Back to GetFilings.com
1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSACTION PERIOD FROM TO
0-23229
(COMMISSION FILE NUMBER)
INDEPENDENCE COMMUNITY BANK CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3387931
(STATE OR OTHER JURISDICTION OF INCORPORATION
OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
195 MONTAGUE STREET, BROOKLYN, NEW YORK 11201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(718) 722-5300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this 10-K [ ]
As of June 24, 1998, there were 76,043,750 shares of the Registrant's
common stock outstanding. The aggregate market value of the Registrant's common
stock (based on closing price quoted on June 24, 1998) held by non-affiliates
was approximately $1,101,561,064.
================================================================================
2
PART I
ITEM 1. BUSINESS
INDEPENDENCE COMMUNITY BANK CORP.
Independence Community Bank Corp. (the "Holding Company") is a Delaware
corporation organized in June 1997 by Independence Savings Bank (the "Bank") for
the purpose of becoming a savings and loan holding company of the Bank. The
Bank's reorganization to the stock form of organization and the concurrent offer
and sale of the Holding Company's common stock was completed on March 13, 1998
(the "Conversion"). The only significant assets of the Holding Company are the
capital stock of the Bank, the loan to the Employee Stock Ownership Plan
("ESOP"), and the portion of the net Conversion proceeds retained by the Holding
Company. The business and management of the Holding Company consists primarily
of the business and management of the Bank (collectively the "Company"). The
Company neither owns nor leases any property, but instead uses the premises and
equipment of the Bank. At the present time, the Holding Company does not intend
to employ any persons other than officers of the Bank, and the Holding Company
will utilize the support staff of the Bank from time to time. Additional
employees will be hired as appropriate to the extent the Holding Company expands
or changes its business in the future.
The Company's executive office is located at 195 Montague Street, Brooklyn,
New York 11201, and its telephone number is (718) 722-5300.
INDEPENDENCE SAVINGS BANK
The Bank's principal business is gathering deposits from customers within
its market area and investing those deposits, primarily in multi-family
residential mortgage loans, single-family residential loans (including
cooperative apartment loans), commercial real estate loans, consumer loans,
commercial business loans, mortgage-backed and mortgage-related securities and
investment securities. The Bank's revenues are derived principally from interest
on its loan and securities portfolios while its primary sources of funds are
deposits, loan amortization and prepayments and maturities of mortgage-backed
and mortgage-related securities and investment securities. The Bank offers a
variety of loan and deposit products to its customers. Though not currently
being offered, the Bank has in the past, and may in the future make available
other financial instruments, such as annuity products and mutual funds, through
arrangements with a third party.
MARKET AREA AND COMPETITION
The Company has been, and intends to continue to be, a community-oriented
financial institution providing financial services and loans for housing within
its market area. The Company oversees its 34 branch office network through its
headquarters located in downtown Brooklyn. The Company operates 18 branch
offices in the borough of Brooklyn and another 10 in the borough of Queens with
the remainder spread among Manhattan, the Bronx, Staten Island and Nassau
County. The Company gathers deposits primarily from the communities and
neighborhoods in close proximity to its branches. Although the Company lends
throughout the New York City metropolitan area, the substantial majority of its
real estate loans are secured by properties located in the boroughs of Brooklyn
and Queens and, to a lesser extent, Manhattan. The Company's customer base, like
the urban neighborhoods which it serves, is racially and ethnically diverse and
is comprised of mostly middle-income households and to a lesser degree, low to
moderate income households. The Company has sought to set itself apart from its
many competitors by tailoring its products and services to meet the needs of its
customers, by emphasizing customer service and convenience and by being actively
involved in community affairs in the neighborhoods and communities which it
serves. As part of the Company's competitive strategy to attract loyal deposit
customers, the Company has historically been a low service fee provider of a
variety of savings and checking account products. The Company believes that its
commitment to customer and community service has permitted it to build strong
customer identification and loyalty which is essential to the Company's ability
to compete effectively.
1
3
In the past several years, the New York City metropolitan area has
benefited from the resurgence and growth in employment and profitability
experienced by national securities and investment banking firms, many of which
are domiciled in Manhattan, as well as the growth and profitability of other
financial service companies, such as money center banks. The strength of the
national economy and of the United States equities markets has contributed
significantly to the recent growth and increased profitability of Wall Street
securities and investment banking firms. Historically, the metropolitan area has
also benefited from being the corporate headquarters of many large industrial
and commercial companies which have, in turn, attracted many smaller companies,
particularly within the service industry. The metropolitan area also offers well
developed transportation and communication systems and a highly skilled and
educated work force. In spite of its size and diversity, the New York City
metropolitan area economy is affected by the level of business activity and
profitability within the securities and financial services industries. During
the late 1980s and early 1990s, the securities and financial services industries
experienced a significant decline in business activity and profitability which,
when combined with a period of weakness in the national economy, resulted in
higher levels of unemployment in the New York City metropolitan area. These
conditions and other factors contributed to an overall decline in the value of
commercial and residential real estate. While real estate values have
substantially recovered, no assurance can be given that such conditions could
not reoccur.
The Company faces significant competition both in making loans and in
attracting deposits. There are a significant number of financial institutions
located within the Company's market area, many of which have greater financial
resources than the Company. The Company's competition for loans comes
principally from commercial banks, savings banks, savings associations,
insurance companies and mortgage-banking companies. Management anticipates that
competition for both multi-family residential mortgage loans and single-family
residential loans will continue to increase in the future. Accordingly, no
assurance can be given that the Company will be able to maintain the volume of
originations of such loans at current levels. The Company's most direct
competition for deposits has historically come from savings associations,
savings banks, commercial banks and credit unions. The Company faces additional
competition for deposits from short-term money market funds and other corporate
and government securities funds, direct purchases of government securities, and
from other financial institutions such as brokerage firms and insurance
companies. Competition may also increase as a result of the elimination of
restrictions on interstate operations of financial institutions.
FORWARD LOOKING INFORMATION
Statements contained herein which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties 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 factors
include, but are not limited to, changes in general economic and market
conditions, and the development of an interest rate environment that adversely
affects the interest rate spread or other income anticipated from the Company's
operations and investments.
LENDING ACTIVITIES
GENERAL. At March 31, 1998, the Company's net loan portfolio totaled $2.75
billion, which represented 52.6% of the Company's $5.22 billion of total assets.
The single largest category of loans in the Company's portfolio is multi-family
residential mortgage loans, which are secured primarily by apartment buildings
and which totaled $1.61 billion or 57.6% of the total loan portfolio at March
31, 1998. The second and third largest categories are single-family residential
mortgage loans and cooperative apartment loans which totaled $505.1 million or
18.2% and $380.9 million or 13.7%, respectively, of the total loan portfolio at
such date. These three
2
4
categories accounted for 89.5% of the Company's total loan portfolio at March
31, 1998. The remainder of the loan portfolio was comprised primarily of $178.5
million of commercial and other real estate loans, $43.9 million of student
loans, $31.6 million of commercial business loans, $15.6 million of home equity
loans and lines of credit and $30.9 million of consumer and other loans.
The types of loans that the Company may originate are subject to federal
and state law and regulations. Interest rates charged by the Company on loans
are affected principally by the demand for such loans and the supply of money
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, the monetary
policy of the federal government, including the Federal Reserve Board,
legislative tax policies and governmental budgetary matters.
3
5
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loans at the dates indicated.
AT MARCH 31,
----------------------------------------------------------------------------------------
1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ----------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family residential $ 505,051 18.2% $ 552,745 21.8% $ 534,539 22.8% $ 376,047
Multi-family residential(1) 1,605,058 57.6 1,365,124 53.9 1,208,039 51.6 1,076,969
Commercial and other real
estate 178,463 6.4 158,336 6.3 162,799 6.9 119,890
---------- ----- ---------- ----- ---------- ----- ----------
Total principal balance --
mortgage loans 2,288,572 82.2 2,076,205 82.0 1,905,377 81.3 1,572,906
Less:
Net deferred fees 9,403 0.3 9,645 0.4 10,451 0.4 11,206
---------- ----- ---------- ----- ---------- ----- ----------
Total mortgage loans 2,279,169 81.9 2,066,560 81.6 1,894,926 80.9 1,561,700
Other loans:
Cooperative apartment loans 380,866 13.7 348,029 13.7 340,507 14.5 360,434
Student loans 43,946 1.6 45,262 1.8 45,947 1.9 47,823
Home equity loans and lines 15,625 0.6 19,545 0.8 23,458 1.0 27,232
Consumer and other loans 30,869 1.1 27,005 1.1 20,611 0.9 18,151
Commercial business loans 31,550 1.1 25,249 1.0 18,003 0.8 16,866
---------- ----- ---------- ----- ---------- ----- ----------
Total principal balance --
other loans 502,856 18.1 465,090 18.4 448,526 19.1 470,506
Less:
Unearned discount and net
deferred fees 138 0.0 130 0.0 116 0.0 95
---------- ----- ---------- ----- ---------- ----- ----------
Total other loans 502,718 18.1 464,960 18.4 448,410 19.1 470,411
Total loans receivable 2,781,887 100.0% 2,531,520 100.0% 2,343,336 100.0% 2,032,111
---------- ===== ---------- ===== ---------- ===== ----------
Less:
Allowance for loan losses 36,347 27,024 20,528 11,849
---------- ---------- ---------- ----------
Loans receivable, net $2,745,540 $2,504,496 $2,322,808 $2,020,262
========== ========== ========== ==========
AT MARCH 31,
----------------------------------
1995 1994
-------- ----------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
-------- ---------- --------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family residential 18.5% $ 308,960 18.1%
Multi-family residential(1) 53.0 896,605 52.7
Commercial and other real
estate 5.9 95,172 5.6
----- ---------- -----
Total principal balance --
mortgage loans 77.4 1,300,737 76.4
Less:
Net deferred fees 0.6 10,529 0.6
----- ---------- -----
Total mortgage loans 76.8 1,290,208 75.8
Other loans:
Cooperative apartment loans 17.8 288,381 16.9
Student loans 2.4 47,609 2.8
Home equity loans and lines 1.3 31,875 1.9
Consumer and other loans 0.9 28,100 1.7
Commercial business loans 0.8 17,694 1.0
----- ---------- -----
Total principal balance --
other loans 23.2 413,659 24.3
Less:
Unearned discount and net
deferred fees 0.0 1,103 0.1
----- ---------- -----
Total other loans 23.2 412,556 24.2
Total loans receivable 100.0% 1,702,764 100.0%
===== ---------- =====
Less:
Allowance for loan losses 8,770
----------
Loans receivable, net $1,693,994
==========
- - ---------------
(1) Includes at March 31, 1998 and March 31, 1997, $354.1 million and $294.9
million, respectively, of loans secured by mixed-use (combined residential
and commercial use)properties.
4
6
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of the Company's loans at March
31, 1998, as well as the dollar amount of such loans which are scheduled to
mature after one year which have fixed or adjustable interest rates. Demand
loans, loans having no schedule of repayments and no stated maturity and
overdraft loans are reported as due in one year or less.
PRINCIPAL REPAYMENTS CONTRACTUALLY DUE IN YEAR(S) ENDED MARCH 31,
-----------------------------------------------------------------------------------------
TOTAL AT
MARCH 31, 2003- 2009-
1998 1999 2000 2001 2002 2008 2014 THEREAFTER
---------- -------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
Mortgage loans:
Single-family residential(1) $ 472,342 $ 737 $ 996 $ 950 $ 2,553 $ 92,174 $110,069 $264,863
Multi-family residential 1,605,058 92,122 125,438 231,112 368,356 736,519 50,821 690
Commercial and other real estate 178,463 20,790 15,379 24,913 31,947 76,963 3,409 5,062
Other loans:
Cooperative apartment loans 380,866 58 73 276 1,118 32,293 42,956 304,092
Consumer and commercial business
loans(2) 121,990 54,154 13,110 10,976 11,354 23,294 5,461 3,641
---------- -------- -------- -------- -------- -------- -------- --------
Total(3) $2,758,719 $167,861 $154,996 $268,227 $415,328 $961,243 $212,716 $578,348
========== ======== ======== ======== ======== ======== ======== ========
- - ---------------
(1) Does not include $32.7 million of single-family residential loans serviced
by others.
(2) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
(3) Of the $2.59 billion of loan principal repayments contractually due after
March 31, 1999, $1.92 billion have fixed rates of interest and $672.8
million have adjustable rates of interest.
LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. The Company originates
both adjustable-rate mortgage loans and fixed-rate mortgage loans, the volume of
which is dependent upon customer demand and market rates of interest. The
Company generally retains all adjustable-rate loans and fixed-rate residential
mortgage loans with contractual terms of 15 years or less for its portfolio. In
the past, the Company generally did not purchase whole mortgage loans or loan
participations. However, during the fourth quarter of fiscal 1996 the Company
entered into an agreement with a local mortgage-banking firm to purchase
conventional (loans not fully or partially guaranteed by the Federal Housing
Administration ("FHA") or the Department of Veterans' Affairs ("VA")),
single-family residential mortgage loans and cooperative apartment loans
originated by such mortgage banking firm on the Company's behalf. During the
year ended March 31, 1998, the Company purchased $11.3 million and $12.7
million, respectively, of conventional single-family residential mortgage loans
and cooperative loans from such mortgage banker. The Company generally sells
(with servicing retained by the Company) newly originated fixed-rate,
single-family residential mortgage loans with contractual terms of more than 15
years in the secondary market to Fannie Mae ("FNMA") and Freddie Mac ("FHLMC").
It has also, on occasion, sold cooperative apartment loans and multi-family
residential mortgage loans. As of March 31, 1998, the Company serviced $211.2
million of loans for others. The Company generally receives an annual fee equal
to .25% to .375% of the outstanding principal balance for servicing loans sold.
In connection with the review of the Company's application for conversion
by the state banking regulators, the Company has undertaken to make a good faith
effort, consistent with safe and sound banking practices, to provide housing
related financing to borrowers and/or projects located in the Bronx and in upper
Manhattan totaling $22.0 million and $16.0 million, respectively, over the two
year period commencing January 1, 1998 of which $14.0 million and $9.0 million,
respectively, are to consist of loans secured by properties in low and moderate
income ("LMI") census tracts, loans to LMI borrowers, loans to community
development projects or qualified investments (subject to certain limitations).
The commitment can be satisfied by originations, purchases or refinancing of
permanent or construction loans for housing related projects or by community
development loans or other "qualified investments" as defined in federal
regulations promulgated pursuant to the Community Reinvestment Act ("CRA"). The
Company will use its good faith efforts to achieve at least one-
5
7
third of the lending commitments during the year ended December 31, 1998. In
addition, the Company agreed to expand its CRA assessment area to include
Manhattan, the Bronx and Nassau County in their entirety. The time frame for
compliance with the commitment is contingent upon the financial capability of
the Company, prevailing market and economic conditions and compliance with safe
and sound banking practices. In addition, in December 1997 the Company entered
into an agreement (the "ICP Agreement") with Inner City Press/Community on the
Move, a local community group ("ICP"), pursuant to which it agreed to use its
best efforts to lend in the Bronx and upper Manhattan at least $27.0 million and
$20.0 million, respectively, over the two year period commencing January 1,
1998, of which at least $18.0 million and $16.0 million, respectively, are to
consist of loans secured by properties in LMI census tracts. For purposes of the
ICP Agreement, "lend" means loans, community development loans or qualified
investments as defined in federal regulations implementing the CRA. In addition,
under the terms of the ICP Agreement the Company is required to use its best
efforts to lend in certain specified LMI areas of Brooklyn an aggregate of at
least $15.0 million in the two year period commencing January 1, 1998. In
addition, during this two year period, the Company agreed to open two automatic
teller machines ("ATM") in LMI census tracts in the Bronx and/or upper Manhattan
or a new branch office within certain specified areas of the Bronx or upper
Manhattan. In connection with the review of the Company's application by Federal
regulators, the Company agreed, subject to principles of safety and soundness,
to meet certain lending requirements substantially identical to those set forth
in the ICP Agreement. Management does not believe that compliance with the
foregoing commitments will have a material effect on the results of operations
or financial condition of the Company.
6
8
LOAN ACTIVITY. The following table shows the activity in the Company's
loan portfolio during the periods indicated.
YEAR ENDED MARCH 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
Total loans held at beginning of period $2,541,295 $2,353,903 $2,043,412
Originations of loans:
Single-family residential 45,476 106,688 31,296
Multi-family residential 410,106 225,906 144,560
Commercial and other real estate 35,679 49,924 18,055
Other loans:
Cooperative apartment loans 82,006 115,685 23,862
Consumer and commercial business loans(1) 47,320 43,009 41,195
---------- ---------- ----------
Total originations 620,587 541,212 258,968
Purchases of loans:
Single-family residential 11,346 19,097 171,608
Multi-family residential -- -- 31,126
Commercial and other real estate -- -- 67,084
Other loans:
Cooperative apartment loans 12,658 11,724 2,317
Consumer and commercial business loans(1) -- -- 3,864
---------- ---------- ----------
Total purchases 24,004 30,821 275,999(2)
---------- ---------- ----------
Total originations and purchases 644,591 572,033 534,967
Loans sold:
Single-family residential 17,470 4,066 5,693
Commercial and other real estate -- 1,494(3) --
Other loans:
Cooperative apartment loans 1,668 67,658 1,123
---------- ---------- ----------
Total sold 19,138 73,218 6,816
Repayments(4) 375,320 311,423 217,660
---------- ---------- ----------
Net loan activity 250,133 187,392 310,491
---------- ---------- ----------
Total principal balance loans held at end of
period 2,791,428 2,541,295 2,353,903
Less:
Discount on loans purchased and net deferred fees at
end of period 9,541 9,775 10,567
---------- ---------- ----------
Total loans receivable at end of period $2,781,887 $2,531,520 $2,343,336
========== ========== ==========
- - ---------------
(1) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
(2) Includes $274.1 million of loans acquired in connection with the acquisition
of Bay Ridge Bancorp, Inc. ("Bay Ridge") in January 1996.
(3) Reflects sale of certain non-performing loans acquired in the Bay Ridge
acquisition.
(4) Includes loans charged off or transferred to other real estate owned.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. The Company
originates multi-family (five or more units) residential mortgage loans which
are secured primarily by apartment buildings, cooperative apartment buildings
and mixed-use (combined residential and commercial) properties located in the
Company's market area. At March 31, 1998, the Company had multi-family
residential mortgage loans totaling $1.61 billion in its portfolio, comprising
57.6% of the total loan portfolio. Historically, the Company has been an active
multi-family residential mortgage lender
7
9
and this portion of the Company's loan portfolio has grown substantially during
the last several years, reflecting the Company's emphasis on such lending. The
Company intends to continue to emphasize multi-family residential mortgage
lending within its market area. The main competitors for loans in this market
tend to be other local banks and savings institutions as well as insurance
companies. Multi-family residential mortgage loans in the Company's portfolio
generally range in amount from $500,000 to $3.0 million and have an average size
of approximately $1.0 million. The Company's multi-family residential mortgage
loans are comprised primarily of middle-income housing located in the boroughs
of Brooklyn, Queens, and to a lesser extent, Manhattan.
When approving new multi-family residential mortgage loans, the Company
follows a set of underwriting standards which it believes are conservative, and
which generally permit a maximum loan-to-value ratio of 75% based on an
appraisal performed by either one of the Company's in-house licensed and
certified appraisers or by a Company-approved licensed and certified appraiser
(whose appraisal is reviewed by a Company licensed and certified appraiser), and
sufficient cash flow from the underlying property to adequately service the
debt. A minimum debt service ratio of 1.3 generally is required on multi-family
residential mortgage loans. The Company also considers the financial resources
of the borrower, the borrower's experience in owning or managing similar
properties, the market value of the property and the Company's lending
experience with the borrower. The Company's current lending policy requires that
loans in excess of $300,000 be approved by two non-officer directors of the
Credit Committee of the Board of Directors.
The Company's multi-family residential mortgage loans include loans secured
by cooperative apartment buildings. In underwriting these loans, the Company
applies the normal underwriting criteria used with other multi-family
properties. In addition, the Company generally will not make a loan on a
cooperative apartment building unless at least 65% of the total units in the
building are owner-occupied. However, the Company will consider making a loan
secured by a cooperative apartment building if it has a large positive rental
income which significantly exceeds maintenance expense. At March 31, 1998, the
Company had $370.5 million of loans, located primarily in Manhattan, secured by
cooperative apartment buildings.
The Company's typical multi-family residential mortgage loan is originated
with a term to maturity of 5 to 10 years (with principal due in full at such
time). These loans have a fixed-rate of interest and may be extended by the
borrower, upon payment of an additional fee, for five additional years at an
interest rate based on the 5-year Federal Home Loan Bank of New York ("FHLB")
advance rate plus a margin, which rate may not be below the initial interest
rate of the loan. The Company recently has been offering loans which have fixed-
rates for the first five years then adjust at the end of the fifth year and
again at the end of the seventh or eighth year to pre-set rates established at
the time of origination. Under the terms of the Company's multi-family
residential mortgage loans, the principal balance generally is amortized at the
rate of 1% per year. Prepayment penalties are generally assessed on these loans.
In addition to multi-family residential mortgage loans, the Company
originates commercial real estate loans which, at March 31, 1998, amounted to
$178.5 million or 6.4% of total loans. This portfolio is comprised primarily of
loans secured by commercial and industrial properties, nursing homes, funeral
homes, churches and synagogues, schools and small shopping centers located
within the Company's market area. The Company's commercial real estate loans
generally range in amount from $50,000 to $1.5 million, and have an average size
of approximately $700,000. The Company originates commercial real estate loans
following similar underwriting standards as applied to multi-family residential
mortgage loans. In addition, the Company reviews rent or lease income, rent
rolls, business receipts, the borrower's credit history and business experience,
and comparable values when underwriting commercial real estate loans.
Loans secured by apartment buildings and other multi-family residential and
commercial properties generally are larger and considered to involve a greater
degree of risk than single-family residential mortgage loans. Payments on loans
secured by multi-family residential and commercial properties are often
dependent on the successful operation or management of the properties and are
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Company seeks to minimize these risks through its underwriting
policies, which generally limit origination of such loans to the Company's
market area and require such loans to be qualified on, among
8
10
other things, the basis of the property's income and
debt service ratio. Such loans accounted for 20.1% of total non-performing loans
at March 31, 1998.
SINGLE-FAMILY RESIDENTIAL AND COOPERATIVE APARTMENT LENDING. The Company
offers residential first mortgage loans secured primarily by owner-occupied
single family (one to four units) residences. The Company also originates loans
to individuals secured by shares of individual cooperative apartments. At March
31, 1998, $505.1 million or 18.2% and $380.9 million or 13.7% of the Company's
total loan portfolio consisted of single-family residential mortgage loans and
cooperative apartment loans, respectively. The substantial majority of these
loans are secured by properties located in the boroughs of Brooklyn, Queens and
Manhattan. The Company offers conforming and non-conforming fixed-rate and
adjustable-rate mortgage loans ("ARMS") with maturities of up to 30 years and a
maximum loan amount generally not exceeding $1.0 million. At March 31, 1998,
adjustable-rate loans represented $615.2 million of the aggregate total of
single-family residential mortgage loans and cooperative apartments loans.
The Company's residential loan originations are generally obtained from
existing or past loan customers, depositors of the Company, members of the local
community and referrals from attorneys, realtors and independent mortgage
brokers who refer members of the communities located in the Company's market
area. The Company has agreements with mortgage-banking firms and with mortgage
brokers with respect to the origination of single-family residential mortgage
loans and cooperative apartment loans for the Company. Under the terms of the
agreements with the mortgage bankers, the mortgage bankers originate and sell
loans to the Company. However, the mortgage brokers process loan applications on
the Company's behalf using the Company's loan documents. In both cases, the
loans are originated and underwritten in accordance with the Company's
underwriting policies, and the Company retains approval authority with respect
to loans it considers for its portfolio. The Company also conducts extensive
print and radio advertising, the majority of which is for its mortgage products.
The Company is a participating seller/servicer with the FNMA and the FHLMC, and
generally underwrites its fixed-rate single-family residential mortgage loans to
conform with standards required by these agencies. Included in single-family
residential loans is a modest amount of loans partially or fully guaranteed by
the FHA or the VA.
The Company continues to place a portion of its lending emphasis in the
cooperative apartment loan market. Although the collateral for cooperative
apartment loans consists of shares in a cooperative housing corporation (a
corporation whose primary asset is the underlying real estate), cooperative
apartment loans generally are treated as single-family residential mortgage
loans. At March 31, 1998, such loans amounted to $380.9 million or 13.7% of the
Company's total loan portfolio. Although the Company's cooperative apartment
loans have in the past related to properties located in the boroughs of
Manhattan, Brooklyn and Queens, in recent periods substantially all of such
loans originated or purchased have related to properties located in Manhattan,
with a significant number of such loans having original loan balances in excess
of $300,000.
The Company's single-family residential mortgage loans and cooperative
apartment loans include ARMs and fixed-rate loans. The Company currently offers
a variety of ARMs, all of which have a 30 year term to maturity, certain of
which can convert to fixed-rate loans. The Company's ARMs currently include
loans which adjust every one or three years as well as loans with an established
rate for the initial five or seven years and which adjust every three years
thereafter. The interest rate on the Company's ARMs fluctuates based upon a
spread above the average yield on United States Treasury securities, adjusted to
a constant maturity which corresponds to the adjustment period of the loan (the
"U.S. Treasury constant maturity index") as published weekly by the Board of
Governors of the Federal Reserve System. In addition, ARMs generally are subject
to limitations on interest increases or decreases of 2% per adjustment period
and an interest rate cap during the life of the loan established at the time of
origination.
The retention of ARMs in the Company's loan portfolio helps reduce the
Company's exposure to increases in interest rates. However, ARMs generally pose
credit risks different from the risks inherent in fixed-rate loans, primarily
because as interest rates rise, the underlying payments of the borrower rise,
thereby increasing the potential for defaults. At the same time, the
marketability of the underlying property may be adversely affected. In order to
minimize risks, ARM borrowers are qualified at the
9
11
rate which would be in effect after the first interest rate adjustment, if that
rate is higher than the initial rate. The Company has not in the past, nor does
it currently, originate negative amortization ARMs.
The Company's fixed-rate, single-family residential mortgage loans and
cooperative apartment loans have terms of up to 30 years. Interest rates charged
on fixed-rate loans are competitively priced based on market conditions. The
Company generally originates fixed-rate loans with terms and in amounts
conforming to the maximum guidelines of the FNMA and the FHLMC.
The Company generally sells its newly originated fixed-rate, single-family
residential mortgage loans with contractual terms of more than 15 years in the
secondary market to agencies such as the FNMA and the FHLMC. The Company
generally retains the servicing rights on all such loans sold. For the year
ended March 31, 1998 the Company sold single-family residential mortgage loans
totaling $17.5 million.
Under the Company's underwriting guidelines, ARMs can be originated with
loan-to-value ratios of up to 80%. Fixed-rate, single-family residential
mortgage loans can be originated with loan-to-value ratios of up to 90%,
provided, however, that private mortgage insurance is required for loans with
loan-to-value ratios in excess of 80%.
In order to provide financing for low and moderate income home buyers, the
Company participates in residential mortgage programs and products sponsored by,
among others, the State of New York Mortgage Authority, the Community
Preservation Corporation, Neighborhood Housing Services and the New York City
Co-op Pilot Program. Various programs sponsored by these groups provide low and
moderate income households with fixed-rate mortgage loans which are generally
below prevailing fixed market rates and which allow below market down payments.
Substantially all of the Company's mortgage loans include due-on-sale
clauses which provide the Company with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of the
property without the Company's consent. It is the Company's policy to enforce
due-on-sale provisions within the applicable regulations and guidelines imposed
by New York law.
CONSUMER LENDING ACTIVITIES. The Company offers a variety of consumer
loans including student loans, home equity loans and lines of credit, automobile
loans, passbook loans and credit card loans in order to provide a full range of
financial services to its customers. Such loans are obtained primarily through
existing and walk-in customers and direct advertising. At March 31, 1998, $90.4
million or 3.3% of the Company's total loan portfolio was comprised of consumer
loans.
The largest component of the Company's consumer loan portfolio is student
loans. The Company has been and continues to be an active originator of student
loans. Substantially all of these loans are originated under the auspices of the
New York State Higher Education Service Corporation ("NYSHESC"). Under the terms
of these loans, no repayment is due until the student's graduation, with 98% of
the principal guaranteed by the NYSHESC. The term and rates of these loans are
established by the NYSHESC. At March 31, 1998, such loans amounted to $43.9
million or 1.6% of the total loan portfolio.
The second largest component of the Company's consumer loan portfolio is
automobile loans. Automobile loans are originated directly with the Company's
customer, rather than through an automobile dealer. The car collateralizes the
loan, with the Company lending up to 80% of the value of the car. The loans
generally amortize over a two to five year period and can be used to purchase
either a new or used car. At March 31, 1998 87.7% of the outstanding balance of
$16.9 million represents loans for the purchase of a new automobile. The Company
generally does not participate in indirect automobile lending.
The third largest component of the Company's consumer loan portfolio is
home equity loans and lines which consist primarily of home equity lines of
credit. Home equity lines of credit are a form of revolving credit and are
secured by the underlying equity in the borrower's primary or secondary
residence. The Company's home equity lines of credit have interest rates that
adjust or float based on the Wall Street Journal Prime Rate ("WSJ Prime"),
loan-to-value ratios of 75% or less, and are generally for amounts of less than
$100,000 but can be as high as $300,000. Interest only payments are made during
the first five years with repayment of principal and interest required during
the final 15 years. The Company offers fixed-rate, fixed-term home im-
10
12
provement loans, which are also secured by the underlying equity in the
borrower's primary or secondary residence. At March 31, 1998, home equity lines
and loans amounted to $15.6 million, or 0.6% of the Company's total loan
portfolio and the Company had $3.5 million of unused commitments pursuant to
such equity lines of credit.
At March 31, 1998, the remaining $14.0 million of the Company's consumer
loan portfolio, which amounted to 0.5% of the Company's total loan portfolio,
was comprised primarily of loans secured by passbook loans and credit card loans
(the Company offers VISA cards on an issuer basis). Passbook loans, which are
loans secured by the borrower's deposits in the Company, totaled $8.8 million at
March 31, 1998, while credit card loans amounted to $1.8 million at such date.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans but generally involve more credit risk than
residential mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral. These risks are not as prevalent in
the case of the Company's consumer loan portfolio, however, because a high
percentage of the portfolio is comprised of home equity loans and lines of
credit which are secured by real estate and underwritten in a manner such that
they result in a lending risk which is similar to single-family residential
mortgage loans.
COMMERCIAL BUSINESS LENDING ACTIVITIES. The Company makes commercial
business loans directly to businesses located in its market area. The Company
targets small and medium sized businesses with the bulk of the loans being
originated for amounts less than $750,000. Applications for commercial business
loans are obtained primarily from existing customers, branch referrals and
direct inquiry. As of March 31, 1998 commercial business loans totaled $31.6
million or 1.1%, of the Company's total loan portfolio.
Commercial business loans originated by the Company generally have terms of
five years or less and adjustable interest rates tied to the WSJ Prime plus a
margin. Such loans are generally secured by real estate, receivables or
inventory and are backed by the personal guarantees of the principals of the
borrower. Commercial business loans generally have shorter terms to maturity and
provide higher yields than residential mortgage loans. Although commercial
business loans generally are considered to involve greater credit risk then
certain other types of loans, management intends to continue to offer commercial
business loans to small and medium sized businesses in its market area.
Furthermore, the Company intends to expand moderately its commercial business
lending program. In furtherance of such strategy, the Company recently increased
advertising and direct mail solicitations with respect to commercial business
loans and is in the process of increasing the number of commercial business loan
officers.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Board of Directors of the
Bank establishes lending authorities for individual officers as to its various
types of loan products. For multi-family residential mortgage loans, commercial
real estate loans, single-family residential mortgage loans and cooperative
apartment loans, the Executive Vice President and Mortgage Officer and a Vice
President have the authority to approve loans in amounts up to $300,000. Any
mortgage loan or cooperative apartment loan in excess of $300,000, however, must
also be approved by the President and at least two members of the Credit
Committee of the Board of Directors, which consists of various directors, the
composition of which is changed periodically. Consumer loans and commercial
business loans of less than $50,000 can be approved by an individual loan
officer, while loans between $50,000 and $300,000 must be approved by a Vice
President and an Executive Vice President. Any commercial business loan in
excess of $300,000 must also be approved by at least two members of the Credit
Committee of the Board of Directors.
The Company's policy limits the amount of credit related to mortgage loans
and cooperative share loans that can be extended to any one borrower to 15% of
the Bank's stockholder's equity. In addition, the Company's policy limits the
amount of commercial business loans that can be extended to any one borrower to
the greater of $2.0 million, 5% of the Bank's stockholder's equity or 10% of
total commercial business loans. 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
stockholder's equity if the loan is unsecured, or 25% of stockholder's equity if
the loan is secured.
11
13
For all single-family residential mortgage loans and cooperative apartment
loans originated by the Company, upon receipt of a completed loan application
from a prospective borrower, a credit report is ordered, income, assets and
certain other information are verified by an independent credit agency, and if
necessary, additional financial information is required to be submitted by the
borrower. An appraisal of the real estate is required, which is performed by an
independent appraiser except with respect to multi-family residential and
commercial real estate loans for which the appraisals are primarily conducted by
licensed and certified in-house appraisers. In addition, appraisals conducted by
independent appraisers are reviewed by the Company's in-house licensed and
certified appraisers. It is the Company's policy to require appropriate
insurance protection, including title and hazard insurance, on all mortgage
loans prior to closing. Other than cooperative apartment loans, borrowers
generally are required to advance funds for certain items such as real estate
taxes, flood insurance and private mortgage insurance, when applicable.
LOAN ORIGINATION AND LOAN FEES. In addition to interest earned on loans,
the Company receives loan origination fees or "points" for many of the loans it
originates. Loan points are a percentage of the principal amount of the mortgage
loan and are charged to the borrower in connection with the origination of the
loan. The Company currently offers a number of residential loans products on
which no points are charged.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
91, which addresses the accounting for non-refundable fees and costs associated
which originating or acquiring loans, the Company's loan origination fees and
certain related direct loan origination costs are offset, and the resulting net
amount is deferred and amortized over the contractual life of the related loans
as an adjustment to the yield of such loans. At March 31, 1998, the Company had
$9.5 million of such net deferred loan fees.
ASSET QUALITY
With the exception of guaranteed student loans and FHA or VA loans, the
Company generally places loans on non-accrual status when they are more than 90
days past due as to interest. Loans may be placed on non-accrual status earlier
if management believes that collection of interest is doubtful. For periods
prior to fiscal 1997, the Company continued to accrue interest on loans more
than 90 days past due if, in management's judgment, the full collection of
interest was probable. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned ("OREO")
until sold. Pursuant to Statement of Position ("SOP") 92-3, such assets are
carried at the lower of fair value minus estimated costs to sell the property,
or cost (generally the balance of the loan on the property at the date of
acquisition). After the date of acquisition, all costs incurred in maintaining
the property are expensed and costs incurred for the improvement or development
of such property are capitalized up to the extent of their net realizable value.
12
14
DELINQUENT LOANS The following table sets forth delinquencies in the
Company's loan portfolio as of the dates indicated:
AT MARCH 31, 1998 AT MARCH 31, 1997
------------------------------------------- -------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- -------------------- -------------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family residential 42 $3,908 84 $4,298 13 $ 535 56 $ 3,311
Multi-family residential 4 960 8 1,190 -- -- 3 1,918
Commercial and other mortgage
loans 5 590 5 1,009 -- -- 5 9,209
Other loans:
Cooperative apartment loans 8 316 19 509 4 196 13 427
Consumer and commercial
business loans(1) 226 1,271 481 2,019 225 1,004 300 1,757
--- ------ --- ------ --- ------ --- -------
Total 285 $7,045 597 $9,025 242 $1,735 377 $16,622
=== ====== === ====== === ====== === =======
Delinquent loans to total loans(3) 0.25% 0.32% 0.07% 0.65%
====== ====== ====== =======
AT MARCH 31, 1996
-------------------------------------------
60-89 DAYS 90 DAYS OR MORE
-------------------- --------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family residential 19 $1,007 53 $ 3,504
Multi-family residential 4 486 4 3,379
Commercial and other mortgage
loans 1 200 15 19,277
Other loans:
Cooperative apartment loans 3 183 8 355
Consumer and commercial
business loans(1) 204 888 243 1,571
--- ------ --- -------
Total 231 $2,764 323 $28,086(2)
=== ====== === =======
Delinquent loans to total loans(3 0.12% 1.19%
====== =======
- - ---------------
(1) Includes student loans, home equity loans and lines of credit, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
(2) Includes $9.5 million of loans acquired in the Bay Ridge acquisition.
(3) Total loans includes loans receivable less deferred loan fees and
unamortized discounts, net.
13
15
NON-PERFORMING ASSETS. The following table sets forth information with
respect to non-performing assets identified by the Company, including
non-performing loans and other real estate owned at the dates indicated. The
Company did not have any troubled debt restructuring at any of the dates
presented.
AT MARCH 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Mortgage loans:
Single-family residential $ 4,423 $ 2,474 $ 2,890 $ 2,074 $ 2,438
Multi-family residential 1,190 1,918 3,379 2,018 2,095
Commercial and other 4,782 11,155 12,600 1,975 2,033
Other loans:
Cooperative apartment loans 509 427 355 451 606
Consumer and commercial business
loans(1) 431 956 1,135 1,590 1,621
------- ------- ------- ------- -------
Total non-accruing loans 11,335 16,930 20,359(2) 8,108 8,793
Loans past due 90 days or more as to:
Interest and accruing(3) 1,607 1,718 8,737 7,564 4,715
Principal and accruing(4) 16,804 8,442 6,413 5,591 7,535
------- ------- ------- ------- -------
Total past due loans and
accruing 18,411 10,160 15,150 13,155 12,250
------- ------- ------- ------- -------
Total non-performing loans 29,746 27,090 35,509 21,263 21,043
------- ------- ------- ------- -------
Other real estate owned, net(5) 192 540 973 1,691 2,024
------- ------- ------- ------- -------
Total non-performing assets(6) $29,938 $27,630 $36,482 $22,954 $23,067
======= ======= ======= ======= =======
Allowance for loan losses as a percent of
total loans 1.31% 1.07% 0.88% 0.58% 0.52%
Allowance for loan losses as a percent of
non-performing loans 122.19 99.76 57.81 55.73 41.68
Non-performing loans as a percent of
total loans 1.07 1.07 1.52 1.05 1.24
Non-performing assets as a percent of
total assets 0.57 0.74 0.94 0.88 0.90
- - ---------------
(1) Consists primarily of commercial business loans and home equity lines of
credit.
(2) Includes $9.5 million of loans acquired in the Bay Ridge acquisition.
(3) Consists primarily of student loans guaranteed by the NYSHESC.
(4) Reflects loans that are 90 days or more past maturity which continue to make
payments on a basis consistent with the original repayment schedule.
(5) Net of related loss allowances.
(6) Non-performing assets consist of non-performing loans and other real estate
owned. Non-performing loans consist of non-accrual loans and loans 90 days
or more past due as to interest and other loans which have been identified
by the Bank as presenting uncertainty with respect to the collectibility of
interest or principal.
14
16
NON-PERFORMING ASSETS (CONTINUED)
The $2.3 million, or 8.4%, increase in non-performing loans from March 31,
1997 to March 31, 1998 was due in large part to an $8.3 million or 81.2%
increase in loans past due and accruing, offset partially by a $5.6 million or
33.0% decrease in non-accruing loans. The increase in non-performing assets from
March 31, 1997 to March 31, 1998 was the result of a $2.7 million increase in
non-performing loans offset in part by $348,000 decline in OREO. The decrease in
non-accruing loans in fiscal 1998 is primarily due to the repayment of two non-
accrual commercial real estate loans aggregating $6.7 million extended to one
borrower.
At March 31, 1998, the Company's $16.8 million of loans past due 90 days or
more as to principal consisted of loans which were contractually past their
maturity but which continue to make payments on a basis consistent with the
loans' original amortization schedule. The amount of such loans increased by
$8.4 million to $16.8 million at March 31, 1998, which is primarily due to the
increased number of loans which have matured and have not been renegotiated.
Such loans consisted primarily of $10.4 million of multi-family residential
loans and $4.8 million of commercial real estate loans. At March 31, 1998, the
$10.4 million of contractually past due maturity multi-family residential loans
consisted of 36 loans with an average principal balance of approximately
$289,000 while the $4.8 million of commercial real estate loans consisted of 23
loans with an average principal balance of approximately $209,000. The Company's
multi-family residential and commercial real estate loans are generally
structured as a five or ten year balloon loan with the ability of the borrower
to extend the term of the loan for an additional five years. At the contractual
maturity date of these particular loans, the borrowers have failed to repay in
full the principal due. The borrowers, however, have continued to make payments
on the loans consistent with the loans' payment terms based on the original
amortization schedule. Although the Company has contacted the borrowers
requesting that they refinance their loans, the borrowers have not yet taken
such steps. The majority of such loans bear interest rates which are above those
charged currently on newly originated multi-family residential and commercial
real estate loans. Furthermore, the Company inspects each of such properties at
least annually. In addition, in many cases, based on current financial
information provided to the Company, the properties are producing sufficient
cash flow to service the debt. Based upon management's review of these credits,
the Company does not believe that any material losses will be incurred with
respect to such properties. However, the delinquency of such loans has been and
continues to be considered in establishing the level of the Companys' allowance
for loan losses. The Company is continuing its efforts to have such loans either
be refinanced or have the term extended.
The interest income that would have been recorded during the years ended
March 31, 1998 and March 31, 1997, if all of the Bank's non-performing loans at
the end of such period had been current in accordance with their terms during
such periods was $758,000 and $1.7 million, respectively.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
Federal Deposit Insurance Corporation ("FDIC") and the New York State Banking
Department ("Department"), which can order the establishment of additional
general or specific loss allowances. The FDIC, in conjunction with the other
federal banking agencies, has adopted an interagency policy statement on the
allowance for loan and lease losses. The policy statement provides guidance for
financial institutions on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of general valuation
guidelines. Generally the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner, and that management has
established acceptable allowance evaluation processes that meets the objectives
set forth in the policy statement. While the Company believes that it has
established an adequate allowance for possible loan losses, there can be no
assurance that the regulators, in reviewing the Company's loan portfolio, will
not request the Company to materially increase, at that time, its allowance for
possible 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
allowances for loan
15
17
losses may become necessary. In addition, if the Company's involvement in
multi-family residential and commercial real estate lending continues to
increase (which is expected), additional provisions may be required due to the
generally greater risk involved in such lending.
CLASSIFIED AND CRITICIZED ASSETS. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of current
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss.
At March 31, 1998, the Company had classified an aggregate of $16.1 million
of assets (a substantial portion of which consisted of non-accrual loans). In
addition, at such date the Company had $69.3 million of assets which were
designated by the Company as special mention. At March 31, 1998, a major
component of the Company's assets deemed special mention was a $14.8 million
loan to the partnership which owns the building in which the Company's executive
offices are located. The loan was originated in 1993 in the amount of $5.0
million to help fund the partnership's purchase of the building. Due to a
variety of factors, there were delays in fully leasing out the building due in
part to the need to effect extensive renovations and tenant improvements,
including asbestos removal. As a consequence, payments on the initial loan were
not made and the loan was placed on non-accrual status in fiscal 1996. The
Company refinanced the loan in early 1997 and increased the principal balance to
$15.0 million. The $10.0 million of additional funds were used in part to repay
advances (plus interest) made to the partnership by Wiljo Development
Corporation ("Wiljo"), a wholly-owned subsidiary of the Company, for
construction costs and other expenses. The Company's executive offices and a
branch office occupy approximately 40% of the building. As of March 31, 1998,
all the remaining space in the building is leased with lease terms generally of
ten years or more, and the new loan is performing in accordance with its terms.
Also included in assets deemed special mention were $16.1 million of loans which
were 90 days or more past due maturity which continued to make payments on a
basis consistent with the original repayment schedule.
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses
amounted to $36.3 million at March 31, 1998 as compared to $27.0 million at
March 31, 1997. At March 31, 1998, the Company's allowance amounted to 1.3% of
total loans and 122.2% of total non-performing loans. It is management's policy
to maintain an allowance for loan losses based upon total loans outstanding, the
volume of loan originations, the type, size and geographic concentration of
loans held by the Company, general economic conditions, the level of past due
and non-accrual loans and the number of loans requiring heightened management
oversight.
The Company's allowance for loan losses increased $9.3 million from March
31, 1997 to March 31, 1998 due to provisions of $10.0 million, partially offset
by charge-offs, net of recoveries, of $688,000. The increase during the period
was due to several factors, including the Company's increased investment in
multi-family residential and commercial real estate loans, all of which were
concentrated in the New York City metropolitan area, an increase in the number
of larger multi-family residential and individual cooperative apartment loans as
compared to prior years, an increase in the number of loans, which, while not
delinquent, exhibit risk characteristics which require heightened management
oversight, including loans which are contractually past due maturity 90 days or
more and an increase of $6.3 million or 25.0% in commercial business loans,
which, though conservatively underwritten in management's view are considered to
have a greater risk of loss.
The Company will continue to monitor and modify its allowance for possible
loan losses as conditions dictate. While management believes
16
18
that, based on information currently available, the
Company's allowance for possible loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances will be given that
the Company's level of allowance for loan losses will be sufficient to absorb
future possible loan losses incurred by the Company or that future adjustments
to the allowance for possible loan losses will not be necessary if economic and
other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for possible
loan losses. Management may in the future further increase the level of its
allowance for loan losses as a percentage of total loans and non-performing
loans in the event the level of multi-family residential, commercial real estate
and commercial business loans (which generally are considered to have a greater
risk of loss than single-family residential mortgage loans) as a percentage of
its total loan portfolio continues to increase. In addition, the FDIC and the
Department as an integral part of their examination process periodically review
the Company's allowance for possible loan losses. Such agencies may require the
Company to make additional provisions for estimated possible loan losses based
upon judgments different from those of management.
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
YEAR ENDED MARCH 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Allowance at beginning of period $27,024 $20,528 $11,849 $ 8,770 $ 6,415
------- ------- ------- ------- -------
Allowance from acquisition(1) -- -- 6,910 -- --
Provision:
Mortgage loans(2) 7,894 8,425 3,300 3,300 3,075
Consumer and commercial business
loans(3) 2,117 (465)(4) 379 292 750
------- ------- ------- ------- -------
Total provision 10,011 7,960 3,679 3,592 3,825
Charge-offs:
Mortgage loans(2) 1,047 1,636 1,634 842 1,049
Consumer and commercial business
loans(3) 263 509 751 220 1,259
------- ------- ------- ------- -------
Total charge-offs 1,310 2,145 2,385 1,062 2,308
------- ------- ------- ------- -------
Recoveries:
Mortgage loans(2) 415 545 176 294 28
Consumer and commercial business
loans(3) 207 136 299 255 810
------- ------- ------- ------- -------
Total recoveries 622 681 475 549 838
------- ------- ------- ------- -------
Net loans charged-off (688) (1,464) (1,910) (513) (1,470)
------- ------- ------- ------- -------
Allowance at end of period $36,347 $27,024 $20,528 $11,849 $ 8,770
======= ======= ======= ======= =======
Net loans charged off to allowance for
loan losses 1.89% 5.42% 9.30% 4.33% 16.76%
Allowance for possible loan losses as a
percent of total loans 1.31% 1.07% 0.88% 0.58% 0.52%
Allowance for possible loan losses as a
percent of total non-performing
loans(5) 122.19% 99.76% 57.81% 55.73% 41.68%
- - ---------------
(1) Reflects allowance for loan losses acquired in the Bay Ridge acquisition in
January 1996.
(2) Includes individual cooperative apartment loans.
(3) Includes student loans, home equity loans and lines of credit, automobile
loans, secured and unsecured personal loans, and commercial business loans.
(4) Reflects adjustment to allowance related to commercial business loans.
(5) Non-performing loans consist of non-accrual loans and loans 90 days or more
past due as to interest or principal and other loans which have been
identified by the Bank as presenting uncertainty with respect to the
collectibility of interest or principal.
17
19
The following table sets forth information concerning the allocation of the
Company's allowance for loan losses by loan category at the dates indicated.
AT MARCH 31,
----------------------------------------------------------------------------
1998 1997 1996 1995
-------------------- -------------------- -------------------- -------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Mortgage loans(1) $30,631 95.6% $23,370 95.4% $16,036 95.4% $ 7,284
Consumer and commercial
business loans(2) 5,716 4.4 3,654 4.6 4,492 4.6 4,565
------- ----- ------- ----- ------- ----- -------
Total $36,347 100.0% $27,024 100.0% $20,528 100.0% $11,849
======= ===== ======= ===== ======= ===== =======
AT MARCH 31,
--------------------------------
1995 1994
---------- -------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
LOANS AMOUNT LOANS
---------- ------ ----------
(DOLLARS IN THOUSANDS)
Mortgage loans(1) 94.6% $4,532 92.7%
Consumer and commercial
business loans(2) 5.4 4,238 7.3
----- ------ -----
Total 100.0% $8,770 100.0%
===== ====== =====
- - ---------------
(1) Includes individual cooperative apartment loans.
(2) Includes student loans, home equity loans and lines of credit, automobile
loans, secured and unsecured personal loans and commercial business loans.
ENVIRONMENTAL ISSUES
The Company encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on property securing
their loans. In addition, the existence of hazardous materials may make it
uneconomic for a lender to foreclose on such properties. Although environmental
risks are usually associated with loans secured by commercial real estate, risks
also may be substantial for loans secured by residential real estate if
environmental contamination makes security property unsuitable for use. This
could also have a negative effect on nearby property values. The Company
attempts to control its risk by requiring a phase one environmental assessment
be completed as part of its underwriting review for all non-residential mortgage
applications.
The Company believes its procedures regarding the assessment of
environmental risks are adequate and the Company is unaware of any environmental
issues which would subject it to any material liability at this time. However,
no assurance can be given that the values of properties securing loans in the
Company's portfolio will not be adversely affected by unforeseen environmental
risks.
INVESTMENT ACTIVITIES
INVESTMENT POLICIES. The investment policy of the Company, which is
established by the Board of Directors, is designed to help the Company achieve
its fundamental asset/liability management objectives. Generally, the policy
calls for the Company to emphasize principal preservation, liquidity,
diversification, short maturities and/or repricing terms, and a favorable return
on investment when selecting new investments for the Company's investment and
mortgage-backed and mortgage-related securities portfolios. In addition, the
policy sets forth objectives which are designed to limit new investments to
those which further the Company's goals with respect to interest rate risk
management. The Company's current securities investment policy permits
investments in various types of liquid assets including obligations of the U.S.
Treasury and federal agencies, investment grade corporate obligations, various
types of mortgage-backed and mortgage-related securities, including
collateralized mortgage obligations ("CMOs"), commercial paper, and insured
certificates of deposit. The Bank, as a New York-chartered savings bank, is
permitted to make certain investments in equity securities and stock mutual
funds. At March 31, 1998, these equity investments totaled $185.6 million of
which $168.1 million consisted of adjustable-rate preferred stocks of public
companies which reprice every 49 days.
The Company currently does not participate in hedging programs, interest
rate swaps, or other activities involving use of off-balance sheet derivative
financial instruments. Similarly, the Company does not invest in
mortgage-related securities which are deemed to be "high risk," or purchase
bonds which are not rated investment grade.
MORTGAGE-BACKED AND MORTGAGE-RELATED SECURITIES. Mortgage-backed
securities (which also
18
20
are known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators, through intermediaries (generally U.S. Government agencies
and government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Company. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the FHLMC, the
FNMA and the Government National Mortgage Association ("GNMA").
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Company. However, the existence of the insurance or
guarantees generally results in such securities bearing yields which are less
than the loans underlying such securities.
The FHLMC is a publicly traded corporation chartered by the U.S.
Government. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal on participation certificates. The FNMA is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. The FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investment with minimal credit risks.
The GNMA is a government agency within the Department of Housing and Urban
Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low-and middle-income housing, there are limits to the maximum size of loans
that qualify for these programs.
The Company adopted SFAS No. 115, as of April 1, 1994. In accordance with
this statement, the Company segregated its mortgage-backed and mortgage-related
investment securities into two categories: those held to maturity and those
available for sale. Held to maturity securities are recorded at amortized cost
and available-for sale securities are recorded at fair value, with unrealized
gains and losses, net of related tax effects, excluded from earnings and
reported as a separate component of stockholders' equity. The effect of the
adoption was to increase equity by $2.7 million at April 1, 1994. In November
1995, the Financial Accounting Standards Board ("FASB") issued a special report,
"A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" which allowed institutions to effect
a one-time reclassification of its securities from held to maturity to available
for sale without requiring that all securities held to maturity be reclassified
to available for sale. As a result, in December 1995, the Company reclassified
$169.1 million of securities from held to maturity to available for sale,
resulting in net unrealized losses of $1.8 million in fiscal 1996. Upon further
consideration, the Company determined during the fourth quarter of fiscal 1997
to reclassify the remainder of its mortgage-related and investment securities
held to maturity (which at the time totaled $129.8 million) as available for
sale. The Company subsequently sold in March 1997 $397.3 million of these
securities at a net loss of $4.5 million in order to improve the yield on and
reduce the interest rate volatility of the Company's investment securities and
mortgage-backed and mortgage-related securities. The Company reinvested the
proceeds primarily into U.S. Treasury notes and bills with maturities of two
years or less, resulting initially in an increase in the yield of approximately
60 basis points by comparison to the securities sold.
At March 31, 1998, the Company's $84.6 million of mortgage-backed and
mortgage-related securities, which represented 1.6% of the Company's total
assets, were comprised of $83.5 million of mortgage-backed securities, which
were issued or guaranteed by the FHLMC, the FNMA or the GNMA, and $1.1 million
of CMOs, substantially all of which are secured by FNMA and FHLMC
mortgage-backed securities. The portfolio decreased $106.4 million during fiscal
1998 primarily due to
19
21
repayments and prepayments of the underlying loans collateralizing such
securities. The proceeds received due to such repayments and prepayments were
reinvested primarily in mortgage loans.
At March 31, 1998, the contractual maturity of approximately 19.2% of the
Company's mortgage-backed and mortgage-related securities was in excess of ten
years. The actual maturity of a mortgage-related security is less than its
stated maturity due to repayments of the underlying mortgages. Prepayments that
are different than anticipated will affect the yield to maturity. The yield is
based upon the interest income and the amortization of any premium or discount
related to the mortgage-backed security. In accordance with GAAP, premiums and
discounts are amortized over the estimated lives of the loans, which decrease
and increase interest income, respectively. The repayment assumptions used to
determine the amortization period for premiums and discounts can significantly
effect the yield of the mortgage-backed security, and these assumptions are
reviewed periodically to reflect actual prepayments. If prepayments are faster
than anticipated, the life of the security may be shortened and may result in a
loss of any premium paid, thus reducing the net yield on such security. Although
repayments of underlying mortgages depend on many factors, including the type of
mortgages, the coupon rate, the age of mortgages, the geographical location of
the underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of repayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the repayment of the underlying
mortgages and the related security. Under such circumstances, the Company may be
subject to reinvestment risk because to the extent that the Company's
mortgage-backed and mortgage-related securities amortize or repay faster than
anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
The following table sets forth the activity in the Company's aggregate
mortgage-backed and mortgage-related securities portfolio during the periods
indicated.
YEAR ENDED MARCH 31,
----------------------------------
1998(1) 1997(1) 1996(1)
--------- --------- --------
(IN THOUSANDS)
Mortgage-backed and mortgage-related securities at
beginning of period $ 190,979 $ 516,023 $305,545
Purchases 14,517 132,587 276,777(2)
Sales (14,522) (310,252) --
Repayments, prepayments and maturities (108,644) (146,836) (60,920)
Accretion of premium (592) (4,307) (2,624)
Amortization of discounts 147 385 189
Unrealized gains (losses) on available-for-sale
mortgage-backed and mortgage-related securities 2,725 3,379 (2,944)
--------- --------- --------
Mortgage-backed and mortgage-related securities at end
of period $ 84,610 $ 190,979 $516,023
========= ========= ========
- - ---------------
(1) All mortgage-backed and mortgage-related securities at March 31, 1998 and
March 31, 1997 were classified available for sale. At March 31, 1996, $160.7
million were classified as held to maturity.
(2) Includes $81.1 million of mortgage-backed and mortgage-related securities
acquired from Bay Ridge.
20
22
INVESTMENT SECURITIES. The Company has the authority to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of
various Federal agencies and of state and municipal governments, mutual funds,
equity securities and corporate obligations. At March 31, 1998, the Company had
U.S. Government and federal agency obligations totaling $1.09 billion or 20.9%
of total assets at such date. Of such amount, $571.0 million consisted of U.S.
Treasury bills with a maturity of less than one year and $487.2 million
consisted of U.S. Treasury notes with maturities of three years or less (of
which $396.6 million had maturities of one year or less). The portfolio
increased to $1.28 billion at March 31, 1998 primarily due to the initial
investment of the stock offering proceeds in investment securities pending
deployment of such assets primarily into loans in accordance with the Company's
operating plan.
The following table sets forth the activity in the Company's aggregate
investment securities portfolio during the periods indicated.
YEAR ENDED MARCH 31,
--------------------------------------
1998(1) 1997(1) 1996(1)
----------- --------- ----------
(DOLLARS IN THOUSANDS)
Investment securities at beginning of period $ 357,487 $ 723,823 $ 91,245
Purchases 2,228,433 785,334 1,154,428(2)
Sales (273,740) (339,842) (213,010)
Maturities and repayments (1,050,965) (823,825) (307,512)
Accretion of premium (475) (85) (25)
Amortization of discounts 13,619 11,551 5,945
Unrealized gains (losses) on available-for-sale
investment securities 7,713 531 (7,248)
----------- --------- ----------
Investment securities at end of period $ 1,282,072 $ 357,487 $ 723,823
=========== ========= ==========
- - ---------------
(1) All investment securities at March 31, 1998 and March 31, 1997 were deemed
available for sale. At March 31, 1996, $39.9 million were classified as held
to maturity.
(2) Includes $178.2 million of investment securities acquired from Bay Ridge.
21
23
The following table sets forth information regarding the amortized cost and
market value of the Company's investment and mortgage-backed and
mortgage-related securities at the dates indicated.
AT MARCH 31
-----------------------------------------------------------------------------
1998 1997 1996
------------------------ --------------------- ------------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
---------- ---------- --------- -------- ---------- ----------
(IN THOUSANDS)
Held to maturity:
Investment securities:
U.S. Government and federal
agency obligations $ -- $ -- $ -- $ -- $ 38,890 $ 38,803
Municipal securities -- -- -- -- 1,105 1,128
Mortgage-backed and mortgage-
related securities:
FNMA -- -- -- -- 5,492 5,486
GNMA -- -- -- -- 98,303 99,859
FHLMC -- -- -- -- 16,907 16,353
---------- ---------- -------- -------- ---------- ----------
Total $ -- $ -- $ -- $ -- $ 160,697 $ 161,629
========== ========== ======== ======== ========== ==========
Available for sale:
Investment securities:
U.S. Government and
federal agency
obligations $1,087,219 $1,089,952 $345,229 $345,144 $ 670,224 $ 669,281
Corporate securities 226 224 363 358 3,220 3,685
Municipal securities 1,104 1,104 1,104 1,104 -- --
Stocks:
Preferred 168,100 168,100 281 280 450 445
Common 17,533 22,692 10,333 10,601 10,288 10,417
Mortgage-related
securities:
FNMA 5,294 5,415 7,319 7,175 3,108 3,091
GNMA 63,566 66,473 79,684 80,757 -- --
FHLMC 11,500 11,611 18,780 18,594 60,493 59,819
CMOs 1,090 1,111 84,761 84,453 334,664 332,411
---------- ---------- -------- -------- ---------- ----------
Total $1,355,632 $1,366,682 $547,854 $548,466 $1,082,447 $1,079,149
========== ========== ======== ======== ========== ==========
22
24
The following table sets forth certain information regarding the maturities
of the Company's investment and mortgage-backed and mortgage-related securities
at March 31, 1998, all of which were classified as available-for-sale.
AT MARCH 31, 1998, CONTRACTUALLY MATURING
------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
UNDER 1 AVERAGE 1-5 AVERAGE 6-10 AVERAGE OVER 10 AVERAGE
YEAR YIELD YEARS YIELD YEARS YIELD YEARS YIELD TOTAL
-------- -------- -------- -------- ------- -------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
Investment Securities:
U.S. Government
obligations $967,659 5.73% $ 90,682 5.98% $ 180 8.29% $ -- --% $1,058,521
Agency securities 10,422 6.52 21,009 6.67 -- -- -- -- 31,431
Corporate securities 107 8.22 117 8.22 -- -- -- -- 224
Municipal securities -- -- 1,104 7.25 -- -- -- -- 1,104
Mortgage-backed and
mortgage-related
securities:
FNMA 4,144 6.97 1,228 6.60 41 8.54 2 9.35 5,415
GNMA 9,499 8.45 25,360 8.40 15,547 8.42 16,067 8.48 66,473
FHLMC 6,205 7.36 4,312 8.42 898 8.26 196 7.85 11,611
CMOs 423 7.06 581 6.82 96 6.31 11 5.84 1,111
-------- -------- ------- ------- ----------
Total $998,459 $144,393 $16,762 $16,276 $1,175,890
======== ======== ======= ======= ==========
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from loan principal and interest payments and repayments,
maturities and sales of securities, interest on securities, advances from the
FHLB of New York and certain other borrowings. Loan payments are a relatively
stable source of funds, while deposit inflows and outflows are influenced by
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis for general business
purposes.
DEPOSITS. The Company's deposit products include NOW accounts (including
the "Active Management" NOW account), money market accounts,
non-interest-bearing checking accounts, passbook and statement savings accounts
and term certificate accounts. Deposit account terms vary, with the principal
differences being the minimum balance required, the time period the funds must
remain on deposit and the interest rate.
The Company's deposits are obtained primarily from the areas in which its
branch offices are located, and management of the Company estimates that only a
minimal amount of the Company's deposits are obtained from customers residing
elsewhere. The Company does not pay fees to brokers to solicit funds for deposit
with the Company or actively solicit negotiable-rate certificates of deposit
with balances of $100,000 or more.
The Company attracts deposits through a network of convenient office
locations by offering a variety of accounts and services, competitive interest
rates and convenient customer hours. Currently the offices of the Company
consist of 34 traditional full-service offices.
In addition to the Company's branch network, the Company currently
maintains 43 ATMs in or at its branch offices and plans to install an additional
five ATMs in its offices by the end of fiscal 1999.
Deposit account terms offered by the Company vary according to the minimum
balance required, the time period the funds must remain on deposit and the
interest rate, among other factors. The Company is not limited with respect to
the rates it may offer on deposit accounts. In determining the characteristics
of its deposit accounts, consideration is given to the profitability to the
Company, matching terms of the deposits with loan products, the attractiveness
to customers and the rates offered by the Company's competitors.
The Company's focus on customer service has facilitated its retention of
lower-costing NOW accounts, money market accounts, non-interest bearing checking
accounts and savings accounts, which generally have rates substantially less
than certifi-
23
25
cates of deposit. At March 31, 1998, these types of deposits amounted to $1.67
billion or 49.2% of the Company's total deposits. During the fiscal year ended
March 31, 1998 the weighted average rate paid on the Company's demand deposits
and passbook savings deposits amounted to 2.66% and 2.86%, respectively, as
compared to a weighted average rate of 5.60% paid on the Company's certificates
of deposit during this period.
The Company's deposits increased $68.3 million or 2.1% to $3.39 billion at
March 31, 1998 from $3.33 billion at March 31, 1997 primarily as a result of the
assumption of $70.0 million of deposits in a branch purchase completed in April
1997 combined with interest credited of $144.5 million, offset by $146.2 million
of deposit outflows. The deposit outflows reflect disintermediation primarily as
a result of the continued strong performance of the equities markets during the
year ended March 31, 1998.
The following table sets forth the activity in the Company's deposits
during the periods indicated.
YEAR ENDED MARCH 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
Beginning balance $3,325,558 $3,396,890 $2,236,422
Increase due to acquisitions 69,997 -- 1,058,984
Decrease due to disposition -- (51,407)
Other net decrease before interest credited (146,205) (158,765) (4,895)
Interest credited 144,489 138,840 106,379
---------- ---------- ----------
Net increase (decrease) in deposits 68,281 (71,332) 1,160,468
---------- ---------- ----------
Ending balance $3,393,839 $3,325,558 $3,396,890
========== ========== ==========
The following table sets forth by various interest rate categories the
certificates of deposit with the Company at the dates indicated.
AT MARCH 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
2.00% to 3.99% $ 1,141 $ 2,666 $ 6,775
4.00% to 4.99% 201,598 215,992 413,348
5.00% to 5.99% 1,309,923 1,260,417 798,536
6.00% to 6.99% 128,527 174,972 457,039
7.00% to 8.99% 79,814 89,701 121,542
9.00% to 10.99% 1,622 8 8
---------- ---------- ----------
$1,722,625 $1,743,756 $1,797,248
========== ========== ==========
24
26
The following table sets forth the amount and remaining maturities of the
Company's certificates of deposit at March 31, 1998.
OVER OVER OVER
SIX SIX MONTHS ONE YEAR TWO YEARS OVER
MONTHS THROUGH THROUGH THROUGH THREE
AND LESS ONE YEAR TWO YEARS THREE YEARS YEARS TOTAL
-------- ----------- --------- ----------- ----------- ----------
(IN THOUSANDS)
2.00% to 3.99% $ 1,141 $ -- $ -- $ -- $ -- $ 1,141
4.00% to 4.99% 195,929 4,910 633 12 114 201,598
5.00% to 5.99% 782,198 341,487 104,393 40,416 41,429 1,309,923
6.00% to 6.99% 14,372 14,002 34,703 25,986 39,464 128,527
7.00% to 8.99% 1,365 3,755 62,930 11,522 242 79,814
9.00% to 10.99% 595 123 904 -- -- 1,622
-------- -------- -------- ------- ------- ----------
Total $995,600 $364,277 203,563 $77,936 $81,249 $1,722,625
======== ======== ======== ======= ======= ==========
As of March 31, 1998, the aggregate amount of outstanding time certificates
of deposit in amounts greater than or equal to $100,000 was approximately $192.4
million. The following table presents the maturity of these time certificates of
deposit at such date.
AMOUNT
--------------
(IN THOUSANDS)
3 Months or less $ 60,882
Over 3 months through 6 months 47,846
Over 6 months through 12 months 34,813
Over 12 months 48,863
--------
$192,404
========
BORROWINGS. The Company may obtain advances from the FHLB based upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans, provided certain standards related to creditworthiness have been
met. Such advances are made pursuant to several credit programs, each of which
has its own interest rate and range of maturities. Such advances are generally
available to meet seasonal and other withdrawals of deposit accounts and to
permit increased lending. At March 31, 1998, the Company had $14.3 million of
advances from the FHLB of New York with maturities ranging between less than one
year and seven years with the majority having a maturity of less than five
years. Borrowings outstanding at March 31, 1998 also included two mortgages
extended to the Company in connection with the purchase of two of its branch
offices. At March 31, 1998, the Company had $701.2 million of borrowings
relating to securities lending activities. The Company in the future may utilize
other forms of borrowings such as repurchase agreements as an additional source
of funds. For further discussion See "Management's Discussion and Analysis of
Financial Condition and Results of Operation-Business Strategy-Controlled
growth" in Item 7 hereof.
EMPLOYEES
The Company had 737 full-time employees and 99 part-time employees at March
31, 1998. None of these employees are represented by a collective bargaining
agent and the Company considers its relationship with its employees to be good.
SAVINGS BANK LIFE INSURANCE
The Company, through its Savings Bank Life Insurance ("SBLI") department,
engages in group life insurance coverage per individual under SBLI's Financial
Institution Group Life Insurance policy. The SBLI Department's activities are
segregated from the Company and, while they do not directly affect the Company's
earnings, management believes that offering SBLI is beneficial to the Company's
relationship with its depositors and the general public. The SBLI Department
pays its own expenses and reimburses the Company for expenses incurred on its
behalf. At March 31, 1998, the SBLI Department had policies totaling $413.5
million in force.
SUBSIDIARIES
At March 31, 1998, the Holding Company's only active subsidiary was the
Bank, and the Bank's two active subsidiaries were Independence Community Realty
Corp. ("ICRC") and Wiljo.
INDEPENDENCE COMMUNITY REALTY CORP. ICRC was established in September 1996
as a real
25
27
estate investment trust. On October 1, 1996, the Company transferred to ICRC
real estate loans with a fair market value of approximately $834.0 million in
return for all 1,000 shares of ICRC's common stock and all 10,000 shares of
ICRC's 8% junior preferred stock. In January 1997, 111 officers and employees of
the Company each received one share of 8% junior preferred stock with a stated
value of $1,000 per share of ICRC. At March 31, 1998, ICRC held $794.1 million
of loans, $37.7 million of commercial paper and $14.5 million of U.S. Treasury
bills.
WILJO DEVELOPMENT CORP. The assets of Wiljo consist primarily of the
office space in the building in which the Company's executive offices are
located and its limited partnership interest in the partnership which owns the
remaining portion of the building. At March 31, 1998, Wiljo had total assets of
$7.6 million and the Company's equity investment in Wiljo amounted to $6.9
million.
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the Company and the Bank. The description of the laws
and regulations hereunder, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
THE COMPANY
GENERAL. Upon consummation of the Conversion, the Holding Company became
subject to regulation as a savings and loan holding company under the Home
Owners' Loan Act, as amended ("HOLA"), instead of being subject to regulation as
a bank holding company under the Bank Holding Company Act of 1956 because the
Bank made an election under Section 10(1) of HOLA to be treated as a "savings
association" for purposes of Section 10(e) of HOLA. As a result, the Holding
Company was required to register with the Office of Thrift Supervision ("OTS")
and is subject to OTS regulations, examinations, supervision and reporting
requirements relating to savings and loan holding companies. The Holding Company
is also required to file certain reports with, and otherwise comply with the
rules and regulations of, the Department and the SEC. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with the Holding Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. With the consummation of the Conversion, the Bank
is the sole savings association subsidiary of the Holding Company. There are
generally no restrictions on the activities of a savings and loan holding
company which holds only one subsidiary savings institution. However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, he may impose such restrictions as are
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the qualified thrift lender ("QTL") test,
as discussed under "-- Qualified Thrift Lender Test," then such unitary holding
company also shall become subject to the activities restrictions applicable to
multiple savings and loan holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, shall register as, and become
subject to the restrictions applicable to, a bank holding company. See
"-- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any
26
28
business activity other than: (i) furnishing or performing management services
for a subsidiary savings institution; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the FRB as permissible for bank holding companies. Those
activities described in clause (vii) above also must be approved by the Director
of the OTS prior to being engaged in by a multiple savings and loan holding
company.
QUALIFIED THRIFT LENDER TEST. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended (the "Code"). A savings bank subsidiary of a savings and loan
holding company that does not comply with the QTL test must comply with the
following restrictions on its operations: (i) the institution may not engage in
any new activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank; (iii)
the institution shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings institution ceases to meet the QTL test, it must
cease any activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
The QTL test set forth in the HOLA requires that qualified thrift
investments ("QTLs") represent 65% of portfolio assets of the savings
institution and its consolidated subsidiaries. Portfolio assets are defined as
total assets less intangibles, property used by a savings association in its
business and liquidity investments in an amount not exceeding 20% of assets.
Generally, QTLs are residential housing related assets. The 1996 amendments
allow small business loans, credit card loans, student loans and loans for
personal, family and household purpose to be included without limitation as
qualified investments. At March 31, 1998 approximately 76.5% of the Bank's
assets were invested in QTLs, which was in excess of the percentage required to
qualify the Bank under the QTL test in effect at that time.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensa-
27
29
tion program that (i) is widely available to employees of the institution and
(ii) does not give preference to any director, executive officer or principal
stockholder, or certain affiliated interests of either, over other employees of
the savings institution. Section 22(h) also requires prior board approval for
certain loans. In addition, the aggregate amount of extensions of credit by a
savings institution to all insiders cannot exceed the institution's unimpaired
capital and surplus. Furthermore, Section 22(g) places additional restrictions
on loans to executive officers. At March 31, 1998, the Bank was in compliance
with the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director, (i) control of any other savings institution or savings and
loan holding company or substantially all the assets thereof or (ii) more than
5% of the voting shares of a savings institution or holding company thereof
which is not a subsidiary. Except with the prior approval of the Director, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
The Director may only approve acquisitions resulting in the formation of a
multiple savings and loan holding company which controls savings institutions in
more than one state if (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
located in the state of the institution to be acquired as of March 5, 1987; (ii)
the acquiror is authorized to acquire control of the savings institution
pursuant to the emergency acquisition provisions of the Federal Deposit
Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
FEDERAL SECURITIES LAWS. The 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 proxy and tender offer rules,
insider trading reporting requirements and restrictions, and certain other
requirements under the Exchange Act.
THE BANK
GENERAL. The Bank is subject to extensive regulation and examination by
the Department, as its chartering authority, and by the FDIC, as the insurer of
its deposits, and is subject to certain requirements established by the OTS as a
result of the Holding Company's savings and loan holding company status. The
federal and state laws and regulations which are applicable to banks regulate,
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of and collateral for certain loans. The Bank must file
reports with the Department and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior to entering into
certain transactions such as establishing branches and mergers with, or
acquisitions of, other depository institutions. There are periodic examinations
by the Department and the FDIC to test the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC or as a result of
the enactment of legislation, could have a material adverse impact on the
Company, the Bank and their operations.
CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System.
The FDIC's capital regulations establish a minimum 3.0% Tier 1 leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-
28
30
chartered, non-member banks, which effectively increases the minimum Tier 1
leverage ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's
regulation, the highest-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, which are considered a strong banking
organization and are rated composite 1 under the Uniform Financial Institutions
Rating System. Leverage or core capital is defined as the sum of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, and minority interests in consolidated
subsidiaries, minus all intangible assets other than certain qualifying
supervisory goodwill and certain mortgage servicing rights.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier 1 capital and
supplementary (Tier 2) capital) to risk-weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item. The components of Tier
1 capital are equivalent to those discussed above under the 3% leverage capital
standard. The components of supplementary capital include certain perpetual
preferred stock, certain mandatory convertible securities, certain subordinated
debt and intermediate preferred stock and general allowances for loan and lease
losses. Allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core capital.
At March 31, 1998, the Bank met each of its capital requirements.
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate risk
in assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies
issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
However, the agencies have determined not to proceed with a previously issued
proposal to develop a supervisory framework for measuring interest rate risk and
an explicit capital component for interest rate risk.
ACTIVITIES AND INVESTMENTS OF NEW YORK-CHARTERED SAVINGS BANKS. The Bank
derives its lending, investment and other authority primarily from the
applicable provisions of New York Banking Law and the regulations of the
Department, as limited by FDIC regulations and other federal laws and
regulations. See "-- Activities and Investments of FDIC Insured State-Chartered
Banks." These New York laws and regulations authorize savings banks, including
the Bank, to invest in real estate mortgages, consumer and commercial loans,
certain types of debt securities, including certain corporate debt securities
and obligations of federal, state and local governments and agencies, certain
types of corporate equity securities and certain other assets. Under the
statutory authority for investing in equity securities, a savings bank may
directly invest up to 7.5% of its assets in certain corporate stock and may also
invest up to 7.5% of its assets in certain mutual fund securities. Investment in
stock of a single corporation is limited to the lesser of 2% of the outstanding
stock of such corporation or 1% of the savings bank's assets, except as set
forth below. Such equity securities must meet certain tests of financial
performance. A savings bank's lending powers are not subject to percentage of
asset limitations, although there are limits applicable to single borrowers. A
savings bank may also, pursuant to the "leeway" authority, make investments not
otherwise permitted under the New York Banking Law. This authority permits
investments in otherwise impermissible investments of up to 1% of the savings
bank's assets in any single investment, subject to certain restrictions and to
an aggregate limit for all such investments of up to 5% of assets. Additionally,
in lieu of investing in such securities in accordance with the reliance upon the
specific investment authority set forth in the New York Banking Law, savings
banks are authorized to elect to invest under a "prudent person" standard in a
wider range of
29
31
debt and equity securities as compared to the types of investments permissible
under such specific investment authority. However, in the event a savings bank
elects to utilize the "prudent person" standard, it will be unable to avail
itself of the other provisions of the New York Banking Law and regulations which
set forth specific investment authority. A New York-chartered stock savings bank
may also exercise trust powers upon approval of the Department.
Under recently enacted legislation, the Department has been granted the
authority to maintain the power of state-chartered banks reciprocal with those
of a national bank.
New York-chartered savings banks may also invest in subsidiaries under
their service corporation investment power. A savings bank may use this power to
invest in corporations that engage in various activities authorized for savings
banks, plus any additional activities which may be authorized by the Department.
Investment by a savings bank in the stock, capital notes and debentures of its
service corporations is limited to 3% of the savings bank's assets, and such
investments, together with the savings bank's loans to its service corporations,
may not exceed 10% of the savings bank's assets.
With certain limited exceptions, a New York-chartered savings bank may not
make loans or extend credit for commercial, corporate or business purposes
(including lease financing) to a single borrower, the aggregate amount of which
would be in excess of 15% of the bank's net worth. The Bank currently complies
with all applicable loans-to-one-borrower limitations.
ACTIVITIES AND INVESTMENTS OF FDIC-INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an
FDIC-insured state-chartered bank may not directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements.
Excluded from the foregoing proscription is the provision of savings bank
life insurance by an FDIC-insured, state-chartered bank that is located in New
York or certain other states and is otherwise authorized to sell such insurance,
provided that (i) the FDIC does not alter its determination pursuant to the FDIA
that such activities do not pose a significant risk to the insurance fund of
which the Bank is a member, (ii) the insurance underwriting is conducted through
a division of the bank that meets the definition of "department" contained in
FDIC regulations and (iii) the bank discloses to purchasers of life insurance
policies and other products that they are not insured by the FDIC, among other
things. At March 31, 1998, the Bank's SBLI Department had $413.5 million of
insurance in force.
Also excluded from the foregoing proscription is the investment by a
state-chartered, FDIC-insured bank in common and preferred stock listed on a
national securities exchange and in shares of an investment company registered
under the Investment Company Act of 1940. In order to qualify for the exception,
a state-chartered FDIC-insured bank must (i) have held such types of investments
during the 14-month period from September 30, 1990 through November 26, 1991,
(ii) be chartered in a state that authorized such investments as of September
30, 1991 and (iii) file a one-time notice with the FDIC in the required form and
receive FDIC approval of such notice. In addition, the total investment
permitted under the exception may not exceed 100% of the bank's tier one capital
as calculated under FDIC regulations. The Bank received FDIC approval of its
notice to engage in this investment activity on February 26, 1993. As of March
31, 1998, the book value of the Bank's investments
30
32
under this exception was $22.4 million, which
equaled 3.6% of its tier one capital. Such grandfathering authority is subject
to termination upon the FDIC's determination that such investments pose a safety
and soundness risk to the Bank or in the event the Bank coverts its charter or
undergoes a change in control.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
Under the New York Banking Law, the Department may issue an order to a New
York-chartered banking institution to appear and explain an apparent violation
of law, to discontinue unauthorized or unsafe practices and to keep prescribed
books and accounts. Upon a finding by the Department that any director, trustee
or officer of any banking organization has violated any law, or has continued
unauthorized or unsafe practices in conducting the business of the banking
organization after having been notified by the Department to discontinue such
practices, such director, trustee or officer may be removed from office by the
Department after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Department against the Bank or any of its directors or
officers. The Department also may take possession of a banking organization
under specified statutory criteria.
PROMPT CORRECTIVE ACTION. Section 38 of the Federal Deposit Insurance
Act("FDIA") provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking regulators,
an institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure, (ii) "adequately capitalized' if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0% and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. The regulations also
provide that a federal banking regulator may, after notice and an opportunity
for a hearing, reclassify a "well capitalized" institution as "adequately
capitalized" and may require an "adequately capitalized" institution or an
"undercapitalized' institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. The federal banking
regulator may not, however, reclassify a "significantly undercapitalized"
institution as "critically undercapitalized."
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with an appropriate federal banking regulator
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Immediately upon becoming undercapitalized, an
institution becomes subject to statutory provisions which, among other things,
set forth various mandatory and discretionary restrictions on the operations of
such an institution.
As March 31, 1998, the Bank had capital levels which qualified it as a
"well-capitalized" institution.
31
33
FDIC INSURANCE PREMIUMS. The Bank is a member of the Bank Insurance Fund
("BIF") administered by the FDIC but has accounts insured by both the BIF and
the Savings Association Insurance Fund ("SAIF"). The SAIF-insured accounts are
held by the Bank as a result of certain acquisitions and branch purchases and
amounted to $1.53 billion as of March 31, 1998. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF.
Effective October 8, 1996, the FDIC imposed a one-time special assessment
equal to 65.7 basis points for all SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. Certain BIF members, including
the Bank, qualified for a 20% reduction of its SAIF-assessable deposits for
purposes of calculating the one-time special assessment. The Bank's one-time
special assessment amounted to $8.6 million, $5.63 million net of related tax
benefits. The payment of the special assessment reduced the Bank's capital by
the amount of the assessment.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective SAIF rates range from zero basis points to 27 basis points which is
the same range of premiums as the BIF rates. From 1997 through 1999,
FDIC-insured institutions will pay 6.4 basis points of their SAIF-assessable
deposits and approximately 1.3 basis points of their BIF-assessable deposits to
fund the Financing Corporation. Based upon the $1.87 billion of BIF-assessable
deposits and $1.53 billion of SAIF-assessable deposits at March 31, 1998, the
Bank would expect to pay $296,000 in insurance premiums per quarter during
calendar 1998.
BROKERED DEPOSITS. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a "well capitalized insured depository institution" may solicit and accept,
renew or roll over any brokered deposit without restriction, (ii) an "adequately
capitalized insured depository institution" may not accept, renew or roll over
any brokered deposit unless it has applied for and been granted a waiver of this
prohibition by the FDIC and (iii) an "undercapitalized insured depository
institution" may not (x) accept, renew or roll over any brokered deposit or (y)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited. The term "undercapitalized insured depository
institution" is defined to mean any insured depository institution that fails to
meet the minimum regulatory capital requirement prescribed by its appropriate
federal banking agency. The FDIC may, on a case-by-case basis and upon
application by an adequately capitalized insured depository institution, waive
the restriction on brokered deposits upon a finding that the acceptance of
brokered deposits does not constitute an unsafe or unsound practice with respect
to such institution. The Company had no brokered deposits outstanding at March
31, 1998.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with its
lending activities, the Company is subject to a variety of federal
32
34
laws designed to protect borrowers and promote lending to various sectors of the
economy and population. Included among these are the federal Home Mortgage
Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act,
Equal Credit Opportunity Act, Fair Credit Reporting Act and the CRA.
The CRA requires insured institutions to define the communities that they
serve, identify the credit needs of those communities and adopt and implement a
"Community Reinvestment Act Statement" pursuant to which they offer credit
products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the
Company, the FDIC) must conduct regular CRA examinations of insured financial
institutions and assign to them a CRA rating of "outstanding," "satisfactory,"
"needs improvement" or "unsatisfactory." The Company's latest federal CRA rating
based upon its last examination is "outstanding."
The Company is also subject to provisions of the New York Banking Law which
impose continuing and affirmative obligations upon banking institutions
organized in New York State to serve the credit needs of its local community
("NYCRA"), which are similar to those imposed by the CRA. Pursuant to the NYCRA,
a bank must file an annual NYCRA report and copies of all federal CRA reports
with the Department. The NYCRA requires the Department to make an annual written
assessment of a bank's compliance with the NYCRA, utilizing a four-tiered rating
system, and make such assessment available to the public. The NYCRA also
requires the Department to consider a bank's NYCRA rating when reviewing a
bank's application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any
such application. The Company's latest NYCRA rating received from the Department
was "satisfactory."
LIMITATIONS ON DIVIDENDS. The Holding Company is a legal entity separate
and distinct from the Bank. The Holding Company's principal source of revenue
consists of dividends from the Bank. The payment of dividends by the Bank is
subject to various regulatory requirements including a requirement, as a result
of the Holding Company's savings and loan holding company status, that the Bank
notify the Director not less than 30 days in advance of any proposed declaration
by its directors of a dividend.
Under New York Banking Law, a New York-chartered stock savings bank may
declare and pay dividends out of its net profits, unless there is an impairment
of capital, but approval of the Department is required if the total of all
dividends declared in a calendar year would exceed the total of its net profits
for that year combined with its retained net profits of the preceding two years,
subject to certain adjustments.
MISCELLANEOUS. The Bank is subject to certain restrictions on loans to the
Holding Company or its non-bank subsidiaries, on investments in the stock or
securities thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on
behalf of the Company or its non-bank subsidiaries. The Bank also is subject to
certain restrictions on most types of transactions with the Holding Company or
its non-bank subsidiaries, requiring that the terms of such transactions be
substantially equivalent to terms of similar transactions with non-affiliated
firms.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. The Bank had
$14.3 million of FHLB advances at March 31, 1998.
As a FHLB member, the Bank is required to purchase and maintain stock in
the FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of New York,
whichever is greater. At March 31, 1998, the Bank had approximately $25.8
million in FHLB stock, which resulted in its compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to
33
35
contribute to affordable housing programs through direct loans or interest
subsidies on advances targeted for community investment and low-and
moderate-income housing projects. These contributions have adversely affected
the level of FHLB dividends paid in the past and could continue to do so in the
future. These contributions also could have an adverse effect on the value of
FHLB stock in the future.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. As of March 31, 1998, the
Bank was in compliance with applicable requirements. However, because required
reserves must be maintained in the form of vault cash or a non-interest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce an institution's earning assets.
TAXATION
FEDERAL TAXATION
GENERAL. The Company is subject to federal income taxation in the same
general manner as other corporations with some exceptions discussed below. The
following discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters and is not a comprehensive description of
the tax rules applicable to the Company. The Bank's federal income tax returns
have been audited or closed without audit by the Internal Revenue Service
through 1993.
METHOD OF ACCOUNTING. For federal income tax purposes, the Company
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its consolidated federal
income tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective taxable years beginning after 1995.
BAD DEBT RESERVE. Prior to the 1996 Act, the Company was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of December 31, 1997 is approximately $3.6
million.
As discussed more fully below, the Company and subsidiaries file combined
New York State Franchise and New York City Financial Corporation tax returns.
The basis of the determination of each tax is the greater of a tax on entire net
income (or on alternative entire net income) or a tax computed on taxable
assets. However, for state purposes, New York State enacted legislation in 1996,
which among other things, decoupled the Federal and New York State tax laws
regarding thrift bad debt deductions and permits the continued use of the bad
debt reserve method under section 593 of the Code. Thus, provided the Bank
continues to satisfy certain definitional tests and other conditions, for New
York State and City income tax purposes, the Bank is permitted to continue to
use the special reserve method for bad debt deductions. The deductible annual
addition to the state reserve may be computed using a specific formula based on
the Bank's loss history ("Experience Method") or a statutory percentage equal to
32% of the Bank's New York State or City taxable income ("Percentage Method").
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Company fail to meet certain thrift asset and definitional
tests. New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Company make certain non-dividend distributions or cease to maintain a bank
charter.
At December 31, 1997, the Company's total federal pre-1988 reserve was
approximately $30.0 million. This reserve reflects the cumulative effects of
federal tax deductions by the Company for which no Federal income tax provision
has been made.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable in-
34
36
come" or "AMTI"). The AMT is payable to the extent such AMTI is in excess of an
exemption amount. Net operating losses can offset no more than 90% of AMTI.
Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years. The Company has not been subject to the
alternative minimum tax and has no such amounts available as credits for
carryover.
NET OPERATING LOSS CARRYOVERS. For the years beginning after August 5,
1997, a financial institution may carry back net operating losses to the
preceding two taxable years and forward to the succeeding 20 taxable years. At
December 31, 1997, the Bank had no net operating loss carryforwards for federal
income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The Holding Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
STATE AND LOCAL TAXATION
NEW YORK STATE AND NEW YORK CITY TAXATION. The Company reports income on a
combined calendar year basis to both New York State and New York City. New York
State Franchise Tax on corporations is imposed in an amount equal to the greater
of (a) 9% of "entire net income" allocable to New York State (b) 3% of
"alternative entire net income" allocable to New York State (c) 0.01% of the
average value of assets allocable to New York State or (d) nominal minimum tax.
Entire net income is based on federal taxable income, subject to certain
modifications. Alternative entire net income is equal to entire net income
without certain modifications. The New York City Corporation Tax is imposed
using similar alternative taxable income methods and rates.
A temporary Metropolitan Transportation Business Tax Surcharge on Banking
corporations doing business in the Metropolitan District has been applied since
1982. The Company transacts a significant portion of its business within this
District and is subject to this surcharge. For the tax year ended December 31,
1997, the surcharge rate is 17% of the State franchise tax liability.
Bad debt reserves maintained for New York State and New York City tax
purposes as of March 31, 1998 for which deferred taxes are not required to be
recognized, amounted to approximately $89.8 million.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $150,000.
35
37
ITEM 2. PROPERTIES
OFFICES AND PROPERTIES
At March 31, 1998, the Company conducted its business from its executive
offices in Brooklyn and 34 full service branch offices:
NET BOOK
VALUE OF
PROPERTY AND
LEASEHOLD
LEASE IMPROVEMENTS AT DEPOSITS AT
OWNED OR EXPIRATION MARCH 31, MARCH 31,
LOCATION LEASED DATE 1998 1998
- - -------- -------- ---------- --------------- -----------
(IN THOUSANDS)
EXECUTIVE AND ADMINISTRATIVE OFFICES:
195 Montague Street
Brooklyn, New York 11201(1) Owned $16,748 $ 75,311
BRANCH OFFICES:
130 Court Street
Brooklyn, New York 11201(2) Owned 4,351 184,066
6424-18th Avenue
Brooklyn, New York 11204 Owned 977 338,279
23 Newkirk Plaza
Brooklyn, New York 11226 Owned 2,320 122,727
443 Hillside Avenue
Williston Park, New York 11596 Owned 2,204 198,620
23-56 Bell Boulevard
Bayside, New York 11360 Leased 9/30/1998(3) 218 207,275
250 Lexington Avenue
New York, New York 10016 Leased 12/31/2001(4) 88 64,913
1416 East Avenue
Bronx, New York 10462 Leased (5) 406 116,674
1420 Northern Boulevard
Manhasset, New York 11030 Leased 9/30/2017 889 74,889
1769-86th Street
Brooklyn, New York 11214 Owned 1,563 165,089
Pratt Institute Campus
200 Willoughby Avenue
Brooklyn, New York 11205 Leased (6) -- 3,316
2357-59 86th Street
Brooklyn, New York 11214 Owned 1,930 84,525
4514 16th Avenue
Brooklyn, New York 11204 Owned 2,052 144,053
37-10 Broadway
Long Island City, New York 11103 Owned 1,138 124,887
22-59 31st Street
Long Island City, New York 11105 Owned 657 95,595
24-28 34th Avenue
Long Island City, New York 11106 Leased 6/30/2007 314 68,168
51-12 31st Avenue
Woodside, New York 11377 Leased 6/30/2007 307 42,976
83-20 Roosevelt Avenue
Jackson Heights, New York 11372 Leased 1/31/2005 1,045 59,669
75-15 31st Avenue
Jackson Heights, New York 11370 Leased 4/30/2004 368 82,303
89-01 Northern Boulevard
Jackson Heights, New York 11372 Leased 7/31/2004 316 78,118
36
38
NET BOOK
VALUE OF
PROPERTY AND
LEASEHOLD
LEASE IMPROVEMENTS AT DEPOSITS AT
OWNED OR EXPIRATION MARCH 31, MARCH 31,
LOCATION LEASED DATE 1998 1998
- - -------- -------- ---------- --------------- -----------
(IN THOUSANDS)
150-28 Union Turnpike
Flushing, New York 11367 Leased 5/31/2012 197 49,433
234 Prospect Park West
Brooklyn, New York 11215 Owned 3,173 41,621
7500 Fifth Avenue
Brooklyn, New York 11209 Owned 582 66,388
440 Avenue P
Brooklyn, New York 11223 Owned 768 83,573
4703 13th Avenue
Brooklyn, New York 11219 Owned 1,123 89,353
301 Avenue U
Brooklyn, New York 11223 Owned 1,025 73,939
8808 Fifth Avenue
Brooklyn, New York 11209 Owned 2,151 58,947
1310 Kings Highway
Brooklyn, New York 11229 Owned 406 70,885
4823 13th Avenue
Brooklyn, New York 11219 Owned 1,488 120,951
1302 Avenue J
Brooklyn, New York 11230 Owned 782 114,506
1550 Richmond Road
Staten Island, New York 10304 Owned 1,079 135,133
1460 Forest Avenue
Staten Island, New York 10302 Leased 8/27/2011 19 124,412
35-06 Broadway(7)
Astoria, New York 11106 Leased 6/13/2002 722 32,568
498 Columbia Street
Brooklyn, New York 11231 Leased 12/31/2002 502 677
------- ----------
Totals $51,908 $3,393,839
======= ==========
- - ---------------
(1) The Bank operates a full-service branch on the ground floor of the building.
(2) Designated as the Bank's main office.
(3) The Bank has an option to extend this lease for an additional 10 year term.
(4) The Bank has an option to extend this lease for two additional 10 year
terms.
(5) Consists of two leases. The original lease executed March 1972 expires in
March 2002. In February 1987, the Bank entered into a lease for additional
space in the adjacent store which expires in November 2002.
(6) The Bank executed a "Memorandum of Understanding" with the Pratt Institute
to occupy the space; no expiration date was stated in the Memorandum.
(7) The Bank notified the Department by letter dated March 10, 1998 of its
intention to close this bank office. The Branch was closed on June 12, 1998
and the accounts transferred to the Bank's branch office located at 37-10
Broadway, Long Island City, New York 11103.
37
39
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which in the opinion of management, in the
aggregate, will not have a material adverse effect on the consolidated financial
condition and results of operations of the Company.
On May 17, 1995 and October 19, 1995, the purported class actions captioned
Simon v. Bay Ridge Bancorp., Inc., Dicunto, Ayoub, Christiansen, Canade, Kasler,
Mihailos, Apel and Cordano, and Pinkowitz v. Bay Ridge Bancorp., Inc., Dicunto,
Ayoub, Christansen, Canade, Kasler, Mihilos, Apel, Cordano, Independence
Community Bank Corp. and Hamm were filed in the Court of Chancery of the State
of Delaware in and for New Castle County. Such actions allege, among other
things, that the directors of Bay Ridge breached their fiduciary duties in
connection with the acquisition of Bay Ridge by the Mutual Holding Company. In
addition, the Pinkowitz complaint alleges that the Mutual Holding Company aided
and abetted the breaches of fiduciary duty allegedly committed by the directors
of Bay Ridge. The Plaintiffs did not specify or claim a particular amount of
damages in such actions. The Mutual Holding Company and the Company (as the
successor to Bay Ridge) intend to vigorously defend against the claims against
the Mutual Holding Company. The Company believes plaintiffs' claims are without
merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
38
40
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
MATTERS
The Board may establish a dividend policy in the future, based upon the
Company's earnings, financial condition and other factors. See "Liquidity and
Commitments" and Notes 1 and 16 of the Notes to Consolidated Financial
Statements for a discussion of restrictions on the Company's ability to pay
dividends. On March 13, 1998, the conversion and reorganization of the Bank and
its mutual holding company parent was completed. In connection with the
consummation of the reorganization, the Holding Company issued 76,043,750 shares
of common stock, including 5,632,870 shares contributed to the Independence
Community Foundation. As of April 30, 1998, there were 21,375 stockholders of
record of the Company. The following table sets forth for the fourth quarter of
fiscal 1998 the high and low stock prices of the Company's common stock as
reported by the Nasdaq National Market under the symbol "ICBC". The common stock
only began trading on the Nasdaq National Market on March 17, 1998. Price
information appears in major newspapers under the symbols "IndepCmntyBk" or
"IndpCm".
Stock price per common share for the quarter ended March 31, 1998:
High 18 3/16
Low 17 1/4
Closing 17 7/8
39
41
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
AT MARCH 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION
DATA:
Total assets $5,222,996 $3,734,723 $3,869,782 $2,619,935 $2,549,180
Cash and cash equivalents 857,251 374,636 103,192 110,394 37,667
Investment securities
held-to-maturity -- -- 39,995 29,427 355,886
Mortgage-backed and mortgage-
related securities held-to-
maturity -- -- 120,702 305,545 376,704
Mortgage-backed and mortgage-
related securities
available-for-sale 84,610 190,979 395,321 -- --
Investment securities
available-for-sale 1,282,072 357,487 683,828 61,818 --
Loans receivable, net 2,745,540 2,504,496 2,322,808 2,020,262 1,693,994
Intangible assets(1) 55,873 60,499 80,268 1,023 1,728
Deposit accounts 3,393,839 3,325,558 3,396,890 2,236,422 2,207,441
FHLB advances 14,300 14,550 56,045 67,462 60,489
Borrowings-securities loaned 701,160 -- -- -- --
Other borrowings 2,381 2,682 1,250 1,286 1,100
Total equity 949,124 309,114 289,819 259,197 220,690
FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest income $293,043 $255,303 $213,100 $191,539 $179,697
Interest expense 160,943 140,187 110,619 80,562 75,633
-------- -------- -------- -------- --------
Net interest income 132,100 115,116 102,481 110,977 104,064
-------- -------- -------- -------- --------
Provision for loan losses 10,011 7,960 3,679 3,592 5,014
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 122,089 107,156 98,802 107,385 99,050
Net gain (loss) on sales of loans
and securities 115 (3,347) 12,222 (3,952) 849
Other non-interest income 10,233 6,256 7,860 6,416 6,873
Amortization of intangible assets 8,740 8,278 1,842 905 864
Charitable contribution to
Independence Community Foundation 56,422 -- -- -- --
Other non-interest expenses(2) 80,713 73,875 50,288 46,713 41,176
-------- -------- -------- -------- --------
(Loss) income before (benefit)
provision for income taxes (13,438) 27,912 66,754 62,231 64,732
(Benefit) provision for income taxes (3,482) 10,732 30,782 27,327 25,808
Cumulative effect of change in
accounting principle(3) -- -- -- -- 3,321
-------- -------- -------- -------- --------
Net (loss) income $ (9,956) $ 17,180 $ 35,972 $ 34,904 $ 42,245
======== ======== ======== ======== ========
40
42
AT OR FOR THE YEAR ENDED MARCH 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
KEY OPERATING RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:(4)
Return on assets(2) 0.64% 0.46% 1.27% 1.37% 1.71%
Return on equity(2) 7.59 5.69 13.13 14.81 21.80
Interest-earning assets to interest-bearing
liabilities 108.71 105.80 109.28 110.55 107.97
Interest rate spread(5) 2.91 3.09 3.39 4.18 4.13
Net interest margin(5) 3.26 3.32 3.77 4.52 4.38
Non-interest expense, exclusive of
amortization of intangible assets, to total
assets(2) 1.90 1.99 1.77 1.83 1.67
Efficiency ratio(6) 56.71 53.82 45.58 39.79 37.12
ASSET QUALITY RATIOS:
Non-performing loans as a percent of total
loans at end of period 1.07% 1.07% 1.52% 1.05% 1.24%
Non-performing assets to total assets at end
of period(7) 0.57 0.74 0.94 0.88 0.90
Allowance for loan losses to non-performing
loans at end of period 122.19 99.76 57.81 55.73 41.68
Allowance for loan losses to total loans at
end of period 1.31 1.07 0.88 0.58 0.52
CAPITAL AND OTHER RATIOS:(4)
Equity to assets at end of period 18.17% 8.28% 7.49% 9.89% 8.66%
Leverage capital 11.16 6.83 6.13 9.54 8.52
Tangible equity to risk-weighted assets at end
of period 22.25 10.05 9.82 13.76 13.85
Total capital to risk-weighted assets at end
of period 23.50 11.15 10.82 14.43 14.41
Number of full service offices at end of
period 34 32 33 21 20
- - ---------------
(1) Represents the excess of cost over fair value of net assets acquired which
consists of goodwill and other intangibles which amounted to $21.8 million
and $34.1 million, respectively, at March 31, 1998. The reduction from March
31, 1996 to March 31, 1997 reflected, in addition to the amortization of
such intangible assets, certain adjustments relating to the acquisition in
1996 of Bay Ridge as well as the acquisition of five branch offices (the
"1996 Branch Acquisition"). The goodwill resulting from the Bay Ridge
acquisition decreased during fiscal 1997 due primarily to the repayment of
the Bay Ridge ESOP loan and the receipt of tax refunds. The intangible
related to the 1996 Branch Acquisition was affected by the sale of the
deposits related to one of the offices acquired, resulting in a $5.3 million
decrease in the remaining premium related to this branch office. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Acquisitions" in Item 7 hereof.
(2) At and for the year ended March 31, 1998, excludes the one time
non-recurring charge of $56.4 million ($37.2 million net of tax) for the
funding of the Independence Community Foundation. At and for the year ended
March 31, 1997, reflects the effects of a special one-time assessment
imposed on institutions which had deposits insured by the SAIF. The Bank, as
a result of the various acquisitions it has completed, is deemed to have
SAIF deposits. As a consequence, during fiscal 1997, it paid $8.6 million in
satisfaction of the special assessment. Had this amount not been paid for
the year ended March 31, 1997, the Bank's returns on assets and equity would
have been 0.61% and 7.44%, respectively, and the Bank's ratio of
non-interest expenses, exclusive of amortization of intangible assets, to
total assets would have been 1.76%.
(3) Reflects adoption of SFAS No. 109.
(4) With the exception of end of period ratios and the efficiency ratio, all
ratios are based on average daily balances during the respective periods and
are annualized where appropriate.
(5) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(6) Reflects adjusted operating expense (net of amortization of intangibles and,
special SAIF assessment and contribution to the Independence Community
Foundation ("Foundation") as a percent of the aggregate of net interest
income and adjusted non-interest income (excluding gains and losses on the
sales of loans and securities).
(7) Non-performing assets consist of non-accrual loans, loans past due 90 days
or more as to interest or principal repayment and accruing and real estate
acquired through foreclosure or by deed-in-lieu therefore.
41
43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans, mortgage-backed and mortgage-related
securities and investment securities, and interest expense on interest-bearing
liabilities, which principally consist of deposits and borrowings. Net interest
income is determined by an institution's interest rate spread (i.e., the
difference between the yields earned on its interest-earning assets and the
rates paid on its interest-bearing liabilities) and the relative amount of
interest-earning assets to interest-bearing liabilities.
The Company's results of operations also are affected by the provision for
loan losses, resulting from management's assessment of the adequacy of the
allowance for loan losses, the level of its non-interest income, including
service fees and related income, gains and losses from the sales of loans and
securities, the level of its non-interest expense, including compensation and
employee benefits, occupancy expense and FDIC insurance premiums, data
processing services and income tax expense.
The Bank is a community-oriented savings bank which emphasizes customer
service and convenience. As part of this strategy, the Bank offers products and
services designed to meet the needs of its customers. The Bank generally has
sought to achieve long-term financial strength and stability by increasing the
amount and stability of its net interest income and non-interest income and by
maintaining a high level of asset quality. In pursuit of these goals, the Bank
has adopted a business strategy emphasizing controlled growth, residential
lending, retail deposit products and customer service while maintaining asset
quality and stable liquidity.
BUSINESS STRATEGY
CONTROLLED GROWTH. In recent years, the Company has sought to increase its
assets and expand its operations. The Company purchased Bay Ridge in January
1996 as well as consummated in March 1996 the 1996 Branch Acquisition which
involved the purchase of five branch offices located in Brooklyn and Staten
Island from a savings institution which was withdrawing from the market area. In
addition, in earlier periods, the Company also completed several other
acquisitions. The Company's assets increased by $1.49 billion or 39.8% from
$3.73 billion at March 31, 1997 to $5.22 billion at March 31, 1998. The increase
in total assets was the result primarily of the receipt of the net proceeds of
the stock offering of $685.7 million conducted in connection with the
reorganization of the Bank, as well as the impact of adopting new accounting
rules relating to the Company's ongoing securities lending activities. These
accounting rules required the Company to recognize $701.2 million in cash and
cash equivalents and an equal amount as borrowed funds. The Company has for many
years "lent" a portion of its securities, primarily U.S. Treasury Notes and
Bills, generally to money center banks and national securities firms. The
securities lent are collateralized generally by cash in an amount slightly in
excess of the value of the securities lent. Under the new accounting rules, the
obligation to return the cash upon receipt of the lent securities is deemed a
borrowing while the cash, which has been invested in cash equivalents, is
reflected as an asset. As a result of the influx of proceeds upon completion of
the conversion and subsequent investment in U.S. Treasury Securities, the
Company increased its activity in security lending transactions pending
deployment of such assets into loans and other earning assets. Prior to January
1, 1998 these transactions were not recorded in the statement of financial
condition.
EMPHASIS ON RESIDENTIAL LENDING. Management believes that the Company is
more likely to achieve its goals of long-term financial strength and
profitability by continuing to emphasize residential loan products and services.
Given the concentration of multi-family housing units in the New York City
metropolitan area, the Company's primary lending emphasis is on the origination
of loans secured by first liens on multi-family residential properties, which
consist primarily of mortgage loans secured by apartment buildings. Multi-family
residential loans totaled $1.61 billion or 57.6% of the total loan portfolio at
March 31, 1998 compared to $1.37 billion at March 31, 1997, which represents a
17.6% increase. The Company also originates single-family (one-to-four units)
residential mortgage loans, which totaled $505.1 million or 18.2% of the total
loan portfolio at March 31, 1998 as compared to $552.7 million at March 31,
1997, representing a
42
44
8.6% decline, and cooperative apartment loans (loans secured by an individual's
shares in a cooperative housing corporation), which loans totaled $380.9 million
or 13.7% of the total loan portfolio at March 31, 1998 as compared to $348.0
million at March 31, 1997, or a 9.4% increase.
MAINTAIN ASSET QUALITY. Management believes that high asset quality is a
key to long-term financial success. Accordingly, the Company has sought to
maintain a high level of asset quality and moderate credit risk by using
underwriting standards which management believes are conservative and by
generally limiting its origination of mortgage loans to its market area. Total
non-performing assets have remained relatively stable even as the Company's
assets have grown significantly. The Company's ratio of non-performing assets to
total assets at March 31, 1998 was 0.57% and its allowance for loan losses to
non-performing loans was 122.19%, while at March 31, 1997 the percentages were
0.74% and 99.76%, respectively.
STABLE SOURCE OF LIQUIDITY. The Company purchases short to medium-term
investment securities and mortgage-backed and mortgage-related securities
combining what management believes to be appropriate liquidity, yield and credit
quality in order to primarily achieve a managed and predictable source of
liquidity to meet loan demand and, to a lesser extent, a stable source of
interest income. These portfolios, which totaled in the aggregate $1.37 billion
at March 31, 1998, compared to $548.5 million at March 31, 1997, are comprised
primarily of obligations of the U.S. Government and federal agencies totaling
$1.09 billion (of which $1.06 billion consists of U.S. Treasury Notes and Bills)
and mortgage-backed and mortgage-related securities totaling $84.6 million (of
which $83.5 million consists of mortgage-backed securities and $1.1 million of
CMO's). Additionally the Company held $168.1 million in adjustable-rate (Dutch
auction) preferred stocks at March 31, 1998. It did not own any of such
securities at March 31, 1997. In accordance with the Company's policy,
investments purchased by the Company generally must be rated at least
"investment grade" upon purchase.
EMPHASIS ON RETAIL DEPOSITS AND CUSTOMER SERVICE. The Company, as a
traditional community-based savings bank, is largely dependent upon its base of
competitively priced core deposits to provide a stable source of funding. The
Company has retained many loyal customers over the years through a combination
of quality service, low service fees on various deposit and other products,
customer convenience, an experienced staff and a commitment to the communities
which it serves. Lower costing deposits, which exclude time deposits, totaled
$1.67 billion or 49.2% of the Company's total deposits at March 31, 1998, as
compared to $1.58 billion at March 31, 1997 a $89.4 million or 5.65% increase.
In addition, the Company does not accept brokered deposits as a source of funds
and has no plans to do so in the future.
ACQUISITIONS
The Company significantly increased its asset size during fiscal 1996
through two acquisitions. In January 1996, the Company completed the acquisition
of Bay Ridge, acquiring $558.6 million of assets and six branch offices located
in Brooklyn with total deposits of $445.2 million. As a result of such
acquisition, the Company recorded goodwill totaling $26.1 million, as adjusted,
which is being amortized on a straight-line basis over a 14 year period. The
amount of goodwill related to the Bay Ridge acquisition was adjusted downward
during fiscal 1997 by $4.8 million primarily as the result of the receipt of
proceeds from the repayment of the Bay Ridge ESOP loan and the receipt of tax
refunds, offset in part by an additional accrual related to a Bay Ridge
qualified retirement plan. As of March 31, 1998, the Company had $21.8 million
of goodwill remaining related to this acquisition.
In March 1996, the Company completed the 1996 Branch Acquisition, providing
the Company with three additional branch offices in Brooklyn and two branch
offices in Staten Island. In connection with the transaction, the Company
assumed approximately $615.6 million of deposits and other liabilities and
recorded $49.5 million of intangible assets. In consideration for the assumption
of deposits and other liabilities, the Company received approximately $557.9
million in cash and branch offices and other fixed assets valued at
approximately $8.1 million. In September 1996, the Company discontinued
operations at one of the branch offices acquired in the 1996 Branch Acquisition
and sold deposits totaling $51.4 million. The intangible related to the 1996
Branch Acquisition, as adjusted, which totaled $30.6 million at March 31, 1998,
is being amortized on a straight line basis over seven years.
43
45
In April 1997, the Company continued its growth by completing a branch
acquisition in Queens. The Company assumed $70.0 million of deposits, receiving
$64.9 million in cash, the branch office and other fixed assets with an
aggregate value of approximately $886,000. In connection with such acquisition,
the Company recorded an intangible asset in the amount of $4.0 million which is
being amortized on a straight line basis over seven years. At March 31, 1998,
the remaining intangible resulting from the deposit acquisition amounted to $3.5
million.
CHANGES IN FINANCIAL CONDITION
Total assets increased by $1.49 billion, or 39.8%, from $3.73 billion at
March 31, 1997 to $5.22 billion at March 31, 1998. The increase in total assets
was the result of the receipt of the net proceeds of the stock offering of
$685.7 million, as well as the impact of adopting new accounting rules relating
to the Company's ongoing securities lending activities. These accounting rules
required the Company to recognize $701.2 million in cash and cash equivalents
and an equal amount as borrowed funds. See "-- Business Strategy -- Controlled
Growth." The $1.49 billion growth in fiscal 1998 assets was primarily reflected
in cash and cash equivalents which increased by $482.6 million or 128.8% to
$857.3 million, a $924.6 million or 258.6% increase in debt and equity
securities, a $106.4 million or 55.7% decline in mortgage-backed and mortgage
related securities and a $212.6 million increase in mortgage loans to $2.28
billion at March 31, 1998 while other loans increased by 8.12% or $37.8 million
to $502.7 million at March 31, 1998. Other assets at March 31, 1998 were $111.8
million, a decline of $57.1 million or 33.8%, which is primarily attributable to
the reduction of receivables of $93.7 million related to securities sales, the
proceeds of which were not received and invested until April, 1997, offset
primarily by an increase in net deferred tax assets of $18.9 million, which
increased mostly as the result of the contribution to the Foundation.
NON-PERFORMING ASSETS. The Company's non-performing assets, which consist
of non-accrual loans, loans past due 90 days or more as to interest or principal
and accruing and other real estate owned acquired through foreclosure or
deed-in-lieu thereof increased by $2.3 million or 8.4% to $29.9 million at March
31, 1998 from $27.6 million at March 31, 1997. The increase in non-performing
assets from March 31, 1997 to March 31, 1998 was primarily due to an $8.4
million increase to $16.8 million in loans contractually past maturity but which
are continuing to pay in accordance with their original repayment schedule. At
March 31, 1998, the Company's non-performing assets amounted to 0.57% of total
assets and consisted of $11.3 million of non-accrual loans ($1.2 million of
which were multi-family residential loans and $4.8 million of which were
commercial and other real estate loans), $1.6 million of loans past due 90 days
or more as to interest and accruing, $16.8 million of loans past due 90 days or
more as to principal and accruing ($10.4 million of which were multi-family
loans and $4.8 million of which were commercial and other real estate loans) and
$192,000 of other real estate owned.
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses
amounted to $36.3 million at March 31, 1998 as compared to $27.0 million at
March 31, 1997. It is management's policy to maintain an allowance for estimated
losses on loans based upon an assessment of prior loss experience, the volume
and type of lending conducted by the Company, industry standards, past due loans
(as to either interest or principal), general economic conditions and other
factors related to the collectibility of the loan portfolio. The Company's
allowance increased during the twelve months ended March 31, 1998 primarily due
to a $10.0 million provision for loan losses made in fiscal 1998. The Company
increased its provision for loan losses by $2.1 million in the twelve months
ended March 31, 1998 as a result of, among other factors, the increased
investment in multi-family residential and commercial real estate loans (all of
which are secured by properties in the New York City metropolitan area), the
increased number of larger multi-family residential and individual cooperative
apartment loans, the increased amount and number of commercial business loans
and consumer loans and the increased number of loans which exhibit risk
characteristics which were determined to require closer oversight (including the
amount of loans which were 90 days or more past due as to principal). At March
31, 1998, the Company's allowance for loan losses amounted to 122.2% of total
non-performing loans as compared to 99.8% of total non-performing loans at March
31, 1997. The Company utilizes these percentages as only one of the factors in
assessing the adequacy of the allowance for loan losses at various points in
time.
44
46
DEPOSITS. Deposits increased $68.3 million or 2.1% to $3.39 billion at
March 31, 1998 from $3.33 billion at March 31, 1997 primarily as a result of the
assumption of $70.0 million of deposits in a branch purchase completed in April
1997 combined with interest credited of $144.5 million, offset by $146.2 million
of deposit outflows. The deposit outflows reflect disintermediation primarily as
a result of the continued strong performance of the equities markets during the
twelve month period.
BORROWINGS. The Company has historically used borrowing only to a limited
extent although it may increase such use in the future. The Company's borrowings
consist primarily of advances from the FHLB of New York. At March 31, 1998, FHLB
advances totaled $14.3 million, a decrease of $250,000 as compared to March 31,
1997. As the result of the previously described accounting change, securities
lending transactions, totaling $701.2 million at March 31, 1998, which were
prior to January 1, 1998, not reflected in the statement of condition, are
included in borrowings.
EQUITY. At March 31, 1998, total equity equaled $949.1 million, compared
to $309.1 million at March 31, 1997. This $640.0 million increase was primarily
the result of net proceeds received in the stock conversion, adjusted for the
contribution of stock to the Foundation, partially offset by the issuance of a
$98.9 million loan to the Company's Employee Stock Ownership Plan (ESOP) to fund
the ESOP's purchase of 5,632,870 shares of common stock in the open market in
accordance with the Bank's Plan of Conversion.
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The table on the following page sets forth, for the periods indicated,
information regarding (i) the total dollar amount of interest income of the
Company from interest-earning assets and the resultant average yields; (ii) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average rate; (iii) net interest income; (iv) interest rate spread;
and (v) net interest margin. Information is based on average daily balances
during the indicated period.
45
47
YEAR ENDED MARCH 31,
----------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable(1):
Mortgage loans $2,193,557 $175,269 7.99% $2,007,670 $161,638 8.05%
Other loans:
Cooperative apartment loans 380,737 27,562 7.24 361,011 26,687 7.39
Consumer and commercial business loans(2) 122,872 10,871 8.85 108,608 9,502 8.75
---------- -------- ---------- --------
Total loans 2,697,166 213,702 7.92 2,477,289 197,827 7.99
Mortgage-backed and mortgage-related securities 157,452 10,992 6.98 475,967 28,856 6.06
Investment securities 783,134 45,689 5.83 395,677 22,356 5.65
Other interest-earning assets(3) 413,343 22,660 5.48 114,490 6,264 5.47
---------- -------- ---------- --------
Total interest-earning assets 4,051,095 293,043 7.23 3,463,423 255,303 7.37
-------- ---- -------- ----
Non-interest-earning assets 192,107 244,567
---------- ----------
Total assets $4,243,202 $3,707,990
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 531,056 $ 14,118 2.66 $ 469,833 $ 12,459 2.65
Savings deposits(5) 1,200,369 34,288 2.86 1,055,807 30,728 2.91
Certificates of deposit 1,795,859 100,560 5.60 1,729,185 95,653 5.53
---------- -------- ---------- --------
Total deposits 3,527,284 148,966 4.22 3,254,825 138,840 4.27
---------- -------- ---------- --------
Total borrowings 199,329 11,977 6.01 18,581 1,347 7.25
---------- -------- ---------- --------
Total interest-bearing liabilities 3,726,613 160,943 4.32 3,273,406 140,187 4.28
-------- ---- -------- ----
Non-interest-bearing liabilities(5) 157,934 132,807
---------- ----------
Total liabilities 3,884,547 3,406,213
Total equity 358,655 301,777
---------- ----------
Total liabilities and equity $4,243,202 $3,707,990
========== ==========
Net interest-earning assets $ 324,482 $ 190,017
========== ==========
Net interest income/interest rate spread $132,100 2.91% $115,116 3.09%
======== ==== ======== ====
Net interest margin 3.26% 3.32%
==== ====
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.09x 1.06x
==== ====
YEAR ENDED MARCH 31,
---------------------------------
1996
---------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
---------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable(1):
Mortgage loans $1,648,009 $140,435 8.52%
Other loans:
Cooperative apartment loans 352,440 26,389 7.49
Consumer and commercial business loans(2) 108,661 9,773 8.99
---------- --------
Total loans 2,109,110 176,597 8.37
Mortgage-backed and mortgage-related securities 286,317 17,779 6.21
Investment securities 204,862 11,635 5.68
Other interest-earning assets(3) 120,791 7,089 5.87
---------- --------
Total interest-earning assets 2,721,080 213,100 7.83
-------- ----
Non-interest-earning assets 118,944
----------
Total assets $2,840,024
==========
Interest-bearing liabilities:
Deposits:
Demand deposits(4) $ 350,395 $ 9,362 2.67
Savings deposits(5) 834,374 25,097 3.01
Certificates of deposit 1,235,755 71,920 5.82
---------- --------
Total deposits 2,420,524 106,379 4.39
---------- --------
Total borrowings 69,402 4,240 6.11
---------- --------
Total interest-bearing liabilities 2,489,926 110,619 4.44
-------- ----
Non-interest-bearing liabilities(5) 76,075
----------
Total liabilities 2,566,001
Total equity 274,023
----------
Total liabilities and equity $2,840,024
==========
Net interest-earning assets $ 231,154
==========
Net interest income/interest rate spread $102,481 3.39%
======== ====
Net interest margin 3.77%
====
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.09x
====
- - ---------------
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Includes home equity lines of credit and improvement loans, student loans,
automobile loans, passbook loans, credit card loans, personal loans and
commercial business loans.
(3) Includes federal funds sold, interest-earning bank deposits, FHLB stock,
overnight commercial paper and certificates of deposit.
(4) Includes NOW and money market accounts.
(5) Includes interest paid on funds received for stock subscriptions in
connection with the Bank's Conversion.
46
48
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate) and (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). The combined
effect of changes in both rate and volume has been allocated proportionately to
the change due to rate and the change due to volume.
FISCAL 1998 COMPARED TO FISCAL 1997 COMPARED TO
FISCAL 1997 FISCAL 1996
-------------------------------- --------------------------------
INCREASE INCREASE
(DECREASE) DUE TO TOTAL NET (DECREASE) DUE TO TOTAL NET
------------------ INCREASE ------------------ INCREASE
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
------- ------- ---------- ------- ------- ----------
(IN THOUSANDS)
Interest-earning assets:
Loans receivable:
Mortgage loans $(1,215) $14,846 $13,631 $(8,088) $29,291 $21,203
Other loans:
Cooperative apartment loans (553) 1,428 875 (349) 647 298
Consumer and commercial business
loans(1) 110 1,259 1,369 (266) (5) (271)
------- ------- ------- ------- ------- -------
Total loans receivable (1,658) 17,533 15,875 (8,703) 29,933 21,230
Mortgage-backed and mortgage-related
securities 3,835 (21,699) (17,864) (439) 11,516 11,077
Investment securities 735 22,598 23,333 (61) 10,782 10,721
Other interest-earning assets 11 16,385 16,396 (467) (358) (825)
------- ------- ------- ------- ------- -------
Total net change in income on
interest-earning assets 2,923 34,817 37,740 (9,670) 51,873 42,203
Interest-bearing liabilities:
Deposits:
Demand deposits 47 1,612 1,659 (70) 3,167 3,097
Savings deposits (541) 4,101 3,560 (856) 6,487 5,631
Certificates of deposit 1,212 3,695 4,907 (3,739) 27,472 23,733
------- ------- ------- ------- ------- -------
Total deposits 718 9,408 10,126 (4,665) 37,126 32,461
Borrowings (269) 10,899 10,630 673 (3,566) (2,893)
------- ------- ------- ------- ------- -------
Total net change in expense
on interest-bearing
liabilities 449 20,307 20,756 (3,992) 33,560 29,568
------- ------- ------- ------- ------- -------
Net change in net interest income $ 2,474 $14,510 $16,984 $(5,678) $18,313 $12,635
======= ======= ======= ======= ======= =======
- - ---------------
(1) Includes home equity lines of credit and loans, student loans, automobile
loans, passbook loans, personal loans, credit card loans and commercial
business loans.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
GENERAL. The Company reported a net loss of $10.0 million and net income
of $17.2 million for the years ended March 31, 1998 and 1997, respectively.
Results of operations for fiscal 1998 reflect the effect of a non-recurring
contribution to the Foundation in connection with the conversion and
reorganization of the Bank and its mutual holding company parent in March, 1998.
Excluding the effect of this contribution, net income was $27.2 million for
fiscal 1998, a 21.3% increase over fiscal 1997, compared to net income of $22.4
million in fiscal 1997 after excluding the net effect of the one-time SAIF
assessment.
NET INTEREST INCOME. Net interest income is determined by interest rate
spread (i.e., the difference between the yields earned on its interest-earning
assets and the rates paid on its interest-bearing liabilities) and the relative
amounts of interest-earning assets to interest-bearing liabilities. The
Company's interest rate spread was 2.91% and 3.09% for the years ended March 31,
1998 and 1997, respectively, while its net interest margin was
47
49
3.26% and 3.32% for the years ended March 31, 1998 and 1997, respectively. Net
interest income increased by $17.0 million or 14.8% to $132.1 million for the
fiscal year ended March 31, 1998 as compared to fiscal 1997. The increase was
due to a $37.7 million increase in interest income offset by a $20.7 million
increase in interest expense. The increase in net interest income reflected the
continued growth in interest-earning assets, in particular, loans, and the
improved yield on and growth of its investment securities. The increase in net
interest income includes approximately $3.6 million earned on stock subscription
funds submitted during the offering period which were invested in short term
securities until the consummation of the offering, at which time the funds
received in excess of the consideration for the common stock issued in the
conversion were refunded.
Interest income increased by $37.7 million to $293.0 million for the fiscal
year ended March 31, 1998 as compared to the same period in 1997 primarily due
to an increase in the average balance of the Company's interest earning-assets,
offset by a decline in the weighted average yield earned thereon from 7.37% for
fiscal 1997 to 7.23% for fiscal 1998. The average yield on assets was negatively
impacted by two factors -- the stock conversion and a recently effective
accounting standard. During the initial public offering period, the Company
received approximately $2.1 billion which was invested in short-term securities
and cash equivalents pending deployment into higher yielding assets, primarily
loans. Upon the completion of the offering, approximately $1.4 billion was
refunded to subscribers, with the balance remaining invested in short-term
securities and cash equivalents. The second factor was an accounting
pronouncement, which requires that transactions, which the Company had
previously not reported on its statement of financial condition but had reported
the net earnings of the transactions in other non-interest income, be reported
on the statement of financial condition as borrowings with corresponding amounts
in an appropriate asset category. Interest income and interest expense related
to the securities lending transaction were reported on a gross basis of $11.1
million and $10.8 million, respectively. The composition of the Company's
interest income for the fiscal year ended March 31, 1998 reflected the changes
in the Company's asset structure effected during fiscal 1997, when the Bank
restructured a portion of its securities portfolio to enhance the overall yield
and reduce exposure to interest rate risk by selling $397.3 million of its
investment securities and mortgage-backed and mortgage-related securities and
reinvesting substantially all of the proceeds of the sales in U.S. Treasury
Notes and Bills, most of which had maturities of two years or less. The weighted
average yield, on a fully taxable basis on the securities purchased was
approximately 60 basis points higher than the weighted yield on the securities
sold. Interest income earned on mortgage-backed and mortgage-related securities
declined by $17.9 million primarily as a result of the decline in the average
balance of such assets from $476.0 million during the 1997 period to $157.5
million for the 1998 period. However, offsetting such decline were $23.3
million, $13.6 million and $16.4 million increases in interest earned during the
fiscal year ended March 31, 1998 on investment securities, mortgage loans and
other interest-earning assets respectively, reflecting the asset restructuring
effected in fiscal 1997 as well as the Company's continued emphasis on
multi-family residential lending.
Interest expense increased by $20.7 million or 14.8% from $140.2 million
for the fiscal year ended March 31, 1997 to $160.9 million for the fiscal year
ended March 31, 1998 with the increase due to a $10.1 million increase in
interest paid on deposits and stock subscription accounts and a $10.6 million
increase in borrowing costs. The Company's average balance of deposits increased
to $3.53 billion for the 1998 period from $3.25 billion for the 1997 period
reflecting deposit inflows related to the stock offering.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
increased by $2.0 million or 25.8% from $8.0 million for the fiscal year ended
March 31, 1997 to $10.0 million for the fiscal year ended March 31, 1998. The
increase in the provision primarily reflected the Company's determination in
fiscal 1998 to increase its allowance for loan losses based upon, among other
factors, the Company's continuing emphasis on multi-family residential,
commercial real estate and commercial business loans secured by properties or
other collateral located in the New York City metropolitan area, the increased
number of larger multi-family residential and commercial real estate loans,
individual cooperative apartment loans, the increased amount and number of
commercial business loans and consumer loans and an increased amount of loans
which exhibit risk characteristics which require increased management
48
50
oversight (including loans contractually past due maturity). At March 31, 1998
and March 31, 1997, the allowance for loan losses as a percentage of total
non-performing loans was 122.2% and 99.8%, respectively.
NON-INTEREST INCOME. Non-interest income increased $7.4 million from $2.9
million for the fiscal year ended March 31, 1997 to $10.3 million for the same
period in 1998. The increase reflected a $667,000 increase in service fees, a
$115,000 gain received on the sale of loans and securities during the 1998
period as compared to a $3.3 million loss incurred on such sales during fiscal
1997 plus a $3.3 million increase in other non-interest income. The loss on the
sale of loans and securities incurred in fiscal 1997 was the result of the
decision to restructure the mortgage-backed and mortgage-related and investment
portfolios. The $3.3 million increase in other non-interest income is primarily
the result of a $1.2 million increase in prepayment fees on mortgages to $2.0
million in fiscal 1998.
NON-INTEREST EXPENSES. Non-interest expenses increased $63.7 million or
77.6% to $145.9 million for the fiscal year ended March 31, 1998 from $82.2
million for the same period in 1997. Exclusive of the $56.4 million contribution
to the Foundation non-interest expenses were $89.5 million in fiscal 1998
compared to $82.2 million in fiscal 1997, an increase of $7.3 million or 8.9%.
Such increase was primarily due to increased data processing fees ($4.5
million), reflecting in large part costs incurred in connection with the
Company's conversion of its data processing systems, increased compensation and
employee benefits expense ($4.8 million), reflecting the increase in the
Company's work force resulting from the data and stock conversions, increased
other non-interest expense ($4.8 million), primarily due to the Company's growth
and structural changes. Such increases were partially offset by a $1.0 million
decrease in FDIC insurance premiums reflecting the lower premium rate assessed
during the 1998 period, and the non-recurrence of the one-time SAIF special
assessment in fiscal 1997.
Total salaries and benefits increased by $4.8 million in fiscal 1998 to
$31.7 million, primarily as the result of the growth of the Company during
fiscal years 1996, 1997 and 1998 and the related expansion of staff plus the
necessity to add staff due to the data and stock conversions, which also caused
overtime pay to increase by $940,000, with the result that related employee
benefits cost also increased, which was further increased by the fourth quarter
of fiscal 1998 recognition of $1.3 million in ESOP contribution expense
reflecting the first payment on the ESOP loan.
Occupancy costs increased by $1.6 million to $12.6 million in fiscal 1998,
primarily as the result of a branch acquisition in April, 1997 and increased
costs related to branch renovation and upgrading.
Data processing service expenses increased by $4.5 million or 64.2% to
$11.5 million during the fiscal year ended March 31, 1998 as compared to the
fiscal year ended March 31, 1997. The increase reflected primarily expenses
incurred in connection with the conversion of the Company's data processing
systems. Such expenses amounted to $5.7 million during the fiscal year ended
March 31, 1998. The Company has recognized substantially all the expenses
expected to be incurred in connection with completion of the first phase of the
conversion of the Company's data processing systems which was completed in the
third quarter of fiscal 1998. However, additional expenses of approximately $6.0
million will be incurred in connection with the second (and final) phase of the
conversion which is expected to be completed by the end of fiscal 1999.
The Company's advertising expenses amounted to $4.3 million and $3.6
million for the fiscal year ended March 31, 1998 and 1997, respectively. The
increase in fiscal years 1998 and 1997 reflected the Company's determination to
increase its market presence through, in part, increased advertising in print
media and radio.
FDIC insurance premiums declined in the fiscal year ended March 31, 1998
from $2.2 million during fiscal 1997 to $1.2 million in fiscal 1998. The
decrease reflects the reduction in the rate paid to the FDIC for deposit
insurance.
As a result of past acquisitions, the Company is deemed to have
SAIF-insured deposits. During fiscal 1997, the FDIC imposed a one-time special
assessment in order to recapitalize the SAIF fund which, for BIF-insured
institutions like the Company which also have deposits deemed to be SAIF-
insured, amounted to 65.7 basis points on the balance of SAIF deposits as of
March 31, 1995. As a result, the Company was assessed $8.6 million in fiscal
1997. The level of deposit insurance expense is and will remain higher than that
of an insured institution with a comparable amount of BIF-only
49
51
insured deposits due to the significant amount of the
Company's deposits deemed to be SAIF-insured. The deposits deemed SAIF-insured
are assessed at a rate of 6.3 basis points compared to 1.3 basis points for the
BIF-insured deposits. At March 31, 1998, $1.53 billion of the Company's deposits
were deemed to be SAIF insured while at March 31, 1997, SAIF insured deposits
were $1.61 billion.
During the twelve months ended March 31, 1998, the amortization of
intangibles increased by $462,000 or 5.6% from the same period in fiscal 1997.
The amortization of intangibles increased in fiscal 1998 due to the acquisition
of a branch office for a premium of $4.0 million, which is being expensed over a
seven year period.
Other non-interest expenses, including miscellaneous items such as
equipment expenses, office supplies, postage, telephone expenses, maintenance
and security services contracts and professional fees, increased $4.8 million or
32.8% to $19.4 million for the fiscal year ended March 31, 1998 compared to the
same period in 1997, primarily as a result of the Company's growth and
structural changes.
INCOME TAXES. For fiscal 1998 the Company, as a result of the $56.4
million contribution to the Foundation, had a $3.5 million tax benefit as
compared to a $10.7 million tax provision for the fiscal 1997. Excluding the
effect of the Foundation, the Company's tax expense would have been $15.8
million. In addition, the Company's effective tax rate was substantially reduced
due to the establishment of a real estate investment trust, Independence
Community Realty Corp., during fiscal 1997.
As of March 31, 1998, net deferred tax assets were $36.8 million. No
valuation allowance was deemed necessary with respect to such asset.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
GENERAL. Net income declined by $18.8 million from fiscal 1996 to fiscal
1997 due primarily to the recognition in fiscal 1996 of a $12.2 million net gain
on the sale of securities and loans as compared to a net loss on the sale of
securities and loans totaling $3.3 million in fiscal 1997. The Bank sold $16.8
million of investment securities in fiscal 1996, recording a gain of $12.1
million. Net income was also affected by the $6.4 million increase in
amortization of intangibles, reflecting a full year of amortization of the
intangible assets recorded in connection with the Bay Ridge acquisition and in
the 1996 Branch Acquisition. The decrease in net income in fiscal 1997 was also
the result, in part, of the increase in the Company's provision for loan losses
from $3.7 million for the year ended March 31, 1996 to $8.0 million for the year
ended March 31, 1997 as the Company increased its allowance for loan losses
primarily in light of its increased investment in multi-family residential and
commercial business loans, the increased number of larger multi-family
residential loans and individual cooperative apartment loans and an increase in
the number of loans which exhibit risk characteristics which management
determined would require closer oversight. Net income was also adversely
affected by the $8.6 million special SAIF assessment. Net income for fiscal 1997
was favorably affected by a reduction in the provision for income taxes due to a
reduction in the Company's effective tax rate for the fiscal year.
NET INTEREST INCOME. Net interest income increased by $12.6 million or
12.3% to $115.1 million in fiscal 1997 as compared to fiscal 1996 primarily due
to a significant increase in the Company's average interest-earning assets as a
result of the Bay Ridge acquisition and the re-investment of the cash received
in the 1996 Branch Acquisition completed during the fourth quarter of fiscal
1996.
Interest income increased by $42.2 million from fiscal 1996 to fiscal 1997
reflecting the increase in the average balance of the Company's interest-
earning assets as a result of the completion of the Bay Ridge acquisition and
the 1996 Branch Acquisition. The average balance of the loan portfolio increased
by $368.2 million both as a result of the acquisition of loans from Bay Ridge as
well as to a lesser extent the Company's investment of a portion of the funds
received in the 1996 Branch Acquisition in new loans. Offsetting in part the
effects of the increase in the average balance of loans was the 38 basis point
decline in the average yield earned on the loan portfolio reflecting in part the
repricing downward of adjustable-rate loans as well as general market conditions
which resulted in loans with lower yields at the time of origination. Investment
of cash received in the 1996 Branch Acquisition as well as investment securities
and mortgage-backed and mortgage-related securities acquired from Bay Ridge were
responsible for the significant increase in the aggregate average balance of
investment securities and mortgage-backed and mortgage-related securities which
increased from $491.2 mil-
50
52
lion in fiscal 1996 to $871.6 million in fiscal 1997. Partially offsetting the
increase in the average balances of these portfolios was a decline in the
average yield earned thereon from 5.99% to 5.88%.
Interest expense increased by $29.6 million or 26.7% to $140.2 million from
fiscal 1996 to fiscal 1997 reflecting a 34.5% increase in the average balance of
deposits, particularly certificates of deposit, as a result of the Bay Ridge
acquisition and the 1996 Branch Acquisition. The growth in the average balance
of deposits was offset in part by the decline in average rates paid thereon from
4.39% to 4.27%. In particular, the average rate paid on certificates of deposit
decreased 29 basis points to 5.53% for fiscal 1997. Such decline reflected in
part both the effect of deposit outflows as certain higher costing deposits were
not reinvested with the Company, as well as the transfer to another institution
of $51.4 million of deposits.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
increased by $4.3 million to $8.0 million in fiscal 1997. The increase in the
provision primarily reflected the Company's determination in fiscal 1997 to
increase its allowance as described previously. See "Business -- Allowance for
Loan Losses" in Item 1 hereof.
NON-INTEREST INCOME. Non-interest income decreased by $17.2 million or
85.5% to $2.9 million from fiscal 1996 to fiscal 1997. The decline reflected in
large part the $12.2 million net gain in fiscal 1996 on the sale of loans and
investment securities and mortgage-backed and mortgage-related securities as
compared to a $3.3 million net loss incurred in fiscal 1997. The net gain was
primarily due to a $12.1 million gain on the sale of $16.8 million of investment
securities which were sold in fiscal 1996 in anticipation of the requirement to
fund the SAIF special assessment while the net loss incurred in fiscal 1997
resulted from a $3.9 million net loss on the sale of $652.3 million of
investment securities and mortgage-backed and mortgage-related securities
effected primarily as part of the Company's asset restructuring. The loss on
loan and securities sales was partially offset by an increase in service fees on
deposit accounts and other depositor and borrower services provided by the
Company from $4.1 million to $5.7 million.
NON-INTEREST EXPENSES. Non-interest expenses increased substantially by
$30.0 million or 57.6% to $82.2 million from fiscal 1996 to fiscal 1997. This
increase was primarily due to the effects of the Bay Ridge acquisition and the
1996 Branch Acquisition (including amortization of intangible assets ($6.4
million), the imposition of the special SAIF assessment ($8.6 million) on that
portion of the Company's deposits deemed to be SAIF-insured deposits and
increased data processing costs ($3.9 million) due, in part, to the data
processing systems conversion. As a result of the two acquisitions in 1996, the
Bank added ten offices to its branch network and increased its work force by
approximately 20%.
Compensation and employee benefits expense increased by $4.6 million or
20.5% to $26.9 million in fiscal 1997 from $22.3 million in fiscal 1996. The
increase in fiscal 1997 reflected in large part the effects of the Bay Ridge
acquisition and the 1996 Branch Acquisition, resulting in an increase of
approximately 20% in the number of employees.
Occupancy costs increased by $3.3 million or 43.4% to $11.0 million in
fiscal 1997 from fiscal 1996 due to the addition of ten additional branch
offices as a result of the Bay Ridge acquisition and the 1996 Branch
Acquisition. The increased cost also reflected expenses incurred in connection
with an on-going branch renovation and improvement program.
Data processing service expenses also increased during fiscal 1997,
increasing 125.2% from $3.1 million for the year ended March 31, 1996 to $7.0
million for the year ended March 31, 1997. The primary reason for the increase
was the determination by the Company to convert its data processing systems. As
a consequence, the Company expensed $2.5 million during fiscal 1997 in
connection with such conversion. In addition, such expense was affected by the
significant increase in the number of customer accounts at the Bank as a result
of the Bay Ridge acquisition and the 1996 Branch Acquisition.
The amortization of intangibles increased by $6.4 million to $8.3 million
in fiscal 1997 from fiscal 1996 reflecting a full year of amortization of the
intangibles recorded in the Bay Ridge acquisition and the 1996 Branch
Acquisition compared to amortization expense related to such intangibles only
during the fourth quarter of fiscal 1996.
Other non-interest expense increased by $3.2 million or 28.0% to $14.6
million in fiscal 1997 as compared to fiscal 1996 primarily as a result of the
significantly expanded branch operations result-
51
53
ing from the purchase transactions completed in 1996.
INCOME TAXES. Income tax expense amounted to $10.7 million and $30.8
million during fiscal 1997 and 1996. The decrease was primarily the result of
$27.9 million of taxable income in fiscal 1997 as compared to $66.8 million of
taxable income in fiscal 1996.
ASSET AND LIABILITY MANAGEMENT
GENERAL. The Company's asset and liability management strategy is
established by the Asset/ Liability Committee of the Company and reviewed by the
Company's Board of Directors periodically. The Asset/Liability Committee meets
monthly. Currently, the Company manages the imbalance between its
interest-earning assets and interest-bearing liabilities within shorter
maturities to ensure that such relationships are within acceptable ranges given
the Company's business strategies and objectives and its analysis of market and
economic conditions. The ability to maximize net interest income is largely
dependent upon the achievement of a positive interest rate spread that can be
sustained during fluctuations in prevailing interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities which either reprice or mature within a
given period of time. The difference, or the interest rate repricing "gap'
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates.
DISCUSSION OF MARKET RISK. As a financial institution, the Company's
primary component of market risk is interest rate volatility. Fluctuations in
interest rates will ultimately impact both the level of income and expense
recorded on a large portion of the Company's assets and liabilities, and the
market value of all interest-earning assets, other than those which possess a
short term to maturity. All significant interest rate risk management procedures
are performed at the Company level. Based upon the Company's nature of
operations, the Company is not subject to foreign currency exchange or commodity
price risk. The Company's real estate loan portfolio, concentrated primarily
within the New York metropolitan area, is subject to risks associated with the
local economy. The Company does not own any trading assets.
The Company's strategies to manage interest rate risk include (i)
increasing the interest sensitivity of its mortgage loan portfolio through the
use of adjustable-rate loans or relatively short-term (five to ten years)
balloon loans, (ii) selling most newly originated fixed-rate, single-family
residential mortgage loans with original terms to maturity of more than 15
years, (iii) originating relatively short-term or adjustable-rate consumer and
commercial business loans, (iv) maintaining a high level of investment
securities and mortgage-backed and mortgage-related securities with maturities
or estimated average lives of less than five years, (v) promoting stable
savings, demand and other transaction accounts and (vi) maintaining a strong
capital position.
52
54
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. For loans, securities, and liabilities with contractual
maturities, the table presents principal cash flows and related weighted-
average interest rates by contractual maturities as well as the Company's
historical experience of the impact of interest rate fluctuations on the
prepayment of residential and home equity loans and mortgage-backed securities.
For deposits that have no contractual maturity, the table presents principal
cash flows and, as applicable, related weighted-average interest rates as due in
one year or less at March 31, 1998.
FAIR
THERE- VALUE
1999 2000 2001 2002 2003 AFTER TOTAL 3/31/98
---------- -------- -------- -------- -------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
RATE SENSITIVE ASSETS:
Fixed interest rate mortgage
loans(1) $ 315,880 $279,060 $247,869 $220,160 $121,417 $759,299 $1,943,685 $1,940,175
Average interest rate 7.98% 7.86% 7.78% 7.82% 7.04% 7.60%
Variable interest rate
mortgage loans(1) $ 56,248 $ 44,337 $ 36,608 $ 30,413 $ 38,611 $105,961 $ 312,178 $ 312,024
Average interest rate 7.90% 8.02% 7.97% 8.05% 9.14% 7.98%
Fixed interest rate other
loans $ 19,752 $ 17,462 $ 21,977 $ 13,588 $ 11,955 $ 7,456 $ 92,190 $ 92,133
Average interest rate 7.04% 6.83% 7.67% 8.89% 7.99% 7.63%
Variable interest rate other
loans $ 82,741 $ 68,065 $ 49,490 $ 46,203 $ 38,117 $126,050 $ 410,666 $ 410,091
Average interest rate 7.96% 6.01% 6.66% 5.76% 5.74% 6.66%
Fixed interest rate
securities $ 967,260 $102,872 $ 9,355 $ 18,266 $ 20,032 $ 64,752 $1,182,537 $1,193,427
Average interest rate 5.72% 6.12% 7.58% 6.44% 6.23% 7.02%
Variable interest rate
securities -- -- -- -- -- $173,095 $ 173,095 $ 173,255
Average interest rate -- -- -- -- -- 4.12%
Other interest-bearing assets $ 837,602 -- -- -- -- $ 837,602 $ 837,602
Average interest rate 5.69% -- -- -- -- --
RATE SENSITIVE LIABILITIES:
Non interest-bearing checking $ 100,935 $ -- $ -- $ -- $ -- $ -- $ 100,935 $ 100,935
Average interest rate -- -- -- -- -- --
Savings and interest-bearing
checking $1,570,279 $ -- $ -- $ -- $ -- $ -- $1,570,279 $1,570,279
Average interest rate 2.72% -- -- -- -- --
Time deposits $1,359,877 $203,563 $ 77,936 $ 33,703 $ 47,190 $ 356 $1,722,625 $1,732,361
Average interest rate 5.37% 6.27% 6.16% 6.04% 5.98% 6.09%
Fixed interest rate
borrowings $ 701,860 $ 1,119 $ 1,425 $ 5,125 $ 6,262 $ 2,050 $ 717,841 $ 718,472
Average interest rate 7.78% 8.04% 7.37% 7.07% 7.51% 7.31%
- - ---------------
(1) Does not include $32.7 million of single-family residential loans serviced
by others.
53
55
Management believes that the assumptions utilized by it to evaluate the
vulnerability of the Company's operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the cash
flows of the Company's assets and liabilities in the above table could vary
substantially if different assumptions were used or actual experience differs
from the historical experience on which they are based.
Although market risk disclosure is a useful measurement and contributes
toward effective asset and liability management, it is difficult to predict the
effect of changing interest rates based solely on that measure. An alternative
methodology is to estimate the change in the Bank's net portfolio value ("NPV")
over a range of interest rate scenarios. NPV is the present value of expected
cash flows from assets, liabilities, and off-balance sheet contracts. The NPV
ratio, under any interest rate scenario, is defined as the NPV in that scenario
divided by the market value of assets in the same scenario. The model assumes
estimated loan prepayment rates and reinvestment rates similar to the Bank's
historical experience. The following sets forth the Bank's NPV as of March 31,
1998.
NPV AS % OF
PORTFOLIO
VALUE OF ASSETS
NET PORTFOLIO VALUE ------------------
CHANGE (IN BASIS POINTS) --------------------------------- NPV CHANGE IN
IN INTEREST RATES AMOUNT(1) $ CHANGE % CHANGE RATIO NPV RATIO
- - ------------------------ --------- -------- -------- ----- ---------
+400 526,547 (143,564) (21.42)% 12.87% (2.08)%
+300 571,061 (99,050) (14.78) 13.61 (1.34)
+200 609,840 (60,271) (8.99) 14.20 (0.75)
+100 642,462 (27,649) (4.13) 14.63 (0.31)
0 670,111 -- -- 14.95 --
- - -100 689,039 18,927 2.82 15.09 0.14
- - -200 714,578 44,466 6.64 15.35 0.40
- - ---------------
(1) Excludes the NPV of the Holding Company.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV table presented assumes that the composition of the Bank's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV table provides an indication of the
Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Bank's net interest income and
will differ from actual results.
REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to minimum regulatory capital requirements imposed by
the FDIC which vary according to an institution's capital level and the
composition of its assets. An insured institution is required to maintain core
capital of not less than 3.0% of total assets plus an additional amount of at
least 100 to 200 basis points ("leverage capital ratio"). An insured institution
must also maintain a ratio of total capital to risk-based assets of 8.0%.
Although the minimum leverage capital ratio is 3.0%, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") stipulates that an
institution with less than a 4.0% leverage capital ratio is deemed to be an
"undercapitalized" institution which results in the imposition of regulatory
restrictions. See Note 14 of the Notes to Consolidated Financial Statements for
the Bank's regulatory capital requirements at March 31, 1998 and 1997 set forth
in Item 8 hereto.
54
56
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, the amortization, prepayment and maturity
of outstanding loans, mortgage-backed and mortgage-related securities, the
maturity of investment securities and other short-term investments and funds
provided from operations. While scheduled payments from the amortization of
loans, mortgage-backed and mortgage-related securities and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. In addition, the Bank
invests excess funds in federal funds sold and other short-term interest-earning
assets which provide liquidity to meet lending requirements. The Company has
been able to generate sufficient cash through its deposits and has only utilized
borrowings, consisting primarily of advances from the FHLB of New York, to a
limited degree as a source of funds during the past five years. Such advances
have ranged from $67.5 million at March 31, 1995 to $14.3 million at March 31,
1998. In addition, the net proceeds of the stock offering were primarily
invested in short-term investment securities, substantially enhancing the
Company's liquidity.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds sold or U.S. Treasury securities and Dutch Auction Rate
Treasury Securities. On a longer term basis, the Company maintains a strategy of
investing in its various lending products. The Company uses its sources of funds
primarily to meet its ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, fund loan commitments and maintain a portfolio
of mortgage backed and mortgage-related securities and investment securities. At
March 31, 1998, there were outstanding commitments and unused lines of credit by
the Company to originate or acquire mortgage loans and other loans aggregating
$138.6 million and $18.0 million, respectively, consisting primarily of fixed
and adjustable-rate residential loans and fixed-rate commercial real estate
loans that are expected to close during the twelve-months ended March 31, 1999.
Certificates of deposit scheduled to mature in one year or less at March 31,
1998, totaled $1.36 billion. Based on historical experience, management believes
that a significant portion of maturing deposits will remain with the Company.
The Company anticipates that it will continue to have sufficient funds, together
with borrowings, to meet its current commitments.
Following the completion of the conversion and reorganization of the Bank
and the Holding Company's stock offering in March 1998, the Company's principal
business was that of its subsidiary, the Bank. The Holding Company invested 50%
of the net proceeds from the stock offering in the Bank and initially invested
the remaining proceeds in short-term securities and money market investments.
The Bank can pay dividends to the Holding Company to the extent such payments
are permitted by law or regulation, which serves as an additional source of
liquidity.
The Holding Company's liquidity is available to, among other things,
support future expansion of operations or diversification into other banking
related businesses, pay dividends or repurchase its common stock.
Restrictions on the amount of dividends the Holding Company and the Bank
may declare can affect the Company's liquidity and cash flow needs. Under
Delaware law, the Holding Company is generally limited to paying dividends to
the extent of the excess of net assets of the Holding Company (the amount by
total assets exceed total liabilities) over its statutory capital or, if no such
excess exists, from its net profits for the current and/or immediately preceding
year.
The Bank's ability to pay dividends to the Holding Company is also subject
to certain restrictions. Under the New York Banking Law, dividends may be
declared and paid only out of the net profits of the Bank. The approval of the
Superintendent is required if the total of all dividends declared in any
calendar year will exceed the net profits for that year plus the retained net
profits of the preceding two years, less any required transfers. In addition, no
dividends may be declared, credited or paid if the effect thereof would cause
the Bank's capital to be reduced below the amount required by the Superintendent
or the FDIC.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been
55
57
prepared in accordance with Generally Accepted Accounting Principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in relative purchasing
power over time due to inflation. Unlike most industrial companies, virtually
all of the Company's assets and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
THE YEAR 2000 ISSUE
The Company's banking operations are, by their nature, dependent upon its
own computer systems as well as those of other companies. The Company has
conducted a review of its computer systems to identify systems that could be
affected by the "Year 2000" issue and management has developed an implementation
plan to respond to this issue. The Year 2000 issue is the result of computer
programs which were written using two digits rather than four to define the
applicable year. As a result, such programs may recognize a date using "00" as
the year 1900 instead of the year 2000 which could result in system failures or
miscalculations.
The Company utilizes a third party computer service bureau for most of its
computer processing. All other computer systems used by the Company are PC based
systems which operate using industry standard software systems that have been
developed and are supported by third party software companies. Accordingly, the
Company's costs to resolve Year 2000 issues are not expected to be material. The
Year 2000 issue, however, creates risk for the Company from unforeseen problems
in its computer processing and from the computer processing problems of other
third parties with whom the Company conducts financial transactions. As a
result, incomplete or untimely resolution of such Year 2000 problems may have an
adverse impact on the operations of the Company.
The FDIC and other federal banking regulators have issued safety and
soundness guidelines to be followed by insured depository institutions, such as
the Bank, to assure resolution of any Year 2000 problems. Any institution's
failure to address appropriately the Year 2000 problem could result in
supervisory action.
As part of its implementation plan, management is monitoring the Year 2000
progress of its vendors and will be participating in the testing of systems
during 1998. Management is also developing appropriate contingency plans to deal
with problems as they may arise. There can be no assurance, however, that the
systems of other companies on which the Company's systems rely will also be
timely converted or that any such failure to convert by another company would
not have an adverse effect on the Company's systems.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial condition.
Under existing accounting standards other comprehensive income is separately
classified into foreign currency items, minimum pension liability adjustments
and unrealized gains and losses on certain investments in debt and equity
securities. Only the last of these items, however is currently applicable to the
Company. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management has determined the impact this
statement will have on the Bank is not material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires disclosures for
each segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It also requires geographic by country, as opposed to
broader geographic regions as permitted under current standards. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997 with earlier
56
58
application permitted. SFAS is limited to additional
disclosure and, accordingly the adoption of the statement will not have an
impact on the Company's financial condition or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to measure compensation cost
of such plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net income and, if
presented, earnings per share, as if this statement had been adopted. The
accounting requirements of this statement are effective for transactions entered
into during fiscal years that begin after December 15, 1995; however, companies
are required to disclose information for awards granted in their first fiscal
year beginning after December 15, 1994. The Company has determined to continue
to use the intrinsic value based methodology provided by APB Opinion No. 25.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125." As amended, SFAS No 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996 except that its provisions with
respect to securities lending, repurchase agreements and dollar-roll transaction
are effective for transfers occurring after December 31, 1997. The adoption of
SFAS No. 125, as amended, caused the Bank to record on its statement of
financial condition securities lending transactions commencing January 1, 1998,
which resulted in the Company recording $701.2 million in cash and cash
equivalents and an equal amount as borrowed funds at March 31, 1998.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Asset and Liability Management" in Item 7 hereto.
57
59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
INDEPENDENCE COMMUNITY BANK CORP.
We have audited the accompanying consolidated statements of financial
condition of Independence Community Bank Corp. (the "Company") as of March 31,
1998 and 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Independence
Community Bank Corp. at March 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young, LLP
New York, New York
June 2, 1998
58
60
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31,
--------------------------
1998 1997
---------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Cash and due from banks $ 747,868 $ 310,429
Commercial paper 37,676 39,866
Federal funds sold 71,707 24,341
---------- ----------
Total cash and cash equivalents 857,251 374,636
Securities available-for-sale:
Investment securities 1,282,072 357,487
Mortgage-backed and mortgage related 84,610 190,979
---------- ----------
Total securities 1,366,682 548,466
Mortgage loans on real estate 2,279,169 2,066,560
Other loans 502,718 464,960
---------- ----------
Total loans 2,781,887 2,531,520
Less allowance for possible loan losses (36,347) (27,024)
---------- ----------
Total loans, net 2,745,540 2,504,496
Premises, furniture and equipment, net 61,443 60,367
Accrued interest receivable 24,395 17,384
Intangible assets, net 55,873 60,499
Other assets 111,812 168,875
---------- ----------
Total assets $5,222,996 $3,734,723
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $3,393,839 $3,325,558
Borrowings on securities loaned 701,160 --
Other borrowings 16,681 17,232
Escrow and other deposits 45,868 41,034
Accrued expenses and other liabilities 116,324 41,785
---------- ----------
Total liabilities 4,273,872 3,425,609
Stockholders' equity:
Common stock ($.01 par value, 125,000,000 shares
authorized, 76,043,750 shares outstanding) 760 --
Additional paid-in-capital 741,277 --
Retained earnings-substantially restricted 298,876 256,076
Unallocated common stock held by ESOP (97,636) --
Contributed capital -- 52,670
Net unrealized gain on securities available-for-sale, net
of tax 5,847 368
---------- ----------
Total stockholders' equity 949,124 309,114
---------- ----------
Total liabilities and stockholders' equity $5,222,996 $3,734,723
========== ==========
See accompanying notes to consolidated financial statements.
59
61
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
INTEREST INCOME:
Mortgage loans on real estate $175,269 $161,638 $140,435
Consumer and commercial business loans 38,433 36,189 36,162
Investment securities 45,689 22,356 11,635
Mortgage-backed and mortgage-related securities 10,992 28,856 17,779
Other 22,660 6,264 7,089
-------- -------- --------
Total interest income 293,043 255,303 213,100
-------- -------- --------
INTEREST EXPENSE:
Deposit accounts 144,489 138,840 106,379
Stock subscription account 4,477 -- --
Borrowings 11,977 1,347 4,240
-------- -------- --------
Total interest expense 160,943 140,187 110,619
-------- -------- --------
Net interest income 132,100 115,116 102,481
-------- -------- --------
Provision for loan losses 10,011 7,960 3,679
-------- -------- --------
Net interest income after provision for loan losses 122,089 107,156 98,802
-------- -------- --------
NON-INTEREST INCOME:
Net gain (loss) on sale of loans and securities 115 (3,347) 12,222
Service fees 6,375 5,708 4,086
Other 3,858 548 3,774
-------- -------- --------
Total non-interest income 10,348 2,909 20,082
-------- -------- --------
NON-INTEREST EXPENSE:
General and administrative expense:
Compensation and employee benefits 31,695 26,879 22,311
Occupancy costs 12,622 10,981 7,656
Data processing services 11,524 7,020 3,117
Advertising 4,275 3,625 3,229
FDIC insurance premiums 1,186 2,199 2,558
Amortization of intangibles 8,740 8,278 1,842
Other 19,411 14,618 11,417
-------- -------- --------
Total general and administrative expense 89,453 73,600 52,130
SAIF special assessment -- 8,553 --
Contribution to Foundation 56,422 -- --
-------- -------- --------
Total non-interest expense 145,875 82,153 52,130
-------- -------- --------
(Loss) income before (benefit) provision for income taxes (13,438) 27,912 66,754
(Benefit) provision for income taxes (3,482) 10,732 30,782
-------- -------- --------
Net (loss) income $ (9,956) $ 17,180 $ 35,972
======== ======== ========
Basic loss per share since conversion $ (0.52) N/A N/A
========
Diluted loss per share since conversion $ (0.52) N/A N/A
========
See accompanying notes to consolidated financial statements.
60
62
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
NET UNREALIZED
GAINS UNALLOCATED
(LOSSES) ON COMMON
ADDITIONAL SECURITIES STOCK
COMMON PAID IN CONTRIBUTED RETAINED AVAILABLE- HELD BY
STOCK CAPITAL CAPITAL EARNINGS FOR-SALE ESOP TOTAL
------ ---------- ----------- -------- -------------- ----------- --------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
Balance -- March 31, 1995 $ -- $ -- $ 52,670 $202,924 $ 3,603 $ -- $259,197
Net unrealized loss on securities
transferred from
held-to-maturity to
available-for-sale, net of tax -- -- -- -- (1,826) -- (1,826)
Changes in net unrealized losses
on securities
available-for-sale, net of tax -- -- -- -- (3,524) -- (3,524)
Net income for the year ended
March 31, 1996 -- -- -- 35,972 -- -- 35,972
---- -------- -------- -------- ------- -------- --------
Balance -- March 31, 1996 -- -- 52,670 238,896 (1,747) -- 289,819
Net unrealized gain on securities
transferred from
held-to-maturity to
available-for-sale, net of tax -- -- -- -- 269 -- 269
Changes in net unrealized gains on
securities available-for-sale,
net of tax -- -- -- -- 1,846 -- 1,846
Net income for the year ended
March 31, 1997 -- -- -- 17,180 -- -- 17,180
---- -------- -------- -------- ------- -------- --------
Balance -- March 31, 1997 -- -- 52,670 256,076 368 -- 309,114
Merge Independence Community Bank
Corp. Mutual Holding Company
into Independence Savings Bank -- -- (52,670) 52,756 -- -- 86
Issuance of 70,410,880 shares of
$.01 par value common stock in
initial public offering at
$10.00 per share net of
conversion related expenses
($18,417) 704 684,988 -- -- -- -- 685,692
Issuance of 5,632,870 shares of
$.01 par value common stock to
the Independence Community
Foundation 56 56,272 -- -- -- -- 56,328
Open market purchases of 5,632,870
shares of Independence Community
Bank Corp. common stock by ESOP
trustee (Avg. price of $17.5527) -- -- -- -- -- (98,872) (98,872)
ESOP shares committed to be
released -- 17 -- -- -- 1,236 1,253
Changes in net unrealized gains on
securities available-for-sale,
net of tax -- -- -- -- 5,479 -- 5,479
Net (loss) for the year ended
March 31, 1998 -- -- -- (9,956) -- -- (9,956)
---- -------- -------- -------- ------- -------- --------
Balance -- March 31, 1998 $760 $741,277 $ -- $298,876 $ 5,847 $(97,636) $949,124
==== ======== ======== ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
61
63
INDEPENDENCE COMMUNITY BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
---------------------------------------
1998 1997 1996
----------- --------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (9,956) $ 17,180 $ 35,972
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Contribution of stock to Independence Community Foundation 56,272 -- --
Provision for loan losses 10,011 7,960 3,679
Net (gain) loss on sale of loans and securities (115) 3,347 (12,222)
Amortization of deferred income and premiums (12,938) (11,164) (6,631)
Amortization of intangibles 8,740 8,278 1,842
Depreciation and amortization 6,862 5,972 3,545
Deferred income tax benefit (23,901) (7,137) (1,416)
Change in assets and liabilities net of effects from
purchase of Bay Ridge Bancorp, Inc.
(Increase) decrease in accrued interest receivable (7,011) 3,687 (1,291)
Decrease (increase) in accounts receivable -- securities
transactions 93,718 (107,624) --
Decrease in due to banks -- (215) (729)
Increase (decrease) in accrued expenses and other
liabilities 74,539 (49,588) 62,732
Other, net (15,836) (6,625) (858)
----------- --------- -----------
Net cash provided by (used in) operating activities 180,385 (135,929) 84,623
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations and purchases (644,591) (503,153) (232,485)
Principal payments on loans 373,734 261,161 189,064
Proceeds from sale of loans 19,219 76,002 8,686
Proceeds from sale of securities 288,303 648,416 175,691
Proceeds from maturities of securities 1,073,291 823,825 306,966
Principal collected on securities 86,318 148,013 61,466
Purchases of securities (2,242,950) (927,977) (1,178,896)
Proceeds from sales of other real estate owned 273 1,308 2,512
Purchases of Federal Home Loan Bank stock (4) (3,579) --
Net additions to premises, furniture and equipment (7,938) (14,433) (6,242)
Payment for purchase of Bay Ridge Bancorp, Inc. net of cash
acquired -- -- (74,731)
----------- --------- -----------
Net cash (used in) provided by investing activities (1,054,345) 509,583 (747,969)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits sold, net of premium -- (47,661) --
Deposits purchased, net of premiums 65,972 -- 560,948
Net increase (decrease) in demand and savings deposits 66,129 2,276 (14,291)
Net (decrease) increase in time deposits (67,845) (22,199) 120,861
Net increase (decrease) in other borrowings 700,609 (40,063) (11,453)
Net increase in escrow and other deposits 4,834 5,437 79
Issuance of Common Stock 685,748 -- --
Loan to ESOP for purchase of shares (98,872) -- --
----------- --------- -----------
Net cash provided by (used in) financing activities 1,356,575 (102,210) 656,144
----------- --------- -----------
Net increase (decrease) in cash and cash equivalents 482,615 271,444 (7,202)
Cash and cash equivalents at beginning of year 374,636 103,192 110,394
----------- --------- -----------
Cash and cash equivalents at end of period $ 857,251 $ 374,636 $ 103,192
=========== ========= ===========
Income taxes paid $ 15,196 $ 25,200 $ 30,383
=========== ========= ===========
Interest paid $ 160,838 $ 138,823 $ 110,586
=========== ========= ===========
See accompanying notes to consolidated financial statements.
62
64
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
1. ORGANIZATION/FORM OF OWNERSHIP
Independence Savings Bank was originally founded as a New York chartered
savings bank in 1850. In April 1992 the Bank reorganized into the mutual holding
company form of organization pursuant to which the Bank became a wholly-owned
stock savings bank subsidiary of the Mutual Holding Company.
On April 18, 1997, the Board of Directors of the Bank and the Board of
Trustees of the Mutual Holding Company adopted the Plan of conversion to convert
the Mutual Holding Company to the stock form of organization and simultaneously
merge with and into the Bank and all of the outstanding shares of Bank common
stock held by the Mutual Holding Company would be cancelled.
The Bank provides financial services primarily to individuals and small
businesses within the New York metropolitan area. The Bank is subject to
regulation by the FDIC and New York Banking Department.
As part of the conversion, the Company was incorporated under Delaware law
in June 1997. The Company is regulated by the OTS. The Company completed its
initial public offering on March 13, 1998 and issued 70,410,880 shares of stock
resulting in proceeds of $685.7 million, net of expenses totaling $18.4 million.
The Company used $343.0 million or approximately 50% of the net proceeds to
purchase all of the outstanding stock of the Bank. The Company also loaned $98.9
million to the ESOP which purchased 5,632,870 shares of the Company's stock in
the open market.
As part of the Plan of Conversion, the Company formed the Independence
Community Foundation and donated 5,632,870 shares of the Company valued at $56.3
million. The Company recorded a contribution expense charge and a corresponding
deferred tax benefit of $19.2 million. The formation of this private charitable
foundation is to further the Bank's commitment to the communities that it
serves.
Additionally, the Bank established, in accordance with the requirements of
the OTS a liquidation account for $319.7 million which was equal to its capital
as of the date of the latest consolidated statement of financial condition
(August 31, 1997) appearing in the Final prospectus in connection with the
reorganization and conversion of the Bank and the Mutual Holding Company. The
liquidation account is reduced as and to the extent that eligible account
holders have reduced their qualifying deposits. Subsequent increases in deposits
do not restore an eligible account holder's interest in the liquidation account.
In the event of a complete liquidation of the Bank, each eligible account holder
will be entitled to receive a distribution from the liquidation account in an
amount proportionate to the adjusted qualifying balances for accounts then held.
In addition to the restriction described above, the Company may not declare
or pay cash dividends on or repurchase any of its shares of common stock if the
effect thereof would cause stockholders' equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration and payment
would otherwise violate regulatory requirements.
2. ACQUISITIONS
On January 3, 1996 the Company acquired, via a cash acquisition, the stock
of Bay Ridge Bancorp, Inc. and its thrift subsidiary, Bay Ridge Federal Savings
Bank. The purchase price paid was approximately $127.8 million, and as a result
the Company acquired approximately $558.6 million in assets and $445.2 million
in liabilities, with the transaction recorded on a purchase accounting basis.
The cost in excess of the net assets acquired is being amortized on a
straight-line basis over approximately 14 years.
On March 15, 1996, the Company assumed approximately $615.6 million of
deposits and acquired $8.1 million of assets from a financial institution. The
Company also received approximately $557.9 million in cash to fund the
assumption of these deposit liabilities. The Company subsequently sold, in
September of 1996, approximately $51.4 million of these deposits. The adjusted
cost in excess of the assets received and the deposits assumed is being
amortized on a straight-line basis over 7 years.
63
65
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 25, 1997, the Company assumed approximately $70.0 million of
deposits and acquired $1.1 million in assets from a financial institution. The
Company also received approximately $64.9 million in cash to fund the assumption
of these deposit liabilities. The adjusted cost in excess of the assets received
and the deposits assumed is being amortized on a straight-line basis over 7
years.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies of
the Company and its subsidiaries. These policies conform to generally accepted
accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include all
majority-owned subsidiaries, after elimination of intercompany transactions and
accounts.
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year's presentation.
SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are carried at fair value. Unrealized gains
or losses on securities available-for-sale are included as a separate component
of stockholders' equity, net of tax. Gains or losses on the sale of such
securities are recognized using the specific identification method.
LOANS
Loans are stated at unpaid principal balances, net of deferred net loan
origination and commitment fees. Interest income on loans is credited as earned.
Accrual of interest income is discontinued and uncollected interest is reversed
for loans on which a default on interest has existed for a period in excess of
90 days, or for loans which management believes, after giving consideration to
economic and business conditions and collection efforts, the collection of
interest is doubtful.
Loan origination and commitment fees and certain direct costs incurred in
connection with loan originations are deferred and amortized to interest income,
using a method which approximates the interest method, over the life of the
related loans as an adjustment to yield.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is determined based upon management's
evaluation of the Company's loan portfolio considering past loan loss
experience, assessment of current and prospective economic conditions, the size
and composition of the loan portfolio, and other relevant factors.
Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that may
be susceptible to significant change. In the opinion of management, the
allowance, when taken as a whole, is adequate to absorb reasonable estimated
loan losses inherent in the Company's loan portfolios.
PREMISES, FURNITURE AND EQUIPMENT
Land is carried at cost. Buildings and improvements, leasehold
improvements, furniture, automobiles and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets. The estimated
useful lives of the assets are as follows:
Buildings 10 to 30 years
Furniture and
equipment 3 to 10 years
Automobiles 3 years
Leasehold improvements are amortized on a straight-line basis over the
lives of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
64
66
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws expected to be in effect
when the differences are expected to reverse.
EARNINGS PER SHARE
Earnings per share is computed in accordance with the provisions of SFAS
No. 128, "Earnings per Share." Basic earnings per share is computed by dividing
net income since conversion by the weighted average number of common shares
outstanding. Diluted EPS is computed using the same method as basic EPS, but
reflects the potential dilution of common stock equivalents. There were no
dilutive common stock equivalents for the year ended March 31, 1998. Employee
Stock Ownership Plan (ESOP) shares that have been allocated to participants'
accounts or are committed to be released for allocation are considered
outstanding for EPS calculation. Since the conversion on March 13, 1998, basic
and diluted weighted average common shares outstanding was 72,442,558 shares,
(adjusted for unallocated ESOP shares). Net loss since conversion was $37.5
million.
EMPLOYEE BENEFITS
The Company follows the provisions of the AICPA's Statement of Position
93-6, "Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6
requires that compensation expense be recognized in an amount equal to the
shares allocated by the ESOP multiplied by the average fair value of the common
stock during the year. The difference between the average fair value and the
$17.55 weighted average per share cost of shares allocated by the ESOP is
recorded as an adjustment to additional paid-in-capital.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company
defines cash and cash equivalents as highly liquid investments with original
maturities of three months or less.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" which provides
accounting and reporting standards for sales, securitizations, and servicing of
receivables and other financial assets, secured borrowing and collateral
transactions, and the extinguishments of liabilities. The standard requires an
entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when control has
been surrendered in accordance with criteria provided in SFAS No. 125. SFAS
No. 125 supersedes SFAS No. 122, "Accounting for Mortgage Servicing Rights" and
is to be applied to transactions occurring after December 31, 1996. The adoption
of SFAS No. 125 as amended resulted in a $701.2 million increase in cash and
cash equivalents and borrowings at March 31, 1998 related to the Company's
securities loaned activities.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pension and other Postretirement Benefits." Statement No. 132 only
addresses disclosure and does not change any of the measurement or recognition
provisions provided for in previously issued accounting standards. Statement
No. 132 is effective for fiscal years beginning after December 15, 1997. The
Company adopted SFAS No. 132 in fiscal 1998 and restated the fiscal 1997
disclosure accordingly.
4. CASH AND DUE FROM BANKS
Cash and due from banks at March 31, 1998 includes $701.2 million of cash
received as collateral, which has been invested in cash equivalents, for
securities loaned under a securities lending agreement with the Federal Home
Loan Bank of New York (the "FHLB").
65
67
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of securities
available-for-sale are as follows:
MARCH 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Investment securities:
Debt securities:
U.S. government and agencies $1,087,219 $ 2,906 $(173) $1,089,952
Municipals 1,104 -- -- 1,104
Corporate 226 -- (2) 224
---------- ------- ----- ----------
Total debt securities 1,088,549 2,906 (175) 1,091,280
---------- ------- ----- ----------
Equity securities:
Preferred 168,100 -- -- 168,100
Common 17,533 5,265 (106) 22,692
---------- ------- ----- ----------
Total equity securities 185,633 5,265 (106) 190,792
---------- ------- ----- ----------
Total investment securities 1,274,182 8,171 (281) 1,282,072
---------- ------- ----- ----------
Mortgage-backed and mortgage related
securities:
FNMA pass through certificates 5,294 124 (3) 5,415
GNMA pass through certificates 63,566 2,939 (32) 66,473
FHLMC pass through certificates 11,500 179 (68) 11,611
Collateralized mortgage obligation bonds 1,090 21 -- 1,111
---------- ------- ----- ----------
Total mortgage-backed and mortgage related
securities 81,450 3,263 (103) 84,610
---------- ------- ----- ----------
Total securities available-for-sale $1,355,632 $11,434 $(384) $1,366,682
========== ======= ===== ==========
MARCH 31, 1997
-------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ---------
(IN THOUSANDS)
Investment securities:
Debt securities:
U.S. government and agencies $345,229 $ 346 $ (431) $345,144
Municipals 1,104 -- -- 1,104
Corporate 363 -- (5) 358
-------- ------ ------- --------
Total debt securities 346,696 346 (436) 346,606
-------- ------ ------- --------
Equity securities:
Preferred 281 -- (1) 280
Common 10,333 268 -- 10,601
-------- ------ ------- --------
Total equity securities 10,614 268 (1) 10,881
-------- ------ ------- --------
Total investment securities 357,310 614 (437) 357,487
-------- ------ ------- --------
Mortgage-backed and mortgage related securities:
FNMA pass through certificates 7,319 18 (162) 7,175
GNMA pass through certificates 79,684 1,433 (360) 80,757
FHLMC pass through certificates 18,780 90 (276) 18,594
Collateralized mortgage obligation bonds 84,761 22 (330) 84,453
-------- ------ ------- --------
Total mortgage-backed mortgage related securities 190,544 1,563 (1,128) 190,979
-------- ------ ------- --------
Total securities available-for-sale $547,854 $2,177 $(1,565) $548,466
======== ====== ======= ========
66
68
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SECURITIES AVAILABLE-FOR-SALE -- (CONTINUED)
Sales of available-for-sale securities are summarized as follows:
YEAR ENDED MARCH 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Proceeds from sales $288,303 $648,416 $175,691
Gross gains 42 1,042 12,681
Gross losses 1 4,905 41
The amortized cost and estimated fair value of debt securities by
contractual maturity are as follows:
MARCH 31, 1998
------------------------
CARRYING FAIR
VALUE VALUE
---------- ----------
(IN THOUSANDS)
One year or less $ 975,869 $ 978,188
One year through five years 112,500 112,912
Five years through ten years 180 180
---------- ----------
$1,088,549 $1,091,280
========== ==========
The amortized cost and estimated fair value of mortgage-backed and
mortgage-related securities by contractual maturity are as follows:
MARCH 31, 1998
-------------------
CARRYING FAIR
VALUE VALUE
-------- -------
(IN THOUSANDS)
One year or less $ 19,710 $20,271
One year through five years 30,341 31,481
Five years through ten years 15,836 16,582
Over ten years 15,563 16,276
-------- -------
$ 81,450 $84,610
======== =======
On November 15, 1995, the Financial Accounting Standards Board issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." In accordance with
provisions in that Special Report, the Company chose to reclassify securities
from held-to-maturity to available-for-sale. At the date of transfer (December,
1995) the amortized cost of those securities was $169.1 million and the net
unrealized losses were $3.5 million.
67
69
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LOANS RECEIVABLE, NET
MARCH 31,
----------------------------
1998 1997
---------- ----------
Loans are summarized as follows: (IN THOUSANDS)
Mortgage Loans on Real Estate:
Single-family residential $ 505,051 $ 552,745
Multi-family 1,605,058 1,365,124
Commercial and other real estate 178,463 158,336
---------- ----------
Total principal balance -- mortgage loans 2,288,572 2,076,205
Less net deferred fees 9,403 9,645
---------- ----------
Total mortgage loans on real estate 2,279,169 2,066,560
Other loans:
Cooperative apartment loans 380,866 348,029
Student loans (guaranteed) 43,946 45,262
Home equity lines and loans 15,625 19,545
Commercial business loans 31,550 25,249
Consumer loans 20,268 15,241
Passbook loans 8,833 9,710
Credit card loans 1,768 2,054
---------- ----------
Total principal balance -- other loans 502,856 465,090
Less unearned discount and net deferred fees 138 130
---------- ----------
Total other loans 502,718 464,960
Less allowance for loan losses (36,347) (27,024)
---------- ----------
Total loans, net $2,745,540 $2,504,496
========== ==========
At March 31, 1998, 1997 and 1996 the Company was servicing loans on behalf
of others which are not included in the consolidated financial statements of
$211.2 million, $314.6 million and $275.3 million respectively.
At March 31, 1998, 1997, and 1996 included in mortgage loans on real estate
are $10.4 million, $15.5 million, and $18.9 million, respectively, of nonaccrual
loans. If interest on the nonaccrual loans had been accrued, such income would
have approximated $.7 million, $1.6 million and $.7 million for the three years
in the period ended March 31, 1998, respectively.
At March 31, 1998, 1997, 1996, included in other loans are $.9 million,
$1.4 million, and $1.5 million, respectively, of nonaccrual loans. If interest
on the nonaccrual loans had been accrued, such income would have approximated
$29,000, $117,800 and $78,800 for the three years in the period ended March 31,
1998, respectively.
68
70
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the changes in the allowance for loan losses is as follows:
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Balance at beginning of period $27,024 $20,528 $11,849
Allowance from acquisition -- -- 6,910
Provision charged to operations 10,011 7,960 3,679
Charge-offs, net of recoveries (688) (1,464) (1,910)
------- ------- -------
Balance at end of period $36,347 $27,024 $20,528
======= ======= =======
The Company's loan portfolio is primarily comprised of secured loans made
to individuals and small businesses located in the New York City Metropolitan
area.
7. PREMISES, FURNITURE AND EQUIPMENT
A summary of premises, furniture and equipment, net of accumulated
depreciation and amortization is as follows:
MARCH 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
Land $ 3,232 $ 3,303
Buildings and improvements 44,395 44,284
Leasehold improvements 4,281 3,591
Furniture and equipment 9,535 9,189
------- -------
Total premises, furniture and equipment $61,443 $60,367
======= =======
Depreciation and amortization expense amounted to $6.9 million, $6.0
million and $3.5 million for the years ended March 31, 1998, 1997 and 1996,
respectively.
8. OTHER ASSETS
A summary of other assets is as follows:
MARCH 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
FHLB stock $ 25,756 $ 25,752
Net deferred tax asset 36,774 17,830
Prepaid expenses 2,399 1,604
Other real estate 192 540
Accounts receivable 35,989 112,116
Other 10,702 11,033
-------- --------
Total other assets $111,812 $168,875
======== ========
69
71
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DEPOSITS
The amounts due to depositors and the weighted average interest rates at
March 31, 1998 and March 31, 1997 are as follows:
MARCH 31,
----------------------------------------------
1998 1997
--------------------- ---------------------
DEPOSIT AVERAGE DEPOSIT AVERAGE
LIABILITY RATE LIABILITY RATE
---------- ------- ---------- -------
(IN THOUSANDS)
Savings $1,011,597 2.75% $1,018,199 2.80%
Money Market 214,182 2.96 218,230 3.00
NOW 344,500 2.46 268,681 2.49
Checking 100,935 -- 76,692 --
Time Deposits 1,722,625 5.48 1,743,756 5.50
---------- ----------
Total deposits $3,393,839 $3,325,558
========== ==========
Scheduled maturities of time deposits are as follows:
MARCH 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
One year $1,359,877 $1,333,075
Two years 203,563 212,451
Three years 77,936 110,601
Four years 33,704 52,008
Thereafter 47,545 35,621
---------- ----------
Total time deposits $1,722,625 $1,743,756
========== ==========
Time deposit accounts in denominations of $100,000 or more totaled
approximately $192.4 million, $189.8 million and $180.1 million at March 31,
1998, March 31, 1997 and March 31, 1996, respectively.
10. BORROWINGS
A summary of borrowings is as follows:
MARCH 31,
------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
Securities loaned $701,160 $ -- $ --
FHLB borrowings 14,300 14,550 56,045
Other 2,381 2,682 1,250
-------- ------- -------
Total borrowings $717,841 $17,232 $57,295
======== ======= =======
The Company has for many years "lent" a portion of its securities,
primarily U.S. Treasury Notes and Bills, generally to money center banks and
national securities firms. The securities lent are collateralized generally by
cash in an amount slightly in excess of the value of the securities lent.
Effective January 1, 1998, the obligation to return the cash upon receipt of the
lent securities is deemed a borrowing while the cash, which has been invested in
cash equivalents, is reflected as an asset. As a result of the influx of
proceeds upon completion of the conversion and subsequent investment in U.S.
Treasury securities, the Company increased its activity in securities lending
transactions pending deployment of such assets into loans and other earning
70
72
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets. Prior to January 1, 1998 these transactions were not recorded in the
statement of financial condition. The fees from these transactions were recorded
in other non-interest income in the statement of operations.
The $701.2 million of securities loaned at March 31, 1998 had a weighted
average interest rate of 5.79%. The average balance of securities lending
transactions from January 1, 1998 through March 31, 1998 was $743.0 million with
an average cost of 5.34%. The maximum amount outstanding at any month end was
$1.36 billion.
Advances from the FHLB are made at fixed rates with remaining maturities
between one and fifteen years, summarized as follows:
MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Less than one year $ 700 $ -- $ --
After one year through five years 11,550 8,350 5,185
After five years through seven years 2,050 4,900 45,195
After seven years through fifteen years -- 1,300 5,665
------- ------- -------
Total FHLB borrowings $14,300 $14,550 $56,045
======= ======= =======
Advances from the FHLB are collateralized by all FHLB stock owned by the
Bank in addition to a blanket pledge of eligible assets in an amount required to
be maintained so that the estimated fair value of such eligible assets exceeds,
at all times, 110% of the outstanding advances (see Note 12).
The average cost of borrowings for the years ended March 31, 1998, March
31, 1997 and March 31, 1996 was 6.0%, 7.6% and 6.2%, respectively.
11. BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan (the "Plan")
covering substantially all of its full-time employees and certain part-time
employees who qualify. The Company makes annual contributions to the Plan equal
to the amount necessary to satisfy the funding requirements of ERISA.
The Company also has a Supplemental Executive Retirement Plan (the
"Supplemental Plan"). The Supplemental Plan is a nonqualified, unfunded plan of
deferred compensation covering those senior officers of the Company whose
benefits under the Plan would be limited by Internal Revenue Code Sections 415
and 401(a)(17).
The following table sets forth the Plan's change in benefit obligation:
MARCH 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
Benefit obligation at beginning of year $25,577 $22,312
Service cost 1,097 924
Interest cost 1,986 1,818
Acquisition -- 3,232
Actuarial loss/(gain) 3,504 (1,796)
Benefits paid (990) (913)
------- -------
Benefit obligation at end of year $31,174 $25,577
======= =======
71
73
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the Plan's change in Plan Assets:
MARCH 31,
--------------------
1998 1997
------- -------
(IN THOUSANDS)
Fair value of Plan assets at beginning of year $24,547 $21,283
Actual return on Plan assets 4,745 2,529
Acquisition -- 1,581
Employer contribution -- 63
Benefits paid (987) (909)
------- -------
Fair value of Plan assets at end of year $28,305 $24,547
======= =======
Funded status $(2,869) $(1,030)
Unrecognized net asset (1,621) (1,823)
Unrecognized prior service cost 557 581
Unrecognized actuarial gain (337) (1,230)
------- -------
Accrued pension cost at December 31, 1997 and 1996 (4,270) (3,502)
Net adjustment (309) (134)
------- -------
Accrued pension cost $(4,579) $(3,636)
======= =======
Net pension expense included the following components:
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Service cost-benefits earned during the period $ 1,097 $ 924 $ 759
Interest cost on projected benefit obligation 1,986 1,818 1,483
Expected return on Plan assets (2,167) (2,075) (1,510)
Amortization of net asset (202) (209) (221)
Amortization of prior service cost 24 24 97
Recognized net actual loss 33 58 67
Settlement gain -- (344) --
------- ------- -------
Net pension expense for the years ended December 31,
1997, 1996 and 1995 771 196 675
Net adjustment 172 (63) (117)
------- ------- -------
Net pension expense $ 943 $ 133 $ 558
======= ======= =======
At December 31, 1997 and 1996, the projected benefit obligation for the
Plans was determined using an assumed discount rate of 7.0% and 7.50%,
respectively, and an assumed rate of compensation increase of 4% for the Plan
and 7% for the Supplemental Plan. At December 31, 1997 and 1996, the weighted
average assumed rate of return on plan assets was 9%. Plan assets consist mainly
of investments in U.S. government and agency obligations, mortgage-backed
securities and common stocks.
The Company also sponsors an incentive savings plan ("401(k) Plan") whereby
eligible employees may make tax deferred contributions up to certain limits. The
Company makes matching contributions up to the lesser of 6% of employee
compensation, or $3,000. The Company may reduce or cease matching contributions
if it is determined that the current or accumulated net earnings or undivided
profits of the Company are insufficient to pay the full amount of contributions
in a plan year. Contributions to the 401(k) Plan by the
72
74
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company aggregated approximately $577,000, $508,400 and $459,000 for the years
ended March 31, 1998, 1997 and 1996, respectively.
Effective April 1, 1995, the Company adopted SFAS No. 106 "Employer's
Accounting for Postretirement Benefits Other Than Pensions." In accordance with
SFAS No. 106, the Company elected to recognize the cumulative effect of this
change in accounting principle over future accounting periods.
Status of the postretirement benefit obligation is as follows:
MARCH 31,
---------------------
1998 1997
-------- -------
(IN THOUSANDS)
Benefit obligation at beginning of year $ 8,843 $11,396
Service cost 322 457
Interest cost 690 850
Amendments -- (3,475)
Acquisition -- 955
Actuarial loss/(gain) 1,303 (920)
Benefits paid (500) (420)
-------- -------
Benefit obligation at end of year $ 10,658 $ 8,843
======== =======
Funded status $(10,658) $(8,843)
Unrecognized transition obligation being recognized over 20
years 4,549 4,817
Unrecognized net loss due to past experience difference from
assumption made 2,611 1,409
Unrecognized prior service cost 21 30
-------- -------
Accrued postretirement benefit cost at December 31, 1997 and
1996 (3,477) (2,587)
Net adjustment (393) (393)
-------- -------
Accrued postretirement benefit cost $ (3,870) $(2,980)
======== =======
YEAR ENDED MARCH 31
------------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
Components of postretirement benefit cost:
Service cost-benefits earned during the period $ 322 $ 457 $ 295
Interest cost on accumulated postretirement benefit
obligation 690 850 681
Amortization of net obligation 267 410 409
Amortization of prior service cost 10 147 --
Recognized net actuarial loss 102 127 --
------ ------ ------
Postretirement benefit expense-years ended December 31, 1997
and 1996 1,391 1,991 1,385
Net adjustment -- 152 348
------ ------ ------
Net postretirement benefit expense $1,391 $2,143 $1,733
====== ====== ======
The assumptions used in arriving at the above include the initial rate of
increase in health care costs of 9% decreasing gradually to 6% by the year 2001.
At December 31, 1997 and 1996, discount rates of 7.0% and 7.5%, respectively,
were used.
The health care cost trend rate assumption has a significant effect on the
amounts reported. A 1% increase in each year would increase the accumulated
postretirement benefit obligation as of December 31,
73
75
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 by $1.4 million and the aggregate of the service and interest cost
components of the net periodic postretirement benefits expense for the year then
ended by $151,300.
EMPLOYEE STOCK OWNERSHIP PLAN
To fund the purchase in the open market of 5,632,870 shares of the
Company's common stock, the ESOP borrowed funds from the Company. The loan to
the ESOP is being repaid principally from the Bank's contributions to the ESOP
over a period of 20 years. The collateral for the loan is the common stock of
the Company purchased by the ESOP. At March 31, 1998, the loan from the Company
had an outstanding balance of $96.7 million.
Shares held by the ESOP are held by a trustee for allocation among
participants as the loan is repaid. The number of shares released annually is
based upon the ratio that the current principal and interest payments bears to
the current and all remaining scheduled future principal and interest payments.
Shares allocated will first be used for the employer matching contribution for
the 401(k) Plan with the remaining shares allocated to the participants based
upon compensation, as described in the 401 (k) Plan, in the year of allocation.
The vesting schedule will be the same as the Bank's current 401(k) plan.
Forfeitures from the 401(k) match portions will be used to reduce the employer
401(k) match expense while forfeitures from shares allocated to the participants
will be allocated among the participants. For the year ended March 31, 1998
70,411 shares were committed to be released and 5,562,459 shares remain
unallocated. No shares had been specifically allocated as of March 31, 1998. The
fair value of unearned ESOP shares was $99.4 million at March 31, 1998.
In accordance with SOP 93-6, the Company recorded compensation expense of
$1.3 million for the year ended March 31, 1998 which was equal to the shares
committed to be released by the ESOP multiplied by the average estimated fair
value of the common stock during the year. The average quoted price of a share
of the Company's common stock was $17.79 for the year ended March 31, 1998.
12. COMMITMENTS AND CONTINGENCIES
At March 31, 1998 and March 31, 1997, there were outstanding commitments
and unused lines of credit by the Company to originate or acquire mortgage loans
on real estate aggregating $138.6 million and $96.9 million, respectively, and
other loans aggregating $18.0 million and $33.2 million, respectively.
Substantially all of these loans were fixed and adjustable rate residential
loans and fixed rate commercial loans that are expected to close during the next
twelve months. The difference between the estimated fair value and the estimated
book value of commitments and unused lines of credit is not significant.
The Company has entered into noncancellable lease agreements with respect
to Bank premises. The minimum annual rental commitments under these operating
leases, exclusive of taxes and other charges, are summarized as follows:
AMOUNT
--------------
(IN THOUSANDS)
Year ended March 31:
1999 $1,415
2000 1,386
2001 1,382
2002 1,311
2003 and thereafter 8,652
The rent expense for the years ended March 31, 1998, 1997 and 1996 was $1.4
million, $1.1 million and $1.0 million, respectively.
The Bank is a member of the FHLB, and owns FHLB stock with a carrying value
of $25,756,300 and $25,752,100 at March 31, 1998 and March 31, 1997,
respectively. As a member, the Bank is able to borrow on
74
76
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a secured basis up to twenty times the amount of its capital stock investment at
either fixed or variable interest rates for terms ranging from six months to
fifteen years (see Note 10). The borrowings are limited to 30% of total assets
except for borrowings to fund deposit outflows.
In the normal course of business, there are outstanding various legal
proceedings, claims, commitments and contingent liabilities. In the opinion of
management, the financial position of the Bank will not be affected materially
by the outcome of such legal proceedings and claims.
13. INCOME TAXES
The components of deferred tax assets and liabilities are summarized as
follows:
MARCH 31,
--------------------
1998 1997
------- -------
(IN THOUSANDS)
Deferred tax assets:
Contribution to Foundation(1) $17,677 $ --
Allowance for loan losses 18,879 11,271
Deferred loan fees 6,007 5,311
Amortization of intangible assets 5,371 3,088
Nonaccrual interest 924 1,330
Employee benefits 4,542 3,367
Other 356 792
------- -------
Gross deferred tax asset 53,756 25,159
------- -------
Less Valuation allowance -- --
------- -------
Deferred tax assets 53,756 25,159
------- -------
Deferred tax liabilities:
Securities available-for-sale 5,203 244
Bad Debt Recapture Under Section 593 1,850 1,930
Acquisition premium on mortgage-backed and
mortgage-related securities 1,689 1,017
Acquisition premium on mortgages 3,407 3,414
Depreciation 795 698
Other 4,038 26
------- -------
Gross deferred tax liabilities 16,982 7,329
------- -------
Net deferred tax asset $36,774 $17,830
======= =======
(1) The contribution to the Foundation resulted in a utilization of
approximately $2 million of deferred tax asset during fiscal 1998.
The Company has reported taxable income for Federal, State and local income
tax purposes in each of the past two years and in management's opinion, in view
of the Company's previous, current and projected future earnings trend, such net
deferred tax asset will be fully realized. Accordingly, no valuation allowance
was deemed necessary for the net deferred tax asset at March 31, 1998 and March
31, 1997.
75
77
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the (benefit) provision for income taxes
attributable to continuing operations are as follows:
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Current
Federal $18,462 $14,832 $22,645
State and local 1,957 3,037 9,553
------- ------- -------
20,419 17,869 32,198
------- ------- -------
Deferred:
Federal (21,365) (4,873) (518)
State and local (2,536) (2,264) (898)
------- ------- -------
(23,901) (7,137) (1,416)
------- ------- -------
Total $(3,482) $10,732 $30,782
======= ======= =======
The table below presents a reconciliation between the reported tax
(benefit) provision and the tax (benefit) provision computed by applying the
statutory Federal income tax rate to (loss) income before (benefit) provision
for income taxes:
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Federal income tax (benefit) provision at
statutory rates $(4,703) $ 9,769 $23,364
(Reduction) increase in tax resulting from:
State and Local taxes, net of federal income
tax effect (376) 502 5,626
Other 1,597 461 1,792
------- ------- -------
$(3,482) $10,732 $30,782
======= ======= =======
The Company files a consolidated Federal income tax return on a calendar
year basis. For Federal income tax purposes, prior to 1996, if certain
definitional tests and other conditions were met, the Company was allowed a
special bad debt deduction in determining its taxable income. The deduction was
based on either specified experience formulas or a percentage of taxable income.
Federal tax legislation enacted during 1996 repealed the special bad debt
deduction provisions. As a result, a large thrift institution such as the
Company is required to use the specific charge-off method in computing its
federal bad debt deduction for tax years beginning after December 31, 1995.
However, New York State enacted legislation which, among other things, would
permit a large thrift institution such as the Company to continue to use the bad
debt reserve method for both New York State and New York City tax purposes.
The 1996 Federal tax legislation also provided that a large thrift
institution such as the Company is required to recapture the excess of its tax
bad debt reserves at December 31, 1995 over the balance of such reserves as of
December 31, 1987 (the "base year"), whether the additions were made under the
percentage of taxable income method or the experience method. The Company is
required to recapture its excess bad debt reserves, for which deferred taxes
have been recognized, over a six year period on a straight line basis beginning
in 1998. The base year reserve will remain subject to recapture in the case of
certain excess distributions to and redemptions of shareholders or if the
subsidiary ceases to be a bank. The New York State
76
78
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
legislation provides that the recapture of excess bad debt reserves is not
required for either New York State or New York City tax purposes.
At March 31, 1998 the base year bad debt reserve for federal income tax
purposes was approximately $30 million, for which deferred taxes are not
required to be recognized. Bad debt reserves maintained for New York State and
New York City tax purposes as of March 31, 1998 for which deferred taxes are not
required to be recognized, amounted to approximately $89.8 million. Accordingly,
deferred tax liabilities of approximately $21 million have not been recognized
as of March 31, 1998.
14. REGULATORY REQUIREMENT
As New York-chartered stock form savings bank, the deposits of which are
insured by the FDIC, the Bank is subject to certain FDIC capital requirements.
Failure to meet minimum capital requirements can initiate certain mandatory and
possible discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Based on its regulatory capital ratios at March 31, 1998 and March 31,
1997, the Bank is categorized as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized"
the Bank must maintain Tier I leverage, Tier I risk-based and minimum total
risk-based ratios as set forth in the table.
The Bank's actual capital amounts and ratios are presented in the tables
below as of March 31, 1998 and March 31, 1997:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY FDIC GUIDELINES AT
ACTUALS AS OF 3/31/98 PURPOSES AT 3/31/98 3/31/98
--------------------- --------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------- ---------- ------- --------- -----
Tier 1 Leverage $622,827 11.16% $223,139 4.0% $278,924 5.0%
Tier 1 Risk-Based 622,827 22.25% 111,991 4.0% 167,987 6.0%
Total Risk-Based 657,841 23.50% 223,982 8.0% 279,978 10.0%
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY FDIC GUIDELINES AT
ACTUALS AS OF 3/31/97 PURPOSES AT 3/31/97 3/31/97
--------------------- --------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------- ---------- ------- --------- -----
Tier 1 Leverage $247,520 6.83% $145,064 4.0% $181,330 5.0%
Tier 1 Risk-Based 247,520 10.05% 98,525 4.0% 147,788 6.0%
Total Risk-Based 274,544 11.15% 197,050 8.0% 246,313 10.0%
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statements of financial condition, for which it
is practicable to estimate fair value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many
77
79
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cases, could not be realized in immediate settlement of the instrument. SFAS No.
107 requirements exclude certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Additionally, tax consequences
related to the realization of the unrealized gains and losses can have a
potential effect on fair value estimates and have not been considered in the
estimates. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The book values and estimated fair values of the Company's financial
instruments are summarized as follows:
MARCH 31, 1998 MARCH 31, 1997
------------------------ ------------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
FINANCIAL ASSETS:
Cash and due from banks $ 747,868 $ 747,868 $ 310,429 $ 310,429
Commercial paper 37,676 37,676 39,866 39,866
Federal funds sold 71,707 71,707 24,341 24,341
Securities available-for-sale 1,366,682 1,366,682 548,466 548,466
Mortgage loans on real estate 2,288,572 2,284,688 2,076,205 2,025,243
Consumer and commercial business loans 502,856 502,224 465,090 466,757
Accrued interest receivable 24,395 24,395 17,384 17,384
FHLB stock 25,756 25,756 25,752 25,752
FINANCIAL LIABILITIES:
Deposits and escrow 1,717,082 1,717,082 1,622,836 1,622,836
Time deposit accounts 1,722,625 1,732,361 1,743,756 1,748,692
Borrowings 717,841 718,472 17,232 15,487
The following methods and assumptions were used by the Company in
estimating the fair values of financial instruments:
The carrying values of cash and due from banks, commercial paper, Federal
funds sold, accrued interest receivable and deposits and escrow all approximate
their fair values primarily due to their liquidity and short-term nature.
Securities available-for-sale: The estimated fair values are based on
quoted market prices.
Mortgage loans or real estate: The Company's mortgage loans on real estate
were segregated into two categories, residential loans and
commercial/multi-family loans. These were stratified further based upon
historical delinquency and loan to value ratios. The fair value for each loan
was then calculated by discounting the projected mortgage cash flow to a yield
target equal to a spread, which is commensurate with the loan quality and type,
over the U.S. Treasury curve at the average life of the cash flow.
Consumer and commercial business loans: The co-op loan portfolio was
priced using the same methodology as the mortgage loans on real estate. The fair
value of the remaining other loan category has been estimated to approximate its
carrying value. This is based on the short-term duration of these loans and the
fact that the majority of these loans reprice frequently.
FHLB stock: Carrying amount approximates fair value since it is redeemable
at cost, with the issuer only.
Time deposit accounts: The estimated fair value for time deposits is based
on a discounted cash flow calculation that applies interest rates currently
being offered by the Company to its current deposit portfolio.
78
80
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings: The estimated fair value of FHLB borrowings is based on the
discounted value of their contractual cash flows. The discount rate used in the
present value computation is estimated by comparison to the current interest
rates charged by the FHLB for advances of similar remaining maturities. The
estimated fair value of borrowings as a result of securities lending
transactions, which are short term durations, were assumed to approximate their
carrying value.
16. ASSET AND DIVIDEND RESTRICTIONS
The Bank is required to maintain a reserve balance with the Federal Reserve
Bank. The required reserve balance was $1.3 million and $1.5 million at March
31, 1998 and March 31, 1997, respectively.
Limitations exist on the availability of the Bank's undistributed earnings
for the payment of dividends to the Holding Company without prior approval of
the Bank's regulatory authorities.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
YEAR ENDED MARCH 31, 1998
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Interest income $66,591 $69,011 $67,208 $ 90,233
Interest expense 35,680 36,754 36,270 52,239
------- ------- ------- --------
Net interest income 30,911 32,257 30,938 37,994
Provision for loan losses 2,230 3,123 2,327 2,331
------- ------- ------- --------
Net interest income after provision for loan
losses 28,681 29,134 28,611 35,663
Non-interest income 2,183 2,243 2,670 3,252
------- ------- ------- --------
Total income 30,864 31,377 31,281 38,915
------- ------- ------- --------
General and administrative expense 20,838 21,540 21,128 25,947
Contribution to Independence Community
Foundation -- -- -- 56,422
------- ------- ------- --------
Income (loss) before provision (benefit) for
income taxes 10,026 9,837 10,153 (43,454)
Provision (benefit) for income taxes 2,956 3,344 2,708 (12,490)
------- ------- ------- --------
Net income (loss) $ 7,070 $ 6,493 $ 7,445 $(30,964)
======= ======= ======= ========
Basic earnings (loss) per common share since
conversion N/A N/A N/A (0.52)
======= ======= ======= ========
Diluted earnings (loss) per common share since
conversion N/A N/A N/A (0.52)
======= ======= ======= ========
79
81
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED MARCH 31, 1997
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Interest income $65,635 $64,577 $65,340 $59,751
Interest expense 35,351 35,216 35,010 34,610
------- ------- ------- -------
Net interest income 30,284 29,361 30,330 25,141
Provision for loan losses 930 946 909 5,175
------- ------- ------- -------
Net interest income after provision for loan
losses 29,354 28,415 29,421 19,966
Non-interest income 2,312 (150) 3,033 (2,286)
------- ------- ------- -------
Total income 31,666 28,265 32,454 17,680
------- ------- ------- -------
General and administrative expense 17,729 16,706 18,418 20,747
SAIF assessment -- 10,000 (1,447) --
------- ------- ------- -------
Income (loss) before provision (benefit) for
income taxes 13,937 1,559 15,483 ( 3,067)
Provision for income taxes 5,507 1,571 3,111 543
------- ------- ------- -------
Net income (loss) $ 8,430 $ (12) $12,372 $(3,610)
======= ======= ======= =======
Basic earnings (loss) per common share N/A N/A N/A N/A
======= ======= ======= =======
Diluted earnings (loss) per common share N/A N/A N/A N/A
======= ======= ======= =======
18. PARENT COMPANY DISCLOSURE
The following Condensed Statement of Financial Condition, as of March 31,
1998 and Condensed Statement of Operations and Cash Flows for the period March
13, 1998 through March 31, 1998, should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto.
CONDENSED STATEMENT OF FINANCIAL CONDITION
MARCH 31, 1998
--------------
(IN THOUSANDS)
ASSETS:
Deposits with the Bank $236,805
Investment in subsidiaries 684,816
Deferred tax asset(1) 17,677
Accounts receivable 12,268
--------
Total assets $951,566
========
LIABILITIES:
Accounts payable $ 2,442
--------
Total liabilities 2,442
Stockholders' equity: 949,124
--------
Total liabilities and stockholders' Equity $951,566
========
- - ---------------
(1) The contribution to the Foundation resulted in a utilization of
approximately $2 million of deferred tax asset during fiscal 1998.
80
82
INDEPENDENCE COMMUNITY BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS
MARCH 31, 1998
--------------
(IN THOUSANDS)
Interest income $ --
--------
Expenses:
Contribution to Independence Community Foundation 56,422
Shareholder expense 200
--------
56,622
--------
Loss before income taxes and undistributed earnings of
subsidiaries (56,622)
Benefit for income taxes, net (19,581)
--------
Loss before undistributed earnings of subsidiaries (37,041)
Equity in undistributed earnings of subsidiaries (417)
--------
Net loss $(37,458)
========
CONDENSED STATEMENT OF CASH FLOWS
MARCH 31, 1998
--------------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss $(37,458)
Adjustments to reconcile net income to net cash provided
by operating activities:
Contribution of stock to Independence Community
Foundation 56,272
(Increase) in deferred income taxes (17,677)
(Increase) in other assets (12,268)
Increase in other liabilities 2,442
Undistributed earnings of subsidiary bank 417
--------
Net cash used by operating activities (8,272)
Cash flows from investing activities:
(Increase) in investment in subsidiaries (343,052)
--------
Net cash used in investing activities (343,052)
Cash flows from financing activities:
Net proceeds from issuance of common stock in initial
public offering 685,748
Loan made to ICBC Employee Stock Ownership Plan (98,872)
ESOP shares committed to be released 1,253
--------
Net cash provided by financing activities 588,129
--------
Net increase in cash 236,805
Cash at beginning of year --
--------
Cash at end of year $236,805
========
81
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table presents information concerning the directors of the
Company.
DIRECTOR
NAME AGE(1) PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS SINCE(2)
- - -------- ------ ---------------------------------------------------- --------
Willard N. Archie 54 Director, certified public accountant and Chief 1994
Executive Officer and Managing Partner of Mitchell &
Titus, LLP, an accounting and management consulting
firm in New York City.
Robert B. Catell 61 Director, President and Chief Operating Officer of 1984
Market Span Corporation since May, 1998, Chairman,
President and Chief Executive Officer of Keyspan
Energy Corporation since October, 1997, Chairman and
Chief Executive Officer of Brooklyn Union, Brooklyn,
New York; Director of the Houston Exploration
Company and Taylor Gas.
Rohit M. Desai 59 Director, Chairman and President of Desai Capital 1992
Management; Director of the Rouse Company, Sunglass
Hut, Finlay Fine Jewelry, Eye Care Centers of
America, Penn National Insurance, American Horizons
Holdings and Telecorp PCS.
Chaim Y. Edelstein 55 Director, self-employed retail consultant since 1991
1995; Consultant to Federated Department Stores from
March 1994 until April 1995; Chairman and Chief
Executive Officer of A&S/Jordan Marsh, Brooklyn, New
York from 1992 until February 1994; Director of Hill
Stores, Inc.
Donald H. Elliott 65 Director, member of the law firm of Hollyer Brady 1973
Smith Troxell Rocket Hines & More LLP since
September 1995; previously partner with Mudge Rose
Guthrie Alexander & Ferdon LLP; Director of the
Brooklyn Union Gas Company.
Robert W. Gelfman 66 Director, Partner with the law firm of Battle Fowler 1988
LLP, New York, New York.
Charles J. Hamm 59 Chairman of the Board, President and Chief Executive 1975
Officer; President of the Bank Since 1985, Chief
Executive Officer of the Bank since 1986.
Scott M. Hand 56 Director, President and Director of Inco Limited, a 1987
mining company headquartered in Ontario, Canada.
Director of P.T. International Nickel Indonesia
Donald E. Kolowsky 65 Director, retired. 1989
Janine Luke 59 Director, Director of Windrove Service Corporation, 1976
an investment advisory firm in New York City since
1996; previously President of Breecom Corp., an
investment advisory firm.
Malcolm MacKay 57 Director, Managing Director of Russell Reynolds 1977
Associates, Inc., an executive placement firm in New
York City. Director of Empire Fidelity Life
Insurance Company, Inc., a subsidiary of Fidelity
Investment Co.
82
84
DIRECTOR
NAME AGE(1) PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS SINCE(2)
- - -------- ------ ---------------------------------------------------- --------
Joseph S. Morgano 66 Director, Executive Vice President and Mortgage 1996
Officer; served in various capacities in the
mortgage area since joining the Bank in 1972.
Wesley D. Ratcliff 55 Director, President and Chief Executive Officer of 1994
Advanced Technological Solutions, Inc., an
electronics service provider located in Brooklyn,
New York since October 1993; previously served as
plant manager of IBM Corporation.
- - ---------------
(1) As of June 1, 1998.
(2) Includes service as Director of the Bank
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information with respect to the principal occupations
during the last five years for the five executive officers of the Company and
the Bank who do not serve as directors of the Company.
Terence J. Mitchell. Age 46 years. Mr. Mitchell has been Executive Vice
President-Director of Marketing and Retail Banking of the Bank since February
1995. Previously, Mr. Mitchell served as a Senior Vice President for Marketing
and Retail Banking.
John B. Zurell. Age 56 years. Mr. Zurell, a certified public accountant,
served as Executive Vice President-Financial Systems and Director of Commercial
and Consumer Lending from February 1994 until July 1997. In July 1997, he was
appointed Chief Financial Officer. Prior to February 1994, he served as a Senior
Vice President of the Bank.
Thomas J. Brady. Age 64 years. Mr. Brady has been Senior Vice President
of the Bank since March 1993 and Treasurer of the Bank since September 1991.
Previously, Mr. Brady served in various positions since joining the Bank in
1971.
John K. Schnock. Age 54 years. Mr. Schnock has been Senior Vice
President, Secretary and Counsel of the Bank since February 1996. Previously,
Mr. Schnock served as a Vice President and then First Vice President since
joining the Bank's Secretary and Counsel department in June 1992. Prior thereto,
Mr. Schnock was an attorney with the law firm of Bleakley Platt Remsen Millham &
Curran, New York, New York, from April 1990 to June 1992.
Frank S. Muzio. Age 45 years. Mr. Muzio, a certified public accountant,
has been Senior Vice President and Controller since April 1998. Previously, Mr.
Muzio served as Senior Vice President, Planning and Analysis of Dime Bancorp,
Inc. since its merger with Anchor Bancorp., Inc., in January, 1995. Prior to the
merger he served as Senior Vice President and Controller of Anchor Bancorp,
Inc., and other senior financial positions since joining the Company in 1986.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"1934 Act"), requires the Company's officers and directors, and persons who own
more than 10% of the Company's Common Stock, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC") and the
NASDAQ Stock Market. Officers, directors and greater than 10% stockholders are
required by regulation to furnish the Company with copies of all Section 16(a)
forms they file. The Company knows of no person who owns 10% or more of the
Company's Common Stock.
Based solely on review of the copies of such forms furnished to the
company, or written representations from its officers and directors, the Company
believes that with respect to the year ended March 31, 1998, the Company's
officers and directors satisfied the reporting requirements promulgated under
Section 16(a) of the 1934 Act except that one report, covering one transaction,
and another report, covering two transactions, were filed late by Messrs.
Edelstein and Brady, respectively.
83
85
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of certain information concerning
the compensation paid by the Bank (including amounts deferred to future periods
by the officers) for services rendered in all capacities during the two fiscal
years ended March 31, 1998 and 1997 to the President and Chief Executive Officer
of the Bank and the four other most highly compensated officers of the Bank.
Said officers, who serve as executive officers of the Company, do not receive
any separate compensation from the Company.
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------- ----------------------------------
AWARDS PAYOUTS
----------------------- --------
OTHER SECURITIES
NAME AND FISCAL ANNUAL RESTRICTED UNDERLYING ELTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) STOCK OPTIONS PAYOUTS COMPENSATION
------------------ ------ --------- -------- --------------- ---------- ---------- -------- ------------
Charles J. Hamm 1998 $517,316 $103,000 -- -- -- $ -- $3,000(4)
Chairman, President 1997 488,463 139,195 -- -- -- 145,070(3) 4,700(5)
and Chief Executive
Officer
Joseph S. Morgano 1998 250,999 50,000 -- -- -- -- 3,000(4)
Executive Vice 1997 238,500 66,278 -- -- -- 42,946(3) 4,700(5)
President and Mortgage
Officer
Terence J. Mitchell 1998 166,923 33,000 -- -- -- -- 3,257(4)
Executive Vice 1997 152,327 38,214 -- -- -- 23,242(3) 5,117(5)
President-Director of
Marketing and Retail
Banking
John B. Zurell 1998 195,154 29,100 -- -- -- -- 3,000(4)
Executive Vice 1997 193,646 46,746 -- -- -- 33,656(3) 4,868(5)
President and Chief
Financial Officer
Thomas J. Brady 1998 118,846 23,500 -- -- -- -- 2,957(4)
Senior Vice President 1997 111,308 30,010 -- -- -- 19,159(3) 4,841(5)
and Treasurer
- - ---------------
(1) Does not include amounts deferred by an officer in prior years and received
by such officer in the current fiscal year.
(2) Does not include amounts attributable to miscellaneous benefits received by
the named executive officer. In the opinion of management of the Bank, the
costs to the Bank of providing such benefits to the named executive officer
during the year ended March 31, 1998 did not exceed the lesser of $50,000 or
10% of the total of annual salary and bonus reported for the individual.
(3) Amount reflects one-third of an award received in April 1997 pursuant to the
Bank's Executive Long-Term Incentive Plan ("ELTIP"), which plan was
established in 1994 and provided for awards based upon the attainment of
certain pre-established performance goals and criteria during the period
from January 1, 1994 through December 31, 1996. In April 1997 the Board of
Directors determined to exclude the effect of the one-time special SAIF
assessment for the purposes of the ELTIP.
(4) Consists of contributions to the Bank's 401(k) profit sharing plan.
(5) Consists of contributions to the Bank's 401(k) profit sharing plan, the
receipt of $1,000 face amount of 8% junior preferred stock of the REIT and
reimbursement of certain tax payments made by the named executive officers.
CHANGE IN CONTROL AGREEMENTS
The Company and the Bank collectively (the "Employers") intends to enter
into Change in Control Agreements with Messrs. Hamm, Morgano, Mitchell, Zurell,
Brady and Schnock (the "Executives"). The Change in Control Agreements have
terms of three years, which term shall be extended each year for a successive
additional one-year period upon approval by the Board of Directors unless either
the Board of Directors or Executive elects, not less than 30 days prior to the
annual anniversary date, not to extend the term.
The Change in Control Agreements provide that if certain adverse actions
are taken with respect to the Executive's employment following a change in
control, as defined, of the Company or the Bank, the Executive will be entitled
to a cash severance amount equal to three times the Executive's annual
compensation. In addition, the Executive will be entitled to a continuation of
benefits similar to those he is receiving at the time of such termination for
the remaining term of the agreement or until he obtains full-time employment
with another employer.
84
86
A change in control is generally defined in the Change in Control
Agreements to include any change in control of the Company or the Bank required
to be reported under the federal securities laws, as well as (i) the acquisition
by any person of 20% or more of the Company's outstanding voting securities and
(ii) a change in a majority of the directors of the Company during any two-year
period without the approval of at least two-thirds of the persons who were
directors of the Company at the beginning of such period.
Each Change in Control Agreement with the Employers provides that if the
payments and benefits to be provided thereunder or otherwise upon termination of
employment are deemed to constitute a "parachute payment" within the meaning of
Section 280G of the Code, then the Executive would be reimbursed for any excise
tax liability pursuant to Sections 280G and 4999 of the Code and for any
additional income taxes imposed as a result of such reimbursement. Because the
amount of the payments and benefits that could constitute a parachute payment is
dependent upon the timing, price and structure of any change in control that may
occur in the future, it is not possible at this time to quantify the severance
benefits payable to an Executive under the employment agreements.
The Bank intends to enter into change in control agreements ("Bank Change
in Control Agreements") with Senior Vice Presidents, First Vice Presidents and
Vice Presidents(the "Officers") which are substantially similar to the Change in
Control Agreements except that such agreements will have terms of one, two or
three years, provide for severance benefits equal to one or two times the
Officer's annual compensation (depending on the terms of the specific agreement)
and limit the amount of severance payable to that amount which will not result
in any portion of such payment being deemed an excess parachute payment under
Section 280G of the Code (the "280G Limitation"). The Company will also enter
into change in control agreements with certain other officers of the Company
("Company Change in Control Agreements") which are substantially similar to the
Bank Change in Control Agreements but which are for three year terms and provide
severance benefits equal to three times the officers' annual compensation,
subject to the 280G Limitation.
Although the above-described Change in Control Agreements, the Company
Change in Control Agreement and the Bank Change in Control Agreements could
increase the cost of any acquisition of control of the Company, management of
the Company does not believe that the terms thereof would have a significant
anti-takeover effect.
BENEFITS
RETIREMENT PLAN. The Company maintains a non-contributory, tax-qualified
defined benefit pension plan (the "Retirement Plan") for eligible employees. All
salaried employees at least age 21 who have completed at least one year of
service are eligible to participate in the Retirement Plan. The Retirement Plan
provides for a benefit for each participant, including executive officers named
in the Executive Compensation Table above, equal to 2% of the participant's
final average compensation (average W-2 compensation during the highest 60
months of employment) multiplied by the participant's years (and any fraction
thereof) of eligible employment (up to a maximum of 30 years).A participant is
fully vested in his or her benefit under the Retirement Plan after five years of
service. The Retirement Plan is funded by the Bank on a actuarial basis and all
assets are held in trust by the Retirement Plan trustee.
85
87
The following table illustrates the annual benefit payable upon normal
retirement at age 65 (in single life annuity amounts with no offset for Social
Security benefits) at various levels of compensation and years of service under
the Retirement Plan and the Supplemental Executive Retirement Plan ("SERP")
maintained by the Bank.
YEARS OF SERVICE(1)(2)
------------------------------------------------
REMUNERATION(3)(4) 15 20 25 30 35
- - ------------------ -------- -------- -------- -------- --------
$125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 75,000
150,000 45,000 60,000 75,000 90,000 90,000
175,000 52,500 70,000 87,500 105,000 105,000
200,000 60,000 80,000 100,000 120,000 120,000
225,000 67,500 90,000 112,500 135,000 135,000
250,000 75,000 100,000 125,000 150,000 150,000
300,000 90,000 120,000 150,000 180,000 180,000
400,000 120,000 160,000 200,000 240,000 240,000
450,000 135,000 180,000 225,000 270,000 270,000
500,000 150,000 200,000 250,000 300,000 300,000
600,000 180,000 240,000 300,000 360,000 360,000
- - ---------------
(1) The annual retirement benefits shown in the table do not reflect a deduction
for Social Security benefits and there are no other offsets to benefits.
(2) The maximum years of service credited for benefit purposes is 30 years.
(3) For the fiscal year of the Retirement Plan beginning on January 1, 1997, the
average final compensation for computing benefits under the Retirement Plan
cannot exceed $160,000 (as adjusted for subsequent years pursuant to Code
provisions).Benefits in excess of the limitation are provided through SERP.
(4) For the fiscal year of the Retirement Plan beginning on January 1, 1997, the
maximum annual benefit payable under the Retirement Plan cannot exceed
$125,000 (as adjusted for subsequent years pursuant to Code provisions).
The following table sets forth the years of credited service and the
average annual earnings (as defined above) determined as of March 31, 1998, for
each of the individuals named in the Executive Compensation Table.
YEARS OF
CREDITED AVERAGE ANNUAL
SERVICE EARNINGS
-------- --------------
Charles J. Hamm 13 years $615,882
Joseph S. Morgano 25 years 290,424
Terence J. Mitchell 23 years 170,990
John B. Zurell 25 years 218,149
Thomas J. Brady 27 years 133,683
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank has adopted the SERP to
provide for eligible employees benefits that would be due under its Retirement
Plan if such benefits were not limited under the Code. SERP benefits provided
with respect to the Retirement Plan are reflected in the pension table. The
Board of Directors of the Bank intends to adopt an amendment to the SERP to
provide eligible employees with benefits that would be due under the ESOP if
such benefits were not limited under the Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Organization Committee of the Board of Directors of the Company and the
Bank determines the salaries and bonuses of the Company's and the Bank's
executive officers. Mr. Hamm, Chairman, President and Chief Executive Officer of
the Company and the Bank is a member of the Organization Committee. The
Committee also reviews and approves the salaries and bonuses for the Company's
and the Bank's other officers and employees. The Compensation Committee met
three times during fiscal 1998. The report of the Compensation Committee with
respect to compensation for the Chief Executive Officer and all other
86
88
executive officers of the Company and the Bank and employees for the year ended
March 31, 1998 is set forth below. The standing Organization Committee consists
of Messrs. Archie, Desai, Edelstein, Elliott, Hamm, Hand, Ratcliff and Mrs.
Luke. Four other Directors, (Messrs. Catell, Gelfman, Kolowsky and MacKay),
serve on a rotating basis.
REPORT OF ORGANIZATION COMMITTEE
Under the rules of the SEC, the Holding Company is required to provide
certain data and information in regard to the compensation and benefits provided
to the Company's President and Chief Executive Officer and certain other
executive officers of the Company for the year ended March 31, 1998. Because the
Holding Company did not have any significant assets until March 13, 1998 (the
completion of the Bank's and the Mutual Holding Company's reorganization and
conversion), the following discussion addresses compensation information
relating to the President and Chief Executive Officer and executive officers of
the Bank for fiscal 1998 and sets forth the report of the Organization Committee
(the "Committee") of the Board of directors of the Bank.
Compensation Philosophy. The Committee is responsible for administering
the compensation of all executive officers. The Committee annually reviews and
evaluates the base salary and incentive compensation for all executive officers,
including the President and Chief Executive Officer, and in conducting such
reviews of the Bank's executive officers other than the President and Chief
Executive Officer places primary consideration upon the recommendations of the
President and Chief Executive Officer, along with the rationale for such
recommendations. The President and Chief Executive Officer does not participate
in the Committee's review of his compensation package. The Committee considers
the objectives and performance of the Bank, individual performance and surveys
of compensation practices at comparable financial institutions in establishing
executive compensation. While the Committee does not use strict numerical
formulas to determine changes in the compensation of the President and Chief
Executive Officer and the other executive officers of the Bank and while it
weighs a variety of different factors in its deliberations, it emphasizes
earnings, profitability, capital position and income level as factors in setting
the compensation of the Bank's executive officers, in particular the President
and Chief Executive Officer. It also takes into account non-quantitative factors
including such factors as the level of responsibility and general management
oversight. While the various quantitative factors approved by the Committee were
considered in evaluating individual officer performance, such factors were not
assigned a specific weight in evaluating the performance of the President and
Chief Executive Officer or the other executive officers.
The purposes of the Bank's executive compensation policies are to attract
and retain qualified individuals; reward high performance by the Bank and the
executive; and maintain compensation at levels that are competitive with other
financial institutions, particularly those in the New York metropolitan area.
The compensation structure is designed to support the achievement of the Bank's
performance and strategic objectives and to ensure that the executive officers'
interests are aligned with the success of the Bank. The Committee makes use of
compensation surveys and has on occasion retained independent consultants to
assist in the design of the Bank's executive compensation package. In light of
the status of the Holding Company as a public company, it is intended that the
compensation policies of the Holding Company and the Bank will incorporate the
consolidated financial results of the Holding Company and other factors related
to the Holding Company's common stock.
Incentive Compensation. An important component of the Company's executive
compensation package is an incentive compensation plan which provides for cash
payments to executive officers based on the performance of the Bank in relation
to a set of performance goals and targets. The institutional goals are
recommended by management each year and approved by the Committee and the Board
of Directors. All officers of the Bank are eligible to participate in the
program. The incentive compensation of executive officers is more closely linked
to Bank performance, while the incentive compensation of junior officers is more
closely linked to personal performance.
Chief Executive Officer. The Committee recommended and the Board of
Directors awarded the Bank's President and Chief Executive Officer a salary
increase of 6.2%, or $30,000, for a new annual salary of
87
89
$515,000 effective February 1997. The decision to increase the Chief Executive
Officer's salary was based on normal cost of living adjustments, an analysis of
the salaries of the Chief Executive Officers of peer group financial
institutions in the New York metropolitan area and the significant contributions
of the Chief Executive Officer to the successful operations of the Bank. No
specific formula was used by the Committee to establish the President and Chief
Executive Officer's salary for 1997 nor did the Committee set specified salary
levels based on the achievement of particular quantitative financial measures or
performance targets.
THE ORGANIZATION COMMITTEE OF THE BANK
Willard N. Archie Robert B. Catell
Rohit M. Desai Chaim Y. Edelstein
Donald H. Elliott Robert W. Gelfman
Charles J. Hamm Scott M. Hand
Donald E. Kolowsky Janine Luke
Malcolm MacKay Wesley D. Ratcliff
PERFORMANCE GRAPH
Pursuant to the rules and regulations of the SEC, the graph below compares
the performance of the Company's Common Stock with that of the Nasdaq Composite
Index (U.S. Companies) and the Nasdaq Bank Composite Index (banks and bank
holding companies, over 99% of which are based in the United States) from March
17, 1998, the date the Company's common stock began trading on the Nasdaq
National Market, through March 31, 1998. The graph is based on an investment of
$100 in the Company's Common Stock at its closing price on March 17, 1998.
Independence
Measurement Period Community Bank
(Fiscal Year Covered) Corp. Nasdaq Total U.S. Nasdaq Banks
3/17/98 100.00 100.00 100.00
3/31/98 103.60 103.40 101.70
88
90
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Common Stock
as of May 31, 1998, and certain other information with respect to (i) persons or
entities, including any "group" as that term is used in Section 13(d)(3) of the
Exchange Act, who or which is the beneficial owner of more than 5% of the issued
and outstanding Common Stock other than the Company Employee Stock Ownership
Plan and the Independence Community Foundation, (ii) each director of the
Company, and (iii) all directors and executive officers of the Company and the
Bank as a group.
AMOUNT AND NATURE
NAME OF BENEFICIAL OF BENEFICIAL
OWNER OF NUMBER OF OWNERSHIP AS OF PERCENT OF
PERSONS IN GROUP MAY 31, 1998(1) COMMON STOCK
------------------ ----------------- ------------
Independence Community Bank Corp.
Employee Stock Ownership Plan
195 Montague Street
Brooklyn, New York 11201 5,632,870(2) 7.4%
Independence Community Foundation
195 Montague Street
Brooklyn, New York 11201 5,607,870 7.4
DIRECTORS:
Willard N. Archie -- --
Robert B. Catell 5,000 *
Rohit M. Desai -- --
Chaim Y. Edelstein 3,000(3) *
Donald H. Elliott 790(4) *
Robert W. Gelfman 1,288(5) *
Charles J. Hamm 6,947(6) *
Scott M. Hand 753 *
Donald E. Kolowsky 1,449 *
Janine Luke -- --
Malcolm MacKay 300 *
Joseph S. Morgano 15,191(6) *
Wesley D. Ratcliff -- --
OTHER SENIOR EXECUTIVE OFFICERS:
Thomas J. Brady 11,831(7) *
Terence J. Mitchell 694(6) *
Frank S. Muzio -- --
John K. Schnock 1,220(6) *
John B. Zurell 993(6) *
All directors and executive officers as a group (18 persons) 49,456 *
- - ---------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals. Under regulations promulgated
pursuant to the Exchange Act, shares of Common Stock are deemed to be
beneficially owned by a person if he or she directly or indirectly has or
shares (i) voting power, which includes the power to vote or to direct the
voting of the shares, or (ii) investment power, which includes the power to
dispose or to direct the disposition of the shares. Unless otherwise
indicated, the named beneficial owner has sole voting and dispositive power
with respect to the shares.
(2) Independence Community Bank Corp. Employee Stock Ownership Plan ("ESOP") was
established by an agreement between the Company and Messrs. Catell, Desai
and Gelfman as well as Marine Midland Bank, who act as trustees of the plan
("Trustees"). As of the Voting Record Date, none of the shares held by the
ESOP had been allocated to the accounts of participating employees. Under
the terms of the ESOP, the Trustees will generally vote the allocated shares
held in the ESOP in accordance with the instructions of the participating
employees. Unallocated shares held in the ESOP will generally be voted in
the same ratio on any matter as those allocated shares for which
instructions are given, subject in each case to the fiduciary duties of the
ESOP trustees and applicable law. Any allocated shares which either abstain
on the proposal or are not voted will be disregarded in determining the
percentage of stock voted for and against each proposal by the participants
and beneficiaries. The amount of Common Stock beneficially owned by all
directors and executive officers as a group does not include the unallocated
shares held by the ESOP.
(3) Includes 395 shares owned by Mr. Edelstein's minor child.
(4) Shares are held by the Directors Fee Deferral Plan. Mr. Elliott disclaims
beneficial ownership of such shares except to the extent of his personal
pecuniary interest therein.
(footnotes continued on following page)
89
91
(5) Includes 288 shares owned by Mr. Gelfman's spouse.
(6) All shares are held in the Independence Savings Bank 401(k) Savings Plan
("401(k) Plan").
(7) Includes 750 shares owned by Mr. Brady's spouse, 2,266 shares owned by Mr.
Brady's minor children and 7,976 shares held by the Bank's 401(k) Plan.
90
92
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with applicable laws and regulations, the Bank offers
mortgage loans to its directors, officers and employees as well as members of
their immediate families for the financing of their primary residences and
certain other loans. These loans are generally made on substantially the same
terms as those prevailing at the time for comparable transactions with
non-affiliated persons. It is the belief of management that these loans neither
involve more than the normal risk of collectibility nor present other
unfavorable features. All such loans were current as of March 31, 1998.
Section 22(h) of the Federal Reserve Act generally provides that any credit
extended by a savings institution, such as the Bank, to its executive officers,
directors and, to the extent otherwise permitted, principal stockholder(s), or
any related interest of the foregoing, must be on substantially the same terms,
including interest rates collateral, as those prevailing at the time for
comparable transactions by the savings institution with no affiliated parties,
unless the loans are made pursuant to a benefit or compensation program that (i)
is widely available to employees of the institution and (ii) does not give
preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution, and must not involve more than the normal risk of repayment or
present other unfavorable features.
91
93
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference from
Item 8 hereof:
Report of Independent Auditors
Consolidated Statements of Financial Condition as of March 31, 1998 and
1997.
Consolidated Statements of Operations for the Years Ended March 31, 1998,
1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended March 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended March 31, 1998,
1997 and 1996.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting
regulations of the SEC are omitted because of the absence of conditions under
which they are required or because the required information is included in the
consolidated financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index.
92
94
EXHIBIT INDEX
3.1* Certificate of Incorporation of Independence Community Bank
Corp.
3.2* Bylaws of Independence Community Bank Corp.
4.0* Specimen Stock Certificate of Independence Community Bank
Corp.
10.1* Form of Change of Control Agreement to be entered into among
Independence Community Bank Corp., Independence Savings Bank
and certain senior executive officers of the Company and the
Bank.
10.2* Form of Change in Control Agreement to be entered into
between Independence Savings Bank and certain officers
thereof.
10.3 Form of Change of Control Agreement to be entered into among
Independence Community Bank Corp., Independence Savings Bank
and certain executive officers of the Company and the Bank.
10.4 Form of Change of Control Agreement to be entered into
between Independence Savings Bank and certain executive
officers thereof.
11.0 Statement re: computation of per share earnings -- Reference
is made to Item 8. "Financial Statements and Supplementary
Data" for the required information.
21.0 Subsidiaries of the Registrant -- Reference is made to Item
2. "Business" for the required information.
23.1 Consent of Ernst & Young LLP
27.0 Financial Data Schedule
(*) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (Registration No. 333-30757) filed by the Company with the SEC
on July 3, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal
1998.
(c) The exhibits listed under (a)(3) of this Item 14 are filed herewith.
(d) Not applicable.
93
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Independence Community Bank Corp.
/s/ CHARLES J. HAMM Date: June 26, 1998
- - -------------------------------------------------------- ----------------------------------
Charles J. Hamm
Chairman of the Board, President and
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 the capacities and on the dates indicated:
NAME DATE
---- ----
/s/ CHARLES J. HAMM June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Charles J. Hamm
Chairman of the Board, President and
Chief Executive Officer
/s/ JOSEPH S. MORGANO June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Joseph S. Morgano
Executive Vice President, Mortgage
Officer and Director
/s/ JOHN B. ZURELL June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
John B. Zurell
Executive Vice President and
Chief Financial Officer
/s/ WILLARD N. ARCHIE June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Willard N. Archie
Director
/s/
- - -------------------------------------------------------- ------------------------------------------
Robert B. Catell
Director
/s/ ROHIT M. DESAI June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Rohit M. Desai
Director
/s/ CHAIM Y. EDELSTEIN June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Chaim Y. Edelstein
Director
/s/ DONALD H. ELLIOTT June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Donald H. Elliott
Director
94
96
NAME DATE
---- ----
/s/ ROBERT W. GELFMAN June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Robert W. Gelfman
Director
/s/ SCOTT M. HAND June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Scott M. Hand
Director
/s/ DONALD E. KOLOWSKY June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Donald E. Kolowsky
Director
/s/ JANINE LUKE June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Janine Luke
Director
/s/ MALCOLM MACKAY June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Malcolm MacKay
Director
/s/ WESLEY D. RATCLIFF June 26, 1998
- - -------------------------------------------------------- ------------------------------------------
Wesley D. Ratcliff
Director
95