared to $717.8 million at March 31, 1998. The increase was
principally due to a $722.4 million increase in FHLB borrowings primarily to
fund the increases in the loan portfolio and mortgage-related securities
pursuant to the implementation of the Company's leverage strategy and, to a
lesser extent, the outflow of deposits. The increase was partially offset by a
$645.5 million decrease in securities lending activities from $701.2 million at
March 31, 1998 to $55.6 million at December 31, 1998. (See discussion in "Cash,
Certificates of Deposit, Commercial Paper and Federal Funds Sold" regarding the
decline in securities lending activity.)
EQUITY.
At December 31, 1998, total equity amounted to $913.9 million, compared to
$949.1 million at March 31, 1998. This $35.1 million decrease was primarily due
to a $35.4 million adjustment to capital as a result of the issuance of grants
and purchase of shares to fund the RRP partially offset by the amortization of
unearned compensation, a $29.9 million charge to capital due to the purchase of
shares in connection with the implementation of the Company's initial 5% stock
repurchase program, a $2.1 million decrease for the dividend payment and a $2.3
million decrease in the unrealized gain on securities available for sale. Such
reductions were partially offset by net income of $32.9 million for the first
nine months of fiscal 1999. Tangible book value per share was $11.66 and the
tangible equity to assets ratio was 16.27% at December 31, 1998.
19
<PAGE> 20
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
--------------------------------------------- ------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 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 $2,715,128 $ 51,227 7.55% $2,229,176 $ 43,849 7.87%
---------- ---------- ---------- --------
Other loans:
Cooperative apartment loans 421,549 7,512 7.13 391,987 6,892 7.03
Consumer and commercial
business loans(2) 116,361 2,441 8.39 125,581 2,687 8.56
Total loans 3,253,038 61,180 7.52 2,746,744 53,428 7.78
Mortgage-backed and mortgage-
related securities 465,128 7,477 6.43 158,762 2,656 6.69
Investment securities 875,993 12,574 5.74 540,753 8,660 6.41
Other interest-earning
assets(3) 380,326 4,719 4.96 189,249 2,464 5.21
---------- ---------- ---------- --------
Total interest-earning assets 4,974,485 85,950 6.91 3,635,508 67,208 7.39
---------- --------
Non-interest-earning
assets 193,352 163,927
---------- ----------
Total assets $5,167,837 $3,799,435
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 655,852 $ 3,545 2.14 $ 608,244 $ 3,450 2.28
Savings deposits 955,707 5,880 2.44 1,005,241 7,116 2.84
Certificates of deposit 1,785,614 24,197 5.38 1,790,662 25,411 5.68
---------- ---------- ---------- --------
Total deposits 3,397,173 33,622 3.93 3,404,147 35,977 4.24
---------- ---------- ---------- --------
Total borrowings 716,603 9,862 5.46 15,683 293 7.47
---------- ---------- ---------- --------
Total interest-bearing
liabilities 4,113,776 43,484 4.19 3,419,830 36,270 4.25
---------- ---- -------- ----
Non-interest-bearing
liabilities 121,105 54,765
---------- ----------
Total liabilities 4,234,881 3,474,595
---------- ----------
Total equity 932,956 324,840
---------- ----------
Total liabilities and
equity $5,167,837 $3,799,435
========== ==========
Net interest-earning
assets $ 860,709 $ 215,678
========== ==========
Net interest income/interest
rate spread $ 42,466 2.72% $ 30,938 3.14%
========== ==== ======== ====
Net interest margin 3.41% 3.40%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.21x 1.06x
==== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------------------ -------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 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 $2,514,537 $144,665 7.67% $2,172,579 $ 130,538 8.01%
---------- -------- ---------- ----------
Other loans:
Cooperative apartment loans 404,842 21,783 7.17 379,866 20,472 7.19
Consumer and commercial
business loans(2) 119,006 7,663 8.59 122,585 8,277 9.00
Total loans 3,038,385 174,111 7.64 2,675,030 159,287 7.94
Mortgage-backed and mortgage-
related securities 302,122 14,994 6.62 169,221 8,888 7.00
Investment securities 884,645 37,158 5.60
607,430 27,734 6.09
Other interest-earning
assets(3) 503,064 20,784 5.51 185,504 6,901 4.96
---------- -------- ---------- ----------
Total interest-earning assets 4,728,216 247,047 6.97 3,637,185 202,810 7.43
-------- ----------
Non-interest-earning
assets 202,261 169,020
---------- ----------
Total assets $4,930,477 $3,806,205
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 657,817 $ 10,656 2.15 $ 589,953 $ 10,178 2.29
Savings deposits 972,666 18,770 2.56 1,023,134 21,732 2.82
Certificates of deposit 1,728,629 70,848 5.44 1,786,463 75,903 5.67
---------- -------- ---------- ----------
Total deposits 3,359,112 100,274 3.96 3,399,550 107,813 4.21
---------- -------- ---------- ----------
Total borrowings 504,042 21,180 5.58 16,293 891 7.29
---------- -------- ---------- ----------
Total interest-bearing
liabilities 3,863,154 121,454 4.17 3,415,843 108,704 4.23
-------- ---- ---------- ----
Non-interest-bearing
liabilities 118,265 68,645
---------- ----------
Total liabilities 3,981,419 3,484,488
---------- ----------
Total equity 949,058 321,717
---------- ----------
Total liabilities and
equity $4,930,477 $3,806,205
========== ==========
Net interest-earning
assets $ 865,062 $ 221,342
========== ==========
Net interest income/interest
rate spread $125,593 2.80% $ 94,106 3.20%
======== ==== ========== ====
Net interest margin 3.54% 3.45%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.22x 1.06x
==== ====
</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, money market and checking accounts.
20
<PAGE> 21
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1998 NINE MONTHS ENDED DECEMBER 31, 1998
COMPARED TO THREE MONTHS ENDED COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------------------------------- -----------------------------------------
Increase Increase
(Decrease) due to Total Net (Decrease) due to Total Net
--------------------- Increase --------------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ---------- ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $ 159 $ 7,219 $ 7,378 $(5,727) $ 19,854 $ 14,127
Co-op apartment loans 90 530 620 (29) 1,340 1,311
Consumer and commercial
business loans(1) (52) (194) (246) (377) (237) (614)
------- -------- -------- ------- -------- --------
Total loans receivable 197 7,555 7,752 (6,133) 20,957 14,824
Mortgage-backed securities 28 4,793 4,821 (520) 6,626 6,106
Investment securities 47 3,867 3,914 (2,382) 11,806 9,424
Other interest-earning assets 26 2,229 2,255 845 13,038 13,883
------- -------- -------- ------- -------- --------
Total net change in income on
interest-earning assets 298 18,444 18,742 (8,190) 52,427 44,237
Interest-bearing liabilities:
Deposits:
Demand deposits (36) 131 95 (642) 1,120 478
Savings deposits (915) (321) (1,236) (1,930) (1,032) (2,962)
Certificates of deposit (1,154) (60) (1,214) (2,811) (2,244) (5,055)
------- -------- -------- ------- -------- --------
Total deposits (2,105) (250) (2,355) (5,383) (2,156) (7,539)
Borrowings 5 9,564 9,569 (257) 20,546 20,289
------- -------- -------- ------- -------- --------
Total net change in expense on
interest-bearing liabilities (2,100) 9,314 7,214 (5,640) 18,390 12,750
------- -------- -------- ------- -------- --------
Net change in net interest
income $ 2,398 $ 9,130 $ 11,528 $(2,550) $ 34,037 $ 31,487
======= ======== ======== ======= ======== ========
</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.
21
<PAGE> 22
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31,
1998 AND 1997
GENERAL.
The Company reported a 54.0% increase in net income of $11.5 million, or
$0.17 per diluted share, for the quarter ended December 31, 1998 compared to
$7.4 million for the same quarter in the prior year. Excluding the effect of
implementation of certain tax planning initiatives and, to a lesser extent, the
Company's stock repurchase program, diluted earnings per share from core
operations was $0.15 per share for the three months ended December 31, 1998. Per
share amounts are not applicable for the quarter ended December 31, 1997 because
the Company's conversion and reorganization was not completed until March 1998.
The $4.1 million increase in net income during the three months ended
December 31, 1998 compared to the same period in the prior year was primarily
due to a $11.5 million increase in net interest income partially offset by a
$0.8 million increase in provision for loan losses, a $3.9 million increase in
non-interest expense and a $2.8 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 3.41% and 3.40% for the three
months ended December 31, 1998 and 1997, respectively. The 1 basis point
increase in net interest margin for the three months was 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 $11.5 million or 37.3% to $42.5 million
for the three months ended December 31, 1998 as compared to $30.9 million for
the period ended December 31, 1997. The increase was due to a $18.7 million
increase in interest income offset in part by a $7.2 million increase in
interest expense. The growth in net interest income reflects primarily the $1.3
billion increase in average interest-earning assets during the three months
ended December 31, 1998 compared to the three months ended December 31, 1997.
This growth was partially offset by a lower interest rate environment resulting
from the flattening of the yield curve as well as compression associated with
the leveraging of the balance sheet.
The increase in interest income was primarily due to a $1.3 billion
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 7.39% to
6.91%. Interest income on loans increased $7.8 million due to a $506.3 million
increase in the average balance of loans partially offset by a 26 basis point
decline in the yield earned on loans from 7.78% for the nine-month fiscal 1998
period to 7.52% for the nine-month fiscal 1999 period. The decline in yield is
attributable to the effects of originations at lower current interest rates
combined with the repricing downward of some of the Company's adjustable-rate
loans. Income on investment securities increased $3.9 million due to a $335.2
million increase in the average balance of investment securities partially
offset by a decrease in the yield earned from 6.41% for the quarter ended
December 31, 1997 to 5.74% for the quarter ended December 31, 1998. Interest
income on mortgage-backed and mortgage-
22
<PAGE> 23
related securities increased $4.8 million during the third quarter of fiscal
1999 compared to the same period in fiscal 1998 as a result of a $306.4 million
increase in the average balance of these securities which was partially offset
by a 26 basis point decline in the yield earned. Income on other
interest-earning assets increased $2.3 million in the current quarter compared
to the prior year quarter due to $1.9 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 $0.6 million increase in interest on federal funds. This increase was due
to the investment in short-term securities, resulting from increased FHLB
advances.
Interest expense increased $7.2 million to $42.5 million or 19.9% for the
three months ended December 31, 1998 as compared to the three months ended
December 31, 1997. The increased FHLB borrowings associated with the
implementation of the Company's leverage strategy resulted in additional
interest expense of $7.6 million. The remainder of the increase was due to a
$1.8 million increase in interest paid on borrowings 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 $2.4 million in interest paid on deposits due
to a 31 basis point decline in the average rate paid on deposits to 3.93% for
the quarter ended December 31, 1998 compared to 4.24% for the quarter ended
December 31, 1997.
PROVISION FOR LOAN LOSSES.
The Company's provision for loan losses increased 33.5% from $2.3 million
for the three months ended December 31, 1997 to $3.1 million for the three
months ended December 31, 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, as well as the increased level of non-performing assets.
NON-INTEREST INCOME.
Non-interest income increased $45,000 or 1.7% for the three months ended
December 31, 1998 compared to the three months ended December 31, 1997. This
increase was principally due to an increase in mortgage prepayment fees offset
by a decline in service fee income resulting from the new accounting rules
effective January 1, 1998 regarding the recording of securities lending. For the
quarter ended December 31, 1997 income from securities lending was recorded as
non-interest income while in the current quarter ended December 31, 1998, it was
included as part of net interest income. For the quarter ended December 31,
1997, the Company recorded $92,000 as income relating to securities lending.
Service fee income also is lower due to a $96,630 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. The Company negotiated a contract with a new provider and resumed the sale
of these products late in the second quarter of fiscal 1999. The remainder of
the decline in service fee income is due to lower deposit-based fees.
23
<PAGE> 24
NON-INTEREST EXPENSES.
Non-interest expense amounted to $25.1 million for the quarter ended
December 31, 1998 compared to $21.1 million for the quarter ended December 31,
1997. The $4.0 million growth in expenses was primarily attributable to
increases in personnel costs of $3.0 million, occupancy costs of $0.4 million,
data processing service expenses of $0.2 million and other non-interest expenses
of $0.6 million. These increases were offset by a $0.2 million decrease in
advertising expense resulting from the timing of certain ad campaigns.
Compensation and employee benefits expense increased $3.0 million or 42.8%
to $10.1 million for the three months ended December 31, 1998 as compared to the
same period in the prior year. The increase was due to the combined effect of
$2.4 million of benefits related to the ESOP and the RRP as well as $0.6 million
related to staff additions and normal merit increases.
Data processing service expenses increased by $0.2 million or 8.1% to $3.1
million during the three months ended December 31, 1998 as compared to the three
months ended December 31, 1997. The increase was primarily due to costs
associated with Year 2000 compliance issues.
Other non-interest expenses increased $0.6 million for the three months
ended December 31, 1998 compared to the same period in the prior year. These
expenses included items such as equipment expenses, office supplies, postage,
telephone expenses, maintenance and security, as well as certain professional
fees and expenditures associated with being a public company.
INCOME TAXES.
Income tax expense amounted to $5.5 million and $2.7 million for the three
months ended December 31, 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 December 31, 1998 was 32.5% compared to 26.7% for the three months
ended December 31, 1997.
As of December 31, 1998, the Company had a net deferred tax asset of $43.8
million. No valuation allowance was deemed necessary with respect to such asset.
24
<PAGE> 25
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
AND 1997
GENERAL.
The Company's net income for the nine months ended December 31, 1998
increased $11.8 million, or 56.6% to $32.9 million, or $0.47 per diluted share,
compared to the nine months ended December 31, 1997. Excluding the effect of
implementation of certain tax planning initiatives and, to a lesser extent, the
Company's stock repurchase program, diluted earnings per share from core
operations was $0.45 per share for the nine months ended December 31, 1998. Per
share amounts are not applicable for the nine months ended December 31, 1997
because the Company's conversion and reorganization was not completed until
March 1998.
The $11.8 million increase in net income during the nine months ended
December 31, 1998 compared to the same period in the prior year was primarily
due to increases of $31.5 million in net interest income and $1.0 million in
non-interest income along with an $84,000 increase in provision for loan losses.
These increases to income were partially offset by a $10.3 million increase in
non-interest expense and a $10.2 million increase in the provision for income
taxes.
NET INTEREST INCOME.
The Company's net interest margin was 3.54% and 3.45% for the nine months
ended December 31, 1998 and 1997, respectively. The 9 basis point increase in
net interest margin for the nine months was 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 $31.5 million or 33.5% to $125.6 million
for the nine months ended December 31, 1998 as compared to the same period in
1997. The increase was due to a $44.2 million increase in interest income offset
in part by a $12.7 million increase in interest expense. The growth in net
interest income reflects primarily the $1.1 billion increase in average
interest-earning assets during the nine months ended December 31, 1998 compared
to the nine months ended December 31, 1997, which was partially offset by a
general compression in interest rate spread due to general declines in market
rates of interest. The increase in average earning assets for the nine months
period was primarily due to the investment of the net proceeds from the
Company's conversion and reorganization which was completed in March 1998, as
well as, the effect of the implementation of a new accounting treatment for
securities lending activities. To a lesser extent, the increase reflected the
use of FHLB advances to fund asset growth in mortgage loans and investment
securities as part of the Company's leverage strategy.
The increase in interest income was primarily due to a $1.1 billion
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 7.43% to
6.97%. Interest income on loans increased $14.8 million due to a $363.4 million
increase in the average balance of loans partially offset by a 30 basis point
decline in the yield earned on loans from 7.94% for the fiscal 1998 period to
7.64% for the fiscal 1999 period. The decline in yield is due to the effects of
originations at lower current interest rates combined with a lower repricing
rate with respect to the Company's adjustable-rate loans repricing during the
nine months ended
25
<PAGE> 26
December 31, 1998. Income on investment securities increased $9.4 million due to
a $277.2 million increase in the average balance of investment securities which
was partially offset by a decline in the yield earned from 6.09% for the nine
months ended December 31, 1997 to 5.60% for the nine months ended December 31,
1998. Interest income on mortgage-backed and mortgage-related securities
increased $6.1 million during the first nine months of fiscal 1999 compared to
the same period in fiscal 1998 as a result of a $132.9 million increase in the
average balance of these securities which was partially offset by a 38 basis
point decline in the yield earned resulting from the general decline in market
rates of interest. Income on other interest-earning assets increased $13.9
million in the current nine months compared to the same period in the prior year
primarily due to $10.4 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, together with a $3.0 million
increase in interest on federal funds. This increase was due to the build-up of
short-term investments, as a result of increased FHLB borrowings, which funds
have yet to be re-deployed into higher yielding mortgage loans and mortgage
related securities.
Interest expense increased $12.7 million or 11.7% for the nine months
ended December 31, 1998 as compared to the nine months ended December 31, 1997,
with the increase due primarily to a $10.2 million increase in interest paid on
borrowings related to the Company's securities lending activities, which in the
prior year was reflected, net of its associated interest income, as fee income
in other non-interest income. Interest expense on borrowings also increased by
$10.0 million as a result of the increased FHLB borrowings. This increase was
partially offset by a decrease of $7.5 million in interest paid on deposits due
to a 25 basis point decline in the average rate paid on deposits to 3.96% for
the nine months ended December 31, 1998 compared to 4.21% for the nine months
ended December 31, 1997 combined with a $40.4 million decrease in the average
balance of deposits.
PROVISION FOR LOAN LOSSES.
The Company's provision for loan losses increased by $84,000 or 1.1% to
$7.8 million as compared to $7.7 million for the same period in the prior year.
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 than
single-family owner occupied residential loans.
NON-INTEREST INCOME.
For the nine months ended December 31, 1998 non-interest income increased
$1.0 million or 14.2% from $7.1 million for the nine months ended December 31,
1997 to $8.1 million for the nine months ended December 31, 1998. The increase
was primarily due to a $2.1 million increase in other non-interest income
partially offset by a $1.1 million decline in service fee income. The rise in
other non-interest income was principally due to a $2.1 million increase in
mortgage prepayment fees for the current year compared to the prior year
resulting from an acceleration in refinancings. The $1.1 million decline in
service fee income is partially attributable to the new accounting rules
effective January 1, 1998 regarding the recording of securities lending
activities. For the nine months ended December 31, 1997 income from securities
lending was recorded as non-interest income while in the nine months ended
December 31, 1998 it was included as part of net interest income. For the nine
months ended December 31, 1997 the Company recorded $0.4 million as income
relating to securities lending. Service
26
<PAGE> 27
fee income is also lower due to a $0.3 million decline in fees associated with
the sales of annuities and mutual funds during the current nine months. The
contract with a third party provider to sell these products expired in January
1998. The Company negotiated a contract with a new provider and resumed the sale
of these products late in the second quarter of fiscal 1999. The remainder of
the decline in service fee income is due to lower deposit-based fees.
NON-INTEREST EXPENSES.
Non-interest expense increased by $10.3 million, or 16.2%, to $73.8
million for the nine months ended December 31, 1998. The increase in expenses
was attributable to increases in personnel costs of $6.9 million, occupancy
costs of $1.2 million, other non-interest expenses of $1.4 million and data
processing service expenses of $0.6 million.
Compensation and employee benefits expense increased $6.9 million, or
31.1%, to $29.0 million for the nine months ended December 31, 1998 as compared
to the same period in the prior year. The increase was due to the combined
effect of $4.8 million of benefits related to the ESOP and RRP as well as $2.1
million related to staff additions and normal merit increases.
Occupancy costs increased $1.2 million to $10.6 million for the nine
months ended December 31, 1998 compared to the same period in the prior year.
These costs increased due to costs related to branch renovations and
improvements.
Data processing service expenses increased $0.6 million, or 6.5%, to $9.2
million during the nine months ended December 31, 1998 as compared to the nine
months ended December 31, 1997. The increase was primarily due to costs
associated with Year 2000 compliance issues. See "The Year 2000 Issue".
For the nine months ended December 31, 1998 advertising expense amounted
to $3.5 million as compared to $3.2 million for the nine months ended December
31, 1997. 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 increased $1.4 million for the nine months
ended December 31, 1998 as compared to the nine months ended December 31, 1997.
These expenses included items such as equipment expenses, office supplies,
postage, telephone expenses, maintenance and security, as well as certain
professional fees and expenditures associated with being a public company.
INCOME TAXES.
Income tax expense amounted to $19.3 million and $9.0 million during the
nine months ended December 31, 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 nine months ended December 31, 1998 was 36.9% compared to 30.0% for
the nine months ended December 31, 1997.
27
<PAGE> 28
REGULATORY CAPITAL REQUIREMENTS
The following table sets forth the Bank's compliance with applicable
regulatory capital requirements at December 31, 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% $206,705 12.8% $660,688 8.8% $453,975
Risk-based capital
ratios:
Tier I 4.0 128,894 20.5 660,688 16.5 531,794
Total 8.0 257,789 21.8 703,369 13.8 445,580
</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. Historically 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. However, due to
the increased demand for mortgage loans during the first nine months of fiscal
1999 and as part of the Company's recently initiated leverage strategy, the
Company has increased its FHLB advances to $726.7 million at December 31, 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 December 31, 1998, there were
outstanding commitments and unused lines of credit by the Company to originate
or acquire mortgage loans and other loans aggregating $177.4 million and $32.6
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, 1999. Certificates of
deposit scheduled to mature in one year or less at December 31, 1998, totaled
$1.4 billion. Based on historical experience, management believes that a
significant portion of maturing deposits will remain with the Company. The
Company
28
<PAGE> 29
anticipates that it will continue to have sufficient funds, together with
borrowings, to meet its current commitments.
THE YEAR 2000 ISSUE
The Year 2000 Issue ("Y2K 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.
In order to be ready for the year 2000 the Company has developed a Year
2000 Testing Assurance Plan(TM) (the "Assurance Plan") which was presented to
the Information Technology Committee of the Board of Directors in March 1998.
The Assurance Plan was developed using the guidelines outlined in the Federal
Financial Institutions Examination Council's "The Effect of 2000 on Computer
Systems". The Company assigned responsibility for the implementation of the
Assurance Plan to the Year 2000 Steering Committee which reports to the
Information Technology Committee of the Board of Directors on a quarterly basis.
The Steering Committee includes the Company's Chief Executive Officer and other
members of executive management. This Committee has engaged an independent
consultant to act as project manager of the Y2K project. The Company has
established an advisory council as well as both research and implementation
support teams, consisting of Company personnel who have relevant expertise in
the various application systems, to perform planning and testing for Y2K
compliance.
The Assurance Plan recognizes that the Company's operating, processing and
accounting systems are computer reliant and could be affected by the Y2K Issue.
The Company 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, etc.).
The Assurance Plan is divided into three phases. Phase 1: Risk
Assessment and Planning, Phase 2: Development and Testing Preparation and
Phase 3: Testing and Validation.
Phase 1: Risk Assessment and Planning - This phase identified each
application and interface, facilities and hardware utilized by the Company and
prioritized them by the level of risk (business critical, medium and low) they
impose on the operations of the Company. The Company identified 42 business
critical systems (operations that will be significantly impacted if the system
is not Year 2000 compliant), 23 medium risk systems (operations that will be
impacted mainly from a productivity perspective, but the risk to the Company can
be identified and managed) and 15 low risk systems (normal business operations
of the Company that will be minimally impacted, if at all, if the system is not
Year 2000 compliant). Substantially all of the Company's vendors of its business
critical and medium risk applications have provided written assurances that
their products and services will be Year 2000 compliant. Of the 75 combined
business critical and medium risk systems, approximately 34% are provided by the
Company's data service processor which has informed the Company that it has
completed testing of its systems and such systems are Year 2000 compliant. Based
upon initial assessment, management presently believes that with planned
modifications to existing software and hardware and planned conversions to new
software and hardware, the Company's third party vendors are taking the
appropriate steps to ensure that business critical systems will function
properly. As of December 31, 1998 Phase I was fully completed.
29
<PAGE> 30
Phase 2: Development and Testing Preparation - This phase of the Assurance
Plan is the comprehensive preparation for the actual testing and validation of
assertions made by third party providers that they are Year 2000 compliant.
During this phase, the vendors will prepare their test system environment and
the Company will define and document all test scenarios and test cases. This
phase has been nearly 100% completed.
Phase 3 - Testing and Validation - The third and final phase of the
Assurance Plan involves a comprehensive testing process by the Company that
employs both unit testing and full integration/confirmation testing. The Company
began testing business critical and medium risk applications in September 1998
and expects to achieve completion by June 1999.
The Company has received assurances that third party products and services
will be Year 2000 compliant. However, these assurances are not guarantees and
may not be enforceable. The contracts with such vendors do not include Year 2000
certification or warranties. Thus, in the event such vendors' products and/or
services are not Year 2000 compliant, the Company's recourse in the event of
such failure may be limited. If the required modifications and conversions are
not made, or are not completed on a timely basis, the Y2K Issue could have a
material impact on the operations of the Company.
The Y2K Issue also affects certain of the Company's customers,
particularly in the areas of access to funds and additional expenditures to
achieve compliance. As of April 1998, the Company had contacted all of its large
borrowers regarding such customers' awareness of the Y2K Issue. While no
assurance can be given that its customers will be Year 2000 compliant,
management believes, based on representations of such customers and reviews of
their operations, that the Company's customers are either addressing the
appropriate issues to insure compliance or that they are not faced with material
Year 2000 issues. In addition, in substantially all cases the credit extended to
such borrowers is collateralized by real estate which inherently minimizes the
Company's exposure in the event that such borrowers do experience problems or
delays becoming Year 2000 compliant.
The Company has completed a Year 2000 contingency plan for 100% of its
identified business critical and medium risk applications including contingency
plans which address operational policies and procedures in the event of data
processing, electrical power supply and/or telephone service failures associated
with the Year 2000. Such contingency plans provide documented actions to allow
the Company to maintain and/or resume normal operations in the event of the
failure of business critical or medium risk applications. Such plans identify
participants, processes and equipment that will be necessary to permit the
Company to continue operations. Such plans include providing off-line system
processing, back-up electrical and telephone systems and other methods to ensure
the Company's ability to continue to operate. Also, the Company has entered into
a contingency contract with an independent data service provider in the event
that the current data service provider (representing approximately 34% of the
business critical and medium risk applications) fails to become Year 2000
compliant by March 1999.
The costs of modifications to the existing software are being primarily
absorbed by the third party vendors. However, the Company recognizes that the
need to purchase new hardware and software. Based upon current estimates, the
Company has identified approximately $3.0 million in total costs, including
hardware, software, and other costs, for completing the Year 2000 project. Of
that amount, approximately $0.3 million and $1.1 million were expensed during
the fiscal year ended March 31, 1998 and the nine months ended December 31,
1998,
30
<PAGE> 31
respectively. The Company has budgeted $0.3 million for the remaining three
months of fiscal 1999.
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. The Bank has been examined for Year 2000 compliance by the
FDIC and New York State Banking Department and is scheduled to be examined again
in the first quarter of calendar 1999.
31
<PAGE> 32
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.
32
<PAGE> 33
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
On February 1, 1999, the Company announced that it had signed
a definitive agreement to acquire Broad National
Bancorporation ("Broad"). Pursuant to the agreement, the
Company will acquire Broad, a bank holding company
headquartered in Newark, New Jersey, in a transaction valued
at $26.50 per Broad share. Upon completion of the acquisition,
Broad's wholly owned subsidiary, Broad National Bank, will
merge into Independence Community Bank, the Company's wholly
owned subsidiary.
Under the terms of the agreement, which was approved
unanimously by both boards of directors, holders of Broad
common stock will receive cash or shares of the Company's
common stock pursuant to an election, proration and allocation
procedure subject to the total consideration being comprised
of 50% of the Company's common stock and 50% cash. The number
of shares of stock any Broad stockholder receives will be
determined based upon an exchange ratio designed to produce a
value of $26.50 per share when Independence stock has a market
value as calculated in the agreement of between $12.75 and
$17.25. To the extent that the market value of Independence
common stock during the pricing period exceeds $17.25 or is
less than $12.75, the per share value of the consideration to
be received by Broad stockholders in the merger, whether in
cash or stock, will increase or decrease, respectively. The
transaction has an aggregate value of approximately $138
million.
The transaction will be accounted for as a purchase and will
not affect the Company's ability to repurchase shares of
stock. The Company intends to repurchase in the open market
all the shares of common stock that will be issued in the
transaction. The transaction is expected to close in the third
quarter of calendar 1999 and is subject to receipt of various
regulatory approvals, approval of Broad's stockholders and
certain other conditions.
The agreement provides for the payment of a termination fee
payable to the Company under certain circumstances. The
members of the Board of Directors and certain executive
officers of Broad, have agreed to vote their shares in favor
of the merger.
The Company filed Form 8-K on February 9, 1999, reporting the
execution of the Agreement. Reference is made to Item 6
hereof.
33
<PAGE> 34
Part II.....(continued)
Item 6 Exhibits and Reports on Form 8-K
a) Not applicable
b) One Form 8-K report was filed during the quarter and an
additional one was filed on February 9, 1999.
<TABLE>
<CAPTION>
Item Date Description
---- ---- -----------
<S> <C> <C> <C>
5 12/17/98 Reported commencement of
Company's first stock
repurchase program.
5 2/1/99 Reported Company's entering
into agreement and plan of
merger with Broad National
Bancorporation.
</TABLE>
34
<PAGE> 35
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 10, 1999 By:/s/ Charles J. Hamm
------------------- ----------------------------------
Charles J. Hamm
Chairman, President and
Chief Executive Officer
Date: February 10, 1999 By:/s/ John B. Zurell
------------------ ----------------------------------
John B. Zurell
Executive Vice President and
Chief Financial Officer
35
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 164,658
<INT-BEARING-DEPOSITS> 18,547
<FED-FUNDS-SOLD> 96,265
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<DEPOSITS> 3,412,226
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<LONG-TERM> 727,797
0
0
<COMMON> 760
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<INTEREST-OTHER> 20,784
<INTEREST-TOTAL> 247,047
<INTEREST-DEPOSIT> 100,274
<INTEREST-EXPENSE> 121,454
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<EXPENSE-OTHER> 73,786
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<INCOME-PRE-EXTRAORDINARY> 52,144
<EXTRAORDINARY> 0
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<EPS-PRIMARY> .47
<EPS-DILUTED> .47
<YIELD-ACTUAL> 6.91
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<ALLOWANCE-CLOSE> 44,140
<ALLOWANCE-DOMESTIC> 44,140
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
