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)
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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
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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.
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.
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.
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<F1> 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
====== ====== ====== ====== ======
<F1> Includes acquisition of $113.1 million loans from Conestoga on June 26,
1996, substantially all of which were one-to-four family loans.
<F2> Includes loans held for sale.
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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 <F1> - - 113,140
Less:
Principal repayments 120,240 91,405 67,308
Loans sold <F2> 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
======== ======== ========
<F1> Substantially all of these mortgage loans are one-to-four family mortgage
loans.
<F2> Includes fixed-rate mortgage loans and student loans.
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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
======= ======== ======== ======= ======== ======= =======
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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
========= ========= =========
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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.
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.
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.
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.''
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
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.
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 <F1> $3,136 $4,294 $7,419 $- $-
Total non-performing loans to total loans
<F3> 0.09% 0.43% 1.12% 1.18% 1.45%
Total non-performing assets to total
assets <F2><F3> 0.11 0.37 0.62 1.44 2.23
<F1>The Bank adopted SFAS 114 effective July 1, 1995. Impaired loans were not
measured prior to this date.
<F2>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.
<F3>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.
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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
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.
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
====== ====== ====== ====== ====== ====== ====== ======
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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.
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.
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 <F1> $950,121 $750,584 $583,686 $429,854 $431,593
======== ======== ======== ======== ========
Average total loans outstanding <F1> $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 <F3> 1.27% 1.43% 1.34% 1.20% 0.84%
Allowance for loan losses to total non-
performing loans at end of
period <F2><F3> 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 $- $-
======== ======== ======== ======== ========
<F1> 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.
<F2> 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.
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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<F1> Amount Loans<F1> Amount Loans<F1> Amount Loans<F1> Amount Loans<F1>
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
(Dollars in thousands)
Impaired
loans <F2> $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%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
<F1> Total loans represent gross loans less FHA and VA loans, which are
government guaranteed loans.
<F2> 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.
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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
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.
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 <F1> - - 124,409
--------- --------- ---------
Amortized cost at end of period $408,086 $306,164 $209,542
========= ========= =========
<F1> 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.
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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<F1>
------------------------ ----------------------- ------------------------
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 <F2> 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 <F2> 5,069 - 3,710 - 575 -
--------- --------- --------- --------- --------- ---------
Total securities, net $574,386 $575,617 $468,799 $469,923 $594,787 $594,679
========= ========= ========= ========= ========= =========
<F1>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.
<F2>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.
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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<F1>
------------------------ ----------------------- ------------------------
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
--------- --------- --------- --------- --------- ---------
(In thousands)
Held-to-Maturity:
Mortgage-backed securities:
<F2>
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 <F3> 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 <F3> <F5> 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 <F4> 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
========= ========= ========= ========= ========= =========
<F1> 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.
<F2> Mortgage-backed securities include investments in CMOs and REMICs.
<F3> Includes corporate debt obligations.
<F4> 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.
<F5> 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.
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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%
======== ======== ======== ========
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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
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 <F1> - - 394,250
Interest credited 42,713 40,282 22,676
--------- --------- ---------
Total increase in deposits $74,947 $13,281 $395,273
========= ========= =========
<F1> 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.
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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%
=========
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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%
======== ====== ====== ====== ====== ======
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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
========= ========= ========= ======== ======== ======== ========
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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.
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
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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
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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. <F1> 1983 / New York <F1> 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
<F1> 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.
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PERSONNEL
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
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.
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.
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:
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%
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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
========= ========= =========
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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
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
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
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
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.
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
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.
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 <F1> 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 <F2> <F3> 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
<F1> 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
<F2> This branch office opened April 29, 1995.
<F3> 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
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
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:
27.1 Financial Data Schedule (EDGAR filing only)
[FN]
<F1> 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.
<F2> 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.
<F3> Incorporated by refence to the registrant's Current Report on Form 8-K
dated April 9, 1998, and filed on April 16, 1998.
<F4> 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.
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
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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
-43-
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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 |
DIME COMMUNITY BANCORP, INC. AND SUBSIDIARY
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
FOR THE FOR THE
YEAR ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997
Net income $13,098 $12,316
======= =======
Weighted average common shares outstanding
for basic earnings per share 11,001 12,897
======= =======
Basic Earnings Per Share $1.19 $0.95
======= =======
Weighted average common shares outstanding
for basic earnings per share 11,001 12,897
Unvested shares of Recognition and Retention
Plan 517 36
Common stock equivalents due to dilutive
effect of stock options 523 47
------------ ------------
Total weighted average common shares and
common share equivalents for diluted
earnings per shares 12,041 12,980
============ ============
Diluted earnings per common share and common
share equivalents $1.09 $0.95
============ ============
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EXHIBIT 21.1
Subsidiaries of Dime Community Bancshares, Inc. - The following are the significant subsidiaries of Dime Community Bancshares, Inc.
Name: The Dime Savings Bank of Williamsburgh
Jurisdiction of incorporation: United States of America
Names under which it does business:
The Dime Savings Bank of Williamsburgh
Subsidiaries of The Dime Savings Bank of Williamsburgh - The following are the significant subsidiaries of The Dime Savings Bank of Williamsburgh.
Name: DSBW Preferred Funding Corporation
Jurisdiction of incorporation: Delaware
Names under which it does business:
DSBW Preferred Funding Corporation
Name: Havemeyer Equities, Inc.
Jurisdiction of incorporation: New York
Names under which it does business:
Havemeyer Equities, Inc.
Name: Havemeyer Brokerage Corporation
Jurisdiction of incorporation: New York
Names under which it does business:
Havemeyer Brokerage Corporation
The remaining subsidiaries, which are all direct or indirect subsidiaries of The Dime Savings Bank of Williamsburgh would not, when considered in the aggregate as a single subsidiary, constitute a significant subsidiary as defined in 17 C.F.R. 210.1-02 (v) Rule 1-02(v) of Regulation S-X as of June 30, 1998. For a description of the Registrant's subsidiaries, see Item 1 of "Business" of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
DIME COMMUNITY BANCSHARES, INC.
UNDER SECTION 102 OF
THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
TABLE OF CONTENTS
PAGE
ARTICLE I
NAME
ARTICLE II
REGISTERED OFFICE AND AGENT
ARTICLE III
PURPOSE
ARTICLE IV
CAPITAL STOCK
Section 1. Shares, Classes and Series Authorized 1
Section 2. Designations, Powers, Preferences, Rights, Qualifications,
Limitations and Restrictions Relating to the Capital Stock 2
ARTICLE V
LIMITATION ON BENEFICIAL OWNERSHIP OF STOCK
Section 1. Applicability of Article 3
Section 2. Prohibitions Relating to Beneficial Ownership of Voting Stock 4
Section 3. Excess Shares 4
Section 4. Powers of the Board of Directors 4
Section 5. Severability 5
Section 6. Exclusions 5
ARTICLE VI
BOARD OF DIRECTORS
Section 1. Number of Directors 6
Section 2. Classification of Board 6
Section 3. Vacancies 6
i
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Section 4. Removal of Directors 6
Section 5. Directors Elected by Preferred Shareholders 7
Section 6. Evaluation of Acquisition Proposals 7
Section 7. Power to Call Special Meeting of Shareholders 7
ARTICLE VII
ACTION BY SHAREHOLDERS WITHOUT A MEETING
ARTICLE VIII
CERTAIN BUSINESS COMBINATIONS
Section 1. Higher Vote Required for Certain Business Combinations 8
Section 2. When Higher Vote is Not Required 8
Section 3. Definitions 11
Section 4. Powers of the Disinterested Directors 15
Section 5. Effect on Fiduciary Obligations of Interested Shareholders 15
Section 6. Amendment, Repeal, Etc 15
ARTICLE IX
LIMITATION OF DIRECTOR LIABILITY
ARTICLE X
INDEMNIFICATION
Section 1. Actions, Suits or Proceedings Other than by or in the Right
of the Corporation 16
Section 2. Actions or Suits by or in the Right of the Corporation 17
Section 3. Indemnification for Costs, Charges and Expenses of a
Successful Party 18
Section 4. Indemnification for Expenses of a Witness 18
Section 5. Determination of Right to Indemnification 18
Section 6. Advancement of Costs, Charges and Ex-penses 19
Section 7. Procedure for Indemnification 19
Section 8. Settlement 20
Section 9. Other Rights; Continuation of Right to Indemnification;
Individual Contracts 20
Section 10. Savings Clause 20
Section 11. Insurance 20
Section 12. Definitions 21
Section 13. Subsequent Amendment and Subsequent Legislation 22
ii
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ARTICLE XI
AMENDMENTS
Section 1. Amendments of Certificate of Incorporation 22
Section 2. Amendments of Bylaws 23
ARTICLE XII
NOTICES
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CERTIFICATE OF INCORPORATION
OF
DIME COMMUNITY BANCSHARES, INC.
THE UNDERSIGNED, for the purpose of forming a corporation pursuant to Section 102 of the General Corporation Law of the State of Delaware, does hereby certify that this Certificate of Incorporation of Dime Community Bancshares, Inc. was duly adopted in accordance with the provisions of Section 102 of the General Corporation Law of the State of Delaware, and further certifies as follows:
ARTICLE I
NAME
The name of the corporation is Dime Community Bancshares, Inc. (the "Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware.
ARTICLE IV
CAPITAL STOCK
SECTION 1. SHARES, CLASSES AND SERIES AUTHORIZED. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is fifty-four million (54,000,000) shares, of which nine million (9,000,000) shares shall be preferred stock, par value one cent ($.01) per share (the "Preferred Stock"), and forty-five million ( 45,000,000) shares shall be common stock, par value one cent ($.01) per share (the "Common Stock"). The Preferred Stock and Common Stock are sometimes hereinafter collectively referred to as the "Capital Stock."
SECTION 2. DESIGNATIONS, POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS RELATING TO THE CAPITAL STOCK. The following is a statement of the designations, powers, preferences and rights in respect of the classes of the Capital Stock, and the qualifications, limitations or restrictions thereof, and of the authority with respect thereto expressly vested in the Board of Directors of the Corporation (the "Board of Directors"):
(a) PREFERRED STOCK. The Preferred Stock may be issued from time to time in one or more series, the number of shares and any designation of each series and the powers, preferences and rights of the shares of each series, and the qualifications, limitations or restrictions thereof, to be as stated and expressed in a resolution or resolutions providing for the issue of such series adopted by the Board of Directors, subject to the limitations prescribed by law. The Board of Directors in any such resolution or resolutions is expressly authorized to state for each such series:
(i) the voting powers, if any, of the holders of stock of such series in addition to any voting rights affirmatively required by law;
(ii) the rights of shareholders in respect of dividends, including, without limitation, the rate or rates per annum and the time or times at which (or the formula or other method pursuant to which such rate or rates and such time or times may be determined) and conditions upon which the holders of stock of such series shall be entitled to receive dividends and other distributions, and whether any such dividends shall be cumulative or non-cumulative and, if cumulative, the terms upon which such dividends shall be cumulative;
(iii) whether the stock of each such series shall be redeemable by the Corporation at the option of the Corporation or the holder thereof, and, if redeemable, the terms and conditions upon which the stock of such series may be redeemed;
(iv) the amount payable and the rights or preferences to which the holders of the stock of such series shall be entitled upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation;
(v) the terms, if any, upon which shares of stock of such series shall be
convertible into, or exchangeable for, shares of stock of any other class or classes or of any other series of the same or any other class or classes, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; and
(vi) any other designations, preferences, and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, so far as they are not inconsistent with the provisions of this Certificate of Incorporation and to the full extent now or hereafter permitted by the laws of the State of Delaware.
All shares of the Preferred Stock of any one series shall be identical to each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon, if cumulative, shall be cumulative.
Subject to any limitations or restrictions stated in the resolution or resolutions of the Board of Directors originally fixing the number of shares constituting a series, the Board of Directors may by resolution or resolutions likewise adopted increase (but not above the total number of authorized shares of that class) or decrease (but not below the number of shares of the series then outstanding) the number of shares of the series subsequent to the issue of shares of that series; and in case the number of shares of any series shall be so decreased, the shares constituting the decrease shall resume that status that they had prior to the adoption of the resolution originally fixing the number of shares constituting such series.
(b) COMMON STOCK. All shares of Common Stock shall be identical to each other in every respect. The shares of Common Stock shall entitle the holders thereof to one vote for each share on all matters on which shareholders have the right to vote. The holders of Common Stock shall not be permitted to cumulate their votes for the election of directors.
Subject to the preferences, privileges and powers with respect to each class or series of Preferred Stock having any priority over the Common Stock, and the qualifications, limitations or restrictions thereof, the holders of the Common Stock shall have and possess all rights pertaining to the Capital Stock.
ARTICLE V
LIMITATION ON BENEFICIAL OWNERSHIP OF STOCK
SECTION 1. APPLICABILITY OF ARTICLE. The provisions of this Article V shall become effective upon (i) the consummation of the conversion of The Dime Savings Bank of Williamsburgh, a savings bank organized under the laws of the United States (the "Bank"), from a mutual to a stock savings bank, and (ii) the concurrent acquisition by the Corporation of all of the outstanding capital stock of the Bank (the "Effective Date"). All terms used in this Article V and not otherwise defined herein shall have the meanings ascribed to such terms in Section 3 of Article VIII, below.
SECTION 2. PROHIBITIONS RELATING TO BENEFICIAL OWNERSHIP OF VOTING STOCK. No Person (other than the Corporation, any Subsidiary, or any pension, profit-sharing, stock bonus or other compensation plan maintained by the Corporation or by a member of a controlled group of corporations or trades or businesses of which the Corporation is a member for the benefit of the employees of the Corporation and/or any Subsidiary, or any trust or custodial arrangement established in connection with any such plan) shall directly or indirectly acquire or hold the beneficial ownership of more than ten percent (10%) of the issued and outstanding Voting Stock of the Corporation. Any Person so prohibited who directly or indirectly acquires or holds the beneficial ownership of more than ten percent (10%) of the issued and outstanding Voting Stock in violation of this Section 2 shall be subject to the provisions of Sections 3 and 4 of this Article V, below. The Corporation is authorized to refuse to recognize a transfer or attempted transfer of any Voting Stock to any Person who beneficially owns, or who the Corporation believes would become by virtue of such transfer the beneficial owner of, more than ten percent (10%) of the Voting Stock.
SECTION 3. EXCESS SHARES. If, notwithstanding the foregoing prohibition, a Person shall, voluntarily or involuntarily, become or attempt to become the purported beneficial owner (the "Purported Owner") of shares of Voting Stock in excess of ten percent (10%) of the issued and outstanding shares of Voting Stock, the number of shares in excess of ten percent (10%) shall be deemed to be "Excess Shares," and the holder thereof shall be entitled to cast one hundredth (1/100) of one vote per share for each Excess Share.
The restrictions set forth in this Article V shall be noted conspicuously on all certificates evidencing ownership of Voting Stock.
SECTION 4. POWERS OF THE BOARD OF DIRECTORS.
(a) The Board of Directors may, to the extent permitted by law, from time to time establish, modify, amend or rescind, by Bylaw or otherwise, regulations and procedures not inconsistent with the express provisions of this Article V for the orderly application, administration and implementation of the provisions of this Article V. Such procedures and regulations shall be kept on file with the Secretary of the Corporation and with the Transfer Agent, shall be made available for inspection by the public and, upon request, shall be mailed to any holder of Voting Stock of the Corporation.
(b) When it appears that a particular Person has become a Purported Owner of Excess Shares in violation of Section 2 of this Article V, or of the rules and regulations of the Board of Directors with respect to this Article V, and that the provisions of this Article V require application, interpretation, or construction, then a majority of the directors of the Corporation shall have the power and duty to interpret all of the terms and provisions of this Article V, and to determine on the basis of information known to them after reasonable inquiry all facts necessary to ascertain compliance with this Article V, including, without limitation, (i) the number of shares of Voting Stock beneficially owned by any Person or Purported
Owner, (ii) whether a Person or Purported Owner is an Affiliate or Associate of, or is acting in concert with, any other Person or Purported Owner, (iii) whether a Person or Purported Owner has an agreement, arrangement or understanding with any other Person or Purported Owner as to the voting or disposition of any shares of the Voting Stock, (iv) the application of any other definition or operative provision of this Article V to the given facts, or (v) any other matter relating to the applicability or effect of this Article V.
The Board of Directors shall have the right to demand that any Person who is reasonably believed to be a Purported Owner of Excess Shares (or who holds of record Voting Stock beneficially owned by any Person reasonably believed to be a Purported Owner in excess of such limit) supply the Corporation with complete information as to (i) the record owner(s) of all shares of Voting Stock beneficially owned by such Person or Purported Owner and (ii) any other factual matter relating to the applicability or effect of this Article V as may reasonably be requested of such Person or Purported Owner.
Any applications, interpretations, constructions or any other determinations made by the Board of Directors pursuant to this Article V, in good faith and on the basis of such information and assistance as was then reasonably available for such purpose, shall be conclusive and binding upon the Corporation and its shareholders and neither the Corporation nor any of its shareholders shall have the right to challenge any such construction, application or determination.
SECTION 5. SEVERABILITY. In the event any provision (or portion thereof) of this Article V shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Article V shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of this Corporation and its shareholders that each such remaining provision (or portion thereof) of this Article V remain, to the fullest extent permitted by law, applicable and enforceable as to all shareholders, including Purported Owners, if any, notwithstanding any such finding.
SECTION 6. EXCLUSIONS. This Article V shall not apply to (a) any offer or sale with a view towards public resale made exclusively by the Corporation to any underwriter or underwriters acting on behalf of the Corporation, or to the selling group acting on such underwriter's or underwriters' behalf, in connection with a public offering of the Common Stock; or (b) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction or reorganization that does not have the effect, directly or indirectly, of changing the beneficial ownership interests of the Corporation's shareholders, other than pursuant to the exercise of any dissenters' appraisal rights, except as a result of immaterial changes due to fractional share adjustments, which changes do not exceed, in the aggregate, one percent (1%) of the issued and outstanding shares of such class of equity or convertible securities.
ARTICLE VI
BOARD OF DIRECTORS
SECTION 1. NUMBER OF DIRECTORS. The number of directors of the Corporation shall be as determined only by resolution of the Board of Directors, but shall not be less than five (5) nor more than fifteen (15).
SECTION 2. CLASSIFICATION OF BOARD. Subject to the rights of any holders of any series of Preferred Stock that may be issued by the Corporation pursuant to a resolution or resolutions of the Board of Directors providing for such issuance and subject to the provisions hereof, the directors of the Corporation shall be divided into three classes with respect to term of office, each class to contain, as near as may be possible, one-third of the entire number of the Board, with the terms of office of one class expiring each successive year. One class of directors shall be initially elected for a term expiring at the annual meeting of shareholders to be held in 1996, another class shall be initially elected for a term expiring at the annual meeting of shareholders to be held in 1997, and another class shall be initially elected for a term expiring at the annual meeting of shareholders to be held in 1998. At each annual meeting of shareholders, the successors to the class of directors (other than directors elected by holders of shares of one or more series of Preferred Stock) whose term expires at that time shall be elected by the shareholders to serve until the annual meeting of shareholders held three years next following and until their successors shall be elected and qualified.
In the event of any intervening changes in the authorized number of directors (other than directors elected by holders of shares of one or more series of Preferred Stock), only the Board of Directors shall designate the class or classes to which the increases or decreases in directorships shall be apportioned in order more nearly to achieve equality of number of directors among the classes; PROVIDED, HOWEVER, that no such apportionment or redesignation shall shorten the term of any incumbent director.
Unless and to the extent that the Bylaws so provide, elections of directors need not be by written ballot.
SECTION 3. VACANCIES. Subject to the limitations prescribed by law and this Certificate of Incorporation, all vacancies in the office of director, including vacancies created by newly created directorships resulting from an increase in the number of directors (subject to the provisions of Article VI, Section 5 hereof relating to directors elected by holders of one or more series of Preferred Stock), shall be filled only by a vote of a majority of the directors then holding office, whether or not a quorum, and any director so elected shall serve for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until his successor shall be elected and qualified.
SECTION 4. REMOVAL OF DIRECTORS. Any or all of the directors (subject to the provisions of Article VI, Section 5 hereof relating to directors elected by holders of shares of
one or more series of Preferred Stock) may be removed at any time, but only for cause, and any such removal shall require the vote, in addition to any vote required by law, of not less than eighty percent (80%) of the total votes eligible to be cast by the holders of all outstanding shares of Capital Stock entitled to vote generally in the election of directors at a meeting of shareholders expressly called for that purpose. For purposes of this Section 4, conduct worthy of removal for "cause" shall include (a) conduct as a director of the Corporation or any subsidiary of the Corporation, which conduct involves willful material misconduct, breach of fiduciary duty involving personal pecuniary gain or gross negligence in the performance of duties, (b) conduct, whether or not as a director of the Corporation or a subsidiary of the Corporation, which conduct involves dishonesty or breach of fiduciary duty and is punishable by imprisonment for a term exceeding one year under state or federal law or (c) removal of such person from the Board of Directors of the Bank, if such person is so serving, in accordance with the Federal Stock Charter and Bylaws of the Bank.
SECTION 5. DIRECTORS ELECTED BY PREFERRED SHAREHOLDERS. Notwithstanding anything set forth in these Bylaws to the contrary, the qualifications, term of office and provisions governing vacancies, removal and other matters pertaining to directors elected by holders of one or more series of Preferred Stock shall be as set forth in a resolution or resolutions adopted by the Board of Directors setting forth the designations, preferences and rights relating to any such series of Preferred Stock pursuant to Article IV, Section 2 hereof.
SECTION 6. EVALUATION OF ACQUISITION PROPOSALS. The Board of Directors of the Corporation, when evaluating any offer to the Corporation or to the shareholders of the Corporation from another party to (a) purchase for cash, or exchange any securities or property for, any outstanding equity securities of the Corporation, (b) merge or consolidate the Corporation with another corporation or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, shall, in connection with the exercise of its judgment in determining what is in the best interest of the Corporation and its shareholders, give due consideration to the extent permitted by law not only to the price or other consideration being offered, but also to all other relevant factors including, without limitation, the financial and managerial resources and future prospects of the other party, the possible effects on the business of the Corporation and its subsidiaries and on the employees, customers, suppliers and creditors of the Corporation and its subsidiaries, and the effects on the communities in which the Corporation's and its subsidiaries' facilities are located.
SECTION 7. POWER TO CALL SPECIAL MEETING OF SHAREHOLDERS. Special meetings of shareholders, for any purpose, may be called at any time only by resolution of at least three-fourths of the Directors of the Corporation then in office or by the Chairman of the Board. At a special meeting, no business shall be transacted and no corporate action shall be taken other than that stated in the notice of meeting prescribed by the Bylaws of the Corporation.
ARTICLE VII
ACTION BY SHAREHOLDERS WITHOUT A MEETING
Except as otherwise provided for or fixed pursuant to the provisions of Article IV of this Certificate of Incorporation relating to the rights of holders of any series of Preferred Stock, no action that is required or permitted to be taken by the shareholders of the Corporation at any annual or special meeting of shareholders may be effected by written consent of stockholders in lieu of a meeting of shareholders.
ARTICLE VIII
CERTAIN BUSINESS COMBINATIONS
SECTION 1. HIGHER VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS. In addition to any affirmative vote required by law, by this Certificate of Incorporation, or by the provisions of any series of Preferred Stock that may at the time be outstanding, and except as otherwise expressly provided for in Section 2 of this Article VIII, any Business Combination, as hereinafter defined, shall require the affirmative vote of not less than eighty percent (80%) (to the extent permitted by law, but in no event less than two-thirds) of the total number of votes eligible to be cast by the holders of all outstanding shares of Voting Stock, voting together as a single class (it being understood that for purposes of this Article VIII each share of the Voting Stock shall have the number of votes granted to it pursuant to Article IV and Article V of this Certificate of Incorporation or in any resolution or resolutions of the Board of Directors for issuance of shares of Preferred Stock), together (to the extent permitted by law) with the affirmative vote of at least fifty percent (50%) of the total number of votes eligible to be cast by the holders of all outstanding shares of the Voting Stock not beneficially owned by the Interested Shareholder involved or any Affiliate or Associate thereof, voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise.
SECTION 2. WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of Section 1 of this Article VIII shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law or any other provision of this Certificate of Incorporation, if the Business Combination shall have been approved by a majority of the Disinterested Directors then in office or if all of the conditions specified in the following subsections (a) through (g) are met:
(a) The aggregate amount of the cash and the Fair Market Value as of the Consummation Date of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following:
(i) (if applicable) the highest per share price (including any brokerage
commissions, transfer taxes, soliciting dealers' fees, dealer-management compensation, and other expenses, including, but not limited to, costs of newspaper advertisements, printing expenses and attorneys' fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it (A) within the two year period immediately prior to the Announcement Date, or (B) in the transaction in which it became an Interested Shareholder, whichever is higher, plus interest compounded annually from the Determination Date through the Consummation Date at the prime rate of interest of Citibank, N.A. (or other major bank headquartered in New York City selected by a majority of the Disinterested Directors then in office) from time to time in effect in New York City, less the aggregate amount of any cash dividends paid and the Fair Market Value of any dividends paid, other than in cash, per share of Common Stock from the Determination Date through the Consummation Date in an amount up to but not exceeding the amount of such interest payable per share of Common Stock; or
(ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the Determination Date, whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value as of the Consummation Date of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Voting Stock, other than Common Stock, in such Business Combination shall be at least equal to the highest of the following (such requirement being applicable to each such class or series of outstanding Voting Stock, whether or not the Interested Shareholder has previously acquired any shares of such class or series of Voting Stock):
(i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes, soliciting dealers' fees, dealer-management compensation, and other expenses, including, but not limited to, costs of newspaper advertisements, printing expenses and attorneys' fees) paid by the Interested Shareholder for any shares of such class or series of Voting Stock acquired by it (A) within the two year period immediately prior to the Announcement Date, or (B) in the transaction in which it became an Interested Shareholder, whichever is higher, plus interest compounded annually from the Determination Date through the Consummation Date at the prime rate of interest of Citibank, N.A. (or other major bank headquartered in New York City selected by a majority of the Disinterested Directors then in office) from time to time in effect in New York City, less the aggregate amount of any cash dividends paid, and the Fair Market Value of any dividends paid other than in cash, per share of such class or series of Voting Stock from the Determination Date through the Consummation Date in an amount up to but not exceeding the amount of such interest payable per share of such class or series of Voting Stock;
(ii) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or
(iii) the Fair Market Value per share of such class or series of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher.
(c) The consideration to be received by holders of any particular class or series of outstanding Voting Stock (including Common Stock) in such Business Combination shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class or series of Voting Stock. If the Interested Shareholder has paid for shares of any class or series of Voting Stock with varying forms of consideration, the form of consideration for such class or series of Voting Stock in such Business Combination shall be either cash or the form used to acquire the largest number of shares of such class or series of Voting Stock previously acquired by it.
(d) The holders of all outstanding shares of Voting Stock not beneficially owned by the Interested Shareholder immediately prior to the Consummation Date shall be entitled to receive in such Business Combination cash or other consideration for their shares in compliance with subsections (a), (b) and (c) of this Section 2.
(e) After the Determination Date and prior to the Consummation Date:
(i) except as approved by a majority of the Disinterested Directors then in office, there shall have been no failure to declare and pay, or set aside for payment, at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Preferred Stock;
(ii) there shall have been (A) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors then in office, and (B) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors then in office; and
(iii) such Interested Shareholder shall not have become the beneficial owner of any additional shares of Voting Stock except (a) as part of the transaction that results in such Interested Shareholder becoming an Interested Shareholder, (b) as the result of a stock dividend paid by the Corporation or (c) upon the exercise or conversion of securities of the Corporation issued pro rata to all holders of Common Stock which are exercisable for or convertible into shares of Voting Stock.
(f) After the Determination Date, the Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by or through the Corporation or an Affiliate of the Corporation,
whether in anticipation of or in connection with such Business Combination or otherwise.
(g) A proxy or information statement describing the proposed Business Combination in accordance with the requirements of the Securities Exchange Act of 1934, as amended, whether or not the Corporation is then subject to such requirements, and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to shareholders of the Corporation at least thirty (30) days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). The first page of such proxy or information statement shall prominently display the recommendation, if any, that a majority of the Disinterested Directors then in office may choose to make to the holders of Voting Stock regarding the proposed Business Combination. Such proxy or information statement shall also contain, if a majority of the Disinterested Directors then in office so requests, an opinion of a reputable investment banking firm (which firm shall be engaged solely on behalf of the shareholders of the Corporation other than the Interested Shareholder and shall be selected by a majority of the Disinterested Directors then in office, furnished with all information it reasonably requests, and paid a reasonable fee for its services by the Corporation upon the Corporation's receipt of such opinion) as to the fairness (or lack of fairness) of the terms of the proposed Business Combination from the point of view of the holders of Voting Stock other than the Interested Shareholder.
SECTION 3. DEFINITIONS. For purposes of this Article VIII, the following terms shall have the following meanings:
(a) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, as in effect on the date of filing by the Secretary of State of the State of Delaware of this Certificate of Incorporation, whether or not the Corporation was then subject to such rule.
(b) "Announcement Date" shall mean the date of the first public announcement of the proposal of the Business Combination.
(c) A Person shall be deemed the "beneficial owner," or to have "beneficial ownership," of any shares of Voting Stock that:
(i) such Person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or
(ii) such Person or any or its Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (but a Person shall not be deemed to be the beneficial owner of any Voting Stock solely by reason of an agreement, arrangement or understanding with the Corporation to effect a
Business Combination) or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote, or to direct the vote of, pursuant to any agreement, arrangement or understanding; or
(iii) is beneficially owned, directly or indirectly, by any other Person with which such first mentioned Person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock;
PROVIDED, HOWEVER, that no director or officer of the Corporation (nor any Affiliate or Associate of any such director or officer) (y) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any Voting Stock of the Corporation beneficially owned by any other such director or officer (or any Affiliate or Associate thereof) or (z) shall be deemed to beneficially own any Voting Stock of the Corporation owned by any pension, profit-sharing, stock bonus or other compensation plan maintained by the Corporation or by a member of a controlled group of corporations or trades or businesses of which the corporation is a member for the benefit of employees of the Corporation and/or any Subsidiary, or any trust or custodial arrangement established in connection with any such plan, not specifically allocated to such Person's personal account.
(d) The term "Business Combination" shall mean any transaction that is referred to in any one or more of the following paragraphs (i) through (vi):
(i) any merger or consolidation of the Corporation or any Subsidiary (other than a merger pursuant to Section 253 of the General Corporation Law of the State of Delaware) with (A) any Interested Shareholder, or (B) any other entity (whether or not such other entity is itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate or Associate of any Interested Shareholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value equal to five percent (5%) or more of the total assets of the Corporation or the Subsidiary in question, as of the end of its most recent fiscal year ending prior to the time the determination is being made; or
(iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder other than (A) on a pro rata basis to all holders of Voting Stock, (B) in connection with the exercise or conversion of securities issued pro rata that are exer-cisable for, or convertible into, securities of the Corporation or any Subsidiary of the
Corporation or (C) the issuance or transfer of such securities having an aggregate Fair Market Value equal to less than one percent (1%) of the aggregate Fair Market Value of all of the outstanding Capital Stock; or
(iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder; or
(v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class or series of equity or convertible securities of the Corporation or any Subsidiary that is directly or indirectly owned by any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, except as a result of immaterial changes due to fractional share adjustments, which changes do not exceed, in the aggregate, 1% of the issued and outstanding shares of such class or series of equity or convertible securities; or
(vi) the acquisition by the Corporation or a Subsidiary of any securities of an Interested Shareholder or its Affiliates or Associates.
(e) "Consummation Date" shall mean the date of the consummation of the Business Combination.
(f) "Determination Date" shall mean the date on which the Interested Shareholder became an Interested Shareholder.
(g) "Disinterested Director" shall mean any member of the Board of Directors of the Corporation who is not an Affiliate or Associate of, or otherwise affiliated with, the Interested Shareholder and who either was a member of the Board of Directors prior to the Determination Date, or was recommended for election by a majority of the Disinterested Directors in office at the time such director was nominated for election. If there is no Interested Shareholder, each member of the Board of Directors shall be a Disinterested Director.
(h) "Fair Market Value" shall mean (i) in the case of stock, the highest closing price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange listed stocks, or, if such stock is not quoted on the Composite Tape, the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the Nasdaq
Stock Market or any system then in use, or if no such quotation is available, the fair market value on the date in question of a share of such stock as determined in good faith by a majority of the Disinterested Directors then in office, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Disinterested Directors then in office.
(i) References to "highest per share price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock.
(j) "Interested Shareholder" shall mean any Person (other than the Corporation, any Subsidiary, or any pension, profit-sharing, stock bonus or other compensation or employee benefit plan maintained by the Corporation or by a member of a controlled group of corporations or trades or businesses of which the corporation is a member for the benefit of employees of the Corporation and/or any Subsidiary, or any trust or custodial arrangement established in connection with any such plan) who or which:
(i) is the beneficial owner of ten percent (10%) or more of the Voting Stock; or
(ii) is an Affiliate or Associate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of ten percent (10%) or more of the then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock that were at any time within the two-year period immediately prior to the date in question beneficially owned by any other Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended, and not executed on any exchange or in the over-the-counter market through a registered broker or dealer.
In determining whether a Person is an Interested Shareholder pursuant to this subsection (j), the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of subsection (c) of this Section 3 but shall not include any other shares of Voting Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.
(k) "Person" shall mean any corporation, partnership, trust, unincorporated
organization or association, syndicate, any other entity or a natural person, together with any Affiliate or Associate of such person or any other person acting in concert with such person.
(l) "Subsidiary" shall mean any corporation or entity of which a majority of any class or series of equity securities is owned, directly or indirectly, by the Corporation; PROVIDED, HOWEVER, that for the purposes of the definition of Interested Shareholder set forth in subsection (j) of this Section 3, the term "Subsidiary" shall mean only a corporation or entity of which a majority of each class or series of outstanding voting securities is owned, directly or indirectly, by the Corporation.
(m) "Voting Stock" shall mean all of the outstanding shares of Capital Stock entitled to vote generally in the election of directors.
SECTION 4. POWERS OF THE DISINTERESTED DIRECTORS. When it
appears that a particular Person may be an Interested Shareholder and
that the provisions of this Article VIII need to be applied or
interpreted, then a majority of the directors of the Corporation who
would qualify as Disinterested Directors shall have the power and duty to
interpret all of the terms and provisions of this Article VIII, and to
determine on the basis of information known to them after reasonable
inquiry of all facts necessary to ascertain compliance with this Article
VIII, including, without limitation, (a) whether a Person is an
Interested Shareholder, (b) the number of shares of Voting Stock
beneficially owned by any Person, (c) whether a Person is an Affiliate or
Associate of another, (d) the Fair Market Value of (i) the assets that
are the subject of any Business Combination, (ii) the securities to be
issued or transferred by the Corporation or any Subsidiary in any
Business Combination, (iii) the consideration other than cash to be
received by holders of shares of any class or series of Common Stock or
Voting Stock other than Common Stock in any Business Combination, (iv)
the outstanding Capital Stock, or (v) any other item the Fair Market
Value of which requires determination pursuant to this Article VIII, and
(e) whether all of the applicable conditions set forth in Section 2 of
this Article VIII have been met with respect to any Business Combination.
Any constructions, applications, or determinations made by the Board of Directors or the Disinterested Directors pursuant to this Article VIII, in good faith and on the basis of such information and assistance as was then reasonably available for such purpose, shall be conclusive and binding upon the Corporation and its shareholders, and neither the Corporation nor any of its shareholders shall have the right to challenge any such construction, application or determination.
SECTION 5. EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED SHAREHOLDERS. Nothing contained in this Article VIII shall be construed to relieve any Interested Shareholder from any fiduciary obligations imposed by law.
SECTION 6. AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of this Certificate of Incorporation or the Bylaws (and notwithstanding the fact that a lesser per-centage may be specified by law, this Certificate of Incorporation or the Bylaws of the
Corporation), in addition to any affirmative vote required by applicable law and any voting rights granted to or held by holders of Preferred Stock, any amendment, alteration, repeal or rescission of any provision of this Article VIII must also be approved by either (i) a majority of the Disinterested Directors, or (ii) the affirmative vote of not less than eighty percent (80%) of the total number of votes eligible to be cast by the holders of all outstanding shares of the Voting Stock, voting together as a single class, together with the affirmative vote of not less than fifty percent (50%) of the total number of votes eligible to be cast by the holders of all outstanding shares of the Voting Stock not beneficially owned by any Interested Shareholder or Affiliate or Associate thereof, voting together as a single class.
ARTICLE IX
LIMITATION OF DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is expressly prohibited by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended.
Any amendment, termination or repeal of this Article IX or any provisions hereof shall not adversely affect or diminish in any way any right or protection of a director of the Corporation existing with respect to any act or omission occurring prior to the time of the final adoption of such amendment, termination or repeal.
In addition to any requirements of law or of any other provisions of this Certificate of Incorporation, the affirmative vote of the holders of not less than eighty percent (80%) of the total number of votes eligible to be cast by the holders of all outstanding shares of Capital Stock entitled to vote thereon shall be required to amend, alter, rescind or repeal any provision of this Article IX.
ARTICLE X
INDEMNIFICATION
SECTION 1. ACTIONS, SUITS OR PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. To the fullest extent permitted by the General Corporation Law of the State of Delaware, the Corporation shall indemnify any person who is or was or has agreed to become a director or officer of the Corporation who was or is made a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or by reason of any action alleged to have been taken or omitted
in such capacity, and the Corporation may indemnify any other person who is or was or has agreed to become an employee or agent of the Corporation who was or is made a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Corporation, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. Notwithstanding anything contained in this Article X, the Corporation shall not be obligated to indemnify any director or officer in connection with an action, suit or proceeding, or part thereof, initiated by such person against the Corporation unless such action, suit or proceeding, or part thereof, was authorized or consented to by the Board of Directors.
SECTION 2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. To the fullest extent permitted by the General Corporation Law of the State of Delaware, the Corporation shall indemnify any person who is or was or has agreed to become a director or officer of the Corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or by reason of any action alleged to have been taken or omitted in such capacity, and the Corporation may indemnify any other person who is or was or has agreed to become an employee or agent of the Corporation who was or is made a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Corporation, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or her or on his or her behalf in connection with the defense or settlement of such action or suit and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, except no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to indemnity for such costs, charges and expenses which the Court of Chancery or such other court shall deem proper. Notwithstanding anything contained in this Article X, the Corporation shall not be obligated to indemnify any director or officer in connection with an action or suit, or part thereof, initiated by such person against the Corporation unless such action or suit, or part thereof, was authorized or consented to by the Board of Directors.
SECTION 3. INDEMNIFICATION FOR COSTS, CHARGES AND EXPENSES OF
A SUCCESSFUL PARTY. To the extent that a director, officer, employee or
agent of the Corporation has been successful, on the merits or otherwise
(including, without limitation, the dismissal of an action without
prejudice), in defense of any action, suit or proceeding referred to in
Section 1 or 2 of this Article X, or in defense of any claim, issue or
matter therein, such person shall be indemnified against all costs,
charges and expenses (including attorneys' fees) actually and reasonably
incurred by such person or on such person's behalf in connection
therewith.
SECTION 4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. To the extent that any person who is or was or has agreed to become a director or officer of the Corporation is made a witness to any action, suit or proceeding to which he or she is not a party by reason of the fact that he or she was, is or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the written request of the Corporation, such person shall be indemnified against all costs, charges and expenses actually and reasonably incurred by such person or on such person's behalf in connection therewith.
To the extent that any person who is or was or has agreed to become an employee or agent of the Corporation is made a witness to any action, suit or proceeding to which he or she is not a party by reason of the fact that he or she was, is or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the written request of the Corporation, such person may be indemnified against all costs, charges and expenses actually and reasonably incurred by such person or on such person's behalf in connection therewith.
SECTION 5. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any
indemnification under Section 1 or 2 of this Article X (unless ordered by
a court) shall be made, if at all, by the Corporation only as authorized
in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper under the circumstances
because he or she has met the applicable standard of conduct set forth in
Section 1 or 2 of this Article X. Any indemnification under Section 4 of
this Article X (unless ordered by a court) shall be made, if at all, by
the Corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or
agent is proper under the circumstances. Such determinations shall be
made by (a) a majority vote of directors who were not parties to such
action, suit or proceeding even though less than a quorum of the Board of
Directors, or (b) if there are no such directors, or if such directors so
direct, by
independent counsel in a written opinion or (c) by the shareholders of the Corporation. To obtain indemnification under this Article X, any person referred to in Section 1, 2, 3 or 4 of this Article X shall submit to the Corporation a written request, including therewith such documents as are reasonably available to such person and are reasonably necessary to determine whether and to what extent such person is entitled to indemnification.
SECTION 6. ADVANCEMENT OF COSTS, CHARGES AND EXPENSES. Costs, charges and expenses (including attorneys' fees) incurred by or on behalf of a director or officer in defending a civil or criminal action, suit or proceeding referred to in Section 1 or 2 of this Article X shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding; PROVIDED, HOWEVER, that the payment of such costs, charges and expenses incurred by or on behalf of a director or officer in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of a written undertaking by or on behalf of the director or officer to repay all amounts so advanced in the event that it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Corporation as authorized in this Article X or by law. No security shall be required for such undertaking and such undertaking shall be accepted without reference to the recipient's financial ability to make repayment. The majority of the directors who were not parties to such action, suit or proceeding may, upon approval of such director or officer of the Corporation, authorize the Corporation's counsel to represent such person, in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding.
SECTION 7. PROCEDURE FOR INDEMNIFICATION. Any indemnification under Section 1, 2, 3 or 4 of this Article X or advancement of costs, charges and expenses under Section 6 of this Article X shall be made promptly, and in any event within sixty (60) days (except indemnification to be determined by shareholders which will be determined at the next annual meeting of shareholders), upon the written request of the director or officer. The right to indemnification or advancement of expenses as granted by this Article X shall be enforceable by the director, officer, employee or agent in any court of competent jurisdiction, if the Corporation denies such request, in whole or in part, or if no disposition of such request is made within sixty (60) days of the request. Such person's costs, charges and expenses incurred in connection with successfully establishing his or her right to indemnification or advancement, to the extent successful, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advancement of costs, charges and expenses under Section 6 of this Article X where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Section 1 or 2 of this Article X, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its directors, its independent legal counsel and its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 1 or 2 of this Article X, nor the fact that there has been an actual determination by the Corporation (including its directors, its independent legal counsel and its shareholders) that the claimant has not met such applicable standard of conduct, shall be a de-
fense to the action or create a presumption that the claimant has not met the applicable standard of conduct.
SECTION 8. SETTLEMENT. The Corporation shall not be obligated to reimburse the costs, charges and expenses of any settlement to which it has not agreed. If in any action, suit or proceeding (including any appeal) within the scope of Section 1 or 2 of this Article X, the person to be indemnified shall have unreasonably failed to enter into a settlement thereof offered or assented to by the opposing party or parties in such action, suit or proceeding, then, notwithstanding any other provision of this Article X, the indemnification obligation of the Corporation to such person in connection with such action, suit or proceeding shall not exceed the total of the amount at which settlement could have been made and the expenses incurred by or on behalf of such person prior to the time such settlement could reasonably have been effected.
SECTION 9. OTHER RIGHTS; CONTINUATION OF RIGHT TO INDEMNIFICATION; INDIVIDUAL CONTRACTS. The indemnification and advancement of costs, charges and expenses provided by or granted pursuant to this Article X shall not be deemed exclusive of any other rights to which those persons seeking indemnification or advancement of costs, charges and expenses may be entitled under law (common or statutory) or any Bylaw, agreement, policy of indemnification insurance or vote of shareholders or directors or otherwise, both as to action in his or her official capacity and as to action in any other capacity while holding office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the legatees, heirs, distributees, executors and administrators of such person. Nothing contained in this Article X shall be deemed to prohibit the Corporation from entering into, and the Corporation is specifically authorized to enter into, agreements with directors, officers, employees and agents providing indemnification rights and procedures different from those set forth herein. All rights to indemnification under this Article X shall be deemed to be a contract between the Corporation and each director, officer, employee or agent of the Corporation who serves or served in such capacity at any time while this Article X is in effect.
SECTION 10. SAVINGS CLAUSE. If this Article X or any portion shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify each director or officer, and may indemnify each employee or agent, of the Corporation as to any costs, charges, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of the Corporation), to the full extent permitted by any applicable portion of this Article X that shall not have been invalidated and to the full extent permitted by applicable law.
SECTION 11. INSURANCE. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the Corporation against any costs, charges or expenses, liability or loss incurred by such person in any such capacity, or arising out of his status as such, whether or
not the Corporation would have the power to indemnify such person against
such costs, charges or expenses, liability or loss under the Certificate
of Incorporation or applicable law; PROVIDED, HOWEVER, that such insurance
is available on acceptable terms as determined by a vote of a majority
of the Board. To the extent that any director, officer, employee or agent
is reimbursed by an insurance company under an indemnification insurance
policy for any costs, charges, expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement to the fullest extent
permitted by any applicable portion of this Article X, the Bylaws, any
agreement, the policy of indemnification insurance or otherwise, the
Corporation shall not be obligated to reimburse the person to be
indemnified in connection with such proceeding.
SECTION 12. DEFINITIONS. For purposes of this Article X, the
following terms shall have the following meanings:
(a) "The Corporation" shall include any constituent corporation or entity (including any constituent of a constituent) absorbed by way of an acquisition, consolidation, merger or otherwise, which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employee or agent so that any person who is or was a director, officer, employee or agent of such constituent corporation or entity, or is or was serving at the written request of such constituent corporation or entity as a director or officer of another corporation, entity, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article X with respect to the resulting or surviving corporation or entity as he would have with respect to such constituent corporation or entity if its separate existence had continued;
(b) "Other enterprises" shall include employee benefit plans, including, but not limited to, any employee benefit plan of the Corporation;
(c) "Director or officer" of the Corporation shall include any director, officer, partner or trustee who is or was or has agreed to serve at the request of the Corporation as a director, officer, partner or trustee of another corporation, partnership, joint venture, trust or other enterprise;
(d) "Serving at the request of the Corporation" shall include any service that imposes duties on, or involves services by a director, officer, employee or agent of the Corporation with respect to an employee benefit plan, its participants or beneficiaries, including acting as a fiduciary thereof;
(e) "Fines" shall include any penalties and any excise or similar taxes assessed on a person with respect to an employee benefit plan;
(f) To the fullest extent permitted by law, person shall be deemed to have acted in "good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful," if his or her action is based on the records or books of account of the Corporation or another enterprise, or on infor-
mation supplied to him or her by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise; and
(g) A person shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation," as referred to in Sections 1 and 2 of this Article X if such person acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan.
SECTION 13. SUBSEQUENT AMENDMENT AND SUBSEQUENT LEGISLATION. Neither the amendment, termination or repeal of this Article X or of relevant provisions of the General Corporation Law of the State of Delaware or any other applicable laws, nor the adoption of any provision of this Certificate of Incorporation or the Bylaws of the Corporation or of any statute inconsistent with this Article X shall eliminate, affect or diminish in any way the rights of any director, officer, employee or agent of the Corporation to indemnification under the provisions of this Article X with respect to any action, suit or proceeding arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal.
If the General Corporation Law of the State of Delaware is amended to expand further the indemnification permitted to directors and officers of the Corporation, then the Corporation shall indemnify such persons to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended.
ARTICLE XI
AMENDMENTS
SECTION 1. AMENDMENTS OF CERTIFICATE OF INCORPORATION. In addition to any affirmative vote required by applicable law and any voting rights granted to or held by holders of any Series of Preferred Stock, any alteration, amendment, repeal or rescission (collectively, any "Change") of any provision of this Certificate of Incorporation must be approved by a majority of the directors of the Corporation then in office and by the affirmative vote of the holders of a majority (or such greater proportion as may otherwise be required pursuant to any specific provision of this Certificate of Incorporation) of the total votes eligible to be cast by the holders of all outstanding shares of Capital Stock entitled to vote thereon; PROVIDED, HOWEVER, that if any such Change relates to Section 13 of Article X or Articles V, VI, VII or XI of this Certificate of Incorporation, such Change must also be approved either (i) by not less than a majority of the authorized number of directors and, if one or more Interested Shareholders (as defined in Article VIII hereof) exist, by not less than a majority of the Disinterested Directors (as defined in Article VIII hereof), or (ii) by the affirmative vote of the holders of not less than two-thirds of the total votes eligible to be cast by the holders of all out-
standing shares of Capital Stock entitled to vote thereon and, if the Change is proposed by or on behalf of an Interested Shareholder or a director who is an Affiliate or Associate (as such terms are defined in Article VIII hereof) of an Interested Shareholder, by the affirmative vote of the holders of not less than a majority of the total votes eligible to be cast by holders of all outstanding shares of Capital Stock entitled to vote thereon not beneficially owned by an Interested Shareholder or an Affiliate or Associate thereof. Subject to the foregoing, the Corporation reserves the right to amend this Certificate of Incorporation from time to time in any and as many respects as may be desired and as may be lawfully contained in an original certificate of incorporation filed at the time of making such amendment.
Except as may otherwise be provided in this Certificate of Incorporation, the Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, and to add or insert herein any other provisions authorized by the laws of the State of Delaware at the time in force, in the manner now or hereafter prescribed by law, and all rights, preferences and privileges of any nature conferred upon shareholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Section 1.
SECTION 2. AMENDMENTS OF BYLAWS. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to make, alter, amend, rescind or repeal from time to time any of the Bylaws of the Corporation in accordance with the terms thereof; PROVIDED, HOWEVER, that any Bylaw made by the Board may be altered, amended, rescinded, or repealed in accordance with the terms thereof by the holders of shares of Capital Stock entitled to vote thereon at any annual meeting or at any special meeting called for that purpose. Notwithstanding the foregoing, any provision of the Bylaws that contains a supermajority voting requirement shall only be altered, amended, rescinded, or repealed by a vote of the Board or holders of shares of Capital Stock entitled to vote thereon that is not less than the supermajority specified in such provision.
ARTICLE XII
NOTICES
The name and mailing address of the incorporator of this Corporation is:
The Dime Savings Bank of Williamsburgh
209 Havemeyer Street
Brooklyn, New York 11211
The Dime Savings Bank of Williamsburgh caused this Certificate of Incorporation to be signed by Vincent F. Palagiano, President of The Dime Savings Bank of Williamsburgh, and attested to by Michael P. Devine, Secretary of The Dime Savings Bank of Williamsburgh, this 11th day of December, 1995.
THE DIME SAVINGS BANK OF WILLIAMSBURGH
By: /S/ VINCENT F. PALAGIANO
---------------------------------------
Vincent F. Palagiano
President
Attest:
/S/ MICHAEL P. DEVINE
-------------------------------
Michael P. Devine
Secretary
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Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
DIME COMMUNITY BANCSHARES, INC.
Adopted on December 14, 1995
Amended and Restated on June 11, 1998
TABLE OF CONTENTS
PAGE
ARTICLE I OFFICES
Section 1. Registered Office 1
Section 2. Additional Offices 1
ARTICLE II SHAREHOLDERS
Section 1. Place of Meetings 1
Section 2. Annual Meetings 1
Section 3. Special Meetings 1
Section 4. Notice of Meetings 1
Section 5. Waiver of Notice 2
Section 6. Fixing of Record Date 2
Section 7. Quorum 2
Section 8. Conduct of Meetings 3
Section 9. Voting; Proxies 3
Section 10. Inspectors of Election 4
Section 11. Procedure for Nominations 4
Section 12. Substitution of Nominees 5
Section 13. New Business 6
ARTICLE III CAPITAL STOCK
Section 1. Certificates of Stock 7
Section 2. Transfer Agent and Registrar 7
Section 3. Registration and Transfer of Shares 7
Section 4. Lost, Destroyed and Mutilated Certificates 8
Section 5. Holder of Record 8
ARTICLE IV BOARD OF DIRECTORS
Section 1. Responsibilities; Number of Directors 8
Section 2. Qualifications 8
Section 3. Mandatory Retirement 9
Section 4. Regular and Annual Meetings 9
Section 5. Special Meetings 9
Section 6. Notice of Meetings; Waiver of Notice 9
Section 7. Conduct of Meetings 9
Section 8. Quorum and Voting Requirements 10
Section 9. Informal Action by Directors 10
Section 10. Resignation 10
Section 11. Vacancies 10
Section 13. Amendments Concerning the Board 10
ARTICLE V COMMITTEES
ii
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Section 1. Standing Committees 11
Section 2. Executive Committee 11
Section 3. Audit Committee 12
Section 4. Compensation Committee 12
Section 5. Nominating Committee 13
Section 6. Other Committees 13
ARTICLE VI OFFICERS
Section 1. Number 13
Section 2. Term of Office and Removal 14
Section 3. Chairman of the Board 14
Section 4. President 14
Section 5. Vice Presidents 15
Section 6. Secretary 15
Section 7. Chief Financial Officer 15
Section 8. Comptroller 15
Section 9. Treasurer 15
Section 10. Other Officers and Employees 15
Section 11. Compensation of Officers and Others 16
ARTICLE VII DIVIDENDS
16
ARTICLE VIII AMENDMENTS
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BYLAWS
OF
DIME COMMUNITY BANCSHARES, INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of Dime Community Bancshares, Inc. (the "Corporation") in the State of Delaware shall be in the City of Wilmington, County of New Castle.
SECTION 2. ADDITIONAL OFFICES. The Corporation may also have offices and places of business at such other places, within or without the State of Delaware, as the Board of Directors (the "Board") may from time to time designate or the business of the Corporation may require.
ARTICLE II
SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of shareholders of the Corporation shall be held at such place, within or without the State of Delaware, as may be fixed by the Board and designated in the notice of meeting. If no place is so fixed, they shall be held at the principal administrative office of the Corporation.
SECTION 2. ANNUAL MEETINGS. The annual meeting of shareholders of the Corporation for the election of directors and the transaction of any other business which may properly come before such meeting shall be held each year on a date and at a time to be designated by the Board.
SECTION 3. SPECIAL MEETINGS. Special meetings of shareholders, for any purpose, may be called at any time only by the Chairman of the Board or by resolution of at least three-fourths of the entire Board. Special meetings shall be held on the date and at the time and place as may be designated by the Board. At a special meeting, no business shall be transacted and no corporate action shall be taken other than that stated in the notice of meeting.
SECTION 4. NOTICE OF MEETINGS. Except as otherwise required by law, written notice stating the place, date and hour of any meeting of shareholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered to each shareholder of record entitled to vote at such meeting, either personally or by mail not
less than ten (10) nor more than sixty (60) days before the date of such
meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the U.S. mail, with postage thereon prepaid, addressed to
the shareholder at his or her address as it appears on the stock transfer
books or records of the Corporation as of the record date prescribed in
Section 6 of this Article II, or at such other address as the shareholder
shall have furnished in writing to the Secretary. Notice of any special
meeting shall indicate that the notice is being issued by or at the
direction of the person or persons calling such meeting. When
any meeting of shareholders, either annual or special, is adjourned to
another time or place, no notice of the adjourned meeting need be given,
other than an announcement at the meeting at which such adjournment is
taken giving the time and place to which the meeting is adjourned;
provided, however, that if the adjournment is for more than thirty (30)
days, or if after adjournment, the Board fixes a new record date for the
adjourned meeting, notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting.
SECTION 5. WAIVER OF NOTICE. Notice of any annual or special meeting need not be given to any shareholder who submits a signed waiver of notice of any meeting, in person or by proxy or by his or her duly authorized attorney-in-fact, whether before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, shall constitute a waiver of notice by such shareholder, except where a shareholder attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or in order to make a determination of shareholders for any other proper purpose, the Board shall fix a date as the record date for any such determination of shareholders, which date shall not precede the date upon which the resolution fixing the record date is adopted by the Board. Such date in any case shall be not more than sixty (60) days and, in the case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 6, such determination shall, unless otherwise provided by the Board, also apply to any adjournment thereof. If no record date is fixed, (a) the record date for determining shareholders entitled to notice of or vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which the notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and (b) the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
SECTION 7. QUORUM. The holders of record of a majority of the total number of votes eligible to be cast in the election of directors generally by the holders of the outstanding shares of the capital stock of the Corporation entitled to vote thereat, represented
in person or by proxy, shall constitute a quorum for the transaction of business at a meeting of shareholders, except as otherwise provided by law, these Bylaws or the Certificate of Incorporation. If less than a majority of such total number of votes are represented at a meeting, a majority of the number of votes so represented may adjourn the meeting from time to time without further notice, PROVIDED, that if such adjournment is for more than thirty days, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. At such adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called. When a quorum is once present to organize a meeting of shareholders, such quorum is not broken by the subsequent withdrawal of any shareholders.
SECTION 8. CONDUCT OF MEETINGS. The Chairman of the Board shall serve as chairman at all meetings of the shareholders or, if the Chairman of the Board is absent or otherwise unable to so serve, the President shall serve as chairman at any meeting of shareholders held in such absence. If both the Chairman of the Board and the President are absent or otherwise unable to so serve, such other person as shall be appointed by a majority of the entire Board of Directors shall serve as chairman at any meeting of shareholders held in such absence. The Secretary or, in his or her absence, such other person as the chairman of the meeting shall appoint, shall serve as secretary of the meeting. The chairman of the meeting shall conduct all meetings of the shareholders in accordance with the best interests of the Corporation and shall have the authority and discretion to establish reasonable procedural rules for the conduct of such meetings, including such regulation of the manner of voting and the conduct of discussion as he or she shall deem appropriate.
SECTION 9. VOTING; PROXIES. Each shareholder entitled to vote at any meeting may vote either in person or by proxy. Unless otherwise specified in the Certificate of Incorporation or in a resolution, or resolutions, of the Board providing for the issuance of preferred stock, each shareholder entitled to vote shall be entitled to one vote for each share of capital stock registered in his or her name on the transfer books or records of the Corporation. Each shareholder entitled to vote may authorize another person or persons to act for him or her by proxy. All proxies shall be in writing, signed by the shareholder or by his or her duly authorized attorney-in-fact, and shall be filed with the Secretary before being voted. No proxy shall be valid after three (3) years from the date of its execution unless otherwise provided in the proxy. The attendance at any meeting by a shareholder who shall have previously given a proxy applicable thereto shall not, as such, have the effect of revoking the proxy. The Corporation may treat any duly executed proxy as not revoked and in full force and effect until it receives a duly executed instrument revoking it, or a duly executed proxy bearing a later date. If ownership of a share of voting stock of the Corporation stands in the name of two or more persons, in the absence of written directions to the Corporation to the contrary, any one or more of such shareholders may cast all votes to which such ownership is entitled. If an attempt is made to cast conflicting votes by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such stock and present at such meeting. If such conflicting votes are evenly split on any particular matter, each faction may vote the securities in question
proportionally, or any person voting the shares, or a beneficiary, if any, may apply to the Court of Chancery or such other court as may have jurisdiction to appoint an additional person to act with the persons so voting the shares, which shall then be voted as determined by a majority of such persons and the person appointed by the Court. Except for the election of directors or as otherwise provided by law, the Certificate of Incorporation or these Bylaws, at all meetings of shareholders, all matters shall be determined by a vote of the holders of a majority of the number of votes eligible to be cast by the holders of the outstanding shares of capital stock of the Corporation present and entitled to vote thereat. Directors shall, except as otherwise required by law, these Bylaws or the Certificate of Incorporation, be elected by a plurality of the votes cast by each class of shares entitled to vote at a meeting of shareholders, present and entitled to vote in the election.
SECTION 10. INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the Board shall appoint one or more persons, other than officers, directors or nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. Such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the meeting shall make such appointment at the meeting. If any person appointed as inspector fails to appear or fails or refuses to act at the meeting, the vacancy so created may be filled by appointment by the Board in advance of the meeting or at the meeting by the chairman of the meeting. The duties of the inspectors of election shall include determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, receiving votes, ballots or consents, hearing and deciding all challenges and questions arising in connection with the right to vote, counting and tabulating all votes, ballots or consents, determining the results, and doing such acts as are proper to the conduct of the election or the vote with fairness to all shareholders. Any report or certificate made by them shall be PRIMA FACIE evidence of the facts stated and of the vote as certified by them. Each inspector shall be entitled to a reasonable compensation for his or her services, to be paid by the Corporation.
SECTION 11. PROCEDURE FOR NOMINATIONS. Subject to the
provisions hereof, the Nominating Committee of the Board shall select
nominees for election as directors. Except in the case of a nominee
substituted as a result of the death, incapacity, withdrawal or other
inability to serve of a nominee, the Nominating Committee shall deliver
written nominations to the Secretary at least sixty (60) days prior to
the date of the annual meeting. Provided the Nominating Committee makes
such nominations, no nominations for directors except those made by the
Nominating Committee shall be voted upon at the annual meeting of
shareholders unless other nominations by shareholders are made in
accordance with the provisions of this Section 11. Nominations of
individuals for election to the Board at an annual meeting of
shareholders may be made by any shareholder of record of the Corporation
entitled to vote for the election of directors at such meeting who
provides timely notice in writing to the Secretary as set forth in this
Section 11. To be timely, a shareholder's notice must be delivered to or
received by the Secretary not later than the following dates: (i) with
respect to an election of directors to be held at an annual meeting of
shareholders, sixty (60) days in advance of such meeting if such meeting
is to be held on a day which is within thirty (30) days preceding the
anniversary of the previous year's annual meeting, or ninety (90) days in advance of such meeting if such meeting is to be held on or after the anniversary of the previous year's annual meeting; and (ii) with respect to an election to be held at an annual meeting of shareholders held at a time other than within the time periods set forth in the immediately preceding clause (i), or at a special meeting of shareholders for the election of directors, the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to shareholders. For purposes of this Section 11, notice shall be deemed to first be given to shareholders when disclosure of such date of the meeting of shareholders is first made in a press release reported to Dow Jones News Services, Associated Press or comparable national news service, or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) such person's written consent to serve as a director, if elected, and (iv) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission (whether or not the Corporation is then subject to such rules); and (b) as to the shareholder giving the notice (i) the name and address of such shareholder, (ii) the class and number of shares of the Corporation which are owned of record by such shareholder and the dates upon which he or she acquired such shares, (iii) a description of all arrangements or understandings between the shareholder and nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the shareholder, and (iv) the identification of any person employed, retained, or to be compensated by the shareholder submitting the nomination or by the person nominated, or any person acting on his or her behalf to make solicitations or recommendations to shareholders for the purpose of assisting in the election of such director, and a brief description of the terms of such employment, retainer or arrangement for compensation. At the request of the Board, any person nominated by the Board for election as a director shall furnish to the Secretary that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee together with the required written consent. No person shall be elected as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 11.
The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not properly brought before the meeting in accordance with the provisions hereof and, if he should so determine, he shall declare to the meeting that such nomination was not properly brought before the meeting and shall not be considered.
SECTION 12. SUBSTITUTION OF NOMINEES. In the event that a person is validly designated as a nominee in accordance with Section 11 of this Article II and shall thereafter become unwilling or unable to stand for election to the Board, the Nominating Committee may designate a substitute nominee upon delivery, not fewer than five (5) days prior to the date of the meeting for the election of such nominee, of a written notice to the Secretary setting forth
such information regarding such substitute nominee as would have been required to be delivered to the Secretary pursuant to Section 11 of this Article II had such substitute nominee been initially proposed as a nominee. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such substituted nominee.
SECTION 13. NEW BUSINESS. Any new business to be taken up at
the annual meeting at the request of the Chairman of the Board, the
President or by resolution of at least three-fourths of the entire Board
shall be stated in writing and filed with the Secretary at least fifteen
(15) days before the date of the annual meeting, and all business so
stated, proposed and filed shall be considered at the annual meeting,
but, except as provided in this Section 13, no other proposal shall be
acted upon at the annual meeting. Any proposal offered by any
shareholder may be made at the annual meeting and the same may be
discussed and considered, but unless properly brought before the meeting
such proposal shall not be acted upon at the meeting. For a proposal to
be properly brought before an annual meeting by a shareholder, the
shareholder must be a shareholder of record and have given timely notice
thereof in writing to the Secretary. To be timely, a shareholder's
notice must be delivered to or received by the Secretary not later than
the following dates: (i) with respect to an annual meeting of
shareholders, sixty (60) days in advance of such meeting if such meeting
is to be held on a day which is within thirty (30) days preceding the
anniversary of the previous year's annual meeting, or ninety (90) days in
advance of such meeting if such meeting is to be held on or after the
anniversary of the previous year's annual meeting; and (ii) with respect
to an annual meeting of shareholders held at a time other than within the
time periods set forth in the immediately preceding clause (i), the close
of business on the tenth (10th) day following the date on which notice of
such meeting is first given to shareholders. For purposes of this
Section 13, notice shall be deemed to first be given to shareholders when
disclosure of such date of the meeting of shareholders is first made in a
press release reported to Dow Jones News Services, Associated Press or
comparable national news service, or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as
amended. A shareholder's notice to the Secretary shall set forth as to
the matter the shareholder proposes to bring before the annual meeting
(a) a brief description of the proposal desired to be brought before the
annual meeting; (b) the name and address of the shareholder proposing
such business; (c) the class and number of shares of the Corporation
which are owned of record by the shareholder and the dates upon which he
or she acquired such shares; (d) the identification of any person
employed, retained, or to be compensated by the shareholder submitting
the proposal, or any person acting on his or her behalf, to make
solicitations or recommendations to shareholders for the purpose of
assisting in the passage of such proposal, and a brief description of the
terms of such employment, retainer or arrangement for compensation; and
(e) such other information regarding such proposal as would be required
to be included in a proxy statement filed pursuant to the proxy rules of
the Securities and Exchange Commission or required to be delivered to the
Corporation pursuant to the proxy rules of the Securities and Exchange
Commission (whether or not the Corporation is then subject to such
rules). This provision shall not prevent the consideration and approval
or disapproval at an annual meeting of reports of officers, directors and
committees of the Board or the management of the Corporation, but
in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. This provision shall not constitute a waiver of any right of the Corporation under the proxy rules of the Securities and Exchange Commission or any other rule or regulation to omit a shareholder's proposal from the Corporation's proxy materials.
The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that any new business was not properly brought before the meeting in accordance with the provisions hereof and, if he should so determine, he shall declare to the meeting that such new business was not properly brought before the meeting and shall not be considered.
ARTICLE III
CAPITAL STOCK
SECTION 1. CERTIFICATES OF STOCK. Certificates representing shares of stock shall be in such form as shall be determined by the Board. Each certificate shall state that the Corporation will furnish to any shareholder upon request and without charge a statement of the powers, designations, preferences and relative, participating, optional or other special rights of the shares of each class or series of stock and the qualifications or restrictions of such preferences and/or rights, or shall set forth such statement on the certificate itself. The certificates shall be numbered in the order of their issue and entered in the books of the Corporation or its transfer agent or agents as they are issued. Each certificate shall state the registered holder's name and the number and class of shares, and shall be signed by the Chairman of the Board or the President, and the Secretary or any Assistant Secretary, and may, but need not, bear the seal of the Corporation or a facsimile thereof. Any or all of the signatures on the certificates may be facsimiles. In case any officer who shall have signed any such certificate shall cease to be such officer of the Corporation, whether because of death, resignation or otherwise, before such certificate shall have been delivered by the Corporation, such certificate may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates had not ceased to be such officer or officers of the Corporation.
SECTION 2. TRANSFER AGENT AND REGISTRAR. The Board shall have the power to appoint one or more Transfer Agents and Registrars for the transfer and registration of certificates of stock of any class, and may require that stock certificates be countersigned and registered by one or more of such Transfer Agents and Registrars.
SECTION 3. REGISTRATION AND TRANSFER OF SHARES. Subject to the provisions of the Certificate of Incorporation of the Corporation, the name of each person owning a share of the capital stock of the Corporation shall be entered on the books of the Corporation together with the number of shares held by him or her, the numbers of the certificates covering such shares and the dates of issue of such certificates. Subject to the provisions of the Certificate of Incorporation of the Corporation, the shares of stock of the Corporation shall be transferable on the books of the Corporation by the holders thereof in person, or by their duly authorized
attorneys or legal representatives, on surrender and cancellation of certificates for a like number of shares, accompanied by an assignment or power of transfer endorsed thereon or attached thereto, duly executed, with such guarantee or proof of the authenticity of the signature as the Corporation or its agents may reasonably require and with proper evidence of payment of any applicable transfer taxes. Subject to the provisions of the Certificate of Incorporation of the Corporation, a record shall be made of each transfer.
SECTION 4. LOST, DESTROYED AND MUTILATED CERTIFICATES. The holder of any shares of stock of the Corporation shall immediately notify the Corporation of any loss, theft, destruction or mutilation of the certificates therefor. The Corporation may issue, or cause to be issued, a new certificate of stock in the place of any certificate theretofore issued by it alleged to have been lost, stolen or destroyed upon evidence satisfactory to the Corporation of the loss, theft or destruction of the certificate, and in the case of mutilation, the surrender of the mutilated certificate. The Corporation may, in its discretion, require the owner of the lost, stolen or destroyed certificate, or his or her legal representatives, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft, destruction or mutilation of any such certificate and the issuance of such new certificate, or may refer such owner to such remedy or remedies as he or she may have under the laws of the State of Delaware.
SECTION 5. HOLDER OF RECORD. Subject to the provisions of the Certificate of Incorporation of the Corporation, the Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 1. RESPONSIBILITIES; NUMBER OF DIRECTORS. The business
and affairs of the Corporation shall be under the direction of the Board.
The Board shall consist of not less than five (5) nor more than fifteen
(15) directors. Within the foregoing limits, the number of directors
shall be determined only by resolution of the Board. A minimum of three
(3) directors shall be persons other than officers or employees of the
Corporation or its subsidiaries and shall not have a relationship which,
in the opinion of the Board (exclusive of such persons), could interfere
with the exercise of independent judgment in carrying out the
responsibilities of a director. No more than two directors shall be
officers or employees of the Corporation or its subsidiaries.
SECTION 2. QUALIFICATIONS. Each director shall be at least
eighteen (18) years of age.
SECTION 3. MANDATORY RETIREMENT. No director shall serve
beyond the end of the annual meeting of the Corporation coincident with
or immediately following the date on
which his or her seventy-fifth (75th) birthday occurs.
SECTION 4. REGULAR AND ANNUAL MEETINGS. An annual meeting of the Board for the election of officers shall be held, without notice other than these Bylaws, immediately after, and at the same place as, the annual meeting of the shareholders, or, with notice, at such other time or place as the Board may fix by resolution. The Board may provide, by resolution, the time and place, within or without the State of Delaware, for the holding of regular meetings of the Board without notice other than such resolution.
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board may be called for any purpose at any time by or at the request of the Chairman of the Board or the President. Special meetings of the Board shall also be called by the Secretary upon the written request, stating the purpose or purposes of the meeting, of at least sixty percent (60%) of the directors then in office, but in any event not less than five (5) directors. The persons authorized to call special meetings of the Board shall give notice of such meetings in the manner prescribed by these Bylaws and may fix any place, within or without the Corporation's regular business area, as the place for holding any special meeting of the Board called by such persons. No business shall be conducted at a special meeting other than that specified in the notice of meeting.
SECTION 6. NOTICE OF MEETINGS; WAIVER OF NOTICE. Except as
otherwise provided in Section 4 of this Article IV, at least twenty-four
(24) hours notice of meetings shall be given to each director if given in
person or by telephone, telegraph, telex, facsimile or other electronic
transmission and at least five (5) days notice of meetings shall be given
if given in writing and delivered by courier or by postage prepaid mail.
The purpose of any special meeting shall be stated in the notice. Such
notice shall be deemed given when sent or given to any mail or courier
service or company providing electronic transmission service. Any
director may waive notice of any meeting by submitting a signed waiver of
notice with the Secretary, whether before or after the meeting. The
attendance of a director at a meeting shall constitute a waiver of notice
of such meeting, except where a director attends a meeting for the
express purpose of objecting at the beginning of the meeting to the
transaction of any business because the meeting is not lawfully called or
convened.
SECTION 7. CONDUCT OF MEETINGS. Meetings of the Board shall be presided over by the Chairman of the Board or such other director or officer as the Chairman of the Board shall designate, and in the absence or incapacity of the Chairman of the Board, the presiding officer shall be the then senior member of the Board in terms of length of service on the Board (which length of service shall include length of service on the Board of Directors of The Dime Savings Bank of Williamsburgh and any predecessors thereto). The Secretary or, in his absence, a person appointed by the Chairman of the Board (or other presiding person), shall act as secretary of the meeting. The Chairman of the Board (or other person presiding) shall conduct all meetings of the Board in accordance with the best interests of the Corporation and shall have the authority and discretion to establish reasonable procedural rules for the conduct of Board meetings. At the discretion of the Chairman of the Board, any one or more directors may participate in a meeting of the Board or a committee of the Board by means of a
conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at any such meeting.
SECTION 8. QUORUM AND VOTING REQUIREMENTS. A quorum at any meeting of the Board shall consist of not less than a majority of the directors then in office or such greater number as shall be required by law, these Bylaws or the Certificate of Incorporation, but not less than one-third (1/3) of the total number. If less than a required quorum is present, the majority of those directors present shall adjourn the meeting to another time and place without further notice. At such adjourned meeting at which a quorum shall be represented, any business may be transacted that might have been transacted at the meeting as originally noticed. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, a majority vote of the directors present at a meeting, if a quorum is present, shall constitute an act of the Board.
SECTION 9. INFORMAL ACTION BY DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or such committee.
SECTION 10. RESIGNATION. Any director may resign at any time by sending a written notice of such resignation to the principal office of the Corporation addressed to the Chairman of the Board or the President. Unless otherwise specified therein, such resignation shall take effect upon receipt thereof.
SECTION 11. VACANCIES. To the extent not inconsistent with the Certificate of Incorporation and subject to the limitations prescribed by law and the rights of holders of Preferred Stock, vacancies in the office of director, including vacancies created by newly created directorships resulting from an increase in the number of directors, shall be filled only by a vote of a majority of the directors then holding office, whether or not a quorum, at any regular or special meeting of the Board called for that purpose. Subject to the rights of holders of Preferred Stock, no person shall be so elected a director unless nominated by the Nominating Committee. Subject to the rights of holders of Preferred Stock, any director so elected shall serve for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until his or her successor shall be elected and qualified.
SECTION 12. COMPENSATION. From time to time, as the Board
deems necessary, the Board shall fix the compensation of directors, and
officers of the Corporation in such one or more forms as the Board may
determine.
SECTION 13. AMENDMENTS CONCERNING THE BOARD. The number,
retirement age, and other restrictions and qualifications for directors
of the Corporation as set forth in
these Bylaws may be altered only by a vote, in addition to any vote required by law, of two-thirds of the entire Board or by the affirmative vote of the holders of record of not less than eighty percent (80%) of the total votes eligible to be cast by holders of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors at a meeting of the shareholders called for that purpose.
ARTICLE V
COMMITTEES
SECTION 1. STANDING COMMITTEES. At each annual meeting of the Board, the directors shall designate from their own number, by resolution adopted by a majority of the entire Board, the following committees:
(a) Executive Committee
(b) Audit Committee
(c) Compensation Committee
(d) Nominating Committee
which shall be standing committees of the Board. The Board shall appoint a director to fill any vacancy on any committee of the Board. The members of the committees shall serve at the pleasure of the Board.
SECTION 2. EXECUTIVE COMMITTEE. There shall be an Executive Committee of the Board consisting of at least six (6) members, as shall be appointed by Board resolution or these Bylaws. The Chief Executive Officer and the President shall be ex-officio members of the Executive Committee, with power to vote on all matters so long as they are also directors of the Corporation. Four (4) members of the Executive Committee, at least three (3) of whom must be non-officer directors, or such other number of members as the Board of Directors may establish by resolution, shall constitute a quorum for the transaction of business. The vote of a majority of members present at any meeting including the presiding member, who shall be eligible to vote, shall constitute the action of the Executive Committee.
The Chairman of the Board or such other director or officer as the Chairman of the Board shall designate shall serve as chairman of the Executive Committee or, if the office of the Chairman of the Board is vacant, the President shall serve as chairman of the Executive Committee. In the absence of the chairman of the Executive Committee, the committee shall designate, from among its membership present, a person to preside at any meeting held in such absence. The Executive Committee shall designate, from its membership or otherwise, a secretary who shall report to the Board at its next regular meeting all proceedings and actions taken by the Executive Committee. The Executive Committee shall meet as necessary at the
call of the Chairman of the Board, the President or at the call of a majority of the members of the Executive Committee.
The Executive Committee shall, to the extent not inconsistent with law, these Bylaws or the Certificate of Incorporation, exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation in the intervals between the meetings of the Board.
SECTION 3. AUDIT COMMITTEE. The Audit Committee shall consist of at least three (3) members whose background and experience are financial and/or business management related, none of whom shall be an officer or salaried employee of the Corporation or its subsidiaries, an attorney who receives a fee or other compensation for legal services rendered to the Corporation or any other individual having a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. At any regular meeting of the Board, any director who is otherwise eligible to serve on the Audit Committee may be elected to fill a vacancy that has occurred on the Audit Committee. The Board shall designate one member of the committee to serve as chairman of the committee. The Audit Committee shall meet annually, at the call of the chairman of the committee and may hold such additional meetings as the chairman of the committee may deem necessary, to examine, or cause to be examined, the records and affairs of the Corporation to determine its true financial condition, and shall present a report of examination to the Board at the Board's next regular meeting following the meeting of the Audit Committee. The committee shall appoint, from its membership or otherwise, a secretary who shall cause to be kept written minutes of all meetings of the committee. The Audit Committee shall make, or cause to be made, such other examinations as it may deem advisable or whenever so directed by the Board and shall report thereon in writing at a regular meeting of the Board. The Audit Committee shall make recommendations to the Board in relation to the employment of accountants and independent auditors and arrange for such other assistance as it may deem necessary or desirable. The Audit Committee shall review and evaluate the procedures and performance of the Corporation's internal auditing staff. A quorum shall consist of at least one-third of the members of the committee, and in no event less than two (2) members of the committee.
SECTION 4. COMPENSATION COMMITTEE. The Compensation Committee shall consist of at least three (3) members, none of whom shall be an officer or salaried employee of the Corporation or its subsidiaries as shall be appointed by Board resolution or these Bylaws. In addition, the Chief Executive Officer and the President shall be ex-officio members of the Compensation Committee without any power to vote. The Board shall designate one member of the committee to serve as chairman of the Compensation Committee, who shall have the authority to adopt and establish procedural rules for the conduct of all meetings of the committee.
The committee shall meet annually at the call of the chairman of the committee, and may hold such additional meetings as the Chairman of the Board may deem necessary. A
quorum shall consist of at least one-third of the voting members of the Committee, and in no event less than two (2) voting members of the committee. The vote of a majority of the voting members present at any meeting, including the chairman of the committee who shall be eligible to vote, shall constitute the action of the Compensation Committee. The committee shall appoint, from its membership or otherwise, a secretary who shall cause to be kept written minutes of all meetings of the committee.
The Compensation Committee shall be responsible for overseeing the development, implementation and conduct of the Corporation's employment and personnel policies, notices and procedures, including the administration of the Corporation's compensation and benefit programs.
SECTION 5. NOMINATING COMMITTEE. The Nominating Committee shall consist of at least three (3) members, none of whom shall be an officer or a salaried employee of the Corporation or its subsidiaries. In addition, the Chief Executive Officer and the President shall be ex- officio members of the Nominating Committee, with power to vote on all matters so long as they are also directors of the Corporation. Notwithstanding the foregoing, no director shall serve on the Nominating Committee in any capacity in any year during which such director's term as a director is scheduled to expire. The Nominating Committee shall review qualifications of and interview candidates for the Board and shall make nominations for election of board members in accordance with the provisions of these Bylaws in relation to those suggestions to the Board. A quorum shall consist of at least one-third of the members of the Committee, and in no event less than two (2) members of the committee.
SECTION 6. OTHER COMMITTEES. The Board may by resolution adopted by a majority of the entire Board at any meeting authorize such other committees as from time to time it may deem necessary or appropriate for the conduct of the business of the Corporation. The members of each committee so authorized shall be appointed by the Board from members of the Board and/or employees of the Corporation. In addition, the Chief Executive Officer and the President shall be ex- officio members of each such committee. Each such committee shall exercise such powers as may be assigned by the Board to the extent not inconsistent with law, these Bylaws or the Certificate of Incorporation.
ARTICLE VI
OFFICERS
SECTION 1. NUMBER. The Board shall, at each annual meeting,
elect a Chairman of the Board, a Chief Executive Officer, a President, a
Secretary and such other officers as the Board from time to time may deem
necessary or the business of the Corporation may require. Any number of
offices may be held by the same person except that no person may
simultaneously hold the offices of President and Secretary.
The election of all officers shall be by a majority of the
Board. If such election is not held at the meeting held annually for the
election of officers, such officers may be so elected at any subsequent
regular meeting or at a special meeting called for that purpose, in the
same manner above provided. Each person elected shall have such authority, bear such title and perform such duties as provided in these Bylaws and as the Board may prescribe from time to time. All officers elected or appointed by the Board shall assume their duties immediately upon their election and shall hold office at the pleasure of the Board. Whenever a vacancy occurs among the officers, it may be filled at any regular or special meeting called for that purpose, in the same manner as above provided.
SECTION 2. TERM OF OFFICE AND REMOVAL. Each officer shall serve until his or her successor is elected and duly qualified, the office is abolished, or he or she is removed. Except for the Chairman of the Board, the Chief Executive Officer or the President, any officer may be removed at any regular meeting of the Board with or without cause by an affirmative vote of a majority of the entire Board. The Board may remove the Chairman of the Board, the Chief Executive Officer or the President at any time, with or without cause, only by a vote of two- thirds of the non-officer directors then holding office at any regular or special meeting of the Board called for that purpose.
SECTION 3. CHAIRMAN OF THE BOARD. The Chairman shall be the Chief Executive Officer of the Corporation and shall, subject to the direction of the Board, oversee all of the major activities of the Corporation and its subsidiaries and be responsible for assuring that the policy decisions of the Board are implemented as formulated. He shall be responsible, in consultation with such Officers and members of the Board as he deems appropriate, for planning the growth of the Corporation. The Chairman shall be responsible for shareholder relations, relations with investments bankers, other similar financial institutions and financial advisors and shall be empowered to designate Officers of the Corporation and its subsidiaries to assist in such activities. The Chairman shall be principally responsible for exploring opportunities for mergers, acquisitions and new business. The Chairman shall preside at all meetings of the shareholders; preside at all meetings of the Board and the Executive Committee; make recommendations to the Board regarding appointments to all committees; and sign instruments in the name of the Corporation. The Chairman will be a member ex-officio, with power to vote on all matters, of all committees of the Board except the Audit Committee; in his capacity as an ex-officio member of the Compensation Committee, he will be without any power to vote.
In the absence or disability of the Chairman of the Board, the President or such other person who the Board shall designate, shall exercise the powers and perform the duties, which otherwise would fall upon the Chairman of the Board.
SECTION 4. PRESIDENT. The President shall, subject to the direction of the Board and the Chief Executive Officer, be the Chief Operating Officer of the Corporation and shall assist the Chief Executive Officer in planning the growth of the Corporation, relations with investment bankers, other similar financial institutions and financial advisors. The President, shall under authority given to him, sign instruments in the name of the Corporation. The President shall have the general supervision and direction of all of the Corporation's officers and personnel, subject to and consistent with policies enunciated by the Board. The President
shall have such other powers as may be assigned to him by the Board, its committees or the Chief Executive Officer. The President will be a member ex-officio, with power to vote on all matters, of all Committees of the Board, except the Audit Committee; in his capacity as ex-officio member of the Compensation Committee he will be without any power to vote.
SECTION 5. VICE PRESIDENTS. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents may be appointed by the Board of Directors to perform such duties as may be prescribed by these Bylaws, the Board, the Chief Executive Officer or the President as permitted by the Board.
SECTION 6. SECRETARY. The Secretary shall attend all meetings of the Board and of the shareholders, and shall record, or cause to be recorded, all votes and minutes of all proceedings of the Board and of the shareholders in a book or books to be kept for that purpose. The Secretary shall perform such executive and administrative duties as may be assigned by the Board, the Chairman of the Board or the President. The Secretary shall have charge of the seal of the Corporation, shall submit such reports and statements as may be required by law or by the Board, shall conduct all correspondence relating to the Board and its proceedings and shall have such other powers and duties as are generally incident to the office of Secretary and as may be assigned to him or her by the Board, the Chairman of the Board or the President.
SECTION 7. CHIEF FINANCIAL OFFICER. The Chief Financial Officer of the Corporation shall have the responsibility for supervising the Comptroller and the Treasurer in maintaining the financial records of the Corporation. He or she shall also supervise the budgeting and forecasting process. He or she shall make such disbursements of the funds of the Corporation as are authorized and monitor the accounts of all such transactions and of the financial condition of the Corporation. The Chief Financial Officer shall also perform such other duties as the Board of Directors may from time to time prescribe.
SECTION 8. COMPTROLLER. The Comptroller shall be the chief accounting officer of the Corporation and shall be responsible for the maintenance of adequate systems and records. The Comptroller shall keep a record of all assets, liabilities, receipts, disbursements, and other financial transactions, and shall see that all expenditures are made in accordance with procedures duly established from time to time by the Board. The Comptroller shall make such reports as may be required by the Board or as are required by law.
SECTION 9. TREASURER. The Treasurer shall be responsible for
all of the money management and investment functions of the Corporation.
Maintenance of relationships with correspondent banks, securities brokers
and safekeeping agents shall be the responsibility of the Treasurer. The
Treasurer shall make such reports as may be required by the Board or as
are required by law.
SECTION 10. OTHER OFFICERS AND EMPLOYEES. Other officers and
employees appointed by the Board shall have such authority and shall
perform such duties as may be assigned to them, from time to time, by the
Board or the Chief Executive Officer or the
President.
SECTION 11. COMPENSATION OF OFFICERS AND OTHERS. The compensation of all officers and employees shall be fixed from time to time by the Board, or by any committee or officer authorized by the Board to do so, upon the recommendation and report by the Compensation Committee. The compensation of agents shall be fixed by the Board, or by any committee or officer authorized by the Board to do so, upon the recommendation and report of the Compensation Committee.
ARTICLE VII
DIVIDENDS
The Board shall have the power, subject to the provisions of law and the requirements of the Certificate of Incorporation, to declare and pay dividends out of surplus (or, if no surplus exists, out of net profits of the Corporation, for the fiscal year in which the dividend is declared and/or the preceding fiscal year, except where there is an impairment of capital stock), to pay such dividends to the shareholders in cash, in property, or in shares of the capital stock of the Corporation, and to fix the date or dates for the payment of such dividends.
ARTICLE VIII
AMENDMENTS
These Bylaws, except as provided by applicable law or the
Certificate of Incorporation, or as otherwise set forth in these Bylaws,
may be amended or repealed at any regular meeting of the entire Board by
the vote of two-thirds of the Board; provided, however, that (a) a notice
specifying the change or amendment shall have been given at a previous
regular meeting and entered in the minutes of the Board; (b) a written
statement describing the change or amendment shall be made in the notice
mailed to the directors of the meeting at which the change or amendment
shall be acted upon; and (c) any Bylaw made by the Board may be altered,
amended, res
cinded, or repealed by the holders of shares of capital stock entitled to
vote thereon at any annual meeting or at any special meeting called for
that purpose in accordance with the percentage requirements set forth in
the Certificate of Incorporation and/or these Bylaws. Notwithstanding
the foregoing, any provision of these Bylaws that contains a
supermajority voting requirement shall only be altered, amended,
rescinded, or repealed by a vote of the Board or holders of capital stock
entitled to vote thereon that is not less than the supermajority
specified in such provision.
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and Notes thereto appearing elsewhere herein.
At or for the fiscal years ended June 30, 1998 1997 1996 <F1> 1995 1994
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SELECTED FINANCIAL CONDITION DATA:
Total assets <F2> $1,623,926 $1,315,026 $1,371,821 $662,739 $646,458
Loans, net <F3> 938,046 739,858 575,874 424,680 427,960
Mortgage-backed securities <F4> 410,589 308,525 209,941 91,548 94,356
Investment securities <F2> <F4> 174,551 168,596 392,450 101,695 86,686
Federal funds sold <F2> 9,329 18,902 115,130 17,809 7,029
Goodwill 24,028 26,433 28,438 - -
Deposits 1,038,342 963,395 950,114 554,841 546,761
Borrowings 360,106 139,543 27,708 17,820 17,871
Stockholders' equity <F5> 186,349 190,889 213,071 77,067 67,919
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Tangible Stockholders' equity <F5> 159,558 162,361 184,188 76,321 67,646
SELECTED OPERATING DATA:
Interest income $106,464 $89,030 $52,619 $49,223 $49,821
Interest expense on deposits and
borrowings 56,935 41,564 23,516 18,946 17,594
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Net interest income 49,529 47,466 29,103 30,277 32,227
Provision for losses 1,635 4,200 2,979 2,950 4,105
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Net interest income after provision for
loan losses 47,894 43,266 26,124 27,327 28,122
Non-interest income 7,007 4,133 1,375 1,773 2,267
Non-interest expense <F6> 29,937 27,492 14,021 14,053 12,714
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Income before income tax expense and
cumulative effect of changes in
accounting principle 24,964 19,907 13,478 15,047 17,675
Income tax expense <F7> 11,866 7,591 6,181 6,621 8,211
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Income before cumulative effect of
changes in accounting principle 13,098 12,316 7,297 8,426 9,464
Cumulative effect on prior years of
changing to a different method of
accounting for:
Income taxes <F8> - - - - (383)
Postretirement benefits other than
pensions <F9> - - (1,032) - -
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Net income <F10> $13,098 $12,316 $6,265 $8,426 $9,081
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<F1> Since the acquisition of Conestoga was completed on June 26, 1996, its
contribution to the Company's earnings and the effect upon average
balance computations for the fiscal year ended June 30, 1996 were not
material.
<F2> At June 30, 1996, investment securities and federal funds sold include
125.0 million and $6.1 million, respectively, of excess proceeds
resulting from the oversubscription to the Company's initial public
offering. The excess proceeds were refunded on July 1, 1996.
<F3> Loans, net, represents gross loans less net deferred loan fees and
allowance for loan losses.
<F4> Amount includes investment in Federal Home Loan Bank of New York
("FHLBNY") capital stock.
<F5> Stockholders' Equity and tangible stockholders' equity increased from
June 30, 1995 to June 30, 1996 primarily due to the Company's initial
public offering.
<F6> Excluding a non-recurring charge of $2.0 million related to the
recapitalization of the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation ("FDIC") , non-interest
expense was $25.5 million during the year ended June 30, 1997.
<F7> Excluding non-recurring New York State and New York City income tax
recoveries of $1.9 million and $1.0 million, respectively, income tax
expense was $10.5 million during the fiscal year ended June 30, 1997.
<F8> Pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," ('SFAS 109"), on July 1, 1993, the Bank
changed prospectively to the deferred method of accounting for income
taxes. The effect of the adoption of this standard is reflected in the
selected operating data as the cumulative effect of adopting a change in
accounting principles.
<F9>The Bank adopted Statement of Financial Accounting Standards No. 106,
''Employers' Accounting for Postretirement Benefits Other Than Pensions''
("SFAS 106") effective July 1, 1995. The Bank elected to record the full
accumulated post retirement benefit obligation upon adoption. This resulted
in a cumulative effect adjustment of $1,032,000 (after reduction for income
taxes of $879,000) to apply retroactively to previous years the new method
of accounting, which is shown in the consolidated statement of income for
the year ended June 30, 1996.
<F10> Excluding a non-recurring charge of $2.0 million relating to
recapitalization of the SAIF and the recovery of New York State and City
deferred income taxes previously provided, net income would have been $10.5
million, and the return on average assets, return on average stockholders'
equity, return on average tangible stockholders' equity, non-interest
expense to average assets, the efficiency ratio, and earnings per share
would have been 0.86%, 5.08%, 5.85%, 2.07%, 50.30% and $0.81, respectively,
for the year ended June 30, 1997. Earnings per share information for the
Company for the fiscal years ended prior to June 30, 1996 are not
meaningful since the sale of the Company's common stock and the merger of
Conestoga Bancorp, Inc. into the Bank occurred on June 26, 1996.
<F11> With the exception of end of period ratios, all ratios are based on
average daily balances during the indicated periods. Asset Quality Ratios
and Regulatory Capital Ratios are end of period ratios.
<F12> Income before cumulative effect of changes in accounting principles is
used to calculate return on average assets and return on average equity
ratios.
NOTES CONTINUED ON NEXT PAGE
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At or for the fiscal years ended June 30, 1998 1997 1996 1995 1994
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SELECTED FINANCIAL RATIOS AND OTHER DATA <F11>:
FINANCIAL AND PERFORMANCE RATIOS:
Return on average assets <F10> <F12> 0.90% 1.00% 1.07% 1.33% 1.46%
Return on average stockholders' equity <F10> <F12> 7.06 5.94 9.07 11.50 14.66
Return on average tangible stockholders'
equity <F10> <F12> 8.24 6.84 11.84 11.53 14.66
Stockholders' equity to total assets
at end of period 11.48 14.52 15.53 11.63 10.51
Tangible equity to tangible assets at end of period 9.99 12.62 13.72 11.53 10.47
Loans to deposits at end of period 91.50 77.91 61.43 77.47 78.94
Average interest rate spread <F13> 2.97 3.38 3.85 4.51 4.80
Net interest margin <F14> 3.56 4.07 4.41 4.91 5.12
Average interest earning assets to average
interest bearing liabilities 114.38 119.33 115.68 113.15 111.50
Non-interest expense to average assets <F10> 2.05 2.24 2.06 2.21 1.97
Core non-interest expense to average assets <F16> 1.73 1.87 2.06 2.21 1.97
Efficiency ratio <F10> <F15> 56.09 54.32 45.98 44.11 37.63
Core efficiency ratio <F15> <F16> 47.39 45.55 45.98 44.11 37.63
Dividend payout ration 21.10 0.05 - N/A N/A
PER SHARE DATA:
Diluted Earnings per share <F10> $1.09 $0.95 N/A N/A N/A
Cash dividends per share 0.23 0.045 $- N/A N/A
Book value per share 15.30 14.58 14.65 N/A N/A
Tangible book value per share 13.10 12.40 12.66 N/A N/A
CASH EARNINGS INFORMATION:
Cash return on average assets <F12> <F17> 1.31% 1.36% 1.07% 1.33% 1.46%
Cash return on average
stockholders' equity <F12> <F17> 10.30 8.06 9.07 11.50 14.66
Cash return on average tangible stockholders'
equity <F12> <F17> 12.01 9.27 9.07 11.50 14.66
Cash earnings per share <F17> $1.74 $1.29 N/A N/A N/A
ASSET QUALITY RATIOS AND OTHER DATA:
Total non-performing loans <F18> $884 $3,190 $6,551 $5,073 $6,248
Other real estate owned, net 825 1,697 1,946 4,466 8,200
Ratios:
Non-performing loans to total loans <F18> 0.09% 0.43% 1.12% 1.18% 1.45%
Non-performing loans and real estate
owned to total assets <F18> 0.11 0.37 0.62 1.44 2.23
ALLOWANCE FOR LOAN LOSSES TO:
Non-performing loans <F18> 1,365.95% 336.24% 119.25% 101.99% 58.15%
Total loans <F19> 1.27 1.43 1.34 1.20 0.84
REGULATORY CAPITAL RATIOS: (Bank only)
Tangible capital 8.32% 9.86% 9.49% 11.53% 10.47%
Core capital 8.32 9.87 9.50 11.56 10.51
Risk-based capital 16.58 19.99 21.24 22.18 19.83
FULL SERVICE BRANCHES 14 15 15 7 7
<F13> Average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
<F14> The net interest margin represents net interest income as a percentage of
average interest-earning assets.
<F15> The efficiency ratio represents non-interest expense as a percentage of
the sum of net interest income and non-interest income, excluding any
gains or losses on sales of assets.
<F16> In calculating these ratios, amortization expense related to goodwill and
the SAIF recapitalization charge are excluded from non-interest expense.
<F17> In calculating these ratios, non-interest expense excludes expenses such
as goodwill amortization and the after-tax effect of compensation expense
related to the Company's stock benefit plans which are accretive to book
value. Excluding the effects of the SAIF Special Assessment and the
recovery of New York State and City deferred income taxes previously
provided, cash return on average assets, cash return on average
stockholders' equity, cash return on average tangible stockholders'
equity, and cash earnings per share would have been 1.21%, 7.19%, 8.28%,
and $1.15 for the year ended June 30, 1997.
<F18> Non-performing loans consist of non-accrual loans. The Company 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.
<F19> Total loans represents loans, net, plus the allowance for loan losses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The primary business of the Company is the operation of its wholly owned subsidiary, the Bank. In addition to directing, planning and coordinating the business activities of the Bank, the Company retained proceeds in connection with the Conversion, which are invested primarily in federal funds and short- term, investment grade marketable securities.
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 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, borrowed funds; and, to a lesser extent, the sale of fixed-rate mortgage loans to the secondary market.
The Company's consolidated results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense paid on its interest-bearing liabilities, such as deposits. The Company also generates non-interest income such as service charges and other fees. The Company's non-interest expenses primarily consist of employee compensation and benefits, occupancy expenses, federal deposit insurance premiums, net costs of other real estate owned, data processing fees and other operating expenses. The Company's results of operations are also significantly affected by general economic and competitive conditions (particularly changes in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies.
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 shareholders 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.
MANAGEMENT STRATEGY
The Bank's primary management strategy is to increase the Bank's household and deposit market shares in the communities it serves, either through acquisitions or purchases of deposits, or by direct marketing, and to increase its origination of, and investment in, mortgage loans, with an emphasis on multi-family loans. Multi-family lending is a significant business of the Bank and reflects the fact that much of the housing in the Bank's primary lending area is multi-family housing. The Company also strives to provide a stable source of liquidity and earnings through the purchase of investment grade securities; seeks to maintain the Bank's asset quality for loans
and other investments; and uses appropriate portfolio and asset/liability management techniques in an effort to manage the effects of interest rate volatility on the Bank's profitability and capital.
FRANCHISE EXPANSION. On June 26, 1996 the Bank completed the acquisition of Conestoga Bancorp, Inc. ("Conestoga") resulting in the merger of Conestoga's wholly-owned subsidiary, Pioneer Savings Bank, F.S.B. ("Pioneer") with and into the Bank, with the Bank as the resulting financial institution (the "Conestoga Acquisition"). The Conestoga Acquisition was accounted for in the Company's financial statements using the purchase method of accounting. Under the purchase method of 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 year ended June 30, 1997, as well the consolidated statements of financial condition as of June 30, 1997 and 1996.
On July 18, 1998, the Company entered into the Merger Agreement, which provides for the acquisition of Financial Bancorp and its wholly-owned subsidiary, Financial Federal. The Financial Acquisition, which is expected to close during the first quarter of 1999, will add five retail branches to the Bank. As of June 30, 1998, these branches totaled $229.0 million in deposits.
The Company continues to evaluate acquisition and other growth opportunities as they become available. Additionally, management plans to supplement this strategy with direct marketing efforts designed to increase customer household and/or deposit balances and the number of the Bank's services used per household among its existing customers.
LOAN ORIGINATIONS WITH AN EMPHASIS ON MULTI-FAMILY LENDING. Management believes that multi-family loans provide advantages as portfolio investments. First, they provide a higher yield than single family loans or investment securities of comparable maturities or terms to repricing. Second, the Company's market area generally has provided a stable flow of new and refinanced multi-family loan originations. In addition to its emphasis on multi-family lending, the Company will continue to market and originate residential first mortgage loans secured primarily by owner-occupied, one-to- four family residences, including condominiums and cooperative apartments. Third, origination and processing costs for the Company's multi-family loans are lower per thousand dollars of originations than comparable single family costs. In addition, to address the higher credit risk associated with multi- family lending, management has developed what it believes are reliable underwriting standards for loan applications in order to maintain a consistent credit quality for new loans.
CAPITAL LEVERAGE STRATEGY. As a result of the Company's initial public offering in June, 1996, the Bank's capital level significantly exceeded all regulatory requirements. A portion of the "excess" capital generated by the initial public offering has been deployed through the use of a capital leverage strategy whereby the Bank invests in high quality mortgage-backed securities ("leverage assets") funded by short term borrowings from various third party lenders. The capital leverage strategy generates additional earnings for the Company by virtue of a positive interest rate spread between the yield on the leverage assets and the cost of the borrowings. Since the average term to maturity of the leverage assets exceeds that of the borrowings used to fund their purchase, the net interest income earned on the leverage strategy would be expected to decline in a rising interest rate environment. See "Discussion of Market Risk." To date, the capital leverage strategy has been undertaken in accordance with limits established by the Board of Directors, aimed at enhancing profitability under moderate levels of interest rate exposure. Assets at June 30, 1997, include $96.3 million related to the capital leverage program, which increased to $266.4 million as of June 30, 1998.
In addition to the capital leverage strategy, the Bank undertook an additional $40.3 million in medium term borrowings from the FHLBNY during the year ended June 30, 1998 in order to fund multi-family and underlying ccoperative loan originations. The Company earns a net interest rate spread between the yield on the multi-family and underlying cooperative loans and the cost of the borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, proceeds from principal and interest payments on loans, mortgage-backed securities and investments, borrowings, and, to a lesser extent, proceeds from the sale of fixed-rate mortgage loans to the secondary mortgage market. While maturities and scheduled amortization of loans and investments are a predictable source of funds, deposit flows, mortgage prepayments and mortgage loan sales are influenced by interest rates, economic conditions and competition.
The primary investing activities of the Company are the origination of multi-family and one-to-four-family mortgage loans, and the purchase of mortgage-backed and other securities. During the year ended June 30, 1998, the Bank's loan originations totaled $326.3 million compared to $264.8 million for the year ended June 30, 1997. Purchases of mortgage-backed and other securities totaled $432.6 million for the year ended June 30, 1998 compared to $362.9 million for the year ended June 30, 1997. These activities were funded primarily by principal repayments on loans and mortgage-backed securities, maturities of investment securities, and borrowings by means of repurchase agreements and FHLB Advances. Principal repayments on loans and mortgage- backed securities totaled $210.9 million during the year ended June 30, 1998, compared to $132.4 million for the year ended June 30, 1997. Maturities of investment securities totaled $73.4 million and $378.8 million, respectively, during the fiscal years ended June 30, 1998 and 1997. Loan and security sales, which totaled $116.9 million and $47.2 million, respectively, during the fiscal years ended June 30, 1998 and 1997, provided some additional cash flows.
Deposits increased $74.9 million and $13.3 million during the fiscal year ended June 30, 1998 and 1997, respectively. Deposit flows are affected by the level of interest rates, the interest rates and products offered by local competitors, and other factors. Certificates of deposit which are scheduled to mature in one year or less from June 30, 1998 totaled $406.4 million. Based upon the Company's current pricing strategy and deposit retention experience, management believes that a significant portion of such deposits will remain with the Company. Net borrowings increased $220.6 million during the fiscal year ended June 30, 1998, with the majority of this growth experienced in securities sold under agreement to repurchase ("Repo") transactions, consistent with the Company's capital leverage strategy.
Stockholders' equity declined $4.5 million during the year ended June 30, 1998. During the fiscal year ended June 30, 1998, the Company repurchased 919,837 shares of its common stock into treasury (the "Treasury Repurchases"). The aggregate cost of the Treasury Repurchases was $20.8 million, at an average price of $22.58 per share. Offsetting the impact of the Treasury Repurchases was net income of $13.1 million and amortization of the Company's Employee Stock Ownership Plan ("ESOP") and Recognition and Retention Plan ("RRP") of $5.4 million during the fiscal year ended June 30, 1998.
In June, 1997, the Company commenced payment of regular quarterly cash dividends, the per share amount of which has been increased for each successive dividend to date. During the year ended June 30, 1998, the Company declared and paid three cash dividends totaling $2.6 million, or $0.23 per outstanding common share on the respective dates of record. On July 16, 1998, the Company declared a cash dividend of $0.10 per common share to all shareholders of record on July 31, 1998. This dividend was paid on August 13, 1998.
The Bank is required to maintain a minimum average daily balance of liquid assets as defined by Office of Thrift Supervision regulations. The minimum required liquidity ratio is currently 4.0%. At March 31, 1998, the Bank's liquidity ratio was 14.2%. The levels of the Bank's short-term liquid assets are dependent on the Bank's operating, financing and investing activities during any given period.
The Bank monitors its liquidity position on a daily basis. Excess short- term liquidity is invested in overnight federal funds sales and various money market investments. In the event that the Bank should require funds beyond its ability to generate them internally, additional sources of funds are available through the use of the Bank's $215.1 million borrowing limit at the FHLBNY. At June 30, 1998, the Bank had $215.1 million in short and medium term borrowings outstanding at the FHLBNY, comprised of outstanding Advances of $103.5 million and securities sold under agreement to repurchase of $111.6 million.
At June 30, 1998, the Bank was in compliance with all applicable regulatory capital requirements. Tangible capital totaled $131.2 million, or 8.32% of total tangible assets, exceeded a 1.50% regulatory requirement; core capital, at 8.32% of adjusted assets, exceeded the required 3.0% regulatory minimum; and total risk-based capital, at 16.58% of risk weighted assets, exceeded the 8.0% regulatory minimum. In addition, at June 30, 1998, the Bank was considered "well-capitalized" for all regulatory purposes.
DISCUSSION OF MARKET RISK
As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Bank's assets and liabilities, and the market value of all interest earning assets, other than those which possess a short term to maturity. During the year ended June 30, 1998, the Company operated under a "flat yield curve" interest rate environment, which features little discrepancy in rates offered on short-term and long-term investments. Under a flat yield curve environment, financial institutions often experience both increased interest rate competition related to loan originations, and above-average prepayment activities related to mortgage-backed investments, both of which adversely impact long-term profitability. The flat yield curve environment experienced during the 1998 fiscal year was a primary factor in the reduction of the Company's interest rate spread compared to the prior fiscal year. 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 economy and real estate market.
Since all of the Company's interest bearing liabilities and virtually all of the Company's interest earning assets are located at the Bank, virtually all of the Company's interest rate risk exposure lies at the Bank level. As a result, all significant interest rate risk management procedures are performed at the Bank level. Based upon the Bank's nature of operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank's real estate loan portfolio, concentrated primarily within New York City, is subject to risks associated with the local economy. The Company does not own any trading assets. See "Asset Quality.". 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.
The Company's interest rate management strategy is designed to stabilize net interest income and preserve capital over a broad range of interest rate movements and has three primary components:
ASSETS. The Company's largest single asset type is the multi-family real estate loan. Multi-family loans typically carry a shorter average term to maturity than one-to-four family residential loans, thus significantly reducing the overall level of interest rate risk. In addition, in order to manage interest rate risk, management emphasizes origination of adjustable rate multi- family loans. Due to the flat yield curve environment, as evidenced by a relatively low level of medium- and long-term interest rates, the Company faced increased consumer demand for fixed rate multi-family loan originations. However, while down from the prior year level of 75%, approximately 60% of multi-family loans originated during the year ended June 30, 1998, were adjustable rate, with repricing typically occurring after five years. In addition, management has sought to include various types of adjustable-rate single family (including cooperative apartment) whole loans and adjustable and floating-rate investment securities in its portfolio, which generally have repricing terms of 3 years or less. At June 30, 1998, adjustable-rate whole loans totaled $617.2 million, or 38.0% of total assets,and adjustable-rate investment securities (CMO's, REMIC's and mortgage-backed securities issued by GSEs) totaled $301.3 million, or 18.6% of total assets.
DEPOSIT LIABILITIES. The Bank, a traditional community-based savings bank, is largely dependent upon its base of competitively priced core deposits (consisting of all deposits except certificates of deposit) to provide stability on the liability side of the balance sheet. The Bank has retained many loyal customers over the years through a combination of quality service, convenience, and a stable and experienced staff. Core deposits, at June 30, 1998 were $426.0 million, or 41.03% of total deposits. The balance of certificates of deposit as of June 30, 1998 was $612.3 million, or 58.97% of total deposits, of which $206.0 million, or 33.6% of total certificates of deposits, mature after one year. Depending on market conditions, management prices its certificates of deposit in an effort to encourage the extension of the average maturities of deposit liabilities beyond one year. Over the twelve- month period ending June 30, 1998, the Bank experienced a strong retention rate on maturing certificates of deposit.
WHOLESALE FUNDS. The Bank does not accept brokered deposits as a source of
funds and has no plans to do so in the future. However, the Bank is a member of
the FHLBNY which provides it with a borrowing line equal to $215.1 million.
From time to time, the Bank will borrow from the FHLBNY for various purposes.
At June 30, 1998, the Bank had outstanding borrowings of $215.1 million with
the FHLBNY.
The Bank actively manages interest rate risk through the use of a simulation model which measures the sensitivity of future net interest income and the net portfolio value to changes in interest rates. In addition, the Bank regularly monitors interest rate sensitivity through GAP Analysis, which measures the terms to maturity or next repricing date of interest earning assets and interest bearing liabilities.
GAP ANALYSIS
The following table sets forth the amounts of the Company's consolidated
interest-earning assets and interest-bearing liabilities, outstanding at
June 30, 1998, which are anticipated, based upon certain assumptions, to
reprice or mature in each of the future time periods shown. Except as stated
below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined based on the earlier of term to
repricing or the term to repayment of the asset or liability. The table is
intended to provide an approximation of the projected repricing of assets and
liabilities at June 30, 1998 on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three-month
period and subsequent selected time intervals. For purposes of presentation in
the following table, the Company utilized the national deposit decay rate
assumptions published by the OTS as of December 31, 1992 (the latest
available), which for savings accounts, NOW and Super NOW accounts and money
market accounts in the one year or less category, were 14%, 37% and 79%,
respectively. The loan amounts in the table reflect principal balances expected
to be redeployed and/or repriced as a result of contractual amortization and
anticipated early payoffs of adjustable-and fixed-rate loans, and as a result
of contractual rate adjustments on adjustable-rate loans. The amounts
attributable to mortgage-backed securities reflect principal balances expected
to be redeployed and/or repriced as a result of anticipated principal
repayments, and as a result of contractual rate adjustments on adjustable-rate
mortgage-backed securities.
More than More than More than Non-
3 Months 3 Months 6 Months to 1 Year to 3 Years to More than interest
At June 30, 1998 or Less to 6 Months 1 Year 3 Years 5 Years to 5 Years bearing Total
----------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ($ IN THOUSANDS)
ASSETS <F1>
Mortgages and
other loans $65,221 $60,744 $56,574 $223,924 $246,014 $297,644 $- $950,121
Investment
securities 26,168 250 5,485 52,270 72,699 6,925 - 163,797
Mortgage-backed
securities <F2> 91,073 70,872 55,153 108,077 43,486 41,928 - 410,589
Federal funds sold 9,329 - - - - - - 9,329
FHLB capital stock 10,754 - - - - - - 10,754
Total interest
earning assets 202,545 131,866 117,212 384,271 362,199 346,497 - 1,544,590
LESS:
Allowance for loan
losses - - - - - - (12,075) (12,075)
----------------------------------------------------------------------------------------------------------------------------------
Net interest-earning
assets 202,545 131,866 117,212 384,271 362,199 346,497 (12,075) 1,532,515
Non-interest-earning
assets 18,008 - - - - - 73,403 91,411
----------------------------------------------------------------------------------------------------------------------------------
Total assets $220,553 $131,866 $117,212 $384,271 $362,199 $346,497 $61,328 $1,623,926
----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Savings Accounts $11,917 $11,917 $23,834 $76,249 $56,394 $160,170 $- $340,481
NOW and Super
NOW accounts 1,658 1,658 3,316 6,072 1,625 3,598 - 17,927
Money market
accounts 6,037 6,037 12,074 3,363 1,601 1,455 - 30,567
Certificates of
Deposit 139,108 103,472 163,791 188,800 16,928 229 - 612,328
Borrowed funds 144,455 23,598 - 44,450 69,000 78,603 - 360,106
Interest-bearing
escrow - - - - - 4,294 - 4,294
----------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities 303,175 146,682 203,015 318,934 145,548 248,349 - 1,365,703
Checking accounts - - - - - - 37,039 37,039
Other non-interest
bearing
liabilities 12,062 - - - - - 22,773 34,835
Stockholders' equity - - - - - - 186,349 186,349
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and stockholders'
equity $315,237 $146,682 $203,015 $318,934 $145,548 $248,349 $246,161 $1,623,926
----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity
gap per period $(100,630) $(14,816) $(85,803) $65,337 $216,651 $98,148 -
------------------------------------------------------------------------------------------------------------------
Cumulative interest
sensitivity gap $(100,630) $(115,446) $(201,249) $(135,912) $80,739 $178,887 -
------------------------------------------------------------------------------------------------------------------
Cumulative interest
sensitivity gap as
a percent of
total assets (6.20)% (7.11)% (12.39)% (8.37)% 4.97% 11.02% -
Cumulative total
interest-
earning assets as
a percent of
cumulative
total interest
bearing liabilities 66.81% 74.34% 69.17% 86.01% 107.23% 113.10% -
<F1> Interest-earning assets are included in the period in which the
balances are expected to be redeployed and/or repriced as result of
anticipated pre-payments, scheduled rate adjustments, and contractual
maturities.
<F2> Based upon historical repayment experience.
|
The Company's balance sheet is primarily comprised of assets which mature or reprice within five years, with a significant portion maturing or repricing within one year. In addition, the Company's deposit base is comprised primarily of savings accounts, and certificates of deposit with maturities of three years or less, representing 11.9% and 57.3%, respectively, of total deposits at June 30, 1998. As a result, at June 30, 1998, the Company's interest-bearing liabilities maturing or repricing within one year totaled $652.9 million, while interest earning assets maturing or repricing within one year totaled $451.6 million, resulting in a negative one-year interest sensitivity gap of $201.2 million, or 12.4% of total assets. In comparison, at June 30, 1997, the Company had a negative one-year interest sensitivity gap of $98.5 million, or 7.5% of total assets. The Company's estimate of repricing liabilities for selected deposit types which do not carry contractual maturities, such as savings accounts, is based upon the decay rate tables published by the OTS.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate with changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features, like annual and lifetime rate caps, which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in the table. Finally, the ability of certain borrowers to make scheduled payments on their adjustable-rate loans may decrease in the event of an interest rate increase.
Under interest rate scenarios other than that which existed on June 30, 1998, the gap ratio for the Company's assets and liabilities could differ substantially based upon different assumptions about how core deposit decay rates and loan prepayments would change. For example, the Company's interest rate risk management model assumes that in a rising rate scenario, by paying competitive rates on non-core deposits, a large share of core deposits will transfer to certificates of deposit and be retained, although at higher cost to the Company. Also, loan and mortgage-backed security prepayment rates would be expected to slow, as borrowers postpone property sales or loan refinancings until rates again decline.
INTEREST RATE RISK EXPOSURE COMPLIANCE
Increases in the level of interest rates also may adversely affect the fair value of the Company's securities and other earning assets. Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company's interest-earning assets, which could adversely affect the Company's results of operations if sold, or, in the case of interest earning assets classified as available for sale, the Company's stockholders' equity, if retained. Under Generally Accepted Accounting Principles ("GAAP"), changes in the unrealized gains and losses, net of taxes, on securities classified as available for sale will be reflected in the Company's stockholders' equity. As of June 30, 1998, the Company's securities portfolio included $449.6 million in securities classified as available for sale. Due to the magnitude of the Company's holdings of securities available for sale, changes in interest rates could produce significant changes in the value of such securities and could produce significant fluctuations in the stockholders' equity of the Company. The Company does not own any trading assets.
On a quarterly basis, an interest rate risk exposure compliance report is
prepared and presented to the Company's Board of Directors. This report,
prepared in accordance with Thrift Bulletin #13 issued by the OTS, presents an
analysis of the change in net interest income and net portfolio value resulting
from an increase or decrease in the level of interest rates. All changes are
measured as percentage changes from the values of projected net interest income
and net projected portfolio value in the flat rate scenario. The calculated
estimates of change in net interest income and net portfolio value are compared
to current limits established by management and approved by the Board of
Directors. The following is a summary of the Company's interest rate exposure
report as of June 30, 1998:
PERCENTAGE CHANGE IN
---------------------------------------------------------------------------
NET INTEREST INCOME NET PORTFOLIO VALUE
---------------------------------------------------------------------------
CHANGE IN INTEREST RATE LIMIT PROJECTED CHANGE LIMIT PROJECTED CHANGE
-------------------------------------------------------------------------------------------------------------
-400 Basis Points -50.00% -5.43% -50.00% 17.36
-300 Basis Points -37.50 1.89 -37.50 16.72
-200 Basis Points -25.00 6.11 -25.00 13.72
-100 Basis Points -12.50 6.87 -12.50 6.99
Flat Rate (1) - - - -
+100 Basis Points -12.50 -9.37 -12.50 -7.61
+200 Basis Points -25.00 -19.04 -25.00 -18.40
+300 Basis Points -37.50 -29.80 -37.50 -30.38
+400 Basis Points -50.00% -41.01 -50.00% -42.29
|
The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flows from principal repayments on loans and mortgage-backed securities and/or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change.
ASSET QUALITY
The Company's real estate loan servicing policies and procedures require that the Company initiate contact with a delinquent borrower as soon as possible after the payment is late ten days. Generally, the policy calls for a late notice to be sent 10 days after the due date of the 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, Company policy calls for the cessation of interest accruals on loans delinquent 90 days or more. When contact is made with the borrower at any time prior to foreclosure, the Company 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 Company when a loan is 90 days past due. As soon as practicable after initiating foreclosure proceedings on a loan, the Company prepares an estimate of the fair value of the underlying collateral. It is the Company'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 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 either sold at foreclosure or sold subsequently by the Company as soon thereafter as practicable.
Management reviews delinquent loans on a periodic basis and reports monthly to the Board of Directors regarding the status of all delinquent and non- accrual loans in the Company's portfolio. The Company retains outside counsel experienced in foreclosure and Companyruptcy procedures to institute foreclosure and other actions on the Company's delinquent loans. It is the policy of the Company to initiate foreclosure proceedings after a loan becomes 90 days past due. As soon as practicable after initiating foreclosure proceedings on a loan, the Company prepares an estimate of the fair value of the underlying collateral. It is the Company's general policy to dispose of properties acquired through foreclosure or deeds in lieu thereof as quickly and as prudently as possible in consideration of market conditions, the physical condition of the property, and any other mitigating conditions.
The continued adherence to these procedures, as well as a strong local real estate market, resulted in a significant drop in problem loans in the Company'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 Company 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. The Company has experienced a shift in the composition of its 60-89 day delinquencies from its conventional mortgage portfolio, which loans typically carry larger average balances, to smaller balance FHA/VA insured ad consumer loans. As a result, the number of delinquent loans has not declined despite the decline in overall dollar level.
Under GAAP, the Company 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 Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that the Company 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 Company had three loans classified as troubled-debt restructurings at June 30, 1998, totaling $3.9 million, and all are currently performing according to their restructured terms. The largest restructured debt, a $2.7 million loan secured by a mortgage on an underlying cooperative apartment building located in Forest Hills, New York, was originated in 1987. The loan was first restructured in 1988, and again in 1994. The current regulations of the OTS require that troubled-debt restructurings remain classified as such until either the loan is repaid or returns to its original terms. The Company did not have 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.
Pursuant to Company guidelines for determining and measuring impairment in loans within the meaning of SFAS 114, 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 Company 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. All of these loans have outstanding balances less than $227,000, and are considered a homogeneous loan pool which are not required to be evaluated for impairment. See "Notes to Consolidated Financial Statements" for a further discussion of impaired loans.
The balance of other real estate owned ("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 $164,000 as of June 30, 1998.
The following table sets forth information regarding the Company's non-
performing loans, non-performing assets, impaired loans and troubled-debt
restructurings at the dates indicated.
At Year Ended June 30, 1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------------------------------
($ 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 44 39 - - -
------------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 884 3,190 6,551 5,073 6,248
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 <F1> $3,136 $4,294 $7,419 N/A N/A
RATIOS:
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
Total non-performing assets and troubled-
debt restructurings to total assets 0.35 0.73 0.96 2.59 3.38
<F1> The Bank adopted SFAS 114 effective July 1, 1995. Impaired loans were not
measured prior to adoption.
|
ANALYSIS OF NET INTEREST INCOME
The Company's profitability, like that of most financial institutions, is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and securities, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the Company's
consolidated statements of operations for the years ended June 30, 1998, 1997
and 1996, and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
daily balances. The yields and costs include fees which are considered
adjustments to yields.
For the years ended June 30, 1998 1997 1996
AVERAGE Average Average
AVERAGE YIELD/ Average Yield/ Average Yield/
BALANCE INTEREST COST Balance Interest Cost Balance Interest Cost
----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
ASSETS:
Interest-earning
assets
Real estate loans $837,755 $69,824 8.33% $642,913 $54,965 8.55% $435,948 $39,314 9.02%
<F1>
Other loans 5,393 487 9.03 5,444 460 8.45 3,497 340 9.72
Investment
securities 164,265 10,798 6.57 215,809 13,654 6.33 107,206 5,738 5.35
<F2> <F3>
Mortgage-backed
securities <F2> 349,910 23,463 6.71 261,275 17,704 6.78 89,001 5,927 6.66
Federal funds sold 35,540 1,892 5.32 40,349 2,247 5.57 23,904 1,300 5.44
----------------------- ---------------------- -------------------
Total interest-
earning assets 1,392,863 $106,464 7.64 1,165,790 $89,030 7.64 659,556 $52,619 7.98%
----------------------- ---------------------- -------------------
Non-interest earning
assets 66,008 64,148 20,424
---------- ---------- --------
Total assets $1,458,871 $1,229,938 $679,980
---------- ---------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
NOW, Super NOW
and Money market
accounts $48,556 $1,131 2.33% $55,327 $1,404 2.54% $30,759 $634 2.06%
Savings accounts 338,062 7,628 2.26 349,821 8,192 2.34 232,631 5,789 2.49
Certificates of
deposit 594,098 34,174 5.75 515,542 28,869 5.60 285,524 16,013 5.61
Mortgagors' escrow 4,700 94 2.00 3,792 79 2.08 3,371 72 2.14
Borrowed funds 232,385 13,908 5.98 52,495 3,020 5.75 17,854 1,008 5.65
----------------------- ---------------------- -------------------
Total interest-
bearing
liabilities 1,217,801 $56,935 4.68% 976,977 $41,564 4.26% 570,139 $23,516 4.13%
----------------------- ---------------------- -------------------
Checking accounts 31,457 27,653 11,646
Other non-interest-
bearing liabilities 24,097 18,131 17,718
---------- ---------- --------
Total liabilities 1,273,355 1,022,761 599,503
Stockholders' equity 185,516 207,177 80,477
---------- ---------- --------
Total liabilities
and stockholders'
equity $1,458,871 $1,229,938 $679,980
---------- ---------- --------
Net interest income/
interest rate
spread <F4> $49,529 2.97% $47,466 3.38% $29,103 3.85%
------- ------- -------
Net interest-earning
assets/net interest
margin <F5> $175,062 3.56% $188,813 4.07% $89,417 4.41%
---------- ---------- --------
Ratio of interest-
earning assets to
interest-bearing
liabilities 114.38% 119.33% 115.68%
<F1> In computing the average balance of loans, non-accrual loans have been
included. Interest income includes loan servicing fees as defined under
SFAS 91.
<F2> Includes securities classified ''available for sale.''
<F3> Includes interest bearing deposits in other banks and FHLB stock.
<F4> Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
<F5> Net interest margin represents net interest income as a percentage of
average interest-earning assets.
|
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing the volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities have
affected the Company's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to (i) changes
attributable to changes in volume (change in volume multiplied by prior rate),
(ii) changes attributable to rate (changes in rate multiplied by prior volume),
and (iii) the net change. Changes attributable to the combined impact of volume
and rate have been allocated proportionately to the changes due to the volume
and the changes due to rate.
YEAR ENDED Year Ended Year Ended
JUNE 30, 1998 June 30, 1997 June 30, 1996
COMPARED TO Compared to Compared to
YEAR ENDED Year Ended Year Ended
JUNE 30, 1997 June 30, 1996 June 30, 1995
INCREASE/(DECREASE) Increase/(Decrease) Increase/(Decrease)
DUE TO Due to Due to
VOLUME RATE NET Volume Rate Net Volume Rate Net
----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
INTEREST-EARNING
ASSETS:
Real estate loans $16,466 $(1,607) $14,859 $18,182 $(2,531) $15,651 $802 $137 $939
Other loans (5) 32 27 177 (57) 120 (28) 61 33
Investment
securities (3,317) 462 (2,855) 6,339 1,577 7,916 1,431 (95) 1,336
Mortgage-backed
securities 5,973 (215) 5,758 11,571 206 11,777 (24) 487 463
Federal funds sold (261) (94) (355) 905 42 947 1,036 (411) 625
----------------------------------------------------------------------------------------------------------------------------------
Total $18,856 $(1,422) $17,434 $37,174 $(763) $36,411 $3,217 $179 $3,396
----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES
NOW, Super NOW
and Money
market $(164) $(109) $(273) $565 $205 $770 $(76) $(6) $(82)
accounts
Savings accounts (280) (284) (564) 2,834 (431) 2,403 (976) 190 (786)
Certificates of
deposit 4,465 840 5,305 12,893 (37) 12,856 3,846 1,596 5,442
Mortgagors' escrow 19 (4) 15 9 (2) 7 8 (7) 1
Borrowed funds 10,558 330 10,888 1,975 37 2,012 (6) 1 (5)
----------------------------------------------------------------------------------------------------------------------------------
Total 14,598 773 15,371 18,276 (228) 18,048 2,796 $1,774 4,570
----------------------------------------------------------------------------------------------------------------------------------
Net change in
net interest
income $4,258 $(2,195) $2,063 $18,898 $(535) $18,363 $421 $(1,595) $(1,174)
----------------------------------------------------------------------------------------------------------------------------------
|
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND JUNE 30, 1997
ASSETS. The Company's assets totaled $1.62 billion at June 30, 1998, an increase of $308.9 million from total assets of $1.32 billion at June 30, 1997. The growth in assets was experienced primarily in real estate loans and mortgage-backed securities available for sale, which increased $199.9 million, $133.7 million, respectively.
The increase in real estate loans resulted primarily from originations of $321.2 million during the fiscal year ended June 30, 1998, of which $308.4 million were multi-family and underlying cooperative and non-residential loans. The increased loan originations resulted from both an active local real estate market and a decline throughout the year medium- and long-term market interest rates. The increase in mortgage backed securities available for sale resulted from purchases of $290.6 million during the year ended June 30, 1998, primarily attributable to the capital leverage program. See "Management Strategy."
These purchases were partially offset by sales and calls of $92.8 million and principal repayments of $64.5 million on these securities. Mortgage-backed securities held-to-maturity declined $31.7 million, as proceeds from sales and principal repayments on these securities were utilized to fund loan originations and purchases of mortgage-backed securities available for sale.
LIABILITIES. Funding for the growth in real estate loans was obtained primarily from increased deposits of $74.9 million, primarily reflecting an increase in certificates of deposit with maturities of one year or less and increased FHLBNY advances of $40.3 million during the past fiscal year. Funding for the increase in mortgage-backed securities available for sale was obtained primarily from increased securities sold under agreement to repurchase transactions of $180.3 million, consistent with the capital leverage program.
As of June 30, 1998, assets were increased by $18.0 million due to unsettled sales of mortgage-backed securities, and liabilities wre increased by $12.1 million, respectively due to purchases of investment and mortgage-backed securities for which settlement had not occurred.
STOCKHOLDERS' EQUITY. Stockholders' equity declined $4.6 million to $186.3 million at June 30, 1998, from $190.9 million at June 30, 1997. During the fiscal year ended June 30, 1998, the Company repurchased 919,837 shares of its common stock into treasury at an aggregate cost of $20.8 million. Offsetting the share repurchases was retained net income of $13.1 million, amortization of the Company's ESOP and RRP of $5.4 million, and an increase of $732,000 of the unrealized gain on investment and mortgage-backed securities available for sale. Also contributing to the decline on stockholders' equity during the year ended June 30, 1998 were cash dividends declared and paid totaling $2.6 million.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND JUNE 30, 1996
The Company's assets totaled $1.32 billion at June 30, 1997, a decrease of $56.8 million from total assets of $1.37 billion at June 30, 1996. This decline resulted primarily from the refund, on July 1, 1996, of $131.1 million in excess proceeds related to the oversubscription to the Company's initial public offering (the "Oversubscription Refund"), which were included in Escrow and other deposits at June 30, 1996. The Oversubscription Refund was paid from the proceeds of matured investment securities of $125.0 million, and from a reduction of $6.1 million in federal funds sold. Removing the effects of the oversubscription refund, total assets increased $74.3 million, reflecting the Company's capital leverage strategy.
Real estate loans and loans held for sale increased $166.4 million, resulting primarily from originations of $262.2 million during the year ended June 30, 1997, of which $256.2 million were multi-family and underlying cooperative and non-residential loans. Mortgage backed securities increased $98.6 million and investment securities held-to-maturity increased $58.0 million, respectively, during the fiscal year ended June 30, 1997. Much of the growth in these assets was realized from the movement of earning assets from lower yielding investment securities available for sale and federal funds sold into these higher-yielding assets. In addition, in order to fund the growth in these assets, borrowings increased $111.8 million and deposits increased $13.3 million. At June 30, 1996, the Company had an unsettled security purchase totaling $34.0 million, which was funded in July, 1996. No such unsettled trades existed as of June 30, 1997.
Stockholders' equity totaled $190.9 million at June 30, 1997, a decrease of $22.2 million from June 30, 1996. The decrease resulted primarily from the $27.7 million repurchase of the Company's common stock into treasury, and the $10.8 million open market purchase of the Company's common stock by the RRP during the year ended June 30, 1997. Offsetting these items was net income of $12.3 million, an increase of $1.7 million in the equity component of the unrealized gain on available for sale securities and a direct contribution to stockholders' equity of $3.1 million related to the benefit expense associated with the Company's ESOP and RRP Plans.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND
1997
GENERAL. Net income for the fiscal year ended June 30, 1998 totaled $13.1 million compared to $12.3 million during the fiscal year ended June 30, 1997. Net income for the fiscal year ended June 30, 1997
was affected by the New York State and New York City income tax recoveries of $1.9 million and $1.0 million, respectively, and the one-time special assessment of $1.1 million, after taxes, for the recapitalization of the SAIF recorded during the quarter ended September 30, 1996. Net income for the fiscal year ended June 30, 1997, excluding these non-recurring items, was $10.5 million. Net income for the year ended June 30, 1998, includes an after-tax gain of $1.1 million related to the sale of the Roslyn branch premise, and an after-tax charge of $1.2 million related to an early retirement program offered during the year.
NET INTEREST INCOME. Net interest income totaled $49.5 million during the year ended June 30, 1998, compared to $47.5 million in the previous year. This increase was attributable primarily to an increase of $227.1 million in average balance of interest earning assets, offset by a decline in the net interest rate spread of 41 basis points, reflecting the flat yield curve interest rate environment experienced during the 1998 fiscal year. See "Discussion of Market Risk." The net interest margin declined 51 basis points from 4.07% for the year ended June 30, 1997 to 3.56% for the year ended June 30, 1998.
INTEREST INCOME. Interest income for the year ended June 30, 1998 was $106.5 million, an increase of $17.5 million from $89.0 million during the year ended June 30, 1997. The largest components contributing to this increase were interest income on real estate loans and mortgage-backed securities, which increased by $14.9 million and $5.8 million, respectively. The increase in interest income on real-estate loans was attributable primarily to an increase of $194.8 million in the average balance of real estate loans, resulting from new loan originations of $321.2 million during the fiscal year ended June 30, 1998. The increases in interest income on mortgage-backed securities was also attributable primarily to increases in the average balances of $88.6 million, resulting from $169.1 million in net purchases of mortgage-backed securities as part of the Company's capital leverage program. Partially offsetting these increases to interest income was a decrease in interest income on investment securities of $2.9 million, primarily resulting from a decline in average balance of investment securities of $51.5 million. The decline in the average balance resulted from the Company utilizing funds from matured investment securities to fund loan originations. Overall, the yield on interest earning assets remained constant at 7.64%, as the impact from the movement of funds from investment securities to higher-yielding real estate loans, was offset by a decline in average yield on real estate loans of 22 basis points due to the decline in medium- and long-term interest rates and increased interest rate competition throughout the 1998 fiscal year. See "Discussion of Market Risk." In addition, the yield on mortgage-backed securities declined 7 basis points due to both prepayments on higher-yielding securities and the interest rate environment experienced during the year.
INTEREST EXPENSE. Interest expense increased $15.3 million, to $56.9 million during the fiscal year ended June 30, 1998, from $41.6 million during the fiscal year ended June 30, 1997. This increase resulted primarily from increases of $5.3 million and $10.9 million in interest expense on certificate of deposit accounts and borrowed funds, respectively, which resulted primarily from increased average balances of $78.6 million and $179.9 million, respectively, during the fiscal year ended June 30, 1998, compared to the fiscal year ended June 30, 1997. The increase in the average balance on certificates of deposit resulted primarily from increased deposit flows due to competitive rates offered on selected certificate accounts for the past twelve months. The increase in average balance of borrowed funds resulted primarily from approximately $180.3 million of borrowed funds added for the period July 1, 1997 to June 30, 1998, under the capital leverage program. In addition to the growth in average balances, the average cost of interest bearing liabilities increased 42 basis points to 4.68% for the fiscal year ended June 30, 1998, from 4.26% in the previous year. The increase in average cost resulted from an increase of $78.6 million in the average balance of certificate of deposit accounts, which generally have a higher average cost than other deposits, the increase of 15 basis points in the average cost on certificate of deposit accounts resulting from a rate promotion instituted for the past twelve months, and an increase of 42 basis points in the average cost on borrowed funds resulting from an increase in the average balance of higher- rate, longer-term borrowings undertaken during the recent fiscal year in order to fund loan originations and the capital leverage program.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $2.6 million to $1.6 million for the fiscal year ended June 30, 1998 from $4.2 million for the fiscal year ended June 30, 1997. The Allowance for Loan Losses increased by $1.3 million during the fiscal year ended June 30, 1998, as the loan loss provision of $1.6 million was partially offset by net charge-offs of $286,000. While the allowance for loan losses increased, non-performing loans declined from $3.2 million at June 30, 1997, to $884,000 at June 30, 1998. The Allowance for Loan Losses as a percentage of non-performing loans and total loans was 1,365.95% and 1.27%, respectively, at June 30, 1998, compared to 336.24% and 1.43%, respectively, at June 30, 1997. The reduction in the provision reflects the significant decline experienced in non-performing loans during the past year. However, in management's judgment, it was prudent to continue the loan loss provision, and thereby increase the loan loss allowance, based upon the Company's growing volume of multi-family loan originations, the composition of its loan portfolio and the Company's historical charge-off experience. See "Asset Quality."
NON-INTEREST INCOME. Non-interest income increased $2.9 million to $7.0 million during the fiscal year ended June 30, 1998 compared to $4.1 million during the fiscal year ended June 30, 1997. This increase was attributable primarily to a gain of $1.9 million from the sale of the Bank's Roslyn branch premise in May, 1998. In addition, service charges and other fees increased $418,000 due to various increases in loan and deposit fees, and other income increased $459,000 due primarily to increased income on FHLBNY capital stock and a reimbursement of $182,000 of legal expenses previously provided, which was recorded in other income. See "-Non-Interest Expense."
NON-INTEREST EXPENSE. Non-interest expense increased $2.4 million to $29.9 million during the fiscal year ended June 30, 1998 from $27.5 million during the fiscal year ended June 30, 1997. This increase resulted primarily from increases of $3.0 million and $2.3 million in salary and employee benefits and ESOP and RRP compensation expense, respectively, offset by declines of $2.1 million, $336,000 and $484,000, respectively, in federal deposit insurance premiums, provision for losses on OREO, and other expenses. The increase in salaries and employee benefits was attributable primarily to a one-time charge of $1.6 million related to benefit costs, other than RRP related costs, associated with an early retirement program offered during the fiscal year ended June 30, 1998. The remainder of the increase resulted from general salary and staff increases. The increase in ESOP and RRP compensation expense was attributable primarily to several factors. First, the RRP expense increased $1.5 million as a full twelve months of expense was recorded during the fiscal year ended June 30, 1998, compared to five months of expense recorded during the fiscal year ended June 30, 1997. The RRP was approved in December, 1996, and expense recognition began in February, 1997. In addition, a one-time charge of $598,000 was recorded during the fiscal year ended June 30, 1998, related to vested shares of retirees who accepted the early retirement program. Finally, the ESOP compensation expense increased $787,000 due to the 50% appreciation in the average price of the Company's common stock during the fiscal year ended June 30, 1998, as the periodic ESOP compensation expense, under GAAP is recorded based upon the average market value of the Company's common stock.
The increase in data processing costs resulted from both increased loan and deposit system utilization charges and expenses recorded related to the Year 2000 computer compliance. See "The Year 2000 Problem." The decline in federal deposit insurance expense resulted primarily from the non-recurring SAIF special assessment of $2.1 million which was recorded during the fiscal year ended June 30, 1997. The reduction in provision for losses on OREO resulted primarily from a decline of 49% in the average balance of OREO during the most recent fiscal year. The reduction in other expenses was attributable primarily to reduced legal expenses due to the settlement of a lawsuit during the past fiscal year, which had caused an increase in legal expenses in prior years. The settlement of such lawsuit resulted in a reimbursement of certain of such expenses. The Company anticipates that its sale of the Roslyn branch premise will result in cost efficiencies for future periods related to occupancy and equipment and other operating expenses.
INCOME TAX EXPENSE. Income tax expense totaled $11.9 million for the fiscal
year ended June 30, 1998, compared to $7.6 million for the fiscal year ended
June 30, 1997. Income tax expense was reduced by $2.9 million during the
fiscal year ended June 30, 1997, due to New York State and New York City
recoveries of $1.9 million and $1.0 million, respectively, related to the
Bank's deferred tax liability.
Income tax expense, exclusive of these recoveries, totaled $10.5 million during the fiscal year ended June 30, 1997. The increase of $1.4 million in income taxes, excluding the non-recurring recoveries, was primarily attributable to an increase of $5.1 million in pre-tax income, offset by a reduction in the effective tax rate. During the year ended June 30, 1998, the Company's effective tax rate was 47.53% compared to 52.61% in the prior year (excluding the non-recurring income tax recoveries). The decline in the effective tax rate was primarily attributable to certain tax benefits associated with the formation and funding of subsidiaries of the Bank during the fiscal year ended June 30, 1998.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1997 AND
1996
GENERAL. Net income for the fiscal year ended June 30, 1997 totaled $12.3 million compared to $6.3 million during the fiscal year ended June 30, 1996. Net income for the fiscal year ended June 30, 1997 was affected by the New York State and New York City income tax recoveries of $1.9 million and $1.0 million, respectively, and the one-time special assessment of $1.1 million, after taxes, for the recapitalization of the SAIF recorded during the quarter ended September 30, 1996. Net income for the fiscal year ended June 30, 1997, excluding these non-recurring items, was $10.5 million.
Also affecting the comparison of the fiscal years ended June 30, 1997 and 1996 was the Company's adoption, on July 1, 1995, of Statement of Financial Accounting Standards No. 106, "Accounting for Post-Retirement Benefits Other than Pensions," whereby the Company elected to record the full accumulated post-retirement medical benefit obligation upon adoption. Adoption of this standard resulted in a cumulative effect reduction of net income of approximately $1.0 million for the fiscal year ended June 30, 1996. Income before cumulative effect of change in accounting principles for the fiscal year ended June 30, 1996 was $7.3 million.
NET INTEREST INCOME. Net interest income totaled $47.5 million during the year ended June 30, 1997 compared to $29.1 million. This increase was attributable primarily to an increase of $506.2 million in average balance of interest earning assets, offset by a decline in the net interest rate spread of 47 basis points. The net interest margin declined 34 basis points from 4.41% for the year ended June 30, 1996 to 4.07% for the year ended June 30, 1997.
INTEREST INCOME. Interest income for the year ended June 30, 1997 was $89.0 million, an increase of $36.4 million from $52.6 million during the year ended June 30, 1996. The largest components contributing to this increase were interest income on real estate loans, investment securities and mortgage-backed securities, which increased by $15.7 million, $7.9 million, and $11.8 million, respectively. The increase in interest income on real-estate loans was attributable primarily to an increase of $207.0 million in the average balance of real estate loans, resulting from both the acquisition of $113.1 million of loans from Conestoga on June 26, 1996, and new loan originations of $262.2 million during the fiscal year ended June 30, 1997, offset by a 47 basis point decrease in the average yield as compared to the prior year. The increases in interest income on investment securities and mortgage-backed securities were also attributable primarily to increases in average balances of $108.6 million and $172.3 million, respectively, during the fiscal year ended June 30, 1997 compared to the fiscal year ended June 30, 1996. The acquisition of $170.8 million and $124.4 million of investment securities and mortgage-backed securities, respectively, from Conestoga, contributed significantly to these average balance increases. In addition, the average yield on investment securities and mortgage-backed securities increased by 98 basis points and 12 basis points, respectively, during the fiscal year ended June 30, 1997, compared to the fiscal year ended June 30, 1996, contributing significantly to the increase in interest income. This increase in yields resulted primarily from both higher yields on securities acquired or repricing during the fiscal year ended June 30, 1997, as well as the acquisition of higher yielding investment and mortgage-backed securities from Conestoga.
INTEREST EXPENSE. Interest expense increased $18.1 million, to $41.6 million during the fiscal year ended June 30, 1997, from $23.5 million during the fiscal year ended June 30, 1996. This increase resulted primarily from increases of $12.9 million, $2.4 million and $2.0 million in interest expense on certificate of deposit accounts, savings accounts and borrowed funds, respectively, which resulted from increased average balances of $230.0 million, $117.2 million and $34.6 million, respectively, during the
fiscal year ended June 30, 1997, compared to the fiscal year ended June 30, 1996. The acquisition of $216.3 million and $129.2 million of certificate of deposit accounts and savings accounts, respectively, from Conestoga contributed significantly to these average balance increases. The increase in borrowing resulted from the capital leverage strategy instituted during the current fiscal year. See "Management Strategy." Overall, the average cost of interest bearing liabilities increased 13 basis points from 4.12% during the fiscal year ended June 30, 1996, to 4.25% during the fiscal year ended June 30, 1997, due primarily to an increase of 48 basis points in the average cost on NOW, Super Now and money market accounts, which resulted from increased rates offered on these deposits under management's deposit pricing strategy, and an increase of 10 basis points on the cost of borrowed funds resulting from the current year borrowing activity.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $1.2 million to $4.2 million for the fiscal year ended June 30, 1997 from $3.0 million for the fiscal year ended June 30, 1996. The allowance for loan losses increased by $2.9 million during the fiscal year ended June 30, 1997, as the loan loss provision of $4.2 million was partially offset by net charge-offs of $1.3 million. While the allowance for loan losses increased, non-performing loans declined from $6.6 million at June 30, 1996, to $3.2 million at June 30, 1997. The allowance for loan losses as a percentage of non-performing loans and total loans was 336.24% and 1.43%, respectively, at June 30, 1997, compared to 119.25% and 1.34%, respectively, at June 30, 1996. In management's judgment, it was prudent to continue the loan loss provision in order to supplement the loan loss allowance, based upon the Company's growing volume of multi-family loan originations, the composition of its loan portfolio and the Company's historical charge-off experience. See "Asset Quality."
NON-INTEREST INCOME. Non-interest income increased $2.7 million to $4.1 million during the fiscal year ended June 30, 1997 compared to $1.4 million during the fiscal year ended June 30, 1996. This increase was attributable primarily to increases of $1.0 million and $733,000 in service charges and other fees, and other income, respectively. Contributing to the increase in service charges and other fees were increased income of $465,000 related to deposit accounts attributable to the growth in deposits from the acquisition of Conestoga, and increases of $272,000 and $162,000, respectively, related to safe deposit boxes and the Company's funding of official checks. The increase in other income was attributable primarily to increased rental income of $241,000 received from retail and other commercial premises acquired from Conestoga. Also contributing to the increase in other income were increases of $170,000 and $120,000 on FHLBNY capital stock dividend income and loan prepayment penalty income, respectively. In addition, net gains on sale of assets totaled $984,000 during the year ended June 30, 1997 compared to a net loss of $18,000 during the year ended June 30, 1996. Sales of assets occur periodically in response to management's review of portfolio assets in light of current market conditions.
NON-INTEREST EXPENSE. Non-interest expense increased $13.5 million to $27.5 million during the fiscal year ended June 30, 1997 from $14.0 million during the fiscal year ended June 30, 1996. Several factors contributed to this increase, including an increase of $2.3 million in federal deposit insurance premium expense. As a result of the Conestoga Acquisition, the Company acquired $394.3 million in deposits which were insured by the SAIF. The Company paid higher assessment rates on these deposits during the three months ended September 30, 1996. In addition, the Company was required to pay $2.0 million, before taxes, related to the SAIF special assessment paid during the three months ended September 30, 1996 on all of its SAIF deposits, which were primarily comprised of the deposits obtained from Conestoga. As a result of the recapitalization of SAIF, the Company, which currently has a Bank Insurance Fund ("BIF")/SAIF deposit ratio of 54/46, has experienced a reduction in FDIC insurance expense during all fiscal quarters subsequent to September 30, 1996. See "Impact of Recent Legislation." Should the Company maintain its status as a well-capitalized institution, given the current FDIC assessment rates, this reduction in quarterly FDIC insurance expense is expected to continue. During the fiscal year ended June 30, 1996, the Company received a refund from the FDIC of $319,000 related to the Company's insurance expense, which reduced its federal deposit insurance premium expense for the period to $109,000. During the fiscal year ended June 30, 1996, virtually all of the Company's deposits were insured by the BIF. See "Impact of Recent Legislation."
Salary and employee benefits, occupancy and equipment, data processing, and other operating expenses increased $2.4 million, $1.3 million, $443,000, and $1.8 million, respectively, resulting from both the acquisition of Conestoga and increased costs associated with activities as a public company. In addition, during the fiscal year ended June 30, 1997, the Company incurred increased expenses of $2.9 million related ESOP and RRP benefits, and $2.4 million related to goodwill amortization resulting from its acquisition of Conestoga. Only minor expenses were recorded during the fiscal year ended June 30, 1996 related to these items, as the Company completed its initial public offering (from which the ESOP and RRP were generated) and its acquisition of Conestoga (from which goodwill was generated) on June 26, 1996. Partially offsetting these increased expenses was a decrease of $136,000 related to losses on other real estate owned, resulting from management's periodic review of reserves established for losses on other real estate owned. Overall, non- interest expense was 2.24% of average assets for the fiscal year ended June 30, 1997. Excluding the effects of the non-recurring SAIF charge, non-interest expense was 2.07% of average assets during the fiscal year ended June 30, 1997 compared to 2.06% for the fiscal year ended June 30, 1996.
INCOME TAX EXPENSE. Income tax expense totaled $7.6 million. Income tax expense was reduced by $2.9 million during the fiscal year ended June 30, 1997, due to New York State and New York City recoveries of $1.9 million and $1.0 million, respectively, related to the Company's deferred tax liability. Both of these recoveries resulted from recent tax legislation passed by both New York State and New York City. See "Impact of Recent Legislation." Income tax expense, exclusive of these recoveries, totaled $10.5 million during the fiscal year ended June 30, 1997, compared to $6.2 million during the fiscal year ended June 30, 1996, an increase of $4.3 million. This increase was attributable to both an increase of $6.4 million in pre-tax income and an increase in the effective tax rate from 45.9% for the fiscal year ended June 30, 1996, to 52.6% for the fiscal year ended June 30, 1997. The increased effective tax rate during the fiscal year ended June 30, 1997, (before recoveries) resulted primarily from the acquisition of Conestoga being accounted for as a tax-free transaction, resulting in the Company receiving no tax benefit for goodwill expense. In addition, the Company received no tax deduction for $666,000 of ESOP compensation expense related to the excess of the average fair market value of the Company's stock during the fiscal year ended June 30, 1997, over the original purchase price of the stock by the ESOP. Excluding the effects of these items, the effective tax rate for the fiscal year ended June 30, 1997 was 45.6%.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
IMPACT OF RECENT LEGISLATION
DEPOSIT INSURANCE - SAIF RECAPITALIZATION. In response to the disparity in deposit insurance asessment rates that existed between banks insured by the BIF and thrifts insured by the SAIF, the Deposit Funds Insurance Act of 1996 (the "Funds Act") was enacted on September 30, 1996. The Funds Act authorized FDIC to impose a special assessment on all institutions with SAIF-assessable deposits in the amount necessary to recapitalize the SAIF. The special SAIF assessment for the Company of $2.0 million, or $1.1 million net of taxes, was charged against income in the quarter ended September 30, 1996 and paid in November, 1996.
As a result of the recapitalization of the SAIF in 1996 after the enactment of the Funds Act, the FDIC reduced the assessment rates for deposit insurance for SAIF-assessable deposits for 1997 to a range of 0 to
27 basis points. The Company's SAIF-assessable deposits are also subject to assessments for payments on the bonds issued in the late 1980's by the Financial Corporation (the "FICO" bonds) to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The Company's total expenses for the fiscal year ended June 30, 1998, for the assessments for deposit insurance and the FICO payments was $350,000, which was a reduction from the total amount of $423,000 paid during the fiscal year ended June 30, 1997.
RECAPTURE OF BAD DEBT RESERVES. The Company, 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 Company has already provided a deferred income tax liability for this tax for financial reporting purposes, there was no adverse impact to the Company's financial condition or results of operations from the enactment of federal legislation that imposed such recapture
New York State (the "State") has enacted legislation, that has enabled the Company to avoid recapture into income the State tax bad debt reserves that otherwise would have occurred as a result of changes in the federal law. New York City has enacted legislation similar to the State legislation.
THE YEAR 2000 PROBLEM
The Year 2000 Problem centers upon the inability of computer systems to recognize the year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field, without considering the upcoming change in the century. With the impending millennium, these programs and computers will recognize "00" as the year 1900 rather than the year 2000. Like most financial providers, the Company and its operations may be significantly affected by the Year 2000 Problem due to the nature of financial information. Software, hardware and equipment both within and outside the Company's direct control and with whom the Company electronically or operationally interfaces (e.g., third party vendors providing data processing, information system management, maintenance of computer systems, and credit bureau information) are likely to be affected. Furthermore, if computer systems are not adequately changed to identify the Year 2000, many computer applications could fail or create erroneous results. As a result, many calculations which rely upon the date field information, such as interest, payment or due dates and other operating functions, will generate results which could be significantly misstated, and the Company could experience a temporary inability to process transactions, send invoices or engage in similar normal business activities. In addition, under certain circumstances, failure to adequately address the Year 2000 Problem could adversely affect the viability of the Company's suppliers and creditors and the creditworthiness of its borrowers. Thus, if not adequately addressed, the Year 2000 Problem could result in a significant adverse impact upon the Company's products, services and competitive condition.
The Company has fully completed its assessment of the Year 2000 Problem. The Company has already replaced and/or upgraded several internal systems in order to ensure Year 2000 compliance and has entered the compliance testing phase on its loan and deposit systems. All testing is expected to be completed prior to December 31, 1998. The Company utilizes outside vendors for software related to its major application systems. As a part of its assessment procedures, the Company assessed the action plans regarding the Year 2000 Problem for each outside vendor. The Company presently believes that, with continued modifications to existing software and conversions to new software, the Year 2000 Problem will be mitigated without causing a material adverse effect upon the operations of the Company. At this time, management of the Company believes that all critical modifications and conversions will be completed in a timely manner. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Problem could have a material adverse impact upon the Company's operations.
In the event that system failures occur related to the Year 2000 Problem, the
Company has developed contingency plans, which involve, among other actions,
utilization of an alternate service provider or alternate products available
through the current vendor.
Monitoring and managing the Year 2000 project will result in additional direct and indirect costs to the Company. Direct costs include potential charges by third party software vendors for product enhancements, costs involved in testing software products for year 2000 compliance, and any resulting costs for developing and implementing contingency plans for critical software products which are not enhanced. Indirect costs will principally consist of the time devoted by existing employees in monitoring software vendor progress, testing enhanced software products and implementing any necessary contingency plans. The Company estimates that total costs related to the Year 2000 Problem will not exceed $100,000. Both direct and indirect costs of addressing the Year 2000 Problem will be charged to earnings as incurred. To date, over one-half of the total estimated costs associated with the Year 2000 Problem have already been expensed.
IMPACT OF RECENT ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income'' ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 requires that financial statements report and display comprehensive income in the same prominence as net income, but permits the statement of comprehensive income to be presented either together with or apart from the income statement. Comprehensive income, as defined by SFAS 130 includes revenues, expenses, and gains and losses which, under current GAAP, bypass net income and are typically reported as a component of stockholders' equity. SFAS 130 is applicable for all entities which present a full set of financial statements and is effective for fiscal years beginning after December 15, 1997, with early adoption permitted. Management is currently evaluating SFAS 130.
In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information'' ("SFAS 131"). SFAS 131 introduces a new method for segment reporting referred to as the "management approach," which focuses upon the manner in which the chief operating decision makers organize segments within a company for making operating decisions and assessing performance. Under the management approach, reportable segments can be based upon, but are not limited to, products and services, geography and legal or management structure. SFAS 131 requires full financial disclosure for each segment, but only requires limited quarterly segment disclosure. SFAS 131 is applicable for all public, for-profit companies, and is effective for fiscal years beginning after December 15, 1997, with early application encouraged. Management is currently evaluating SFAS 131.
In February, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Disclosures About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 amends disclosure requirements related to pension and other postretirement benefits previously required under Statements of Financial Accounts Standards Nos. 87, 88 and 106. SFAS 132 does not change the measurement or recognition of these plans. Adoption of SFAS 132 is required for all fiscal years beginning after December 15, 1997.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities " ("SFAS 133"). SFAS 133 requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. Under SFAS
133 an entity may designate a derivative as a hedge of exposure to either
changes in: (a) fair value of a recognized asset or liability or firm
commitment, (b) cash flows of a recognized or forecasted transaction, or (c)
foreign currencies of a net investment in foreign operations, firm commitments,
available-for-sale securities or a forecasted transaction. Depending upon the
effectiveness of the hedge and/or the transaction being hedged, any changes in
the fair value of the derivative instrument is either recognized in earnings in
the current year, deferred to future periods, or recognized in other
comprehensive income. Changes in the fair value of all derivative instruments
not recognized as hedge accounting are recognized in current year earnings.
Adoption of SFAS 133 is required for all fiscal quarters or fiscal years
beginning after June 15, 1999.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Dime Community Bancshares, Inc. Common Stock is traded on the Nasdaq National Market and quoted under the symbol "DCOM." Prior to June 15, 1998, the Company's common stock was quoted under the symbol "DIME."
The following table shows the high and low sales price for the Company's common stock and dividends declared by the Company during the period indicated. The Company's Common stock began trading on June 26, 1996, the date of the initial public offering.
Fiscal Year Fiscal Year
End June 30, 1998 End June 30, 1997
Quarter Ended High Low High Low
Dividends Sales Closing Dividends Sales Sales
Declared Price Price Declared Price Price
-----------------------------------------------------------------------------------------------------------------------
September 30th $- $20-1/2 $18-3/8 - $14 11-3/4
December 31st 0.06 25-3/4 18-3/8 - 15-1/8 13-1/4
March 31st 0.08 25-1/4 18-3/4 - 19-5/8 14-1/2
June 30th 0.09 29-1/2 24-3/8 $0.045 20 16-5/8
On June 30, 1998, the last trading date in the fiscal year, the Company's
stock closed at $27{3/4}. At September 25, 1998 the Company had approximately
1,029 shareholders of record, not including the number of persons or entities
holding stock in nominee or street name through various brokers and banks.
There were 12,176,513 shares of common stock outstanding at June 30, 1998.
As the principal asset of the Company, from time-to-time the Bank may be the
principal source of funds for payment of dividends by the Company. The Bank
will not be permitted to pay dividends on its capital stock if its
stockholders' equity would be reduced below applicable regulatory requirements
or the amount required for the liquidation account established during the
Bank's conversion. See Note 2 to the Consolidated Financial Statements of the
Company for a further discussion of the liquidation account. The OTS capital
distribution regulations applicable to savings institutions (such as the Bank)
that meet their regulatory capital requirements, generally limit dividend
payments in any year to the greater of (i) 100% of year-to-date net income plus
an amount that would reduce surplus capital by one-half or (ii) 75% of net
income for the most recent four quarters. Surplus capital is the excess of
actual capital at the beginning of the year over the institution's minimum
regulatory capital requirement. In addition, capital distributions from the
Bank to the Company, if in excess of established limits, could result in
recapture of the Bank's New York State and City bad debt reserves. See Note 14
to the Consolidated Financial Statements of the Company for a further
discussion of this tax matter.
Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its shareholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Bank. The Company is subject, however, to the requirements of Delaware law,
which generally limits dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.
- 23 -
|
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors of
the Dime Community Bancshares, Inc. and Subsidiary
We have audited the accompanying consolidated statements of condition of Dime
Community Bancshares, Inc. (formerly Dime Community Bancorp, Inc.) and
Subsidiary (the ''Company'') as of June 30, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dime Community
Bancshares, Inc. and Subsidiary as of June 30, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1998 in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 15, effective July 1, 1995, the Company changed its
method of accounting for postretirement benefits other than pensions to comply
with Statement of Financial Accounting Standards No. 106.
/s/ DELOITTE & TOUCHE LLP
New York, New York
August 14, 1998
- 24 -
|
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except share amounts)
|
JUNE 30, 1998 1997
----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $16,266 $19,198
Investment securities held-to-maturity (estimated market value of
$78,593 and $102,024 at June 30, 1998 and 1997, respectively) (Note 4) 78,091 101,587
Investment securities available for sale (Note 4):
Bonds and notes (amortized cost of $72,715 and $52,426 at
June 30, 1998 and 1997, respectively) 73,031 52,798
Marketable equity securities (historical cost of $10,425 and $4,912
at June 30, 1998 and 1997, respectively) 12,675 5,889
Mortgage-backed securities held-to-maturity (estimated market
value of $47,443 and $79,075 at June 30, 1998 and 1997,
respectively) (Note 5) 46,714 78,388
Mortgage backed securities available for sale (amortized cost of
$361,372 and $227,776 at June 30, 1998 and 1997,
respectively)(Note 5) 363,875 230,137
Federal funds sold 9,329 18,902
Loans (Note 6):
Real estate 943,864 744,246
Other loans 5,716 6,076
Less allowance for loan losses (Note 7) (12,075) (10,726)
----------------------------------------------------------------------------------------------------------------------------------
Total loans, net 937,505 739,596
Loans held for sale 541 262
Premises and fixed assets (Note 9) 10,742 13,995
Federal Home Loan Bank of New York capital stock (Note 10) 10,754 8,322
Other real estate owned, net (Note 7) 825 1,697
Goodwill (Note 3) 24,028 26,433
Receivable for securities sold 18,008 -
Other assets (Notes 14 and 15) 21,542 17,822
----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,623,926 $1,315,026
----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Due to depositors (Note 11) $1,038,342 $963,395
Escrow and other deposits 15,395 14,974
Securities sold under agreements to repurchase (Note 12) 256,601 76,333
Federal Home Loan Bank of New York advances (Note 13) 103,505 63,210
Payable for securities purchased 12,062 -
Accrued postretirement benefit obligation (Note 15) 2,721 2,546
Other liabilities (Note 15) 8,951 3,679
----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,437,577 1,124,137
----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par, 9,000,000 shares authorized, none issued or
outstanding at June 30, 1998 and June 30, 1997) - -
Common stock ($0.01 par, 45,000,000 shares authorized, 14,551,100 shares and
14,547,500 shares issued at June 30, 1998 and 1997, respectively, and
12,176,513 and 13,092,750 shares outstanding at June 30, 1998 and 1997, respectively. 145 145
Additional paid-in capital 143,322 141,716
Unallocated common stock of Employee Stock Ownership Plan (Note 15) (9,175) (10,324)
Unearned common stock of Recognition and Retention Plan (Note 15) (6,963) (9,671)
Common stock held by Benefit Maintenance Plan (Note 15) (431) -
Treasury stock, at cost (2,374,587 shares and 1,454,750 shares at
June 30, 1998 and 1997, respectively ) (Note 18) (48,470) (27,703)
Retained earnings (Note 2) 105,158 94,695
Unrealized gain on securities available for sale, net of deferred taxes 2,763 2,031
----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 186,349 190,889
----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,623,926 $1,315,026
|
See Notes to consolidated financial statements.
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share amounts)
FOR THE YEARS ENDED JUNE 30, 1998 1997 1996 ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans secured by real estate $69,824 $54,965 $39,314 Other loans 487 460 340 Investment securities 10,798 13,654 5,738 Mortgage-backed securities 23,463 17,704 5,927 Federal funds sold 1,892 2,247 1,300 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME 106,464 89,030 52,619 ---------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits and escrow 43,027 38,544 22,508 Borrowed funds 13,908 3,020 1,008 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 56,935 41,564 23,516 ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 49,529 47,466 29,103 Provision for loan losses 1,635 4,200 2,979 ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 47,894 43,266 26,124 NON-INTEREST INCOME: Service charges and other fees 2,352 1,934 911 Net gain on sales and redemptions of securities and other assets 2,873 859 (30) Net gain on sales of loans 108 125 12 Other 1,674 1,215 482 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST INCOME 7,007 4,133 1,375 ---------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits 12,748 9,794 7,359 ESOP and RRP compensation expense 5,378 3,058 114 OCCUPANCY AND EQUIPMENT 3,011 3,084 1,775 SAIF special assessment - 2,032 - Federal deposit insurance premiums 350 423 109 Data processing costs 1,169 1,000 557 Provision for losses on other real estate owned 114 450 586 Goodwill amortization 2,405 2,405 25 Other 4,762 5,246 3,496 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST EXPENSE 29,937 27,492 14,021 ---------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 24,964 19,907 13,478 Income tax expense 11,866 7,591 6,181 ---------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 13,098 12,316 7,297 CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGING TO A DIFFERENT METHOD OF ACCOUNTING FOR: Postretirement benefits other than pensions - - (1,032) ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $13,098 $12,316 $6,265 ---------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: BASIC $1.19 $0.95 N/A ---------------------------------------------------------------------------------------------------------------------------------- DILUTED $1.09 $0.95 N/A ---------------------------------------------------------------------------------------------------------------------------------- |
See Notes to consolidated financial statements.
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands Except Per Share Data)
FOR THE YEARS ENDED JUNE 30, 1998 1997 1996 ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK (PAR VALUE $0.01): Balance at beginning of period $145 $145 $- Issuance of common stock in initial public offering - - 145 ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of period 145 145 145 ---------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of period 141,716 141,240 - Issuance of common stock in initial public offering - - 145,330 Cost of issuance of common stock - (190) (4,107) Stock options exercised 52 - - Tax benefit of RRP shares 33 - Amortization of excess fair value over cost - ESOP stock 1,521 666 17 ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of period 143,322 141,716 141,240 ---------------------------------------------------------------------------------------------------------------------------------- EMPLOYEE STOCK OWNERSHIP PLAN: Balance at beginning of period (10,324) (11,541) - Common stock acquired by ESOP - - (11,638) Amortization of earned portion of ESOP stock 1,149 1,217 97 ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of period (9,175) (10,324) (11,541) ---------------------------------------------------------------------------------------------------------------------------------- RECOGNITION AND RETENTION PLAN: Balance at beginning of period (9,671) - - Common stock acquired by RRP - (10,846) - Amortization of earned portion of RRP stock 2,708 1,175 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of period (6,963) (9,671) - ---------------------------------------------------------------------------------------------------------------------------------- TREASURY STOCK: Balance at beginning of period (27,703) - - Purchase of treasury shares, at cost (20,767) (27,703) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of period (48,470) (27,703) - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK HELD BY BENEFIT MAINTENANCE PLAN: Balance at beginning of period - - - Common stock acquired (431) - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of period (431) - - ---------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS: Balance at beginning of period 94,695 82,916 76,651 Net income for the period 13,098 12,316 6,265 CASH DIVIDENDS DECLARED AND PAID (2,635) (537) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of period 105,158 94,695 82,916 ---------------------------------------------------------------------------------------------------------------------------------- UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE, NET: Balance at beginning of period 2,031 311 416 Change in unrealized gain on securities available for sale during the period, net of deferred taxes 732 1,720 (105) ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of period $2,763 $2,031 $311 ---------------------------------------------------------------------------------------------------------------------------------- |
See Notes to consolidated financial statements.
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In thousands)
FOR THE YEARS ENDED JUNE 30, 1998 1997 1996 ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $13,098 $12,316 $6,265 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net gain on investment and mortgage backed securities called (9) - (79) Net (gain) loss on investment and mortgage backed securities sold (1,123) (768) 164 Net gain on sale of loans held for sale (108) (125) (12) Net gain on sale of other assets (1,973) (19) - Net depreciation and amortization (accretion) 847 (958) 102 ESOP and RRP compensation expense 5,378 3,058 114 Provision for loan losses 1,635 4,200 2,979 Goodwill amortization 2,405 2,405 25 (Increase) decrease in loans held for sale (171) 322 (310) (Increase) decrease in other assets and other real estate owned (3,476) (2,401) 3,040 Increase in accrued postretirement benefit obligation 175 165 2,115 Increase in receivable for securities purchased (18,008) - - Increase (decrease) in payable for securities purchased 12,062 (33,994) 33,994 Increase in other liabilities 5,272 858 1,677 ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) Operating Activities 16,004 (14,941) 50,074 ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease (increase) in federal funds sold 9,573 96,228 (52,253) Proceeds from maturities of investment securities held to maturity 10,250 19,075 13,065 Proceeds from maturities of investment securities available for sale 63,145 359,710 399,135 Proceeds from calls of investment securities held to maturity 42,500 5,000 11,056 Proceeds from calls of investment securities available for sale 11,500 26,011 11,323 Proceeds from sales of investment securities available for sale 13,437 27,253 501 Proceeds from sales of mortgage backed securities held to maturity 5,317 - 2,555 Proceeds from sales and calls of mortgage backed securities available 92,776 16,713 - for sale Purchases of investment securities held to maturity (29,082) (82,010) (9,292) Purchases of investment securities available for sale (112,930) (126,741) (541,951) Purchases of mortgage backed securities held to maturity - (38,842) (11,714) Purchases of mortgage backed securities available for sale (290,576) (115,265) (11,554) Principal collected on mortgage backed securities held to maturity 26,216 12,820 9,995 Principal collected on mortgage backed securities available for sale 64,470 28,201 15,877 Net increase in loans (199,545) (168,381) (41,856) Cash disbursed in acquisition of Conestoga Bancshares, net of cash - (400) (93,074) acquired Sales (Purchases) of fixed assets, net 4,262 (652) (779) Purchase of Federal Home Loan Bank stock (2,432) (718) (123) ---------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by Investing Activities (291,119) 58,002 (299,089) ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in due to depositors 74,947 13,281 1,019 Net increase (decrease) in escrow and other deposits 421 (126,758) 128,625 Proceeds from Federal Home Loan Bank of New York Advances 40,295 47,500 - Increase (decrease) in securities sold under agreements to repurchase 180,268 64,335 (111) Proceeds from issuance of common stock, net of ESOP stock purchase - - 133,837 Common stock issued for exercise of Stock Options and tax benefits of 85 - - RRP Cash disbursed for expenses related to issuance of common stock - (190) (4,107) Purchase of common stock by the Recognition and Retention Plan - (10,846) - Purchase of common stock by Benefit Maintenance Plan (431) - - Cash dividends paid to stockholders (2,635) (537) - Purchase of treasury stock (20,767) (27,703) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by Financing Activities 272,183 (40,918) 259,263 ---------------------------------------------------------------------------------------------------------------------------------- (DECREASE) INCREASE IN CASH AND DUE FROM BANKS (2,932) 2,143 10,248 CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 19,198 17,055 6,807 ---------------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS, END OF PERIOD $16,266 $19,198 $17,055 ---------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $10,984 $8,486 $6,993 ---------------------------------------------------------------------------------------------------------------------------------- Cash paid for interest $54,941 $41,270 $23,744 ---------------------------------------------------------------------------------------------------------------------------------- Transfer of loans to other real estate owned $779 $1,407 $1,069 ---------------------------------------------------------------------------------------------------------------------------------- Transfer of investment and mortgage backed securities held-to-maturity $- $- $3,300 to available for sale ---------------------------------------------------------------------------------------------------------------------------------- Change in unrealized gain on available for sale securities, net of $732 $1,720 $(105) deferred taxes ---------------------------------------------------------------------------------------------------------------------------------- |
On June 26, 1996, the Bank acquired all of the outstanding common stock of Conestoga Bancshares, Inc. for cash. In connection with this acquisition, the following assets were acquired and liabilities assumed:
Fair Value of Investments, Loans and Other Assets Acquired, net $507,023
Cash paid for Common Stock (101,272)
------------------------------------------------------------------------------
Deposits and Other Liabilities Assumed $405,751
------------------------------------------------------------------------------
|
See Notes to consolidated financial statements.
DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Dime Community Bancshares, Inc. (formerly Dime Community Bancorp, Inc.) (the "Company"), is a Delaware corporation organized by the Bank for the purpose of acquiring all of the capital stock of The Dime Savings Bank of Williamsburgh (the "Bank") issued in the Conversion on June 26, 1996. Presently, the significant assets of the Company are the capital stock of the Bank, the Company's loan to the Bank's ESOP, and investments of the net conversion proceeds retained by the Company. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended.
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. 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. Thirteen additional offices are located in the boroughs of Brooklyn, Queens, and the Bronx, and in Nassau County.
Since the sale of the Company's stock and the merger of Conestoga Bancorp, Inc. into the Bank occurred on June 26, 1996, the Company's results of operations for the year ended June 30, 1996 are comprised of the results of operations of the Bank. Earnings per share information for the Company for the year ended June 30, 1996 is not meaningful.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The accounting and reporting policies of the Company conform to generally accepted accounting principles. The following is a description of the significant policies:
PRINCIPLES OF CONSOLIDATION - The accompanying 1998, 1997 and 1996 consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, the Bank. All financial statements presented include the accounts of the Bank's five wholly-owned subsidiaries, Havemeyer Equities Corp. (''HEC''), Boulevard Funding Corp. (''BFC''), Havemeyer Brokerage Corp. (''HBC''), Havemeyer Investments Inc. ("HII") and DSBW Residential Preferred Funding Corp. ("DRPFC"). HBC's primary function is the management of an investment securities portfolio. HII was established during the fiscal year ended June 30, 1998, and its primary function is the sale of insurance and annuity products. DRPFC , established in March, 1998, is intended to qualify as real estate investment trust for federal tax purposes. BFC was established in order to invest in real estate joint ventures and other real estate assets. BFC has no investments in real estate at June 30, 1998, and is currently inactive. HEC was also originally established in order to invest in real estate joint ventures and other real estate assets. In June, 1998, HEC assumed direct ownership of DSBW Preferred Funding Corp. ("DPFC"). DPFC, established as a direct subsidiary of the Bank in March, 1998, is intended to qualify as real estate investment trust for federal tax purposes. HEC has no other investments as of June 30, 1998. All significant intercompany accounts and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES - Purchases and sales of investments and mortgage-backed securities are recorded on trade date. Gains and losses on sales of investment and mortgage-backed securities are recorded on the specific identification basis.
SFAS No. 115, ''Accounting for Investments in Debt and Equity Securities'' (''SFAS 115'') requires that debt and equity securities that have readily determinable fair values be carried at fair value unless they are held to maturity. Debt securities are classified as held to maturity and carried at amortized cost only if the reporting entity has a positive intent and ability to hold these securities to maturity. If not classified as held to maturity, such securities are classified as securities available for sale or as trading securities. Unrealized holding gains or losses on securities available for sale are excluded from earnings and reported net of income taxes as a separate component of stockholders' equity. At June 30, 1998 and 1997, all equity securities are classified as available for sale.
LOANS HELD FOR SALE - Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or estimated market
value.
ALLOWANCE FOR LOAN LOSSES - It is the policy of the Bank to provide a valuation allowance for estimated losses on loans based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations which may affect the borrower's ability to repay, estimated value of underlying collateral and current economic conditions in the Bank's lending area. The allowance is increased by provisions for loan losses charged to operations and is reduced by charge-offs, net of recoveries. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management uses available information to estimate losses on loans, future additions to the allowance may be necessary based on changes in economic conditions beyond management's control. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. Management believes, based upon all relevant and available information, that the allowance for loan losses is adequate to absorb losses inherent in the portfolio.
SFAS No. 114, ''Accounting by Creditors for Impairment of a Loan'' (''SFAS 114'') requires all creditors to account for impaired loans, except those loans that are accounted for at fair value or at the lower of cost or fair value, at the present value of expected future cash flows discounted at the loan's effective interest rate. As an expedient, creditors may account for impaired loans at the fair value of the collateral or at the observable market price of the loan if one exists.
LOAN INCOME RECOGNITION - Interest income on loans is recorded under the level yield method. Under this method, discount accretion and premium amortization are included in interest income.
Accrual of interest is discontinued when its receipt is in doubt, generally, when a loan becomes ninety days past due as to principal or interest. When interest accruals are discontinued, any interest credited to income in the current year is reversed. Payments on nonaccrual loans are applied to principal. Management may elect to continue the accrual of interest when a loan is in the process of collection and the estimated fair value of collateral is sufficient to cover the principal balance and accrued interest. Loans are returned to accrual status once the doubt concerning collectibility has been removed and the borrower has demonstrated performance in accordance with the loan terms and conditions.
LOAN FEES - Loan origination fees and certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual loan terms.
OTHER REAL ESTATE OWNED, NET - Properties acquired as a result of foreclosure on a mortgage loan are classified as other real estate owned and are 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. Subsequent write downs are charged to the valuation allowance for possible losses on other real estate owned.
PREMISES AND FIXED ASSETS - Land is stated at original cost. Buildings and furniture and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the properties as follows:
Buildings 2.22% to 2.50% per year Furniture and equipment 10% per year
Leasehold improvements are amortized over the remaining non-cancelable terms of the related leases.
EARNINGS PER SHARE ("EPS")- In December, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share'' ("SFAS 128"). SFAS 128 establishes new standards for computing and presenting earnings per share. SFAS 128, which replaced APB Opinion No. 15 (issued by the American Institute of Certified Public Accountants in 1971) as the authoritative guidance for calculation and disclosure of earnings per share. SFAS 128 requires disclosure of basic earnings per share and diluted earnings per share, for entities with complex capital structures, on the face of the income statement, along with a reconciliation of the numerator and denominator of basic and diluted earnings per share. Earnings per share amounts for the year ended June 30, 1997 have been restated to reflect the adoption of SFAS 128.
The following is a reconciliation of the numerator and denominator of basic earnings per share for the years ended June 30, 1998 and 1997.
Fiscal Year Ended June 30, 1998 1997
-------------------------------------
NUMERATOR:
Net Income $13,098 $12,316
--------------------------------------------------------------------------------------------------------------------
DENOMINATOR:
Average shares outstanding utilized in the calculation of basic earnings per
share 11,000,744 12,897,686
--------------------------------------------------------------------------------------------------------------------
Unvested shares of Recognition and Retention Plan 516,777 35,932
Common stock equivalents due to the dilutive effect of stock options 523,207 46,572
--------------------------------------------------------------------------------------------------------------------
Average shares outstanding utilized in the calculation of diluted earnings
per share 12,040,728 12,980,190
--------------------------------------------------------------------------------------------------------------------
|
Common stock equivalents due to the dilutive effect of stock options are calculated based upon the average market value of the Company's common stock during the fiscal years ended June 30, 1998 and 1997.
GOODWILL - Goodwill generated from the Bank's acquisition of Conestoga Bancorp, Inc. on June 26, 1996 is recorded on a straight line basis over a twelve year period. In March 1995, the FASB issued SFAS No. 121, ''Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of'' which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment and reported at the lower of carrying amount or fair value, less cost to sell, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Since June 26, 1996, no such event or change in circumstance has occurred which has caused the Company to review the recorded level of goodwill associated with assets acquired from Conestoga.
INCOME TAXES - Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109") which requires that deferred taxes be provided for temporary differences between the book and tax bases of assets and liabilities.
CASH FLOWS - For purposes of the Consolidated Statement of Cash Flows, the Bank considers cash and due from banks to be cash equivalents.
EMPLOYEE BENEFITS - The Company maintains a Retirement Plan and 401(k) Plan for substantially all of its employees, both of which are tax qualified under the Employee Retirement Income Security Act of 1974 (ERISA).
The Company provides additional postretirement benefits to employees, which are recorded in accordance with Statement of Financial Accounting Standards No. 106, ''Employers' Accounting for Postretirement Benefits Other Than Pensions'' ("SFAS 106"). This Statement requires accrual of postretirement benefits (such as health care benefits) during the years an employee provides services. The Company adopted SFAS 106 on July 1, 1995. As permitted by SFAS 106, the Bank elected to record the full cumulative liability at the time of adoption, which resulted in a cumulative effect adjustment of $1,032, after reduction for income taxes of $879, which was charged to operations during the fiscal year ended June 30, 1996.
The Company maintains an Employee Stock Ownership Plan for employees ("ESOP"). Compensation expense related to the ESOP is recorded in accordance with SOP 93- 6, which requires the compensation expense to be recorded during the period in which the shares become committed to be released to participants. The compensation expense is measured based upon the fair market value of the stock during the period, and, to the extent that the fair value of the shares committed to be released differs from the original cost of such shares, the difference is recorded as an adjustment to additional paid-in capital.
In December, 1996, the Company adopted a Recognition and Retention Plan for
employees and outside directors ("RRP') and Stock Option Plan for Employees and
Outside Directors (the "Stock Option Plan"), which are subject to the
accounting requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123"). SFAS 123 encourages,
but does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations ("APB 25"). Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. To date, no compensation
expense
has been recorded for stock options, since, for all granted options, the market price on the date of grant equals the amount employees must pay to acquire the stock. In accordance with APB 25, compensation expense related to the RRP is recorded for all shares earned by participants during the period at $18.64 per share, the average historical cost of the shares of all RRP shares acquired.
FINANCIAL INSTRUMENTS - Statement of Financial Accounting Standards No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On balance sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS 119 at June 30, 1998, 1997 or 1996.
RECENTLY ISSUED ACCOUNTING STANDARDS- In June, 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, ''Accounting for Transfers of Financial Assets and Extinguishments of Liabilities'' ("SFAS 125"). SFAS 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are borrowings. SFAS 125 also requires that liabilities and derivatives incurred or obtained as part of a transfer be measured initially at fair value. This statement also provides guidance on measurement of servicing rights on assets transferred and derecognition of liabilities transferred. SFAS 125 is effective for all transfers, servicing, or extinguishments occurring after December 31, 1996, except for certain provisions relating to the accounting for secured borrowings and collateral and the accounting for transfers and servicing of repurchase agreements, dollar rolls, securities lending and similar transactions, for which the effective date was deferred until January 1, 1998, in accordance with Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127"). The Company adopted these standards effective January 1, 1997 and January 1, 1998. The adoption of thess standards did not have a material impact on the financial condition or results of operations of the Bank.
In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income'' ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 requires that financial statements report and display comprehensive income in the same prominence as net income, but permits the statement of comprehensive income to be presented either together with or apart from the income statement. Comprehensive income, as defined by SFAS 130 includes revenues, expenses, and gains and losses which, under current GAAP, bypass net income and are typically reported as a component of stockholders' equity. SFAS 130 is applicable for all entities which present a full set of financial statements and is effective for fiscal years beginning after December 15, 1997, with early adoption permitted. Management is currently evaluating SFAS 130.
In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information'' ("SFAS 131"). SFAS 131 introduces a new method for segment reporting referred to as the "management approach," which focuses upon the manner in which the chief operating decision makers organize segments within a company for making operating decisions and assessing performance. Under the management approach, reportable segments can be based upon, but are not limited to, products and services, geography and legal or management structure. SFAS 131 requires full financial disclosure for each segment, but only requires limited quarterly segment disclosure. SFAS 131 is applicable for all public, for-profit companies, and is effective for fiscal years beginning after December 15, 1997, with early application encouraged. Management of the Company is currently evaluating SFAS 131.
In February, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Disclosures About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 amends disclosure requirements related to pension and other postretirement benefits previously required under Statements of Financial Accounts Standards Nos. 87, 88 and 106. SFAS 132 does not change the measurement or recognition of these plans. Adoption of SFAS 132 is required for all fiscal years beginning after December 15, 1997.
In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities " ("SFAS 133"). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in
earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. Adoption of SFAS 133 is required for all fiscal quarters or fiscal years beginning after June 15, 1999. Adoption of SFAS 133 is not expected to have an impact upon the Company's consolidated financial condition or results of operations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas in the accompanying financial statements where estimates are significant include the allowance for loans losses, the carrying value of other real estate, purchase accounting adjustments related to the acquisition of Conestoga and the fair value of financial instruments.
RECLASSIFICATION - Certain June 30, 1997, and 1996 amounts have been reclassified to conform to the June 30, 1998 presentation.
2. CONVERSION TO STOCK FORM OF OWNERSHIP
On November 2, 1995, the Board of Directors of the Bank adopted a Plan of Conversion to convert from mutual to stock form. As part of the conversion, the Company was incorporated under Delaware law for the purpose of acquiring and holding all of the outstanding stock of the Bank. On June 26, 1996, the Company completed its initial public offering and issued 14,547,500 shares of common stock (par value $.01 per share) at a price of $10.00 per share, resulting in net proceeds of approximately $141,368 prior to the acquisition of stock by the Employee Stock Ownership Plan. The Company retained approximately $53,397 of the net proceeds and used the remaining net proceeds to purchase all of the outstanding stock of the Bank. Costs related to the conversion were charged against the Company's proceeds from the sale of the stock.
At the time of conversion, the Bank established a liquidation account in an amount equal to the retained earnings of the Bank as of the date of the most recent financial statements contained in the final conversion prospectus. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held.
As discussed in Note 3, the Company acquired Conestoga Bancorp, Inc. on June 26, 1996. The liquidation account previously established by Conestoga's subsidiary, Pioneer Savings Bank, F.S.A. during its initial public offering in March, 1993, was assumed by the Company in the acquisition.
The Bank may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause stockholders' equity to be reduced below applicable regulatory capital maintenance requirements, the amount required for the liquidation account, or if such declaration and payment would otherwise violate regulatory requirements.
3. ACQUISITION OF CONESTOGA BANCORP, INC.
On June 26, 1996, the Bank completed the acquisition of Conestoga Bancorp, Inc., the holding company for Pioneer Savings Bank, F.S.B. The Bank received approximately $170,836, $124,411 and $111,991 of investment securities, mortgage-backed securities and loans, respectively, at fair value and assumed approximately $394,250 of customer deposit liabilities. Approximately $10,000 of investment securities acquired were classified as held-to-maturity at June 30, 1996. All other securities acquired were classified as available for sale. Total cash paid for the acquisition was $101,272. The goodwill generated in the transaction of $28,438 is being amortized on a straight line basis over 12 years for financial reporting purposes.
This acquisition was recorded using the purchase method of accounting; accordingly, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values.
All operations of Conestoga acquired by the Bank are reflected in the consolidated statement of operations of the Company for the years ended June 30, 1998 and 1997. The consolidated statements of financial condition as of June 30, 1998 and 1997 include the assets acquired from Conestoga. The information below presents, on an unaudited pro forma basis, the consolidated statement of operations for the Company for the year ended June 30, 1996. All information below is adjusted for the acquisition of Conestoga, as if the transaction had been consummated on July 1, 1995.
Pro Forma for Year Ended June 30, 1996
------------------------------------------------------------------
Net interest income $43,129
Provision for possible loan losses 3,083
Non-interest income 3,965
Non-interest expense:
Goodwill amortization 2,350
Other non-interest expense 20,540
------------------------------------------------------------------
Total non-interest expense 22,890
------------------------------------------------------------------
Income before income taxes $21,121
------------------------------------------------------------------
|
4. INVESTMENT SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses and estimated market value of investment securities held to maturity at June 30, 1998 were as follows:
Investment Securities Held to Maturity
----------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
DEBT SECURITIES:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $64,448 $412 $(49) $64,811
Obligations of state and political
subdivisions 1,899 43 - 1,942
Corporate securities 11,494 96 - 11,590
Public utilities 250 - - 250
----------------------------------------------------------------------------------------------------------------------------
$78,091 $551 $(49) $78,593
----------------------------------------------------------------------------------------------------------------------------
|
The amortized cost and estimated market value of investment securities held to maturity at June 30, 1998, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated Market
Cost Value
----------------------------------------------------------------------------------------------
Due in one year or less $9,224 $9,233
Due after one year through five years 65,568 66,034
Due after five years through ten years 3,299 3,326
-------------------------------------
$78,091 $78,593
-------------------------------------
|
During the year ended June 30, 1998, proceeds from the calls of investment securities held to maturity totaled $42,500. A gain of $9 resulted on these calls. There were no sales of investment securities held to maturity during the year ended June 30, 1998.
The amortized/historical cost, gross unrealized gains and losses and estimated
market value of investment securities available for sale at June 30, 1998 were
as follows:
Investment Securities Available for Sale
----------------------------------------------------------------------------------------------------------------------------
Amortized Gross Gross Estimated
Historical Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
DEBT SECURITIES:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $28,377 $133 $(19) $28,491
Corporate securities 37,494 295 (43) 37,746
Public utilities 6,844 14 (64) 6,794
----------------------------------------------------------------------------------------------------------------------------
72,715 442 (126) 73,031
EQUITY SECURITIES: 10,425 2,317 (67) 12,675
----------------------------------------------------------------------------------------------------------------------------
$83,140 $2,759 $(193) $85,706
----------------------------------------------------------------------------------------------------------------------------
|
The amortized cost and estimated market value of investment securities available for sale at June 30, 1998, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated Market
Cost Value
Due in one year or less $10,008 $10,005
Due after one year through five years 59,066 59,401
Due after five years through ten years 3,641 3,625
-------------------------------------
$72,715 $73,031
-------------------------------------
|
During the year ended June 30, 1998, proceeds from the sales and calls of investment securities available for sale totaled $13,437 and $11,500, respectively. A gain of $520 resulted from the sales. No gain or loss resulted from the calls.
The amortized cost, gross unrealized gains and losses and estimated market value of investment securities held to maturity at June 30, 1997 were as follows:
Investment Securities Held to Maturity
----------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
DEBT SECURITIES:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $86,036 $498 $(116) $86,418
Obligations of state and political
subdivisions 1,974 43 - 2,017
Corporate securities 13,327 28 (14) 13,341
Public utilities 250 - (2) 248
----------------------------------------------------------------------------------------------------------------------------
$101,587 $569 $(132) $102,024
----------------------------------------------------------------------------------------------------------------------------
|
During the year ended June 30, 1997, proceeds from the calls of investment securities held to maturity totaled $5,000. No gain or loss was recognized on these calls. There were no sales of investment securities held to maturity during the year ended June 30, 1997.
The amortized/historical cost, gross unrealized gains and losses and estimated
market value of investment securities available for sale at June 30, 1997 were
as follows:
Investment Securities Available for Sale
Amortized/ Gross Gross Estimated
Historical Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
DEBT SECURITIES:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $33,706 $130 $(28) $33,808
Corporate securities 17,471 277 (5) 17,743
Public utilities 1,249 12 (14) 1,247
52,426 419 (47) 52,798
----------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES: 4,912 980 (3) 5,889
----------------------------------------------------------------------------------------------------------------------------
$57,338 $1,399 $(50) $58,687
----------------------------------------------------------------------------------------------------------------------------
|
During the year ended June 30, 1997, proceeds from the sales and calls of investment securities available for sale totaled $27,253 and $26,011, respectively. A loss of $273 and gain of $11 were recognized from the sales and calls, respectively.
5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses and the estimated market value of mortgage-backed securities held to maturity at June 30, 1998 were as follows:
Mortgage-Backed Securities Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
GNMA pass-through certificates $7,364 $344 $- $7,708
FHLMC pass-through certificates 23,086 229 (11) 23,304
FNMA pass-through certificates 16,264 173 (6) 16,431
----------------------------------------------------------------------------------------------------------------------------
$46,714 $746 $(17) $47,443
----------------------------------------------------------------------------------------------------------------------------
|
Proceeds from the sales of mortgage-backed securities held to maturity were $5,317 during the fiscal year ended June 30, 1998. A gain of $175 was recognized from these sales. The unpaid principal of the securities at the dates of sale was less than 15% of their acquired par value, and thus are permissable sales under SFAS 115.
The amortized cost, gross unrealized gains and losses and the estimated market value of mortgage-backed securities available for sale at June 30, 1998 were as follows:
Mortgage-Backed Securities Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
Collateralized mortage obligations $255,334 $1,072 $(230) $256,176
GNMA pass-through certificates 80,525 1,473 - 81,998
FHLMC pass-through certificates 8,692 34 (14) 8,712
FNMA pass-through certificates 16,821 208 (40) 16,989
----------------------------------------------------------------------------------------------------------------------------
$361,372 $2,787 $(284) $363,875
----------------------------------------------------------------------------------------------------------------------------
|
Proceeds from the calls and sales of mortgage-backed securities available for
sale were $92,776 during the year ended June 30, 1998. A gain of $428 was
recognized on these sales.
The amortized cost, gross unrealized gains and losses and the estimated market value of mortgage-backed securities held to maturity at June 30, 1997 were as follows:
Mortgage-Backed Securities Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
GNMA pass-through certificates $15,100 $562 $(2) $15,660
FHLMC pass-through certificates 40,528 127 (56) 40,599
FNMA pass-through certificates 22,760 120 (64) 22,816
----------------------------------------------------------------------------------------------------------------------------
$78,388 $809 $(122) $79,075
----------------------------------------------------------------------------------------------------------------------------
|
There were no sales of mortgage-backed securities held to maturity during the fiscal year ended June 30, 1997.
The amortized cost, gross unrealized gains and losses and the estimated market value of mortgage-backed securities available for sale at June 30, 1997 were as follows:
Mortgage-Backed Securities Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
Collateralized mortage obligations $72,343 $333 $(176) $72,500
GNMA pass-through certificates 88,874 1,903 (6) 90,771
FHLMC pass-through certificates 17,698 293 (54) 17,937
FNMA pass-through certificates 48,861 416 (348) 48,929
----------------------------------------------------------------------------------------------------------------------------
$227,776 $2,945 $(584) $230,137
----------------------------------------------------------------------------------------------------------------------------
|
Proceeds from the sale of mortgage-backed securities available for sale were $16,713 during the year ended June 30, 1997. A gain of $495 was recognized on these sales.
6. LOANS
The Company's real estate loans are comprised of the following:
At June 30, 1998 1997
--------------------------------------------------------------------------------------
One-to-four family $125,163 $140,536
Multi-family and underlying
cooperative 717,638 498,536
Nonresidential 50,062 43,180
F.H.A. and V. A. insured mortgage loans 11,934 14,153
Co-op loans 42,553 50,931
--------------------------------------------------------------------------------------
947,350 747,336
Net unearned fees (3,486) (3,090)
--------------------------------------------------------------------------------------
$943,864 $744,246
--------------------------------------------------------------------------------------
|
The Bank originates both adjustable and fixed interest rate real estate loans. At June 30, 1998, the approximate composition of these loans was as follows:
Fixed Rate Variable Rate
Period to Maturity or Next Repricing Book Value Period to Maturity or Next Repricing Book Value
-------------------------------------------------------- ---------------------------------------------------
1 month-1 year $16,520 1 month-1 year $127,240
1 year-3 years 22,939 1 year-3 years 118,181
3 years-5 years 7,317 3 years-5 years 241,405
5 years-10 years 209,855 5 years-10 years 130,415
Over 10 years 73,478 Over 10 years -
-------------------------------------------------------- ---------------------------------------------------
$330,109 $617,241
-------------------------------------------------------- ---------------------------------------------------
|
The adjustable rate loans have interest rate adjustment limitations and are generally indexed to the Federal Home Loan Bank of New York ("FHLBNY") five- year borrowing funds rate, the one-year constant maturity Treasury index, or the Federal Home Loan Bank national mortgage contract rate.
A concentration of credit risk exists within the Bank's loan portfolio, as the majority of real estate loans are collateralized by properties located in New York City and Long Island.
The Company's other loans are comprised of the following:
At June 30, 1998 1997
-----------------------------------------------------------------------
Student loans $677 $1,005
Passbook loans (secured by savings
and time deposits) 2,367 2,801
Home improvement loans 1,753 1,243
Consumer installment and other loans 919 1,027
-----------------------------------------------------------------------
5,716 6,076
Unearned discount - -
-----------------------------------------------------------------------
$5,716 $6,076
-----------------------------------------------------------------------
|
Loans on which the accrual of interest has been discontinued were $884 and $3,190 at June 30, 1998 and 1997, respectively. If interest on those loans had been accrued, interest income would have been increased by approximately $51 and $247 for the years ended June 30, 1998 and 1997, respectively.
The Bank had outstanding loans considered troubled-debt restructurings of $3,971 and $4,671 at June 30, 1998 and 1997, respectively. Income recognized on these loans was approximately $306 and $357 for the years ended June 30, 1998 and 1997, respectively, compared to interest income of $415 and $471 calculated under the original terms of the loans, for the years ended June 30, 1998 and 1997, respectively.
The recorded investment in loans for which impairment has been recognized under the guidance of SFAS 114 was approximately $3,136 and $4,294 at June 30, 1998 and 1997, respectively. The average balance of impaired loans was approximately $3,838 and $4,736 for the years ended June 30, 1998 and 1997, respectively. Write-downs of $45 and $985 were taken on impaired loans during the years ended June 30, 1998 and 1997, respectively. At June 30, 1998 and 1997, specific reserves totaling $23 and $122 were allocated within the allowance for loan losses for impaired loans. Net principal received and interest income recognized on impaired loans during the years ended June 30, 1998 and 1997 were not material. At June 30, 1998 and 1997, one loan totaling $2,681, was deemed impaired for which no reserves have been provided. This loan, which is included in troubled-debt restructurings at June 30, 1998 and 1997, has performed in accordance with the provisions of the restructuring agreement signed in October, 1995. The loan was on accrual status at both June 30, 1998 and 1997. All other loans deemed impaired, which total 3 and 6 loans as of June 30, 1998 and 1997, respectively, have reserves allocated towards their outstanding balance.
The following assumptions were utilized in evaluating the loan portfolio pursuant to the provisions of SFAS 114:
HOMOGENOUS LOANS - One-to-four family residential mortgage loans and loans on cooperative apartments having a balance of less than $227 and consumer loans are considered to be small balance homogenous loan pools and, accordingly, are not covered by SFAS 114.
LOANS EVALUATED FOR IMPAIRMENT - All non-homogeneous loans greater than $1,000 are individually evaluated for potential impairment. Additionally, residential mortgage loans exceeding $227 and delinquent in excess of 60 days are evaluated for impairment. A loan is considered impaired when it is probable that all contractual amounts due will not be collected in accordance with the terms of the loan. A loan is not deemed to be impaired if a delay in receipt of payment is expected to be less than 30 days or if, during a longer period of delay, the Bank expects to collect all amounts due, including interest accrued at the contractual rate during the period of the delay. Factors considered by management include the property location, economic conditions, and any unique circumstances affecting the loan. Except as noted above, at June 30, 1998 and 1997, all impaired loans were on nonaccrual status. In addition, at June 30, 1998 and 1997, respectively, approximately $428 and $1,577 of one-to-four family residential mortgage loans, loans on cooperative apartments and consumer loans with a balance of less than $227 were on nonaccrual status. These loans are considered as a homogeneous loan pool not covered by SFAS 114.
RESERVES AND CHARGE-OFFS - The Bank allocates a portion of its total allowance for loan losses to loans deemed impaired under SFAS 114. All charge-offs on impaired loans are recorded as a reduction in both loan principal and the allowance for loan losses. Management evaluates the adequacy of its allowance for loan losses on a regular basis. At June 30, 1998, management believes that its allowance is adequate to provide for losses inherent in the total loan portfolio, including impaired loans.
MEASUREMENT OF IMPAIRMENT - Since all impaired loans are collateralized by real estate properties, the fair value of the collateral is utilized to measure impairment.
INCOME RECOGNITION - Accrual of interest is discontinued on loans identified as impaired and past due ninety days. Subsequent cash receipts are applied initially to the outstanding loan principal balance. Additional receipts beyond the recorded outstanding balance at the time interest is discontinued are recorded as recoveries in the Bank's allowance for loan losses.
7. ALLOWANCE FOR LOAN LOSSES AND POSSIBLE LOSSES ON OTHER REAL ESTATE OWNED
Changes in the allowance for loan losses were as follows:
For the year ended June 30, 1998 1997 1996
---------------------------------------------------------------------------
Balance at beginning of period $10,726 $7,812 $5,174
Provision charged to operations 1,635 4,200 2,979
Loans charged off (328) (1,388) (1,023)
Recoveries 42 102 14
Reserve acquired in purchase
of Conestoga - - 668
---------------------------------------------------------------------------
$12,075 $10,726 $7,812
---------------------------------------------------------------------------
|
Changes in the allowance for possible losses on real estate owned were as follows:
For the year ended June 30, 1998 1997 1996
-----------------------------------------------------------------------------
Balance at beginning of period $187 $114 $-
Provision charged to operations 114 450 586
Charge-offs, net of recoveries (137) (377) (472)
-----------------------------------------------------------------------------
$164 $187 $114
-----------------------------------------------------------------------------
|
Prior to July 1, 1995, no valuation allowance for possible losses on Other real estate owned was maintained by the Bank.
8. MORTGAGE SERVICING ACTIVITIES
At June 30, 1998 and 1997, the Bank was servicing loans for others having principal amounts outstanding of approximately $58,619 and $69,648 respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. In connection with these loans serviced for others, the Bank held borrowers' escrow balances of approximately $569, $652 and $1,055 at June 30, 1998, 1997 and 1996, respectively.
9. PREMISES AND FIXED ASSETS
The following is a summary of premises and fixed assets:
At June 30, 1998 1997
------------------------------------------------------------------------
Land $2,164 $3,964
Buildings 11,753 12,778
Leasehold improvements 1,282 1,190
Furniture and equipment 6,503 7,105
------------------------------------------------------------------------
21,702 25,037
Less: accumulated appreciation
and amortization (10,960) (11,042)
------------------------------------------------------------------------
$10,742 $13,995
------------------------------------------------------------------------
|
Depreciation and amortization expense amounted to approximately $964, $1,076, and $501 for the years ended June 30, 1998, 1997 and 1996, respectively.
10. FEDERAL HOME LOAN BANK OF NEW YORK CAPITAL STOCK
The Bank is a Savings Bank Member of the FHLBNY. Membership requires the purchase of shares of FHLBNY capital stock at $100 per share. The Bank owned 107,535 and 83,215 shares at June 30, 1998 and 1997, respectively. The FHLBNY paid dividends on the capital stock of 7.2% , 6.4%, and 6.9% during the years ended June 30, 1998, 1997 and 1996, respectively.
11. DUE TO DEPOSITORS
The deposit accounts of each deposit household are insured up to $100 by either the Bank Insurance Fund or the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC").
Deposits are summarized as follows:
June 30, 1998 1997
-----------------------------------------------------------------------------
EFFECTIVE Effective
COST LIABILITY Cost Liability
-----------------------------------------------------------------------------
Savings accounts 2.27% $340,481 2.27% $344,377
Certificates of deposit 5.84 612,328 5.61 541,773
Money market accounts 3.09 30,567 2.96 33,530
NOW and Super NOW accounts 1.24 17,927 1.24 16,324
Non-interest bearing checking
accounts - 37,039 - 27,391
-----------------------------------------------------------------------------
4.30% $1,038,342 4.09% $963,395
-----------------------------------------------------------------------------
|
The distribution of certificates of deposits by remaining maturity was as follows:
At June 30, 1998 1997
-----------------------------------------------------------------------
Maturity in three months or less $139,108 $116,828
Over 3 through 6 months 103,472 88,912
Over 6 through 12 months 163,791 107,714
Over 12 months 205,957 228,319
-----------------------------------------------------------------------
Total certificates of deposit $612,328 $541,773
-----------------------------------------------------------------------
|
The aggregate amount of Certificates of deposits with a minimum denomination of $100 was approximately $60,259 and $46,806 at June 30, 1998 and 1997, respectively.
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Presented below is information concerning securities sold with agreement to repurchase:
At or for the year ended June 30, 1998 1997
-------------------------------------------------------------------------------
Balance outstanding at end of period $256,601 $76,333
Average interest cost at end of period 5.74% 5.69%
Average balance outstanding $145,676 $32,374
Average interest cost during the year 5.95% 5.73%
Carrying value of underlying collateral $267,469 $83,778
Estimated market value of underlying
collateral $268,991 $84,172
Maximum balance outstanding at month
end during period $256,601 $76,333
|
13. FEDERAL HOME LOAN BANK OF NEW YORK ADVANCES
The Bank had borrowings (''Advances'') from the FHLBNY totaling $103,505 and $63,210 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 FHLB advances was 6.05% and 6.18%, respectively, at June 30, 1998 and 1997. At June 30, 1998, in accordance with the Advances, Collateral Pledge and Security Agreement, the Bank maintained in excess of $113,856 of qualifying collateral (principally bonds and mortgage-backed securities), as defined, to secure such advances.
14. INCOME TAXES
The Company's Federal, State and City income tax provisions were comprised of
the following:
Year Ended June 30, 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------
STATE State State
FEDERAL AND CITY TOTAL Federal and City Total Federal and City Total
-------------------------------------------------------------------------------------------------------------------------
Current $8,687 $2,698 $11,385 $6,047 $4,541 $10,588 $4,218 $2,563 $6,781
Deferred 776 (295) 481 2,153 (5,150) (2,997) (332) (268) (600)
-------------------------------------------------------------------------------------------------------------------------
$9,463 $2,403 $11,866 $8,200 $(609) $7,591 $3,886 $2,295 $6,181
-------------------------------------------------------------------------------------------------------------------------
|
In accordance with SFAS 109, deferred tax assets and liabilities are recorded for temporary differences between the book and tax bases of assets and liabilities.
The components of Federal and net State and City deferred income tax assets and liabilities were as follows:
At June 30, 1998 1997
STATE State
FEDERAL AND CITY Federal and City
-------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Excess book bad debt over tax
bad debt reserve $2,990 $2,188 $2,417 $1,880
Net operating loss carryforward - - 305 -
Employee benefit plans 2,858 1,682 735 448
Tax effect of purchase
accounting fair value
adjustments 366 216 1,173 715
Other - - 147 119
-------------------------------------------------------------------------------------------------------------
Total deferred tax assets 6,214 4,086 4,777 3,162
Less: Valuation allowance on
deferred tax assets - - - -
-------------------------------------------------------------------------------------------------------------
Deferred tax assets after
valuation allowance $6,214 $4,086 $4,777 $3,162
-------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Undistributed earnings of
subsidiary $1,677 $358 $- $-
Difference in book and tax
carrying value of fixed assets 412 245 265 164
Tax effect of unrealized gain on
securities available for sale 1,436 871 1,057 623
Other 122 7 - -
-------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $3,647 $1,481 $1,322 $787
-------------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $2,567 $2,605 $3,455 $2,375
-------------------------------------------------------------------------------------------------------------
|
During the year ended June 30, 1998, deferred tax liabilities include an increase of $627 resulting from adjustments pursuant to SFAS 115.
The provision for income taxes differed from that computed at the Federal statutory rate as follows:
Year ended June 30, 1998 1997 1996
---------------------------------------------------------------------
Tax at Federal statutory rate $8,737 $6,967 $4,717
State and local taxes, net of
Federal income tax benefit 1,562 (396) 1,492
Goodwill amortization 843 843 -
Amortization of excess fair value
over cost - ESOP stock 532 233 -
Reserve for losses on sale of
loans - - -
Utilization of capital loss on sale
of securities - - -
Other, net 193 (56) (28)
---------------------------------------------------------------------
$11,867 $7,591 $6,181
---------------------------------------------------------------------
Effective tax rate 47.53% 38.13% 45.9%
---------------------------------------------------------------------
|
Savings banks that meet certain definitions, tests, and other conditions prescribed by the Internal Revenue Code are allowed to deduct, with limitations, a bad debt deduction. Prior to August, 1996, this deduction could be computed as a percentage of taxable income before such deduction ("PTI Method") or based upon actual loss experience for Federal, New York State and New York City income taxes.
Pursuant to SFAS 109, the Bank is not required to provide deferred taxes on its
tax loan loss reserve as of December 31, 1987 ("base year reserve"). The
amount of this reserve on which no deferred taxes have been provided is
approximately $12,153. This reserve could be recognized as taxable income and
create a current tax
liability using the income tax rates then in effect if one of the following 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 or distributions in liquidation; 2) the Bank fails to qualify as a Bank as provided by the Internal Revenue Code, or 3) there is a change in federal tax law.
On August 20, 1996, Federal legislation was signed into law which repealed the reserve method of accounting for bad debts, including the percentage of taxable income method used by the Bank. This repeal is effective for the Bank's taxable year beginning January 1, 1996. In addition, the legislation requires the Bank to include in taxable income its bad debt reserves in excess of its base year reserve over a 6 to 8 year period depending upon the maintenance of certain loan origination levels. Since the percentage of taxable income method tax bad debt deduction and the corresponding increase in the tax bad debt reserve in excess of the base year have been treated as temporary differences pursuant to SFAS 109, this change in tax law will have no effect on the Company's future consolidated statement of operations. Since the Bank's bad debt reserve exceeds its base year reserve by $3,100, approximately $176 will be currently payable as a result of the legislation.
In anticipation of the Federal legislation, on July 30, 1996, New York State
(the "State") enacted legislation, effective January 1, 1996, which generally
retains the percentage of taxable income method for computing allowable bad
debt deductions and does not require the Bank to recapture into income State
tax bad debt reserves unless one of the following events occur: 1) the Bank's
retained earnings represented by the reserve is used for purposes other than to
absorb losses from bad debts, including dividends in excess of the Bank's
earnings and profits or distributions in liquidation or in redemption of stock;
2) the Bank fails to qualify as a thrift as provided by the State tax law, or
3) there is a change in state tax law. The Bank had a deferred tax liability of
approximately $1.9 million recorded for the excess of State tax bad debt
reserves over its reserve at December 31, 1987 in accordance with SFAS 109. In
December, 1996 after evaluating the State tax legislation, as well as relevant
accounting literature and industry practices, management of the Bank concluded
that this liability was no longer required to be recorded, and recovered the
full deferred tax liability. This recovery resulted in a reduction of income
tax expense during the year ended June 30, 1997 for the full amount of the
recovered deferred tax liability.
On March 11, 1997, New York City enacted legislation, effective January 1, 1996, which conformed its tax law regarding bad debt deductions to New York State's tax law. As a result of this legislation, the Bank, in March, 1997, recovered a deferred tax liability of approximately $1.0 million previously recorded for the excess of New York City tax bad debt reserves over its reserve at December 31, 1987. This recovery resulted in a reduction of income tax expense during the year ended June 30, 1997 for the full amount of the recovered deferred tax liability.
15. EMPLOYEE BENEFIT PLANS
EMPLOYEE RETIREMENT PLAN - The Bank is a participant in a noncontributory defined benefit retirement plan with the RSI Retirement Trust. Substantially all full-time employees are eligible for participation after one year of service. In addition, a participant must be at least 21 years of age at the date of enrollment. During the year ended June 30, 1998, the Bank offered an early retirement program to all Plan participants who met certain eligibility criterion. As a result of the early retirement program, a non-recurring charge of $1,611 was recorded.
The retirement cost for the pension plan includes the following components (including, for 1998, a non-recurring charge of $1,611 related to an early retirement program):
For the year ended June 30, 1998 1997 1996
-----------------------------------------------------------------------
Service cost $332 $400 $206
Interest cost 781 727 488
Actual return on plan assets (2,931) (838) (546)
Net amortization and deferral 1,843 (224) (82)
Expense associated with early
retirement program 1,611 - -
-----------------------------------------------------------------------
Net periodic cost $1,636 $65 $66
-----------------------------------------------------------------------
- 42 -
|
The funded status of the plan was as follows:
At June 30, 1998 1997
-------------------------------------------------------------------------
Accumulated benefit obligation, including
vested benefits of $11,428 and $8,976,
respectively $11,490 $9,031
-------------------------------------------------------------------------
Projected benefit obligation $12,675 $10,015
Plan assets at fair value (investments in
trust funds managed by RSI and
comingled New York State Retirement
Fund) 13,599 11,121
-------------------------------------------------------------------------
Excess of plan assets over projected
benefit obligation 924 1,106
Additional employer contribution - 126
Unrecognized loss from experience
different from that assumed 560 380
Unrecognized transition asset - (72)
Unrecognized net past service liability (207) (239)
Accrued liability related to early retirement
program (1,611) -
-------------------------------------------------------------------------
(Accrued) Prepaid retirement expense included in
Other (liabilities) assets $(334) $1,301
-------------------------------------------------------------------------
Major assumptions utilized were as follows:
At June 30, 1998 1997
-------------------------------------------------------------------------
Discount rate 6.75% 8.00%
Rate of increase in compensation levels 4.50 6.00
Expected long-term return on plan assets 9.00 9.00
|
BENEFIT MAINTENANCE PLAN AND DIRECTORS' RETIREMENT PLAN - During the fiscal year ended June 30, 1994, The Bank established a Supplemental Executive Retirement Plan (''SERP'') for its executive officers. The SERP was established to compensate the executive officers for any curtailments in benefits due to the statutory limitations on benefit plans. The SERP exists as a nonqualified plan which supplements the existing qualified plans. Defined benefit and defined contribution costs are incurred annually related to the SERP. During the year ended June 30, 1997, the SERP was renamed the Benefit Maintenance Plan ("BMP"), and sponsorship was transferred to the Company . As of June 30, 1998, the Benefit Maintenance Plan has an investment in the Company's common stock of $431.
Effective July 1, 1996, The Company established a non-qualified Retirement Plan for all of its outside directors, which will provide benefits to each eligible outside director commencing upon his termination of Board service or at age 65. Each outside director who serves or has agreed to serve as an outside director will automatically become a participant in the Plan.
The retirement cost for the defined benefit portion of the BMP and Directors' Retirement plan include the following components:
For the year ended June 30, 1998 1997 1996
----------------------------------------------------------------------
Service cost $104 $203 $56
Interest cost 248 211 88
Net amortization and deferral 170 178 49
----------------------------------------------------------------------
$522 $592 $193
----------------------------------------------------------------------
|
The defined contribution costs incurred by the Bank related to the BMP/SERP
for the years ended June 30, 1998, 1997 and 1996 were $522, $305 and $25,
respectively. During the fiscal year ended June 30, 1997, benefits related
to the Employee Stock Ownership Plan were added to the defined contribution
cost of the BMP.
The funded status of the defined benefit portion of the plans was as follows:
At June 30, 1998 1997
-------------------------------------------------------------------------
Accumulated benefit obligation, including
vested benefits of $1,999 and $1,530
respectively $2,278 $1,808
-------------------------------------------------------------------------
Projected benefit obligation $3,562 $3,276
Plan assets at fair value - -
-------------------------------------------------------------------------
Deficiency of plan assets over projected
benefit obligation (3,562) (3,276)
Unrecognized loss from experience
different from that assumed 1,443 834
Unrecognized net past service liability 535 1,350
-------------------------------------------------------------------------
Accrued expense prior to additional
minimum liability included in other
liabilities (1,584) (1,092)
-------------------------------------------------------------------------
Additional minimum liability (860) (931)
-------------------------------------------------------------------------
Accrued expense after minimum liability $(2,444) $(2,023)
-------------------------------------------------------------------------
Major assumptions utilized were as follows:
At June 30, 1998 1997
---------------------------------------------------------------------------
DIRECTORS' Directors'
RETIREMENT PLAN BMP Retirement Plan BMP
---------------------------------------------------------------------------
Discount rate 6.75% 6.50% 7.50% 7.25%
Rate of increase in
compensation levels 4.50 4.00 5.50 4.00
|
401(K) PLAN - The Bank also has a 401(k) plan which covers substantially all employees. Prior to May 31, 1996, under such plan the Bank matched 50% of each participant's contribution up to 6% of the participant's annual compensation for the first four years of participation and thereafter 100% of the participant's contribution up to a maximum of 6%. Effective May 31, 1996, the plan was amended whereby the Bank ceased all contributions to the plan. Participation in the 401(k) plan is voluntary. A salaried employee becomes eligible for the plan after completion of one year of service. The Bank contributed approximately $181 to the plan for the year ended June 30, 1996. The 401(k) plan owns participant investments in the Company's common stock which totaled $6,630, $4,758 and $2,092 at June 30, 1998, 1997 and 1996, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - The Bank offers additional postretirement benefits to its retired employees who have provided at least five (5) consecutive years of credited service and were active employees prior to April 1, 1991, as follows:
(1) Employees who retired prior to April 1, 1991 receive full medical coverage in effect until their death at no cost to such retirees;
(2) Eligible employees retiring after April 1, 1991 will be eligible for continuation of their medical coverage in effect at the time of such employees' retirement until their death. Throughout an employee's retirement, the Bank will continue to pay the premiums for this coverage up to the premium amount paid for the first year of retirement coverage. Should the premiums increase, the employee will have to pay the differential to maintain full medical coverage.
Postretirement medical benefits are only available to those full-time employees who, upon termination of service, start collecting retirement benefits immediately from the Bank. The Bank reserves the right at any time, and to the extent permitted by law, to change, terminate or discontinue any of the group benefits, and can exercise the maximum discretion permitted by law, in administering, interpreting, modifying or taking any other action with respect to the plan or benefits.
The Bank accrues the cost of such benefits during the years an employee renders the necessary service. The Bank adopted SFAS 106 effective July 1, 1995. The Bank elected to record the full accumulated postretirement benefit obligation upon adoption. This resulted in a cumulative effect adjustment of $1,032 (after reduction for income taxes of $879), which is shown in the consolidated statement of income for the year ended June 30, 1996.
The postretirement cost includes the following components:
For the year ended June 30, 1998 1997
---------------------------------------------------------------
Service cost $37 $75
Interest cost 178 192
Unrecognized past service liability (29) -
---------------------------------------------------------------
$186 $267
---------------------------------------------------------------
|
The funded status of the postretirement benefit plan was as follows:
At June 30, 1998 1997
---------------------------------------------------------------------------
Accumulated benefit obligation:
Retirees $1,503 $1,229
Fully eligible active participants 514 163
Other active participants 697 963
---------------------------------------------------------------------------
Total 2,714 2,355
Plan assets at fair value - -
---------------------------------------------------------------------------
Deficiency of plan assets over
accumulated benefit obligation 2,714 2,355
Unrecognized loss (gain) from experience
different from that assumed (7) 191
---------------------------------------------------------------------------
Accrued postretirement benefit obligation $2,721 $2,546
---------------------------------------------------------------------------
|
The assumed medical cost trend rates used in computing the accumulated postretirement benefit obligation was 7.0% in 1998 and was assumed to decrease gradually to 5.0% in 2003 and to remain at that level thereafter. Increasing the assumed medical care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation by approximately $137.
The assumed discount rate and rate of compensation increase used to measure the accumulated postretirement benefit obligation at June 30, 1998 were 6.75% and 4.5%, respectively. The assumed discount rate and rate of compensation increase used to measure the accumulated postretirement benefit obligation at June 30, 1997 were 8.0% and 6.0%, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN - In connection with the conversion, the Board of Directors of the Company adopted the Dime Community Bancshares Employee Stock Ownership Plan (the "ESOP"). The ESOP borrowed $11,638 from the Company and used the funds to purchase 1,163,800 shares of the Company's common stock. The loan will be repaid principally from the Bank's discretionary contributions to the ESOP over a period of time not to exceed 10 years. The Bank's obligation to make such contributions is reduced by any investment earnings realized on such contributions or any dividends paid by the Company on stock held in the unallocated account. The loan had an outstanding balance of $9,175 and $10,324, respectively at June 30, 1998 and 1997, and a fixed rate of 8.0%.
Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants on the basis of compensation, as described in the plan, in the year of allocation. The ESOP vests at a rate of 25% per year of service beginning after two years with full vesting after five years, or upon attainment of age 65, death, disability, retirement or in the event of a "change of control" of the Company as defined in the ESOP. Shares of common stock allocated to participating employees totaled 116,380 and 121,702 during the years ended June 30, 1998 and 1997. The ESOP benefit expense recorded in accordance with SOP 93-6 for allocated shares totaled $2,670 and $1,883, respectively, for the years ended June 30, 1998 and 1997.
STOCK BENEFIT PLANS
RECOGNITION AND RETENTION PLAN ("RRP") - In December, 1996, the
shareholders approved the RRP, which is designed to encourage key officers and
directors of the Company and Bank to remain with the Company, as well as to
provide these persons with a proprietary interest in the Company. During the
year ended June 30, 1997, the Bank contributed $10.8 million to the RRP, which
purchased 581,900 shares of the Company's common stock in open market
transactions. As of June 30, 1998, all of the shares under the RRP have been
awarded to officers or directors of the Company or Bank. The RRP shares vest
on February 1{st }of each year over a total period of five years. Shares
become 100% vested in the event of death or disability of the participant, or
in the event of a "change of control" of the Company as defined by the RRP. As
of June 30, 1998 and 1997, 164,876 shares and 15,870 shares have vested under
the RRP, respectively. The Company recognized compensation expense of $2,708
and $1,175 during the years ended June 30, 1998 and 1997, which related to the
earned portion of vested shares.
The Company continues to account for compensation expense under the RRP under APB 25, measuring compensation cost based upon the average acquisition value of the RRP shares. Had the Company recorded compensation expense under the fair value methodology encouraged under SFAS 123, compensation expense would have decreased by $601 and $315, respectively, for the years ended June 30, 1998 and 1997, net income would have increased $325 and $173 for the years ended June 30, 1998 and 1997, respectively and basic and diluted earnings per share would increased by $0.03 and $0.02, respectively for the year ended June 30, 1998, and $0.01 and $0.01, respectively for the year ended June 30, 1997. The effects of applying SFAS 123 for disclosing compensation cost may not be representative of the effect on reported net income for future years.
STOCK OPTION PLAN - In November, 1996, the Company adopted the Dime Community Bancshares, Inc. 1996 Stock Option Plan for Outside Directors, Officers and Employees (the "1996 Stock Option Plan"), which permits the Company to grant up to 1,454,750 incentive or non-qualified stock options to outside directors, officers and other employees of the Company or the Bank. The Compensation Committee of the Board of Directors administers the Stock Option Plan and authorizes all option grants.
On December 26, 1996, 1,393,425 stock options were granted to outside directors, officers and certain employees. All stock options granted under the 1996 Stock Option Plan expire on December 26, 2006. One-fifth of the shares granted to participants under the 1996 Stock Option Plan become exercisable by participants on December 26, 1997, 1998, 1999, 2000 and 2001, respectively. Activity related to the Stock Option Plan for the fiscal years ended June 30, 1998 and 1997 is as follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997
----------------------------------------------------------------------------------------------------------------------------
Options outstanding - beginning of year 1,393,425 -
Options granted - 1,393,425
Options exercised 3,600 -
Options forfeited 1,600 -
Options outstanding - end of year 1,388,225 1,393,425
Remaining options available for grant under the plan 62,925 61,325
|
The exercise price on all stock options granted under the Plan was $14.50, which, under the terms of the Stock Option Plan, was equivalent to the fair market value of the Company's stock as of the close of business on the grant date. At June 30, 1998 and 1997, respectively, 305,225 and 39,675 options are exercisable.
The weighted average fair value per option at the date of grant for stock options granted was estimated to be $5.72 using the Binomial Option Pricing model with the following assumptions:
Expected life (in years) 10 Interest rate 5.79% Volatility 22.89 Dividend yield 1.40 |
The Company continues to account for Stock Options under APB 25, accordingly no compensation cost has been recognized. Had the Company recorded compensation expense under the fair value methodology encouraged under SFAS 123, compensation expense would have increased by $1,063 and $532, respectively, for the years ended June 30, 1998 and 1997, net income would have decreased by $574 and $287 respectively for the years ended June 30, 1998 and 1997, both basic and diluted earnings per share would have decreased by $0.05 for the year ended June 30, 1998, and both basic and diluted earnings would have decreased by $0.02 during the year ended June 30, 1997. The effects of applying SFAS 123 for disclosing compensation cost may not be representative of the effect on reported net income for future years.
16. COMMITMENTS AND CONTINGENCIES
MORTGAGE LOAN COMMITMENTS AND LINES OF CREDIT - At June 30, 1998 and 1997, the Bank had outstanding commitments to make mortgage loans aggregating approximately $158,042 and $115,076, respectively.
At June 30, 1998, commitments to originate fixed rate and adjustable rate mortgage loans were $62,904 and $95,138 respectively. Interest rates on fixed rate commitments ranged between 6.38% to 10.25%. Substantially all
of the Bank's commitments will expire within two months. A concentration risk exists with these commitments as virtually all of the outstanding mortgage loan commitments involve properties located within New York City.
The Bank had available at June 30, 1998 unused lines of credit with the Federal Home Loan Bank of New York totaling $100,000, expiring on September 11, 1998.
LEASE COMMITMENTS - At June 30, 1998, aggregate net minimum annual rental commitments on leases are as follows:
Year Ended June 30, Amount ----------------------------- 1999 $428 2000 449 2001 451 2002 399 2003 415 Thereafter 1,511 |
Net rental expense for the years ended June 30, 1998, 1997 and 1996 approximated $183, $197, and $278, respectively.
LITIGATION - The Company and its subsidiary are subject to certain pending and threatened legal actions which arise out of the normal course of business. Management believes that the resolution of any pending or threatened litigation will not have a material adverse effect on the financial condition or results of operations.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Standards No. 107, ''Disclosures About Fair Value of Financial Instruments.'' The estimated fair value amounts have been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Bank could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
CASH AND DUE FROM BANKS - The fair value is assumed to be equal to their carrying value as these amounts are due upon demand.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES - The fair value of these securities is based on quoted market prices obtained from an independent pricing service.
FEDERAL FUNDS SOLD - The fair value of these assets, principally overnight deposits, is assumed to be equal to their carrying value due to their short maturity.
FEDERAL HOME LOAN BANK OF NEW YORK (FHLBNY) STOCK - The fair value of FHLBNY stock is assumed to be equal to the carrying value as the stock is carried at par value and redeemable at par value by the FHLBNY.
LOANS AND LOANS HELD FOR SALE - The fair value of loans receivable is determined by utilizing either secondary market prices, or, to a greater extent, by discounting the future cash flows, net of prepayments of the loans using a rate for which similar loans would be originated to new borrowers with similar terms. This methodology is applied to all loans, inclusive of impaired and non-accrual loans.
DEPOSITS - The fair value of savings, money market, NOW, Super NOW and checking accounts is assumed to be their carrying amount. The fair value of certificates of deposit is based upon the discounted value of contractual cash flows using current rates for instruments of the same remaining maturity.
ESCROW, OTHER DEPOSITS AND BORROWED FUNDS - The estimated fair value of escrow, other deposits and borrowed funds is assumed to be the amount payable at the reporting date.
OTHER LIABILITIES - The estimated fair value of other liabilities, which
primarily include trade accounts payable, is assumed to be their carrying
amount.
COMMITMENTS TO EXTEND CREDIT - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
The estimated fair values of the Bank's financial instruments at June 30, 1998 and 1997 were as follows:
CARRYING FAIR
JUNE 30, 1998 AMOUNT VALUE
---------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $16,266 $16,266
Investment securities held to maturity 78,091 78,593
Investment securities available for sale 85,706 85,706
Mortgage-backed securities held to maturity 46,714 47,443
Mortgage-backed securities available for sale 363,875 363,875
Loans and loans held for sale 938,046 942,341
Federal funds sold 9,329 9,329
FHLB stock $10,754 $10,754
---------------------------------------------------------------------------------------------------------
LIABILITIES:
Savings, money market, NOW Super NOW and checking accounts $426,014 $426,014
Certificates of Deposit 612,328 610,296
Escrow, other deposits and borrowed funds 375,501 375,501
Other liabilities 23,734 23,734
Off-balance sheet liability-commitments to extend credit $- $(1,431)
---------------------------------------------------------------------------------------------------------
|
CARRYING FAIR
JUNE 30, 1998 AMOUNT VALUE
-------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $19,198 $19,198
Investment securities held to maturity 101,587 102,024
Investment securities available for sale 58,687 58,687
Mortgage-backed securities held to maturity 78,388 79,075
Mortgage-backed securities available for sale 230,137 230,137
Loans and loans held for sale 739,858 738,958
Federal funds sold 18,902 18,902
FHLB stock $8,322 $8,322
---------------------------------------------------------------------------------------------------------
LIABILITIES:
Savings, money market, NOW Super NOW and checking accounts $421,622 $421,622
Certificates of Deposit 541,773 540,319
Escrow , other deposits and borrowed funds 154,517 154,517
Other liabilities 6,225 6,225
Off-balance sheet liability-commitments to extend credit $- $(1,179)
---------------------------------------------------------------------------------------------------------
|
18. TREASURY STOCK
The Company repurchased 919,837 shares and 1,454,750 shares of its common stock into treasury during the fiscal years ended June 30, 1998 and 1997, respectively. The average cost of all shares repurchased was $22.58 and $19.04, respectively during the years ended June 30, 1998 and 1997. All shares were repurchased in accordance with applicable regulations of the Office of Thrift Supervision and Securities and Exchange Commission.
19. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures that have been established by regulation to ensure
capital adequacy require the Bank to maintain minimum capital amounts and
ratios (set forth in the table below). The Bank's primary regulatory agency,
the OTS, requires that the Bank maintain minimum ratios of tangible capital (as
defined in the
regulations) of 1.5%, core capital (as defined) of 3%, and total risk-based capital (as defined) of 8%. The Bank is also subject to prompt corrective action requirement regulations set forth by the FDIC. These regulations require the Bank to maintain minimum of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 1998, that the Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the OTS categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" the Bank must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
To Be Categorized as
"Well Capitalized"
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
----------------------------------------------------------------------------
As of June 30, 1998 Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------------------------
Tangible capital $131,186 8.32% $23,655 1.5% N/A N/A
Core capital 131,186 8.32 47,309 3.0% N/A N/A
Total risk-based capital (to risk weighted
assets) 141,885 16.58 68,472 8.0% $85,590 10.00%
Tier I risk-based capital (to risk weighted
assets) 131,186 15.33 N/A N/A 51,354 6.00
Tier I leverage capital (to average assets) 131,186 9.06 N/A N/A 72,380 5.00
|
To Be Categorized as
"Well Capitalized"
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
----------------------------------------------------------------------------
As of June 30, 1997 Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------------------------
Tangible capital: $124,118 9.86% $18,873 1.5% N/A N/A
Core capital: 124,182 9.87 37,748 3.0% N/A N/A
Total risk-based capital (to risk weighted
assets) 132,465 19.99 53,009 8.0% $66,261 10.00%
Tier I risk-based capital (to risk weighted
assets) 124,182 18.74 N/A N/A 39,756 6.00
Tier I leverage capital (to average assets) 124,182 10.35 N/A N/A 59,980 5.00
|
The following is a reconciliation of generally accepted accounting principles (GAAP) capital to regulatory capital for the Bank:
At June 30, 1998 1997
------------------------------------------------------------------------------------------------------------------
TANGIBLE CORE RISK-BASED Tangible Core Risk-Based
CAPITAL CAPITAL CAPITAL Capital Capital Capital
----------------------------------------- -------------------------------------
GAAP capital $156,718 $156,718 $156,718 $152,198 $152,198 $152,198
Non-allowable assets:
Core deposit intangible - - - (64) - -
Unrealized gain on
available for sale
securities (1,504) (1,504) (1,504) (1,583) (1,583) (1,583)
Goodwill (24,028) (24,028) (24,028) (26,433) (26,433) (26,433)
General valuation
allowance - - 10,699 - - 8,283
------------------------------------------------------------------------------------------------------------------
Regulatory capital 131,186 131,186 141,885 124,118 124,182 132,465
Minimum capital
requirement 23,655 47,309 68,472 18,873 37,748 53,009
------------------------------------------------------------------------------------------------------------------
Regulatory capital
excess $107,531 $83,877 $73,413 $105,245 $86,434 $79,456
------------------------------------------------------------------------------------------------------------------
|
20. QUARTERLY FINANCIAL INFORMATION
The following represents the unaudited results of operations for each of the quarters during the fiscal years ended June 30, 1998 and 1997.
For the three
months ended September 30, 1997 December 31, 1997 March 31, 1998 June 30, 1998
--------------------------------------------------------------------------------------------------------------------
Net interest income $12,026 $12,279 $12,459 $12,765
Provision for loan losses 525 525 525 60
Net interest income after
provision for loan losses 11,501 11,754 11,934 12,705
Non-interest income 981 1,032 1,261 3,733
Non-interest expense: 6,746 6,860 7,063 9,268
--------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,736 5,926 6,132 7,170
Income tax expense 2,898 3,039 2,794 3,135
--------------------------------------------------------------------------------------------------------------------
Net income $2,838 $2,887 $3,338 $4,035
--------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE <F1>:
Basic $0.25 $0.26 $0.31 $0.37
--------------------------------------------------------------------------------------------------------------------
Diluted $0.23 $0.24 $0.28 $0.34
--------------------------------------------------------------------------------------------------------------------
<F1> The quarterly earnings per share amounts, when added, may not agree to
earnings per share reported on the Consolidated Statement of Operations
due to differences in the computed weighted average shares outstanding
as well as rounding differences.
|
For the three
months ended September 30, 1996 December 31, 1996 March 31, 1997 June 30, 1997
--------------------------------------------------------------------------------------------------------------------
Net interest income $11,165 $11,969 $12,116 $12,216
Provision for loan losses 1,050 1,050 1,050 1,050
Net interest income after
provision for loan losses 10,115 10,919 11,066 11,166
Non-interest income 757 1,052 781 1,543
Non-interest expense: 8,132 5,604 6,741 7,015
--------------------------------------------------------------------------------------------------------------------
Income before income
taxes 2,740 6,367 5,106 5,694
Income tax expense 1,516 1,428 1,608 3,039
--------------------------------------------------------------------------------------------------------------------
Net income $1,224 $4,939 $3,498 $2,655
--------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE <F1>:
Basic $0.09 $0.37 $0.26 $0.22
--------------------------------------------------------------------------------------------------------------------
Diluted $0.09 $0.37 $0.26 $0.22
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
SAIF special assessment
charge $2,032 $- $- $-
Income tax recovery - 1,848 1,034 -
Diluted EPS
excluding SAIF special
assessment and income
tax recoveries $0.17 $0.23 $0.19 $0.22
--------------------------------------------------------------------------------------------------------------------
<F1> The quarterly earnings per share amounts, when added, may not agree to
earnings per share reported on the Consolidated Statement of Operations
due to differences in the computed weighted average shares outstanding
as well as rounding differences.
|
21. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The Company began operations on June 26, 1996. The following statements of condition as of June 30, 1998 and 1997, and the related statements of operations and cash flows for the years ended June 30, 1998, 1997 and 1996 reflect the Company's investment in its wholly-owned subsidiary, the Bank, using the equity method of accounting:
DIME COMMUNITY BANCSHARES, INC. CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except share amounts)
At June 30, 1998 1997
-----------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $55 $17
Investment securities available for sale 18,677 22,363
Federal funds sold 1,291 6,040
ESOP loan to subsidiary 9,175 10,324
Investment in subsidiary 156,718 152,198
Receivable for securities sold 1,264 -
Other assets 184 344
-----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $187,364 $191,286
-----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $1,015 $397
Stockholders' equity 186,349 190,889
-----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY: $187,364 $191,286
-----------------------------------------------------------------------------------------------------------------
|
DIME COMMUNITY BANCSHARES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands except share amounts)
For the year ended June 30, 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
Interest income $2,041 $3,585 $27
Dividends received from Bank 13,000 - -
Gain on sales of securities 521 11 -
Non-interest expense 481 446 -
--------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity of undistributed
(overdistributed) earnings of the Bank 15,081 3,150 27
Income tax expense 935 1,487 -
--------------------------------------------------------------------------------------------------------------------
Income before equity of undistributed (overdistributed)
earnings of the Bank 14,146 1,663 27
Equity in (overdistributed) undistributed earnings of the
Bank <F1> (1,048) 10,653 6,238
--------------------------------------------------------------------------------------------------------------------
NET INCOME $13,098 $12,316 $6,265
--------------------------------------------------------------------------------------------------------------------
<F1> The equity in overdistributed earnings of the Bank for the year ended
June 30, 1998, represents dividends paid to the Company in excess of
the Bank's current year's earnings.
|
DIME COMMUNITY BANCSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands except share amounts)
For the year ended June 30, 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $13,098 $12,316 $6,265
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in overdistributed (undistributed) earnings of
Bank 1,048 (10,653) (6,238)
Gain on sale of investment securities available for sale (520) (11) -
Net accretion of discount on investment securities
available for sale (291) (1,130) -
Decrease (Increase) in other assets 160 (321) (23)
Increase in receivable for securities purchased (1,264) - -
(Decrease) Increase in payable for securities purchased - (33,994) 33,994
(Decrease)Increase in other liabilities (71) (225) 241
----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities 12,160 (34,018) 34,239
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (Increase) in federal funds sold 4,749 47,583 (53,623)
Proceeds from sale of investment securities available for sale 13,439 10,011 -
Proceeds from calls and maturities of investment securities
available for sale 13,500 120,595 -
Purchases of investment securities available for sale (20,940) (117,006) (33,994)
Principal repayments on ESOP loan 911 1,165 97
Cash disbursed in purchase of subsidiary stock - - (76,332)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 11,659 62,348 (163,852)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - - 129,730
Cash disbursed for expenses related to issuance of
common stock - (190) -
COMMON STOCK ISSUED FOR EXERCISE OF STOCK OPTIONS 52 - -
CASH DIVIDENDS PAID TO STOCKHOLDERS (2,635) (537) -
PURCHASE OF TREASURY STOCK (20,767) (27,703) -
PURCHASE OF COMMON STOCK BY BENEFIT MAINTENANCE PLAN (431) - -
----------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (23,781) (28,430) 129,730
----------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS 38 (100) 117
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 17 117 -
----------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS, END OF PERIOD $55 $17 $117
----------------------------------------------------------------------------------------------------------------------------
|
22. PENDING ACQUISITION OF FINANCIAL BANCORP, INC. (UNAUDITED)
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 (the "Merger Consideration"); PROVIDED, HOWEVER, that 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. The Merger Consideration will be calculated to produce a value of $40.50 per share of Financial Bancorp Common Stock 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. If the Company's Average Closing Price is greater than $31.05 or less than $22.95, then the amount of the Merger Consideration will be increased or decreased 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. Financial Bancorp's asets, deposits, and stockholders' equity totaled $340,999, $229,027 and $28,730 respectively, at June 30, 1998.
| ARTICLE 9 |
| In Thousands Except Per Share |
| MULTIPLIER: 1000 |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | JUN 30 1998 |
| PERIOD START | JUL 01 1997 |
| PERIOD END | JUN 30 1998 |
| CASH | 16266 |
| INT BEARING DEPOSITS | 0 |
| FED FUNDS SOLD | 9329 |
| TRADING ASSETS | 0 |
| INVESTMENTS HELD FOR SALE | 449581 |
| INVESTMENTS CARRYING | 124805 |
| INVESTMENTS MARKET | 126036 |
| LOANS | 950121 |
| ALLOWANCE | 12075 |
| TOTAL ASSETS | 1623926 |
| DEPOSITS | 1038342 |
| SHORT TERM | 168053 |
| LIABILITIES OTHER | 39129 |
| LONG TERM | 192053 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 145 |
| OTHER SE | 186204 |
| TOTAL LIABILITIES AND EQUITY | 1623926 |
| INTEREST LOAN | 70311 |
| INTEREST INVEST | 34261 |
| INTEREST OTHER | 1892 |
| INTEREST TOTAL | 106464 |
| INTEREST DEPOSIT | 43027 |
| INTEREST EXPENSE | 56935 |
| INTEREST INCOME NET | 49529 |
| LOAN LOSSES | 1635 |
| SECURITIES GAINS | 900 |
| EXPENSE OTHER | 29937 |
| INCOME PRETAX | 24964 |
| INCOME PRE EXTRAORDINARY | 13098 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 13098 |
| EPS PRIMARY | 1.19 |
| EPS DILUTED | 1.09 |
| YIELD ACTUAL | 7.64 |
| LOANS NON | 884 |
| LOANS PAST | 0 |
| LOANS TROUBLED | 3971 |
| LOANS PROBLEM | 3917 |
| ALLOWANCE OPEN | 10726 |
| CHARGE OFFS | 328 |
| RECOVERIES | 42 |
| ALLOWANCE CLOSE | 12075 |
| ALLOWANCE DOMESTIC | 12075 |
| ALLOWANCE FOREIGN | 0 |
| ALLOWANCE UNALLOCATED | 0 |