<PAGE> 1
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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, 2000.
[ ] 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 OR (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
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 Form 10-K [X]
As of June 9, 2000, there were 65,719,845 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 9, 2000) held by
non-affiliates was approximately $751,636,913.
(1) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
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<PAGE> 2
INDEPENDENCE COMMUNITY BANK CORP.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
ITEM 1. BUSINESS
Description of Business 1
Market Area and Competition 1
Lending Activities 2
Asset Quality 12
Investment Activities 19
Sources of Funds 22
Employees 25
Savings Bank Life Insurance 25
Subsidiaries 25
Regulation of Savings and Loan Holding Companies 26
Regulation of State-Chartered Banks 29
Federal Taxation 34
State and Local Taxation 35
ITEM 2. Properties 37
ITEM 3. Legal Proceedings 40
ITEM 4. Submission of Matters to a Vote of Security Holders 40
PART II
ITEM 5. Market for Independence Community Bank Corp.'s Common Equity
and Related Stockholder Matters 41
ITEM 6. Selected Financial Data 42
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 44
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk 64
ITEM 8. Financial Statements and Supplementary Data 65
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 97
PART III
ITEM 10. Directors and Executive Officers of Independence Community
Bank Corp. 97
ITEM 11. Executive Compensation 97
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 97
ITEM 13. Certain Relationship and Related Transactions 97
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 97
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.
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, wholesale lines of credit to mortgage bankers,
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-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 and
commercial businesses within its market area. The Company oversees its 65 branch
office network through its headquarters located in downtown Brooklyn. The
Company operates 17 branch offices in the borough of Brooklyn, another nine in
the borough of Queens and six dispersed among Manhattan, the Bronx, Staten
Island and Nassau County. As a result of the acquisitions of Broad National
Bancorporation ("Broad"), Newark, New Jersey and Statewide Financial Corp.
("Statewide"), Jersey City, New Jersey during fiscal 2000, the Company also
operates 33 branches in the northern New Jersey counties of Bergen, Essex,
Hudson, Middlesex and Union. 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, as well as the counties in northern
and central New Jersey. 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 exper-
1
<PAGE> 4
ienced 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 in recent periods has
contributed significantly to the 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, commercial business 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,
equities market 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 that 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
Securities and Exchange Commission ("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, 2000, the Company's net loan portfolio totaled $4.88
billion, which represented 73.9% of the Company's $6.60 billion of total assets.
The single largest category of loans in the Company's portfolio is multi-family
residential mortgage loans, which totaled $2.73 billion or 55.2% of the
Company's total loan portfolio at March 31, 2000. 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 commercial real estate loans which totaled $674.1 million or 13.6% and
$597.2 million or 12.1%, respectively, of the total loan portfolio at such date.
These three categories collectively accounted for 80.9% of the Company's total
loan portfolio at March 31, 2000. The remainder of the loan portfolio was
comprised of $462.2 million of cooperative apartment loans, $253.6 million of
commercial business loans, $121.1 million of home equity loans and lines of
credit, $48.2 million of warehouse mortgage lines of credit, $39.3 million of
student loans and $34.3 million of consumer and other loans.
2
<PAGE> 5
The types of loans that the Company may originate are subject to federal
and state laws 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 Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"), legislative tax policies
and governmental budgetary matters.
3
<PAGE> 6
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Company's loans at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------------------------------------------------
2000 1999 1998 1997
---------------------- ---------------------- ---------------------- ----------
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 $ 674,118 13.6% $ 491,523 14.0% $ 505,051 18.2% $ 552,745
Multi-family residential(1) 2,731,104 55.2 2,195,879 62.6 1,605,058 57.6 1,365,124
Commercial real estate 597,165 12.1 250,105 7.1 178,463 6.4 158,336
---------- ----- ---------- ----- ---------- ----- ----------
Total principal
balance-mortgage loans 4,002,387 80.9 2,937,507 83.7 2,288,572 82.2 2,076,205
Less:
Net deferred fees (8,727) 0.2 (10,529) 0.3 (9,403) 0.3 (9,645)
---------- ----- ---------- ----- ---------- ----- ----------
Total mortgage loans 3,993,660 80.7 2,926,978 83.4 2,279,169 81.9 2,066,560
---------- ----- ---------- ----- ---------- ----- ----------
Commercial business loans 253,606 5.1 39,362 1.1 31,550 1.1 25,249
---------- ----- ---------- ----- ---------- ----- ----------
Other loans:
Cooperative apartment loans 462,185 9.3 458,165 13.1 380,866 13.7 348,029
Student loans 39,260 0.8 41,633 1.2 43,946 1.6 45,262
Home equity loans and lines of
credit 121,109 2.4 12,295 0.4 15,625 0.6 19,545
Warehouse mortgage lines of
credit 48,175 1.0 -- -- -- -- --
Consumer and other loans 34,318 0.7 28,382 0.8 30,869 1.1 27,005
---------- ----- ---------- ----- ---------- ----- ----------
Total principal balance-other
loans 705,047 14.2 540,475 15.5 471,306 17.0 439,841
Less:
Unearned discounts and net
deferred fees (1,793) 0.0 (334) 0.0 (138) 0.0 (130)
---------- ----- ---------- ----- ---------- ----- ----------
Total other loans 703,254 14.2 540,141 15.5 471,168 17.0 439,711
---------- ----- ---------- ----- ---------- ----- ----------
Total loans receivable 4,950,520 100.0% 3,506,481 100.0% 2,781,887 100.0% 2,531,520
---------- ===== ---------- ===== ---------- ===== ----------
Less:
Allowance for loan losses (70,286) (46,823) (36,347) (27,024)
---------- ---------- ---------- ----------
Loans receivable, net $4,880,234 $3,459,658 $2,745,540 $2,504,496
========== ========== ========== ==========
<CAPTION>
AT MARCH 31,
----------------------------------
1997 1996
-------- ----------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
-------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
Single-family residential 21.8% $ 534,539 22.8%
Multi-family residential(1) 53.9 1,208,039 51.6
Commercial real estate 6.3 162,799 6.9
----- ---------- -----
Total principal
balance-mortgage loans 82.0 1,905,377 81.3
Less:
Net deferred fees 0.4 (10,451) 0.4
----- ---------- -----
Total mortgage loans 81.6 1,894,926 80.9
----- ---------- -----
Commercial business loans 1.0 18,003 0.8
----- ---------- -----
Other loans:
Cooperative apartment loans 13.7 340,507 14.5
Student loans 1.8 45,947 1.9
Home equity loans and lines of
credit 0.8 23,458 1.0
Warehouse mortgage lines of
credit -- -- --
Consumer and other loans 1.1 20,611 0.9
----- ---------- -----
Total principal balance-other
loans 17.4 430,523 18.3
Less:
Unearned discounts and net
deferred fees 0.0 (116) 0.0
----- ---------- -----
Total other loans 17.4 430,407 18.3
----- ---------- -----
Total loans receivable 100.0% 2,343,336 100.0%
===== ---------- =====
Less:
Allowance for loan losses (20,528)
----------
Loans receivable, net $2,322,808
==========
</TABLE>
---------------
(1) Includes at March 31, 2000 and March 31, 1999, $648.8 million and $567.8
million, respectively, of loans secured by mixed-use (combined residential
and commercial use) properties.
4
<PAGE> 7
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of the Company's loans at March
31, 2000, 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, 2005- 2011-
2000 2001 2002 2003 2004 2010 2016 THEREAFTER
---------- -------- -------- -------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential(1) $ 653,528 $ 376 $ 831 $ 5,081 $ 22,199 $ 93,450 $ 89,286 $442,305
Multi-family residential(2) 2,728,829 56,804 190,017 109,540 278,078 1,949,759 119,318 25,313
Commercial real estate(3) 597,083 25,363 32,008 32,747 28,070 299,500 125,880 53,515
Commercial business loans 253,605 78,500 36,735 16,812 14,468 83,194 22,451 1,445
Other loans:
Cooperative apartment loans 462,185 29 431 2,381 5,819 10,811 38,217 404,497
Consumer loans(4) 194,687 27,206 27,476 26,431 15,598 87,987 9,989 --
Warehouse mortgage lines of
credit 48,175 48,175 -- -- -- -- -- --
---------- -------- -------- -------- -------- ---------- -------- --------
Total(5) $4,938,092 $236,453 $287,498 $192,992 $364,232 $2,524,701 $405,141 $927,075
========== ======== ======== ======== ======== ========== ======== ========
</TABLE>
---------------
(1) Does not include $20.6 million of single-family residential loans serviced
by others.
(2) Does not include $2.3 million of multi-family residential loans serviced by
others.
(3) Does not include $82,000 of commercial real estate loans serviced by others.
(4) Includes student loans, home equity loans and lines of credit, automobile
loans and passbook loans.
(5) Of the $4.70 billion of loan principal repayments contractually due after
March 31, 2001, $3.65 billion have fixed rates of interest and $1.05 billion
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 single-family residential mortgage loans (loans not fully
or partially guaranteed by the Federal Housing Administration ("FHA") or the
Department of Veterans' Affairs ("VA")) and cooperative apartment loans
originated by such mortgage banking firm on the Company's behalf. During the
year ended March 31, 2000, the Company purchased $2.1 million and $6.3 million,
respectively, of conventional single-family residential mortgage loans and
cooperative loans from such mortgage banker. 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, 2000, the Company serviced $184.0 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 agreed to make a good faith effort, pursuant to regulatory
obligations incurred in connection with the Conversion, 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, were 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
could be satisfied by originations, purchases or refinancing of permanent or
construction loans for housing related projects or by community development
loans or other "qualified
5
<PAGE> 8
investments" as defined in federal regulations promulgated pursuant to the
Community Reinvestment Act ("CRA"). As of March 31, 2000, the Company had
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, were to consist of
loans secured by properties in LMI census tracts in the Bronx and upper
Manhattan. For purposes of the ICP Agreement, "lend" meant 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 was 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, 2000 the Company had 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.
In December 1998, Broad entered into an agreement with New Jersey Citizen
Action ("NJCA"), a community group, pursuant to which Broad agreed to use its
best efforts to lend a total of $20.0 million in the state of New Jersey over a
five year period beginning on January 1, 1999. Subsequent to the merger of Broad
and the Company in July 1999 and the merger of Statewide and the Company in
January 2000, the Bank entered into a modified agreement with NJCA pursuant to
which a revised target goal of extending $33.0 million in loans was established
for the five-year term of the agreement ending December 31, 2004. Such loans are
to consist primarily of affordable home mortgage products in the form of
one-to-four family mortgage loans to qualified low and moderate income
borrowers, community development financing consisting primarily of loans for the
purpose of purchasing, constructing and rehabilitating housing affordable to low
and moderate income families and economic development financing to facilitate
small business startup and expansion and job development. As of March 31, 2000,
the Company had extended approximately $18.9 million of loans in connection with
the NJCA agreement. Management does not believe that compliance with the NJCA
agreement will have a material effect on the Company's results of operations or
financial condition.
6
<PAGE> 9
LOAN ACTIVITY. The following table shows the activity in the Company's
loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total principal balance of loans held at the beginning
of period $3,517,344 $2,791,428 $2,541,295
Acquired from Broad acquisition 362,514 -- --
Acquired from Statewide acquisition 398,974 -- --
---------- ---------- ----------
Total acquired from acquisitions 761,488 -- --
---------- ---------- ----------
Originations of loans:
Single-family residential 33,828 109,477 45,476
Multi-family residential 784,788 789,253 410,106
Commercial real estate 237,389 105,816 35,679
Cooperative apartment loans 74,868 164,062 82,006
Consumer(1) 47,252 28,023 27,255
Commercial business loans 142,257 21,799 20,065
Warehouse mortgage lines of credit 194,994 -- --
---------- ---------- ----------
Total originations 1,515,376 1,218,430 620,587
---------- ---------- ----------
Purchases of loans:
Single-family residential 2,138 3,738 11,346
Multi-family residential -- 43,126 --
Cooperative apartment loans 6,266 13,747 12,658
---------- ---------- ----------
Total purchases 8,404 60,611 24,004
---------- ---------- ----------
Total originations and purchases 1,523,780 1,279,041 644,591
Loans sold:
Single-family residential 1,867 28,162 17,470
Cooperative apartment loans 675 11,761 1,668
---------- ---------- ----------
Total sold 2,542 39,923 19,138
Repayments(2) 839,030 513,202 375,320
---------- ---------- ----------
Net loan activity 1,443,696 725,916 250,133
---------- ---------- ----------
Total principal balance of loans held at the
end of period 4,961,040 3,517,344 2,791,428
Less:
Discounts on loans purchased and net deferred fees at
end of period (10,520) (10,863) (9,541)
---------- ---------- ----------
Total loans receivable at end of period $4,950,520 $3,506,481 $2,781,887
========== ========== ==========
</TABLE>
---------------
(1) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans and credit card loans.
(2) 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, 2000, the Company had multi-family
residential mortgage loans totaling $2.73 billion in its portfolio, comprising
55.2% of the total loan portfolio. Historically, the Company has been an active
multi-family residential mortgage lender
7
<PAGE> 10
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, 2000, the
Company had $637.7 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. These loans have a fixed-rate of
interest and may be extended by the borrower, upon payment of an additional fee,
for an additional five year period 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
with the remaining principal due in full at maturity. 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, 2000, amounted to
$597.2 million or 12.1% 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 $2.5 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 underwriting
policies, which generally limit the origination of such loans to loans secured
by properties located in the Company's market area and
8
<PAGE> 11
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. During
fiscal 2000, the Company reduced its emphasis on both single-family residential
and cooperative apartment loans in favor of higher yielding, commercial real
estate and business loans. At March 31, 2000, $674.1 million or 13.6% and $462.2
million or 9.3% 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 New
York boroughs of Brooklyn, Queens, Manhattan and various counties in central and
northern New Jersey. 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,
2000, ARMs represented $803.6 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, branch referrals, realtors and
independent mortgage brokers who refer members of the communities located in the
Company's market area. The Company also conducts extensive print and radio
advertising, a portion 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, 2000, such loans amounted to $462.2 million or 9.3% 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, including one which permits the borrowers to convert the loan
to a fixed-interest rate. The Company's ARMs also 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. All of the Company's ARMs have a 30 year term to maturity. 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 Federal Reserve
Board. 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
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
9
<PAGE> 12
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, 2000 the Company sold single-family residential mortgage loans
totaling $1.9 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 Community
Preservation Corporation, 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, 2000, $194.7 million or 3.9% of
the Company's total loan portfolio was comprised of consumer loans.
The largest component of the Company's consumer loan portfolio is home
equity loans and 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 80% or less, and are generally for
amounts of less than $100,000 but can be as high as $300,000. The loan repayment
is based on a 15 year term consisting of level principal amortization plus
accrued interest. The 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. As a result of the Statewide acquisition, $14.8 million,
or 7.6%, of the Company's consumer loan portfolio consists of FHA Title 1 home
improvement loans. These loans were originated on both a direct basis and
through a network of improvement contractors/dealers who were approved by
Statewide under FHA guidelines. Statewide also purchased FHA Title 1 home
improvement loans from FHA-approved lenders who originated the loans in
accordance with Statewide's lending criteria and within FHA underwriting
guidelines. These guidelines provide more liberal equity and debt-to-income
ratios than for non-FHA improvement loans. In the event of default, the FHA
insures 90% of the principal balance plus accrued interest. The interest rates
are generally higher than the interest rates for one-to-four family mortgage
loans due to the more liberal underwriting standards. Based on the Company's
strategy to build customer relationships through sales efforts within its branch
network, indirect lending originations such as FHA Title 1 home improvement
loans will be curtailed. At March 31, 2000, home equity loans and lines of
credit amounted to $121.1 million, or 2.4%, of the Company's total loan
portfolio. The Company had an additional $48.2 million of unused commitments
pursuant to such equity lines of credit.
The second 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
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<PAGE> 13
("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 U. S. Department of
Education. At March 31, 2000, such loans amounted to $39.3 million or 0.8% of
the total loan portfolio.
The third largest component of the Company's consumer loan portfolio is
automobile loans which totaled $18.9 million at March 31, 2000, of which 63%
were originated directly with the Company's customers, rather than indirectly
through automobile dealers. The car collateralizes the loan, with the Company
lending up to 90% 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.
The Company also participates in indirect automobile lending through an
agreement with an independent finance company. Under the terms of the lending
program, the finance company grants the Company full recourse throughout the
lives of the loans the Company purchases.
At March 31, 2000, the remaining $15.4 million of the Company's consumer
loan portfolio, which amounted to 0.3% of the Company's total loan portfolio,
was comprised primarily of passbook loans, which loans are secured by the
borrowers' deposits at the Bank and other unsecured loans. During fiscal 2000
the Company sold its entire credit card portfolio. The Company has 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 receives a per unit fee. The
Company does not record an asset or assume any related credit risk.
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 majority
of the portfolio is comprised of home equity loans and lines of credit which are
secured by real estate. The loans are underwritten in a manner such that they
result in a lending risk which is similar to that of 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, 2000, commercial business loans totaled $253.6
million, or 5.1%, of the Company's total loan portfolio. During fiscal 2000, the
Company expanded its commercial business lending program, which was further
developed with the acquisitions of Broad and Statewide.
Commercial business loans originated by the Company generally have terms of
five years or less and adjustable interest rates tied to Prime plus a margin.
Such loans are generally secured by real estate, receivables, inventory,
equipment, machinery and vehicles and are further collateralized 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.
WAREHOUSE MORTGAGE LINES OF CREDIT. The Mortgage Funding group, acquired
as a result of the Statewide acquisition, originates revolving lines of credit
to small and medium-sized mortgage banking companies at interest rates
approximating prime. The lines are drawn upon by these companies to fund the
origination of mortgages, primarily one-to-four family loans, where the amount
of the draw is generally no higher than 97% of the loan which, in turn, is no
higher than 80% of the appraised value of the property. The lines are repaid
upon completion of the sale of the mortgage loan to third parties which usually
occurs within 90 days. During the period between the origination and sale of the
loan, the Company maintains possession of the original mortgage note. The
customers of the Mortgage Funding group are located primarily in New Jersey and
surrounding states. These loans are of short duration and are made to a customer
base whose primary business is mortgage refinancing. In the event of rising
interest rates, the Company expects that utilization of these lines of credit
would be substantially reduced and replaced only to the extent of strength in
the general housing markets. As of March 31, 2000, warehouse mortgage lines of
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<PAGE> 14
credit totaled $48.2 million, or 1.0% of the Company's total loan portfolio.
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 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 $500,000 must be approved by two loan
officers. Any commercial business loan in excess of $500,000 also must be
approved by at least two members of the Credit Committee of the Board of
Directors.
The Company's policy limits the amount of credit related to mortgage loans
and cooperative share loans that can be extended to any one borrower to 15% of
the Bank's stockholder's equity. 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 $6.0 million, or 5% of the Bank's stockholder's equity. 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 exceed (i)
15% of the Bank's stockholder's equity if the loan is unsecured, or (ii) 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 securing single-family residential
mortgage and cooperative apartment loans is required, which is performed by an
independent appraiser. With respect to multi-family residential and commercial
real estate loans, the appraisals are primarily conducted by licensed and
certified in-house appraisers. In addition, the 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, mortgage loan
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. During fiscal 2000, the Company offered a number of residential loan
products on which no points were 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, 2000, the Company had
$10.5 million of 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. Such assets are carried at the
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<PAGE> 15
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.
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<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, 2000 AT MARCH 31, 1999
------------------------------------------- -------------------------------------------
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 29 $1,373 71 $ 3,712 35 $1,665 54 $2,684
Multi-family residential 3 357 6 1,128 3 845 4 830
Commercial and other -- -- 14 3,281 -- -- 3 962
Commercial business loans 7 227 13 3,821 -- -- 1 367
Other loans:
Cooperative apartment loans 3 219 11 243 7 365 12 381
Consumer loans(1) 319 1,618 611 2,649 190 767 419 1,230
--- ------ ---- ------- ---- ------ ---- ------
Total 361 $3,794 726 $14,834 235 $3,642 493 $6,454
=== ====== ==== ======= ==== ====== ==== ======
Delinquent loans to total
loans(2) 0.08% 0.30% 0.10% 0.18%
====== ======= ====== ======
<CAPTION>
AT MARCH 31, 1998
-------------------------------------------
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 42 $3,908 84 $4,298
Multi-family residential 4 960 8 1,190
Commercial and other 5 590 5 1,009
Commercial business loans 3 407 4 331
Other loans:
Cooperative apartment loans 8 316 19 509
Consumer loans(1) 223 864 477 1,688
--- ------ --- ------
Total 285 $7,045 597 $9,025
=== ====== === ======
Delinquent loans to total
loans(2) 0.25% 0.32%
====== ======
</TABLE>
---------------
(1) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans and credit card loans.
(2) Total loans includes loans receivable less deferred loan fees and
unamortized discounts, net.
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<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 restructurings at any of the dates presented.
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Single-family residential $ 3,712 $ 2,809 $ 4,423 $ 2,474 $ 2,890
Multi-family residential 1,128 830 1,190 1,918 3,379
Commercial and other 3,281 2,687 4,782 11,155 12,600
Commercial business loans 3,821 367 349 790 1,010
Other loans:
Cooperative apartment loans 243 381 509 427 355
Consumer loans 33 33 82 166 125
------- ------- ------- ------- -------
Total non-accruing loans 12,218(1) 7,107 11,335 16,930 20,359(2)
------- ------- ------- ------- -------
Loans past due 90 days or more as to:
Interest and accruing(3) 2,616 1,197 1,607 1,718 8,737
Principal and accruing(4) 11,516 30,805 16,804 8,442 6,413
------- ------- ------- ------- -------
Total past due loans and
accruing 14,132 32,002 18,411 10,160 15,150
------- ------- ------- ------- -------
Total non-performing loans 26,350 39,109 29,746 27,090 35,509
------- ------- ------- ------- -------
Other real estate owned, net(5) 68 273 192 540 973
------- ------- ------- ------- -------
Total non-performing assets(6) $26,418 $39,382 $29,938 $27,630 $36,482
======= ======= ======= ======= =======
Allowance for loan losses as a percent of
total loans 1.42% 1.34% 1.31% 1.07% 0.88%
Allowance for loan losses as a percent of
non-performing loans 266.74% 119.72% 122.19% 99.76% 57.81%
Non-performing loans as a percent of
total loans 0.53% 1.12% 1.07% 1.07% 1.52%
Non-performing assets as a percent of
total assets 0.40% 0.71% 0.57% 0.74% 0.94%
</TABLE>
---------------
(1) Includes $2.0 million of loans acquired in the Broad acquisition and $1.3
million of loans acquired in the Statewide acquisition.
(2) Includes $9.5 million of loans acquired in the Bay Ridge Bancorp, Inc. ("Bay
Ridge") acquisition.
(3) Consists primarily of student loans guaranteed by the NYSHESC and home
equity loans and lines of credit.
(4) Reflects loans more than 90 days or more past maturity which continue to
make payments on a basis consistent with the original repayment schedule.
(5) Net of related valuation allowances.
(6) Non-performing assets consist of non-performing loans and OREO.
Non-performing loans consist of non-accrual loans and loans 90 days or more
past due as to interest or principal and accruing.
Non-performing assets decreased 32.9% to $26.4 million at March 31, 2000,
compared to $39.4 million at March 31, 1999. The decrease of $13.0 million was
primarily due to satisfactions totaling $19.3 million on loans that were
previously contractually past due as to maturity, although current as to monthly
principal and interest payments. The decrease was partially offset by a $5.1
million increase in non-accrual loans, primarily commercial business loans
attributable to the Broad acquisition.
At March 31, 2000, the Company's $11.5 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 decreased by
$19.3 million to $11.5 million at March 31, 2000, which was primarily due to
loan satisfactions. Such loans consisted primarily of $6.6 million of
multi-family residential loans and $4.3
15
<PAGE> 18
million of commercial real estate loans. At March 31, 2000, the $6.6 million of
contractually past due multi-family residential loans consisted of 29 loans with
an average principal balance of approximately $226,000, while the $4.3 million
of commercial real estate loans consisted of 14 loans with an average principal
balance of approximately $306,000. 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. 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, 2000 and March 31, 1999 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 $572,000 and $562,000, 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 and commercial business lending continues to
increase (which is expected), additional provisions may be 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, 2000, the Company had classified an aggregate of $26.2 million
of assets (a portion of which consisted of non-accrual loans). In
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<PAGE> 19
addition, at such date the Company had $81.0 million of assets that were
designated by the Company as special mention. At March 31, 2000, a major
component of the Company's assets deemed special mention was a $14.5 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 Bank, 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, 2000, 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 $10.3 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 determination of the adequacy of the
allowance for loan losses and the periodic provisions to the allowance charged
to income is the responsibility of management. The formalized process for
assessing the adequacy of the allowance for loan losses is performed on a
quarterly basis. Individual loans are specifically identified by loan officers
as meeting the criteria of classified or criticized loans. Such criteria
include, but are not limited to, non-accrual loans, past maturity loans, chronic
delinquencies and loans requiring heightened management oversight. Each loan is
assigned to a risk level of special mention, substandard, doubtful and loss.
Loans that do not meet the criteria of classified or criticized are categorized
as pass loans. Each risk level, including pass loans, have an associated reserve
ratio that increases as the risk level category increases. The reserve ratio is
applied to the aggregate balance of loans designated to each risk level to
compute the reserve requirement. This method of analysis is performed on the
entire loan portfolio.
The Company's overall allowance includes the required balance as a result
of the calculation discussed above as well as a supplemental balance. The
supplemental balance takes into consideration increases in total loans
outstanding, the volume of loan originations, the type, size and geographic
concentration of loans held by the Company, number of loans requiring heightened
management oversight and general economic conditions. Recognition is also given
to the changed risk profile of the portfolio as a result of the Broad and
Statewide acquisitions. During fiscal 2000, primarily as a result of the
acquisitions, the Company significantly increased its portfolio of commercial
mortgage and business loans, which loans, in management's view are considered to
have a greater risk of loss. In addition, both of the acquired institutions loan
underwriting standards were not as conservative as those of the Company's, which
may increase the potential risk of loss on these loans.
Other factors used to support the balance of the allowance for loan losses
and its components include regulatory examinations, peer comparisons with other
financial institutions and economic data associated with the real estate market
in the Company's market area, which has recently expanded due to the Broad and
Statewide acquisitions.
The Company's allowance for loan losses amounted to $70.3 million at March
31, 2000 as compared to $46.8 million at March 31, 1999. At March 31, 2000, the
Company's allowance amounted to 1.4% of total loans compared to 1.3% at March
31, 1999. The allowance for loan losses as a percent of non-performing loans was
226.7% at March 31, 2000 compared to 119.7% at March 31, 1999.
The Company's allowance for loan losses increased $23.5 million from March
31, 1999 to March 31, 2000, due to an aggregate of $9.5 million of allowances
assumed in connection with the Broad and Statewide acquisitions, provisions
totaling $9.8 million and recoveries, net of charge-offs, of $4.2 million. As a
result of the reduction in non-performing assets and continued strong asset
quality ratios, management reduced the provision for loan losses by $0.9 million
for the year ended March 31, 2000 as compared to the prior year.
17
<PAGE> 20
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 portfolio 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. In the
future, management may 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,
----------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $46,823 $36,347 $27,024 $20,528 $11,849
------- ------- ------- ------- -------
Allowances of acquired institutions(1) 9,452 -- -- -- 6,910
Provision:
Mortgage loans(2) 7,648 9,450 7,894 8,425 3,300
Consumer and commercial business
loans(3) 2,169 1,248 2,117 (465)(4) 379
------- ------- ------- ------- -------
Total provision 9,817 10,698 10,011 7,960 3,679
------- ------- ------- ------- -------
Charge-offs:
Mortgage loans(2) 40 194 1,047 1,636 1,634
Consumer and commercial business
loans(3) 199 403 263 509 751
------- ------- ------- ------- -------
Total charge-offs 239 597 1,310 2,145 2,385
------- ------- ------- ------- -------
Recoveries:
Mortgage loans(2) 1,020 241 415 545 176
Consumer and commercial business
loans(3) 3,413 134 207 136 299
------- ------- ------- ------- -------
Total recoveries 4,433 375 622 681 475
------- ------- ------- ------- -------
Net loans recovered/(charged-off) 4,194 (222) (688) (1,464) (1,910)
------- ------- ------- ------- -------
Allowance at end of period $70,286 $46,823 $36,347 $27,024 $20,528
======= ======= ======= ======= =======
Net loans charged off to allowance for
loan losses N/A 0.47% 1.89% 5.42% 9.30%
Allowance for possible loan losses as a
percent of total loans 1.42% 1.34% 1.31% 1.07% 0.88%
Allowance for possible loan losses as a
percent of total non-performing
loans(5) 266.74% 119.72% 122.19% 99.76% 57.81%
</TABLE>
---------------
(1) Reflects allowance for loan losses acquired in connection with the
acquisitions of Broad and Statewide during fiscal 2000 of $6.7 million and
$2.8 million, respectively, and allowance for loan losses of $6.9 million
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, credit card 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,
------------------------------------------------------------------
2000 1999 1998
---------------------- ------------------- -------------------
AMOUNT OF AMOUNT OF AMOUNT OF
ALLOWANCE PERCENT(1) ALLOWANCE PERCENT ALLOWANCE PERCENT
--------- ---------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans(2) $54,743 89.9% $40,128 96.5% $30,631 95.6%
Commercial business loans 6,729 6.1 4,163 1.1 3,494 1.1
Other loans(3) 8,814 4.0 2,532 2.4 2,222 3.3
------- ----- ------- ----- ------- -----
Total $70,286 100.0% $46,823 100.0% $36,347 100.0%
======= ===== ======= ===== ======= =====
<CAPTION>
AT MARCH 31,
-----------------------------------------
1997 1996
------------------- -------------------
AMOUNT OF AMOUNT OF
ALLOWANCE PERCENT ALLOWANCE PERCENT
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans(2) $23,370 95.3% $16,036 95.4%
Commercial business loans 2,272 1.0 3,179 0.8
Other loans(3) 1,382 3.7 1,313 3.8
------- ----- ------- -----
Total $27,024 100.0% $20,528 100.0%
======= ===== ======= =====
</TABLE>
---------------
(1) Percent of loans in each category to total loans.
(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 credit card 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-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-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, 2000, these equity investments totaled $60.3
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-RELATED SECURITIES. Mortgage-related securities (which also are
known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family or multi-family
mortgages, the princi-
19
<PAGE> 22
pal 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-related 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.
At March 31, 2000, the Company's $773.0 million of mortgage-related
securities, which represented 11.7% of the Company's total assets, were
comprised of $721.0 million of CMOs and $52.0 million of mortgage-backed
securities, which were issued or guaranteed by the FHLMC, the FNMA or the GNMA.
The portfolio was reduced by $416.8 million (primarily through sales) during
fiscal 2000 in large part to fund mortgage loan originations, the majority of
which consisted of multi-family residential loans. Included in this decrease was
a $37.0 million increase in unrealized losses on mortgage-related securities.
This is a direct result of the recent rise in market rates of interest. The
underlying mortgages which support these securities have a yield that is lower
than current mortgage rates thereby reducing the fair value of the related
securities.
At March 31, 2000, the contractual maturity of approximately 94.2% of the
Company's mortgage-related securities was in excess of ten years. The actual
maturity of a mortgage-related security is generally 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-related 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 the 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 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
20
<PAGE> 23
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-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
mortgage-related securities portfolio during the periods indicated, all of which
are available-for-sale.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
2000 1999 1998
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-related securities at beginning of period $1,189,833 $ 84,610 $ 190,979
Increase due to acquisitions 251,095 -- --
Purchases -- 1,232,479 14,517
Sales (491,326) -- (14,522)
Repayments, prepayments and maturities (139,384) (118,972) (108,644)
Amortization of premium (592) (823) (592)
Accretion of discounts 443 88 147
Unrealized (losses) gains on available-for-sale
mortgage-related securities (37,038) (7,549) 2,725
---------- ----------- ---------
Mortgage-related securities at end of period $ 773,031 $ 1,189,833 $ 84,610
========== =========== =========
</TABLE>
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. In order to fund higher
yielding mortgage originations, consisting primarily of multi-family residential
loans, the Company reduced its investment securities portfolio by $119.0
million, or 35.9%, from $331.8 million at March 31, 1999 to $212.8 million at
March 31, 2000.
The following table sets forth the activity in the Company's investment
securities portfolio during the periods indicated, all of which are
available-for-sale.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
2000 1999 1998
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment securities at beginning of period $ 331,795 $ 1,282,072 $ 357,487
Increase due to acquisitions 112,781 -- --
Purchases 458,196 717,698 2,228,433
Sales (502,428) (456,013) (273,740)
Maturities and repayments (171,238) (1,207,133) (1,050,965)
Amortization of premium (206) (464) (475)
Accretion of discounts 544 3,488 13,619
Unrealized (losses) gains on available-for-sale
investment securities (16,676) (7,853) 7,713
--------- ----------- -----------
Investment securities at end of period $ 212,768 $ 331,795 $ 1,282,072
========= =========== ===========
</TABLE>
21
<PAGE> 24
The following table sets forth information regarding the amortized cost and
fair value of the Company's investment and mortgage-related securities at the
dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------------------
2000 1999 1998
----------------------- ------------------------ ------------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
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 $ 153,930 $137,872 $ 268,524 $ 264,223 $1,087,219 $1,089,952
Corporate securities -- -- 78 78 226 224
Municipal securities 3,615 3,489 699 699 1,104 1,104
Stocks:
Preferred 46,365 46,270 15,000 15,000 168,100 168,100
Common 25,497 25,137 47,457 51,795 17,533 22,692
---------- -------- ---------- ---------- ---------- ----------
Total investment securities 229,407 212,768 331,758 331,795 1,274,182 1,282,072
Mortgage-related securities:
FNMA 8,631 8,566 3,830 3,875 5,294 5,415
GNMA 35,385 35,638 46,981 48,956 63,566 66,473
FHLMC 7,807 7,784 6,756 6,820 11,500 11,611
CMOs 762,635 721,043 1,136,655 1,130,182 1,090 1,111
---------- -------- ---------- ---------- ---------- ----------
Total mortgage-related securities 814,458 773,031 1,194,222 1,189,833 81,450 84,610
---------- -------- ---------- ---------- ---------- ----------
Total securities
available-for-sale $1,043,865 $985,799 $1,525,980 $1,521,628 $1,355,632 $1,366,682
========== ======== ========== ========== ========== ==========
</TABLE>
The following table sets forth certain information regarding the maturities
of the Company's investment and mortgage-related securities at March 31, 2000,
all of which were classified as available-for-sale.
<TABLE>
<CAPTION>
AT MARCH 31, 2000, 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 $7,198 5.15% $11,645 7.09% $ 266 8.29% $118,763 6.50% $137,872
Municipal securities -- -- 1,741 6.04 1,519 6.89 229 7.08 3,489
Mortgage-related securities:
FNMA 758 9.39 277 7.68 826 8.32 6,705 6.74 8,566
GNMA -- -- 2,079 7.28 6,846 8.51 26,713 7.64 35,638
FHLMC 356 3.99 1,173 5.04 3,518 7.82 2,737 6.76 7,784
CMOs -- -- -- -- 28,719 6.26 692,324 6.42 721,043
------ ------- ------- -------- --------
Total $8,312 5.49% $16,915 7.44% $41,694 6.84% $847,471 6.47% $914,392
====== ==== ======= ==== ======= ==== ======== ==== ========
</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 negotiable order of
withdrawal ("NOW") accounts (including the "Active Management" NOW account),
money market accounts, non-in-
22
<PAGE> 25
terest-bearing checking accounts, passbook and statement savings accounts, New
Jersey municipal deposits, IOLTA accounts and term certificate accounts.
The Company's deposits are obtained primarily from the areas in which its
branch offices are located; management 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 65
traditional full-service offices. The Company currently expects to open three
new banking locations in New York and a state-of-the-art call center during
fiscal 2001.
In addition to its branch network, the Company currently maintains 82 ATMs
in or at its branch offices and 12 ATMs at remote sites. The Company currently
plans to install an additional 10 ATMs in its offices and 8 ATMs at remote sites
by the end of fiscal 2001.
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, 2000, these types of deposits
amounted to $2.31 billion or 52.4% of the Company's total deposits. During the
fiscal year ended March 31, 2000 the weighted average rate paid on the Company's
demand deposits and savings deposits amounted to 1.74% and 2.19%, respectively,
as compared to a weighted average rate of 5.06% paid on the Company's
certificates of deposit during this period.
The Company's deposits increased $964.7 million or 28.0% to $4.41 billion
at March 31, 2000 from $3.45 billion at March 31, 1999 primarily as a result of
$1.03 billion deposits assumed in connection with the acquisitions of Broad and
Statewide and interest credited of $138.8 million, partially offset by $202.6
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,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits at beginning of period $3,447,364 $3,393,800 $3,325,558
Increase due to acquisitions 1,028,476 -- 69,997
Other net decrease before interest credited (202,577) (79,582) (146,244)
Interest credited 138,769 133,146 144,489
---------- ---------- ----------
Net increase in deposits 964,668 53,564 68,242
---------- ---------- ----------
Deposits at end of period $4,412,032 $3,447,364 $3,393,800
========== ========== ==========
</TABLE>
23
<PAGE> 26
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,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
2.00% to 3.99% $ 34,374 $ -- $ 1,141
4.00% to 4.99% 856,700 795,127 201,598
5.00% to 5.99% 977,142 842,203 1,309,923
6.00% to 6.99% 219,938 105,935 128,527
7.00% to 8.99% 13,021 76,665 79,814
9.00% to 10.99% -- 972 1,622
---------- ---------- ----------
$2,101,175 $1,820,902 $1,722,625
========== ========== ==========
</TABLE>
The following table sets forth the amount and remaining maturities of the
Company's certificates of deposit at March 31, 2000.
<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>
2.00% to 3.99% $ 27,251 $ 5,351 $ 1,688 $ 84 $ -- $ 34,374
4.00% to 4.99% 646,324 155,209 40,298 4,339 10,530 856,700
5.00% to 5.99% 344,652 437,580 102,997 55,633 36,280 977,142
6.00% to 6.99% 28,295 118,822 42,865 24,650 5,306 219,938
7.00% to 8.99% 12,338 218 196 39 230 13,021
---------- -------- -------- ------- ------- ----------
Total $1,058,860 $717,180 $188,044 $84,745 $52,346 $2,101,175
========== ======== ======== ======= ======= ==========
</TABLE>
As of March 31, 2000, the aggregate amount of outstanding time certificates
of deposit in amounts greater than or equal to $100,000 was approximately $319.6
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 $112,714
Over 3 months through 6 months 53,806
Over 6 months through 12 months 102,280
Over 12 months 50,789
--------
$319,589
========
</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 borrowings as its primary funding source to
support asset growth. The Company, at March 31, 2000, had $845.4 million of FHLB
advances outstanding with maturities of seven years or less with the majority
having a maturity of less than five years. Another funding source available to
the Company are repurchase agreements with the FHLB. These repurchase agreements
are generally collateralized by CMOs held by the Company. At March 31, 2000, the
Company had $315.0 million of FHLB repurchase agreements outstanding with
maturities ranging between less than one year and ten years with the majority
having a maturity of less than one year. Borrowings outstanding at March 31,
2000 also included a $1.0 million other 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.
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EMPLOYEES
The Company had 1,191 full-time employees and 251 part-time employees at
March 31, 2000. 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,
engaged 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. In accordance with regulatory mandate, at December 31, 1999, the
operations of the SBLI department ceased and all assets, policies and surplus
were transferred to a newly created mutual life insurance company. The Company
has formed a new subsidiary (Independence Community Insurance Agency, Inc.
("ICIA")) as a licensed life insurance agency to sell the products of the new
mutual insurance company. This new subsidiary will retain all commission income
from policies previously generated and serviced by the SBLI department.
SUBSIDIARIES
At March 31, 2000, the Holding Company's three active subsidiaries were the
Bank, Mitchamm Corp. ("Mitchamm") and BNB Capital Trust (the "Issuer Trust").
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. 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.
BNB CAPITAL TRUST. The Issuer Trust (assumed by the Holding Company as
part of the acquisition of Broad) is a statutory business trust formed under
Delaware law pursuant to (i) a trust agreement, as amended and restated, dated
as of June 9, 1997, executed by Broad, as Depositor, Bankers Trust Company, as
Property Trustee, and Bankers Trust (Delaware), as Delaware Trustee, and (ii)
the filing of a Certificate of Trust with the Delaware Secretary of State on
June 9, 1997. As a result of the Broad acquisition, the Issuer Trust is wholly
owned by the Holding Company. The Holding Company, as holder of all of the
beneficial interests represented by the common securities of the Issuer Trust
(the "Common Securities"), selected two employees of the Holding Company to
serve as administrators. The Issuer Trust's business and affairs are conducted
by its Property Trustee, the Delaware Trustee and the two administrators. The
Issuer Trust was created to issue and sell the 9.5% Cumulative Trust Preferred
Securities (the "Trust Preferred Securities") and the Common Securities, and use
the proceeds of such sales to acquire the 9.5% Junior Subordinated Debentures
(the "Junior Subordinated Debentures") issued by Broad. The Junior Subordinated
Debentures are the sole asset of the Issuer Trust and payments under the Junior
Subordinated Debentures are the sole revenue of the Issuer Trust. The Holding
Company has entered into several contractual arrangements for the purpose of
fully and unconditionally guaranteeing the Trust Preferred Securities pursuant
to the terms of such agreements. The Issuer Trust has a term of 31 years, but
may terminate earlier as provided in the Trust Agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 hereof and "Financial Statements and Supplementary Data" set forth in
Item 8 hereof for additional information.
The following are the subsidiaries of the Bank:
INDEPENDENCE COMMUNITY INVESTMENT CORP. ("ICIC"). ICIC was established in
December 1998 as the Delaware-chartered holding Company for Independence
Community Realty Corp. ("ICRC") and the Renaissance Asset Corporation ("RAC").
On December 18, 1998 the Bank 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.
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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 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, 2000, ICRC held
$1.1 billion of loans and $37.3 million of short-term investments.
RENAISSANCE ASSET CORPORATION. RAC, which was acquired from Broad, was
established by Broad National Bank ("Broad National") in November, 1997 as a New
Jersey real estate investment trust. At March 31, 2000, RAC held $129.7 million
of loans.
INDEPENDENCE COMMUNITY INSURANCE AGENCY, INC. ICIA was established in
1984. ICIA was formed as a licensed life insurance agency to sell the products
of the new mutual insurance company formed by the Savings Bank Life Insurance
Department of New York.
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, 2000, Wiljo had total assets of
$7.1 million and the Company's equity investment in Wiljo amounted to $6.8
million.
BROAD NATIONAL REALTY CORP. ("BNRC") BNRC was established by Broad
National in July, 1987. The assets of BNRC consist primarily of an office
building located at 909 Broad Street, Newark New Jersey. BNRC is also the
holding company for BNB Horizons Inc. ("Horizon"). BNRC had total assets of $3.3
million at March 31, 2000.
BNB HORIZONS INC. Horizon was established by Broad National in May, 1998
to manage vacant land located at 901 Broad Street, Newark New Jersey. Horizon's
assets totaled $1.2 million at March 31, 2000.
BNB INVESTMENT CORP. ("Investment Corp") Investment Corp. was established
by Broad National in February, 1987 to hold various investment securities. Total
assets at March 31, 2000 were $62.3 million.
BRONATOREO. Bronatoreo was established by Broad National in August, 1992
to maintain parking lots located behind 905 Broad Street, Newark New Jersey.
Total assets at March 31, 2000 were $1.8 million.
STATEWIDE FINANCIAL SERVICES ("SFS"). SFS was established by Statewide
Savings Bank, S.L.A. ("Statewide Bank") in July, 1985 to sell annuity products.
Total assets at March 31, 2000 were $0.2 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 HOLDING 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. The Holding Company operates as a unitary savings
and loan holding company. Generally, there are only limited restrictions on the
activities of a unitary savings and loan holding company which applied to become
or was a unitary savings and loan holding company prior to May 4, 1999 and its
non-savings institution subsidi-
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aries. Under the enacted Gramm-Leach-Bliley Act of 1999 (the "GBLA"), companies
which applied to the OTS to become unitary savings and loan holding companies
will be restricted to engaging in those activities traditionally permitted to
multiple savings and loan holding companies. 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, the Director may impose such restrictions as 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 grandfathered unitary savings and
loan holding companies under the GBLA, if the savings institution subsidiary of
such a holding company fails to meet the 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 Holding Company were to acquire control of another savings
institution, other than through merger or other business combination with the
Bank, the Holding 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
Holding 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 subsidiary
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 Federal Reserve Board 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 Qualified Thrift Lender ("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 ("QTIs") 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
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<PAGE> 30
assets. Generally, QTIs 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, 2000 approximately 88.0% of
the Bank's assets were invested in QTIs, 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
institution. 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, 2000, 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 of the OTS, (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 of the OTS 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 Holding 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 Holding Company is subject to the proxy and
tender offer rules, insider trading reporting require-
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ments 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 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, 2000, 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
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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 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',
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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.
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, 2000, the book value of the Bank's investments under this exception was
$14.1 million, which equaled 2.8% 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 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 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
31
<PAGE> 34
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, 2000, 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 deposit accounts insured by both the
BIF and the Savings Association Insurance Fund ("SAIF"). The SAIF-insured
accounts are held by the Bank as a result of certain acquisitions and branch
purchases involving SAIF-insured deposits. Such deposits amounted to $2.26
billion as of March 31, 2000. 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 that the
FDIC determines by regulation or order poses 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
32
<PAGE> 35
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective SAIF rates ranged from zero basis points to 27 basis points which was
the same range of premiums as the BIF rates. From 1997 through 1999, almost all
FDIC-insured institutions paid 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. Beginning January 1, 2000, all FDIC insured
institutions are assessed the same rate of 2.1 basis points of their BIF and
SAIF assessable deposits to fund the Financing Corporation. Based upon the $2.27
billion of BIF-assessable deposits and $2.26 billion of SAIF-assessable deposits
at March 31, 2000, the Bank expects to pay $240,000 in insurance premiums per
quarter during calendar 2000.
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, 2000.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with its
lending activities, the Bank 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.
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 Bank,
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 Bank'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 Bank'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 of the OTS not less than 30 days
33
<PAGE> 36
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.
During fiscal 2000, the Bank requested approval of or non-objection to
requests to distribute an aggregate of $285.0 million. Of this amount, $176.0
million was distributed to the Holding Company in fiscal 2000. The distributions
were primarily used by the Holding Company to fund the cash portion of the
merger consideration paid in the Broad and Statewide acquisitions as well as the
Holding Company's open market stock repurchase programs.
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
$1.16 billion of FHLB borrowings at March 31, 2000.
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, 2000, the Bank had approximately $82.3
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 an adverse effect on the
value of FHLB stock in the future.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board 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, 2000, 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
34
<PAGE> 37
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, 1999 is approximately $2.4
million. The Company has an associated deferred tax liability of approximately
$1.0 million at December 31, 1999.
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 Bank 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 Bank make certain non-dividend distributions or cease to maintain a bank
charter.
At December 31, 1999, the Bank'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 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, 1999, 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, 1999, 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
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<PAGE> 38
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,
1999, 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, 2000, for which deferred taxes are not required to be
recognized, amounted to approximately $122 million.
The Company is currently undergoing an audit of its New York State income
tax returns for the calendar years 1994, 1995 and 1996. The Company has recently
received a notice which could result in additional income tax liability to New
York State and New York City for the years in question. The Company has
conducted a review and analysis of the basis and accuracy of the State's claims.
Based on its review, the Company does not believe that the final resolution will
have a material financial statement impact.
NEW JERSEY TAXATION. The Company and certain eligible and qualified
subsidiaries report income on a separate company basis, as New Jersey Law does
not permit consolidated return filing. The state of New Jersey imposes a tax on
entire net income allocated to the state at a rate of 7.5%, if allocated income
is $100,000 or less, or at a rate of 9.0% on allocated income over $100,000.
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. The Holding Company pays the maximum
franchise tax.
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<PAGE> 39
ITEM 2. PROPERTIES
OFFICES AND PROPERTIES
At March 31, 2000, the Company conducted its business from its executive
offices in Brooklyn and 65 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 2000 2000
-------- -------- ---------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EXECUTIVE AND ADMINISTRATIVE OFFICES:
195 Montague Street
Brooklyn, New York 11201(1) Owned $15,670 $ 92,737
BRANCH OFFICES:
130 Court Street
Brooklyn, New York 11201(2) Owned 5,875 187,982
6424-18th Avenue
Brooklyn, New York 11204 Owned 945 317,153
23 Newkirk Plaza
Brooklyn, New York 11226 Owned 2,264 118,904
443 Hillside Avenue
Williston Park, New York 11596 Owned 2,036 180,867
23-56 Bell Boulevard
Bayside, New York 11360 Leased 9/30/2008 5 204,241
250 Lexington Avenue
New York, New York 10016 Leased 12/31/2001(3) 21 59,862
1416 East Avenue
Bronx, New York 10462 Leased (4) 351 117,064
1420 Northern Boulevard
Manhasset, New York 11030 Leased 9/30/2017 856 84,115
1769-86th Street
Brooklyn, New York 11214 Owned 1,449 163,941
Pratt Institute Campus
200 Willoughby Avenue
Brooklyn, New York 11205 Leased (5) 9 4,478
2357-59 86th Street
Brooklyn, New York 11214 Owned 1,784 92,630
4514 16th Avenue
Brooklyn, New York 11204 Owned 1,891 132,317
37-10 Broadway
Long Island City, New York 11103 Owned 1,707 159,580
22-59 31st Street
Long Island City, New York 11105 Owned 645 104,023
24-28 34th Avenue
Long Island City, New York 11106 Leased 6/30/2007 319 72,064
51-12 31st Avenue
Woodside, New York 11377 Leased 6/30/2007 311 46,503
83-20 Roosevelt Avenue
Jackson Heights, New York 11372 Leased 1/31/2005 1,003 61,315
</TABLE>
(continued on following page)
37
<PAGE> 40
<TABLE>
<CAPTION>
NET BOOK
VALUE OF
PROPERTY AND
LEASEHOLD
IMPROVEMENTS
LEASE AT DEPOSITS AT
OWNED OR EXPIRATION MARCH 31, MARCH 31,
LOCATION LEASED DATE 2000 2000
-------- -------- ---------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
75-15 31st Avenue
Jackson Heights, New York 11370 Leased 4/30/2004 $ 358 $ 86,858
89-01 Northern Boulevard
Jackson Heights, New York 11372 Leased 7/31/2004 313 83,959
150-28 Union Turnpike
Flushing, New York 11367 Leased 5/31/2012 203 52,920
234 Prospect Park West
Brooklyn, New York 11215 Owned 3,035 58,983
7500 Fifth Avenue
Brooklyn, New York 11209 Owned 564 67,441
440 Avenue P
Brooklyn, New York 11223 Owned 1,310 90,577
301 Avenue U
Brooklyn, New York 11223 Owned 1,487 85,166
8808 Fifth Avenue
Brooklyn, New York 11209 Owned 2,236 58,371
1310 Kings Highway
Brooklyn, New York 11229 Owned 392 72,483
4823 13th Avenue
Brooklyn, New York 11219 Owned 4,779 190,665
1302 Avenue J
Brooklyn, New York 11230 Owned 931 108,670
1550 Richmond Road
Staten Island, New York 10304 Owned 1,061 133,692
1460 Forest Avenue
Staten Island, New York 10302 Leased 11/30/2011 34 126,359
498 Columbia Street
Brooklyn, New York 11231 Leased 12/31/2002 369 6,369
905 Broad Street
Newark, New Jersey 07102 Owned 994 56,892
745 Broad Street
Newark, New Jersey 07102 Leased 12/31/2003 55 28,587
243 Chestnut Street
Newark, New Jersey 07105 Leased 7/16/2007 108 16,666
236 West St. George Avenue
Linden, New Jersey 07105 Owned 131 4,402
7 Wheeler Point Road
Newark, New Jersey 07105 Leased 2/28/2004 48 57,396
123-133 Jackson Street
Newark, New Jersey 07105 Owned 638 103,449
225 Milburn Avenue
Milburn, New Jersey 07041 Leased 3/31/2001 2 23,855
65 River Road
North Arlington, New Jersey 07031 Leased 3/31/2001 91 26,167
1000 South Elmora Avenue
Elizabeth, New Jersey 07202 Leased 4/30/2006 177 55,334
</TABLE>
(continued on following page)
38
<PAGE> 41
<TABLE>
<CAPTION>
NET BOOK
VALUE OF
PROPERTY AND
LEASEHOLD
IMPROVEMENTS
LEASE AT DEPOSITS AT
OWNED OR EXPIRATION MARCH 31, MARCH 31,
LOCATION LEASED DATE 2000 2000
-------- -------- ---------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
30 W. Mt. Pleasant Avenue
Livingston, New Jersey 07039 Leased 11/30/2001 $ 3 $ 33,752
Convery Plaza, Route 35
Perth Amboy, New Jersey 08861 Leased 8/31/2002 3 18,785
466 Bloomfield Ave
Newark, New Jersey 07107 Leased 12/31/2002 3 29,673
826 Elizabeth Avenue
Elizabeth, New Jersey 07201 Owned 285 40,963
554 Central Avenue
East Orange, New Jersey 07018 Owned 425 29,245
255 Prospect Avenue
West Orange, New Jersey 07052 Owned 42 3,358
180 Schuyler Avenue
Kearny, New Jersey 07032 Leased 3/31/2000 3 10,519
348 Central Avenue
Jersey City, New Jersey 07307 Leased 9/30/2006 335 3,461
290 Ferry Street
Newark, New Jersey 07105 Leased 11/30/2000 7 11,324
9 Path Plaza
Jersey City, New Jersey 07306 Leased 6/30/2001 571 92,407
241 Central Avenue
Jersey City, New Jersey 07307 Owned 244 69,420
214 Newark Avenue
Jersey City, New Jersey 07302 Owned 81 25,291
12 Chapel Avenue
Jersey City, New Jersey 07305 Leased 1/1/2003 52 5,680
400 Marin Boulevard
Jersey City, New Jersey 07302 Leased 6/15/2010 181 14,460
86 River Street
Hoboken, New Jersey 07030 Leased 12/31/2002 64 11,084
416 Anderson Avenue
Cliffside Park, New Jersey 07010 Owned 101 12,732
35 South Main Street
Lodi, New Jersey 07644
Building Owned 417 21,196
Adjacent parcel of land Leased 12/31/2000
19 Schuyler Avenue
North Arlington, New Jersey 07031 Leased 2/28/2008 195 5,614
1322A Patterson Plank Road
Secaucus, New Jersey 07094 Owned 599 44,591
456 North Broad Street
Elizabeth, New Jersey 07208 Owned 611 52,453
314 Elizabeth Avenue
Elizabeth, New Jersey 07206 Leased 4/1/2098 10 28,206
345 South Avenue
Garwood, New Jersey 07027 Owned 152 27,433
</TABLE>
(continued on following page)
39
<PAGE> 42
<TABLE>
<CAPTION>
NET BOOK
VALUE OF
PROPERTY AND
LEASEHOLD
IMPROVEMENTS
LEASE AT DEPOSITS AT
OWNED OR EXPIRATION MARCH 31, MARCH 31,
LOCATION LEASED DATE 2000 2000
-------- -------- ---------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
246 South Avenue
Fanwood, New Jersey 07023 Owned $ 229 $ 17,640
1886 Springfield Avenue
Maplewood, New Jersey 07040 Leased 7/19/2009 632 7,708
------- ----------
Totals $61,702 $4,412,032
======= ==========
</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 in March 1972 expires in
September 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.
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 December 1, 1995, Statewide Bank initiated a suit against the U.S.
Government alleging, among other things, breach of contract and seeking
restitution for harm caused to Statewide Bank through changes in Federal banking
regulations regarding the treatment of goodwill in calculating the capital of
thrift institutions. The case relates to goodwill created by Statewide Bank's
1982 acquisition of Arch Federal Savings and Loan Association. The 1989 change
in Federal regulations required a phase-out of goodwill from the calculation of
a thrift institution's capital ratios and required that by January 1, 1995, no
goodwill be counted as capital. As of the effective date of the regulations,
Statewide Bank had $18.7 million in goodwill on its balance sheet.
The suit was initially subject to a stay pending a ruling by the U.S.
Supreme Court of the U.S. Government's appeal of a decision of the U.S. Court of
Federal Claims ("Court of Claim's") in another case which had upheld the right
of three thrift institutions to maintain such actions. In July 1996, the U.S.
Supreme Court ruled in "United States v. Winstar Corporation" upholding the
Court of Claim's ruling in favor of the three institutions involved in that
suit. Subsequently, the stay in all goodwill related cases was lifted. The U.S.
Government then filed a motion seeking to dismiss all goodwill related claims
filed six years after the date of the Financial Institutions Reform, Recovery
and Enforcement Act's adoption on August 9, 1989. Statewide Bank had filed its
claim on December 1, 1995. Statewide Bank, along with the approximately 25 other
institutions subject to the motion, vigorously opposed the U.S. Government's
motion to dismiss. In January 1997, the judge appointed to hear the motion ruled
against the U.S. Government, holding that the statute of limitations had not
begun to run until OTS regulations implementing the Financial Institutions
Reform, Recovery and Enforcement Act were adopted on December 7, 1989. The case
is currently in the discovery phase, and no trial date has been set.
Accordingly, for these reasons and because of other facts affecting the
predictability of litigation, management cannot predict the eventual outcome,
the amount of damages, if any, or the timing of final disposition of the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 43
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 Holding 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, 2000, there were
67,254,439 shares of common stock outstanding. As of May 31, 2000 the Holding
Company had 14,334 stockholders of record. The following table sets forth the
high and low stock prices of the Holding 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>
2000 1999
-------------- --------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 14 9/16 11 11/16 19 1/8 14 15/16
Second Quarter 13 13/16 11 5/8 17 5/16 11
Third Quarter 12 1/2 10 9/16 16 11 29/32
Fourth Quarter 12 3/8 9 3/4 16 3/8 12 7/8
</TABLE>
The following schedule summarizes the cash dividends paid by the Holding
Company per share of common stock for the fiscal years ended 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----- -----
<S> <C> <C>
First Quarter $0.04 N/A
Second Quarter 0.05 N/A
Third Quarter 0.06 $0.03
Fourth Quarter 0.06 0.03
</TABLE>
On April 26, 2000, the Board of Directors declared a quarterly cash
dividend of $0.07 per common share, payable on May 25, 2000, to stockholders of
record at the close of business on May 11, 2000.
See "Liquidity and Commitments" and Notes 1 and 17 of the "Notes to
Consolidated Financial Statements" set forth in Item 8 hereof for discussion of
restrictions on the Holding Company's ability to pay dividends.
41
<PAGE> 44
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION
DATA:
Total assets $6,604,150 $5,536,978 $5,222,996 $3,734,723 $3,869,782
Cash and cash equivalents 152,167 279,885 857,251 374,636 103,192
Investment securities
held-to-maturity -- -- -- -- 39,995
Mortgage-related securities
held-to-maturity -- -- -- -- 120,702
Mortgage-related securities
available-for-sale 773,031 1,189,833 84,610 190,979 395,321
Investment securities
available-for-sale 212,768 331,795 1,282,072 357,487 638,828
Loans receivable, net 4,880,234 3,459,658 2,745,540 2,504,496 2,322,808
Intangible assets(1) 220,979 47,244 55,873 60,499 80,268
Deposit accounts 4,412,032 3,447,364 3,393,800 3,325,558 3,396,890
FHLB borrowings 1,160,375 1,106,725 14,300 14,550 56,045
Borrowings-securities loaned -- -- 701,160 -- --
Trust preferred securities(2) 11,500 -- -- -- --
Other borrowings 2,363 11,639 2,381 2,682 1,250
Total stockholders' equity 834,807 824,962 949,124 309,114 289,819
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income $402,486 $336,415 $293,043 $255,303 $213,100
Interest expense 203,660 167,221 160,943 140,187 110,619
-------- -------- -------- -------- --------
Net interest income 198,826 169,194 132,100 115,116 102,481
-------- -------- -------- -------- --------
Provision for loan losses 9,817 10,698 10,011 7,960 3,679
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 189,009 158,496 122,089 107,156 98,802
Net (loss) gain on sales of loans
and securities (1,716) 390 115 (3,347) 12,222
Other non-interest income 18,632 10,933 10,233 6,256 7,860
Amortization of intangible assets 14,613 8,629 8,740 8,278 1,842
Charitable contribution to
Independence Community
Foundation(3) -- -- 56,422 -- --
Other non-interest expenses 105,277 89,574 80,713 73,875 50,288
-------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes 86,035 71,616 (13,438) 27,912 66,754
Provision (benefit) for income taxes 32,789 26,441 (3,482) 10,732 30,782
-------- -------- -------- -------- --------
Net income (loss) $ 53,246 $ 45,175 $ (9,956) $ 17,180 $ 35,972
======== ======== ======== ======== ========
Basic earnings (loss) per share(3) $ 0.90 $ 0.67 $ (0.52) N/A N/A
======== ======== ======== ======== ========
Diluted earnings (loss) per share(3) $ 0.90 $ 0.66 $ (0.52) N/A N/A
======== ======== ======== ======== ========
</TABLE>
(footnotes on next page)
42
<PAGE> 45
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31,
---------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:(5)
Return on assets(4) 0.88% 0.90% 0.64% 0.46% 1.27%
Return on equity(4) 6.51 4.87 7.59 5.69 13.13
Interest-earning assets to
interest-bearing liabilities 111.17 120.66 105.17 103.59 109.28
Interest rate spread(6) 3.07 2.79 3.05 3.18 3.39
Net interest margin(6) 3.47 3.50 3.26 3.32 3.77
Non-interest expense, excluding
amortization of intangible assets, to
total assets(4) 1.74 1.78 1.90 1.99 1.77
Efficiency ratio(7) 48.41 49.73 56.71 53.82 45.58
Cash dividends declared per common share $ 0.21 $ 0.06 N/A N/A N/A
ASSET QUALITY RATIOS:
Non-performing loans as a percent of
total loans at end of period 0.53% 1.12% 1.07% 1.07% 1.52%
Non-performing assets to total assets at
end of period(8) 0.40 0.71 0.57 0.74 0.94
Allowance for loan losses to
non-performing loans at end of period 266.74 119.72 122.19 99.76 57.81
Allowance for loan losses to total loans
at end of period 1.42 1.34 1.31 1.07 0.88
CAPITAL AND OTHER INFORMATION:(5)
Equity to assets at end of period 12.64% 14.90% 18.17% 8.28% 7.49%
Leverage capital(9) 7.83 12.85 11.16 6.83 6.13
Tangible equity to risk-weighted assets
at end of period(9) 11.37 17.73 22.25 10.05 9.82
Total capital to risk-weighted assets at
end of period(9) 12.62 19.03 23.50 11.15 10.82
Cash earnings(10) $73,431 $58,459 $36,754 $25,458 $37,814
Diluted cash earnings per common share $ 1.24 $ 0.86 $ 0.13 N/A N/A
Number of full service offices at end of
period 65 32 34 32 33
</TABLE>
---------------
(1) Represents the excess of cost over fair value of net assets acquired, which
consists of goodwill and other intangibles, which amounted to $200.4
million and $20.6 million, respectively, at March 31, 2000. The increase
from March 31, 1999 to March 31, 2000 reflected the $99.3 million and $88.9
million of goodwill resulting from the acquisitions of Broad and Statewide,
respectively. 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 trust preferred securities were assumed by the Holding Company as part
of the Broad acquisition effective the close of business on July 31, 1999.
(3) The Bank completed its conversion and reorganization on March 13, 1998 (the
"Conversion"). 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") in connection with the completion of the
Conversion.
(4) 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%.
(footnotes continued on following page)
43
<PAGE> 46
(5) With the exception of end of period ratios and the efficiency ratio, all
ratios are based on average daily balances during the respective periods.
(6) 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.
(7) 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).
(8) 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.
(9) Ratios reflect the capital position of the Bank only.
(10) 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 1998, cash earnings were 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-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, deposit insurance
premiums, data processing services, amortization of intangibles 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 Company generally has sought to
achieve long-term financial strength and stability by increasing the amount and
stability of its net interest income and non-interest income and by maintaining
a high level of asset quality. In pursuit of these goals, the Company has
adopted a business strategy emphasizing controlled growth, multi-family
residential lending, commercial business lending, retail deposit products and
customer service, while maintaining asset quality and stable liquidity.
BUSINESS STRATEGY
CONTROLLED GROWTH. In recent years, the Company has sought to increase its
assets and expand its operations. The Company in fiscal 2000 continued to
utilize merger and acquisition activities as its primary method of expansion.
The Company completed two acquisitions in this fiscal year. The Company
completed its acquisition of Broad, which had $646.3 million in assets,
effective the close of business on July 31, 1999. The acquisition of Statewide,
which had $745.2 million in assets, was completed effective the close of
business on January 7, 2000. The Broad and Statewide acquisitions enabled the
Company to expand into contiguous markets with similar demographics of the
Company's within the New York market area. The acquisitions also enabled the
Company 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 smaller acquisitions in earlier periods.
The Company's assets increased by $1.07 billion or 19.3% from $5.54 billion
at March 31, 1999 to $6.60 billion at March 31, 2000. The increase reflects
primarily the $1.39 billion of assets acquired in connection with the Broad and
Statewide acquisi-
44
<PAGE> 47
tions. These increases were partially offset by the Company's use of $126.4
million to fund the repurchase of its common stock in the open market, along
with a $202.6 million outflow of deposits. Total loans increased approximately
$1.44 billion, of which $761.5 million was the result of the Broad and Statewide
acquisitions. The remaining increase was funded by increased FHLB borrowings in
conjunction with the continuation, in the early part of fiscal 2000 of the
Company's leverage strategy. To support asset growth, primarily mortgage-related
securities and multi-family and commercial real estate loans, the Company
initiated in fiscal 1999 its leverage strategy which utilized FHLB borrowings as
its primary funding source.
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 $535.2 million or 24.4% to $2.73 billion or 55.2% of
the total loan portfolio at March 31, 2000 compared to $2.20 billion or 62.6% at
March 31, 1999. The increase in multi-family loans during fiscal 2000 was
primarily due to the origination of $784.8 million of such loans combined with
$30.7 million of loans acquired in connection with the acquisitions of Broad and
Statewide. The Company also originates single-family (one-to-four units)
residential mortgage loans, which totaled $674.1 million or 13.6% of the total
loan portfolio at March 31, 2000 as compared to $491.5 million or 14.0% at March
31, 1999. The $182.6 million increase of single-family residential loans during
fiscal 2000 is primarily due to $253.1 million of loans acquired in connection
with the acquisitions of Broad and Statewide, as well as $33.8 million of
originations. Cooperative apartment loans (loans secured by an individual's
shares in a cooperative housing corporation), increased $4.0 million, or 0.9% to
$462.2 million or 9.3% of the total loan portfolio at March 31, 2000 as compared
to $458.2 million or 13.1% at March 31, 1999. Multi-family, single-family and
cooperative apartment loans comprised 78.1% of the Company's total loans at
March 31, 2000, compared to 89.7% at March 31, 1999, reflecting the growth,
during fiscal 2000, in commercial real estate and commercial business loans
primarily as a result of the Broad and Statewide acquisitions.
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 decreased, even as the Company's assets have grown
significantly. However, the Company's non-accrual loans increased $5.1 million,
to $12.2 million at March 31, 2000 with the increase primarily related to loans
acquired in the acquisitions of Broad and Statewide. The Company's ratio of non-
performing assets to total assets at March 31, 2000 was 0.40% and its allowance
for loan losses to non-performing loans was 266.7%, while at March 31, 1999 the
percentages were 0.71% and 119.7%, respectively.
STABLE SOURCE OF LIQUIDITY. The Company purchases short to medium-term
investment securities 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 $985.8 million at March 31, 2000
compared to $1.52 billion at March 31, 1999, are comprised primarily of
mortgage-related securities totaling $773.0 million (of which $721.0 million
consists of CMOs and $52.0 million of mortgage-backed securities), $137.9
million of obligations of the U.S. Government and federal agencies and $46.3
million of Dutch Auction Rate Preferred Stock securities. 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, relatively low service fees on various deposit and other
products, customer convenience, an experienced staff and a
45
<PAGE> 48
commitment to the communities which it serves. Lower costing deposits, which
exclude time deposits, totaled $2.31 billion or 52.4% of the Company's total
deposits at March 31, 2000, as compared to $1.63 billion at March 31, 1999, a
$684.4 million or 42.1% increase. This increase in lower costing deposits is
primarily attributable to $627.1 million of lower costing deposits assumed in
the Broad and Statewide acquisitions. 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
The Company completed its acquisition of Broad and the merger of Broad's
wholly owned subsidiary, Broad National, with and into the Bank, all effective
as of July 31, 1999.
Under the terms of the Agreement and Plan of Merger between the Company and
Broad dated February 1, 1999 (the "Broad Agreement"), the merger consideration
consisted of approximately 50% Independence common stock and 50% cash. As a
result of the completed election procedures and in accordance with the terms of
a formula set forth in the Broad Agreement, each Broad stockholder who submitted
a valid election for stock consideration received 1.9859 shares of Holding
Company common stock for each share of Broad common stock, plus cash in lieu of
any fractional shares, and each Broad stockholder who submitted a valid election
for cash consideration received $26.50 per share of Broad common stock except
Broad stockholders who elected to receive cash as any portion of their
consideration for their Broad shares received a portion of such consideration in
the form of Holding Company common stock (the "Consideration Adjustment") in
accordance with the terms of the Broad Agreement. To the extent that certain
Broad stockholders elected to receive some combination of stock and cash
consideration in exchange for their shares of Broad common stock, such
individuals received the entire portion of their stock election in the form of
1.9859 shares of Holding Company common stock for each share of Broad common
stock, plus cash in lieu of any fractional shares, and the cash portion of their
election was subject to the Consideration Adjustment described above. The
remaining shares of Broad common stock for which a valid election was not
submitted received 1.9859 shares of Holding Company common stock for each share
of Broad common stock, plus cash in lieu of any fractional shares. The Broad
transaction had an aggregate value of approximately $132 million assuming an
acquisition value of $26.50 per share of Broad common stock.
As a result of the Broad acquisition, the Company acquired $646.3 million
of assets and 18 branch offices located in northern New Jersey, with total
deposits of $584.8 million. The acquisition was accounted for as a purchase and
the excess of cost over the fair value of net assets acquired ("goodwill") in
the transaction was $99.3 million, which is being amortized on a straight-line
basis over 15 years. The Company had $94.9 million of goodwill remaining related
to the Broad acquisition at March 31, 2000.
The Company completed its acquisition of Statewide and the merger of
Statewide's wholly owned subsidiary, Statewide Bank, with and into the Bank, all
effective as of January 7, 2000.
Under the terms of the Agreement and Plan of Merger between the Company and
Statewide dated April 12, 1999 (the "Statewide Agreement"), the merger
consideration consisted of approximately 4,172,606 shares of Holding Company
common stock and approximately $51.2 million based upon 4,051,277 shares of
Statewide common stock deemed outstanding under the terms of the Statewide
Agreement as of the completion of the merger. As a result of completed election
procedures and in accordance with the terms of the formula set forth in the
Statewide Agreement, each Statewide stockholder who submitted a valid election
for stock consideration received 2.0700 shares of Holding Company common stock
for each share of Statewide common stock, plus cash in lieu of any fractional
shares, and each Statewide stockholder who submitted a valid election for cash
consideration received $25.14 per share of Statewide common stock. To the extent
that any Statewide stockholders elected to receive some combination of stock and
cash consideration in exchange for their shares of Statewide common stock, such
individuals received the entire portion of their stock election in the form of
2.0700 shares of Holding Company common stock for each share of Statewide common
stock, plus cash in lieu of any fractional shares, and the cash portion of their
election at the rate of $25.14 per share of Statewide common stock. The
remaining shares of Statewide common stock for which valid elections were not
submitted were converted into the right to receive on a pro rata basis $25.14 in
cash for approximately 53% of the shares not tendered and 2.0700 shares of
Holding Company com-
46
<PAGE> 49
mon stock for each remaining share of Statewide common stock, plus cash in lieu
of any fractional shares.
As a result of the Statewide acquisition, the Company acquired $745.2
million of assets and 15 branch offices located in northern New Jersey, with
total deposits of $443.7 million. The acquisition was accounted for as a
purchase resulting in goodwill of approximately $88.9 million, which is being
amortized on a straight-line basis over 15 years. At March 31, 2000, the Company
had $87.4 million of goodwill remaining related to this acquisition.
As a result of the acquisitions, the Company currently operates 65 banking
offices located in the greater New York Metropolitan area, which includes the
five boroughs of New York City, Nassau County as well as the Northern New Jersey
counties of Essex, Union, Bergen, Hudson and Middlesex, which were formerly
served by Broad National and Statewide 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 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, 2000, the remaining intangible resulting from the
deposit acquisition amounted to $2.3 million.
During fiscal 1996 the Company significantly increased its asset size
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, 2000, the Company had $18.1 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 $18.2 million at March
31, 2000, is being amortized on a straight-line basis over seven years.
CHANGES IN FINANCIAL CONDITION
Total assets increased by $1.07 billion, or 19.3%, from $5.54 billion at
March 31, 1999 to $6.60 billion at March 31, 2000. The increase in total assets
was due to $646.3 million of assets acquired in the Broad acquisition and $745.2
million of assets acquired in connection with the acquisition of Statewide.
These increases were partially offset by the Company's use of $126.4 million to
fund its open market repurchase programs combined with a $202.6 million outflow
of deposits. See "-- Business Strategy -- Controlled Growth." The $1.07 billion
of asset growth in fiscal 2000 primarily reflected the combined effects of a
$1.07 billion increase in mortgage loans to $3.99 billion, an increase in
commercial business and other loans of $377.4 million, or 65.1%, to $956.9
million at March 31, 2000, a $173.7 million increase in intangible assets and a
$113.5 million increase in other assets. Partially offsetting these increases
was a $416.8 million decrease in mortgage-related securities, a $127.7 million,
or 45.6% decrease in cash and cash equivalents and a $119.0 million or 35.9%
decrease in investment securities.
NON-PERFORMING ASSETS. The Company's non-performing assets, which consist
of non-accrual loans, loans past due 90 days or more as to interest or principal
and accruing and other real estate owned acquired through foreclosure or
deed-in-lieu thereof, decreased by $13.0 million or 32.9% to $26.4 million at
March 31, 2000 from $39.4 million at March 31, 1999. The decrease in
non-performing assets from March 31, 1999 to March 31, 2000 was
47
<PAGE> 50
primarily due to a $19.3 million decrease, due to loan satisfactions, to $11.5
million from $30.8 million of loans contractually past maturity but which are
continuing to pay in accordance with their original repayment schedule. This
decrease was partially offset by a $5.1 million increase in non-accrual loans,
of which $3.3 million is attributable to the Broad and Statewide acquisitions.
At March 31, 2000, the Company's non-performing assets totaled $26.4 million, or
0.40% of total assets and consisted of $12.2 million of non-accrual loans
(including $3.8 million of commercial business loans, $3.7 million of
single-family residential loans, $3.3 million of commercial real estate loans
and $1.1 million of multi-family residential loans), $11.5 million of loans past
due 90 days or more as to principal and accruing ($6.6 million of which were
multi-family loans and $4.3 million of which were commercial real estate loans),
$2.6 million of loans past due 90 days or more as to interest and accruing and
$68,000 of other real estate owned.
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses
amounted to $70.3 million at March 31, 2000 as compared to $46.8 million at
March 31, 1999. The Company's allowance increased during the year ended March
31, 2000 primarily due to a $9.8 million provision for loan losses, $9.5 million
of allowances for loan losses acquired in connection with the Broad and
Statewide acquisitions and $4.2 million of net recoveries in fiscal 2000. As a
result of the reduction in non-performing assets and continued strong asset
quality ratios, management reduced the provision for loan losses by $0.9 million
for the year ended March 31, 2000 as compared to the prior year. At March 31,
2000, the Company's allowance for loan losses amounted to 266.7% of total
non-performing loans as compared to 119.7% of total non-performing loans at
March 31, 1999. It is management's policy to maintain an allowance for estimated
losses on loans based upon an assessment of prior loss experience, the volume
and type of lending conducted by the 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
utilizes these percentages as only one of the factors in assessing the adequacy
of the allowance for loan losses at various points in time. Other factors
included in the analysis of the allowance for loan losses include the 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).
DEPOSITS. Deposits increased $964.7 million or 28.0% to $4.41 billion at
March 31, 2000, compared to $3.45 billion at March 31, 1999. The increase was
due to the $1.03 billion of deposits assumed in connection with the acquisitions
of Broad and Statewide and interest credited of $138.8 million, which was
partially offset by deposit outflows totaling $202.6 million. The deposit
outflows during fiscal 2000 were attributable to the run off of approximately
$59.6 million at maturity of certain higher costing municipal and jumbo
certificate of deposits previously offered by Broad National, disintermediation
resulting primarily from customer transfers of funds to the equities markets
and, to a lesser extent, to other financial institutions conducting deposit
gathering campaigns by paying above market rates.
BORROWINGS. Borrowings increased $44.4 million or 4.0% to $1.16 billion at
March 31, 2000 compared to $1.12 billion at March 31, 1999. The increase was
principally due to a $135.0 million increase in FHLB repurchase agreements
primarily to fund the increases in the loan portfolio pursuant to the
continuation of the Company's previously described leverage strategy. The
increase was partially offset by decreases of $81.4 million in FHLB advances and
$9.0 million in other repurchase agreements. See Note 9 of the "Notes to
Consolidated Financial Statements" set forth in Item 8 hereof.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES. On June 30, 1997, $11.5 million of Trust Preferred Securities were
issued by BNB Capital Trust (the "Trust"), a Delaware statutory business trust
formed by Broad. The net proceeds from the issuance were invested in Broad in
exchange for its junior subordinated debentures. The sole asset of the Trust,
the obligor on the Trust Preferred Securities, is $11.9 million principal amount
of 9.5% Junior Subordinated Debentures due June 30, 2027. Broad entered into
several contractual arrangements (which the Holding Company assumed as part of
48
<PAGE> 51
the Broad acquisition) for the purpose of guaranteeing the Trust's payment of
distributions on, payments on any redemptions of, and any liquidation
distribution with respect to, the Trust Preferred Securities.
The proceeds from the issuance of the Trust Preferred Securities were used
to fund stock repurchases by Broad and for general corporate purposes as well as
to meet debt service obligations pursuant to the junior subordinated debentures.
STOCKHOLDERS' EQUITY. The Holding Company's stockholders' equity totaled
$834.8 million at March 31, 2000, compared to $825.0 million at March 31, 1999.
The $9.8 million increase was primarily due to the reissuance of 9,123,305
treasury shares in connection with the Broad and Statewide acquisitions, net
income of $53.2 million, amortization of the earned portion of restricted stock
grants of $5.6 million and $3.4 million related to the ESOP shares committed to
be released for fiscal 2000. These increases were partially offset by a $126.4
million reduction in capital resulting from the purchase of 10,022,867 shares of
common stock in connection with the Company's open market repurchase programs, a
$12.9 million decrease due to dividends declared and a $30.6 million increase in
the net unrealized loss in securities available-for-sale.
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) the interest rate
spread; and (v) the net interest margin. Information is based on average daily
balances during the indicated period.
49
<PAGE> 52
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
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 $3,487,337 $257,338 7.38% $2,596,554 $198,003 7.63%
Cooperative apartment loans 478,747 33,228 6.94 414,542 29,576 7.13
Consumer loans(2) 136,197 10,916 8.01 86,483 7,004 8.10
Commercial business loans 134,746 11,951 8.87 32,782 3,140 9.58
---------- -------- ---------- --------
Total loans 4,237,027 313,433 7.40 3,130,361 237,723 7.59
Mortgage-related securities 922,665 58,714 6.36 430,170 28,254 6.57
Investment securities 318,526 17,350 5.45 828,265 46,216 5.58
Other interest-earning assets(3) 246,062 12,989 5.28 439,814 24,222 5.51
---------- -------- ---------- --------
Total interest-earning assets 5,724,280 402,486 7.03 4,828,610 336,415 6.97
-------- ---- -------- ----
Non-interest-earning assets 333,509 214,315
---------- ----------
Total assets $6,057,789 $5,042,925
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 941,652 $ 16,400 1.74 $ 664,878 $ 14,238 2.14
Savings deposits(5) 1,071,547 23,512 2.19 969,893 24,480 2.52
Certificates of deposit 1,953,141 98,857 5.06 1,749,558 94,428 5.40
---------- -------- ---------- --------
Total deposits 3,966,340 138,769 3.50 3,384,329 133,146 3.93
---------- -------- ---------- --------
Trust preferred securities(6) 7,667 728 9.50 -- -- --
Total borrowings 1,175,273 64,163 5.46 617,542 34,075 5.52
---------- -------- ---------- --------
Total interest-bearing liabilities 5,149,280 203,660 3.96 4,001,871 167,221 4.18
-------- ---- -------- ----
Non-interest-bearing liabilities 90,544 112,854
---------- ----------
Total liabilities 5,239,824 4,114,725
Total stockholders' equity 817,965 928,200
---------- ----------
Total liabilities and stockholders' equity $6,057,789 $5,042,925
========== ==========
Net interest-earning assets $ 575,000 $ 826,739
========== ==========
Net interest income/interest rate spread $198,826 3.07% $169,194 2.79%
======== ==== ======== ====
Net interest margin 3.47% 3.50%
==== ====
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.11x 1.21x
==== ====
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1998
---------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1):
Mortgage loans $2,193,557 $175,269 7.99%
Cooperative apartment loans 380,737 27,562 7.24
Consumer loans(2) 93,909 7,895 8.41
Commercial business loans 28,963 2,976 10.28
---------- --------
Total loans 2,697,166 213,702 7.92
Mortgage-related securities 157,452 10,992 6.98
Investment securities 783,134 45,689 5.83
Other interest-earning assets(3) 413,343 22,660 5.48
---------- --------
Total interest-earning assets 4,051,095 293,043 7.23
-------- -----
Non-interest-earning assets 192,107
----------
Total assets $4,243,202
==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 669,901 $ 14,118 2.11
Savings deposits(5) 1,200,369 34,288 2.86
Certificates of deposit 1,782,384 100,560 5.64
---------- --------
Total deposits 3,652,654 148,966 4.08
---------- --------
Trust preferred securities(6) -- -- --
Total borrowings 199,329 11,977 6.01
---------- --------
Total interest-bearing liabilities 3,851,983 160,943 4.18
-------- -----
Non-interest-bearing liabilities 32,564
----------
Total liabilities 3,884,547
Total stockholders' equity 358,655
----------
Total liabilities and stockholders' equity $4,243,202
==========
Net interest-earning assets $ 199,112
==========
Net interest income/interest rate spread $132,100 3.05%
======== =====
Net interest margin 3.26%
=====
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.05x
=====
</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 and personal loans.
(3) Includes federal funds sold, interest-earning bank deposits, FHLB stock,
overnight commercial paper and certificates of deposit.
(4) Includes NOW, money market and checking accounts.
(5) Includes interest paid on funds received for stock subscriptions in
connection with the Bank's Conversion.
(6) Acquired in connection with the acquisition of Broad effective July 31,
1999.
50
<PAGE> 53
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 2000 COMPARED TO FISCAL 1999 COMPARED TO
FISCAL 1999 FISCAL 1998
--------------------------------- ----------------------------------
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 $ (6,675) $66,010 $ 59,335 $ (8,206) $ 30,940 $ 22,734
Cooperative apartment loans (809) 4,461 3,652 (388) 2,402 2,014
Consumer loans(1) (70) 3,982 3,912 (283) (607) (890)
Commercial business loans (249) 9,060 8,811 (212) 375 163
-------- ------- -------- -------- -------- --------
Total loans receivable (7,803) 83,513 75,710 (9,089) 33,110 24,021
Mortgage-related securities (887) 31,347 30,460 (682) 17,944 17,262
Investment securities (1,053) (27,813) (28,866) (2,021) 2,548 527
Other interest-earning assets (973) (10,260) (11,233) 123 1,439 1,562
-------- ------- -------- -------- -------- --------
Total net change in income on
interest-earning assets (10,716) 76,787 66,071 (11,669) 55,041 43,372
Interest-bearing liabilities:
Deposits:
Demand deposits (3,002) 5,164 2,162 217 (97) 120
Savings deposits (3,386) 2,418 (968) (3,685) (6,123) (9,808)
Certificates of Deposit (6,163) 10,592 4,429 (4,279) (1,853) (6,132)
-------- ------- -------- -------- -------- --------
Total deposits (12,551) 18,174 5,623 (7,747) (8,073) (15,820)
Trust preferred securities -- 728 728 -- -- --
Borrowings (375) 30,463 30,088 (1,054) 23,152 22,098
-------- ------- -------- -------- -------- --------
Total net change in
expense on
interest-bearing
liabilities (12,926) 49,365 36,439 (8,801) 15,079 6,278
-------- ------- -------- -------- -------- --------
Net change in net interest income $ 2,210 $27,422 $ 29,632 $ (2,868) $ 39,962 $ 37,094
======== ======= ======== ======== ======== ========
</TABLE>
---------------
(1) Includes home equity lines of credit and improvement loans, student loans,
automobile loans, passbook loans, personal loans and credit card loans.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
GENERAL. For the year ended March 31, 2000, the Company reported a 36.4%
increase in diluted earnings per share to $0.90, compared to $0.66 for the year
ended March 31, 1999. Net income for fiscal 2000 increased 17.9% to $53.2
million, compared to $45.2 million for fiscal 1999.
Cash earnings for fiscal 2000 increased 25.6% to $73.4 million, compared to
$58.5 million for the prior fiscal year. Cash earnings per diluted share
increased 44.2% to $1.24 for fiscal 2000 compared to $0.86 for fiscal 1999. 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.
The organization believes the reporting of cash earnings along with GAAP
earnings provides further insight into the Company's operating performance.
NET INTEREST INCOME. Net interest income increased by $29.6 million or
17.5% to $198.8 million for the fiscal year ended March 31, 2000 as compared to
$169.2 million for fiscal 1999. The increase was due to a $66.1 million increase
in interest income, offset by a $36.5 million increase in interest
51
<PAGE> 54
expense. The growth in net interest income primarily reflects the $895.7 million
increase in average interest-earning assets, which is primarily attributable to
the implementation of the Company's leveraging strategy in the third quarter of
fiscal 1999 and, to a lesser extent, the assets acquired in connection with the
July 31, 1999 acquisition of Broad and the January 7, 2000 acquisition of
Statewide. Such growth was partially offset by a lower interest rate environment
resulting from the flattening of the yield curve during fiscal 2000 as well as
interest rate compression associated with the continued leveraging of the
balance sheet. The Company initiated in fiscal 1999 a leverage strategy which
utilized FHLB borrowings as its primary funding source.
For the year ended March 31, 2000, the Company's net interest margin
decreased to 3.47% from 3.50% for the comparative fiscal periods, primarily the
result of the implementation of the Company's leveraging strategy during the
third quarter of fiscal 1999, under which the increased investment in
mortgage-related securities was funded with FHLB advances and repurchase
agreements. Such borrowings, which bear interest generally at higher rates than
deposits, increased the Company's cost of funds. Also contributing to the net
interest margin compression were the generally lower yields on loans originated
during fiscal 2000, when compared to the average yields on the outstanding loan
portfolios at the beginning of the fiscal year, combined with the downward
repricing of adjustable-rate mortgages. The decline also reflected the Company's
use of $126.4 million of its earning assets to fund its open market stock
repurchase programs. This decline was partially offset by the acquisition of
Broad's higher yielding commercial loan portfolio and the associated lower cost
commercial deposit base.
The Company'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), increased to 3.07%, compared to 2.79% for the year ended
March 31, 1999. Due to the general flattening of the yield curve, the Company
experienced a general decline in essentially all of its interest-earning asset
and interest-bearing liability portfolios. However, the net interest rate spread
increased by 28 basis points reflecting a shift in the mix to higher yielding
assets and lower costing liabilities, resulting partially from the acquisitions
of Broad and Statewide as well as the Company's leverage program.
Interest income increased by $66.1 million or 19.6%, to $402.5 million for
the fiscal year ended March 31, 2000, as compared to the same period in fiscal
1999. This increase is primarily due to the $895.7 million increase in the
average balance of the Company's interest-earning assets, combined with a 6
basis point increase in the weighted average yield earned thereon, from 6.97%
for fiscal 1999 to 7.03% for fiscal 2000.
Interest income on loans increased $75.7 million due to a $1.11 billion
increase in the average balance of loans, partially offset by a 19 basis point
decline in the yield earned on loans from 7.59% for the fiscal 1999 period to
7.40% for the fiscal 2000 period. The increase in average balance is due to the
combined effects of $1.52 billion of loan originations in fiscal 2000 and $760.7
million of loans acquired in connection with the acquisitions of Broad and
Statewide. The decline in yield is due to the effects of loan originations at
lower interest rates existing throughout much of fiscal 2000, together with
downward repricing with respect to the Company's adjustable-rate loans repricing
during fiscal 2000, reflecting declines in market rates of interest experienced
during the first three quarters of the fiscal year. Income on investment
securities decreased $28.9 million for the fiscal year ended March 31, 2000, due
to a $509.7 million decrease in the average balance of investment securities,
along with a decline in the yield earned from 5.58% for fiscal 1999 to 5.45% for
fiscal 2000. Interest income on mortgage-related securities increased $30.5
million during fiscal 2000 compared to fiscal 1999 as a result of a $492.5
million increase in the average balance of these securities. This increase was
partially offset by a 21 basis point decline in the yield earned to 6.36% for
fiscal 2000 from 6.57% for fiscal 1999, reflecting the general decline in market
rates of interest experienced during the first three quarters of the fiscal
year. In conjunction with its leveraging strategy, the Company reallocated its
assets from investment securities to higher yielding mortgage-related
securities. Income on other interest-earning assets (consisting primarily of
interest on federal funds and dividends on FHLB stock) decreased $11.2 million
in fiscal 2000 compared to fiscal 1999. This decrease primarily reflects the
$10.6 million decline in interest income earned from securities lending
activities during fiscal 1999 accompanied by a $3.0 million decrease in interest
on federal funds and overnight deposits. These de-
52
<PAGE> 55
creases were partially offset by a $2.2 million increase in dividends on FHLB
stock.
Interest expense increased $36.5 million or 21.8% to $203.7 million for the
year ended March 31, 2000, as compared to $167.2 million for the year ended
March 31, 1999. The increased FHLB borrowings associated with the implementation
of the Company's leveraging strategy resulted in additional interest expense of
$40.4 million, which was partially offset by a $10.4 million decrease in
interest paid on borrowings related to securities lending activities. Interest
paid on deposits increased by $5.6 million for the year ended March 31, 2000,
due to the $582.0 million increase in the average balance of deposits, primarily
as a result of the acquisitions of Broad and Statewide. This increase was
partially offset by a 43 basis point decline in the average rate paid on
deposits to 3.50% for fiscal 2000 compared to 3.93% for fiscal 1999, reflecting
the acquisition of Broad's lower cost commercial deposit base combined with
decreases in market rates of interest experienced during the first three
quarters of the fiscal year. Interest expense on Trust Preferred Securities was
$0.7 million for fiscal 2000. Trust Preferred Securities were assumed as part of
the Broad acquisition effective the close of business on July 31, 1999.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
decreased by $0.9 million or 8.2%, from $10.7 million for the fiscal year ended
March 31, 1999, to $9.8 million for the fiscal year ended March 31, 2000. The
decrease in the provision primarily reflected the quality of the Company's
assets, with non-performing assets as a percentage of total assets declining to
40 basis points at March 31, 2000, compared to 71 basis points at March 31,
1999. Non-performing assets decreased 32.9% to $26.4 million at March 31, 2000,
compared to $39.4 million at March 31, 1999. The decrease of $13.0 million was
primarily due to satisfactions totaling $19.3 million on loans that were
previously contractually past due as to maturity, although current as to monthly
principal and interest payments. The decrease was partially offset by a $5.1
million increase in non-accrual loans, primarily commercial business loans. At
March 31, 2000 and March 31, 1999, the allowance for loan losses as a percentage
of total non-performing loans was 266.7% and 119.7%, respectively.
NON-INTEREST INCOME. Non-interest income increased by $5.6 million, from
$11.3 million for the fiscal year ended March 31, 1999 to $16.9 million for
fiscal 2000. The increase reflected an $8.4 million increase in service fee
income, a $1.7 million net loss on the sale of loans and securities during
fiscal 2000 as compared to a $390,000 gain incurred on such sales during fiscal
1999 and a $0.7 million decrease in other non-interest income.
The $8.4 million increase in service fee income was primarily the result of
fee income generated by the Broad National and Statewide Bank branch network,
increased fees on sales of annuities and mutual funds and an increase in banking
service and ATM fees. Other non-interest income decreased $0.7 million,
primarily as a result of the $0.9 million decrease resulting from the
completion, in fiscal 1999, of the accretion of intangible assets resulting from
the 1992 acquisition of another financial institution, as well as a $0.6 million
decline in mortgage loan prepayment fees. These decreases were partially offset
by $0.8 million income from the Company's investment in a mortgage brokerage
company. The increase was partially offset by a $1.7 million net loss on the
sale of approximately $993.8 million of securities, consisting mainly of
collateralized mortgage obligation bonds and Dutch Auction Rate Preferred Stock
securities, which were sold primarily to fund mortgage loan originations and the
Company's open market stock repurchase programs.
NON-INTEREST EXPENSE. Non-interest expense increased $21.7 million or
22.1% to $119.9 million for the fiscal year ended March 31, 2000, from $98.2
million for fiscal 1999. This increase primarily reflects increases of $11.5
million in compensation and employee benefit expense, $3.2 million in occupancy
costs, $6.0 million in amortization of intangibles and $3.8 million in other
non-interest expense, partially offset by a decrease of $2.8 million in data
processing fees.
Total salaries and benefits increased by $11.5 million in fiscal 2000 to
$51.6 million, primarily the result of $7.5 million in staff additions mainly
related to the Broad and Statewide acquisitions, as well as normal salary
increases. Such expenses also increased by $2.5 million during fiscal 2000 due
to the full year impact of the implementation of the Company's 1998 Recognition
and Retention Plan and Trust Agreement (the "Recognition Plan"), which was
adopted at the end of the second quarter of fiscal 1999. The expense associated
with
53
<PAGE> 56
the Recognition Plan is incurred over the five year vesting period from date of
grant.
Occupancy costs increased by $3.2 million to $16.7 million in fiscal 2000,
primarily reflecting the expansion of operations resulting from the acquisitions
of Broad and Statewide.
Data processing fees decreased by $2.8 million or 27.3%, to $7.5 million
during the fiscal year ended March 31, 2000 as compared to $10.3 million during
the fiscal year ended March 31, 1999. The decrease mainly reflected the
completion of the installation of a new teller and platform system in the fourth
quarter of fiscal 1999, as well as $1.2 million of lower Y2K costs in fiscal
2000 compared to fiscal 1999. See "-- The Year 2000 Issue." These declines were
partially offset by increases as the result of the Broad and Statewide
acquisitions.
The Company's advertising expenses amounted to $4.7 million and $4.6
million for the fiscal years ended March 31, 2000 and 1999, respectively. The
increase in fiscal years 2000 and 1999 as compared to fiscal 1998 reflects the
Company's focus on brand awareness through, in part, increased advertising in
print media and radio.
FDIC deposit insurance premiums remained constant for the fiscal years
ended March 31, 2000 and 1999. As a result of past acquisitions, the Company is
deemed to have SAIF-insured deposits. The level of deposit insurance expense was
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 were assessed at a rate of
6.4 basis points compared to 1.3 basis points for the BIF-insured deposits.
Beginning January 1, 2000, all FDIC-insured institutions are assessed the same
rate of 2.1 basis points of their BIF and SAIF assessable deposits to fund the
Financing Corporation. At March 31, 2000, $2.26 billion of the Company's
deposits were deemed to be SAIF insured while at March 31, 1999, SAIF-insured
deposits were $1.54 billion.
Amortization of intangibles increased $6.0 million, or 69.3% to $14.6
million for fiscal 2000, compared to $8.6 million for fiscal 1999. The increase
is primarily due to $99.3 million of goodwill recognized as a result of the
Broad acquisition. In addition, the acquisition of Statewide has increased
goodwill by $88.9 million. Both acquisitions are being amortized over a
fifteen-year period. The Company will experience an increase in amortization of
intangibles during fiscal 2001 due to the full year impact of the amortization
of goodwill relating to the Broad and Statewide acquisitions.
Other non-interest expense includes items such as equipment expenses,
office supplies, postage, telephone expenses, maintenance and security services
contracts and professional fees. Other non-interest expense increased $3.8
million or 19.2%, to $23.7 million for the fiscal year ended March 31, 2000,
compared to $19.9 million for fiscal 1999, primarily due to additional expenses
associated with the expansion of operations resulting from the acquisitions of
Broad and Statewide.
INCOME TAXES. Income tax expense increased $6.4 million to $32.8 million
for the year ended March 31, 2000 compared to $26.4 million in fiscal 1999. This
increase is primarily due to a $14.4 million increase in pre-tax income to $86.0
million for fiscal 2000 compared to $71.6 million in fiscal 1999. In addition,
the Company's effective tax rate for the year ended March 31, 2000 was 38.1%,
compared to 36.9% for the year ended March 31, 1999. The increase in the
effective tax rate during fiscal 2000 compared to fiscal 1999 is attributable to
the increase in the amortization of intangibles, which is non-deductible for tax
purposes.
As of March 31, 2000, net deferred tax assets were $87.9 million, compared
to $48.5 million at March 31, 1999. No valuation allowance was deemed necessary
with respect to such assets. (See Note 14 of the "Notes to Consolidated
Financial Statements" set forth in Item 8 hereof.)
CASH EARNINGS. Tangible stockholders' equity (stockholders' equity less
intangibles) totaled $613.8 million at March 31, 2000, compared to $777.7
million at March 31, 1999. Tangible equity is a critical measure of a company's
ability to repurchase shares, pay dividends and continue to grow.
Although reported earnings and return on equity are traditional measures of
a company's performance, the Company believes that the change in tangible
equity, or "cash earnings," is also a significant measure of a company's
performance. Cash earnings exclude the effects of various non-cash expenses,
such as the amortization for the allocation of shares held by the ESOP and the
Recognition Plan and related tax benefit, as well as the amortization of
intangibles. In the case of tangible equity,
54
<PAGE> 57
these items have either been previously charged to equity, as in the case of
ESOP and Recognition Plan charges, through contra-equity accounts, or do not
affect tangible equity, such as the market appreciation of allocated ESOP
shares, for which the operating charge is offset by a credit to additional
paid-in capital, and amortization of intangibles, for which the related
intangible asset has already been deducted in the calculation of tangible
equity.
The Company believes that cash earnings and cash returns on average equity
reflect the Company's ability to generate tangible capital that can be leveraged
for future growth.
The following table reflects the Company's cash earnings for the periods
indicated as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net income $53,246 $45,175
Additional contributions to stockholders' equity:
Amortization of intangibles 14,613 8,629
Amortization and appreciation of stock-related benefit
plans, net of tax 5,572 4,655
------- -------
Cash earnings $73,431 $58,459
======= =======
Diluted cash earnings per share $ 1.24 $ 0.86
======= =======
Cash return on average equity 8.98% 6.30%
Cash efficiency ratio 44.27% 45.63%
</TABLE>
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
fiscal 1998, cash earnings were 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
GAAP earnings provides further insight into the Company's operating performance.
NET INTEREST INCOME. Net interest income is determined by the 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. For
the year ended March 31, 1999, the Company's interest rate spread decreased to
2.79%, compared to 3.05% for the year ended March 31, 1998. This 26 basis point
decrease was attributable to the generally lower yields on loan and investments
originated or purchased in fiscal 1999, reflecting market rates of interest at
that time, combined with the downward repricing of adjustable rate instruments,
while the cost of total interest-bearing liabilities remained stable. The
Company's net interest margin increased to 3.50% from 3.26% for the comparative
fiscal periods, primarily reflecting an increase in net interest-earning assets
resulting from the investment of the proceeds of the Conversion, partially
offset by a decline in the 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
55
<PAGE> 58
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 leverage strategy which utilized FHLB
borrowings as its primary funding source for loan originations.
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, reflecting 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 fiscal 1998 to 7.59%
for fiscal 1999. The decline in yield resulted from the effects of loan
originations at lower interest rates, combined with a lower repricing rate with
respect to the Company's adjustable-rate loans repricing during fiscal 1999,
reflecting the decline 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-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 for fiscal 1999, compared to fiscal 1998, 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 reflected 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 was principally 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 borrowings was 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, from 6.01% for fiscal 1998. The decrease in interest paid on
deposits was due to the $268.3 million decrease in the average balance of
deposits, accompanied by 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
reflected 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,
56
<PAGE> 59
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 $1.9 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 $1.2 million decrease in
service fee income. The $1.9 million increase in other non-interest income is
primarily the result of a $1.6 million increase in prepayment fees on mortgage
loans to $3.6 million in fiscal 1999, resulting from acceleration in the
refinance market driven by lower market rates of interest.
The $1.2 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,
this income 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 was also lower for the fiscal year ended March 31, 1999, 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 was due to lower
deposit-based fees.
NON-INTEREST EXPENSE. Non-interest expense 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). This increase reflected increases of $8.4 million in compensation
and employee benefit expense, reflecting in large part, benefits related to the
ESOP and the Recognition Plan, $0.9 million in occupancy costs and $0.5 million
in other non-interest expense, primarily due to the Company's growth and
structural changes. These increases were partially offset by a $1.3 million
decrease in data processing fees, mainly reflecting the reduction of data
processing conversion costs.
Total salaries and benefits increased by $8.4 million in fiscal 1999 to
$40.1 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
Recognition Plan 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.
Data processing fees decreased by $1.3 million or 10.9% to $10.3 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.
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 deposit 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
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<PAGE> 60
SAIF insured. The deposits deemed SAIF insured were 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
as compared to $1.53 billion at March 31, 1998.
Other non-interest expense includes items such as equipment expenses,
office supplies, postage, telephone expenses, maintenance and security services
contracts and professional fees. Other non-interest expenses increased by $0.5
million or 2.4%, to $19.9 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 was 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, compared
to $36.8 million at March 31, 1998. No valuation allowance was deemed necessary
with respect to such assets. (See Note 14 of the "Notes to Consolidated
Financial Statements" set forth in Item 8 hereof.)
CASH EARNINGS. Tangible stockholders' equity (stockholders' equity less
intangibles) totaled $777.7 million at March 31, 1999, compared to $893.3
million at March 31, 1998. For fiscal 1998, cash earnings were also adjusted for
the one time non-recurring charge of $56.4 million ($37.2 million net of tax)
related to the Foundation. Earnings per share for the fiscal year ended March
31, 1998 are presented on an historical basis from March 13, 1998 (the date of
Conversion) to March 31, 1998.
The following table reflects the Company's cash earnings for the periods
indicated as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net income $45,175 $(9,956)
Contribution to the Foundation, net of tax -- 37,181
Additional contributions to stockholders' equity:
Amortization of intangibles 8,629 8,740
Amortization and appreciation of stock-related benefit
plans, net of tax 4,655 789
------- -------
Cash earnings $58,459 $36,754
======= =======
Diluted cash earnings per share $ 0.86 $ 0.13
======= =======
Cash return on average equity 6.30% 10.25%
Cash efficiency ratio 45.63% 55.83%
</TABLE>
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 and
approved by the Company's Board of Directors periodically. The Asset/Liability
Committee meets semi-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.
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<PAGE> 61
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 and the slope of
the yield curve. 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 greater New York City metropolitan area (which
includes parts of northern New Jersey), 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-related instruments with maturities or estimated average lives of less
than five years, (v) promoting stable savings, demand and other transaction
accounts, (vi) maintaining a strong capital position and (vii) maintaining a
relatively high level of liquidity and/or borrowing capacity.
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<PAGE> 62
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,
2000. 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-related 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, 2000.
<TABLE>
<CAPTION>
FAIR
THERE- VALUE
2001 2002 2003 2004 2005 AFTER TOTAL 3/31/00
---------- -------- -------- -------- ------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate mortgage
loans(1) $ 98,847 $ 98,362 $100,598 $105,942 $99,700 $2,908,974 $3,412,423 $3,206,764
Average interest rate 7.96% 8.68% 8.00% 7.41% 7.75% 8.09%
Variable interest rate
mortgage loans(1) $ 86,153 $ 71,746 $ 64,295 $ 29,994 $29,557 $ 285,272 $ 567,017 $ 558,759
Average interest rate 7.63% 7.71% 8.02% 7.85% 7.98% 7.34%
Fixed interest rate
commercial business loans $ 29,886 $ 20,473 $ 22,413 $ 24,181 $26,836 $ 19,166 $ 142,955 $ 142,484
Average interest rate 8.19% 8.81% 8.95% 8.81% 8.85% 8.25%
Variable interest rate
commercial business loans $ 79,711 $ 30,939 $ -- $ -- $ -- $ -- $ 110,650 $ 110,560
Average interest rate 9.67% 8.76% -- -- -- --
Variable interest rate
warehouse mortgage lines
of credit $ 48,175 $ -- $ -- $ -- $ -- $ -- $ 48,175 $ 48,175
Average interest rate 7.47% -- -- -- -- --
Fixed interest rate other
loans $ 50,698 $ 45,904 $ 32,846 $ 16,095 $24,225 $ 53,597 $ 223,365 $ 221,987
Average interest rate 7.78% 7.74% 8.04% 7.88% 8.15% 7.43%
Variable interest rate other
loans $ 83,506 $ 67,755 $ 54,939 $ 21,507 $17,458 $ 188,342 $ 433,507 $ 421,641
Average interest rate 6.97% 6.97% 6.97% 6.85% 6.85% 6.93%
Fixed interest rate
securities(2) $ 250,079 $148,626 $130,932 $104,163 $89,360 $ 320,363 $1,043,523 $ 981,068
Average interest rate 6.02% 6.43% 6.65% 6.43% 6.43% 6.42%
Variable interest rate
securities(2) $ 1,120 $ 849 $ 518 $ -- $ -- $ 2,170 $ 4,657 $ 4,731
Average interest rate 8.08% 7.98% 7.65% -- -- 7.18%
Other interest-bearing
assets $ 159,917 $ -- $ -- $ -- $ -- $ -- $ 159,917 $ 159,917
Average interest rate 5.69% -- -- -- -- --
RATE SENSITIVE LIABILITIES:
Non interest-bearing
checking $ 345,579 $ -- $ -- $ -- $ -- $ -- $ 345,579 $ 345,579
Average interest rate -- -- -- -- -- --
Savings and interest-bearing
checking $1,965,278 $ -- $ -- $ -- $ -- $ -- $1,965,278 $1,965,278
Average interest rate 2.18% -- -- -- -- --
Time deposits $1,776,040 $188,044 $ 84,745 $ 30,469 $21,448 $ 429 $2,101,175 $2,107,782
Average interest rate 5.11% 5.69% 5.82% 5.52% 5.46% 5.48%
Fixed interest rate
borrowings $ 327,425 $148,914 $ 54,599 $515,500 $ 1,300 $ 115,000 $1,162,738 $1,123,761
Average interest rate 5.70% 5.64% 5.42% 5.50% 7.69% 5.57%
</TABLE>
---------------
(1) Does not include $22.9 million of loans serviced by others.
(2) Does not include $4.3 million of unamortized non-cash premium or discount on
securities.
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<PAGE> 63
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 Company's net portfolio value
("NPV") over a range of interest rate scenarios.
NPV is defined as the net present value of the expected future cash flows
of an entity's assets and liabilities and, therefore, theoretically represents
the market value of the Company's net worth. Increases in the value of assets
will increase the NPV whereas decreases in value of assets will decrease the
NPV. Conversely, increases in the value of liabilities will decrease NPV whereas
decreases in the value of liabilities will increase the NPV. The changes in
value of assets and liabilities due to changes in interest rates reflect the
interest rate sensitivity of those assets and liabilities as their values are
derived from the characteristics of the asset of liability (i.e. fixed rate,
adjustable rate, caps, floors) relative to the interest rate environment. For
example, in a rising interest rate environment, the fair value of a fixed-rate
asset will decline, whereas the fair value of an adjustable-rate asset,
depending on its repricing characteristics, may not decline.
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 Company's historical experience. The following sets forth the Company's NPV
as of March 31, 2000.
<TABLE>
<CAPTION>
NPV AS % OF
PORTFOLIO
VALUE OF ASSETS
NET PORTFOLIO VALUE ------------------
CHANGE (IN BASIS POINTS) --------------------------------- NPV CHANGE IN
IN INTEREST RATES AMOUNT $ CHANGE % CHANGE RATIO NPV RATIO
------------------------ --------- -------- -------- ----- ---------
<S> <C> <C> <C> <C> <C>
+300 412,783 (361,473) (46.69)% 7.16% (4.84)%
+200 530,880 (243,376) (31.43) 8.86 (3.14)
+100 651,126 (123,130) (15.90) 10.47 (1.53)
0 774,256 -- -- 12.00 --
-100 902,995 128,739 16.63 13.50 1.50
-200 1,056,092 281,836 36.40 15.24 3.24
-300 1,241,690 467,434 60.37 17.31 5.31
</TABLE>
As of March 31, 2000, the Company's NPV was $774.3 million, or 12.00% of
the market value of assets. Following a 200 basis point increase in interest
rates, the Company's "post shock" NPV was $530.9 million, or 8.86% of the market
value of assets. The change in the NPV ratio or the Company's Sensitivity
Measure was negative 3.14%.
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 Company'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
Company'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 Company'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
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<PAGE> 64
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 15
of the "Notes to Consolidated Financial Statements" set forth in Item 8 hereof
for the Bank's regulatory capital requirements and compliance therewith at March
31, 2000 and 1999.
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-related securities, the maturity of debt
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans, mortgage-related
securities and maturing debt securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Company invests excess funds in federal funds sold
and other short-term interest-earning assets which provide liquidity to meet
lending requirements. Historically, the Company has been able to generate
sufficient cash through its deposits and has only utilized borrowings,
consisting primarily of advances from the FHLB of New York, to a limited degree
as a source of funds prior to fiscal 1999. However, due to the increased demand
for mortgage loans during fiscal 1999 and in connection with the implementation
of the Company's leverage strategy, the Company has increased its FHLB
borrowings to $1.16 billion at March 31, 2000, from $1.12 billion at March 31,
1999. The amount of such borrowings have ranged from $56.0 million at March 31,
1996 to $1.16 billion at March 31, 2000. See Note 9 of the "Notes to
Consolidated Financial Statements" set forth in Item 8 hereof.
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
Preferred Stock 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-related securities and investment securities.
At March 31, 2000, there were outstanding commitments by the Company to
originate or acquire mortgage loans aggregating $88.3 million, consisting
primarily of fixed and adjustable-rate multi-family residential loans, which are
expected to close during the twelve-months ended March 31, 2001. At March 31,
2000, outstanding commitments for other loans totaled $53.1 million, primarily
comprised of home equity loans and lines of credit. In addition, at March 31,
2000, unused commercial business lines of credit and warehouse mortgage lines of
credit outstanding were $117.4 million and $112.4 million, respectively.
Certificates of deposit scheduled to mature in one year or less at March 31,
2000, totaled $1.78 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 gen-
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<PAGE> 65
erally 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 of Banks of the State of New York 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.
During fiscal 2000, the Bank requested approval of or non-objection to
requests to distribute an aggregate of $285.0 million. Of this amount, $176.0
million was distributed to the Holding Company in fiscal 2000. The distributions
were primarily used by the Holding Company to fund the cash portion of the
merger consideration paid in the Broad and Statewide acquisitions as well as the
Holding Company's open market stock repurchase programs.
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 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
Year 2000 ("Y2K") issues resulted from the inability of many computer
programs or computerized equipment to accurately calculate, store or use data
for the year 2000 or later. These potential shortcomings could result in a
system failure or miscalculations causing disruptions of operation, including
among other things, a temporary inability to process transactions, track
important customer information, provide convenient access to this information,
or engage in normal business operations.
As a result of its diligent efforts, the Company has experienced no
disruptions or problems regarding the year 2000 rollover. As part of the
Company's Y2K plan, on January 1, 2000, the Company tested and sampled internal
systems, including its primary third-party data processor, telecommunications
systems, automated teller machines and related third party vendors supporting
these machines, various third party software applications and the Company's
ability to interface with its correspondent banks. All testing completed on
January 1, 2000 indicated all systems were operating as normal. All of the
Company's internal hardware and software continue to operate as normal, and to
date, to the Company's knowledge, all vendors utilized by the Company in its
daily operations are operating normally and have not indicated any Y2K related
problems.
The Company will continue to monitor and oversee all internal operations
and be in contact with its vendors regarding Y2K related issues. Based on the
successful transition through the January, 2000 rollover period and the
previously conducted testing, the Company does not anticipate any significant
Y2K problems to arise.
The Company's expenditures for the Y2K effort totaled approximately $2.5
million through March 31, 2000, including $509,000 expended in fiscal 2000. The
Company does not anticipate any further expenditures to be incurred related to
this matter.
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. In June 1999, the FASB issued Statement of Financial
63
<PAGE> 66
Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." ("SFAS No. 137"). SFAS No. 137 defers the effective
date of SFAS No. 133 from fiscal quarters of fiscal years beginning after June
15, 1999 to June 15, 2000. SFAS No. 133 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 March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation", an interpretation of APB
Opinion No. 25 ("Interpretation No. 44"). The Company is required to adopt
Interpretation No. 44 on July 1, 2000. Interpretation No. 44 requires that stock
options that, among other things, have been modified to reduce the exercise
price be accounted for using variable accounting rather than fixed accounting.
For example, if the Company reduced the option exercise price, it would be
required to apply variable accounting to these options and if the market price
of the Company's common stock increases it would recognize additional
compensation expense that it otherwise would not have incurred. As of the date
hereof, the Company has not taken any actions which will trigger the application
of variable accounting. However, although management of the Company believes the
implementation of Interpretation No. 44 will not have an impact on the Company's
financial condition or results of operations, it is still reviewing it in light
of the provisions of its stock benefit plans.
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 hereof.
64
<PAGE> 67
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,
2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG, LLP
---------------------------------------------------
Ernst & Young, LLP
New York, New York
May 5, 2000
65
<PAGE> 68
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
2000 1999
-------------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and due from banks $ 134,170 $ 70,811
Commercial paper -- 37,290
Federal funds sold 17,997 171,784
---------- ----------
Total cash and cash equivalents 152,167 279,885
Securities available-for-sale:
Investment securities 212,768 331,795
Mortgage-related securities 773,031 1,189,833
---------- ----------
Total securities available-for-sale 985,799 1,521,628
Mortgage loans on real estate 3,993,660 2,926,978
Other loans 956,860 579,503
---------- ----------
Total loans 4,950,520 3,506,481
Less allowance for possible loan losses (70,286) (46,823)
---------- ----------
Total loans, net 4,880,234 3,459,658
Premises, furniture and equipment, net 88,704 68,595
Accrued interest receivable 33,509 30,737
Intangible assets, net 220,979 47,244
Other assets 242,758 129,231
---------- ----------
Total assets $6,604,150 $5,536,978
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $4,412,032 $3,447,364
Borrowings 1,162,738 1,118,364
Company-obligated mandatorily redeemable cumulative trust
preferred securities of a subsidiary trust holding solely
junior subordinated debentures of the Company 11,500 --
Escrow and other deposits 73,516 61,003
Accrued expenses and other liabilities 109,557 85,285
---------- ----------
Total liabilities 5,769,343 4,712,016
Stockholders' equity:
Common stock ($.01 par value, 125,000,000 shares
authorized, 76,043,750 shares issued; 67,254,439 and
67,873,876 shares outstanding at March 31, 2000 and
1999, respectively) 760 760
Additional paid-in-capital 718,953 739,090
Treasury stock at cost: 8,789,311 and 8,169,874 shares at
March 31, 2000 and 1999, respectively (116,693) (125,993)
Unallocated common stock held by ESOP (87,749) (92,693)
Unearned common stock held by Recognition Plan (27,907) (33,918)
Retained earnings-substantially restricted 380,358 340,019
Accumulated other comprehensive loss:
Net unrealized loss on securities available-for-sale,
net of tax (32,915) (2,303)
---------- ----------
Total stockholders' equity 834,807 824,962
---------- ----------
Total liabilities and stockholders' equity $6,604,150 $5,536,978
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
66
<PAGE> 69
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Mortgage loans on real estate $257,338 $198,003 $175,269
Other loans 56,095 39,720 38,433
Investment securities 17,350 46,216 45,689
Mortgage-related securities 58,714 28,254 10,992
Other 12,989 24,222 22,660
-------- -------- --------
Total interest income 402,486 336,415 293,043
-------- -------- --------
INTEREST EXPENSE:
Deposits 138,769 133,146 144,489
Stock subscription account -- -- 4,477
Borrowings 64,163 34,075 11,977
Cumulative trust preferred securities 728 -- --
-------- -------- --------
Total interest expense 203,660 167,221 160,943
-------- -------- --------
Net interest income 198,826 169,194 132,100
-------- -------- --------
Provision for loan losses 9,817 10,698 10,011
-------- -------- --------
Net interest income after provision for loan losses 189,009 158,496 122,089
-------- -------- --------
NON-INTEREST INCOME:
Net (loss) gain on sales of loans and securities (1,716) 390 115
Service fees 13,621 5,212 6,375
Other 5,011 5,721 3,858
-------- -------- --------
Total non-interest income 16,916 11,323 10,348
-------- -------- --------
NON-INTEREST EXPENSE:
General and administrative expense:
Compensation and employee benefits 51,640 40,127 31,695
Occupancy costs 16,671 13,507 12,622
Data processing fees 7,464 10,271 11,524
Advertising 4,665 4,608 4,275
FDIC insurance premiums 1,142 1,182 1,186
Amortization of intangible assets 14,613 8,629 8,740
Other 23,695 19,879 19,411
-------- -------- --------
Total general and administrative expense 119,890 98,203 89,453
Contribution to Foundation -- -- 56,422
-------- -------- --------
Total non-interest expense 119,890 98,203 145,875
-------- -------- --------
Income (loss) before provision for (benefit from) income
taxes 86,035 71,616 (13,438)
Provision for (benefit from) income taxes 32,789 26,441 (3,482)
-------- -------- --------
Net income (loss) $ 53,246 $ 45,175 $ (9,956)
======== ======== ========
Basic earnings (loss) per share $ 0.90 $ 0.67 $ (0.52)
======== ======== ========
Diluted earnings (loss) per share $ 0.90 $ 0.66 $ (0.52)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
67
<PAGE> 70
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
UNEARNED
UNALLOCATED COMMON
COMMON STOCK ACCUMULATED
ADDITIONAL STOCK HELD BY OTHER
COMMON PAID-IN TREASURY HELD BY RECOGNITION RETAINED COMPREHENSIVE
STOCK CAPITAL STOCK ESOP PLAN EARNINGS INCOME (LOSS) TOTAL
------ ---------- --------- ----------- ----------- -------- ------------- --------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- March 31, 1997 $ -- $ -- $ -- $ -- $ -- $308,746 $ 368 $309,114
Comprehensive loss:
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 loss -- -- -- -- -- (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 per share) -- -- -- (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)
---- -------- --------- -------- -------- -------- -------- --------
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
Recognition Plan (2,816,435
shares) -- (1,247) -- -- (36,920) -- -- (38,167)
Amortization of earned portion
of Recognition 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
---- -------- --------- -------- -------- -------- -------- --------
Comprehensive income:
Net income for the year
ended March 31, 2000 -- -- -- -- -- 53,246 -- 53,246
Other comprehensive income,
net of tax benefit of
$25.0 million
Change in net unrealized
gains on securities
available-for-sale, net
of tax -- -- -- -- -- -- (25,858) (25,858)
Less: Reclassification
adjustment for net
losses realized in net
income, net of tax -- -- -- -- -- -- (4,754) (4,754)
---- -------- --------- -------- -------- -------- -------- --------
Comprehensive income -- -- -- -- -- 53,246 (30,612) 22,634
Repurchase of common stock
(10,022,867 shares) -- -- (126,386) -- -- -- -- (126,386)
Treasury stock issued for
Broad National Bancorporation
acquisition (4,950,699
shares) -- (7,317) 73,378 -- -- -- -- 66,061
Treasury stock issued for
Statewide Financial Corp.
acquisition (4,172,606
shares) -- (7,356) 58,040 -- -- -- -- 50,684
Treasury stock issued for
options exercised (280,125
shares) -- (3,595) 4,268 -- -- -- -- 673
Dividends paid -- -- -- -- -- (12,907) -- (12,907)
ESOP shares committed to be
released -- (1,496) -- 4,944 -- -- -- 3,448
Amortization of earned portion
of Recognition Plan -- (373) -- -- 6,011 -- -- 5,638
---- -------- --------- -------- -------- -------- -------- --------
Balance -- March 31, 2000 $760 $718,953 $(116,693) $(87,749) $(27,907) $380,358 $(32,915) $834,807
==== ======== ========= ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
68
<PAGE> 71
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 53,246 $ 45,175 $ (9,956)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Contribution of stock to Foundation -- -- 56,272
Provision for loan losses 9,817 10,698 10,011
Net loss (gain) on sale of loans and securities 1,716 (390) (115)
Amortization of deferred income and premiums (2,522) (5,298) (12,938)
Amortization of intangibles 14,613 8,629 8,740
Amortization of unearned compensation of ESOP and
Recognition Plan 9,002 7,377 1,253
Depreciation and amortization 9,964 7,271 6,862
Deferred income tax benefit (7,153) (4,446) (23,901)
Decrease (increase) in accrued interest receivable 3,981 (6,018) (7,011)
Decrease in accounts receivable -- securities transactions 531 13,023 93,718
Increase (decrease) in accrued expenses and other
liabilities 7,333 (31,078) 74,539
Other, net (11,548) 15,815 (17,089)
----------- ----------- -----------
Net cash provided by operating activities 88,980 60,758 180,385
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and purchases (1,523,780) (1,279,041) (644,591)
Principal payments on loans 829,660 512,868 373,734
Proceeds from sale of loans 2,552 39,966 19,219
Proceeds from sale of securities 992,024 456,359 288,303
Proceeds from maturities of securities 142,946 1,027,983 1,073,291
Principal collected on securities 167,677 297,715 86,318
Purchases of securities (458,196) (1,950,177) (2,242,950)
Proceeds from sales of other real estate owned 440 76 273
Purchases of Federal Home Loan Bank stock (35,738) (30,480) (4)
Cash consideration paid to acquire Broad (66,061) -- --
Cash consideration paid to acquire Statewide (51,173) -- --
Cash and cash equivalents acquired from Broad acquisition 196,653 -- --
Cash and cash equivalents acquired from Statewide
acquisition 17,492 -- --
Net additions to premises, furniture and equipment (12,419) (14,423) (7,938)
----------- ----------- -----------
Net cash provided by (used in) investing activities 202,077 (939,154) (1,054,345)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits purchased, net of premiums -- -- 65,972
Net increase (decrease) in demand and savings deposits 57,260 (44,713) 66,129
Net (decrease) increase in time deposits (121,068) 98,277 (67,845)
Net (decrease) increase in other borrowings (225,594) 400,523 700,609
Net increase in escrow and other deposits 9,150 15,135 4,834
Issuance of common stock -- -- 685,748
Loan to ESOP for purchase of shares -- -- (98,872)
Purchase of shares for Recognition Plan -- (38,167) --
Repurchase of common stock (126,386) (125,993) --
Proceeds from exercise of stock options 770 -- --
Dividends paid (12,907) (4,032) --
----------- ----------- -----------
Net cash (used in) provided by financing activities (418,775) 301,030 1,356,575
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (127,718) (577,366) 482,615
Cash and cash equivalents at beginning of year 279,885 857,251 374,636
----------- ----------- -----------
Cash and cash equivalents at end of period $ 152,167 $ 279,885 $ 857,251
=========== =========== ===========
Income taxes paid $ 27,690 $ 28,917 $ 15,196
=========== =========== ===========
Interest paid $ 200,443 $ 161,790 $ 160,838
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
69
<PAGE> 72
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
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 and
Agreement and Plan of Reorganization (the "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 as a savings and loan holding
company. The Company completed its initial public offering on March 13, 1998 and
issued 70,410,880 shares of common stock resulting in proceeds of $685.7
million, net of expenses which totaled $18.4 million. The Company used $343.0
million or approximately 50% of the net proceeds to purchase all of the
outstanding stock of the Bank. The Company also loaned $98.9 million to the
Employee Stock Ownership Plan ("ESOP") which purchased 5,632,870 shares of the
Company's common stock in the open market.
As part of the Conversion, the Company formed the Independence Community
Foundation (the "Foundation") and donated 5,632,870 shares of common stock of
the Company valued at the time of its contribution at $56.3 million. The Company
recorded a contribution expense charge and a corresponding deferred tax benefit
of $19.2 million. The formation of the 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 retained earnings 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
as of each March 31st. 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 State Banking Department.
2. ACQUISITIONS
The Company completed its acquisition of Broad National Bancorporation
("Broad") and the merger of Broad's wholly owned subsidiary, Broad National Bank
("Broad National"), with and into the Bank, all effective as of the close of
business on July 31, 1999.
Under the terms of the Agreement and Plan of Merger between the Company and
Broad dated February 1, 1999 (the "Broad Agreement"), the merger consideration
consisted of approximately 50% Independence common stock and 50% cash. As a
result of the completed election procedures and in accordance with the terms of
a formula set forth in the Broad Agreement, each Broad stockholder who submitted
a valid election for stock consideration received 1.9859 shares of Company
common stock for each share of Broad common stock, plus cash in
70
<PAGE> 73
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lieu of any fractional shares, and each Broad stockholder who submitted a valid
election for cash consideration received $26.50 per share of Broad common stock
except Broad stockholders who elected to receive cash as any portion of their
consideration for their Broad shares received a portion of such consideration in
the form of Company common stock (the "Consideration Adjustment") in accordance
with the terms of the Broad Agreement. To the extent that certain Broad
stockholders elected to receive some combination of stock and cash consideration
in exchange for their shares of Broad common stock, such individuals received
the entire portion of their stock election in the form of 1.9859 shares of
Company common stock for each share of Broad common stock, plus cash in lieu of
any fractional shares, and the cash portion of their election was subject to the
Consideration Adjustment described above. The remaining shares of Broad common
stock for which a valid election was not submitted received 1.9859 shares of
Company common stock for each share of Broad common stock, plus cash in lieu of
any fractional shares. The Broad transaction had an aggregate value of
approximately $132 million assuming an acquisition value of $26.50 per share of
Broad common stock.
As a result of the Broad acquisition, the Company acquired $646.3 million
of assets and assumed $584.8 million of deposits. The acquisition was accounted
for as a purchase and the excess of cost over the fair value of net assets
acquired ("goodwill") in the transaction was $99.3 million, which is being
amortized on a straight-line basis over 15 years.
The Company completed its acquisition of Statewide Financial Corp.
("Statewide") and the merger of Statewide's wholly owned subsidiary, Statewide
Savings Bank, S.L.A. ("Statewide Bank"), with and into the Bank, all effective
as of the close of business on January 7, 2000.
Under the terms of the Agreement and Plan of Merger between the Company and
Statewide dated April 12, 1999 (the "Statewide Agreement"), the merger
consideration consisted of approximately 4,172,606 shares of Independence common
stock and approximately $51.2 million based upon 4,051,277 shares of Statewide
common stock deemed outstanding under the terms of the Statewide Agreement as of
the completion of the merger. As a result of the completed election procedures
and in accordance with the terms of the formula set forth in the Statewide
Agreement, each Statewide stockholder who submitted a valid election for stock
consideration received 2.0700 shares of Company common stock for each share of
Statewide common stock, plus cash in lieu of any fractional shares, and each
Statewide stockholder who submitted a valid election for cash consideration
received $25.14 per share of Statewide common stock. To the extent that any
Statewide stockholders elected to receive some combination of stock and cash
consideration in exchange for their shares of Statewide common stock, such
individuals received the entire portion of their stock election in the form of
2.0700 shares of Company common stock for each share of Statewide common stock,
plus cash in lieu of any fractional shares, and the cash portion of their
election at the rate of $25.14 per share of Statewide common stock. The
remaining shares of Statewide common stock for which valid elections were not
submitted were converted into the right to receive on a pro rata basis $25.14 in
cash for approximately 53% of the shares not tendered and 2.0700 shares of
Company common stock for each remaining share of Statewide common stock, plus
cash in lieu of any fractional shares.
As a result of the Statewide acquisition, the Company acquired $745.2
million of assets and assumed $443.7 million of deposits. The acquisition was
accounted for as a purchase resulting in goodwill of approximately $88.9
million. The goodwill is being amortized on a straight-line basis over 15 years.
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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies of
the Company and its subsidi-
71
<PAGE> 74
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aries. 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 portfolios considering past loan loss
experience, assessment of current economic conditions, the size and composition
of the loan portfolios, and other relevant factors.
Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making various 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 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.
72
<PAGE> 75
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 "Recognition Plan") 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
both 59,203,079 shares for the year ended March 31, 2000. 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 was computed by dividing net income between
March 13, 1998 (the date of Conversion) and March 31, 1998 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 occurred
late in fiscal 1998 (March 13, 1998), basic and diluted weighted average common
shares outstanding were both 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, net of tax.
SEGMENT REPORTING
During fiscal 1999 the Company adopted SFAS No. 131, "Disclosures About
Segments of an 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 information
by country, as opposed to broader geographic regions as permitted under prior
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 opera-
73
<PAGE> 76
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tions, 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.
4. SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000
-------------------------------------------------
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 $ 153,930 $ 1,127 $(17,185) $ 137,872
Municipals 3,615 -- (126) 3,489
---------- ------- -------- ----------
Total debt securities 157,545 1,127 (17,311) 141,361
---------- ------- -------- ----------
Equity securities:
Preferred 46,365 -- (95) 46,270
Common 25,497 1,637 (1,997) 25,137
---------- ------- -------- ----------
Total equity securities 71,862 1,637 (2,092) 71,407
---------- ------- -------- ----------
Total investment securities 229,407 2,764 (19,403) 212,768
---------- ------- -------- ----------
Mortgage-related securities:
FNMA Pass Through Certificates 8,631 49 (114) 8,566
GNMA Pass Through Certificates 35,385 354 (101) 35,638
FHLMC Pass Through Certificates 7,807 58 (81) 7,784
Collateralized Mortgage Obligation Bonds 762,635 -- (41,592) 721,043
---------- ------- -------- ----------
Total mortgage-related securities 814,458 461 (41,888) 773,031
---------- ------- -------- ----------
Total securities available-for-sale $1,043,865 $ 3,225 $(61,291) $ 985,799
========== ======= ======== ==========
</TABLE>
74
<PAGE> 77
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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-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-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>
Sales of available-for-sale securities are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales $992,024 $456,359 $288,303
Gross gains 5,569 346 42
Gross losses (7,298) -- (1)
</TABLE>
The amortized cost and estimated fair value of debt securities by
contractual maturity are as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
One year or less $ 7,233 $ 7,198
One year through five years 12,527 13,386
Five years through ten years 1,876 1,785
Over ten years 135,909 118,992
--------- ---------
$ 157,545 $ 141,361
========= =========
</TABLE>
75
<PAGE> 78
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated fair value of mortgage-related securities
by contractual maturity are as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
One year or less $ 1,118 $ 1,114
One year through five years 3,572 3,529
Five years through ten years 40,310 39,909
Over ten years 769,458 728,479
-------- --------
$814,458 $773,031
======== ========
</TABLE>
5. LOANS RECEIVABLE, NET
Loans are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Mortgage Loans on Real Estate:
Single-family residential $ 674,118 $ 491,523
Multi-family residential 2,731,104 2,195,879
Commercial real estate 597,165 250,105
---------- ----------
Total principal balance -- mortgage loans 4,002,387 2,937,507
Less net deferred fees (8,727) (10,529)
---------- ----------
Total mortgage loans on real estate 3,993,660 2,926,978
Commercial business loans 253,606 39,362
Other Loans:
Cooperative apartment loans 462,185 458,165
Student loans 39,260 41,633
Home equity loans and lines of credit 121,109 12,295
Warehouse mortgage lines of credit 48,175 --
Consumer loans 25,799 18,631
Passbook loans 8,519 8,233
Credit card loans -- 1,518
---------- ----------
Total principal balance -- other loans 705,047 540,475
Less unearned discount and net deferred fees (1,793) (334)
---------- ----------
Total other loans 703,254 540,141
Less allowance for loan losses (70,286) (46,823)
---------- ----------
Total loans, net $4,880,234 $3,459,658
========== ==========
</TABLE>
At March 31, 2000, 1999 and 1998, the Company was servicing loans on behalf
of others which are not included in the consolidated financial statements of
$184.0 million, $206.9 million and $211.2 million, respectively.
76
<PAGE> 79
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 2000, 1999, and 1998, included in mortgage loans on real
estate are $8.1 million, $6.3 million and $10.4 million, respectively, of
nonaccrual loans. If interest on the nonaccrual mortgage loans had been accrued,
such income would have approximated $0.4 million, $0.5 million and $0.7 million
for the years ended March 31, 2000, 1999 and 1998, respectively.
At March 31, 2000, 1999, 1998, included in commercial business and other
loans are $4.1 million, $0.8 million and $0.9 million, respectively, of
nonaccrual loans. If interest on the nonaccrual commercial business and other
loans had been accrued, such income would have approximated $216,000, $31,000
and $29,000 for the years ended March 31, 2000, 1999 and 1998, respectively.
The increase in lost income on commercial business and other loans for
fiscal 2000 compared to fiscal 1999 reflects the increase in the Company's
commercial business lending area, primarily through the acquisitions of Broad
and Statewide.
A summary of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period $46,823 $36,347 $27,024
Allowance of acquired institutions 9,452 -- --
Provision charged to operations 9,817 10,698 10,011
Net recoveries (charge-offs) 4,194 (222) (688)
------- ------- -------
Balance at end of period $70,286 $46,823 $36,347
======= ======= =======
</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,
------------------
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land $ 5,577 $ 3,232
Buildings and improvements 55,317 45,651
Leasehold improvements 6,909 4,828
Furniture and equipment 20,901 14,884
------- -------
Total premises, furniture and equipment $88,704 $68,595
======= =======
</TABLE>
Depreciation and amortization expense amounted to $10.0 million, $7.3
million and $6.9 million for the years ended March 31, 2000, 1999 and 1998,
respectively.
77
<PAGE> 80
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. OTHER ASSETS
A summary of other assets is as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
FHLB stock $ 82,323 $ 56,236
Net deferred tax asset 87,931 48,471
Prepaid expenses 2,221 2,128
Other real estate 68 273
Accounts receivable 44,969 11,246
Other 25,246 10,877
-------- --------
$242,758 $129,231
======== ========
</TABLE>
The Bank is a member of the FHLB of New York, and owns FHLB stock with a
carrying value of $82,322,800 and $56,236,300 at March 31, 2000 and March 31,
1999, 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.
8. DEPOSITS
The amounts due to depositors and the weighted average interest rates at
March 31, 2000 and March 31, 1999 are as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------
2000 1999
--------------------- ---------------------
DEPOSIT AVERAGE DEPOSIT AVERAGE
LIABILITY RATE LIABILITY RATE
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Savings $1,226,996 2.00% $ 970,069 2.30%
Money Market 193,561 2.23 202,292 2.66
NOW 544,721 2.57 351,270 2.71
Checking 345,579 -- 102,831 --
Time Deposits 2,101,175 5.15 1,820,902 5.19
---------- ----------
$4,412,032 $3,447,364
========== ==========
</TABLE>
Scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
One year $1,776,040 $1,537,801
Two years 188,044 164,280
Three years 84,745 41,606
Four years 30,469 45,386
Thereafter 21,877 31,829
---------- ----------
$2,101,175 $1,820,902
========== ==========
</TABLE>
78
<PAGE> 81
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Time deposit accounts in denominations of $100,000 or more totaled
approximately $319.6 million, $232.5 million and $192.4 million at March 31,
2000, 1999 and 1998, respectively.
9. BORROWINGS
A summary of borrowings is as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
FHLB advances $ 845,375 $ 926,725
Repurchase agreements -- FHLB 315,000 180,000
Repurchase agreements -- other 1,000 9,950
Other 1,363 1,689
---------- ----------
$1,162,738 $1,118,364
========== ==========
</TABLE>
Advances from the FHLB are made at fixed rates with remaining maturities
between less than one year and seven years, summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Less than one year $141,425 $126,100
Over one year through five years 653,950 750,625
Over five years through seven years 50,000 50,000
-------- --------
$845,375 $926,725
======== ========
</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 7).
The average cost of FHLB advances were 5.4% and 5.5% for the years ended
March 31, 2000 and March 31, 1999, 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.
Repurchase agreements with the FHLB are made at fixed rates with remaining
maturities between less than one year and ten years, summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Less than one year $185,000 $ --
Over one year through five years 65,000 115,000
Over five years through ten years 65,000 65,000
-------- --------
$315,000 $180,000
======== ========
</TABLE>
79
<PAGE> 82
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 2000, all of the outstanding FHLB repurchase agreements were
secured by collateralized mortgage obligations. The average balance of FHLB
repurchase agreements during fiscal 2000 was $246.4 million with an average cost
of 5.8%. The maximum amount outstanding at any month end during fiscal 2000 was
$315.0 million. The average balance of FHLB repurchase agreements during fiscal
1999 was $58.7 million with an average cost of 5.2%. The maximum amount
outstanding at any month end during fiscal 1999 was $180.0 million.
At March 31, 2000, all of the other outstanding repurchase agreements had
original contractual maturities of less than one year and were secured by U.S.
Treasury securities. The average balance of other repurchase agreements during
fiscal 2000 was $4.8 million with an average cost of 6.1%. The maximum amount
outstanding at any month end during fiscal 2000 was $10.0 million. The average
balance of other repurchase agreements during fiscal 1999 was $7.4 million with
an average cost of 5.6%. The maximum amount outstanding at any month end during
fiscal 1999 was $110.0 million.
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 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, 2000
or March 31, 1999. 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 during fiscal 1999 was $383.2 million.
10. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES
On June 30, 1997, $11.5 million of 9.5% Cumulative Trust Preferred
Securities (the "Trust Preferred Securities") were issued by BNB Capital Trust
(the "Trust"), a Delaware statutory business trust formed by Broad. The net
proceeds from the issuance were invested in Broad in exchange for its junior
subordinated debentures. The sole asset of the Trust, the obligor on the Trust
Preferred Securities, is $11.9 million principal amount of 9.5% Junior
Subordinated Debentures (the "Junior Subordinated Debentures") due June 30,
2027. Broad entered into several contractual arrangements (which the Company
assumed as part of the Broad acquisition) for the purpose of guaranteeing the
Trust's payment of distributions on, payments on any redemptions of, and any
liquidation distribution with respect to, the Trust Preferred Securities. As a
result of the Broad acquisition, all the assets, liabilities and obligations of
Broad as to securities became assets, liabilities and obligations of the
Company.
Cash distributions on both the Trust Preferred Securities and the Junior
Subordinated Debentures are payable quarterly in arrears on the last day of
March, June, September and December of each year.
The Trust Preferred Securities are subject to mandatory redemption (i) in
whole, but not in part, upon repayment of the Junior Subordinated Debentures at
Stated Maturity or, at the option of the Company, their earlier redemption in
whole upon the occurrence of certain changes in the tax treatment or capital
treatment of the Trust Preferred Securities, or a change in the law such that
the Trust would be considered an investment company and (ii) in whole or in part
at any time on or after June 30, 2002 contemporaneously with the optional
redemption by the Company of the Junior Subordinated Debentures in whole or in
part. The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after June 30, 2002, in whole at any time or in
part from time to time, or (ii) in whole, but not in part, at any time
80
<PAGE> 83
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
within 90 days following the occurrence and continuation of certain changes in
the tax treatment or capital treatment of the Trust Preferred Securities, or a
change in law such that the Trust would be considered an investment company.
11. 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 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,
------------------
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Benefit obligation at beginning of year $38,432 $31,174
Service cost 2,019 1,527
Interest cost 2,700 2,352
Acquisitions 4,483 --
Actuarial (gain)/loss (5,999) 4,421
Benefits paid (2,487) (1,042)
------- -------
Benefit obligation at end of year $39,148 $38,432
======= =======
</TABLE>
The following table sets forth the Plan's change in Plan assets:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
2000 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Fair value of Plan assets at beginning of year $ 32,795 $28,305
Actual return on Plan assets 9,341 5,528
Acquisitions 6,327 --
Benefits paid (2,484) (1,038)
-------- -------
Fair value of Plan assets at end of year $ 45,979 $32,795
======== =======
Funded status $ 6,832 $(5,637)
Unrecognized net asset (1,216) (1,418)
Unrecognized prior service cost 509 533
Unrecognized actuarial (gain)/loss (11,293) 978
-------- -------
Accrued pension cost at December 31, 1999 and 1998 (5,168) (5,544)
Net adjustment (279) (322)
-------- -------
Accrued pension cost $ (5,447) $(5,866)
======== =======
</TABLE>
81
<PAGE> 84
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension expense included the following components:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 2,019 $ 1,527 $ 1,097
Interest cost on projected benefit obligation 2,700 2,352 1,986
Expected return on Plan assets (3,168) (2,500) (2,167)
Amortization of net asset (203) (203) (202)
Amortization of prior service cost 24 24 24
Recognized net actual loss 100 77 33
------- ------- -------
Net pension expense for the years ended December 31,
1999, 1998 and 1997 1,472 1,277 771
Net adjustment 165 18 172
------- ------- -------
Net pension expense $ 1,637 $ 1,295 $ 943
======= ======= =======
</TABLE>
At December 31, 1999 and 1998, the projected benefit obligation for the
Plan was determined using an assumed discount rate of 7.75% and 6.75%,
respectively, and an assumed rate of compensation increase of 4% for the Pension
Plan and 7% for the Supplemental Plan. At December 31, 1999 and 1998, 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-related 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,
-------------------
2000 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Benefit obligation at beginning of year $ 9,759 $10,658
Service cost 403 334
Interest cost 721 610
Actuarial gain (258) (1,373)
Benefits paid (533) (470)
-------- -------
Benefit obligation at end of year $ 10,092 $ 9,759
======== =======
Funded status $(10,092) $(9,759)
Unrecognized transition obligation being recognized over 20
years 4,014 4,282
Unrecognized net loss due to past experience difference from
assumption made 838 1,225
Unrecognized prior service cost 1 11
-------- -------
Accrued postretirement benefit cost at December 31, 1999 and
1998 (5,239) (4,241)
Net adjustment (250) (191)
-------- -------
Accrued postretirement benefit cost $ (5,489) $(4,432)
======== =======
</TABLE>
82
<PAGE> 85
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Components of postretirement benefit cost:
Service cost-benefits earned during the period $ 403 $ 334 $ 322
Interest cost on accumulated postretirement benefit
obligation 721 610 690
Amortization of net obligation 268 268 267
Amortization of prior service cost 10 10 10
Recognized net actuarial loss 129 12 102
------ ------ ------
Postretirement benefit expense-years ended December 31, 1999
and 1998 1,531 1,234 1,391
Net adjustment 74 (190) --
------ ------ ------
Net postretirement benefit expense $1,605 $1,044 $1,391
====== ====== ======
</TABLE>
The assumptions used in arriving at the above include the initial rate of
increase in health care costs of 7% decreasing gradually to 6% by the year 2001.
At December 31, 1999, 1998 and 1997, discount rates of 7.75%, 6.75% and 7.00%,
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, 1999 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 $134,700.
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 $38,000, $25,000 and
$577,000 for the years ended March 31, 2000, 1999 and 1998, 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, 2000, the loan
from the Company had an outstanding principal balance of $94.1 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 shares allocated in each of fiscal
83
<PAGE> 86
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 and 1999. At March 31, 2000 there were 70,411 shares committed to be
released and 5,069,582 shares remaining unallocated.
In accordance with SOP 93-6, the Company recorded compensation expense of
$3.4 million, $4.3 million and $1.3 million for the years ended March 31, 2000,
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 PLAN
The Recognition Plan was implemented in September 1998. The objective of
the Recognition Plan 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 Recognition Plan may
grant up to 4% of the shares of common stock sold in the Conversion, or
2,816,435 shares. The Recognition Plan 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 Recognition Plan
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 generally payable over a five year period at a rate of 20% per year,
beginning one year from the anniversary date. Subject to certain exceptions,
awards become 100% vested upon termination of employment due to death,
disability or retirement. Compensation expense is recognized over the vesting
period at the fair value of the common stock on the date of grant for
non-performance share awards. The expense related to performance share awards is
recognized over the vesting period at the fair value on the measurement date.
The Company recorded compensation expense related to the Recognition Plan of
$5.4 million and $3.1 million for the years ended March 31, 2000 and 1999,
respectively.
The following table sets forth the activity in the Company's Recognition
Plan during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
2000 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
GRANT GRANT
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 2,180,517 $13.3125 -- $ --
Granted 28,363 12.0300 2,188,517 13.3125
Vested (454,660) 13.2800 -- --
Forfeited -- -- (8,000) 13.3125
--------- ---------
Outstanding, end of year 1,754,220 $13.3000 2,180,517 $13.3125
========= ======== ========= ========
</TABLE>
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 shares of 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
84
<PAGE> 87
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Company's common stock at an exercise price equal to the fair market
value of the stock on 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 and non-employee directors of the Company who elect to
retire require the approval of the Board of Directors or the committee
administering the Option Plan to accelerate vesting of options.
Broad and Statewide maintained several stock option plans for its officers,
directors and other key employees. Generally, these plans granted options to
individuals at a price equivalent to the fair market value of the stock at the
date of grant. Options awarded under the plans generally vested over a five year
period and expired ten years from the date of grant. In connection with the
Broad and Statewide acquisitions, options which were converted by election of
the option holder to options to purchase the Company's common stock totaled
579,026 and became 100% exercisable at the effective date of the acquisitions.
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 for the periods
indicated, assuming that the 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>
YEAR ENDED MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net income
As reported $53,246 $45,175
Pro forma $46,264 $42,980
Basic earnings per share
As reported $ 0.90 $ 0.67
Pro forma $ 0.78 $ 0.63
Diluted earnings per share
As reported $ 0.90 $ 0.66
Pro forma $ 0.78 $ 0.63
</TABLE>
85
<PAGE> 88
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth stock option activity and the
weighted-average fair value of options granted for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------
2000 1999
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 6,051,708 $13.3125 -- $ --
Granted 146,000 11.3677 6,102,408 13.3125
Broad/Statewide converted options 579,026 6.9200 -- --
Exercised (368,933) 5.8463 -- --
Forfeited (10,780) 13.3125 (50,700) 13.3125
--------- ---------
Outstanding, end of year 6,397,021 $13.0849 6,051,708 $13.3125
========= ======== ========= ========
Options exercisable at end of year 1,437,962 5,400
Weighted average fair value of options granted $ 4.0353 $ 5.1700
</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 6.55%, volatility of 34.66%, expected
dividend yield of 2.49% and expected life of 6 years.
The following table is a summary of the information concerning currently
outstanding and exercisable options as of March 31, 2000.
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE EXERCISABLE PRICE
--------------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
$00.0000 -- $10.0000 199,743 7.3 199,743 $ 7.5697
$10.0001 -- $12.0000 156,350 9.8 10,350 10.8900
$12.0001 -- $13.3125 6,040,928 8.5 1,227,869 13.3125
--------- ---------
6,397,021 8.5 1,437,962 $12.4973
========= === ========= ========
</TABLE>
12. STOCKHOLDERS' EQUITY
On May 27, 1999, the Company announced that its Board of Directors
authorized a fourth stock repurchase plan for up to five percent of the shares
of common stock then outstanding or 3,250,870 shares. On November 30, 1999, the
Company announced that a fifth stock repurchase plan was authorized by the Board
of Directors for an additional 3,350,529 shares, or five percent of the
Company's then outstanding common stock. On March 10, 2000, the Company
announced that its Board of Directors authorized a sixth stock repurchase
program of 3,390,972 shares, or five percent, of the Company's then outstanding
common stock.
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 are held as treasury stock and are available for
issuance pursuant to the Company's benefit plans, including the option plans,
acquisitions and for general corporate purposes. During fiscal 2000, the Company
repurchased 10,022,867 shares of its common stock at a cost of $126.4 million
and issued 280,125 shares of treasury stock in connection with the exercise of
options. In addition, during fiscal 2000, the Company reissued 9,123,305, or
12.0% of its treasury shares in connection with the Broad and Statewide
acquisitions. At March 31, 2000, the Company had repurchased a total of
18,192,741 shares, or 23.9% of its common stock at a cost of $252.4 million.
86
<PAGE> 89
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET RISKS
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are reflected in the consolidated
financial statements when and if proceeds associated with the commitments are
disbursed. The exposure to credit loss in the event of non performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. Management uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
financial instruments.
Commitments to extend credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Management evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary, upon extension of
credit, is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
The notional principal amount of the off-balance sheet financial
instruments at March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
CONTRACT CONTRACT
OR AMOUNT OR AMOUNT
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit -- mortgage loans $ 88,334 $224,409
Commitments to extend credit -- other loans 53,134 12,661
Commitments to extend credit -- commercial business loans 117,356 24,237
Commitments to extend credit -- warehouse mortgage lines
of credit 112,392 --
Standby letters of credit 2,966 --
-------- --------
Total $374,182 $261,307
======== ========
</TABLE>
LEASE COMMITMENTS
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:
2001 $ 2,600
2002 2,584
2003 2,154
2004 1,889
2005 and thereafter 10,945
</TABLE>
87
<PAGE> 90
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The rent expense for the years ended March 31, 2000, 1999 and 1998 was $2.5
million, $1.6 million and $1.4 million, respectively.
OTHER COMMITMENTS AND CONTINGENCIES
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.
14. INCOME TAXES
The components of deferred tax assets and liabilities are summarized as
follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Securities available-for-sale $25,010 $ 2,049
Contribution to the Foundation 12,290 15,979
Allowance for loan losses 27,848 19,644
Depreciation 524 --
Deferred loan fees 2,588 3,408
Amortization of intangible assets 7,167 5,706
Nonaccrual interest 2,233 745
Employee benefits 12,110 6,354
Other 3,927 849
------- -------
Gross deferred tax asset 93,697 54,734
------- -------
Deferred tax liabilities:
Bad debt recapture under Section 593 973 1,232
Acquisition premium on mortgage-related securities 413 1,755
Acquisition premium on mortgages 3,353 2,397
Depreciation -- 641
Other 1,027 238
------- -------
Gross deferred tax liabilities 5,766 6,263
------- -------
Net deferred tax asset $87,931 $48,471
======= =======
</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, 2000 and March
31, 1999.
88
<PAGE> 91
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision for (benefit from) income taxes
attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
2000 1999 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $36,187 $28,968 $ 18,462
State and local 3,755 1,919 1,957
------- ------- --------
39,942 30,887 20,419
------- ------- --------
Deferred:
Federal (5,189) (3,527) (21,365)
State and local (1,964) (919) (2,536)
------- ------- --------
(7,153) (4,446) (23,901)
------- ------- --------
Total $32,789 $26,441 $ (3,482)
======= ======= ========
</TABLE>
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 for (benefit
from) income taxes:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision (benefit) at
statutory rates $30,112 $25,066 $(4,703)
Increase(reduction) in tax resulting from:
State and local taxes, net of Federal income
tax effect 1,164 650 (376)
Other 1,513 725 1,597
------- ------- -------
$32,789 $26,441 $(3,482)
======= ======= =======
</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
89
<PAGE> 92
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000, 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, 2000 for which deferred taxes are not
required to be recognized, amounted to approximately $122 million. Accordingly,
deferred tax liabilities of approximately $25 million have not been recognized
as of March 31, 2000.
The Bank has undistributed earnings from a wholly owned subsidiary. As a
result of the formation of this subsidiary, State and local taxes of $2.7
million, net of federal benefit, was not provided as the Bank expects to receive
dividends from the subsidiary only upon its liquidation.
The Company is currently undergoing an audit of its New York State income
tax returns for the calendar years 1994, 1995 and 1996. The Company has recently
received a notice which could result in additional income tax liability to New
York State and New York City for the years in question. The Company has
conducted a review and analysis of the basis and accuracy of the State's claims.
Based on its review, the Company does not believe that the final resolution will
have a material financial statement impact.
15. REGULATORY REQUIREMENTS
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.
Based on its regulatory capital ratios at March 31, 2000 and March 31,
1999, 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, 2000 and March 31, 1999:
<TABLE>
<CAPTION>
TO BE WELL-CAPITALIZED
ACTUAL AMOUNTS FOR CAPITAL ADEQUACY UNDER FDIC GUIDELINES
AS OF 3/31/00 PURPOSES AT 3/31/00 AT 3/31/00
----------------- --------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Leverage $497,573 7.83% $254,094 4.00% $317,618 5.00%
Tier 1 Risk-Based 497,573 11.37% 175,100 4.00% 262,650 6.00%
Total Risk-Based 552,484 12.62% 350,201 8.00% 437,751 10.00%
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL-CAPITALIZED
ACTUAL AMOUNTS FOR CAPITAL ADEQUACY UNDER FDIC GUIDELINES
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>
90
<PAGE> 93
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. 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.
The book values and estimated fair values of the Company's financial
instruments are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
------------------------ ------------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 134,170 $ 134,170 $ 70,811 $ 70,811
Commercial paper -- -- 37,290 37,290
Federal funds sold 17,997 17,997 171,784 171,784
Securities available-for-sale 985,779 985,799 1,521,628 1,521,628
Mortgage loans on real estate 4,002,387 3,787,970 2,937,507 2,926,030
Commercial business loans 253,606 253,044 39,362 39,362
Other loans 656,872 643,628 540,475 540,933
Warehouse mortgage lines of credit 48,175 48,175 -- --
Accrued interest receivable 33,509 33,509 30,737 30,737
FHLB stock 82,323 82,323 56,236 56,236
FINANCIAL LIABILITIES:
Deposits 2,310,857 2,310,857 1,626,462 1,626,462
Time deposit accounts 2,101,175 2,107,782 1,820,902 1,835,167
Borrowings 1,162,738 1,123,761 1,118,364 1,112,374
Escrow and other deposits 73,516 73,516 61,003 61,003
Trust Preferred Securities 11,500 11,895 -- --
</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, warehouse mortgage lines of credit, 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 on 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
91
<PAGE> 94
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Commercial business loans: The commercial business loan portfolio was
priced using the same methodology as the mortgage loans on real estate.
Other loans: The cooperative apartment loan portfolio was priced using the
same methodology as the mortgage loans on real estate. The fair values of the
remaining components of other loans have been estimated to approximate their
carrying values. This is based on the short-term duration of these loans or the
fact that the majority of these loans reprice frequently.
FHLB stock: The 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.
Trust Preferred Securities: The estimated fair value for Trust Preferred
Securities is based on a discounted cash flow calculation that applies current
interest rates for similar trust preferred securities.
17. ASSET AND DIVIDEND RESTRICTIONS
The Bank is required to maintain a reserve balance with the Federal Reserve
Bank. The required reserve balance was $6.0 million, $1.3 million and $1.3
million at March 31, 2000, 1999 and 1998, respectively.
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.
During fiscal 2000, the Bank requested approval of or non-objection to
requests to distribute an aggregate of $285.0 million. Of this amount, $176.0
million was distributed to the Company in fiscal 2000. The distributions were
primarily used by the Company to fund the cash portion of the merger
consideration paid in the Broad and Statewide acquisitions as well as the
Company's open market stock repurchase programs.
92
<PAGE> 95
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 2000
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income $91,569 $97,868 $102,165 $110,884
Interest expense 47,432 49,364 51,357 55,507
------- ------- -------- --------
Net interest income 44,137 48,504 50,808 55,377
Provision for loan losses 2,629 2,930 2,527 1,731
------- ------- -------- --------
Net interest income after provision for loan
losses 41,508 45,574 48,281 53,646
Non-interest income 1,889 5,086 5,150 4,791
------- ------- -------- --------
Total income 43,397 50,660 53,431 58,437
------- ------- -------- --------
General and administrative expense 22,250 26,042 27,048 29,937
Amortization of intangible assets 2,155 3,359 3,959 5,140
------- ------- -------- --------
Income before provision for income taxes 18,992 21,259 22,424 23,360
Provision for income taxes 6,994 8,236 8,866 8,693
------- ------- -------- --------
Net income $11,998 $13,023 $ 13,558 $ 14,667
======= ======= ======== ========
Basic earnings per common share $ 0.21 $ 0.22 $ 0.23 $ 0.24
======= ======= ======== ========
Diluted earnings per common share $ 0.21 $ 0.22 $ 0.23 $ 0.24
======= ======= ======== ========
Dividend declared per common share $ 0.04 $ 0.05 $ 0.06 $ 0.06
======= ======= ======== ========
Stock price per common share
High $14.562 $13.813 $ 12.500 $ 12.375
======= ======= ======== ========
Low $11.688 $11.625 $ 10.563 $ 9.750
======= ======= ======== ========
Close $13.500 $11.938 $ 12.500 $ 11.125
======= ======= ======== ========
</TABLE>
93
<PAGE> 96
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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>
19. PARENT COMPANY DISCLOSURE
The following Condensed Statement of Financial Condition, as of March 31,
2000 and 1999 and Condensed Statement of Operations and Cash Flows for the years
ended March 31, 2000, 1999 and 1998 should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto.
94
<PAGE> 97
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 12,081 $ 55,802
Securities available for sale 10,598 34,351
Investment in subsidiaries 688,367 721,460
Net deferred tax asset 7,927 13,853
Dividends receivable 109,000 --
Other assets 20,703 3,668
-------- --------
Total assets $848,676 $829,134
======== ========
LIABILITIES:
Subordinated debentures $ 11,856 $ --
Accrued expenses and other liabilities 2,013 4,172
-------- --------
Total liabilities 13,869 4,172
Stockholders' equity 834,807 824,962
-------- --------
Total liabilities and stockholders' equity $848,676 $829,134
======== ========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
2000 1999 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income $ 686 $ 3,235 $ --
Net (loss) gain on sales of securities (1,215) 346 --
Other non-interest income 1,388 -- --
------- ------- --------
859 3,581 --
------- ------- --------
Expenses:
Contribution to the Foundation -- -- 56,422
Shareholder expense 575 712 200
Other expense 1,186 500 --
------- ------- --------
1,761 1,212 56,622
------- ------- --------
(Loss) income before income taxes and undistributed earnings
of subsidiaries (902) 2,369 (56,622)
Provision for (benefit from) income taxes, net 150 150 (19,581)
------- ------- --------
(Loss) income before undistributed earnings of subsidiaries (1,052) 2,219 (37,041)
Equity in undistributed earnings of subsidiaries 54,298 42,956 (417)
------- ------- --------
Net income (loss) $53,246 $45,175 $(37,458)
======= ======= ========
</TABLE>
95
<PAGE> 98
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
2000 1999 1998
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 53,246 $ 45,175 $(37,458)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Contribution of stock to the Foundation -- -- 56,272
Loss on sale of securities 1,215 -- --
Decrease (increase) in deferred income taxes 5,926 3,824 (17,677)
Dividends received from subsidiary 176,000 -- --
(Increase) decrease in other assets (17,035) 8,600 (12,268)
Increase in subordinated debentures 11,856 -- --
(Decrease) increase in other liabilities (2,160) 1,730 2,442
Amortization of Trust Preferred Securities 97 -- --
Amortization of unearned compensation of ESOP and
Recognition Plan 9,086 7,377 1,253
Undistributed earnings of subsidiaries (54,298) (42,956) 417
Other, net (288) (783) --
--------- --------- --------
Net cash provided by (used in) operating
activities 183,645 22,967 (7,019)
--------- --------- --------
Cash flows from investing activities:
Decrease (increase) in investment in subsidiaries 3,709 -- (343,052)
Purchase of securities available-for-sale (33,020) (209,037) --
Proceeds on sales of securities 57,702 173,259 --
Cash consideration paid to acquire Broad National
Bancorporation (66,061) -- --
Cash consideration paid to acquire Statewide Financial
Corp. (51,173) -- --
--------- --------- --------
Net cash used in investing activities (88,843) (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)
Proceeds received on exercise of stock options 770 -- --
Repurchase of common stock (126,386) (125,993) --
Purchase of shares for Recognition Plan -- (38,167) --
Dividends paid (12,907) (4,032) --
--------- --------- --------
Net cash used in financing activities (138,523) (168,192) (586,876)
--------- --------- --------
Net (decrease) increase in cash and cash
equivalents (43,721) (181,003) 236,805
Cash and cash equivalents at beginning of year 55,802 236,805 --
--------- --------- --------
Cash and cash equivalents at end of year $ 12,081 $ 55,802 $236,805
========= ========= ========
</TABLE>
96
<PAGE> 99
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 5 of the definitive proxy statement of the Company for the Annual Meeting of
Stockholders to be held on July 28, 2000, which was filed with the SEC on June
23, 2000 ("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, 2000 and
1999.
Consolidated Statements of Operations for the Years Ended March 31,
2000, 1999 and 1998.
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended March 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended March 31,
2000, 1999 and 1998.
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.
97
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1(1) Certificate of Incorporation of Independence Community Bank
Corp.
3.2(1) Bylaws of Independence Community Bank Corp.
4.0(1) Specimen Stock Certificate of Independence Community Bank
Corp.
10.1(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(1) Form of Change in Control Agreement to be entered into
between Independence Community Bank and certain officers
thereof.
10.3(1) 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(1) Form of Change of Control Agreement to be entered into
between Independence Community Bank and certain executive
officers thereof.
10.5(2) Independence Community Bank Severance Plan.
10.6(3) 1998 Stock Option Plan.
10.7(3) 1998 Recognition and Retention Plan and Trust Agreement.
10.8(4) Broad National Bancorporation Incentive Stock Option Plan.
10.9(4) 1993 Broad National Incentive Stock Option Plan.
10.10(4) 1993 Broad National Directors Non-Statutory Stock Option
Plan.
10.11(4) 1996 Broad National Incentive Stock Option Plan.
10.12(4) 1996 Broad National Bancorporation Directors Non-Statutory
Stock Option Plan.
10.13(5) 1996 Statewide Financial Corporation Incentive Stock Option
Plan.
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>
---------------
(1) 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.
(2) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1999 filed by the Company with the
SEC on June 28, 1999.
(3) Incorporated herein by reference from the Company's definitive proxy
statement filed by the Company with the SEC on August 17, 1998.
(4) Incorporated herein by reference from the Company's registration statement
on Form S-8 (Registration No. 333-85981) filed by the Company with the SEC
on August 26, 1999.
(5) Incorporated herein by reference from the Company's registration statement
on Form S-8 (Registration No. 333-95767) filed by the Company with the SEC
on January 31, 2000.
(b) Reports on Form 8-K
The following Current report on Form 8-K was filed during the fourth
quarter of fiscal 2000.
<TABLE>
<CAPTION>
DATE ITEM AND DESCRIPTION
---- --------------------
<S> <C>
January 7, 2000 5 -- Reported completion of acquisition of Statewide
Financial Corp.
</TABLE>
(c) The exhibits listed under (a)(3) of this Item 14 are filed herewith.
(d) Not applicable.
98
<PAGE> 101
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 23, 2000
-------------------------------------------------------- ----------------------------------
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 23, 2000
-------------------------------------------------------- ------------------------------------------
Charles J. Hamm
Chairman of the Board, President and
Chief Executive Officer
/s/ DONALD M. KARP June 23, 2000
-------------------------------------------------------- ------------------------------------------
Donald M. Karp
Vice Chairman of the Board
/s/ VICTOR M. RICHEL June 23, 2000
-------------------------------------------------------- ------------------------------------------
Victor M. Richel
Vice Chairman of the Board
/s/ JOSEPH S. MORGANO June 23, 2000
-------------------------------------------------------- ------------------------------------------
Joseph S. Morgano
Executive Vice President, President
Commercial Real Estate Lending Division
and Director
/s/ JOHN B. ZURELL June 23, 2000
-------------------------------------------------------- ------------------------------------------
John B. Zurell
Executive Vice President and
Chief Financial Officer
/s/ WILLARD N. ARCHIE June 23, 2000
-------------------------------------------------------- ------------------------------------------
Willard N. Archie
Director
/s/ ROBERT B. CATELL June 23, 2000
-------------------------------------------------------- ------------------------------------------
Robert B. Catell
Director
/s/ ROHIT M. DESAI June 23, 2000
-------------------------------------------------------- ------------------------------------------
Rohit M. Desai
Director
</TABLE>
99
<PAGE> 102
<TABLE>
<CAPTION>
NAME DATE
---- ----
<S> <C>
/s/ CHAIM Y. EDELSTEIN June 23, 2000
-------------------------------------------------------- ------------------------------------------
Chaim Y. Edelstein
Director
/s/ DONALD H. ELLIOTT June 23, 2000
-------------------------------------------------------- ------------------------------------------
Donald H. Elliott
Director
/s/ ROBERT W. GELFMAN June 23, 2000
-------------------------------------------------------- ------------------------------------------
Robert W. Gelfman
Director
/s/ SCOTT M. HAND June 23, 2000
-------------------------------------------------------- ------------------------------------------
Scott M. Hand
Director
/s/ DONALD E. KOLOWSKY June 23, 2000
-------------------------------------------------------- ------------------------------------------
Donald E. Kolowsky
Director
/s/ JANINE LUKE June 23, 2000
-------------------------------------------------------- ------------------------------------------
Janine Luke
Director
/s/ MALCOLM MACKAY June 23, 2000
-------------------------------------------------------- ------------------------------------------
Malcolm MacKay
Director
/s/ MARIA FIORINI RAMIREZ June 23, 2000
-------------------------------------------------------- ------------------------------------------
Maria Fiorini Ramirez
Director
/s/ WESLEY D. RATCLIFF June 23, 2000
-------------------------------------------------------- ------------------------------------------
Wesley D. Ratcliff
Director
</TABLE>
100
