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United States
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 May 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transaction period from _________________ to
_________________
0-23293
(Commission File Number)
WARWICK COMMUNITY BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 06-1497903
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
18 Oakland Avenue, 10990-0591
Warwick, New York (Zip Code)
(Address of Principal Executive Offices)
(914) 986-2206
(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 August 21, 1998, there were 6,606,548 shares of the Registrant's
common stock outstanding. The aggregate market value of the Registrant's common
stock (based on closing price quoted on August 21, 1998) held by non-affiliates
was approximately $87,262,611.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the year
ended May 31, 1998 are incorporated by reference into Items 1, 5, 6, 7, 7A
and 8 of Part II hereof and Item 14 of Part IV hereof.
(2) Portions of the definitive Proxy Statement for the Registrant's 1998 Annual
Meeting of Shareholders are incorporated by reference into Items 10, 11, 12
and 13 of Part III hereof.
PART I
ITEM 1. Business
General
Warwick Community Bancorp, Inc. (the "Registrant") is a bank holding
company incorporated in September 1997 under the laws of the State of Delaware
and is registered under the Bank Holding Company Act of 1956, as amended
("BHCA"). The Registrant was organized for the purpose of owning all of the
outstanding capital stock of The Warwick Savings Bank (the "Bank"). On December
23, 1997, the Bank completed its conversion from a New York State chartered
mutual savings bank to a New York State chartered stock savings bank, the
Registrant completed the sale of 6,414,125 shares of common stock at $10.00 per
share and the Registrant made a charitable contribution of 192,423 shares of its
common stock to the Warwick Savings Foundation, a charitable foundation
organized by the Registrant and the Bank. The Registrant's operations commenced
on December 23, 1997 and consist principally of the operations of the Bank, the
Registrant's only direct subsidiary. The Registrant, the Bank and the Bank's
subsidiaries are sometimes collectively referred to herein as the "Company."
The Bank was organized in 1875 as a New York State chartered mutual savings
bank and became a New York State chartered stock savings bank on December 23,
1997. The Bank's deposits are insured by the Bank Insurance Fund ("BIF") of the
Federal Deposit Insurance Corporation ("FDIC") up to the maximum amounts
permitted by law.
The Bank is a community-oriented savings bank whose principal business has
been and continues to be attracting retail deposits from the general public in
the area surrounding its four branches and investing those deposits, together
with funds generated from operations and borrowings, primarily in one- to
four-family residential mortgage loans, mortgage-backed securities, commercial
business and commercial real estate loans and various debt and equity
securities. The Bank also originates home equity loans (Good Neighbor Home
Loans) and lines of credit, consumer loans, student loans and its own credit
card loans. Additionally, the Bank sells Savings Bank Life Insurance.
The Bank's revenues are derived principally from the interest on its
mortgage loans, securities, commercial and consumer loans and, to a lesser
degree, from its mortgage banking activities, loan and securities sales,
servicing fee income and income derived from non-traditional investment products
offered through its wholly owned subsidiary, WSB Financial Services, Inc. ("WSB
Financial"). The Bank's primary sources of funds are deposits, borrowings,
principal and interest payments on loans and securities and proceeds from the
sale of loans and securities.
Market Area
The Bank has been, and intends to continue to be, a community-oriented
savings institution offering a variety of financial services to meet the needs
of the communities it serves. The Bank maintains its headquarters in the village
of Warwick in Orange County, New York and operates three additional branch
offices located in the village of Monroe, the town of Woodbury and the town of
Wallkill, Orange County, New York. The Bank's primary deposit gathering areas
are currently
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concentrated in proximity to its full-service banking offices. The Bank's
current primary lending market includes not only Orange County, New York, but
also Rockland, Dutchess and, to a lesser extent, Westchester, Putnam and
Sullivan Counties, New York, by virtue of the various loan originators servicing
these areas. In addition, with its mortgage banking subsidiary, WSB Mortgage
Company of New Jersey, Inc. ("WSB Mortgage"), and its attendant loan production
office in West Milford, Passaic County, New Jersey, the Bank has expanded its
mortgage banking operations into the northeastern New Jersey market.
Although the Bank's market area is predominantly rural with many small
towns, many of the area's residents work in northern New Jersey, western
Connecticut and New York City. Some of the county's major employers are ShopRite
Supermarkets, the Arden Hill Hospital and related life care complex, Horton
Memorial Hospital, Yellow Freight, the Wakefern Corporation and the United
States Military Academy at West Point.
The Bank's market area grew significantly in population during the 1980's
as rising housing prices closer to New York City, coupled with the abundance of
vacant land in Orange County, led to a boom in housing construction. As the
economy throughout the region declined in the late 1980's and early 1990's,
communities surrounding the Bank's offices, particularly in the Warwick area,
continued to experience growth, but more slowly. The conversion of Stewart
International Airport, approximately 20 miles to the northeast of the Bank's
main office in Warwick, into a full-service commercial airport in 1990 gave the
Bank's market area an additional boost. However, the health of the economy in
the New York City metropolitan area has, and will continue to have, a direct
impact on the economic well-being of residents and businesses in the Bank's
market area.
Competition
The Bank faces substantial competition for both deposits and loans. The
deregulation of the financial services industry has led to increased competition
among savings banks and other financial institutions for a significant portion
of the deposit and lending activity that had traditionally been the arena of
savings banks and savings and loan associations. The Bank competes for savings
deposits with other savings banks, savings and loan associations, commercial
banks, credit unions, money market mutual funds, insurance companies, brokerage
firms and other financial institutions, many of which are substantially larger
in size than the Bank.
The Bank's competition for loans comes principally from savings banks,
savings and loan associations, commercial banks, mortgage bankers, finance
companies and other institutional lenders, many of whom maintain offices in the
Bank's market area. The Bank's principal methods of competition include
providing personal customer service, a variety of financial services and
competitive loan and deposit pricing, as well as implementing advertising and
marketing programs.
While the Bank is subject to competition from other financial institutions,
some of which have much greater financial and marketing resources, the Bank
believes it benefits by its community bank orientation as well as its relatively
high core deposit base. Management believes that the variety, depth and
stability of the communities in which the Bank is located support the service
and lending activities conducted by the Bank. The relative economic stability of
the Bank's lending area is reflected in the small number of mortgage
delinquencies experienced by the Bank.
-3-
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one- to four-family residences. At
May 31, 1998, the Bank had total gross loans outstanding of $214.5 million
(before deducting the allowance for loan losses and net deferred loan fees), of
which $129.9 million, or 60.6%, were one- to four-family, owner-occupied
residential first mortgage loans. The remainder consisted of $34.1 million of
commercial business and commercial real estate loans, or 16.0% of total loans,
$15.9 million in home equity loans, or 7.4% of total loans, $2.8 million in
residential construction mortgage loans (net of undisbursed portion), or 1.3% of
total loans, and $14.0 million in consumer loans, or 6.5% of total loans.
Additionally, the Bank originates Veterans Administration ("VA") guaranteed
loans and Federal Housing Authority ("FHA") insured loans. For the fiscal year
ended May 31, 1998, the Bank originated $3.6 million of such loans. The Bank is
active in the origination of State of New York Mortgage Association ("SONYMA")
loans, which are subject to certain customer eligibility requirements and are
subsequently sold to the State of New York. For the fiscal year ending May 31,
1998, the Bank originated $8.6 million in SONYMA loans. The Bank continues to
service these loans for such agency and, instead of a servicing fee, the Bank
obtains a state (franchise) income tax credit.
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are in turn
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Board of Governors of the Federal Reserve
System ("FRB"), and legislative tax policies.
-4-
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated:
At May 31,
----------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
--------- ----- --------- ----- --------- -----
(Dollars in thousands)
Mortgage loans:
Conventional one-
to-four-family
loans ........................... $ 129,915 60.57% $ 81,803 58.56% $ 61,936 56.18%
Mortgage loans held for sale ...... 17,237 8.04 4,832 3.46 5,054 4.59
VA or FHA loans ................... 595 0.28 749 0.54 376 0.34
Home equity loans ................. 15,876 7.40 13,449 9.63 11,040 10.02
Residential construction loans .... 6,703 3.13 4,110 2.94 961 0.87
Undisbursed portion of
construction loans .............. (3,939) (1.84) (2,118) (1.52) (1,838) (1.67)
--------- ------- --------- ------ --------- ------
Total mortgage loans ......... 166,387 77.58 102,825 73.61 77,529 70.33
--------- ------- --------- ------ --------- ------
Consumer and other loans:
Commercial ........................ 34,114 15.91 23,418 16.76 19,385 17.59
Automobile ........................ 8,352 3.89 7,738 5.54 7,496 6.80
Student ........................... 1,353 0.63 1,332 0.95 1,533 1.39
Credit card ....................... 1,239 0.58 1,334 0.95 1,195 1.08
Other consumer loans .............. 3,026 1.41 3,054 2.19 3,102 2.81
--------- ------- --------- ------ --------- ------
Total consumer and other loans 48,084 22.42 36,876 26.39 32,711 29.67
--------- ------- --------- ------ --------- ------
Total loans .................. 214,471 100.00% 139,701 100.00% 110,240 100.00%
======= ====== ======
Discounts, premiums and
deferred loan fees, net ......... (293) (146) (38)
Allowance for loan losses ......... (1,513) (1,232) (1,305)
--------- --------- ------
Total loans, net .................. $ 212,665 $ 138,323 $ 108,897
========= ========= =========
At May 31,
-----------------------------------------------------
1995 1994
------------------------ ------------------------
Percent Percent
of of
Amount Total Amount Total
--------- ----- --------- -----
(Dollars in thousands)
Conventional one-
to-four-family
loans ........................... $ 78,562 63.34% $ 71,762 65.42%
Mortgage loans held for sale ...... 2,968 2.39 -- --
VA or FHA loans ................... 182 0.15 211 0.19
Home equity loans ................. 9,714 7.83 10,051 9.16
Residential construction loans .... 2,901 2.34 1,613 1.47
Undisbursed portion of
construction loans .............. (1,307) (1.05) (1,169) (1.06)
--------- ------ --------- ------
Total mortgage loans ......... 93,020 75.00 82,468 75.18
--------- ------ --------- ------
Consumer and other loans:
Commercial ........................ 17,772 14.33 15,472 14.10
Automobile ........................ 7,483 6.03 6,621 6.04
Student ........................... 1,732 1.40 1,438 1.31
Credit card ....................... 1,165 0.94 1,285 1.17
Other consumer loans .............. 2,855 2.30 2,410 2.20
--------- ------ --------- ------
Total consumer and other loans 31,007 25.00 27,226 24.82
--------- ------ --------- ------
Total loans .................. 124,027 100.00% 109,694 100.00%
====== ======
Discounts, premiums and
deferred loan fees, net ......... (158) (187)
Allowance for loan losses ......... (1,206) (909)
--------- ---------
Total loans, net .................. $ 122,663 $ 108,598
========= =========
Loan Maturity. The following table shows the contractual maturity of the
Bank's loans at May 31, 1998. The table reflects the entire unpaid principal
balance in the maturity period that includes the final loan payment date and,
accordingly, does not give effect to periodic principal repayments or possible
prepayments. Principal repayments and prepayments totaled $11.5 million, $18.4
million and $23.4 million for the fiscal years ended May 31, 1998, 1997 and
1996, respectively. Additionally, since the Bank regularly sells and securitizes
residential mortgage loans as part of its mortgage banking operations, these
activities have resulted in $12.2 million and $30.7 million in loan sales and
securitizations, respectively, for the fiscal year ended in 1998 and $6.2
million and $21.6 million, respectively, for the fiscal year ended in 1997.
-5-
May 31, 1998
------------------------------------------------------------------------------------
Mortgage Loans
----------------------- Home
Adjustable Equity
Fixed Rate Rate Commercial Lines of Consumer Other Total Loans
Mortgages Mortgages Loans Credit Loans Loans Receivable
---------- --------- --------- --------- --------- --------- ----------
(In thousands)
Amounts due:
Within one year .............................. $ 2,414 $ -- $ 7,279 $ -- $ 1,356 $ -- $ 11,049
--------- --------- --------- --------- --------- --------- ---------
After one year:
One to three years ........................ 312 -- 5,126 -- 4,963 1,429 11,830
Three to five years ....................... 709 27 12,033 -- 6,257 -- 19,026
Five to 10 years .......................... 24,691 2,444 4,881 1,610 9,038 -- 42,664
Over 10 years ............................. 71,514 48,400 4,795 3,546 237 1,410 129,902
--------- --------- --------- --------- --------- --------- ---------
Total due after one year ............. 97,226 50,871 26,835 5,156 20,495 2,839 203,422
--------- --------- --------- --------- --------- --------- ---------
Total amounts due ......................... $ 99,640 $ 50,871 $ 34,114 $ 5,156 $ 21,851 $ 2,839 214,471
========= ========= ========= ========= ========= =========
Discounts, premiums and deferred
loan fees, net .............................. (293)
Allowance for loan losses .................... (1,513)
---------
Loans receivable, net ........................ $ 212,665
=========
The following table sets forth the dollar amounts in each loan category at
May 31, 1998 that are contractually due after May 31, 1999, and whether such
loans have fixed interest rates or adjustable interest rates.
Due After May 31, 1999
------------------------------------
Fixed Adjustable Total
-------- ---------- --------
(In thousands)
Mortgage loans ....................... $ 97,226 $ 50,871 $148,097
Commercial loans ..................... 16,136 10,699 26,835
Home equity lines of credit .......... -- 5,156 5,156
Consumer loans ....................... 20,223 272 20,495
Other loans .......................... 2,839 -- 2,839
-------- -------- --------
Total loans .......................... $136,424 $ 66,998 $203,422
======== ======== ========
Origination, Purchase, Sale and Servicing of Loans. The Bank's residential
lending activities are conducted through its team of commissioned loan
originators, who regularly call upon realtors, builders and others in the real
estate business in an effort to solicit mortgage loan applications. The loans
are all self-originated, as the Bank does not use mortgage brokers, with
applications taken at the Bank's various branch offices and loan production
offices. Thereafter, the applications are processed, underwritten and prepared
for closing at the Monroe branch office, and the data is electronically linked
together during the various stages of the application process to facilitate
tracking and monitoring at the Bank's Warwick office.
The Bank originates both adjustable-rate and fixed-rate mortgage loans. Its
ability to originate loans is dependent upon the relative customer demand for
fixed-rate or adjustable-rate mortgage loans, which is affected by the current
and expected future levels of interest rates. During the fiscal year ended May
31, 1998, the Bank experienced an increase in both fixed-rate and
adjustable-rate mortgage loan originations. This was attributable to the
increased refinancing
-6-
activity that occurred during the 1998 fiscal year. The Bank currently holds for
its portfolio all adjustable-rate, bi-weekly mortgage loans and any
non-conforming loans it originates. Periodically, the Bank considers the
possible sale of its jumbo loans; however, management believes it has the
ability to build relationships with jumbo mortgage customers to create
cross-selling opportunities.
The residential loan products currently offered by the Bank include VA
guaranteed and FHA insured mortgage loans, a variety of loans that conform to
the underwriting standards specified by the Federal National Mortgage
Association ("FNMA") ("conforming loans"), SONYMA loans and, to a much lesser
extent, non-conforming loans, i.e., jumbo loans. The Bank sells most of the
conforming mortgage loans it originates to FNMA in exchange for FNMA
mortgage-backed securities through purchase and guarantee programs sponsored by
FNMA. The Bank then sells such FNMA mortgage-backed securities to private
investors and retains the servicing rights. In those cases in which
non-conforming loans are sold to private institutional investors, servicing
rights are typically released. SONYMA loans are all originated for sale back to
SONYMA, with servicing retained in exchange for tax credits.
During the time between the processing of a residential mortgage loan
application and the final disposition or sale of such loan after it is closed,
the Bank is exposed to movements in the market price due to changes in market
interest rates. The Bank attempts to manage this risk by utilizing forward sales
of mortgage-backed securities and put options on mortgage-backed securities to
securities brokers and dealers, as well as cash sales to FNMA. Depending upon
market conditions, interest rate expectations, economic data and other factors,
the Bank's Hedging Committee, comprised of various members of senior operating
management, which meets daily, attempts to cover certain percentages of its
pipeline and warehouse. However, there can be no assurance that the Bank will be
successful in its efforts to mitigate the risk of interest rate fluctuation
between the time of origination and the ultimate disposition or sale of such
loans. At May 31, 1998, the Bank had $7.9 million of forward sale commitments
representing approximately 25% of closed loans and 30-year and 15-year
fixed-rate conforming loan commitments, at specified interest rates at such
date.
Currently, the Bank services all of its one- to four-family loans,
commercial business and commercial real estate, home equity and consumer loans.
All FHA and VA loans are sold on a servicing-released basis, as are other
selected loans sold to private institutional investors. Additionally, the Bank
services a large volume of conforming fixed-rate and adjustable-rate loans that
it has previously securitized and kept in its securities portfolio or sold to
private investors. At May 31, 1998, the Bank was servicing $144.2 million of
residential mortgage loans for others. For the fiscal years ended May 31, 1998,
1997 and 1996, loan servicing fees totaled $368 thousand, $335 thousand and $158
thousand, respectively. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, making inspections as required
of mortgaged premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults,
ensuring the status of insurance and tax payments on behalf of the borrowers and
generally administering the loans.
-7-
The following table sets forth the Bank's loan originations, repayments and
other portfolio activity for the periods indicated.
For the Year Ended May 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
Mortgage loans (gross):
At beginning of period ........... $ 89,376 $ 66,489 $ 83,306
Mortgage loans originated:
Fixed-rate mortgages ............. 100,612 50,250 69,928
Adjustable-rate mortgages ........ 14,879 18,776 15,133
--------- --------- ---------
Total mortgage loans originated 115,491 69,026 85,061
Principal repayments ............. (11,457) (18,375) (23,403)
Sale of loans .................... (12,214) (6,172) (3,731)
Securitizations .................. (30,685) (21,592) (74,744)
--------- --------- ---------
At end of period ................. $ 150,511 $ 89,376 $ 66,489
========= ========= =========
Other loans (gross):
At beginning of period ........... $ 50,325 $ 43,751 $ 40,721
Commercial loans originated ...... 26,628 14,966 12,326
Consumer loans originated ........ 13,409 16,774 10,936
Commercial repayments ............ (15,933) (10,933) (10,573)
Consumer repayments .............. (10,470) (9,038) (9,659)
Other loans sold ................. -- (5,195) --
--------- --------- ---------
At end of period ................. $ 69,959 $ 50,325 $ 43,571
========= ========= =========
One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate and
adjustable-rate mortgage and construction loans, with maturities up to 30 years,
which are secured by one- to four-family, owner-occupied residences. The
majority of such loans are secured by property located in Orange County, New
York; however, there are a number of loans secured by property located in
Rockland and Dutchess Counties, New York, and, to a lesser extent, in
Westchester, Putnam and Sullivan Counties, New York.
At May 31, 1998, the Bank's total gross loans outstanding were $214.5
million, of which $129.9 million, or 60.6%, were one- to four-family residential
mortgage loans. Of the one- to four-family residential mortgage loans
outstanding at that date, 66.2%, or $99.6 million, were fixed-rate loans and
33.8%, or $50.9 million, were adjustable-rate loans. The interest rates for the
majority of the Bank's adjustable-rate mortgage loans are indexed to the yield
on one-year U.S. Treasury securities. The Bank currently offers adjustable-rate
mortgage loan programs with interest rates that adjust either every one or three
years. An adjustable-rate mortgage loan may carry an initial interest rate that
is less than the fully-indexed rate for the loan. All adjustable-rate mortgage
loans offered
-8-
have lifetime interest rate caps or ceilings. Generally, adjustable-rate
mortgage loans pose credit risks somewhat greater than the credit risk inherent
in fixed-rate loans primarily because, as interest rates rise, the underlying
payments of the borrowers rise, increasing the potential for default. The Bank
currently has no mortgage loans that are subject to negative amortization.
Commercial Lending. As part of the Bank's commercial lending program, the
Bank originates various types of secured and unsecured commercial business loans
and lines of credit and commercial real estate and construction loans. The
Bank's commercial loan portfolio consisted of the following types of commercial
loans at the dated indicated.
At May 31,
-------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- --------------- --------------- --------------
Percent Percent Percent Percent Percent
of of of of of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Commercial loans
by type:
Non-farm and non- ................... $16,862 7.86% $10,372 7.42% $ 8,288 7.52% $ 6,749 5.44% $ 5,046 4.60%
residential
One- to four-family ................. 3,094 1.44 1,157 0.83 1,161 1.05 1,387 1.12 1,593 1.45
Multi-family ........................ 3,759 1.75 3,022 2.16 1,565 1.42 501 0.41 390 0.36
Farm ................................ 404 0.19 318 0.23 156 0.14 471 0.38 491 0.45
Acquisition, development ............ 3,791 1.77 2,781 1.99 2,414 2.19 2,819 2.27 2,393 2.18
& construction
Term loans .......................... 367 0.17 258 0.18 108 0.10 188 0.15 494 0.45
Installment loans ................... 2,176 1.02 1,796 1.29 1,617 1.47 1,542 1.24 1,920 1.75
Demand loans ........................ 608 0.28 498 0.36 444 0.40 456 0.37 627 0.57
Time loans .......................... 224 0.10 300 0.21 174 0.16 150 0.12 306 0.28
S.B.A. loans ........................ 526 0.25 636 0.46 546 0.50 657 0.53 223 0.20
Lines of credit ..................... 2,164 1.01 2,166 1.55 2,861 2.60 2,763 2.23 1,922 1.75
Loans and draws disbursed ........... -- -- 88 0.06 -- -- -- -- -- --
Non-accrual ......................... 139 0.06 26 0.02 51 0.04 89 0.07 67 0.06
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total ............................. $34,114 15.90% $23,418 16.76% $19,385 17.59% $17,772 14.33% $15,472 14.10%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Commercial business loans generally carry greater credit risks than
residential mortgage loans because their repayment is more dependent on (i) the
underlying financial condition of the borrower and/or the value of any property
or the cash flow from any property securing the loan or the business being
financed and (ii) general as well as local economic conditions. Mortgage loans
secured by commercial real estate properties, including construction and
development lending, are generally larger and involve a higher degree of risk
than one- to four-family residential mortgage loans. This risk is attributable
to the uncertain realization of projected income-producing cash flows, which are
affected by vacancy rates, the ability to maintain rent levels against
competitively-priced properties and the ability to collect rent from tenants on
a timely basis. Also, in the case of construction and
-9-
development lending, risk is largely dependent upon the accuracy of the initial
estimate of the property's value at completion of construction or development
compared to the estimated cost (including interest payments) of construction and
other assumptions. In addition, commercial construction loans are subject to
many of the same risks as residential construction loans.
Commercial Business Lending. The Bank also offers various types of
short-term and medium-term commercial business loans on a secured and unsecured
basis to borrowers located in the Bank's market area. Borrowers in the
commercial market are generally local companies engaged in retailing and
construction that require traditional working capital financing with cyclical
repayments coming primarily from asset conversion. These loans include time and
demand loans, term loans and lines of credit. The Bank is also an approved Small
Business Administration ("SBA") lender. At May 31, 1998, the Bank's commercial
business loan portfolio amounted to $6.5 million, or 3.0% of total gross loans
outstanding. The largest commercial business loan outstanding at May 31, 1998
was a $500 thousand loan to a borrower whose business in Monroe, New York,
specializes in industrial flooring. In addition, the Bank has committed a line
of credit of $2.5 million to the Warwick Valley Telephone Company. At May 31,
1998, $700 thousand of such line was outstanding.
The Bank's lines of credit are typically established for one year and are
subject to renewal upon satisfactory review of the borrower's financial
statements and credit history. Secured short-term commercial business loans are
usually collateralized by real estate and are generally guaranteed by a
principal of the borrower. Interest on these loans is usually payable monthly at
fixed rates or rates that fluctuate based on a spread above the prime rate. The
Bank offers term loans with terms generally not exceeding five years. Typically,
term loans have floating interest rates based on a spread above the prime rate.
The Bank also offers business loans on a revolving basis, whereby the borrower
pays interest only. Interest on such loans fluctuates based on the prime rate.
Normally these loans require periodic interest payments during the loan term,
with full repayment of principal and interest at maturity. The Bank offers
business and merchant credit cards to its corporate customers; however, these
services are provided through third party vendors. The Bank bears the credit
risk in the case of business credit cards, but credit risk is borne by the third
party on merchant credit cards, with the Bank receiving a fee in the latter
case. In approving a commercial business loan the Bank will consider the
borrower's sources of cash flow to repay the loan, a secondary source of
repayment and the borrower's credit standing.
Commercial Real Estate and Construction Lending. The Bank originates
commercial real estate mortgage loans that are generally secured by a
combination of residential property for development and retail facilities and
properties used for business purposes, such as small office buildings and
apartment buildings located in the Bank's market area. Loans are also made to
develop land and for land acquisition. The Bank's loan policy and underwriting
procedures provide that commercial real estate loans may be made in amounts up
to the lesser of (i) 80% of the lesser of the appraised value or purchase price
of the property, in the case of improved, existing commercial, investment
property, (ii) 75% of the lesser of the appraised value or purchase price of the
property, in the case of commercial, multi-family and non-residential
construction property, (iii) 70% of the lesser of the appraised value or
purchase price of the property, in the case of commercial land development,
generally for subdivision or industrial park land development property and (iv)
60% of the lesser of the appraised value or purchase price of the property in
the case of raw land. In
-10-
addition to restrictions on loan to value, the Bank's underwriting procedures
provide that commercial real estate loans may be made in amounts up to the
lesser of (i) $2.5 million or (ii) the Bank's current loans-to-one borrower
limit. Regarding (iii) and (iv), the Bank usually engages in this type of
lending only with experienced local developers operating in the Bank's primary
market area. Such loans are typically offered for the construction of properties
that are pre-sold or for which permanent financing has been secured. At May 31,
1998, the Bank had $3.8 million in a variety of acquisition, development and
construction ("ADC") loans in its commercial lending area. The Bank's policy is
not to make construction loans for purposes of speculation, so that the borrower
must have secured permanent financing commitments from generally recognized
lenders for an amount greater than the amount of the loan. In most cases, the
Bank itself provides the permanent financing. While the number and volume of
this type of specialized lending is presently limited, it should be noted that
the Bank intends to continue to emphasize its commercial real estate, including
ADC, loan activity as it expands its mortgage origination operations into New
Jersey through WSB Mortgage. The largest commercial real estate loan in the
Bank's portfolio as of May 31, 1998 was a $2.4 million loan secured by a golf
course known as Hudson National Golf Club in Croton-on-Hudson, New York.
The Bank's commercial mortgage loans are generally prime-based and may be
made with terms up to ten years, generally with a five-year or ten-year balloon
maturity and a 30-year amortization schedule. In reaching its decision as to
whether to make a commercial real estate loan, the Bank considers the
qualifications of the borrower as well as the underlying property. Some of the
factors considered are: the net operating income of the mortgaged premises
before debt service and depreciation, the debt service ratio (the ratio of the
property's net cash flow to debt service requirements), which must be a minimum
of 1.25, the ratio of loan amount to appraised value and the credit worthiness
of the borrower.
Residential Construction Lending. The Bank originates loans for the
acquisition and development of property to individuals in its market area. The
Bank's residential construction loans primarily have been made to finance the
construction of one- to four-family, owner-occupied residential properties. The
Bank offers construction to permanent financing loans with one or two closings,
and will not make residential construction loans unless the borrower has been
approved for permanent financing. The interest rate charged during the
construction phase of the loan is based on the 30-year fixed mortgage rate. The
Bank's policies provide that construction loans may be made in amounts up to 95%
of the appraised value of the completed property. At May 31, 1998, the Bank had
$2.8 million of residential construction loans (net of undisbursed portion),
which amounted to 1.3% of the Bank's gross loans outstanding.
Construction lending generally involves additional risks to the lender as
compared with residential mortgage lending. These risks are attributable to the
fact that loan funds are advanced upon the security of the project under
construction, predicated on the present value of the property and the
anticipated future value of the property upon completion of construction or
development. Moreover, because of the uncertainties inherent in delays resulting
from labor problems, materials shortages, weather conditions and other
contingencies, it is relatively difficult to evaluate the total funds required
to complete a project and to establish the loan-to-value ratio. If the Bank's
initial estimate of the property's value at completion is inaccurate, the Bank
may be confronted with a project that, when completed, has an insufficient value
to assure full repayment.
-11-
Home Equity Lending. The Bank offers fixed-rate, fixed-term home equity
loans, called the Good Neighbor Home Loan, and adjustable-rate home equity lines
of credit in its market area. Both the loan and line of credit are offered in
amounts up to 80% of the appraised value of the property (including the first
mortgage) with a maximum loan amount of up to $100 thousand. The fixed-rate,
fixed-term Good Neighbor Home Loan is offered with terms of up to 15 years. The
home equity line of credit is offered for terms up to 20 years, with the first
five years being offered on a revolving basis, requiring payments of interest
only; thereafter, the line converts to an amortizing loan. As of May 31, 1998,
$15.9 million, or 7.4%, of the Bank's gross loans, were home equity loans.
Consumer Lending. The Bank offers various types of secured and unsecured
consumer loans, including automobile loans, home improvement loans, personal
loans, student loans and credit cards (VISA). The Bank's consumer loans have
original maturities of not more than five years. Interest rates charged on such
loans are set at competitive rates, taking into consideration the type and term
of the loan. Consumer loan applications are reviewed and approved in conformance
with the Bank's Board-approved lending policy. At May 31, 1998, the Bank's
consumer loan portfolio totaled $14.0 million, or 6.5% of the total gross loans
outstanding.
Loan Approval Procedures and Authority. The Bank's Board of Directors
establishes the lending policies and loan approval limits of the Bank.
Conforming residential mortgage loans are approved in accordance with FNMA
guidelines by the Bank's underwriting group. Certain conforming loans and all
non-conforming loans are approved by either the Bank's Executive Vice President
or President. The Board of Directors has established the following lending
authority for commercial lending, including commercial real estate lending: (i)
various officers have limited individual authority up to $25 thousand; (ii)
certain officers have joint authority up to $50 thousand; (iii) certain officers
have joint authority up to $100 thousand; and (iv) the Bank's Commercial Loan
Committee has authority to approve loans of up to $500 thousand. All of the
aforementioned loans are subsequently ratified by the Executive Committee of the
Board of Directors. Loans in excess of $500 thousand but not more than $1
million must be approved by the Executive Committee of the Board of Directors,
which meets on a bi-weekly basis. Loans in excess of $1 million must be approved
by the full Board of Directors of the Bank, which meets on a bi-weekly basis.
The approval of consumer loans generally requires the dual authorization of two
lending officers for loans over certain amounts ($5 thousand for unsecured loans
and $10 thousand for secured loans). Likewise, home equity loans or lines of
credit also require dual authorizations. The foregoing lending limits are
reviewed and reaffirmed annually by the Board of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and certain
other information is verified by an independent credit agency, and, if
necessary, additional financial information is required to be submitted by the
borrower. An appraisal of any real estate intended to secure the proposed loan
is required, which currently is performed by an independent appraiser designated
and approved by the Bank. The Board of Directors annually approves the
independent appraisers used by the Bank and approves the Bank's appraisal
policy. It is the Bank's policy to obtain title and hazard insurance on all real
estate loans. In connection with a borrower's request for a renewal of a
multi-family or commercial mortgage loan with a balloon maturity, the Bank
evaluates both the borrower's ability to service the renewed loan applying an
interest rate that reflects prevailing market conditions, as well as the value
of the underlying collateral property. The reevaluation of the property
typically
-12-
requires a new appraisal, depending upon the loan amount and other factors. It
is the Bank's policy to note all exceptions to policy in the respective credit
files and report such exceptions to the original decision-making body (i.e., the
Commercial Loan Committee, Executive Committee or Board of Directors) prior to
closing if a condition of the original approval is not met.
Asset Quality
Non-Performing Loans. The Bank's management and Board of Directors perform
a monthly review of delinquent loans. The actions taken by the Bank with respect
to delinquencies vary depending on the nature of the loan and period of
delinquency. The Bank's policies on residential mortgage loans provide that
delinquent mortgage loans be reviewed and that a late charge notice be mailed no
later than the 15th day of delinquency, with the delinquency charge assessed on
the 16th day. The Bank's collection policies on residential mortgage loans
essentially mirror those shown in the FNMA servicing agreements. On other loans,
telephone contact and various delinquency notices at different intervals are the
methods used to collect past due loans.
It is the Bank's general policy to discontinue accruing interest on all
loans when management has determined that the borrower will be unable to meet
contractual obligations or when unsecured interest or principal payments are 90
days past due. Generally, when residential mortgage or secured consumer loans
are delinquent 90 days, they are classified as nonaccrual. When a loan is
classified as nonaccrual, the recognition of interest income ceases. Interest
previously accrued and remaining unpaid is reversed against income. Cash
payments received are applied to principal, and interest income is not
recognized unless management determines that the financial condition and payment
record of the borrower warrant the recognition of income. If a foreclosure
action is commenced and the loan is not brought current, paid in full or an
acceptable workout arrangement is not agreed upon before the foreclosure sale,
the real property securing the loan is generally sold at foreclosure. Property
acquired by the Bank as a result of foreclosure on a mortgage loan is classified
as "real estate owned" and is recorded at the lower of the unpaid balance or
fair value less costs to sell at the date of acquisition and thereafter. Upon
foreclosure, it is the Bank's policy to generally require an appraisal of the
property and, thereafter, appraise the property on an as-needed basis.
-13-
The following table sets forth information regarding non-accrual loans,
other past due loans and other real estate owned ("OREO'). There were no
troubled debt restructurings within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15 at any of the dates presented below.
At May 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accrual mortgage loans delinquent
more than 90 days .............................. $ 699 $1,111 $ 582 $1,093 $1,217
Non-accrual other loans delinquent
more than 90 days .............................. 186 83 82 131 69
------ ------ ------ ------ ------
Total non-accrual loans ................................. 885 1,194 664 1,224 1,286
Total 90 days or more delinquent
and still accruing interest .................... 133 237 199 978 928
------ ------ ------ ------ ------
Total non-performing loans .............................. 1,018 1,431 863 2,202 2,214
Total foreclosed real estate, net of related
allowance for losses ................................. 409 224 330 493 306
------ ------ ------ ------ ------
Total non-performing assets ............................. $1,427 $1,655 $1,193 $2,695 $2,520
====== ====== ====== ====== ======
Non-performing loans to total loans ..................... 0.47% 1.02% 0.78% 1.78% 2.02%
Total non-performing assets to total assets ............. 0.35% 0.58% 0.44% 1.04% 1.08%
Interest income that would have been recorded if the non-accrual mortgage
loans had been performing in accordance with their original terms aggregated
approximately $100,000, $93,000 and $54,000 for the years ended May 31, 1998,
1997 and 1996, respectively.
Other Real Estate Owned. At May 31, 1998, the Bank's OREO, net, which
consisted of five single family residential properties, totaled $409 thousand
and was held directly by the Bank.
Classified Assets. Federal regulations and the Bank's Internal Loan Review
and Grading System, which is a part of the Bank's loan policy, require that the
Bank utilize an internal asset classification system as a means of reporting
problem and potential problem assets. The Bank limits its loan review procedure
to the higher-risk commercial business and commercial real estate loans,
commercial loans greater than $25,000 and jumbo residential mortgage loans.
At each regularly scheduled Board of Directors meeting, a watch list is
presented, showing all loans listed as "Special Mention," "Substandard,"
"Doubtful" and "Loss." An asset is considered Substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Assets classified as Doubtful have all the
weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets
-14-
classified as Loss are those considered uncollectible and viewed as non-bankable
assets, worthy of charge-off. Assets which do not currently expose the Bank to
sufficient risk to warrant classification in one of the aforementioned
categories, but possess weaknesses which may or may not be out of the control of
management, are deemed to be "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances, which is a regulatory term, represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to specific problem assets. When an insured institution classifies one
or more assets, or portions thereof, as Loss, it is required either to establish
a specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge-off such amount.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the FDIC and the
Banking Department of the State of New York ("NYSBD"), 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 (i) institutions have effective systems and controls to
identify, monitor and address asset quality problems; (ii) management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and (iii) management has established acceptable
allowance evaluation processes that meet the objectives set forth in the policy
statement. Management believes it has established an adequate allowance for
possible loan and lease losses and analyzes its process regularly, with
modifications made if needed, and reports those results four times per year at
the Bank's Board of Directors meetings. However, there can be no assurance that
the regulators, in reviewing the Bank's loan portfolio, will not request the
Bank to materially increase its allowance for loan and lease losses at that
time. Although management believes that adequate specific and general loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of specific and general loan loss
allowances may become necessary.
At May 31, 1998, the Bank had $631 thousand of assets classified as
Substandard and $563 thousand of assets classified as Special Mention. There
were no assets classified as Doubtful or Loss as of May 31, 1998. The $631
thousand of loans classified as Substandard were also impaired under SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition
Disclosures," which the Bank adopted in fiscal 1995. SFAS No. 114 defines an
impaired loan as a loan for which it is probable, based on current information,
that the lender will not collect all amounts due under the contractual terms of
the loan agreement.
-15-
The following table sets forth delinquencies in the Bank's loan portfolio
at the dates indicated:
At May 31, 1998 At May 31, 1997
------------------------------------------- --------------------------------------------
60-89 Days 90 Days 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)
One- to four-family ................ 12 $ 952 12 $ 764 7 $ 475 16 $1,214
Multi-family ....................... -- -- -- -- -- -- -- --
Commercial loans ................... 4 533 4 211 5 724 5 121
Home equity lines of
credit .......................... -- -- 1 16 -- -- 2 57
Other loans ........................ 13 26 11 27 8 16 17 39
------ ------ ------ ------ ------ ------ ------ ------
Total loans ................... 29 $1,511 28 $1,018 20 $1,215 40 $1,431
====== ====== ====== ====== ====== ====== ====== ======
At May 31, 1996
----------------------------------------
60-89 Days 90 Days or More
------------------ -------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- -------- -------- --------
(Dollars in thousands)
One- to four-family ................ 11 $ 792 11 $ 692
Multi-family ....................... -- -- -- --
Commercial loans ................... 7 710 4 58
Home equity lines of credit ........ 1 11 2 57
Other loans ........................ 9 33 28 56
------ ------ ------ ------
Total loans ................... 28 $1,546 45 $ 863
====== ====== ====== ======
Allowance for Loan and Lease Losses. The allowance for loan and lease
losses is based upon management's periodic evaluation of the loan portfolio
under current economic conditions, considering factors such as asset
classifications, the Bank's past loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability to
repay and the estimated value of the underlying collateral. The allowance for
loan and lease losses is maintained at an amount management considers adequate
to cover loan and lease losses that are deemed probable and estimable. At May
31, 1998, the Bank's allowance for loan and lease losses was $1.5 million, or
0.71% of total loans, as compared to $1.2 million, or 0.88%, at May 31, 1997.
The Bank had non-performing loans of $1.2 million and $1.4 million at May 31,
1998 and May 31, 1997, respectively. The Bank will continue to monitor and
modify its allowance for loan losses as conditions dictate. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. These agencies may require the Bank to
establish additional valuation allowances, based on their judgments of the
information available at the time of the examination.
-16-
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
At or For the
Year Ended May 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period ...... $ 1,232 $ 1,305 $ 1,206 $ 909 $ 808
Charge-offs:
Real estate mortgage loans .......... (151) (119) (24) (61) (195)
Commercial loans .................... (52) -- -- -- (126)
Consumer loans ...................... (122) (94) (125) (47) (58)
------- ------- ------- ------- -------
Total charge-offs .......... (325) (213) (149) (108) (379)
Recoveries:
Real estate mortgage loans .......... -- -- 18 123 8
Commercial loans .................... -- -- 74 13 33
Consumer loans ...................... 14 10 16 8 24
------- ------- ------- ------- -------
Total recoveries ........... 14 10 108 144 65
Provision for loan losses ........... 592 130 140 261 415
------- ------- ------- ------- -------
Balance at end of period ............ $ 1,513 $ 1,232 $ 1,305 $ 1,206 $ 909
======= ======= ======= ======= =======
Ratio of net charge-offs during the
period to average loans outstanding 0.18% 0.16% 0.03% N/A 0.29%
Ratio of allowance for loan losses to
total loans at end of period ...... 0.71% 0.88% 1.18% 0.97% 0.83%
Ratio of allowance for loan losses to
non-performing loans .............. 123.61% 86.09% 151.22% 54.77% 41.06%
The following table sets forth the Bank's allowance for loan losses
allocated by loan category, the percent of the allocated allowances to the total
allowance and the percent of loans in each category to total loans at the dates
indicated.
At May 31,
-------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
Allowance for mortgage
loan loss .............. $ 372 77.58% $ 224 73.60% $ 393 70.33% $ 403 75.00% $ 288 75.18%
Allowance for consumer
loan loss .............. 406 6.51 436 9.64 310 12.09 311 10.67 258 10.72
Allowance for commercial
loan loss .............. 735 15.91 572 16.76 602 17.58 492 14.33 363 14.10
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowances
for loan loss .......... $1,513 100.00% $1,232 100.00% $1,305 100.00% $1,206 100.00% $ 909 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
-17-
Environmental Issues
The Bank 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 properties securing their loans. In
addition, the existence of hazardous materials may make it unattractive 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 residential real estate loans if environmental contamination
makes security property unsuitable for use. As of May 31, 1998, the Bank was not
aware of any environmental issues that would subject the Bank to material
liability. No assurance, however, can be given that the values of properties
securing loans in the Bank's portfolio will not be adversely affected by
unforseen environmental contamination.
Investment Activities
Investment Policies. The investment policy of the Bank, which is
established by the Board of Directors, is contained in the Bank's Liquidity and
Funds Management Policy. It is based upon asset/liability management goals and
emphasizes high credit quality and diversified investments while seeking to
optimize net interest income within acceptable limits of safety and liquidity.
The Bank also considers the investment advice it receives from some of its
outside investment advisers. Recently, the Bank has engaged in leveraging
activities to enhance returns on equity. The policy is designed to provide and
maintain liquidity to meet day-to-day, cyclical and long-term changes in the
Bank's asset/liability structure, and to provide needed flexibility to meet loan
demand. Approximately 86% of the Bank's debt security portfolio at May 31, 1998
is classified as available-for-sale.
The Bank's investment policy permits it to invest in U.S. government
obligations, securities of various government-sponsored agencies, including
mortgage-backed securities issued/guaranteed by FNMA, the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Government National Mortgage Association
("GNMA"), certain types of equity securities (such as institutional mutual
funds), certificates of deposit of insured banks, federal funds and investment
grade corporate debt securities and commercial paper.
The Bank's investment policy prohibits investment in certain types of
mortgage derivative securities that management considers to be high risk. The
Bank generally purchases only short- and medium-term classes of CMOs guaranteed
by FNMA or FHLMC. At May 31, 1998, the Bank held no securities issued by any one
entity with a total carrying value in excess of 10% of the Bank's equity at that
date, except for obligations of the U.S. government and government-sponsored
agencies and certain mortgage-backed securities, which are fully collateralized
by mortgages held by single purpose entities and guaranteed by
government-sponsored agencies.
Mortgage-Backed Securities. The Bank invests in mortgage-backed securities
and uses such investments to complement its mortgage lending activities. At May
31, 1998, the amortized cost of mortgage-backed securities totaled $81.1
million, or 19.8% of total assets. The market value of all mortgage-backed
securities totaled $91.1 million at May 31, 1998. All of the Bank's
mortgage-backed securities are included in its available-for-sale portfolio.
Additionally, the Bank's securities portfolio includes CMOs, with an amortized
cost of $19.6 million and a market value of $19.6 million at May 31, 1998. A CMO
is a special type of debt security in which the stream of principal
-18-
and interest payments on the underlying mortgages or mortgage-backed securities
is used to create classes with different maturities and, in some cases,
amortization schedules as well as a residual interest, with each class
possessing different risk characteristics. However, management regularly
monitors the risks inherent in its CMOs and believes these securities may
represent attractive alternatives relative to other investments due to the wide
variety of maturity, repayment and interest rate options available.
At May 31, 1998, all securities in the Bank's mortgage-backed securities
portfolio were directly or indirectly insured or guaranteed by GNMA, FNMA or
FHLMC. The Bank's mortgage-backed securities portfolio had a weighted average
yield of 7.30% at May 31, 1998.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
borrowings of the Bank. In general, mortgage-backed securities issued or
guaranteed by GNMA, FNMA and FHLMC are weighted at no more than 20% for
risk-based capital purposes, compared to the 50% risk weighting assigned to most
non-securitized residential mortgage loans.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors, such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed and value of such
securities. In contrast to mortgage-backed pass-through securities in which cash
flow is received (and, hence, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying CMOs are segmented and paid in accordance with a
pre-determined priority to investors holding various tranches of such securities
or obligations. A particular tranche of a CMO may therefore carry prepayment
risk that differs from that of both the underlying collateral and other
tranches. It is the Bank's strategy to purchase tranches of CMOs that are
categorized as "planned amortization classes," "targeted amortization classes"
or "very accurately defined maturities" and are intended to produce stable cash
flows in different interest rate environments.
-19-
The following table sets forth activity in the Bank's securities portfolio
for the periods indicated.
For the Year
Ended May 31,
----------------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
Beginning Balance ........................................................... $ 126,393 $ 144,284 $ 110,333
--------- --------- ---------
Debt securities purchased-- held-to-maturity ................................ 5,560 200 526
Debt securities purchased-- available-for-sale .............................. 44,558 23,687 18,723
Equity securities purchased-- available-for-sale ............................ 14,963 2,277 4,723
Mortgage-backed securities purchased-- held-to-maturity ..................... -- -- --
Mortgage-backed securities purchased-- available-for-sale ................... 59,644 23,221 12,101
Mortgage-backed securities formed by securitizing
originated mortgage loans .......................................... 30,347 21,358 72,325
Less:
Sale of debt securities -- available-for-sale ............................... 9,284 18,199 7,184
Sale of equity securities-- available-for-sale .............................. 5,466 5,317 1,876
Sale of mortgage-backed securities available-for-sale ....................... 25,764 25,375 --
Sale of mortgage-backed securities formed by securitizing
originated mortgage loans-- trading ................................ 22,604 17,486 22,668
Principal repayments on mortgage-backed securities
and debt securities ................................................ 16,447 10,469 3,637
Maturities and called debt securities ....................................... 32,800 12,425 39,576
Accretion of discount/amortization of (premium) ............................. 809 (83) 75
Change in gross unrealized gains (losses) on available-for-sale
securities ......................................................... 840 720 419
--------- --------- ---------
Ending Balance .............................................................. $ 170,749 $ 126,393 $ 144,284
========= ========= =========
-20-
The following table sets forth the amortized cost and market value of the
Bank's securities by accounting classification category and by type of security,
at the dates indicated:
At May 31,
----------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
(In thousands)
Debt securities held-to-maturity:
U.S. Government obligations ...................... $ -- $ -- $ 720 $ 725 $ 717 $ 658
Agency securities ................................ 6,659 6,610 4,965 4,981 5,887 5,910
Municipal bonds .................................. 665 667 407 410 432 437
Other debt obligations ........................... -- -- -- -- 82 83
--------- --------- --------- --------- --------- ---------
Total debt securities held-to-
maturity ........................ 7,324 7,277 6,092 6,116 7,118 7,088
--------- --------- --------- --------- --------- ---------
Debt securities available-for-sale:
U.S. Government obligations ...................... 4,047 4,163 9,079 9,165 21,684 21,716
Agency securities ................................ 40,418 40,071 20,822 20,856 15,328 15,206
Other debt obligations ........................... 822 851 7,991 8,029 16,203 16,256
--------- --------- --------- --------- --------- ---------
Total debt securities available-
for-sale ........................ 45,287 45,085 37,892 38,050 53,215 53,178
--------- --------- --------- --------- --------- ---------
Equity securities available-for-sale:
Preferred stock .................................. 1,102 1,122 204 204 305 277
Common stock ..................................... 582 576 -- -- -- --
Mutual funds ..................................... 13,823 14,931 5,597 6,091 8,636 8,821
--------- --------- --------- --------- --------- ---------
Total equity securities available-
for-sale ........................ 15,507 16,629 5,801 6,295 8,941 9,098
--------- --------- --------- --------- --------- ---------
Total debt and equity
securities ...................... 68,118 68,991 49,785 50,461 69,274 69,364
--------- --------- --------- --------- --------- ---------
Mortgage-backed securities trading:
FNMA ............................................. -- -- -- -- 1,992 1,934
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities trading .............. -- -- -- -- 1,992 1,934
--------- --------- --------- --------- --------- ---------
Mortgage-backed securities available-for-sale:
FHLMC ............................................ 9,720 9,872 11,062 11,029 10,395 10,322
GNMA ............................................. 49,164 49,307 29,230 29,190 4,396 4,348
FNMA ............................................. 22,213 22,973 32,519 33,052 52,871 53,336
CMOs ............................................. 19,593 19,559 2,696 2,685 4,973 4,950
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities available-for-sale ... 100,690 101,711 75,507 75,956 72,635 72,956
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities ...................... 100,690 101,711 75,507 75,956 74,627 74,890
--------- --------- --------- --------- --------- ---------
Net unrealized (losses) gains on trading
securities ...................... -- -- (58)
Net unrealized (losses) gains on available-
for-sale and trading securities .................. 1,941 1,101 441
--------- --------- ---------
Total securities .............. $ 170,749 $ 170,702 $ 126,393 $ 126,417 $ 144,284 $ 144,254
========= ========= ========= ========= ========= =========
-21-
The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
At May 31,
------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Total Value Total Value Total
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Debt securities:
U.S. Government obligations ...................... $ 4,822 2.82% $ 9,885 7.82% $ 22,433 15.55%
Agency securities ................................ 46,071 26.98 25,821 20.43 21,093 14.62
Municipal bonds .................................. 665 0.39 407 0.32 432 0.30
Other debt obligations ........................... 851 0.50 8,029 6.35 16,338 11.32
-------- -------- -------- -------- -------- --------
Total debt securities ................... 52,409 30.69 44,142 34.92 60,296 41.79
-------- -------- -------- -------- -------- --------
Equity securities:
Preferred stock .................................. 1,122 0.66 204 0.16 277 0.19
Common stock ..................................... 576 0.34 -- -- -- --
Mutual funds ..................................... 14,931 8.74 6,091 4.82 8,821 6.12
-------- -------- -------- -------- -------- --------
Total equity securities ................. 16,629 9.74 6,295 4.98 9,098 6.31
-------- -------- -------- -------- -------- --------
Mortgage-backed securities
FHLMC ............................................ 9,872 5.78 11,029 8.73 10,322 7.15
GNMA ............................................. 49,307 28.88 29,190 23.09 4,348 3.01
FNMA ............................................. 22,973 13.46 33,052 26.15 55,270 38.31
CMOs ............................................. 19,559 11.45 2,685 2.13 4,950 3.43
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities ........ 101,711 59.57 75,956 60.10 74,890 51.90
-------- -------- -------- -------- -------- --------
Total securities ........................ $170,749 100.00% $126,393 100.00% $144,284 100.00%
======== ======== ======== ======== ======== ========
Debt and equity securities available-
for-sale ............................ $ 61,714 36.14% $ 44,345 35.08% $ 62,276 43.16%
Debt and equity securities held-to-
maturity ............................ 7,324 4.29 6,092 4.82 7,118 4.94
-------- -------- -------- -------- -------- --------
Total debt and equity
securities .......................... 69,038 40.43 50,437 39.90 69,394 48.10
-------- -------- -------- -------- -------- --------
Mortgage-backed securities trading ............... -- -- -- -- 1,934 1.34
Mortgage-backed securities available-
for-sale ................................ 101,711 59.57 75,956 60.10 72,956 50.56
Mortgage-backed securities held-to-
maturity ................................ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities ........ 101,711 59.57 75,956 60.10 74,890 51.90
-------- -------- -------- -------- -------- --------
Total securities ............... $170,749 100.00% $126,393 100.00% $144,284 100.00%
======== ======== ======== ======== ======== ========
-22-
The following table sets forth certain information regarding the carrying
value and weighted average yield of the Bank's securities at May 31, 1998, by
remaining period to contractual maturity. Actual maturities may differ from
contractual maturities because certain security issuers may have the right to
call or prepay their obligations.
At May 31, 1998
----------------------------------------------------------------------------------------------
More than One Year More than Five More Than
One Year or Less to Five Years Years to Ten Years Ten Years Total
------------------ ------------------ ------------------ ------------------ -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
--------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
Held-to-maturity:
Municipal bonds ................. $ 560 3.78% $ 105 6.96% $ -- --% $ -- -- % $ 665 4.28%
U.S. Government obligations ..... 309 4.76 350 7.01 -- -- -- -- 659 5.95
Agency securities ............... -- -- 1,000 5.90 5,000 7.00 -- -- 6,000 6.82
-------- -------- -------- -------- --------
Total held-to-maturity . 869 4.13 1,455 6.24 5,000 7.00 -- -- 7.324 6.51
-------- -------- -------- -------- --------
Available-for-sale:
Mortgage backed securities:
Variable Rate:
FHLMC .................. -- -- -- -- -- -- 813 7.28 813 7.28
GNMA ................... -- -- -- -- -- -- 756 6.83 756 6.83
FNMA ................... -- -- -- -- -- -- 1,988 7.61 1,988 7.61
Fixed Rate:
FHLMC .................. -- -- 1,021 5.59 539 7.08 7,499 7.18 9,059 6.99
GNMA ................... -- -- 4 8.00 43 7.71 48,504 7.58 48,551 7.58
FNMA ................... -- -- -- -- 671 8.25 20,314 7.34 20,985 7.37
CMOs ................... -- -- -- -- -- -- 19,559 6.65 19,559 6.65
-------- -------- -------- -------- --------
Total mortgage-backed
securities .......... -- -- 1,025 5.60 1,253 7.73 99,433 7.31 101,711 7. 30
-------- -------- -------- -------- --------
Debt securities:
U.S. Government obligations ... 2,037 8.71 2,126 7.06 -- -- -- -- 4,163 7.87
Agency securities ............. -- -- -- -- 19,814 7.49 20,257 6.92 40,071 7.20
Other debt obligations ........ 20 4.66 831 6.70 -- -- -- -- 851 6.65
-------- -------- -------- -------- --------
Total debt securities .. 2,057 8.67 2,957 6.96 19,814 7.49 20,257 6.92 45,085 7.25
-------- -------- -------- -------- --------
Equity Securities:
Preferred stock ............... -- -- -- -- -- -- 1,122 6.63 1,122 6.63
Common stock .................. -- -- -- -- -- -- 576 -- 576 --
Mutual funds .................. -- -- -- -- -- -- 14,931 11.52 14,931 11.52
-------- -------- -------- -------- --------
Total equity securities -- -- -- -- -- -- 16,629 10.79 16,629 10.79
-------- -------- -------- -------- --------
Total available-for-sale 2,057 8.67 3,982 6.61 21,067 7.50 136,319 7.68 163,425 7.64
-------- -------- -------- -------- --------
Total securities ....... $ 2,926 7.32 $ 5,437 6.51 $ 26,067 7.41 $136,319 7.68 $170,749 7.59
======== ======== ======== ======== ========
Sources of Funds
General. Deposits, borrowings, loan and security repayments and
prepayments, proceeds from sales of securities and cash flows generated from
operations are the primary sources of the Bank's funds for use in lending,
investing and for other general purposes. Management intends to increase its
deposit base through competitive pricing but continually evaluates wholesale
funding through Federal Home Loan Bank of New York ("FHLBNY") advances and other
sources, depending upon market conditions.
-23-
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of regular (passbook)
savings accounts, statement savings accounts, checking accounts, NOW accounts,
basic banking accounts, money market accounts and certificates of deposit. In
recent years, the Bank has offered certificates of deposit with maturities of up
to 60 months. At May 31, 1998, the Bank's core deposits, which the Bank
considers to consist of checking accounts, NOW accounts, money market accounts,
regular savings accounts and statement savings accounts, constituted 68.2% of
total deposits. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. The Bank's deposits are obtained predominantly from the areas
in proximity to its office locations. The Bank relies primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Bank's ability to attract and
retain deposits. Certificate accounts in excess of $100 thousand are not
actively solicited by the Bank, nor does the Bank use brokers to obtain
deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Years Ended May 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(In thousands)
Deposits .......................... $ 1,140,993 $ 777,214 $ 817,610
Withdrawals ....................... (1,146,633) (796,578) (822,470)
----------- ----------- -----------
(Withdrawals) in excess of deposits (5,640) (19,364) (4,860)
Interest credited on deposits ..... 7,150 7,610 8,814
----------- ----------- -----------
Net increase (decrease) in deposits $ 1,510 $ (11,754) $ 3,954
=========== =========== ===========
At May 31, 1998 the Bank had $6.1 million in certificate of deposit
accounts in amounts of $100 thousand or more, maturing as follows:
Weighted
Average
Amount Rate
------ ----
(Dollars in thousands)
Maturity Period:
Three months or less ....................... $2,684 4.83%
Over 3 through 6 months .................... 1,574 4.92
Over 6 through 12 months ................... 1,004 4.92
Over 12 months ............................. 845 5.46
------ ----
Total .................................... $6,107 4.96%
====== ====
-24-
The following table sets forth the distribution of the Bank's deposit
accounts and the related weighted average interest rates for the periods
indicated.
For the Years Ended May 31,
---------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Percent Weighted Percent Weighted Percent Weighted
of Average of Average of Average
Average Total Nominal Average Total Nominal Average Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------- -------- ------- -------- -------- ------- -------- -------- -------
(Dollars in thousands)
Checking accounts ....................... $ 19,302 9.00% -- $ 18,629 8.54% -- $ 18,834 8.18% --
Passbook accounts ....................... 77,999 36.35 2.95% 78,132 35.83 3.00% 77,868 33.83 3.00%
NOW accounts ............................ 7,498 3.50 2.23 7,040 3.23 2.25 7,095 3.08 2.25
Interest-on-checking accounts ........... 7,886 3.68 1.00 7,077 3.24 1.00 5,543 2.41 1.00
-------- ------ -------- ------ -------- ------
Total passbook, NOW and interest-on-
checking accounts ....................... 93,383 43. 53 2.73 92,249 42.30 2.79 90,506 39.32 2.82
-------- ------ -------- ------ -------- ------
Money market accounts ................... 25,827 12.04 3.29 27,017 12.39 3.27 28,674 12.46 3.26
-------- ------ -------- ------ -------- ------
Certificate accounts:
Certificates of deposit-- one year
and less ..................... 55,906 26.06 5.11 59,118 27.11 4.98 69,453 30.17 5.74
IRA Certificates of deposit--
one year and less ............ 8,062 3.76 5.11 7,330 3.36 5.13 7,200 3.12 5.83
Certificates of deposit-- more
than one year ................ 6,533 3.04 5.16 7,603 3.49 5.16 7,595 3.30 5.17
IRA Certificates of deposit--
more than one year ........... 4,119 1.92 5.21 5,104 2.34 5.35 5,584 2.43 5.53
-------- ------ -------- ------ -------- ------
Total certificates ...................... 74,620 34.78 5.12 79,155 36.30 5.03 89,832 39.02 5.69
-------- ------ -------- ------ -------- ------
Escrow deposits ......................... 1,422 0.66 2.00 1,020 0.47 2.00 2,346 1.02 2.00
-------- ------ -------- ------ -------- ------
Total deposits .......................... $214,554 100.00% 3.98% $218,070 100.00% 3.42% $230,192 100.00% 3.76%
======== ====== ======== ====== ======== ======
The following table presents, by interest rate ranges, the amount of
certificate accounts outstanding at the dates indicated and the period to
maturity of the certificate accounts outstanding at May 31, 1998.
Period to Maturity from May 31, 1998 At May 31,
-------------------------------------------- -------------------------------
Over
Less Than One to Two to Three
One Year Two Years Three Years Years 1998 1997 1996
--------- --------- ----------- ------- ------- ------- -------
(In thousands)
Certificate accounts:
3.99% or less ....................... $ 3 $ 1 $ 1 $ -- $ 5 $ -- $ --
4.00% to 4.99% ...................... 28,768 941 -- -- 29,709 8,505 34,167
5.00% to 5.99% ...................... 35,829 1,429 1,626 2,309 41,193 65,816 47,516
6.00% to 6.99% ...................... -- -- -- -- -- 717 3,091
7.00% to 7.99% ...................... -- -- -- -- -- -- 776
8.00% to 8.99% ...................... -- -- -- -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Total ................ $ 64,600 $ 2,371 $ 1,627 $ 2,309 $70,907 $75,038 $85,550
======== ======= ======= ======= ======= ======= =======
Borrowings. The Bank historically had not used borrowings as a source of
funds. However, the Bank became a member of the FHLBNY in 1995 and has used this
source considerably since then. FHLBNY advances may also be used to acquire
certain other assets as may be deemed appropriate for investment purposes,
including leveraging opportunities. This form of leveraging allows for a
reasonable net margin of return, the majority of which is locked in for a
specified period. Since the
-25-
locked-in period might cover only a part of the investment's term (up to its
call date in the majority of the transactions), such a practice might result in
a limited degree of interest rate risk, since the earlier maturing borrowings
are required to be rolled over to fund the remaining lives of the particular
investments. FHLBNY advances are to be collateralized primarily by certain of
the Bank's mortgage loans and mortgage-backed securities and secondarily by the
Bank's investment in capital stock of the FHLBNY. Such advances may be made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLBNY will
advance to member institutions, including the Bank, fluctuates from time to time
in accordance with the policies of the FHLBNY. At May 31, 1998, the Bank had
$62.9 million in FHLBNY advances and the capability to borrow additional funds
of $34.0 million from the FHLBNY upon complying with the FHLBNY collateral
requirements.
The Bank at times sells securities under agreements to repurchase, which
transactions are treated as financings, and the obligation to repurchase the
securities sold is reflected as a liability in the statements of financial
condition. The dollar amount of securities underlying the agreements remains in
the asset account and are held in safekeeping. There were $27.2 million, $23.1
million and $4.7 of securities sold under repurchase agreements outstanding at
May 31, 1998, 1997 and 1996, respectively.
The following table sets forth certain information regarding borrowed funds
for the dates indicated.
At or For the Year Ended May 31,
-----------------------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
FHLBNY Advances:
Average balance outstanding .................... $20,381 $11,563 $ 388
Maximum amount outstanding at any month-end
during the period ............ 62,850 17,450 3,600
Balance outstanding at end of period ........... 62,850 5,250 3,600
Weighted-average interest rate during the period 5.54% 5.53% 5.41%
Weighted-average interest rate at end of period 5.05% 5.71% 6.00%
Other Borrowings:
Average balance outstanding .................... $24,056 $19,685 $ 101
Maximum amount outstanding at any month-end
during the period ............ 27,500 23,300 4,700
Balance outstanding at end of period ........... 27,190 23,090 4,700
Weighted-average interest rate during the period 6.18% 6.20% 6.32%
Weighted-average interest rate at end of period 6.39% 6.50% 6.32%
Total Borrowings:
Average balance outstanding .................... $44,437 $31,249 $ 489
Maximum amount outstanding at any month-end
during the period ............................ 90,350 38,850 8,300
Balance outstanding at end of period ........... 90,040 28,340 8,300
Weighted-average interest rate during the period 5.98% 6.10% 5.60%
Weighted-average interest rate at end of period 5.45% 6.30% 6.18%
-26-
Subsidiary Activities
The Bank has three wholly owned subsidiaries, WSB Financial, Warsave
Development, Inc. ("Warsave") and WSB Mortgage. The Bank offers mutual funds and
tax deferred annuities through WSB Financial to the Bank's customers and members
of the community. WSB Financial contributed $112 thousand, $92 thousand and $90
thousand in net income, before taxes, to the Bank's net income in the fiscal
years ended May 31, 1998, 1997 and 1996, respectively.
Warsave was formed to acquire and hold real estate. Its single asset as of
May 31, 1998 is a two-story house situated adjacent to the Bank's Warwick
office. The building, which may ultimately be used for future expansion, is
presently rented for the purpose of generating rental income.
WSB Mortgage was formed in New Jersey in 1997 for the purpose of engaging
in mortgage banking operations in New Jersey.
Personnel
As of May 31, 1998, the Bank had 99 full-time and 38 part-time employees.
The Bank has experienced a very low turnover rate among its employees and, as of
May 31, 1998, 52 of the Bank's employees had been with the Bank for more than
five years. The employees are not represented by a collective bargaining unit,
and the Bank considers its relationship with its employees to be good.
Federal And State Taxation
Federal Taxation
General. The following is intended only as a discussion of material federal
income tax matters and does not purport to be a comprehensive description of the
federal income tax rules applicable to the Bank or the Registrant. The Bank has
been audited by the IRS for the tax years ending December 31, 1993 and December
31, 1995. For federal income tax purposes, the Registrant and the Bank file
consolidated income tax returns and report their income on a calendar year basis
using the accrual method of accounting and will be subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's tax reserve for bad debts, discussed below.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an
adjusted tax basis of $500 million or less) is permitted to maintain a reserve
for bad debts with respect to "qualifying loans," which, in general, are loans
secured by certain interests in real property, and to make, within specified
formula limits, annual additions to the reserve which are deductible for
purposes of computing the Bank's taxable income. Pursuant to the Small Business
Job Protection Act of 1996, the Bank is now recapturing (taking into income)
over a multi-year period a portion of the balance of its bad debt reserve as of
December 31, 1996.
Distributions. To that the extent that the Bank makes "non-dividend
distributions" to the Registrant, , such distributions will be considered to
have been made from the Bank's "base year reserve," i.e., its reserve as of July
31, 1988, and then from the Bank's supplemental reserve for losses on loans, to
the extent thereof, and an amount based on the amount distributed (but not in
-27-
excess of the amount of such reserves) will be included in the Bank's income.
Non-dividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, as calculated for federal income tax
purposes, distributions in redemption of stock, and distributions in partial or
complete liquidation. Dividends paid out of the Bank's current or accumulated
earnings and profits will not be so included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Registrant, approximately one and one-half
times the amount of such distribution (but not in excess of the amount of such
reserves) would be includible in income for federal income tax purposes,
assuming a 34% federal corporate income tax rate. See "Regulation and
Supervision" herein for limits on the payment of dividends by the Bank. The Bank
does not intend to pay dividends that would result in a recapture of any portion
of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is also adjusted by determining the tax treatment of certain items in
a manner that negates the deferral of income resulting from the regular tax
treatment of those items. Thus, the Bank's AMTI is increased by an amount equal
to 75% of the amount by which the Bank's adjusted current earnings exceeds its
AMTI (determined without regard to this adjustment and prior to reduction for
net operating losses). The Bank does not expect to be subject to the AMT.
Although the corporate environmental tax of 0.12% of the excess of AMTI (with
certain modifications) over $2.0 million has expired, under current
Administration proposals, such tax will be retroactively reinstated for taxable
years beginning after December 31, 1997 and before January 2009.
Elimination of Dividends; Dividends Received Deduction. The Registrant may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations.
State Taxation
New York State Taxation. The Bank is subject to the New York State
Franchise Tax on Banking Corporations in an annual amount equal to the greater
of (i) 9% of the Bank's "entire net income" allocable to New York State during
the taxable year, or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greatest of (a) 0.01% of the value of
the taxable assets allocable to New York State with certain modifications, (b)
3% of the Bank's "alternative entire net income" allocable to New York State or
(c) $250. Entire net income is similar to federal taxable income, subject to
certain modifications and alternative entire net income is equal to entire net
income without certain adjustments. For purposes of computing its entire net
income, the Bank is permitted a deduction for an addition to the reserve for
losses on qualifying real property loans. For New York State purposes, the
applicable percentage to calculate bad debt deduction under the percentage of
taxable income method is 32%.
New York State passed legislation that enabled the Bank to avoid the
recapture of the New York State tax bad debt reserves that otherwise would have
occurred as a result of changes in federal law and to continue to utilize either
the federal method or a method based on a percentage of its
-28-
taxable income for computing its additions to bad debt reserve. However, the New
York bad debt reserve is subject to recapture for "non-dividend distributions"
in a manner similar to the recapture of federal bad debt reserves for such
distributions. Also, the New York bad debt reserve is subject to recapture in
the event that the Bank fails to satisfy certain definitional tests relating to
its assets and the nature of its business.
A Metropolitan Business District Surcharge on banking corporations doing
business in the metropolitan district has been applied since 1982. The Bank does
all of its business within this District and is subject to this surcharge. For
the tax year ending December 31, 1998 the surcharge rate is 17%.
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, the Registrant is exempted from Delaware Corporate income tax but
is required to file annual returns and pay annual fees and a franchise tax to
the State of Delaware.
Regulation And Supervision
General
The Bank is a New York State chartered stock savings bank, and its deposit
accounts are insured up to applicable limits by the FDIC under the BIF. The Bank
is subject to extensive regulation by the NYSBD as its chartering agency, and by
the FDIC as the deposit insurer. The Bank must file reports with the NYSBD and
the FDIC concerning its activities and financial condition, and it must obtain
regulatory approval prior to entering into certain transactions, such as mergers
with, or acquisitions of, other depository institutions and opening or acquiring
branch offices. The NYSBD and the FDIC conduct periodic examinations to assess
the Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings bank can engage and is intended primarily for the protection of the
deposit 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 NYSBD or the FDIC or through legislation, could have a material adverse
impact on the Registrant and the Bank and their operations and stockholders. The
Registrant is also required to file certain reports with, and otherwise comply
with, the rules and regulations of the FRB and the NYSBD and the rules and
regulations of the Securities and Exchange Commission ("SEC") under the federal
securities laws.
Certain of the laws and regulations applicable to the Bank and to the
Registrant are summarized below or elsewhere herein. These summaries do not
purport to be complete and are qualified in their entirety by reference to such
laws and regulations.
New York Banking Regulation
Activity Powers. The Bank derives its lending, investment and other
activity powers primarily from the applicable provisions of the New York Banking
Law ("Banking Law") and the regulations adopted thereunder. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt
-29-
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. A savings bank may also exercise
trust powers upon approval of the NYSBD. The exercise of these lending,
investment and activity powers are limited by federal law and the regulations
thereunder.
Loans-to-One-Borrower Limitations. 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
and to certain entities related to the borrower, the aggregate amount of which
would exceed 15% of the bank's net worth, plus an additional 10% of the bank's
net worth if secured by the requisite collateral. The Bank currently complies
with all applicable loans-to-one-borrower limitations.
Community Reinvestment Act. The Bank is also subject to provisions of the
Banking Law that, like the provisions of the federal Community Reinvestment Act
("CRA"), impose continuing and affirmative obligations upon a banking
institution organized in the State of New York to serve the credit needs of its
local community ("NYCRA"). The obligations of the NYCRA are similar to those
imposed by the CRA, and the New York Banking Board adopted new regulations,
effective December 10, 1997, to implement the NYCRA, which regulations were
consistent with the federal regulations implementing the CRA. The New York
Banking Board replaced its prior process-focused regulations with
performance-focused regulations that were intended to parallel the CRA
regulations of the federal banking agencies and to promote consistency in CRA
evaluations by considering more objective criteria. The new regulations require
a biennial assessment of a bank's compliance with the NYCRA, utilizing a
four-tiered rating system, and require the NYBD to make available to the public
such rating and a written summary of the assessment results. Pursuant to the
NYCRA, a bank must file with the NYSBD an annual NYCRA report and copies of all
federal CRA reports. The Bank's latest NYCRA rating, received by letter dated
April 27, 1998 from the Banking Department, was a rating of "Satisfactory." The
NYCRA also requires the Superintendent of Banks of the State of New York
("Superintendent") 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.
Dividends. Under the Banking Law, the Bank may declare and pay dividends
only out of the net profits of the Bank. The approval of the Superintendent is
required if the total of all dividends declared in any calendar year will exceed
the net profits for that year plus the retained net profits of the preceding two
years less any required transfer to surplus or a fund for the retirement of
preferred stock. In addition, dividends may not 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.
Enforcement. Under the Banking Law, the Superintendent 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 Superintendent 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 Superintendent to
discontinue such practices, the Superintendent may remove such director, trustee
or officer from office after notice and an opportunity to be heard. The Bank
does not know of any past or current practice, condition or
-30-
violation that might lead to any proceeding by the Superintendent or the Banking
Department against the Bank or any of its directors or officers.
Federal Banking Regulation
Capital Requirements. FDIC regulations require BIF-insured banks, such as
the Bank, to maintain minimum levels of capital. The regulations establish a
minimum leverage capital requirement of not less than 3.0% Tier 1 capital to
total assets for banks in the strongest financial and managerial condition, with
a rating of 1 (the highest examination rating of the FDIC for banks) under the
Uniform Financial Institutions Rating System. For all other banks, the minimum
leverage capital requirement is 3% plus an additional cushion of at least 100 to
200 basis points. The FDIC and the other federal banking regulators have
proposed amendments to their minimum capital regulations to provide that the
minimum leverage capital ratio for a depository institution that has been
assigned the highest composite rating of 1 under the Uniform Financial
Institutions Rating System will be 3% and that the minimum leverage capital
ratio for any other depository institution will be 4%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the depository institution. Tier 1 capital is comprised of the sum of common
stockholders' equity (excluding the net unrealized appreciation or depreciation,
net of tax, from available-for-sale securities), non-cumulative perpetual
preferred stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets (other than qualifying
servicing rights), and any net unrealized loss on marketable equity securities.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 capital) to risk-weighted
assets of at least 8% and Tier 1 capital to risk-weighted assets of at least 4%.
In determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet items, 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 requirement. The components of Tier 2 capital currently include
cumulative perpetual preferred stock, certain perpetual preferred stock for
which the dividend rate may be reset periodically, mandatory convertible
securities, subordinated debt, intermediate preferred stock and allowance for
possible loan losses. Allowance for possible loan losses includible in Tier 2
capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the
amount of Tier 2 capital that may be included in total capital cannot exceed
100% of Tier 1 capital.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the overall financial condition of the
bank and the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also 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. The agencies determined not to proceed with a
previously
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issued proposal to develop a supervisory framework for measuring interest rate
risk and an explicit capital component for interest rate risk.
The following table shows the Bank's leverage ratio, its Tier 1 risk-based
capital ratio, and its total risk-based capital ratio, at May 31, 1998:
At May 31, 1998
------------------------------------------------
Percent of Capital Percent of
Capital Assets(1) Requirement Assets(1)
------- --------- ----------- ---------
(Dollars in thousands)
Regulatory Tier 1
leverage capital $53,397 13.91% $15,352 4.0%
Tier 1 risk-based capital 53,397 25.55 8,360 4.0
Total risk-based capital 54,910 26.27 16,721 8.0
- ----------
(1) For purpose of calculating Regulatory Tier 1 leverage capital, assets are
adjusted total average assets. In calculating Tier 1 risked-based capital
and total risk-based capital, assets are total risk-weighted assets.
As the preceding table shows, the Bank exceeded the minimum capital adequacy
requirements at the date indicated.
The following table shows the Registrant's leverage ratio, its Tier 1
risk-based capital ratio, and its total risk-based capital ratio, at May 31,
1998:
At May 31, 1998
------------------------------------------------
Percent of Capital Percent of
Capital Assets(1) Requirement Assets(1)
------- --------- ----------- ---------
(Dollars in thousands)
Regulatory Tier 1
leverage capital $84,985 21.44% $15,855 4.0%
Tier 1 risk-based capital 84,985 40.07 8,484 4.0
Total risk-based capital 86,498 40.78 16,968 8.0
- ----------
(1) For purpose of calculating Regulatory Tier 1 leverage capital, assets are
adjusted total average assets. In calculating Tier 1 risked-based capital
and total risk-based capital, assets are total risk-weighted assets.
As the preceding table shows, the Registrant exceeded the minimum capital
adequacy requirements at the date indicated.
Activity Restrictions on State-Chartered Banks. Section 24 of the Federal
Deposit Insurance Act, as amended ("FDIA"), which was added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), generally
limits the activities and investments of state-chartered FDIC insured banks and
their subsidiaries to those permissible for federally chartered national banks
and their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common and
preferred stocks listed on a national securities exchange or the shares of
registered investment companies if (1) the bank held such types of investments
during the 14-month period from September 30, 1990 through November 26, 1991,
(2) the state in which the bank is chartered permitted such investments as of
September 30, 1991, and (3) the bank notifies the FDIC and obtains approval from
the FDIC to make
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or retain such investments. Upon receiving such FDIC approval, an institution's
investment in such equity securities will be subject to an aggregate limit up to
the amount of its Tier 1 capital. The Bank received approval from the FDIC to
retain and acquire such equity investments subject to a maximum permissible
investment equal to the lesser of 100% of the Bank's Tier 1 capital or the
maximum permissible amount specified by the Banking Law. Section 24 also
contains an exception for certain majority owned subsidiaries, but the
activities of such subsidiaries are limited to those permissible for a national
bank, permissible under Section 24 of the FDIA and the FDIC regulations issued
pursuant thereto, or as approved by the FDIC.
Any bank that held an impermissible investment or engaged in an
impermissible activity and that did not receive FDIC approval to retain such
investment or to continue such activity was required to submit to the FDIC a
plan for divesting of such investment or activity as quickly and prudently as
possible. Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24 or the
FDIC regulations thereunder, an insured bank must seek approval from the FDIC to
make such investment or engage in such activity. The FDIC will not approve the
activity unless such bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist orders and to remove directors and officers. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including: (i) insolvency (whereby the assets of the bank are less than its
liabilities to depositors and others); (ii) substantial dissipation of assets or
earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the bank will be unable to meet the demands of its depositors or
to pay its obligations in the normal course of business; and (v) insufficient
capital, or the incurring or likely incurring of losses that will deplete
substantially all of the institution's capital with no reasonable prospect of
replenishment of capital without federal assistance.
Deposit Insurance. Pursuant to FDICIA, the FDIC established a system for
setting deposit insurance premiums based upon the risks a particular bank or
savings association posed to its deposit insurance funds. Under the risk-based
deposit insurance assessment system, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending six months before the assessment period, consisting
of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and
one of three supervisory subcategories within each capital group. With respect
to the capital ratios, institutions are classified as well capitalized, or
adequately capitalized using ratios that are substantially similar to the prompt
corrective action capital ratios discussed below. Any institution that does not
meet these two definitions is deemed to be undercapitalized for this purpose.
The supervisory subgroup to which an institution is assigned
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is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the institution's state supervisor). An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. Under
the final risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied. Assessments rates for deposit
insurance currently range from 0 basis points to 27 basis points. The capital
and supervisory subgroup to which an institution is assigned by the FDIC is
confidential and may not be disclosed. A bank's rate of deposit insurance
assessments will depend upon the category and subcategory to which the bank is
assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on the earnings of the Bank.
Under the Deposit Insurance Funds Act of 1996 ("Funds Act"), the assessment
base for the payments on the bonds ("FICO bonds") issued in the late 1980s by
the Financing Corporation to recapitalize the now defunct Federal Savings and
Loan Insurance Corporation was expanded to include, beginning January 1, 1997,
the deposits of BIF-insured institutions, such as the Bank. Until December 31,
1999, or such earlier date on which the last savings association ceases to
exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of
the rate imposed on deposits insured by the Savings Association Insurance Fund
("SAIF"). The annual rate of assessments for the payments on the FICO bonds for
the semi-annual period beginning on July 1, 1997 was 0.0126% for BIF-assessable
deposits and 0.0630% for SAIF-assessable deposits and was 0.0122% for
BIF-assessable deposits and 0.0610% for SAIF-assessable deposits for the period
beginning on July 1, 1998.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Transactions with Affiliates of the Bank. Transactions between an insured
bank, such as the Bank, and any of its affiliates is governed by Sections 23A
and 23B of the Federal Reserve Act. An affiliate of a bank is any company or
entity that controls, is controlled by or is under common control with the bank.
Currently, a subsidiary of a bank that is not also a depository institution is
not treated as an affiliate of the bank for purposes of Sections 23A and 23B,
but the FRB has proposed treating any subsidiary of a bank that is engaged in
activities not permissible for bank holding companies under the Bank Holding
Company Act of 1956, as amended ("BHCA"), as an affiliate for purposes of
Sections 23A and 23B. Generally, Sections 23A and 23B (i) limit the extent to
which the bank 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 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 that are consistent with safe and sound banking
practices. The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and other similar types of transactions.
Further, most loans by a bank to any of its affiliate must be secured by
collateral in amounts ranging from 100 to 130 percent of the loan amounts. In
addition, any covered transaction by a bank with an affiliate and any purchase
of assets or services by a bank
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from an affiliate must be on terms that are substantially the same, or at least
as favorable, to the institution as those that would be provided to a
non-affiliate.
Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. ss. 1972 on certain tying arrangements and extensions
of credit by correspondent banks. In general, a depository institution is
prohibited, subject to certain exceptions, from extending credit to or offering
any other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution.
Uniform Real Estate Lending Standards. Pursuant to FDICIA, the federal
banking agencies adopted uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in real estate or
made for the purpose of financing the construction of a building or other
improvements to real estate. Under the joint regulations adopted by the banking
agencies, all financial institutions must adopt and maintain written policies
that establish appropriate limits and standards for extensions of credit that
are secured by liens or interests in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must establish
loan portfolio diversification standards, prudent underwriting standards
(including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies ("Interagency
Guidelines") that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multi-family or other non-residential property, the supervisory limit is 80%;
(iv) for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non-owner occupied, one- to four-family property), the limit
is 85%. Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
Community Reinvestment Act. Under the CRA, as implemented by FDIC and FRB
regulations, a savings bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community. The CRA requires the FDIC, in connection with its examination of a
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution.
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In April 1995, the FDIC and the other federal banking agencies amended
their CRA regulations. Among other things, the amended CRA regulations
substitute for the prior process-based assessment factors a new evaluation
system that would rate an institution based on its actual performance in meeting
community needs. In particular, the proposed system would focus on three tests:
(a) a lending test, to evaluate the institution's record of making loans in its
service areas; (b) an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and (c) a service
test, to evaluate the institution's delivery of services through its branches,
ATMs, and other offices. Small banks would be assessed pursuant to a streamlined
approach focusing on a lesser range of information and performance standards.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. The Bank's latest
CRA rating, received from the FDIC by letter dated February 20, 1996, was a
rating of "satisfactory."
Safety and Soundness Standards. Pursuant to the requirements of FDICIA, as
amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal shareholder. In addition,
the FDIC adopted regulations to require a bank that is given notice by the FDIC
that it is not satisfying any of such safety and soundness standards to submit a
compliance plan to the FDIC. If, after being so notified, a bank fails to submit
an acceptable compliance plan or fails in any material respect to implement an
accepted compliance plan, the FDIC may issue an order directing corrective and
other actions of the types to which a significantly undercapitalized institution
is subject under the "prompt corrective action" provisions of FDICIA. If a bank
fails to comply with such an order, the FDIC may seek to enforce such an order
in judicial proceedings and to impose civil monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
FDIC, as well as the other federal banking regulators, adopted regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The regulations establish five categories, consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The FDIC's regulations
defines the five capital categories as follows: Generally, an institution will
be treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is
at least 6%, its ratio of Tier 1 capital to total assets is at least 5%, and it
is not subject to any order or directive by the FDIC to meet a specific capital
level. An institution will be treated as "adequately capitalized" if its ratio
of total capital to risk-weighted assets is at least 8%, its ratio of Tier 1
capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital
to total assets is at least 4% (3% if the bank receives the highest rating under
the Uniform Financial Institutions Rating System) and it is not a
well-capitalized institution. An institution that has total risk-based capital
of less than 8%,
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Tier 1 risk-based-capital of less than 4% or a leverage ratio that is less than
4% (or less than 3% if the institution is rated a composite "1" under the
Uniform Financial Institutions Rating System) would be considered to be
"undercapitalized." An institution that has total risk-based capital of less
than 6%, Tier 1 capital of less than 3% or a leverage ratio that is less than 3%
would be considered to be "significantly undercapitalized," and an institution
that has a tangible capital to assets ratio equal to or less than 2% would be
deemed to be "critically undercapitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital deteriorates
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to monitor closely the condition of an
undercapitalized bank and to restrict the growth of its assets. An
undercapitalized bank is required to file a capital restoration plan within 45
days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of: (i) an amount equal to the five percent of the bank's total
assets at the time it became "undercapitalized," and (ii) the amount that is
necessary (or would have been necessary) to bring the bank into compliance with
all capital standards applicable with respect to such bank as of the time it
fails to comply with the plan. If a bank fails to submit an acceptable plan, it
is treated as if it were "significantly undercapitalized." Banks that are
significantly or critically undercapitalized are subject to a wider range of
regulatory requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a receiver
or conservator for an insured depositary bank. If one or more grounds exist for
appointing a conservator or receiver for a bank, the FDIC may require the bank
to issue additional debt or stock, sell assets, be acquired by a depository bank
holding company or combine with another depository bank. Under FDICIA, the FDIC
is required to appoint a receiver or a conservator for a critically
undercapitalized bank within 90 days after the bank becomes critically
undercapitalized or to take such other action that would better achieve the
purposes of the prompt corrective action provisions. Such alternative action can
be renewed for successive 90-day periods. However, if the bank continues to be
critically undercapitalized on average during the quarter that begins 270 days
after it first became critically undercapitalized, a receiver must be appointed,
unless the FDIC makes certain findings that the bank is viable.
Loans to a Bank's Insiders
Federal Regulation. A bank's loans to its executive officers, directors,
any owner of 10% or more of its stock (each, an "insider") and any of certain
entities affiliated to any such person (an "insider's related interest") are
subject to the conditions and limitations imposed by Section 22(h) of the
Federal Reserve Act and the FRB's Regulation O thereunder. Under these
restrictions, the aggregate amount of the loans to any insider and the insider's
related interests may not exceed the loans-to-one-borrower limit applicable to
national banks, which is comparable to the loans-to-one-borrower limit
applicable to the Bank's loans for commercial, corporate or business purposes.
All loans by a bank to all such persons and related interests in the aggregate
may not exceed the bank's unimpaired capital and unimpaired surplus. With
certain exceptions, loans to an executive officer, other than loans for the
education of the officer's children and certain loans secured by the officer's
residence, may not exceed the lesser of (a) $100,000 or (b) the greater of
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$25,000 or 2.5% of the bank's capital and unimpaired surplus. Regulation O also
requires that any proposed loan to an insider or a related interest of that
insider be approved in advance by a majority of the board of directors of the
bank, with any interested director not participating in the voting, if such
loan, when aggregated with any existing loans to that insider and the insider's
related interests, would exceed either (a) $500,000 or (b) the greater of
$25,000 or 5% of the bank's unimpaired capital and surplus. Generally, such
loans must be made on substantially the same terms as, and follow credit
underwriting procedures that are not less stringent than, those that are
prevailing at the time for comparable transactions with other persons. An
exception is made for extensions of credit made pursuant to a benefit or
compensation plan of a bank that is widely available to employees of the bank
and that does not give any preference to insiders of the bank over other
employees of the bank.
In addition, provisions of the BHCA prohibit extensions of credit to a
bank's insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
New York Regulation. Applicable New York law imposes conditions and
limitations on a stock savings bank's loans to its directors and executive
officers that are comparable in most respects to the conditions and limitations
imposed under federal law, as discussed above. However, there are a number of
differences. For example, the New York law does not affect loans to shareholders
owning 10% or more of the savings bank's stock.
Federal Home Loan Bank System
The Bank is a member of the FHLBNY, which is one of the 12 regional Federal
Home Loan Banks that comprise the FHLB system. Each of the Federal Home Loan
Banks are subject to supervision and regulation by the Federal Housing Finance
Board ("FHFB"), and each acts as a central credit facility primarily for its
member institutions. As a member of the FHLBNY, the Bank is required to acquire
and hold shares of capital stock in the FHLBNY in an amount at least equal to
the greater of 1% of the aggregate unpaid principal of its home mortgage loans,
home purchase contracts, and similar obligations at the beginning of each year,
or 1/20 of its advances (borrowings) from the FHLBNY. The Bank was in compliance
with this requirement with an investment in FHLBNY stock at May 31, 1998, of
$3.4 million.
Each FHLB serves as a reserve or central bank for its member institutions
within its assigned region. Each is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It offers advances to
members in accordance with policies and procedures established by the FHFB and
the board of directors of the FHLB. Long-term advances may only be made for the
purpose of providing funds for residential housing finance.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain
non-interest-earning reserves against its transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves of 3% must be maintained against aggregate transaction accounts of
$47.8 million or less (subject to adjustment by the FRB) and an initial reserve
of
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$1,434,000 plus 10% (subject to adjustment by the FRB between 8% and 14%)
against that portion of total transaction accounts in excess of $47.8 million.
The first $4.47 million of otherwise reservable balances (subject to adjustments
by the FRB) are exempted from the reserve requirements. The Bank is in
compliance with the foregoing requirements. Because required reserves must be
maintained in the form of either vault cash, a non-interest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the FRB, the effect
of this reserve requirement is to reduce the Bank's interest-earning assets.
Holding Company Regulation
Federal Regulation. The Registrant is subject to examination, regulation
and periodic reporting under the BHCA, as administered by the FRB. The FRB has
adopted capital adequacy guidelines for bank holding companies on a consolidated
basis substantially similar to those of the FDIC for the Bank. As of May 31,
1998, the Registrant's total capital and Tier 1 capital ratios exceed these
minimum capital requirements.
The Registrant is required to obtain the prior approval of the FRB to
acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior FRB approval is required for the Registrant to acquire direct or
indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.
A bank holding company, such as the Registrant, is required to give the FRB
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, will be equal to 10% or more of the Registrant's
consolidated net worth. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe and unsound practice,
or would violate any law, regulation, FRB order or directive, or any condition
imposed by, or written agreement with, the FRB. Such notice and approval is not
required for a bank holding company that would be treated as "well capitalized"
under applicable regulations of the FRB, that has received a composite "1" or
"2" rating at its most recent bank holding company inspection by the FRB, and
that is not the subject of any unresolved supervisory issues.
The status of the Registrant as a registered bank holding company under the
BHCA does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
In addition, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of any company engaged in,
non-banking activities. One of the principal exceptions to this prohibition is
for activities found by the FRB to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking as to be a proper incident thereto are: (i) making or servicing loans;
(ii) performing certain data processing services; (iii) providing discount
brokerage services; (iv) acting as fiduciary, investment or financial advisor,
(v) leasing personal or real property; (vi) making investments in corporations
or projects designed primarily to promote community welfare; and (vii) acquiring
a savings and loan association.
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Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), depository institutions are liable to the FDIC for losses
suffered or anticipated by the FDIC in connection with the default of a commonly
controlled depository institution or any assistance provided by the FDIC to such
an institution in danger of default. This law would have potential applicability
if the Registrant ever acquired as a separate subsidiary a depository
institution in addition to the Bank.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, purchase of assets from or issuance of letter of
credit on behalf of the bank holding company or its subsidiaries, and on the
investment in or acceptance of stocks or securities of such holding company or
its subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank, the
Registrant, any subsidiary of the Registrant and related interests of such
persons. Moreover, banks are prohibited from engaging in certain tie-in
arrangements (with the bank's parent holding company or any of the holding
company's subsidiaries) in connection with any extension of credit, lease or
sale of property or furnishing of services.
New York Regulation. Under the Banking Law, certain companies owning or
controlling banks are regulated as a bank holding company. For the purposes of
the Banking Law, the term "bank holding company," is defined generally to
include any "company" that, directly or indirectly, either (a) controls the
election of a majority of the directors or (b) owns, controls or holds with
power to vote more than 10% of the voting stock of a bank holding company or, if
the company is a banking institution, another banking institution, or 10% or
more of the voting stock of each of two or more banking institutions. The term
"company" is defined to include corporations, partnerships and other types of
business entities, chartered or doing business in New York, and the term
"banking institution" is defined to include commercial banks, stock savings
banks and stock savings and loan associations. A company controlling, directly
or indirectly, only one banking institution will not be deemed to be a bank
holding company for the purposes of the Banking Law. Under the Banking Law, the
prior approval of the New York Banking Board is required before: (1) any action
is taken that causes any company to become a bank holding company; (2) any
action is taken that causes any banking institution to become or to be merged or
consolidated with a subsidiary of a bank holding company; (3) any bank holding
company acquires direct or indirect ownership or control of more than 5% of the
voting stock of a banking institution; (4) any bank holding company or
subsidiary thereof acquires all or substantially all of the assets of a banking
institution; or (5) any action is taken that causes any bank holding company to
merge or consolidate with another bank holding company. Additionally, certain
restrictions apply to New York State bank holding companies regarding the
acquisition of banking institutions that have been chartered for five years or
less and are located in smaller communities. Directors, officers and employees
of a New York State bank holding company are subject to limitations regarding
their affiliation with securities underwriting or distribution firms and with
other bank holding companies, and directors and executive officers are subject
to limitations regarding loans obtained from certain of the holding company's
banking subsidiaries. Although the Registrant is not a bank holding company for
purposes of the Banking Law, any future acquisition of ownership, control, or
the power to vote 10% or more of the voting stock of another banking institution
or bank holding company would cause it to become such.
-40-
Acquisition of the Registrant
Federal Restrictions. Under the federal Change in Bank Control Act
("CBCA"), a notice must be submitted to the FRB if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Registrant's shares of Common Stock outstanding, unless the FRB has found that
the acquisition will not result in a change in control of the Registrant. Under
the CBCA, the FRB has 60 days within which to act on such notices, taking into
consideration certain factors, including the financial and managerial resources
of the acquiror, the convenience and needs of the communities served by the
Registrant and the Bank, and the anti-trust effects of the acquisition. Under
the BHCA, any company would be required to obtain prior approval from the FRB
before it may obtain "control" of the Registrant within the meaning of the BHCA.
Control generally is defined to mean the ownership or power to vote 25% more of
any class of voting securities of the Registrant or the ability to control in
any manner the election of a majority of the Registrant's directors.
New York Change in Bank Control Restrictions. In addition to the CBCA, the
Banking Law generally requires prior approval of the New York Banking Board
before any action is taken that causes any company to acquire direct or indirect
control of a banking institution that is organized in the State of New York. For
this purpose, the term "company" is defined to include corporations,
partnerships and other types of business entities, chartered or doing business
in New York, and an individual or combination of individuals acting in concert
and residing or doing business in New York, and the term "control" is defined
generally to mean the power to direct or cause the direction of the management
and policies of the banking institution and is presumed to exist if the company
owns, controls or holds with power to vote 10% or more of the voting stock of
the banking institution.
Interstate Banking and Branching
In the past, interstate banking was limited under the BHCA to those states
that permitted interstate banking by statute. New York was one of a number of
states that permitted, subject to the reciprocity conditions of the Banking Law,
out-of-state bank holding companies to acquire New York banks. By 1995, most
states had adopted statutes permitting multistate bank holding companies.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Banking Act") was enacted on September 29, 1994. As of September
29, 1995, the Interstate Banking Act permitted approval under the BHCA of the
acquisition by a bank holding company that is well capitalized and managed of a
bank outside of the holding company's home state regardless of whether the
acquisition was permitted under the law of the state of the bank to be acquired.
The FRB may not approve an acquisition under the BHCA that would result in the
acquiring holding company controlling more than 10% of the deposits in the
United States or more than 30% of the deposits in any particular state.
In the past, branching across state lines was not generally available to a
state bank, such as the Bank. While out-of-state branches were authorized under
the Banking Law, similar authority was not generally available under the laws of
most other states. Beginning June 1, 1997, the Interstate Banking Act, permitted
the responsible federal banking agencies to approve merger transactions between
banks located in different states, regardless of whether the merger would be
-41-
prohibited under state law. Accordingly, the Interstate Banking Act permits a
bank to have branches in more than one state.
Before any bank acquisition can be completed, prior approval thereof may
also be required to be obtained from other agencies having supervisory
jurisdiction over the bank to be acquired, including the Banking Department. The
Interstate Banking Act will facilitate the consolidation of the banking industry
that has taken place over recent years and will allow the creation of larger,
presumably more efficient, banking networks.
ITEM 2. Properties
The Bank conducts its business through its main office in Warwick, New York
and its three branch offices located in Monroe, Woodbury and Wallkill, New York.
Management believes that the Bank's current facilities are adequate to meet the
present and immediately foreseeable needs of the Bank and the Registrant.
The following sets forth the Bank's branches and loan production offices at
May 31, 1998.
Leased Date Lease
or Leased or Expiration
Owned Acquired Date
----- -------- ----
Main Office:
18 Oakland Avenue
Warwick, New York 10990 Owned 1972 N/A
Branches:
591 Route 17M
Monroe, New York 10950 Owned 1976 N/A
556 Route 32
Highland Mills, New York 10930 Owned 1979 N/A
1 Industrial Avenue
Walkill, New York 10940 Owned 1998 N/A
Loan Production Offices:
Taconic Plaza Shopping Center,
Store #10
Route 52
East Fishkill, New York Leased 1997 01/31/99
151 South Main Street, Suite 104
New City, New York Leased 1997 04/30/99
1435 Union Valley Road, 1st Floor
West Milford, New Jersey Leased 1997 04/30/99
45 Whitney Road
Mahwah, New Jersey Leased 1998 05/01/99
-42-
ITEM 3. Legal Proceedings
The Registrant is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which in
the aggregate involve amounts which management believes to be immaterial to the
financial condition and results of operations of the Registrant.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholders'
Matters
The information required by this item appears under the caption "Market for
Common Stock" on page 21 of the Registrant's Annual Report to Shareholders for
the year ended May 31, 1998 and is incorporated herein by reference.
ITEM 6. Selected Financial Data
The information required by this item appears on pages 8 through 9,
inclusive, of the Registrant's Annual Report to Shareholders for the year ended
May 31, 1998 and is incorporated herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item appears on pages 10 through 21,
inclusive, of the Registrant's Annual Report to Shareholders for the year ended
May 31, 1998 and is incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item appears on pages 11 through 13,
inclusive, of the Registrant's Annual Report to Shareholders for the year ended
May 31, 1998 and is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
The information required by this item appears on pages 22 through 44,
inclusive, of the Registrant's Annual Report to Shareholders for the year ended
May 31, 1998 and is incorporated herein by reference.
-43-
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Officers of the Registrant
The information required by this item appears under the caption "Election
of Directors" on pages 5 through 9, inclusive, and under the caption "Compliance
with Section 16(a) of the Exchange Act" on page 19 of the Registrant's Proxy
Statement ("Proxy Statement") for its 1998 Annual Meeting of Shareholders to be
held on September 22, 1998 and is incorporated herein by reference.
ITEM 11. Executive Compensation
The information required by this item appears on pages 13 through 19,
inclusive, of the Registrant's Proxy Statement and is incorporated herein by
reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item appears under the captions "Stock
Ownership of Certain Beneficial Owners" on page 3 and "Stock Ownership of
Management" on pages 4 and 5, inclusive, of the Registrant's Proxy Statement and
is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item appears under the caption "Certain
Relationships and Related Transactions" on page 19 of the Registrant's Proxy
Statement and is incorporated herein by reference.
-44-
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. The following consolidated financial statements of the Registrant and
its subsidiaries, and the independent auditors' report thereon,
included on pages 22 through 44 of the Registrant's Annual Report to
Shareholders for the fiscal year ended May 31, 1998, are incorporated
herein by reference:
Consolidated Statements of Financial Condition as of May 31,
1998 and 1997;
Consolidated Statements of Income for Each of the Years in
the Three-Year Period Ended May 31, 1998;
Consolidated Statements of Changes in Stockholders' Equity
for Each of the Years in the Three-Year Period Ended May 31,
1998;
Consolidated Statements of Cash Flows for Each of the Years
in the Three-Year Period Ended May 31, 1998;
Notes to Consolidated Financial Statements
The remaining information appearing in the Registrant's Annual Report
to Shareholders is not deemed to be filed as part of this report,
except as expressly provided herein.
2. All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or the notes thereto.
3. Exhibits
(a) The following exhibits are filed as part of this report, except as
otherwise indicated.
3.1 Certificate of Incorporation of Warwick Community Bancorp, Inc.
(1)
3.2 Bylaws of Warwick Community Bancorp, Inc. (1)
4.1 Certificate of Incorporation of Warwick Community Bancorp, Inc.
(See Exhibit 3.1 hereto)
4.2 Bylaws of Warwick Community Bancorp, Inc. (See Exhibit 3.2
hereto)
4.3 Restated Organization Certificate of The Warwick Savings Bank (1)
4.4 Bylaws of The Warwick Savings Bank, as amended (1)
-45-
4.5 Stock Certificate of Warwick Community Bancorp, Inc. (1)
10.1 Employment Agreement by and between Warwick Community Bancorp,
Inc. and Timothy A. Dempsey
10.2 Employment Agreement by and between Warwick Community Bancorp,
Inc. and Ronald J. Gentile
10.3 Employment Agreement by and between Warwick Community Bancorp,
Inc. and Arthur W. Budich
10.4 Employment Agreement by and between Warwick Community Bancorp,
Inc. and Nancy L. Sobotor-Littell
10.5 Employee Retention Agreement by and between The Warwick Savings
Bank and Laurence D. Haggerty
10.6 Employee Retention Agreement by and between The Warwick Savings
Bank and Donna M. Lyons
10.7 Employee Retention Agreement by and between The Warwick Savings
Bank and Barbara A. Rudy
10.8 Employee Retention Agreement by and between The Warwick Savings
Bank and Arthur S. Anderson
10.9 Recognition and Retention Plan of Warwick Community Bancorp, Inc.
(2)
10.10 Trust Agreement between Warwick Community Bancorp, Inc. and
Orange County Trust Company for the Recognition and Retention
Plan of Warwick Community Bancorp, Inc.
10.11 Stock Option Plan of Warwick Community Bancorp, Inc.(2)
10.12 Warwick Community Bancorp, Inc. Employee Stock Ownership Plan
(1)
10.13 Trust Agreement between Warwick Community Bancorp, Inc. and
Marine Midland Bank for the Warwick Community Bancorp, Inc.
Employee Stock Ownership Plan
10.14 Loan Agreement by and between the Warwick Community Bancorp,
Inc. Employee Stock Ownership Trust and Warwick Community
Bancorp, Inc.
10.15 Benefit Restoration Plan of The Warwick Savings Bank (1)
10.16 Grantor Trust Agreement by and between The Warwick Savings Bank
and Marine Midland Bank for the Benefit Restoration Plan of The
Warwick Savings Bank
10.17 The Warwick Savings Bank 401(k) Savings Plan (1)
-46-
10.18 Trust Agreement between The Warwick Savings Bank and Marine
Midland Bank for The Warwick Savings Bank 401(k) Savings Plan
Employer Stock Fund
11.1 Statement re: Computation of per share earnings
13.1 1998 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (EDGAR filing only)
99.1 Proxy Statement for the 1998 Annual Meeting of Shareholders
- ----------
(1) Incorporated herein by reference to the Exhibits to the Registrant's
Registration Statement on Form S-1, filed on September 19, 1997,
Registration No. 333-36021.
(2) Incorporated herein by reference to the Registrant's definitive Proxy
Statement for the Special Meeting of Stockholders held on June 24, 1998.
(b) No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
-47-
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.
WARWICK COMMUNITY BANCORP, INC.
Dated: August 31, 1998 BY: /s/ Timothy A. Dempsey
------------------------------------
Timothy A. Dempsey
President and Chief Executive Officer
BY: /s/ Arthur W. Budich
------------------------------------
Arthur W. Budich
Senior Vice President, Treasurer
and Chief Financial Officer
-48-
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 in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ Timothy A. Dempsey President and Chief Executive Officer and August 31, 1998
- ---------------------------- Director
Timothy A. Dempsey
/s/ Ronald J. Gentile Executive Vice President and Chief August 31, 1998
- ---------------------------- Operating Officer and Director
Ronald J. Gentile
/s/ Frances M. Gorish Director August 31, 1998
- ----------------------------
Frances M. Gorish
/s/ R. Michael Kennedy Director August 31, 1998
- ----------------------------
R. Michael Kennedy
/s/ Fred M. Knipp Director August 31, 1998
- ----------------------------
Fred M. Knipp
/s/ Emil R. Krahulik Director August 31, 1998
- ----------------------------
Emil R. Krahulik
/s/ Thomas F. Lawrence, Jr. Director August 31, 1998
- ----------------------------
Thomas F. Lawrence, Jr.
/s/ Henry L. Nielsen, Jr. Director August 31, 1998
- ----------------------------
Henry L. Nielsen, Jr.
/s/ John W. Sanford III Director August 31, 1998
- ----------------------------
John W. Sanford III
/s/ Robert N. Smith Director August 31, 1998
- ----------------------------
Robert N. Smith
-49-