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UNITED STATES
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, 2001
0-28886
Commission File Number
ROSLYN BANCORP, INC.
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(Exact name of registrant as specified in its charter.)
Delaware 11-3333218
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
One Jericho Plaza, Jericho, New York 11753-8905
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(Address of Principal Executive Offices) (Zip Code)
(516) 942-6000
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(Registrant's telephone number, including area code)
None
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Securities registered pursuant to Section 12(b) of the Act
Common Stock, $.01 par value
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Securities registered pursuant to Section 12(g) of the Act
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 the 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. [ ]
As of March 5, 2002 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $1,734,362,467. This figure is based on the
closing price on the NASDAQ National Market for a share of the registrant's
common stock on March 5, 2002, which was $20.36 as reported in The Wall Street
Journal on March 6, 2002.
The Registrant had 85,184,797 shares of Common Stock outstanding as of March 5,
2002.
1
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
2001 are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
2
INDEX
Page
No.
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PART I
Item 1. Business ............................................................................................. 4
Item 2. Properties ........................................................................................... 49
Item 3. Legal Proceedings .................................................................................... 52
Item 4. Submission of Matters to a Vote of Security Holders .................................................. 52
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters ............................... 52
Item 6. Selected Financial Data .............................................................................. 52
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 52
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................................... 52
Item 8. Financial Statements and Supplementary Data .......................................................... 53
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................. 53
PART III
Item 10. Directors and Executive Officers of the Company ...................................................... 53
Item 11. Executive Compensation ............................................................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management ....................................... 53
Item 13. Certain Relationships and Related Transactions ....................................................... 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................................... 54
SIGNATURES ........................................................................................................... 57
3
PART I
Private Securities Litigation Reform Act Safe Harbor Statement
Statements contained in this Form 10-K which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Amounts stated herein could vary as a result of
market and other factors. Such forward-looking statements are subject to risks
and uncertainties which could cause actual results to differ materially from
those currently anticipated due to a number of factors, which include, but are
not limited to, factors discussed in documents filed by the Company with the
Securities and Exchange Commission (SEC) from time to time. Such forward-looking
statements may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated," "intend" and "potential."
Examples of forward looking statements include, but are not limited to,
estimates with respect to the financial condition, expected or anticipated
revenue, results of operations and business of the Company that are subject to
various factors which could cause actual results to differ materially from these
estimates. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on the operations of the Company and its subsidiaries
include, but are not limited to, changes in: interest rates; general economic
conditions; monetary and fiscal policies of the U. S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board; the quality or
composition of the loan or investment portfolios; demand for loan and
non-deposit products; deposit flows; real estate values; the level of defaults;
losses and prepayments on loans held by the Company in portfolio or sold in the
secondary markets; demand for financial services in the Company's market area;
completion and delivery of residential housing units being sold in connection
with its joint venture real estate projects; competition; accounting principles,
policies, practices or guidelines; legislation or regulation; and other
economic, competitive, governmental, regulatory, and technological factors
affecting the Company's operations, pricing, products and services. The
forward-looking statements are made as of the date of this Annual Report, and,
except as required by applicable law, the Company assumes no obligation to
update the forward-looking statements or to update the reasons why actual
results could differ from those projected in the forward-looking statements.
These risks and uncertainties should be considered in evaluating forward-looking
statements, which speak only as of the date of this Form 10-K, and undue
reliance should not be placed on such statements.
Item 1. Business
- ------ --------
General
All capital accounts, share and per share data included in the
consolidated financial statements and the notes thereto have been retroactively
adjusted to reflect the 3-for-2 stock split distributed in the form of a stock
dividend on August 22, 2001.
When necessary, certain reclassifications have been made to prior
period amounts to conform to the current period presentation.
4
Roslyn Bancorp, Inc. (Registrant, Holding Company or, collectively with
its subsidiaries, referred to as the Company) was incorporated under Delaware
law on July 26, 1996. On January 10, 1997, the Registrant acquired The Roslyn
Savings Bank and its subsidiaries (collectively, the Bank), as part of the
Bank's conversion from a mutual to stock form of organization (the
Conversion). On January 10, 1997, Roslyn Bancorp, Inc. issued an aggregate of
65,463,689 shares of its common stock, par value $0.01 per share (Common Stock),
of which 63,557,039 shares were issued in a subscription offering and 1,906,650
shares were issued to The Roslyn Savings Foundation (the Foundation), a
charitable foundation established by the Bank. Prior to such date, the Company
had no assets, liabilities or operations. In connection with the Conversion, the
Company raised $410.7 million of net conversion proceeds, of which $205.3
million was utilized for the acquisition of 100% of the outstanding stock of the
Bank.
The Company is a savings and loan holding company and is subject to
regulation by the Office of Thrift Supervision (OTS) and the SEC. At December
31, 2001, the Company had consolidated total assets of $8.74 billion, deposits
of $4.49 billion and stockholders' equity of $569.0 million. Currently, the
Company's activities consist solely of managing its subsidiaries, principally
the Bank. The Bank is a community-oriented stock savings bank, which was
originally chartered by the State of New York in 1875. The following discussion
addresses the operations of the Company.
After the close of business on February 16, 1999, T R Financial Corp.,
a Delaware company, merged with and into the Company and T R Financial Corp.'s
subsidiary, Roosevelt Savings Bank, a New York State chartered stock savings
bank, merged with and into the Bank (the Merger). All subsidiaries of Roosevelt
Savings Bank became subsidiaries of the Bank. The acquisition was accounted for
as a pooling-of-interests, and, accordingly, all historical financial
information for the Company has been restated to include T R Financial Corp.'s
historical information for the earliest period presented.
In August 1995, the Bank completed its acquisition of certain assets
and liabilities of Residential Mortgage Banking, Inc. (RMBI), including its loan
servicing portfolio, through its wholly-owned mortgage banking subsidiary,
Roslyn National Mortgage Corporation (RNMC) (formerly Residential First, Inc.
(RFI)). Subsequently, on August 28, 2000, the Company announced strategic
initiatives and plans to discontinue the residential mortgage banking business
through the divestiture of its subsidiary, RNMC. In connection with this
strategy, the Bank sold off a substantial part of the residential origination
capabilities of RNMC to a third party mortgage company during the fourth quarter
of 2000.
The Bank's principal business consists of accepting retail deposits
from the general public in the areas surrounding its branch offices and
investing those deposits, together with funds generated from operations and
borrowings, primarily in commercial real estate, multi-family and construction
loans, mortgage-backed and mortgage related securities, various debt and equity
securities and, to a lesser extent, one- to four-family residential mortgage
loans. The Bank also originates and invests in home equity, consumer and student
loans. In connection with the divestiture of RNMC, the Bank adopted strategic
initiatives to focus on higher margin business lines, thus de-emphasizing its
investment in one- to four-family residential mortgage loans. The Bank's
revenues are derived principally from the interest income generated by its
investment securities, mortgage, consumer and commercial loans and from retail
banking fees. The Bank's primary sources of funds are deposits, borrowings and
principal and interest payments on loans and securities.
Following the divestiture of RNMC, the Bank entered into a private label
program for origination of one- to four-family loans through its existing branch
network under a mortgage origination assistance agreement with a third party
originator. Under this program, the Bank utilizes the third party's mortgage
loan origination platforms (including, among others, telephone and internet
platforms) to originate loans based on defined underwriting criteria and in
accordance with Federal National Mortgage Association (FNMA) guidelines. Such
loans close in the Bank's name and utilize the Bank's licensing. The Bank
5
funds such loans directly, and, under a separate loan and servicing rights
purchase and sale agreement with the third party originator, has the option to
retain the loans for its portfolio, sell the loans to a third party investor or
deliver the loans back to the third party originator at agreed upon pricing.
The Bank maintains various subsidiaries, incorporated in New York, to
either (a) maintain ownership of specific real estate properties utilized by the
Bank as retail branches or acquired by the Bank as a result of foreclosure or in
connection with its lending activities; or (b) operate as a real estate
investment trust (REIT); or (c) offer annuity, mutual fund and insurance
products. The Bank previously offered savings bank life insurance through its
Savings Bank Life Insurance Department prior to the dissolution of the
department on December 31, 1999.
The Holding Company, in addition to the Bank, maintains various
subsidiaries incorporated in New York and Vermont to either (a) operate a
captive reinsurance company for the purpose of issuing and reinsuring policies
of mortgage insurance; or (b) operate as a joint venture partner in the
development of a residential community. During 2001, the Holding Company
divested itself of a wholly-owned subsidiary previously used to operate as a
joint venture partner in a residential mortgage brokerage company.
Market Area and Competition
The Bank is a community-oriented financial institution offering a
variety of financial services to meet the needs of the communities it serves.
Currently, the Bank operates 32 banking offices in Kings, Queens, Bronx, Nassau
and Suffolk counties in New York. The Bank's primary deposit gathering area is
currently concentrated around the areas where its banking offices are located in
Kings, Queens, Bronx, Nassau and Suffolk counties, which the Bank generally
considers to be its primary market area. The Bank's primary lending area is
concentrated in the New York City metropolitan area.
The New York City metropolitan area has historically benefited from
having a large number of corporate headquarters and a diversity of financial
service entities. Additionally, the Counties of Queens, Nassau and Suffolk
historically have benefited from a large developed suburban market, well
educated employment base and a diversity of industrial, service and high
technology businesses. During the late 1980's and early 1990's, however, due in
part to the effects of a prolonged period of weakness in the national economy,
the decline in the regional economy, layoffs in the financial services industry
and corporate relocations, the New York City metropolitan area experienced
reduced levels of employment. After a prolonged period of decline, which was
marked by layoffs in the financial services and defense industries and corporate
relocations and downsizings, the economy in the greater New York metropolitan
area improved. During 2000 and early 2001, the residential and commercial real
estate market in the New York City metropolitan area was favorably impacted by
the increased demand for housing and development, low unemployment levels and a
strong underlying economy. During the mid to later part of 2001, the residential
and commercial real estate market in the New York City metropolitan area was
impacted by a downturn in the economy, rising unemployment and the tragic events
of September 11, 2001; however, downward pressure on interest rates brought on
by, among other things, the actions of the Federal Reserve Board has continued
to fuel loan demand, especially on Long Island, and the demand for housing
remains stable.
The Bank faces significant competition in its primary market area in
attracting deposits, originating loans and selling non-deposit products. The New
York City metropolitan area is a highly competitive market. The Bank faces
direct competition from a significant number of financial institutions operating
in its market area, many with a state-wide or regional presence, and, in some
cases, a national or international presence. This competition arises from
commercial banks, savings banks, mortgage banking companies, mortgage brokers,
credit unions, financial holding companies and other providers of financial
services, many of which are significantly larger than the Bank and, therefore,
have greater financial and
6
marketing resources than those of the Bank.
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists
primarily of first mortgage loans secured by one- to four-family residences,
commercial real estate and multi-family properties located in its primary
lending area. The types of loans that the Bank may originate or purchase are
subject to federal and state laws and regulations. The 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, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters.
7
The following table sets forth the composition of the Company's loan
portfolio, including loans held-for-sale, in dollar amounts and in percentages
of the respective gross loan portfolios at the dates indicated:
At December 31,
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2001 2000 1999
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Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
----------- -------- ---------- -------- ---------- -------
(Dollars in thousands)
Real estate loans:
One- to four-family $2,290,067 62.06% $3,046,228 74.88% $2,964,835 76.14%
Multi-family 173,780 4.71 102,824 2.53 89,161 2.29
Commercial real estate 629,663 17.06 523,028 12.85 489,504 12.57
Construction and
development 312,630 8.47 138,205 3.40 107,781 2.77
Home equity and second
mortgage 175,192 4.75 153,239 3.77 139,191 3.57
Consumer and other (1) 67,587 1.83 38,173 0.94 21,947 0.56
Student 774 0.02 822 0.02 1,788 0.05
Automobile leases 40,481 1.10 65,627 1.61 79,804 2.05
----------- -------- ----------- -------- ----------- -------
Gross loans 3,690,174 100.00% 4,068,146 100.00% 3,894,011 100.00%
======== ======== =======
Net deferred loan costs/(fees) 16,350 19,532 17,303
Allowance for loan losses (40,634) (40,524) (40,155)
----------- ----------- -----------
Total loans, net 3,665,890 4,047,154 3,871,159
Less:
Loans held-for-sale, net:
One- to four-family (8,590) - (61,064)
Student (774) (822) (1,788)
----------- ----------- -----------
Loan receivable held for
investment, net $3,656,526 $4,046,332 $3,808,307
=========== =========== ===========
At December 31,
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1998 1997
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Percent Percent
of of
Amount Total Amount Total
----------- -------- ---------- --------
(Dollars in thousands)
Real estate loans:
One- to four-family $2,809,995 76.09% $2,313,417 75.66%
Multi-family 84,575 2.29 71,525 2.34
Commercial real estate 484,260 13.11 462,087 15.11
Construction and
development 101,545 2.75 70,818 2.32
Home equity and second
mortgage 114,915 3.11 59,274 1.94
Consumer and other (1) 16,219 0.44 11,496 0.38
Student 1,734 0.05 3,027 0.10
Automobile leases 79,786 2.16 65,887 2.15
------------ -------- ------------ --------
Gross loans 3,693,029 100.00% 3,057,531 100.00%
======== ========
Net deferred loan costs/(fees) 12,645 (1,032)
Allowance for loan losses (40,207) (38,946)
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Total loans, net 3,665,467 3,017,553
Less:
Loans held-for-sale, net:
One- to four-family (79,991) (13,987)
Student (1,734) (3,027)
------------ ------------
Loan receivable held for investment, net $3,583,742 $3,000,539
============ ============
- ----------------------------
(1) Consumer and other loans includes private banking, personal secured,
personal unsecured, modernization, business, automobile and passbook loans.
8
Loan Originations. The Bank directly originates all commercial real estate,
multi-family, construction and development, home equity, second mortgage,
consumer and student loans. One- to four-family loans are originated through a
third party originator. The Bank has entered into a private label program for
the origination of one- to four-family loans through its existing branch network
under a mortgage origination assistance agreement with a third party mortgage
originator. Under this program, the Bank will utilize the third party's mortgage
loan origination platforms (including, among others, telephone and internet
platforms) to originate loans, based on defined underwriting criteria and in
accordance with FNMA guidelines. Such loans close in the Bank's name and utilize
the Bank's licensing. The Bank will fund such loans directly, and, under a
separate loan and servicing rights purchase and sale agreement with the third
party originator and has the option to retain the loans for its portfolio or
sell the loans to a third party investor or deliver the loans back to the
same third party originator at agreed upon pricing. During the year ended
December 31, 2001, the Bank originated $79.7 million of one- to four-family
loans under the aforementioned program, of which the Bank retained $2.6 million.
All loans originated by the Bank are underwritten in accordance with
Bank-approved loan underwriting policies and procedures. The Bank originates
both adjustable-rate and fixed-rate one- to four-family loans, multi-family
loans, commercial real estate loans, home equity and second mortgage loans,
construction and development loans, consumer loans and student loans. Prior to
the divestiture of RNMC, the Bank emphasized the origination and retention of
one- to four-family lending. Presently, the Bank emphasizes the origination of
commercial real estate, multi-family and construction loans to selected real
estate developers operating within the Bank's primary market area. Also prior to
the RNMC divestiture, the Bank had emphasized the sale of one- to four-family
loans to the secondary market. The Bank's ability to originate loans is
dependent, in part, upon the relative customer demand for the types of loans
offered by it and demand for fixed-rate or adjustable-rate loans, which is
affected by current and expected future levels of interest rates.
During 2000 and 2001, the Bank did not purchase any residential whole
loans from unaffiliated originators. It is not anticipated that the Company will
purchase a significant amount of one- to four-family loans during 2002.
Loan Sales, Servicing and Mortgage Banking Activities. Prior to the
2000 divestiture of RNMC, all of the Bank's mortgage banking operations were
conducted through RNMC with the exception of the servicing of one- to
four-family loans originated by the Bank prior to the establishment of RNMC,
which are being serviced directly by a third party provider on behalf of the
Bank. RNMC's mortgage banking revenues generally consisted of loan origination
fees, interest income earned on mortgages during the period they were
held-for-sale, less the interest expense incurred to finance the mortgages,
gains (or losses) from the sale of mortgage loans, loan servicing fees and gains
(or losses) from the sale of loan servicing. Prior to the establishment of RNMC
in 1995, the Bank's loan sale, purchase and servicing activities were primarily
conducted directly by the Bank. Additionally, the fees generated from servicing
loans for third parties during 2001 were significantly reduced due to servicing
rights sales that occurred and the elimination of the Bank's mortgage banking
activities during the year ended December 31, 2000.
During most of 2000, RNMC originated one- to four-family loans through
commissioned loan personnel and through referrals from real estate brokers,
builders, developers and other sources. RNMC also utilized a network of approved
mortgage brokers and loan correspondents to originate mortgage loans. As a
mortgage banking company, RNMC originated one- to four-family loans for sale to
the Bank and a variety of other investors, including financial institutions and
securities brokerage firms. RNMC also originated loans for sale directly to FNMA
and Federal Home Loan Mortgage Corporation
9
(FHLMC) based upon loan terms and underwriting criteria provided to RNMC by such
agencies. RNMC delivered loan products to investors in the form of whole loans
and in the form of mortgage-backed securities issued by FNMA and FHLMC, which it
received in exchange for the sale of whole loans to such agencies. RNMC's one-
to four-family loan production was not dedicated solely to the Bank, as RNMC
offered a variety of competing loan products to customers pursuant to loan
programs that were pre-approved by other potential loan investors. Accordingly,
the Bank competed with RNMC's other investors for the purchase of one- to
four-family loans and mortgage-backed securities on the basis of rates and
terms. Based upon a best execution analysis, RNMC sold loans on a servicing
retained and a servicing released basis. The Bank's policy as to the types of
loans it originated for investment through RNMC was based upon an analysis of
current and anticipated market interest rates and other market conditions. It is
currently the strategy of the Bank to acquire one- to four-family loans through
the private label origination program described above. For the year ended
December 31, 2000, RNMC originated $1.13 billion of loans and mortgage-backed
securities of which $534.4 million were purchased by the Bank for its loan and
mortgage-backed securities portfolios.
Currently, the Bank services all of its commercial, construction and
development, multi-family, home equity, second mortgage, consumer and student
loans. Principally all one- to four-family loans are serviced by a third party
service provider on behalf of the Bank. The same third party service provider
services all servicing retained conforming one- to four-family loans sold to
other investors. Most Federal Housing Administration (FHA) and Veterans
Administration (VA) loans originated by the Bank have been sold, on a
servicing-released basis, as were other selected loans, to private institutional
investors. In addition, in connection with the Bank's acquisition of certain
liabilities and assets from RMBI, the Bank acquired the servicing rights to
$623.0 million of loans sold by RMBI. At December 31, 2001 the Bank's loan
servicing portfolio totaled $104.1 million. Loan servicing includes collecting
and remitting loan payments, accounting for principal and interest, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults, making certain insurance and tax payments on
behalf of the borrowers and generally administering the loans.
As consideration for subservicing the Bank's portfolios, the third party
service provider receives an annual flat fee per loan and a portion of the
ancillary fee income collected. During 2000, RNMC also utilized the same third
party service provider to service its loan portfolio. The Bank, and the former
RNMC, recognizes servicing fee income in excess of servicing fees paid to the
third party service provider, a portion of the ancillary fee income and retains
the use of the related loan escrow balances. During the year ended 2001 the Bank
sold to a third party on a servicing-released basis, without recourse, $68.6
million of loans. During the year ended December 31, 2000, the Bank, through
RNMC, sold without recourse, $387.2 million of whole loans with loan servicing
retained.
10
The following table shows the maturity of the Bank's loan portfolio at
December 31, 2001. Loans held-for-sale are included in the within one year
maturity category. The table does not include prepayments or scheduled principal
amortization. Prepayments and scheduled principal amortization on loans totaled
$1.07 billion for the year ended December 31, 2001.
At December 31, 2001
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Real Estate Loans
--------------------------------------------------
Home
One- to Commercial Construction Equity and
Four- Multi- Real and Second Consumer
Family Family Estate Development Mortgage and Other
----------- --------- ---------- ------------ ------------ ---------
(In thousands)
Amounts due:
Within one year $ 10,816 $ 187 $ 25,950 $ 71,871 $ 1,472 $ 12,090
---------- --------- ---------- ---------- -------- ---------
After one year:
More than one year to three years 47,977 166 80,817 212,655 3,622 15,555
More than three years to five years 13,478 1,318 68,237 28,104 11,302 14,353
More than five years to 10 years 298,723 113,238 315,660 - 53,707 1,205
More than 10 years to 20 years 647,572 53,347 123,863 - 17,997 -
More than 20 years 1,271,501 5,524 15,136 - 87,092 24,384
---------- --------- ---------- ---------- -------- ---------
Total due after December 31, 2002 2,279,251 173,593 603,713 240,759 173,720 55,497
---------- --------- ---------- ---------- -------- ---------
Total amount due $2,290,067 $ 173,780 $ 629,663 $ 312,630 $175,192 $ 67,587
========== ========= ========== ========== ======== =========
At December 31, 2001
------------------------------------
Total
Automobile Loans
Student Leases Receivable
---------- ----------- ----------
(In thousands)
Amounts due:
Within one year $ 774 $ 39,309 $ 162,469
---------- ----------- ----------
After one year:
More than one year to three years - 1,172 361,964
More than three years to five years - - 136,792
More than five years to 10 years - - 782,533
More than 10 years to 20 years - - 842,779
More than 20 years - - 1,403,637
---------- ----------- ----------
Total due after December 31, 2002 - 1,172 3,527,705
---------- ----------- ----------
Total amount due $ 774 $ 40,481 $3,690,174
========== ===========
Unamortized discounts,
deferred loan costs/(fees)
and deferred mortgage
interest, net 16,350
Allowance for loan losses (40,634)
----------
Total loans, net 3,665,890
Less:
Loans held-for-sale, net:
One- to four-family (8,590)
Student (774)
----------
Loan receivable held for
investment, net $3,656,526
==========
11
The following table sets forth, at December 31, 2001, the dollar amount
of gross loans receivable contractually due after December 31, 2002 and whether
such loans have fixed or adjustable interest rates:
Due After December 31, 2002
-----------------------------------------------------------
Fixed Adjustable Total
----------------- ----------------- -----------------
(In thousands)
Real estate loans:
One- to four-family $ 1,318,766 $ 960,485 $ 2,279,251
Multi-family 60,751 112,842 173,593
Commercial real estate 302,485 301,228 603,713
Construction and development 18,580 222,179 240,759
----------------- ----------------- -----------------
Total real estate loans 1,700,582 1,596,734 3,297,316
Home equity and second mortgage 56,591 117,129 173,720
Consumer and other loans and automobile
leases, net (1) 9,061 47,608 56,669
----------------- ----------------- -----------------
$ 1,766,234 $ 1,761,471 $ 3,527,705
================= ================= =================
- --------------
(1) Includes private banking, personal secured, personal unsecured,
modernization, business, automobile and passbook loans.
One- to Four-Family Loans. The Bank, through its private label
origination program with a third party originator, offers both fixed-rate and
adjustable-rate mortgage loans secured by one- to four-family residences located
in the Bank's primary market area. Under its agreement with the third party
originator, the Bank offers a range of one- to four-family mortgage loan
products to current and prospective customers through various delivery channels,
supported by direct consumer advertising, including telemarketing, Bank branch
office traffic and the Bank's internet website. In addition, the Bank may
purchase whole loans in the secondary market. All loans purchased in the
secondary market are quality control reviewed for adherence to the Bank's
underwriting standards.
At December 31, 2001, the Bank's one- to four-family loans totaled
$2.29 billion, or 62.06% of gross loans, and includes $125.6 million of
purchased loans. Of the one- to four-family loans outstanding at that date,
42.2% were fixed-rate loans and 57.8% were adjustable-rate loans. The interest
rates for the majority of the Bank's adjustable-rate one- to four-family
mortgage loans are indexed to the one year and five year Constant Maturity
Treasury Index (CMT Index). Interest rate adjustments on such loans are limited
to a 2% annual adjustment cap and a maximum adjustment of 6% over the life of
the loan. Certain of the Bank's adjustable-rate mortgage loans can be converted
to fixed-rate loans with interest rates based upon the then-current market rates
plus a varying margin.
One- to four-family residential first mortgage loans are generally
underwritten according to FNMA guidelines. The Bank, through a third party
originator, generally originates one- to four-family residential mortgage loans
in amounts up to $1.0 million following such guidelines, subject to certain
12
exceptions which require the approval of a Senior Lending Officer. The Bank
generally requires private mortgage insurance be obtained for loans in excess of
an 80% loan-to-value ratio. Mortgage loans originated by the Bank and retained
for its portfolio, generally include due-on-sale clauses which provide the Bank
with the contractual right to deem the loan immediately due and payable in the
event the borrower transfers ownership of the property without the Bank's
consent. Due-on-sale clauses are an important means of adjusting the yields on
the Bank's fixed-rate mortgage loan portfolio, and the Bank generally has
exercised its rights under these clauses.
Multi-Family Lending. The Bank originates fixed- and adjustable-rate
multi-family mortgage loans generally secured by five to 400 unit buildings
located in the Bank's primary market area. At December 31, 2001, the Bank's
multi-family loan portfolio was $173.8 million, or 4.71% of total gross loans.
In reaching its decision on whether to make a multi-family loan, the Bank
generally considers the borrower's qualifications and financial condition,
including credit history, profitability and expertise, as well as the value and
condition of the underlying property. Additional factors considered by the Bank
may include: the net operating income of the mortgaged premises before debt
service and depreciation; the debt coverage ratio (the ratio of net operating
income to debt service); and the ratio of loan amount to appraised value.
Pursuant to the Bank's underwriting policies, a multi-family mortgage loan
generally may be made in an amount up to 75% of the lower of the appraised value
or sales price of the underlying property, with amortization periods of up to 30
years. The Bank's adjustable-rate multi-family loans generally have been
originated with rates that are fixed for the first five years with a single
adjustment on the fifth anniversary of the loan based upon the average monthly
yield on U.S. Treasury obligations, adjusted to a constant maturity of five
years, plus a margin of 1.50% to 2.50%. Ten year fixed-rate loans are also
offered based on similar spreads. During 2001, the Bank began to substitute the
posted rates of the Federal Home Loan Bank of New York (FHLB) as the index for
fixed-rate advances instead of the treasury rates for this type of financing.
For such loans, margins of 1.75% to 2.75% are typically added. The Bank
generally offers multi-family loans with terms of up to 10 years. The Bank's
current policies limit the amount of multi-family loans it may hold to 25% of
the aggregate loan portfolio. The Bank's current policies also limit such loans
to $15 million per project and an aggregate of $40 million in loans outstanding
per borrower, although the Bank will make exceptions to this policy provided
Board approval for the loan is obtained. In addition, the Bank generally
requires a debt service coverage ratio minimum of 120%. The Bank also requires
title insurance and an appraisal on the subject property conducted by an
independent appraiser. Finally, the Bank generally requires a market occupancy
rate of at least 90% prior to lending for multi-unit apartment buildings.
When evaluating the qualifications of multi-family loan borrowers, the Bank
considers the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar property and the Bank's
lending experience with the borrower. The Bank's underwriting guidelines require
that the borrower demonstrate appropriate management skills and the ability to
maintain the property based on current rental income. These guidelines require
borrowers to present evidence of the ability to repay the mortgage and a history
of making mortgage payments on a timely basis. In making its assessment of the
creditworthiness of a borrower, the Bank generally reviews the borrower's
financial statements and credit history, as well as other related documentation.
Commercial Real Estate Lending. The Bank originates commercial real estate
loans that are generally secured by properties used for business purposes which
are located in the Bank's primary market area. The Bank's underwriting
guidelines provide that commercial real estate loans generally may be made in
amounts up to 75% of the lower of the appraised value or sales price of the
underlying
13
property, subject to the Bank's current loans-to-one-borrower limit, which, at
December 31, 2001, was $15 million per project and an aggregate of $40 million
in loans outstanding per borrower. The Bank may make exceptions to these
guidelines, from time to time, provided the proper approval is obtained. These
loans may be made with terms up to 20 years and generally are offered at
interest rates that adjust in accordance with the CMT Index or the FHLB advance
rate. The Bank's underwriting standards and procedures for commercial real
estate loans are similar to those applicable to its multi-family loans, whereby
the Bank considers the net operating income of the collateral property and the
borrower's expertise, credit history and profitability, among other things. The
Bank has generally required that the properties securing commercial real estate
loans have debt service coverage ratios of at least 125%. At December 31, 2001,
the Bank's commercial real estate loan portfolio totaled $629.7 million, or
17.06% of gross loans.
Construction and Development Lending. The Bank originates loans for the
acquisition and development of commercial and residential property located in
its primary market area. Construction and development loans are offered
primarily to experienced local developers operating in the Bank's primary market
area. The majority of the Bank's construction loans are originated to finance
the construction of one- to four-family owner-occupied residential, multi-family
and commercial real estate properties located in the Bank's primary market area.
At December 31, 2001, the Bank had outstanding $312.6 million of construction
and development loans, or 8.5% of gross loans, and $121.7 million of unfunded
construction loan commitments. Construction loans generally are offered with
terms up to three years for residential property and up to two years for
multi-family and commercial property and generally may be made in amounts up to
90% of the estimated cost to construct. For such loans, the Bank's practice,
where applicable, is to require that properties being financed be pre-sold or to
require borrowers to secure permanent financing commitments from generally
recognized lenders for an amount equal to or greater than the amount of the
loan. In some cases, the Bank itself may provide permanent financing. Loan
proceeds are disbursed incrementally as construction progresses and as
inspections by the Bank's supervising engineer warrant.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved,
owner-occupied real estate and therefore, the borrowers are required to provide
a personal guarantee during construction. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction compared to the estimated cost (including
interest) of construction and other assumptions, including the estimated time to
sell residential properties. If the estimate of value proves to be inaccurate,
the Bank may be confronted with a project, when completed, having a value which
is insufficient to assure full repayment.
Home Equity and Second Mortgage Lending. The Bank offers fixed-rate, fixed
term home equity loans and adjustable-rate home equity lines-of-credit in its
primary market area. At December 31, 2001, the Bank's home equity and second
mortgage portfolio was $175.2 million, or 4.75% of gross loans. Standard
fixed-rate, fixed term home equity loans are offered in amounts of up to 80% of
the appraised value of the property (including the first mortgage) with a
maximum loan amount of $100,000. Standard adjustable-rate home equity
lines-of-credit are offered in amounts up to 80% of the appraised value of the
property (including the first mortgage) with a maximum line amount of $250,000.
The Bank also offers home equity loans and lines-of-credit where
loan-to-value ratios, expense ratios or credit histories fall outside of the
ranges used for the standard product. The alternative products
14
offer fixed-rate loans up to 90% of the appraised value of the subject property
(including the first mortgage) with a maximum loan amount of $100,000. The
alternative products offer adjustable-rate lines-of-credit up to 90% of the
appraised value of the property (including the first mortgage) with a maximum
loan amount of $100,000, or up to 80% of the appraised value of the property
(including the first mortgage) with a maximum loan amount of $250,000. Such
alternative loan/line-of-credit products generally carry interest rates greater
than those offered on the Bank's standard home equity loan products.
Consumer, Student and Other Lending. At December 31, 2001, the Bank's
portfolio of consumer, other and student loans was $68.4 million, or 1.85% of
gross loans, and primarily consisted of private banking, secured and unsecured
personal loans, automobile loans, home improvement loans and student loans.
Private banking entails offering a wide array of deposit and loan products that
are customized to meet the needs of a specific client base, principally composed
of entrepreneurs, professionals, senior corporate executives and wealthy
individuals. A private banking loan can be either fixed or adjustable-rate,
secured or unsecured and typically have a maturity of one year or less, or are
payable on demand. Secured personal loans are collateralized with deposits from
any federally insured financial institution. Unsecured personal loans are
offered with a maximum term of five years and maximum amount of $15,000. The
Bank also offers automobile loans with terms up to five years and $50,000 for a
new automobile and four years and $25,000 for a used automobile, depending on
the vehicle year, and limited to a maximum amount of $25,000. Home improvement
loans are offered to homeowners for the purpose of modernization and maintenance
of owner-occupied properties for terms up to five years and to a maximum loan
amount of $20,000. The Bank offers both subsidized and unsubsidized student
loans through a forward purchasing and servicing agreement with the Student Loan
Marketing Association (Sallie Mae). Cash cushion loans (checking overdraft
protection) are offered in amounts up to $5,000. The Bank also offers Master
Card(R)(TM) and Visa(R)(TM) credit cards through an affinity relationship with
MBMA American, which assumes underwriting responsibility and credit risk for all
advances.
Automobile Leases. At December 31, 2001, there were $40.5 million of
automobile leases outstanding, or 1.10% of gross loans. The Bank previously had
originated, or purchased, leases originated by an unrelated third party, which
were secured by automobiles. As of July 30, 1999, the Bank terminated its
agreement with the third party and no longer originates or purchases automobile
leases.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies and loan approval limits of the Bank. The Board
of Directors has established an Executive Committee, comprised of rotating
members of the Board of Directors, to review and approve loans in amounts
greater than management's approval limits up to levels that require the Board's
direct approval. The Board of Directors has authorized the following persons to
approve loans up to the amounts indicated: (a) commercial real estate loans of
up to $1.0 million can be approved by the Chairman, President or Senior
Commercial Lending Officer plus one additional officer in the Commercial Lending
Division; (b) commercial real estate loans in excess of $1.0 million and up to
$2.0 million can be approved by any two of the Chairman, President or Senior
Commercial Lending Officer plus one additional officer in the Commercial Lending
Division; (c) commercial real estate loans, multi-family loans, construction
loans and loan participations in excess of $2.0 million require the approval of
the Executive Committee of the Board of Directors; when these loans exceed $7.5
million, they require the approval of the Board of Directors. Home equity loans,
lines of credit, personal loans, and home improvement loans may be approved by a
Consumer Loan Officer up to a defined maximum amount
15
established by the Board of Directors. Loan amounts greater than the defined
maximum amount must be countersigned by the Senior Consumer Lending Officer.
With respect to home equity loans, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and certain
other information is verified by independent credit agencies. If necessary,
additional financial information may be required. An appraisal of real estate
intended to secure a proposed loan generally is required to be performed by
appraisers approved by the Bank. For proposed mortgage loans, the Board of
Directors annually approves the independent appraisers used by the Bank and
approves the Bank's appraisal policy. The Bank's policy is to obtain title and
hazard insurance on all mortgage loans, and the Bank may require borrowers to
make payments to a mortgage escrow account for the payment of property taxes.
Any exceptions to the Bank's underwriting policies must be noted on an
underwriting standards checklist and approved in accordance with the loan
approval procedures described above. The Bank subjects all loan commitments for
non-residential mortgage loans to an environmental site assessment. See,
"Environmental Issues."
Delinquent Loans, Real Estate Owned and Classified Assets
Management and the Board of Directors perform a monthly review of all
delinquent loans. The procedures taken by the Bank with respect to delinquencies
vary depending on the nature of the loan and period of delinquency. The Bank
generally requires that delinquent residential and commercial mortgage loans be
reviewed, that a delinquency notice be mailed no later than the sixteenth day of
delinquency and that a late charge be assessed after 15 days. The Bank's third
party subservicer follows similar delinquency procedures. The Bank's procedures
provide that telephone contact should be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with a borrower
at any time prior to foreclosure, the Bank will attempt to obtain full payment
or work out a repayment schedule to avoid foreclosure. It is the Bank's policy
generally to discontinue accruing interest on all loans that are more than 90
days past due or when, in the opinion of management, such suspension is
warranted. Property acquired by the Bank as a result of foreclosure on a
mortgage loan is classified as real estate owned (REO) and is recorded at the
lower of the unpaid principal balance or fair value less estimated costs to sell
at the date of acquisition and thereafter as circumstances dictate. It is the
Bank's policy to require an appraisal of the property shortly before foreclosure
and, thereafter, to appraise the property on an as-needed basis.
At December 31, 2001, the Bank's REO, net, consisted of foreclosed one-
to four-family properties totaling $478,000 and was held directly by the Bank or
through its subsidiaries formed for the purpose of holding and maintaining such
properties. See "Subsidiary Activities." Bank personnel or an independent
inspector generally conducts periodic external inspections on all properties
securing loans in foreclosure. Based upon such inspections and appraisals, the
Bank will charge-off any loan principal it deems uncollectible at such time.
Bank personnel conduct monthly reviews of its foreclosed real estate and
periodically adjusts its valuation allowance for declines in the value of REO.
At December 31, 2001, the Bank had no allowance for losses on REO. The Bank is
currently offering for sale, through brokers and through its own personnel, all
REO acquired as a result of foreclosure.
The Bank's policies permit the financing of the sale of its foreclosed
real estate on substantially the same terms applicable to its other real estate
mortgage loans except that the Bank may loan no more than 80% of the lesser of
the appraised value or sales price of the foreclosed property.
16
Federal regulations and the Bank's policies require that the Bank
utilize an internal asset classification system as a means of reporting problem
and potential problem assets. The Bank currently classifies problem and
potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset
is considered Substandard if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
the Bank will sustain some loss if the deficiencies are not corrected. Assets
classified as Doubtful have all of the weaknesses inherent in those classified
Substandard with the added characteristic that the weaknesses present make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. Assets classified as
Loss are those considered uncollectible and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted. Assets which do not currently expose the Bank to sufficient risk
to warrant classification in one of the aforementioned categories, but possess
certain other types of weaknesses, are designated as "Special Mention."
When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish a general valuation
allowance for loan losses in an amount deemed prudent by management, unless the
loss of principal appears to be remote. General valuation allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When the Bank classifies one or
more assets, or portions thereof, as Loss, it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified or to charge-off such amount.
A New York State chartered savings institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the Federal Deposit Insurance Company (FDIC) and New York
State Banking Department (NYSBD), either of which can order the establishment of
additional general or specific loss allowances. The FDIC, in conjunction with
the other federal banking agencies, has adopted an inter-agency policy statement
on the allowance for loan and lease losses. The policy statement provides
guidance for financial institutions on both the responsibilities of management
for the assessment and establishment of adequate allowances and guidance for
banking agency examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management analyze all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management
establish acceptable allowance evaluation processes that meet the objectives set
forth in the policy statement. While the Bank believes that it has established
an adequate allowance for loan losses, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank to
materially increase its allowance for loan losses, thereby negatively affecting
the Company's financial condition and earnings at that time. Although management
believes that adequate specific and general loan loss allowances have been
established, actual losses are dependent upon future events and, as such,
further additions to the level of specific and general loan loss allowances may
become necessary under as yet undetermined circumstances.
The Bank's senior management reviews and classifies the Bank's loans on
a monthly basis and reports the results of its reviews to the Board of
Directors. At December 31, 2001, the Bank had $54.3 million of loans designated
as Substandard, consisting of 18 commercial real estate and 89 one- to
four-family loans, and no loans classified as Doubtful or Loss. At December 31,
2001, the Bank also had $38.0 million of assets designated as Special Mention,
consisting of 12 commercial real estate and 11
17
one- to four-family loans, which were designated due to past loan delinquencies.
18
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans and REO:
At December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- ---------- ---------- -----------
(Dollars in thousands)
Non-accrual loans:
One- to four-family $ 6,353 $ 8,859 $ 16,354 $ 15,662 $ 9,029
Commercial real estate 33,128 830 2,434 2,775 9,564
Home equity 111 74 79 120 116
Consumer and other (1) 49 17 96 96 221
---------- --------- ---------- ---------- -----------
Total non-accrual loans 39,641 9,780 18,963 18,653 18,930
Loans contractually past due 90 days or
more and still accruing (2) 5,865 - - 3,421 1,295
---------- --------- ---------- ---------- -----------
Total non-performing loans 45,506 9,780 18,963 22,074 20,225
Real estate owned, net (3) 478 293 - 1,176 1,197
---------- --------- ---------- ---------- -----------
Total non-performing assets $ 45,984 $ 10,073 $ 18,963 $ 23,250 $ 21,422
========== ========= ========== ========== ===========
Allowance for loan losses as a percent of
loans (4) 1.10% 0.99% 1.04% 1.11% 1.28%
Allowance for loan losses as a percent of
total non-performing loans (4) 89.29% 414.36% 211.75% 182.15% 192.56%
Non-performing loans as a percent of
loans (4) 1.23% 0.24% 0.49% 0.61% 0.67%
Non-performing assets as a percent of
total assets 0.53% 0.13% 0.25% 0.30% 0.29%
(1) Includes private banking, personal secured, personal unsecured,
modernization, business, automobile and passbook loans.
(2) Amounts shown in 2001 includes government guaranteed loans.
(3) REO balances are shown net of related loss allowances, if any.
(4) Loans include loans receivable held for investment, net, excluding the
allowance for loan losses which at December 31, 2001, 2000, 1999, 1998 and
1997 was $40.6 million, $40.5 million, $40.2 million, $40.2 million and
$38.9 million, respectively.
The principal balance of non-accrual loans was $39.6 million, $9.8
million and $19.0 million at December 31, 2001, 2000 and 1999, respectively.
Interest income that would have been recorded if these loans had been
performing in accordance with their original terms aggregated $1.6 million,
$596,000 and $2.5 million during the years ended December 31, 2001, 2000 and
1999, respectively. Actual interest income collected on non-accrual loans
was $1.2 million, $490,000 and $410,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
Included in non-performing loans at December 31, 2001 are $5.9 million
of FHA and VA government guaranteed loans. During 2001, such loans were
returned to accrual status from non-accrual status based on management's
reasonable assurance that the loans would be fully collectible, given the
underlying government guarantee of principal and interest.
During the fourth quarter of 2001, the Company placed two commercial
credit relationships, totaling $32.3 million, on non-accrual status. The
first relationship consists of two loans totaling $13.3 million secured by
five commercial properties in the New York Metropolitan area with an
indicated loan-to-value ratio below 75% based on independent appraisals
conducted on the properties. The second relationship is
19
a $19.0 million loan secured by two assisted living facilities, also in the New
York Metropolitan area, with an indicated loan-to-value ratio below 70% based on
an independent appraisal.
The Bank is aggressively pursuing the recovery of the two large above
referenced commercial loans. With regard to the $19.0 million loan secured by
two assisted living facilities in the New York Metropolitan area, the Bank as an
initial step to ensure that the project's cash flows would remain available to
support the property and repay the loan, obtained the appointment of a federal
court receiver in connection with its foreclosure action. This receiver assumed
control of the facilities within a short time after the collection process was
commenced and is expected to remain in place through the conclusion of the
Bank's collection efforts. Subsequent to the Bank commencing foreclosure
proceeding the borrower filed a Chapter 11 bankruptcy case; however, the Bank
was successful in convincing the bankruptcy court to keep the receiver in place
notwithstanding the bankruptcy filing. Finally, the Bank has asserted in this
case that it possesses an absolute assignment of rents which should provide that
excess cash flow from the assisted living facilities be used to service the
Bank's debt.
Additionally, the second commercial credit added to non-accrual status
during the fourth quarter consisted of two loans totaling $13.3 million secured
by five commercial properties in the New York Metropolitan area. The borrower
entities have filed a Chapter 11 bankruptcy case in which the Bank, being a
secured creditor, is actively engaged. The Bank has filed a motion seeking
relief from the automatic bankruptcy stay so that foreclosure proceedings can
proceed. A hearing on that motion is scheduled for March 14, 2002. Pending that
hearing, the Bank is continuing to negotiate with the debtors, the debtors'
other lenders and the debtors' bondholders to consensually resolve the Bank's
motion.
Although no assurances can be given, based on management's evaluation
of all currently available information regarding the foregoing two credit
relationships, including the collateral values determined by independent
appraisers, management believes that it is unlikely that the Company will incur
any material loss of principal on either credit relationship.
The principal balance of restructured loans that have not complied with the
terms of their restructuring agreements for a satisfactory period of time was
$4.5 million at December 31, 2001. No such loans were outstanding at December
31, 2000. Interest income that would have been recorded if the restructured
loans had been performing in accordance with their original terms aggregated
$30,000 and $107,000 during the years ended December 31, 2001 and 1999,
respectively. Interest income recorded for restructured loans amounted to
$345,000, $558,000 and $671,000 for the years ended December 31, 2001, 2000 and
1999, respectively. Additionally, restructured loans totaling $4.2 million, $4.4
million and $7.6 million have complied with the terms of their restructuring
agreements for a satisfactory period and were returned to the performing loan
portfolio during the years ended December 31, 2001, 2000 and 1999, respectively.
Allowance for Loan Losses
The Company's formalized process for assessing the adequacy of the
allowance for loan losses, and the resultant need, if any, for periodic
provisions to the allowance charged to income, entails both individual loan
analyses and loan pool analyses. The individual loan analyses are periodically
performed on individually significant loans or otherwise, as management deems
necessary. Such analyses primarily involve multi-family, commercial real estate
and construction and development loans. The result of these individual analyses
is the allocation of the overall allowance for loan losses to specific
allowances for
20
individual loans, including both loans considered impaired and non-impaired.
The loan pool analyses are performed on the portfolio, excluding those
analyzed on an individual basis, and consist primarily of one- to-four family
residential and consumer loans. The pools consist of aggregations of homogeneous
loans having similar credit risk characteristics. Examples of pools defined by
the Company for this purpose are Company-originated, fixed-rate residential
loans; Company-originated, adjustable-rate residential loans; purchased
residential loans; outside-serviced residential loans; residential second
mortgage loans; participation in conventional first mortgages; residential
construction and development loans; commercial real estate loans; commercial
construction loans, multi-family loans, etc. For each such defined pool, there
is a set of sub-pools based upon delinquency status: current, 30-59 days, 60-89
days, 90-119 days and 120+ days (the latter three sub-pools are considered to be
"classified" by the Company). For each sub-pool, the Company has developed a
range of allowance necessary to adequately provide for probable losses inherent
in each sub-pool. These ranges are based upon a number of factors, including the
risk characteristics of the sub-pool, actual loss and migration experience,
expected loss and migration experience considering current economic conditions,
industry norms, and the relative seasoning of the sub-pool. The ranges of
allowance developed by the Company are applied to the outstanding principal
balance of the loans in each sub-pool; as a result, further specific and general
allocations of the overall allowance are made (the allocations for the
classified sub-pools are considered specific and the allocations for the
non-classified sub-pools are considered general).
The Company's overall allowance also contains an unallocated amount
which is supplemental to the allowances derived from the aforementioned process
and takes into consideration, among other things, known and expected trends that
are likely to affect the creditworthiness of the loan portfolio as a whole,
national and local economic conditions, unemployment conditions in the local
lending area and the timeliness of court foreclosure proceedings in the
Company's local and other lending areas.
As of December 31, 2001, the Bank's allowance for loan losses was $40.6
million, or 1.10% of loans and 89.29% of total non-performing loans, as compared
to $40.5 million, or 0.99% of loans and 414.36% of total non-performing loans,
as of December 31, 2000. The Bank had total non-performing loans of $45.5
million and $9.8 million at December 31, 2001 and 2000, respectively, and
non-performing loans to total loans ratio of 1.23% and 0.24%, respectively. The
Bank will continue to monitor and modify its allowance for loan losses as
conditions dictate. 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. No assurance can be given that the Bank's level
of allowance for loan losses will be sufficient to cover future loan losses
incurred by it 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. Management may in the future change its level
of loan loss allowance as a percentage of total loans and non-performing loans
in the event it increases the level of multi-family, commercial real estate,
construction and development or other lending as a percentage of its total loan
portfolio. In addition, the FDIC and NYSBD periodically review the Bank's
allowance for loan losses as an integral part of their examination processes.
Such agencies, from time to time, may require the Bank to make changes to
provisions for loan losses based upon judgments that may differ from those of
management.
21
The following table sets forth activity in the Bank's allowance for loan losses
for the periods indicated:
For the Years Ended December 31,
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ -------------
(Dollars in thousands)
Balance at beginning of year $ 40,524 $ 40,155 $ 40,207 $ 38,946 $ 37,690
Provision for loan losses 850 1,000 - 1,500 1,400
Charge-offs:
Real estate loans:
One- to four-family 52 463 25 187 189
Commercial real estate 508 199 - 387 327
Construction and development - - - - -
Consumer and other loans 261 231 170 128 167
------------ ------------ ------------ ------------ -------------
Total charge-offs 821 893 195 702 683
------------ ------------ ------------ ------------ -------------
Recoveries:
Real estate loans:
One- to four-family 32 5 96 55 202
Commercial real estate - 213 5 330 272
Construction and development - - - - -
Consumer and other loans 49 44 42 78 65
------------ ------------ ------------ ------------ -------------
Total recoveries 81 262 143 463 539
------------ ------------ ------------ ------------ -------------
Net charge-offs (740) (631) (52) (239) (144)
------------ ------------ ------------ ------------ -------------
Balance at end of year $ 40,634 $ 40,524 $ 40,155 $ 40,207 $ 38,946
============ ============ ============ ============ =============
Ratio of net charge-offs
during the year to average loans
outstanding during the year 0.02% 0.02% 0.00% 0.01% 0.01%
22
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance and the percent of loans to total loans (including
loans held-for-sale) in each of the categories listed at the dates indicated:
At December 31,
-----------------------------------------------------------------------------------------
2001 2000
---------------------------------------- ----------------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance Each Allowance Each
To Total Category to To Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
----------- ----------- ------------- ------------- ----------- ----------
(Dollars in thousands)
One- to four-family $ 11,119 27.36% 62.06% $ 16,978 41.90% 74.88%
Multi-family 4,862 11.97 4.71 762 1.88 2.53
Commercial real estate 4,900 12.06 17.06 8,148 20.11 12.85
Construction and development 13,342 32.84 8.47 8,458 20.87 3.40
Home equity/second mortgage 614 1.51 4.75 572 1.41 3.77
Consumer and other (1) 2,753 6.77 2.95 1,886 4.65 2.57
Unallocated 3,044 7.49 - 3,720 9.18 -
----------- ----------- ------------- ------------- ----------- ----------
Total allowance for loan losses $ 40,634 100.00% 100.00% $ 40,524 100.00% 100.00%
=========== =========== ============= ============= =========== ==========
At December 31,
----------------------------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance Each Allowance Each
To Total Category to To Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
----------- ----------- ----------- ------------- ----------- -----------
(Dollars in thousands)
One- to four-family $ 16,144 40.20% 76.14% $ 17,823 44.34% 76.09%
Multi-family 1,444 3.60 2.29 1,662 4.13 2.29
Commercial real estate 7,054 17.57 12.57 11,223 27.91 13.11
Construction and development 6,875 17.12 2.77 5,984 14.88 2.75
Home equity/second mortgage 486 1.21 3.57 794 1.97 3.11
Consumer and other (1) 1,168 2.91 2.66 804 2.00 2.65
Unallocated 6,984 17.39 - 1,917 4.77 -
----------- ------------ ------------- ------------ ----------- -----------
Total allowance for loan losses $ 40,155 100.00% 100.00% $ 40,207 100.00% 100.00%
=========== ============ ============= ============ =========== ===========
At December 31,
----------------------------------------
1997
----------------------------------------
Percent of
Percent of Loans in
Allowance Each
To Total Category To
Amount Allowance Total Loans
----------- ----------- -----------
(Dollars in thousands)
One- to four-family $ 16,501 42.37% 75.66%
Multi-family 1,945 5.00 2.34
Commercial real estate 12,339 31.68 15.11
Construction and development 3,770 9.68 2.32
Home equity/second mortgage 375 0.96 1.94
Consumer and other (1) 523 1.34 2.63
Unallocated 3,493 8.97 -
----------- ----------- -------------
Total allowance for loan losses $ 38,946 100.00% 100.00%
=========== =========== =============
(1) Consumer and other loans includes private banking, personal
secured, personal unsecured, modernization, business, automobile and passbook
loans.
23
Environmental Issues
The Bank encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on property securing
their loans. In addition, the existence of hazardous materials may make it
unattractive for a lender to foreclose on such properties. Although
environmental risks are usually associated with loans secured by commercial real
estate, such risks also may be present for loans secured by residential real
estate if environmental contamination makes collateral property unsuitable for
use. The Bank attempts to control such risk by requiring that a phase one
environmental site assessment be completed as part of its underwriting review
for all non-residential mortgage applications. In addition, the Bank's policy is
to maintain ownership of specific commercial real estate properties acquired by
it in separately incorporated subsidiaries.
Securities Investment Activities
The Company's and the Bank's Boards of Directors set the securities
investment policy of the Company and the Bank, respectively. Such policies
dictate that investment decisions will be made based on the safety of the
investment, liquidity requirements of the respective entity and potential return
on the investments, among other things. In pursuing these objectives, the
Company and the Bank consider the ability of an investment to provide earnings
consistent with factors of quality, maturity, marketability and risk
diversification. The Board of Directors of the Company and Bank has established
an Investment Committee comprised of five directors and the Investment Officer
to supervise the respective securities investment program. The respective
Investment Committees meet periodically and evaluate all investment activities
for safety and soundness, evaluate the respective investment policy and its
objectives for the next period and submit a report to the respective Board of
Directors. The Bank's Investment Officer is responsible for making securities
investment portfolio decisions for the Company and the Bank in accordance with
the respective policy. While the Investment Officer has the authority to conduct
trades within specific guidelines established by the Company's and Bank's
investment policies, all Company and Bank transactions are periodically reviewed
by the respective Investment Committee and are reported to the respective Board
of Directors on a monthly basis.
At December 31, 2001, the Company's policy generally limits securities
investments to U.S. Government and agency securities, municipal bonds, corporate
debt obligations and corporate equities (including trust preferred securities).
In addition, the Company's policy permits investments in mortgage-backed and
mortgage related securities, including securities issued and guaranteed by FNMA,
FHLMC, Government National Mortgage Association (GNMA) and Collateralized
Mortgage Obligations (CMOs). The Company's current securities investment
strategy is to de-emphasize its investment in U.S. Government obligations,
corporate debt and municipal bonds and to emphasize the purchase of
mortgage-backed and mortgage related securities and government agency
securities.
At December 31, 2001, the Company had $4.57 billion in securities,
consisting primarily of mortgage-backed and mortgage related securities,
government agency securities and trust preferreds, as compared to $3.18 billion
at December 31, 2000. Upon the purchase of an investment security, the Bank and
the Holding Company will make a determination as to the classification of the
security. However, the Bank and the Holding Company currently do not purchase
securities with the intention of trading such securities, nor does the Bank or
the Holding Company maintain trading portfolios. As of December 31, 2001, the
Company's entire securities portfolio, or 52.3% of its total assets, were
classified as available-
24
for-sale, with the portfolio having an average life of 3.02 years. For the years
ended December 31, 2001 and 2000, the Company designated all newly-purchased
securities as available-for-sale.
Mortgage-Backed and Mortgage Related Securities. The Company purchases
mortgage-backed and mortgage related securities in order to: (a) generate
positive interest rate spreads with minimal administrative expense; (b) lower
its credit risk as a result of the guarantees provided by FHLMC, FNMA and GNMA;
(c) utilize these securities as collateral for borrowings; and (d) increase the
liquidity of the Company. The Company has primarily invested in mortgage-backed
and mortgage related securities issued or sponsored by GNMA, FHLMC and FNMA. The
Company also invests in CMOs issued or sponsored by private issuers.
At December 31, 2001, mortgage-backed and mortgage related securities
totaled $3.56 billion, or 40.8% of total assets and 41.8% of total
interest-earning assets, of which all was classified as available-for-sale. At
December 31, 2001, 17.8% of mortgage-backed and mortgage related securities were
adjustable-rate and 82.2% were fixed-rate. The mortgage-backed and mortgage
related securities portfolio had coupon rates ranging from 2.6% to 12.5% and had
a weighted average yield of 6.29% at December 31, 2001.
At December 31, 2001, the Company's CMO portfolio totaled $2.64 billion,
or 31.0% of total interest-earning assets, and consisted of $1.57 billion of
such securities issued by government sponsored agencies and $1.07 billion issued
by private issuers, including nationally recognized mortgage conduits. It is the
policy of the Bank to limit its purchases of privately issued CMOs to non-high
risk securities rated not less than "AAA" by at least two rating agencies and
having an average life of seven years or less. The Bank also limits the amount
of such investments to no more than $100 million per transaction, 10% of the
Bank's total assets related to any single issuer and 35% of its total CMO
portfolio. For government sponsored CMOs, the Bank's policy limits such
investments to non-high risk securities that have an average life of ten years
or less and limits the amount of such investments to no more than $100 million
per transaction. The Bank monitors the credit rating of its CMOs on a regular
basis. The current securities investment policy of the Bank prohibits the
purchase of higher risk CMOs, which are defined as those securities exhibiting
significantly greater volatility of estimated average life and price relative to
interest rates as compared with standard 30-year fixed-rate securities. At
December 31, 2001, the Bank's CMO portfolio had an average estimated life of
1.14 years and a weighted average yield of 5.94%.
Debt Securities. At December 31, 2001 the Company's debt securities
portfolio totaled $355.7 million, or 4.1% of total assets. The Company's
investment in debt securities is comprised of investments in U.S. treasury
securities, U.S. government agency securities and municipal securities.
U.S. Government and Agency Obligations. At December 31, 2001, the
Company's U.S. treasury securities portfolio totaled $1.0 million, all of which
was classified as available-for-sale. Such portfolio primarily consisted of
short-term securities. The Company's current investment practice, however, is to
de-emphasize its investments in such instruments. At December 31, 2001, the
Company's agency securities portfolio totaled $349.7 million, all of which was
classified as available-for-sale and consisted of callable zero coupon bonds.
The Company's callable zero coupon bonds generally are callable after one year
and in six-month intervals thereafter. The current policy of the Bank limits the
purchase of agency debt obligations to maturities of 30 years or less and limits
such purchases to no more than $100 million per transaction, although purchases
of structured notes are limited to the lesser of $50 million per transaction or
10% of the Bank's total assets.
25
Municipal Bonds. At December 31, 2001, the Company's municipal bond
portfolio totaled $5.0 million, all of which was classified as
available-for-sale. Such securities are comprised of general obligation bonds
(i.e., obligations backed by the general credit of the issuer). All of the
Company's municipal bonds are currently rated investment grade by at least one
national rating agency. At December 31, 2001, the municipal bond portfolio had
an average life of approximately 23.8 years and a weighted average yield of
6.90%. Certain interest earned on municipal bonds is exempt from federal, state
and local income taxes. The Company's current investment practice is to
de-emphasize its investment in municipal bonds.
Equity Securities. At December 31, 2001, the Company's equity
securities portfolio totaled $649.0 million, all of which was classified as
available-for-sale. At December 31, 2001, the Holding Company's equity
securities portfolio totaled $202.0 million and the Bank's equity securities
portfolio totaled $447.0 million. At December 31, 2001 the Company's equity
securities portfolio consisted of common and preferred stocks and trust
preferreds. Also included in the Company's equity securities at December 31,
2001 is $14.1 million invested in stock mutual funds. The majority of the
Company's preferred stock portfolio of $114.6 million is redeemable by the
issuers pursuant to the terms of such stock, generally after a three to five
year holding period. The Company benefits from its investment in common and
preferred stocks due to tax deductions received in connection with dividends
paid by corporate issuers on equity securities.
The Bank's investment policy limit for its common and preferred stock
investments is 5% and 7.5%, respectively, of the Bank's total assets and allows
for the purchase of common and preferred stock with a limitation of 1% of the
Bank's total assets in any single issuer. At December 31, 2001, the Bank's
policies permit the purchase of preferred stock rated "Baa" or better by at
least one national rating agency, with a 1% limitation on the purchase of
preferred stock of any single issuer.
The Bank's investment policy limits investment in capital notes or
trust preferreds, issued primarily by financial institutions, to 1% of the
Bank's total assets in any single issuer and 7.5% of the Bank's total assets. In
addition, such investment can only be of investment grade. These securities
represent secondary capital and rank subordinate and junior in right of payment
to all indebtedness of the issuing company. In order to offset the higher degree
of risk, management focuses primarily on, but not limited to, securities issued
by New York metropolitan area institutions. At December 31, 2001, the Company
had $514.8 million of trust preferreds.
Other Investment Activities. During the second quarter of 2000, the
Bank purchased a $100.0 million Bank Owned Life Insurance policy (BOLI). The
BOLI policy was implemented to offset future employee benefit costs. The
purchase of the BOLI policy, and its increase in cash surrender value, is
classified in "other assets" in the Company's consolidated statements of
financial condition. The income related to the BOLI, which is generated by the
increase in the cash surrender value of the policy, is classified in "other
income" in the Company's consolidated statements of income.
During the third quarter of 2000, O.B. Ventures, LLC, a subsidiary of
the Holding Company, made a $25.0 million investment, at a preferred return of
9.5%, which is classified as "other assets" in the Company's consolidated
statements of financial condition, in a real estate joint venture with the
Holiday Organization in The Hamlet on Olde Oyster Bay, L.C.C. This joint venture
was for the development a residential community in the Town of Oyster Bay, New
York. The Company also receives a 50% share of the residual profits, which is
classified as "other income" in the Company's consolidated statements of income.
For the year ended December 31, 2001, 81 residential units were delivered at a
profit of $6.3 million.
26
The following table sets forth the composition of the Company's debt,
equity, mortgage-backed and mortgage related securities available-for-sale
portfolios in dollar amounts and in percentages at the dates indicated:
At December 31,
--------------------------------------------------------------------------------
2001 2000 1999
----------------------- ------------------------ ---------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------- ---------- ---------- ---------- ---------- ------------
(Dollars in thousands)
Debt securities:
U.S. Government obligations $ 1,020 0.02% $ 41,328 1.30% $ 67,880 1.92%
U.S. Government agency securities 349,725 7.66 665,551 20.95 267,942 7.59
State, county and municipal bonds 4,950 0.11 4,865 0.16 4,833 0.14
---------- ---------- ----------- ---------- ---------- ----------
Total debt securities available-for-sale 355,695 7.79 711,744 22.41 340,655 9.65
---------- ---------- ----------- ---------- ---------- ----------
Equity securities:
Preferred and common stock and other 134,220 2.95 192,582 6.06 219,506 6.21
Trust preferreds 514,813 11.27 182,385 5.74 169,040 4.79
---------- ---------- ----------- ---------- ---------- ----------
Total equity securities available-for-sale 649,033 14.22 374,967 11.80 388,546 11.00
---------- ---------- ----------- ---------- ---------- ----------
Mortgage-backed and mortgage related securities:
FHLMC 359,212 7.87 143,851 4.53 173,581 4.92
GNMA 504,475 11.05 722,809 22.75 797,202 22.58
FNMA 58,948 1.29 141,301 4.45 235,817 6.68
CMOs 2,638,219 57.78 1,082,022 34.06 1,594,684 45.17
---------- ---------- ----------- ---------- ---------- ----------
Total mortgage-backed and mortgage related
securities available-for-sale 3,560,854 77.99 2,089,983 65.79 2,801,284 79.35
---------- ---------- ----------- ---------- ---------- ----------
Total securities available-for-sale $4,565,582 100.00% $3,176,694 100.00% $3,530,485 100.00%
========== ========== =========== ========== ========== ==========
27
The following table sets forth certain information regarding the amortized cost
and estimated fair value of the Company's debt, equity, mortgage-backed and
mortgage related securities at the dates indicated:
At December 31, 2001 At December 31, 2000 At December 31, 1999
------------------------ ------------------------ ------------------------
Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Available-for-sale:
Debt securities:
U. S. Government obligations $ 1,000 $ 1,020 $ 41,055 $ 41,328 $ 67,192 $ 67,880
U. S. Government agency securities 355,255 349,725 666,285 665,551 287,642 267,942
State, county and municipal bonds 4,470 4,950 4,463 4,865 4,762 4,833
---------- ----------- ---------- ---------- ---------- ----------
Total debt securities 360,725 355,695 711,803 711,744 359,596 340,655
Equity securities:
Preferred and common stock and other 150,554 134,220 210,761 192,582 244,395 219,506
Trust preferreds 533,823 514,813 218,951 182,385 194,604 169,040
---------- ----------- ---------- ---------- ---------- ----------
Total equity securities 684,377 649,033 429,712 374,967 438,999 388,546
---------- ----------- ---------- ---------- ---------- ----------
Total debt and equity securities 1,045,102 1,004,728 1,141,515 1,086,711 798,595 729,201
---------- ----------- ---------- ---------- ---------- ----------
Mortgage-backed and mortgage related securities:
FHLMC 353,911 359,212 140,187 143,851 171,591 173,581
GNMA 495,152 504,475 718,480 722,809 813,335 797,202
FNMA 57,274 58,948 140,561 141,301 240,151 235,817
CMOs 2,659,691 2,638,219 1,112,595 1,082,022 1,696,202 1,594,684
---------- ----------- ---------- ---------- ---------- ----------
Total mortgage-backed and mortgage related
securities 3,566,028 3,560,854 2,111,823 2,089,983 2,921,279 2,801,284
---------- ----------- ---------- ---------- ---------- ----------
Total securities available-for-sale $4,611,130 $ 4,565,582 $3,253,338 $3,176,694 $3,719,874 $3,530,485
========== =========== ========== ========== ========== ==========
28
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
securities portfolio as of December 31, 2001:
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years More than Ten Years
-------------------- -------------------- -------------------- ---------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- ---------- --------
(Dollars in thousands)
Available-for-sale securities:
Mortgage-backed and
mortgage related securities:
FHLMC $ - -% $ - -% $ - -% $ 359,212 7.33%
GNMA - - 245 9.00 2,459 9.80 501,771 7.29
FNMA - - - - 45 6.92 58,903 7.11
CMOs - - 647 8.00 4,224 6.43 2,633,348 5.94
-------- -------- -------- ----------
Total mortgage-backed and
mortgage related securities - - 892 8.27 6,728 7.66 3,553,234 6.29
-------- -------- -------- ----------
Debt securities:
U. S. Government obligations 1,020 6.50 - - - - - -
U. S. Government agency securities - - - - - - 349,725 7.43
State, county and municipal bonds - - - - - - 4,950 6.90
-------- -------- -------- ----------
Total debt securities 1,020 6.50 - - - - 354,675 7.42
-------- -------- -------- ----------
Equity securities (1):
Preferred and common stock
and other - - - - - - 134,220 3.64
Trust preferreds - - - - - - 514,813 8.22
-------- -------- -------- ----------
Total equity securities - - - - - - 649,033 7.27
-------- -------- -------- ----------
Total securities
available-for-sale $ 1,020 6.50 $ 892 8.27 $ 6,728 7.66 $4,556,942 6.52
======== ======== ======== ==========
Total
-----------------------
Weighted
Carrying Average
Value Yield
---------- --------
(Dollars in thousands)
Available-for-sale securities:
Mortgage-backed and
mortgage related securities:
FHLMC $ 359,212 7.33%
GNMA 504,475 7.30
FNMA 58,948 7.11
CMOs 2,638,219 5.94
----------
Total mortgage-backed and
mortgage related securities 3,560,854 6.29
----------
Debt securities:
U. S. Government obligations 1,020 6.50
U. S. Government agency securities 349,725 7.43
State, county and municipal 4,950 6.90
----------
Total debt securities 355,695 7.42
----------
Equity securities (1):
Preferred and common stock
and other 134,220 3.64
Trust preferreds 514,813 8.22
----------
Total equity securities 649,033 7.27
----------
Total securities
available-for-sale $4,565,582 6.52
==========
(1) As equity securities have no maturities, they are classified in the "More
than Ten Years" category.
29
Sources of Funds
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities and proceeds from maturing
securities are the primary sources of the Company's funds for use in lending,
investing and for other general purposes. The Company also utilizes borrowed
funds, primarily reverse-repurchase agreements, FHLB advances and other
borrowings, to fund its operations.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. At December 31, 2001, the Bank's deposit accounts
consisted of savings (including school savings and club accounts), Super NOW and
NOW accounts, checking accounts, money market accounts and certificates of
deposit. The Bank offers certificates of deposit with balances in excess of
$100,000 at preferential rates (jumbo certificates) and also offers Individual
Retirement Accounts and other qualified plan accounts.
At December 31, 2001, the Bank's deposits totaled $4.49 billion. For
the year ended December 31, 2001, the average balance of core deposits (savings,
Super NOW and NOW, money market and non-interest-bearing demand accounts)
totaled $1.59 billion, or 36.8% of total average deposits. At December 31, 2001,
the Bank had a total of $2.76 billion in certificates of deposit, of which $2.20
billion had maturities of one year or less. For the year ended December 31,
2001, the average balance of certificate of deposit accounts represented 63.2%
of total average deposits. Although the Bank has a significant portion of its
deposits in shorter term certificates of deposit, management monitors activity
on the Bank's certificate of deposit accounts and, based on historical
experience and the Bank's current pricing strategy, believes it will retain a
large portion of such accounts upon maturity.
The flow of deposits is influenced by general economic conditions,
changes in money market rates, prevailing interest rates and competition. The
Bank's deposits are obtained predominantly from the areas in which its branch
offices are located. The Bank relies primarily on competitive pricing of its
deposit products, customer service and long-standing relationships with its
customers to attract and retain these deposits; however, market interest rates
and rates offered by competing financial institutions significantly affect the
Bank's ability to attract and retain deposits. In addition, the Bank had
previously paid a special interest payment on savings and NOW accounts,
calculated as a percentage of interest paid on these accounts during the year.
During the years ended 2001 and 2000 no such special interest payments were
made. The Company does not anticipate making any such payments in the future.
For the year ended December 31, 1999, the Bank paid a special interest payment
of 5% of interest paid on savings and NOW accounts, which totaled $336,000.
The Bank uses traditional means of advertising its deposit products,
including radio and print media, and generally does not solicit deposits from
outside its market area. While certificate accounts in excess of $100,000 are
accepted by the Bank, and may be subject to preferential rates, the Bank does
not actively solicit such deposits as such deposits generally are more difficult
to retain than core deposits. The Bank has authorized the utilization of brokers
to obtain deposits to fund its activities and has entered into several
relationships with nationally recognized retail brokerage firms to accept
deposits sold by such firms. Dependent on market conditions, the Bank may use
such brokered deposits, from time to time, to fund asset growth and manage
interest rate risk. The Bank's policies limit the amount of brokered deposits
that the Bank may have at any time to 25% of total retail deposits. During the
fourth quarter of 2001, the Bank acquired $32.8 million of brokered certificates
with a weighted average rate of 3.86%.
30
These brokered certificates have original maturities ranging from two to four
years. At December 31, 2001, the Bank had $59.1 million in brokered deposits,
representing 1.3% of total deposits.
The following table presents the deposit activity of the Bank for the
periods indicated:
For the Years Ended December 31,
-----------------------------------
2001 2000 1999
-------- ------- ------------
(In thousands)
Net deposits (withdrawals) from deposit accounts $241,306 $(135,505) $(339,458)
Interest credited on deposit accounts 168,680 166,674 166,088
------- --------- ----------
Total increase (decrease) in deposit accounts $409,986 $ 31,169 $(173,370)
======= ========= ==========
At December 31, 2001, the Bank had outstanding $595.9 million in
certificate of deposit accounts in amounts of $100,000 or more, maturing as
follows:
Weighted
Maturity Period Amount Average Rate
- ------------------------------- ------------- ---------------
(Dollars in thousands)
Three months or less $ 163,568 3.68%
Over three through six months 79,348 3.52
Over six through 12 months 230,468 4.07
Over 12 months 122,507 4.58
----------
Total $ 595,891 3.99
==========
31
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Average balances for the periods
presented utilize average daily balances.
For the Years Ended December 31,
---------------------------------------------------------------------------------------
2001 2000
----------------------------------------- ------------------------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
------------- --------- --------- -------------- ---------- ----------
(Dollars in thousands)
Money market accounts $ 321,728 7.43% 3.12% $ 239,525 5.94% 4.39%
Savings accounts (1) (2) 897,122 20.74 1.63 925,293 22.96 1.90
Super NOW and NOW accounts (3) 218,055 5.04 1.34 168,708 4.19 1.86
Non-interest-bearing demand accounts 157,289 3.64 - 142,690 3.54 -
------------- --------- -------------- ----------
Total 1,594,194 36.85 1.73 1,476,216 36.63 2.11
------------- --------- -------------- ----------
Certificates of deposit 2,732,065 63.15 5.20 2,554,147 63.37 5.63
------------- --------- -------------- ----------
Total average deposits $ 4,326,259 100.00% 3.92 $ 4,030,363 100.00% 4.34
============= ========= ============== ==========
For the Years Ended December 31,
----------------------------------------
1999
----------------------------------------
Percent
of Total Weighted
Average Average Average
Balance Deposits Rate
------------ ---------- ----------
(Dollars in thousands)
Money market accounts $ 171,720 4.05% 3.82%
Savings accounts (1) (2) 992,385 23.43 2.20
Super NOW and NOW accounts (3) 150,247 3.55 2.14
Non-interest-bearing demand accounts 140,181 3.31 -
------------ ---------
Total 1,454,533 34.34 2.17
------------ ---------
Certificates of deposit 2,781,650 65.66 5.10
------------ ---------
Total average deposits $ 4,236,183 100.00% 4.09
============ =========
(1) Includes special interest payments made by the Bank on such accounts for
the year ended December 31, 1999, which resulted in an increased cost of
such accounts of 4 basis points. No such special payments were made during
2001 and 2000.
(2) Savings accounts include mortgagors' escrow deposits.
(3) Includes special interest payments made by the Bank on such accounts for
the year ended December 31, 1999, which resulted in an increased cost of
such accounts of 2 basis points. No such special payments were made during
2001 and 2000.
32
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated:
Period to Maturity from December 31, 2001
---------------------------------------------------------------------------
Greater Greater Greater
Than Greater Than Than
One One to Two Than Three to Four to Greater At December 31,
Year Two Two to Four Five Than --------------------------------
or Less Years Three Years Years Years Five Years 2001 2000 1999
---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Certificates of deposit: (In thousands)
0 to 3.00% $ 690,857 $ 29,354 $ 12 $ - $ - $ - $ 720,223 $ 150 $ 260
3.01 to 4.00% 751,190 118,093 20,277 162 - 117 889,839 - 457
4.01 to 5.00% 449,528 85,793 41,955 8,118 64,731 2,228 652,353 53,702 932,036
5.01 to 6.00% 226,573 64,659 32,442 1,632 5,477 14,913 345,696 1,335,495 1,411,943
6.01 to 7.00% 77,352 10,271 29,771 9,757 2,830 4,206 134,187 1,238,341 224,833
7.01 to 8.00% 5,765 1,611 6,216 603 82 - 14,277 18,340 22,900
Over 8.01% 141 - - 12 - 9 162 1,839 13,025
---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Total $2,201,406 $ 309,781 $ 130,673 $ 20,284 $ 73,120 $ 21,473 $2,756,737 $2,647,867 $2,605,454
========== ========== =========== ========== =========== ========== ========== ========== ==========
33
Borrowed Funds. The Company's primary source of borrowings consists of
reverse-repurchase agreements entered into with nationally recognized securities
brokerage firms and FHLB advances. At December 31, 2001, the Company had $1.76
billion and $1.69 billion of reverse-repurchase agreements and FHLB advances,
respectively, outstanding.
Reverse-repurchase agreements are contracts for the sale of securities
owned or borrowed by the Company with an agreement to repurchase those
securities at an agreed upon price and date. Historically, the Company has
entered into reverse-repurchase agreements as a method of providing the Company
with cost effective funding in periods where its need for funds exceeds the
amount of funds provided by its deposit gathering activities. Currently, the
Company utilizes such reverse-repurchase agreements in periods when the Company
can generate securities investments with yields in excess of its cost of such
borrowing. At December 31, 2001, the Company's policies limited the use of
reverse-repurchase agreements to maturities of overnight to thirty years. The
collateral for such borrowings consists of U.S. agency obligations,
mortgage-backed securities or trust preferreds. The security brokers utilized
for borrowings transactions are subject to an ongoing financial review in order
to ensure the selection of only those dealers whose financial strength will
minimize the risk of principal loss due to default. This review is done
internally and/or by qualified third parties. Additionally, a Public Securities
Association Master Repurchase Agreement must be executed and on file for each
dealer selected. The Company averaged $1.58 billion in reverse-repurchase
agreements during the year ended December 31, 2001.
During the year ended December 31, 2001 the Company prepaid $258.9 million
of reverse-repurchase agreements with a weighted average rate of 6.44%. As a
result, for the year ended December 31, 2001, the Company incurred a prepayment
penalty of $8.3 million ($5.0 million, net of tax). The prepayment penalty is
reflected as an extraordinary item in the Company's December 31, 2001
consolidated statement of income. In addition, subsequent to the Merger in 1999,
the Company had restructured $427.1 million of reverse-repurchase agreements and
$118.1 million of FHLB borrowings. These borrowed funds had maturities between
less than one year and four years and a weighted average rate of 5.98%. The
borrowings were then replaced with new funds with a weighted average rate of
4.98% and maturities between less than one year and four years. For the year
ended December 31, 1999, the Company incurred a prepayment penalty of $7.2
million ($4.2 million, net of tax). The prepayment penalty is reflected as an
extraordinary item in the Company's December 31, 1999 consolidated statement of
income.
Pursuant to a blanket collateral agreement with the FHLB, advances and
overnight line of credit borrowings are secured by a pledge of certain eligible
collateral, principally one- to four-family mortgage loans, in an amount equal
to 110% of outstanding advances.
On November 21, 2001, the Company issued $75.0 million of 7.50% unsecured
senior bank notes with a maturity date of December 1, 2008. Interest on such
notes is paid semi-annually on June 1 and December 1 of each year, beginning
June 1, 2002. The Company used the net proceeds from the bank notes for general
corporate purposes, including the repurchase of outstanding common stock and
repaying or reducing indebtedness. In connection with this $75.0 million
offering the Company capitalized $1.5 million of associated costs, which were
comprised primarily of underwriting, legal and accounting fees, to be amortized
over the shorter of the life of the borrowing or its useful life. For the year
ended December 31, 2001, $33,000 of such costs has been amortized and is
reflected as interest expense on borrowings in the accompanying consolidated
statement of income. In addition, the Company has the ability to issue an
additional $125.0 million in debt and other securities, with rates and terms to
be determined, pursuant to the Company's $200.0 million shelf registration filed
with the SEC during 2001. The proceeds of any such offering can be used for
general corporate purposes, which may include repurchasing the Company's common
stock, financing possible acquisitions of branches or other financial
institutions or financial service companies, extending credit to, or funding
investments in the Company's subsidiaries and repaying, reducing or refinancing
indebtedness.
34
The following table sets forth certain information regarding borrowed funds
for the dates indicated:
At or For the Years Ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
(Dollars in thousands)
Other borrowings (FHLB advances):
Average balance outstanding during the year $ 1,566,403 $ 683,584 $ 247,084
Maximum amount outstanding at any month
end during the year 2,007,807 902,913 411,178
Balance outstanding at end of year 1,687,806 782,411 395,196
Weighted average interest rate during the year 5.15% 6.34% 4.16%
Weighted average interest rate at end of year 4.94 6.02 5.19
Reverse-repurchase agreements:
Average balance outstanding during the year $ 1,580,050 $ 2,078,967 $ 2,305,473
Maximum amount outstanding at any month
end during the year 1,856,284 2,226,662 2,594,268
Balance outstanding at end of year 1,757,489 2,072,614 2,449,345
Weighted average interest rate during the year 5.74% 5.95% 5.70%
Weighted average interest rate at end of year 4.60 5.98 5.67
Senior bank notes:
Average balance outstanding during the year $ 8,424 - -
Maximum amount outstanding at any month
end during the year 75,000 - -
Balance outstanding at end of year 75,000 - -
Weighted average interest rate during the year 7.81% - -
Weighted average interest rate at end of year 7.50 - -
Total borrowed funds:
Average balance outstanding during the year $ 3,154,877 $ 2,762,551 $ 2,552,557
Maximum amount outstanding at any month
end during the year 3,520,295 2,913,647 2,844,541
Balance outstanding at end of year 3,520,295 2,855,025 2,844,541
Weighted average interest rate during the year 5.45% 6.05% 5.55%
Weighted average interest rate at end of year 4.82 5.99 5.59
Savings Bank Life Insurance
Effective as of January 1, 2000, in connection with a New York State
approved restructuring of the Savings Bank Mutual Life Insurance Company, Inc.
into the Mutual Life Insurance Company of New York Inc. (now known as SBLI USA
Mutual Life Insurance Company, Inc. or SBLI Co.), the Bank restructured its
Savings Bank Life Insurance (SBLI) Department.
SBLI Co. was formed in 1999 as a mutual life insurance company under the
laws of the State of New York and vested with the assets of the former Savings
Bank Life Insurance Departments of various savings banks of the State of New
York, including the Bank. In connection with the reorganization of SBLI Co., the
Bank transferred the assets of its SBLI Department to SBLI Co. and
simultaneously entered into a general agency agreement with SBLI Co. whereby the
Bank, through its wholly-owned subsidiary, RSB Agency, Inc., continues to sell
various insurance products issued by SBLI Co., among other carriers.
Previously, the Bank engaged in group life insurance coverage per
individual under SBLI's Financial Institution Group Life Insurance policy. The
SBLI Department's activities were segregated
35
from the Bank and, while they did not directly affect the Bank's earnings in a
material way, management believed that offering SBLI insurance products was
beneficial to the Bank's relationship with its depositors and the general
public. The SBLI department paid its own expenses and reimbursed the Bank for
expenses incurred on its behalf prior to its termination on January 1, 2000.
Subsidiary Activities
Roslyn National Mortgage Corporation. RNMC, a wholly-owned subsidiary of
the Bank, was engaged in the origination, sale and servicing of one- to
four-family loans during the period from August 1995 to on or about September 1,
2000. RNMC was formed in connection with the Bank's acquisition of certain
assets and liabilities of a company formerly known as Residential Mortgage
Banking, Inc. (RMBI). During 2000, RNMC discontinued all of its mortgage loan
origination and related operations and was divested of its assets relating to
that business. Following the completion of activities necessary to fully unwind
its previous mortgage lending operations, it is expected that RNMC's only
operations will consist of paying the expenses under a lease agreement for its
former headquarters space in Melville, New York and collecting rental income
under certain sublease agreements it has made for such space. It is anticipated
that the income from such subleases will substantially offset the corresponding
rental expense under the paramount lease.
Roslyn Capital Corp. Roslyn Capital Corp. (RCC), is a wholly-owned
subsidiary of the Bank organized on April 1, 1997 for the purpose of investing
in mortgage related assets as a real estate investment trust. On that date, the
Bank transferred to RCC certain one- to four-family residential mortgage loans,
commercial real estate loans and mortgage-backed securities including certain
associated assets and liabilities. In return, the Bank received shares of common
and preferred stock of RCC.
RSB Agency, Inc. RSB Agency, Inc. (Agency), a wholly-owned subsidiary of
the Bank incorporated in 1983, is engaged in the sale of life insurance and the
collection of commissions for previously-issued life insurance policies. Agency
is also currently active in the sale of annuities, mutual funds and other
financial services products for which it receives commissions from third
parties.
Roosevelt Asset Funding Corp. Roosevelt Asset Funding Corp. (RAFC), a
wholly-owned subsidiary of the Bank, is a real estate investment trust which was
incorporated in the State of Delaware on April 28, 1997 for the purpose of
investing in mortgage related assets as a real estate investment trust. On that
date, the Bank transferred to RAFC certain one- to four-family residential
mortgage loans, commercial real estate loans and mortgage-backed securities
including certain associated assets and liabilities. In return, the Bank
received shares of common and preferred stock of RAFC.
O.B. Ventures Corp. O.B. Ventures Corp. (OBV), a wholly-owned subsidiary of
the Holding Company, was established on April 11, 2000. OBV was a joint venture
partner with The Holiday Organization in The Hamlet on Olde Oyster Bay, L.L.C.
The purpose of the joint venture is to develop, construct and sell a 370 unit
residential community located in the Town of Oyster Bay, New York. On
December 28, 2001, OBV merged with and into O.B. Ventures, LLC (OBV LLC), a New
York limited liability company, with OBV LLC as the surviving entity.
O.B.Ventures, LLC OBV, LLC, a New York limited liability company and a
wholly-owned subsidiary of the Holding Company, was established on December 28,
2001. OBV, LLC is a joint venture partner with The Holiday Organization in The
Hamlet on Olde Oyster Bay, L.L.C. The purpose of the joint venture is to
develop, construct and sell a 370 unit residential community located in the Town
of Oyster Bay, New York. On December 28, 2001, OBV merged with and into OBV,
LLC, with OBV, LLC as the surviving entity.
RBI Holdings, Inc. RBI Holdings, Inc. (RBI), a wholly-owned subsidiary of
the Holding Company, was established on March 17, 1999. RBI was a 50% joint
venture partner in a mortgage
36
brokerage company. RBI sold its joint venture partnership interest during 2001
and has been dissolved.
RNMC Re, Inc. RNMC Re, Inc. (RRI), a wholly-owned subsidiary of the Holding
Company, was established in December 1999. RRI was organized as a captive
re-issuance company in the State of Vermont. RRI reinsures mortgage impairment
policies underwritten by principal carriers. The subsidiary retains a portion of
the risks associated with such policies in consideration for a percentage of the
premiums paid. The individual loans covered by these policies were originated by
RNMC.
Other Subsidiaries. The Bank has 7 other wholly-owned subsidiaries. BSR
1400 Corp. and 1400 Corp. are periodically used to hold REO. In addition, BSR
1400 Corp. holds Bank facilities and leases thereon. Residential Mortgage
Banking, Inc. (a Bank subsidiary) was established in connection with the
transaction between the Bank and RMBI and has been inactive since that time.
Bellingham Corp., Blizzard Realty Corp., Old Northern Co. Ltd. and VBF Holding
Corporation currently are inactive subsidiaries. The Holding Company, other than
the Bank, has 3 other wholly-owned subsidiaries, which were inactive as of
December 31, 2001, Mt. Sinai Ventures, LLC, Muttontown Ventures, Corp. and
Roslyn Funding Corp.
Personnel
As of December 31, 2001, the Bank had 618 full-time employees and 190
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
a good one.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of,
the OTS.
The Bank is a New York State chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the FDIC as a member of the Bank
Insurance Fund (BIF). The Bank is subject to extensive regulation by the NYSBD,
as its chartering agency, and by the FDIC, as the deposit insurer. The Bank must
file reports with the NYSBD and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior to entering into
certain transactions such as establishing branches and mergers with, or
acquisitions of, other depository institutions. There are periodic examinations
by the NYSBD and the FDIC to assess the Bank's financial condition and
compliance with various regulatory requirements. This regulation and supervision
establishes a framework of activities in which a savings bank can engage and is
intended primarily for the protection of the insurance fund and depositors and
is not intended for the protection of stockholders and other creditors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the NYSBD, the FDIC or through
legislation, could have a material adverse impact on the Company and the Bank
and their operations and stockholders. The Company is also required to file
certain reports with and otherwise comply with the rules and regulations of the
OTS, the NYSBD and SEC under the federal securities laws. Certain of the
regulatory requirements applicable to the Bank and to the Company are referred
to below or elsewhere herein. The description of statutory provisions and
regulations applicable to savings banks and their holding companies set forth in
this Form 10-K does not purport to be a complete description of such statutes
and regulations and their effect on the Bank and the Company.
37
New York State Law
The Bank derives its lending, investment and other authority primarily
from the applicable provisions of New York State Banking Law and the regulations
of the NYSBD, as limited by FDIC regulations. The exercise by an FDIC-insured
savings bank of the lending and investment powers of a savings bank under the
New York State Banking Law is limited by FDIC regulations and other federal
laws and regulations. With certain limited exceptions, a New York State
chartered savings bank may not make loans or extend credit for commercial,
corporate or business purposes (including lease financing) to a single borrower,
the aggregate amount of which would be in excess of 15% of the bank's net worth.
The Bank currently complies with all applicable loans-to-one-borrower
limitations.
Under New York State Banking Law, a New York State chartered stock
savings bank may declare and pay dividends out of its net profits, unless there
is an impairment of capital. Additionally, the approval of the New York
Superintendent of Banks (Superintendent) is required if the total of all
dividends declared in a calendar year would exceed the total of the
institution's net profits for that year combined with its retained net profits
of the preceding two years, subject to certain adjustments and any waivers
granted.
Under the New York State Banking Law, the Superintendent may issue an
order to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the NYSBD that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office by the NYSBD after notice and an opportunity to be heard. The Bank
does not know of any past or current practice, condition or violation that is
likely to lead to any such proceeding by the Superintendent or the NYSBD against
the Bank or any of its directors or officers. The Superintendent also may take
possession of a banking organization under specified statutory criteria.
Assessments. Savings banks are required to pay assessments to the NYSBD
to fund operations. Assessments paid by the Bank for the fiscal year ended
December 31, 2001 totaled $191,000.
FDIC Regulations
Capital Requirements. The FDIC has adopted risk-based capital
guidelines to which the Bank is subject. Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to four
risk-weighted categories ranging from 0% to 100%, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The
first tier (Tier I) includes stockholders' equity (excluding net unrealized
gains and losses on available-for-sale securities, except net unrealized losses
on equity securities with readily determinable fair values, net of tax), certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations). Recent
regulatory amendments also require the deduction from Tier I capital of a
percentage of the carrying value of certain non-financial equity investments
acquired after March 13, 2000. Supplementary (Tier II) capital includes, among
other items, cumulative perpetual and long-term limited-life preferred stock,
mandatory convertible securities, certain hybrid capital instruments, term
subordinated debt and the allowance for loan and lease losses, subject to
certain limitations, less required deductions. Savings banks are required to
maintain a total risk-based capital ratio of at least 8%, of which at least 4%
must be Tier I capital.
In addition, the FDIC regulations prescribe a minimum Tier I leverage
ratio (Tier I capital to adjusted total average assets as specified in the
regulations) of 3% for banks that meet certain specified
38
criteria, including that the institution have the highest examination rating and
are not experiencing or anticipating significant growth. All other banks are
required to maintain a Tier I leverage ratio of at least 4%. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant.
The following is a summary of the Bank's regulatory capital at December
31, 2001:
GAAP Capital to Total Assets 5.23 %
Total Capital to Risk-Weighted Assets 11.18 %
Tier I Leverage Ratio 5.46 %
The FDIC, along with the other federal banking agencies, has adopted a
regulation providing that the agencies will take account of the exposure of a
bank's capital and economic value to changes in interest rate risk in assessing
a bank's capital adequacy. The agencies issued a joint policy statement
providing guidance on interest rate risk management, including a discussion of
the critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
Standards for Safety and Soundness. The federal banking agencies have
adopted regulations and Interagency Guidelines Establishing Standards for Safety
and Soundness (the Guidelines) to implement safety and soundness standards. The
Guidelines set forth the standards that the federal banking agencies use to
identify and address problems at insured depository institutions before capital
becomes impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standards.
Dividend Limitations. The FDIC has authority to use its enforcement
powers to prohibit a savings bank from paying dividends if, in its opinion, the
payment of dividends would constitute an unsafe or unsound practice. Federal law
prohibits the payment of dividends by a bank that will result in the bank
failing to meet applicable capital requirements on a pro forma basis.
Additionally, the Bank, as a subsidiary of a savings and loan holding company,
is required to provide the OTS with 30 days prior written notice before
declaring any dividend. The Bank's payment of dividends is also restricted in
the event the dividend would impair the liquidation account established in
connection with the Conversion. As indicated above, the Bank is also subject to
dividend declaration restrictions imposed by New York State law.
Investments and Activities
The activities of all state-chartered financial institutions, including
savings banks and their subsidiaries, have generally been limited by federal law
to those activities of the type and in the amount authorized for national banks,
notwithstanding state law. Applicable regulations permit certain exceptions to
these limitations. For example, certain state chartered banks, such as the Bank,
may, with FDIC approval, continue to exercise state authority to invest in
common or preferred stocks listed on a national securities exchange or the
National Market System of NASDAQ and in the shares of an investment company
registered under the Investment Company Act of 1940, as amended. Such banks may
also continue to sell life insurance, annuities, mutual funds and similar
financial products. In addition, the FDIC is authorized to permit such
institutions to engage in state authorized activities or investments that do not
meet this standard (other than non-subsidiary equity investments) if the
institutions has met all applicable capital requirements and if it is determined
that such activities or investments do not pose a significant risk to the BIF.
All non-subsidiary equity investments, unless otherwise authorized or approved
by the FDIC, must have been divested by December 19, 1996, pursuant to an
FDIC-approved divestiture plan unless such investments were grandfathered by the
FDIC. The Bank received grandfathering authority from the FDIC in February 1993
to invest in listed stocks and/or registered shares subject to the maximum
permissible investment of 100% of Tier I capital, as specified by the FDIC's
regulations, or the maximum amount permitted by New York State Banking Law,
whichever is
39
less. Such grandfathering authority is subject to termination upon
the FDIC's determination that such investments pose a safety and soundness risk
to the Bank or in the event the Bank converts its charter or undergoes a change
in control.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements, the severity of which depends upon the degree
of under capitalization.
An institution is deemed to be "adequately capitalized" if it has a
total risk-based capital ratio of 8% or greater, a Tier I risk-based capital
ratio of 4% or greater, and a leverage ratio of 4% or greater. An institution is
deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I risk-based capital ratio of less than 4%, or a leverage
ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less
than 3%. An institution is deemed to be "critically undercapitalized" if it has
a ratio of tangible equity (as defined in the regulations) to total assets that
is equal to or less than 2%.
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan to their primary regulator. A bank's compliance with such plan
is required to be guaranteed by any company that controls the undercapitalized
institutions. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks are subject to one or more of a number of additional
restrictions, including but not limited to an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks or dismiss
directors or officers, and limits on interest rates paid on deposits,
compensation of executive officers and capital distributions by the parent
holding company. "Critically undercapitalized" institutions also may not,
beginning 60 days after becoming "critically undercapitalized," make any payment
of principal or interest on certain subordinated debt or extend credit for a
highly leveraged transaction or enter into any material transaction outside the
ordinary course of business. In addition, "critically undercapitalized"
institutions are subject to appointment of a receiver or conservator. Generally,
subject to a narrow exception, the appointment of a receiver or conservator is
required for a "critically undercapitalized" institution within 270 days after
it obtains such status.
Transactions with Affiliates
Transactions between depository institutions and their affiliates is
governed by federal law. An affiliate of a savings bank is any company or entity
that controls, is controlled by, or is under common control with the savings
bank, other than a subsidiary. Generally, the extent to which the savings bank
or its subsidiaries may engage in "covered transactions" with any one affiliate
is limited to an amount equal to 10% of such savings bank's capital stock and
surplus. There is an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. The term
"covered transaction" includes the making of loans or other extensions of credit
to an affiliate; the purchase of assets from an affiliate, the purchase of, or
an investment in, the securities of an affiliate; the acceptance of securities
of an affiliate as collateral for a loan or extension of credit to any person;
or issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. Federal law also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances on letters of
credit issued on behalf of an affiliate. A federal statute also requires that
covered transactions and a broad list of other specified transactions be on
terms substantially the same as or no less favorable to the savings bank, or its
subsidiary, as similar transactions with non-affiliated parties.
40
Federal law restricts a savings bank with respect to loans to
directors, certain executive officers, and principal stockholders. Loans to
directors, executive officers and stockholders who control, directly or
indirectly, more than 10% of a savings bank, and certain related interests of
any of the foregoing, may not exceed, together with all other outstanding loans
to such persons and affiliated entities, the savings bank's total capital and
surplus. Loans above certain amounts to directors, certain executive officers,
and stockholders who control more than 10% of a stock savings bank, and their
respective related interests, must be approved in advance by a majority of the
board of directors of the savings bank. Loans to directors, executive officers
and principal stockholders must be made on terms substantially the same as
offered in comparable transactions to other persons. Recent legislation created
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. Federal law places additional
limitations on loans to certain executive officers.
Enforcement
The FDIC has extensive enforcement authority over insured savings
banks, including the Bank. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
orders and to remove directors and officers. In general, these enforcement
actions may be initiated in response to violations of laws and regulations and
to unsafe or unsound practices. The FDIC has authority under federal law to
appoint a conservator or receiver for an insured savings bank under certain
circumstances.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. Under
this system the FDIC assigns an institution to one of three capital categories
based on the institution's financial information, as of the reporting period
ending seven months before the assessment period. The capital categories are:
(i) well capitalized; (ii) adequately capitalized; or (iii) undercapitalized,
and each category has three supervisory subcategories, or supervisory subgroups.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation conducted by the FDIC, or provided to the FDIC by the
institution's primary federal regulator, and on information which the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory subgroup to which it is assigned.
Assessment rates currently range from zero basis points to 27 basis points of
assessable deposits. As of December 31, 2001, the Bank's rate was zero basis
points. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank. The Bank is
also required to share, along with all other FDIC-insured institutions, the
payments on financing corporation bonds. Such payments during 2001 approximated
1.9 basis points of assessable deposits. The Bank's insurance premiums were
$840,000 during fiscal 2001.
Under the Federal Deposit Insurance (FDI) Act, insurance of an
institution's deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC. Management of the Bank
does not know of any practice, condition or violation that might lead to
termination of its deposit insurance.
Federal Reserve System
Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW, Super NOW and regular checking accounts). For 2002, the Federal
Reserve Board regulations require that reserves be maintained against
transaction accounts as follows: the first $5.7 million of otherwise reservable
balances are exempt from
41
reserve requirements; a three percent reserve ratio will be assessed on
transaction accounts over $5.7 million to and including $41.3 million; a ten
percent reserve ratio will be applied to transaction accounts above $41.3
million. The Bank is currently in compliance with the foregoing requirements.
Holding Company Regulation
The Company is regulated as a non-diversified unitary savings and loan
holding company under applicable federal law. As such, the Company has
registered with the OTS and is subject to OTS regulations,examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. This
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution. Additionally, the
Bank is required to notify the OTS at least 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage. Upon any non-supervisory acquisition by the Company of
another savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage. The
Home Owners' Loan Act (HOLA) limits the activities of a multiple savings and
loan holding company and its non-insured institution subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, as amended, subject to the prior approval of the OTS,
and to other activities authorized by OTS regulation. Multiple savings and loan
holding companies are prohibited from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary company engaged in activities other
than those permitted by multiple savings and loan holding companies. Recent
legislation designed to modernize the regulation of the financial services
industry expands the ability of bank holding companies to affiliate with other
types of financial services companies such as insurance companies and investment
banking companies. However, the legislation provides that companies that acquire
control of a single savings association after May 4, 1999 (or that filed an
application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally will
not be permitted to engage in non-financial activities. The authority for
unrestricted activities is grandfathered for unitary savings and loan holding
companies, such as the Company, that existed prior to May 4, 1999. However, the
authority for unrestricted activities would not apply to any company that was to
acquire the Company.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof, or
from acquiring such an institution or company by merger, consolidation or
purchase of its assets, without prior written approval of the OTS. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (i) interstate supervisory acquisitions by
savings and loan holding companies, and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the extent
to which they permit interstate savings and loan holding company acquisitions.
In order for the Company to continue to be regulated as a savings and
loan holding company by the OTS (rather than as a bank holding company by the
Federal Reserve Board), the Bank must continue
42
to qualify as a qualified thrift lender. In order to qualify as a qualified
thrift lender, the Bank must maintain compliance with the OTS' Qualified Thrift
Lender (QTL) Test. Under the QTL Test, a savings institution is required to
qualify as a "domestic building and loan association" within the meaning of the
Internal Revenue Code (the Code) or maintain at least 65% of its "portfolio
assets" (total assets less: (i) specified liquid assets up to 20% of total
assets; (ii) intangibles, including goodwill; and (iii) the value of property
used to conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
and mortgage related securities) in at least nine months out of each 12 month
period. A holding company of an institution that fails the test must either
convert to a bank holding company and thereby become subject to the regulation
and supervision of the Federal Reserve Board or operate under certain
restrictions. For the year ended December 31, 2001, the Bank met all of the
requirements relating to the QTL Test.
New York State Holding Company Regulation. In addition to the federal
holding company regulations, a bank holding company organized or doing business
in New York State also may be subject to regulation under the New York State
Banking Law. The term "bank holding company," for purposes of the New York State
Banking Law, is defined generally to include any person, company or trust that
directly or indirectly owns, controls or holds, with power to vote, 10% or more
of the voting stock of each of two or more banking institutions, including
commercial banks and state savings banks and savings and loan associations
organized in stock form. In general, a holding company controlling, directly or
indirectly, only one banking institution is not deemed to be a bank holding
company for the purposes of the New York State Banking Law. The prior approval
of the NYSBD is required before any action is taken that causes any company to
become a bank holding company; any bank holding company acquires direct or
indirect ownership or control of more than 5% of the voting stock of a banking
institution; or any bank holding company acquires a banking institution by
merger or purchase of assets. Although the Company is not currently a bank
holding company for purposes of New York State law, any future acquisition of
ownership, control, or the power to vote 10% or more of the voting stock of
another banking institution or bank holding company would cause it to become
such.
Acquisition of the Company. Under the Federal Change in Bank Control
Act (CIBCA), a notice must be submitted to the OTS if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's outstanding voting stock, unless the OTS has found that the
acquisition will not result in a change of control of the Company. Under the
CIBCA, the OTS has 60 days from the filing of a complete notice to act, taking
into consideration certain factors, including the financial and managerial
resources of the acquirer and the anti-trust effects of the acquisition. Any
person or group acting in concert that so acquires control would then be subject
to regulation as a savings and loan holding company.
Prior approval of the NYSBD is required under New York law before any
person or group acting in concert acquires direct or indirect control of the
banking institution. Control is presumed to exist upon ownership, control or
holding, with power to vote, 10% or more of the voting stock of a bank or
company, such as the Company, that owns, controls or holds with power to vote
10% or more of a bank.
Federal Securities Laws
The Company's common stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the Exchange Act). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Holding Company, the Bank and their subsidiaries
(excluding RCC and RAFC) will report their income on a consolidated basis, using
a
43
calendar year and the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's treatment of its reserve for bad
debts discussed below. The following discussion of tax matters is intended only
as a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Bank or the Company. The Bank was last audited by the
Internal Revenue Service for the year ended December 31, 1991 which resulted in
no change to taxable income.
Bad Debt Reserves. Prior to the enactment of The Small Business Job
Protection Act of 1996 (the 1996 Act) on August 20, 1996, for federal income tax
purposes, thrift institutions which met certain definitional tests primarily
relating to their assets (the 60% Test) and the nature of their business, were
permitted to establish tax reserves for bad debts and to make annual additions
thereto, which additions could, within certain specified limitations, be
deducted in arriving at taxable income. The Bank's deduction for bad debts with
respect to non-qualifying loans could be computed using an amount based on a six
year moving average of the Bank's actual loss experience (the Experience
Method). The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interest in real property, could be computed
using the Experience Method or a percentage equal to 8% of the Bank's taxable
income (the PTI Method), computed with certain modifications and without regard
to this deduction and reduced by the amount of the permitted deduction for bad
debts on non-qualifying loans. Additions to the tax bad debt reserve under the
PTI method were subject to an overall limitation. The allowable deduction under
the PTI Method was limited to the excess of 12% of withdrawable accounts of
depositors at the end of the year over the sum of the Bank's surplus, undivided
profits and reserves at the beginning of the year. Use of the PTI Method had the
effect of reducing the marginal rate of federal tax on the Bank's income to
32.2%, exclusive of any minimum tax, as compared to the maximum corporate
federal income tax rate of 35%.
The 1996 Act. Under the 1996 Act, for tax years beginning after
December 31, 1995, the PTI Method was repealed. Additionally, "large banks"
(i.e., those with assets having an adjusted basis of more than $500 million),
which includes the Bank, are no longer permitted to make additions to its tax
bad debt reserve, can only deduct bad debts as they occur and was required to
recapture (i.e., include in its taxable income) over a six year period the
excess of the balance of its tax bad debt reserves as of December 31, 1995 over
the balance of such reserves as of December 31, 1987 (or a lesser amount if the
Bank's loan portfolio decreased since December 31, 1987). For tax years
beginning in 1996 and 1997, the recapture requirement was suspended if the
principal amount of residential mortgages originated by the Bank during the year
was not less than the average of the principal amount of loans made during the
six preceding taxable years. As of December 31, 1995, the Bank's tax bad debt
reserve exceeded the balance of such reserve as of December 31, 1987 by $2.0
million.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Holding Company, such distributions will be considered to
have been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. Non-dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid from the Bank's current or accumulated earnings and profits will
not be so included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to that
income, is equal to the amount of the distribution. Thus, if the Bank were to
make a non-dividend distribution to the Holding Company, approximately one and
one-half times the amount of such distribution (but not in excess of the amount
of such reserves) would be included in income for federal income tax purposes,
assuming a 35% federal corporate income tax rate. See "Regulation and
Supervision" for limits on the payment of dividends by the Bank. The Bank does
not intend to pay dividends that would result in a recapture of any portion of
its tax bad debt reserves.
44
Corporate Alternative Minimum Tax. In addition to the regular income
tax, the Code imposes a alternative minimum tax (AMT) in an amount equal to 20%
of alternative minimum taxable income (AMTI) to the extent the AMT exceeds the
regular tax. AMTI is regular taxable income as modified by certain adjustments
and tax preference items. AMTI includes an amount equal to 75% of the excess of
adjusted current earnings over AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses). Only 90% of AMTI
can be offset by net operating loss carry forwards. The AMT is available as a
credit against future regular income tax. The AMT credit can be carried forward
indefinitely. For 2001, the Bank does not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Holding Company and
the Bank may exclude from its income 100% of dividends received from their
consolidated subsidiaries. No dividends received deduction is available for
dividends paid by the Bank's REIT subsidiaries (RAFC and RCC). However, a 100%
dividends paid deduction is available to these REIT subsidiaries for qualifying
dividend payments. A 70% dividends received deduction generally applies with
respect to dividends received from corporations that are not members of such
consolidated group, except that an 80% dividends received deduction applies if
the Company owns more than 20% of the stock of a corporation distributing a
dividend.
State and Local Taxation
New York State Taxation. The Holding Company, the Bank and certain of
their subsidiaries are subject to the New York State Franchise Tax on Banking
Corporations in an annual amount equal to the greater of (a) 8.5% (9% for 2000
and prior) of "entire net income" allocable to New York State or (b) the
applicable alternative tax. The alternative tax is generally the greater of (a)
.01% of the value of the taxable assets allocable to New York State with
certain modifications, (b) 3% of "alternative entire net income" allocable to
New York State or (c) $250. Entire net income is similar to federal taxable
income, subject to certain modifications (prior to 2001 net operating losses
could not be carried back or carried forward) and alternative entire net income
is equal to entire net income without certain adjustments. The Holding Company,
the Bank and their subsidiaries (excluding RCC, RAFC, OBV and RRI) file a
combined return.
The New York State tax law on banking corporations was amended in 1997
to allow a deduction for net operating losses sustained in tax years beginning
on or after January 1, 2001. The deduction may not exceed the allowable federal
net operating loss deduction augmented by the excess of the New York State bad
debt deduction over the federal bad debt deduction. No carryback of these losses
is allowed. However, the losses may be carried forward for the 20 year period
allowed under Code Section 172.
The New York State tax law on banking corporations was amended in 1999
to reduce the tax rate on allocated entire net income. For tax years beginning
after June 30, 2000 and before July 1, 2001, the tax rate is 8.5%; for tax years
beginning after June 30, 2001 and before July 1, 2002, the tax rate is 8%; and
for tax years beginning after June 30, 2002, the tax rate is 7.5%.
OBV is subject to the New York State Franchise Tax on Business
Corporations in an amount equal to the greater of (a) 8% (8.5% for 2000) of
"entire net income" allocable to New York State, or (b) the applicable
alternative tax. The alternative tax is the greater of (a) 2.5% (3% for 2000) of
the corporation's "alternative entire net income", (b) .00178 of capital
allocable to New York State, or (c) a fixed amount up to a maximum of $1,500.
Entire net income is similar to federal taxable income, subject to certain
modifications and alternative entire net income is equal to entire net income
with certain adjustments.
The New York State tax law on business corporations was amended in 1998
to reduce the tax rate on allocated entire net income. For tax years beginning
after June 30, 1999 and before July 1, 2000, the tax rate is 8.5%; for tax years
beginning after June 30, 2000 and before July 1, 2001, the tax rate is 8%;
45
and for tax years beginning after June 30, 2001 the tax rate is 7.5%.
The Company does business within the Metropolitan Transportation Business
Tax District (the District) which is comprised of the counties of New York,
Bronx, Kings, Queens, Richmond, Dutchess, Nassau, Orange, Putnam, Rockland,
Suffolk, and Westchester. A tax surcharge is imposed on banking corporations and
business corporations doing business within the District and has been applied
since 1982. The District tax rate is 17% on the tax described above, subject to
modification in certain circumstances, and is scheduled to expire for tax years
ending on or after December 31, 2005.
The Bank was last audited by the State of New York for the three-year
period ended December 31, 1995, which resulted in adjustments which were
immaterial to the Bank's financial statements. T R Financial Corp. and
subsidiaries was last audited by the State of New York for the years ended
December 31, 1997 and 1998 and for the period ended February 16, 1999 (date of
Merger), which resulted in no adjustments to the returns.
Bad Debt Reserves. For purposes of computing its New York State entire net
income, the Bank is permitted a deduction for an addition to the reserve for
losses on qualifying real property loans. The allowable deduction is the same as
for Federal income tax purposes, prior to the 1996 Act, except that the
percentage allowable under the PTI Method is 32% instead of 8%. The New York
State tax law was amended in August 1996 to prevent the recapture of tax bad
debt reserves that would otherwise occur as a result of the enactment of the
1996 Act. However, the New York State bad debt reserve is subject to recapture
for "non-dividend distributions" in a manner similar to the recapture of the
Federal tax bad debt reserves for such distributions. Also, the New York State
tax bad debt reserve is subject to recapture in the event that the Bank fails to
meet the 60% Test, which it presently satisfies. Although there can be no
assurance that the Bank will satisfy the 60% Test in the future, management
believes that this level of qualifying assets can be maintained by the Bank.
Each year the Bank reviews the most favorable method to calculate the deduction
attributable to an addition to the tax bad debt reserve.
City of New York Taxation. The Holding Company, the Bank and their
subsidiaries (excluding RCC, RAFC, OBV and RRI) are also subject to a New York
City banking corporation tax in an annual amount equal to the greater of (a) 9%
of entire net income allocable to New York City, or (b) the applicable
alternative tax. The applicable alternative tax is the greater of (a) .01% of
the value of taxable assets allocable to New York City with certain
modifications, (b) 3% of alternative entire net income allocable to New York
City, or (c) $125. Entire net income and alternative net income are calculated
in a manner similar to New York State including the allowance of a deduction for
an addition to the tax bad debt reserve. The income is allocated to New York
City based upon three factors: receipts, wages and deposits. The Holding
Company, the Bank and their subsidiaries (excluding RCC, RAFC, OBV and RRI) file
a combined return.
In March 1997, the New York City tax law was amended, similar to New York
State tax law, to prevent the recapture of the tax bad debt reserve that would
have otherwise occurred as a result of the enactment of the 1996 Act. The New
York City tax law was not amended to permit a deduction for net operating losses
sustained in taxable years beginning on or after January 1, 2001.
Delaware Taxation. The Holding Company, as a Delaware holding company not
earning income in the State of Delaware, is exempted from corporate income tax.
However, the Holding Company is required to file an annual report with, and pay
an annual franchise tax based on authorized shares to, the State of Delaware.
Roslyn National Mortgage Corporation. RNMC is subject to tax in the various
states in which it operated. RNMC is also subject to tax in New York City.
RNMC Re, Inc. RRI is subject to tax on its premium income in the State of
Vermont.
46
EXECUTIVE OFFICERS OF THE COMPANY AND THE BANK
The name, age, position, term of office as officer and period during which
he or she has served as an officer is provided below for each executive officer
of the Bank. For those who also serve as officers of the Company, the
individual's title at the Company is also provided.
Joseph L. Mancino, Vice Chairman of the Board, President and Chief
Executive Officer of the Registrant since 1999 and Chairman of the Board and
Chief Executive Officer of the Bank since 1993, joined the Bank in 1960. Mr.
Mancino was President of the Bank from 1993 until February 2000. In connection
with the Registrant's acquisition of T R Financial Corp. in 1999, Mr. Mancino
became Vice Chairman of the Registrant. Mr. Mancino is 63 years of age.
John M. Tsimbinos, Chairman of the Board of the Registrant and Vice
Chairman of the Board of the Bank since 1999, joined the Company and the Bank in
1999 in connection with the Registrant's acquisition of T R Financial Corp. Mr.
Tsimbinos is 64 years of age.
John R. Bransfield, Jr., Vice Chairman of the Registrant commencing in
February 2000, President and Chief Operating Officer of the Bank commencing in
February 2000, joined the Bank in 1993 as a Senior Vice President and Senior
Lending Officer, became a director in 1998, and became Senior Executive Vice
President and Chief Operating Officer in 1999. Mr. Bransfield is 60 years of
age.
John L. Klag, Executive Vice President and Investment Officer of the Bank,
joined the Bank in 1993 and became Executive Vice President and Investment
Officer in 1999. Mr. Klag is 44 years of age.
Nancy C. MacKenzie, Executive Vice President and Chief Information Officer
of the Bank, joined the Bank in 1976, became Chief Information Officer in 1995,
and became Executive Vice President and Chief Information Officer in 1999. Ms.
MacKenzie is 48 years of age.
Mary Ellen McKinley, Executive Vice President and Human Resources Officer
of the Bank, joined the Bank in 1994 and became Senior Vice President and Human
Resources Officer in 2000 and Executive Vice President and Human Resources
Officer in 2001. Ms. McKinley is 56 years of age.
Daniel L. Murphy, Executive Vice President and Retail Banking Officer of
the Bank, joined the Bank in 1978 and became Executive Vice President and Retail
Banking Officer in 1999. Mr. Murphy is 42 years of age.
Michael P. Puorro, Treasurer and Chief Financial Officer of the Registrant
and Executive Vice President and Chief Financial Officer of the Bank, joined the
Bank in 1992 and became Executive Vice President and Chief Financial Officer in
1999. Mr. Puorro is 42 years of age.
R. Patrick Quinn, Corporate Secretary of the Registrant and Executive Vice
President, General Counsel and Corporate Secretary of the Bank, joined the Bank
in 1999 as General Counsel and Corporate Secretary and became Executive Vice
President, General Counsel and Corporate Secretary in 2001. Mr. Quinn is 40
years of age.
Ralph E. Caccipuoti, Senior Vice President and Retail Operations Officer of
the Bank, joined the Bank in 1975 and became Senior Vice President and Retail
Operations Officer in 1999. Mr. Caccipuoti is 46 years of age.
Henry F. Chichester, Jr., Senior Vice President and Sales Development
Officer of the Bank, joined the Bank in 1975 and became Senior Vice President
and Sales Development Officer in 2001. Mr. Chichester is 59 years of age.
47
John F. Coffey, Senior Vice President and Senior Commercial Lending Officer
of the Bank, joined the Bank in 1996, and became Senior Vice President and
Commercial Lending Officer in 1999. Mr. Coffey is 55 years of age.
Kevin T. Dunne, Senior Vice President and Senior Consumer Lending Officer
of the Bank, joined the Bank in 1974 and became Senior Vice President and Senior
Consumer Lending Officer in 1999. Mr. Dunne is 46 years of age.
Walter G. Mullins, Senior Vice President and Marketing Officer of the Bank,
joined the Bank in 1999 in connection with the Registrant's acquisition of T R
Financial Corp. Mr. Mullins is 56 years of age.
Russell S. Safirstein, Senior Vice President and Auditor of the Bank,
joined the Bank in 1994, and became Senior Vice President and Auditor in 2001.
Mr. Safirstein is 35 years of age.
Richard F. Schneider, Senior Vice President and Corporate Tax Officer of
the Bank and Assistant Secretary of the Registrant, joined the Bank in 1999 and
became Senior Vice President and Corporate Tax Officer of the Bank in January
2002 and Assistant Secretary of the Registrant in June 2001. Mr. Schneider is 50
years of age.
Gerard L. Treglia, Senior Vice President and Retail Systems Officer of the
Bank, joined the Bank in 1999 in connection with the Registrant's acquisition of
T R Financial Corp. Mr. Treglia is 52 years of age.
William A. Walter, Senior Vice President and Assistant Chief Financial
Officer of the Bank, joined the Bank in 1996, and became Senior Vice President
and Assistant Chief Financial Officer in 1999. Mr. Walter is 37 years of age.
48
Item 2. Properties.
- ------------------
The Bank currently conducts its business through one administrative office
and 32 banking offices. The following table sets forth the Bank's offices:
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
-------------------------------- --------------- ----------------- -----------------
Administrative Office:
Jericho Office
One Jericho Plaza Leased 1999 2014
Jericho, NY 11753
Branch Offices:
Main Office:
Roslyn Owned 1932 Not Applicable
1400 Old Northern Boulevard
Roslyn, NY 11576
Astoria Leased 2001 2021
30-75 Steinway Street
Astoria, NY 11103
Bayshore Leased 1999 2009
130 East Main Street
Bayshore, NY 11706
Bayside Owned 1969 Not Applicable
224-04 Union Turnpike
Bayside, NY 11364
Bellerose Owned 1975 Not Applicable
247-53 Jamaica Avenue
Bellerose, NY 11426
Bellmore Owned 1972 Not Applicable
2641 Merrick Road
Bellmore, NY 11710
2267 Bellmore Avenue Leased 2000 2010
Bellmore, NY 11710
Brooklyn Owned 1920 Not Applicable
1024 Gates Avenue
Brooklyn, NY 11221
2925 Avenue U Owned 1955 Not Applicable
Brooklyn, NY 11229
8110-8112 Fifth Avenue Leased 2001 2016
Brooklyn, NY 11209
49
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
-------------------------------- --------------- ----------------- -----------------
Bronx Leased 2001 2016
3681-83 Tremont Avenue
Bronx, NY 10465
East Meadow Leased 2000 2010
1900 Hempstead Turnpike
East Meadow, NY 11554
East Northport Owned 1992 Not Applicable
580 Larkfield Road
East Northport, NY 11731
Farmingdale Owned 1968 Not Applicable
14 Conklin Street
Farmingdale, NY 11735
Forest Hills Leased 2000 2010
107-40 Queens Boulevard
Forest Hills, NY 11375
Freeport Leased 2001 2017
160 South Main Street
Freeport, NY 11520
Garden City Leased 1994 2005
108 Seventh Street
Garden City, NY 11530
Hewlett Owned 1996 Not Applicable
1280 Broadway
Hewlett, NY 11557
Howard Beach (1) Owned 1965 Not Applicable
156-02 Cross Bay Boulevard
Howard Beach, NY 11414
Huntington Station Leased 2000 2010
693 East Jericho Turnpike
Huntington Station, NY 11746
Lawrence Leased 1996 2003
333 Central Avenue
Lawrence, NY 11559
Little Neck Leased 2002 2017
254-09 Horace Harding
Expressway
Little Neck, NY 11362
50
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
----------------------------------- ------------------- -------------------- -----------------
Massapequa (2) Leased 1996 2014
6199 Sunrise Highway /Owned
Massapequa, NY 11758
Massapequa Park Owned 1961 Not Applicable
4848 Merrick Road
Massapequa Park, NY 11762
Merrick Leased 2000 2010
2111 Merrick Avenue
Merrick, NY 11566
New Hyde Park Owned 1975 Not Applicable
1114 Jericho Turnpike
New Hyde Park, NY 11040
North Babylon Owned 1991 Not Applicable
1501 Deer Park Avenue
North Babylon, NY 11703
Oceanside Owned 1998 Not Applicable
3140 Long Beach Road
Oceanside, NY 11572
Smithtown Leased 1998 2008
719 Smithtown Bypass
Smithtown, NY 11787
Syosset Leased 2001 2011
2 Muttontown Road
Syosset, NY 11791
West Hempstead Owned 1965 Not Applicable
50 Hempstead Turnpike
West Hempstead, NY 11552
Woodbury (3) Leased 1976 2009
8081 Jericho Turnpike
Woodbury, NY 11797
- ------------------------------
(1) Includes a leased accommodation facility adjacent to the branch office. The
lease on such facility expires December 2011.
(2) The Bank owns the building but leases the minority portion of the land. The
Bank has the option to renew the lease upon expiration for two (2)
additional consecutive terms of thirty-three (33) years each.
(3) The Bank owns the building but leases the majority portion of the land. The
Bank has the option to renew the lease upon expiration for two (2)
additional consecutive terms of twenty (20) years each.
51
Item 3. Legal Proceedings.
- ---------------------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operation.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
None.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
- --------------------------------------------------------------------------------
Information regarding the market for the Company's common equity and
related stockholder matters appears in the 2001 Annual Report under the caption
"Market Price of Common Stock" and is incorporated herein by this reference. The
following schedule summarizes the dividend payout ratio (dividends declared per
share/net income per share) for the periods indicated:
For the Years Ended December 31,
--------------------------------------------------------------------
2001 2000 1999
------------------- -------------------- ------------------
35.94% 42.96% 190.74%
On July 26, 2001, the Company declared a three-for-two stock split in
the form of a stock dividend payable on August 22, 2001. Stockholders received
one additional share for every two shares held at the record date of August 6,
2001. A total of 39,598,569 shares of common stock were issued in connection
with the stock split. As a result of the stock split, $396,000 was reclassified
from additional paid-in-capital to common stock.
Item 6. Selected Financial Data.
------------------------
Information regarding selected financial data appears on page 14 of the
2001 Annual Report under the caption "Selected Consolidated Financial and Other
Data of the Company" and is incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 16 through 28 of the 2001
Annual Report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Management of Interest Rate Risk and Gap Analysis" in the 2001 Annual Report is
incorporated herein by this reference.
52
Item 8. Financial Statements and Supplementary Data.
- ------------------------------------------------------
Information regarding the financial statements and the Independent
Auditors' Report appears on pages 29 through 59 of the 2001 Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
None.
PART III
Item 10. Directors and Executive Officers of the Company.
- ----------------------------------------------------------
Information regarding the directors and executive officers of the
Company is incorporated herein by reference to the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held on May 21, 2002 (the 2001
Stockholders Meeting) under the caption "Information with Respect to the
Nominees, Continuing Directors, and Certain Executive Officers of the Company."
Pursuant to General Instruction G(3) to the Form 10-K, the Company's Proxy
Statement for the 2001 Stockholders Meeting to be held on May 21, 2002 will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year covered by this Form 10-K.
Item 11. Executive Compensation.
- ---------------------------------
Information regarding executive compensation is incorporated herein
by reference to the Company's Proxy Statement for the 2001 Stockholders Meeting
to be held on May 21, 2002 under the caption "Executive Compensation," not
including the report of the compensation committee, the report of the Audit
committee and the stock performance graph. Pursuant to General Instruction G(3)
to the Form 10-K, the Company's Proxy Statement for the 2001 Stockholders
Meeting to be held on May 21, 2002 will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
Information regarding person or group that may be deemed to be the
beneficiary of more than 5% of the Company's common stock is incorporated herein
by reference to the Company's Proxy Statement under the caption "Stock
Ownership."
Information regarding security ownership of management is
incorporated herein by reference to the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on May 21, 2002 under the caption
"Information with Respect to the Nominees, Continuing Directors and Named
Executive Officers of the Company." Pursuant to General Instructions G(3) to the
Form 10-K, the Company's Proxy Statement for the 2001 Stockholders Meeting to be
held on May 21, 2002 will be filed with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year covered by this Form
10-K.
53
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
Information regarding certain relationships and related transactions is
incorporated herein by reference to the company's Proxy Statement for the 2001
Stockholders Meeting to be held on May 21, 2002 under the caption "Transactions
With Certain Related Persons". Pursuant to General Instruction G(3) to the Form
10-K, the Company's Proxy Statement for the 2001 Stockholders Meeting to be held
on May 21, 2002 will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- --------------------------------------------------------------------------
1. Financial Statements
The following consolidated financial statements are included in the
Company's Annual Report for the fiscal year ended December 31, 2001 and
are incorporated herein by reference:
- Consolidated Statements of Financial Condition as of December 31,
2001 and 2000
- Consolidated Statements of Income for the Years Ended December 31,
2001, 2000 and 1999
- Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999
- Consolidated Statements of Cash Flows for the Years Ended December
31, 2001, 2000 and 1999
- Notes to Consolidated Financial Statements
- Independent Auditors' Report
The remaining information appearing in the Annual Report is not deemed
to be filed as part of this report, except as expressly provided
herein.
(a) 2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 2001
None.
54
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
- ------
2.1 Agreement and Plan of Merger, dated as of May 25, 1998, by and between
Roslyn Bancorp, Inc. and T R Financial Corp./1/
2.2 First Amendment, dated as of January 23, 1999, to the Agreement and Plan
of Merger, dated as of May 25, 1998, by and between Roslyn Bancorp, Inc.
And T R Financial Corp./2/
3.1 Certificate of Incorporation of Roslyn Bancorp, Inc./3/
3.2 Certificate of Amendment to Certificate of Incorporation of Roslyn
Bancorp, Inc./4/
3.3 Third Amended and Restated Bylaws of Roslyn Bancorp, Inc./5/
4.0 Form of Stock Certificate of Roslyn Bancorp, Inc./3/
4.1 Shareholder Protection Rights Agreement, dated as of September 26, 2000,
between Roslyn Bancorp, Inc. and Registrar and Transfer Company as Rights
Agent /6/
4.3 Form of Note for Senior Debt Securities/7/
10.1 Employment Agreement between Roslyn Bancorp, Inc. and Joseph L.
Mancino/8/
10.2 Employment Agreement between Roslyn Savings Bank and Joseph L. Mancino/8/
10.3 Employment Agreement between Roslyn Bancorp, Inc. and John R. Bransfield,
Jr./8/
10.4 Employment Agreement between Roslyn Savings Bank and John R. Bransfield,
Jr./8/
10.5 Employment Agreement between Roslyn Bancorp, Inc. and John M.
Tsimbinos/8/
10.6 Employment Agreement between Roslyn Savings Bank and John M. Tsimbinos/9/
10.7 The Roslyn Savings Bank Management Supplemental Retirement Plan/3/
10.8 Roslyn Bancorp, Inc. 1997 Stock-Based Incentive Plan/10/
10.9 Supplemental Executive Retirement Plan of Roosevelt Savings Bank, as
amended and restated as of March 16, 1993/11/
10.10 First Amendment to the Supplemental Executive Retirement Plan of
Roosevelt Savings Bank, as amended and restated/12/
10.11 T R Financial Corp. 1993 Incentive Stock Option Plan, amended and
restated as of January 23, 1997/13/
10.12 Benefit Restoration Plan for the Roslyn Savings Bank/14/
10.13 Roslyn Bancorp, Inc 2001 Stock-Based Incentive Plan/15/
11.0 Statement re: Computation of per Share Earnings (incorporated by
reference to Note 16 to Notes to Consolidated Statements - Part IV, Item
14)
13.0 2001 Annual Report
21.0 Subsidiary information is incorporated by reference to "Part I -
Subsidiary Activities"
23.0 Consent of KPMG LLP
Notes
- -----
1. Incorporated by reference into this document from the Registration
Statement on Form S-4, and any amendments thereto, Registration No.
333-67359, filed with the Securities and Exchange Commission on November
16, 1998.
2. Incorporated by reference into this document from the Form 8-K, and any
amendments thereto, Commission File No. 0-28886, filed with the Securities
and Exchange Commission on January 28, 1999.
3. Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1, and any amendments thereto,
Registration Statement No. 333-10471, filed with the Securities and
Exchange Commission on August 20, 1996.
4. Incorporated by reference into this document from the Exhibits to the
Company's quarterly report on Form 10-Q, Commission File No. 0-28886, filed
with the Securities and Exchange Commission on August 13, 1999.
5. Incorporated by reference into this document from the Exhibits to the
Company's quarterly report on
55
Form 10-Q, Commission File No. 0-28886, filed with the Securities and
Exchange Commission on August 10, 2000.
6. Incorporated by reference into this document from the Exhibits filed with
the Form 8-A, and any amendments thereto, Commission File No. 0-28886,
filed with the Securities and Exchange Commission on September 29, 2000.
7. Incorporated by reference into this document from Exhibits to the
Registrant Statement on Form S-3, and any amendments thereto,
Registration No. 333-67282, filed with the Securities and Exchange
Commission on August 10, 2001.
8. Incorporated by reference into this document from the Exhibits filed with
the Form 10-K and any amendments thereto, Commission File No. 0-28886,
filed with the Securities and Exchange Commission on March 31, 1999.
9. Incorporated by reference into this document from the Exhibits to the
Company's quarterly report on Form 10-Q, Commission File No. 0-28886,
filed with the Securities and Exchange Commission on May 17, 1999.
10. Incorporated by reference into this document from the Company's Proxy
Statement, Commission File No. 0-28886, filed with the Securities and
Exchange Commission on June 6, 1997.
11. Incorporated by reference into this document from the Exhibits to T R
Financial Corp.'s Annual Report on Form 10-K for fiscal year 1993,
Commission File No. 0-21386, filed with the Securities and Exchange
Commission on March 30, 1994.
12. Incorporated by reference into this document from the Exhibits to T R
Financial Corp.'s Annual Report on Form 10-K for fiscal year 1995,
Commission File No. 0-21386, filed with the Securities and Exchange
Commission on March 27, 1996 and as amended as of March 29, 1996.
13. Incorporated by reference to the Exhibits to T R Financial Corp.'s
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders,
Commission File No. 0-21386, filed with the Securities and Exchange
Commission on March 19, 1997.
14. Incorporated by reference into this document from the Registration
Statement on Form S-8, and any amendments thereto, Registration No.
333-49790, filed with the Securities and Exchange Commission on
November 13, 2000.
15. Incorporated by reference into this document from the Company's Proxy
Statement, Commission File No. 0-28886, filed with the Securities and
Exchange Commission on April 19, 2001.
56
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.
Roslyn Bancorp, Inc.
------------------------------------------
(Registrant)
/s/ Joseph L. Mancino March 13, 2002
------------------------------------------ --------------
Joseph L. Mancino, Vice Chairman of the
Board, President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
- ---- ----- -----
/s/ Joseph L. Mancino Vice Chairman of the Board, President, March 13, 2002
- -------------------------------- --------------
Joseph L. Mancino & Chief Executive Officer
/s/ John M. Tsimbinos Chairman of the Board March 13, 2002
- -------------------------------- --------------
John M. Tsimbinos
/s/ John R. Bransfield, Jr. Vice Chairman of the Board March 13, 2002
- -------------------------------- --------------
John R. Bransfield, Jr.
/s/ Michael P. Puorro Treasurer & Chief Financial Officer March 13, 2002
- -------------------------------- --------------
Michael P. Puorro
/s/ Thomas J. Calabrese, Jr. Director March 13, 2002
- -------------------------------- --------------
Thomas J. Calabrese, Jr.
/s/ Maureen E. Clancy Director March 13, 2002
- -------------------------------- --------------
Maureen E. Clancy
/s/ Thomas A. Doherty Director March 13, 2002
- -------------------------------- --------------
Thomas A. Doherty
/s/ Robert G. Freese Director March 13, 2002
- -------------------------------- --------------
Robert G. Freese
/s/ Leonard Genovese Director March 13, 2002
- -------------------------------- --------------
Leonard Genovese
57
SIGNATURES (Continued)
NAME TITLE DATE
- ---- ----- -----
/s/ Dr. Edwin W. Martin, Jr. Director March 13, 2002
- ------------------------------ --------------
Dr. Edwin W. Martin, Jr.
/s/ Victor C. McCuaig Director March 13, 2002
- ------------------------------ --------------
Victor C. McCuaig
/s/ James E. Swiggett Director March 13, 2002
- ------------------------------ --------------
James E. Swiggett
/s/ Spiros J. Voutsinas Director March 13, 2002
- ------------------------------ --------------
Spiros J. Voutsinas
/s/ Richard C. Webel Director March 13, 2002
- ------------------------------ --------------
Richard C. Webel
58