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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from__________to_________
Commission file Number 0-27782
DIME COMMUNITY BANCORP, INC.
(Exact Name of registrant as specified in its charter)
Delaware 11-3297463
(State or other jurisdiction (I.R.S. employer
of incorporation or idntification number)
organization)
209 Havemeyer Street, Brooklyn, NY 11211
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 782-6200
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 Company (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 Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ X ]
As of September 22, 1997, there were 12,624,750 shares of the Company's
common stock, $0.01 par value, outstanding. The aggregate market value of the
voting stock held by non-affiliates of the Company as of September 22, 1997 was
$209,268,766. This figure is based upon the closing price on the NASDAQ
National Market for a share of the Company's common stock on September 22,
1997, which was $20.125 as reported in the Wall Street Journal on September 23,
1997.
DOCUMENTS INCORPORATED BY REFERENCE
(1) The Annual Report to Shareholders for the fiscal year ended June 30, 1997
(Item 1 of Part I, and Items 5 through 8 of Part II) and (2) the definitive
Proxy Statement dated October 6, 1997 to be distributed on behalf of the Board
of Directors of Registrant in connection with the Annual Meeting of
Shareholders to be held on November 13, 1997 and any adjournment thereof and
which is expected to be filed with the Securities and Exchange Commission on or
about October 7, 1997
(Part III).
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS
GENERAL............................................. 3
ACQUISITION OF CONESTOGA BANCORP,INC................ 4
MARKET AREA AND COMPETITION.......................... 4
LENDING ACTIVITIES................................... 5
ASSET QUALITY........................................ 12
ALLOWANCE FOR LOANLOSSES............................. 16
INVESTMENT ACTIVITIES................................ 19
SOURCES OF FUNDS..................................... 23
SUBSIDIARY ACTIVITIES................................ 26
PERSONNEL............................................ 26
FEDERAL , STATE AND LOCAL TAXATION
FEDERAL TAXATION............................... 27
STATE AND LOCAL TAXATION....................... 28
REGULATION
GENERAL........................................ 29
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS..... 29
REGULATION OF HOLDING COMPANY.................. 36
FEDERAL SECURITIES LAWS........................ 37
ITEM 2. PROPERTIES......................................... 38
ITEM 3. LEGAL PROCEEDINGS.................................. 39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 39
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS......................................... 39
ITEM 6. SELECTED FINANCIAL
DATA........................................................ 39
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE......................... 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.... 40
ITEM 11. EXECUTIVE COMPENSATION............................. 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................... 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.......................................... 40
SIGNATURES................................................... 43
PAGE 2
Statements contained in this Annual Report on Form 10-K relating to plans,
strategies, economic performance and trends, and other statements that are not
descriptions of historical facts may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward looking information is inherently
subject to various factors which could cause actual results to differ
materially from these estimates. These factors include: changes in general,
economic and market conditions, or the development of an adverse interest rate
environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments. The Company has no
obligation to update these forward looking statements.
PART I
ITEM 1. BUSINESS
General
Dime Community Bancorp, Inc. (the "Company") is a Delaware corporation
organized in December, 1995 at the direction of the Board of Directors of The
Dime Savings Bank of Williamsburgh (the "Bank") for the purpose of acquiring
all of the capital stock of the Bank issued in the conversion of the Bank, on
June 26, 1996, from a federal mutual savings bank to a federal stock savings
bank (the "Conversion"). In connection with the Conversion, the Company issued
14,547,500 shares (par value $0.01) of common stock at a price of $10.00 per
share to certain of the Bank's eligible depositors who subscribed for shares
and to an Employee Stock Ownership Plan ("ESOP") established by the Company.
The Company realized net proceeds of $141.4 million from the sale of its common
stock and utilized approximately $76.4 million of the proceeds to purchase 100%
of the Bank's common stock and $11.6 million to fund a loan to the ESOP for its
purchase of 1,163,800 shares, or 8%, of the Company's common stock. The
remaining proceeds of $53.4 million were retained by the Company.
The primary business of the Company is the operation of its wholly-owned
subsidiary, the Bank. In addition to directing, planning and coordinating the
business activities of the Bank, the Company retained proceeds of $53.4 million
in connection with the Conversion, which are invested in federal funds, short-
term, investment grade marketable securities and mortgage-backed securities.
The Company also holds a note evidencing the loan that it made to the ESOP to
purchase 8% of its common stock issued in the Conversion. See "-Regulation -
Regulation of the Holding Company."
The Company is a unitary savings and loan holding company, which, under
existing law, is generally not restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender. Under regulations of the Office of Thrift Supervision
("OTS") the Bank is a qualified thrift lender if its ratio of qualified thrift
investments to portfolio assets ("QTL Ratio") is 65% or more, on a monthly
average basis in nine of every twelve months. At June 30, 1997, the Bank's QTL
Ratio was 94.4%, and the Bank has maintained more that 65% of its portfolio
assets in qualified thrift investments in at least nine of the preceding twelve
months.
In the future, the Company may organize or acquire, through merger or
otherwise, other subsidiaries, including other financial institutions, or
branches thereof, or other financial services related companies, although there
are no current arrangements, understandings or agreements regarding any such
acquisition or expansion.
The Company neither owns nor leases any property but instead uses the
premises and equipment of the Bank. At the present time, the Company does not
employ any persons other than certain officers of the Bank who do not receive
any extra compensation as officers of the Company. The Company utilizes the
support staff of the Bank from time to time, as needed. Additional employees
may be hired as deemed appropriate by the management of the Company.
PAGE 3
Unless otherwise disclosed, the information presented in this Form 10-K
reflect the financial condition and results of operations of the Company and
the Bank on a consolidated basis. At June 30, 1996, the Company had total
consolidated assets of $1.37 billion, which included $131.1 million of excess
proceeds resulting from the oversubscription to the Company's initial public
offering, which was refunded on July 1, 1996. Certain information which
discloses percentages of total assets will include parenthetical disclosure for
"Adjusted Assets," which represents total assets adjusted for the refund of
excess proceeds on July 1, 1996.
The Bank's principal business has been, and continues to be, gathering
deposits from customers within its market area, and investing those deposits,
primarily in multi-family and one- to four-family residential mortgage loans,
mortgage-backed securities, and obligations of the U.S. Government and
Government Sponsored Entities ("GSEs"). The Bank's revenues are derived
principally from interest on its loan and securities portfolios. The Bank's
primary sources of funds are: deposits; loan amortization, prepayments and
maturities; amortization, prepayments and maturities of mortgage-backed and
investment securities; and borrowings, and, to a lesser extent, the sale of
fixed-rate mortgage loans to the secondary market. The Bank is also a member
of the Federal Home Loan Bank of New York ("FHLBNY").
ACQUISITION OF CONESTOGA BANCORP, INC.
On June 26, 1996 the Bank completed the acquisition (the "Acquisition") of
Conestoga Bancorp, Inc. ("Conestoga"), resulting in the merger of Conestoga's
wholly-owned subsidiary, Pioneer Savings Bank, F.S.B. ("Pioneer") with and into
the Bank, with the Bank as the resulting financial institution.
The Acquisition was accounted for in the financial statements using the
purchase method of accounting. Under purchase accounting, the acquired assets
and liabilities of Conestoga are recognized at their fair value as of the date
of the Acquisition. Shareholders of Conestoga were paid approximately $101.3
million in cash, resulting in goodwill of $28.4 million, which is being
amortized on a straight line basis over a twelve year period.
Since the Acquisition occurred on June 26, 1996, its impact upon the
Company's consolidated results of operations for the fiscal year ended June 30,
1996 was minimal The full effect of the Acquisition is reflected in the
Company's consolidated results of operations for the fiscal year ended June 30,
1997, as well the consolidated statements of financial condition as of June 30,
1997 and 1996.
MARKET AREA AND COMPETITION
The Bank has been, and intends to continue to be, a community-oriented
financial institution providing financial services and loans for housing within
its market areas. The Bank maintains its headquarters in the Williamsburgh
section of the borough of Brooklyn. Fourteen additional offices are located in
the boroughs of Brooklyn, Queens, and the Bronx, and in Nassau County. The Bank
gathers deposits primarily from the communities and neighborhoods in close
proximity to its branches. The Bank's primary lending area is larger, and
includes much of New York City and Nassau County. Most of the Bank's mortgage
loans are secured by properties located in its primary lending area.
The New York City metropolitan area has historically benefited from having a
large number of corporate headquarters and a diversity of financial services
industries. However, due to (1) the lingering effects of the decline of the
stock market in 1987, (2) the resulting decline in the regional economy and (3)
layoffs and corporate relocations in the financial services industry, the New
York City metropolitan area experienced reduced levels of employment and an
overall decline in the underlying values of local properties from 1987 to 1993.
Since then, the local economy has improved significantly. Unemployment has
remained low, home sales have increased, residential apartment and commercial
property vacancy rates have declined considerably, and local real estate values
have stabilized. The rise and decline of the Bank's non-performing asset
portfolio closely parallels the trend of the local economy during this period.
See "- Asset Quality." A strong local economy existed throughout the Company's
entire fiscal year ended June 30, 1997. Despite these encouraging trends, the
outlook for the local economy remains uncertain.
PAGE 4
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's market area has a high density of financial
institutions, many of which have greater financial resources than the Bank, and
all of which are competitors of the Bank to varying degrees. The Bank's
competition for loans comes principally from commercial banks, savings banks,
savings and loan associations, mortgage banking companies and insurance
companies. The Bank has recently faced increased competition for the
origination of multi-family loans, which comprised 66.15% Bank's loan portfolio
at June 30, 1997. Management anticipates that competition for both multi-family
and one- to four-family loans will continue to increase in the future. Thus, no
assurances can be made that the Bank will be able to maintain its current level
of such loans. The Bank's most direct competition for deposits has historically
come from savings and loan associations, savings banks, commercial banks and
direct purchases of government securities. The Bank faces additional
competition for deposits from short-term money market funds and other corporate
and government securities funds, and from other financial institutions such as
brokerage firms and insurance companies. Competition may also increase as a
result of the lifting of restrictions on the overall operations of financial
institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily
of multi-family loans secured by apartment buildings (including loans
underlying apartment buildings organized under cooperative form of ownership,
"underlying cooperatives"), conventional first mortgage loans secured primarily
by one- to four-family residences, including condominiums and cooperative
apartment share loans, and non-residential (commercial) property loans. At June
30, 1997, the Bank's loan portfolio totaled $753.7 million. Within the loan
portfolio, $498.5 million or 66.15% were multi-family loans, $191.7 million or
25.44% were loans to finance the purchase of one- to four-family properties and
cooperative apartment share loans, $43.2 million or 5.73% were loans to
finance the purchase of commercial properties, primarily small shopping
centers, warehouses and nursing homes, and $14.2 million or 1.88% were loans to
finance multi-family and residential properties with either full or partial
credit guarantees provided by either the Federal Housing Administration
(''FHA'') or the Veterans' Administration (''VA''). Of the total mortgage loan
portfolio outstanding at that date, 23.48% were fixed-rate loans and 76.52%
were adjustable-rate loans (''ARMs''), of which 78.16% are multi-family and
non-residential property loans which carry a maturity of 10 years, and an
amortization period of no longer than 25 years. These loans have a fixed
interest rate that adjusts after the fifth year indexed to the 5-year FHLBNY
advance rate, but may not adjust below the initial interest rate of the loan.
At June 30, 1997, the Bank's loan portfolio also included $2.8 million in
passbook loans, $1.2 million in home improvement loans, and $2.0 million in
other consumer loans.
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans, the supply of money
available for lending purposes, and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, and the
fiscal and monetary policy of the federal government.
PAGE 5
The following table sets forth the composition of the Bank's mortgage and other
loan portfolios in dollar amounts and percentages at the dates indicated.
AT June 30,
- ------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
1997 Total 1996 Total 1995 Total 1994 Total 1993 Total
------- ------ ------- ----- ------ ----- ------- ----- ------ -----
(Dollars In Thousands) (Dollars In Thousands)
Mortgage loans:
One-to-four family 140,798 18.68% $170,182 29.05% $58,291 13.52% $59,461 13.74% $75,248 16.26%
Multi-family and
underlying cooperative 498,536 66.15 296,630 50.63 252,436 58.56 242,088 55.92 243,803 52.67
Non-residential 43,180 5.73 37,708 6.44 26,972 6.26 26,896 6.21 25,873 5.59
FHA/VA insured 14,153 1.88 16,686 2.85 22,061 5.12 27,264 6.30 33,421 7.22
Cooperative apartment 50,931 6.76 59,083 10.08 67,524 15.67 73,250 16.92 80,469 17.39
------- ------ ------- ----- ------ ----- ------- ----- ------ -----
Total mortgage loans 747,598 99.20 580,289 99.05 427,284 99.13 428,959 99.09 458,814 99.13
------- ------ ------- ----- ------ ----- ------- ----- ------ -----
Other loans:
Student loans 1,005 0.13 1,307 0.22 1,431 0.33 1,506 0.35 1,696 0.37
Passbook savings (secured
by savings and time
deposits) 2,801 0.37 3,044 0.52 1,510 0.35 1,516 0.35 1,375 0.30
Home improvement loans 1,243 0.16 891 0.15 475 0.11 550 0.13 665 0.14
Consumer installment and
other 1,027 0.14 323 0.06 336 0.08 362 0.08 302 0.06
------- ------ ------- ----- ------ ----- ------- ----- ------ -----
Total other loans 6,076 0.80 5,565 0.95 3,752 0.87 3,934 0.91 4,038 0.87
------- ------ ------- ----- ------ ----- ------- ----- ------ -----
Gross loans 753,674 100.00% 585,854 100.00% 431,036 100.00% 432,893 100.00% 462,852 100.00%
------- ====== ------- ====== ------ ====== ------- ====== ------ =====
Less:
Unearned discounts and net
deferred loan fees 3,090 2,168 1,182 1,300 1,434
Allowance for loan losses 10,726 7,812 5,174 3,633 2,996
------- ------- ------ ------- ------
Loans, net $739,858 $575,874 $424,680 $427,960 $458,422
======= ======= ======= ======= =======
Loans serviced for others:
One-to-four family and
cooperative apartment $60,242 $63,360 $63,192 $65,063 $59,403
Multi-family and underlying
cooperative 9,406 27,690 30,264 34,396 44,079
------- ------ ------- ------- ------
Total loans serviced for
others $69,648 $91,050 $93,456 $99,459 $103,482
======= ====== ======= ======= =======
Includes acquisition of $113.1 million loans from Conestoga on June 26,
1996, substantially all of which were one-to-four family loans.
Includes loans held for sale.
PAGE 6
LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. The Bank
originates both ARMs and fixed-rate loans, which activity is
dependent upon customer demand and market rates of interest, and
generally does not purchase whole mortgage loans or loan
participations. Generally, the Bank sells all originated one- to
four-family fixed-rate mortgage loans in the secondary market to
the Federal National Mortgage Association (''FNMA''), the Federal
Home Loan Mortgage Corporation (''FHLMC''), the State of New York
Mortgage Agency (''SONYMA'') and other private secondary market
purchasers. ARMs, including adjustable-rate multi-family loans,
and fixed-rate multi-family and non-residential mortgage loans
with maturities up to 15 years, are retained for the Bank's
portfolio. For the fiscal year ended June 30, 1997 origination of
ARMs totaled $198.1 million or 75.5% of all loan originations.
Originations of fixed-rate mortgage loans totaled $64.1 million,
while sales of fixed-rate loans totaled $4.2 million. The Bank
generally sells all fixed-rate loans without recourse and retains
the servicing rights. As of June 30, 1997, the Bank was servicing
$69.6 million of loans for others. The Bank generally receives a
loan servicing fee equal to 0.25% of the outstanding principal
balance for servicing loans sold.
On April 9, 1996, the Bank entered into a Community
Reinvestment Banking Agreement (the ''CRB Agreement'') with a
local, Bronx-based community group. In the CRB Agreement, the Bank
has agreed to use its best efforts, consistent with safe and sound
banking practices, to increase its dollar volume of lending in
certain low and moderate income neighborhoods to at least $46.8
million and a maximum of $86.0 million over the three-year period
ending December 31, 1998. Pursuant to the CRB Agreement, the Bank
also has agreed to use its best efforts to open three automated
teller machines (''ATMs'') in the neighborhoods of East Brooklyn,
Upper Manhattan and the South Bronx in New York City. Consistent
with the CRB Agreement, the Bank has expanded its Community
Reinvestment Act service territory to include the entirety of
Brooklyn, Manhattan and the Bronx. The Bank is in compliance with
all currently applicable provisions of the CRB Agreement.
The following table sets forth the Bank's loan originations,
loan sales and principal repayments for the periods indicated.
For the Years Ended June 30,
-----------------------------------------------
1997 1996 1995
-------- -------- -------
(In Thousands)
Loans (gross):
At beginning of period $585,854 $431,036 $432,893
Mortgage loans originated:
One-to-four family 4,279 6,087 5,509
Multi-family and underlying cooperative 245,324 94,379 36,326
Non-residential 11,055 11,764 2,563
Cooperative apartment 1,582 568 888
-------- -------- --------
Total mortgage loans originated 262,240 112,798 45,286
Other loans originated 2,549 2,122 2,115
-------- -------- --------
Total loans originated 264,789 114,920 47,401
-------- -------- --------
Loans acquired from Conestoga - 113,140 -
Less:
Principal repayments 91,405 67,308 45,988
Loans sold 4,157 5,740 2,791
Loans transferred from real estate pending
foreclosure - (875) (2,316)
Mortgage loans transferred to Other Real Estate
Owned 1,407 1,069 2,795
-------- -------- --------
Unpaid principal balance at end of period $753,674 $585,854 $431,036
======== ======== ========
Substantially all of these mortgage loans are one-to-four family mortgage
loans.
Includes fixed-rate mortgage loans and student loans.
PAGE 7
LOAN MATURITY AND REPRICING. The following table shows the earlier of
maturity or repricing period of the Bank's loan portfolio at June 30, 1997.
Loans that have adjustable rates are shown as being due in the period during
which the interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on the Bank's loan portfolio totaled $91.4 million for
the year ended June 30, 1997.
At June 30, 1997
--------------------------------------------------------------------------------------------
Mortgage Loans
----------------------------------------------------------------------
Multi-
family and
One-to- Underlying Non- FHA/VA Cooperative Other Total
Four-Family Cooperative Residential Insured Apartment Loans Loans
------ ---------- ----------- -------- ---------- ------ ------
(In Thousands)
Amount due:
One year or less $44,285 $29,814 $6,577 $- $39,395 $5,055 $125,126
------ -------- -------- ------- -------- ------ -------
After one year:
One to three years 18,864 101,529 7,052 6,947 11,027 1,021 146,440
More than three years to five 2,565 252,905 23,562 - 477 - 279,509
years
More than five years to ten years 16,728 81,880 4,309 152 32 - 103,101
More than ten years to twenty 29,554 32,408 1,159 7,054 - - 70,175
years
Over twenty years 28,802 - 521 - - - 29,323
------ -------- -------- ------- -------- ------ -------
Total due or repricing after one
year 96,513 468,722 36,603 14,153 11,536 1,021 628,548
------ -------- -------- ------- -------- ------ -------
Total amounts due or repricing,
gross $140,798 $498,536 $43,180 $14,153 $50,931 $6,076 $753,674
======= ======== ======== ======= ======== ====== =======
The following table sets forth the dollar amounts in each loan category at
June 30, 1997 that are due after June 30, 1998, and whether such loans have
fixed or adjustable-interest rates.
Due after June 30, 1998
------------------------------------
Fixed Adjustable Total
--------- --------- ---------
(In Thousands)
Mortgage loans:
One-to-four family $76,311 $20,202 $96,513
Multi-family and underlying
cooperative 76,363 392,359 468,722
Non-residential 8,416 28,187 36,603
FHA/VA insured 14,153 - 14,153
Cooperative apartment 179 11,357 11,536
Other loans - 1,021 1,021
--------- --------- ---------
Total loans $175,422 $453,126 $628,548
========= ========= =========
Multi-family and Non-residential Lending. The Bank originates adjustable-
rate and fixed-rate multi-family (five or more units) and non-residential loans
which are secured primarily by apartment buildings, underlying cooperatives,
mixed-use (residential combined with commercial) and other non-residential
properties, generally located in the Bank's primary lending area. The main
competitors for loans in this market tend to be other small- to medium-sized
local savings institutions. Multi-family and non-residential loans in the
Bank's portfolio generally range in amount from $100,000 to $9.0 million, and
have an average loan size of approximately $672,000. Residential multi-family
loans in this range generally have between 5 and 100 apartments per building.
The Bank had a total of $439.4 million of multi-family loans in its portfolio
on buildings with under 100 units as of June 30, 1997. Mostly as a result of
rent control and rent stabilization, the associated rent rolls for buildings of
this type indicate a rent range that would be considered affordable for low- to
moderate-income households. In addition, at June 30, 1997, the Bank had a total
of $50.9 million in loans secured by mortgages on underlying cooperative
apartment buildings.
PAGE 8
The Bank originated multi-family loans totaling $245.3 million during the
fiscal year ended June 30, 1997, versus $94.4 million during the year ended
June 30, 1996. At June 30, 1997, the Bank had $115.1 million of commitments
outstanding to originate mortgage loans, which included $6.4 million of
commitments to refinance existing mortgage loans. This compares to $81.2
million of commitments outstanding at June 30, 1996. All the mortgage
commitments outstanding at June 30, 1997 were issued to borrowers within the
Bank's service area, $114.5 million of which are secured by multi-family and
underlying cooperative apartment buildings.
The Bank's current lending policy requires loans in excess of $500,000 to be
approved by the Board of Directors. The Bank also considers the financial
resources and income level of the borrower, the borrower's experience in owning
or managing similar properties, the market value of the property and the Bank's
lending experience with the borrower. The typical adjustable-rate multi-family
loan carries a maturity of 10 years, and an amortization period of no longer
than 25 years. These loans have a fixed interest rate that adjusts after the
fifth year indexed to the 5-year FHLBNY advance rate, but may not adjust below
the initial interest rate of the loan. Prepayment penalties are assessed
throughout the life of the loans. The Bank also offers fixed-rate, self-
amortizing, multi-family and non-residential loans with maturities of up to 15
years.
At June 30, 1997, the Bank had multi-family loans totaling $498.5 million in
its portfolio, comprising 66.2% of the gross loan portfolio. The underwriting
standards for new loans generally require (1) a maximum loan-to-value ratio of
75% based on an appraisal performed by an independent, state-certified
appraiser and (2) sufficient cash flow from the underlying property to
adequately service the debt, represented by a debt service ratio not below
1.15. Of the Bank's multi-family loans, $434.3 million, or 87.1 %, were
secured by apartment buildings, and $64.2 million, or 12.9 % were secured by
underlying cooperatives at June 30, 1997. Multi-family loans are generally
viewed as exposing the Bank to a greater risk of loss than one- to four-family
residential loans and typically involve higher loan principal amounts. At June
30, 1997, the Bank had 141 multi-family and non-residential loans with
principal balances of $1.0 million or more, totaling $276.4 million. These
loans, while underwritten to the same standards as all other multi-family and
non-residential loans, tend to expose the Bank to a higher degree of risk due
to the potential impact of losses from any one loan relative to the size of the
Bank's capital position. As of June 30, 1997, none of these loans were in
arrears nor in the process of foreclosure. See ''- Asset Quality.''
Loans secured by apartment buildings and other multi-family residential
properties are generally larger and involve a greater degree of risk than
one-to-four family mortgage loans. Repayment of multi-family loans is
dependent, in large part, on sufficient cash flow from the property to cover
operating expenses and debt service. Economic events and government
regulations, such as rent control and rent stabilization laws, which are
outside the control of the borrower or the Bank, could impair the value of the
security for the loan or the future cash flow of such properties. As a result,
rental income might not rise sufficiently over time to meet increases in the
loan rate at repricing, or increases in overhead expenses (I.E., utilities,
taxes). During the last five fiscal years, the Bank's charge-offs related
to its multi-family loan portfolio totaled $6.2 million. As of June 30,
1997, the Bank had $1.6 million of non-performing multi-family loans.
See "- Asset Quality and - Allowance for Loan Losses" for discussions of the
Bank's underwriting procedures utilized in originating multi-family loans.
The Bank's loan portfolio also includes $43.2 million in non-residential
real estate mortgage loans which represented 5.73% of gross loans at June 30,
1997. This portfolio is comprised of commercial and industrial properties, and
shopping centers. The Bank utilizes, where appropriate, rent or lease income,
business receipts, the borrowers' credit history and business experience, and
comparable appraisal values when underwriting non-residential applications. As
of June 30, 1997, there were no non-performing non-residential loans in the
Bank's portfolio. Like multi-family loans, the repayment of non-residential
real estate mortgage loans is dependent, in large part, upon sufficient cash
flows from the property to cover operating expenses and debt service. For this
reason, non-residential real estate mortgage loans are considered to include
greater risk than one-to-four family residential loans.
PAGE 9
The Bank's three largest loans at June 30, 1997, consisted of a $9.0 million
loan secured by a first mortgage on a 276 unit apartment building located in
midtown Manhattan originated in May, 1997; an $8.5 million first mortgage loan,
originated in June, 1997, secured by a 631 unit apartment building located in
the Forest Hills section of Queens; and a $7.2 million first mortgage loan,
originated in February, 1997, secured by a 306 unit apartment building located
in the Borough Park section of Brooklyn. As of June 30, 1997, all of these
loans were performing in accordance with their terms. See "-Regulation of
Federal Savings Associations - Loans to One Borrower." While the loans are
current, their large loan balance does subject the Bank to a greater potential
loss in the event of non-compliance by the borrower.
The Bank also currently services a total of $9.4 million in multi-family
loans for various private investors. These loans were sold in the late 1980s,
without recourse.
ONE- TO FOUR-FAMILY MORTGAGE AND COOPERATIVE APARTMENT LENDING. The Bank
offers residential first mortgage loans secured primarily by owner-occupied,
one-to four-family residences, including condominiums, and cooperative
apartment share loans. Lending is primarily confined to an area covered by a
50-mile radius from the Bank's Main Office in Brooklyn. The Bank offers
conforming and non-conforming fixed-rate mortgage loans and adjustable-rate
mortgage loans with maturities of up to 30 years and a maximum loan amount of
$500,000. The Bank's residential mortgage loan originations are generally
obtained from existing or past loan customers, depositors of the Bank, members
of the local community and referrals from attorneys, realtors and independent
mortgage brokers who refer members of the communities located in the Bank's
primary lending area. The Bank is a participating seller/servicer with several
government-sponsored mortgage agencies: FNMA, FHLMC, and SONYMA, and generally
underwrites its one- to four-family residential mortgage loans to conform with
standards required by these agencies. Although the collateral for cooperative
apartment loans is comprised of shares in a cooperative corporation (a
corporation whose primary asset is the underlying real estate), cooperative
apartment loans generally are treated as one- to four-family loans. The Bank's
portfolio of such loans is $50.9 million, or 6.76% of total loans as of June
30, 1997. The recent market for cooperative apartment loan financing has
improved with the support of certain government agencies, particularly SONYMA
and FNMA, who are insuring and purchasing, respectively, cooperative apartment
share loans in qualifying buildings. The Bank adheres to underwriting
guidelines established by SONYMA and FNMA for all fixed-rate cooperative
apartment loans which are originated for sale. Adjustable-rate cooperative
apartment loans continue to be originated both for portfolio and for sale.
At June 30, 1997, $191.7 million, or 25.44%, of the Bank's loans consisted of
one-to four- family and cooperative apartment mortgage loans. ARMs represented
60.89% of total one- to four-family and cooperative apartment loans, while
fixed-rate mortgages comprised 39.11% of the total. A large portion of these
fixed rate mortgages were acquired from Conestoga. See "- Acquisition of
Conestoga." The Bank currently offers one- to four-family and cooperative
apartment mortgage ARMs secured by residential properties with rates that
adjust every one or three years. One- to four-family ARMs are offered with
terms of up to 30 years. The interest rate at repricing on one- to four-family
ARMs currently offered 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 Federal Reserve Board.
Additionally, one- and three-year one- to four-family ARMs are generally
subject to limitations on interest rate increases of 2% and 3%, respectively,
per adjustment period, and an aggregate adjustment of 6% over the life of the
loan. For the year ended June 30, 1997, the Bank originated $2.6 million of
one- to four-family and cooperative apartment mortgage ARMs.
The volume and types of ARMs originated by the Bank have been affected by
such market factors as the level of interest rates, competition, consumer
preferences and availability of funds. During fiscal 1997, demand for one- to
four-family ARMs was relatively weak due to the prevailing low interest rate
environment and consumer preference for fixed-rate loans. Accordingly, although
the Bank will continue to offer one- to four-family ARMs, there can be no
assurance that in the future the Bank will be able to originate a sufficient
volume of one- to four-family ARMs to increase or maintain the proportion that
these loans bear to total loans.
PAGE 10
The retention of one- to four-family and cooperative apartment mortgage
ARMs, as opposed to fixed-rate residential mortgage loans, in the Bank's loan
portfolio helps reduce the Bank's exposure to increases in interest rates.
However, one- to four-family 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 default. At the same time, the marketability of the underlying
property may be adversely affected. In order to minimize risks, applicants for
one- to four-family ARMs are qualified at the highest rate which would be in
effect after the first interest rate adjustment, if rates were to rise. The
Bank has not in the past, nor does it currently, originate one- to four-family
ARMs which provide for negative amortization.
The Bank currently offers fixed-rate mortgage loans with terms of 10 to 30
years secured by one- to four-family residences and cooperative apartments.
Interest rates charged on fixed-rates loans are competitively priced based on
market conditions. The Bank generally originates fixed-rate loans for sale in
amounts up to the maximum allowed by FNMA, FHLMC and SONYMA, with private
mortgage insurance required for loans with loan-to-value ratios in excess of
80%. For the year ended June 30, 1997, the Bank originated $3.3 million of
fixed-rate, one- to four-family residential mortgage and cooperative apartment
loans.
The Bank generally sells its newly originated conforming fixed-rate mortgage
loans in the secondary market to federal and state agencies such as FNMA, FHLMC
and SONYMA, and its non-conforming fixed-rate mortgage loans to various private
sector secondary market purchasers. With few exceptions, such as SONYMA, the
Bank retains the servicing rights on all such loans sold. For the year ended
June 30, 1997, the Bank sold mortgage loans totaling $3.3 million. As of June
30, 1997, the Bank's portfolio of one-to four-family fixed-rate mortgage loans
serviced for others totaled $60.2 million. The Bank intends to continue to sell
all of its newly-originated fixed-rate mortgage loans to conform to its
interest-rate risk policy. No assurances can be made, however, that the Bank
will be able to do so.
Originated mortgage loans in the Bank's one-to-four family portfolio
generally include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event
that the borrower transfers ownership of the property without the Bank's
consent. It is the Bank's policy to enforce due-on-sale provisions within the
applicable regulations and guidelines imposed by New York law and secondary
market purchasers.
Home equity loans currently are originated to a maximum of $250,000. When
combined with the balance of the first mortgage lien, the home equity loan may
not exceed 75% of the appraised value of the property at the time of the loan
commitment. The Bank's home equity loans outstanding at June 30, 1997, totaled
$1.2 million against total available credit lines of $1.8 million.
OTHER LENDING. The Bank also originates other loans, primarily student and
passbook loans. Total other loans outstanding at June 30, 1997, amounted to
$6.1 million, or 0.80%, of the Bank's loan portfolio. Passbook loans, totaling
$2.8 million, and home improvement loans, totaling $1.2 million, comprise the
majority of the Bank's other loan portfolio.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Board of Directors
establishes lending authorities for individual officers as to its various types
of loan products. For multi-family and one- to four-family mortgage loans,
including cooperative apartment and condominium loans, the Loan Operating
Committee, which is comprised of the Chief Executive Officer, President, and
Executive Vice President, and the heads of both the residential loan and multi-
family loan origination departments, has the authority to approve loans in
amounts up to $500,000. Any loan in excess of $500,000, however, must be
approved by the Board of Directors. In addition, regulatory restrictions
imposed on the Bank's lending activities limit the amount of credit that can be
extended to any one borrower to 15% of total capital. See ''- Regulation -
Regulation of Federal Savings Associations - Loans to One Borrower.''
For all one- to four-family loans originated by the Bank, 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
intended to secure the proposed loan is required, which currently is performed
by an independent appraiser designated and approved by the Board of Directors.
In certain cases, the Bank may also require certain environmental hazard
reports on multi-family properties. It is the Bank's policy to require
appropriate insurance protection, including title and hazard insurance, on all
real estate mortgage loans prior to closing. Borrowers generally are required
to advance funds for certain items such as real estate taxes, flood insurance
and private mortgage insurance, when applicable.
PAGE 11
ASSET QUALITY
DELINQUENT LOANS AND FORECLOSED ASSETS. Management does not expect to
incur significant losses on its current portfolio of delinquent mortgage loans.
Loans in the process of foreclosure and other non-accrual loans, 88 loans in
all, totaled $3.2 million at June 30, 1997 versus $6.6 million at June 30,
1996. The largest loan in this group is a $672,000 foreclosure on an underlying
cooperative apartment building located in Manhattan. The Bank believes that its
allowance for loan losses as of June 30, 1997 is adequate. The Bank had 33
loans totaling $603,000 delinquent 60-89 days at June 30, 1997, as compared to
33 such delinquent loans totaling $2.3 million at June 30, 1996.
The Bank's real estate loan servicing policies and procedures require that
the Bank initiate contact with a delinquent borrower as soon after the tenth
day of delinquency as possible. Generally, the policy calls for a late notice
to be sent 10 days after the due date of the late payment. If payment has not
been received within 30 days of the due date, a letter is sent to the borrower.
Thereafter, periodic letters and phone calls are placed to the borrower until
payment is received. In addition, Bank policy calls for the cessation of
interest accruals on loans delinquent 60 days or more. When contact is made
with the borrower at any time prior to foreclosure, the Bank will attempt to
obtain the full payment due, or work out a repayment schedule with the borrower
to avoid foreclosure. Generally, foreclosure proceedings are initiated by the
Bank when a loan is 90 days past due. If a foreclosure action is instituted and
the loan is not brought current, paid in full, or refinanced before the
foreclosure sale, the real property securing the loan is generally sold at
foreclosure or by the Bank as soon thereafter as practicable.
Management reviews delinquent loans on a continuous basis and reports
monthly to the Board of Directors regarding the status of all delinquent and
non-accrual loans in the Bank's portfolio. The Bank retains outside counsel
experienced in foreclosure and bankruptcy procedures to institute foreclosure
and other actions on the Bank's delinquent loans. It is the policy of the Bank
to initiate foreclosure proceedings after a loan becomes 90 days past due. As
soon as practicable after initiating foreclosure proceedings on a loan, the
Bank prepares an estimate of the fair value of the underlying collateral. It
is the Bank's general policy to dispose of properties acquired through
foreclosure or deeds in lieu thereof as quickly and as prudently as possible in
consideration of market conditions, the physical condition of the property, and
any other mitigating conditions.
The continued adherence to these procedures, as well as a strong local real
estate market resulted in a significant drop in problem loans in the Bank's
portfolio during the fiscal year ended June 30, 1997. Evidence of this is
reflected in declines in both non-performing loans and loans delinquent 60-89
days. Non-performing loans totaled $3.2 million at June 30, 1997 as compared
to $6.6 million at June 30, 1996. The Bank had 33 loans totaling $603,000
million delinquent 60-89 days at June30, 1997, as compared to 33 such
delinquent loans totaling $2.3 million at June 30, 1996.
Under Generally Accepted Accounting Principles ("GAAP"), the Bank is required
to account for certain loan modifications or restructurings as ''troubled-debt
restructurings.'' In general, the modification or restructuring of a debt
constitutes a troubled-debt restructuring if the Bank, for economic or legal
reasons related to the borrower's financial difficulties, grants a concession
to the borrower that the Bank would not otherwise consider. Debt restructurings
or loan modifications for a borrower do not necessarily always constitute
troubled-debt restructurings, however, and troubled-debt restructurings do not
necessarily result in non-accrual loans. The Bank had four loans classified as
troubled-debt restructurings at June 30, 1997, totaling $4.7 million, and all
are currently performing according to their restructured terms. The largest
restructured debt, a $2.7 million loan secured by a mortgage on an underlying
cooperative apartment building located in Forest Hills, New York, was
originated in 1987. The loan was first restructured in 1988, and again in 1994.
The current regulations of the Office of Thrift Supervision require that
troubled-debt restructurings remain classified as such until either the loan is
repaid or returns to its original terms. The Bank did not incur any new loan
restructurings during the fiscal year ended June 30, 1997. All four troubled-
debt restructurings as of June 30, 1997 are on accrual status as they have been
performing in accordance with the restructuring terms for over one year.
PAGE 12
Effective July 1, 1995, the Bank adopted SFAS 114, which established guidelines
for determining and measuring impairment in loans. In the event the carrying
balance of the loan, including all accrued interest, exceeds the estimate of
fair value, the loan is considered to be impaired and a reserve is established
pursuant to SFAS 114. Generally, the Bank considers non-performing loans to be
impaired loans. The recorded investment in loans deemed impairment under the
guidance of SFAS 114 was approximately $4.3 million as of June 30, 1997,
compared to $7.4 million at June 30, 1996, and the average balance of impaired
loans was $4.7 million for the year ended June 30, 1997 compared to $6.7
million for the year ended June 30, 1996. The impaired portion of these loans
is represented by specific reserves totaling $122,000 allocated within the
allowance for loan losses at June 30, 1997. At June 30, 1997, one loan totaling
$2.7 million, was deemed impaired for which no reserves have been provided.
This loan, which is included in troubled-debt restructurings at June 30, 1997,
has performed in accordance with the provisions of the restructuring agreement
signed in October, 1995. The loan has been retained on accrual status at June
30, 1997. At June 30, 1997, approximately $1.6 million of one-to-four family
and cooperative apartment loans on nonaccrual status are not deemed impaired
under SFAS 114. All of these loans have outstanding balances less than
$203,000, and are considered a homogeneous loan pool not covered by SFAS 114.
PAGE 13
NON-PERFORMING ASSETS AND TROUBLED-DEBT RESTRUCTURINGS. The following
table sets forth information regarding the Bank's non-performing assets and
troubled-debt restructurings at the dates indicated.
At June 30,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- --------
(Dollars In Thousands)
Non-performing loans:
One-to-four family $1,123 $1,149 $572 $1,276 $3,449
Multi-family and underlying
cooperative 1,613 4,734 3,978 4,363 7,265
Non-residential - - - - -
Cooperative apartment 415 668 523 609 918
Other loans 39 - - - -
--------- --------- --------- --------- ---------
Total non-performing loans 3,190 6,551 5,073 6,248 11,632
Total Other Real Estate Owned 1,697 1,946 4,466 8,200 7,981
--------- --------- --------- --------- ---------
Total non-performing assets $4,887 $8,497 $9,539 $14,448 $19,613
========= ========= ========= ========= =========
Troubled-debt restructurings $4,671 $4,671 $7,651 $7,421 $5,219
Total non-performing assets and
troubled-debt restructurings $9,558 $13,168 $17,190 $21,869 $24,832
========= ========= ========= ========= =========
Impaired loans $4,294 $7,419 $- $- $-
Total non-performing loans to total
loans 0.43% 1.12% 1.18% 1.45% 2.52%
Total non-performing assets to total
assets 0.37 0.62 1.44 2.23 3.04
Total non performing assets and
troubled-debt restructurings to
total assets <3> 0.73 0.96 2.59 3.38 3.84
The Bank adopted SFAS 114 effective July 1, 1995. Impaired loans were not
measured prior to this date.
Total non-performing assets to total Adjusted Assets were 0.68% at June
30, 1996.
Total non-performing assets and troubled-debt restructurings to total
Adjusted Assets were 1.06% at June 30, 1996.
The Bank recorded $188,000 and $357,000 of interest income on non-performing
loans and troubled-debt restructurings, respectively, for the year ended June
30, 1997, and $47,000 and $344,000, respectively, for the fiscal year ended
June 30, 1996. If the Bank's non-performing loans and troubled-debt
restructurings had been performing in accordance with their terms, the Bank
would have recorded additional interest income of $247,000 and $114,
respectively, for the year ended June 30, 1997, and $410,000 and $127,000,
respectively, for the fiscal year ended June 30, 1996.
OTHER REAL ESTATE OWNED ("OREO"). Property acquired by the Bank as a result
of a foreclosure on a mortgage loan is classified as OREO and is recorded at
the lower of the recorded investment in the related loan or the fair value of
the property at the date of acquisition, with any resulting write down charged
to the allowance for loan losses. The Bank obtains an appraisal on a real
estate owned property as soon as practicable after it takes possession of the
real property. The Bank will generally reassess the value of OREO at least
annually thereafter. At June 30, 1997, the Bank had $1.7 million in OREO.
CLASSIFIED ASSETS. The Bank's Loan Loss Reserve Committee meets every other
month to review all problem loans in the portfolio to determine whether any
loans require reclassification in accordance with applicable regulatory
guidelines. Recommendations are reported by the Loan Loss Reserve Committee to
the Board of Directors on a quarterly basis. The Loan Loss Reserve Committee,
subject to Board approval, establishes policy relating to the internal
classification of loans and believes that its classification policies are
consistent with regulatory policies. All non-performing loans and OREO are
considered to be classified assets. In addition, the Bank maintains a "watch
list" comprised of 25 loans totaling $4.9 million at June 30, 1997 which, while
performing, are characterized by weaknesses which require special attention
from management and are considered to be potential problem loans. All loans on
the watch list are considered to be classified assets or are otherwise
categorized as "Special Mention" as discussed below. As a result of its bi-
monthly review of the loan portfolio, the Loan Loss Reserve Committee may
decide to reclassify one or more of the loans on the watch list.
PAGE 14
Federal regulations and Bank policy require that loans and other assets
considered to be of lesser quality be classified as ''Substandard,''
''Doubtful'' or ''Loss'' assets. An asset is considered ''Substandard'' if it
is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. ''Substandard'' assets have a
well-defined weakness or weaknesses and are characterized by the distinct
possibility that the Bank will sustain ''some loss'' if deficiencies are not
corrected. Assets classified as ''Doubtful'' have all of the weaknesses
inherent in those classified ''Substandard'' with the added characteristic that
the weaknesses present make ''collection or liquidation in full,'' on the basis
of current existing facts, conditions, and values, ''highly questionable and
improbable.'' Assets classified as ''Loss'' are those considered
''uncollectible'' and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not expose the Bank to sufficient risk to warrant classification in
one of the aforementioned categories but possess potential weaknesses that
deserve management's attention are designated ''Special Mention'' by
management. At June 30, 1997 the Bank had $7.7 million of loans designated
Special Mention.
When an insured institution classifies one or more assets, or portion
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
Generally, federally-insured institutions must maintain an allowance for loan
losses at a level that is ''adequate to absorb estimated credit losses
associated with the loan portfolio.'' The general valuation allowance, which is
a regulatory term, represents a loss allowance which has been established to
recognize the inherent risk associated with lending activities, but which,
unlike the specific allowance, has not been allocated to particular problem
assets. When an insured institution classifies one or more assets, or
proportions thereof, as ''Loss,'' it is required to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge-off such amount.
At June 30, 1997, the Bank had $4.5 million of assets classified
Substandard, consisting of 55 loans, no assets classified as doubtful, and
$89,000 of assets classified as Loss, consisting of 2 loans.
PAGE 15
The following table sets forth at June 30, 1997 the Bank's aggregate
carrying value of the assets classified as Substandard, Doubtful or Loss or
designated as Special Mention.
Special Mention Substandard Doubtful Loss
------------------- ------------------- ------------------- ------------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars In Thousands)
Mortgage Loans:
One-to-four family 6 $738 14 $1,640 - $- - $-
Multi-family and
underlying
cooperative 15 6,321 2 642 - - 2 89
Non-residential - - 2 78 - - - -
Cooperative apartment 10 593 5 394 - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total Mortgage Loans 31 7,652 23 2,754 - - 2 89
------ ------ ------ ------ ------ ------ ------ ------
Other Real Estate Owned:
One-to-four family - - 1 328 - - - -
Multi-family and - -
underlying cooperative - - 1 713 - -
Non-residential - - - - - - - -
Cooperative apartment - - 20 656 - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total Other Real Estate
Owned - - 22 1,697 - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total 31 $7,652 55 $4,451 - $- 2 $89
====== ====== ====== ====== ====== ====== ====== ======
ALLOWANCE FOR LOAN LOSSES
The Bank has established a Loan Loss Reserve Committee and has charged it
with, among other things, specific responsibility for monitoring the adequacy
of the loan loss reserve. The Loan Loss Reserve Committee's findings, along
with recommendations for additional loan loss reserve provisions, if any, are
reported directly to senior management of the Bank, and to the Board of
Directors. The Allowance for Loan Losses is supplemented through a periodic
provision for loan losses based on the Loan Loss Reserve Committee's evaluation
of several variables, including the level of non-performing loans, the ratio of
reserves to total performing loans, the level and composition of new loan
activity, and an estimate of future losses determinable at the date the
portfolio is evaluated. Such evaluation, which includes a review of all loans
on which full collectibility may not be reasonably assured, considers among
other matters, the fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan loss allowance. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses, its valuation of
OREO, and both the level of loans in foreclosure and pending foreclosure. Based
on their judgments about information available to them at the time of their
examination, the regulators may require the Bank to recognize additions to the
allowance.
Loan loss reserves are established based upon a review of the two components
of the Bank's loan portfolio, performing loans and non-performing loans.
Performing loans are reviewed based upon the premise that, over time, the loan
portfolio will generate losses and that some portion of the loan portfolio
which is currently performing will default. The evaluation process is thus
based upon the Bank's historical loss experience.
Non-performing loans are reviewed individually to determine if the
liquidation value of the underlying collateral is sufficient to pay off the
existing debt. Should the bank determine that a non-performing loan is likely
to result in a principal loss, the loan is then placed into one of four
classifications. The particular classification assigned to any one loan, or
proportion thereof, (loss, doubtful, substandard or special mention) is based
upon the actual level of loss attributable to that loan, as determined by the
Loan Loss Reserve Committee. The Bank will then increase its general valuation
allowance in an amount established by the Loan Loss Reserve Committee to
appropriately reflect the anticipated loss from each loss classification
category.
PAGE 16
Specific reserves are established against loans classified as ''loss.''
Rather than an estimation of potential loss, the establishment of a specific
reserve represents the identification of an actual loss which will result in a
charge-off. This loss amount will be set aside on the Bank's balance sheet as a
specific reserve and will serve to reduce the carrying value of the associated
loan. The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by various regulatory
agencies which can order the establishment of additional general or specific
loss allowances.
The Bank has increased its allowance for loan losses to a level which
management believes is adequate to absorb possible losses that may be incurred
within the Bank's loan portfolio. The Bank provided $4.2 million to its
allowance for loan losses for the fiscal year ended June 30, 1997. At June 30,
1997, the total allowance was $10.7 million, which amounted to 336.24% of non-
performing loans and 1.43% of total loans. The increase in the allowance
reflects management's assessment of the risks inherent in its loan portfolio,
including those risks associated with the Bank's emphasis on multi-family
mortgage loans, which are considered to be at greater risk of loss than one- to
four-family loans. The Bank will continue to monitor and modify the level of
its allowance for loan losses in order to maintain such allowance at a level
which management considers adequate to provide for loan losses. For the fiscal
year ended June 30, 1997, the Bank had charge-offs, net of recoveries, of $1.3
million against the allowance. Since 1985, total principal losses attributable
to the Bank's loan portfolio have averaged 0.18% of the average outstanding
loan balance.
PAGE 17
The following table sets forth activity in the Bank's allowance for loan
losses at or for the dates indicated.
At or for the Year Ended June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars In Thousands)
Total loans outstanding at end of period $750,584 $583,686 $429,854 $431,593 $461,418
======== ======== ======== ======== ========
Average total loans outstanding $648,357 $449,063 $430,845 $455,705 474,362
======== ======== ======== ======== ========
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $7,812 $5,174 $3,633 $2,996 $2,094
Provision for loan losses 4,200 2,979 2,950 4,105 3,395
Charge-offs
One-to-four family (104) (21) (146) (224) (272)
Multi-family and underlying cooperative (985) (553) (1,081) (2,203) (1,355)
Non-residential - (274) (92) - (19)
FHA/VA insured - - (9) - (13)
Cooperative apartment (276) (170) (328) (1,109) (876)
Other (23) (5) - - -
-------- -------- -------- -------- -------
Total charge-offs (1,388) (1,023) (1,656) (3,536) (2,535)
-------- -------- -------- -------- -------
Recoveries 102 14 247 68 42
-------- -------- -------- -------- -------
Reserve acquired in purchase of Conestoga - 668 - - -
-------- -------- -------- -------- -------
Balance at end of period $10,726 $7,812 $5,174 $3,633 $2,996
======== ======== ======== ======== =======
Allowance for loan losses to total loans
at end of period 1.43% 1.34% 1.20% 0.84% 0.65%
Allowance for loan losses to total non-
performing loans at end of period 336.24 119.25 101.99 58.15 25.76
Ratio of net charge-offs to average
loans outstanding during the period 0.20 0.22 0.33 0.76 0.53
ALLOWANCE FOR LOSSES ON OTHER REAL ESTATE
OWNED:
Balance at beginning of period $114 $- $- $- $-
Provision charged to operations 450 586 - - -
Charge-offs, net of recoveries (377) (472) - - -
-------- -------- -------- -------- --------
Balance at end of period $187 $114 $- $- $-
======== ======== ======== ======== ========
Total loans represents loans, net, plus the allowance for loan losses.
Total loans at June 30, 1996 includes $113.1 million of loans acquired
from Conestoga.
The Bank adopted SFAS No. 114 on July 1, 1995. See ''Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Impact of Accounting Standards.''
PAGE 18
The following table sets forth the Bank's allowance for loan losses
allocated by loan category and the percent of loans in each category to total
loans at the dates indicated.
At June 30,
--------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------- --------------------- ---------------------- ---------------------- --------------------
Percent Percent Percent Percent Percent
of Loans of Loan of Loans of Loan of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------ ------- ------ ------- ------ ------- ------ ------- -------
(Dollars In thousands)
Impaired
loans $122 0.58% $955 1.30% $- -% $- -% $- -%
One-to-four
family 820 19.04 1,171 29.90 556 14.25 398 14.66 391 17.52
Multi-family
and
underlying 7,398 66.83 3,808 50.81 3,372 61.72 2,267 59.68 1,773 56.77
cooperative
Non-
residential 862 5.84 605 6.63 103 6.60 72 6.63 54 6.02
Cooperative
apartment 1,355 6.89 1,085 10.38 1,031 16.51 784 18.06 669 18.75
Other 169 0.82 188 0.98 112 0.92 112 0.97 109 0.94
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $10,726 100.00% $7,812 100.00% $5,174 100.00% $3,633 100.00% $2,996 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Total loans represent gross loans less FHA and VA loans, which are
government guaranteed loans.
The Bank adopted SFAS 114 effective July 1, 1995. Prior to this date,
impaired loans were not measured. At June 30, 1997 and 1996, impaired
loans represent 0.57% and 1.27% of total loans.
INVESTMENT ACTIVITIES
INVESTMENT STRATEGIES OF THE COMPANY - The Company's
principal asset is its investment in the Bank's common
stock, which amounted to $152.2 million at June 30, 1997
The Company's other investments at that date totaled $28.4
million, which are invested primarily in U.S. agency
obligations which will be utilized for general business
activities which may include, but are not limited to: (1)
repurchases of Common Stock, (2) acquisition of other
companies, (3) subject to applicable limitations, the
payment of dividends, and/or (4) investments in the equity
securities of other financial institutions and other
investments not permitted for federally-insured
institutions. There can be no assurance that the Company
will engage in any of these activities in the future.
Otherwise, the investment policy of the Company calls
for investments in relatively short-term, liquid securities
similar to such securities defined in the securities
investment policy of the Bank.
INVESTMENT POLICY OF THE BANK. The securities
investment policy of the Bank, which is established by its
Board of Directors, is designed to help the Bank achieve
its overall asset/liability management objectives.
Generally, the policy calls for management to emphasize
principal preservation, liquidity, diversification, short
maturities and/or repricing terms, and a favorable return
on investment when selecting new investments for the Bank's
portfolio. The Bank'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 securities, commercial paper,
certificates of deposit, and federal funds sold to select
financial institutions periodically approved by the Board
of Directors.
PAGE 19
Investment strategies are implemented by the Asset and
Liability Management Committee ("ALCO") comprised of the
Chief Executive Officer, President, Executive Vice
President and other senior management officers. The
strategies take into account the Bank's overall balance
sheet, including loans and deposits, and are intended to
protect and enhance the Company's earnings and market
value. The strategies are reviewed monthly by the ALCO and
reported regularly to the Board of Directors.
The Bank currently does not participate in hedging
programs, interest rate swaps, or other activities
involving the use of off-balance sheet derivative financial
instruments. These activities are prohibited by the Bank's
securities investment policy. Similarly, the Bank has not
and does not invest in mortgage-backed securities which are
deemed to be ''high risk,'' or purchase bonds which are not
rated investment grade.
MORTGAGE-BACKED SECURITIES. In its securities
investment activities over the past few years the Company
has increased its purchases of mortgage-backed securities,
which provide the portfolio with investments consisting of
desirable repricing, cash flow and credit quality
characteristics. Mortgage-backed securities generally yield
less than the loans that underlie the securities because of
the cost of payment guarantees and credit enhancements that
reduce credit risk to the investor. While mortgage-backed
securities backed by federally sponsored agencies carry a
reduced credit risk as compared to whole loans, such
securities remain subject to the risk that fluctuating
interest rates, along with other factors such as the
geographic distribution of the underlying mortgage loans,
may alter the prepayment rate of such mortgage loans and so
affect both the prepayment speed, and value, of such
securities. However, mortgage-backed securities are more
liquid than individual mortgage loans and may be used to
collateralize borrowings of the Company. Approximately
98.40% of the Company's $308.5 million mortgage-backed
securities portfolio, which represented 23.46% of the
Company's total assets at June 30, 1997, was comprised of
securities backed by either the Governmental National
Mortgage Association (''GNMA''), FHLMC, or FNMA. In
addition to the superior credit quality provided by the
agency backing, the mortgage-backed securities portfolio
also provides the Company with important interest rate risk
management features. One year adjustable-rate mortgage-
backed securities, which total $86.9 million, are the
single largest component of the Company's mortgage-backed
securities portfolio. These securities are structured so
that the interest rate received by the Company adjusts
annually in tandem with changes in other short-term market
interest rates, a feature which reduces the Company's
exposure to interest rate risk. The Company also has a
$85.6 million investment in fixed-rate balloon mortgage-
backed securities which provide a return of principal and
interest on a monthly basis, and have original maturities
of between five to seven years, at which point the entire
remaining principal balance is repaid (the ''balloon''
payment). The remainder of the Company's mortgage-backed
securities portfolio is split between a $15.5 million
investment in seasoned pass-through certificates backed by
GNMA, FNMA or FHLMC, with an average remaining maturity of
7 years, $43.6 million in 15 or 30 year fixed rate FNMA or
GNMA securities, and an $76.9 million of Collateralized
Mortgage Obligations ("CMOs") comprised entirely of fixed
rate, short-term classes with relatively little cash flow
volatility or floating rate classes which reprice
periodically.
At June 30, 1997, the Bank has $72.5 million in CMOs and
REMICSs. All of the securities are undewritten by U.S
agency obligations or highly reputable financial
institutions. In addition, none of these securities have
stripped principal and interest components and the Bank is
positioned in priority tranches in all securities. The
majority of these securities have been purchased from
short-term borrowings as part of securities sold under
agreement to repurchase transactions, in which these
securities act as collateral for the borrowed funds. As of
June 30, 1997, the fair value of these securities equal or
exceed their cost basis.
The Bank adopted SFAS 115 effective July 1, 1994. SFAS
115 requires that investments in equity securities that
have readily determinable fair values and all investments
in debt securities be classified in one of the following
three categories and accounted for accordingly: trading
securities, securities available for sale, or securities
held to maturity. The Company had no securities
classified as trading securities during the year ended
June 30, 1996, and does not intend to trade securities.
Unrealized gains and losses on available for sale
securities are excluded from earnings and are reported as a
separate component of stockholders' equity, net of deferred
taxes. At June 30, 1997, the Company had $288.8 million of
securities classified as available for sale which
represented 21.96% of total assets at June 30, 1997. Given
the size of the available for sale portfolio, future
fluctuations in market values of these securities could
result in fluctuations in the Company's stockholders'
equity.
PAGE 20
The maturities on the Bank's fixed-term mortgage-backed
securities (balloons, seasoned GNMAs and FHLMCs) are
relatively short as compared to the final maturities on its
ARMs and CMO portfolios. Except for fixed rate mortgage
backed securities acquired from Conestoga, which were
generally classified as available for sale, the Company
typically classifies purchased fixed rate mortgage-backed
securities as held-to-maturity, and carries the securities
at amortized cost. The Company is confident of its ability
to hold these securities to final maturity. The Company
typically classifies purchased ARMs and CMOs as available
for sale, in recognition of the greater prepayment
uncertainty associated with these securities, and carries
these securities at fair market value.
The following table sets forth activity in the Company's
mortgage-backed securities portfolio for the periods
indicated.
For the Year Ended June 30,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(In Thousands)
Amortized cost at beginning of period $209,542 $90,543 $94,356
Purchases/ Sales (net) 137,889 20,743 10,067
Principal repayments (41,021) (25,871 (13,595)
Premium and discount amortization, net (246) (282 (285)
Securities acquired in purchase of Conestoga(1) - 124,409 -
--------- --------- ---------
Amortized cost at end of period 306,164 $209,542 $90,543
========= ========= =========
(1) Amount comprised of $9.9 million of FHLMC securities, $38.4 million of
FNMA securities, $70.1 of GNMA securities, and $6.0 million of CMOs.
The following table sets forth the amortized cost and fair
value of the Company's securities at the dates indicated.
At June 30,
--------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ----------------------------- ------------------------
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
--------- --------- --------- --------- --------- ---------
(In Thousands)
Mortgage-backed securities:
GNMA $103,974 $106,431 $88,133 $88,562 $24,402 $24,960
FNMA 71,621 71,745 56,721 56,653 7,417 7,599
FHLMC 58,226 58,536 56,122 56,153 54,888 55,382
CMOs 72,343 72,500 8,566 8,589 3,836 3,964
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities 306,164 309,212 209,542 209,957 90,543 91,905
--------- --------- --------- --------- --------- ---------
Investment securities:
U.S. treasury and agency 119,742 120,226 297,993 297,906 25,834 25,694
Other 34,271 34,596 83,700 83,611 67,991 67,909
--------- --------- --------- --------- --------- ---------
Total investment securities 154,013 154,822 381,693 381,517 93,825 93,603
Equity securities 4,912 5,889 2,977 3,205 3,304 3,070
Net unrealized gain 3,710 - 575 - 770 -
--------- --------- --------- --------- --------- ---------
Total securities, net $468,799 $469,923 $594,787 $594,679 $188,442 $188,578
========= ========= ========= ========= ========= =========
Includes $9.9 million of FHLMC securities, $38.4 million of FNMA
securities, $70.1 million in GNMA securities, $6.0 million in CMOs,
$119.1 million in agency obligations, and $51.7 million in corporate
obligations acquired from Conestoga.
The net unrealized gain at June 30, 1997, 1996 and 1995 relates to
available for sale securities in accordance with SFAS No. 115. The
net unrealized gain is presented in order to reconcile the
''Amortized Cost'' of the Company's securities portfolio to the
recorded value reflected in the Consolidated Statements of
Condition.
PAGE 21
CORPORATE DEBT OBLIGATIONS. The Company
invests in the short-term investment grade
debt obligations of various corporations.
Corporate debt obligations generally carry
both a higher rate of return and a higher
degree of credit risk than U.S. Treasury
securities with comparable maturities. In
addition, corporate securities are generally
less liquid than comparable U.S. Treasury
securities. In recognition of the additional
risks associated with investing in these
securities, the Company's investment policy
limits new investments in corporate
obligations to those companies which are
rated single ''A'' or better by one of the
nationally recognized rating agencies, and
limits investments in any one corporate
entity to the lesser of 1% of total assets
or 15% of the Company's equity. At June 30,
1997, the Company's portfolio of corporate
debt obligations totaled $31.1 million, or
6.63% of total assets.
The following table sets forth the amortized
cost and fair value of the Company's
securities, by accounting classification and
by type of security, at the dates indicated.
At June 30,
--------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ----------------------------- ------------------------
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
--------- --------- --------- --------- --------- ---------
(In Thousands)
Held-to-Maturity:
Mortgage-backed securities:
Pass through securities $78,388 $79,075 $52,580 $52,596 $53,815 $54,172
-------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities 78,388 79,075 $52,580 $52,596 $53,815 $54,172
Investment securities 101,587 102,024 43,552 43,428 51,475 51,254
-------- --------- --------- --------- --------- ---------
Total Held-to Maturity $179,975 $181,099 $96,132 $96,024 $105,290 $105,426
======== ========= ========= ========= ========= =========
Available-for-Sale:
Mortgage-backed securities:
Pass through securities $155,433 $157,637 $148,396 $148,772 $32,892 $33,769
CMOs 72,343 72,500 8,566 8,589 3,836 3,964
-------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities 227,776 230,137 156,962 157,361 36,728 37,733
Investment securities 52,426 52,798 338,141 338,089 42,350 42,349
Equity securities 4,912 5,889 2,977 3,205 3,304 3,070
Net unrealized gain 3,710 - 575 - 770 -
-------- --------- --------- --------- --------- ---------
Total Available-for-Sale $288,824 $288,824 $498,655 $498,655 $83,152 $83,152
======== ========= ========= ========= ========= =========
Total securities, net $468,799 $469,923 $594,787 $594,679 $188,442 $188,578
======== ========= ========= ========= ========= =========
Includes $118.4 million of mortgage-backed pass-
through securities, $6.0 million in CMOs, and
$170.8 million in investment securities acquired
from Conestoga. Except, for $10.7 million of
investment securities which were classified as
held-to-maturity, all securities acquired were
classified as available for sale.
Mortgage-backed securities include investments in
CMOs and REMICs.
Includes corporate debt obligations.
The net unrealized gain at June 30, 1997, 1996 and
1995 relates to available for sale securities in
accordance with SFAS No. 115. The net unrealized
gain is presented in order to reconcile the
''Amortized Cost'' of the Company's securities
portfolio to the recorded value reflected in the
Consolidated Statements of Condition.
Amount includes $125.0 million of investment
securities (short-term agency obligations) which
matured on July 1, 1996 in order to coincide with
the refund of excess subscription proceeds received
in the Company's initial public offering.
PAGE 22
The following table sets forth
certain information regarding the
amortized cost, fair value and
weighted average yield of the
Company's debt securities at June
30, 1997, by remaining period to
contractual maturity. With respect
to mortgage-backed securities, the
entire amount is reflected in the
maturity period that includes the
final security payment date and,
accordingly, no effect has been
given to periodic repayments or
possible prepayments. Other than
obligations of federal agencies
and GSEs, the Company has no
investments in securities issued
by any one entity in excess of 10%
of stockholders' equity at June
30, 1997.
At June 30, 1997
------------------------------------------------------------
Held-to-Maturity Available-for Sale
------------------------------------------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Fair Value Yield Cost Fair Value Yield
-------- -------- ------ -------- -------- ------
(Dollars In Thousands)
Mortgage-backed securities:
Due within 1 year $7,536 $7,541 6.07% $- $- -%
Due after 1 year but within 5 years 32,295 32,295 6.42 25,441 25,513 6.67
Due after 5 years but within 10
years 28,803 29,105 6.93 7,338 7,330 6.70
Due after ten years 9,754 10,134 7.95 194,997 197,295 7.06
-------- -------- -------- --------
Total 78,388 79,075 6.77 227,776 230,137 7.00
-------- -------- -------- --------
U.S. Treasury and Agency:
Due within 1 year - - - 4,000 3,999 5.72
Due after 1 year but within 5 years 75,133 75,509 6.89 25,461 25,506 6.31
Due after 5 years but within 10
years 10,903 10,909 8.06 4,245 4,302 7.33
Due after ten years - - - - - -
-------- -------- -------- --------
Total 86,036 86,418 7.03 33,706 33,807 6.37
-------- -------- -------- --------
Corporate and Other
Due within 1 year 5,248 5,255 6.30 6,490 6,528 6.83
Due after 1 year but within 5 years 8,829 8,858 6.26 10,981 11,215 7.05
Due after 5 years but within 10
years 229 248 5.81 1,249 1,247 7.68
Due after ten years 1,245 1,245 7.50 - - -
-------- -------- -------- --------
Total 15,551 15,606 6.37 18,720 18,990 7.01
-------- -------- -------- --------
Total:
Due within 1 year 12,784 12,796 6.16 10,490 10,527 6.41
Due after 1 year but within 5 years 116,257 116,662 6.71 61,883 62,234 6.59
Due after 5 years but within 10
years 39,935 40,262 7.28 12,832 12,879 7.00
Due after ten years 10,999 11,379 7.50 194,997 197,295 7.06
-------- -------- -------- --------
Total $179,975 $181,099 6.78% $280,202 $282,935 6.93%
======== ======== ======== ========
SOURCES OF FUNDS
GENERAL. Deposits, repayments of
loans and mortgage-backed securities,
investment security maturities and
redemptions, and short- to medium-term
borrowings from the FHLBNY, which include
both advances and repurchase agreements
treated as financings, are the Bank's
primary sources of funding for its lending
and investment activities. The Bank is
also active in the secondary mortgage
market, selling substantially all of its
new long-term, fixed-rate residential
mortgage product to either FNMA, FHLMC, or
SONYMA.
PAGE 23
DEPOSITS. The Bank offers a variety
of deposit accounts having a range of
interest rates and terms. The Bank
presently offers savings accounts, money
market accounts, checking accounts, NOW
and Super NOW accounts, and certificates
of deposit. The flow of deposits is
influenced significantly by general
economic conditions, changes in prevailing
interest rates, and competition from other
financial institutions and investment
products. The Bank has not used brokers to
attract and retain deposits, relying
instead on customer service, convenience
and long-standing relationships with
customers. Consequently, the communities
in which the bank maintains branch offices
have historically provided the Bank with
nearly all of its deposits. At June 30,
1997, the Bank had deposit liabilities of
$963.4 million, up $13.3 million from June
30, 1996. Within total deposits, $40.1
million, or 4.2%, consisted of
certificates of deposit with balances of
$100,000 or greater. Individual Retirement
Accounts (''IRA's'') totaled $98.0
million, or 10.3% of total deposits.
The following table presents the deposit
activity of the Bank for the periods
indicated.
For the Year Ended June 30,
--------------------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
Deposits $1,702,024 $696,881 $699,479
Withdrawals 1,729,025 718,534 709,317
--------- --------- ---------
Withdrawals in excess of deposits (27,001) (21,653) (9,838)
Deposits acquired in purchase of - 394,250 -
Conestoga
Interest credited 40,282 22,676 17,918
--------- --------- ---------
Total increase in deposits $13,281 $395,273 $8,080
========= ========= =========
Amount comprised of $216.3 million in certificate of deposits,
$129.2 in savings accounts, $16.9 million in checking accounts,
$30.8 million in money market accounts, and $954,000 in NOW and
Super NOW accounts.
At June 30, 1997 the Bank had $46.8 million in certificate of
deposit accounts over $100,000 maturing as follows:
Weighted
Average
Amount Rate
--------- ---------
(Dollars In Thousands)
Maturity Period
Within three months $9,568 5.33%
After three but within six months 7,157 5.25
After six but within twelve months 10,572 5.66
After 12 months 19,509 6.21
---------
Total $46,806 5.76%
=========
The following table sets forth the distribution of
the Bank's deposit accounts and the related weighted\
average interest rates at the dates indicated.
At June 30,
------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------ ---------------------------------- ----------------------------
Percent Weighted Percent Weighted Percent of Weighted
of Total Average of Total Average Total Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars In Thousands)
Checking accounts $27,391 2.84% - % $27,684 2.91% - % $10,219 1.85% -%
NOW accounts 15,817 1.64 1.24 15,029 1.58 1.50 13,877 2.50 1.50
Super NOW accounts 507 0.05 1.24 552 0.06 1.50 674 0.12 1.50
Money market accounts 33,530 3.48 2.96 45,948 4.84 3.04 16,698 3.01 2.65
Savings accounts 344,377 35.75 2.27 365,146 38.43 2.50 238,217 42.93 2.50
Certificates
of deposit 541,773 56.24 5.61 495,755 52.18 5.50 275,156 49.59 5.72
------ ------ ------- ------ ------ ------
Totals $963,395 100.00% $950,114 100.00% $554,841 100.00%
======= ====== ======= ====== ====== ======
PAGE 24
The following table presents, by interest rate ranges, the
amount of certificate accounts outstanding at the dates indicated
and the period to maturity of the certificate accounts outstanding
at June 30, 1997.
Period to Maturity at June 30, 1997 Total at June 30,
----------------------------------------------- --------------------------------------
Less than One to Four to Five
Interest Rate Range One Year Three Years Years 1997 1996 1995
- --------------- --------- --------- --------- --------- --------- ---------
(In Thousands)
4.00% and below $11 $1 $- $12 $3,300 $20,646
4.01% to 5.00% 82,249 2,605 - 84,854 204,826 45,135
5.01% to 6.00% 210,580 63,386 8,099 282,065 144,331 86,389
6.01% to 7.00% 16,786 135,198 6,544 158,528 116,545 112,929
7.01% and above 3,828 12,409 77 16,314 26,753 10,057
--------- --------- --------- --------- --------- ---------
Total $313,454 $213,599 $14,720 $541,773 $495,755 $275,156
========= ========= ========= ========= ========= =========
BORROWINGS. The Bank has been a member and shareholder of the FHLBNY since
February 14, 1980. One of the privileges accorded FHLBNY shareholders is the
ability to borrow money under various lending (''Advance'') programs at
competitive interest rates. The Bank's total borrowing capacity at the FHLBNY
at June 30, 1997 is in excess of $166.4 million. Included as part of the total
borrowing capacity at the FHLBNY, the Bank has been approved for an ''Overnight
Line of Credit'' of $50.0 million, and a $50.0 million ''One-Month Overnight
Line of Credit,'' both priced at 0.125% over the prevailing federal funds rate.
The Bank had borrowings (''Advances'') from the Federal Home Loan Bank
of New York totaling $63.2 million and $15.7 million at June 30, 1997 and 1996,
respectively. The average cost of FHLB advances was 5.79% and 5.40%,
respectively, during the years ended June 30, 1997 and 1996, and the average
interest rate on outstanding FHLB advances was 6.18% and 5.40%, respectively,
at June 30, 1997 and 1996. At June 30, 1997, in accordance with the Advances,
Collateral Pledge and Security Agreement, the Bank maintained in excess of
$69.5 million of qualifying collateral (principally bonds and mortgage-backed
securities), as defined, to secure such advances.
Securities sold with agreement to repurchase totaled $76.3 million at June
30, 1997. The mortgage-backed securities sold with agreement to repurchase
mature at various periods beginning in May, 2001. Borrowings under such
reverse repurchase agreements involve the delivery of securities to broker-
dealers who arrange the transactions. The securities remain registered in the
name of the Bank, and are returned upon the maturities of the agreements. Funds
to repay the Bank's securities sold with agreement to repurchase at maturity
will be provided primarily by cash received from the maturing securities.
PAGE 25
Presented below is information concerning securities sold with agreement to
repurchase and FHLB Advances for the years ended June 30, 1997, 1996 and 1995:
Securities sold Under Agreement to Repurchase:
At or For the Year Ended June 30,
------------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars In Thousands)
Balance outstanding at end of period $76,333 $11,998 $2,110
Average interest cost at end of period 5.69% 6.00% 7.50%
Average balance outstanding 32,374 $2,148 2,212
Average interest cost during the year 5.73% 7.13% 7.25%
Carrying value of underlying collateral $83,778 $13,433 $2,767
Estimated market value of underlying collateral 84,172 $13,660 $2,843
Maximum balance outstanding at month end
during period 76,333 11,998 2,164
FHLB Advances:
At or For the Year Ended June 30,
------------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars In Thousands)
Balance outstanding at end of period $63,210 $15,710 $15,710
Average interest cost at end of period 6.18% 5.40% 5.40%
Average balance outstanding $20,121 $15,710 $15,710
Average interest cost during the year 5.79% 5.40% 5.40%
Maximum balance outstanding at month end
during period $63,210 $15,710 $15,710
SUBSIDIARY ACTIVITIES
The Company's only subsidiary is the Bank. The Bank was originally founded in
1864 as a New York State-chartered mutual savings bank. On November 1, 1995,
the Bank converted to a federal mutual savings bank. On June 26, 1996, the
Bank converted from the mutual to the stock form of ownership, and 100% of its
outstanding shares were acquired by the Company. The operation of the Bank is
the primary business of the Company.
The Bank has three wholly-owned subsidiary corporations. Havemeyer Brokerage
Corporation (''HBC''), prior to April, 1997, was engaged in the sale of
insurance and annuity products primarily to the Bank's customers and members of
the local community. Effective April 1, 1997, HBC, with the approval of the
OTS, was redesignated as an operating subsidiary, whose primary function is the
management of a securities portfolio. In May, 1997, the Bank transferred
approximately $139.0 million in investment securities to HBC and HBC began its
new form of operations. As of June 30, 1997, HBC had $140.7 million in
consolidated assets, and for the year ended June 30, 1997, had pre-tax income
of $1.5 million. Havemeyer Equities Corporation (''HEC'') and Boulevard Funding
Corporation (''BFC'') are currently inactive. As of June 30, 1997, HEC had $902
and BFC had $1,464 of consolidated assets. The Bank has formed a new
subsidiary, Havemeyer Investment Inc. ("HII"), whose primary operations will
be sales of insurance and annuity products to the Bank's customers, and is
currently awaiting final approval from the OTS for HII to begin operations.
PERSONNEL
As of June 30, 1997, the Company had 209 full-time employees and 80 part-
time employees. The employees are not represented by a collective bargaining
unit, and the Company considers its relationship with its employees to be good.
FEDERAL, STATE AND LOCAL TAXATION
PAGE 26
FEDERAL TAXATION
General. The following is a discussion of material tax matters and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank was last audited for its taxable year ended
December 31, 1988 For federal income tax purposes, the Company and the Bank
will file separate income tax returns and report their income on a June 30
fiscal year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's tax reserve for bad debts,
discussed below.
Tax Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the
"1996 Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Internal Revenue Code of 1986 (the "Code") relating to a
savings institution's use of bad debt reserves for federal income tax purposes
and requires such an institution to recapture (i.e., take into income) certain
portions of its accumulated bad debt reserves. The effect of the 1996 Act on
the Bank is discussed below. Prior to the enactment of the 1996 Act, the Bank
was permitted to establish tax reserves for bad debts and to make annual
additions thereto, which additions, within specified formula limits, were
deducted in arriving at the Bank's taxable income. The Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, was permitted to be computed using an amount based
on a six-year moving average of the Bank's charge-offs for actual losses (the
"Experience Method"), or an amount equal to 8% of the Bank's taxable income
(the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve. Use of the PTI Method had the effect of reducing
the marginal rate of federal tax on the Bank's income to 32.2%, exclusive of
any minimum or environmental tax, as compared to the generally applicable
maximum corporate federal income tax rate of 35%. The Bank's deduction with
respect to non-qualifying loans was required to be computed under the
Experience Method. Each year the Bank reviewed the most favorable way to
calculate the deduction attributable to an addition to the tax bad debt
reserves.
THE 1996 ACT. Under the 1996 Act, for its current and future taxable years,
the Bank is not permitted to make additions to its tax bad debt reserves. The
Bank will be allowed to deduct bad debts as incurred. In addition, the Bank is
required to recapture (i.e., take into income) over a six year period the
excess of the balance of its tax bad debt reserves as of July 1, 1996 (other
than its supplemental reserve for losses on loans) over the balance of such
reserves as of June 30, 1988 (or over a lesser amount if the Bank's loan
portfolio decreased since June 30, 1988). As a result of such recapture, the
Bank will pay additional federal tax of approximately $1.1 million. Since the
Bank had already provided a deferred income tax liability for this amount prior
to the enactment of the 1996 Act, the enactment of the 1996 Act did not
adversely impact the Bank's financial condition or results of operations.
Moreover, such recapture will be suspended for each of the two successive
taxable years, beginning July 1, 1996, in which the Bank originates a minimum
of certain residential loans based upon the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding its current
taxable year. The recapture was suspended based upon the Bank's origination
levels during the tax year ended June 30, 1997.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserve balance as of June
30, 1988, to the extent thereof, and then from the Bank's supplemental reserve
for losses on loans, to the extent thereof, and an amount based on the amount
distributed (but not in excess of the amount of such reserves) will be included
in the Bank's income. Non-dividend distributions include distributions in
excess of the Bank's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid out
of the Bank's current or accumulated earnings and profits will not be so
included in the Bank's income.
PAGE 27
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the amount of such distribution (but not in excess of the amount
of such reserves) would be includable in income for federal income tax
purposes, assuming a 35% federal corporate income tax rate. See "Regulation"
and "Dividend Policy" for limits on the payment of dividends by the Bank. The
Bank does not intend to pay dividends that would result in a recapture of any
portion of its tax bad debt reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of
those items. Thus, the Bank's AMTI is increased by an amount equal to 75% of
the amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses).
STATE AND LOCAL TAXATION
STATE OF NEW YORK. The Bank and the Company are subject to New York State
franchise tax on one of several alternative bases, whichever results in the
highest tax, and will file combined returns for purposes of this tax. The basic
tax is measured by "entire net income," which is federal taxable income with
adjustments. For New York State tax purposes, so long as the Bank continues to
meet certain definitional tests relating to its assets and the nature of its
business, it will be permitted deductions, within specified formula limits, for
additions to its bad debt reserves for purposes of computing its entire net
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, may be computed
using an amount based on the Bank's actual loss experience (the "Experience
Method") or an amount equal to 32% of the Bank's entire net income (the "PTI
Method"), computed without regard to this deduction and reduced by the amount
of any permitted addition to the Bank's reserve for non-qualifying loans.
On July 30, 1996, New York State (the "State") enacted legislation,
effective January 1, 1996, which generally retains the percentage of taxable
income method for computing allowable bad debt deductions and does not require
the Bank to recapture into income State tax bad debt reserves unless one of the
following events occur: 1) the Bank's retained earnings represented by the
reserve is used for purposes other than to absorb losses from bad debts,
including dividends in excess of the Bank's earnings and profits or
distributions in liquidation or in redemption of stock; 2) the Bank fails to
qualify as a thrift as provided by the State tax law, or 3) there is a change
in state tax law. The Bank had a deferred tax liability of approximately $1.9
million recorded for the excess of State tax bad debt reserves over its reserve
at December 31, 1987 in accordance with SFAS 109. In December, 1996 after
evaluating the State tax legislation, as well as relevant accounting literature
and industry practices, management of the Bank concluded that this liability
was no longer required to be recorded, and recovered the full deferred tax
liability. This recovery resulted in a reduction of income tax expense during
the year ended June 30, 1997 for the full amount of the recovered deferred tax
liability.
The Bank's deduction with respect to non-qualifying loans must be computed
under the Experience Method which is based on the Bank's actual charge-offs.
Each year the Bank will review the most favorable way to calculate the
deduction attributable to an addition to the tax bad debt reserves.
The New York State tax rate for the 1997 calendar year is 10.755%
(including commuter transportation and other surcharges) of net income. In
general, the Company will not be required to pay New York State tax on
dividends and interest received from the Bank.
CITY OF NEW YORK. The Bank and the Company are also subject to a similarly
calculated New York City banking corporation tax of 9% on income allocated to
New York City.
On March 11, 1997, New York City enacted legislation, effective January 1,
1996, which conformed its tax law regarding bad debt deductions to New York
State's tax law. As a result of this legislation, the Bank, in March, 1997,
recovered a deferred tax liability of approximately $1.0 million previously
recorded for the excess of New York City tax bad debt reserves over its base
year reserve at December 31, 1987. This recovery resulted in a reduction of
income tax expense during the year ended June 30, 1997 for the full amount of
the recovered deferred tax liability.
STATE OF DELAWARE. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax, but is
required to file an annual report and pay an annual franchise tax to the State
of Delaware.
PAGE 28
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination, and supervision by
the OTS, as its chartering agency, and the FDIC, as its deposit insurer. The
Bank's deposit accounts are insured up to applicable limits by the Bank
Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF")
administered by the FDIC, and it is a member of the FHLBNY. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition, and it must obtain regulatory approvals prior to entering into
certain transactions, such as mergers with, or acquisitions of, other
depository institutions. The OTS and the FDIC conduct periodic examinations to
assess the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings association can engage and is intended primarily for the
protection of the insurance fund and depositors. The Company, as a unitary
savings and loan holding company, is required to file certain reports with, and
otherwise comply with, the rules and regulations of the OTS and of the
Securities and Exchange Commission (the ''SEC'') under the federal securities
laws.
The OTS and the FDIC have significant 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
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank, and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations, and it does not
purport to be a comprehensive description of all such statutes and regulations.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
BUSINESS ACTIVITIES. The Bank derives its lending and investment powers
from the Home Owner's Loan Act, as amended (''HOLA''), and the regulations of
the OTS thereunder. Under these laws and regulations, the Bank may invest in
mortgage loans secured by residential and commercial real estate, commercial
and consumer loans, certain types of debt securities, and certain other assets.
The Bank may also establish service corporations that may engage in activities
not otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on commercial loans; (d) a limit
of 35% of an association's assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities; (e) a limit of 5% of assets on non-
conforming loans (loans in excess of the specific limitations of HOLA); and (f)
a limit of the greater of 5% of assets or an association's capital on certain
construction loans made for the purpose of financing what is or is expected to
become residential property.
LOANS TO ONE BORROWER. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are fully secured by readily-marketable collateral. Such
collateral is defined to include certain debt and equity securities and
bullion, but generally does not include real estate. At June 30, 1997, the
Bank's limit on loans to one borrower was $22.8 million. At June 30, 1997, the
Bank's largest aggregate amount of loans to one borrower was $13.0 million and
the second largest borrower had an aggregate balance of $9.0 million.
PAGE 29
QTL TEST. HOLA requires a savings association to meet a QTL test. A
savings association may satisfy the QTL test by maintaining at least 65% of its
''portfolio assets'' in certain ''qualified thrift investments'' in at least
nine months of the most recent twelve-month period. ''Portfolio assets'' means,
in general, an association's total assets less the sum of (a) specified liquid
assets up to 20% of total assets, (b) certain intangibles, including goodwill
and credit card and purchased mortgage servicing rights, and (c) the value of
property used to conduct the association's business. ''Qualified thrift
investments'' includes various types of loans made for residential and housing
purposes, investments related to such purposes, including certain mortgage-
backed and related securities, small business loans, education loans, and
credit card loans. At June 30, 1997, the Bank maintained 94.4% of its
portfolio assets in qualified thrift investments. The Bank had also satisfied
the QTL test in each of the prior 12 months and, therefore, was a qualified
thrift lender. A savings association may also satisfy the QTL test by
qualifying as a "domestic building and loan association" as defined in the
Internal Revenue Code of 1986.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The
initial restrictions include prohibitions against (a) engaging in any new
activity not permissible for a national bank, (b) paying dividends not
permissible under national bank regulations, (c) obtaining new advances from
any FHLB, and (d) establishing any new branch office in a location not
permissible for a national bank in the association's home state. In addition,
within one year of the date a savings association ceases to meet the QTL test,
any company controlling the association would have to register under, and
become subject to the requirements of, the Bank Holding Company Act of 1956, as
amended. If the savings association does not requalify under the QTL test
within the three-year period after it failed the QTL test, it would be required
to terminate any activity and to dispose of any investment not permissible for
a national bank and would have to repay as promptly as possible any outstanding
advances from an FHLB. A savings association that has failed the QTL test may
requalify under the QTL test and be free of such limitations, but it may do so
only once.
CAPITAL REQUIREMENTS. The OTS regulations require savings associations to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets, and a risk-
based capital ratio requirement of 8% of core and supplementary capital to
total risk-based assets. In determining the amount of risk-weighted assets for
purposes of the risk-based capital requirement, a savings association must
compute its risk-based assets by multiplying its assets and certain off-balance
sheet items by risk-weights, which range from 0% for cash and obligations
issued by the United States Government or its agencies, to 100% for consumer
and commercial loans, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights and investments in and loans to subsidiaries engaged
in activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain
qualifying supervisory goodwill and certain purchased credit card
relationships. Supplementary capital currently includes cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, and the allowance for
possible loan losses. The allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets,
and the amount of supplementary capital that may be included as total capital
cannot exceed the amount of core capital.
The OTS regulations require a savings association with ''above normal''
interest rate risk to deduct a portion of such capital from its total capital
to account for the ''above normal'' interest rate risk. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (I.E., the difference between incoming and outgoing discounted cash
flows from assets, liabilities and off-balance sheet contracts) resulting from
a hypothetical 2% increase or decrease in market rates of interest, divided by
the estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. At the times when the 3-month
Treasury bond equivalent yield falls below 4%, an association may compute its
interest rate risk on the basis of a decrease equal to one-half of that
Treasury rate rather than on the basis of 2%. A savings association whose
measured interest rate risk exposure exceeds 2% would be considered to have
''above normal'' risk. The interest rate risk component is an amount equal to
PAGE 30
one-half of the difference between the association's measured interest rate
risk and 2%, multiplied by the estimated economic value of the association's
assets. That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Any required
deduction for interest rate risk becomes effective on the last day of the third
quarter following the reporting date of the association's financial data on
which the interest rate risk was computed. The OTS has indefinitely deferred
the implementation of the intrest rate risk component in the computation of an
institution's risk-based capital requirements. The OTS continues to monitor
the interest rate risk of individual institutions and retains the right to
impose additional capital requirements on individual institutions.
The table below presents the Bank's regulatory capital as compared to the
OTS regulatory capital requirements at June 30, 1997:
Actual Minimum Capital Requirement
----------------------- ---------------------------
Amount Ratio Amount Ratio
--------- --------- ---------- ----------
As of June 30, 1997: (Dollars In Thousands)
Tangible $124,118 9.86% $18,873 1.5%
Core Capital 124,182 9.87 37,748 3.0%
Risk-based capital 132,465 19.99 53,009 8.0%
The following is a reconciliation of generally accepted accounting principles
(GAAP) capital to regulatory capital for the Bank:
At June 30, 1997
Tangible Core Risk-Based
Capital Capital Capital
--------- --------- ---------
(In Thousands)
GAAP capital $152,198 $152,198 $152,198
--------- --------- ---------
Non-allowable assets:
Core deposit intangible (64) - -
Unrealized gain on available for
sale securities (1,583) (1,583) (1,583)
Goodwill (26,433) (26,433) (26,433)
General valuation allowance - - 8,283
--------- --------- ---------
Regulatory capital 124,118 124,182 132,465
Minimum capital requirement 18,873 37,748 53,009
--------- --------- ---------
Regulatory capital excess $105,245 $86,434 $79,456
========= ========= =========
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. At least 30-days written notice must be
given to the OTS of a proposed capital distribution by a savings association,
and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. An association that has
capital in excess of all fully phased-in regulatory capital requirements before
and after a proposed capital distribution and that is not otherwise restricted
in making capital distributions, could, after prior notice but without the
approval of the OTS, make capital distributions during a calendar year equal to
the greater of (a) 100% of its net earnings to date during the calendar year
plus the amount that would reduce by one-half its ''surplus capital ratio''
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year, or (b) 75% of its net earnings for the previous
four quarters. Any additional capital distributions would require prior OTS
approval. In addition, the OTS can prohibit a proposed capital distribution,
otherwise permissible under the regulation, if the OTS has determined that the
association is in need of more than normal supervision or if it determines that
a proposed distribution by an association would constitute an unsafe or unsound
practice. Furthermore, under the OTS prompt corrective action regulations, the
Bank would be prohibited from making any capital distribution if, after the
distribution, the Bank failed to meet its minimum capital requirements, as
described above. See '' - Prompt Corrective Regulatory Action.''
PAGE 31
LIQUIDITY. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of
certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of
its net withdrawable deposit accounts plus short-term borrowings. This
liquidity requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10% depending upon economic conditions and the
savings flows of member institutions, and is currently 5%. OTS regulations also
require each savings association to maintain an average daily balance of short-
term liquid assets at a specified percentage (currently 1%) of the total of its
net withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average liquidity ratio for the month ended June 30,
1997 was 14.98%, which exceeded the applicable requirements. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
ASSESSMENTS. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. The Bank's
assessment expense during the year ended June 30, 1997 totaled $423,000.
BRANCHING. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
associations located in another state and (b) to an association that either
satisfies the QTL test for a "qualified thrift lender," or qualifies as a
''domestic building and loan association'' under the Internal Revenue Code of
1986, which imposes qualification requirements similar to those for a
''qualified thrift lender'' under HOLA. See ''QTL Test.'' The authority for a
federal savings association to establish an interstate branch network would
facilitate a geographic diversification of the association's activities. This
authority under HOLA and the OTS regulations preempts any state law purporting
to regulate branching by federal savings associations.
COMMUNITY REINVESTMENT. Under the CRA, as implemented by OTS regulations,
a savings association has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings association, to assess the association's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such association. The CRA also
requires all institutions to make public disclosure of their CRA ratings. The
Bank received a ''Satisfactory'' CRA rating in its most recent examination.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual
performance in meeting community needs. In particular, the proposed system
would focus on three tests: (a) a lending test, to evaluate the institution's
record of making loans in its service areas; (b) an investment test, to
evaluate the institution's record of investing in community development
projects, affordable housing, and programs benefiting low or moderate income
individuals and businesses; and (c) a service test, to evaluate the
institution's delivery of services through its branches, ATMs, and other
offices. The amended CRA regulations also clarify how an institution's CRA
performance would be considered in the application process.
PAGE 32
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with its ''affiliates'' is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act (''FRA''). In general, an
affiliate of the Bank is any company that controls the Bank or any other
company that is controlled by a company that controls the Bank, excluding the
Bank's subsidiaries other than those that are insured depository institutions.
The OTS regulations prohibit a savings association (a) from lending to any of
its affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the Bank Holding Company Act (''BHC
Act'') and (b) from purchasing the securities of any affiliate other than a
subsidiary. Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
association and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings association's capital and surplus. Extensions
of credit to affiliates are required to be secured by collateral in an amount
and of a type described in Section 23A, and the purchase of low quality assets
from affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the association as those
prevailing at the time for comparable transactions with nonaffiliated
companies. In the absence of comparable transactions, such transactions may
only occur under terms and circumstances, including credit standards, that in
good faith would be offered to or would apply to nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive officers,
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the Federal Reserve Board (''FRB'') thereunder. Among other
things, these provisions require that extensions of credit to insiders (a) be
made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features and (b)
not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on
the amount of the association's capital. In addition, extensions of credit in
excess of certain limits must be approved by the association's board of
directors.
ENFORCEMENT. Under the Federal Deposit Insurance Act (''FDI Act''), the
OTS has primary enforcement responsibility over savings associations and has
the authority to bring enforcement action against all ''institution-affiliated
parties,'' including any controlling stockholder or any shareholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or
certain other wrongful actions that causes or is likely to cause a more than a
minimal loss or other significant adverse effect on an insured savings
association. Civil penalties cover a wide range of violations and actions and
range from $5,000 for each day during which violations of law, regulations,
orders, and certain written agreements and conditions continue, up to $1
million per day for such violations if the person obtained a substantial
pecuniary gain as a result of such violation or knowingly or recklessly caused
a substantial loss to the institution. Criminal penalties for certain financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. In addition, regulators have substantial discretion to take
enforcement action against an institution that fails to comply with its
regulatory requirements, particularly with respect to its capital requirements.
Possible enforcement actions range from the imposition of a capital plan and
capital directive to receivership, conservatorship, or the termination of
deposit insurance. Under the FDI Act, the FDIC has the authority to recommend
to the Director of OTS that enforcement action be taken with respect to a
particular savings association. If action is not taken by the Director of the
OTS, the FDIC has authority to take such action under certain circumstances.
PAGE 33
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994
(''Community Development Act''), requires the OTS, together with the other
federal bank regulatory agencies, to prescribe standards, by regulations or
guidelines, relating to internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, asset quality, earnings, stock valuation, and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The OTS and the federal bank
regulatory agencies have adopted, effective August 9, 1995, a set of guidelines
prescribing safety and soundness standards pursuant to FDICIA, as amended. The
guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal shareholder. The OTS and the
other agencies determined that the adoption of stock valuation standards was
not appropriate. In addition, the OTS adopted regulations pursuant that
authorize, but do not require, the OTS to order an institution that has been
given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified,
an institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue
an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association
is subject under the ''prompt corrective action'' provisions of FDICIA. If an
institution fails to comply with such an order, the OTS may seek to enforce
such order in judicial proceedings and to impose civil money penalties.
Effective October 1, 1996, the OTS and the federal bank regulatory agencies
adopted guidelines for identifying and monitoring asset quality and earnings
standards.
REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of
financing the construction of improvements on real estate. The OTS regulations
require each savings association to establish and maintain written internal
real estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards also must be
consistent with accompanying OTS guidelines, which include loan-to-value ratios
for the different types of real estate loans. Associations are also permitted
to make a limited amount of loans that do not conform to the proposed loan-to-
value limitations so long as such exceptions are reviewed and justified
appropriately. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value standards are justified.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings associations.
For this purpose, a savings association would be placed in one of five
categories based on the association's capital. Generally, a savings association
is treated as ''well capitalized'' if its ratio of total capital to risk-
weighted assets is at least 10.0%, its ratio of core capital to risk-weighted
assets is at least 6.0%, its ratio of core capital to total assets is at least
5.0%, and it is not subject to any order or directive by the OTS to meet a
specific capital level. A savings association will be treated as ''adequately
capitalized'' if its ratio of total capital to risk-weighted assets is at least
8.0%, its ratio of core capital to risk-weighted assets is at least 4.0%, and
its ratio of core capital to total assets is at least 4.0% (3.0% if the
association receives the highest rating on the CAMEL financial institutions
rating system). A savings association that has a total risk-based capital of
less than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than
4.0% (3.0% leverage ratio if the association receives the highest rating on the
CAMEL financial institutions rating system) is considered to be
''undercapitalized.'' A savings association that has a total risk-based capital
of less than 6.0% or a Tier 1 risk-based capital ratio or a leverage ratio of
less than 3.0% is considered to be ''significantly undercapitalized.'' A
savings association that has a tangible capital to assets ratio equal to or
less than 2% is deemed to be ''critically undercapitalized.'' The elements of
an association's capital for purposes of the prompt corrective action
regulations are defined generally as they are under the regulations for minimum
capital requirements. As of the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
institution's category. See ''- Capital Requirements.''
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching, and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent,
pay any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
PAGE 34
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky, and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver for an
association, the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository association holding company or
combine with another depository association. The OTS and the FDIC have a broad
range of grounds under which they may appoint a receiver or conservator for an
insured depository association. Under FDICIA, the OTS is required to appoint a
receiver (or with the concurrence of the FDIC, a conservator) for a critically
undercapitalized association within 90 days after the association becomes
critically undercapitalized or, with the concurrence of the FDIC, to take such
other action that would better achieve the purposes of the prompt corrective
action provisions. Such alternative action can be renewed for successive 90-day
periods. However, if the association continues to be critically
undercapitalized on average during the quarter that begins 270 days after it
first became critically undercapitalized, a receiver must be appointed, unless
the OTS makes certain findings with which the FDIC concurs and the Director of
the OTS and the Chairman of the FDIC certify that the association is viable. In
addition, an association that is critically undercapitalized is subject to more
severe restrictions on its activities, and is prohibited, without prior
approval of the FDIC from, among other things, entering into certain material
transactions or paying interest on new or renewed liabilities at a rate that
would significantly increase the association's weighted average cost of funds.
When appropriate, the OTS can require corrective action by a savings
association holding company under the ''prompt corrective action'' provisions
of FDICIA.
INSURANCE OF DEPOSIT ACCOUNTS - Savings associations are subject to a risk-
based assessment system for determining the deposit insurance assessments to be
paid by insured depository institutions. Under the risk-based assessment
system, which began in 1993, the FDIC assigns an institution to one of three
capital categories based on the institution's financial information as of the
reporting period ending seven months before the assessment period. The three
capital categories consist of (a) well capitalized, (b) adequately capitalized,
or (c) undercapitalized. The FDIC also assigns an institution to one of the
three supervisory subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based upon a supervisory
evaluation provided to the FDIC by the institutions primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Under the regulation, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates currently range from 0.0% of deposits for an institution in
the highest category (i.e., well-capitalized and financially sound, with no
more than a few minor weaknesses) to 0.27% of deposits for an institution in
the lowest category (i.e., undercapitalized and substantial supervisory
concern). The FDIC is authorized to raise the assessment rates as necessary to
maintain the required reserve ratio of 1.25%. As a result of the Deposit
Insurance Funds Act of 1996 (the "Funds Act"). Both the BIF and SAIF currently
satisfy the reserve ratio requirement. See "Recent Development - Insurance
Expense - SAIF Recapitalization." If the FDIC determines that assessment
rates should be increased, institutions in all risk categories could be
affected. The FDIC has exercised this authority several times in the past and
could raise insurance assessment rates in the future. If such action is taken,
it could have an adverse effect upon the earnings of the Bank.
The Funds Act also amended the FDIA to recapitalize the SAIF and to expand
the assessment base for the payments of FICO bonds. Beginning January 1, 1997,
the assessment base included the deposits of both BIF and SAIF-insured
institutions. See "Recent Development - Insurance Expense - DSAIF
Recapitalization." Until December 31, 1999, or such earlier date on which the
last savings association ceases to exist, the rate of assessment for BIF-
assessable deposits shall be one-fifth of the rate imposed on SAIF-assessable
deposits. The annual rate of assessments for the payments of FICO bonds for
the semi-annual period beginning January 1, 1997 was 0.0130% for BIF-assessable
deposits and 0.0648% for SAIF-assessable deposits. For the semi-annual period
beginning on July 1, 1997, the rates of assessment for FICO bonds are 0.0126%
for BIF-assessable deposits and 0.0630% for SAIF-assessable deposits.
PAGE 35
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLBNY, which
is one of the regional FHLBs composing the FHLB System. Each FHLB provides a
central credit facility primarily for its member institutions. The Bank, as a
member of the FHLBNY, is required to acquire and hold shares of capital stock
in the FHLB in an amount at least equal to the greater of 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year or one-twentieth{ }of its advances
(borrowings) from the FHLBNY. The Bank was in compliance with this requirement
with an investment in FHLB stock at June 30, 1997, of $8.3 million. Any advances
from a FHLB must be secured by specified types of collateral, and all long-term
advances may be obtained only for the purpose of providing funds for
residential housing finance. The FHLBNY paid dividends on the capital stock of
$503,027, $332,964, and $367,131 and during the years ended June 30, 1997, 1996
and 1995, respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Bank's net interest income would likely also be
reduced. Further, there can be no assurance that the impact of FDICIA and the
Financial Institutions Reform, Recovery and Enforcement Act of 1989
(''FIRREA'') on the FHLBs will not also cause a decrease in the value of the
FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM. The Bank is subject to provisions of the FRA and
the FRB's regulations pursuant to which depository institutions may be required
to maintain non-interest-earning reserves against their deposit accounts and
certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained in the amount of 3%
of the aggregate of transaction accounts up to $49.3 million. The amount of
aggregate transaction accounts in excess of $49.3 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.4 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve Bank, or
a pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. FHLB System members are also
authorized to borrow from the Federal Reserve ''discount window,'' but FRB
regulations require such institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.
REGULATION OF HOLDING COMPANY
The Company is a non-diversified unitary savings association holding company
within the meaning of HOLA, as amended. As such, the Company is required to
register with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries, if
any. Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the financial safety,
soundness, or stability of a subsidiary savings association.
HOLA prohibits a savings association holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
association or holding company thereof, without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-
subsidiary savings association, a non-subsidiary holding company, or a non-
subsidiary company engaged in activities other than those permitted by HOLA; or
acquiring or retaining control of a depository institution that is not insured
by the FDIC. In evaluating an application by a holding company to acquire a
savings association, the OTS must consider the financial and managerial
resources and future prospects of the company and savings association involved,
the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community, and competitive factors.
PAGE 36
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to satisfy the QTL test. See
''- Regulation of Federal Savings Associations - QTL Test'' for a discussion of
the QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association or of a savings bank that meets the QTL test and is
deemed to be a savings association by the OTS and that will be held as a
separate subsidiary, the Company will become a multiple savings association
holding company and will be subject to limitations on the types of business
activities in which it can engage. HOLA limits the activities of a multiple
savings association holding company and its non-insured association
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the BHC Act, subject to the prior approval of the OTS,
and to other activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings association holding company controlling savings associations
in more than one state, subject to two exceptions: an acquisition of a savings
association in another state (a) in a supervisory transaction, and (b) pursuant
to authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of
requiring that the laws of both the state in which the acquiring holding
company is located (as determined by the location of its subsidiary savings
association) and the state in which the association to be acquired is located,
have each enacted legislation allowing its savings associations to be acquired
by out-of-state holding companies on the condition that the laws of the other
state authorize such transactions on terms no more restrictive than those
imposed on the acquiror by the state of the target association. Some of these
states also impose regional limitations, which restrict such acquisitions to
states within a defined geographic region. Other states allow full nationwide
banking without any condition of reciprocity. Some states do not authorize
interstate acquisitions of savings associations.
Transactions between the Company and the Bank, including any of its
subsidiaries, and any of its affiliates are subject to various conditions and
limitations. See '' Regulation of Federal Savings Associations - Transactions
with Related Parties.'' The Bank must give 30-days written notice to the OTS
prior to any declaration of the payment of any dividends or other capital
distributions to the Company. See ''- Regulation of Federal Savings
Associations - Limitation on Capital Distributions.''
FEDERAL SECURITIES LAWS
The Company's Common stock is registered with the SEC under Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
PAGE 37
ITEM 2 - PROPERTIES
The Bank conducts its business through fifteen full-service offices,
including eight offices acquired from Conestoga in June, 1996. The Bank's Main
Office and headquarters is located at 209 Havemeyer Street, Brooklyn, New York.
The Bank believes that its current facilities are adequate to meet the present
and immediately foreseeable needs of the Bank and the Company.
Leased or Date Leased or Lease Expiration Net Book Value
Owned or Acquired Date at June 30, 1997
-------- -------- ------------ ------------
ADMINISTRATIVE OFFICE Owned 1989 - $3,985,014
275 South 5th Street
Brooklyn. New York 11211
MAIN OFFICE Owned 1906 - $358,939
209 Havemeyer Street
Brooklyn, New York 11211
AVENUE M BRANCH Owned 1993 - $467,368
1600 Avenue M at East 16{th}
Street
Brooklyn, New York 11230
BAYSIDE BRANCH Leased 1974 May, 2004 $48,882
61-38 Springfield Boulevard
Bayside, New York 11364
BELLMORE BRANCH Owned 1973 - $499,146
2412 Jerusalem Avenue
Bellmore, New York 11710
BENSONHURST BRANCH Owned 1978 - $1,097,205
1545 86th Street
Brooklyn, New York 11228
BRONX BRANCH Leased 1965 October, 2006 $31,102
1931 Turnbull Avenue
Bronx, New York 10473
GATES AVENUE BRANCH Owned 1905 - $273,994
1012 Gates Avenue
Brooklyn, New York 11221
HILLCREST BRANCH Leased 1971 May, 2001 $52,285
176-47 Union Turnpike
Flushing, New York 11366
KINGS HIGHWAY BRANCH Owned 1976 - $810,201
1902-1904 Kings Highway
Brooklyn, New York 11229
MARINE PARK BRANCH Owned 1993 - $815,842
2172 Coyle Street
Brooklyn, NY 11229
MERRICK BRANCH Owned 1960 - $233,059
1775 Merrick Avenue
Merrick, New York 11566
PORT WASHINGTON BRANCH Owned 1971 - $470,284
1000 Port Washington Boulevard
Port Washington, New York
11050
ROSLYN BRANCH Owned 1990 - $2,967,444
1075 Northern Boulevard
Roslyn, NY 11576
WESTBURY BRANCH 1994 - $552,277
622 Old Country Road
Westbury, New York 11590
WHITESTONE BRANCH Owned 1979 - $807,409
24-44 Francis Lewis Boulevard
Whitestone, New York 11357
The Bank has an option to extend this lease for an additional ten year
term at fair market rent, as determined by the agreement of the parties
or, if the parties cannot agree, by arbitration.
Prior to October 2, 1993, this branch office was located at 2161 Coyle
Street, Brooklyn, New York.
This branch office opened April 29, 1995.
Building owned, land leased. Lease expires in October, 2003.
Includes premises utilized by Help Center Service and Havemeyer Brokerage
Corp.
PAGE 38
ITEM 3 - LEGAL PROCEEDINGS
On December 5, 1996, Dime Bancorp, Inc. and its wholly-owned subsidiary, Dime
Savings Bank of New York, FSB (together "Dime of New York,") filed a complaint
in the United States District Court, Southern District of New York against the
Company and the Bank. Dime of New York alleges violations of New York State
and federal trademark law and unfair competition law. Dime of New York seeks
injunctive relief in the form of an order requiring the Bank to use its full
name with identical type-size and type-style in marketing and advertising
materials, or in the alternative requiring the Bank to change its name, due to
alleged inequitable conduct. The complaint also seeks an order requiring the
Company to change its corporate name and change its Nasdaq Stock Market trading
symbol "DIME." Dime of New York does not seek monetary damages.
The Company and the Bank have answered the complaint and filed counterclaims in
which they seek to enjoin the Dime of New York from employing service marks
that are confusingly similar to the Company's and the Bank's service marks.
The action is in the preliminary stages of discovery. The Company and the Bank
intend to defend vigorously these claims made against them and pursue their
counterclaims.
The Bank is involved in various other legal actions arising in the ordinary
course of its business which, in the aggregate, involve amounts which are
believed to be immaterial to the financial condition and results of operations
of the Bank.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5- MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information regarding the market for the Company's common stock and related
stockholder matters appears in the 1997 Annual Report under the caption "Market
for the Company's Common Stock and Related Stockholder Matters," and is
incorporated herein by this reference.
ITEM 6. - SELECTED FINANCIAL DATA
Information regarding selected financial data appears in the 1997 Annual Report
to Shareholders for the year ended June 30, 1997 ("1997 Annual Report") under
the caption "Financial Highlights," and is incorporated herein by this
reference.
ITEM 7. -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information regarding management's discussion and analysis of financial
condition and results of operations appears in the 1997 Annual Report under
the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and is incorporated herein
by this reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding market risk appears in the 1997 Annual Report to
Shareholders under the caption "Discussion of Market Risk" and is incorporated
herein by reference.
PAGE 39
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information regarding financial statements and supplementary data, including
the Independent Auditors' Report appears in the 1997 Annual Report under the
captions:
"Independent Auditors' Report," "Consolidated Statements of Financial Condition
at June 30, 1997 and 1996,"
"Consolidated Statements of Operations for each of the years in the three year
period ended June 30, 1997,"
"Consolidated Statements of Stockholders' Equity for each of the years in the
three year period ended
June 30, 1997," "Consolidated Statements of Cash Flows for each of the years in
the three year period ended
June 30,1997,"and "Notes to Consolidated Financial Statements," and is
incorporated herein by this reference.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding directors and executive officers of the Company is
presented under the headings "Proposal 1 - Election of Directors - General, "-
Information as to Nominees and Continuing Directors,""- Nominees for Election
as Director," "-Continuing Directors," "-Meetings and Committees of the Board
of Directors," "-Executive Officers," "-Directors' Compensation," "-Executive
Compensation," and "-Section 16(a) Beneficial Ownership Reporting Compliance"
in the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on November 13, 1997 (the "Proxy Statement") which will
be filed with the SEC within 120 days of June 30, 1997, and is incorporated
herein by reference.
ITEM 11. - EXECUTIVE COMPENSATION
Information regarding executive and director compensation is presented
under the headings "Election of Directors - Directors' Compensation," "-
Executive Compensation," "-Summary Compensation Table," "Employment
Agreements," "- Employee Retention Agreements," "-Employee Severance
Compensation Plan," and "- Benefits," in the Proxy Statement and is
incorporated herein by reference.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is included under the headings "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement and is incorporated
herein by reference.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
included under the heading "Transactions with Certain Related Persons" in the
Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements and schedules of the
Company, and the independent auditors' report thereon are included in
the Company's Annual Report to Shareholders for the year
ended June 30, 1997, and are incorporated herein by reference:
Independent Auditors' Report
Consolidated Statements of Financial Condition at June 30, 1997 and 1996
Consolidated Statements of Operations for each of the years in the three
year period ended June 30, 1997
PAGE 40
Consolidated Statements of Stockholders' Equity for each of the years in
the three year period ended June 30, 1997
Consolidated Statements of Cash Flows for each of the years in the three
year period ended June 30,1997
Notes to Consolidated Financial Statements
Quarterly Results of Operations (Unaudited) for each of the years in the
two year period ended June 30, 1997
The remaining information appearing in the 1997 Annual Report is not
deemed to be filed as a part of this report, except as expressly
provided herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1997
On May 16, 1997, the Company filed a Current Report on Form 8-K regarding
the death of James M. Fox, director.
(c) Exhibits Required by Item 601 of Securities and Exchange Commission
Regulation S-K:
EXHIBIT
NUMBER
- ------------
3.1 Certificate of Incorporation of Dime Community Bancorp, Inc. (1)
3.2 Bylaws of Dime Community Bancorp, Inc. (2)
4.1 Certificate of Incorporation of Dime Community Bancorp, Inc. (1)
4.2 Bylaws of Dime Community Bancorp, Inc. (2)
4.3 Draft Stock Certificate of Dime Community Bancorp, Inc. (1)
10.1 Agency Agreement, by and among Dime Community Bancorp, Inc., The Dime
Savings Bank of Williamsburgh and Sandler O'Neill & Partners, L.P. (1)
10.2 Agreement and Plan of Merger dated as of the 2nd day of November, 1995
by and between The Dime Savings Bank of Williamsburgh and Conestoga
Bancorp, Inc. (3)
10.3 Stock Option Agreement dated as of the 2nd day of November, 1995 by and
between The Dime Savings Bank of Williamsburgh and Conestoga Bancorp,
Inc. (3)
10.4 Engagement Letter, dated September 11, 1995 between The Dime Savings
Bank of Williamsburgh and Ryan Beck & Co., Inc. (1)
10.5 Amended and Restated Employment Agreement between The Dime Savings Bank
of Williamsburgh and Vincent F. Palagiano (4)
10.6 Amended and Restated Employment Agreement between The Dime Savings Bank
of Williamsburgh and Michael P. Devine (4)
10.7 Amended and Restated Employment Agreement between The Dime Savings Bank
of Williamsburgh and Kenneth J. Mahon (4)
10.8 Employment Agreement between Dime Community Bancorp, Inc. and Vincent F.
Palagiano (4)
10.9 Employment Agreement between Dime Community Bancorp, Inc. and Michael P.
Devine (4)
10.10 Employment Agreement between Dime Community Bancorp, Inc. and Kenneth J.
Mahon (4)
10.11 Form of Employee Retention Agreements by and among The Dime Savings Bank
of Williamsburgh, Dime Community Bancorp, Inc. and certain executive
officers (4)
10.12 Employee Stock Ownership Plan of Dime Community Bancorp, Inc. and
certain affiliates (1)
10.13 First Amendment to Employee Stock Ownership Plan of Dime Community
Bancorp, Inc. and Certain Affiliates (4)
10.14 ESOP Loan Commitment Letter and ESOP Loan Documents (4)
10.15 The Dime Savings Bank of Williamsburgh 401(k) Savings Plan in RSI
Retirement Trust (1)
PAGE 41
10.18 Seventh, Eighth and Ninth Amendments to The Dime Savings Bank of
Williamsburgh 401(k) Savings Plan
in RSI Retirement Trust (4)
10.16a Tenth and Eleventh Amendments to The Dime Savings Bank of Williamsburgh
401(k) Savings Plan in RSI
Retirement Trust
10.17 The Benefit Maintenance Plan of Dime Community Bancorp, Inc.
10.18 Severance Pay Plan of The Dime Savings Bank of Williamsburgh (4)
10.19 Retirement Plan for Board Members of Dime Community Bancorp, Inc. (4)
10.20 Dime Community Bancorp, Inc. Stock Option Plan for Outside Directors,
Officers and Employees, as
amended by amendments number 1 and 2.
10.21 Recognition and Retention Plan for Outside Directors, Officers and
Employees of Dime Community
Bancorp, Inc., as amended by amendments number 1 and 2.
10.22 Form of stock option agreement for Outside Directors under Dime
Community Bancorp, Inc. 1996 Stock
Option Plan for Outside Directors, Officers and Employees
10.23 Form of stock option agreement for officers and employees under Dime
Community Bancorp, Inc. 1996
Stock Option Plan for Outside Directors, Officers and Employees
10.24 Form of award notice for outside directors under the Recognition and
Retention Plan for Outside Directors,
Officers and Employees of Dime Community Bancorp, Inc.
10.25 Form of award notice for officers and employees under the Recognition
and Retention Plan for Outside
Directors, Officers and Employees of Dime Community Bancorp, Inc.
11.0 Statement Re: Computation of Per Share Earnings
13.1 1997 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant (1)
27.1 Financial Data Schedule (EDGAR filing only)
(1) Incorporated by reference to Exhibits to the Registration Statement on
Form S-1, No. 33-80735 filed on December 22, 1995, as amended.
(2) Incorporated by reference to the registrant's 10-Q dated December 31, 1996.
(3) Incorporated by reference to the Schedule 13D of The Dime Savings Bank of
Williamsburgh, filed with the Commission on November 23, 1995.
(4) Incorporated by reference to Exhibits to the Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 filed on September 27, 1996.
PAGE 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange
Act of 1934, as amended, the Registrant certifies that it has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on September 26, 1997.
Dime Community Bancorp, Inc.
By: /S/ VINCENT F. PALAGIANO
----------------------------------
Vincent F. Palagiano
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
NAME TITLE DATE
/S/ VINCENT F. PALAGIANO
Vincent F. Palagiano Chairman of the Board and Chief September 26,1997
Executive Officer (Principal
executive officer)
/S/ MICHAEL P. DEVINE
Michael P. Devine President and Chief Operating September 26, 1997
Officer and Director
/S/ KENNETH J. MAHON
Kenneth J. Mahon Executive Vice President, September 26, 1997
Secretary and Chief Financial
Officer (Principal financial
officer)
/S/ ANTHONY BERGAMO
Anthony Bergamo Director September 26, 1997
/S/ GEORGE L. CLARK, JR.
George L. Clark, Jr. Director September 26, 1997
/S/ STEVEN D. COHN
Steven D. Cohn Director September 26, 1997
/S/ PATRICK E. CURTIN
Patrick E. Curtin Director September 26, 1997
/S/ JOSEPH H. FARRELL
Joseph H. Farrell Director September 26, 1997
/S/ FRED P. FEHRENBACH
Fred P. Fehrenbach Director September 26, 1997
/S/ JOHN J. FLYNN
John J. Flynn Director September 26, 1997
/S/ MALCOLM T. KITSON
Malcolm T. Kitson Director September 26, 1997
/S/ STANLEY MEISELS
Stanley Meisels Director September 26, 1997
/S/ LOUIS V. VARONE
Louis V. Varone Director September 26, 1997
PAGE 44