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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, 1998
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 BANCSHARES, INC.
(Exact Name of registrant as specified in its charter)
Delaware 11-3297463
(State or other jurisdiction of incorporation or (I.R.S. employer
organization) identification number)
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)
PREFERRED STOCK, PURCHASE RIGHT
(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 24, 1998, there were 11,714,008 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 24, 1998 was $186,167,500. This figure is based upon the closing
price on the NASDAQ National Market for a share of the Company's common
stock on September 24, 1998, which was $18.875 as reported in the Wall
Street Journal on September 25, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(1) The Annual Report to Shareholders for the fiscal year ended June 30, 1998
(Item 1 of Part I, and Items 5 through 8 of Part II) and (2) the definitive
Proxy Statement dated October 5, 1998 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 12, 1998 and any adjournment thereof and
which is expected to be filed with the Securities and Exchange Commission on or
about October 6, 1998
(Part III).
TABLE OF CONTENTS
PAGE
PART I
R ITEM 1. BUSINESS
GENERAL..........................................................3
ACQUISITION OF CONESTOGA BANCORP, INC............................4
PROPOSED ACQUISITION OF FINANCIAL BANCORP, INC...................4
MARKET AREA AND COMPETITION......................................4
LENDING ACTIVITIES...............................................5
ASSET QUALITY...................................................12
ALLOWANCE FOR LOAN LOSSES.......................................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..................................27
REGULATION
GENERAL...................................................28
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...................................39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..............39
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
-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 Bancshares, 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 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. The primary business of the Company is the operation
of its wholly-owned subsidiary, the Bank. 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,
1998, the Bank's QTL Ratio was 95.48%, 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.
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.
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 of Conestoga Bancorp,
Inc. ("Conestoga") (the "Conestoga Acquisition"), 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 Conestoga Acquisition was accounted for in the financial statements using
the purchase method of accounting.
-3-
Under purchase accounting, the acquired assets and liabilities of Conestoga
are recognized at their fair value as of the date of the Conestoga
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
Conestoga 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 Conestoga Acquisition is reflected in the
Company's consolidated results of operations for the fiscal years ended
June 30, 1998 and 1997, as well the consolidated statements of financial
condition as of June 30, 1998 and 1997.
PROPOSED ACQUISITION OF FINANCIAL BANCORP, INC.
On July 18, 1998, the Company entered into the Merger Agreement with
Financial Bancorp, pursuant to which Financial Bancorp will be merged into the
Company. The Merger Agreement provides that each outstanding share of common
stock, par value $.01 per share, of Financial Bancorp ("Financial Bancorp
Common Stock") will be converted into the right to receive, at the election of
the holder thereof, either shares of common stock, par value $0.01 per share,
of the Company ("Company Common Stock") or cash subject to the election,
allocation and proration procedures set forth in the Merger Agreement. If
the Company's average closing price for the ten-day period ending ten
days prior to the anticipated closing of the Merger (the "Average Closing
Price") is between $22.95 and $31.05, the value of the consideration per
share to be received by Financial Bancorp stockholders, whether in the form of
stock or cash, will be $40.50, and 50% of the total consideration to be
paid to Financial Bancorp's shareholders shall consist of Company Common
Stock and 50% shall consist of cash. If the Company's Average Closing Price
is greater than $31.05 or less than $22.95, then the value of the
consideration per share to be received by Financial Bancorp shareholders
in the Merger will be adjusted, and the percentage of the total
consideration consisting of the Company's Common Stock and cash will change,
all as set forth in the Merger Agreement. If the Company Common Stock has a
market value during the pricing period of less than or equal to $20.25,
Financial Bancorp has the right to termination the Merger Agreement unless
the Company agrees to increase the per share consideration to Financial
Bancorp's shareholders to at least $38.12.
The Financial Acquisition is subject to (i) approval by the shareholders
of Financial Bancorp, (ii) approval of the OTS and (iii) satisfaction or waiver
of certain other conditions. Financial Bancorp is a unitary savings bank
holding company for its wholly owned subsidiary, Financial Federal, a federal
savings bank.
There are currently no other arrangements, understandings or agreements
regarding any such acquisition or expansion.
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. Currently, thirteen additional offices are
located in the boroughs of Brooklyn, Queens, and the Bronx, and in Nassau
County. The Financial Acquisition will add five branches, all of which are
located in Queens and Brooklyn. 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.
Since 1993, the Bank's local economy has experienced strong performance.
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. A strong local economy existed throughout
the Company's entire fiscal year ended June 30, 1998. Despite these
encouraging trends, the outlook for the local economy remains uncertain.
Recent troubled economic conditions in several nations throughout Europe, Asia
and South and Central America have created interest rate volatility for U.S.
government and agency obligations. As a result of this interest rate
volatility, the U.S. stock market, especially amongst financial institutions,
has experienced even greater volatility subsequent to June 30, 1998. It is
unclear at this time what, if any, effect these conditions will have on the
local and regional economies and real estate market.
-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 75.3% Bank's loan portfolio
at June 30, 1998. 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, 1998, the Bank's loan portfolio totaled $953.6 million. Within the loan
portfolio, $717.6 million or 75.3% were multi-family loans, $168.3 million or
17.6% were loans to finance the purchase of one-to-four family properties and
cooperative apartment share loans, $50.1 million or 5.3% were loans to finance
the purchase of commercial properties, primarily small shopping centers,
warehouses and nursing homes, and $11.9 million or 1.3% 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, 30.3% were fixed-rate loans and 69.7% were
adjustable-rate loans (''ARMs''), of which 85.6% 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, 1998, the Bank's loan portfolio also included $2.4 million in
passbook loans, $1.8 million in home improvement loans, and $1.6 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.
-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
1998 Total 1997 Total 1996 Total 1995 Total 1994 Total
---- ---- ---- --- --- --- --- --- --- ---
(Dollars In Thousands)
Mortgage loans: (2)
One-to-four family $125,704 13.18% $140,798 18.68% $170,182 29.05% $58,291 13.52% $59,461 3.74%
Multi-family and underlying
cooperative 717,638 75.26 498,536 66.15 296,630 50.63 252,436 58.56 242,088 55.92
Non-residential 50,062 5.25 43,180 5.73 37,708 6.44 26,972 6.26 26,896 6.21
FHA/VA insured 11,934 1.25 14,153 1.88 16,686 2.85 22,061 5.12 27,264 6.30
Cooperative apartment 42,553 4.46 50,931 6.76 59,083 10.08 67,524 15.67 73,250 16.92
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
Total mortgage loans 947,891 99.40 747,598 99.20 580,289 99.05 427,284 99.13 428,959 99.09
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
Other loans:
Student loans 677 0.07 1,005 0.13 1,307 0.22 1,431 0.33 1,506 0.35
Passbook savings (secured by
savings and time
deposits) 2,367 0.25 2,801 0.37 3,044 0.52 1,510 0.35 1,516 0.35
Home improvement loans 1,753 0.18 1,243 0.16 891 0.15 475 0.11 550 0.13
Consumer installment and
other 919 0.10 1,027 0.14 323 0.06 336 0.08 362 0.08
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
Total other loans 5,716 0.60 6,076 0.80 5,565 0.95 3,752 0.87 3,934 0.91
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
Gross loans 953,607 100.00% 753,674 100.00% 585,854 100.00% 431,036 100.00% 432,893 100.00%
------ ====== ------ ====== ----- ====== ----- ====== ----- =====
Less:
Unearned discounts and net
deferred loan fees 3,486 3,090 2,168 1,182 1,300
Allowance for loan losses 12,075 10,726 7,812 5,174 3,633
------ ------ ----- ----- -----
Loans, net $938,046 $739,858 $575,874 $424,680 $427,960
====== ====== ====== ====== ======
Loans serviced for others:
One-to-four family and
cooperative apartment $55,802 $60,242 $63,360 $63,192 $65,063
Multi-family and underlying
cooperative 2,817 9,406 27,690 30,264 34,396
------ ------ ----- ----- -----
Total loans serviced for
others $58,619 $69,648 $91,050 $93,456 $99,459
====== ====== ====== ====== ======
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.
-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, 1998 origination of ARMs totaled $182.0
million or 56.7% of all loan originations. Originations of fixed-rate mortgage
loans totaled $139.2 million, while sales of fixed-rate loans totaled $5.4
million. The Bank generally sells all fixed-rate loans without recourse and
retains the servicing rights. As of June 30, 1998, the Bank was servicing $58.6
million of loans for non-related institutions. 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.
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,
---------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
Loans (gross):
At beginning of period $753,674 $585,854 $431,036
Mortgage loans originated:
One-to-four family 11,438 4,279 6,087
Multi-family and underlying cooperative 292,555 245,324 94,379
Non-residential 15,929 11,055 11,764
Cooperative apartment 1,281 1,582 568
-------- -------- --------
Total mortgage loans originated 321,203 262,240 112,798
Other loans originated 5,101 2,549 2,122
-------- -------- --------
Total loans originated 326,304 264,789 114,920
-------- -------- --------
Loans acquired from Conestoga - - 113,140
Less:
Principal repayments 120,240 91,405 67,308
Loans sold 5,352 4,157 5,740
Loans transferred from real estate pending - - (875)
foreclosure
Mortgage loans transferred to Other Real Estate
Owned 779 1,407 1,069
-------- -------- --------
Unpaid principal balance at end of period $953,607 $753,674 $585,854
======== ======== ========
Substantially all of these mortgage loans are one-to-four family mortgage
loans.
Includes fixed-rate mortgage loans and student loans.
-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, 1998.
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 $120.2 million for
the year ended June 30, 1998.
At June 30, 1998
-----------------------------------------------------------
Mortgage Loans
-----------------------------------------------------------
Multi-
family and
One-to-Four- Underlying Non- FHA/VA Cooperative Other Total
Family Cooperative Residential Insured Apartment Loans Loans
------ -------- -------- ------ -------- ------ ------
(In Thousands)
Amount due:
One year or less $43,487 $63,066 $2,404 $- $34,874 $5,265 $149,096
------ -------- -------- ------ -------- ------ ------
After one year:
One to three years 9,880 111,982 7,697 4,997 6,709 451 141,716
More than three years to five 4,756 224,222 19,658 - - - 248,636
years
More than five years to ten years 20,202 300,475 19,228 114 122 - 340,141
More than ten years to twenty 23,298 17,893 1,075 6,823 632 - 49,721
years
Over twenty years 24,081 - - - 216 - 24,297
------ -------- -------- ------ -------- ------ ------
Total due or repricing after one
year 82,217 654,572 47,658 11,934 7,679 451 804,511
------ -------- -------- ------ -------- ------ ------
Total amounts due or repricing,
gross $125,704 $717,638 $50,062 $11,934 $42,553 $5,716 $953,607
======= ======== ======== ======= ======== ======= =======
The following table sets forth the dollar amounts in each loan category at
June 30, 1998 that are due after June 30, 1999, and whether such loans have
fixed or adjustable-interest rates.
Due after June 30, 1999
------------------------------------
Fixed Adjustable Total
--------- --------- ---------
(In Thousands)
Mortgage loans:
One-to-four family $70,641 $11,576 $82,217
Multi-family and
underlying cooperative 213,761 440,811 654,572
Non-residential 16,634 31,024 47,658
FHA/VA insured 11,934 - 11,934
Cooperative apartment 1,088 6,591 7,679
Other loans - 451 451
--------- --------- ---------
Total loans $314,058 $490,453 $804,511
========= ========= =========
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 $772,000. Residential multi-family
loans in this range generally have between 5 and 100 apartments per building.
The Bank had a total of $629.9 million of multi-family loans in its portfolio
on buildings with under 100 units as of June 30, 1998. 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, 1998, the Bank had a total
of $94.6 million in loans secured by mortgages on underlying cooperative
apartment buildings.
-8-
The Bank originated multi-family loans totaling $292.6 million during the
fiscal year ended June 30, 1998, versus $245.3 million during the year ended
June 30, 1997. At June 30, 1998, the Bank had $158.0 million of commitments
outstanding to originate mortgage loans, which included $20.9 million of
commitments to refinance existing mortgage loans. This compares to $115.1
million of commitments outstanding at June 30, 1997. All the mortgage
commitments outstanding at June 30, 1998 were issued to borrowers within the
Bank's service area, $147.9 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 Loan Operating Committee, comprised of the Chief Executive
Officer, President, Executive Vice President, and the heads of both the
residential loan and multi-family loan origination departments. Loans in
excess of $3.0 million are required 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, 1998, the Bank had multi-family and underlying cooperative loans
totaling $717.6 million in its portfolio, comprising 75.3% 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, $623.0
million, or 86.8%, were secured by apartment buildings and $94.6 million, or
13.2%, were secured by underlying cooperatives at June 30, 1998. 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, 1998, the Bank had 227 multi-family and non-
residential loans with principal balances of $1.0 million or more, totaling
$436.7 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, 1998, 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 $4.9 million. As of June 30, 1998, the Bank had $236,000 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 $50.1 million in non-residential
real estate mortgage loans which represented 5.25% of gross loans at June 30,
1998. 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, 1998, 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.
-9-
The Bank's three largest loans at June 30, 1998, consisted of a $8.9 million
loan secured by a first mortgage on a 276 unit apartment building located in
midtown Manhattan originated in May, 1997; an $8.4 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 $7.1 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, 1998, 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 $2.8 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 $42.6 million, or 4.47% of total loans as of June
30, 1998. The market for cooperative apartment loan financing has improved
over the past five years 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, 1998, $168.3 million, or 17.65%, of the Bank's loans consisted
of one-to-four family and cooperative apartment mortgage loans. ARMs
represented 55.29% of total one-to-four family and cooperative apartment loans,
while fixed-rate mortgages comprised 44.71% of the total. 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, 1998, the Bank originated $1.7
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 1998, 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.
-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, 1998, the Bank originated $9.7 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, 1998, the Bank sold mortgage loans totaling $5.4 million. As of June
30, 1998, the Bank's portfolio of one-to-four family fixed-rate mortgage loans
serviced for others totaled $55.8 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, 1998, totaled
$2.9 million against total available credit lines of $4.9 million. During the
fiscal year ended June 30, 1998, the Bank offered a home-equity line promotion
to selected mortgage customers, which resulted in the increase in credit lines
from $1.8 million at June 30, 1997 to $4.9 million at June 30, 1998.
OTHER LENDING. The Bank also originates other loans, primarily student and
passbook loans. Total other loans outstanding at June 30, 1998, amounted to
$5.7 million, or 0.60%, of the Bank's loan portfolio. Passbook loans, totaling
$2.4 million, and home improvement loans, totaling $1.8 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 $3.0 million. Any loan in excess of $3.0 million, however, must
be approved by the Board of Directors. All loans in excess of $500,000 are
presented to the Board of Directors for their review. 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.''
-11-
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.
ASSET QUALITY
DELINQUENT LOANS AND FORECLOSED ASSETS. 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'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. 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. 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.
The Bank retains outside counsel experienced in foreclosure and bankruptcy
procedures to institute foreclosure and other actions on the Bank's delinquent
loans.
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, particularly multi-family and underlying cooperative loans, during
the fiscal year ended June 30, 1998. Primarily, these declines reflect
satisfaction of loans out of successful foreclosure proceedings, as well as the
movement of loans to other real estate followed by the successful disposition
of the underlying properties. Evidence of this is reflected in declines in
both non-performing loans and loans delinquent 60-89 days. Non-performing
loans totaled $884,000 at June 30, 1998, as compared to $3.2 million at June
30, 1997. The largest loan in this group is a $236,000 foreclosure on an
underlying cooperative apartment building located in Brooklyn. The Bank had 35
loans totaling $328,000 delinquent 60-89 days at June 30, 1998, as compared to
33 such delinquent loans totaling $603,000 at June 30, 1997.
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
three loans classified as troubled-debt restructurings at June 30, 1998,
totaling $4.0 million, and all are currently performing according to their
restructured terms. During the year ended June 30, 1998, one of the Bank's
existing troubled-debt restructuring loans was satisfied. 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
-12-
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, 1998. All three troubled-debt restructurings as of June 30,
1998 are on accrual status as they have been performing in accordance with the
restructuring terms for over one year.
Under GAAP, the Bank 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. The recorded investment
in loans deemed impaired was approximately $3.1 million as of June 30, 1998,
compared to $4.3 million at June 30, 1997, and the average balance of impaired
loans was $3.8 million for the year ended June 30, 1998 compared to $4.7
million for the year ended June 30, 1997. The impaired portion of these loans
is represented by specific reserves totaling $23,000 allocated within the
allowance for loan losses at June 30, 1998. At June 30, 1998, 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, 1998,
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, 1998. Generally, the Bank considers non-performing loans to be impaired
loans. However, at June 30, 1998, approximately $428,000 of one-to-four
family, cooperative apartment and consumer loans on nonaccrual status are not
deemed impaired under GAAP. All of these loans have outstanding balances less
than $227,000, and are considered a homogeneous loan pool not covered by GAAP.
-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,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars In Thousands)
Non-performing loans:
One-to-four family $471 $1,123 $1,149 $572 $1,276
Multi-family and underlying
cooperative 236 1,613 4,734 3,978 4,363
Non-residential - - - - -
Cooperative apartment 133 415 668 523 609
Other loans 44 39 - - -
--------- --------- --------- --------- ---------
Total non-performing loans 884 3,190 6,551 5,073 6,248
Total Other Real Estate Owned 825 1,697 1,946 4,466 8,200
--------- --------- --------- --------- ---------
Total non-performing assets $1,709 $4,887 $8,497 $9,539 $14,448
========= ========= ========= ========= =========
Troubled-debt restructurings $3,971 $4,671 $4,671 $7,651 $7,421
Total non-performing assets and troubled-
debt restructurings $5,680 $9,558 $13,168 $17,190 $21,869
========= ========= ========= ========= =========
Impaired loans $3,136 $4,294 $7,419 $- $-
Total non-performing loans to total loans
0.09% 0.43% 1.12% 1.18% 1.45%
Total non-performing assets to total
assets 0.11 0.37 0.62 1.44 2.23
The Bank adopted SFAS 114 effective July 1, 1995. Impaired loans were not
measured prior to this date.
Adjusting total assets at June 30, 1996, for $131.0 million of excess
subscription proceeds related to the Company's initial public offering,
total non-performing assets to total assets were 0.68% at June 30, 1996.
The excess subscription proceeds were refunded by the Company on July 1,
1996.
Non-performing loans consists of non-accrual loans; the Bank did not have
any loans that were 90 days or more past due and still accruing at any of
the dates presented. Non-performing loans and non-performing assets do not
include troubled-debt restructurings (''TDRs''). See "Asset Quality.''
Including TDR's, the ratio of non-performing loans to total loans would
have been 0.51%, 1.05%, 1.92%, 2.96% and 3.17%, respectively, for the years
ended June 30, 1998, 1997, 1996, 1995 and 1994, the ratio of non-performing
assets to total assets would have been 0.35%, 0.73%, 0.96%, 2.59% and
3.38%, respectively, for the years ended June 30, 1998, 1997, 1996, 1995
and 1994, and the allowance for loan losses as a percentage of non-
performing loans would have been 248.71%, 136.45%, 69.61%, 40.66% and
26.58%, respectively for the years ended June 30, 1998, 1997, 1996, 1995
and 1994.
The Bank recorded $30,000 and $306,000 of interest income on non-performing
loans and troubled-debt restructurings, respectively, for the year ended June
30, 1998, and $188,000 and $357,000, respectively, for the fiscal year ended
June 30, 1997. 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 $51,000 and $109,000,
respectively, for the year ended June 30, 1998, and $247,000 and $114,000,
respectively, for the fiscal year ended June 30, 1997.
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 an OREO
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. The balance of OREO was $825,000, consisting of 14 properties, at
June 30, 1998 compared to $1.7 million, consisting of 22 properties, at June
30, 1997. During the year ended June 30, 1998, $779,000 in loans were
transferred into OREO. Offsetting this addition, were OREO sales and charge-
offs of $1.7 million during the year ended June 30, 1998. All charge-offs were
recorded against the allowance for losses on real estate owned, which was
$164,000 as of June 30, 1998.
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
-14-
Directors on a quarterly basis. The Loan Loss Reserve Committee, subject to
Board approval, establishes policies 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 30 loans totaling $3.9 million at June 30, 1998 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.
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, 1998 the Bank had $3.1 million of loans designated
Special Mention.
At June 30, 1998, the Bank had $1.7 million of assets classified
Substandard, consisting of 20 loans, no assets classified as Doubtful, and
$9,000 of assets classified as Loss, consisting of 1 loan.
-15-
The following table sets forth at June 30, 1998 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 7 $900 1 $227 - $- - $-
Multi-family and
underlying 4 1,642 2 424 - - - -
cooperative
Non-residential - - - - - - - -
Cooperative apartment 12 536 5 208 - - 1 9
------ ------ ------ ------ ------ ------ ------ ------
Total Mortgage Loans 23 3,078 8 859 - - 1 9
------ ------ ------ ------ ------ ------ ------ ------
Other Real Estate Owned:
One-to-four family - - 2 441 - - - -
Multi-family and - -
underlying
cooperative - - - - - -
Non-residential - - - - - - - -
Cooperative apartment - - 10 384 - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total Other Real Estate
Owned - - 12 825 - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total 23 $3,078 20 $1,684 - $- 1 $9
====== ====== ====== ====== ====== ====== ====== ======
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.
-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 $1.6 million to its
allowance for loan losses for the fiscal year ended June 30, 1998. At June 30,
1998, the total allowance was $12.1 million, which amounted to 1,365.95% of
non-performing loans, 248.71% of non-performing loans and troubled-debt
restructurings and 1.27% 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, 1998, the Bank had charge-offs, net of recoveries, of $286,000 against the
allowance. Since 1994, total principal losses attributable to the Bank's loan
portfolio have averaged 0.31% of the average outstanding loan balance.
-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,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars In Thousands)
Total loans outstanding at end of period $950,121 $750,584 $583,686 $429,854 $431,593
======== ======== ======== ======== ========
Average total loans outstanding $843,148 $648,357 $449,063 $430,845 $455,705
======== ======== ======== ======== ========
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $10,726 $7,812 $5,174 $3,633 $2,996
Provision for loan losses 1,635 4,200 2,979 2,950 4,105
Charge-offs
One-to-four family (165) (104) (21) (146) (224)
Multi-family and underlying cooperative (49) (985) (553) (1,081) (2,203)
Non-residential - - (274) (92) -
FHA/VA insured - - - (9) -
Cooperative apartment (112) (276) (170) (328) (1,109)
Other (2) (23) (5) - -
-------- -------- -------- -------- --------
Total charge-offs (328) (1,388) (1,023) (1,656) (3,536)
-------- -------- -------- -------- --------
Recoveries 42 102 14 247 68
-------- -------- -------- -------- --------
Reserve acquired in purchase of Conestoga - - 668 - -
-------- -------- -------- -------- --------
Balance at end of period $12,075 $10,726 $7,812 $5,174 $3,633
======== ======== ======== ======== ========
Allowance for loan losses to total loans
at end of period 1.27% 1.43% 1.34% 1.20% 0.84%
Allowance for loan losses to total non-
performing loans at end of
period 1,365.95 336.24 119.25 101.99 58.15
Ratio of net charge-offs to average loans
outstanding during the period 0.03 0.20 0.22 0.33 0.76
ALLOWANCE FOR LOSSES ON OTHER REAL ESTATE
OWNED:
Balance at beginning of period $187 $114 $- $- $-
Provision charged to operations 114 450 586 - -
Charge-offs, net of recoveries (137) (377) (472) - -
-------- -------- -------- -------- --------
Balance at end of period $164 $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.
Non-performing loans consists of non-accrual loans; the Bank did not have
any loans that were 90 days or more past due and still accruing at any of
the dates presented. Non-performing loans and non-performing assets do not
include troubled-debt restructurings (''TDRs''). See "Asset Quality.''
Including TDR's, the ratio of non-performing loans to total loans would
have been 0.51%, 1.05%, 1.92%, 2.96% and 3.17% for the years ended June 30,
1998, 1997, 1996, 1995 and 1994, respectively, the ratio of non-performing
assets to total assets would have been 0.35%, 0.73%, 0.96%, 2.59% and 3.38%
for the years ended June 30, 1998, 1997, 1996, 1995 and 1994, respectively,
and the allowance for loan losses as a percentage of non-performing loans
would have been 248.71%, 136.45%, 69.61%, 40.66% and 26.58% for the years
ended June 30, 1998, 1997, 1996, 1995 and 1994, respectively.
-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,
--------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------ -------------------- -------------------- -------------------- --------------------
Percent Percent Percent Percent Percent
of Loan of Loan of Loan of Loan of Loan
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 $23 0.33% $122 0.58% $955 1.30% $- -% $- -%
One-to-four
family 669 13.32 820 19.04 1,171 29.90 556 14.25 398 14.66
Multi-family
and
underlying
cooperative 10,160 75.90 7,398 66.83 3,808 50.81 3,372 61.72 2,267 59.68
Non-
residential 445 5.32 862 5.84 605 6.63 103 6.60 72 6.63
Cooperative
apartment 605 4.52 1,355 6.89 1,085 10.38 1,031 16.51 784 18.06
Other 173 0.61 169 0.82 188 0.98 112 0.92 112 0.97
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $12,075 100.00% $10,726 100.00% $7,812 100.00% $5,174 100.00% $3,633 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
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 $156.7 million at June
30, 1998. The Company's other investments at that date totaled $20.0 million,
and are invested primarily in equity securities and U.S. agency obligations
which will be utilized for general business activities. These activities 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.
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
-19-
officers. The strategies take into account the overall composition of the
Bank's 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 Company did not engage in any hedging transactions utilizing derivative
instruments (such as interest rate swaps and caps) during the fiscal year ended
June 30, 1998, and did not have any such hedging transactions in place at June
30, 1998. In the future, the Company may, with Board approval, engage in
hedging transactions utilizing derivative instruments.
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 readily be used to collateralize borrowings of the Company.
Approximately 62.9% of the Company's $410.6 million mortgage-backed securities
portfolio, which represented 25.3% of the Company's total assets at
June 30, 1998, 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.
At June 30, 1998, the Bank had $256.2 million in CMOs and REMICSs, which
comprise the largest component of the Bank's mortgage-backed securities. All
of the securities are either backed by U.S agency obligations or have been
issued by highly reputable financial institutions. In addition, all of the
non-agency backed obligations had been rated in the highest rating category by
at least one nationally recognized rating agency at the time of purchase. 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 using funds from short-
term borrowings as part of reverse repurchase transactions, in which these
securities act as collateral for the borrowed funds. As of June 30, 1998, the
fair value of these securities equal or exceed their cost basis.
The second largest component of the Bank's mortgage-backed securities portfolio
is a $56.7 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). In addition,
the Bank has an investment in one year adjustable-rate mortgage-backed
securities, which total $45.1 million. 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 remainder of the Company's
mortgage-backed securities portfolio is split between a $7.4 million investment
in seasoned pass-through certificates backed by GNMA, FNMA or FHLMC, with an
average remaining maturity of 7 years, and $45.2 million in 15 or 30 year fixed
rate FNMA or GNMA securities.
GAAP 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, 1998, 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, 1998, the Company had $449.6 million of
securities classified as available for sale which represented 27.68% of total
assets at June 30, 1998. 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.
-20-
The maturities on the Bank's fixed-rate 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,
------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
Amortized cost at beginning of period $306,164 $209,542 $90,543
Purchases/ Sales (net) 193,086 137,889 20,743
Principal repayments (90,686) (41,021) (25,871)
Premium and discount amortization, net (478) (246) (282)
Securities acquired in purchase of
Conestoga - - 124,409
--------- --------- ---------
Amortized cost at end of period $408,086 $306,164 $209,542
========= ========= =========
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,
------------------------------------------------------------------------
1998 1997 1996
------------------------ ----------------------- ------------------------
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
--------- --------- --------- --------- --------- ---------
(In thousands)
Mortgage-backed securities:
GNMA $87,889 $89,706 $103,974 $106,431 $88,133 $88,562
FNMA 33,085 33,420 71,621 71,745 56,721 56,653
FHLMC 31,778 32,016 58,226 58,536 56,122 56,153
CMOs 255,334 256,176 72,343 72,500 8,566 8,589
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities 408,086 411,318 306,164 309,212 209,542 209,957
--------- --------- --------- --------- --------- ---------
Investment securities:
U.S. treasury and agency 92,825 93,302 119,742 120,226 297,993 297,906
Other 57,981 58,322 34,271 34,596 83,700 83,611
--------- --------- --------- --------- --------- ---------
Total investment securities 150,806 151,624 154,013 154,822 381,693 381,517
Equity securities 10,425 12,675 4,912 5,889 2,977 3,205
Net unrealized gain 5,069 - 3,710 - 575 -
--------- --------- --------- --------- --------- ---------
Total securities, net $574,386 $575,617 $468,799 $469,923 $594,787 $594,679
========= ========= ========= ========= ========= =========
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, 1998, 1997 and 1996 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.
-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, 1998, the Company's portfolio of
corporate debt obligations totaled $49.2 million, or 3.03% 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,
------------------------------------------------------------------------
1998 1997 1996
------------------------ ----------------------- ------------------------
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
--------- --------- --------- --------- --------- ---------
(In thousands)
Held-to-Maturity:
Mortgage-backed securities:
Pass through securities $46,714 $47,443 $78,388 $79,075 $52,580 $52,596
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities 46,714 47,443 78,388 79,075 $52,580 $52,596
Investment securities 78,091 78,593 101,587 102,024 43,552 43,428
--------- --------- --------- --------- --------- ---------
Total Held-to Maturity $124,805 $126,036 $179,975 $181,099 $96,132 $96,024
========= ========= ========= ========= ========= =========
Available-for-Sale:
Mortgage-backed securities:
Pass through securities $106,038 $107,699 $155,433 $157,637 $148,396 $148,772
CMOs 255,334 256,176 72,343 72,500 8,566 8,589
--------- --------- --------- --------- --------- ---------
Total mortgage-backed
securities 361,372 363,875 227,776 230,137 156,962 157,361
Investment securities 72,715 73,031 52,426 52,798 338,141 338,089
Equity securities 10,425 12,675 4,912 5,889 2,977 3,205
Net unrealized gain 5,069 - 3,710 - 575 -
--------- --------- --------- --------- --------- ---------
Total Available-for-Sale $449,581 $449,581 $288,824 $288,824 $498,655 $498,655
========= ========= ========= ========= ========= =========
Total securities, net $574,386 $575,617 $468,799 $469,923 $594,787 $594,679
========= ========= ========= ========= ========= =========
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, 1998, 1997 and 1996 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.
-22-
The following table sets forth certain information regarding the amortized
cost, fair value and weighted average yield of the Company's securities at June
30, 1998, 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, 1998.
At June 30, 1998
-------------------------------------------------------------------
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 $5,776 $5,779 5.95% $2,879 $2,865 5.00%
Due after 1 year but within 5 years 16,830 16,979 6.79 17,634 17,780 6.82
Due after 5 years but within 10
years 24,081 24,656 7.45 5,262 5,299 6.62
Due after ten years 28 29 9.44 335,596 337,931 6.83
-------- -------- -------- --------
Total 46,715 47,443 7.03 361,371 363,875 6.81
-------- -------- -------- --------
U.S. Treasury and Agency:
Due within 1 year 4,939 4,947 7.25 2,015 2,013 5.67
Due after 1 year but within 5 years 57,509 57,851 6.49 26,362 26,478 6.25
Due after 5 years but within 10
years 2,000 2,013 6.13 - - -
Due after ten years - - - - - -
-------- -------- -------- --------
Total 64,448 64,811 6.54 28,377 28,491 6.21
-------- -------- -------- --------
Corporate and Other
Due within 1 year 4,284 4,286 7.54 18,419 20,667 5.56
Due after 1 year but within 5 years 8,059 8,183 6.31 32,704 32,923 6.74
Due after 5 years but within 10
years 1,299 1,313 7.33 3,641 3,625 6.99
Due after ten years - - - - - -
-------- -------- -------- --------
Total 13,642 13,782 6.79 54,764 57,214 6.36
-------- -------- -------- --------
Total:
Due within 1 year 14,999 15,012 6.83 23,313 24,545 6.41
Due after 1 year but within 5 years 82,398 83,013 6.53 76,700 77,181 6.59
Due after 5 years but within 10
years 27,380 27,982 7.34 8,903 8,924 7.00
Due after ten years 28 29 9.44 335,596 337,931 7.06
-------- -------- -------- --------
Total $124,805 $126,036 6.75% $444,512 $449,581 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.
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
-23-
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, 1998, the Bank had deposit
liabilities of $1.04 billion, up $74.9 million from June 30, 1997. Within
total deposits, $60.3 million, or 5.8%, consisted of certificates of
deposit with balances of $100,000 or greater. Individual Retirement
Accounts (''IRA's'') totaled $111.9 million, or 10.8% of total deposits.
The following table presents the deposit activity of the Bank for the periods
indicated.
For the Year Ended June 30,
------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
Deposits $1,373,072 $1,702,024 $696,881
Withdrawals 1,340,838 1,729,025 718,534
--------- --------- ---------
Deposits (Withdrawals) in excess of withdrawals
(deposits) 32,234 (27,001) (21,653)
Deposits acquired in purchase of Conestoga - - 394,250
Interest credited 42,713 40,282 22,676
--------- --------- ---------
Total increase in deposits $74,947 $13,281 $395,273
========= ========= =========
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, 1998 the Bank had $60.3 million in certificate of deposit
accounts over $100,000 maturing as follows:
Weighted
Average
Amount Rate
--------- ---------
(Dollars In Thousands)
Maturity Period
Within three months $13,588 5.35%
After three but within six months 10,499 5.44
After six but within twelve months 15,857 5.83
After 12 months 20,315 6.16
---------
Total $60,259 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,
------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ------------------------------- ---------------------------
Percent Weighted Percent Weighted Percent Weighted
of Total Average of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars In Thousands)
Checking accounts $37,039 3.57% - % $27,391 2.84% - % $27,684 2.91% - %
NOW and Super NOW accounts 17,927 1.73 1.24 16,324 1.69 1.24 15,581 1.64 1.50
Money market accounts 30,567 2.94 3.09 33,530 3.48 2.96 45,948 4.84 3.04
Savings accounts 340,481 32.79 2.27 344,377 35.75 2.27 365,146 38.43 2.50
Certificates of deposit 612,328 58.97 5.84 541,773 56.24 5.61 495,755 52.18 5.50
------ ------ ------ ------ ------ -----
Totals $1,038,342 100.00% $963,395 100.00% $950,114 100.00%
======== ====== ====== ====== ====== ======
-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, 1998.
Period to Maturity at June 30,1998
------------------------------------------------------------------------------
Total at June 30,
Less than One to Four to Over Five -------- -------- --------
Interest Rate Range One Year Three Years Five Years Years 1998 1997 1996
- --------------- --------- --------- --------- --------- --------- --------- --------
(In Thousands)
4.00% and below $- $1 $- $- $1 $12 $3,300
4.01% to 5.00% 134,653 500 - - 135,153 84,854 204,826
5.01% to 6.00% 145,222 76,447 11,184 229 233,082 282,065 144,331
6.01% to 7.00% 125,058 100,481 5,665 - 231,204 158,528 116,545
7.01% and above 1,438 11,371 79 - 12,888 16,314 26,753
--------- --------- --------- -------- -------- -------- --------
Total $406,371 $188,800 $16,928 229 $612,328 $541,773 $495,755
========= ========= ========= ======== ======== ======== ========
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, 1998 is in excess of $215.0 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 $103.5 million and $63.2 million at June 30, 1998 and
1997, respectively. The average cost of FHLB advances was 6.04% and 5.79%,
respectively, during the years ended June 30, 1998 and 1997, and the average
interest rate on outstanding FHLBNY advances was 6.05% and 6.18%, respectively,
at June 30, 1998 and 1997. At June 30, 1998, the Bank maintained in excess of
$113.9 million of qualifying collateral (principally bonds and mortgage-backed
securities), as defined by the FHLBNY, to secure such advances.
Securities sold with agreement to repurchase totaled $256.6 million at June
30, 1998. 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.
-25-
Presented below is information concerning securities sold with agreements to
repurchase and FHLB Advances for the years ended June 30, 1998, 1997 and 1996:
Securities Sold Under Agreements to Repurchase:
At or For the Year Ended June 30,
------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars In Thousands)
Balance outstanding at end of period $256,601 $76,333 $11,998
Average interest cost at end of period 5.74% 5.69% 6.00%
Average balance outstanding 145,676 32,374 $2,148
Average interest cost during the year 5.95% 5.73% 7.13%
Carrying value of underlying collateral $267,469 $83,778 $13,433
Estimated market value of underlying collateral 268,991 84,172 $13,660
Maximum balance outstanding at month end during period 256,601 76,333 11,998
FHLB Advances:
At or For the Year Ended June 30,
------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars In Thousands)
Balance outstanding at end of period $103,505 $63,210 $15,710
Average interest cost at end of period 6.05% 6.18% 5.40%
Average balance outstanding 86,709 20,121 $15,710
Average interest cost during the year 6.04% 5.79% 5.40%
Maximum balance outstanding at month end during period 103,505 63,210 $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 six wholly-owned subsidiary corporations, five of which are
directly owned. DSBW Preferred Funding Corp. is a direct subsidiary of
Havemeyer Equities Inc., a direct subsidiary of the Bank. The following table
presents an overview of the Bank's subsidiaries as of June 30, 1998. Havemeyer
Investments Inc. began operations in September, 1997 and DSBW Preferred Funding
and DSBW Residential Preferred Funding began operations in March, 1998.
COMPANY Year/ State of Incorporation Primary Business Activities
Havemeyer Equities Inc. 1977 / New York Ownership of DSBW Preferred Funding Corp.
Boulevard Funding Corp. 1981 / New York Currently Inactive
Havemeyer Brokerage Corp. 1983 / New York Management of investment portfolio.
Havemeyer Investments Inc. 1997 / New York Sale of annuity products
DSBW Preferred Funding Corp. 1998 / Delaware Real Estate Investment Trust
DSBW Residential Preferred Funding Corp. 1998 / Delaware Real Estate Investment Trust
In April, 1997, Havemeyer Brokerage Corp., with aproval from the OTS,
changed its corporate designation from a services corporation to an
operating subsidiary. Prior to April, 1997, the primary business
activities of Havemeyer Brokerage Corp. were the sale of annuity
products.
PERSONNEL
-26-
As of June 30, 1998, the Company had 211 full-time employees and 83 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
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 will each report its resepective
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 Bank, as a "large bank" (one with assets
having an adjusted basis of more than $500 million), is unable to make
additions to its tax bad debt reserve, is permitted to deduct bad debts only as
they occur and is required to recapture (i.e. take into income), over a multi-
year period, a portion of the balance of its bad debt reserves as of June 30,
1997. Since the Bank has already provided a deferred income tax liability for
this tax for financial reporting purposes, there was no adverse impact to the
Bank's financial condition or results of operations from the enactment of the
federal legislation that imposed such recapture. The recapture is suspended
during the tax years ended June 30, 1997 and 1998, based upon the Bank's
origination levels for certain residential loans which met the minimum levels
required by the Small Business Job Protection Act of 1996, (the "1996 Act") to
suspend recapture for that tax year.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve," i.e. its reserve as of
June 30, 1998, to the extent thereof and then from its supplemental reserve for
losses on loans, and an amount based on the amount distributed will be included
in the Bank's taxable 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.
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). Under pending legislative proposals, for taxable years
beginning after December 31, 1997, and before January 1, 2009, an environment
tax of 0.12% of the excess of AMTI (with certain modifications) over $2 million
would be imposed upon corporations, including the Bank, whether or not an AMT
is paid.
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
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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.
New York State (the "State") enacted legislation, which enables the Bank to
avoid the recapture into income of the 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'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 1998 calendar year is 10.53%
(including a commuter transportation surcharge) 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.
New York City also enacted legislation which conformed its tax law regarding
bad debt deductions to New York State's tax law.
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.
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.
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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, with the
amount of commercial loans in excess of 10% of assets being limited to small
business 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, 1998, the
Bank's limit on loans to one borrower was $23.5 million. At June 30, 1998, the
Bank's largest aggregate amount of loans to one borrower was $14.1 million and
the second largest borrower had an aggregate balance of $13.6 million.
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, 1998, the Bank maintained 95.5% 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.
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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. The OTS and the federal banking regulators have
proposed amendments to their minimum capital regulations to provide that the
minimum leverage capital ratio for a depository institution that has been
assigned the highest composite rating of 1 under the Uniform Financial
Institutions Rating would be 3% and that the minimum leverage capital ratio for
any other depository institution would be 4%, unless a higher capital ratio is
warranted by the particular circumstances or risk profile of the depository
institution. 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 OTS and other federal banking regulators adopted,
effective October 1, 1998, an amendment to their risk-based capital guidelines
that permits insured depository institutions to include in supplementary
capital up to 45% of the pretax net unrealized holding gains on certain
available-for-sale equity securities, as such gain are computed under the
guidelines. 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
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, 1998:
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Actual Minimum Capital Requirement
Amount Ratio Amount Ratio
--------- --------- ---------- ----------
As of June 30, 1998: (Dollars In Thousands)
Tangible $131,186 8.32% $23,655 1.5%
Core Capital 131,186 8.32 47,309 3.0%
Risk-based capital 141,885 16.58 68,472 8.0%
The following is a reconciliation of generally accepted accounting principles
(GAAP) capital to regulatory capital for the Bank:
At June 30, 1998
-----------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
--------- --------- ---------
(In Thousands)
GAAP capital $156,718 $156,718 $156,718
--------- --------- ---------
Non-allowable assets:
Unrealized gain on available for
sale securities (1,504) (1,504) (1,504)
Goodwill (24,028) (24,028) (24,028)
General valuation allowance - - 10,699
--------- --------- ---------
Regulatory capital 131,186 131,186 141,885
Minimum capital requirement 23,655 47,309 68,472
--------- --------- ---------
Regulatory capital excess $107,531 $83,877 $73,413
========= ========= =========
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. The OTS has proposed amendments of its capital distribution
regulations to reduce regulatory burdens on savings associations. If adopted
as proposed, certain savings associations will be permitted to pay capital
distributions within the amounts described above for Tier 1 institutions
without notice to, or the approval of, the OTS. However, a savings association
subsidiary of a savings and loan holding company, such as the Bank, will
continue to have to file a notice unless the specific capital distribution
requires an application. 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.''
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 4%. Monetary
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penalties may be imposed for failure to meet these liquidity requirements.
The Bank's average liquidity ratio for the month ended June 30, 1998 was
14.2% 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, 1998 totaled $350,000. The
OTS has proposed amendments to its regulations that are intended to assess
savings associations on a more equitable basis. The proposed regulations would
base the assessment for an individual savings association on three components:
the size of the association, on which the basic assessment would be based; the
association's supervisory condition, which would result in percentage increases
for any savings institution with a composite rating of 3, 4 or 5 in its most
recent safety and soundness examination; and the complexity of the
association's operations, which would result in percentage increases for a
savings association that managed over $1 billion in trust assets, serviced for
others loans aggregating more than $1 billion, or had certain off-balance sheet
assets aggregating more than $1 billion. In order to avoid a disproportionate
impact upon the smaller savings institutions, the OTS is proposing to permit
the portion of the assessment based on asset size either under the current
regulations or under amended regulations. Management believes that, assuming
the proposed regulations are adopted as proposed, any changes in the rate of
OTS assessments will not be material.
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.
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
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that controls the Bank, excluding the Bank's subsidiaries other than those that
are insured depository institutions. Currently, a subsidiary of a bank that is
not also a depository institution is not treated as an affiliate of the bank
for purposes of Sections 23A and 23B, but the Federal Reserve Bank has
proposed treating any subsidiary of a bank that is engaged in activities
not permissible for bank holding companies under the BHCA as an affiliate for
purposes of Sections 23A and 23B. 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.
STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the requirements of the
FDI Act, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994 (''Community Development Act''), the OTS,
together with the other federal bank regulatory agencies, have adopted 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, asset quality,
earnings 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
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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. 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.
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
options and profit-sharing) during the 12 months preceding the month when the
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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. 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. 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.
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. For the semi-annual period beginning July 1, 1998, the
rates of assessment for the FICO bonds is 0.0122% for BIF-assessable deposits
and 0.0610 for SAIF-assessable deposits.
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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, 1998, of $10.8 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
$663,485, $503,027, and $332,964 and during the years ended June 30, 1998, 1997
and 1996, 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 $47.8 million. The amount of
aggregate transaction accounts in excess of $47.8 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 $4.7 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.
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
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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.
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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 at
Owned Acquired Date June 30, 1998
-------- -------- ------------ ------------
ADMINISTRATIVE OFFICE Owned 1989 - $3,768,537
275 South 5{th} Street
Brooklyn. New York 11211
MAIN OFFICE Owned 1906 - $592,604
209 Havemeyer Street
Brooklyn, New York 11211
AVENUE M BRANCH Owned 1993 - $503,415
1600 Avenue M at East 16th Street
Brooklyn, New York 11230
BAYSIDE BRANCH Leased 1974 May, 2004 $51,480
61-38 Springfield Boulevard
Bayside, New York 11364
BELLMORE BRANCH Owned 1973 - $502,889
2412 Jerusalem Avenue
Bellmore, New York 11710
BENSONHURST BRANCH Owned 1978 - $1,099,003
1545 86th Street
Brooklyn, New York 11228
BRONX BRANCH Leased 1965 October, 2006 $102,987
1931 Turnbull Avenue
Bronx, New York 10473
GATES AVENUE BRANCH Owned 1905 - $271,651
1012 Gates Avenue
Brooklyn, New York 11221
HELP CENTER Leased 1998 May, 2003 $181,940
1379 Jerusalem Avenue
Merrick, New York 11566
HILLCREST BRANCH Leased 1971 May, 2001 $62,580
176-47 Union Turnpike
Flushing, New York 11366
KINGS HIGHWAY BRANCH Owned 1976 - $867,694
1902-1904 Kings Highway
Brooklyn, New York 11229
MARINE PARK BRANCH Owned 1993 - $858,654
2172 Coyle Street
Brooklyn, NY 11229
MERRICK BRANCH Owned 1960 - $242,547
1775 Merrick Avenue
Merrick, New York 11566
PORT WASHINGTON BRANCH Owned 1971 - $477,166
1000 Port Washington Boulevard
Port Washington, New York 11050
WESTBURY BRANCH 1994 - $568,439
622 Old Country Road
Westbury, New York 11590
WHITESTONE BRANCH Owned 1979 - $818,060
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
This branch office opened April 29, 1995.
Building owned, land leased. Lease expires in October, 2003.
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ITEM 3 - LEGAL PROCEEDINGS
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 1998 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 1998 Annual Report
to Shareholders for the year ended June 30, 1998 ("1998 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 1998 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 1998 Annual Report to
Shareholders under the caption "Discussion of Market Risk" and is incorporated
herein by reference.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information regarding financial statements and supplementary data, including
the Independent Auditors' Report appears in the 1998 Annual Report under the
captions:
"Independent Auditors' Report," "Consolidated Statements of Financial Condition
at June 30, 1998 and 1997,"
"Consolidated Statements of Operations for each of the years in the three year
period ended June 30, 1998,"
"Consolidated Statements of Stockholders' Equity for each of the years in the
three year period ended
June 30, 1998," "Consolidated Statements of Cash Flows for each of the years in
the three year period ended
June 30,1998,"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
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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, 1998 (the "Proxy Statement") which will
be filed with the SEC within 120 days of June 30, 1998, 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, 1998, and are incorporated herein by
reference:
Independent Auditors' Report
Consolidated Statements of Financial Condition at June 30, 1998 and 1997
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, 1998
Consolidated Statements of Cash Flows for each of the years in the three
year period ended June 30,1998
Notes to Consolidated Financial Statements
Quarterly Results of Operations (Unaudited) for each of the years in the
two year period ended June 30, 1998
The remaining information appearing in the 1998 Annual Report is not
deemed to be filed as a part of this report, except as expressly provided
herein.
2. Financial Statement Schedules
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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 April 9, 1998, the Company filed a Current Report on Form 8-K
regarding the adoption of a Shareholders Rights Plan.
(c) Exhibits Required by Item 601 of Securities and Exchange Commission
Regulation S-K:
EXHIBIT
NUMBER
- ------------
2.1. Agreement and Plan of Merger, dated as of July 18, 1998, by and
between Dime Community Bancshares, Inc. and Financial Bancorp, Inc.
3.1 Certificate of Incorporation of Dime Community Bancshares, Inc.
3.2 Bylaws of Dime Community Bancshares, Inc.
4.1 Certificate of Incorporation of Dime Community Bancshares, Inc. (See
Exhibit 3.1 hereto).
4.2 Bylaws of Dime Community Bancshares, Inc. (See Exhibit 3.2 hereto).
4.3 Draft Stock Certificate of Dime Community Bancshares, Inc.
4.4 Certificate of Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock
4.5 Rights Agreement, dated as of April 9, 1998, between Dime Community
Bancorp, Inc. and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent
4.6 Form of Rights Certificate
4.7 Stock Option Agreement, dated as of July 18, 1998, by and between Dime
Community Bancshares, Inc. and Financial Bancorp, Inc.
10.5 Amended and Restated Employment Agreement between The Dime Savings Bank
of Williamsburgh and Vincent F. Palagiano
10.6 Amended and Restated Employment Agreement between The Dime Savings Bank
of Williamsburgh and Michael P. Devine
10.7 Amended and Restated Employment Agreement between The Dime Savings Bank
of Williamsburgh and Kenneth J. Mahon
10.8 Employment Agreement between Dime Community Bancorp, Inc. and Vincent
F. Palagiano
10.9 Employment Agreement between Dime Community Bancorp, Inc. and Michael
P. Devine
10.10 Employment Agreement between Dime Community Bancorp, Inc. and Kenneth J.
Mahon
10.11 Form of Employee Retention Agreements by and among The Dime Savings Bank
of Williamsburgh, Dime Community Bancorp, Inc. and certain executive
officers
10.17 The Benefit Maintenance Plan of Dime Community Bancorp, Inc.
10.18 Severance Pay Plan of The Dime Savings Bank of Williamsburgh
10.1 Retirement Plan for Board Members of Dime Community Bancorp, Inc.
10.2 Dime Community Bancorp, Inc. Stock Option Plan for Outside Directors ,
Officers and Employees, as amended by amendments number 1 and 2.
10.3 Recognition and Retention Plan for Outside Directors, Officers and
Employees of Dime Community Bancorp, Inc., as amended by amendments number
1 and 2.
10.4 Form of stock option agreement for Outside Directors under Dime Community
Bancorp, Inc. 1996 Stock Option Plan for Outside Directors, Officers and
Employees.
10.5 Form of stock option agreement for officers and employees under Dime
Community Bancorp, Inc. 1996 Stock Option Plan for Outside Directors,
Officers and Employees
10.6 Form of award notice for outside directors under the Recognition and
Retention Plan for Outside Directors, Officers and Employees of Dime
Community Bancorp, Inc.
10.7 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 1998 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant
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27.1 Financial Data Schedule (EDGAR filing only)
[FN]
Incorporated by reference to Exhibits to the Annual Report on Form 10-K for
the fiscal year ended June 30, 1997 and filed on September 26, 1996.
Incorporated by reference to the registrant's Annual Report of Form 10K for
the fiscal year ended June 30, 1997, and filed on September 26, 1997.
Incorporated by refence to the registrant's Current Report on Form 8-K
dated April 9, 1998, and filed on April 16, 1998.
Incorporated by reference to the registrant's Current Report on Form 8-K,
dated July 18, 1998, and filed on July 20, 1998, and amended in
July 27,1998.
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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 28, 1998.
Dime Community Bancshares, 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 Chairman of the Board and Chief September 28,1998
Vincent F. Palagiano Executive Officer (Principal
executive officer)
/s/ MICHAEL P. DEVINE President and Chief Operating September 28, 1998
Michael P. Devine Officer and Director
/s/ KENNETH J. MAHON Executive Vice President, September 28, 1998
Kenneth J. Mahon Secretary and Chief Financial
Officer (Principal financial
officer)
/s/ ANTHONY BERGAMO Director September 28, 1998
Anthony Bergamo
/s/ GEORGE L. CLARK, JR. Director September 28, 1998
George L. Clark, Jr.
/s/ STEVEN D. COHN Director September 28, 1998
Steven D. Cohn
/s/ PATRICK E. CURTIN Director September 28, 1998
Patrick E. Curtin
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/s/ JOSEPH H. FARRELL Director September 28, 1998
Joseph H. Farrell
/s/ FRED P. FEHRENBACH Director September 28, 1998
Fred P. Fehrenbach
/s/ JOHN J. FLYNN Director September 28, 1998
John J. Flynn
/s/ MALCOLM T. KITSON Director September 28, 1998
Malcolm T. Kitson
/s/ STANLEY MEISELS Director September 28, 1998
Stanley Meisels
/s/ LOUIS V. VARONE Director September 28, 1998
Louis V. Varone
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