<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number 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 area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes 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 August 9, 1999,
the registrant had 68,030,486 shares of common stock ($.01 par value per share)
outstanding.
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INDEPENDENCE COMMUNITY BANK CORP.
<TABLE>
<CAPTION>
Table of Contents PAGE
- - -------------------------------------------------------------- ----------
<S> <C>
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Condition 3
as of June 30, 1999 (unaudited)
and March 31, 1999
Consolidated Statements of Income for 4
the three months ended
June 30, 1999 and 1998 (unaudited)
Consolidated Statements of Changes in 5
Stockholders' Equity for the three months
ended June 30, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows 6
for the three months ended
June 30, 1999 and 1998(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 28
About Market Risk
Part II Other Information
Item 1 Legal Proceedings 29
Item 2 Changes in Securities and Use of Proceeds 29
Item 3 Defaults upon Senior Securities 29
Item 4 Submission of Matters to a Vote of 29
Security Holders
Item 5 Other Information 29
Item 6 Exhibits and Reports on Form 8-K 29
Signatures 30
</TABLE>
2
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INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 191,404 $ 70,811
Commercial paper 61,314 37,290
Federal funds sold 107,600 171,784
----------- -----------
Total cash and cash equivalents 360,318 279,885
----------- -----------
Securities available-for-sale:
Investment securities 260,317 331,795
Mortgage-backed and mortgage-related securities 857,425 1,189,833
----------- -----------
Total securities available for sale 1,117,742 1,521,628
----------- -----------
Mortgage loans on real estate 3,154,405 2,926,978
Other loans 617,524 579,503
----------- -----------
Total loans 3,771,929 3,506,481
Less: Allowance for possible loan losses 49,423 46,823
----------- -----------
Total loans, net 3,722,506 3,459,658
----------- -----------
Premises, furniture and equipment, net 68,482 68,595
Accrued interest receivable 26,166 30,575
Intangible assets, net 45,089 47,244
Other assets 160,176 129,393
----------- -----------
Total assets $ 5,500,479 $ 5,536,978
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 3,437,162 $ 3,447,364
Borrowings 1,118,279 1,118,364
Escrow and other deposits 46,053 61,003
Accrued expenses and other liabilities 127,210 85,285
----------- -----------
Total liabilities 4,728,704 4,712,016
----------- -----------
Stockholders' equity
Common stock: $.01 par value: 125,000,000
shares authorized, 76,043,750 shares issued;
64,554,908 shares and 67,873,876 shares
outstanding at June 30, 1999 and
March 31, 1999, respectively 760 760
Additional paid-in-capital 738,624 739,090
Treasury stock at cost: 11,488,842 shares
and 8,169,874 shares at June 30, 1999 and
March 31, 1999, respectively (170,738) (125,993)
Unallocated common stock held by ESOP (91,457) (92,693)
Unearned common stock held by RRP (32,467) (33,918)
Retained earnings-substantially restricted 346,589 340,019
Accumulated other comprehensive income:
Net unrealized loss on securities available-
for-sale, net of tax (19,536) (2,303)
----------- -----------
Total stockholders' equity 771,775 824,962
----------- -----------
Total liabilities and stockholders' equity $ 5,500,479 $ 5,536,978
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
INTEREST INCOME:
Mortgage loans on real estate $ 55,836 $ 45,439
Other loans 10,529 9,641
Investment securities 3,645 12,542
Mortgage-backed and mortgage-related
securities 17,495 2,153
Other 4,064 9,747
-------- --------
Total interest income 91,569 79,522
-------- --------
INTEREST EXPENSE:
Deposits 32,370 33,715
Borrowings 15,062 4,525
-------- --------
Total interest expense 47,432 38,240
-------- --------
Net interest income 44,137 41,282
Provision for loan losses 2,629 2,332
-------- --------
Net interest income after
provision for loan losses 41,508 38,950
NON-INTEREST INCOME:
Net (loss) gain on sales of loans
and securities (2,169) 18
Service fees 2,188 1,264
Other 1,870 1,488
-------- --------
Total non-interest income 1,889 2,770
-------- --------
NON-INTEREST EXPENSE:
Compensation and employee benefits 10,358 9,285
Occupancy costs 3,402 3,400
Data processing fees 1,703 2,963
Advertising 1,415 1,129
FDIC insurance premiums 282 299
Amortization of intangible assets 2,155 2,164
Other 5,090 4,141
-------- --------
Total non-interest expense 24,405 23,381
-------- --------
Income before provision for income taxes 18,992 18,339
Provision for income taxes 6,994 7,430
-------- --------
Net income $ 11,998 $ 10,909
======== ========
Basic earnings per share $ 0.21 $ 0.15
======== ========
Diluted earnings per share $ 0.21 $ 0.15
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(In Thousands, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional Unallocated Unearned
Common Paid in Treasury Common Stock Common Stock
Stock Capital Stock Held by ESOP Held by RRP
--------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance-March 31,1999 $ 760 $ 739,090 $(125,993) $ (92,693) $ (33,918)
Comprehensive income:
Net income for the three months ended
June 30, 1999 -- -- -- -- --
Other comprehensive income, net of tax benefit
of $15.1 million
Change in net unrealized losses on
securities available-for-sale, net of tax -- -- -- -- --
Less: reclassification adjustment of
net losses realized in net income, net of tax -- -- -- -- --
--------- --------- --------- --------- ---------
Comprehensive income -- -- -- -- --
Repurchase of common stock (3,318,968 shares) -- -- (44,745) -- --
Dividends declared -- -- -- -- --
ESOP shares committed to be released -- (308) -- 1,236 --
Amortization of earned portion of Recognition
and Retention Plan -- (158) -- -- 1,451
--------- --------- --------- --------- ---------
Balance-June 30, 1999 $ 760 $ 738,624 $(170,738) $ (91,457) $ (32,467)
========= ========= ========= ========= =========
Balance-March 31, 1998 $ 760 $ 741,277 $ -- $ (97,636) $ --
Comprehensive income:
Net income for the three months ended
June 30, 1998 -- -- -- -- --
Other comprehensive income, net of tax of $256
Change in net unrealized gains on securities
available-for-sale, net of reclassification
adjustment of $0 -- -- -- -- --
--------- --------- --------- --------- ---------
Comprehensive income -- -- -- -- --
ESOP shares committed to be released -- (9) -- 1,236 --
Other conversion related costs -- (317) -- -- --
--------- --------- --------- --------- ---------
Balance-June 30, 1998 $ 760 $ 740,951 $ -- $ (96,400) $ --
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive
Earnings Income Total
--------- ------------- ---------
<S> <C> <C> <C>
Balance-March 31,1999 $ 340,019 $ (2,303) $ 824,962
Comprehensive income:
Net income for the three months ended
June 30, 1999 11,998 -- 11,998
Other comprehensive income, net of tax benefit
of $15.1 million
Change in net unrealized losses on
securities available-for-sale, net of tax -- (14,485) (14,485)
Less: reclassification adjustment of
net losses realized in net income, net of tax -- (2,748) (2,748)
--------- --------- ---------
Comprehensive income 11,998 (17,233) (5,235)
Repurchase of common stock (3,318,968 shares) -- -- (44,745)
Dividends declared (5,428) -- (5,428)
ESOP shares committed to be released -- -- 928
Amortization of earned portion of Recognition
and Retention Plan -- -- 1,293
--------- --------- ---------
Balance-June 30, 1999 $ 346,589 $ (19,536) $ 771,775
========= ========= =========
Balance-March 31, 1998 $ 298,876 $ 5,847 $ 949,124
Comprehensive income:
Net income for the three months ended
June 30, 1998 10,909 -- 10,909
Other comprehensive income, net of tax of $256
Change in net unrealized gains on securities
available-for-sale, net of reclassification
adjustment of $0 -- (324) (324)
--------- --------- ---------
Comprehensive income 10,909 (324) 10,585
ESOP shares committed to be released -- -- 1,227
Other conversion related costs -- -- (317)
--------- --------- ---------
Balance-June 30, 1998 $ 309,785 $ 5,523 $ 960,619
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,998 $ 10,909
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,629 2,332
Net loss (gain) on sale of loans and securities 2,169 (18)
Amortization of deferred income and premiums (543) (1,666)
Amortization of intangibles 2,155 2,164
Depreciation and amortization 2,001 1,787
Deferred income tax benefit (1,851) (2,720)
Amortization of unearned compensation of
ESOP and RRP 2,221 --
Decrease (increase) in accrued interest receivable 4,409 (1,290)
(Increase) decrease in accounts receivable-securities
transactions (3,460) 13,906
Increase (decrease)in accrued expenses and other
liabilities 41,925 (6,298)
Other, net (11,055) 12,263
--------- ---------
Net cash provided by operating activities 52,598 31,369
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Loan originations and purchases (462,662) (254,608)
Principal payments on loans 195,135 120,715
Proceeds from sale of loans 1,274 14,263
Proceeds from sale of securities available-for-sale 376,967 158,410
Proceeds from maturities of securities
available-for-sale 65,000 555,158
Principal collected on securities
available-for-sale 74,288 19,432
Purchases of securities available-for-sale (144,869) (527,662)
Net additions to premises, furniture and equipment (1,888) (2,889)
--------- ---------
Net cash provided by investing activities 103,245 82,819
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits 28,319 (92,632)
Net decrease in time deposits (38,521) (20,804)
Net decrease in borrowings (85) (318,374)
Net decrease in escrow and other deposits (14,950) (10,227)
Repurchase of common stock (44,745) --
Dividends paid (5,428) --
--------- ---------
Net cash used in financing activities (75,410) (442,037)
--------- ---------
Net increase (decrease) in cash and cash equivalents 80,433 (327,849)
Cash and cash equivalents at beginning of period 279,885 857,251
--------- ---------
Cash and cash equivalents at end of period $ 360,318 $ 529,402
========= =========
SUPPLEMENTAL INFORMATION
Income taxes paid $ 1,255 $ 10,302
========= =========
Interest paid $ 44,967 $ 38,207
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED 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 reorganized 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 to convert
the Mutual Holding Company to the stock form of organization and simultaneously
merge with and into the Bank and all of the outstanding shares of Bank common
stock held by the Mutual Holding Company would be cancelled.
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"). 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
loaned $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.
As part of the Plan of Conversion, the Company formed the Independence
Community Foundation (the "Foundation") and donated 5,632,870 shares of common
stock of the Company valued at the time of its contribution at $56.3 million.
The Foundation was established in order to further the Company's and the Bank's
commitment to the communities that they serve.
Additionally, the Bank established, 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 fourth consecutive
quarterly cash dividend on June 25, 1999. The dividend amounted to $0.05 per
share of common stock and is payable on August 24, 1999 to shareholders of
record on July 29, 1999.
On May 27, 1999 the Company announced that its Board of Directors
authorized a fourth stock purchase plan for up to five percent of common shares
outstanding or 3,250,870 shares. As of June 30, 1999, 11,488,842 shares had been
purchased at a cost of $170.7 million pursuant to the Company's four publicly
announced repurchase programs.
The purchased shares will be held as treasury stock and will be
utilized to partially fund acquisitions (see Note 2 - Acquisitions) as well the
Company's benefit plans, in particular, the 1998 Stock Option Plan, ("Option
Plan") and for general corporate purposes.
7
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2. ACQUISITIONS
The Company successfully completed its acquisition of Broad National
Bancorporation ("Broad") and the merger of Broad's wholly owned subsidiary,
Broad National Bank ("Broad National") with and into the Bank, all effective as
of July 31, 1999.
Under the terms of the Agreement and Plan of Merger between
Independence and Broad dated February 1, 1999 (the "Agreement"), the merger
consideration was to consist of approximately 50% Independence common stock and
approximately 50% cash. As a result of the recently completed election
procedures and in accordance with the terms of a formula set forth in the
Agreement, each Broad stockholder who submitted a valid election for stock
consideration will receive 1.9859 shares of Independence common stock for each
share of Broad common stock, plus cash in lieu of any fractional shares, and
each Broad stockholder who submitted a valid election for cash consideration
will receive $26.50 per share of Broad common stock except that Broad
stockholders who elected to receive cash as any portion of their consideration
for their Broad shares will receive a portion of such consideration in the form
of Independence common stock (the "Consideration Adjustment") in accordance with
the terms of the Agreement. To the extent that certain Broad stockholders may
have elected to receive some combination of stock and cash consideration in
exchange for their shares of Broad common stock, such individuals will receive
the entire portion of their stock election in the form of 1.9859 shares of
Independence common stock for each share of Broad common stock, plus cash in
lieu of any fractional shares, and the cash portion of their election will be
subject to the Consideration Adjustment described above. The remaining shares of
Broad common stock for which a valid election was not submitted have been
converted into the right to receive 1.9859 shares of Independence common stock
for each share of Broad common stock, plus cash in lieu of any fractional
shares. The Broad transaction has an aggregate value of approximately $132
million assuming an acquisition value of $26.50 per share of Broad common stock.
The acquisition is being accounted for as a purchase. As a result of
the acquisition, the Company has assets in excess of $6.1 billion, deposits of
approximately $4.0 billion and operates 50 banking offices located in the
greater New York Metropolitan area, which includes the five counties of New York
City and Nassau County that are served by the Bank and the Northern New Jersey
counties of Essex, Union, Bergen, Hudson and Middlesex which were formerly
served by Broad National.
On April 13, 1999, the Company announced that it had signed a
definitive agreement to acquire Statewide Financial Corp.("Statewide"). Pursuant
to the agreement, the Company will acquire Statewide, in a transaction valued at
the time of execution of the definitive agreement at $25.25 per Statewide share.
Upon completion of the acquisition, Statewide's wholly owned subsidiary,
Statewide Savings Bank, S.L.A., a New Jersey-chartered savings and loan
association which operates 16 branches in Bergen, Hudson and Union Counties,
will merge with and into the Bank. Based upon Statewide's public filings, at
March 31, 1999, Statewide had assets totaling $744.2 million, deposits totaling
$441.4 million and stockholders' equity of $58.9 million.
Under the terms of the Statewide agreement, which was approved
unanimously by both boards of directors, holders of Statewide 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 approximately 50% paid in the Company's common stock and 50% paid
in cash. The number of shares of the Company's common stock that any Statewide
stockholder receives will be determined based upon an exchange ratio based on
the average closing price of the Company's common stock during the pricing
period as
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calculated pursuant to the terms of the agreement. The Statewide transaction had
an aggregate value as of the date of execution of approximately $108 million.
The Statewide 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 of the shares of common stock that
will be issued in the transaction. The transaction currently is expected to
close by January 31, 2000 and is subject to receipt of various regulatory
approvals, approval by Statewide's stockholders and certain other conditions.
Additional information concerning the agreement and the proposed acquisition is
contained in the Company's Current Report on Form 8-K filed with the SEC on
April 20, 1999.
Concurrent with the execution of the agreement, Statewide granted an
option to the Company to purchase up to 19.9% of Statewide's common shares then
outstanding under certain circumstances.
3. 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 three months
ended June 30, 1999 are not necessarily indicative of the results to be expected
for the year ending March 31, 2000. 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, 1999.
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 50 banking offices located in the greater
New York Metropolitan area, which includes the five counties of New York City
and Nassau County that are served by the Bank and the Northern New Jersey
counties of Essex, Union, Bergen, Hudson and Middlesex which were formerly
served by Broad National. 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.
4. 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
9
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(the "RRP") shares are not considered to be outstanding for the calculation of
basic EPS. However, a portion of such shares are considered in the calculation
of diluted EPS as common stock equivalents of basic EPS. Basic and diluted
weighted-average common shares outstanding were 58,006,504 shares for the
quarter ended June 30, 1999 compared to 70,482,065 shares for the quarter ended
June 30, 1998.
5. 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. Dividends paid by the Company on shares owned by the
ESOP are also utilized to repay the debt. 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 original principal and interest payments to be
made. ESOP participants will become 100% vested in the ESOP after three years of
service. Compensation expense related to the 70,411 shares committed to be
released during the first quarter of fiscal 2000 was $0.9 million. At June 30,
1999, 281,644 shares were allocated to participant accounts and 70,411 shares
were committed for release.
Recognition and Retention Plan
The 1998 Recognition and Retention Plan ("RRP") was implemented in
September 1998. The RRP may grant up to 4% of the common stock sold in the
Conversion, or 2,816,435 shares. The RRP provides that awards may be designated
as performance share awards, subject to the achievement of performance goals, or
non-performance share awards which are subject to time vesting requirements.
Certain key executive officers were granted performance based-shares. These
shares become payable only upon the achievement of certain annually-defined
corporate performance targets. During fiscal 1999, the RRP purchased all
2,816,435 shares in the open market. On September 25, 1998, (the "anniversary
date"), the Board of Directors issued grants covering 2,188,517 shares of stock
of which 844,9310 were deemed performance based. All stock awards are payable
over a five-year period at a rate of 20% per year, beginning one year from the
anniversary date. Subject to certain exceptions, awards become 100% vested upon
termination of employment due to death, disability or retirement. Compensation
expense is recognized over the vesting period at the fair value of the common
stock on the date of grant for non-performance share awards. The expense related
to performance share awards is recognized over the vesting period at the fair
value on the measurement date. The Company recorded compensation expense of $1.3
million related to the RRP for the three months ended June 30, 1999.
Option Plan
The Option Plan was implemented in September 1998. 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 covering 6,101,608 shares of common stock vesting over a five-year
period at a rate of 20% per year, beginning one year from the anniversary date.
The option exercise 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 is 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
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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 three months ended June 30, 1999 or its statement of condition at June 30,
1999.
6. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130 "Reporting Comprehensive
Income" in the first quarter of fiscal 1999. Comprehensive income includes net
income and all other changes in equity during a period except those resulting
from investments by owners and distribution to owners. Other comprehensive
income includes revenues, expenses, gains and losses that under generally
accepted accounting principles are included in comprehensive income but excluded
from net income. Comprehensive income and accumulated other comprehensive income
are reported net of related income taxes. Accumulated other comprehensive income
consists solely of unrealized gains and losses on available for sale securities.
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7. SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of securities
available-for-sale at June 30, 1999 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 $ 169,646 $ 31 $ (6,792) $ 162,885
Municipals 699 -- -- 699
Corporate 78 -- -- 78
---------- ---------- ---------- ----------
Total debt securities 170,423 31 (6,792) 163,662
---------- ---------- ---------- ----------
Equity securities:
Preferred 70,000 -- -- 70,000
Common 24,482 3,506 (1,333) 26,655
---------- ---------- ---------- ----------
Total equity securities 94,482 3,506 (1,333) 96,655
---------- ---------- ---------- ----------
Total investment securities 264,905 3,537 (8,125) 260,317
---------- ---------- ---------- ----------
Mortgage-backed and
mortgage-related securities:
FNMA pass through certificates 3,550 55 (24) 3,581
GNMA pass through certificates 42,643 1,424 (24) 44,043
FHLMC pass through
certificates 6,200 83 (46) 6,237
Collateralized mortgage
obligation bonds 835,047 41 (31,524) 803,564
---------- ---------- ---------- ----------
Total mortgage-backed and
mortgage-related securities 887,440 1,603 (31,618) 857,425
---------- ---------- ---------- ----------
Total securities available-
for-sale $1,152,345 $ 5,140 $ (39,743) $1,117,742
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated fair value of securities available-for-sale at
March 31, 1999 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 $ 268,524 $ 249 $ (4,550) $ 264,223
Municipals 699 -- -- 699
Corporate 78 -- -- 78
---------- ---------- ---------- ----------
Total debt securities 269,301 249 (4,550) 265,000
---------- ---------- ---------- ----------
Equity securities:
Preferred 15,000 -- -- 15,000
Common 47,457 6,995 (2,657) 51,795
---------- ---------- ---------- ----------
Total equity securities 62,457 6,995 (2,657) 66,795
---------- ---------- ---------- ----------
Total investment securities 331,758 7,244 (7,207) 331,795
---------- ---------- ---------- ----------
Mortgage-backed and
mortgage-related securities:
FNMA pass through certificates 3,830 68 (23) 3,875
GNMA pass through certificates 46,981 1,991 (16) 48,956
FHLMC pass through
certificates 6,756 102 (38) 6,820
Collateralized mortgage
obligation bonds 1,136,655 1,188 (7,661) 1,130,182
---------- ---------- ---------- ----------
Total mortgage-backed and
mortgage related securities 1,194,222 3,349 (7,738) 1,189,833
---------- ---------- ---------- ----------
Total securities available-
for-sale $1,525,980 $ 10,593 $ (14,945) $1,521,628
========== ========== ========== ==========
</TABLE>
12
<PAGE> 13
8. LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
the Company's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, 1999 AT MARCH 31, 1999
----------------------------------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
----------- ------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $ 482,105 12.8% $ 491,523 14.0%
Multi-family residential 2,404,826 63.7 2,195,879 62.6
Commercial and other
real estate 278,662 7.4 250,105 7.1
----------- ----- ----------- -----
Total principal balance
mortgage loans 3,165,593 83.9 2,937,507 83.7
Less net deferred fees (11,188) (0.3) (10,529) (0.3)
----------- ----- ----------- -----
Total mortgage loans 3,154,405 83.6 2,926,978 83.4
----------- -----------
Other loans:
Cooperative apartment loans 487,993 12.9 458,165 13.1
Student loans 39,601 1.1 41,633 1.2
Home equity loans and lines 12,176 0.3 12,295 0.4
Commercial business loans 51,307 1.4 39,362 1.1
Consumer and other loans 26,955 0.7 28,382 0.8
----------- ----- ----------- -----
Total principal balance
other loans 618,032 16.4 579,837 16.6
Less unearned discounts and
deferred fees (508) 0.0 (334) 0.0
----------- ----- ----------- -----
Total other loans 617,524 16.4 579,503 16.6
Total loans receivable 3,771,929 100.0% 3,506,481 100.0%
----------- ===== ----------- =====
Less allowance for loan losses (49,423) (46,823)
----------- -----------
Loans receivable, net $ 3,722,506 $ 3,459,658
=========== ===========
</TABLE>
13
<PAGE> 14
9. 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 JUNE 30, 1999 AT MARCH 31, 1999
---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans
Mortgage loans:
Single-family residential $ 1,877 $ 2,809
Multi-family residential 958 830
Commercial and other 2,820 2,687
Other loans:
Cooperative apartment loans 400 381
Consumer and commercial
business loans(1) 1,697 400
------- -------
Total non-accrual loans 7,752 7,107
------- -------
Loans past due 90 days or more as to:
Interest and accruing 1,248 1,197
Principal and accruing(2) 26,653 30,805
------- -------
Total past due loans and
accruing 27,901 32,002
------- -------
Total non-performing loans 35,653 39,109
------- -------
Other real estate owned, net(3) 264 273
------- -------
Total non-performing assets $35,917 $39,382
======= =======
Allowance for loan losses as a
percent of total loans 1.31% 1.34%
Allowance for loan losses as a
percent of non-performing loans 138.62 119.72
Non-performing loans as a percent of
total loans 0.95 1.12
Non-performing assets as a percent
of total assets 0.65 0.71
</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.
14
<PAGE> 15
10. 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>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allowance at beginning of period $ 46,823 $ 36,347
-------- --------
Provision:
Mortgage loans(1) 2,775 1,800
Consumer and commercial business loans (146) 532
-------- --------
Total provisions 2,629 2,332
-------- --------
Charge-offs:
Mortgage loans(1) 2 25
Consumer and commercial business loans(2) 48 59
-------- --------
Total charge-offs 50 84
-------- --------
Recoveries:
Mortgage loans(1) -- 237
Consumer and commercial business loans (2) 21 38
-------- --------
Total recoveries 21 275
-------- --------
Net (charge-offs) recoveries (29) 191
-------- --------
Allowance at end of period $ 49,423 $ 38,870
======== ========
Allowance for possible loan
losses as a percent of total loans 1.31% 1.34%
Allowance for possible loan
losses as a percent of total
non-performing loans(3) 138.62% 137.02%
</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.
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 investment 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, amortization of goodwill and income tax expense.
The Bank is a community-oriented 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 and stability by increasing the
amount and stability of its net interest income and non-interest income and by
maintaining a high level of asset quality. In pursuit of these goals, the
Company has adopted a business strategy emphasizing controlled growth,
multi-family residential lending, commercial business lending, retail deposit
products and customer service, while maintaining asset quality and stable
liquidity.
Certain information in this Form 10-Q may constitute forward-looking
information that involves risks and uncertainties that could cause actual
results to differ materially from those estimated. Persons are cautioned that
such forward-looking statements are not guarantees of future performance and are
subject to various factors which could cause actual results to differ materially
from those estimated. These factors include, but are not limited to, changes in
general economic and market conditions and the development of an interest rate
environment that adversely affects the interest rate spread or other income from
the Company's and the Bank's investments and operations.
CHANGES IN FINANCIAL CONDITION
GENERAL.
Total assets at June 30, 1999 were $5.50 billion, a decrease of $36.5
million, from $5.54 billion at March 31, 1999. The decrease resulted primarily
from the Company's purchase of its stock in the open market. During the quarter
ended June 30, 1999, cash and cash equivalents increased $80.4 million and the
total loan portfolio increased $262.8 million while its securities
available-for-sale portfolio decreased $403.9 million during the same period as
described below.
CASH, CERTIFICATES OF DEPOSIT, COMMERCIAL PAPER AND FEDERAL FUNDS SOLD
(COLLECTIVELY "CASH AND CASH EQUIVALENTS").
Cash and cash equivalents increased from $279.9 million at March 31,
1999 to $360.3 million at June 30, 1999. The $80.4 million increase was
principally due increased overnight deposits as a result of security sales in
anticipation of funding the Broad acquisition as well as funding mortgage loans.
16
<PAGE> 17
SECURITIES AVAILABLE-FOR-SALE.
The aggregate securities available-for-sale portfolio (which includes
investment securities and mortgage-backed and mortgage-related securities)
decreased $403.9 million from $1.52 billion at March 31, 1999 to $1.18 billion
at June 30, 1999. As of June 30, 1999 and March 31, 1999, the Company's
investment securities totaled $260.3 million and $331.8 million, respectively,
all of which were classified as available for sale. Total securities were
reduced during the three months in order to fund mortgage originations,
consisting of primarily multi-family properties, as well as the anticipated
closure of the Broad acquisition.
The Company's mortgage-backed and mortgage-related securities, a
portion of which at June 30, 1999 consisted of collateralized mortgage
obligations secured by mortgage-backed securities issued by Fannie Mae ("FNMA")
or Freddie Mac ("FHLMC"), decreased from $1.19 billion at March 31, 1999 to
$857.4 million (all of which were classified as available for sale) at June 30,
1999.
At June 30, 1999, the Company had a $19.5 million net unrealized loss
on available-for-sale investment and mortgage-backed and mortgage-related
securities.
LOANS, NET.
Loans, net increased by $262.8 million or 7.6% to $3.72 billion at June
30, 1999 from $3.46 billion at March 31, 1999. During the first three months of
fiscal 2000 the Company originated approximately $433.8 million of mortgage
loans, compared to $214.2 million in the corresponding period of last year.
These mortgage loans, consisting primarily of multi-family residential loans,
were originated primarily for retention in its loan portfolio. The increased
level of 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 $208.9 million, or 9.5%, in multi-family
loans from $2.20 billion at March 31, 1999 to $2.40 billion at June 30, 1999.
These loans currently comprise 63.7% of the loan portfolio compared to 62.6% at
March 31, 1999.
NON-PERFORMING ASSETS.
The overall quality of the Company's assets remained strong with
non-performing assets as a percentage of total assets decreasing to 65 basis
points (0.65%) at June 30, 1999 compared to 71 basis points (0.71%) at March 31,
1999. At June 30, 1999, the Company's non-performing assets consisted of $7.8
million of non-accrual loans, $1.2 million of loans past due 90 days or more as
to interest and accruing, $26.7 million of loans past due 90 days or more as to
principal and accruing ($21.0 million of which were multi-family loans and $5.2
million of which were commercial and other real estate loans) and $264,000 of
other real estate acquired through foreclosure or deed-in-lieu thereof.
Non-performing assets decreased by $3.5 million to $35.9 million at June 30,
1999 from $39.4 million at March 31, 1999. This decrease was primarily due to a
decrease 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 $49.4 million at
June 30, 1999 as compared to $46.8 million at March 31, 1999. At June 30, 1999,
the
17
<PAGE> 18
Company's allowance amounted to 1.31% of total loans and 138.6% of total
non-performing loans compared to 1.34% and 119.7%, at March 31, 1999,
respectively. It is management's policy to maintain an allowance for loan losses
based upon total loans outstanding, the volume of loan originations, the type,
size and geographic concentration of loans held by the Company, general economic
conditions, the level of past due and non-accrual loans and the number of loans
requiring heightened management oversight.
The Company's allowance for loan losses increased $2.6 million from
March 31, 1999 to June 30, 1999 due to provisions of $2.6 million, and net
charge-offs 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 June
30, 1999, intangibles totaled $45.1 million and consisted primarily of $19.5
million related to the acquisition of Bay Ridge and $25.6 million primarily
related to the Branch Acquisitions. The Company's intangible assets decreased by
$2.1 million to $45.1 million at June 30, 1999 from $47.2 million at March 31,
1999 as a result of the amortization of the intangible assets during the three
months ended June 30, 1999. Amortization of such intangibles will continue to
reduce net income until such intangible assets are fully amortized. The recently
completed Broad transaction as well as the pending Statewide transaction will
increase intangible assets and the related amortization of intangibles will
directly impact fiscal 2000 earnings.
DEPOSITS.
Deposits decreased $10.2 million or 0.3% to $3.44 billion at June 30,
1999. The decrease was due to deposit outflows totaling $42.6 million which was
partially offset by interest credited of $32.4 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.
EQUITY.
At June 30, 1999, total stockholders' equity totaled $771.8 million,
compared to $825.0 million at March 31, 1999. This $53.2 million decrease was
primarily due to a $44.7 million reduction in capital due to the purchase of
shares in connection with the Company's stock purchase program, a $5.4 million
decrease for dividends declared and a net $17.2 million increase in the
unrealized loss on securities available for sale. Such reductions were partially
offset by net income of $12.0 million, amortization of earned portion of RRP of
$1.3 million and $0.9 million related to ESOP shares committed to be released
for the first three months of fiscal 2000. Tangible book value per share was
$11.26 and the tangible equity to assets ratio was 13.32% at June 30, 1999.
18
<PAGE> 19
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID.
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) the interest rate spread; and (v)
the net interest margin. Information is based on average daily balances during
the indicated periods and is annualized where appropriate.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998
-------------------------------------------- -------------------------------------------
(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 $3,014,546 $ 55,836 7.41% $2,323,455 $ 45,439 7.82%
Other loans:
Cooperative apartment
loans 465,082 8,071 6.94 385,975 6,985 7.24
Consumer and commercial
business loans(2) 121,670 2,458 8.08 121,185 2,656 8.77
---------- ---------- ---------- ----------
Total loans 3,601,298 66,365 7.37 2,830,615 55,080 7.78
Mortgage-backed and mortgage-
related securities 1,117,652 17,495 6.26 118,249 2,153 7.28
Investment securities 277,060 3,645 5.26 951,422 12,542 5.27
Other interest-earning
assets(3) 340,127 4,064 4.78 671,221 9,747 5.81
---------- ---------- ---------- ----------
Total interest-earning
assets 5,336,137 91,569 6.86 4,571,507 79,522 6.96
---------- ---- ---------- ----
Non-interest-earning
assets 202,848 208,276
---------- ----------
Total assets $5,538,985 $4,779,783
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 733,292 $ 3,615 1.98 $ 524,015 $ 3,469 2.66
Savings deposits 974,367 5,739 2.36 989,204 6,644 2.69
Certificates of deposit 1,794,067 23,016 5.15 1,759,776 23,602 5.38
---------- ---------- ---------- ----------
Total deposits 3,501,726 32,370 3.71 3,272,995 33,715 4.13
---------- ---------- ---------- ----------
Total borrowings 1,117,699 15,062 5.41 324,404 4,525 5.59
---------- ---------- ---------- ----------
Total interest-bearing
liabilities 4,619,425 47,432 4.12 3,597,399 38,240 4.26
---------- ---- ---------- ----
Non-interest-bearing
liabilities 113,743 229,887
---------- ----------
Total liabilities 4,733,168 3,827,286
Total equity 805,817 952,497
---------- ----------
Total liabilities and
equity $5,538,985 $4,779,783
========== ==========
Net interest-earning
assets $ 716,712 $ 974,108
========== ==========
Net interest income/interest
rate spread $ 44,137 2.74% $ 41,282 2.70%
========== ==== ========== ====
Net interest margin 3.30% 3.60%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.16x 1.27x
==== ====
</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.
19
<PAGE> 20
RATE/VOLUME ANALYSIS.
The following table sets forth the effects of changing rates and
volumes on net interest income of the Company. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate) and (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume).
The combined effect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
--------------------------------------------
Increase
(Decrease) due to Total Net
--------------------------- Increase
Rate Volume (Decrease)
-------- -------- ---------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $ (3,095) $ 13,492 $ 10,397
Co-op apartment loans (349) 1,435 1,086
Consumer and commercial
business loans(1) (209) 11 (198)
-------- -------- --------
Total loans receivable (3,653) 14,938 11,285
Mortgage-backed securities (2,851) 18,193 15,342
Investment securities (6) (8,891) (8,897)
Other interest-earning assets (876) (4,807) (5,683)
-------- -------- --------
Total net change in income on
interest-earning assets (7,386) 19,433 12,047
Interest-bearing liabilities:
Deposits:
Demand deposits (39,791) 39,937 146
Savings deposits (805) (100) (905)
Certificates of deposit (19,739) 19,153 (586)
-------- -------- --------
Total deposits (60,335) 58,990 (1,345)
Borrowings (30,257) 40,794 10,537
-------- -------- --------
Total net change in expense on
interest-bearing liabilities (90,592) 99,784 9,192
-------- -------- --------
Net change in net interest
income $ 83,206 $(80,351) $ 2,855
======== ======== ========
</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.
20
<PAGE> 21
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND
1998
GENERAL.
The Company reported a 40% increase in diluted earnings per share to
$0.21 per diluted share for the quarter ended June 30, 1999 compared to $0.15
per diluted share for the quarter ended June 30, 1998. Net income increased
10.0% to $12.0 million for the quarter ended June 30, 1999 compared to $10.9
million for the quarter ended June 30, 1998.
The Company also reported a 22% increase in net income from core
operations to $13.3 million for the quarter ended June 30, 1999 versus $10.9
million in the prior year quarter. Earnings per diluted share from core
operations was $0.23 for the current year quarter, an increase of 53% from the
same period last year. Income from core operations is defined as net income
adjusted for gains or losses on the sale of loans and securities, net of tax.
Cash earnings (which include net income adjusted for the amortization
of intangibles and certain charges related to the Company's stock related
benefit plans, net of tax) for the first quarter of fiscal year 2000 increased
12.7% to $15.6 million and increased 35% per diluted share to $0.27 compared to
the same period in the prior fiscal year. Management believes the reporting of
cash earnings along with traditional generally accepted accounting principles
earnings provides a more complete picture of the Company's operating
performance.
NET INTEREST INCOME.
Net interest income increased by $2.8 million or 6.9% to $44.1 million
for the three months ended June 30, 1999 as compared to $41.3 million for the
period ended June 30, 1998. The increase was due to a $12.0 million increase in
interest income offset in part by a $9.2 million increase in interest expense.
The growth in net interest income reflects primarily the $764.6 million increase
in average interest-earning assets during the three months ended June 30, 1999
compared to the three months ended June 30, 1998. 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 Company's net interest margin was 3.30% and 3.60% for the three
months ended June 30, 1999 and 1998, respectively. The 30 basis point decrease
in net interest margin for the 1999 period is primarily the result of the
Company's leveraging strategy during fiscal 1999 under which the increased
investment in mortgage-backed and mortgage-related securities was funded with
Federal Home Loan Bank advances which bear interest generally at higher rates
than deposits. Also contributing to the interest margin compression were lower
yields on loan originations combined with the downward repricing of adjustable
rate mortgages. This decline was partially offset by a reduction in the overall
cost of deposits. The decline also reflected the Company's use of $170.7 million
of its earning assets to fund its stock purchase program.
The increase in interest income was primarily due to a $764.6 million
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 6.96% to
6.86%. Interest income on loans increased $11.3 million due to a $770.7 million
increase in the average balance of loans partially offset by a 41 basis point
decline in the yield earned on loans from 7.78% for the three-month fiscal 1999
21
<PAGE> 22
period to 7.37% for the three-month fiscal 2000 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 in addition to the pre-payments of higher yielding mortgages. Income on
investment securities decreased $8.9 million due to a $674.4 million decrease in
the average balance of investment securities for the quarter ended June 30, 1999
compared to the quarter ended June 30, 1998. Interest income on mortgage-backed
and mortgage-related securities increased $15.3 million during the first quarter
of fiscal 2000 compared to the same period in fiscal 1999 as a result of a
$999.4 million increase in the average balance of these securities which was
partially offset by a 102 basis point decline in the yield earned. Income on
other interest-earning assets (consisting primarily of interest on federal funds
and dividends on Federal Home Loan Bank stock) decreased $5.7 million in the
current quarter compared to the prior year quarter due to a decrease of $4.3
million of interest income earned from securities lending activities along with
a $1.3 million decrease in interest on federal funds.
Interest expense increased $9.2 million to $47.4 million or 24.0% for
the three months ended June 30, 1999 as compared to the three months ended June
30, 1998. The increased FHLB borrowings associated with the implementation of
the Company's leverage strategy resulted in additional interest expense of $14.6
million. The increase was partially offset by a $4.2 million decrease in
interest paid on borrowings related to securities lending activities. This
increase was partially offset by a decrease of $1.3 million in interest paid on
deposits due to a 42 basis point decline in the average rate paid on deposits to
3.71% for the quarter ended June 30, 1999 compared to 4.13% for the quarter
ended June 30, 1998.
PROVISION FOR LOAN LOSSES.
The Company's provision for loan losses increased 12.7% from $2.3
million for the three months ended June 30, 1998 to $2.6 million for the three
months ended June 30, 1999. The Company continues to provide for loan losses due
to its ongoing and increasing investment in multi-family residential and
commercial real estate loans, which, while not delinquent, may be subject to
greater risk of loss.
NON-INTEREST INCOME.
Non-interest income decreased $0.9 million to $1.9 million for the
three months ended June 30, 1999 compared to $2.8 million for the three months
ended June 30, 1998. This decrease was primarily due to a net loss of $2.2
million recognized on the sale of approximately $379 million of securities which
were sold to fund mortgage originations. Other non-interest income increased
$1.3 million as a result of increased mortgage prepayment fees of $0.8 million
associated with the refinancing of mortgage loans, increased fees on sales of
annuities and mutual funds and an increase in banking service fees.
22
<PAGE> 23
NON-INTEREST EXPENSES.
Non-interest expense amounted to $24.4 million for the quarter ended
June 30, 1999 compared to $23.4 million for the quarter ended June 30, 1998. The
$1.0 million growth in expenses was primarily attributable to increases in
personnel costs of $1.1 million, advertising expenses of $0.3 million and other
non-interest expenses of $0.9 million. These increases were offset by a $1.3
million decrease in data processing service expense.
Compensation and employee benefits expense increased $1.1 million or
11.6% to $10.4 million for the three months ended June 30, 1999 as compared to
the same period in the prior year. The increase is primarily the result of a
$1.3 million expense due to the implementation of the Company's 1998 Recognition
and Retention Plan.
Data processing service expenses decreased by $1.3 million or 42.5% to
$1.7 million during the three months ended June 30, 1999 as compared to the
three months ended June 30, 1998. During the 1999 period, the Company was
involved in the second phase of its data processing conversion. Such second
phase was completed during the fourth quarter of fiscal 1999. Accordingly, the
Company's data processing costs have substantially declined.
Other non-interest expenses increased $0.9 million for the three months
ended June 30, 1999 compared to the same period in the prior year primarily due
to an increase in professional services. These expenses also include items such
as equipment expenses, office supplies, postage, telephone expenses and
maintenance and security.
INCOME TAXES.
Income tax expense amounted to $7.0 million and $7.4 million for the
three months ended June 30, 1999 and 1998, respectively. The decrease
experienced in the fiscal 2000 period reflected a decrease in the Company's
effective tax rate for the three months ended June 30, 1999 to 36.8% compared to
40.5% for the three months ended June 30, 1998.
As of June 30, 1999, the Company had a net deferred tax asset of $63.3
million. No valuation allowance was deemed necessary with respect to such asset.
23
<PAGE> 24
REGULATORY CAPITAL REQUIREMENTS
The following table sets forth the Bank's compliance with applicable
regulatory capital requirements at June 30, 1999.
<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)(2) 4.0% $218,261 12.5% $682,706 8.5% $464,445
Risk-based capital
ratios:(2)
Tier I 4.0 158,200 17.3 682,706 13.3 524,506
Total 8.0 316,399 18.5 733,329 10.5 416,930
</TABLE>
- - ---------------
(1) Reflects the 4.0% requirement to be met in order for an institution to
be "adequately capitalized" under applicable laws and regulations.
(2) The Bank is categorized as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized "well
capitalized" the Bank must maintain Tier 1 leverage capital of 5%, Tier
1 risk-based capital of 6% and Total risk-based capital of 10%.
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
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 fiscal 1999 and as part of the
Company's leverage strategy, the Company has increased its FHLB advances which
totaled $1.11 billion at June 30, 1999.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds sold or U.S. Treasury securities. On a longer term basis,
the Company maintains a strategy of investing in various lending products. The
Company uses its sources of funds primarily to meet its ongoing commitments, to
pay maturing certificates of deposit and savings withdrawals, fund loan
commitments and maintain a portfolio of mortgage-backed and mortgage-related
securities and debt and equity securities. At June 30, 1999, there were
outstanding commitments and unused lines of credit by the Company to originate
or acquire mortgage loans and other loans aggregating $277.7 million and $17.6
million, respectively, consisting primarily of fixed and adjustable-rate
residential loans and fixed-rate commercial real estate loans that are expected
to
24
<PAGE> 25
close during the twelve months ended June 30, 2000. Certificates of deposit
scheduled to mature in one year or less at June 30, 1999, totaled $1.5 billion.
Based on historical experience, management believes that a significant portion
of maturing deposits will remain with the Company. The Company 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 the
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 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 - As of December 31, 1998, Phase
I was fully completed. 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 Y2K 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 Y2K 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 Y2K 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 Y2K compliant. Based upon its initial assessment,
management presently believes that with planned modifications to existing
software and hardware and planned conversions to new
25
<PAGE> 26
software and hardware, the Company's third party vendors are taking the
appropriate steps to ensure that business critical systems will function
properly.
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 prepared their test system environment
and the Company defined and documented all test scenarios and test cases. This
phase is 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 all such testing was successfully completed by June 30, 1999 and no
exceptions were noted.
The Company has received assurances that third party products and
services will be Y2K compliant. However, these assurances are not guarantees and
may not be enforceable. The Company's contracts with such third-party vendors do
not include Y2K certification or warranties. Thus, in the event such vendors'
products and/or services are not Y2K 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 Y2K 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 timely compliance or that they are not faced with material Y2K
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 Y2K compliant. In addition, in February 1999, the Company
notified its entire customer base of the Y2K issue and the steps it has taken to
ensure that the Company, and it's underlying computer systems, are Year 2000
compliant.
The Company has completed a Y2K 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 plan provides 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. The contingency plan
identifies participants, processes and equipment that will be necessary to
permit the Company to continue operations. The contingency plan includes
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's current data service provider (representing approximately 34% of
the business critical and medium risk applications) is Y2K compliant at March
31, 1999.
The costs of modifications to the existing software are being primarily
absorbed by the third party vendors. However, the Company recognizes the need to
26
<PAGE> 27
purchase new hardware and software. Based upon current estimates, the Company
has identified approximately $3.4 million in total costs, including hardware,
software, and other costs, for completing the Year 2000 project. Of that amount,
approximately $1.7 million and $0.3 million were expensed during the fiscal
years ended March 31, 1999 and 1998, respectively. The Company has expensed $0.4
million in the first quarter of fiscal 2000 and has budgeted another $1.0
million for the remainder of fiscal 2000.
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 the Department.
27
<PAGE> 28
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, 1999, which was filed
with the Securities and Exchange Commission on June 28, 1999. 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, 1999.
28
<PAGE> 29
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
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Not applicable
b) Reports on Form 8-K
<TABLE>
<CAPTION>
DATE ITEM DESCRIPTION
-------------- ---- -------------------------
<S> <C> <C>
April 12, 1999 5 Proposed acquisition of
Statewide Financial Corp.
</TABLE>
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDEPENDENCE COMMUNITY BANK CORP.
Date: August 10, 1999 By: /s/ Charles J. Hamm
----------------- ------------------------------------
Charles J. Hamm
Chairman, President and
Chief Executive Officer
Date: August 10, 1999 By: /s/ John B. Zurell
----------------- ------------------------------------
John B. Zurell
Executive Vice President and
Chief Financial Officer
30
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 191,404
<INT-BEARING-DEPOSITS> 61,314
<FED-FUNDS-SOLD> 107,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,117,742
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,771,929
<ALLOWANCE> 49,423
<TOTAL-ASSETS> 5,500,479
<DEPOSITS> 3,437,162
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,291,542
<LONG-TERM> 0
0
0
<COMMON> 760
<OTHER-SE> 771,015
<TOTAL-LIABILITIES-AND-EQUITY> 5,500,479
<INTEREST-LOAN> 66,365
<INTEREST-INVEST> 21,140
<INTEREST-OTHER> 4,064
<INTEREST-TOTAL> 91,569
<INTEREST-DEPOSIT> 32,370
<INTEREST-EXPENSE> 47,432
<INTEREST-INCOME-NET> 44,137
<LOAN-LOSSES> 2,629
<SECURITIES-GAINS> (2,169)
<EXPENSE-OTHER> 24,405
<INCOME-PRETAX> 18,992
<INCOME-PRE-EXTRAORDINARY> 18,992
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,998
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
<YIELD-ACTUAL> 6.86
<LOANS-NON> 7,752
<LOANS-PAST> 27,901
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 46,823
<CHARGE-OFFS> 50
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 49,423
<ALLOWANCE-DOMESTIC> 49,423
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
