<PAGE> 1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
0-23229
(COMMISSION FILE NUMBER)
INDEPENDENCE COMMUNITY BANK CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3387931
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
195 MONTAGUE STREET, BROOKLYN, NEW YORK 11201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
</TABLE>
(718) 722-5300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this 10-K. [X]
As of June 7, 1999, there were 65,059,876 shares of the Registrant's common
stock issued and outstanding. The aggregate market value of the Registrant's
common stock (based on the closing price as quoted on June 7, 1999) held by
non-affiliates was approximately $749,306,876.
(1) Portions of the definitive proxy statement for the Annual Meeting of
stockholders are incorporated into Part III.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE> 2
INDEPENDENCE COMMUNITY BANK CORP.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
ITEM 1. BUSINESS
Description of Business 1
Market Area and Competition 2
Lending Activities 3
Asset Quality 13
Investment Activities 19
Sources of Funds 23
Employees 25
Savings Bank Life Insurance 25
Subsidiaries 25
Regulation of Savings and Loan Holding Companies 26
Regulation of State-Chartered Banks 28
Federal Taxation 34
State and Local Taxation 35
ITEM 2. Properties 36
ITEM 3. Legal Proceedings 38
ITEM 4. Submission of Matters to a Vote of Security Holders 38
PART II
ITEM 5. Market for Independence Community Bank Corp.'s Common Equity
and Related Stockholder Matters 39
ITEM 6. Selected Financial Data 40
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 42
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk 60
ITEM 8. Financial Statements and Supplementary Data 61
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 91
PART III
ITEM 10. Directors and Executive Officers of Independence Community
Bank Corp. 91
ITEM 11. Executive Compensation 91
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 91
ITEM 13. Certain Relationship and Related Transactions 91
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 91
SIGNATURES
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
INDEPENDENCE COMMUNITY BANK CORP.
Independence Community Bank Corp. (the "Holding Company") is a Delaware
corporation organized in June 1997 by Independence Community Bank (the "Bank"),
formerly known as Independence Savings Bank, for the purpose of becoming the
parent savings and loan holding company of the Bank. The Bank's reorganization
to the stock form of organization and the concurrent offer and sale of the
Holding Company's common stock was completed on March 13, 1998 (the
"Conversion"). The assets of the Holding Company are primarily the capital stock
of the Bank, certain cash and cash equivalents and securities available for
sale. The business and management of the Holding Company consists primarily of
the business and management of the Bank (the Holding Company and the Bank are
collectively referred to herein as the "Company"). The Holding Company neither
owns nor leases any property, but instead uses the premises and equipment of the
Bank. At the present time, the Holding Company does not intend to employ any
persons other than officers of the Bank, and utilizes the support staff of the
Bank from time to time. Additional employees may be hired as appropriate to the
extent the Holding Company expands or changes its business in the future.
The Company's executive office is located at 195 Montague Street, Brooklyn,
New York 11201, and its telephone number is (718) 722-5300.
RECENT DEVELOPMENTS
On April 13, 1999, the Holding Company announced that it had signed a
definitive agreement to acquire Statewide Financial Corp. a New Jersey-
chartered savings and loan holding company headquartered in Jersey City, New
Jersey ("Statewide"). Pursuant to the agreement, the Holding 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 Holding 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 Holding Company's common stock and
50% paid in cash. The number of shares of the Holding Company's common stock
that a Statewide stockholder receives for each share of Statewide common stock
will be determined in part upon an exchange ratio based on the average closing
price of the Holding Company's common stock during a ten consecutive trading day
period ending ten business days before the anticipated date of completion of the
transaction. 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 Holding Company's ability to repurchase shares of stock. The Holding
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 Holding Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission ("SEC") on April 20, 1999.
In connection with the execution of the agreement, Statewide granted an
option to the Company to purchase under certain circumstances shares of
Statewide common stock in an amount up to 19.9% of the number of shares of
Statewide common stock currently outstanding.
On February 1, 1999, the Holding Company announced that it had signed a
definitive agreement to acquire Broad National Bancorporation, a New
Jersey-chartered bank holding company headquartered in Newark, New Jersey
("Broad"). Pursuant to the agreement, the Holding Company will acquire Broad, in
a transaction valued at the time of execution of the definitive agreement at
$26.50 per Broad share. Upon completion of the acquisition, Broad's wholly owned
subsidiary, Broad National
1
<PAGE> 4
Bank, which has 16 full-service bank offices located in Bergen, Essex, Hudson,
Middlesex and Union counties, will merge with and into the Bank. Based upon
Broad's public filings, at March 31, 1999, Broad had total assets of $676.3
million, deposits totaling $576.7 million and stockholders' equity of $45.8
million.
Under the terms of the Broad agreement, which was approved unanimously by
both boards of directors, holders of Broad common stock will receive cash or
shares of the Holding 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 Holding Company's common stock and 50% paid in
cash. The number of shares of the Holding Company's common stock that a Broad
stockholder receives for each share of Broad common stock will be determined
based upon an exchange ratio designed to produce a value of $26.50 per Broad
share when the Holding Company's common stock has an average closing price
during the pricing period of between $12.75 and $17.25 as calculated pursuant to
the terms of the agreement. To the extent that the average closing price of the
Holding Company's 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 Broad transaction has an aggregate value of
approximately $138 million assuming an acquisition value of $26.50 per share of
Broad common stock.
The Broad transaction will be accounted for as a purchase and will not
affect the Holding Company's ability to repurchase shares of stock. The
transaction is expected to close in the third quarter of calendar 1999 and is
subject to receipt of various regulatory approvals, approval by Broad's
stockholders and certain other conditions. Additional information concerning the
agreement and the proposed acquisition is contained in the Holding Company's
Current Report on Form 8-K filed with the SEC on February 9, 1999, which report
is incorporated by reference.
The Broad agreement provides for the payment of a termination fee payable
to the Holding 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. On June 24, 1999, Broad shareholders approved the
merger agreement.
These two pending acquisitions will allow the Company to expand into
contiguous markets with similar demographics. These markets also provide the
Company with the opportunity to further emphasize its focus on multi-family
lending, commercial business lending and commercial deposits and accelerates the
Company's strategy of becoming more like a commercial bank.
INDEPENDENCE COMMUNITY BANK
The Bank's principal business is gathering deposits from customers within
its market area and investing those deposits, primarily in multi-family
residential mortgage loans, single-family residential loans (including
cooperative apartment loans), commercial real estate loans, consumer loans,
commercial business loans, mortgage-backed and mortgage-related securities and
investment securities. The Bank's revenues are derived principally from interest
on its loan and securities portfolios while its primary sources of funds are
deposits, Federal Home Loan Bank of New York ("FHLB") borrowings, loan
amortization and prepayments and maturities of mortgage-backed and
mortgage-related securities and investment securities. The Bank offers a variety
of loan and deposit products to its customers. The Bank also makes available
other financial instruments, such as annuity products and mutual funds, through
arrangements with a third party.
MARKET AREA AND COMPETITION
The Company has been, and intends to continue to be, a community-oriented
financial institution providing financial services and loans for housing within
its market area. The Company oversees its 32 branch office network through its
headquarters located in downtown Brooklyn. The Company operates 17 branch
offices in the borough of Brooklyn and another nine in the borough of Queens
with the remaining branches dispersed among Manhattan, the Bronx, Staten Island
and Nassau County. The Company gathers deposits primarily from the communities
and neighborhoods in close proximity to its branches. Although the Company lends
throughout the New York City metropolitan area, the substantial majority of its
real estate loans are secured by properties located in the boroughs of Brooklyn,
Queens and Manhattan.
2
<PAGE> 5
The Company's customer base, like that of the urban neighborhoods which it
serves, is racially and ethnically diverse and is comprised of mostly
middle-income households and to a lesser degree, low to moderate income
households. The Company has sought to set itself apart from its many competitors
by tailoring its products and services to meet the needs of its customers, by
emphasizing customer service and convenience and by being actively involved in
community affairs in the neighborhoods and communities which it serves. As part
of the Company's competitive strategy to attract loyal deposit customers, the
Company historically has been a low service fee provider of a variety of savings
and checking account products. The Company believes that its commitment to
customer and community service has permitted it to build strong customer
identification and loyalty which is essential to the Company's ability to
compete effectively.
Over the past several years, the New York City metropolitan area has
benefited from the resurgence and growth in employment and profitability
experienced by national securities and investment banking firms, many of which
are domiciled in Manhattan, as well as the growth and profitability of other
financial service companies, such as money center banks. The strength of the
national economy and of the United States equities markets has contributed
significantly to the recent growth and increased profitability of Wall Street
securities and investment banking firms. Historically, the New York City
metropolitan area has also benefited from being the corporate headquarters of
many large industrial and commercial companies which have, in turn, attracted
many smaller companies, particularly within the service industry. The
metropolitan area also offers well developed transportation and communication
systems and a highly skilled and educated work force. In spite of its size and
diversity, the New York City metropolitan area economy is affected by the level
of business activity and profitability within the securities and financial
services industries. During the late 1980s and early 1990s, the securities and
financial services industries experienced a significant decline in business
activity and profitability which, when combined with a period of weakness in the
national economy, resulted in higher levels of unemployment in the New York City
metropolitan area. These conditions and other factors contributed to an overall
decline in the value of commercial and residential real estate. While real
estate values have substantially recovered, no assurance can be given that such
conditions could not reoccur.
The Company faces significant competition both in making loans and in
attracting deposits. There are numerous financial institutions located within
the Company's market area, many of which have greater financial resources than
the Company. The Company's competition for loans comes principally from
commercial banks, savings banks, savings associations, insurance companies and
mortgage-banking companies. Management anticipates that competition for both
multi-family residential mortgage loans and single-family residential loans will
continue to increase in the future. Accordingly, no assurance can be given that
the Company will be able to maintain the volume of originations of such loans at
current levels. The Company's most direct competition for deposits has
historically come from savings associations, savings banks, commercial banks and
credit unions. The Company faces additional competition for deposits from
short-term money market funds and other corporate and government securities
funds, direct purchases of government securities, and from other financial
institutions such as brokerage firms and insurance companies. Competition also
may increase as a result of the elimination of restrictions on interstate
operations of financial institutions.
FORWARD LOOKING INFORMATION
Statements contained herein which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those currently anticipated due to a number of factors, which include, but
are not limited to, factors discussed in documents filed by the Company with the
SEC from time to time. Such 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
anticipated from the Company's operations and investments.
LENDING ACTIVITIES
GENERAL. At March 31, 1999, the Company's net loan portfolio totaled $3.46
billion, which represented 62.5% of the Company's $5.54 billion of total assets.
The single largest category of loans in the
3
<PAGE> 6
Company's portfolio is multi-family residential mortgage loans, which totaled
$2.2 billion or 62.6% of the Company's total loan portfolio at March 31, 1999.
Such loans are secured primarily by apartment buildings located in the Company's
market area. The second and third largest categories are single-family
residential mortgage loans and cooperative apartment loans which totaled $491.5
million or 14.0% and $458.2 million or 13.1%, respectively, of the total loan
portfolio at such date. These three categories collectively accounted for 89.7%
of the Company's total loan portfolio at March 31, 1999. The remainder of the
loan portfolio was comprised of $250.1 million of commercial and other real
estate loans, $41.6 million of student loans, $39.4 million of commercial
business loans, $12.3 million of home equity loans and lines of credit and $28.4
million of consumer and other loans.
The types of loans that the Company may originate are subject to federal
and state law and regulations. Interest rates charged by the Company on loans
are affected principally by the demand for such loans and the supply of money
available for lending purposes and the rates offered by its competitors. These
factors in turn, are affected by general and economic conditions, the monetary
policy of the federal government, including the Federal Reserve Board,
legislative tax policies and governmental budgetary matters.
4
<PAGE> 7
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Company's loans at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------------------------------------------------
1999 1998 1997 1996
---------------------- ---------------------- ---------------------- ----------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $ 491,523 14.0% $ 505,051 18.2% $ 552,745 21.8% $ 534,539
Multi-family residential(1) 2,195,879 62.6 1,605,058 57.6 1,365,124 53.9 1,208,039
Commercial and other real
estate 250,105 7.1 178,463 6.4 158,336 6.3 162,799
---------- ----- ---------- ----- ---------- ----- ----------
Total principal balance --
mortgage loans 2,937,507 83.7 2,288,572 82.2 2,076,205 82.0 1,905,377
Less:
Net deferred fees (10,529) 0.3 (9,403) 0.3 (9,645) 0.4 (10,451)
---------- ----- ---------- ----- ---------- ----- ----------
Total mortgage loans 2,926,978 83.4 2,279,169 81.9 2,066,560 81.6 1,894,926
---------- ----- ---------- ----- ---------- ----- ----------
Other loans:
Cooperative apartment loans 458,165 13.1 380,866 13.7 348,029 13.7 340,507
Student loans 41,633 1.2 43,946 1.6 45,262 1.8 45,947
Home equity loans and lines 12,295 0.4 15,625 0.6 19,545 0.8 23,458
Consumer and other loans 28,382 0.8 30,869 1.1 27,005 1.1 20,611
Commercial business loans 39,362 1.1 31,550 1.1 25,249 1.0 18,003
---------- ----- ---------- ----- ---------- ----- ----------
Total principal balance --
other loans 579,837 16.6 502,856 18.1 465,090 18.4 448,526
Less:
Unearned discount and net
deferred fees (334) 0.0 (138) 0.0 (130) 0.0 (116)
---------- ----- ---------- ----- ---------- ----- ----------
Total other loans 579,503 16.6 502,718 18.1 464,960 18.4 448,410
Total loans receivable 3,506,481 100.0% 2,781,887 100.0% 2,531,520 100.0% 2,343,336
---------- ===== ---------- ===== ---------- ===== ----------
Less:
Allowance for loan losses (46,823) (36,347) (27,024) (20,528)
---------- ---------- ---------- ----------
Loans receivable, net $3,459,658 $2,745,540 $2,504,496 $2,322,808
========== ========== ========== ==========
<CAPTION>
AT MARCH 31,
----------------------------------
1996 1995
-------- ----------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
-------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
Single-family residential 22.8% $ 376,047 18.5%
Multi-family residential(1) 51.6 1,076,969 53.0
Commercial and other real
estate 6.9 119,890 5.9
----- ---------- -----
Total principal balance --
mortgage loans 81.3 1,572,906 77.4
Less:
Net deferred fees 0.4 (11,206) 0.6
----- ---------- -----
Total mortgage loans 80.9 1,561,700 76.8
----- ---------- -----
Other loans:
Cooperative apartment loans 14.5 360,434 17.8
Student loans 1.9 47,823 2.4
Home equity loans and lines 1.0 27,232 1.3
Consumer and other loans 0.9 18,151 0.9
Commercial business loans 0.8 16,866 0.8
----- ---------- -----
Total principal balance --
other loans 19.1 470,506 23.2
Less:
Unearned discount and net
deferred fees 0.0 (95) 0.0
----- ---------- -----
Total other loans 19.1 470,411 23.2
Total loans receivable 100.0% 2,032,111 100.0%
===== ---------- =====
Less:
Allowance for loan losses (11,849)
----------
Loans receivable, net $2,020,262
==========
</TABLE>
- - ---------------
(1) Includes at March 31, 1999 and March 31, 1998, $567.8 million and $354.1
million, respectively, of loans secured by mixed-use (combined residential
and commercial use) properties.
5
<PAGE> 8
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of the Company's loans at March
31, 1999, as well as the dollar amount of such loans which are scheduled to
mature after one year and which have fixed or adjustable interest rates. Demand
loans, overdraft loans and loans having no schedule of repayments and no stated
maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
PRINCIPAL REPAYMENTS CONTRACTUALLY DUE IN YEAR(S) ENDED MARCH 31,
-------------------------------------------------------------------------------------------
TOTAL AT
MARCH 31, 2004- 2010-
1999 2000 2001 2002 2003 2009 2015 THEREAFTER
---------- -------- -------- -------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential(1) $ 467,799 $ 299 $ 781 $ 2,087 $ 7,596 $ 91,169 $103,064 $262,803
Multi-family residential 2,195,879 86,578 148,855 266,409 115,904 1,455,382 92,126 30,624
Commercial and other real estate 250,105 18,169 22,987 27,229 23,143 133,173 21,579 3,825
Other loans:
Cooperative apartment loans 458,165 38 140 698 3,678 20,422 43,292 389,897
Consumer and commercial business
loans(2) 121,672 53,612 12,070 12,017 12,415 20,306 7,375 3,877
---------- -------- -------- -------- -------- ---------- -------- --------
Total(3) $3,493,620 $158,696 $184,833 $308,440 $162,736 $1,720,452 $267,436 $691,026
========== ======== ======== ======== ======== ========== ======== ========
</TABLE>
- - ---------------
(1) Does not include $23.7 million of single-family residential loans serviced
by others.
(2) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
(3) Of the $3.34 billion of loan principal repayments contractually due after
March 31, 2000, $2.60 billion have fixed rates of interest and $730.6
million have adjustable rates of interest.
LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. The Company originates
both adjustable-rate mortgage loans and fixed-rate mortgage loans, the relative
volume of which is dependent upon customer demand and market rates of interest.
The Company generally retains all adjustable-rate loans and fixed-rate
residential mortgage loans with contractual terms of 15 years or less for its
portfolio. In the past, the Company generally did not purchase whole mortgage
loans or loan participations. However, during the fourth quarter of fiscal 1996
the Company entered into an agreement with a local mortgage-banking firm to
purchase conventional (loans not fully or partially guaranteed by the Federal
Housing Administration ("FHA") or the Department of Veterans' Affairs ("VA")),
single-family residential mortgage loans and cooperative apartment loans
originated by such mortgage banking firm on the Company's behalf. During the
year ended March 31, 1999, the Company purchased $3.7 million and $13.7 million,
respectively, of conventional single-family residential mortgage loans and
cooperative loans from such mortgage banker. During fiscal 1999 the Company
purchased an aggregate of $43.1 million of multi-family loans from the Community
Preservation Corp. ("CPC"), a provider of financing for low- and moderate-income
homebuyers, which loans continue to be serviced by CPC. The Company generally
sells (with servicing retained by the Company) newly originated fixed-rate,
single-family residential mortgage loans with contractual terms of more than 15
years in the secondary market to Fannie Mae ("FNMA") and Freddie Mac ("FHLMC").
It has also, on occasion, sold cooperative apartment loans and multi-family
residential mortgage loans. As of March 31, 1999, the Company serviced $206.9
million of loans for others. The Company generally receives an annual fee equal
to .25% to .375% of the outstanding principal balance for servicing loans sold.
The Company has undertaken to make a good faith effort, pursuant to
regulatory obligations incurred in connection with the Conversion in 1998,
consistent with safe and sound banking practices, to provide housing related
financing to borrowers and/ or projects located in the Bronx and in upper
Manhattan totaling $22.0 million and $16.0 million, respectively, over the two
year period commencing January 1, 1998 of which $14.0 million and $9.0 million,
respectively, are to consist of loans secured by properties in low and moderate
income ("LMI") census tracts, loans to LMI borrowers, loans to community
development projects or other qualified investments (subject to certain
limitations). This lending commitment can be satisfied by originations,
purchases or refinancing of permanent or construction loans for housing related
projects or
6
<PAGE> 9
by community development loans or other "qualified investments" as defined in
federal regulations promulgated pursuant to the Community Reinvestment Act
("CRA"). As of March 31, 1999, the Company has exceeded these commitments. In
addition, the Company agreed to expand its CRA assessment area to include
Manhattan, the Bronx and Nassau County in their entirety. In December 1997, the
Company entered into an agreement (the "ICP Agreement") with Inner City Press/
Community on the Move, a local community group ("ICP"), pursuant to which the
Company agreed to use its best efforts to lend at least $27.0 million and $20.0
million in the Bronx and upper Manhattan, respectively. Over the two-year period
commencing January 1, 1998, at least $18.0 million and $16.0 million,
respectively, of such loans, are to consist of loans secured by properties in
LMI census tracts in the Bronx and upper Manhattan. For purposes of the ICP
Agreement, "lend" means making loans, community development loans or qualified
investments as defined in federal regulations implementing the CRA. In addition,
under the terms of the ICP Agreement the Company is required to use its best
efforts to lend in certain specified LMI areas of Brooklyn an aggregate of at
least $15.0 million in the two-year period commencing January 1, 1998. In
addition, during this two-year period, the Company agreed to open two automatic
teller machines ("ATM") in LMI census tracts in the Bronx and/or upper Manhattan
or a new branch office within certain specified areas of the Bronx or upper
Manhattan. In connection with the review of the Company's Conversion application
by Federal regulators, the Company agreed, subject to principles of safety and
soundness, to meet certain lending requirements substantially identical to those
set forth in the ICP Agreement. As of March 31, 1999 the Company has exceeded
each of these lending commitments. The Company is still in the process of
finding suitable locations for the branch office or ATM facilities. Management
does not believe that compliance with the commitments related to the selection
of a branch office or ATM site will have a material effect on the results of
operations or financial condition of the Company.
7
<PAGE> 10
LOAN ACTIVITY. The following table shows the activity in the Company's
loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total principal balance of loans held at the beginning
of period $2,791,428 $2,541,295 $2,353,903
Originations of loans:
Single-family residential 109,477 45,476 106,688
Multi-family residential 789,253 410,106 225,906
Commercial and other real estate 105,816 35,679 49,924
Other loans:
Cooperative apartment loans 164,062 82,006 115,685
Consumer and commercial business loans(1) 49,822 47,320 43,009
---------- ---------- ----------
Total originations 1,218,430 620,587 541,212
---------- ---------- ----------
Purchases of loans:
Single-family residential 3,738 11,346 19,097
Multi-family residential 43,126 -- --
Commercial and other real estate -- -- --
Other loans:
Cooperative apartment loans 13,747 12,658 11,724
Consumer and commercial business loans(1) -- -- --
---------- ---------- ----------
Total purchases 60,611 24,004 30,821
---------- ---------- ----------
Total originations and purchases 1,279,041 644,591 572,033
Loans sold:
Single-family residential 28,162 17,470 4,066
Commercial and other real estate -- -- 1,494(2)
Other loans:
Cooperative apartment loans 11,761 1,668 67,658
---------- ---------- ----------
Total sold 39,923 19,138 73,218
Repayments(3) 513,202 375,320 311,423
---------- ---------- ----------
Net loan activity 725,916 250,133 187,392
---------- ---------- ----------
Total principal balance of loans held at the
end of period 3,517,344 2,791,428 2,541,295
Less:
Discount on loans purchased and net deferred fees at
end of period 10,863 9,541 9,775
---------- ---------- ----------
Total loans receivable at end of period $3,506,481 $2,781,887 $2,531,520
========== ========== ==========
</TABLE>
- - ---------------
(1) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
(2) Reflects sale of certain non-performing loans acquired in the acquisition of
Bay Ridge Bancorp., Inc. ("Bay Ridge") in January 1996.
(3) Includes loans charged off or transferred to other real estate owned.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. The Company
originates multi-family (five or more units) residential mortgage loans which
are secured primarily by apartment buildings, cooperative apartment buildings
and mixed-use (combined residential and commercial) properties located in the
Company's market area. At March 31, 1999, the Company had multi-family
residential mortgage loans totaling $2.2 billion in its portfolio, comprising
62.6% of the total
8
<PAGE> 11
loan portfolio. Historically, the Company has been an active multi-family
residential mortgage lender and this portion of the Company's loan portfolio has
grown substantially during the last several years, reflecting the Company's
emphasis on such lending. The Company intends to continue to emphasize
multi-family residential mortgage lending within its market area. The main
competitors for loans in this market tend to be other local banks and savings
institutions as well as insurance companies. Multi-family residential mortgage
loans in the Company's portfolio generally range in amount from $500,000 to $3.0
million and have an average size of approximately $1.0 million. The Company's
multi-family residential mortgage loans are comprised primarily of middle-income
housing located in the boroughs of Brooklyn, Queens and Manhattan.
When approving new multi-family residential mortgage loans, the Company
follows a set of underwriting standards which it believes are conservative, and
which generally permit a maximum loan-to-value ratio of 75% based on an
appraisal performed by either one of the Company's in-house licensed and
certified appraisers or by a Company-approved licensed and certified independent
appraiser (whose appraisal is reviewed by a Company licensed and certified
appraiser), and sufficient cash flow from the underlying property to adequately
service the debt. A minimum debt service ratio of 1.3 generally is required on
multi-family residential mortgage loans. The Company also considers the
financial resources of the borrower, the borrower's experience in owning or
managing similar properties, the market value of the property and the Company's
lending experience with the borrower. The Company's current lending policy
requires that loans in excess of $500,000 be approved by two non-officer
directors of the Credit Committee of the Board of Directors.
The Company's multi-family residential mortgage loans include loans secured
by cooperative apartment buildings. In underwriting these loans, the Company
applies the normal underwriting criteria used with other multi-family
properties. In addition, the Company generally will not make a loan on a
cooperative apartment building unless at least 65% of the total units in the
building are owner-occupied. However, the Company will consider making a loan
secured by a cooperative apartment building if it has a large positive rental
income which significantly exceeds maintenance expense. At March 31, 1999, the
Company had $551.9 million of loans secured by cooperative apartment buildings
located primarily in Manhattan.
The Company's typical multi-family residential mortgage loan is originated
with a term to maturity of 5 to 10 years (with principal due in full at such
time). These loans have a fixed-rate of interest and may be extended by the
borrower, upon payment of an additional fee, for five additional years at an
interest rate based on the 5-year FHLB advance rate plus a margin, which rate
may not be below the initial interest rate of the loan. The Company has been
offering loans which have fixed-rates for the first five years then adjust at
the end of the fifth year and again at the end of the seventh or eighth year to
pre-set rates established at the time of origination. Under the terms of the
Company's multi-family residential mortgage loans, the principal balance
generally is amortized at the rate of 1% per year. Prepayment penalties are
generally assessed on these loans.
In addition to multi-family residential mortgage loans, the Company
originates commercial real estate loans which, at March 31, 1999, amounted to
$250.1 million or 7.1% of total loans. This portfolio is comprised primarily of
loans secured by commercial and industrial properties as well as nursing homes,
funeral homes, churches and synagogues, schools and small shopping centers
located within the Company's market area. The Company's commercial real estate
loans generally range in amount from $50,000 to $1.5 million, and have an
average size of approximately $700,000. The Company originates commercial real
estate loans using similar underwriting standards as applied to multi-family
residential mortgage loans. In addition, the Company reviews rent or lease
income, rent rolls, business receipts, the borrower's credit history and
business experience, and comparable values of similar properties when
underwriting commercial real estate loans.
Loans secured by apartment buildings and other multi-family residential and
commercial properties generally are larger and considered to involve a greater
degree of risk than single-family residential mortgage loans. Payments on loans
secured by multi-family residential and commercial properties are often
dependent on the successful operation or management of the properties and are
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Company seeks to minimize these risks through its
9
<PAGE> 12
underwriting policies, which generally limit the origination of such loans to
the Company's market area and require such loans to be qualified on, among other
things, the basis of the property's income and debt service ratio.
SINGLE-FAMILY RESIDENTIAL AND COOPERATIVE APARTMENT LENDING. The Company
offers residential first mortgage loans secured primarily by owner-occupied
single family (one to four units) residences. The Company also originates loans
to individuals secured by shares of individual cooperative apartments. At March
31, 1999, $491.5 million or 14.0% and $458.2 million or 13.1% of the Company's
total loan portfolio consisted of single-family residential mortgage loans and
cooperative apartment loans, respectively. The substantial majority of these
loans are secured by properties located in the boroughs of Brooklyn, Queens and
Manhattan. The Company offers conforming and non-conforming fixed-rate and
adjustable-rate mortgage loans ("ARMs") with maturities of up to 30 years and a
maximum loan amount generally not exceeding $1.0 million. At March 31, 1999,
ARMs represented $678.9 million of the aggregate total of single-family
residential mortgage loans and cooperative apartments loans.
The Company's residential loan originations are generally obtained from
existing or past loan customers, depositors of the Company, members of the local
community and referrals from attorneys, realtors and independent mortgage
brokers who refer members of the communities located in the Company's market
area. The Company has agreements with mortgage-banking firms and with mortgage
brokers with respect to the origination of single-family residential mortgage
loans and cooperative apartment loans for the Company. Under the terms of the
agreements with the mortgage bankers, the mortgage bankers originate and sell
loans to the Company. However, the mortgage brokers originate loans on the
Company's behalf using the Company's loan documents. In both cases, the loans
are originated and underwritten in accordance with the Company's underwriting
policies, and the Company retains approval authority with respect to loans it
considers for its portfolio. The Company also conducts extensive print and radio
advertising, the majority of which is for its mortgage products. The Company is
a participating seller/servicer with the FNMA and the FHLMC, and generally
underwrites its fixed-rate single-family residential mortgage loans to conform
with standards required by these agencies. Included in single-family residential
loans is a modest amount of loans partially or fully guaranteed by the FHA or
the VA.
The Company continues to place a portion of its lending emphasis in the
cooperative apartment loan market. Although the collateral for cooperative
apartment loans consists of shares in a cooperative housing corporation (a
corporation whose primary asset is the underlying real estate), cooperative
apartment loans generally are treated as single-family residential mortgage
loans. At March 31, 1999, such loans amounted to $458.2 million or 13.1% of the
Company's total loan portfolio. Although the Company's cooperative apartment
loans in the past have related to properties located in the boroughs of
Manhattan, Brooklyn and Queens, in recent periods substantially all of such
loans originated or purchased have related to properties located in Manhattan,
with a significant number of such loans having original loan balances in excess
of $300,000.
The Company's single-family residential mortgage loans and cooperative
apartment loans include ARMs and fixed-rate loans. The Company currently offers
a variety of ARMs, all of which have a 30 year term to maturity and certain of
which can convert to fixed-rate loans. The Company's ARMs currently include
loans which adjust every one or three years as well as loans with an established
rate for the initial five or seven years of the loan and which adjust every
three years thereafter. The interest rate on the Company's ARMs fluctuates based
upon a spread above the average yield on United States Treasury securities,
adjusted to a constant maturity which corresponds to the adjustment period of
the loan (the "U.S. Treasury constant maturity index") as published weekly by
the Board of Governors of the Federal Reserve System. In addition, ARMs
generally are subject to limitations on interest increases or decreases of 2%
per adjustment period and an interest rate cap during the life of the loan
established at the time of origination.
The retention of ARMs in the Company's loan portfolio helps reduce the
Company's exposure to increases in interest rates. However, ARMs generally pose
credit risks different from the risks inherent in fixed-rate loans, primarily
because as interest rates rise, the underlying payments of the borrower rise,
thereby increasing the potential for defaults. At the same time, the
marketability of the underlying property may be adversely affected. In order to
10
<PAGE> 13
minimize risks, ARM borrowers are qualified at the rate which would be in effect
after the first interest rate adjustment, if that rate is higher than the
initial rate. The Company has not in the past, nor does it currently, originate
ARMs with negative amortization.
The Company's fixed-rate, single-family residential mortgage loans and
cooperative apartment loans have terms of up to 30 years. Interest rates charged
on fixed-rate loans are competitively priced based on market conditions. The
Company generally originates fixed-rate loans with terms and in amounts
conforming to the maximum guidelines of the FNMA and the FHLMC.
The Company generally sells its newly originated fixed-rate, single-family
residential mortgage loans with contractual terms of more than 15 years in the
secondary market to agencies such as the FNMA and the FHLMC. The Company
generally retains the servicing rights on all such loans sold. For the year
ended March 31, 1999 the Company sold single-family residential mortgage loans
totaling $28.2 million.
Under the Company's underwriting guidelines, ARMS can be originated with
loan-to-value ratios of up to 80%. Fixed-rate, single-family residential
mortgage loans can be originated with loan-to-value ratios of up to 90%,
provided, however, that private mortgage insurance is required for loans with
loan-to-value ratios in excess of 80%.
In order to provide financing for low-and moderate-income home buyers, the
Company participates in residential mortgage programs and products sponsored by,
among others, the State of New York Mortgage Authority, the CPC, Neighborhood
Housing Services and the New York City Co-op Pilot Program. Various programs
sponsored by these groups provide low and moderate income households with
fixed-rate mortgage loans which are generally below prevailing fixed market
rates and which allow below-market down payments.
Substantially all of the Company's mortgage loans include due-on-sale
clauses which provide the Company with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of the
property without the Company's consent. It is the Company's policy to enforce
due-on-sale provisions within the applicable regulations and guidelines imposed
by New York law.
CONSUMER LENDING ACTIVITIES. The Company offers a variety of consumer
loans including student loans, home equity loans and lines of credit, automobile
loans and passbook loans in order to provide a full range of financial services
to its customers. Such loans are obtained primarily through existing and walk-in
customers and direct advertising. At March 31, 1999, $82.3 million or 2.4% of
the Company's total loan portfolio was comprised of consumer loans.
The largest component of the Company's consumer loan portfolio is student
loans. The Company has been and continues to be an active originator of student
loans. Substantially all of these loans are originated under the auspices of the
New York State Higher Education Service Corporation ("NYSHESC"). Under the terms
of these loans, no repayment is due until the student's graduation, with 98% of
the principal guaranteed by the NYSHESC. The term and rates of these loans are
established by the NYSHESC. At March 31, 1999, such loans amounted to $41.6
million or 1.2% of the total loan portfolio.
The second largest component of the Company's consumer loan portfolio is
automobile loans which totaled $15.4 million at March 31, 1999. The vast
majority of automobile loans are originated directly with the Company's
customer, rather than indirectly through automobile dealers. The car
collateralizes the loan, with the Company lending up to 80% of the value of the
car. The loans generally amortize over a two to five year period and can be used
to purchase either a new or used car. At March 31, 1999, 78.8% of the total
amount of automobile loans represent loans for the purchase of a new automobile.
The Company generally does not participate in indirect automobile lending.
The third largest component of the Company's consumer loan portfolio is
home equity loans and lines which consist primarily of home equity lines of
credit. Home equity lines of credit are a form of revolving credit and are
secured by the underlying equity in the borrower's primary or secondary
residence. The Company's home equity lines of credit have interest rates that
adjust or float based on the Wall Street Journal Prime Rate ("WSJ Prime"),
loan-to-value ratios of 75% or less, and are generally for amounts of less than
$100,000 but can be as high as $300,000. Interest only payments are made during
the first five years with repayment of principal and interest required during
the final 15 years. The
11
<PAGE> 14
Company offers fixed-rate, fixed-term home improvement loans, which are also
secured by the underlying equity in the borrower's primary or secondary
residence. At March 31, 1999, home equity lines and loans amounted to $12.3
million, or 0.4% of the Company's total loan portfolio and the Company had an
additional $3.8 million of unused commitments pursuant to such equity lines of
credit.
At March 31, 1999, the remaining $13.0 million of the Company's consumer
loan portfolio, which amounted to 0.4% of the Company's total loan portfolio,
was comprised primarily of loans secured by passbook loans and credit card
loans. Subsequent to March 31, 1999, the Company sold its entire credit card
portfolio. The Company has recently entered into an agreement with another
financial institution to act as their agent and offer credit cards in the
Company's market area for which the Company will receive a per unit fee. The
Company will not record an asset or assume any related credit risk. Passbook
loans, which are loans secured by the borrower's deposits in the Company,
totaled $8.2 million at March 31, 1999, while credit card loans amounted to $1.5
million at such date.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans but generally involve more credit risk than
residential mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral. These risks are not as prevalent in
the case of the Company's consumer loan portfolio, however, because a high
percentage of the portfolio is comprised of home equity loans and lines of
credit which are secured by real estate and underwritten in a manner such that
they result in a lending risk which is similar to single-family residential
mortgage loans.
COMMERCIAL BUSINESS LENDING ACTIVITIES. The Company makes commercial
business loans directly to businesses located in its market area. The Company
targets small and medium sized businesses with the bulk of the loans being
originated for amounts less than $750,000. Applications for commercial business
loans are obtained primarily from existing customers, branch referrals and
direct inquiry. As of March 31, 1999, commercial business loans totaled $39.4
million, or 1.1%, of the Company's total loan portfolio.
Commercial business loans originated by the Company generally have terms of
five years or less and adjustable interest rates tied to the WSJ Prime plus a
margin. Such loans are generally secured by real estate, receivables or
inventory and are backed by the personal guarantees of the principals of the
borrower. Commercial business loans generally have shorter terms to maturity and
provide higher yields than residential mortgage loans. Although commercial
business loans generally are considered to involve greater credit risk then
certain other types of loans, management intends to continue to offer commercial
business loans to small and medium-sized businesses in its market area.
Furthermore, the Company intends to expand its commercial business lending
program. In furtherance of such strategy, the Company continues to increase its
advertising and direct mail solicitations with respect to commercial business
loans and is in the process of increasing the number of commercial business loan
officers.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Board of Directors of the
Bank has established lending authorities for individual officers as to its
various types of loan products. For multi-family residential mortgage loans,
commercial real estate loans, single-family residential mortgage loans and
cooperative apartment loans, the Executive Vice President and Mortgage Officer
and a Senior Vice President have the authority to approve loans in amounts up to
$500,000. Any mortgage loan or cooperative apartment loan in excess of $500,000,
however, must also be approved by the President and at least two members of the
Credit Committee of the Board of Directors, which consists of various directors,
the composition of which is changed periodically. Consumer loans and commercial
business loans of less than $50,000 can be approved by an individual loan
officer, while loans between $50,000 and $300,000 must be approved by two loan
officers. Any commercial business loan in excess of $300,000 must also be
approved by at least two members of the Credit Committee of the Board of
Directors.
The Company's policy limits to 15% of the Bank's stockholder's equity the
amount of credit related to mortgage loans and cooperative share loans that can
be extended to any one borrower. In addition, the Company's policy limits the
amount of commercial business loans that can be extended to any one borrower to
the greater of $2.0 million, 5% of the Bank's stockholder's equity or 10% of
total commercial business loans. With certain limited exceptions, a New York
State-chartered savings bank may not make loans or extend credit for commercial,
corporate or business purposes (in-
12
<PAGE> 15
cluding lease financing) to a single borrower, the aggregate amount of which
would be in excess of 15% of the Bank's stockholder's equity if the loan is
unsecured, or 25% of stockholder's equity if the loan is secured.
For all single-family residential mortgage loans and cooperative apartment
loans originated by the Company, upon receipt of a completed loan application
from a prospective borrower, a credit report is ordered, income, assets and
certain other information are verified by an independent credit agency, and if
necessary, additional financial information is required to be submitted by the
borrower. An appraisal of the real estate is required, which is performed by an
independent appraiser except with respect to multi-family residential and
commercial real estate loans for which the appraisals are primarily conducted by
licensed and certified in-house appraisers. In addition, appraisals conducted by
independent appraisers are reviewed by the Company's in-house licensed and
certified appraisers. It is the Company's policy to require appropriate
insurance protection, including title and hazard insurance, on all mortgage
loans prior to closing. Other than cooperative apartment loans, borrowers
generally are required to advance funds for certain items such as real estate
taxes, flood insurance and private mortgage insurance, when applicable.
LOAN ORIGINATION AND LOAN FEES. In addition to interest earned on loans,
the Company receives loan origination fees or "points" for many of the loans it
originates. Loan points are a percentage of the principal amount of the mortgage
loan and are charged to the borrower in connection with the origination of the
loan. The Company currently offers a number of residential loans products on
which no points are charged.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
91, which addresses the accounting for non-refundable fees and costs associated
which originating or acquiring loans, the Company's loan origination fees and
certain related direct loan origination costs are offset, and the resulting net
amount is deferred and amortized over the contractual life of the related loans
as an adjustment to the yield of such loans. At March 31, 1999, the Company had
$10.9 million of such net deferred loan fees.
ASSET QUALITY
The Company generally places loans on non-accrual status when interest
payments become more than 90 days past due. However, student, FHA or VA loans
continue to accrue interest because their interest payments are guaranteed by
various government programs and agencies. Loans may be placed on non-accrual
status earlier if management believes that collection of interest is doubtful.
When a loan is placed on non-accrual status, previously accrued but unpaid
interest is deducted from interest income.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned ("OREO")
until sold. Pursuant to Statement of Position ("SOP") 92-3, such assets are
carried at the lower of fair value minus estimated costs to sell the property,
or cost (generally the balance of the loan on the property at the date of
acquisition). After the date of acquisition, all costs incurred in maintaining
the property are expensed and costs incurred for the improvement or development
of such property are capitalized up to the extent of their net realizable value.
13
<PAGE> 16
DELINQUENT LOANS The following table sets forth delinquencies in the
Company's loan portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31, 1999 AT MARCH 31, 1998
------------------------------------------- -------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- -------------------- -------------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential 35 $1,665 54 $2,684 42 $3,908 84 $4,298
Multi-family residential 3 845 4 830 4 960 8 1,190
Commercial and other mortgage
loans -- -- 3 962 5 590 5 1,009
Other loans:
Cooperative apartment loans 7 365 12 381 8 316 19 509
Consumer and commercial
business loans(1) 190 767 420 1,597 226 1,271 481 2,019
--- ------ --- ------ --- ------ --- ------
Total 235 $3,642 493 $6,454 285 $7,045 597 $9,025
=== ====== === ====== === ====== === ======
Delinquent loans to total loans(2) 0.10% 0.18% 0.25% 0.32%
====== ====== ====== ======
<CAPTION>
AT MARCH 31, 1997
-------------------------------------------
60-89 DAYS 90 DAYS OR MORE
-------------------- --------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential 13 $ 535 56 $ 3,311
Multi-family residential -- -- 3 1,918
Commercial and other mortgage
loans -- -- 5 9,209
Other loans:
Cooperative apartment loans 4 196 13 427
Consumer and commercial
business loans(1) 225 1,004 300 1,757
--- ------ --- -------
Total 242 $1,735 377 $16,622
=== ====== === =======
Delinquent loans to total loans(2 0.07% 0.65%
====== =======
</TABLE>
- - ---------------
(1) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
(2) Total loans includes loans receivable less deferred loan fees and
unamortized discounts, net.
14
<PAGE> 17
NON-PERFORMING ASSETS. The following table sets forth information with
respect to non-performing assets identified by the Company, including
non-performing loans and OREO at the dates indicated. The Company did not have
any troubled debt restructuring at any of the dates presented.
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Single-family residential $ 2,809 $ 4,423 $ 2,474 $ 2,890 $ 2,074
Multi-family residential 830 1,190 1,918 3,379 2,018
Commercial and other 2,687 4,782 11,155 12,600 1,975
Other loans:
Cooperative apartment loans 381 509 427 355 451
Consumer and commercial business
loans(1) 400 431 956 1,135 1,590
------- ------- ------- ------- -------
Total non-accruing loans 7,107 11,335 16,930 20,359(2) 8,108
------- ------- ------- ------- -------
Loans past due 90 days or more as to:
Interest and accruing(3) 1,197 1,607 1,718 8,737 7,564
Principal and accruing(4) 30,805 16,804 8,442 6,413 5,591
------- ------- ------- ------- -------
Total past due loans and
accruing 32,002 18,411 10,160 15,150 13,155
------- ------- ------- ------- -------
Total non-performing loans 39,109 29,746 27,090 35,509 21,263
------- ------- ------- ------- -------
Other real estate owned, net(5) 273 192 540 973 1,691
------- ------- ------- ------- -------
Total non-performing assets(6) $39,382 $29,938 $27,630 $36,482 $22,954
======= ======= ======= ======= =======
Allowance for loan losses as a percent of
total loans 1.34% 1.31% 1.07% 0.88% 0.58%
Allowance for loan losses as a percent of
non-performing loans 119.72 122.19 99.76 57.81 55.73
Non-performing loans as a percent of
total loans 1.12 1.07 1.07 1.52 1.05
Non-performing assets as a percent of
total assets 0.71 0.57 0.74 0.94 0.88
</TABLE>
- - ---------------
(1) Consists primarily of commercial business loans and home equity lines of
credit.
(2) Includes $9.5 million of loans acquired in the Bay Ridge acquisition.
(3) Consists primarily of student loans guaranteed by the NYSHESC.
(4) Reflects loans that are 90 days or more past maturity which continue to make
payments on a basis consistent with the original repayment schedule.
(5) Net of related loss allowances.
(6) Non-performing assets consist of non-performing loans and other real estate
owned. Non-performing loans consist of non-accrual loans and loans 90 days
or more past due as to interest or principal and accruing.
15
<PAGE> 18
NON-PERFORMING ASSETS (CONTINUED)
The increase in non-performing assets from March 31, 1998 to March 31, 1999
was the result of a $9.4 million increase in non-performing loans along with an
$81,000 increase in OREO. The $4.2 million decrease in non-accruing loans in
fiscal 1999 was primarily due to the repayment of a $2.0 million non-accrual
commercial real estate loan with the remainder due to the repayment of
multi-family residential and commercial real estate loans.
At March 31, 1999, the Company's $30.8 million of loans past due 90 days or
more as to principal consisted of loans which were contractually past their
maturity but which continued to make payments on a basis consistent with the
loans' original amortization schedule. The amount of such loans increased by
$14.0 million to $30.8 million at March 31, 1999, which was primarily due to the
increased number of loans which matured and have not been renegotiated. Such
loans consisted primarily of $24.9 million of multi-family residential loans and
$5.3 million of commercial real estate loans. At March 31, 1999, the $24.9
million of contractually past due multi-family residential loans consisted of 67
loans with an average principal balance of approximately $372,000 while the $5.3
million of commercial real estate loans consisted of 14 loans with an average
principal balance of approximately $379,000. The Company's multi-family
residential and commercial real estate loans are generally structured as a five
or ten year balloon loan with the ability of the borrower to extend the term of
the loan for an additional five years. At the contractual maturity date of these
particular loans, the borrowers failed to repay in full the principal due. The
borrowers, however, have continued to make payments on the loans consistent with
the loans' payment terms based on the original amortization schedule. Although
the Company has contacted the borrowers requesting that they refinance their
loans, the borrowers have not yet taken such step. The majority of such loans
bear interest rates which are above those being charged currently on newly
originated multi-family residential and commercial real estate loans.
Furthermore, the Company inspects each of such properties at least annually. In
addition, in many cases, based on current financial information provided to the
Company, the properties are producing sufficient cash flow to service the debt.
Based upon management's review of these credits, the Company does not believe
that any material losses will be incurred with respect to such properties.
However, the delinquency of such loans has been and continues to be considered
in establishing the level of the Company's allowance for loan losses. The
Company is continuing its efforts to have the borrowers refinance or extend the
term of such loans.
The interest income that would have been recorded during the years ended
March 31, 1999 and March 31, 1998, if all of the Bank's non-performing loans at
the end of such period had been current in accordance with their terms during
such periods was $562,000 and $758,000, respectively.
A New York-chartered savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the Federal Deposit Insurance Corporation ("FDIC") and the
New York State Banking Department ("Department"), which can order the
establishment of additional general or specific loss allowances. The FDIC, in
conjunction with the other federal banking agencies, has adopted an interagency
policy statement on the allowance for loan and lease losses. The policy
statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management has analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner, and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Company believes that it has established an adequate allowance for
possible loan losses, there can be no assurance that the regulators, in
reviewing the Company's loan portfolio, will not request the Company to
materially increase its allowance for possible loan losses, thereby adversely
affecting the Company's financial condition and results of operations at that
time. Although management believes that adequate specific and general loan loss
allowances have been established, actual losses depend upon future events and,
as such, further additions to the allowances for loan losses may become
necessary. In addition, if the Company's involvement in multi-family residential
and commercial real estate lending continues to increase (which is expected),
additional provisions may be
16
<PAGE> 19
required due to the generally greater inherent risk involved in such lending.
CLASSIFIED AND CRITICIZED ASSETS. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the same weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, resulting in a
high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. Another category designated "special mention" also
must be established and maintained for assets which do not currently expose an
insured institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss.
At March 31, 1999, the Company had classified an aggregate of $16.8 million
of assets (a portion of which consisted of non-accrual loans). In addition, at
such date the Company had $114.2 million of assets which were designated by the
Company as special mention. At March 31, 1999, a major component of the
Company's assets deemed special mention was a $14.7 million loan to the
partnership which owns the building in which the Company's executive offices are
located. The loan was originated in 1993 in the amount of $5.0 million to help
fund the partnership's purchase of the building. As a result of a variety of
factors, there were delays in fully leasing out the building due in part to the
need to effect extensive renovations and tenant improvements, including asbestos
removal. As a consequence, payments on the initial loan were not made and the
loan was placed on non-accrual status in fiscal 1996. The Company refinanced the
loan in early 1997 and increased the principal balance to $15.0 million. The
$10.0 million of additional funds were used in part to repay advances (plus
interest) made to the partnership by Wiljo Development Corporation ("Wiljo"), a
wholly-owned subsidiary of the Company, for construction costs and other
expenses. The Company's executive offices and a branch office occupy
approximately 40% of the building. As of March 31, 1999, all the remaining space
in the building is leased with lease terms generally of ten years or more, and
the new loan is performing in accordance with its terms. Also included in assets
deemed special mention were $30.0 million of loans which were 90 days or more
past due maturity which continued 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 $46.8 million at March 31, 1999 as compared to $36.3 million at
March 31, 1998. At March 31, 1999, the Company's allowance amounted to 1.3% of
total loans and 119.7% of total non-performing loans. 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 $10.5 million from March
31, 1998 to March 31, 1999 due to provisions totaling $10.7 million, partially
offset by charge-offs, net of recoveries, of $222,000. The increase during the
period was due to several factors, including the Company's continued increased
investment in multi-family residential and commercial real estate loans, all of
which were concentrated in the New York City metropolitan area, an increase in
the number of larger multi-family residential, commercial real estate and
individual cooperative apartment loans as compared to prior years, an increase
in the number of loans, which, while not delinquent, exhibit risk
characteristics which require heightened management oversight, including loans
which are contractually past due maturity 90 days or more, and an increase of
$7.8 million or 24.8% in commercial business loans, which, though conservatively
underwritten in management's view are considered to have a greater risk of loss.
The Company will continue to monitor and modify its allowance for possible
loan losses as conditions dictate. While management believes that, based on
information currently available, the Company's allowance for possible loan
losses is sufficient to cover losses inherent in its loan portfo-
17
<PAGE> 20
lio at this time, no assurances can be given that future adjustments to the
allowance for possible loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for possible loan
losses. Management may in the future further increase the level of its allowance
for loan losses as a percentage of total loans and non-performing loans in the
event the level of multi-family residential, commercial real estate and
commercial business loans (which generally are considered to have a greater risk
of loss than single-family residential mortgage loans) as a percentage of its
total loan portfolio continues to increase. In addition, the FDIC and the
Department as an integral part of their examination process periodically review
the Company's allowance for possible loan losses. Such agencies may require the
Company to make additional provisions for estimated possible loan losses based
upon judgments different from those of management.
The following table sets forth the activity in the Company's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $36,347 $27,024 $20,528 $11,849 $ 8,770
------- ------- ------- ------- -------
Allowance from acquisition(1) -- -- -- 6,910 --
Provision:
Mortgage loans(2) 9,450 7,894 8,425 3,300 3,300
Consumer and commercial business
loans(3) 1,248 2,117 (465)(4) 379 292
------- ------- ------- ------- -------
Total provision 10,698 10,011 7,960 3,679 3,592
------- ------- ------- ------- -------
Charge-offs:
Mortgage loans(2) 194 1,047 1,636 1,634 842
Consumer and commercial business
loans(3) 403 263 509 751 220
------- ------- ------- ------- -------
Total charge-offs 597 1,310 2,145 2,385 1,062
------- ------- ------- ------- -------
Recoveries:
Mortgage loans(2) 241 415 545 176 294
Consumer and commercial business
loans(3) 134 207 136 299 255
------- ------- ------- ------- -------
Total recoveries 375 622 681 475 549
------- ------- ------- ------- -------
Net loans charged-off (222) (688) (1,464) (1,910) (513)
------- ------- ------- ------- -------
Allowance at end of period $46,823 $36,347 $27,024 $20,528 $11,849
======= ======= ======= ======= =======
Net loans charged off to allowance for
loan losses 0.47% 1.89% 5.42% 9.30% 4.33%
Allowance for possible loan losses as a
percent of total loans 1.34% 1.31% 1.07% 0.88% 0.58%
Allowance for possible loan losses as a
percent of total non-performing
loans(5) 119.72% 122.19% 99.76% 57.81% 55.73%
</TABLE>
- - ---------------
(1) Reflects allowance for loan losses acquired in the Bay Ridge acquisition in
January 1996.
(2) Includes individual cooperative apartment loans.
(3) Includes student loans, home equity loans and lines of credit, automobile
loans, secured and unsecured personal loans, and commercial business loans.
(4) Reflects adjustment to allowance related to commercial business loans.
(5) Non-performing loans consist of non-accrual loans and loans 90 days or more
past due as to interest or principal and accruing.
18
<PAGE> 21
The following table sets forth information concerning the allocation of the
Company's allowance for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------- -------------------- -------------------- ---------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY
AMOUNT OF TO TOTAL AMOUNT OF TO TOTAL AMOUNT OF TO TOTAL AMOUNT OF
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE
--------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1) $40,128 96.5% $30,361 95.6% $23,370 95.4% $16,036
Other loans(2) 6,695 3.5 5,716 4.4 3,654 4.6 4,492
------- ----- ------- ----- ------- ----- -------
Total $46,823 100.0% $36,347 100.0% $27,024 100.0% $20,528
======= ===== ======= ===== ======= ===== =======
<CAPTION>
AT MARCH 31,
-------------------------------
1996 1995
-------- --------------------
PERCENT PERCENT
OF LOANS OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL AMOUNT OF TO TOTAL
LOANS ALLOWANCE LOANS
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans(1) 95.4% $ 7,284 94.6%
Other loans(2) 4.6 4,565 5.4
----- ------- -----
Total 100.0% $11,489 100.0%
===== ======= =====
</TABLE>
- - ---------------
(1) Includes individual cooperative apartment loans.
(2) Includes student loans, home equity loans, and lines of credit, automobile
loans, secured and unsecured personal loans, and commercial business loans.
ENVIRONMENTAL ISSUES
The Company encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on property securing
their loans. In addition, the existence of hazardous materials may make it
uneconomic for a lender to foreclose on such properties. Although environmental
risks are usually associated with loans secured by commercial real estate, risks
also may be substantial for loans secured by residential real estate if
environmental contamination makes security property unsuitable for use. This
could also have a negative effect on nearby property values. The Company
attempts to control its risk by requiring a Phase One environmental assessment
be completed as part of its underwriting review for all non-residential mortgage
applications.
The Company believes its procedures regarding the assessment of
environmental risk are adequate and the Company is unaware of any environmental
issues which would subject it to any material liability at this time. However,
no assurance can be given that the values of properties securing loans in the
Company's portfolio will not be adversely affected by unforeseen environmental
risks.
INVESTMENT ACTIVITIES
INVESTMENT POLICIES. The investment policy of the Company, which is
established by the Board of Directors, is designed to help the Company achieve
its fundamental asset/liability management objectives. Generally, the policy
calls for the Company to emphasize principal preservation, liquidity,
diversification, short maturities and/or repricing terms, and a favorable return
on investment when selecting new investments for the Company's investment and
mortgage-backed and mortgage-related securities portfolios. In addition, the
policy sets forth objectives which are designed to limit new investments to
those which further the Company's goals with respect to interest rate risk
management. The Company's current securities investment policy permits
investments in various types of liquid assets including obligations of the U.S.
Treasury and federal agencies, investment-grade corporate obligations, various
types of mortgage-backed and mortgage-related securities, including
collateralized mortgage obligations ("CMOs"), commercial paper, and insured
certificates of deposit. The Bank, as a New York-chartered savings bank, is
permitted to make certain investments in equity securities and stock mutual
funds. At March 31, 1999 these equity investments totaled $32.2 million. See
"Business-Regulation -- Activities and Investments of FDIC-Insured
State-Chartered Banks".
The Company currently does not participate in hedging programs, interest
rate swaps, or other activities involving use of off-balance sheet derivative
financial instruments. Similarly, the Company does not invest in
mortgage-related securities which are deemed to be "high risk," or purchase
bonds which are not rated investment grade.
MORTGAGE-BACKED AND MORTGAGE-RELATED SECURITIES. Mortgage-backed
securities (which also are known as mortgage participation certificates or
19
<PAGE> 22
pass-through certificates) represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally U.S. Government agencies and government sponsored enterprises) that
pool and repackage the participation interests in the form of securities, to
investors such as the Company. Such U.S. Government agencies and government
sponsored enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, the FNMA and the Government National
Mortgage Association ("GNMA").
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Company. However, the existence of the guarantees or
insurance generally results in such securities bearing yields which are less
than the loans underlying such securities.
The FHLMC is a publicly traded corporation chartered by the U.S.
Government. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal on participation certificates. The FNMA is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. The FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low-and middle-income housing, there are limits to the maximum size of loans
that qualify for these programs.
In fiscal 1997 the Company reclassified its mortgage-backed and
mortgage-related and investment securities held to maturity (which at the time
totaled $129.8 million) as available-for-sale. The Company subsequently sold in
March 1997 $397.3 million of these securities, incurring a net loss of $4.5
million in order to improve the yield on and reduce the interest rate volatility
of the Company's investment securities and mortgage-backed and mortgage-related
securities. The Company reinvested the proceeds primarily in U.S. Treasury notes
and bills with maturities of two years or less, resulting initially in an
increase in the yield of approximately 60 basis points by comparison to the
securities sold.
At March 31, 1999, the Company's $1.19 billion of mortgage-backed and
mortgage-related securities, which represented 21.5% of the Company's total
assets, were comprised of $1.13 billion of CMOs, and $59.7 million of
mortgage-backed securities, which were issued or guaranteed by the FHLMC, the
FNMA or the GNMA. The portfolio increased $1.11 billion during fiscal 1999
primarily due to the Company's determination to invest a greater portion of its
assets into higher yielding mortgage-backed and mortgage-related securities.
At March 31, 1999, the contractual maturity of approximately 88.1% of the
Company's mortgage-backed and mortgage-related securities was in excess of ten
years. The actual maturity of a mortgage-related security is less than its
stated maturity due to repayments of the underlying mortgages. Prepayments at a
rate different than that anticipated will affect the yield to maturity. The
yield is based upon the interest income and the amortization of any premium or
discount related to the mortgage-backed security. In accordance with generally
accepted accounting principles ("GAAP"), premiums and discounts are amortized
over the estimated lives of the loans, which decrease and increase interest
income, respectively. The repayment assumptions used to determine the
amortization period for premiums and discounts can significantly effect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect actual prepayments. If prepayments are faster than
anticipated, the life of the security may be shortened and may result in a loss
due to an acceleration of any unamortized premium. Although repayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of
20
<PAGE> 23
the underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of repayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the repayment of the underlying
mortgages and the related security. Under such circumstances, the Company may be
subject to reinvestment risk because to the extent that the Company's
mortgage-backed and mortgage-related securities amortize or repay faster than
anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
The following table sets forth the activity in the Company's aggregate
mortgage-backed and mortgage-related securities portfolio during the periods
indicated, all of which are available for sale.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
1999(1) 1998(1) 1997(1)
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed and mortgage-related securities at
beginning of period $ 84,610 $ 190,979 $ 516,023
Purchases 1,232,479 14,517 132,587
Sales -- (14,522) (310,252)
Repayments, prepayments and maturities (118,972) (108,644) (146,836)
Amortization of premium (823) (592) (4,307)
Accretion of discounts 88 147 385
Unrealized gains (losses) on available-for-sale
mortgage- backed and mortgage-related securities (7,549) 2,725 3,379
---------- --------- ---------
Mortgage-backed and mortgage-related securities at end
of period $1,189,833 $ 84,610 $ 190,979
========== ========= =========
</TABLE>
- - ---------------
(1) All mortgage-backed and mortgage-related securities at March 31, 1999, 1998
and 1997 were classified available-for-sale.
INVESTMENT SECURITIES. The Company has the authority to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various Federal agencies and of state and municipal governments, mutual funds,
equity securities and corporate obligations. The portfolio decreased 74.1% from
$1.28 billion at March 31, 1998 to $331.8 million at March 31, 1999 primarily
due to the redeployment of the initial investment of the stock offering proceeds
from investment securities into higher yielding mortgage loans and mortgage
related securities in accordance with the Company's operating plan.
21
<PAGE> 24
The following table sets forth the activity in the Company's aggregate
investment securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1999(1) 1998(1) 1997(1)
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Investment securities at beginning of period $ 1,282,072 $ 357,487 $ 723,823
Purchases 717,698 2,228,433 785,334
Sales (456,013) (273,740) (339,842)
Maturities and repayments (1,207,133) (1,050,965) (823,825)
Amortization of premium (464) (475) (85)
Accretion of discounts 3,488 13,619 11,551
Unrealized gains (losses) on available-for-sale
investment securities (7,853) 7,713 531
----------- ----------- ---------
Investment securities at end of period $ 331,795 $ 1,282,072 $ 357,487
=========== =========== =========
</TABLE>
- - ---------------
(1) All investment securities at March 31, 1999, 1998 and 1997 were deemed
available-for-sale.
The following table sets forth information regarding the amortized cost and
market value of the Company's investment and mortgage-backed and
mortgage-related securities at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31
-----------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ---------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
---------- ---------- ---------- ---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale:
Investment securities:
U.S. Government and
federal agency
obligations $ 268,524 $ 264,223 $1,087,219 $1,089,952 $345,229 $345,144
Corporate securities 78 78 226 224 363 358
Municipal securities 699 699 1,104 1,104 1,104 1,104
Stocks:
Preferred 15,000 15,000 168,100 168,100 281 280
Common 47,457 51,795 17,533 22,692 10,333 10,601
Mortgage-backed and
mortgage-related
securities:
FNMA 3,830 3,875 5,294 5,415 7,319 7,175
GNMA 46,981 48,956 63,566 66,473 79,684 80,757
FHLMC 6,756 6,820 11,500 11,611 18,780 18,594
CMOs 1,136,655 1,130,182 1,090 1,111 84,761 84,453
---------- ---------- ---------- ---------- -------- --------
Total $1,525,980 $1,521,628 $1,355,632 $1,366,682 $547,854 $548,466
========== ========== ========== ========== ======== ========
</TABLE>
22
<PAGE> 25
The following table sets forth certain information regarding the maturities
of the Company's investment and mortgage-backed and mortgage-related securities
at March 31, 1999, all of which were classified as available-for-sale.
<TABLE>
<CAPTION>
AT MARCH 31, 1999, CONTRACTUALLY MATURING
------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
UNDER 1 AVERAGE 1-5 AVERAGE 6-10 AVERAGE OVER 10 AVERAGE
YEAR YIELD YEARS YIELD YEARS YIELD YEARS YIELD TOTAL
------- -------- ------ -------- ------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government and
federal agency
obligations $97,800 5.77% $2,602 6.25% $20,484 6.37% $ 143,337 6.17% $ 264,223
Corporate securities 78 7.76 -- -- -- -- -- -- 78
Municipal securities -- -- 699 7.25 -- -- -- -- 699
Mortgage-backed and
mortgage-related
securities:
FNMA -- -- 1,583 7.38 -- -- 2,292 6.55 3,875
GNMA -- -- 2,598 7.39 6,397 8.00 39,961 7.81 48,956
FHLMC -- -- 1,445 5.63 1,424 6.58 3,951 6.77 6,820
CMOs -- -- -- -- 38,069 6.29 1,092,113 6.43 1,130,182
------- ------ ------- ---------- ----------
Total $97,878 $8,927 $66,374 $1,281,654 $1,454,833
======= ====== ======= ========== ==========
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from loan principal and interest payments and repayments,
maturities and sales of securities, interest on securities, advances from the
FHLB of New York and certain other borrowings. Loan payments are a relatively
stable source of funds, while deposit inflows and outflows are influenced by
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis for general business
purposes.
DEPOSITS. The Company's deposit products include NOW accounts (including
the "Active Management" NOW account), money market accounts,
non-interest-bearing checking accounts, passbook and statement savings accounts
and term certificate accounts. Deposit account terms vary, with the principal
differences being the minimum balance required, the time periods the funds must
remain on deposit and the interest rate.
The Company's deposits are obtained primarily from the areas in which its
branch offices are located, and management of the Company estimates that only a
minimal amount of the Company's deposits are obtained from customers residing
elsewhere. The Company does not pay fees to brokers to solicit funds for deposit
or actively solicit negotiable-rate certificates of deposit with balances of
$100,000 or more.
The Company attracts deposits through a network of convenient office
locations offering a variety of accounts and services, competitive interest
rates and convenient customer hours. The branch network consists of 32
traditional full-service offices.
In addition to its branch network, the Company currently maintains 52 ATMs
in or at its branch offices and plans to install an additional 5 ATMs in its
offices by the end of fiscal 2000.
Deposit accounts offered by the Company vary according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. The Company is not limited with respect to
the rates it may offer on deposit accounts. In determining the characteristics
of its deposit accounts, consideration is given to the profitability to the
Company, matching terms of the deposits with loan products, the attractiveness
to customers and the rates offered by the Company's competitors.
The Company's focus on customer service has facilitated its retention of
lower-costing NOW accounts, money market accounts, non-interest bearing checking
accounts and savings accounts, which generally have rates substantially less
than certificates of deposit. At March 31, 1999, these types of
23
<PAGE> 26
deposits amounted to $1.63 billion or 47.2% of the Company's total deposits.
During the fiscal year ended March 31, 1999 the weighted average rate paid on
the Company's demand deposits and passbook savings deposits amounted to 2.14%
and 2.52%, respectively, as compared to a weighted average rate of 5.40% paid on
the Company's certificates of deposit during this period.
The Company's deposits increased $53.6 million or 1.6% to $3.45 billion at
March 31, 1999 from $3.39 billion at March 31, 1998 primarily as a result of
interest credited of $133.1 million, offset by $79.6 million of deposit
outflows.
The following table sets forth the activity in the Company's deposits
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance $3,393,800 $3,325,558 $3,396,890
Increase due to acquisitions -- 69,997 --
Decrease due to disposition -- -- (51,407)
Other net decrease before interest credited (79,582) (146,244) (158,765)
Interest credited 133,146 144,489 138,840
---------- ---------- ----------
Net increase (decrease) in deposits 53,564 68,242 (71,332)
---------- ---------- ----------
Ending balance $3,447,364 $3,393,800 $3,325,558
========== ========== ==========
</TABLE>
The following table sets forth by various interest rate categories the
certificates of deposit with the Company at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
2.00% to 3.99% $ -- $ 1,141 $ 2,666
4.00% to 4.99% 795,127 201,598 215,992
5.00% to 5.99% 842,203 1,309,923 1,260,417
6.00% to 6.99% 105,935 128,527 174,972
7.00% to 8.99% 76,665 79,814 89,701
9.00% to 10.99% 972 1,622 8
---------- ---------- ----------
$1,820,902 $1,722,625 $1,743,756
========== ========== ==========
</TABLE>
The following table sets forth the amount and remaining maturities of the
Company's certificates of deposit at March 31, 1999.
<TABLE>
<CAPTION>
OVER OVER OVER
SIX SIX MONTHS ONE YEAR TWO YEARS OVER
MONTHS THROUGH THROUGH THROUGH THREE
OR LESS ONE YEAR TWO YEARS THREE YEARS YEARS TOTAL
-------- ----------- --------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
4.00% to 4.99% $502,058 $219,854 $ 58,710 $ 6,459 $ 8,046 $ 795,127
5.00% to 5.99% 383,547 331,248 65,319 17,149 44,940 842,203
6.00% to 6.99% 16,611 19,210 28,170 17,815 24,129 105,935
7.00% to 8.99% 1,516 62,785 12,081 183 100 76,665
9.00% to 10.99% 972 -- -- -- -- 972
-------- -------- -------- ------- ------- ----------
Total $904,704 $633,097 $164,280 $41,606 $77,215 $1,820,902
======== ======== ======== ======= ======= ==========
</TABLE>
24
<PAGE> 27
As of March 31, 1999, the aggregate amount of outstanding time certificates
of deposit in amounts greater than or equal to $100,000 was approximately $232.5
million. The following table presents the maturity of these time certificates of
deposit at such date.
<TABLE>
<CAPTION>
AMOUNT
------
(IN THOUSANDS)
<S> <C>
3 Months or less $ 65,392
Over 3 months through 6 months 42,848
Over 6 months through 12 months 85,778
Over 12 months 38,527
--------
$232,545
========
</TABLE>
BORROWINGS. The Company may obtain advances from the FHLB based upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans, provided certain standards related to creditworthiness have been
met. Such advances are made pursuant to several credit programs, each of which
has its own interest rate and range of maturities. Such advances are generally
available to meet seasonal and other withdrawals of deposit accounts and to
permit increased lending. During fiscal 1999, the Company initiated a leverage
strategy which utilized FHLB advances as its primary funding source to support
asset growth. The Company, at March 31, 1999, had $1.1 billion of FHLB advances
outstanding with maturities ranging between less than one year and seven years
with the majority having a maturity of less than five years. Borrowings
outstanding at March 31, 1999 also included a $10.0 million repurchase agreement
and two mortgages extended to the Company in connection with the purchase of two
of its branch offices. For further discussion See "Management's Discussion and
Analysis of Financial Condition and Results of Operation-Business
Strategy-Controlled growth" in Item 7 hereof and Note 9 of the "Notes to
Consolidated Financial Statements" set forth in Item 8 hereof.
EMPLOYEES
The Company had 761 full-time employees and 169 part-time employees at
March 31, 1999. None of these employees are represented by a collective
bargaining agreement or agent and the Company considers its relationship with
its employees to be good.
SAVINGS BANK LIFE INSURANCE
The Company, through its Savings Bank Life Insurance ("SBLI") department,
engages in group life insurance coverage for individuals under SBLI's Financial
Institution Group Life Insurance policy. The SBLI Department's activities are
segregated from the Company and, while they do not directly affect the Company's
earnings, management believes that offering SBLI is beneficial to the Company's
relationship with its depositors and the general public. The SBLI Department
pays its own expenses and reimburses the Company for expenses incurred on its
behalf. At March 31, 1999, the SBLI Department had policies totaling $412.5
million in force.
SUBSIDIARIES
At March 31, 1999, the Holding Company's two active subsidiaries were the
Bank and Mitchamm Corp. ("Mitchamm"). The Bank's three active subsidiaries were
Independence Community Investment Corp. ("ICIC"), Independence Community Realty
Corp. ("ICRC") and Wiljo.
MITCHAMM CORP. Mitchamm was established in September 1997 primarily to
operate Mail Boxes Etc. ("MBE") franchises, which provides mail services,
packaging and shipping services primarily to individuals and small businesses.
Mitchamm began operations at one facility during the third quarter of fiscal
1999. The Company anticipates adding two more facilities during fiscal 2000. In
addition, Mitchamm is the area franchisee for MBE in Brooklyn, Queens and Staten
Island which could provide additional royalty income as the MBE franchise
expands within these areas.
INDEPENDENCE COMMUNITY INVESTMENT CORP. ICIC was established in December
1998 as the Delaware-chartered holding Company for ICRC. On December 18, 1998
the Company transferred 1,000 shares of ICRC's common stock, par value $.01 per
share, and 9,889 shares of junior preferred stock, stated value $1,000 per
share, to ICIC in return for all 1,000 shares of ICIC's common stock, par value
$.01 per share.
INDEPENDENCE COMMUNITY REALTY CORP. ICRC was established in September 1996
as a real estate investment trust. On October 1, 1996, the Company transferred
to ICRC real estate loans with a fair market value of approximately $834.0
million in return for all 1,000 shares of ICRC's common
25
<PAGE> 28
stock and all 10,000 shares of ICRC's 8% junior preferred stock. In January
1997, 111 officers and employees of the Company each received one share of 8%
junior preferred stock with a stated value of $1,000 per share of ICRC. At March
31, 1999, ICRC held $1.0 billion of loans and $37.3 million of commercial paper.
WILJO DEVELOPMENT CORP. The assets of Wiljo consist primarily of the
office space in the building in which the Company's executive offices are
located and its limited partnership interest in the partnership which owns the
remaining portion of the building. At March 31, 1999, Wiljo had total assets of
$7.5 million and the Company's equity investment in Wiljo amounted to $6.7
million.
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the Company and the Bank. The description of the laws
and regulations hereunder, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
THE COMPANY
GENERAL. Upon consummation of the Conversion, the Holding Company became
subject to regulation as a savings and loan holding company under the Home
Owners' Loan Act, as amended ("HOLA"), instead of being subject to regulation as
a bank holding company under the Bank Holding Company Act of 1956 because the
Bank made an election under Section 10(1) of HOLA to be treated as a "savings
association" for purposes of Section 10(e) of HOLA. As a result, the Holding
Company was required to register with the Office of Thrift Supervision ("OTS")
and is subject to OTS regulations, examinations, supervision and reporting
requirements relating to savings and loan holding companies. The Holding Company
is also required to file certain reports with, and otherwise comply with the
rules and regulations of, the Department and the SEC. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with the Holding Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. With the consummation of the Conversion, the Bank
is the sole savings association subsidiary of the Holding Company. There are
generally no restrictions on the activities of a savings and loan holding
company which holds only one subsidiary savings institution. However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, he may impose such restrictions as are
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the qualified thrift lender ("QTL") test,
as discussed under "-- Qualified Thrift Lender Test," then such unitary holding
company also shall become subject to the activities restrictions applicable to
multiple savings and loan holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, shall register as, and become
subject to the restrictions applicable to, a bank holding company. See
"-- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business activity other than: (i) furnishing or performing management
services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidi-
26
<PAGE> 29
ary savings institution; (iv) holding or managing properties used or occupied by
a subsidiary savings institution; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987 to be engaged
in by multiple savings and loan holding companies; or (vii) unless the Director
of the OTS by regulation prohibits or limits such activities for savings and
loan holding companies, those activities authorized by the FRB as permissible
for bank holding companies. Those activities described in clause (vii) above
also must be approved by the Director of the OTS prior to being engaged in by a
multiple savings and loan holding company.
QUALIFIED THRIFT LENDER TEST. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended (the "Code"). A savings bank subsidiary of a savings and loan
holding company that does not comply with the QTL test must comply with the
following restrictions on its operations: (i) the institution may not engage in
any new activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank; (iii)
the institution shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings institution ceases to meet the QTL test, it must
cease any activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
The QTL test set forth in the HOLA requires that qualified thrift
investments ("QTLs") represent 65% of portfolio assets of the savings
institution and its consolidated subsidiaries. Portfolio assets are defined as
total assets less intangibles, property used by a savings association in its
business and liquidity investments in an amount not exceeding 20% of assets.
Generally, QTLs are residential housing related assets. The 1996 amendments
allow small business loans, credit card loans, student loans and loans for
personal, family and household purpose to be included without limitation as
qualified investments. At March 31, 1999 approximately 79.5% of the Bank's
assets were invested in QTLs, which was in excess of the percentage required to
qualify the Bank under the QTL test in effect at that time.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institu-
27
<PAGE> 30
tion. Section 22(h) also requires prior board approval for certain loans. In
addition, the aggregate amount of extensions of credit by a savings institution
to all insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At March 31, 1999, the Bank was in compliance with the above
restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director, (i) control of any other savings institution or savings and
loan holding company or substantially all the assets thereof or (ii) more than
5% of the voting shares of a savings institution or holding company thereof
which is not a subsidiary. Except with the prior approval of the Director, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
The Director may only approve acquisitions resulting in the formation of a
multiple savings and loan holding company which controls savings institutions in
more than one state if (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
located in the state of the institution to be acquired as of March 5, 1987; (ii)
the acquiror is authorized to acquire control of the savings institution
pursuant to the emergency acquisition provisions of the Federal Deposit
Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
FEDERAL SECURITIES LAWS. The Company's Common Stock is registered with the
SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company is subject to the proxy and tender offer rules,
insider trading reporting requirements and restrictions, and certain other
requirements under the Exchange Act.
THE BANK
GENERAL. The Bank is subject to extensive regulation and examination by
the Department, as its chartering authority, and by the FDIC, as the insurer of
its deposits, and is subject to certain requirements established by the OTS as a
result of the Holding Company's savings and loan holding company status. The
federal and state laws and regulations which are applicable to banks regulate,
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of and collateral for certain loans. The Bank must file
reports with the Department and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior to entering into
certain transactions such as establishing branches and mergers with, or
acquisitions of, other depository institutions. There are periodic examinations
by the Department and the FDIC to test the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC or as a result of
the enactment of legislation, could have a material adverse impact on the
Company, the Bank and their operations.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System.
The FDIC's capital regulations establish a minimum 3.0% Tier 1 leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively increases the minimum Tier
1 leverage ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's
regulation, the highest-rated banks are those that the FDIC determines are not
anticipating
28
<PAGE> 31
or experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, which are considered a strong banking organization and
are rated composite 1 under the Uniform Financial Institutions Rating System.
Leverage or core capital is defined as the sum of common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, and minority interests in consolidated subsidiaries, minus all
intangible assets other than certain qualifying supervisory goodwill and certain
mortgage servicing rights.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier 1 capital and
supplementary (Tier 2) capital) to risk-weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item. The components of Tier
1 capital are equivalent to those discussed above under the 3% leverage capital
standard. The components of supplementary capital include certain perpetual
preferred stock, certain mandatory convertible securities, certain subordinated
debt and intermediate preferred stock and general allowances for loan and lease
losses. Allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core capital.
At March 31, 1999, the Bank met or exceeded each of its capital requirements.
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate risk
in assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies
issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
However, the agencies have determined not to proceed with a previously issued
proposal to develop a supervisory framework for measuring interest rate risk and
an explicit capital component for interest rate risk.
ACTIVITIES AND INVESTMENTS OF NEW YORK-CHARTERED SAVINGS BANKS. The Bank
derives its lending, investment and other authority primarily from the
applicable provisions of New York Banking Law and the regulations of the
Department, as limited by FDIC regulations and other federal laws and
regulations. See "-- Activities and Investments of FDIC Insured State-Chartered
Banks." These New York laws and regulations authorize savings banks, including
the Bank, to invest in real estate mortgages, consumer and commercial loans,
certain types of debt securities, including certain corporate debt securities
and obligations of federal, state and local governments and agencies, certain
types of corporate equity securities and certain other assets. Under the
statutory authority for investing in equity securities, a savings bank may
directly invest up to 7.5% of its assets in certain corporate stock and may also
invest up to 7.5% of its assets in certain mutual fund securities. Investment in
stock of a single corporation is limited to the lesser of 2% of the outstanding
stock of such corporation or 1% of the savings bank's assets, except as set
forth below. Such equity securities must meet certain tests of financial
performance. A savings bank's lending powers are not subject to percentage of
asset limitations, although there are limits applicable to single borrowers. A
savings bank may also, pursuant to the "leeway" authority, make investments not
otherwise permitted under the New York Banking Law. This authority permits
investments in otherwise impermissible investments of up to 1% of the savings
bank's assets in any single investment, subject to certain restrictions and to
an aggregate limit for all such investments of up to 5% of assets. Additionally,
in lieu of investing in such securities in accordance with the reliance upon the
specific investment authority set forth in the New York Banking Law, savings
banks are authorized to elect to invest under a "prudent person" standard in a
wider range of debt and equity securities as compared to the types of
investments permissible under such specific investment authority. However, in
the event a savings bank elects to utilize the "prudent person" standard, it
will be unable to avail itself of the other provisions
29
<PAGE> 32
of the New York Banking Law and regulations which set forth specific investment
authority. A New York-chartered stock savings bank may also exercise trust
powers upon approval of the Department.
Under recently enacted legislation, the Department has been granted the
authority to maintain the power of state-chartered banks reciprocal with those
of a national bank.
New York-chartered savings banks may also invest in subsidiaries under
their service corporation investment power. A savings bank may use this power to
invest in corporations that engage in various activities authorized for savings
banks, plus any additional activities which may be authorized by the Department.
Investment by a savings bank in the stock, capital notes and debentures of its
service corporations is limited to 3% of the savings bank's assets, and such
investments, together with the savings bank's loans to its service corporations,
may not exceed 10% of the savings bank's assets.
With certain limited exceptions, a New York-chartered savings bank may not
make loans or extend credit for commercial, corporate or business purposes
(including lease financing) to a single borrower, the aggregate amount of which
would be in excess of 15% of the bank's net worth. The Bank currently complies
with all applicable loans-to-one-borrower limitations.
ACTIVITIES AND INVESTMENTS OF FDIC-INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an
FDIC-insured state-chartered bank may not directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements.
Excluded from the foregoing proscription is the provision of savings bank
life insurance by an FDIC-insured, state-chartered bank that is located in New
York or certain other states and is otherwise authorized to sell such insurance,
provided that (i) the FDIC does not alter its determination pursuant to the FDIA
that such activities do not pose a significant risk to the insurance fund of
which the Bank is a member, (ii) the insurance underwriting is conducted through
a division of the bank that meets the definition of "department" contained in
FDIC regulations and (iii) the bank discloses to purchasers of life insurance
policies and other products that they are not insured by the FDIC, among other
things. At March 31, 1999, the Bank's SBLI Department had $412.5 million of
insurance in force.
Also excluded from the foregoing proscription is the investment by a
state-chartered, FDIC-insured bank in common and preferred stock listed on a
national securities exchange and in shares of an investment company registered
under the Investment Company Act of 1940. In order to qualify for the exception,
a state-chartered FDIC-insured bank must (i) have held such types of investments
during the 14-month period from September 30, 1990 through November 26, 1991,
(ii) be chartered in a state that authorized such investments as of September
30, 1991 and (iii) file a one-time notice with the FDIC in the required form and
receive FDIC approval of such notice. In addition, the total investment
permitted under the exception may not exceed 100% of the bank's tier one capital
as calculated under FDIC regulations. The Bank received FDIC approval of its
notice to engage in this investment activity on February 26, 1993. As of March
31, 1999, the book value of the Bank's investments under this exception was
$32.2 million, which equaled 4.8% of its tier one capital. Such grandfathering
authority is subject to termination upon the FDIC's determination that such
investments pose a safety and soundness risk to the Bank
30
<PAGE> 33
or in the event the Bank coverts its charter or undergoes a change in control.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
Under the New York Banking Law, the Department may issue an order to a New
York-chartered banking institution to appear and explain an apparent violation
of law, to discontinue unauthorized or unsafe practices and to keep prescribed
books and accounts. Upon a finding by the Department that any director, trustee
or officer of any banking organization has violated any law, or has continued
unauthorized or unsafe practices in conducting the business of the banking
organization after having been notified by the Department to discontinue such
practices, such director, trustee or officer may be removed from office by the
Department after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Department against the Bank or any of its directors or
officers. The Department also may take possession of a banking organization
under specified statutory criteria.
PROMPT CORRECTIVE ACTION. Section 38 of the Federal Deposit Insurance Act
("FDIA") provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking regulators,
an institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure, (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0% and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. The regulations also
provide that a federal banking regulator may, after notice and an opportunity
for a hearing, reclassify a "well capitalized" institution as "adequately
capitalized" and may require an "adequately capitalized" institution or an
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. The federal banking
regulator may not, however, reclassify a "significantly undercapitalized"
institution as "critically undercapitalized."
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with an appropriate federal banking regulator
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Immediately upon becoming undercapitalized, an
institution becomes subject to statutory provisions which, among other things,
set forth various mandatory and discretionary restrictions on the operations of
such an institution.
As March 31, 1999, the Bank had capital levels which qualified it as a
"well-capitalized" institution.
FDIC INSURANCE PREMIUMS. The Bank is a member of the Bank Insurance Fund
("BIF") administered by the FDIC but has accounts insured by both the BIF and
the Savings Association Insurance Fund ("SAIF"). The SAIF-insured accounts
31
<PAGE> 34
are held by the Bank as a result of certain acquisitions and branch purchases
involving SAIF-insured deposits, such deposits amounted to $1.54 billion as of
March 31, 1999. As insurer, the FDIC is authorized to conduct examinations of,
and to require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF.
Effective October 8, 1996, the FDIC imposed a one-time special assessment
equal to 65.7 basis points for all SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. Certain BIF members, including
the Bank, qualified for a 20% reduction of its SAIF-assessable deposits for
purposes of calculating the one-time special assessment. The Bank's one-time
special assessment amounted to $8.6 million, $5.63 million net of related tax
benefits. The payment of the special assessment reduced the Bank's capital by
the amount of the assessment.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective SAIF rates range from zero basis points to 27 basis points which is
the same range of premiums as the BIF rates. From 1997 through 1999, almost all
FDIC-insured institutions will pay 6.4 basis points of their SAIF-assessable
deposits and approximately 1.3 basis points of their BIF-assessable deposits to
fund the Financing Corporation. Based upon the $1.91 billion of BIF-assessable
deposits and $1.54 billion of SAIF-assessable deposits at March 31, 1999, the
Bank would expect to pay $282,000 in insurance premiums per quarter during
calendar 1999.
BROKERED DEPOSITS. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a "well capitalized insured depository institution" may solicit and accept,
renew or roll over any brokered deposit without restriction, (ii) an "adequately
capitalized insured depository institution" may not accept, renew or roll over
any brokered deposit unless it has applied for and been granted a waiver of this
prohibition by the FDIC and (iii) an "undercapitalized insured depository
institution" may not (x) accept, renew or roll over any brokered deposit or (y)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited. The term "undercapitalized insured depository
institution" is defined to mean any insured depository institution that fails to
meet the minimum regulatory capital requirement prescribed by its appropriate
federal banking agency. The FDIC may, on a case-by-case basis and upon
application by an adequately capitalized insured depository institution, waive
the restriction on brokered deposits upon a finding that the acceptance of
brokered deposits does not constitute an unsafe or unsound practice with respect
to such institution. The Company had no brokered deposits outstanding at March
31, 1999.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with its
lending activities, the Company is subject to a variety of federal laws designed
to protect borrowers and promote lending to various sectors of the economy and
population. Included among these are the federal Home Mortgage Disclosure Act,
Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit
Opportunity Act, Fair Credit Reporting Act and the CRA.
32
<PAGE> 35
The CRA requires insured institutions to define the communities that they
serve, identify the credit needs of those communities and adopt and implement a
"Community Reinvestment Act Statement" pursuant to which they offer credit
products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the
Company, the FDIC) must conduct regular CRA examinations of insured financial
institutions and assign to them a CRA rating of "outstanding," "satisfactory,"
"needs improvement" or "unsatisfactory." The Company's latest federal CRA rating
based upon its last examination is "satisfactory."
The Company is also subject to provisions of the New York Banking Law which
impose continuing and affirmative obligations upon banking institutions
organized in New York State to serve the credit needs of its local community
("NYCRA"), which are similar to those imposed by the CRA. Pursuant to the NYCRA,
a bank must file an annual NYCRA report and copies of all federal CRA reports
with the Department. The NYCRA requires the Department to make an annual written
assessment of a bank's compliance with the NYCRA, utilizing a four-tiered rating
system, and make such assessment available to the public. The NYCRA also
requires the Department to consider a bank's NYCRA rating when reviewing a
bank's application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any
such application. The Company's latest NYCRA rating received from the Department
was "satisfactory."
LIMITATIONS ON DIVIDENDS. The Holding Company is a legal entity separate
and distinct from the Bank. The Holding Company's principal source of revenue
consists of dividends from the Bank. The payment of dividends by the Bank is
subject to various regulatory requirements including a requirement, as a result
of the Holding Company's savings and loan holding company status, that the Bank
notify the Director not less than 30 days in advance of any proposed declaration
by its directors of a dividend.
Under New York Banking Law, a New York-chartered stock savings bank may
declare and pay dividends out of its net profits, unless there is an impairment
of capital, but approval of the Department is required if the total of all
dividends declared in a calendar year would exceed the total of its net profits
for that year combined with its retained net profits of the preceding two years,
subject to certain adjustments.
MISCELLANEOUS. The Bank is subject to certain restrictions on loans to the
Holding Company or its non-bank subsidiaries, on investments in the stock or
securities thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on
behalf of the Company or its non-bank subsidiaries. The Bank also is subject to
certain restrictions on most types of transactions with the Holding Company or
its non-bank subsidiaries, requiring that the terms of such transactions be
substantially equivalent to terms of similar transactions with non-affiliated
firms.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. The Bank had
$1.1 billion of FHLB advances at March 31, 1999.
As an FHLB member, the Bank is required to purchase and maintain stock in
the FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of New York,
whichever is greater. At March 31, 1999, the Bank had approximately $56.2
million in FHLB stock, which resulted in its compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
continue to do so in the future. These contributions also could have
33
<PAGE> 36
an adverse effect on the value of FHLB stock in the future.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. As of March 31, 1999, the
Bank was in compliance with applicable requirements. However, because required
reserves must be maintained in the form of vault cash or a non-interest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce an institution's earning assets.
TAXATION
FEDERAL TAXATION
GENERAL. The Company is subject to federal income taxation in the same
general manner as other corporations with some exceptions discussed below.
The following discussion of federal taxation is intended only to summarize
certain pertinent federal income tax matters and is not a comprehensive
description of the tax rules applicable to the Company. The Bank's federal
income tax returns have been audited or closed without audit by the Internal
Revenue Service through 1994.
METHOD OF ACCOUNTING. For federal income tax purposes, the Company
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its consolidated federal
income tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective taxable years beginning after 1995.
BAD DEBT RESERVE. Prior to the 1996 Act, the Company was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of December 31, 1998 is approximately $3.0
million. The Company has an associated deferred tax liability of $1.2 million at
December 31, 1998.
As discussed more fully below, the Company and certain eligible or
qualified subsidiaries file combined New York State Franchise and New York City
Financial Corporation tax returns. The basis of the determination of each tax is
the greater of a tax on entire net income (or on alternative entire net income)
or a tax computed on taxable assets. However, for state purposes, New York State
enacted legislation in 1996, which among other things, decoupled the Federal and
New York State tax laws regarding thrift bad debt deductions and permits the
continued use of the bad debt reserve method under section 593 of the Code.
Thus, provided the Bank continues to satisfy certain definitional tests and
other conditions, for New York State and City income tax purposes, the Bank is
permitted to continue to use the special reserve method for bad debt deductions.
The deductible annual addition to the state reserve may be computed using a
specific formula based on the Bank's loss history ("Experience Method") or a
statutory percentage equal to 32% of the Bank's New York State or City taxable
income ("Percentage Method").
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Company fail to meet certain thrift asset and definitional
tests. New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Company make certain non-dividend distributions or cease to maintain a bank
charter.
At December 31, 1998, the Company's total federal pre-1988 reserve was
approximately $30.0 million. This reserve reflects the cumulative effects of
federal tax deductions by the Company for which no Federal income tax provision
has been made.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more
34
<PAGE> 37
than 90% of AMTI. Certain payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years. As of December 31,
1998, the Company has no AMT credits available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. For the years beginning after August 5,
1997, a financial institution may carry back net operating losses to the
preceding two taxable years and forward to the succeeding 20 taxable years. At
December 31, 1998, the Bank had no net operating loss carryforwards for federal
income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The Holding Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
STATE AND LOCAL TAXATION
NEW YORK STATE AND NEW YORK CITY TAXATION. The Company and certain eligible
and qualified subsidiaries report income on a combined calendar year basis to
both New York State and New York City. New York State Franchise Tax on
corporations is imposed in an amount equal to the greater of (a) 9% of "entire
net income" allocable to New York State (b) 3% of "alternative entire net
income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications. Alternative
entire net income is equal to entire net income without certain modifications.
The New York City Corporation Tax is imposed using similar alternative taxable
income methods and rates.
A temporary Metropolitan Transportation Business Tax Surcharge on Banking
corporations doing business in the Metropolitan District has been applied since
1982. The Company transacts a significant portion of its business within this
District and is subject to this surcharge. For the tax year ended December 31,
1998, the surcharge rate is 17% of the State franchise tax liability.
Bad debt reserves maintained for New York State and New York City tax
purposes as of March 31, 1999, for which deferred taxes are not required to be
recognized, amounted to approximately $93 million. Accordingly, deferred tax
liabilities of approximately $22 million have not been recognized as of March
31, 1999.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $150,000.
35
<PAGE> 38
ITEM 2. PROPERTIES
OFFICES AND PROPERTIES
At March 31, 1999, the Company conducted its business from its executive
offices in Brooklyn and 32 full service branch offices:
<TABLE>
<CAPTION>
NET BOOK
VALUE OF
PROPERTY AND
LEASEHOLD
IMPROVEMENTS
LEASE AT DEPOSITS AT
OWNED OR EXPIRATION MARCH 31, MARCH 31,
LOCATION LEASED DATE 1999 1999
- - -------- -------- ---------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EXECUTIVE AND ADMINISTRATIVE OFFICES:
195 Montague Street
Brooklyn, New York 11201(1) Owned $16,176 $ 83,498
BRANCH OFFICES:
130 Court Street
Brooklyn, New York 11201(2) Owned 3,706 182,822
6424-18th Avenue
Brooklyn, New York 11204 Owned 995 330,750
23 Newkirk Plaza
Brooklyn, New York 11226 Owned 2,317 119,648
443 Hillside Avenue
Williston Park, New York 11596 Owned 2,140 195,123
23-56 Bell Boulevard
Bayside, New York 11360 Leased 9/30/2008 55 216,281
250 Lexington Avenue
New York, New York 10016 Leased 12/31/2001(3) 63 65,612
1416 East Avenue
Bronx, New York 10462 Leased (4) 491 117,029
1420 Northern Boulevard
Manhasset, New York 11030 Leased 9/30/2017 902 98,991
1769-86th Street
Brooklyn, New York 11214 Owned 1,516 163,043
Pratt Institute Campus
200 Willoughby Avenue
Brooklyn, New York 11205 Leased (5) 7 4,520
2357-59 86th Street
Brooklyn, New York 11214 Owned 1,876 89,822
4514 16th Avenue
Brooklyn, New York 11204 Owned 1,990 131,212
37-10 Broadway
Long Island City, New York 11103 Owned 1,903 160,665
22-59 31st Street
Long Island City, New York 11105 Owned 659 102,026
24-28 34th Avenue
Long Island City, New York 11106 Leased 6/30/2007 324 68,739
51-12 31st Avenue
Woodside, New York 11377 Leased 6/30/2007 321 44,797
83-20 Roosevelt Avenue
Jackson Heights, New York 11372 Leased 1/31/2005 1,039 59,920
75-15 31st Avenue
Jackson Heights, New York 11370 Leased 4/30/2004 368 84,896
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
NET BOOK
VALUE OF
PROPERTY AND
LEASEHOLD
IMPROVEMENTS
LEASE AT DEPOSITS AT
OWNED OR EXPIRATION MARCH 31, MARCH 31,
LOCATION LEASED DATE 1999 1999
- - -------- -------- ---------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
89-01 Northern Boulevard
Jackson Heights, New York 11372 Leased 7/31/2004 $ 322 $ 81,947
150-28 Union Turnpike
Flushing, New York 11367 Leased 5/31/2012 211 53,176
234 Prospect Park West
Brooklyn, New York 11215 Owned 3,122 50,092
7500 Fifth Avenue
Brooklyn, New York 11209 Owned 582 67,007
440 Avenue P
Brooklyn, New York 11223 Owned 1,357 88,799
301 Avenue U
Brooklyn, New York 11223 Owned 1,462 81,000
8808 Fifth Avenue
Brooklyn, New York 11209 Owned 2,236 61,959
1310 Kings Highway
Brooklyn, New York 11229 Owned 405 72,672
4823 13th Avenue
Brooklyn, New York 11219 Owned 4,795 189,693
1302 Avenue J
Brooklyn, New York 11230 Owned 805 111,296
1550 Richmond Road
Staten Island, New York 10304 Owned 1,067 136,431
1460 Forest Avenue
Staten Island, New York 10302 Leased 8/27/2011 31 131,521
498 Columbia Street
Brooklyn, New York 11231 Leased 12/31/2002 468 2,377
------- ----------
Totals $53,711 $3,447,364
======= ==========
</TABLE>
- - ---------------
(1) The Bank operates a full-service branch on the ground floor of the building.
(2) Designated as the Bank's main office.
(3) The Bank has an option to extend this lease for two additional 10 year
terms.
(4) Consists of two leases. The original lease executed March 1972 expires in
March 2002. In February 1987, the Bank entered into a lease for additional
space in the adjacent store which expires in November 2002.
(5) The Bank executed a "Memorandum of Understanding" with the Pratt Institute
to occupy the space; no expiration date was stated in the Memorandum.
37
<PAGE> 40
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which in the opinion of management, in the
aggregate, will not have a material adverse effect on the consolidated financial
condition and results of operations of the Company.
On May 17, 1995 and October 19, 1995, the purported class actions captioned
Simon v. Bay Ridge Bancorp., Inc., Dicunto, Ayoub, Christiansen, Canade, Kasler,
Mihailos, Apel and Cordano, and Pinkowitz v. Bay Ridge Bancorp., Inc., Dicunto,
Ayoub, Christansen, Canade, Kasler, Mihilos, Apel, Cordano, Independence
Community Bank Corp. and Hamm were filed in the Court of Chancery of the State
of Delaware in and for New Castle County. Such actions alleged, among other
things, that the directors of Bay Ridge breached their fiduciary duties in
connection with the acquisition of Bay Ridge by the Mutual Holding Company. In
addition, the Pinkowitz complaint alleged that the Mutual Holding Company aided
and abetted the breaches of fiduciary duty allegedly committed by the directors
of Bay Ridge. The Plaintiffs did not specify or claim a particular amount of
damages in such actions. The Company believes that plaintiffs claims are without
merit. In February 1999 the plaintiffs and defendants in both actions entered
into stipulations and orders of dismissal to dismiss both actions without
prejudice. Although it is possible for these actions to be reopened, the Company
does not expect such event to occur.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
38
<PAGE> 41
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
MATTERS
On March 13, 1998 the conversion and reorganization of the Bank and its
mutual holding company parent was completed. In connection with the consummation
of the reorganization, the Company issued 76,043,750 shares of common stock,
including 5,632,870 shares which were contributed to the Independence Community
Foundation (the "Foundation"). As of March 31, 1999, there were 67,873,876
shares of common stock outstanding. As of May 31, 1999 the Company had 16,379
stockholders of record. The following table sets forth the high and low stock
prices of the Company's common stock as reported by the Nasdaq Stock Market
under symbol "ICBC". The common stock began trading on the Nasdaq Stock Market
on March 17, 1998. Price information appears in major newspapers under the
symbols "IndepCmntyBk" or "IndpCm".
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 19 1/8 14 15/16 N/A N/A
Second Quarter 17 5/16 11 N/A N/A
Third Quarter 16 11 29/32 N/A N/A
Fourth Quarter 16 3/8 12 7/8 18 3/16 17 7/8
</TABLE>
The following schedule summarizes the cash dividends paid per common share for
fiscal 1999:
<TABLE>
<CAPTION>
1999
-----
<S> <C>
First Quarter N/A
Second Quarter N/A
Third Quarter $0.03
Fourth Quarter 0.03
</TABLE>
No dividends were declared or paid in fiscal 1998 since the Company was a
publicly owned Company only for a small portion of such fiscal year. On April
30, 1999, the Board of Directors declared a quarterly cash dividend of $0.04 per
common share, payable on May 25, 1999, to common stockholders of record at the
close of business on May 11, 1999.
See "Liquidity and Commitments" and Notes 1 and 16 of the Notes to
Consolidated Financial Statements set forth at Item 8 hereof for discussion of
restrictions on the Company's ability to pay dividends.
39
<PAGE> 42
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION
DATA:
Total assets $5,536,978 $5,222,996 $3,734,723 $3,869,782 $2,619,935
Cash and cash equivalents 279,885 857,251 374,636 103,192 110,394
Investment securities
held-to-maturity -- -- -- 39,995 29,427
Mortgage-backed and mortgage-
related securities held-to-
maturity -- -- -- 120,702 305,545
Mortgage-backed and mortgage-
related securities
available-for-sale 1,189,833 84,610 190,979 395,321 --
Investment securities
available-for-sale 331,795 1,282,072 357,487 683,828 61,818
Loans receivable, net 3,459,658 2,745,540 2,504,496 2,322,808 2,020,262
Intangible assets(1) 47,244 55,873 60,499 80,268 1,023
Deposit accounts 3,447,364 3,393,800 3,325,558 3,396,890 2,236,422
FHLB advances 1,106,725 14,300 14,550 56,045 67,462
Borrowings-securities loaned -- 701,160 -- -- --
Other borrowings 11,639 2,381 2,682 1,250 1,286
Total Stockholders' equity 824,962 949,124 309,114 289,819 259,197
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income $336,415 $293,043 $255,303 $213,100 $191,539
Interest expense 167,221 160,943 140,187 110,619 80,562
-------- -------- -------- -------- --------
Net interest income 169,194 132,100 115,116 102,481 110,977
-------- -------- -------- -------- --------
Provision for loan losses 10,698 10,011 7,960 3,679 3,592
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 158,496 122,089 107,156 98,802 107,385
Net gain (loss) on sales of loans
and securities 390 115 (3,347) 12,222 (3,952)
Other non-interest income 10,933 10,233 6,256 7,860 6,416
Amortization of intangible assets 8,629 8,740 8,278 1,842 905
Charitable contribution to
Independence Community Foundation -- 56,422 -- -- --
Other non-interest expenses(2) 89,574 80,713 73,875 50,288 46,713
-------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes 71,616 (13,438) 27,912 66,754 62,231
Provision (benefit) for income taxes 26,441 (3,482) 10,732 30,782 27,327
-------- -------- -------- -------- --------
Net income (loss) $ 45,175 $ (9,956) $ 17,180 $ 35,972 $ 34,904
======== ======== ======== ======== ========
Basic earnings (loss) per share(2) $ 0.67 $ (0.52) N/A N/A N/A
======== ======== ======== ======== ========
Diluted earnings (loss) per share(2) $ 0.66 $ (0.52) N/A N/A N/A
======== ======== ======== ======== ========
</TABLE>
(footnotes on next page)
40
<PAGE> 43
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:(4)
Return on assets(3) 0.90% 0.64% 0.46% 1.27% 1.37%
Return on equity(3) 4.87 7.59 5.69 13.13 14.81
Interest-earning assets to
interest-bearing liabilities 120.66 105.17 103.59 109.28 110.55
Interest rate spread(5) 2.79 3.05 3.18 3.39 4.18
Net interest margin(5) 3.50 3.26 3.32 3.77 4.52
Non-interest expense, exclusive of
amortization of intangible assets, to
total assets(3) 1.78 1.90 1.99 1.77 1.83
Efficiency ratio(6) 49.73 56.71 53.82 45.58 39.79
Cash dividend declared per common share $ 0.06 N/A N/A N/A N/A
ASSET QUALITY RATIOS:
Non-performing loans as a percent of
total loans at end of period 1.12% 1.07% 1.07% 1.52% 1.05%
Non-performing assets to total assets at
end of period(7) 0.71 0.57 0.74 0.94 0.88
Allowance for loan losses to
non-performing loans at end of period 119.72 122.19 99.76 57.81 55.73
Allowance for loan losses to total loans
at end of period 1.34 1.31 1.07 0.88 0.58
CAPITAL AND OTHER RATIOS:(4)
Equity to assets at end of period 14.90% 18.17% 8.28% 7.49% 9.89%
Leverage capital(8) 12.85 11.16 6.83 6.13 9.54
Tangible equity to risk-weighted assets
at end of period(8) 17.73 22.25 10.05 9.82 13.76
Total capital to risk-weighted assets at
end of period(8) 19.03 23.50 11.15 10.82 14.43
Cash earnings(9) $58,459 $36,754 $25,458 $37,814 $35,809
Diluted cash earnings per common share $ 0.86 N/A N/A N/A N/A
Number of full service offices at end of
period 32 34 32 33 21
</TABLE>
- - ---------------
(1) Represents the excess of cost over fair value of net assets acquired which
consists of goodwill and other intangibles which amounted to $19.9 million
and $27.3 million, respectively, at March 31, 1999. The reduction from March
31, 1996 to March 31, 1997 reflected, in addition to the amortization of
such intangible assets, certain adjustments relating to the acquisition in
1996 of Bay Ridge as well as the acquisition of five branch offices (the
"1996 Branch Acquisition"). The goodwill resulting from the Bay Ridge
acquisition decreased during fiscal 1997 due primarily to the repayment of
the Bay Ridge ESOP loan and the receipt of tax refunds. The intangible
related to the 1996 Branch Acquisition was affected by the sale of deposits
related to one of the offices acquired, resulting in a $5.3 million decrease
in the remaining premium related to this branch office. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation-Recent Acquisitions" in Item 7 hereof.
(2) The Mutual Holding Company converted to stock form on March 13, 1998.
Accordingly, earnings per share for the fiscal year ended March 31, 1998 are
presented on an historical basis from March 13, 1998 to March 31, 1998.
Includes the one time non-recurring charge of $56.4 million ($37.2 million,
net of tax) for funding of the Independence Community Foundation
("Foundation") at the time of The Mutual Holding Company's reorganization to
a stock holding company.
(3) At and for the year ended March 31, 1998, excludes the one time
non-recurring charge of $56.4 million ($37.2 million net of tax) for the
funding of the Foundation. At and for the year ended March 31, 1997,
reflects the effects of a special one-time assessment imposed on
institutions which had deposits insured by the SAIF. The Bank, as a result
of the various acquisitions it has completed, is deemed to have SAIF
deposits. As a consequence, during fiscal 1997, it paid $8.6 million in
satisfaction of the special assessment. Had this amount not been paid for
the year ended March 31, 1997, the Bank's returns on assets and equity would
have been 0.61% and 7.44%, respectively, and the Bank's ratio of
non-interest expenses, exclusive of amortization of intangible assets, to
total assets would have been 1.76%.
(4) With the exception of end of period ratios and the efficiency ratio, all
ratios are based on average daily balances during the respective periods.
(5) Interest rate spread represents the difference between the weighted-average
yield on interest-earning assets and the weighted-average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(footnotes continued on following page)
41
<PAGE> 44
(6) Reflects adjusted operating expense (net of amortization of intangibles,
special SAIF assessment and contribution to the Foundation) as a percent of
the aggregate of net interest income and adjusted non-interest income
(excluding gains and losses on the sales of loans and securities).
(7) Non-performing assets consist of non-accrual loans, loans past due 90 days
or more as to interest or principal repayment and accruing and real estate
acquired through foreclosure or by deed-in-lieu therefore.
(8) Ratios reflect the capital position of the Bank only.
(9) Cash earnings 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 fiscal 1999, cash earnings was also adjusted
for the one time non-recurring charge of $56.4 million ($37.2 million net of
tax) for funding of the Foundation.
ITEM 7. 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 principally consist of deposits and borrowings. Net interest
income is determined by an institution's interest rate spread (i.e., the
difference between the yields earned on its interest-earning assets and the
rates paid on its interest-bearing liabilities) and the relative amounts of
interest-earning assets and interest-bearing liabilities.
The Company's results of operations also are affected by the provision for
loan losses, resulting from management's assessment of the adequacy of the
Company's allowance for loan losses, the level of its non-interest income,
including service fees and related income, gains and losses from the sales of
loans and securities, the level of its non-interest expense, including
compensation and employee benefits, occupancy expense, FDIC insurance premiums,
data processing services and income tax expense.
The Bank is a community-oriented bank which emphasizes customer service and
convenience. As part of this strategy, the Bank offers products and services
designed to meet the needs of its customers. The Bank generally has sought to
achieve long-term financial strength and stability by increasing the amount and
stability of its net interest income and non-interest income and by maintaining
a high level of asset quality. In pursuit of these goals, the Bank has adopted a
business strategy emphasizing controlled growth, residential lending, retail
deposit products and customer service, while maintaining asset quality and
stable liquidity.
BUSINESS STRATEGY
CONTROLLED GROWTH. In recent years, the Company has sought to increase its
assets and expand its operations. The Company continues to utilize merger and
acquisition activities to achieve expansion. The Company announced two
acquisitions in February and April 1999 of Broad and Statewide, respectively.
Both acquisitions are expected to close during fiscal 2000. These two pending
acquisitions will allow the Company to expand into contiguous markets with
similar demographics. These markets also provide the Company the opportunity to
further emphasize its focus on multi-family lending, commercial business lending
and commercial deposits and accelerate the Company's strategy of becoming more
like a commercial bank. See "-- Acquisitions".
The Company purchased Bay Ridge in January 1996 and in March 1996
consummated the 1996 Branch Acquisition which involved the purchase of five
branch offices located in Brooklyn and Staten Island from a savings institution
which was withdrawing from the market area. The Company also completed several
other acquisitions in earlier periods.
The Company's assets increased by $314.0 million or 6.0% from $5.22 billion
at March 31, 1998 to $5.54 billion at March 31, 1999. Total loans and investment
securities increased approximately $879.5 million which was funded by increased
FHLB borrowings in conjunction with implementation of the Company's leverage
strategy. To support asset growth in fiscal 1999, the Company initiated a
strategy (i.e. leverage) which utilized FHLB advances as its primary funding
source. This increase was partially offset by a $701.2 million decrease in cash
and cash equivalents related to securities lending activities. The Company has
for many years "lent" a portion of its securities, primarily U.S. Treasury Notes
and Bills, generally to money center banks and national securities firms. The
securities lent are collateralized generally by cash in an amount slightly in
excess of the value of the securities lent. The obligation to return the cash
upon receipt of the lent securities is deemed a borrowing,
42
<PAGE> 45
while the cash, which has been invested in cash equivalents, is reflected as an
asset. In response to the increased demand for mortgage loans during fiscal
1999, the Company began changing its asset mix by systematically shifting 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. There were no securities lending transactions outstanding at
March 31, 1999 compared to $701.2 million at March 31, 1998.
EMPHASIS ON RESIDENTIAL LENDING. Management believes that the Company is
more likely to achieve its goals of long-term financial strength and
profitability by continuing to emphasize residential loan products and services.
Given the concentration of multi-family housing units in the New York City
metropolitan area, the Company's primary lending emphasis is on the origination
of loans secured by first liens on multi-family residential properties, which
consist primarily of mortgage loans secured by apartment buildings. Multi-family
residential loans increased $590.8 million or 36.8% to $2.20 billion or 62.6% of
the total loan portfolio at March 31, 1999 compared to $1.61 billion or 57.6% at
March 31, 1998. The Company also originates single-family (one-to-four units)
residential mortgage loans, which totaled $491.5 million or 14.0% of the total
loan portfolio at March 31, 1999 as compared to $505.1 million or 18.2% at March
31, 1998. Cooperative apartment loans (loans secured by an individual's shares
in a cooperative housing corporation), increased $77.3 million, or 20.3% to
$458.2 million or 13.1% of the total loan portfolio at March 31, 1999 as
compared to $380.9 million or 13.7% at March 31, 1998.
MAINTAIN ASSET QUALITY. Management believes that high asset quality is a
key to long-term financial success. Accordingly, the Company has sought to
maintain a high level of asset quality and moderate credit risk by using
underwriting standards which management believes are conservative and by
generally limiting its origination of mortgage loans to its market area. Total
non-performing assets have remained relatively stable even as the Company's
assets have grown significantly. The Company's ratio of non-performing assets to
total assets at March 31, 1999 was 0.71% and its allowance for loan losses to
non-performing loans was 119.7%, while at March 31, 1998 the percentages were
0.57% and 122.2%, respectively.
STABLE SOURCE OF LIQUIDITY. The Company purchases short to medium-term
investment securities and mortgage-backed and mortgage-related securities
combining what management believes to be appropriate liquidity, yield and credit
quality in order to primarily achieve a managed and predictable source of
liquidity to meet loan demand and, to a lesser extent, a stable source of
interest income. These portfolios, which totaled in the aggregate $1.52 billion
at March 31, 1999, compared to $1.37 billion at March 31, 1998, are comprised
primarily of mortgage-backed and mortgage-related securities totaling $1.19
billion (of which $1.13 billion consists of CMO's and $59.7 million of mortgage-
backed securities) and $264.2 million of obligations of the U.S. Government and
federal agencies. In accordance with the Company's policy, investments purchased
by the Company generally must be rated at least "investment grade" upon
purchase.
EMPHASIS ON RETAIL DEPOSITS AND CUSTOMER SERVICE. The Company, as a
community-based financial institution is largely dependent upon its base of
competitively priced core deposits to provide a stable source of funding. The
Company has retained many loyal customers over the years through a combination
of quality service, low service fees on various deposit and other products,
customer convenience, an experienced staff and a commitment to the communities
which it serves. Lower costing deposits, which exclude time deposits, totaled
$1.63 billion or 47.2% of the Company's total deposits at March 31, 1999, as
compared to $1.67 billion at March 31, 1998 a $44.7 million or 2.7% decrease. In
addition, the Company does not accept brokered deposits as a source of funds and
presently has no plans to do so in the future.
ACQUISITIONS
On April 13, 1999, the Company announced that it had signed a definitive
agreement to acquire 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.
43
<PAGE> 46
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 a ten consecutive trading day
period ending ten business days before the anticipated date of completion of the
transaction. 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.
In connection with the merger, Statewide has granted an option to the
Company to purchase up to 19.9% of Statewide's common shares currently
outstanding under certain circumstances.
On February 1, 1999, the Company announced that it had signed a definitive
agreement to acquire Broad. Pursuant to the agreement, the Company will acquire
Broad, in a transaction valued at the time of execution of the definitive
agreement at $26.50 per Broad share. Upon completion of the acquisition, Broad's
wholly owned subsidiary, Broad National Bank, which has 16 full-service bank
offices located in Bergen, Essex, Hudson, Middlesex and Union counties, will
merge with and into the Bank. Based upon Broad's public filings, at March 31,
1999, Broad had total assets of $676.3 million, deposits totaling $576.7 million
and stockholders' equity of $45.8 million.
Under the terms of the Broad 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
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 Broad stockholder
receives will be determined based upon an exchange ratio designed to produce a
value of $26.50 per share when the Company's common stock has an average closing
price during the pricing period between $12.75 and $17.25 as calculated pursuant
to the terms of the agreement. To the extent that the market value of the
Company's 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 Broad transaction has an aggregate value of approximately $138
million assuming an acquisition value of $26.50 per share of Broad common stock.
The Broad 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 its 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 by Broad'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
February 9, 1999, which report is incorporated by reference.
The Broad 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.
These two pending acquisitions allow the Company to expand into contiguous
markets with similar demographics. These markets also provide the Company with
the opportunity to further emphasize its focus on multi-family lending,
commercial business loans and commercial deposits and accelerates the Company's
strategy of becoming more like a commercial bank.
In April 1997, the Company continued its growth by completing a branch
acquisition in Queens. The Company assumed $70.0 million of deposits, receiving
$64.9 million in cash, the branch
44
<PAGE> 47
office and other fixed assets with an aggregate value of approximately $886,000.
In June 1998, this branch office was consolidated into another branch office in
the same geographic area. In connection with such acquisition, the Company
recorded an intangible asset in the amount of $4.0 million which is being
amortized on a straight line basis over seven years. At March 31, 1999, the
remaining intangible resulting from the deposit acquisition amounted to $2.9
million.
The Company significantly increased its asset size during fiscal 1996
through two acquisitions. In January 1996, the Company completed the acquisition
of Bay Ridge, acquiring $558.6 million of assets and six branch offices located
in Brooklyn with total deposits of $445.2 million. As a result of such
acquisition, the Company recorded goodwill totaling $26.1 million, as adjusted,
which is being amortized on a straight-line basis over a 14 year period. The
amount of goodwill related to the Bay Ridge acquisition was adjusted downward
during fiscal 1997 by $4.8 million primarily as the result of the receipt of
proceeds from the repayment of the Bay Ridge ESOP loan and the receipt of tax
refunds, offset in part by an additional accrual related to a Bay Ridge
qualified retirement plan. As of March 31, 1999, the Company had $19.9 million
of goodwill remaining related to this acquisition.
In March 1996, the Company completed the 1996 Branch Acquisition, providing
the Company with three additional branch offices in Brooklyn and two branch
offices in Staten Island. In connection with the transaction, the Company
assumed approximately $615.6 million of deposits and other liabilities and
recorded $49.5 million of intangible assets. In consideration for the assumption
of deposits and other liabilities, the Company received approximately $557.9
million in cash and branch offices and other fixed assets valued at
approximately $8.1 million. In September 1996, the Company discontinued
operations at one of the branch offices acquired in the 1996 Branch Acquisition
and sold deposits totaling $51.4 million. The remaining intangible related to
the 1996 Branch Acquisition, as adjusted, which totaled $24.4 million at March
31, 1999, is being amortized on a straight line basis over seven years.
CHANGES IN FINANCIAL CONDITION
Total assets increased by $314.0 million, or 6.0%, from $5.22 billion at
March 31, 1998 to $5.54 billion at March 31, 1999. The increase in total assets
was due to the implementation of the Company's leverage strategy partially
offset by a decrease in cash and cash equivalents related to securities lending
activities. See "-- Business Strategy-Controlled Growth." The $314.0 million of
asset growth in fiscal 1999 primarily reflected the combined effects of a $1.11
billion increase in mortgage-backed and mortgage-related securities, a $647.8
million increase in mortgage loans to $2.93 billion and an increase in other
loans of $76.8 million, or 15.3%, to $579.5 million at March 31, 1999. Partially
offsetting these increases was a $577.4 million, or 67.4% decrease in cash and
cash equivalents and a $950.3 million or 74.1% decrease in investment
securities. Other assets at March 31, 1999 were $129.4 million, an increase of
$17.6 million, or 15.7%, which is primarily attributable to $30.5 million of
additional FHLB stock and an $11.7 million increase in net deferred tax assets
partially offset by a $24.7 million decrease in accounts receivable.
NON-PERFORMING ASSETS. The Company's non-performing assets, which consist
of non-accrual loans, loans past due 90 days or more as to interest or principal
and accruing and other real estate owned acquired through foreclosure or
deed-in-lieu thereof increased by $9.5 million or 31.5% to $39.4 million at
March 31, 1999 from $29.9 million at March 31, 1998. The increase in
non-performing assets from March 31, 1998 to March 31, 1999 was primarily due to
a $14.0 million increase to $30.8 million in loans contractually past maturity
but which are continuing to pay in accordance with their original repayment
schedule, which increase was partially offset by a $4.2 million decrease in
non-accruing loans. At March 31, 1999, the Company's non-performing assets
amounted to 0.71% of total assets and consisted of $7.1 million of non-accrual
loans (including $2.8 million of single-family residential loans, $0.8 million
of multi-family residential loans and $2.7 million of commercial and other real
estate loans), $1.2 million of loans past due 90 days or more as to interest and
accruing, $30.8 million of loans past due 90 days or more as to principal and
accruing ($24.9 million of which were multi-family loans and $5.3 million of
which were commercial and other real estate loans) and $273,000 of other real
estate owned.
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses
amounted to $46.8 million at March 31, 1999 as compared to $36.3 million at
March 31, 1998. It is management's policy to main-
45
<PAGE> 48
tain an allowance for estimated losses on loans based upon an assessment of
prior loss experience, the volume and type of lending conducted by the Company,
industry standards, past due loans (as to either interest or principal), general
economic conditions and other factors related to the collectibility of the loan
portfolio. The Company's allowance increased during the year ended March 31,
1999 primarily due to a $10.7 million provision for loan losses made in fiscal
1999. The Company increased its provision for loan losses by $0.7 million for
the year ended March 31, 1999 as compared to the prior year as a result of,
among other factors, its increased investment in multi-family residential and
commercial real estate loans (all of which are secured by properties in the New
York City metropolitan area), the increased number of larger multi-family
residential and individual cooperative apartment loans, the increased amount and
number of commercial business loans and the increased number of loans which
exhibit risk characteristics which were determined to require closer oversight
(including the amount of loans which were 90 days or more past due as to
principal). At March 31, 1999, the Company's allowance for loan losses amounted
to 119.7% of total non-performing loans as compared to 122.2% of total
non-performing loans at March 31, 1998. The Company utilizes these percentages
as only one of the factors in assessing the adequacy of the allowance for loan
losses at various points in time.
DEPOSITS. Deposits increased $53.6 million or 1.6% to $3.45 billion at
March 31, 1999 compared to $3.39 billion at March 31, 1998. The increase was due
to interest credited of $133.1 million which was partially offset by deposit
outflows totaling $79.6 million. During the first quarter of fiscal 1999 the
Bank experienced outflows of deposits accumulated during the subscription
offering in the fourth quarter of fiscal 1998. Such outflows were partially
offset by deposit inflows during the later part of the year due to the
instability that has arisen in the equities market as well as special deposit
programs instituted by the Bank.
BORROWINGS. Borrowings increased $400.5 million or 55.8% to $1.12 billion
at March 31, 1999 compared to $717.8 million at March 31, 1998. The increase was
principally due to a $1.11 billion increase in FHLB borrowings primarily to fund
the increases in the loan and mortgage-related securities portfolio pursuant to
the implementation of the Company's previously described leverage strategy. The
increase was partially offset by a $701.2 million decrease in securities lending
activities from $701.2 million at March 31, 1998 to $0 at March 31, 1999. The
Company has for many years "lent" a portion of its securities, primarily U.S.
Treasury Notes and Bills, generally to money center banks and national
securities firms. The securities lent are collateralized generally by cash in an
amount slightly in excess of the value of the securities lent. The obligation to
return the cash upon receipt of the lent securities is deemed a borrowing, while
the cash, which has been invested in cash equivalents, is reflected as an asset.
In response to the increased demand for mortgage loans during fiscal 1999, the
Company began changing its asset mix by systematically shifting 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.
STOCKHOLDERS' EQUITY. The Company's stockholders' equity totaled $825.0
million at March 31, 1999 compared to $949.1 million at March 31, 1998. The
$124.2 million decrease was primarily due to a $126.0 million reduction in
capital due to the purchase of 8,169,874 shares in connection with the Company's
stock repurchase programs, a $35.1 million adjustment to capital as a result of
the issuance of grants and purchase of shares to fund the 1998 Recognition and
Retention Plan and Trust Agreement ("RRP"), net of related amortization, a $4.0
million decrease due to dividend declarations and an $8.2 million decrease in
the unrealized gain on securities available-for-sale. Such reductions were
partially offset by net income of $45.2 million and $4.3 million related to ESOP
shares committed to be released for fiscal 1999.
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The table on the following page 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) interest rate spread;
and (v) net interest margin. Information is based on average daily balances
during the indicated period.
46
<PAGE> 49
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1):
Mortgage loans $2,596,554 $198,003 7.63% $2,193,557 $175,269 7.99%
Other loans:
Cooperative apartment loans 414,542 29,576 7.13 380,737 27,562 7.24
Consumer and commercial business loans(2) 119,265 10,144 8.51 122,872 10,871 8.85
---------- -------- ---------- --------
Total loans 3,130,361 237,723 7.59 2,697,166 213,702 7.92
Mortgage-backed and mortgage-related securities 430,170 28,254 6.57 157,452 10,992 6.98
Investment securities 828,265 46,216 5.58 783,134 45,689 5.83
Other interest-earning assets(3) 439,814 24,222 5.51 413,343 22,660 5.48
---------- -------- ---------- --------
Total interest-earning assets 4,828,610 336,415 6.97 4,051,095 293,043 7.23
-------- ---- -------- ----
Non-interest-earning assets 214,315 192,107
---------- ----------
Total assets $5,042,925 $4,243,202
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 664,878 $ 14,238 2.14 $ 669,901 $ 14,118 2.11
Savings deposits(5) 969,893 24,480 2.52 1,200,369 34,288 2.86
Certificates of deposit 1,749,558 94,428 5.40 1,782,384 100,560 5.64
---------- -------- ---------- --------
Total deposits 3,384,329 133,146 3.93 3,652,654 148,966 4.08
---------- -------- ---------- --------
Borrowings 617,542 34,075 5.52 199,329 11,977 6.01
---------- -------- ---------- --------
Total interest-bearing liabilities 4,001,871 167,221 4.18 3,851,983 160,943 4.18
-------- ---- -------- ----
Non-interest-bearing liabilities 112,854 32,564
---------- ----------
Total liabilities 4,114,725 3,884,547
Total stockholders' equity 928,200 358,655
---------- ----------
Total liabilities and stockholders' equity $5,042,925 $4,243,202
========== ==========
Net interest-earning assets $ 826,739 $ 199,112
========== ==========
Net interest income/interest rate spread $169,194 2.79% $132,100 3.05%
======== ==== ======== ====
Net interest margin 3.50% 3.26%
==== ====
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.21x 1.05x
==== ====
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1997
---------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1):
Mortgage loans $2,007,670 $161,638 8.05%
Other loans:
Cooperative apartment loans 361,011 26,687 7.39
Consumer and commercial business loans(2) 108,608 9,502 8.75
---------- --------
Total loans 2,477,289 197,827 7.99
Mortgage-backed and mortgage-related securities 475,967 28,856 6.06
Investment securities 395,677 22,356 5.65
Other interest-earning assets(3) 114,490 6,264 5.47
---------- --------
Total interest-earning assets 3,463,423 255,303 7.37
-------- ----
Non-interest-earning assets 244,567
----------
Total assets $3,707,990
==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 539,783 $ 12,459 2.31
Savings deposits(5) 1,055,807 30,728 2.91
Certificates of deposit 1,729,185 95,653 5.53
---------- --------
Total deposits 3,324,775 138,840 4.18
---------- --------
Borrowings 18,581 1,347 7.25
---------- --------
Total interest-bearing liabilities 3,343,356 140,187 4.19
-------- ----
Non-interest-bearing liabilities 62,857
----------
Total liabilities 3,406,213
Total stockholders' equity 301,777
----------
Total liabilities and stockholders' equity $3,707,990
==========
Net interest-earning assets $ 120,067
==========
Net interest income/interest rate spread $115,116 3.18%
======== ====
Net interest margin 3.32%
====
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.04x
====
</TABLE>
- - ---------------
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Includes home equity lines of credit and improvement loans, student loans,
automobile loans, passbook loans, credit card loans, personal loans and
commercial business loans.
(3) Includes federal funds sold, interest-earning bank deposits, FHLB stock,
overnight commercial paper and certificates of deposit.
(4) Includes NOW and money market accounts.
(5) Includes interest paid on funds received for stock subscriptions in
connection with the Bank's Conversion.
47
<PAGE> 50
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>
FISCAL 1999 COMPARED TO FISCAL 1998 COMPARED TO
FISCAL 1998 FISCAL 1997
--------------------------------- ---------------------------------
INCREASE INCREASE
(DECREASE) DUE TO TOTAL NET (DECREASE) DUE TO TOTAL NET
------------------- INCREASE ------------------- INCREASE
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
-------- ------- ---------- ------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $ (8,206) $30,940 $ 22,734 $(1,215) $ 14,846 $ 13,631
Other loans:
Cooperative apartment loans (388) 2,402 2,014 (553) 1,428 875
Consumer and commercial
business loans(1) (412) (315) (727) 110 1,259 1,369
-------- ------- -------- ------- -------- --------
Total loans receivable (9,006) 33,027 24,021 (1,658) 17,533 15,875
Mortgage-backed and mortgage-
related securities (682) 17,944 17,262 3,835 (21,699) (17,864)
Investment securities (2,021) 2,548 527 735 22,598 23,333
Other interest-earning assets 123 1,439 1,562 11 16,385 16,396
-------- ------- -------- ------- -------- --------
Total net change in income on
interest-earning assets (11,586) 54,958 43,372 2,923 34,817 37,740
Interest-bearing liabilities:
Deposits:
Demand deposits 217 (97) 120 (1,149) 2,808 1,659
Savings deposits (3,685) (6,123) (9,808) (541) 4,101 3,560
Certificates of deposit (4,279) (1,853) (6,132) 1,926 2,981 4,907
-------- ------- -------- ------- -------- --------
Total deposits (7,747) (8,073) (15,820) 236 9,890 10,126
Borrowings (1,054) 23,152 22,098 (269) 10,899 10,630
-------- ------- -------- ------- -------- --------
Total net change in expense
on interest-bearing
liabilities (8,801) 15,079 6,278 (33) 20,789 20,756
-------- ------- -------- ------- -------- --------
Net change in net interest income $ (2,785) $39,879 $ 37,094 $ 2,956 $ 14,028 $ 16,984
======== ======= ======== ======= ======== ========
</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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
GENERAL. For the year ended March 31, 1999, the Company reported net
income of $45.2 million, or $0.66 per diluted share, compared to $27.2 million
for the year ended March 31, 1998, excluding the contribution to the Foundation.
Results of operations for the fiscal year ended March 31, 1998 included the
effect of a $56.4 million ($37.2 million net of tax) non-recurring contribution
to the Foundation in connection with the Conversion in March 1998. As a result
of the contribution, the Company experienced a net loss of $10.0 million for the
fiscal year ended March 31, 1998. No similar loss occurred in fiscal 1999.
Earnings per share are not meaningful for fiscal 1998 since the Company only had
shares outstanding for the last 18 days of the fiscal year.
Cash earnings for fiscal 1999 were $58.5 million, or $0.86 per diluted
share, compared to $36.8 million for the prior fiscal year. Cash earnings
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
48
<PAGE> 51
fiscal 1998, cash earnings was also adjusted for the one time non-recurring
charge of $56.4 million ($37.2 million net of tax) for funding of the
Foundation. The organization believes the reporting of cash earnings along with
Generally Accepted Accounting Principles ("GAAP") earnings provides further
insight into the Company's operating performance.
NET INTEREST INCOME. Net interest income is determined by interest rate
spread (i.e., the difference between the yields earned on its interest-earning
assets and the rates paid on its interest-bearing liabilities) and the relative
amounts of interest-earning assets to interest-bearing liabilities. The
Company's interest rate spread was 2.79% and 3.05% for the years ended March 31,
1999 and 1998, respectively, while its net interest margin was 3.50% and 3.26%
for the years ended March 31, 1999 and 1998, respectively. The interest rate
spread decreased 26 basis points as a result of generally lower yields on loan
and investments originated or purchased in fiscal 1999 reflecting current market
rates of interest combined with the downward repricing of adjustable rate
instruments while the cost of total interest-bearing liabilities remained
stable. The increase in net interest margin was due to an increase in net
interest-earning assets resulting from the investment of the proceeds of the
Conversion offset by a decline in yield on interest-earning assets.
Net interest income increased by $37.1 million or 28.1% to $169.2 million
for the fiscal year ended March 31, 1999 as compared to fiscal 1998. The
increase was due to a $43.4 million increase in interest income offset by a $6.3
million increase in interest expense. The increase in net interest income
reflected the continued growth in interest-earning assets as a result of the net
proceeds from the Conversion combined with the implementation of the Company's
leverage strategy which was partially offset by a general compression in
interest rate spread due to general declines in market rates of interest. To
support asset growth in fiscal 1999, the Company initiated a strategy (i.e.
leverage) which utilized FHLB advances as its primary funding source.
Interest income increased by $43.4 million to $336.4 million for the fiscal
year ended March 31, 1999 as compared to the same period in 1998 primarily due
to an increase of $777.5 million in the average balance of the Company's
interest earning-assets, offset by a decline in the weighted average yield
earned thereon from 7.23% for fiscal 1998 to 6.97% for fiscal 1999. The
composition of the Company's interest income for the fiscal year ended March 31,
1999 reflected the changes in the Company's asset structure effected during
fiscal 1999. The Company restructured its asset mix by systematically shifting
its investments from U.S. Treasury securities (reflecting in a large part the
initial investment of the Conversion proceeds) into higher yielding mortgage
loans and mortgage-related securities.
Interest income on loans increased $24.0 million due to a $433.2 million
increase in the average balance of loans partially offset by a 33 basis point
decline in the yield earned on loans from 7.92% for the fiscal 1998 period to
7.59% 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 fiscal
1999 reflecting declines in market rates of interest. Income on investment
securities increased $0.5 million due to a $45.1 million increase in the average
balance of investment securities which was partially offset by a decline in the
yield earned from 5.83% for fiscal 1998 to 5.58% for fiscal 1999. Interest
income on mortgage-backed and mortgage-related securities increased $17.3
million during fiscal 1999 compared to the same period in fiscal 1998 as a
result of a $272.7 million increase in the average balance of these securities
which was partially offset by a 41 basis point decline in the yield earned
resulting from the general decline in market rates of interest. Income on other
interest-earning assets increased $1.6 million in the current year compared to
the same period in the prior year primarily due to a $2.9 million increase in
interest on federal funds which was partially offset by a $1.4 million reduction
in interest on term deposits. The increase in federal funds income was due to
the build-up of short-term investments, as a result of increased FHLB
borrowings, which funds were subsequently re-deployed into higher yielding
mortgage loans and mortgage related securities.
Interest expense increased $6.3 million or 3.9% to $167.2 million for the
year ended March 31, 1999 as compared to $160.9 million for the year ended March
31, 1998. The increase is primarily the result of a $22.1 million increase in
interest paid on borrowings partially offset by a decrease of $15.8 million in
interest paid on deposits. The increase in
49
<PAGE> 52
borrowings is attributable to a $418.2 million increase in the average balance
of borrowings (primarily FHLB borrowings) as a result of the Company's
leveraging strategy which was partially offset by a 49 basis point decline in
the rate paid on borrowings to 5.52% for fiscal 1999. The decrease in interest
paid on deposits is due to a $268.3 million decrease in the average balance of
deposits along with a 15 basis point decline in the average rate paid on
deposits to 3.93% for the year ended March 31, 1999 compared to 4.08% for the
year ended March 31, 1998. The decline in the average balance of deposits
reflects in large part the outflow, during the first quarter of fiscal 1999, of
deposits accumulated during the Conversion in the fourth quarter of fiscal 1998.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
increased by $0.7 million or 6.9% from $10.0 million for the fiscal year ended
March 31, 1998 to $10.7 million for the fiscal year ended March 31, 1999. The
increase in the provision primarily reflected the continuation of the Company's
determination to increase its allowance for loan losses based upon, among other
factors, the Company's continuing emphasis on multi-family residential,
commercial real estate and commercial business loans secured by properties or
other collateral located in the New York City metropolitan area, the increased
number of larger multi-family residential, commercial real estate and individual
cooperative apartment loans, the increased amount and number of commercial
business loans and the increased amount of loans which exhibit risk
characteristics which require greater management oversight (including loans
contractually past due maturity). At March 31, 1999 and March 31, 1998, the
allowance for loan losses as a percentage of total non-performing loans was
119.7% and 122.2%, respectively.
NON-INTEREST INCOME. Non-interest income increased $1.0 million from $10.3
million for the fiscal year ended March 31, 1998 to $11.3 million for the same
period in 1999. The increase reflected a $1.8 million increase in other
non-interest income, a $390,000 gain received on the sale of loans and
securities during the 1999 period as compared to a $115,000 gain incurred on
such sales during fiscal 1998, partially offset by a $1.1 million decrease in
service fee income. The $1.8 million increase in other non-interest income is
primarily the result of a $1.6 million increase in prepayment fees on mortgages
to $3.6 million in fiscal 1999 resulting from acceleration in the refinance
market driven by lower market rates of interest.
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. Prior to the effective date, income from
securities lending was recorded as non-interest income. For fiscal year 1999 it
was included as part of net interest income. During fiscal 1998 the Company
recorded $0.4 million as income relating to securities lending. Service fee
income is also lower due to a $0.2 million decline in fees associated with the
sales of annuities and mutual funds. 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 expenses increased $8.7 million or
9.8% to $98.2 million for the fiscal year ended March 31, 1999 from $89.5
million for the same period in 1998 (exclusive of the $56.4 million contribution
to the Foundation). Such increase was primarily due to increased compensation
and employee benefit expense ($8.7 million), reflecting in large part benefits
related to the ESOP and RRP, increased occupancy costs ($0.9 million), increased
other non-interest expense ($0.6 million) primarily due to the Company's growth
and structural changes. Such increases were partially offset by a $1.6 million
decrease in data processing fees primarily reflecting the reduction of data
processing conversion costs.
Total salaries and benefits increased by $8.7 million in fiscal 1999 to
$40.4 million, primarily as the result of a full year of ESOP compensation
expense of $4.3 million compared to $1.3 million for one quarter in fiscal 1998,
compensation expense of $3.1 million relating to the implementation of the RRP
late in the second quarter of fiscal 1999 and the continued growth of the
Company during fiscal 1999 which necessitated the addition to staff as well as
normal merit increases of approximately $2.7 million.
Occupancy costs increased by $0.9 million to $13.5 million in fiscal 1999,
primarily as the result of increased costs related to branch renovation and
upgrading.
50
<PAGE> 53
Data processing service expenses decreased by $1.6 million or 14.2% to $9.9
million during the fiscal year ended March 31, 1999 as compared to the fiscal
year ended March 31, 1998. The decrease reflected primarily the reduction of
expenses incurred in connection with the conversion of the Company's data
processing systems. Such expenses amounted to $5.7 million during the fiscal
year ended March 31, 1998 for the first phase of the conversion of the Company's
data processing systems which was completed in the third quarter of fiscal 1998.
During fiscal 1999 expenses of approximately $3.4 million were incurred in
connection with the second (and final) phase of the conversion. Partially
offsetting the decrease in conversion costs was a $1.4 million increase in costs
associated with year 2000 compliance issues. See "-- The Year 2000 Issue."
The Company's advertising expenses amounted to $4.6 million and $4.3
million for the fiscal years ended March 31, 1999 and 1998, respectively. The
increase in fiscal years 1999 and 1998 reflected the Company's determination to
increase its market presence through, in part, increased advertising in print
media and radio.
FDIC insurance premiums remained constant at $1.2 million for the fiscal
years ended March 31, 1999 and 1998. As a result of past acquisitions, the
Company is deemed to have SAIF-insured deposits. The level of deposit insurance
expense is and will remain higher than that of an insured institution with a
comparable amount of BIF-only insured deposits due to the significant amount of
the Company's deposits deemed to be SAIF-insured. The deposits deemed
SAIF-insured are assessed at a rate of 6.4 basis points compared to 1.3 basis
points for the BIF-insured deposits. At March 31, 1999, $1.54 billion of the
Company's deposits were deemed to be SAIF insured while at March 31, 1998, SAIF
insured deposits were $1.53 billion.
Other non-interest expenses, including items such as equipment expenses,
office supplies, postage, telephone expenses, maintenance and security services
contracts and professional fees, increased $0.6 million or 3.1% to $20.0 million
for the fiscal year ended March 31, 1999 compared to the same period in 1998,
primarily as a result of certain professional fees and expenditures associated
with being a public company.
INCOME TAXES. Income tax expense increased $10.6 million to $26.4 million
for the year ended March 31, 1999 compared to $15.8 million in fiscal 1998,
excluding the effect of the $56.4 million contribution to the Foundation. This
increase is primarily due to a $28.6 million increase in pre-tax income to $71.6
million for fiscal 1999 compared to $43.0 million in fiscal 1998, excluding the
contribution to the Foundation. In addition, the Company's effective tax rate
for the year ended March 31, 1999 was 36.9% compared to 36.7% for the year ended
March 31, 1998, excluding the contribution to the Foundation.
As of March 31, 1999, net deferred tax assets were $48.5 million. No
valuation allowance was deemed necessary with respect to such assets.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
GENERAL. The Company reported a net loss of $10.0 million and net income
of $17.2 million for the years ended March 31, 1998 and 1997, respectively.
Results of operations for fiscal 1998 reflect the effect of a non-recurring
contribution to the Foundation in connection with the Conversion. Excluding the
effect of this contribution, net income was $27.2 million for fiscal 1998, a
21.3% increase over fiscal 1997, compared to net income of $22.4 million in
fiscal 1997 after excluding the net effect of the one-time SAIF assessment.
NET INTEREST INCOME. Net interest income is determined by interest rate
spread and the relative amounts of interest-earning assets to interest-bearing
liabilities. The Company's interest rate spread was 3.05% and 3.18% for the
years ended March 31, 1998 and 1997, respectively, while its net interest margin
was 3.26% and 3.32% for the years ended March 31, 1998 and 1997, respectively.
Net interest income increased by $17.0 million or 14.8% to $132.1 million for
the fiscal year ended March 31, 1998 as compared to fiscal 1997. The increase
was due to a $37.7 million increase in interest income offset by a $20.7 million
increase in interest expense. The increase in net interest income reflected the
continued growth in interest-earning assets, in particular, loans, and the
improved yield on and growth of its investment securities. The increase in net
interest income includes approximately $3.6 million earned on stock subscription
funds submitted during the offering period which were invested in short-term
securities until the consummation of the offering, at which time the funds
received in
51
<PAGE> 54
excess of the consideration for the common stock issued in the conversion were
refunded.
Interest income increased by $37.7 million to $293.0 million for the fiscal
year ended March 31, 1998 as compared to the same period in 1997 primarily due
to an increase in the average balance of the Company's interest earning-assets,
offset by a decline in the weighted average yield earned thereon from 7.37% for
fiscal 1997 to 7.23% for fiscal 1998. The average yield on assets was adversely
impacted by two factors -- the Conversion offering and the adoption of a new
accounting standard. During the Conversion offering, the Company received
approximately $2.1 billion which was invested in short-term securities and cash
equivalents pending deployment into higher yielding assets, primarily loans.
Upon the completion of the offering, approximately $1.4 billion was refunded to
subscribers, with the balance remaining being invested in short-term securities
and cash equivalents. The second factor was an accounting pronouncement, which
requires that securities lending transactions, which the Company had not
previously reported on its statement of financial condition but had reported the
net earnings thereon in other non-interest income, must be reported on the
statement of financial condition as borrowings with corresponding amounts in an
appropriate asset category. Interest income and interest expense related to the
securities lending transaction were reported on a gross basis of $11.1 million
and $10.8 million, respectively. The composition of the Company's interest
income for the fiscal year ended March 31, 1998 reflected the changes in the
Company's asset structure effected during fiscal 1997, when the Bank
restructured a portion of its securities portfolio to enhance the overall yield
and reduce exposure to interest rate risk by selling $397.3 million of its
investment securities and mortgage-backed and mortgage-related securities and
reinvesting substantially all of the proceeds of the sales in U.S. Treasury
Notes and Bills, most of which had maturities of two years or less. The weighted
average yield, on a fully taxable basis on the securities purchased was
approximately 60 basis points higher than the weighted yield on the securities
sold. Interest income earned on mortgage-backed and mortgage-related securities
declined by $17.9 million primarily as a result of the decline in the average
balance of such assets from $476.0 million during the 1997 period to $157.5
million for the 1998 period. However, offsetting such decline were $23.3
million, $13.6 million and $16.4 million increases in interest earned during the
fiscal year ended March 31, 1998 on investment securities, mortgage loans and
other interest-earning assets respectively, reflecting the asset restructuring
effected in fiscal 1997 as well as the Company's continued emphasis on
multi-family residential lending.
Interest expense increased by $20.7 million or 14.8% from $140.2 million
for the fiscal year ended March 31, 1997 to $160.9 million for the fiscal year
ended March 31, 1998 with the increase due to a $10.1 million increase in
interest paid on deposits and stock subscription accounts and a $10.6 million
increase in borrowing costs. The Company's average balance of deposits increased
to $3.53 billion for the 1998 period from $3.25 billion for the 1997 period
reflecting deposit inflows related to the stock offering.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
increased by $2.0 million or 25.8% from $8.0 million for the fiscal year ended
March 31, 1997 to $10.0 million for the fiscal year ended March 31, 1998. The
increase in the provision primarily reflected the Company's determination in
fiscal 1998 to increase its allowance for loan losses based upon, among other
factors, the Company's continuing emphasis on multi-family residential,
commercial real estate and commercial business loans secured by properties or
other collateral located in the New York City metropolitan area, the increased
number of larger multi-family residential, commercial real estate and individual
cooperative apartment loans, the increased amount and number of commercial
business loans and the increased amount of loans which exhibit risk
characteristics which require greater management oversight (including loans
contractually past due maturity). At March 31, 1998 and March 31, 1997, the
allowance for loan losses as a percentage of total non-performing loans was
122.2% and 99.8%, respectively.
NON-INTEREST INCOME. Non-interest income increased $7.4 million from $2.9
million for the fiscal year ended March 31, 1997 to $10.3 million for the same
period in 1998. The increase reflected a $667,000 increase in service fees, a
$115,000 gain received on the sale of loans and securities during the 1998
period as compared to a $3.3 million loss incurred on such sales during fiscal
1997 plus a $3.3 million increase in other non-interest income. The loss on the
sale of loans and securities incurred in
52
<PAGE> 55
fiscal 1997 was the result of the decision to restructure the mortgage-backed
and mortgage-related and investment portfolios. The $3.3 million increase in
other non-interest income is primarily the result of a $1.2 million increase in
prepayment fees on mortgages to $2.0 million in fiscal 1998.
NON-INTEREST EXPENSES. Non-interest expenses increased $63.7 million or
77.6% to $145.9 million for the fiscal year ended March 31, 1998 from $82.2
million for the same period in 1997. Exclusive of the $56.4 million contribution
to the Foundation non-interest expenses were $89.5 million in fiscal 1998
compared to $82.2 million in fiscal 1997, an increase of $7.3 million or 8.9%.
Such increase was primarily due to increased data processing fees ($4.5
million), reflecting in large part costs incurred in connection with the
Company's conversion of its data processing systems, increased compensation and
employee benefits expense ($4.8 million) reflecting the increase in the
Company's work force resulting from the data and stock conversions, increased
other non-interest expense ($4.8 million) primarily due to the Company's growth
and structural changes. Such increases were partially offset by a $1.0 million
decrease in FDIC insurance premiums reflecting the lower premium rate assessed
during the 1998 period, and the non-recurrence of the one-time SAIF special
assessment in fiscal 1997.
Total salaries and benefits increased by $4.8 million in fiscal 1998 to
$31.7 million, primarily as the result of the expansion and growth of the
Company during fiscal years 1998, 1997 and 1996. In addition to normal staff
increases resulting from the Company's expansion and earlier acquisitions,
additional resources were necessary to support the organization's data and
Conversion projects, causing overtime pay to increase by $940,000. Employee
benefits costs increased comparably due to staff increases and further increased
in the fourth quarter of fiscal 1998 due to the recognition of $1.3 million in
ESOP compensation expense reflecting the first payment on the ESOP loan.
Occupancy costs increased by $1.6 million to $12.6 million in fiscal 1998,
primarily as the result of a branch acquisition in April, 1997 and increased
costs related to branch renovation and upgrading.
Data processing service expenses increased by $4.5 million or 64.2% to
$11.5 million during the fiscal year ended March 31, 1998 as compared to the
fiscal year ended March 31, 1997. The increase reflected primarily expenses
incurred in connection with the conversion of the Company's data processing
systems. Such expenses amounted to $5.7 million during the fiscal year ended
March 31, 1998. The Company recognized substantially all the expenses incurred
in connection with completion of the first phase of the conversion of the
Company's data processing systems which was completed in the third quarter of
fiscal 1998. However, additional expenses of approximately $6.0 million were
incurred in connection with the second (and final) phase of the conversion which
was completed by the end of fiscal 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Comparisons of
Results of Operations for the Years Ended March 31, 1999 and
1998 -- Non-interest Expenses" and "-- The Year 2000 Issue."
The Company's advertising expenses amounted to $4.3 million and $3.6
million for the fiscal year ended March 31, 1998 and 1997, respectively. The
increase in fiscal years 1998 and 1997 reflected the Company's determination to
increase its market presence through, in part, increased advertising in print
media and radio. FDIC insurance premiums declined in the fiscal year ended March
31, 1998 from $2.2 million during fiscal 1997 to $1.2 million in fiscal 1998.
The decrease reflects the reduction in the rate paid to the FDIC for deposit
insurance. As a result of past acquisitions, the Company is deemed to have
SAIF-insured deposits. During fiscal 1997, the FDIC imposed a one-time special
assessment in order to recapitalize the SAIF fund which, for BIF-insured
institutions like the Company which also have deposits deemed to be SAIF-
insured, amounted to 65.7 basis points on the balance of SAIF deposits as of
March 31, 1995. As a result, the Company was assessed $8.6 million in fiscal
1997. The level of deposit insurance expense is and will remain higher than that
of an insured institution with a comparable amount of BIF-only insured deposits
due to the significant amount of the Company's deposits deemed to be
SAIF-insured. The deposits deemed SAIF-insured are assessed at a rate of 6.3
basis points compared to 1.3 basis points for the BIF-insured deposits. At March
31, 1998, $1.53 billion of the Company's deposits were deemed to be SAIF insured
while at March 31, 1997, SAIF insured deposits were $1.61 billion.
During the year ended March 31, 1998, the amortization of intangibles
increased by $462,000 or 5.6% from the same period in fiscal 1997. The
53
<PAGE> 56
amortization of intangibles increased in fiscal 1998 due to the acquisition of a
branch office for a premium of $4.0 million, which is being expensed over a
seven year period.
Other non-interest expenses, including miscellaneous items such as
equipment expenses, office supplies, postage, telephone expenses, maintenance
and security services contracts and professional fees, increased $4.8 million or
32.8% to $19.4 million for the fiscal year ended March 31, 1998 compared to the
same period in 1997, primarily as a result of the Company's growth and
structural changes.
INCOME TAXES. For fiscal 1998 the Company, as a result of the $56.4
million contribution to the Foundation, had a $3.5 million tax benefit as
compared to a $10.7 million tax provision for the fiscal 1997. Excluding the
effect of the Foundation, the Company's tax expense would have been $15.8
million. In addition, the Company's effective tax rate was substantially reduced
due to the establishment of ICRC during fiscal 1997.
As of March 31, 1998, net deferred tax assets were $36.8 million. No
valuation allowance was deemed necessary with respect to such asset.
ASSET AND LIABILITY MANAGEMENT
GENERAL. The Company's asset and liability management strategy is
established by the Asset/ Liability Committee of the Company and reviewed by the
Company's Board of Directors periodically. The Asset/Liability Committee meets
monthly. Currently, the Company manages the imbalance between its
interest-earning assets and interest-bearing liabilities within shorter
maturities to ensure that such relationships are within acceptable ranges given
the Company's business strategies and objectives and its analysis of market and
economic conditions. The ability to maximize net interest income is largely
dependent upon the achievement of a positive interest rate spread that can be
sustained during fluctuations in prevailing interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities which either reprice or mature within a
given period of time. The difference, or the interest rate repricing "gap"
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates.
DISCUSSION OF MARKET RISK. As a financial institution, the Company's
primary component of market risk is interest rate volatility. Fluctuations in
interest rates will ultimately impact both the level of income and expense
recorded on a large portion of the Company's assets and liabilities, and the
market value of all interest-earning assets, other than those which possess a
short term to maturity. All significant interest rate risk management procedures
are performed at the Company level. Based upon the Company's nature of
operations, the Company is not subject to foreign currency exchange or commodity
price risk. The Company's real estate loan portfolio, concentrated primarily
within the New York metropolitan area, is subject to risks associated with the
local economy. The Company does not own any trading assets.
The Company's strategies to manage interest rate risk include (i)
increasing the interest sensitivity of its mortgage loan portfolio through the
use of adjustable-rate loans or relatively short-term (five to ten years)
balloon loans, (ii) selling most newly originated fixed-rate, single-family
residential mortgage loans with original terms to maturity of more than 15
years, (iii) originating relatively short-term or adjustable-rate consumer and
commercial business loans, (iv) investing in securities, primarily
mortgage-backed and mortgage-related instruments with maturities or estimated
average lives of less than five years, (v) promoting stable savings, demand and
other transaction accounts and (vi) maintaining a strong capital position.
54
<PAGE> 57
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. The Company did not have any trading assets as of March 31,
1999. For loans, securities, and liabilities with contractual maturities, the
table presents principal cash flows and related weighted-average interest rates
by contractual maturities as well as the Company's historical experience of the
impact of interest rate fluctuations on the prepayment of residential and home
equity loans and mortgage-backed securities. For deposits that have no
contractual maturity, the table presents principal cash flows and, as
applicable, related weighted-average interest rates as due in one year or less
at March 31, 1999.
<TABLE>
<CAPTION>
FAIR
THERE- VALUE
2000 2001 2002 2003 2004 AFTER TOTAL 3/31/99
---------- -------- -------- -------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate
mortgage loans(1) $ 90,882 $ 87,870 $ 84,859 $ 85,795 $ 84,430 $2,176,947 $2,610,783 $2,598,177
Average interest rate 8.16% 8.76% 7.35% 7.20% 7.45% 7.26%
Variable interest rate
mortgage loans(1) $ 59,006 $ 46,528 $ 43,224 $ 31,735 $ 20,907 $ 101,598 $ 302,998 $ 304,228
Average interest rate 7.41% 7.47% 7.91% 8.27% 8.40% 7.54%
Fixed interest rate other
loans $ 27,235 $ 24,483 $ 19,608 $ 9,132 $ 7,278 $ 16,036 $ 103,772 $ 103,686
Average interest rate 7.92% 7.81% 7.89% 8.96% 7.87% 6.69%
Variable interest rate
other loans $ 102,954 $ 81,124 $ 64,425 $ 41,670 $ 32,480 $ 153,411 $ 476,064 $ 476,609
Average interest rate 7.01% 7.01% 7.03% 6.96% 6.93% 7.17%
Fixed interest rate
securities(2) $ 952,331 $280,450 $141,423 $ 72,805 $ 36,969 $ 37,070 $1,521,048 $1,514,976
Average interest rate 6.26% 6.50% 6.53% 6.58% 6.62% 6.83%
Variable interest rate
securities(2) $ 1,518 $ 1,094 $ 797 $ 123 $ -- $ 2,949 $ 6,481 $ 6,652
Average interest rate 8.13% 7.98% 7.80% 8.68% -- 6.80%
Other interest-bearing
assets $ 291,942 $ -- $ -- $ -- $ -- $ -- $ 291,942 $ 291,942
Average interest rate 5.51% -- -- -- -- --
RATE SENSITIVE LIABILITIES:
Non interest-bearing
checking $ 102,831 $ -- $ -- $ -- $ -- $ -- $ 102,831 $ 102,831
Average interest rate -- -- -- -- -- --
Savings and
interest-bearing checking $1,523,631 $ -- $ -- $ -- $ -- $ -- $1,523,631 $1,523,631
Average interest rate 2.41% -- -- -- -- --
Time deposits $1,537,801 $164,280 $ 41,606 $ 45,386 $ 5,236 $ 26,593 $1,820,902 $1,835,167
Average interest rate 5.11% 5.54% 5.80% 5.99% 5.80% 5.46%
Fixed interest rate
borrowings $ 136,077 $111,425 $184,213 $104,599 $465,750 $ 116,300 $1,118,364 $1,112,374
Average interest rate 5.20% 5.05% 5.25% 5.60% 5.47% 5.49%
</TABLE>
- - ---------------
(1) Does not include $23.7 million of single-family residential loans serviced
by others.
(2) Does not include $1.5 million of unamortized non-cash premium or discount on
securities.
55
<PAGE> 58
Management believes that the assumptions utilized by it to evaluate the
exposure of the Company's operations to changes in interest rates approximate
actual experience and considers them reasonable; however, the cash flows of the
Company's assets and liabilities in the above table could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which they are based.
Although market risk disclosure is a useful measurement and contributes
toward effective asset and liability management, it is difficult to predict the
effect of changing interest rates based solely on that measure. An alternative
methodology is to estimate the change in the Bank's net portfolio value ("NPV")
over a range of interest rate scenarios. NPV is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. The NPV
ratio, under any interest rate scenario, is defined as the NPV in that scenario
divided by the market value of assets in the same scenario. The model assumes
estimated loan prepayment rates and reinvestment rates similar to the Bank's
historical experience. The following sets forth the Bank's NPV as of March 31,
1999.
<TABLE>
<CAPTION>
NPV AS % OF
PORTFOLIO
VALUE OF ASSETS
NET PORTFOLIO VALUE ------------------
CHANGE (IN BASIS POINTS) --------------------------------- NPV CHANGE IN
IN INTEREST RATES AMOUNT(1) $ CHANGE % CHANGE RATIO NPV RATIO
- - ------------------------ --------- -------- -------- ----- ---------
<S> <C> <C> <C> <C> <C>
+300 566,783 (220,977) (28.05)% 11.25% (2.94)%
+200 661,660 (126,100) (16.01) 12.66 (1.53)
+100 734,441 (53,319) (6.77) 13.60 (0.58)
0 787,760 -- -- 14.19 --
- - -100 844,641 56,881 7.22 14.81 0.62
- - -200 935,081 147,321 18.70 15.97 1.79
- - -300 1,041,418 253,658 32.20 17.31 3.12
</TABLE>
- - ---------------
(1) Excludes the NPV of the Holding Company.
As of March 31, 1999, the Bank's NPV was $787.8 million, or 14.19% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Bank's "post shock" NPV was $661.7 million, or 12.66% of the market value of
assets. The change in the NPV ratio or the Bank's Sensitivity Measure was
negative 1.53%.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV table presented assumes that the composition of the Bank's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV table provides an indication of the
Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Bank's net interest income and
will differ from actual results.
REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to minimum regulatory capital requirements imposed by
the FDIC which vary according to an institution's capital level and the
composition of its assets. An insured institution is required to maintain core
capital of not less than 3.0% of total assets plus an additional amount of at
least 100 to 200 basis points ("leverage capital ratio"). An insured institution
must also maintain a ratio of total capital to risk-based assets of 8.0%.
Although the minimum leverage capital ratio is 3.0%, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") stipulates that an
institution with less than a 4.0% leverage capital ratio is deemed to be an
"undercapitalized" institution which results in the imposition of certain
regulatory restrictions. See Note 14 of the Notes to Consolidated Financial
Statements for the Bank's regulatory capital requirements at March 31, 1999 and
1998.
56
<PAGE> 59
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 investment 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 investment
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 recently initiated leverage strategy, the Company has
increased its FHLB advances to $1.11 billion at March 31, 1999. The amount of
such advances have ranged from $67.5 million at March 31, 1995 to $1.11 billion
at March 31, 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, U.S. Treasury securities or Dutch Auction Rate
Treasury Securities. On a longer term basis, the Company maintains a strategy of
investing in its 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 investment securities. At
March 31, 1999, there were outstanding commitments and unused lines of credit by
the Company to originate or acquire mortgage loans and other loans aggregating
$224.4 million and $36.9 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 March 31, 2000.
Certificates of deposit scheduled to mature in one year or less at March 31,
1999, totaled $1.54 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.
Following the completion of the Conversion, the Company's principal
business was that of its subsidiary, the Bank. The Holding Company invested 50%
of the net proceeds from the Conversion in the Bank and initially invested the
remaining proceeds in short-term securities and money market investments. The
Bank can pay dividends to the Holding Company to the extent such payments are
permitted by law or regulation, which serves as an additional source of
liquidity.
The Holding Company's liquidity is available to, among other things, fund
acquisitions, support future expansion of operations or diversification into
other banking related businesses, pay dividends or repurchase its common stock.
Restrictions on the amount of dividends the Holding Company and the Bank
may declare can affect the Company's liquidity and cash flow needs. Under
Delaware law, the Holding Company is generally limited to paying dividends to
the extent of the excess of net assets of the Holding Company (the amount by
which total assets exceed total liabilities) over its statutory capital or, if
no such excess exists, from its net profits for the current and/or immediately
preceding year.
The Bank's ability to pay dividends to the Holding Company is also subject
to certain restrictions. Under the New York Banking Law, dividends may be
declared and paid only out of the net profits of the Bank. The approval of the
Superintendent is required if the total of all dividends declared in any
calendar year will exceed the net profits for that year plus the retained net
profits of the preceding two years, less any required transfers. In addition, no
dividends may be declared, credited or paid if the effect thereof would cause
the Bank's capital to be reduced below the amount required by the Superintendent
or the FDIC.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which require
57
<PAGE> 60
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation. Unlike most industrial companies, virtually all of
the Company's assets and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
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 -- 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 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 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. The Company expects that Phase 2 will be
fully completed no later than June 30, 1999.
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
58
<PAGE> 61
September 1998 and expects such testing to be completed by June 30, 1999.
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.
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
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 $0.3 million and $1.7 million were expensed during the fiscal
years ended March 31, 1998 and 1999, respectively. The Company has budgeted $1.4
million for 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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS No. 133 requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative (unrealized gains
and losses) depends on the intended use of the derivative and the resulting
designation. SFAS No. 133 is effective for fiscal quarters of fiscal years
beginning after June 15, 2000 and does not require restatement of prior periods.
Currently the Company does not have any derivative instruments nor has it
entered into any hedging transactions. Therefore management of the Company
believes the implementation of SFAS No. 133 will not have an impact on the
Company's financial condition or results of operations.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained
59
<PAGE> 62
after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" ("SFAS No. 134"). SFAS No. 134 conforms the accounting for
securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking enterprise.
SFAS No. 134 is effective for the first fiscal quarter beginning after December
31, 1998. Management of the Company believes the implementation of SFAS No. 134
will not have a material impact on the Company's financial condition or results
of operations.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Asset and Liability Management" in Item 7 hereto.
60
<PAGE> 63
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
INDEPENDENCE COMMUNITY BANK CORP.
We have audited the accompanying consolidated statements of financial
condition of Independence Community Bank Corp. (the "Company") as of March 31,
1999 and 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Independence
Community Bank Corp. at March 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG, LLP
- - ---------------------------------------------------
Ernst & Young, LLP
New York, New York
April 30, 1999
61
<PAGE> 64
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1999 1998
---------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and due from banks $ 70,811 $ 747,868
Commercial paper 37,290 37,676
Federal funds sold 171,784 71,707
---------- ----------
Total cash and cash equivalents 279,885 857,251
Securities available-for-sale:
Investment securities 331,795 1,282,072
Mortgage-backed and mortgage-related 1,189,833 84,610
---------- ----------
Total securities 1,521,628 1,366,682
Mortgage loans on real estate 2,926,978 2,279,169
Other loans 579,503 502,718
---------- ----------
Total loans 3,506,481 2,781,887
Less allowance for possible loan losses (46,823) (36,347)
---------- ----------
Total loans, net 3,459,658 2,745,540
Premises, furniture and equipment, net 68,595 61,443
Accrued interest receivable 30,575 24,395
Intangible assets, net 47,244 55,873
Other assets 129,393 111,812
---------- ----------
Total assets $5,536,978 $5,222,996
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $3,447,364 $3,393,800
Borrowings on securities loaned -- 701,160
Other borrowings 1,118,364 16,681
Escrow and other deposits 61,003 45,868
Accrued expenses and other liabilities 85,285 116,363
---------- ----------
Total liabilities 4,712,016 4,273,872
Stockholders' equity:
Common stock ($.01 par value, 125,000,000 shares
authorized, 76,043,750 shares issued; 67,873,876 and
76,043,750 shares outstanding at March 31, 1999 and
1998, respectively) 760 760
Additional paid-in-capital 739,090 741,277
Treasury stock at cost; 8,169,874 shares (125,993) --
Unallocated common stock held by ESOP (92,693) (97,636)
Unearned Common Stock held by RRP (33,918) --
Retained earnings-substantially restricted 340,019 298,876
Accumulated other comprehensive income:
Net unrealized (loss) gain on securities
available-for-sale, net of tax (2,303) 5,847
---------- ----------
Total stockholders' equity 824,962 949,124
---------- ----------
Total liabilities and stockholders' equity $5,536,978 $5,222,996
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
62
<PAGE> 65
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Mortgage loans on real estate $198,003 $175,269 $161,638
Other loans 39,720 38,433 36,189
Investment securities 46,216 45,689 22,356
Mortgage-backed and mortgage-related securities 28,254 10,992 28,856
Other 24,222 22,660 6,264
-------- -------- --------
Total interest income 336,415 293,043 255,303
-------- -------- --------
INTEREST EXPENSE:
Deposits 133,146 144,489 138,840
Stock subscription account -- 4,477 --
Borrowings 34,075 11,977 1,347
-------- -------- --------
Total interest expense 167,221 160,943 140,187
-------- -------- --------
Net interest income 169,194 132,100 115,116
-------- -------- --------
Provision for loan losses 10,698 10,011 7,960
-------- -------- --------
Net interest income after provision for loan losses 158,496 122,089 107,156
-------- -------- --------
NON-INTEREST INCOME:
Net gain (loss) on sale of loans and securities 390 115 (3,347)
Service fees 5,253 6,375 5,708
Other 5,680 3,858 548
-------- -------- --------
Total non-interest income 11,323 10,348 2,909
-------- -------- --------
NON-INTEREST EXPENSE:
General and administrative expense:
Compensation and employee benefits 40,371 31,695 26,879
Occupancy costs 13,507 12,622 10,981
Data processing services 9,887 11,524 7,020
Advertising 4,608 4,275 3,625
FDIC insurance premiums 1,182 1,186 2,199
Amortization of intangibles 8,629 8,740 8,278
Other 20,019 19,411 14,618
-------- -------- --------
Total general and administrative expense 98,203 89,453 73,600
SAIF special assessment -- -- 8,553
Contribution to Foundation -- 56,422 --
-------- -------- --------
Total non-interest expense 98,203 145,875 82,153
-------- -------- --------
Income (loss) before provision (benefit) for income taxes 71,616 (13,438) 27,912
Provision (benefit) for income taxes 26,441 (3,482) 10,732
-------- -------- --------
Net income (loss) $ 45,175 $ (9,956) $ 17,180
======== ======== ========
Basic earnings (loss) per share $ 0.67 $ (0.52) N/A
======== ========
Diluted earnings (loss) per share $ 0.66 $ (0.52) N/A
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
63
<PAGE> 66
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
UNALLOCATED UNEARNED
COMMON COMMON ACCUMULATED
ADDITIONAL STOCK STOCK OTHER
COMMON PAID IN TREASURY HELD BY HELD BY RETAINED COMPREHENSIVE
STOCK CAPITAL STOCK ESOP RRP EARNINGS INCOME TOTAL
------ ---------- --------- ----------- -------- -------- ------------- ---------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- March 31, 1996 $ -- $ -- $ -- $ -- $ -- $291,566 $(1,747) $ 289,819
Comprehensive income:
Net income for the year ended
March 31, 1997 -- -- -- -- -- 17,180 -- 17,180
Other comprehensive income,
net of tax of $0.2 million
Net unrealized gain on
securities transferred from
held-to-maturity to
available-for-sale, net of
tax -- -- -- -- -- -- 269 269
Changes in net unrealized
gains on securities
available-for-sale, net of
tax -- -- -- -- -- -- 901 901
Less: reclassification
adjustment for losses
realized in net income, net
of tax -- -- -- -- -- -- 945 945
---- -------- --------- -------- -------- -------- ------- ---------
Comprehensive income -- -- -- -- -- 17,180 2,115 19,295
---- -------- --------- -------- -------- -------- ------- ---------
Balance -- March 31, 1997 -- -- -- -- -- 308,746 368 309,114
Comprehensive income:
Net loss for the year ended
March 31, 1998 -- -- -- -- -- (9,956) -- (9,956)
Other comprehensive income,
net of tax of $5.2 million
Changes in net unrealized
gains on securities
available-for-sale, net of
tax -- -- -- -- -- -- 5,347 5,347
Less: reclassification
adjustment for losses
realized in net income, net
of tax -- -- -- -- -- -- 132 132
---- -------- --------- -------- -------- -------- ------- ---------
Comprehensive income -- -- -- -- -- (9,956) 5,479 (4,477)
Merge Independence Community
Bank Corp. Mutual Holding
Company into Independence
Savings Bank -- -- -- -- -- 86 -- 86
Issuance of 70,410,880 shares of
$.01 par value common stock in
initial public offering at
$10.00 per share net of
conversion related expenses
($18,417) 704 684,988 -- -- -- -- -- 685,692
Issuance of 5,632,870 shares of
$.01 par value common stock to
the Foundation 56 56,272 -- -- -- -- -- 56,328
Open market purchases of
5,632,870 shares of
Independence Community Bank
Corp. common stock by ESOP
trustee (Avg. price of
$17.5527) -- -- -- (98,872) -- -- -- (98,872)
ESOP shares committed to be
released -- 17 -- 1,236 -- -- -- 1,253
---- -------- --------- -------- -------- -------- ------- ---------
Balance -- March 31, 1998 760 741,277 -- (97,636) -- 298,876 5,847 949,124
---- -------- --------- -------- -------- -------- ------- ---------
Comprehensive income:
Net income for the year ended
March 31, 1999 -- -- -- -- -- 45,175 -- 45,175
Other comprehensive income,
net of tax benefit of $2.0
million
Changes in net unrealized
gains on securities
available-for-sale, net of
tax -- -- -- -- -- -- (8,150) (8,150)
Less: reclassification
adjustment for losses
realized in net income, net
of tax -- -- -- -- -- -- -- --
---- -------- --------- -------- -------- -------- ------- ---------
Comprehensive income -- -- -- -- -- 45,175 (8,150) 37,025
Repurchase of common stock
(8,169,874 shares) -- -- (125,993) -- -- -- -- (125,993)
Dividends paid -- -- -- -- -- (4,032) -- (4,032)
ESOP shares committed to be
released -- (669) -- 4,943 -- -- -- 4,274
Other conversion related costs -- (372) -- -- -- -- -- (372)
Issuance of grants and purchase
of shares under RRP (2,816,435
shares) -- (1,247) -- -- (36,920) -- -- (38,167)
Amortization of earned portion
of Recognition and Retention
Plan -- 101 -- -- 3,002 -- -- 3,103
---- -------- --------- -------- -------- -------- ------- ---------
Balance -- March 31, 1999 $760 $739,090 $(125,993) $(92,693) $(33,918) $340,019 $(2,303) $ 824,962
==== ======== ========= ======== ======== ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
64
<PAGE> 67
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1999 1998 1997
----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 45,175 $ (9,956) $ 17,180
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Contribution of stock to Foundation -- 56,272 --
Provision for loan losses 10,698 10,011 7,960
Net (gain) loss on sale of loans and securities (390) (115) 3,347
Amortization of deferred income and premiums (5,298) (12,938) (11,164)
Amortization of intangibles 8,629 8,740 8,278
Amortization of unearned compensation of ESOP and RRP 7,377 1,253 --
Depreciation and amortization 7,271 6,862 5,972
Deferred income tax benefit (4,446) (23,901) (7,137)
(Increase) decrease in accrued interest receivable (6,180) (7,011) 3,687
Decrease (increase) in accounts receivable-securities
transactions 13,023 93,718 (107,624)
(Decrease) increase in accrued expenses and other
liabilities (31,078) 74,539 (49,588)
Other, net 15,977 (17,089) (6,840)
----------- ----------- ---------
Net cash provided by (used in) operating activities 60,758 180,385 (135,929)
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations and purchases (1,279,041) (644,591) (503,153)
Principal payments on loans 512,868 373,734 261,161
Proceeds from sale of loans 39,966 19,219 76,002
Proceeds from sale of securities 456,359 288,303 648,416
Proceeds from maturities of securities 1,027,983 1,073,291 823,825
Principal collected on securities 297,715 86,318 148,013
Purchases of securities (1,950,177) (2,242,950) (927,977)
Proceeds from sales of other real estate owned 76 273 1,308
Purchases of Federal Home Loan Bank stock (30,480) (4) (3,579)
Net additions to premises, furniture and equipment (14,423) (7,938) (14,433)
----------- ----------- ---------
Net cash (used in) provided by investing activities (939,154) (1,054,345) 509,583
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits sold, net of premium -- -- (47,661)
Deposits purchased, net of premiums -- 65,972 --
Net (decrease) increase in demand and savings deposits (44,713) 66,129 2,276
Net increase (decrease) in time deposits 98,277 (67,845) (22,199)
Net increase (decrease) in other borrowings 400,523 700,609 (40,063)
Net increase in escrow and other deposits 15,135 4,834 5,437
Issuance of Common Stock -- 685,748 --
Loan to ESOP for purchase of shares -- (98,872) --
Purchase of shares for RRP (38,167) -- --
Repurchase of Common Stock (125,993) -- --
Dividends paid (4,032) -- --
----------- ----------- ---------
Net cash provided by (used in) financing activities 301,030 1,356,575 (102,210)
----------- ----------- ---------
Net (decrease) increase in cash and cash equivalents (577,366) 482,615 271,444
Cash and cash equivalents at beginning of year 857,251 374,636 103,192
----------- ----------- ---------
Cash and cash equivalents at end of period $ 279,885 $ 857,251 $ 374,636
=========== =========== =========
Income taxes paid $ 28,917 $ 15,196 $ 25,200
=========== =========== =========
Interest paid $ 161,790 $ 160,838 $ 138,823
=========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
65
<PAGE> 68
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
1. ORGANIZATION/FORM OF OWNERSHIP
Independence Community 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 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, the Company was incorporated under Delaware law
in June 1997. The Company is regulated by the 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 ESOP which purchased 5,632,870 shares of the
Company's stock in the open market.
As part of the Conversion, the Company formed the Independence Community
Foundation and donated 5,632,870 shares of Common Stock of the Company valued at
$56.3 million. The Company recorded a contribution expense charge and a
corresponding deferred tax benefit of $19.2 million. The formation of this
private charitable foundation is to further the Bank's commitment to the
communities that it serves.
Additionally, the Bank established, in accordance with the requirements of
State and Federal regulations a liquidation account for $319.7 million which was
equal to its capital as of the date of the latest consolidated statement of
financial condition (August 31, 1997) appearing in the final prospectus in
connection with the Conversion of the Bank and the Mutual Holding Company. The
liquidation account is reduced as, and to the extent that, eligible and
supplemental eligible account holders have reduced their qualifying deposits.
Subsequent increases in deposits do not restore an eligible account holder's
interest in the liquidation account. In the event of a complete liquidation of
the Bank, each eligible account holder or a supplemental eligible account
holder's will be entitled to receive a distribution from the liquidation account
in an amount proportionate to the adjusted qualifying balances for accounts then
held.
In addition to the restriction described above, the Company may not declare
or pay cash dividends on or repurchase any of its shares of common stock if the
effect thereof would cause stockholders' equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration and payment
would otherwise violate regulatory requirements.
The Bank provides financial services primarily to individuals and small
businesses within the New York metropolitan area. The Bank is subject to
regulation by the FDIC and New York Banking Department.
2. ACQUISITIONS
On April 13, 1999, the Company announced that it had signed a definitive
agreement to acquire 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
66
<PAGE> 69
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
In connection with the merger, Statewide has granted an option to the
Company to purchase up to 19.9% of Statewide's common shares currently
outstanding under certain circumstances.
On February 1, 1999, the Company announced that it had signed a definitive
agreement to acquire Broad. Pursuant to the agreement, the Company will acquire
Broad, in a transaction valued at the time of execution of the definitive
agreement at $26.50 per Broad share. Upon completion of the acquisition, Broad's
wholly owned subsidiary, Broad National Bank, which has 16 full-service bank
offices located in Bergen, Essex, Hudson, Middlesex and Union counties, will
merge with and into the Bank. Based upon Broad's public filings, at March 31,
1999, Broad had total assets of $676.3 million, deposits totaling $576.7 million
and stockholders' equity of $45.8 million.
Under the terms of the Broad 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
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 Broad stockholder
receives will be determined based upon an exchange ratio designed to produce a
value of $26.50 per share when the Company's common stock has an average closing
price during the pricing period between $12.75 and $17.25 as calculated pursuant
to the terms of the agreement. To the extent that the market value of the
Company's 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 Broad transaction has an aggregate value of approximately $138
million assuming an acquisition value of $26.50 per share of Broad common stock.
The Broad transaction also 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 its common stock that will
be issued in the transaction. The transaction currently is expected to close in
the third quarter of calendar 1999 and is subject to receipt of various
regulatory approvals, approval by Broad'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 February 9, 1999, which report is incorporated by reference.
The Broad 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.
On April 25, 1997, the Company assumed approximately $70.0 million of
deposits and acquired $1.1 million in assets from a financial institution. The
Company also received approximately $64.9 million in cash to fund the assumption
of these deposit liabilities. The adjusted cost in excess of the assets received
and the deposits assumed is being amortized on a straight-line basis over 7
years.
On March 15, 1996, the Company assumed approximately $615.6 million of
deposits and ac-
67
<PAGE> 70
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
quired $8.1 million of assets from a financial institution. The Company also
received approximately $557.9 million in cash to fund the assumption of these
deposit liabilities. The Company subsequently sold, in September of 1996,
approximately $51.4 million of these deposits. The adjusted cost in excess of
the assets received and the deposits assumed is being amortized on a
straight-line basis over 7 years.
On January 3, 1996 the Company acquired, via a cash acquisition, all of the
stock of Bay Ridge Bancorp, Inc. and its thrift subsidiary, Bay Ridge Federal
Savings Bank. The purchase price paid was approximately $127.8 million, and as a
result the Company acquired approximately $558.6 million in assets and $445.2
million in liabilities, with the transaction recorded on a purchase accounting
basis. The cost in excess of the net assets acquired is being amortized on a
straight-line basis over approximately 14 years.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies of
the Company and its subsidiaries. These policies conform to generally accepted
accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include all
majority-owned subsidiaries, after elimination of intercompany transactions and
accounts.
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year's presentation.
SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are carried at fair value. Unrealized gains
or losses on securities available-for-sale are included as a separate component
of stockholders' equity, net of tax. Gains or losses on the sale of such
securities are recognized using the specific identification method.
LOANS
Loans are stated at unpaid principal balances, net of deferred loan fees.
Interest income on loans is credited as earned. Accrual of interest income is
discontinued and uncollected interest is reversed for loans on which a default
on interest has existed for a period in excess of 90 days, or for loans which
management believes, after giving consideration to economic and business
conditions and collection efforts, the collection of interest is doubtful.
Loan origination and commitment fees and certain direct costs incurred in
connection with loan originations are deferred and amortized to interest income,
using a method which approximates the interest method, over the life of the
related loans as an adjustment to yield.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is determined based upon management's
evaluation of the Company's loan portfolio considering past loan loss
experience, assessment of current economic conditions, the size and composition
of the loan portfolio, and other relevant factors.
Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that may
be susceptible to significant change. In the opinion of management, the
allowance, when taken as a whole, is adequate to absorb reasonable estimated
loan losses inherent in the Company's loan portfolios.
PREMISES, FURNITURE AND EQUIPMENT
Land is carried at cost. Buildings and improvements, leasehold
improvements, furniture, automobiles and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed on a
straight-line basis over the
68
<PAGE> 71
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated useful lives of the assets. The estimated useful lives of the assets
are as follows:
<TABLE>
<S> <C>
Buildings 10 to 30 years
Furniture and
equipment 3 to 10 years
Automobiles 3 years
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the
lives of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
INCOME TAXES
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws expected to be in effect
when the differences are expected to reverse.
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 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 67,708,509 and
68,000,595 shares, respectively, for the year ended March 31, 1999.
For fiscal 1998 basic EPS is computed by dividing net income since
Conversion by the weighted average number of common shares outstanding. There
were no dilutive common stock equivalents for the year ended March 31, 1998.
Since the Conversion on March 13, 1998, basic and diluted weighted average
common shares outstanding was 72,442,558 shares.
EMPLOYEE BENEFITS
Compensation expense related to the ESOP is recognized in an amount equal
to the shares committed to be released by the ESOP multiplied by the average
fair value of the common stock during the year. The difference between the
average fair value and the $17.55 weighted average per share cost of shares
committed to be released by the ESOP is recorded as an adjustment to additional
paid-in-capital.
The Company uses the intrinsic value based methodology which measures
compensation cost for stock options as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pension and other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
only addresses disclosure and does not change any of the measurement or
recognition provisions provided for in previously issued accounting standards.
The Company adopted SFAS No. 132 in fiscal 1998 and restated the fiscal 1997
disclosure accordingly.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" in the
first quarter of fiscal 1999. All comparative financial statements provided for
earlier periods have been restated to reflect application of the provisions.
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.
SEGMENT REPORTING
During fiscal 1999 the Company adopted SFAS No. 131, "Disclosures About
Segments of an
69
<PAGE> 72
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Enterprise and Related Information." SFAS No. 131 requires disclosures for each
segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It also requires geographic by country, as opposed to
broader geographic regions as permitted under current standards. As a
community-oriented financial institution, substantially all of the Company's
operations involve the delivery of loan and deposit products to customers in its
market area. Management makes operating decisions and assesses performance based
on an ongoing review of these community banking operations, which constitute the
Company's only operating segment for financial reporting purposes under SFAS No.
131.
TREASURY STOCK
Repurchases of common stock are recorded as treasury stock at cost.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company
defines cash and cash equivalents as highly liquid investments with original
maturities of three months or less.
70
<PAGE> 73
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST 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>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST 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>
71
<PAGE> 74
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sales of available-for-sale securities are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales $456,359 $288,303 $648,416
Gross gains 346 42 1,042
Gross losses (0) (1) (4,905)
</TABLE>
The amortized cost and estimated fair value of debt securities by
contractual maturity are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
One year or less $ 97,663 $ 97,878
One year through five years 3,409 3,301
Five years through ten years 20,460 20,484
Over ten years 147,769 143,337
--------- --------
$ 269,301 $265,000
========= ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed and
mortgage-related securities by contractual maturity are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
One year through five years $ 5,559 $ 5,626
Five years through ten years 45,525 45,890
Over ten years 1,143,138 1,138,317
---------- ----------
$1,194,222 $1,189,833
========== ==========
</TABLE>
72
<PAGE> 75
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LOANS RECEIVABLE, NET
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1999 1998
---------- ----------
Loans are summarized as follows: (IN THOUSANDS)
<S> <C> <C>
Mortgage Loans on Real Estate:
Single-family residential $ 491,523 $ 505,051
Multi-family residential 2,195,879 1,605,058
Commercial and other real estate 250,105 178,463
---------- ----------
Total principal balance -- mortgage loans 2,937,507 2,288,572
Less net deferred fees (10,529) (9,403)
---------- ----------
Total mortgage loans on real estate 2,926,978 2,279,169
Other loans:
Cooperative apartment loans 458,165 380,866
Student loans 41,633 43,946
Home equity lines and loans 12,295 15,625
Commercial business loans 39,362 31,550
Consumer loans 18,631 20,268
Passbook loans 8,233 8,833
Credit card loans 1,518 1,768
---------- ----------
Total principal balance -- other loans 579,837 502,856
Less unearned discount and net deferred fees (334) (138)
---------- ----------
Total other loans 579,503 502,718
Less allowance for loan losses (46,823) (36,347)
---------- ----------
Total loans, net $3,459,658 $2,745,540
========== ==========
</TABLE>
At March 31, 1999, 1998 and 1997 the Company was servicing loans on behalf
of others which are not included in the consolidated financial statements of
$206.9 million, $211.2 million and $314.6 million, respectively.
At March 31, 1999, 1998, and 1997 included in mortgage loans on real estate
are $6.3 million, $10.4 million, and $15.5 million, respectively, of nonaccrual
loans. If interest on the nonaccrual loans had been accrued, such income would
have approximated $0.5 million, $0.7 million and $1.6 million for the three
years in the period ended March 31, 1999, 1998 and 1997 respectively.
At March 31, 1999, 1998, 1997, included in other loans are $0.8 million,
$0.9 million, and $1.4 million, respectively, of nonaccrual loans. If interest
on the nonaccrual loans had been accrued, such income would have approximated
$31,000, $29,000 and $117,800 for the three years ended March 31, 1999, 1998 and
1997, respectively.
73
<PAGE> 76
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period $36,347 $27,024 $20,528
Provision charged to operations 10,698 10,011 7,960
Charge-offs, net of recoveries (222) (688) (1,464)
------- ------- -------
Balance at end of period $46,823 $36,347 $27,024
======= ======= =======
</TABLE>
The Company's loan portfolio is primarily comprised of secured loans made to
individuals and small businesses located in the New York City metropolitan area.
6. PREMISES, FURNITURE AND EQUIPMENT
A summary of premises, furniture and equipment, net of accumulated
depreciation and amortization is as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land $ 3,232 $ 3,232
Buildings and improvements 45,651 44,395
Leasehold improvements 4,828 4,281
Furniture and equipment 14,884 9,535
------- -------
Total premises, furniture and equipment $68,595 $61,443
======= =======
</TABLE>
Depreciation and amortization expense amounted to $7.3 million, $6.9
million and $6.0 million for the years ended March 31, 1999, 1998 and 1997,
respectively.
7. OTHER ASSETS
A summary of other assets is as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
FHLB stock $ 56,236 $ 25,756
Net deferred tax asset 48,471 36,774
Prepaid expenses 2,128 2,399
Other real estate 273 192
Accounts receivable 11,246 35,989
Other 11,039 10,702
-------- --------
$129,393 $111,812
======== ========
</TABLE>
74
<PAGE> 77
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DEPOSITS
The amounts due to depositors and the weighted-average interest rates at
March 31, 1999 and March 31, 1998 are as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------
1999 1998
--------------------- ---------------------
DEPOSIT AVERAGE DEPOSIT AVERAGE
LIABILITY RATE LIABILITY RATE
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Savings $ 970,069 2.30% $1,011,597 2.75%
Money Market 202,292 2.66 214,182 2.96
NOW 351,270 2.71 344,500 2.46
Checking 102,831 -- 100,896 --
Time Deposits 1,820,902 5.19 1,722,625 5.48
---------- ----------
$3,447,364 $3,393,800
========== ==========
</TABLE>
Scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
One year $1,537,801 $1,359,877
Two years 164,280 203,563
Three years 41,606 77,936
Four years 45,386 33,704
Thereafter 31,829 47,545
---------- ----------
$1,820,902 $1,722,625
========== ==========
</TABLE>
Time deposit accounts in denominations of $100,000 or more totaled
approximately $232.5 million, $192.4 million and $189.8 million at March 31,
1999, 1998 and 1997, respectively.
9. BORROWINGS
A summary of borrowings is as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------
1999 1998 1997
---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities loaned $ -- $701,160 $ --
FHLB borrowings 1,106,725 14,300 14,550
Repurchase agreements 9,950 -- --
Other 1,689 2,381 2,682
---------- -------- -------
$1,118,364 $717,841 $17,232
========== ======== =======
</TABLE>
The Company has for many years "lent" a portion of its securities,
primarily U.S. Treasury Notes and Bills, generally to money center banks and
national securities firms. The securities lent are collateralized generally by
cash in an amount slightly in excess of the value of the securities lent.
Effective January 1, 1998, the obligation to return the cash upon receipt of the
lent securities is deemed a borrowing while the cash, which has been invested in
cash equivalents, is reflected as an asset. As a result of the influx of
proceeds upon completion of the conversion and subsequent investment in U.S.
Treasury securities, the Company increased
75
<PAGE> 78
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
its activity in securities lending transactions pending deployment of such
assets into loans and other earning assets. Prior to January 1, 1998, these
transactions were not recorded in the statement of financial condition. The fees
from these transactions were recorded in other non-interest income in the
statement of operations.
There were no securities lending transactions outstanding at March 31, 1999
compared to $701.2 million at March 31, 1998. The average balance of securities
lending transactions during fiscal 1999 was $189.0 million with an average cost
of 5.50%. The maximum amount outstanding at any month end was $383.2 million.
The average balance of securities lending transactions from January 1, 1998
through March 31, 1998 was $743.0 million with an average cost of 5.34%. The
maximum amount outstanding at any month end was $1.36 billion.
Advances from the FHLB are made at fixed rates with remaining maturities
between one and fifteen years, summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1999 1998 1997
---------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Less than one year $ 126,100 $ 700 $ --
Over one year through five years 865,625 11,550 8,350
Over five years through seven years 115,000 2,050 4,900
Over seven years through fifteen years -- -- 1,300
---------- ------- -------
$1,106,725 $14,300 $14,550
========== ======= =======
</TABLE>
Advances from the FHLB are collateralized by all FHLB stock owned by the
Bank in addition to a blanket pledge of eligible assets in an amount required to
be maintained so that the estimated fair value of such eligible assets exceeds,
at all times, 110% of the outstanding advances (see Note 12).
The average cost of FHLB borrowings for the years ended March 31, 1999,
1998 and 1997 was 5.5%, 6.0% and 7.6%, respectively.
The Company enters into sales of securities under agreements to repurchase.
These agreements are recorded as financing transactions, and the obligations to
repurchase are reflected as a liability in the consolidated statements of
financial condition. The securities underlying the agreements are delivered to
the dealer with whom each transaction is executed. The dealers, who may sell,
loan or otherwise dispose of such securities to other parties in the normal
course of their operations, agree to resell to the Company substantially the
same securities at the maturities of the agreements. The Company retains the
right of substitution of collateral throughout the terms of the agreements.
At March 31, 1999, all of the outstanding repurchase agreements had
original contractual maturities of less than one year and were secured by U.S.
Treasury securities. The average balance of repurchase agreements during fiscal
1999 was $7.4 million with an average cost of 5.60%. The maximum amount
outstanding at any month end was $110.0 million.
10. BENEFIT PLANS
PENSION PLAN
The Company has a noncontributory defined benefit pension plan (the
"Pension Plan") covering substantially all of its full-time employees and
certain part-time employees who qualify. The Company makes annual contributions
to the Plan equal to the amount necessary to satisfy the funding requirements of
ERISA.
The Company also has a Supplemental Executive Retirement Plan (the
"Supplemental Plan"). The Supplemental Plan is a nonqualified, unfunded plan of
deferred compensation covering those senior officers of
76
<PAGE> 79
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company whose benefits under the Pension Plan would be limited by Internal
Revenue Code Sections 415 and 401(a)(17).
The following table sets forth the Pension Plan's and the Supplemental
Plan's (collectively, the "Plan") change in benefit obligation:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Benefit obligation at beginning of year $31,174 $25,577
Service cost 1,527 1,097
Interest cost 2,352 1,986
Actuarial loss 4,421 3,504
Benefits paid (1,042) (990)
------- -------
Benefit obligation at end of year $38,432 $31,174
======= =======
</TABLE>
The following table sets forth the Plan's change in Plan assets:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Fair value of Plan assets at beginning of year $28,305 $24,547
Actual return on Plan assets 5,528 4,745
Benefits paid (1,038) (987)
------- -------
Fair value of Plan assets at end of year $32,795 $28,305
======= =======
Funded status $(5,637) $(2,869)
Unrecognized net asset (1,418) (1,621)
Unrecognized prior service cost 533 557
Unrecognized actuarial loss/(gain) 978 (337)
------- -------
Accrued pension cost at December 31, 1998 and 1997 (5,544) (4,270)
Net adjustment (322) (309)
------- -------
Accrued pension cost $(5,866) $(4,579)
======= =======
</TABLE>
77
<PAGE> 80
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension expense included the following components:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 1,527 $ 1,097 $ 924
Interest cost on projected benefit obligation 2,352 1,986 1,818
Expected return on Plan assets (2,500) (2,167) (2,075)
Amortization of net asset (203) (202) (209)
Amortization of prior service cost 24 24 24
Recognized net actual loss 77 33 58
Settlement gain -- -- (344)
------- ------- -------
Net pension expense for the years ended December 31,
1998, 1997 and 1996 1,277 771 196
Net adjustment 18 172 (63)
------- ------- -------
Net pension expense $ 1,295 $ 943 $ 133
======= ======= =======
</TABLE>
At December 31, 1998 and 1997, the projected benefit obligation for the
Plan was determined using an assumed discount rate of 6.75% and 7.0%,
respectively, and an assumed rate of compensation increase of 4% for the Pension
Plan and 7% for the Supplemental Plan. At December 31, 1998 and 1997, the
weighted average assumed rate of return on Plan assets was 9%. Plan assets
consist mainly of investments in U.S. government and agency obligations,
mortgage-backed securities and common stocks.
POSTRETIREMENT BENEFITS
Effective April 1, 1995, the Company adopted SFAS No. 106 "Employer's
Accounting for Postretirement Benefits Other Than Pensions." In accordance with
SFAS No. 106, the Company elected to recognize the cumulative effect of this
change in accounting principle over future accounting periods.
Status of the postretirement benefit obligation is as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1999 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Benefit obligation at beginning of year $10,658 $ 8,843
Service cost 334 322
Interest cost 610 690
Actuarial (gain)/loss (1,373) 1,303
Benefits paid (470) (500)
------- --------
Benefit obligation at end of year $ 9,759 $ 10,658
======= ========
Funded status $(9,759) $(10,658)
Unrecognized transition obligation being recognized over 20
years 4,282 4,549
Unrecognized net loss due to past experience difference from
assumption made 1,225 2,611
Unrecognized prior service cost 11 21
------- --------
Accrued postretirement benefit cost at December 31, 1998 and
1997 (4,241) (3,477)
Net adjustment (191) (393)
------- --------
Accrued postretirement benefit cost $(4,432) $ (3,870)
======= ========
</TABLE>
78
<PAGE> 81
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Components of postretirement benefit cost:
Service cost-benefits earned during the period $ 334 $ 322 $ 457
Interest cost on accumulated postretirement benefit
obligation 610 690 850
Amortization of net obligation 268 267 410
Amortization of prior service cost 10 10 147
Recognized net actuarial loss 12 102 127
------ ------ ------
Postretirement benefit expense-years ended December 31, 1998
and 1997 1,234 1,391 1,991
Net adjustment (190) -- 152
------ ------ ------
Net postretirement benefit expense $1,044 $1,391 $2,143
====== ====== ======
</TABLE>
The assumptions used in arriving at the above include the initial rate of
increase in health care costs of 8% decreasing gradually to 6% by the year 2001.
At December 31, 1998 and 1997, discount rates of 6.75% and 7.0%, respectively,
were used.
The health care cost trend rate assumption has a significant effect on the
amounts reported. A 1% increase in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1998 by $1.1 million and
the aggregate of the service and interest cost components of the net periodic
postretirement benefits expense for the year then ended by $123,700.
401(K) PLAN
The Company also sponsors an incentive savings plan ("401(k) Plan") whereby
eligible employees may make tax deferred contributions up to certain limits. The
Company makes matching contributions up to the lesser of 6% of employee
compensation, or $3,000. Beginning in fiscal 1999, the matching contribution for
full-time employees is in the form of shares held in the ESOP while the
contribution for part-time employees remained a cash contribution. The Company
may reduce or cease matching contributions if it is determined that the current
or accumulated net earnings or undivided profits of the Company are insufficient
to pay the full amount of contributions in a plan year. Cash contributions to
the 401(k) Plan by the Company aggregated approximately $25,000, $577,000 and
$508,400 for the years ended March 31, 1999, 1998 and 1997, respectively.
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 is the
common stock of the Company purchased by the ESOP. At March 31, 1999, the loan
from the Company had an outstanding balance of $96.3 million.
Shares held by the ESOP are held by a trustee for allocation among
participants as the loan is repaid. The number of shares released annually is
based upon the ratio that the current principal and interest payment bears to
the original principal and interest payments to be made. Shares allocated will
first be used for the employer matching contribution for the 401(k) Plan with
the remaining shares allocated to the ESOP participants based upon compensation
in the year of allocation. Forfeitures from the 401(k) match portions will be
used to reduce the employer 401(k) match while forfeitures from shares allocated
to the ESOP participants will be allocated among the participants. There were
281,644 and 0 shares allocated in fiscal 1999
79
<PAGE> 82
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1998, respectively. At March 31, 1999 there were 70,411 shares committed to
be released and 5,351,226 shares remain unallocated.
In accordance with SOP 93-6, the Company recorded compensation expense of
$4.3 million and $1.3 million for the year ended March 31, 1999 and 1998,
respectively, which was equal to the shares committed to be released by the ESOP
multiplied by the average estimated fair value of the common stock during the
period in which they were released.
RECOGNITION AND RETENTION PLAN (RRP)
The 1998 Recognition and Retention Plan ("RRP") was implemented in
September 1998. The objective of the RRP is to enable the Company to provide
officers, key employees and non-employee directors of the Company with a
proprietary interest in the Company as an incentive to contribute to its
success. 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 a performance goal, 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 845,000 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. Awards become 100% vested upon termination of employment due
to death, disability or retirement. In fiscal 1999, 8,000 shares were forfeited.
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 $3.1 million related to the RRP for the year ended March
31, 1999. The RRP was not in effect for fiscal year 1998.
STOCK OPTION PLAN
The 1998 Stock Option Plan (the "Option Plan") was implemented in September
1998. The Company has reserved for the future issuance pursuant to the 1998
Stock Option Plan ("Option Plan") 7,041,088 shares of common stock, which is
equal to 10% of the common stock sold in the Conversion. Under the Option Plan,
stock options (which expire ten years from the date of grant) have been granted
to officers, key employees and non-employee directors of the Company. Each
option entitles the holder to purchase one share of the Company's common stock
at an exercise price equal to the fair market value of the stock at the date of
the 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 in 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. However, all options become 100%
exercisable in the event the employee terminates his employment due to death,
disability or retirement. However, senior officers of the Company who elect to
retire require the approval of the Board of Directors to accelerate vesting of
options.
The Company accounts for stock-based compensation using the intrinsic value
method. Since each option granted has an exercise price equal to the fair market
value of one share of the Company's stock on the date of the grant, no
compensation cost has been recognized. The following table compares reported net
income and earnings per share to net income and earnings per share on a pro
forma basis assuming that the
80
<PAGE> 83
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company accounted for stock-based compensation under SFAS No. 123. The effects
of applying SFAS No. 123 in this pro forma disclosure are not indicative of
future amounts.
<TABLE>
<CAPTION>
1999
-------
<S> <C>
Net Income
As reported $45,175
Pro forma $42,980
Earnings per share
As reported
Basic $ 0.67
Diluted $ 0.66
Pro forma
Basic $ 0.63
Diluted $ 0.63
</TABLE>
STOCK OPTION ACTIVITY
The following table sets forth stock option activity and the
weighted-average fair value of options granted.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1999
---------------------
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, beginning of year --
Granted 6,101,608 $13.3125
Exercised --
Forfeited 51,600 $13.3125
--------- --------
Outstanding, end of year 6,050,008 $13.3125
--------- --------
Options exercisable as of March 31,
1999 5,400
Weighted average fair value of options
granted $ 5.17
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model using the following weighted-average
assumptions: risk free interest rates of 4.53%, volatility of 37.5%, expected
dividend yield of 1.2% and expected life of six years.
11. STOCKHOLDERS' EQUITY
On December 7, 1998, the Company announced that its Board of Directors
authorized an initial stock repurchase plan for up to five percent of the common
stock then outstanding or 3,802,187 shares. On January 19, 1999, the Company
announced that a second stock repurchase plan was authorized by the Board of
Directors for an additional 3,802,187 shares, or approximately five percent of
the Company's outstanding common stock before the effect of the initial stock
repurchase plan. On March 11, 1999, the Company announced that its Board of
Directors authorized a third stock repurchase program of 3,421,968 shares, or
five percent, of the Company's outstanding common stock at March 11, 1999.
Repurchases are authorized to be made by the Company from time to time in
open-market transactions as, in the opinion of management, market conditions
warrant. Repurchased shares will be held as treasury stock and will be available
for issuance pursuant to the Company's benefit plans, including the Option Plan,
to fund the acquisition of Broad and Statewide and for general corporate
purposes. At March 31, 1999, the Company had repurchased 8,169,874 shares of
stock at a cost of $126.0 million.
81
<PAGE> 84
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
At March 31, 1999 and March 31, 1998, there were outstanding commitments
and unused lines of credit by the Company to originate or acquire mortgage loans
on real estate aggregating $224.4 million and $138.6 million, respectively, and
other loans aggregating $36.9 million and $18.0 million, respectively.
Substantially all of these loans were fixed and adjustable rate residential
loans and fixed rate commercial loans that are expected to close during the next
twelve months. The difference between the estimated fair value and the estimated
book value of commitments and unused lines of credit is not significant.
The Company has entered into noncancellable lease agreements with respect
to Bank premises. The minimum annual rental commitments under these operating
leases, exclusive of taxes and other charges, are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Year ended March 31:
2000 $1,476
2001 1,473
2002 1,447
2003 1,036
2004 and thereafter 8,384
</TABLE>
The rent expense for the years ended March 31, 1999, 1998 and 1997 was $1.6
million, $1.4 million and $1.1 million, respectively.
The Bank is a member of the FHLB, and owns FHLB stock with a carrying value
of $56,236,300 and $25,756,300 at March 31, 1999 and March 31, 1998,
respectively. As a member, the Bank is able to borrow on a secured basis up to
twenty times the amount of its capital stock investment at either fixed or
variable interest rates for terms ranging from six months to fifteen years (see
Note 9). The borrowings are limited to 30% of total assets except for borrowings
to fund deposit outflows.
In the normal course of business, there are outstanding various legal
proceedings, claims, commitments and contingent liabilities. In the opinion of
management, the financial position of the Bank will not be affected materially
by the outcome of such legal proceedings and claims.
82
<PAGE> 85
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
The components of deferred tax assets and liabilities are summarized as
follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Securities available for sale $ 2,049 $ --
Contribution to the Foundation 15,979 17,677
Allowance for loan losses 19,644 18,879
Deferred loan fees 3,408 6,007
Amortization of intangible assets 5,706 5,371
Nonaccrual interest 745 924
Employee benefits 6,354 4,542
Other 849 356
------- -------
Gross deferred tax asset 54,734 53,756
------- -------
Deferred tax liabilities:
Securities available-for-sale -- 5,203
Bad debt recapture under Section 593 1,232 1,850
Acquisition premium on mortgage-backed and
mortgage-related securities 1,755 1,689
Acquisition premium on mortgages 2,397 3,407
Depreciation 641 795
Other 238 4,038
------- -------
Gross deferred tax liabilities 6,263 16,982
------- -------
Net deferred tax asset $48,471 $36,774
======= =======
</TABLE>
The Company has reported taxable income for Federal, State and local income
tax purposes in each of the past two years and in management's opinion, in view
of the Company's previous, current and projected future earnings trend, such net
deferred tax asset will be fully realized. Accordingly, no valuation allowance
was deemed necessary for the net deferred tax asset at March 31, 1999 and March
31, 1998.
Significant components of the provision (benefit) for income taxes
attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1999 1998 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal $28,968 $ 18,462 $14,832
State and local 1,919 1,957 3,037
------- -------- -------
30,887 20,419 17,869
------- -------- -------
Deferred:
Federal (3,527) (21,365) (4,873)
State and local (919) (2,536) (2,264)
------- -------- -------
(4,446) (23,901) (7,137)
------- -------- -------
Total $26,441 $ (3,482) $10,732
======= ======== =======
</TABLE>
83
<PAGE> 86
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below presents a reconciliation between the reported tax
provision (benefit) and the tax provision (benefit) computed by applying the
statutory Federal income tax rate to income (loss) before provision (benefit)
for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision (benefit) at
statutory rates $25,066 $(4,703) $ 9,769
Increase(reduction) in tax resulting from:
State and Local taxes, net of federal income
tax effect 650 (376) 502
Other 725 1,597 461
------- ------- -------
$26,441 $(3,482) $10,732
======= ======= =======
</TABLE>
The Company files a consolidated Federal income tax return on a calendar
year basis. For Federal income tax purposes, prior to 1996, if certain
definitional tests and other conditions were met, the Company was allowed a
special bad debt deduction in determining its taxable income. The deduction was
based on either specified experience formulas or a percentage of taxable income.
Federal tax legislation enacted during 1996 repealed the special bad debt
deduction provisions. As a result, a large thrift institution such as the
Company is required to use the specific charge-off method in computing its
federal bad debt deduction for tax years beginning after December 31, 1995.
However, New York State enacted legislation which, among other things, would
permit a large thrift institution such as the Company to continue to use the bad
debt reserve method for both New York State and New York City tax purposes.
The 1996 Federal tax legislation also provided that a large thrift
institution such as the Company is required to recapture the excess of its tax
bad debt reserves at December 31, 1995 over the balance of such reserves as of
December 31, 1987 (the "base year"), whether the additions were made under the
percentage of taxable income method or the experience method. The Company is
required to recapture its excess bad debt reserves, for which deferred taxes
have been recognized, over a six year period on a straight line basis beginning
in 1998. The base year reserve will remain subject to recapture in the case of
certain excess distributions to and redemptions of shareholders or if the
subsidiary ceases to be a bank. The New York State legislation provides that the
recapture of excess bad debt reserves is not required for either New York State
or New York City tax purposes.
At March 31, 1999, the base year bad debt reserve for federal income tax
purposes was approximately $30 million, for which deferred taxes are not
required to be recognized. Bad debt reserves maintained for New York State and
New York City tax purposes as of March 31, 1999 for which deferred taxes are not
required to be recognized, amounted to approximately $93 million. Accordingly,
deferred tax liabilities of approximately $22 million have not been recognized
as of March 31, 1999.
14. REGULATORY REQUIREMENT
As a New York State-chartered stock form savings bank, the deposits of
which are insured by the FDIC, the Bank is subject to certain FDIC capital
requirements. Failure to meet minimum capital requirements can initiate certain
mandatory and possible discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
84
<PAGE> 87
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based on its regulatory capital ratios at March 31, 1999 and March 31,
1998, the Bank is categorized as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized"
the Bank must maintain Tier I leverage, Tier I risk-based and minimum total
risk-based ratios as set forth in the following table.
The Bank's actual capital amounts and ratios are presented in the tables
below as of March 31, 1999 and March 31, 1998:
<TABLE>
<CAPTION>
TO BE WELL-CAPITALIZED
FOR CAPITAL ADEQUACY UNDER FDIC GUIDELINES
ACTUALS AS OF 3/31/99 PURPOSES AT 3/31/99 AT 3/31/99
--------------------- --------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage $674,365 12.85% $209,880 4.00% $262,350 5.00%
Tier 1 Risk-Based 674,365 17.73% 152,184 4.00% 228,276 6.00%
Total Risk-Based 723,938 19.03% 304,368 8.00% 380,460 10.00%
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL-CAPITALIZED
FOR CAPITAL ADEQUACY UNDER FDIC GUIDELINES
ACTUALS AS OF 3/31/98 PURPOSES AT 3/31/98 AT 3/31/98
--------------------- --------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage $622,827 11.16% $223,139 4.00% $278,924 5.00%
Tier 1 Risk-Based 622,827 22.25% 111,991 4.00% 167,987 6.00%
Total Risk-Based 657,841 23.50% 223,982 8.00% 279,978 10.00%
</TABLE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statements of financial condition, for which it
is practicable to estimate fair value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 requirements exclude certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Additionally, tax consequences related to the realization of the
unrealized gains and losses can have a potential effect on fair value estimates
and have not been considered in the estimates. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
85
<PAGE> 88
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The book values and estimated fair values of the Company's financial
instruments are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 1998
------------------------ ------------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 70,811 $ 70,811 $ 747,868 $ 747,868
Commercial paper 37,290 37,290 37,676 37,676
Federal funds sold 171,784 171,784 71,707 71,707
Securities available-for-sale 1,521,628 1,521,628 1,366,682 1,366,682
Mortgage loans on real estate 2,937,507 2,926,030 2,288,572 2,284,688
Other loans 579,837 580,295 502,856 502,224
Accrued interest receivable 30,575 30,575 24,395 24,395
FHLB stock 56,236 56,236 25,756 25,756
FINANCIAL LIABILITIES:
Deposits 1,626,462 1,626,462 1,671,175 1,671,175
Time deposit accounts 1,820,902 1,835,167 1,722,625 1,732,361
Borrowings 1,118,364 1,112,374 717,841 718,472
Escrow and other deposits 61,003 61,003 45,868 45,868
</TABLE>
The following methods and assumptions were used by the Company in
estimating the fair values of financial instruments:
The carrying values of cash and due from banks, commercial paper, Federal
funds sold, accrued interest receivable, deposits and escrow and other deposits
all approximate their fair values primarily due to their liquidity and
short-term nature.
Securities available-for-sale: The estimated fair values are based on
quoted market prices.
Mortgage loans or real estate: The Company's mortgage loans on real estate
were segregated into two categories, residential loans and
commercial/multi-family loans. These were stratified further based upon
historical delinquency and loan to value ratios. The fair value for each loan
was then calculated by discounting the projected mortgage cash flow to a yield
target equal to a spread, which is commensurate with the loan quality and type,
over the U.S. Treasury curve at the average life of the cash flow.
Other loans: The co-op loan portfolio was priced using the same
methodology as the mortgage loans on real estate. The fair value of the
remaining components of other loans has been estimated to approximate its
carrying value. This is based on the short-term duration of these loans or the
fact that the majority of these loans reprice frequently.
FHLB stock: Carrying amount approximates fair value because it is
redeemable at cost, with the issuer only.
Time deposit accounts: The estimated fair value for time deposits is based
on a discounted cash flow calculation that applies interest rates currently
being offered by the Company to its current deposit portfolio.
Borrowings: The estimated fair value of FHLB borrowings is based on the
discounted value of their contractual cash flows. The discount rate used in the
present value computation is estimated by comparison to the current interest
rates charged by the FHLB for advances of similar remaining maturities. The
estimated
86
<PAGE> 89
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of borrowings as a result of securities lending transactions, which
are short term durations, were assumed to approximate their carrying value.
16. ASSET AND DIVIDEND RESTRICTIONS
The Bank is required to maintain a reserve balance with the Federal Reserve
Bank. The required reserve balance was $1.3 million at March 31, 1999 and 1998.
Limitations exist on the availability of the Bank's undistributed earnings
for the payment of dividends to the Company without prior approval of the Bank's
regulatory authorities.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income $79,522 $81,575 $85,950 $89,368
Interest expense 38,240 39,730 43,484 45,767
------- ------- ------- -------
Net interest income 41,282 41,845 42,466 43,601
Provision for loan losses 2,332 2,325 3,107 2,934
------- ------- ------- -------
Net interest income after provision for loan
losses 38,950 39,520 39,359 40,667
Non-interest income 2,770 2,616 2,715 3,222
------- ------- ------- -------
Total income 41,720 42,136 42,074 43,889
------- ------- ------- -------
General and administrative expense 21,217 23,148 22,947 22,262
Amortization of intangible assets 2,164 2,155 2,155 2,155
------- ------- ------- -------
Income before provision for income taxes 18,339 16,833 16,972 19,472
Provision for income taxes 7,430 6,314 5,509 7,188
------- ------- ------- -------
Net income $10,909 $10,519 $11,463 $12,284
======= ======= ======= =======
Basic earnings per common share $ 0.15 $ 0.15 $ 0.17 $ 0.20
======= ======= ======= =======
Diluted earnings per common share $ 0.15 $ 0.15 $ 0.17 $ 0.20
======= ======= ======= =======
Dividend declared per common share $ -- $ -- $ 0.03 $ 0.03
======= ======= ======= =======
Stock price per common share
High $19.125 $17.313 $16.000 $16.375
======= ======= ======= =======
Low $14.938 $11.000 $11.906 $12.875
======= ======= ======= =======
Close $17.000 $14.063 $15.938 $12.875
======= ======= ======= =======
</TABLE>
87
<PAGE> 90
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income $66,591 $69,011 $67,208 $ 90,233
Interest expense 35,680 36,754 36,270 52,239
------- ------- ------- --------
Net interest income 30,911 32,257 30,938 37,994
Provision for loan losses 2,230 3,123 2,327 2,331
------- ------- ------- --------
Net interest income after provision for loan
losses 28,681 29,134 28,611 35,663
Non-interest income 2,183 __ 2,243 2,670 3,252
------- ------- ------- --------
Total income 30,864 31,377 31,281 38,915
------- ------- ------- --------
General and administrative expense 18,606 19,370 18,958 23,778
Amortization of intangible assets 2,232 2,170 2,170 2,169
Contribution to Independence Community
Foundation -- -- -- 56,422
------- ------- ------- --------
Income (loss) before provision (benefit) for
income taxes 10,026 9,837 10,153 (43,454)
Provision (benefit) for income taxes 2,956 3,344 2,708 (12,490)
------- ------- ------- --------
Net income (loss) $ 7,070 $ 6,493 $ 7,445 $(30,964)
======= ======= ======= ========
Basic earnings (loss) per common share N/A N/A N/A $ (0.52)
======= ======= ======= ========
Diluted earnings (loss) per common share N/A N/A N/A $ (0.52)
======= ======= ======= ========
Stock price per common share
High N/A N/A N/A $ 18.188
======= ======= ======= ========
Low N/A N/A N/A $ 17.875
======= ======= ======= ========
Close N/A N/A N/A $ 17.875
======= ======= ======= ========
</TABLE>
18. PARENT COMPANY DISCLOSURE
The following Condensed Statement of Financial Condition, as of March 31,
1999 and 1998 and Condensed Statement of Operations and Cash Flows for the years
ended March 31, 1999 and 1998 should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto.
88
<PAGE> 91
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 55,802 $236,805
Securities available for sale 34,351 --
Investment in subsidiaries 721,460 684,816
Net deferred tax asset 13,853 17,677
Other assets 3,668 12,268
-------- --------
Total assets $829,134 $951,566
======== ========
LIABILITIES:
Accrued expenses and other liabilities $ 4,172 $ 2,442
-------- --------
Total liabilities 4,172 2,442
Stockholders' equity 824,962 949,124
-------- --------
Total liabilities and stockholders' equity $829,134 $951,566
======== ========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Interest income $ 3,235 $ --
Net gain on sales of securities 346 --
------- --------
3,581 --
------- --------
Expenses:
Contribution to the Foundation -- 56,422
Shareholder expense 712 200
Other expense 500 --
------- --------
1,212 56,622
------- --------
Income (loss) before income taxes and undistributed earnings
of subsidiaries 2,369 (56,622)
Provision (benefit) for income taxes, net 150 (19,581)
------- --------
Income (loss) before undistributed earnings of subsidiaries 2,219 (37,041)
Equity in undistributed earnings of subsidiaries 42,956 (417)
------- --------
Net income (loss) $45,175 $(37,458)
======= ========
</TABLE>
89
<PAGE> 92
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 45,175 $ (37,458)
Adjustments to reconcile net income to net cash provided by
operating activities:
Contribution of stock to the Foundation -- 56,272
Decrease (increase) in deferred income taxes 3,824 (17,677)
Decrease (increase) in other assets 8,600 (12,268)
Increase in other liabilities 1,730 2,442
Amortization of unearned compensation of ESOP and RRP 7,377 1,253
Undistributed earnings of subsidiaries (42,956) 417
Other, net (783) --
--------- ---------
Net cash provided by (used in) operating
activities 22,967 (7,019)
--------- ---------
Cash flows from investing activities:
(Increase) in investment in subsidiaries -- (343,052)
Purchase of securities available for sale (209,037) --
Proceeds on sales of securities 173,259 --
--------- ---------
Net cash used in investing activities (35,778) (343,052)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock in initial
public offering -- 685,748
Loan made to ESOP -- (98,872)
Repurchase of common stock (125,993) --
Purchase of shares for RRP (38,167) --
Dividends paid (4,032) --
--------- ---------
Net cash (used in) provided by financing
activities (168,192) 586,876
--------- ---------
Net (decrease) increase in cash and cash
equivalents (181,003) 236,805
Cash and cash equivalents at beginning of year 236,805 --
--------- ---------
Cash and cash equivalents at end of year $ 55,802 $ 236,805
========= =========
</TABLE>
19. SUBSEQUENT EVENTS
On April 13, 1999, the Company announced that it had signed a definitive
agreement to acquire Statewide. Pursuant to the agreement, the Company will
acquire Statewide, a New Jersey savings and loan holding company headquartered
in Jersey City, New Jersey, in a transaction valued at the time of execution of
the agreement at $25.25 per Statewide share. Upon completion of the acquisition,
Statewide's wholly owned subsidiary, Statewide Savings Bank, S.L.A., will merge
into the Bank. See Note 2 -- Acquisitions.
90
<PAGE> 93
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from pages 2
to 6 of the definitive proxy statement of the Company for the Annual Meeting of
Stockholders to be held on July 23, 1999, which was filed with the SEC on June
22, 1999 ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from pages 10
to 17 of the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from pages 7
to 9 of the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from page 18
of the Definitive Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference from
Item 8 hereof:
Report of Independent Auditors
Consolidated Statements of Financial Condition as of March 31, 1999 and
1998.
Consolidated Statements of Operations for the Years Ended March 31, 1999,
1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended March 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended March 31, 1999,
1998 and 1997.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting
regulations of the SEC are omitted because of the absence of conditions under
which they are required or because the required information is included in the
consolidated financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index.
91
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1* Certificate of Incorporation of Independence Community Bank
Corp.
3.2* Bylaws of Independence Community Bank Corp.
4.0* Specimen Stock Certificate of Independence Community Bank
Corp.
10.1* Form of Change of Control Agreement to be entered into among
Independence Community Bank Corp., Independence Community
Bank and certain senior executive officers of the Company
and the Bank.
10.2* Form of Change in Control Agreement to be entered into
between Independence Community Bank and certain officers
thereof.
10.3* Form of Change of Control Agreement to be entered into among
Independence Community Bank Corp., Independence Community
Bank and certain executive officers of the Company and the
Bank.
10.4* Form of Change of Control Agreement to be entered into
between Independence Community Bank and certain executive
officers thereof.
10.5 Independence Community Bank Severance Plan.
10.6** 1998 Stock Option Plan.
10.7** 1998 Recognition and Retention Plan and Trust Agreement.
11.0 Statement re computation of per share earnings -- Reference
is made to Item 8. "Financial Statements and Supplementary
Data" for the required information.
21.0 Subsidiaries of the Registrant -- Reference is made to Item
2. "Business" for the required information.
23.1 Consent of Ernst & Young LLP
27.0 Financial Data Schedule
</TABLE>
(*) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (Registration No. 333-30757) filed by the Company with the SEC
on July 3, 1997.
(**) Incorporated herein by reference from the Company's definitive proxy
statements filed by the Company with the SEC on August 17, 1998.
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the fourth quarter of
fiscal 1999.
<TABLE>
<CAPTION>
DATE ITEM AND DESCRIPTION
- - ---- --------------------
<S> <C>
5 -- Proposed acquisition of Broad National
February 1, 1999 Bancorporation.
</TABLE>
(c) The exhibits listed under (a)(3) of this Item 14 are filed herewith.
(d) Not applicable.
92
<PAGE> 95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
/s/ CHARLES J. HAMM Date: June 24, 1999
- - -------------------------------------------------------- ----------------------------------
Charles J. Hamm
Chairman of the Board, President and Chief
Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME DATE
---- ----
<S> <C>
/s/ CHARLES J. HAMM June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Charles J. Hamm
Chairman of the Board, President and
Chief Executive Officer
/s/ JOSEPH S. MORGANO June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Joseph S. Morgano
Executive Vice President, Mortgage
Officer and Director
/s/ JOHN B. ZURELL June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
John B. Zurell
Executive Vice President and
Chief Financial Officer
/s/ WILLARD N. ARCHIE June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Willard N. Archie
Director
/s/ ROBERT B. CATELL June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Robert B. Catell
Director
/s/ ROHIT M. DESAI June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Rohit M. Desai
Director
/s/ CHAIM Y. EDELSTEIN June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Chaim Y. Edelstein
Director
/s/ DONALD H. ELLIOTT June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Donald H. Elliott
Director
</TABLE>
93
<PAGE> 96
<TABLE>
<CAPTION>
NAME DATE
---- ----
<S> <C>
/s/ ROBERT W. GELFMAN June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Robert W. Gelfman
Director
/s/ SCOTT M. HAND June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Scott M. Hand
Director
/s/ DONALD E. KOLOWSKY June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Donald E. Kolowsky
Director
/s/
- - -------------------------------------------------------- ------------------------------------------
Janine Luke
Director
/s/ MALCOLM MACKAY June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Malcolm MacKay
Director
/s/ WESLEY D. RATCLIFF June 24, 1999
- - -------------------------------------------------------- ------------------------------------------
Wesley D. Ratcliff
Director
</TABLE>
94
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1* Certificate of Incorporation of Independence Community Bank
Corp.
3.2* Bylaws of Independence Community Bank Corp.
4.0* Specimen Stock Certificate of Independence Community Bank
Corp.
10.1* Form of Change of Control Agreement to be entered into among
Independence Community Bank Corp., Independence Community
Bank and certain senior executive officers of the Company
and the Bank.
10.2* Form of Change in Control Agreement to be entered into
between Independence Community Bank and certain officers
thereof.
10.3* Form of Change of Control Agreement to be entered into among
Independence Community Bank Corp., Independence Community
Bank and certain executive officers of the Company and the
Bank.
10.4* Form of Change of Control Agreement to be entered into
between Independence Community Bank and certain executive
officers thereof.
10.5 Independence Community Bank Severance Plan.
10.6** 1998 Stock Option Plan.
10.7** 1998 Recognition and Retention Plan and Trust Agreement.
11.0 Statement re computation of per share earnings -- Reference
is made to Item 8. "Financial Statements and Supplementary
Data" for the required information.
21.0 Subsidiaries of the Registrant -- Reference is made to Item
2. "Business" for the required information.
23.1 Consent of Ernst & Young LLP
27.0 Financial Data Schedule
</TABLE>
(*) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (Registration No. 333-30757) filed by the Company with the SEC
on July 3, 1997.
(**) Incorporated herein by reference from the Company's definitive proxy
statements filed by the Company with the SEC on August 17, 1998.
95
<PAGE> 1
Exhibit 10.5
INDEPENDENCE COMMUNITY BANK SEVERANCE PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
Independence Community Bank (the "Bank") hereby establishes the 1998
Severance Plan (the "Plan").
ARTICLE II
PURPOSE OF THE PLAN
The purpose of this Plan is provide certain specified benefits to certain
Officers as provided herein whose employment is terminated in connection with or
subsequent to a Change in Control of the Bank's parent corporation, Independence
Community Bank Corp. (the "Corporation") (the Bank and the Corporation are
hereinafter collectively referred to as the "Employer").
ARTICLE III
DEFINITIONS
3.01 ANNUAL COMPENSATION. An Officer's "Annual Compensation" for purposes
of this Plan shall be deemed to mean the aggregate base salary and cash
incentive compensation earned by or paid to the Officer by the Employer or any
subsidiary thereof during the calendar year immediately preceding the calendar
year in which the Date of Termination occurs; provided, however, for purposes of
this Plan the Officer's Annual Compensation does not include deferred
compensation earned by the Officer in a prior year but received in the calendar
year immediately preceding the calendar year in which the Date of Termination
occurs.
3.02 CAUSE. Termination of an Officer's employment for "Cause" shall mean
termination because of personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) or final cease-and-desist order.
For purposes of this paragraph, no act or failure to act on the Officer's part
shall be considered "willful" unless done, or omitted to be done, by the Officer
not in good faith and without reasonable belief that the Officer's action or
omission was in the best interests of the Employer.
3.03 CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean the occurrence of any of the following: (i) the
acquisition of control of the Corporation as defined in 12 C.F.R. Section 574.4,
unless a presumption of control is successfully rebutted or unless the
transaction is exempted by 12 C.F.R. Section 574.3(c)(vii), or any successor to
such sections; (ii) an event that would be required to be reported in response
to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant
to the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any
successor thereto, whether or not any class of securities of the Corporation is
registered under the Exchange Act; (iii) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
1
<PAGE> 2
Act), directly or indirectly, of securities of the Corporation representing 20%
or more of the combined voting power of the Corporation's then outstanding
securities; or (iv) during any period of three consecutive years, individuals
who at the beginning of such period constitute the Board of Directors of the
Corporation cease for any reason to constitute at least a majority thereof
unless the election, or the nomination for election by stockholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
3.04 CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
3.05 COMMITTEE. "Committee" means a committee of two or more directors
appointed by the Board pursuant to Article VII hereof.
3.06 DATE OF TERMINATION. "Date of Termination" shall mean (i) if an
Officer's employment is terminated for Cause, the date on which the Notice of
Termination is given, and (ii) if an Officer's employment is terminated for any
other reason, the date specified in the Notice of Termination.
3.07 DISABILITY. Termination by the Employer of an Officer's employment
based on "Disability" shall mean termination because of any physical or mental
impairment which qualifies the Officer for disability benefits under the
applicable long-term disability plan maintained by the Employer or any
subsidiary or, if no such plan applies, which would qualify the Officer for
disability benefits under the Federal Social Security System.
3.08 EMPLOYEE. "Employee" shall mean any person, including an Officer,
employed by the Employer on a salaried basis. A person employed by the Employer
on a hourly, commission or fee basis or similar arrangement shall not be
considered an Employee for purposes of this Plan.
3.09 GOOD REASON. Termination by an Officer of the Officer's employment
for "Good Reason" shall mean termination by the Officer following a Change in
Control of the Corporation based on any one of the following:
(i) Without the Officer's express written consent, a reduction in
the Officer's base salary as in effect immediately prior to
the date of the Change in Control of the Corporation or as the
same may be increased from time to time thereafter; provided,
however, that Officer may not terminate his employment for
Good Reason pursuant to the terms hereof in the event the
reduction of his salary is consistent with the reduction of
salaries of other similarly situated officers of the Employers
in connection with a general reduction in salaries of the
officers thereof subsequent to a Change in Control of the
Corporation and such reduction is not more than 10% from his
salary as in effect immediately prior to the date of the
Change in Control of the Corporation.
2
<PAGE> 3
(ii) Without the Officer's express written consent, the assignment
of any duties or responsibilities which are substantially
diminished as compared with the Officer's duties and
responsibilities immediately prior to a Change in Control of
the Corporation, or a material change in the Officer's
reporting responsibilities, titles or offices as an employee
and as in effect immediately prior to such a Change in Control
of the Corporation, or any removal of the Officer from or any
failure to re-elect the Officer to any of such
responsibilities, titles or offices, except in connection with
the termination of the Officer's employment for Cause,
Disability or Retirement or as a result of the Officer's death
or by the Officer other than for Good Reason;
(iii) Any relocation of the Officer's principal site of employment
to a location more than fifty (50) miles from the principal
executive office of the Employers; or
(iv) Any purported termination of the Officer's employment for
Disability or Retirement which is not effected pursuant to a
Notice of Termination satisfying the requirements of Section
3.11 below.
3.10 IRS. "IRS" shall mean the Internal Revenue Service.
3.11 NOTICE OF TERMINATION. Any purported termination of an Officer's
employment by the Employer for any reason or by an Officer for any reason,
including without limitation for Good Reason, shall be communicated by written
"Notice of Termination" to the other party hereto. For purposes of this Plan, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Plan relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Officer's employment under the provision so indicated, (iii)
specifies a Date of Termination, which shall be not less than thirty (30) nor
more than ninety (90) days after such Notice of Termination is given, except in
the case of the Employers' termination of the Officer's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Article VIII hereof.
3.12 OFFICER. "Officer" shall mean any Employee of the Employer having the
title of Vice President or more senior title who is not a party to a severance
or employment agreement with the Employer that is in effect as of the date of
the Notice of Termination.
3.13 OFFICER'S SEVERANCE PERIOD. "Officer's Severance Period" shall mean
the period of time over which benefits are payable to an Officer as provided in
Section 4.01 (whether or not the Officer elects to receive the benefits to be
paid pursuant to subsection (a) thereof in a lump sum).
3.14 RETIREMENT. "Retirement" shall mean voluntary termination by the
Officer in accordance with the Employer's retirement policies, including early
retirement, generally applicable to their salaried employees.
3
<PAGE> 4
ARTICLE IV
BENEFITS
4.01 PAYMENTS AND BENEFITS UPON TERMINATION. If the Officer's employment
is terminated subsequent to a Change in Control of the Corporation by (i) the
Employer for other than Cause, Disability, Retirement or the Officer's death or
(ii) the Officer for Good Reason, then the Employer shall:
(a) pay to the Officer the following amount of severance compensation and
benefits, subject to reduction as provided in subsections 4.01(c) and (d):
(i) if the Officer has the title of Senior Vice President at the
date of the Change in Control of the Corporation, in either thirty-six (36)
equal monthly installments beginning with the first business day of the month
following the Date of Termination or the present value of such amount in a lump
sum as of the Date of Termination (at the Officer's election), a cash severance
amount equal to three (3) times the Officer's Annual Compensation;
(ii) if the Officer has the title of First Vice President at the
date of the Change in Control of the Corporation, in either twenty-four (24)
equal monthly installments beginning with the first business day of the month
following the Date of Termination or the present value of such amount in a lump
sum as of the Date of Termination (at the Officer's election), a cash severance
amount equal to two (2) times the Officer's Annual Compensation;
(iii) if the Officer has the title of Vice President at the date of
the Change in Control of the Corporation, in either twelve (12) equal monthly
installments beginning with the first business day of the month following the
Date of Termination or the present value of such amount in a lump sum as of the
Date of Termination (at the Officer's election), a cash severance amount equal
to one (1) times the Officer's Annual Compensation;
(b) maintain and provide for a period ending at the earlier of (i) the
expiration of the Officer's Severance Period or (ii) the date of the Officer's
full-time employment by another employer (provided that the Officer is entitled
under the terms of such employment to benefits substantially similar to those
described in this subparagraph (b)), at no cost to the Officer, the Officer's
continued participation in all group insurance, including life insurance, health
and accident insurance and disability insurance, the Bank's 401(k) Plan, the
Bank's Retirement Plan and the Corporation's Employee Stock Ownership Plan,
provided that in the event that the Officer's participation in any plan, program
or arrangement as provided in this subparagraph (b) is barred, or during such
period any such plan, program or arrangement is discontinued or the benefits
thereunder are materially reduced, the Employer shall arrange to provide the
Officer with benefits substantially similar to those which the Officer was
entitled to receive under such plans, programs and arrangements immediately
prior to the Date of Termination. Notwithstanding anything to the contrary in
this subparagraph (b), the Officer shall not be entitled to participate in any
stock option or restricted stock plan or any cash incentive program or plan
subsequent to the Date of Termination.
4
<PAGE> 5
(c) Notwithstanding anything to the contrary herein, the multiplier used
to calculate the amount the payments due an Officer (36, 24 or 12, as the case
may be) pursuant to the provisions of Section 4.01(a) shall be reduced by a
number equal to the number of whole months that the Officer continues to be
employed by the Employer or the successor thereto subsequent to a Change of
Control of the Corporation.
(d) If the payments and benefits pursuant to Sections 4.01 (a) and (b)
hereof, either alone or together with other payments and benefits which the
Officer has the right to receive from the Employer, would constitute a
"parachute payment" under Section 280G of the Code, the payments and benefits
payable by the Bank pursuant to Section 4.01 hereof shall be reduced, in the
manner determined by the Officer, by the amount, if any, which is the minimum
necessary to result in no portion of the payments and benefits payable by the
Bank under Section 4.01 being non-deductible to the Bank pursuant to Section
280G of the Code and subject to the excise tax imposed under Section 4999 of the
Code. The parties hereto agree that the present value of the payments and
benefits payable pursuant to this Plan to the Officer upon termination shall be
limited to three times the Officer's Annual Compensation, subject to reduction
as provided hereby. The determination of any reduction in the payments and
benefits to be made pursuant to Section 4.01 shall be based upon the opinion of
independent counsel selected by the Bank's independent public accountants and
paid by the Bank. Such counsel shall be reasonably acceptable to the Bank and
the Officer; shall promptly prepare the foregoing opinion, but in no event later
than thirty (30) days from the Date of Termination; and may use such actuaries
as such counsel deems necessary or advisable for the purpose.
(c) Nothing contained herein shall result in a reduction of any payments
or benefits to which the Officer may be entitled upon termination of employment
under any circumstances other than as specified in Sections 4.02(a) and 4.02(b)
set forth above, or a reduction in the payments and benefits specified in
Section 4.01 below zero.
4.02 MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) An Officer shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the Officer
as a result of employment by another employer after the Date of Termination or
otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to an Officer upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or otherwise.
4.03 WITHHOLDING. All payments required to be made by the Employer
hereunder to the Officer shall be subject to the withholding of such amounts, if
any, relating to tax and other payroll deductions as the Employer may reasonably
determine should be withheld pursuant to any applicable law or regulation.
5
<PAGE> 6
ARTICLE V
ASSIGNMENT
The Employer may assign this Plan and its rights and obligations hereunder
in whole, but not in part, to any corporation, bank or other entity with or into
which the Bank or the Corporation may hereafter merge or consolidate or to which
the Bank or the Corporation may transfer all or substantially all of its
respective assets, if in any such case said corporation, bank or other entity
shall by operation of law or expressly in writing assume all obligations of the
Employer hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Plan or their rights and obligations
hereunder. An Officer may not assign or transfer any rights or benefits due
hereunder.
ARTICLE VI
DURATION AND EFFECTIVE DATE OF PLAN
6.01 DURATION. Except in the event of a Change in Control of the
Corporation, this Plan is subject to change or termination, in whole or in part,
at any time without notice, in the Board's sole discretion. In the event of a
Change in Control of the Corporation, this Plan may not be terminated or amended
to reduce the benefits provided hereunder for a period of three (3) years from
the date of the Change in Control of the Corporation.
6.02 EFFECTIVE DATE. This Plan shall be effective as of October 1st,
1998.
ARTICLE VII
ADMINISTRATION
7.01 DUTIES OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, as appointed from time to time by the Board of
Directors of the Bank pursuant to Section 7.02. The Committee shall have the
authority to adopt, amend and rescind such rules, regulations and procedures as,
in its opinion, may be advisable in the administration of the Plan, including,
without limitation, rules, regulations and procedures with respect to the
operation of the Plan The interpretation and construction by the Committee of
any provisions of the Plan, any rule, regulation or procedure adopted by it
pursuant thereto shall be final and binding in the absence of action by the
Board of Directors of the Bank.
7.02 APPOINTMENT AND OPERATION OF THE COMMITTEE. The members of the
Committee shall be appointed by, and will serve at the pleasure of, the Board of
Directors of the Bank. The Board from time to time may remove members from, or
add members to, the Committee, provided the Committee shall continue to consist
of two or more members of the Board. The Committee shall act by vote or written
consent of a majority of its members. Subject to the express provisions and
limitations of the Plan, the Committee may adopt such rules, regulations and
procedures as it deems appropriate for the conduct of its affairs. It may
appoint one of its members to be chairman and any person, whether or not a
member, to be its secretary or agent.
6
<PAGE> 7
The Committee shall report its actions and decisions to the Board at appropriate
times but in no event less than one time per calendar year.
7.03 LIMITATION ON LIABILITY. Neither the members of the Board of
Directors of the Bank nor any member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any rule,
regulation or procedure adopted by it pursuant thereto. If a member of the Board
or the Committee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of anything done or not
done by him in such capacity under or with respect to the Plan, the Bank shall,
subject to the requirements of applicable laws and regulations, indemnify such
member against all liabilities and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in the best interests of the
Bank and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful.
ARTICLE VIII
MISCELLANEOUS
8.01 NOTICE. For the purposes of this Plan, notices and all other
communications provided for in this Plan shall be in writing and shall be deemed
to have been duly given when delivered or mailed by certified or registered
mail, return receipt requested, postage prepaid, addressed, with respect to the
Bank, Secretary, Independence Community Bank, 195 Montague Street, 12th Floor,
Brooklyn, New York 11201, and with respect to an Officer, to the home address
thereof set forth in the records of the Bank at the date of any such notice.
8.02 GOVERNING LAW. The validity, interpretation, construction and
performance of this Plan shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New York.
8.03 NATURE OF EMPLOYMENT AND OBLIGATIONS.
(a) Nothing contained herein shall be deemed to create other than a
terminable at will employment relationship between the Employer and an Officer,
and the Employer may terminate the Officer's employment at any time, subject to
providing any payments specified herein in accordance with the terms hereof.
(b) Nothing contained herein shall create or require the Employer to
create a trust of any kind to fund any benefits which may be payable hereunder,
and to the extent that the Officer acquires a right to receive benefits from the
Employer hereunder, such right shall be no greater than the right of any
unsecured general creditor of the Employer.
8.04 HEADINGS. The section headings contained in this Plan are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Plan.
7
<PAGE> 8
8.05 VALIDITY. The invalidity or unenforceability of any provision of this
Plan shall not affect the validity or enforceability of any other provisions of
this Plan, which shall remain in full force and effect.
8.06 REGULATORY PROHIBITION. Notwithstanding any other provision of this
Plan to the contrary, any payments made to an Officer pursuant to this Plan, or
otherwise, are subject to and conditioned upon their compliance with Section
18(k) of the Federal Deposit Insurance Act (12 U.S.C. Section 1828(k)) and the
regulations promulgated thereunder, including 12 C.F.R. Part 359.
8
<PAGE> 1
Exhibit 23.1
Consent of Ernst & Young LLP
Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-50987) pertaining to the Independence Community Bank 401(k)
Savings Plan in RSI Retirement Trust (the "Plan") of our report dated April
30, 1999, with respect to the consolidated financial statements of
Independence Community Bank Corp., included in the Form 10-K for the year
ended March 31, 1999.
/s/Ernst & Young LLP
New York, New York
June 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 70,811
<INT-BEARING-DEPOSITS> 37,290
<FED-FUNDS-SOLD> 171,784
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,521,628
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,506,481
<ALLOWANCE> 46,823
<TOTAL-ASSETS> 5,536,978
<DEPOSITS> 3,447,364
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,264,652
<LONG-TERM> 0
0
0
<COMMON> 760
<OTHER-SE> 824,202
<TOTAL-LIABILITIES-AND-EQUITY> 5,536,978
<INTEREST-LOAN> 237,723
<INTEREST-INVEST> 74,470
<INTEREST-OTHER> 24,222
<INTEREST-TOTAL> 336,415
<INTEREST-DEPOSIT> 133,146
<INTEREST-EXPENSE> 167,221
<INTEREST-INCOME-NET> 169,194
<LOAN-LOSSES> 10,698
<SECURITIES-GAINS> 390
<EXPENSE-OTHER> 98,203
<INCOME-PRETAX> 71,616
<INCOME-PRE-EXTRAORDINARY> 71,616
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,175
<EPS-BASIC> 0.67
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 6.97
<LOANS-NON> 7,103
<LOANS-PAST> 32,002
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 36,347
<CHARGE-OFFS> 597
<RECOVERIES> 375
<ALLOWANCE-CLOSE> 46,823
<ALLOWANCE-DOMESTIC> 46,823
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
