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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to _______________
Commission File No.: 1-13503
Staten Island Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3958850
----------------------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15 Beach Street Staten Island, New York 10304
---------------------------------------- ------------
(Address) (Zip Code)
Registrant's telephone number, including area code: (718) 556-6518
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
Securities registered pursuant to Section 12(b) 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
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
Indicate 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 amendment to this
Form 10-K.
Based upon the $17.06 closing price of the Registrant's common stock as of March
24, 2000, the aggregate market value of the 32,123,421 shares of the
Registrant's common stock deemed to be held by non-affiliates of the Registrant
was $548.1 million. Although directors and executive officers of the Registrant
and certain of its employee benefit plans were assumed to be "affiliates" of the
Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 24, 2000: 37,341,123
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 1999 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2000 Annual Meeting of
Stockholders are incorporated into Part III, Items 9 through 13 of this Form
10-K.
PART I
Item 1. Business
In addition to historical information, this Annual Report on Form 10-K
includes certain "forward-looking statements," as defined in the Securities Act
of 1933 and the Securities Exchange Act of 1934, based on current management
expectations. The Company's actual results could differ materially from those
management expectations. Such forward-looking statements include statements
regarding the Company's intentions, beliefs or current expectations as well as
the assumptions on which such statements are based. Stockholders and potential
stockholders are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements. Factors that could cause future results to vary from
current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and fees. The Company undertakes no obligation to update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
Staten Island Bancorp, Inc.
Staten Island Bancorp, Inc. (the "Company") is a Delaware corporation
organized in July 1997 by Staten Island Savings Bank (the "Bank" or "Staten
Island Savings") for the purpose of becoming a unitary holding company of the
Bank. The Bank's conversion from the mutual to stock form and the concurrent
offer and sale of the Company's common stock was consummated on December 22,
1997. The only significant assets of the Company are the capital stock of the
Bank, the Company's loan to the Employee Stock Ownership Plan ("ESOP"), and the
portion of the net conversion proceeds retained by the Company for investments.
The business and management of the Company consists primarily of the business
and management of the Bank. The Company neither owns nor leases any property,
but instead uses the premises and equipment of the Bank. At the present time,
the Company does not intend to employ any persons other than officers of the
Bank, and the Company will utilize the support staff of the Bank from time to
time. Additional employees will be hired as appropriate to the extent the
Company expands or changes its business in the future.
The Company's executive office is located at the executive office of
the Bank at 15 Beach Street, Staten Island, New York 10304, and its telephone
number is (718) 556-6518.
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Staten Island Savings Bank
The Bank was originally founded as a New York State chartered savings
bank in 1864. The Bank maintains a network of 16 full-service branch offices
located in Staten Island and one branch office located in the Bay Ridge area of
Brooklyn, New York, three limited service branch offices in Staten Island, and
six full service branch offices in Monmouth and Ocean counties, New Jersey. The
Bank also maintains a lending center and Trust Department office on Staten
Island along with a commercial lending office in the Bay Ridge Brooklyn branch.
The Bank is a traditional, full-service, community oriented savings bank
headquartered in Staten Island, New York. Staten Island Savings Bank is
primarily engaged in attracting deposits from the general public and using those
and other available sources of funds to originate loans secured primarily by
single-family (one to four units) residences located in Staten Island and the
metropolitan New York area.
The Bank has long-standing ties to Staten Island with over 134 years of
service to the communities and residents of Staten Island and, more recently,
the Bay Ridge area of Brooklyn. As of June 30, 1999 (the latest available data),
the Bank was the largest depository institution in terms of deposit market share
in Staten Island with 30.4% of the total deposits and 23.0% of the total number
of branch offices of depository institutions in Staten Island. Historically, the
Bank also has been among the leaders in terms of the number and amount of
residential mortgage loan originations in Staten Island. Staten Island Savings'
operating strategy emphasizes customer service and convenience and, in large
part, the Bank attributes its commitment to maintaining customer satisfaction
for its market share position. The Bank attempts to differentiate itself from
its competitors by providing the type of personalized customer service not
generally available from larger banks while offering a greater variety of
products and services than is typically available from smaller local depository
institutions. The Bank has an experienced management team directing its
operations. The Bank's Chairman and Chief Executive Officer and President and
Chief Operating Officer have 33 years and 29 years, respectively, of service
with the Bank while the other executive officers of the Bank have an average of
16 years of service with Staten Island Savings Bank.
In recent years, the Bank has facilitated its growth through
acquisitions. In 1998, the Bank's wholly-owned subsidiary, SIB Mortgage Corp.
(the "Mortgage Company" or "SIBMC") acquired substantially all of the assets of
Ivy Mortgage Corp. The Mortgage Company, located in Branchburg, New Jersey,
operates under the name Ivy Mortgage in 22 states primarily on the east coast.
The Mortgage Company originates loans and sells them to investors generating fee
income for the Company. The Bank also purchases specific adjustable rate loans
and higher yielding loans from the Mortgage Company to fill in its portfolio
with loan products the Bank requires. The Bank will also use certain Mortgage
Company locations to offer its commercial loan products including loans to small
businesses. This has slightly reduced the Bank's traditional dependence on the
economy of Staten Island and to a larger extent New York City. (See
"Subsidiaries")
In 1999 the Bank formed American Construction Lending Services, Inc.,
("ACLS"), as a wholly owned subsidiary. Headquartered in Wallingford,
Connecticut, ACLS operates as a wholesale lender specializing in single-family
residential construction loan products throughout the United States. The
construction loans originated by ACLS facilitates the Bank's ability to obtain
higher yielding, short-term loans for its balance sheet. The resultant permanent
loan is sold using the resources of the Mortgage Company or retained in the
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Bank's portfolio if the loan meets the investment needs of the Bank. ACLS is
expected to enable the Bank to reach a broader customer base by expanding the
geographic area it operates in and to provide an opportunity to add to the
revenue and income base for the Company. (See "Subsidiaries")
On January 14, 2000 the Company acquired First State Bancorp, the
holding company for First State Bank, Howell, New Jersey. First State Bank was
merged with and into the Bank and the Bank now operates the former branch
offices of First State as the First State Division of Staten Island Savings
Bank. The First State Division has six full-service branch offices in New Jersey
and has two additional branch offices under construction. The current branch
structure consists of four branches in northern Ocean County and two in Monmouth
County and the new branches will be located in Ocean County and Monmouth County.
At the time of acquisition First State Bancorp had $374.0 million in assets.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary federal regulator. The Bank is also regulated by the Federal Deposit
Insurance Corporation ("FDIC"), which is the administrator of the Bank Insurance
Fund ("BIF"). The Bank is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the Federal Home Loan Bank ("FHLB") of New York, which is one of
the 12 regional banks comprising the FHLB System.
Staten Island Savings' executive office is located at 15 Beach Street,
Staten Island, New York 10304, and its telephone number is (718) 556-6512.
Market Area and Competition
The Bank faces significant competition both in making loans and in
attracting deposits. There are a significant number of financial institutions
located within the Bank's market area, many of which have greater financial
resources than the Bank. The Bank's competition for loans comes principally from
commercial banks, other savings banks, savings associations and mortgage-banking
companies. The Bank's most direct competition for deposits has historically come
from savings associations, other savings banks, commercial banks and credit
unions. The Bank faces additional competition for deposits from short-term money
market funds and other corporate and government securities funds and from other
non-depository financial institutions such as brokerage firms and insurance
companies. Competition for banking services may increase as a result of, among
other things, the elimination of restrictions on interstate operations of
financial institutions.
Lending Activities
General. At December 31, 1999, Staten Island Savings' total net loans
held for investment amounted to $2.2 billion or 47.9% of the Company's total
assets at such date. The Bank's primary emphasis has been, and continues to be,
the origination of loans secured by first liens on single-family residences
(which includes one to four family residences) located primarily in Staten
Island and, to a lesser extent, other areas in New York City. At December 31,
1999, $1.7 billion or 80.8% of the Bank's net loan portfolio were secured by
one- to four- family residences of which $873.6 million were located on Staten
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Island and an additional $429.1 million were located in other areas of New York
City.
In addition to loans secured by single-family residential real estate,
the Bank's mortgage loan portfolio includes loans secured by commercial real
estate, which amounted to $223.8 million or 10.4% of the net loan portfolio at
December 31, 1999, construction and land loans, which totaled $60.1 million or
2.8% of the net loan portfolio at December 31, 1999, home equity loans, which
totaled $5.4 million or .3% of the net loan portfolio at December 31, 1999, and
loans secured by multi-family (over four units) residential properties, which
amounted to $42.5 million or 2.0% of the net loan portfolio at December 31,
1999. In addition to mortgage loans, the Bank originates various other loans
including commercial business loans and consumer loans. At December 31, 1999,
the Bank's total other loans amounted to $89.1 million or 4.1% of the net loan
portfolio.
The types of loans that the Bank may originate are subject to federal
and state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans, the supply of money available
for lending purposes and the rates offered by its competitors. These factors
are, in turn, affected by general and economic conditions, the monetary policy
of the federal government, including the Federal Reserve Board, legislative tax
policies and governmental budgetary matters.
5
Loan Portfolio Composition. The following table sets forth the composition of
the Company's loan portfolio at the dates indicated.
At December 31,
---------------
1999 1998 1997
(Dollars in Thousands)
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
Mortgage loans:
One to four family residential $ 1,737,913 80.83% $ 1,187,212 81.48% $ 863,694 79.76%
Multi-family residential 42,501 1.98 33,328 2.29 28,218 2.61
Commercial real estate 223,809 10.41 137,720 9.45 120,084 11.09
Construction and land 60,105 2.80 42,420 2.91 40,476 3.74
Home equity 5,390 0.25 6,121 0.42 6,538 0.60
---------- ------ --------- ------ --------- ------
Total mortgage loans 2,069,718 96.27 1,406,801 96.55 1,059,010 97.80
Other loans:
Student loans 657 0.03 940 0.06 4,033 0.37
Automobile leases (1) -- -- -- -- -- --
Passbook loans 5,357 0.25 5,989 0.41 6,929 0.64
Commercial business loans 33,646 1.56 36,592 2.51 19,559 1.81
Other consumer loans 49,395 2.30 24,070 1.65 13,212 1.22
---------- ------ --------- ------ --------- ------
Total other loans 89,055 4.14 67,591 4.63 43,733 4.04
---------- ------ --------- ------ --------- ------
Total loans receivable 2,158,773 100.41% 1,474,392 101.18 1,102,743 101.84
Less:
Premium (discount) on loans purchased 4,640 0.22 1,194 0.08 (729) (0.07)
Allowance for loan losses (14,271) (0.66) (16,617) (1.14) (15,709) (1.45)
Deferred loan costs, (fees) net 897 0.03 (1,910) (0.12) (3,387) (0.32)
---------- ------ --------- ------ --------- ------
Loans receivable, net $ 2,150,039 100.00% $1,457,059 100.00% $ 1,082,918 100.00%
=========== ====== ========== ====== =========== ======
(1) Consists of loans secured by assignments of automobile lease payments.
At December 31,
---------------
1996 1995
(Dollars in Thousands)
Percent of Percent of
Amount Total Amount Total
------ ----- ------ -----
Mortgage loans:
One to four family residential $ 743,089 76.76% $ 611,964 76.39%
Multi-family residential 26,444 2.73 25,977 3.24
Commercial real estate 115,593 11.94 99,000 12.36
Construction and land 28,779 2.97 18,123 2.26
Home equity 7,464 0.78 8,193 1.02
--------- ------ --------- ------
Total mortgage loans 921,369 95.18 763,257 95.27
Other loans:
Student loans 4,522 0.47 6,072 0.76
Automobile leases (1) 28,249 2.92 18,705 2.33
Passbook loans 5,933 0.61 5,683 0.71
Commercial business loans 14,995 1.55 15,257 1.90
Other 9,712 1.00 9,079 1.14
--------- ------ --------- ------
Total other loans 63,411 6.55 54,796 6.84
--------- ------ --------- ------
Total loans receivable 984,780 101.73 818,053 102.11
Less:
Premium (discount) on loans purchased (3,475) (0.36) (2,911) (0.36)
Allowance for loan losses (9,977) (1.03) (10,704) (1.34)
Deferred loan costs, (fees) net (3,313) (0.34) (3,301) (0.41)
--------- ------ --------- ------
Loans receivable, net $968,015 100.00% $ 801,137 100.00%
======== ====== =========== ======
(1) Consists of loans secured by assignments of automobile lease payments.
6
Loan Activity. The following table sets forth the Company's activity in its loan
portfolio:
Year Ended December 31
1999 1998 1997
---- ---- ----
(Dollars In Thousands)
Total loans held at beginning
of period ..................... $ 1,550,834 $ 1,102,743 $ 984,780
Originations of loans:
Mortgage loans:
Single family residential ..... 1,333,757 508,124 194,937
Multi-family residential ...... 14,372 9,988 4,603
Commercial real estate ........ 126,561 41,294 22,171
Construction and land ......... 51,051 38,514 27,936
Home equity ................... 2,545 2,686 2,744
Other loans:
Student loans ................. 1,475 2,205 3,202
Passbook loans ................ 5,302 5,666 8,614
Commercial business loans ..... 56,625 23,180 13,942
Other consumer loans .......... 15,771 12,197 11,363
--------- ------- -------
Total originations .......... 1,607,459 643,854 289,512
Purchases of loans:
Mortgage loans:
Single-family residential (1) -- 59,412 --
Other consumer loans ........ 16,088 6,855 --
--------- ------- -------
Total purchases ............ 16,088 66,267 --
--------- ------- -------
Total originations and purchases 1,623,547 710,121 289,512
Loans sold:
Mortgage loans:
Single-family residential (2).. 644,557 57,577 1,104
Other loans:
Student loans ................. -- -- 3,185
--------- ------- -------
Total loans sold ............. 644,557 57,577 4,289
Transfers to real estate owned .. 325 1,166 1,149
Charge-offs ..................... 1,260 2,119 1,022
Repayments ...................... 324,937 201,168 165,089
--------- ------- -------
Net activity in loans ........... 652,468 448,091 117,963
--------- ------- -------
Gross loans held at end of
period .......................... $ 2,203,302 $1,550,834 $1,102,743
=========== ========== =========
(1) Represents loans acquired from Ivy Mortgage Corp.
(2) For the years ended December 31, 1999 and 1998, consists primarily of
loans originated by SIBMC and sold to third parties.
The lending activities of Staten Island Savings are subject to written
underwriting standards and loan origination procedures established by management
and approved by the Bank's Board of Directors. Applications for mortgages and
other loans are taken at all of the Bank's branch offices. In addition, the
Bank's business development officers, loan officers and branch managers call on
individuals in the Bank's market area in order to solicit new loan originations
as well as other banking relationships. The Bank also relies on independent
mortgage brokers, a group of whom are authorized to accept and process mortgage
loan applications on the Bank's behalf, and a non-employee commercial loan
solicitor in order to obtain new loan applications. All loan applications are
forwarded to the Bank's loan origination center for underwriting and approval.
The Bank's employees at the loan origination center supervise the process of
obtaining credit reports, appraisals and other documentation involved with a
loan. The Bank requires that a property appraisal be obtained in connection with
all new mortgage loans. Property appraisals are performed by an independent
appraiser from a list approved by the Bank's Board of Directors. Staten Island
Savings requires that title insurance and hazard insurance be maintained on all
collateral properties (except for home equity loans and home secured loans) and
that flood insurance be maintained if the property is within a designated flood
plain.
Certain officers of the Bank have been authorized by the Board of
Directors to approve loans up to certain designated amounts. The Loan Review
Committee of the Board of Directors must approve all loans where new monies
advanced would increase borrowers or guarantors total outstanding credit with
the Bank above $1.5 million but not exceeding $7.5 million. Loans in excess of
$7.5 million must be approved by the full Board of Directors of the Bank.
A federal savings association generally may not make loans to one
borrower and related entities in an amount which exceeds 15% of its unimpaired
capital and surplus, although loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. However, the Bank generally maintains
a more restrictive limit of loans to any one borrower and related entities of 5%
of the Bank's unimpaired capital and surplus, or $19.5 million at December 31,
1999. As of December 31, 1999, the Bank's largest concentration of loans to any
one borrower and related entities were $18.9 million and are performing in
accordance with their terms.
Single Family Residential. Substantially all of the Bank's
single-family residential mortgage loans consist of conventional loans.
Conventional loans are loans that are neither insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Department of Veterans
Affairs ("VA"). The vast majority of the Bank's single-family residential
mortgage loans retained in the portfolio are secured by properties located in
Staten Island and, to a lesser extent, other areas of New York City.
Historically, the Bank has retained substantially all mortgage loans which it
has originated and has not engaged in sales of residential mortgage loans. As of
December 31, 1999, $1.7 billion, or 80.8%, of the Bank's net loans consisted of
single-family residential mortgage loans. The Bank originated for its portfolio
$714.7 million of one to four family residential mortgage loans during the year
ended December 31, 1999 and $433.5 million and $194.9 million in 1998 and 1997,
respectively. The Bank anticipates that a significant portion of its future new
loan originations will continue to be single-family residential mortgage loans.
The bank's residential mortgage loans have either fixed-rates of
interest or interest rates which adjust periodically during the term of the
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loan. Fixed-rate loans generally have maturities ranging from 10 to 30 years and
are fully amortizing with monthly or bi-weekly loan payments sufficient to repay
the total amount of the loan with interest by the end of the loan term. The
bank's fixed-rate loans generally are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government-sponsored
agencies, such as the Federal Home Loan Mortgage Corporation ("FHLMC"), and
other investors in the secondary market for mortgages. At December 31, 1999,
$1.2 billion, or 67.4%, of the bank's single-family residential mortgage loans
were fixed-rate loans. Substantially all of the Bank's single-family residential
mortgage loans contain due-on-sale clauses, which permit the Bank to declare the
unpaid balance to be due and payable upon the sale or transfer of any interest
in the property securing the loan. The bank enforces such due-on-sale clauses.
The adjustable-rate single-family residential mortgage ("ARM") loans
currently offered by the Bank have interest rates which adjust every one, three
or five years in accordance with a designated index such as one-, three- or
five-year U.S. Treasury obligations adjusted to a constant maturity ("CMT"),
plus a stipulated margin. In addition, the Bank offers an ARM with a fixed-rate
for the first ten years which adjusts on an annual basis thereafter. At December
31, 1999, the Bank's five-year and ten-year ARM loans amounted to $244.6 million
and $240.1 million, respectively. The Bank's adjustable-rate single-family
residential real estate loans generally have a cap of 2% through 5% on any
increase or decrease in the interest rate at any adjustment date, and include a
specified cap on the maximum interest rate over the life of the loan, whose cap
is generally 5% or 6% above the initial rate. The Bank may offer ARM loans with
initial rates which are below the fully indexed rate. Such loans generally are
underwritten based on the fully indexed rate. The Bank's adjustable-rate loans
require that any payment adjustment resulting from a change in the interest rate
of an adjustable-rate loan be sufficient to result in full amortization of the
loan by the end of the loan term and, thus, do not permit any of the increased
payment to be added to the principal amount of the loan, or so-called negative
amortization. At December 31, 1999, $565.7 million or 32.6% of the Bank's
single-family residential mortgage loans were adjustable-rate loans.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase, the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. The Bank believes that these risks, which have not had a material adverse
effect on the Bank to date, generally, are less than the risks associated with
holding fixed-rate loans in an increasing interest rate environment.
The volume and types of ARMs originated by the Bank have been affected
by such market factors as the level of interest rates, competition, consumer
preferences and availability of funds. Accordingly, although the Bank will
continue to offer single-family ARMs, there can be no assurance that in the
future the Bank will be able to originate a sufficient volume of single-family
ARMs to increase or maintain the proportion that these loans bear to total
loans. The Bank facilitates its origination efforts with respect to ARMS by
purchasing ARM loans from SIBMC. During 1999, the Bank purchased $85.0 million
of ARM loans from SIBMC (the majority of which loans were secured by properties
located in the New York metropolitan area.)
The Bank's single-family residential mortgage loans generally do not
exceed $750,000. In addition, the maximum loan-to-value ("LTV") ratio for the
Bank's single-family residential mortgage
9
loans generally is 95% of the appraised value of the secured property, provided,
however, that private mortgage insurance is obtained on the portion of the
principal amount that exceeds 80% of the appraised value. Loans purchased by the
Bank from SIBMC are underwritten on substantially similar terms as loans
originated directly by the Bank.
At December 31, 1999, the Bank's home equity loans amounted to $5.4
million or 0.3% of the Bank's net loans. The Bank offers floating rate home
equity lines of credit. Home equity loans, like single-family residential
mortgage loans, are secured by the underlying equity in the borrower's
residence. However, the Bank generally obtains a second mortgage position to
secure home equity loans. The Bank's home equity loans generally require LTV
ratios of 80% or less after taking into consideration any first mortgage loan.
Commercial Real Estate Loans and Multi-Family Residential Loans. At
December 31, 1999, the Bank's commercial real estate loans and multi-family
residential mortgage loans amounted to $223.8 million and $42.5 million,
respectively, or 10.4% and 2.0%, respectively, of the Bank's net loan portfolio.
Commercial real estate and multi-family residential real estate loans often have
adjustable interest rates, shorter terms to maturity and higher yields than the
Bank's single-family residential real estate loans. Because of such factors, in
recent years the Bank has increased its efforts in originating commercial real
estate loans and multi-family residential loans.
The Bank's commercial real estate loans generally are secured by small
office buildings, retail and industrial use buildings, strip shopping centers
and other commercial uses located in the Bank's market area. The Bank's
commercial real estate loans seldom exceed $1.5 million and, as of December 31,
1999, the average size of the Bank's commercial real estate loans was $320,000.
The Bank originated $126.6 million of commercial real estate loans during the
year ended December 31, 1999 compared to $41.3 million and $22.2 million,
respectively, of commercial real estate loan originations in 1998 and 1997.
The Bank's multi-family residential real estate loans are concentrated
in Brooklyn and, to a lesser extent, Staten Island. The Bank originated $14.4
million of multi-family residential real estate loans during the year ended
December 31, 1999 compared to $10.0 million and $4.6 million, respectively, of
originations in 1998 and 1997. The Bank generally has not been a substantial
originator of multi-family residential real estate loans due to, among other
factors, the relatively limited amount of apartment and other multi-family
properties in Staten Island.
The Bank's commercial real estate and multi-family residential loans
generally are three or five-year adjustable-rate loans indexed to three-or
five-year U.S. Treasury obligations adjusted to a CMT, plus a margin. Generally,
fees of between .50% and 1.50% of the principal loan balance are charged to the
borrower upon closing. The Bank generally charges prepayment penalties on
commercial real estate and multi-family residential mortgage loans. Although
terms for multi-family residential and commercial real estate loans may vary,
the Bank's underwriting standards generally provide for terms of up to 25 years
with amortization of principal over the term of the loan and LTV ratios of not
more than 75%. Generally, the Bank obtains personal guarantees of the principals
as additional security for any commercial real estate and multi-family
residential loans.
The Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to the
10
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the market, location and physical
condition. The Bank has also generally imposed a debt coverage ratio (the ratio
of net cash from operations before payment of debt service to debt service) of
not less than 125%. The underwriting analysis also includes credit checks and a
review of the financial condition of the borrower and guarantor, if applicable.
An appraisal report is prepared by an independent appraiser commissioned by the
Bank to substantiate property values for every commercial real estate and
multi-family loan transaction. All appraisal reports are reviewed by the Bank
prior to the closing of the loan.
Commercial real estate and multi-family residential lending entails
substantially different risks when compared to single-family residential lending
because such loans often involve large loan balances to single borrowers and
because the payment experience on such loans is typically dependent on the
successful operation of the project or the borrower's business. These risks can
also be significantly affected by supply and demand conditions in the local
market for apartments, offices, warehouses, or other commercial space. The Bank
attempts to minimize its risk exposure by limiting such lending to proven
businesses, only considering properties with existing operating performance
which can be analyzed, requiring conservative debt coverage ratios, and
periodically monitoring the operation and physical condition of the collateral.
As of December 31, 1999, $5.6 million or 2.5% of the Bank's commercial
real estate loans and none of its multi-family residential real estate loans
were non-accrual loans.
Construction and Land Loans. The Bank originates primarily residential
construction loans to real estate builders and, to a significantly lesser
extent, the Bank originates such loans to individuals who have a contract with a
builder for the construction of their residence. At December 31, 1999,
construction and land loans amounted to $60.1 million or 2.8% of the Company's
net loan portfolio of which $52.0 million consisted of construction loans and
$8.1 million consisted of land loans. In addition, at such date, the Bank had
$27.1 million of undisbursed funds for construction loans in process. The Bank
originated $51.1 million of construction and land loans during the year ended
December 31, 1999, compared to $38.5 million and $27.9 million of construction
loans in 1998 and 1997, respectively. In the future, the Company's construction
lending efforts are expected to be enhanced by ACLS, which commenced operations
in October 1999.
The Bank's construction loans generally have floating rates of interest
for a term of up to two years. Construction loans to builders are typically made
with a maximum loan to value ratio of 75%. The Bank's construction loans to
builders are made on either a pre-sold or speculative (unsold) basis. However,
the Bank generally limits the number of unsold homes under construction to its
builders, with the amount dependent on the reputation of the builder, the
present outstanding obligations of the builder, the location of the property and
prior sales of homes in the development and the surrounding area. The Bank
generally limits the number of construction loans for speculative units to two
to four model homes per project.
Prior to making a commitment to fund a construction loan, the Bank
requires an appraisal of the property by independent appraisers approved by the
Board of Directors. The Bank's staff also reviews and inspects each project at
the commencement of construction and prior to every disbursement of funds during
11
the term of the construction loan. Loan proceeds are disbursed after inspections
of the project based on a percentage of completion. The Bank requires monthly
interest payments during the construction term.
The Bank originates land loans to developers for the purpose of holding
or developing the land (i.e., roads, sewer and water) for sale. Such loans are
secured by a lien on the property, are generally limited to 60% of the appraised
value of the secured property and are typically made for a period of up to two
years with a floating interest rate based on the prime rate. The Bank requires
monthly interest payments during the term of the land loan. The principal of the
loan is reduced as lots are sold and released. In addition, the Bank generally
obtains personal guarantees from its borrowers and originates such loans to
developers with whom it has established relationships.
Construction and land lending generally is considered to involve a higher level
of risk as compared to permanent single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on developers and builders. Moreover, a
construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project. The nature of these
loans is such that they are generally more difficult to evaluate and monitor. In
addition, speculative construction loans to a builder are secured by unsold
homes and thus pose a greater potential risk to the Bank than construction loans
to individuals on their personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction and land lending to primarily
residential properties. In addition, the Bank has adopted strict underwriting
guidelines and other requirements for loans which are believed to involve higher
elements of credit risk. It is also the Bank's policy to obtain personal
guarantees from the principals of its corporate borrowers on its construction
and land loans.
Other Loans. The Bank offers a variety of other or non-mortgage loans.
Such other loans, which include commercial business loans, passbook loans,
student loans, overdraft loans, manufactured home loans and a variety of other
personal loans, amounted to $89.1 million or 4.1% of the Bank's net loan
portfolio at December 31, 1999.
At December 31, 1999, the Bank's commercial business loans amounted to
$33.6 million or 1.6% of the Bank's net loan portfolio. The Bank's commercial
business loans have a term of up to five years and may have either fixed-rates
of interest or, to a lesser extent, floating rates tied to the prime rate. The
Bank's commercial business loans are made to small to medium sized businesses
within the Bank's market area. A substantial portion of the Bank's small
business loans are unsecured with the remainder generally secured by perfected
security interests in accounts receivable and inventory or other corporate
assets. In addition, the Bank generally obtains personal guarantees from the
principals of the borrower with respect to all commercial business loans. In
addition, the Bank may extend loans for a commercial business purpose which are
secured by a mortgage on the proprietor's home or the business property. In such
cases, the loan, while underwritten to commercial business loan standards, is
reported as a single-family or commercial real estate mortgage loan, as the case
may be. Commercial business loans generally are deemed to involve a greater
degree of risk than single-family residential mortgage loans.
12
The Bank's commercial business loans include discounted loans, which
amounted to $5.3 million or 0.2% of the Bank's loans at December 31, 1999. The
Bank's discounted loans, which are made primarily to local businesses, are
designed to provide an interim source of financing and require no payment of
principal or interest until the due date of the loan, which may be up to one
year but generally is 60 or 90 days from the date of origination. While the
borrower is contractually obligated to repay the entire face amount of the loan
at maturity, the Bank advances only a portion of the face amount with the
difference constituting the interest component. In addition to personal
guarantees, discounted loans may also be secured by perfected security interests
in receivables. However, due to the lack of an amortization schedule and, in
certain cases, the absence of perfected security interests, discounted loans
generally may be deemed to involve a greater risk of loss than single-family
residential mortgage loans.
At December 31, 1999, included in total other consumer loans was $22.0
million of loans primarily secured by manufactured housing. This represents
1.20% of the Bank's net loan portfolio. The Bank currently purchases these
loans, after a review of the loan documentation and underwriting which is
prepared by the company originating the loan. The majority of the loans are
secured by manufactured housing and are located in the northeastern section of
the country. The Bank services the loan and is assisted by the originating
company in the collection process.
The balance of the Bank's other loans consists of loans secured by
passbook accounts, loans on overdraft accounts, home improvement loans, student
loans and various other personal loans.
Mortgage Banking Activities. On November 20, 1998, the Bank's wholly
owned subsidiary, SIB Mortgage Corp., acquired substantially all of the
residential mortgage production operations and certain other assets and
liabilities of Ivy Mortgage Corp. SIBMC conducts business as a licensed mortgage
banker in 22 states under the name "Ivy Mortgage." SIBMC's primary business is
to originate and sell residential mortgage loans on a servicing released basis
to the secondary market. The primary source of loans originated by SIBMC is a
network of approximately 100 retail commissioned loan officers who solicit
business through realtors, financial planners, insurance agents and other
referral sources. To a lesser extent SIBMC also derives applications from
third-party sources such as mortgage brokers and from the Internet. Loan
applications are generally processed on a de-centralized basis in SIBMC's
network of 29 offices. SIBMC's primary method of credit underwriting the loans
is to electronically submit the necessary data to the major mortgage agencies'
(FHLMC or FNMA) automated underwriting facilities. The company also has
underwriters in all of its regions who manually underwrite loans that are not
eligible for Agency submission, in which case, loans are originated for re-sale
to individual investors in the secondary market. All credit decisions are based
on individual investors' underwriting guidelines. In most instances SIBMC is
delegated to make underwriting decisions for its private investors either
directly or through automated intelligence. Generally, all properties securing
loans must be appraised by a licensed appraiser on SIBMC's approved list. Credit
reports, flood zone certifications and real estate tax certifications are
required on all loans. SIBMC also requires title insurance, hazard insurance and
flood insurance when a loan is determined to be in flood zone. SIBMC's
underwriters are authorized to approve loans based on the individual investors
delegated authority. All limits also are subject to Staten Island Savings Bank's
limitations and SIBMC is subject to the same limitations as the Bank for loans
to one borrower.
During the year ended December 31, 1999, SIBMC originated a total of
$708.5 million of mortgage loans, of which the Bank purchased $85.0 million. The
Bank purchases ARM loans originated by SIBMC in order to supplement the ARMs
originated directly by the Bank in its efforts
13
to manage interest rate risk. SIBMC originates primarily conventional
single-family residential mortgage loans and, to a lesser extent, FHA-insured
single-family residential mortgage loans.
The Bank has provided SIBMC with a $95.4 million line of credit to
finance its loan originations. At December 31, 1999, $43.9 million was
outstanding on such line of credit. In addition, the Bank also has extended a
$10.6 million working capital line of credit to SIBMC for day-to-day operating
expenses, of which $6.2 million was drawn as of December 31, 1999. Interest paid
by SIBMC on such loans is eliminated upon consolidation in the Company's
financial statements.
SIBMC originates loans which conform to the underwriting standards for
purchase by the FHLMC and FNMA ("conforming loans") as well as non-conforming
loans. Non-conforming loans generally consist of loans which, primarily because
of size or other underwriting technicalities which may be cured through
seasoning, do not satisfy the guidelines for resale to FNMA or FHLMC and other
private secondary market investors at the time of origination. Management
believes that these loans are essentially of the same credit quality as
conforming loans. During the year ended December 31, 1999, non-conforming
conventional loans represented approximately 20% of SIBMC's total volume of
mortgage loans originated.
Loan origination activities performed by SIBMC include soliciting,
completing and processing mortgage loan applications and preparing and
organizing the necessary loan documentation. Loan applications are examined for
compliance with underwriting criteria and, if all requirements are met, SIBMC
issues a commitment to the prospective borrower specifying the amount of the
loan and the loan origination fees, points and closing costs to be paid by the
borrower or seller and the date on which the commitment expires.
Typically, when a mortgage loan is originated, the borrower pays an
origination fee. These fees are generally in the range of 0% to 3.0% of the
principal amount of the mortgage loan, and are payable at the closing of such
loan. SIBMC receives these fees on mortgage loans originated through its retail
branches. SIBMC may charge additional fees depending upon market conditions and
regulatory considerations as well as SIBMC's objectives concerning mortgage loan
origination volume and pricing. SIBMC incurs certain costs in originating
mortgage loans, including overhead, out-of-pocket costs and in some cases, where
the mortgage loans are subject to a purchase commitment from private investors,
related commitment fees. The volume and type of mortgage loans and of
commitments made by investors vary with competitive and economic fluctuations in
revenues from mortgage loan originations. Generally accepted accounting
principles ("GAAP") require that general operating expenses incurred in
originating mortgage loans be charged using the interest method, until the
repayment or sale of the related mortgage loans. Loans originated by SIBMC
generally are sold in approximately 45 days. Revenues from SIBMC's loan sales
are recorded as other income in the Company's consolidated financial statements.
When SIBMC sells loans, it assumes limited recourse for first payment
defaults fraud and non-compliance with its investors' underwriting guidelines.
The first payment default recourse is generally limited to a loan that goes into
foreclosure where the delinquency occurred within the first 90 days after a loan
is sold to an investor. The recourse obligation for fraud and non-compliance to
underwriting standards is generally for the life of the loan. During 1999, SIBMC
recognized no losses due to such recourse arrangements.
14
Loan Origination and Loan Fees. In addition to interest earned on
loans, the Bank receives loan origination fees or "points" for many of the loans
it originates. Loan points are a percentage of the principal amount of the
mortgage loan and are charged to the borrower in connection with the origination
of the loan.
In accordance with SFAS No. 91, which addresses the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as
interest income over the contractual life, adjusted for prepayments, of the
related loans as an adjustment to the yield of such loans. At December 31, 1999,
the Bank had $0.9 million of such deferred loan costs, net.
Asset Quality
General. As a part of the Bank's efforts to improve its asset quality,
it has developed and implemented an asset classification system. All of the
Bank's assets are subject to review under this classification system. Loans are
periodically reviewed and the classifications are reviewed by the Board of
Directors on at least a quarterly basis. In addition, the Bank has retained an
independent third party consultant to review the Bank's classifications, among
other things, on a periodic basis. The Bank has also added staff and enhanced
the procedures of the loan administration area in the collection and loan review
area.
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made 16 days after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency continues, late charges are
assessed and additional efforts are made to collect the loan. While the Bank
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be doubtful
and the value of the collateral is not sufficient to satisfy all interest,
principal and potential costs due on the loan. Prior to 1998, the Bank's policy
was to cease accruing interest on any loan which was 90 days or more past due as
to principal or interest. Commencing in 1998, management reviews individual
secured loans to determine their accrual status when they approach 90 days past
due. The Bank does not accrue interest on unsecured loans that are 90 days or
more past due. When a loan is placed on non-accrual status, previously accrued
unpaid interest is deducted from interest income. At December 31, 1999 the Bank
had $12.5 million of loans in non-accrual status compared to $16.2 million as of
December 31, 1998.
Real estate acquired by the Bank as a result of foreclosure or
deed-in-lieu of foreclosure is classified as real estate owned until sold. These
foreclosed assets are considered held for sale and are carried at the lower of
fair value minus the estimated costs to sell the property. After the date of
acquisition, all costs incurred in maintaining the property are capitalized up
to the extent of their net realizable value. The Bank performs ongoing
inspections of the properties and adjusts the carrying value as needed. The Bank
attempts to sell all properties through brokers and through its own personnel.
At December 31, 1999, the Bank had $887,000 in these properties compared to
$849,000 as of December 31, 1998.
15
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1999, in dollar amounts and as a percentage of
each category of the Bank's loan portfolio. The amounts presented represent the
total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.
December 31, 1999
-----------------
(Dollars in Thousands)
30-59 Days 60-89 Days 90 Days or More
--------- ----------- ---------------
Percent of Percent of Percent of
Loan Loan Loan
Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ --------
Mortgage loans:
Residential:
Single-family ........... $39,880 2.29% $ 7,291 0.42% $ 4,616 0.27%
Multi-family ............ 1,502 3.53 123 0.29 41 0.10
Commercial real estate .. 8,752 3.91 1,498 0.67 535 0.24
Construction and land ... 3,597 5.98 736 1.22 466 0.78
Home equity ............. 58 1.08 -- -- 33 0.61
------ ------- -------
Total ..................... 53,789 2.64 9,648 0.47 5,691 0.27
Other loans:
Commercial business loans 1,778 5.28 418 1.24 744 2.21
Other loans ............. 1,491 2.69 361 0.65 451 0.81
------ ------- -------
Total other loans ......... 3,269 3.67 779 0.87 1,195 1.34
------ ------- -------
Total loans ............... $57,058 2.63% $10,427 0.48% $ 6,886 0.32%
======= ======= =======
16
Loans Past Due 90 Days or More and Still Accruing And Non-Accruing Assets. The
following table sets forth information with respect to, non-accruing loans, and
other real estate owned and loans past due 90 days or more and still accruing.
At December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-Accruing Assets
Mortgage loans:
Single-family residential ......... $ 2,899 $ 7,067 $ 9,395 $10,417 $11,159
Multi-family residential .......... -- 131 319 322 98
Commercial real estate ............ 5,568 6,534 8,436 11,102 11,653
Construction and land ............. 1,793 1,761 1,131 -- 379
Home equity ....................... 106 212 545 644 124
Other loans:
Automobile leases ................. -- -- -- 15 18
Commercial business loans ......... 1,783 346 835 106 175
Other consumer loans .............. 325 181 570 144 307
------- ------- ------- ------- -------
Total non-accrual loans ........... 12,474 16,232 21,231 22,750 23,913
Other real estate owned, net ...... 887 849 618 1,103 627
------- ------- ------- ------- -------
Total non-accruing assets ........ $13,361 $17,081 $21,849 $23,853 $24,540
Loans past due 90 days or more
and still accruing 6,886 7,422 -- -- --
------- ------- ------- ------- -------
Non-accuring assets and loans past
due 90 days or more and
still accruing $20,247 $24,503 $21,849 $23,853 $24,540
======= ======= ======= ======= =======
Non-accruing loans to total loans 0.62% 1.16% 1.98% 2.42% 3.00%
Non-accruing assets to total assets 0.30% 0.45% 0.82% 1.34% 1.42%
Non-accruing loans to total loans 0.58% 1.10% 1.93% 2.31% 2.92%
Non-accruing loans to total assets 0.28% 0.43% 0.80% 1.28% 1.38%
Non-accrual loans and other real estate owned at December 31, 1999 totaled
$13.4 million, down from $17.1 million at December 31, 1998 and $21.8 million at
December 31, 1997.
The interest income that would have been recorded during the year ended December
31, 1999 if all of the Bank's non-accrual loans at the end of such period had
been current in accordance with their terms during such period was $746,000. The
actual amount of interest recorded as income (on a cash basis) on such loans
during 1999 amounted to $935,000.
Classified and Criticized Assets. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
17
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable and there is a high
probability of loss. An asset classified as a loss is considered uncollectable
and of such little value that continuance as an asset of the institution is not
warranted. Another category designated as "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. At December 31, 1999, the Bank had an aggregate
of $25.1 million of classified assets of which $11.6 million were classified
substandard and $13.5 million of assets which were deemed special mention.
Allowance for Loan Losses. The level of the allowance for loan losses
is based on management's continuing review of the adequacy of the allowance.
Such review is based on the composition of the loan portfolio and its inherent
risk characteristics, the level of chargeoffs, both current and historic, local
and national economic conditions including the direction of real estate values,
current levels of delinquent and non-accruing loans, and the current trends in
regulatory supervision. At December 31, 1999, the Bank's allowance for loan
losses amounted to $14.3 million or 114.4% and 0.66% of the Bank's non-accrual
loans and total loans receivable, respectively. As a result of the reduction in
the Bank's non-accruing loans and the overall quality of the Bank's loan
portfolio, management deemed it prudent to reverse $1.9 million of the allowance
for loan losses which was the primary reason for the $1.8 million benefit for
the loan loss reserve for 1999 compared to a provision of $1.6 million in the
year 1998.
18
Allowance for Loan Losses. The following table sets forth the activity
in the Bank's allowance for loan losses during the periods indicated.
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Allowance at beginning of period .. $ 16,617 $ 15,709 $ 9,977 $ 10,704 $ 3,124
Provisions (Benefit ) ............. (1,843) 1,594 6,003 1,000 --
Increase as a result of acquisition -- 96 -- -- 8,026
Charge-offs:
Mortgage loans:
Single-family residential ......... 148 358 501 1,590 606
Multi-family residential .......... -- 31 100 -- --
Commercial real estate ............ 474 344 210 376 --
Other loans ........................ 1,043 1,386 507 729 176
-------- -------- -------- -------- --------
Total charge-offs ................. 1,665 2,119 1,318 2,695 782
Recoveries:
Mortgage loans:
Single-family residential .......... 456 267 533 408 198
Commercial real estate ............ 34 210 251 413 19
Construction and land ............. -- 3 10 -- --
Other loans ........................ 672 857 253 147 119
-------- -------- -------- -------- --------
Total recoveries .................. 1,162 1,337 1,047 968 336
-------- -------- -------- -------- --------
Allowance at
end of period ....................... $ 14,271 $ 16,617 $ 15,709 $ 9,977 $ 10,704
======== ======== ======== ======== ========
Allowance for loan losses to total
non-accruing loans at end of period 114.40% 102.37% 73.69% 43.85% 44.20%
======== ======== ======== ======== ========
Allowance for loan losses to total
loans at end of period ............ 0.66% 1.07% 1.42% 1.02% 1.32%
======== ======== ======== ======== ========
19
The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses by loan category at the dates indicated.
At December 31,
---------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Percent of Percent of Percent of Percent of Percent of
Loan in Loan in Loan in Loan in Loan in
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
Mortagage Loans
Residential ...... $ 5,890 83.88% $ 5,562 84.89% $ 5,853 82.97% $ 3,192 80.27% $ 2,002 80.65%
Commercial ....... 5,579 12.39 7,721 11.74 6,696 14.83 5,842 14.91 7,735 14.62
Other Loans ...... 2,802 4.10 3,334 4.40 3,160 4.04 943 6.55 967 6.84
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total ............ $14,271 100.37% $16,617 101.03% $15,709 101.84% $ 9,977 101.73% $10,704 102.11%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
20
The Bank will continue to monitor and modify its allowance for loan
losses as conditions dictate. While management believes that, based on
information currently available, the Bank's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurance can be given that the Bank's level of allowance for loan losses will
be sufficient to absorb future loan losses incurred by the Bank or that future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for loan
losses. In addition, the OTS, as an integral part of its examination process,
periodically reviews the Bank's allowance for loan losses. Such agency may
require the Bank to make adjustments to the loan loss reserve based upon their
own judgements which could differ from those of management.
Securities Activities
General. As of December 31, 1999, the Company had securities totaling
$2.0 billion or 43.7% of the Company's total assets at such date. The unrealized
depreciation on the Company's securities available for sale amounted to $34.6
million, net of income taxes. The securities investment policy of the Bank and
Company, which has been established by the Board of Directors, is designed,
among other things, to assist the Bank in its asset/liability management
policies. The investment policy emphasizes principal preservation, favorable
returns on investments, maintaining liquidity within designated guidelines,
minimizing credit risk and maintaining flexibility. The current securities
investment policies permit investments in various types of assets including
obligations of the U.S. Treasury and federal agencies, investment grade
corporate obligations, various types of mortgage-backed and mortgage-related
securities, commercial paper, certificates of deposit, equities and federal
funds sold to financial institutions approved by the Board of Directors.
The Bank converted to a federally chartered mutual savings bank in
August 1997. Prior to that date, the Bank operated as a New York State chartered
mutual savings bank. While operating under its New York Charter, the Bank was
permitted to make certain investments in equity securities and stock mutual
funds. Pursuant to the current law for federally chartered thrifts, the Bank was
required to divest or transfer such securities. The Bank transferred these
securities with a market value of $60.8 million to the Company during the month
of February 1998. The Company's securities portfolio as of December 31, 1999 was
$145.3 million, consisting of equity investments and certain corporate bonds
which are not legal investments for a federally chartered thrift.
At December 31, 1999, all of the Company's securities were classified
as available for sale. Such classification as available for sale provides the
Company with the flexibility to sell securities if deemed appropriate in
response to, among other factors, changes in interest rates. Securities
classified as available for sale are carried at fair value. Unrealized gains and
losses on available for sale securities are recognized as direct increases or
decreases in equity, net of applicable income taxes.
In the year ended December 31,1999, the Company recognized a net loss
on security transactions of $5.5 million which included a $9.1 million
write-down of two corporate bonds which management determined to be permanently
impaired due to the deterioration of the financial condition of the issuer of
those bonds. The Company recognized a net gain on security transactions of
$524,000 and a net loss of $85,000 for the years ended December 31, 1998 and
1997, respectively.
21
The Bank's investment policy provides management with the authority to
sell securities provided, among other things, any losses on such sales do not
exceed $750,000, in which event prior approval of the Board of Directors is
required. Generally, management will enter into such securities sales only if it
believes that it can replace the securities sold with newly purchased securities
that, due to their higher yield, will offset the losses within a twelve month
period.
The following table sets forth the activity in the Company's aggregate
securities portfolio during the periods indicated.
Year Ended December 31,
1999 1998 1997
---- ---- ----
(Dollars In Thousands)
Securities at beginning of period ............ $ 2,029,041 $ 1,350,466 $ 703,134
Purchases:
U.S. government and agencies ................. 121,954 19,819 25,073
Agency mortgage-backed securities ............ 153,489 351,465 519,430
Agency CMOs .................................. 66,637 199,852 166,015
Private CMOs ................................. 38,130 374,353 165,137
Other debt securities ........................ 44,497 239,128 167
Marketable equity securities ................. 92,408 119,768 34,483
----------- ----------- -----------
Total purchases............................... 517,115 1,304,385 910,305
Sales:
U.S. government and agencies ................. -- -- 30,000
Agency mortgage-backed securities ............ -- 2,772 18,183
Private CMOs ................................. -- -- 24,952
Other debt securities ........................ 23,681 88,168 --
Marketable equity securities ................. 52,576 18,284 24,822
----------- ----------- -----------
Total sales .................................. 76,257 109,224 97,957
Repayments and prepayments: ..................
U.S.government and agencies .................. 33,050 49,943 22,025
State and municipals ......................... -- -- 3,045
Agency mortgage-backed securities ............ 240,177 263,362 104,187
Agency CMOs................................... 46,949 134,220 33,366
Private CMOs ................................. 69,754 72,082 16,866
Other debt securities ........................ -- -- 1,000
Marketable equity securities ................. -- 60 --
----------- ----------- -----------
Total repayments and prepayments ............. 389,930 519,667 180,489
Accretion of discount and (amortization
of premium) .................................. (10,497) (2,392) (520)
Write-down for permanently impaired securities (9,069) -- --
Unrealized gains or (losses)
on available-for-sale securities ............. (96,449) 5,473 16,435
Realized gains or (losses) on trading assets . -- -- (442)
----------- ----------- -----------
Securities at end of period .................. $ 1,963,954 $ 2,029,041 $ 1,350,466
=========== =========== ===========
Mortgage-Backed and Mortgage-Related Securities. At December 31, 1999,
the Company's securities included $793.6 million, or 17.7% of total assets, of
mortgage participation certificates (which are also known as mortgage-backed
securities).
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages. The principal and interest payments
on mortgage-backed securities are passed from the mortgage originators, as
servicer, through intermediaries (generally U.S. Government agencies and
government-sponsored enterprises) that pool and repackage the participation
interests, in the form of securities, to investors such as the Bank. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the FHLMC, the
Federal National Mortgage Association ("FNMA") and the Government National
Mortgage Association ("GNMA").
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are
23
backed by pools of mortgages that have loans with interest rates that are within
a range and have varying maturities. The underlying pool of mortgages can be
composed of either fixed-rate or adjustable-rate loans. As a result, the risk
characteristics of the underlying pool of mortgages, (i.e., fixed-rate or
adjustable-rate) as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.
The Bank's securities also include $656.8 million, or 14.6% of total
assets, in collateralized mortgage obligations ("CMOs"), which are also known as
mortgage-related securities. A CMO can be collateralized by loans or securities
which are insured or guaranteed by the FHLMC, the FNMA or the GNMA. As of
December 31, 1999, $238.6 million of the Bank's CMOs were insured or guaranteed
by the FHLMC, FNMA or GNMA and the remaining $418.2 million of the Bank's CMOs
were privately issued. While non-agency private issue CMOs are somewhat less
liquid than CMOs insured or guaranteed by the GNMA, FNMA or FHLMC, they
generally have a higher yield than agency insured or guaranteed CMOs. In
contrast to pass-through mortgage-backed securities in which cash flow is
received pro rata by all security holders, the cash flow from the mortgages
underlying a CMO is segmented and paid in accordance with a predetermined
priority schedule to investors holding various CMO classes. By allocating the
principal and interest cash flows from the underlying collateral among the
separate CMO classes, different classes of bonds are created, each with its own
stated maturity, estimated average life, coupon rate and prepayment
characteristics. The regular interests of some CMOs are like traditional debt
instruments because they have stated principal amounts and traditionally defined
interest rate terms. Purchasers of certain other CMOs are entitled to the
excess, if any, of the issuer's cash inflows, including reinvestment earnings,
over the cash outflows for debt service and administrative expenses. These CMOs
may include instruments designated as residual interests, which represent an
equity ownership interest in the underlying collateral, subject to the first
lien of the investors in the other classes of the CMO. Certain residual CMO
interests may be riskier than many regular CMO interests to the extent that they
could result in the loss of a portion of the original investment. Moreover, cash
flows from residual interests are very sensitive to prepayments and, thus,
contain a high degree of interest rate risk. As of December 31, 1999, the Bank's
CMOs did not include any residual interests, or interest-only or principal-only
securities. As a matter of policy, the Bank does not invest in residual
interests of CMOs or interest-only and principal-only securities.
Mortgage-backed and mortgage-related securities generally yield less
than the loans which underlie such securities because of their payment
guarantees or credit enhancements which offer nominal credit risk. In addition,
mortgage-backed and related securities are more liquid than individual mortgage
loans and may be used to collateralize borrowings of the Bank. Mortgage-backed
securities issued or guaranteed by the FNMA or the FHLMC (except interest-only
securities or the residual interests in CMOs) are weighted at no more than 20.0%
for risk-based capital purposes, compared to a weight of 50.0% to 100.0% for
residential loans.
The Bank generally does not invest in mortgage-backed and
mortgage-related securities with estimated average lives exceeding 10 years. At
December 31, 1999, the estimated duration of the Bank's mortgage-backed and
mortgage-related securities was approximately 5.1 years. The actual maturity of
a mortgage-backed or mortgage-related security may be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or accretion of discount related to the
mortgage-backed security. In accordance with GAAP, premiums are amortized and
discounts are accreted over the estimated lives of the loans, which decrease and
increase interest income, respectively. The prepayment assumptions used to
determine the amortization period for premiums and discounts can significantly
affect the yield of the mortgage-backed or mortgage-related security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying
24
mortgages depend on many factors, including the type of mortgages, the coupon
rate, the age of mortgages, the geographical location of the underlying real
estate collateralizing the mortgages and general levels of market interest
rates, the difference between the interest rates on the underlying mortgages and
the prevailing mortgage interest rates, generally, is the most significant
determinant of the rate of prepayments.
During periods of rising mortgage interest rates, if the coupon rates
of the underlying mortgages are less than the prevailing market interest rates
offered for mortgage loans, refinancings generally decrease and slow the
prepayment of the underlying mortgages and the related securities. Conversely,
during periods of falling mortgage interest rates, if the coupon rates of the
underlying mortgages exceed the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages and the related securities. Under such
circumstances, the Bank may be subject to reinvestment risk to the extent that
the Bank's mortgage-backed and mortgage-related securities amortize or prepay
faster than anticipated because the Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate. At December
31, 1999, of the $1.5 billion of mortgage-backed and mortgage-related
securities, an aggregate of $1.1 billion were secured by fixed-rate loans and an
aggregate of $338.4 million were secured by adjustable-rate loans.
25
U.S. Government and Agency Obligations
At December 31, 1999, the Company's U.S. Government securities
portfolio totaled $12.3 million with a weighted average maturity of 0.9 years.
The U.S. Government agency securities portfolio, consisting of callable
securities, totaled $143.5 million with a weighted average maturity of 7.4 years
and a weighted average life of 2.4 years to the call date.
Other Securities
At December 31, 1999, the Company's other securities consisted
primarily of $140.7 million in corporate bonds, $11.6 million in asset backed
bonds, and $0.5 million in foreign bonds. The corporate bonds consist of longer
term financial institution bonds of which $67.6 million have adjustable rates
using the 3 month LIBOR as the index and $73.1 million have fixed-rates for
longer terms. The weighted average maturity of the corporate bond portfolio is
20.0 years.
The following table sets forth certain information regarding the
contractual maturities of the Bank's U.S. Government Agency obligations and
other securities (all of which were classified as available for sale)
At December 31, 1999,
Maturing Weighted Maturing Weighted Maturing Weighted Maturing Weighted
Under 1 Average 1 - 5 Average 6 - 10 Average Over 10 Average
Year Yield Years Yield Years Yield Years Yield
(Dollars in Thousands)
U.S.Government and
federal agency obligations $ 8,000 7.82% $38,000 6.19% $118,775 6.39% $ -- -- %
Other Securities 100 8.13 20,500 6.52 15,250 6.83 129,837 8.00
------- ------- -------- --------
$ 8,100 $58,500 $134,025 $129,837
======= ======= ======== ========
Equity Securities
At December 31, 1999, the Company's investment in equity securities was
$205.0 million, consisting of $69.6 million of preferred stock, $40.9 million of
common stock, $60.2 million of FHLB stock and $34.3 million of mutual funds. All
equity investments are classified as available for sale.
Sources of Funds
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, proceeds from maturing securities
and cash flows from operations are the primary sources of the Bank's funds for
use in lending, investing and for other general purposes. The Bank also utilizes
borrowings, primarily FHLB advances and reverse repurchase agreements, to fund
its operations and on a longer term basis for general business.
26
Deposits. The Bank's deposit products include a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") accounts,
money market accounts, noninterest bearing checking accounts, commercial
checking accounts, regular savings accounts and term certificate accounts. The
Bank also offers jumbo certificate of deposit accounts and Individual Retirement
Accounts ("IRA") and other qualified plan accounts. While jumbo certificate of
deposit accounts are accepted by the Bank and may be subject to preferential
rates, the Bank does not actively solicit such deposits as such deposits are
more difficult to retain than core deposits. Deposit account terms vary with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.
At December 31, 1999, the Bank's deposits totaled $1.8 billion, of
which 81.3% were interest bearing deposits. Core deposits (savings accounts,
non-interest bearing commercial and retail demand deposits, money market
accounts and NOW accounts) were $1.2 billion or 68.5% and certificates of
deposit were $573.0 million or 31.5% at December 31, 1999. Although the Bank has
a significant portion of its deposits in core deposits, management monitors the
activity in these accounts and, based on historical experience and the Bank's
current pricing strategy, believes it will continue to retain a large portion of
these deposits. The Bank is not limited with respect to the rates it may offer
on deposit products.
The Bank utilizes traditional marketing methods to attract new
customers and savings deposits. In addition, the Bank's business development
officers have actively solicited, through individual meetings and other
contacts, deposit accounts, particularly commercial accounts. The Bank's lending
officers and branch managers have increased their efforts to solicit new
deposits from the Bank's loan customers and other residents and businesses in
their market area. Total deposits held by banks in the Bank's market area have
decreased over the past few years. However the Bank has continued to be the
largest depository institution, by deposit market share, in Staten Island. While
the Bank historically has not accepted brokered deposits, the Bank is currently
in the process of establishing relationships with deposit brokers and may, in
the future, utilize brokered deposits as a funding source, depending upon market
conditions.
For the year ended December 31, 1999, deposits, before interest
credited, increased $42.1 million compared with an increase of $54.8 million in
1998. Inclusive of interest credited, deposits increased $91.2 million in 1999
and $105.4 million in 1998.
27
The following table sets forth the activity in the Bank's deposits during the
periods indicated.
Year Ended December 31,
1999 1998 1997
---- ---- ----
(Dollars In Thousands)
Beginning balance............... $ 1,729,060 $1,623,652 $1,577,748
Net increase (decrease) before
interest credited............... 42,065 54,763 (9,386)
Interest credited............... 49,107 50,645 55,290
----------- ---------- ----------
Net increase in deposits........ 91,172 105,408 45,904
----------- ---------- ----------
Ending balance ................. $ 1,820,232 $1,729,060 $1,623,652
=========== ========== ==========
The following table sets forth, by various interest rate categories,
the certificates of deposit with the Bank at the dates indicated.
At December 31,
------------------------------------
1999 1998 1997
---- ---- ----
(Dollar in Thousands)
0.00% to 2.99% .......................... $ 343 $ 4,343 $ --
3.00% to 3.99% .......................... 1,912 3,516 9,704
4.00% to 4.99% .......................... 406,285 253,301 128,150
5.00% to 6.99%........................... 162,666 273,931 380,820
7.00% to 8.99% .......................... 1,837 2,063 2,019
-------- -------- --------
Total ................................... $573,043 $537,154 $520,693
======== ======== ========
Weighted Average Rate
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit at December 31, 1999.
Over Six Over One Over Two
Months Year Years
Six Months Through One Through Two Through Three Over Three
or Less Years Years Years Years
-------- ----- ---- ----- -----
(Dollars in Thousands)
0.00% to 2.99%........ $ 343 $ -- $ -- $ -- $ --
3.00% to 3.99%........ 1,361 551 -- -- --
4.00% to 4.99%........ 297,030 72,812 29,221 2,554 4,668
5.00% to 6.99%........ 63,859 32,044 43,763 9,691 13,309
7.00% to 8.99% ....... 1,837 -- -- -- --
-------- -------- -------- -------- --------
Total ............... $364,430 $105,407 $ 72,984 $ 12,245 $ 17,977
======== ======== ======== ======== ========
As of December 31, 1999, the aggregate amount of outstanding
certificates of deposit in amounts greater than or equal to $100,000 was
approximately $161.6 million. The following table presents the maturity of these
certificates of deposit at such date.
December 31, 1999
------------------
(Dollars in Thousands)
----------------------
3 months or less ..................... $ 86,518
Over 3 months through 6 months........ 23,547
Over 6 months through 12 months...... 29,760
Over 12 months ....................... 21,778
--------
$161,603
========
28
The following table sets forth the dollar amount of deposits in the
various types of deposit accounts offered by the Bank at the dates indicated.
At December 31,
---------------
1999 1998 1997
---- ---- ----
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
Savings accounts............. $ 737,794 40.53% $ 730,614 42.25% $ 709,074 43.67%
Certificates of
deposit ..................... 573,043 31.48 537,154 31.07 520,693 32.07
Money market accounts ....... 89,003 4.89 82,360 4.76 76,088 4.69
NOW accounts ................ 80,352 4.41 73,541 4.26 67,076 4.13
Demand deposits ............ 340,040 18.69 305,392 17.66 250,721 15.44
---------- ------ ---------- ------ ---------- ------
Total ....................... $1,820,232 100.00% $1,729,061 100.00% $1,623,652 100.00%
========== ====== ========== ====== ========== ======
Borrowings. During 1999, the Bank continued to leverage its capital by
utilizing borrowings as an additional source of funds for investments and loans.
At December 31, 1999 the Bank had borrowings of $2.0 billion which consisted of
FHLB advances and reverse repurchase agreements from the FHLB and established
brokerage firms. These borrowings are collaterized primarily by the Bank's
mortgage-backed securities portfolio and the single family residential loan
portfolio.
The Bank's strategy to invest borrowings at acceptable spreads has
increased the overall cost of funds while incrementally increasing net interest
income and decreasing the net interest rate spread. The Bank intends to reduce
its utilization of borrowings to fund asset growth during 2000 and to emphasize
more traditional funding sources such as deposit growth.
29
The following table sets forth information with respect to the
Company's borrowings at and during the periods indicated.
At or For the Year Ended December 31,
-------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Maximum balance $2,049,372 $1,349,477 $ 250,000
Average balance $1,673,755 $ 664,822 $ 81,071
Year end balance $2,049,372 $1,344,477 $ 250,000
Weighted average
interest rate:
At end of year 5.65% 5.24% 5.86%
During the year 5.35% 5.58% 5.88%
Trust Activities. The Bank also provides a full range of trust and
investment services, and acts as executor or administrator of estates and as
trustee for various types of trusts. Trust and investment services are offered
through the Bank's Trust Department which was acquired in 1995. Fiduciary and
investment services are provided primarily to persons and entities located in
Staten Island, New York. Services offered include fiduciary services for trusts
and estates, money management, custodial services and pension and employee
benefits consulting. As of December 31, 1999, the Trust Department maintained
approximately 348 trust/fiduciary accounts with an aggregate value of $133.3
million.
The accounts maintained by the Trust/Investment Services Division
consist of "managed" and "non-managed" accounts. "Managed" accounts are those
for which the Bank has responsibility for administration and investment
management and/or investment advice. "Non-managed" accounts are those accounts
for which the Bank merely acts as a custodian. The Company receives fees
depending upon the level and type of service provided. The Trust Department
administers various trust accounts (revocable, irrevocable and charitable
trusts, and trusts under wills), agency accounts (various investment fund
products), estate accounts and employee benefit plan accounts (assorted plans
and IRA accounts). Two trust officers and related staff are assigned to the
Trust Department. The administration of trust and fiduciary accounts are
monitored by the Trust Committee of the Board of Directors of Staten Island
Savings.
30
Savings Bank Life Insurance. During the year, the Bank maintained a
Savings Bank Life Insurance "SBLI" department which issues life insurance to
individuals. The financial statements of the SBLI Department are not
consolidated with the Bank's and the SBLI department's activities are segregated
from the Bank. The SBLI Department pays its own expenses and reimburses the Bank
for expenses incurred on its behalf. At December 31, 1999, the SBLI department
had policies totaling $1.5 billion in force. In accordance with regulatory
mandate, at December 31, 1999, the operations of the SBLI department ceased and
all assets, policies and surplus were transferred to a newly created mutual life
insurance company. The Bank has formed a new subsidiary as a licensed life
insurance agency to sell the products of the new mutual insurance company. This
new subsidiary will retain all commission income from policies previously
generated and serviced by the SBLI department.
Subsidiaries
SIB Mortgage Corp. (SIBMC) is a wholly-owned subsidiary of the Bank
incorporated in the State of New Jersey in 1998. SIBMC was formed to purchase
substantially all of the assets of Ivy Mortgage Corp. SIBMC currently originates
loans in 22 states and had assets totaling $54.0 million at December 31, 1999.
Staten Island Funding Corporation (SIFC) is a wholly-owned subsidiary
of SIBIC incorporated in the State of Maryland in 1998 for the purpose of
establishing a Real Estate Investment Trust ("REIT"). The Bank transferred real
estate mortgage loans totaling $648.0 million, net. In return the Bank received
all the shares of common stock and preferred stock in SIFC. The assets of SIFC
totaled $655.4 million at December 31, 1999.
SIB Investment Corporation (SIBIC) is a wholly-owned subsidiary of the
Bank that was incorporated in the State of New Jersey in 1998 for the purpose of
managing certain investments of the Bank. The Bank transferred the common stock
and a majority of the preferred stock of SIFC to SIBIC. The consolidated assets
of SIBIC at December 31, 1999 were $718.4 million.
American Construction Lending Services, Inc. (ACLS) is a wholly owned
subsidiary of the Bank incorporated in the State of Connecticut in 1999. ACLS
commenced operations in October of 1999. ACLS was formed to originate and
service residential construction loans throughout the United States. The assets
of ACLS totaled $5.7 million at December 31, 1999.
ACLS originates short-term, generally six-month to one-year,
construction loans primarily to individuals for their own residences. ACLS
generally originates construction loans only when the borrower has a commitment
from a financial institution for a permanent mortgage loan. SIBMC provides
permanent financing for a significant amount of the loans originated by ACLS,
which permanent mortgage loans generally are then sold into the secondary
market. In addition, the Bank will provide permanent loans for certain of the
construction loans originated by ACLS, which are primarily for properties
located in the New York City metropolitan area. During 1999, ACLS originated
$8.6 million in construction loans. ACLS currently conducts business in 16
states.
31
SIB Financial Corporation (SIBFC) is a wholly owned subsidiary of the
Bank incorporated in the State of New York in 2000. SIBFC was formed as a
licensed life insurance agency to sell the products of the new mutual insurance
company formed by the Savings Bank Life Insurance Department of New York.
Employees. The Bank had 907 full-time employees and 98 part-time
employees at December 31, 1999. None of these employees are represented by a
collective bargaining agent and the Bank believes that it enjoys good relations
with its personnel.
Year 2000. In the third quarter of 1998, the Company converted most of
its mission critical systems such as deposits and loans to a Year 2000 compliant
platform provided by a new data processing service provider. The cost of Year
2000 compliance was borne by the servicer under terms of the company's contract
with them. In 1999, the Company's other information technology systems were also
upgraded for year 2000 compliance. Comprehensive tests of Year 2000
functionality were completed in 1999 and no significant problems were noted. In
accordance with regulatory guidelines, the Company also developed and
successfully tested a Year 2000 business resumption contingency plan. During the
century turnover and to date, the Company did not or has not experienced any
disruptions to its information technology systems or in the level of service
provided to customers. For the year ended 1999, the Company incurred expenses of
approximately $150,000 related to Year 2000 compliance.
32
REGULATION
General
The Bank is a federally chartered and insured savings bank subject to
extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the BIF
(Bank Insurance Fund).
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Company or the Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals.
Regulation of Savings and Loan Holding Companies
Holding Company Acquisitions. The Company is a savings and loan holding
company within the meaning of the Home Owners' Loan Act, as amended ("HOLA").
The HOLA and OTS regulations generally prohibit a savings and loan holding
company, without prior OTS approval, from acquiring, directly or indirectly, the
ownership or control of any other savings association or savings and loan
holding company, or all, or substantially all, of the assets or more than 5% of
the voting shares thereof. These provisions also prohibit, among other things,
any director or officer of a savings and loan holding company, or any individual
who owns or controls more than 25% of the voting shares of such holding company,
from acquiring control of any savings association not a subsidiary of such
savings and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. The Company operates as a unitary savings
and loan holding company. Generally, there are limited restrictions on the
activities of a unitary savings and loan holding company and its non-savings
association subsidiaries. If the Company ceases to be a unitary savings and loan
holding company, the activities of the Company and its non-savings association
subsidiaries would thereafter be subject to substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid.
Affiliate Restrictions. Transactions between a savings association and
its "affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in
connection therewith limit the extent to which a savings association or its
subsidiaries may engage in certain "covered transactions" with affiliates to an
amount equal to 10% of the association's capital and surplus, in the case of
covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings association and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
33
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings association and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings association or its subsidiaries and
an affiliate must be on terms and conditions that are consistent with safe and
sound banking practices. With certain exceptions, each loan or extension of
credit by a savings association to an affiliate must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of affiliate transactions.
Financial Modernization. Under the Gramm-Leach Bliley Act enacted into
law on November 12, 1999, no company may acquire control of a savings and loan
holding company after May 4, 1999, unless the company is engaged only in
activities traditionally permitted to a multiple savings and loan holding
company or newly permitted to a financial holding company under Section 4(k) of
the Bank Holding Company Act. Existing savings and loan holding companies and
those formed pursuant to an application filed with the OTS before May 4, 1999,
may engage in any activity including non-financial or commercial activities
provided such companies control only one savings and loan association that meets
the Qualified Thrift Lender test. Corporate reorganizations are permitted, but
the transfer of grandfathered unitary thrift holding company status through
acquisition is not permitted.
Regulation of Federal Savings Banks
Regulatory System. As a federally insured savings bank, lending
activities and other investments of the Bank must comply with various statutory
and regulatory requirements. The Bank is regularly examined by the OTS and must
file periodic reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the BIF, up to applicable limits.
34
Federal Home Loan Banks. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal to the greater of: (i) 1% of its aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5% of
its FHLB advances (borrowings). The current investment in FHLB stock is based on
5% of the Bank's borrowings outstanding from the FHLB.
Liquid Assets. Under OTS regulations, for each calendar month, a
savings bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during the
preceding calendar month. This liquidity requirement, which is currently at
4.0%, may be changed from time to time by the OTS to any amount between 4.0% to
10.0%, depending upon certain factors. OTS regulations also require each savings
association to maintain an average daily balance of short-term liquid assets
equal to not less than 1.0% of the average daily balance of its net withdrawable
accounts and short-term borrowings during the preceding calendar month. The Bank
maintains liquid assets in compliance with these regulations.
Regulatory Capital Requirements. OTS capital regulations require
savings banks to satisfy minimum capital standards, risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
banks must meet each of these standards in order to be deemed in compliance with
OTS capital requirements. In addition, the OTS may require a savings association
to maintain capital above the minimum capital levels.
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings bank is required to maintain
core capital equal to a minimum of 3% of adjusted total assets. A savings bank
is also required to maintain tangible capital in an amount at least equal to
1.5% of its adjusted total assets.
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by the activities or condition of its
holding company, affiliates, subsidiaries or other persons or savings
associations with which it has significant business relationships.
35
The Bank is not subject to any such individual minimum regulatory
capital requirement.
The Bank's tangible capital ratio was 8.93%, its core capital ratio was
8.97% and its total risk-based capital ratio was 19.80% at December 31, 1999.
Prompt Corrective Action. The prompt corrective action regulation of
the OTS, promulgated under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), requires certain mandatory actions and authorizes
certain other discretionary actions to be taken by the OTS against a savings
bank that falls within certain undercapitalized capital categories specified in
the regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. The Bank meets the capital requirements of a "well capitalized"
institution under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an
insured depository institution from declaring any dividends, making any other
capital distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept brokered deposits only with a waiver from the FDIC and
are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll-over
brokered deposits.
Institutions that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the institution and periodic review
of the institution's efforts to restore its capital, (ii) a requirement that the
institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time it received notice of being undercapitalized, or the amount
necessary to bring the institution into compliance with applicable capital
standards at the time it fails to comply with the plan, and (iii) a limitation
on the institution's ability to make any acquisition, open any new branch
offices, or engage in any new line of business without the prior approval of the
appropriate federal banking agency for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are necessary to resolve the problems of the
institution at the least possible long-term cost to the deposit insurance fund.
These supervisory actions include: (i) requiring the institution to raise
additional capital or be acquired by another institution or holding company if
certain grounds exist, (ii) restricting transactions between the institution and
its affiliates, (iii) restricting interest rates paid by the institution on
deposits, (iv) restricting the institution's asset growth or requiring the
institution to reduce its assets, (v) requiring replacement of senior executive
officers and directors, (vi) requiring the institution to alter or terminate any
activity deemed to pose excessive risk to the institution, (vii) prohibiting
capital distributions by bank holding companies without prior approval by the
FRB, (viii) requiring the institution to divest certain subsidiaries, or
requiring the institution's holding company to divest the institution or certain
36
affiliates of the institution, and (ix) taking any other supervisory action that
the agency believes would better carry out the purposes of the prompt corrective
action provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a
timely, acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The regulation
also makes mandatory for significantly undercapitalized institutions certain of
the supervisory actions that are discretionary for institutions classified as
undercapitalized, creates a presumption in favor of certain discretionary
supervisory actions, and subjects significantly undercapitalized institutions to
additional restrictions, including a prohibition on paying bonuses or raises to
senior executive officers without the prior written approval of the appropriate
federal bank regulatory agency. In addition, significantly undercapitalized
institutions may be subjected to certain of the restrictions applicable to
critically undercapitalized institutions.
The regulation requires that an institution be placed into
conservatorship or receivership within 90 days after it becomes critically
undercapitalized, unless the OTS, with concurrence of the FDIC, determines that
other action would better achieve the purposes of the prompt corrective action
provisions of FDICIA. Any such determination must be renewed every 90 days. A
depository institution also must be placed into receivership if the institution
continues to be critically undercapitalized on average during the fourth quarter
after the institution initially became critically undercapitalized, unless the
institution's federal bank regulatory agency, with concurrence of the FDIC,
makes certain positive determinations with respect to the institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized institutions
and to a number of other severe restrictions. For example, beginning 60 days
after becoming critically undercapitalized, such institutions may not pay
principal or interest on subordinated debt without the prior approval of the
FDIC. (However, the regulation does not prevent unpaid interest from accruing on
subordinated debt under the terms of the debt instrument, to the extent
otherwise permitted by law.) In addition, critically undercapitalized
institutions may be prohibited from engaging in a number of activities,
including entering into certain transactions or paying interest above a certain
rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
Conservatorship/Receivership. In addition to the grounds discussed
under "Prompt Corrective Action," the OTS (and, under certain circumstances, the
FDIC) may appoint a conservator or receiver for a savings association if any one
or more of a number of circumstances exist, including, without limitation, the
following: (i) the institution's assets are less than its obligations to
creditors and others, (ii) a substantial dissipation of assets or earnings due
to any violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books, papers,
records or assets or refusal to submit such items for inspection to any examiner
or lawful agent of the appropriate federal banking agency or state bank or
savings association supervisor, (vi) the institution is likely to be unable to
pay its obligations or meet its depositors' demands in the normal course of
business, (vii) the institution has incurred, or is likely to incur, losses that
will deplete all or substantially all of its capital, and there is no reasonable
prospect for the institution to become adequately capitalized without federal
assistance, (viii) any violation of law or unsafe or unsound practice that is
likely to cause insolvency or substantial dissipation of assets or
37
earnings, weaken the institution's condition, or otherwise seriously prejudice
the interests of the institution's depositors or the federal deposit insurance
fund, (ix) the institution is undercapitalized and the institution has no
reasonable prospect of becoming adequately capitalized, fails to become
adequately capitalized when required to do so, fails to submit a timely and
acceptable capital restoration plan, or materially fails to implement an
accepted capital restoration plan, (x) the institution is critically
undercapitalized or otherwise has substantially insufficient capital, or (xi)
the institution is found guilty of certain criminal offenses related to money
laundering.
Enforcement Powers. The OTS and, under certain circumstances the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss; restrict the growth of
the institution; and rescind agreements and contracts.
Capital Distribution Regulation. As a subsidiary of a savings and loan
holding company the Bank is required to provide advance notice to the OTS of any
proposed capital distribution on its capital stock.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the Code as a "domestic building and loan association." The
Bank is a domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and educational
38
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At December 31, 1999, under the
expanded QTL test, approximately 89.04% of the Bank's portfolio assets were
qualified thrift investments.
FDIC Assessments. The deposits of the Bank are insured to the maximum
extent permitted by the BIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions is made by the FDIC for each semi-annual assessment
period. The Bank paid $207,000 in insurance deposit premiums during 1999.
Community Reinvestment Act and the Fair Lending Laws. Savings
associations have a responsibility under the Community Reinvestment Act ("CRA")
and related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Fair
Lending Laws could result in enforcement actions by the OTS, as well as other
federal regulatory agencies and the Department of Justice.
Safety and Soundness Guidelines. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
39
Change of Control. Subject to certain limited exceptions, no company
can acquire control of a savings association without the prior approval of the
OTS, and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Companies subject to the Bank Holding Company Act that acquire or own
savings associations are no longer defined as savings and loan holding companies
under the HOLA and, therefore, are not generally subject to supervision and
regulation by the OTS. OTS approval is no longer required for a bank holding
company to acquire control of a savings association, although the OTS has a
consultative role with the FRB in examination, enforcement and acquisition
matters.
TAXATION
Federal Taxation
General. The Company and the Bank are subject to federal income
taxation in the same general manner as other corporations with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Bank. The Bank's
federal income tax returns have been audited or closed without audit by the IRS
through 1995.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its consolidated federal
income tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific chargeoff method in computing its bad debt deduction beginning with its
1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of December 31, 1999 is approximately $4.8
million. The Bank began to recapture the reserve in 1998.
As discussed more fully below, the Bank and subsidiaries file combined
New York State Franchise and New York City Financial Corporation tax returns.
The basis of the determination of each tax is the greater of a tax on entire net
income (or on alternative entire net income) or a tax computed on taxable
assets. However, for state purposes, New York State enacted legislation in 1996,
which among other things, decoupled the Federal and New York State tax laws
regarding thrift bad debt deductions and permits the continued use of the bad
40
debt reserve method under section 593. Thus, provided the Bank continues to
satisfy certain definitional tests and other conditions, for New York State and
City income tax purposes, the Bank is permitted to continue to use the special
reserve method for bad debt deductions. The deductible annual addition to the
state reserve may be computed using a specific formula based on the Bank's loss
history ("Experience Method") or a statutory percentage equal to 32% of the
Bank's New York State or City taxable income ("Percentage Method").
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a bank
charter.
At December 31, 1999 the Bank's total federal pre-1988 reserve was
approximately $11.7 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 1999, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
State and Local Taxation
New York State and New York City Taxation. The Company and the Bank
report income on a combined calendar year basis to both New York State and New
York City. New York State Franchise Tax on corporations is imposed in an amount
equal to the greater of (a) 9% of "entire net income" allocable to New York
State (b) 3.25% of "alternative entire net income" allocable to New York State
(c) 0.02% of the average value of assets allocable to New York State or (d)
nominal minimum tax. Entire net income is based on federal taxable income,
subject to certain modifications. Alternative entire net income is equal to
entire net income without certain modifications. The New York City Corporation
41
Tax is imposed using similar alternative taxable income methods and rates.
A temporary Metropolitan Transportation Business Tax Surcharge on
Banking corporations doing business in the Metropolitan District has been
applied since 1982. The Bank transacts a significant portion of its business
within this District and is subject to this surcharge. For the tax year ended
December 31, 1999, the surcharge rate is 17% of the State franchise tax
liability
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $150,000. The Delaware tax for 1999 was
$150,000. The Mortgage Company and the Construction Lending Company are subject
to taxes for the additional states that they operate in.
42
PART II
Item 2. Properties
At December 31, 1999, the Bank conducted its business from its
executive and administrative offices in Staten Island, New York, and 16 full
service branch offices in Staten Island, one full service branch office in
Brooklyn as well as three limited service branch offices, a loan origination
center and its Trust Department in Staten Island. In addition, the Bank
maintains 37 automated teller machines ("ATMs").
SIBMC conducts its business from its executive and administrative
office in Branchburg, New Jersey and eight retail loan origination offices.
SIBIC conducts its business in its executive office located in
Middletown, New Jersey.
ACLS conducts its business from its executive office in Wallingford,
Connecticut.
The following table sets forth certain information relating to the
Company's offices at December 31, 1999.
Lease Improvements at Deposit at
Owned or Expiration December 31, December 31,
Leased Date 1999 1999
Location (1)
Executive Office:
15 Beach Street Owned $1,806 --
Staten Island, NY 10304
Branch Offices:
81-91 Water Street Owned 225 $161,126
Staten Island, NY 10304
15 Hyatt Street Owned 109 63,678
Staten Island, NY 10301
257 New Dorp Lane Owned 35 142,941
Staten Island,
NY 10305
260 New Dorp Lane Owned 471 (1)
Staten Island, NY 10305
1837 Victory Boulevard Owned 149 162,176
Staten Island, NY 10314
1850 Victory Boulevard Owned 149 (2)
Staten Island, NY 10314
43
1320 Hylan Boulevard Owned 435 160,498
Staten Island, NY 10305
461-465, 475 Forest Avenue Owned 669 107,770
Staten Island, NY 10310
3150 Amboy Road Owned 401 101,621
Staten Island, NY 10308
900 Huguenot Avenue Leased 2000 (3) 345 71,457
Staten Island, NY 10312
5472 Amboy Road Owned 1,178 (4)
Staten Island, NY 10309
2700 Hylan Boulevard Leased 2005 (3) 374 123,290
Staten Island, NY 10306
4025 Amboy Road Owned 230 104,921
Staten Island, NY 10308
6975 Amboy Road Owned 1,330 71,397
Staten Island, NY
10309
1630 Forest Avenue Owned 1,103 89,836
Staten Island, NY 10302
43 Richmond Hill Road Leased 2009 491 77,073
Staten Island,
NY 10314
800 Forest Avenue Owned 796 60,817
Staten Island, NY 10310
1630 Richmond Road Owned 1,080 169,862
Staten Island, NY 10304
4310-4312-4320 Amboy Road Leased 2007 (3) 256 73,444
Staten Island, NY 10312
9512-20 3rd Avenue Leased 2004 265 72,932
Brooklyn, NY 11209
Other Offices:
45 Beach Street Owned 574 (5)
Staten Island, NY 10304
260 Christopher Lane Leased 2003 194 (6)
Staten Island, NY 10314
96 Prospect Street Owned 923 (5)
Staten Island, NY 10304
44
1591 Richmond Road Owned 615 (7)
Staten Island, NY
10304
176 Broadway Leased 2000 -- (8)
New York, NY
10038
1500 Victory Blvd. Leased 2002(3) 42 (5)
Staten Island, NY 10314
SIB Mortgage Corp. Executive Leased 2001 52 (6)
Offices/Branch
1250 Route 28
Branchburg, NJ 08876
99 Merimack Street Leased 2001 5 (6)
Haverhill,Ma
86 Summit Avenue Leased 2002 6 (6)
Summit, NJ 07901
400 West Cummings Park Leased 2001 10 (6)
Suite 4900 Woburn, MA 01801
1 Neshamiy Interplex Leased 2002 0 (6)
Suite 102
Trevose, PA 19053
Plaza 800 Islington Street Leased 2001 1 (6)
Portsmouth, NH
29 Emmons Drive Leased 2002 0 (6)
W Windsor, NJ
1111 Street Road Leased 2000 0 (6)
Southampton, PA 18966
317 Brick Boulevard Leased 2003 4 (6)
Brick, NJ 08723
100 N.E. 5th Avenue Owned 6 (6)
Delray Beach, FL
ACLS Leased 2004 14 (6)
Executive Office
102 Barnes Road
Wallingford, CT 06492
SIB Investment Corporation Leased 2000 0 (6)
Executive Office 1650 Route 35
South Middletown, NJ 07748
45
(1) Consists of two ATMs and a manned drive-in facility.
(2) Consists of three ATMs and a manned drive-in facility.
(3) Excludes options to extended term.
(4) An automated drive through facility with two ATMs.
(5) Administrative office.
(6) Loan origination office.
(7) Trust Department office.
(8) SBLI Department.(to be closed March 31, 2000)
46
Item 3. Legal Proceedings.
The Company is not involved in any legal proceedings other than
immaterial proceedings occurring in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security-Holders.
- -------------------------------------------------------------
Not applicable.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- -------------------------------------------------------------------------------
The information required herein to stockholders, to the extent
applicable, is incorporated by reference from page 37 and 38 of the Company's
1999 Annual Report ("1999 Annual Report")
Item 6. Selected Financial Data.
- --------------------------------
The information required herein is incorporated by reference from page
10 of the 1999 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- --------------------------------------------------------------------------------
The information required herein is incorporated by reference from pages
13 to 20 of the 1999 Annual Report.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
- --------------------------------------------------------------------
The information required herein is incorporated by reference from pages
11 to 13 of the 1999 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages
21 to 37 of the 1999 Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
- --------------------------------------------------------------------------------
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
The information required herein is incorporated by reference from pages
3 to 6 of the definitive proxy statement of the Company for the Annual Meeting
of Stockholders to be held on April 27, 2000. ("Definitive Proxy Statement").
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages
10 to 14 of the Definitive Proxy Statement.
47
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
The information required herein is incorporated by reference from pages
7 and 9 of the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from pages
14 and 15 of the Definitive Proxy Statement.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) Documents Filed as Part of this Report
--------------------------------------
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13.0):
Report of Independent Auditors
Consolidated Statements of Condition as of December 31, 1999
and 1998.
Consolidated Statements of Income for the Years Ended December
31, 1999, 1998 and 1997.
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the
absence of conditions under which they are required or because
the required information is included in the consolidated
financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K,
and this list includes the Exhibit Index.
Index Exhibit Index
- ----- -------------
3.1* Certificate of Incorporation of Staten Island Bancorp, Inc.
3.2* Bylaws of Staten Island Bancorp, Inc.
4.0* Specimen Stock Certificate of Staten Island Bancorp, Inc.
10.1* Form of Employment Agreement among Staten Island Bancorp,
Inc., Staten Island Savings Bank and certain executive
officers.
10.2* Form of Employment Agreement between Staten Island Bancorp,
Inc.and each of Harry P. Doherty and James R. Coyle.
10.3* Form of Employment Agreement between Staten Island Savings
Bank and each of Harry P. Doherty and James R. Coyle.
10.4** Amended and Restated 1998 Stock Option Plan
10.5** Amended and Restated 1998 Recognition and Retention Plan and
Trust Agreement
10.6*** Deferred Compensation Plan
13.0 1999 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is made to "Item 2.
"Business" for the required information
23.0 Consent of Arthur Andersen, LLP
27.0 Financial Data Schedule
48
(*) Incorporated herein by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-32113) filed by the Company
with the SEC.
(**) Incorporated herein by reference from the Company's definitive proxy
statement dated March 29, 2000.
(***) Incorporated herein by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. STATEN ISLAND BANCORP,
INC.
By: /s/ Harry P. Doherty
--------------------
Harry P. Doherty
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
Name Title Date
/s/ Harry P. Doherty Chairman and Chief March 30, 2000
- -------------------- Executive Officer
Harry P. Doherty
/s/ James R. Coyle Director, President March 30, 2000
- ------------------ and Chief Operating
James R. Coyle Officer
/s/ Edward J. Klingele Senior Vice President and March 30, 2000
- ---------------------- Chief Financial Officer
Edward J. Klingele (principal financial and
accounting officer)
/s/ Harold Banks Director March 30, 2000
- -----------------
Harold Banks
/s/ Charles J. Bartels Director March 30, 2000
- ----------------------
Charles J. Bartels
/s/ William G. Horn Director March 30, 2000
- -------------------
William G. Horn
/s/ Dennis P. Kelleher Director March 30, 2000
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Dennis P. Kelleher
49
/s/ Julius Mehrberg Director March 30, 2000
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Julius Mehrberg
/s/ John R. Morris Director March 30, 2000
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John R. Morris
/s/Kenneth W. Nelson Director March 30, 2000
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Kenneth W. Nelson
/s/ William E. O'Mara Director March 30, 2000
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William E. O'Mara
50