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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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) 447-7900
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)
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(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 $16.50 closing price of the Registrant's common stock as of March
24, 1998, the aggregate market value of the 37,570,845 shares of the
Registrant's common stock deemed to be held by non-affiliates of the Registrant
was $619.9 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, 1999: 42,538,705
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, 1998 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1998 Annual Meeting of
Stockholders are incorporated into Part III, Items 9 through 13 of this Form
10-K.
PART I
Item 1. Business
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 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) 447-7900.
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 as well as three limited service branch offices in Staten
Island. 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 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, to a lesser extent,
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, 1998 (the latest available data),
the Bank was the largest depository institution in terms of deposit market share
in Staten Island with 30% of the total deposits and 23% 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 32 years and 28 years, respectively, of service
with the Bank while the other executive officers of the Bank have an average of
15 years of service with Staten Island Savings.
In recent years, the Bank has facilitated its growth through
acquisitions. In 1998, the Bank's wholly-owned subsidiary, SIB Mortgage
Corporation (the "Mortgage Company") acquired the assets of Ivy Mortgage Corp.
The Mortgage Company, located in Branchburg, New Jersey, will continue to do
business as Ivy Mortgage Corp. 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 will also purchase 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
of the Mortgage Company locations to offer its commercial loan products
including loans to small businesses. This will alleviate some of the reliance of
the Bank's business on the economy of Staten Island and to a larger extent New
York City. In 1990, the Bank acquired several branch offices of a former savings
and loan association from the Resolution Trust Corporation and in August 1995,
the Bank acquired, Gateway State Bank, a local commercial bank headquartered on
Staten Island.
1
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"), 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) 447-7900.
This Form 10-K and the Company's Annual Report to Stockholders contain
certain forward-looking statements and information relating to the Company that
are based on the beliefs of management as well as assumptions made by and
information currently available to management. In addition, in those and other
portions of this document and the Company's Annual Report to Stockholders, the
words "anticipate, "believe," "estimate," "expect," "intend," "should" and
similar expressions, or the negative thereof, as they relate to the Company or
the Company's management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Company with respect to future
looking events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.
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, 1998, Staten Island Savings' total net loans
amounted to $1.5 billion or 38.6% 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, Brooklyn and other areas in New York. At December 31, 1998, $1.2 billion
or 81.5% of the Bank's net loan portfolio were secured by one to four family
residences of which $797.7 million were located on Staten Island and an
additional $316.8 million located in other areas of New York State.
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 $137.7 million or 9.5% of the net loan portfolio at
December 31, 1998, construction and land loans, which totaled $42.4 million or
2.9% at December 31, 1998, home equity loans, which totaled $6.1 million or .4%
at December 31, 1998, and loans secured by multi-family (over four units)
residential properties, which amounted to $33.3 million or 2.3% of the net loan
portfolio at December 31, 1998. In addition to mortgage loans, the Bank
originates various other loans including commercial business loans and consumer
loans. At December 31, 1998, the Bank's total other loans amounted to $67.6
million or 4.6% 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.
2
Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loans at the dates indicated.
At December 31,
1998 1997 1996
---- ---- ----
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Mortgage loans:
One to four family $ 1,187,212 81.48% $ 863,694 79.76% $ 743,089 76.76%
residential................
Multi-family residential. 33,328 2.29 28,218 2.61 26,444 2.73
Commercial real estate... 137,720 9.45 120,084 11.09 115,593 11.94
Construction and land.... 42,420 2.91 40,479 3.74 28,779 2.97
Home equity.............. 6,121 0.42 6,538 0.60 7,464 0.76
--------- ------ --------- ------ ------- ------
Total mortgage loans... 1,406,801 96.55 1,059,010 97.80 921,369 95.18
Other loans:
Student loans............ 940 0.06 4,033 0.37 4,522 0.47
Automobile leases (1).... - 0.00 - - 28,249 2.92
Passbook loans........... 5,989 0.41 6,929 0.00 5,933 0.61
Commercial business loans 36,592 2.51 19,559 1.84 14,995 1.55
Other.................... 24,070 1.65 13,212 1.22 9,712 1.00
--------- ------ --------- ------ ------- ------
Total other loans...... 67,591 4.63 43,733 4.04 63,411 6.55
--------- ------ --------- ------ ------- ------
Total loans receivable. 1,474,392 101.18 1,102,743 101.84 984,780 101.73
Less:
Premium (discount) on 1,194 0.08 (729) (0.07) (3,475) (0.36)
loans purchased..
Allowance for loan losses (16,617) (1.14) (15,709) (1.45) (9,977) (1.03)
Deferred loan fees....... (1,910) (0.12) (3,387) (0.32) (3,313) (0.34)
--------- ------ --------- ------ ------- ------
Loans receivable, net...... $ 1,457,059 100.00% $1,082,918 100.00% $ 968,015 100.00%
=========== ====== ========== ====== =========
1995
----
Percent of Percent
Amount Total Amount of
------ ----- ------ --
(Dollars in Thousands)
Mortgage loans:
One to four family $ 611,964 76.39% $ 506,397 83.16%
residential................
Multi-family residential. 25,977 3.24 24,347 4.00
Commercial real estate... 99,000 12.36 30,037 4.93
Construction and land.... 18,123 2.26 3,003 0.49
Home equity.............. 8,193 1.02 9,858 1.59
------- ------ ------- ------
Total mortgage loans... 763,257 95.27 573,442 94.17
Other loans:
Student loans............ 6,072 0.76 23,398 3.84
Automobile leases (1).... 18,705 2.33 8,344 1.37
Passbook loans........... 5,683 0.71 4,673 0.77
Commercial business loans 15,257 1.90 200 0.03
Other.................... 9,079 1.13 5,972 0.98
------- ------ ------- ------
Total other loans...... 54,796 6.84 42,587 6.99
------- ------ ------- ------
Total loans receivable. 818,053 102.11 616,029 101.16
Less:
Premium (discount) on (0.36) (0.19)
loans purchased.. (2,911) (1,134)
Allowance for loan losses (10,704) (1.34) (0.51)
(3,124)
Deferred loan fees....... (3,301) (0.41) (2,817)
------- ------ ------- ------
(0.46)
Loans receivable, net...... $ 801,137 100.00% $ 608,954 100.00%
========= ====== ========= ======
(1) Consists of loans secured by assignments of automobile lease payments.
3
Year Ended December 31,
1998 1997 1996
---------- ---------- --------
(Dollars In Thousands)
Total loans held at beginning
of period................................ $ 1,102,743 $ 984,780 $818,053
Originations of loans:
Mortgage loans:
One to four family residential......... 508,124 194,937 181,200
Multi-family residential............... 9,988 4,603 2,087
Commercial real estate................. 41,294 22,171 35,677
Construction and land.................. 38,514 27,936 32,080
Home equity............................ 2,686 2,744 1,224
Other loans:
Student loans.......................... 2,205 3,202 3,469
Passbook loans......................... 5,666 8,614 5,995
Commercial business loans.............. 23,180 9,415 7,806
Other consumer loans (1)............... 12,197 7,666 3,131
----------- --------- --------
Total originations.................. 643,854 289,512 287,950
Purchases of loans:
Mortgage loans:
One to four family residential (2)..... 59,412 -- --
Multi-family residential............... -- -- --
Commercial real estate................. -- -- --
Construction and land.................. -- -- --
Home equity............................ -- -- --
Other loans: --
Student loans.......................... -- -- --
Passbook loans......................... -- -- --
Commercial business loans.............. -- -- --
Other consumer loans................... 6,855 -- --
----------- --------- --------
Total purchases ..................... 66,267 -- --
----------- --------- --------
Total originations and purchases... 710,121 289,512 287,950
----------- --------- --------
Year Ended December 31,
1998 1997 1996
---------- ---------- --------
(Dollars In Thousands)
Loans sold:
Mortgage loans:
One to four family residential(3)...... 57,577 1,104 --
Multi-family residential............... -- -- --
Commercial real estate................. -- -- --
Construction and land.................. -- -- --
Home equity............................ -- -- --
Other loans:
Student loans.......................... -- 3,185 3,340
Passbook loans........................ -- --
Commercial business loans.............. -- -- --
Other consumer loans................... -- -- --
----------- --------- --------
Total sold........................... 57,577 4,289 3,340
Transfers to real estate owned.......... 1,166 1,149 1,629
Charge-offs................................ 2,119 1,022 2,373
Repayments................................. 201,091 165,089 113,881
----------- --------- --------
Net activity in loans...................... 448,091 117,963 166,727
----------- --------- --------
Gross loans held at end of period.......... $1,550,834 $1,102,743 $984,780
========== ========== ========
(1) Includes amounts drawn on overdraft loans.
(2) Represents loans purchased in the Ivy Mortgage Corp. acquisition.
(3) Loan sales by Ivy Mortgage Corp.
4
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 mortgage 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 $5.0 million. Loans in excess of
$5.0 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 $21.1 million at December 31,
1998.
One to Four 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 are secured by properties located in Staten Island and, to a
lesser extent, Brooklyn and other areas of New York. 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, 1998, $1.2
billion, or 81.5%, of the Bank's net loans consisted of single-family
residential mortgage loans. The Bank originated $508.1 million of one to four
family residential mortgage loans during the year ended December 31, 1998 and
$194.9 million and $181.2 million in 1997 and 1996, respectively. The Bank
anticipates that a significant portion of its future new loan originations will
continue to be single-family residential mortgage loans.
5
The Bank's residential mortgage loans have either fixed rates of
interest or interest rates which adjust periodically during the term of the
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, 1998,
$855.5 million, or 72.1%, 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, 1998, the Bank's five-year and ten-year ARM loans amounted to $202.4 million
and $93.0 million, respectively. The Bank's adjustable-rate single-family
residential real estate loans generally have a cap of 2% thru 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, which cap generally
is 5% or 6% above the initial rate. From time to time, based on prevailing
market conditions, 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, 1998, $331.7 million or 27.9% 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. In recent periods, demand for
single-family ARMs has been relatively weak due to the prevailing low interest
rate environment and consumer preference for fixed-rate loans. Accordingly,
although the Bank will continue to offer single-family ARMs, there can be no
assurance that in the future the
6
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's single-family residential mortgage loans generally do not
exceed $700,000. In addition, the maximum loan-to-value ("LTV") ratio for the
Bank's single-family residential mortgage loans generally is 95% of the
appraised value of the security property, provided, however, that private
mortgage insurance is obtained on the portion of the principal amount that
exceeds 80% of the appraised value.
At December 31, 1998, the Bank's home equity loans amounted to $6.1
million or 0.4% 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 its 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, 1998, the Bank's commercial real estate loans and multi-family
residential mortgage loans amounted to $137.7 million and $33.3 million,
respectively, or 9.5% and 2.3%, respectively, of the Bank's net loan portfolio.
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 $1.0 million and, as of December 31,
1998, the average size of the Bank's commercial real estate loans was $325,000.
The Bank originated $41.3 million of commercial real estate loans during the
year ended December 31, 1998 compared to $22.2 million and $35.7 million,
respectively, of commercial real estate loan originations in 1997 and 1996.
The Bank's multi-family residential real estate loans are concentrated
in Brooklyn and, to a lesser extent, Staten Island. The Bank originated $10.0
million of multi-family residential real estate loans during the year ended
December 31, 1998 compared to $4.6 million and $2.1 million, respectively, of
originations in 1997 and 1996. 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 basis points 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
7
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
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, 1998, $6.5 million or 4.7% of the Bank's commercial
real estate loans and $131,000 or 0.4% of its multi-family residential real
estate loans were considered non-performing loans.
Construction and Land Loans. The Bank originates primarily residential
construction loans to local (primarily Staten Island) real estate builders,
generally with whom it has an established relationship. 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. The Bank's construction
loans are secured by property located primarily in the Bank's market area. At
December 31, 1998, construction and land loans amounted to $42.4 million or 2.9%
of the Bank's net loan portfolio of which $32.0 million consisted of
construction loans and $10.4 million consisted of land loans. In addition, at
such date, the Bank had $14.1 million of undisbursed funds for construction
loans in process. The Bank originated $38.5 million of construction and land
loans during the year ended December 31, 1998, compared to $27.9 million and
$32.1 million of construction loans in 1997 and 1996, respectively.
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
local builders are made on either a pre-sold or speculative (unsold) basis.
However, the Bank generally limits the number of unsold homes under construction
8
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 appraiser 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
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 local 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. All of the
Bank's land loans are secured by property located in its market area. 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 not
pre-sold 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 generally and
by limiting 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, by limiting the geographic area in which the Bank will do business
to its existing market and by working with builders with whom it has established
relationships. 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 $67.6 million or 4.6% of the Bank's loan portfolio
at December 31, 1998.
9
At December 31, 1998, the Bank's commercial business loans amounted to
$36.6 million or 2.5% 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.
The Bank's commercial business loans include discounted loans, which
amounted to $8.2 million or 0.6% of the Bank's loans at December 31, 1998. 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, 1998, included in total other loans as other loans was
$6.8 million of loans secured by manufactured housing. This represents 0.46% 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.
At December 31, 1998, the Bank had $1.0 million of student loans in its
portfolio. The Bank has been and continues to be an active originator of student
loans. Substantially, all of these loans are originated under the auspices of
the New York State Higher Education Services Corporation ("NYSHESC"). Under the
terms of these loans, no repayment is due until the student's graduation, with
98% of the principal guaranteed by the NYSHESC. The terms and rates of these
loans are established by the NYSHESC. Presently, the Bank's general practice is
to sell its student loans into the secondary market as the loans are originated.
The balance of the Bank's other loans consist of loans secured by
passbook accounts, loans on overdraft accounts, home improvement loans and
various other personal loans.
10
Loans Held For Sale. At December 31, 1998 the Bank had $77.9 million of
loans held for sale. Such loans are originated by the Mortgage Company through
its network of retail loan origination offices. The loans are underwritten by
the Mortgage Company to meet the standards of its investors.
The Bank has provided the Mortgage Company with a warehouse line of
credit to fund the loans. The majority of the loans are secured by one to four
family residences. The Mortgage Company also has a line of credit with the Bank
for its operating cash needs. Both borrowing arrangements have similar terms to
other commercial borrowers with similar loan products. Revenues and expenses
generated are eliminated on the consolidated financial statements.
A majority of the loans are sold within a 45 day period to approved
buyers. Revenues and costs in originating and selling the loan are deferred
until the loan is sold and the transaction is completed. Revenues generated from
the sale are recorded as other income in the Company's consolidated financial
statements.
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, 1998,
the Bank had $1.9 million of such deferred loan fees and 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.
11
Loans are placed on nonaccrual 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. Management reviews individual
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 nonaccrual status previously accrued unpaid
interest is deducted from interest income.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
Pursuant to Statement of Position ("SOP") 92-3 issued by the American Institute
of Certified Public Accountants ("AICPA") in April 1992, which provides guidance
on determining the balance sheet treatment of foreclosed assets in annual
financial statements for periods ending on or after December 15, 1992, there is
a rebuttable presumption that foreclosed assets are held for sale and such
assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value. The Bank's accounting for its real estate owned
complies with the guidance set forth in SOP 92-3.
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage loans at December 31, 1998, 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, 1998
-----------------
30-59 Days 60-89 Days 90 Days or More
------------------------- ------------------------ ---------------------
Percent of Percent of Percent of
Amount Loan Category Amount Loan Category Amount Loan Category
------ ------------- ------ ------------- ------ -------------
(Dollars in Thousands)
Mortgage loans:
Residential:
Single-family .............................. $ 950 0.08% $ 7,814 0.62% $ 2,350 0.20%
Multi-family ............................... 145 0.44 168 0.50 -- 0.00%
Commercial real estate ....................... 334 0.24 727 0.53 1,495 1.09%
Construction and land ........................ 79 0.19 1,168 2.75 3,028 7.14%
Home equity .................................. 12 2.58 210 3.43 -- 0.00%
------- ---- ------- ---- ------- ----
Total ...................................... $ 1,520 0.54% $10,087 3.43% $ 6,873 0.49%
Other loans:
Commercial business loans .................... 2,569 7.02% 1,02 4.10% 50 0.14%
Other loans .................................. 860 2.77% 665 .15% 499 1.61%
------- ---- ------- ---- ------- ----
Total other loans ............ 3,429 5.07% 2,167 3.21% 549 0.81%
------- ---- ------- ---- ------- ----
Total loans .............. $ 4,949 0.34% $12,254 0.83% $ 7,422 0.50%
======= ==== ======= ==== ======= ====
12
Non-Performing Assets. The following table sets forth information with
respect to non-performing assets identified by the Bank, including nonaccrual
loans and other real estate owned, and non-performing investments in real estate
at the dates indicated.
At December 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccrual loans:
Mortgage loans:
Single-family residential... $7,067 $9,395 $10,417 $11,159(1) $6,692
Multi-family residential.... 131 319 322 98 86
Commercial real estate...... 6,534 8,436 11,102 11,653 560
Construction and land....... 1,761 1,131 -- 379 240
Home equity................. 212 545 644 124 --
Other loans:
Automobile leases........... -- -- 15 18 --
Commercial business loans... 346 835 81 49 --
Discounted loans............ 25 126 --
Other loans................. 181 570 144 307 61
-------- -------- -------- -------- --------
Total nonaccruing loans. 16,232 21,231 22,750 23,913 7,639
-------- -------- -------- -------- --------
Total non-performing loans... 16,232 21,316 22,751 24,215 8,054
-------- -------- -------- -------- --------
Other real estate owned, net..... 849 618 1,103 627 373
-------- -------- -------- -------- --------
Total non-performing assets.. $ 17,081 $ 21,934 $ 23,854 $ 24,842 $ 8,427
======== ======== ======== ======== ========
Non-performing assets to total
loans............................. 1.10% 1.98% 2.42% 3.04% 1.37%
Non-performing assets to total
assets............................ 0.45% 0.82% 1.34% 1.44% 0.61%
Non-performing loans to total
loans............................. 1.05% 1.93% 2.31% 2.96% 1.31%
Non-performing loans to total
assets............................ 0.43% 0.80% 1.28% 1.40% 0.59%
(1) The acquisition of Gateway occurred in August 1995.
Non-performing assets at December 31, 1998 totaled $17.1 million down
from $21.9 million at December 31, 1997 and $23.9 million at December 31, 1996.
The primary reason for the increase in non-performing assets in 1995 compared to
earlier periods was the acquisition of a local commercial bank. While the Bank
has continued to originate commercial real estate loans, construction and land
loans, and commercial business loans, and intends to increase the level of
originations of such loans, management has implemented loan underwriting
policies and procedures which it believes are more conservative than those
previously used by this commercial bank. Management has also enhanced the
collection and workout procedures and loan administration staff with regard to
non-performing assets which is reflected in the decrease achieved in 1998.
The interest income that would have been recorded during the year ended
December 31, 1998 if all of the Bank's non-performing loans at the end of such
period had been current in accordance with their terms during such period was
$794,000. The actual amount of interest
13
recorded as income (on a cash basis) on such loans during 1998 amounted to
$713,000.
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
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 loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. At December 31, 1998, the Bank had an aggregate
of $25.8 million of classified assets of which $14.9 million were classified
substandard and $10.9 million of assets which were deemed special mention.
Allowance for Loan Losses. The allowance for loan losses is maintained
through provisions for loan losses which are determined by management. The
provision for loan losses are determined by management's ongoing evaluation of
the risks inherent in the portfolio. Such evaluation includes the national and
regional economics, the real estate market in the Bank's primary lending area,
chargeoff and recovery trends in the portfolio, and the composition of the
portfolio. At December 31, 1998, the Bank's allowance for loan losses amounted
to $16.6 million or 102.4% and 1.1% of the Bank's non-performing loans and total
loans receivable, respectively. The Bank's provision for loan losses amounted to
$1.6 million for 1998 and $6.0 million during 1997 which included a
non-recurring amount of $4.0 million.
Effective December 21, 1993, and reinforced with a joint press release
November 24, 1998 the OTS, in conjunction with the Office of the Comptroller of
the Currency, the FDIC and the Federal Reserve Board, issued a Policy Statement
regarding an institution's allowance for loan and lease losses. The Policy
Statement, which reflects the position of the issuing regulatory agencies and
does not necessarily constitute GAAP, includes guidance (i) on the
responsibilities of management for the assessment and establishment of an
adequate allowance and (ii) for the agencies' examiners to use in evaluating the
adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth quantitative measures for the
allowance with respect to assets classified substandard and doubtful and with
respect to the remaining portion of an institution's loan portfolio.
Specifically, the Policy Statement sets forth the following quantitative
measures which examiners may use to determine the reasonableness of an
allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the
portfolio that is classified substandard; and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming 12 months based on facts and
circumstances available on the evaluation date. While the Policy Statement sets
forth this quantitative measure, such guidance is not intended as a "floor" or
"ceiling." The Bank's policy for establishing loan losses is not inconsistent
with the Policy Statement.
14
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
Year Ended December 31,
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
Allowance at beginning of
period ..................... $15,709 $ 9,977 $10,704 $ 3,124 $ 3,180
Provisions ................... 1,594 6,003 1,000 8,026 76
Increase as a result of ...... 96 -- -- -- --
acquisition
Charge-offs:
Mortgage loans:
Single-family
residential .......... 358 501 1,590 606 107
Multi-family
residential .......... 31 100 -- -- 36
Commercial real estate . 344 210 376 -- --
Other loans .............. 1,386 507 729 176 275
------- ------- ------- ------- -------
Total charge-offs ...... 2,119 1,318 2,695 782 418
Recoveries:
Mortgage loans:
Single-family
residential ........... 267 533 408 198 166
Multi-family residential -- -- -- -- 10
Commercial real estate .. 210 251 413 19 --
Construction and land ... 3 10 -- -- --
Other loans .............. 857 253 147 119 110
------- ------- ------- ------- -------
Total recoveries ....... 1,337 1,047 968 336 286
------- ------- ------- ------- -------
Allowance at end of period ... $16,617 $15,709 $ 9,977 $10,704 $ 3,124
======= ======= ======= ======= =======
Allowance for loan losses to
total nonperforming loans at
end of period .............. 102.37% 73.69% 43.85% 44.20% 38.79%
======= ======= ======= ======= =======
Allowance for loan losses to
total loans at end of period . 1.07% 1.42% 1.02% 1.32% 0.51%
======= ======= ======= ======= =======
15
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,
1998 1997 1996 1995
--------------------- ------------------------ --------------------- --------------------
Percent of Percent of Percent of Percent of
Loan in Loan in Loan in Loan in
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
Residential ........ $ 5,562 84.89% $ 5,853 82.37% $ 3,192 77.20% $ 2,002 77.50%
Other............... 7,721 11.74 6,696 15.43 5,842 17.98 7,735 17.77
Other loans......... 3,334 4.40 3,160 4.04 943 6.55 967 6.84
------- ------ ------- ------ ------ ------ ------- ------
Total.............. $16,617 101.02% $15,709 101.84% $9,977 101.73% $10,704 102.11%
======= ====== ======= ====== ====== ====== ======= ======
At December 31,
1994
-----------------------
Percent of
Loan in
Category to
Amount Total Loans
------ -----------
(Dollars in Thousands)
Residential ........ $2,100 85.78%
Other............... -- 8.39
Other loans......... 1,024 6.99
------ ------
Total.............. $3,124 101.16%
====== ======
16
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 additional provisions for estimated loan losses based
upon judgments different from those of management.
Securities Activities
General. As of December 31, 1998, the Company had securities totaling
$2.0 billion or 53.7% of the Company's total assets at such date. The unrealized
appreciation on the Company's securities available for sale amounted to $15.5
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. Interest and dividend income
from the Company's securities portfolio is the largest source of income to the
Company. 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, 1998 was
$171.6 million, consisting of equity investments and certain corporate bonds
which are not legal investments for a federally chartered thrift.
The Bank currently does not participate in hedging programs, interest
rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. These activities require the prior approval of
the Board of Directors under the Bank's securities investment policy. Similarly,
the Bank has not and does not invest in mortgage derivative securities which are
deemed to be "high risk," or purchase privately issued securities which are not
rated investment grade. The Bank tests its securities on at least a semi-annual
basis to ensure that they would not be considered "high risk" securities under
Federal banking laws.
17
At December 31, 1998, 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. Securities classified as
trading account are carried at market value with any increase or decrease in
unrealized appreciation or depreciation included in the Company's income
statement. As of December 31, 1998, the Company had no securities that were held
in a trading account. In the year ended December 31, 1998 the Company recognized
a net gain on security transactions of $524,000 compared to net losses on
security transactions of $85,000 and $2.7 million for the years ended December
31, 1997 and 1996, respectively.
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 $500,000, 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. During the fourth quarter of 1996, management and the Board of Directors
reviewed the Bank's entire securities portfolio and authorized extensive sales
as part of its securities restructuring efforts. The Bank substantially replaced
the securities sold with securities having a significantly higher (over 75 basis
points) projected yield without, in management's view, sacrificing credit
quality or liquidity. The Bank does not anticipate that it will, as a matter of
course, continue to authorize similar amounts of losses in its securities
activities.
18
The following table sets forth the activity in the Bank's aggregate
securities portfolio during the periods indicated.
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
(Dollars In Thousands)
Securities at beginning of period .... $ 1,350,466 $ 703,134 $ 788,622
Purchases:
U.S. government and agencies ....... 19,819 25,073 29,670
State and municipals ............... -- -- --
Agency mortgage-backed securities .. 351,465 519,430 212,634
Agency CMOs ........................ 199,852 166,015 35,079
Private CMOs ....................... 374,353 165,137 53,258
Other debt securities .............. 239,128 167 --
Marketable equity securities ....... 119,768 34,483 15,059
----------- ----------- -----------
Total purchases .................. 1,304,385 910,305 345,700
Sales:
U.S. government and agencies ....... -- 30,000 71,051
State and municipals ............... -- -- 70
Agency mortgage-backed securities .. 2,772 18,183 113,617
Agency CMOs ........................ -- -- 16,332
Private CMOs ....................... -- 24,952 --
Other debt securities .............. 88,168 -- 36,042
Marketable equity securities ....... 18,284 24,822 3,305
----------- ----------- -----------
Total sales ...................... 109,224 97,957 240,417
Repayments and prepayments:
U.S. government and agencies ....... 49,943 22,025 46,800
State and municipals ............... -- 3,045 --
Agency mortgage-backed securities .. 263,362 104,187 102,748
Agency CMOs ........................ 134,220 33,366 4,399
Private CMOs ....................... 72,082 16,866 3,466
Other debt securities .............. -- 1,000 31,767
Marketable equity securities ....... 60 -- --
----------- ----------- -----------
Total repayments and prepayments ... 519,667 180,489 189,180
Accretion of discount and amortization
of premium ......................... (2,392) (520) (692)
Unrealized gains or (losses) on
available-for-sale securities ...... 5,473 16,435 (899)
Realized gains and losses on trading
assets ............................. -- (442) --
----------- ----------- -----------
Securities at end of period .......... $ 2,029,041 $ 1,350,466 $ 703,134
=========== =========== ===========
19
Mortgage-Backed and Mortgage-Related Securities. At December 31, 1998,
the Company's securities included $913.0 million, or 24.2% 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
FNMA and the Government National Mortgage Association ("GNMA").
The FHLMC is a private corporation chartered by the U.S. Government.
The FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. The FNMA is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low- and middle-income housing, there are limits to the maximum size of loans
that qualify for these programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are 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 $711.0 million, or 18.8% of total
assets, in collateralized mortgage obligations ("CMOs"), which are also known as
mortgage-related securities. CMOs have been developed in response to investor
concerns regarding the uncertainty of cash flows associated with the prepayment
option of the underlying mortgagor and are typically issued by governmental
agencies, governmental sponsored enterprises and special purpose entities, such
as trusts, corporations or partnerships, established by financial institutions
or other similar institutions. A CMO can be collateralized by loans or
securities which are insured or guaranteed by the FHLMC,
21
the FNMA or the GNMA. As of December 31, 1998, $234.6 million of the Bank's CMOs
were insured or guaranteed by the FHLMC, FNMA or GNMA and the remaining $476.3
million of the Bank's CMOs were rated "AAA" by national rating agencies. 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 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, 1998, 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, 1998, the estimated weighted average life of the Bank's
mortgage-backed and mortgage-related securities was approximately 4.3 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.
21
Although prepayments of underlying mortgages depend on many factors, including
the type of mortgages, the coupon rate, the age of mortgages, the geographical
location of the underlying real estate collateralizing the mortgages and general
levels of market interest rates, the difference between the interest rates on
the underlying mortgages and the prevailing mortgage interest rates, generally,
is the most significant determinant of the rate of 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 because to the
extent that the Bank's mortgage-backed and mortgage-related securities amortize
or prepay faster than anticipated, the Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate. At December
31, 1998, of the $1.6 billion of mortgage-backed and mortgage-related
securities, an aggregate of $1.1 billion were secured by fixed-rate securities
and an aggregate of $493.9 million were secured by adjustable-rate securities.
U.S. Government and Agency Obligations
At December 31, 1998, the Company's U.S. Government securities
portfolio totaled $30.2 million with a weighted average maturity of 1.1 years.
The U.S. Government agency securities portfolio consisting of callable
securities totaled $46.1 million with a weighted average maturity of 7.7 years
and a weighted average life of 6 months to the call date.
Other Securities
At December 31, 1998, the Company's other securities consisted
primarily of $134.6 million in corporate bonds, $12.4 million in asset backed
bonds, and $0.2 million in foreign bonds. The corporate bonds consist of longer
term financial institution bonds of which $58.5 million have adjustable rates
using the 3 month LIBOR as the index and $76.0 million have fixed rates for
longer terms. The weighted average maturity of the corporate bond portfolio is
20.4 years.
Equity Securities
At December 31, 1998, the Company's investment in equity securities was
$181.5 million, consisting of $80.1 million of preferred stock, $31.6 million of
common stock, $29.7 million of FHLB stock and $40.0 million of mutual funds. All
equity investments are classified as available for sale.
22
The following table sets forth certain information regarding the
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, 1998.
Contractually Maturing
Weighted Weighted Weighted Weighted
Under 1 Average 1-5 Average 6-10 Average Over 10 Average
Year Yield Years Yield Years Yield Years Yield
---- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
U.S.Government and $17,250 6.54% $27,804 7.42% $30,000 6.70% $ -- --%
federal agency
obligations
Other -- -- 30,100 6.78% 12,000 5.72% 110,837 7.77%
------ ------- ------ ---------
$17,250 $57,904 $42,000 $110,837
======= ======= ======= ========
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
borrowed funds on a short term basis to compensate for reductions in the
availability of funds from other sources and on a longer term basis for general
business.
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. 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, 1998, the Bank's deposits totaled $1.7 billion, of
which 82.3% were interest bearing deposits. Noninterest bearing demand deposits,
commercial and retail were $305.4 million or 17.7% of deposits. Core deposits
(savings accounts, money market accounts and NOW accounts) were $886.5 million
or 51.3% and certificates of deposit were $537.2 million or 31.0% at December
31, 1998. 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, believes it will continue to retain a large portion of
these deposits.
Total deposits held by banks in the Bank's market area have decreased
over the past few years. 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. The Bank does not participate in the brokered deposit market.
The Bank is the largest depository institution,
23
by deposit market share, in Staten Island.
For the year ended December 31, 1998 deposits before interest credited
increased $54.8 million compared with a decrease of $9.4 million in 1997.
Inclusive of interest credited, deposits increased $105.4 million in 1998 and
$45.9 million in 1997.
The following table sets forth the activity in the Bank's deposits
during the periods indicated.
Year Ended December 31,
1998 1997 1996
---------- ---------- ----------
(Dollars In Thousands)
Beginning balance................... $1,623,652 $1,577,748 $1,535,617
Net increase (decrease) before
interest credited................. 54,763 (9,386) (8,397)
Interest credited................... 50,645 55,290 50,528
---------- ---------- ----------
Net increase in deposits............ 105,408 45,904 42,131
Ending balance...................... $1,729,060 $1,623,652 $1,577,748
========== ========== ==========
The following table sets forth by various interest rate categories the
certificates of deposit with the Bank at the dates indicated.
At December 31,
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
0.00% to 2.99% .............. $ 4,343 $ -- $ --
3.00% to 3.99% .............. 3,516 9,704 12,314
4.00% to 4.99% .............. 253,301 128,150 223,234
5.00% to 6.99% .............. 273,931 380,820 262,924
7.00% to 8.99% .............. 2,063 2,019 2,098
-------- -------- --------
Total ................... $537,154 $520,693 $500,570
======== ======== ========
Weighted Average Rate
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit at December 31, 1998.
24
Over Six Over One Over Two
Months Year Years
Six Months Through One Through Two Through Three Over Three
and Less Year Years Years Years
-------- ---- ----- ----- -----
(Dollars in Thousands)
0.00% to 2.99%............. $ 4,343 $ -- $ -- $ -- $ --
3.00% to 3.99%............. 3,037 479 -- -- --
4.00% to 4.99%............. 156,209 46,070 48,073 1,580 1,369
5.00% to 6.99%............. 133,516 63,769 48,732 11,192 16,722
7.00% to 8.99%............. -- -- 2,063 -- --
----------- -------- -------- ------- -------
Total.................. $ 297,105 $110,318 $ 98,868 $12,772 $18,091
=========== ======== ======== ======= =======
As of December 31, 1998, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000, was
approximately $122.2 million. The following table presents the maturity of these
time certificates of deposit at such dates.
December 31,
1998
--------
(Dollars in Thousands)
3 months or less............................................ $59,072
Over 3 months through 6 months.............................. 20,288
Over 6 months through 12 months............................. 16,566
Over 12 months.............................................. 26,240
--------
$122,166
========
The following table sets forth the dollar amount of deposits in various
types of deposits offered by the Bank at the dates indicated.
At December 31,
1998 1997 1996
---- ---- ----
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
Savings accounts .... $ 730,614 42.25% $ 709,074 43.67% $ 735,009 45.27%
Certificates of
deposits .......... 537,154 31.07 520,693 32.07 500,570 30.83
Money market accounts 82,360 4.76 76,088 4.69 79,704 4.91
NOW accounts ........ 73,541 4.25 67,076 4.13 60,206 3.71
Demand deposits ..... 305,392 17.66 250,721 15.44 202,259 12.46
---------- ------ ---------- ------ ---------- ------
Total . $1,729,061 100.00% $1,623,652 100.00% $1,577,748 100.00%
========== ====== ========== ====== ========== ======
Borrowings. During 1998, the Bank continued to leverage its capital by
utilizing borrowings as an additional source of funds for asset growth. At
December 31, 1998 the Bank had borrowings of $1.3 billion which consisted of
reverse repurchase agreements with established brokerage firms and the FHLB of
New York. These borrowings are collateralized primarily by the Bank's mortgage-
backed securities. The Bank had $250.0 million in borrowings at December 31,
1997.
25
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 may continue to
utilize borrowings through FHLB advances collateralized by the Bank's whole loan
portfolio in 1999.
The following table sets forth information with respect to the
Company's reverse repurchase agreements at and during the periods indicated. The
Bank did not have any reverse repurchase agreements at or for the year ended
December 31, 1996.
At or For the Year Ended December 31,
1998 1997
---- ----
(Dollars in Thousands)
Maximum balance $ 1,349,477 $250,000
Average balance $ 664,822 $ 81,071
Year end balance $ 1,344,477 $250,000
Weighted average
interest rate:
At end of year 5.24% 5.86%
During the year 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, 1998, the Trust Department maintained
approximately 435 trust/fiduciary accounts with an aggregate principal balance
of $137.1 million.
The accounts maintained by the Trust/Investment Services Division
consist of "managed" and "non-managed" accounts. "Managed" accounts are those
accounts under custody 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 dependent 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.
26
Savings Bank Life Insurance. The Bank has 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. The SBLI
Department's activities are segregated from the Bank and, while they do not
directly affect the Bank's earnings, management believes that offering SBLI is
beneficial to the Bank's relationship with its depositors and the general
public. The SBLI Department pays its own expenses and reimburses the Bank for
expenses incurred on its behalf. At December 31, 1998, the SBLI Department had
policies totaling $1.6 billion in force.
Subsidiaries
SIB Mortgage Corporation (SIBMC) is a wholly-owned subsidiary of the
Bank incorporated in the State of New Jersey in 1998. SIBMC was formed to
purchase the assets of Ivy Mortgage Corp. SIBMC currently originates loans in 22
states and had assets totaling $84.4 million at December 31, 1998.
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, which included certain other
associated assets and liabilities. In return the Bank received all the shares of
common stock and preferred stock in SIFC. The assets of SIFC totaled $655.0
million at December 31, 1998.
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, 1998 were $686.0 million.
Employees
The Bank had 538 full-time employees and 102 part-time employees at
December 31, 1998. None of these employees is represented by a collective
bargaining agent and the Bank believes that it enjoys good relations with its
personnel.
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 Inurance 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
27
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
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
28
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.
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.
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
29
withdrawable accounts plus short-term borrowings (its liquidity base) during the
preceding calendar month. This liquidity requirement, which is currently at
5.0%, 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.
Under OTS regulations, a savings bank with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is measured,
generally, as the decline in an institution's net portfolio value that would
result from a 200 basis point increase or decrease in market interest rates
(whichever would result in lower net portfolio value), divided by the estimated
economic value of the savings association's assets. The interest rate risk
component to be deducted from total capital is equal to one-half of the
difference between an institution's measured exposure and "normal" IRR exposure
(which is defined as 2%), multiplied by the estimated economic value of the
institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation. Based on internal measures of interest
rate risk at December 31, 1998, the Bank would have been required to deduct $8.2
million pursuant to the IRR component in calculating total risk-based capital
had the IRR component of the capital regulations been in effect. However, even
in the event of such a deduction, the Bank would still be deemed to be a
"well-capitalized" institution.
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
30
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. The Bank is not subject to any such individual minimum regulatory
capital requirement.
The Bank's tangible capital ratio was 11.31%, its core capital ratio
was 11.39% and its total risk-based capital ratio was 26.04% at December 31,
1998.
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.
31
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
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,
32
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 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
33
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.
34
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
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, 1998, under the
expanded QTL test, approximately 99.97% 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.
35
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF (Savings Association
Insurance Fund) will be less than the designated reserve ratio of 1.25% of SAIF
insured deposits. In setting these increased assessments, the FDIC must seek to
restore the reserve ratio to that designated reserve level, or such higher
reserve ratio as established by the FDIC. The FDIC may also impose special
assessments on SAIF members to repay amounts borrowed from the United States
Treasury or for any other reason deemed necessary by the FDIC.
Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranges from 0 to 27 basis points. However, insured
institutions are required to pay a Financing Corporation assessment, in order to
fund the interest on bonds issued to resolve thrift failures in the 1980's,
equal to approximately 6 basis points for each $100 in domestic deposits, while
BIF insured institutions pay an assessment equal to approximately 1 basis point
for each $100 in domestic deposits. The assessment is expected to be reduced to
about 2 basis points no later than January 1, 2000, when BIF insured
institutions fully participate in the assessment. These assessments, which may
be revised based upon the level of BIF and SAIF deposits will continue until the
bonds mature in the year 2017.
The BIF fund met its target reserve level in September 1995, but the
SAIF was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semi-annual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance premiums
for SAIF members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF. The legislation also provided for the merger of the BIF and the SAIF, with
such merger being conditioned upon the prior elimination of the thrift charter.
Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was collected on November 27, 1996.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective BIF and SAIF rates both range from zero basis points to 27 basis
points. From 1997 through 1999, FDIC-insured institutions will pay approximately
1.3 basis points of their BIF-assessable deposits and 6.4 basis points of their
SAIF-assessable deposits to fund the Financing Corporation. The Bank's insurance
premiums, which had amounted to the minimum $2,000 annual fee for its
BIF-insured deposits, were increased to 1.3 basis points. The Bank paid $204,000
in insurance premiums during 1998.
36
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.
New 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.
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.
Under recent legislation, 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
37
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 1993.
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, 1998 is approximately $7.0
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
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, 1998 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
38
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, 1998, 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% of "alternative entire net income" allocable to New York State (c)
0.01% of the average value of assets allocable to New York State or (d) nominal
minimum tax. Entire net income is based on federal taxable income, subject to
certain modifications. Alternative entire net income is equal to entire net
income without certain modifications. The New York City Corporation Tax is
imposed using similar alternative taxable income methods and rates.
A temporary Metropolitan Transportation Business Tax Surcharge on
Banking corporations doing business in the Metropolitan District has been
applied since 1982. The Bank transacts a significant portion of its business
within this District and is subject to this surcharge. For the tax year ended
December 31, 1998, the surcharge rate is 17% of the State franchise tax
liability
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 1998 was
$122,000. The Mortgage Company is subject to taxes for the additional states
that they operate in.
39
PART II
Item 2. Properties
At December 31, 1998, 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 36 automated teller machines ("ATMs"), with at least two ATMs at each
of the Bank's branch offices, and an office for its SBLI activities.
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.
The following table sets forth certain information relating to the
Bank's offices at December 31, 1998.
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location (1) Leased Date December 31, 1998 December 31, 1998
- ------------ ------ ---- ----------------- -----------------
(Dollars in Thousands)
Executive Office:
15 Beach Street
Staten Island, NY 10304 Owned 1,893 $ --
Branch Offices:
81-91 Water Street Owned 242 147,623
Staten Island, NY 10304
15 Hyatt Street Owned 128 65,581
Staten Island, NY 10301
257 New Dorp Lane Owned 20 139,526
Staten Island, NY 10305
260 New Dorp Lane Owned 487 (1)
Staten Island, NY 10305
1837 Victory Boulevard Owned 177 158,778
Staten Island, NY 10314
1850 Victory Boulevard Owned 157 (2)
Staten Island, NY 10314
40
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location (1) Leased Date December 31, 1998 December 31, 1998
- ------------ ------ ---- ----------------- -----------------
(Dollars in Thousands)
1320 Hylan Boulevard Owned 490 157,739
Staten Island, NY 10305
461-465, 475 Forest Avenue Owned 684 109,209
Staten Island, NY 10310
3150 Amboy Road Owned 420 100,917
Staten Island, NY 10308
900 Huguenot Avenue Leased 2000 (3) 356 71,987
Staten Island, NY 10312
5472 Amboy Road Owned 1,197 (4)
Staten Island, NY 10309
2700 Hylan Boulevard Leased 2005 (3) 388 125,032
Staten Island, NY 10306
4025 Amboy Road Owned 262 101,137
Staten Island, NY 10308
6975 Amboy Road Owned 1,372 65,808
Staten Island, NY 10309
1630 Forest Avenue Owned 1,125 86,427
Staten Island, NY 10302
43 Richomd Hill Road Leased 1999 (3) 509 70,779
Staten Island, NY 10314
800 Forest Avenue Owned 808 57,928
Staten Island, NY 10310
1630 Richmond Road Owned 1,092 145,317
Staten Island, NY 10304
4310-4312-4320 Amboy Road Leased 2007 (3) 321 62,847
Staten Island, NY 10312
9512-20 3rd Avenue Leased 1999 (3) 305 62,406
Brooklyn, NY 11209
41
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location (1) Leased Date December 31, 1998 December 31, 1998
- ------------ ------ ---- ----------------- -----------------
(Dollars in Thousands)
Other Offices:
45 Beach Street Owned 556 (5)
Staten Island, NY 10304
260 Christopher Lane Leased 2003 184 (6)
Staten Island, NY 10314
96 Prospect Street Owned 939 (5)
Staten Island, NY 10304
1591 Richmond Road Owned 634 (7)
Staten Island, NY 10304
176 Broadway Leased 2000 - (8)
New York, NY 10038
1500 Victory Blvd. Leased 2002(3) - N/A
Staten Island, NY 10314
SIB Mortgage Corp.
Executive Offices/Branch Leased 2001 26 N/A
1250 Route 28
Branchburg, NJ 08876
99 Merimack Street Leased 2001 5 N/A
Haverhill, Ma
86 Summit Avenue Leased 1999 6 N/A
Summit, NJ 07901
400 West Cummings Park Leased 2001 10 N/A
Suite 4900
Woburn, MA 01801
597 Horsham Road Leased Monthly 0 N/A
Horsham, PA
Plaza 800 Islington Street Leased 2001 1 N/A
Portsmouth, NH
29 Emmons Drive Leased 2002 0 N/A
W Windsor, NJ
42
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location (1) Leased Date December 31, 1998 December 31, 1998
- ------------ ------ ---- ----------------- -----------------
(Dollars in Thousands)
1111 Street Road Leased 2000 0 N/A
Southampton, NJ 18966
317 Brick Boulevard Leased 2003 4 N/A
Brick, NJ 08723
SIB Investment Corporation Leased 2000 0 N/A
1650 Route 35 South
Middletown, NJ 07748
(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 center.
(7) Trust Department office.
(8) SBLI Department.
43
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 the extent applicable, is
incorporated by reference from page 35 and 36 of the Company's 1998 Annual
Report ("1998 Annual Report")
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from page
8 of the 1998 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
12 to 18 of the 1998 Annual Report.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
The information required herein is incorporated by reference from pages
9 to 12 of the 1998 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages
19 to 35 of the 1998 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 29, 1999, which was filed on March 29, 1999
("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.
44
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):
Report of Independent Auditors
Consolidated Statements of Condition as of December 31, 1998
and 1997.
Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, 1997 and 1996.
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.
45
(3) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit 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 to be entered into among Staten Island Bancorp, Inc.,
Staten Island Savings Bank and certain executive officers.
10.2* Form of Employment Agreement to be entered into between Staten Island Bancorp, Inc.
and each of Harry P. Doherty and James R. Coyle.
10.3* Form of Employment Agreement to be entered into 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 1998 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
(*) 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, 1999.
46
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 Executive March 31, 1999
- --------------------------- Officer
Harry P. Doherty
/s/ James R. Coyle Director, President and Chief
- --------------------------- Operating Officer March 31, 1999
James R. Coyle
/s/ Edward J. Klingele Senior Vice President and Chief
- --------------------------- Financial Officer (principal
Edward J. Klingele financial and accounting officer) March 31, 1999
/s/ Harold Banks Director March 31, 1999
- ---------------------------
Harold Banks
/s/ Charles J. Bartels Director March 31, 1999
- --------------------------
Charles J. Bartels
/s/ William G. Horn Director March 31, 1999
- --------------------------
William G. Horn
/s/ Dennis P. Kelleher Director March 31, 1999
- --------------------------
Dennis P. Kelleher
/s/ Julius Mehrberg Director March 31, 1999
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Julius Mehrberg
/s/ John R. Morris Director March 31, 1999
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John R. Morris
/s/Kenneth W. Nelson Director March 31, 1999
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Kenneth W. Nelson
/s/ William E. O'Mara Director March 31, 1999
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William E. O'Mara
47