SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to _______________
Commission File No.: 1-13503
Staten Island Bancorp, Inc.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3958850
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15 Beach Street
Staten Island, New York 10304
----------------------- ---------------------
(Address) (Zip Code)
Registrant's telephone number, including area code: (718) 556-6518
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
Securities registered pursuant to Section 12(b) of the Act
Common Stock (par value $.01 per share)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Based upon the $24.70 closing price of the Registrant's common stock as of March
26, 2001, the aggregate market value of the 28,784,098 shares of the
Registrant's common stock deemed to be held by non-affiliates of the Registrant
was $711.0 million. Although directors and executive officers of the Registrant
and certain of its employee benefit plans were assumed to be "affiliates" of the
Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 26, 2001: 33,692,182.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 2000 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2001 Annual Meeting of
Stockholders are incorporated into Part III, Items 9 through 13 of this Form
10-K.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS PAGE NO.
Description of Business 2
Market Area and Competition 4
Lending Activities 5
Mortgage Banking Activities 13
Asset Quality 15
Securities Activities 21
Sources of Funds 25
Trust Activities 28
Subsidiaries 29
Employees 29
Regulation General 30
Regulation of Savings and Loan Holding Companies 30
Regulation of Federal Savings Banks 32
Federal Taxation 38
State and Local Taxation 39
PART II
ITEM 2. PROPERTIES 40
ITEM 3. LEGAL PROCEEDINGS 41
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 41
ITEM 5. MARKET OR REGISTRANT'S COMMON EQUITY AND 41
RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA 41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 41
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 41
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 41
ITEM 11. EXECUTIVE COMPENSATION 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 42
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND 42
REPORTS ON FORM 8-K
2
PART I
Item 1. Business
- -----------------
In addition to historical information, this Annual Report on Form 10-K
includes certain "forward-looking statements," as defined in the Securities Act
of 1933 and the Securities Exchange Act of 1934, based on current management
expectations. The Company's actual results could differ materially from those
management expectations. Such forward-looking statements include statements
regarding the Company's intentions, beliefs or current expectations as well as
the assumptions on which such statements are based. Stockholders and potential
stockholders are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements. Factors that could cause future results to vary from
current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and fees. The Company undertakes no obligation to update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
Staten Island Bancorp, Inc.
Staten Island Bancorp, Inc. (the "Company") is a Delaware corporation
organized in July 1997 by SI Bank & Trust (the "Bank" or "SIBT"), formerly
Staten Island Savings Bank, for the purpose of becoming a unitary holding
company of the Bank. The Bank's conversion from the mutual to stock form and the
concurrent offer and sale of the Company's common stock was consummated on
December 22, 1997. The only significant assets of the Company are the capital
stock of the Bank, the Company's loan to the Employee Stock Ownership Plan
("ESOP") and the portion of the net conversion proceeds retained by the Company
for investments. The business and management of the Company consists primarily
of the business and management of the Bank. 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 intend to employ any persons other than
officers of the Bank and the Company will utilize the support staff of the Bank
from time to time. Additional employees will be hired as appropriate to the
extent the Company expands or changes its business in the future.
The Company's executive office is located at the executive office of
the Bank at 15 Beach Street, Staten Island, New York 10304, and its telephone
number is (718) 556-6518.
4
SI Bank & Trust
The Bank was originally founded as a New York State chartered savings
bank in 1864. The Bank maintains a network of 17 full-service branch offices
located in Staten Island, New York, two branch offices located in Brooklyn, New
York, three limited service branch offices in Staten Island, and 11 full service
branch offices in Ocean, Monmouth, Union, and Middlesex counties of New Jersey.
The Bank also maintains a lending center and Trust Department on Staten Island
along with a commercial lending office in Brooklyn. The Bank is a traditional,
full-service, community bank headquartered in Staten Island, New York. SI Bank &
Trust is primarily engaged in attracting deposits from the general public and
businesses and using those and other available sources of funds to originate
loans secured primarily by single-family (one to four units) residences, and to
a lesser extent, commercial loans both secured and unsecured.
The Bank has served the communities and residents of Staten Island for
over 135 years and more recently, the borough of Brooklyn and certain counties
in the State of New Jersey. As of June 30, 2000 (the latest available data), the
Bank had the largest market share of any depository institution in Staten Island
with over 30.0% of the total deposits and 23.0% of the total number of branch
offices of depository institutions in Staten Island. Historically, the Bank also
has been among the leaders in terms of the number and amount of residential
mortgage loan originations in Staten Island. SIBT's operating strategy
emphasizes customer service and convenience and, in large part, the Bank
attributes its commitment to maintaining customer satisfaction for its market
share position. The Bank attempts to differentiate itself from its competitors
by providing the type of personalized customer service not generally available
from larger banks, while offering a greater variety of products and services
than is typically available from smaller local depository institutions. The Bank
has an experienced management team directing its operations. The Bank's Chairman
and Chief Executive Officer and President and Chief Operating Officer have 35
years and 31 years, respectively, of service with the Bank while the other
executive officers of the Bank have an average of 13 years of service with SIBT.
On September 5, 2000 the Bank changed its name to SI Bank & Trust to
reflect the expansion into new product lines and new geographic markets which
has taken place over the past five years. In 1995, the Bank acquired a $315.0
million commercial bank and became the leading provider of both consumer,
commercial and small business services in its primary market area of Staten
Island. At the same time, the Bank acquired a branch in Brooklyn and a Trust and
Investment Department. Since that acquisition, the Bank has achieved significant
growth in its commercial checking and loan business and remains the dominant
provider on Staten Island. Geographic expansion into the State of New Jersey
occurred in 2000 along with a new branch in Brooklyn. Over the past five years,
the Bank has transformed into a full service community bank and the new name
accurately defines that. The Bank's name is no longer associated with any one
geographic area allowing for expansion outside of Staten Island.
In recent years, the Bank has facilitated its growth through
acquisitions. In 1998, the Bank's wholly-owned subsidiary, SIB Mortgage Corp.
(the "Mortgage Company" or "SIBMC") acquired substantially all of the assets of
Ivy Mortgage Corp. The Mortgage Company, headquartered in Branchburg, New
Jersey, operates under the name Ivy Mortgage in 27 states. The Mortgage Company
originates loans and sells them to investors generating fee income for the
Company. The Bank also purchases specific adjustable rate loans and higher
yielding loans from the Mortgage Company to fill in its portfolio with loan
products the Bank requires. The Bank also uses certain Mortgage Company
5
locations to offer its commercial loan products including loans to small
businesses. This has reduced the Bank's traditional dependence on the economy of
Staten Island and to a larger extent New York City. (See "Subsidiaries")
In 1999, the Bank formed American Construction Lending Services, Inc.,
("ACLS"), as a wholly owned subsidiary, headquartered in Wallingford,
Connecticut. In March 2001, the Bank merged ACLS into the Mortgage Company and
the former operations of ACLS will be continued as a division of the Mortgage
Company. The ACLS division operates as a wholesale lender specializing in
single-family residential construction loan products throughout the United
States. The construction loans originated by ACLS facilitate the Bank's ability
to obtain higher yielding, short-term loans for its balance sheet. The resultant
permanent loan is sold using the resources of the Mortgage Company or retained
in the Bank's portfolio, if the loan meets the investment needs of the Bank. The
ACLS division is expected to enable the Bank to reach a broader customer base by
expanding its geographic market area and providing an opportunity to add to the
revenue and income base for the Company.
On January 14, 2000, the Company acquired First State Bancorp, the
holding company for First State Bank, Howell, New Jersey. First State Bank was
merged with and into the Bank with the branches operating under the name of SI
Bank & Trust. The branch system of First State consisted of four branches in
Ocean County and two in Monmouth County, New Jersey. In December 2000, the Bank
opened a new branch in Jackson, New Jersey and we expect to open another new
branch in Ocean County, New Jersey in 2001. Plans for these branches were
underway at the time of the acquisition. At the time of the acquisition, First
State Bancorp had $374.0 million in assets and $319.0 million in deposits.
On December 8, 2000 the Company purchased four branches from Unity
Bancorp, New Jersey. Three branches are located in Union County and one in
Middlesex County of New Jersey, bringing the Bank's branch network in New Jersey
to 11. The deposits acquired from Unity were approximately $41.0 million.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary federal regulator. The Bank is also regulated by the Federal Deposit
Insurance Corporation ("FDIC"), which is the administrator of the Bank Insurance
Fund ("BIF"). The Bank is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the Federal Home Loan Bank ("FHLB") of New York, which is one of
the 12 regional banks comprising the FHLB System.
SI Bank & Trust's executive office is located at 15 Beach Street,
Staten Island, New York 10304, and its telephone number is (718) 556-6518.
Market Area and Competition
The Bank faces significant competition both in making loans and in
attracting deposits. There are a significant number of financial institutions
located within the Bank's market area, many of which have greater financial
resources than the Bank. The Bank's competition for loans comes principally from
commercial banks, other savings banks, savings associations and mortgage-banking
companies. The Bank's most direct competition for deposits has historically come
from
6
savings associations, other savings banks, commercial banks and credit unions.
The Bank faces additional competition for deposits from short-term money market
funds and other corporate and government securities funds and from other
non-depository financial institutions such as brokerage firms and insurance
companies. Competition for banking services may increase as a result of, among
other things, the elimination of restrictions on interstate operations of
financial institutions.
Lending Activities
General. At December 31, 2000, the Company's total net loans held for
investment amounted to $2.8 billion or 54.34% of the Company's total assets at
such date. The Bank's primary emphasis has been, and continues to be, the
origination of loans secured by first liens on single-family residences (which
includes one-to-four family residences) located primarily in Staten Island and,
to a lesser extent, other areas in New York City. At December 31, 2000, $2.2
billion or 77.5% of the Company's net loan portfolio were secured by single
family residences of which $839.4 million were located on Staten Island
and an additional $666.2 million were located in other areas of New York City.
In addition to loans secured by single-family residential real estate,
the Company's mortgage loan portfolio includes loans secured by commercial real
estate, which amounted to $307.4 million or 10.8% of the net loan portfolio at
December 31, 2000, construction and land loans, which totaled $153.0 million or
5.4% of the net loan portfolio at December 31, 2000, home equity loans, which
totaled $10.7 million or .4% of the net loan portfolio at December 31, 2000, and
loans secured by multi-family (over four units) residential properties, which
amounted to $49.0 million or 1.7% of the net loan portfolio at December 31,
2000. In addition to mortgage loans, the Company originates various other loans
including commercial business loans and consumer loans. At December 31, 2000,
the Company's total other loans amounted to $123.5 million or 4.3% of the net
loan portfolio.
The types of loans that the Bank may originate are subject to federal
and state law 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, the monetary policy
of the federal government, including the Federal Reserve Board, legislative tax
policies and governmental budgetary matters.
7
Loan Portfolio Composition. The following table sets forth the composition of
the Company's loan portfolio at the dates indicated.
At December 31,
(Dollars in Thousands)
2000 1999 1998
---- ---- ----
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
Mortgage Loans:
Single-family residential ........... $ 2,206,972 77.50% $ 1,737,913 80.83% $ 1,187,212 81.48%
Multi-family residential ............ 49,034 1.72 42,501 1.98 33,328 2.29
Commercial real estate .............. 307,407 10.80 223,809 10.41 137,720 9.45
Construction and land ............... 152,956 5.37 60,105 2.80 42,420 2.91
Home equity ......................... 10,699 0.38 5,390 0.25 6,121 0.42
----------- ------ ----------- ------ ----------- ------
Total mortgage loans ................ 2,727,068 95.77 2,069,718 96.27 1,406,801 96.55
Other loans:
Student loans ....................... 333 0.01 657 0.03 940 0.06
Automobile leases (1) ............... -- -- -- -- -- --
Passbook loans ...................... 6,237 0.22 5,357 0.25 5,989 0.41
Commercial business loans ........... 52,980 1.86 33,646 1.56 36,592 2.51
Other consumer loans ................ 63,984 2.25 49,395 2.30 24,070 1.65
----------- ------ ----------- ------ ----------- ------
Total other loans ................... 123,534 4.34 89,055 4.14 67,591 4.63
----------- ------ ----------- ------ ----------- ------
Total loans receivable .............. 2,850,602 100.10 2,158,773 100.41 1,474,392 101.18
Less: ............................... 5,713 0.20 4,640 0.22 1,194 0.08
Premium (discount) on loans purchased
(14,638) (0.51) (14,271) (0.66) (16,617) (1.14)
Allowance for loan losses
Deferred loan costs, (fees) net ..... 5,983 0.21 897 0.03 (1,910) (0.12)
----------- ------ ----------- ------ ----------- ------
Loans receivable, net ............... $ 2,847,660 100.00% $ 2,150,039 100.00% $ 1,457,059 100.00%
=========== ====== =========== ====== =========== ======
1997 1996
---- ----
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
Mortgage Loans:
Single-family residential ........... $ 863,694 79.7% $ 743,089 76.76%
Multi-family residential ............ 28,218 2.61 26,444 2.73
Commercial real estate .............. 120,084 11.09 115,593 11.94
Construction and land ............... 40,476 3.74 28,779 2.97
Home equity ......................... 6,538 0.60 7,464 0.78
----------- ------ ---------- ------
Total mortgage loans ................ 1,059,010 97.80 921,369 95.18
Other loans:
Student loans ....................... 4,033 0.37 4,522 0.47
Automobile Leases (1) ............... -- -- 28,249 2.92
Passbook loans ...................... 6,929 0.64 5,933 0.61
Commercial business loans ........... 19,559 1.84 14,995 1.55
Other consumer loans ................ 13,212 1.22 9,712 1.00
----------- ------ ---------- ------
Total other loans ................... 43,733 4.07 63,411 6.55
----------- ------ ---------- ------
Total loans receivable .............. 1,102,743 101.87 984,780 101.73
Less: ............................... (729) (0.07) (3,475) (0.36)
Premium (discount) on loans purchased
(15,709) (1.45) (9,977) (1.03)
Allowance for loan losses
Deferred loan costs, (fees) net ..... (3,387) (0.32) (3,313) (0.34)
----------- ------ ---------- ------
Loans receivable, net ............... $ 1,082,918 100.00% $ 968,015 100.00%
=========== ====== ========== ======
(1) Consists of loans secured by assignments of automobile lease payments
This schedule does not include $116.2 million of net loans held for sale by
SIBMC.
8
Loan Activity: The following table sets forth the Company's activity in its loan
portfolio.
Year Ended December 31,
2000 1999 1998
---------- ---------- ----------
(Dollars in Thousands)
Total loans held at beginning .......... $2,203,302 $1,550,834 $1,102,743
of period
Originations of loans:
Mortgage loans:
Single-family residential ............ 1,395,115 1,333,757 508,124
Multi-family residential ............. 9,907 14,372 9,988
Commercial real estate ............... 70,665 126,561 41,294
Construction and land ................ 147,212 51,051 38,514
Home equity .......................... 7,359 2,545 2,686
Other loans:
Student loans ........................ 871 1,475 2,205
Passbook loans ....................... 8,873 5,302 5,666
Commercial business loans ............ 62,774 56,625 23,180
Other consumer loans ................. 9,681 15,771 12,197
---------- ---------- ----------
Total originations ................. 1,712,457 1,607,459 643,854
Purchases of loans: (1)
Mortgage loans:
Single-family residential .......... 55,549 -- 59,412(2)
Multi-family residential ........... 3,020 -- --
Commercial real estate ............. 49,358 -- --
Construction and land .............. 35,155 -- --
Home equity ........................ 3,566 -- --
Other loans:
Passbook loans ..................... 3,608 -- --
Commercial business loans .......... 5,235 -- --
Other consumer loans ............... 12,866 16,088 6,855
---------- ---------- ----------
Total purchases .................. 168,357 16,088 66,267
---------- ---------- ----------
Total originations and purchases 1,880,814 1,623,547 710,121
---------- ---------- ----------
Loans sold:
Mortgage loans:
Single-family residential .......... 730,506 644,557 57,577
Other loans:
Student loans ...................... -- -- --
---------- ---------- ----------
Total loans sold ................. 730,506 644,557 57,577
Transfers to real estate owned ......... 930 325 1,166
Transfers to repossessed assets ........ 244 -- --
Charge-offs ............................ 1,928 1,260 2,119
Repayments ............................. 388,311 324,937 201,168
---------- ---------- ----------
Net activity in loans .................. 758,895 652,468 448,091
---------- ---------- ----------
Gross loans held at end of period ...... $2,962,197 $2,203,302 $1,550,834
========== ========== ==========
(1) Includes the following amounts acquired from First State Bank, single family
residential $19.5 million, multi-family residential $3.0 million, commercial
real estate $49.4 million, construction and land $7.4 million, commercial
loans $5.2 million, passbook loans $3.6 million and consumer loans $2.1
million.
(2) Represents loans acquired from Ivy Mortgage Corp.
9
The lending activities of SIBT are subject to written underwriting
standards and loan origination procedures established by management and approved
by the Bank's Board of Directors.
The Bank's primary source of loan applications for residential
mortgages are independent mortgage brokers throughout the tri-state area, a
group of whom are authorized to accept and process applications on the Bank's
behalf. Applications for mortgages and other loans are also taken at all of the
Bank's branch offices. In addition, the Bank's business development officers,
loan officers and branch managers call on individuals in the Bank's market area
in order to solicit new loan originations as well as other banking
relationships. All loan applications are forwarded to the Bank's loan
origination center for underwriting and approval. The Bank's employees at the
loan origination center supervise the process of obtaining credit reports,
appraisals and other documentation involved with a loan. The Bank requires that
a property appraisal be obtained in connection with all new mortgage loans.
Property appraisals are performed by an independent appraiser from a list
approved by the Bank's Board of Directors. SI Bank & Trust requires that title
insurance and hazard insurance be maintained on all collateral properties
(except for home equity loans and home secured loans) and that flood insurance
be maintained if the property is within a designated flood plain.
Certain officers of the Bank have been authorized by the Board of
Directors to approve loans up to certain designated amounts. The Loan Review
Committee of the Board of Directors must approve all loans where new monies
advanced would increase borrowers or guarantors total outstanding credit with
the Bank above $1.5 million but not exceeding $7.5 million. Loans in excess of
$7.5 million must be approved by the full Board of Directors of the Bank.
A federal savings association generally may not make loans to one
borrower and related entities in an amount which exceeds 15% of its unimpaired
capital and surplus, although loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. However, the Bank maintains a more
restrictive limit of loans to any one borrower and related entities of 5% of the
Bank's unimpaired capital and surplus, or $19.9 million at December 31, 2000. As
of December 31, 2000, the Bank's largest concentration of loans to any one
borrower and related entities (excluding intra-company loans) was $17.5 million
and the loans were performing in accordance with their terms.
Single-Family Residential. Substantially all of the Company's
single-family residential mortgage loans consist of conventional loans.
Conventional loans are loans that are neither insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Department of Veterans
Affairs ("VA"). Approximately 38% of the Company's single-family residential
mortgage loans retained in the portfolio are secured by properties located in
Staten Island and an additional 30% are secured by properties in other areas of
New York City. As of December 31, 2000, $2.2 billion, or 77.5%, of the Company's
net loans consisted of single-family residential mortgage loans. The Bank
originated $635.0 million of single-family residential mortgage loans during the
year ended December 31, 2000 and $714.7 million and $433.5 million in 1999 and
1998, respectively. In addition SIBMC originated $760.1 million and $708.5
million of single-family residential mortgage loans during the years ended
December 31, 2000 and 1999, respectively.
10
During the year 2000, the Bank sold $230.0 million of single family
residential loans, primarily fixed rates, to maintain and improve the Bank's
level of interest rate risk. To a lesser extent, the sales were used as a source
of funds for the origination of higher yielding adjustable rate loans. The Bank
anticipates that a significant portion of its future new loan originations will
continue to be single-family residential mortgage loans and that its fixed rate
loan originations will be sold into the secondary market rather than being held
in portfolio. During the years ended December 31, 2000 and 1999, SIBMC sold to
investors single-family residential loans totaling $503.1 million and $642.9
million, respectively. Also during those years $221.3 million and $91.0 million
of loans originated by SIBMC were retained for the Company's loan portfolio.
The Bank's residential mortgage loans have either fixed-rates of
interest or interest rates which adjust periodically during the term of the
loan. Fixed-rate loans generally have maturities ranging from 10 to 30 years and
are fully amortizing with monthly or bi-weekly loan payments sufficient to repay
the total amount of the loan with interest by the end of the loan term. The
Bank's fixed-rate loans generally are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government-sponsored
agencies, such as the Federal Home Loan Mortgage Corporation ("FHLMC"), and
other investors in the secondary market for mortgages. At December 31, 2000,
$1.1 billion, or 51.6%, of the Bank's single-family residential mortgage loans
were fixed-rate loans. Substantially all of the Bank's single-family residential
mortgage loans contain due-on-sale clauses, which permit the Bank to declare the
unpaid balance to be due and payable upon the sale or transfer of any interest
in the property securing the loan. The Bank enforces such due-on-sale clauses.
The adjustable-rate single-family residential mortgage ("ARM") loans
currently offered by the Bank have interest rates which adjust every one, three
or five years in accordance with a designated index such as one-, three- or
five-year U.S. Treasury obligations adjusted to a constant maturity ("CMT"),
plus a stipulated margin. In addition, the Bank offers an ARM with a fixed-rate
for the first ten years which adjusts on an annual basis thereafter. At December
31, 2000, the Bank's five-year and ten-year ARM loans amounted to $622.1 million
and $244.5 million, respectively. The Bank's adjustable-rate single-family
residential real estate loans generally have a cap of 2% to 5% on any increase
or decrease in the interest rate at any adjustment date, and include a specified
cap on the maximum interest rate over the life of the loan, which cap is
generally 5% or 6% above the initial rate. The Bank may offer ARM loans with
initial rates which are below the fully indexed rate. Such loans generally are
underwritten based on the fully indexed rate. The Bank's adjustable-rate loans
require that any payment adjustment resulting from a change in the interest rate
of an adjustable-rate loan be sufficient to result in full amortization of the
loan by the end of the loan term and, thus, do not permit any of the increased
payment to be added to the principal amount of the loan, or so-called negative
amortization. At December 31, 2000, $1.1 million or 48.4% of the Bank's
single-family residential mortgage loans were adjustable-rate loans compared to
$565.7 million or 32.6% at December 31, 1999.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase, the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying
11
collateral property may be adversely affected by higher interest rates. The Bank
believes that these risks, which have not had a material adverse effect on the
Bank to date, generally, are less than the risks associated with holding
fixed-rate loans in a rising interest rate environment.
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. Accordingly, although the Bank will
continue to offer single-family ARMs, there can be no assurance that in the
future the Bank will be able to originate a sufficient volume of single-family
ARMs to increase or maintain the proportion that these loans bear to total
loans. The Bank supplements its origination efforts with respect to ARMS by
purchasing ARM loans from SIBMC. During 2000, the Bank purchased $146.9 million
of ARM loans from SIBMC. SIBMC also held $74.4 million of ARM loans in its
portfolio.
The Bank's single-family residential mortgage loans generally do not
exceed $750,000. In addition, the maximum loan-to-value ("LTV") ratio for the
Bank's single-family residential mortgage loans, generally, is 95% of the
appraised value of the secured property, provided, however, that private
mortgage insurance is obtained on the portion of the principal amount that
exceeds 80% of the appraised value. Loans purchased by the Bank from SIBMC are
underwritten on substantially similar terms as loans originated directly by the
Bank.
At December 31, 2000, the Company's home equity loans amounted to $10.7
million or 0.4% of the Company's net loans. The Bank offers floating rate home
equity lines of credit. Home equity loans, like single-family residential
mortgage loans, are secured by the underlying equity in the borrower's
residence. However, the Bank generally obtains a second mortgage position to
secure home equity loans. The Bank's home equity loans generally require LTV
ratios of 80% or less after taking into consideration any first mortgage loan.
Commercial Real Estate Loans and Multi-Family Residential Loans. At
December 31, 2000, the Company's commercial real estate loans and multi-family
residential mortgage loans amounted to $307.4 million and $49.0 million,
respectively, or 10.8% and 1.7%, respectively, of the Bank's net loan portfolio.
Commercial real estate and multi-family residential real estate loans often have
adjustable interest rates, shorter terms to maturity and higher yields than the
Bank's single-family residential real estate loans. Because of such factors, in
recent years the Bank has increased its efforts in originating commercial real
estate loans and multi-family residential loans.
The Bank's commercial real estate loans generally are secured by small
office buildings, retail and industrial use buildings, strip shopping centers
and other commercial uses located in the Bank's market area. The Bank's
commercial real estate loans seldom exceed $1.5 million and as of December 31,
2000, the average size of the Bank's commercial real estate loans was $435,000.
The Bank originated $70.7 million of commercial real estate loans during the
year ended December 31, 2000 compared to $126.6 million and $41.3 million of
commercial real estate loan originations in 1999 and 1998, respectively .
The Bank's multi-family residential real estate loans are concentrated
in Brooklyn and, to a lesser extent, Staten Island. The Bank originated $9.9
million of multi-family residential real estate loans during the year ended
December 31, 2000 compared to $14.4 million and $10.0 million of
12
originations in 1999 and 1998, respectively. The Bank generally has not been a
substantial originator of multi-family residential real estate loans due to,
among other factors, the relatively limited amount of apartment and other
multi-family properties in Staten Island.
The Bank's commercial real estate and multi-family residential loans
generally are three or five-year adjustable-rate loans indexed to three-or
five-year U.S. Treasury obligations adjusted to a CMT, plus a margin. Generally,
fees of between .50% and 1.50% of the principal loan balance are charged to the
borrower upon closing. The Bank generally charges prepayment penalties on
commercial real estate and multi-family residential mortgage loans. Although
terms for multi-family residential and commercial real estate loans may vary,
the Bank's underwriting standards generally provide for terms of up to 25 years
with amortization of principal over the term of the loan and LTV ratios of not
more than 75%. Generally, the Bank obtains personal guarantees of the principals
as additional security for any commercial real estate and multi-family
residential loans.
The Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the market, location and physical
condition. The Bank has also generally imposed a debt coverage ratio (the ratio
of net cash from operations before payment of debt service to debt service) of
not less than 125%. The underwriting analysis also includes credit checks and a
review of the financial condition of the borrower and guarantor, if applicable.
An appraisal report is prepared by an independent appraiser commissioned by the
Bank to substantiate property values for every commercial real estate and
multi-family loan transaction. All appraisal reports are reviewed by the Bank
prior to the closing of the loan.
Commercial real estate and multi-family residential lending entails
substantially different risks when compared to single-family residential lending
because such loans often involve large loan balances to single borrowers and
because the payment experience on such loans is typically dependent on the
successful operation of the project or the borrower's business. These risks can
also be significantly affected by supply and demand conditions in the local
market for apartments, offices, warehouses, or other commercial space. The Bank
attempts to minimize its risk exposure by limiting such lending to proven
businesses, only considering properties with existing operating performance
which can be analyzed, requiring conservative debt coverage ratios, and
periodically monitoring the operation and physical condition of the collateral.
As of December 31, 2000, $3.0 million or 1.0% of the Bank's commercial
real estate loans and $340,000 or 0.7% of its multi-family residential real
estate loans were non-accrual loans.
Construction and Land Loans. The Company originates and services a
majority of its construction and land loans through the ACLS division of SIBMC.
To a lesser extent the Bank also originates construction and land loans. The
construction loans originated are primarily residential construction loans to
real estate builders and, to a lesser extent, residential construction loans to
individuals who have a contract with a builder for the construction of their
residence. ACLS will also originate construction loans for multi-family projects
and non-residential property. While the terms of the construction and land loans
offered by the Bank and the ACLS division are substantially similar, the Bank
restricts its lending to the New York metropolitan area while the
13
ACLS division has a presence in six states. At December 31, 2000, the
construction and land loan portfolio amounted to $153.0 million or 5.4% of the
Company's net loan portfolio of which $88.8 million consisted of residential
construction loans, $5.6 million of multi-family construction loans, $19.4
million of non-residential construction loans and $39.4 million of land loans.
In addition, at such date the Company had $98.0 million of undisbursed funds for
construction loans in process. The Bank and ACLS disbursed $147.2 million of
construction and land loans during the year ended December 31, 2000 compared to
$51.1 million and $38.5 million of construction loans in 1999 and 1998,
respectively. In the future, the Company's construction lending efforts are
expected to expand and be enhanced by the operation of the ACLS Division as an
originator of construction loans in a number of states. At December 31, 2000 the
outstanding principal balance of loans in the ACLS loan portfolio was $95.8
million.
The Company's construction loans generally have floating rates of
interest for a term of up to two years. Construction loans to builders are
typically made with a maximum loan to value ratio of 75%. The Company's
construction loans to builders are made on either a pre-sold or speculative
(unsold) basis. However, the Company generally limits the number of unsold homes
under construction to its builders, with the amount dependent on the reputation
of the builder, the present outstanding obligations of the builder, the location
of the property and prior sales of homes in the development and the surrounding
area. The Company generally limits the number of construction loans for
speculative units to two to four model homes per project.
Prior to making a commitment to fund a construction loan, the Company
requires an appraisal of the property by independent appraisers approved by the
Board of Directors. The Company's staff also reviews and inspects each project
at the commencement of construction and prior to every disbursement of funds
during the term of the construction loan. Loan proceeds are disbursed after
inspections of the project based on a percentage of completion. The Company
requires monthly interest payments during the construction term.
The Company originates land loans to developers for the purpose of
holding or developing the land (i.e., roads, sewer and water) for sale. Such
loans are secured by a lien on the property, are generally limited to 70% of the
appraised value of the secured property and are typically made for a period of
up to two years with a floating interest rate based on the prime rate. The
Company requires monthly interest payments during the term of the land loan. The
principal of the loan is reduced as lots are sold and released. In addition, the
Bank generally obtains personal guarantees from its borrowers and originates
such loans to developers with whom it has established relationships.
Construction and land lending generally is considered to involve a
higher level of risk as compared to permanent single-family residential lending,
due to the concentration of principal in a limited number of loans and borrowers
and the effects of general economic conditions on developers and builders.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated cost (including interest) of the project. The nature
of these loans is such that they are generally more difficult to evaluate and
monitor. In addition, speculative construction loans to a builder are secured by
unsold homes and thus pose a greater potential risk to the Company than
construction loans to individuals on their personal residences.
14
The Company has attempted to minimize the foregoing risks by, among
other things, limiting the extent of its construction and land lending to
primarily residential properties. In addition, the Company has adopted strict
underwriting guidelines and other requirements for loans which are believed to
involve higher elements of credit risk. It is also the Company's policy to
obtain personal guarantees from the principals of its corporate borrowers on its
construction and land loans.
Other Loans. The Company offers a variety of other or non-mortgage
loans through the Bank. Such other loans, which include commercial business
loans, passbook loans, student loans, overdraft loans, manufactured home loans
and a variety of other personal loans, amounted to $123.5 million or 4.3% of the
Bank's net loan portfolio at December 31, 2000.
At December 31, 2000, the Bank's commercial business loans amounted to
$53.0 million or 1.9% of the Company's net loan portfolio. The Bank's commercial
business loans have a term of up to five years and may have either fixed-rates
of interest or, to a lesser extent, floating rates tied to the prime rate. The
Bank's commercial business loans are made to small to medium sized businesses
within the Bank's market area. A substantial portion of the Bank's small
business loans are unsecured with the remainder generally secured by perfected
security interests in accounts receivable and inventory or other corporate
assets. The Bank generally obtains personal guarantees from the principals of
the borrower with respect to all commercial business loans. In addition, the
Bank may extend loans for a commercial business purpose which are secured by a
mortgage on the proprietor's home or the business property. In such cases, the
loan, while underwritten to commercial business loan standards, is reported as a
single-family or commercial real estate mortgage loan, as the case may be.
Commercial business loans generally are deemed to involve a greater degree of
risk than single-family residential mortgage loans.
The Bank's commercial business loans include discounted loans, which
amounted to $5.5 million or 0.2% of the Bank's loans at December 31, 2000. The
Bank's discounted loans, which are made primarily to local businesses, are
designed to provide an interim source of financing and require no payment of
principal or interest until the due date of the loan, which may be up to one
year but generally is 60 or 90 days from the date of origination. While the
borrower is contractually obligated to repay the entire face amount of the loan
at maturity, the Bank advances only a portion of the face amount with the
difference constituting the interest component. In addition to personal
guarantees, discounted loans may also be secured by perfected security interests
in receivables and or certain other assets of the Company. However, due to the
lack of an amortization schedule and, in certain cases, the absence of perfected
security interests, discounted loans generally may be deemed to involve a
greater risk of loss than single-family residential mortgage loans.
At December 31, 2000, included in total other consumer loans was $29.5
million of loans primarily secured by manufactured housing. This represents 1.0%
of the Bank's net loan portfolio. The Bank currently purchases these loans after
a review of the loan documentation and underwriting, which is prepared by the
company originating the loan. The majority of the loans are secured by
manufactured housing and are located in the northeastern section of the country.
The Bank services the loan and is assisted by the originating company in the
collection process.
15
The balance of the Bank's other loans consists of loans secured by
savings accounts, loans on overdraft accounts, home improvement loans, student
loans and various other personal loans.
Mortgage Banking Activities. On November 20, 1998, the Bank's wholly
owned subsidiary, SIB Mortgage Corp., acquired substantially all of the
residential mortgage production operations and certain other assets and
liabilities of Ivy Mortgage Corp. SIBMC conducts business as a licensed mortgage
banker in 27 states under the name "Ivy Mortgage." SIBMC's primary business is
to originate and sell residential mortgage loans on a servicing released basis
to the secondary market. The primary source of loans originated by SIBMC is a
network of approximately 100 retail commissioned loan officers who solicit
business through realtors, financial planners, insurance agents and other
referral sources. To a lesser extent SIBMC also derives applications from
third-party sources, such as mortgage brokers, and from the Internet. Loan
applications are generally processed on a de-centralized basis in SIBMC's
network of 54 offices. SIBMC's primary method of credit underwriting the loans
is to electronically submit the necessary data to the major mortgage agencies'
(FHLMC or FNMA) automated underwriting facilities. SIBMC also has underwriters
in all of its regions who manually underwrite loans that are not eligible for
Agency submission, in which case, loans are originated for re-sale to individual
investors in the secondary market. All credit decisions are based on the
individual investors' underwriting guidelines. In most instances SIBMC is
delegated to make underwriting decisions for its private investors either
directly or through automated intelligence. Generally, all properties securing
loans must be appraised by a licensed appraiser on SIBMC's approved list. Credit
reports, flood zone certifications and real estate tax certifications are
required on all loans. SIBMC also requires title insurance, hazard insurance and
flood insurance when a loan is determined to be in a flood zone. SIBMC's
underwriters are authorized to approve loans based on the individual investors
delegated authority. All limits also are subject to the Bank's limitations and
SIBMC is subject to the same limitations as the Bank for loans to one borrower.
During the year ended December 31, 2000, SIBMC originated a total of
$760.1 million of mortgage loans, of which $74.4 million were held in SIBMC's
portfolio at December 31, 2000. During the year ended December 31, 1999, SIBMC
originated a total of $708.5 million of residential mortgage loans of which
$50,000 were held in SIBMC's portfolio. The Bank purchased $146.9 million of
residential mortgage loans from SIBMC during the year ended December 31, 2000.
The loans held in portfolio and purchased by the Bank are primarily higher
yielding ARM loans to supplement the Bank's origination of ARM loans in its
efforts to manage interest rate risk. SIBMC originates primarily conventional
single-family residential mortgage loans and, to a lesser extent, FHA-insured
single-family residential mortgage loans.
The Bank has provided SIBMC with a $325.0 million line of credit to
finance its loan originations. At December 31, 2000, $194.4 million was
outstanding on such line of credit. In addition, the Bank also has extended a
$15.0 million working capital line of credit to SIBMC for day-to-day operating
expenses, of which $10.5 million was drawn as of December 31, 2000. Interest
paid by SIBMC on such loans is eliminated upon consolidation in the Company's
financial statements.
SIBMC originates loans which conform to the underwriting standards for
purchase by the FHLMC and FNMA ("conforming loans") as well as non-conforming
loans. Non-conforming loans
16
generally consist of loans which, primarily because of size or other
underwriting technicalities which may be cured through seasoning, do not satisfy
the guidelines for resale to FNMA or FHLMC and other private secondary market
investors at the time of origination. Management believes that these loans are
essentially of the same credit quality as conforming loans. During the year
ended December 31, 2000, non-conforming conventional loans represented
approximately 20% of SIBMC's total volume of mortgage loans originated.
Loan origination activities performed by SIBMC include soliciting,
completing and processing mortgage loan applications and preparing and
organizing the necessary loan documentation. Loan applications are examined for
compliance with underwriting criteria and, if all requirements are met, SIBMC
issues a commitment to the prospective borrower specifying the amount of the
loan and the loan origination fees, points and closing costs to be paid by the
borrower or seller and the date on which the commitment expires.
Typically, when a mortgage loan is originated, the borrower pays an
origination fee. These fees could be up to 3.0 % of the principal amount of the
mortgage loan, and are payable at the closing of such loan. SIBMC receives these
fees on mortgage loans originated through its retail branches. SIBMC may charge
additional fees depending upon market conditions and regulatory considerations
as well as SIBMC's objectives concerning mortgage loan origination volume and
pricing. SIBMC incurs certain costs in originating mortgage loans, including
overhead, out-of-pocket costs and in some cases, where the mortgage loans are
subject to a purchase commitment from private investors, related commitment
fees. The volume and type of mortgage loans and of commitments made by investors
vary with competitive and economic fluctuations in revenues from mortgage loan
originations. Generally accepted accounting principles ("GAAP") require that
general operating expenses incurred in originating mortgage loans be charged to
income using the interest method, until the repayment or sale of the related
mortgage loans. Loans originated by SIBMC generally are sold in approximately 45
days. Revenues from SIBMC's loan sales are recorded as other income in the
Company's consolidated financial statements. SIBMC was profitable for the third
and fourth quarter of 2000 and the Company expects that it will continue to be
profitable in 2001.
When SIBMC sells loans, it assumes limited recourse for first payment
defaults, fraud and non-compliance with its investors' underwriting guidelines.
The first payment default recourse is generally limited to a loan that goes into
foreclosure where the delinquency occurred within the first 90 days after a loan
is sold to an investor. The recourse obligation for fraud and non-compliance to
underwriting standards is generally for the life of the loan. During 2000,
SIBMC recognized no losses due to such recourse arrangements.
Loan Origination Costs and Fees. In addition to interest earned on
loans, the Bank receives loan origination fees or "points" on a portion of the
loans it originates. Loan points are a percentage of the principal amount of the
mortgage loan and are charged to the borrower in connection with the origination
of the loan. Loan costs, which are deferred, are primarily the direct costs to
originate a loan and fees paid to brokers.
In accordance with SFAS No. 91, which addresses the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain
17
related direct loan origination costs and fees are offset, and the resulting net
amount is deferred and amortized as an adjustment to interest income over the
contractual life, adjusted for prepayments, of the related loans resulting in an
adjustment to the yield of such loans. For loans that are sold by the Bank, the
unamortized portion of the deferred fees and costs is an adjustment to the gain
or loss on the sale. At December 31, 2000, the Bank had $6.0 million of such
deferred loan costs, net.
Asset Quality
General. As a part of the Bank's efforts to improve its asset quality,
it has developed and implemented an asset classification system. All of the
Bank's assets are subject to review under this classification system. Loans are
periodically reviewed and the classifications are reviewed by the Board of
Directors on at least a quarterly basis.
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made 16 days after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency continues, late charges are
assessed and additional efforts are made to collect the loan. While the Bank
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be doubtful
and the value of the collateral is not sufficient to satisfy all interest,
principal and potential costs due on the loan. Prior to 1998, the Bank's policy
was to cease accruing interest on any loan which was 90 days or more past due as
to principal or interest. Commencing in 1998, management reviews individual
secured loans to determine their accrual status when they approach 90 days past
due. When a loan is placed on non-accrual status, previously accrued unpaid
interest is deducted from interest income. At December 31, 2000, the Bank had
$9.8 million of loans in non-accrual status compared to $12.5 million as of
December 31, 1999 and $16.2 million as of December 31, 1998.
Real estate acquired by the Bank as a result of foreclosure or
deed-in-lieu of foreclosure is classified as real estate owned until sold. These
foreclosed assets are considered held for sale and are carried at the lower of
fair value minus the estimated costs to sell the property. After the date of
acquisition, all costs incurred in maintaining the property are capitalized up
to the extent of their net realizable value. The Bank performs ongoing
inspections of the properties and adjusts the carrying value as needed. The Bank
attempts to sell all properties through brokers and through its own personnel.
At December 31, 2000, the Bank had $893,000 in these properties compared to
$887,000 as of December 31, 1999.
18
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 2000, in dollar amounts and as a percentage of
each category of the Bank's loan portfolio. The amounts presented represent the
total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.
December 31, 2000
------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days or More (1)
-------------------- ------------------------- -------------------------
Percent Percent Percent
of Loan of Loan of Loan
Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Mortgage loans:
Residential:
Single-family $8,864 0.40% $2,264 0.10% $5,919 0.27%
Multi-family 18 0.04 -- 0.00 -- 0.00
Commercial real estate 1,734 0.56 1,277 0.42 165 0.05
Construction and land 424 0.28 623 0.41 184 0.12
Home equity 536 5.01 12 0.11 53 0.50
------- ---- ------ ---- ------ ----
Total 11,576 0.42 4,176 0.15 6,321 0.23
------- ---- ------ ---- ------ ----
Other loans:
Commercial business loans 2,129 4.02 282 0.53 127 0.24
Other consumer loans 2,454 3.48 683 0.97 620 0.88
------- ---- ------ ---- ------ ----
Total other loans 4,583 3.71 965 0.78 747 0.60
------- ---- ------ ---- ------ ----
Total loans $16,159 0.57% $5,141 0.18% $7,068 0.25%
======= ====== ======
(1) Still accruing interest.
19
Loans Past Due 90 Days or More and Still Accruing And Non-Accruing
Assets. The following table sets forth information with respect to, non-accruing
loans, and other real estate owned and loans past due 90 days or more and still
accruing.
At December 31,
--------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(Dollars in Thousands)
Non-Accruing Assets
Mortgage loans:
Single-family residential . $ 3,335 $ 2,899 $ 7,067 $ 9,395 $10,417
Multi-family residential .. 340 -- 131 319 322
Commercial real estate .... 2,979 5,568 6,534 8,436 11,102
Construction and land ..... 524 1,793 1,761 1,131 --
Home equity ............... 5 106 212 545 644
Other loans:
Automobile leases ......... -- -- -- -- 15
Commercial business loans . 1,482 1,783 346 835 106
Other consumer loans ...... 1,111 325 181 570 144
------- ------- ------- ------- -------
Total non-accrual loans ... 9,776 12,474 16,232 21,231 22,750
Other real estate owned, net .. 893 887 849 618 1,103
------- ------- ------- ------- -------
Total non-accruing assets . $10,669 $13,361 $17,081 $21,849 $23,853
Loans past due 90 days or more
and still accruing ........ 7,068 6,886 7,422 -- --
------- ------- ------- ------- -------
Non-accuring assets and loans past
and due 90 days or more and
still accruing ................ $17,737 $20,247 $24,503 $21,849 $23,853
======= ======= ======= ======= =======
Non-accruing assets to total loans 0.37% 0.62% 1.16% 1.98% 2.42%
Non-accruing assets to total assets 0.20% 0.30% 0.45% 0.82% 1.34%
Non-accruing loans to total loans . 0.34% 0.58% 1.10% 1.93% 2.31%
Non-accruing loans to total assets 0.19% 0.28% 0.43% 0.80% 1.28%
Non-accrual loans and other real estate owned at December 31, 2000
totaled $10.7 million, down from $13.4 million at December 31, 1999 and $17.1
million at December 31, 1998.
The interest income that would have been recorded during the year ended
December 31, 2000 if all of the Bank's non-accrual loans at the end of such
period had been current in accordance with their terms during such period was
$728,000. The actual amount of interest recorded as income (on a cash basis) on
such loans during 2000 amounted to $109,000.
Classified and Criticized Assets. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
20
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable and there is a high
probability of loss. An asset classified as a loss is considered uncollectable
and of such little value that continuance as an asset of the institution is not
warranted. Another category designated as "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. At December 31, 2000, the Bank had an aggregate
of $26.0 million of classified assets of which $16.2 million were classified
substandard, $9.4 million of assets which were deemed special mention and
$327,000 of assets which were classified doubtful.
Allowance for Loan Losses. The level of the allowance for loan losses
is based on management's continuing review of the adequacy of the allowance.
Such evaluation is based on the composition of the loan portfolio and its
inherent risk characteristics, the level of chargeoffs, both current and
historic, local and national economic conditions including the direction of real
estate values, current levels of delinquent and non-accruing loans, and the
current trends in regulatory supervision. At December 31, 2000, the Bank's
allowance for loan losses amounted to $14.6 million or 149.7% and 0.51% of the
Bank's non-accrual loans and total loans receivable, respectively.
As a result of the changing mix of loan origination, management deemed
it prudent to provide a $652,000 provision for the allowance for loan losses in
2000 compared to a $1.8 million benefit for the loan loss reserve for the year
ending December 31, 1999.
21
Allowance for Loan Losses. The following table sets forth the activity
in the Bank's allowance for loan losses during the periods indicated.
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
------- ------- ------- ------ -------
Allowance at beginning of period $14,271 $16,617 $15,709 $9,977 $10,704
Provisions (Benefit) 652 1,843 1,594 6,003 1,000
Increase as a result of acquisition 847 -- 96 -- --
Charge-offs:
Mortgage loans:
Single-family residential 120 148 358 501 1,590
Multi-family residential -- -- 31 100 --
Commercial real estate 134 474 344 210 376
Construction and land 6 -- -- -- --
Other loans 1,926 1,043 1,386 507 729
----- ----- ----- --- ---
Total charge-offs 2,186 1,665 2,119 1,318 2,695
Recoveries:
Mortgage loans:
Single-family residential 19 456 267 533 408
Commercial real estate 27 34 210 251 413
Construction and land -- -- 3 10 --
Other loans 1,008 672 857 253 147
------- ------- ------- ------ -------
Total recoveries 1,054 1,162 1,337 1,047 968
------- ------- ------- ------ -------
Allowance at end of period $14,638 $14,271 $16,617 $15,709 $9,977
======= ======= ======= ======= ======
Allowance for loan losses to total
non-accruing loans at end of period 149.73 % 114.40 % 102.37 % 73.69 % 43.85%
======= ======= ======= ======= ======
Allowance for loan losses to total
loans at end of period 0.51% 0.66% 1.07% 1.42% 1.02%
======= ======= ======= ======= ======
22
The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses by loan category at the dates indicated.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Percent of Percent of Percent of Percent of Percent
Loan in Loan in Loan in Loan in Loan in
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
Residential $ 2,686 79.60% $ 5,890 83.88% $ 5,562 84.89% $ 5,853 82.97% $ 3,192 80.27%
Commercial 9,237 18.03 5,579 12.39 7,721 11.74 6,696 14.83 5,842 14.91
Other loans 2,715 2.48 2,802 4.10 3,334 4.40 3,160 4.04 943 6.55
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $14,638 100.11% $14,271 100.37% $16,617 101.03% $15,709 101.84% $ 9,977 101.73%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
23
The Bank will continue to monitor and modify its allowance for loan
losses as conditions dictate. While management believes, based on information
currently available, the Bank's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurance can be given
that the Bank's level of allowance for loan losses will be sufficient to absorb
future loan losses incurred by the Bank or that future adjustments to the
allowance for loan losses will not be necessary if economic and other conditions
differ substantially from those conditions used by management to determine the
current level of the allowance for loan losses. In addition, the OTS, as an
integral part of its examination process, periodically reviews the Bank's
allowance for loan losses. Such agency may require the Bank to make adjustments
to the loan loss reserve based upon their own judgements which could differ from
those of management.
Securities Activities
General. As of December 31, 2000, the Company had securities totaling
$1.9 billion or 36.0% of the Company's total assets at such date. The unrealized
depreciation on the Company's securities available for sale amounted to $2.9
million, net of income taxes. The securities investment policy of the Bank and
Company, which has been established by the Board of Directors, is designed,
among other things, to assist the Bank in its asset/liability management
policies. The investment policy emphasizes principal preservation, favorable
returns on investments, maintaining liquidity within designated guidelines,
minimizing credit risk and maintaining flexibility. The current securities
investment policies permit investments in various types of assets including
obligations of the U.S. Treasury and federal agencies, investment grade
corporate obligations, various types of mortgage-backed and mortgage-related
securities, commercial paper, certificates of deposit, equities and federal
funds sold to financial institutions approved by the Board of Directors.
The parent Company's securities portfolio, on a non-consolidated basis,
as of December 31, 2000 was $118.8 million, consisting of equity investments and
certain corporate bonds which are not permitted investments for a federally
chartered thrift.
At December 31, 2000, all of the Company's securities were classified
as available for sale. Such classification as available for sale provides the
Company with the flexibility to sell securities if deemed appropriate in
response to, among other factors, changes in interest rates. Securities
classified as available for sale are carried at fair value. Unrealized gains and
losses on available for sale securities are recognized as direct increases or
decreases in equity, net of applicable income taxes.
In the year ended December 31, 2000, the Company recognized a net loss
on securities transactions of $569,000 compared to a net loss on securities
transactions of $5.5 million in 1999 and a net gain on securities transactions
of $524,000 in 1998. The net loss on securities transactions in 1999 included a
$9.0 million writedown of two corporate bonds which management determined to be
permanently impaired due to the deterioration of the financial condition of the
issuer of those bonds.
The investment policy of the Company and the Bank provides management
with the authority to sell securities provided, among other things, any losses
on such sales do not exceed $750,000, in which event prior approval of the Board
of Directors is required. Generally, management will enter into such securities
24
sales only if it believes that it can replace the securities sold with newly
purchased securities that, due to their higher yield, will offset the losses
within a twelve month period.
25
The following table sets forth the activity in the Bank's aggregate
securities portfolio during the periods indicated.
Year Ended December 31,
-----------------------
2000 1999 1998
----------- ---------- ----------
(Dollars In Thousands)
Securities at beginning of period....... $1,963,954 $2,029,041 $ 1,350,466
Purchases:
U.S. government and agencies.......... 219,313 121,954 19,819
State and municipals 1,515 -- --
Agency mortgage-backed securities..... 65,589 153,489 351,465
Agency CMOs........................... 10,981 66,637 199,852
Private CMOs.......................... 16 38,130 374,353
Other debt securities................. 45,180 44,497 239,128
Marketable equity securities.......... 39,038 92,408 119,768
----------- ---------- ----------
Total purchases..................... 381,632 517,115 1,304,385
Sales:
U.S. government and agencies.......... 198,212 -- --
State and municipals -- -- --
Agency mortgage-backed securities..... 26,075 -- 2,772
Agency CMOs 645 -- --
Private CMOs.......................... -- -- --
Other debt securities................. 39,797 23,681 88,168
Marketable equity securities.......... 45,493 52,576 18,284
----------- ---------- ----------
Total sales......................... 310,222 76,257 109,224
Repayments and prepayments:
U.S. government and agencies.......... 8,100 33,050 49,943
State and municipals.................. 140 -- --
Agency mortgage-backed securities..... 139,847 240,177 263,362
Agency CMOs........................... 35,805 46,949 134,220
Private CMOs.......................... 24,592 69,754 72,082
Other debt securities................. 103 -- --
Marketable equity securities.......... -- -- 60
----------- ---------- ----------
Total repayments and prepayments...... 208,587 389,930 519,667
Accretion of discount and (amortization
of premium)........................... 1,227 (10,497) (2,392)
Write-down for permanently impaired securities -- (9,069) --
Unrealized gains or (losses) on
available-for-sale securities......... 60,942 (96,449) 5,473
Securities at end of period $ 1,888,946 $1,963,954 $2,029,041
=========== ========== ==========
Mortgage-Backed and Mortgage-Related Securities. The Company purchases
mortgage backed securities and mortgage related securities in order to generate
positive interest rate spreads with minimal administrative expense, lower its
credit risk as a result of guarantees provided by FNMA, FHLMC, and GNMA,
increase the liquidity of the Company and utilize these securities as collateral
for borrowing. The Company has primarily invested in mortgage backed and
mortgage related securities issued or sponsored by private issuers, GNMA, FNMA
and FHLMC. At December 31, 2000, the Company's securities included $1.3 billion
or 25.7% of total assets of mortgage backed and mortgage related securities. At
such date, 18.6% of the mortgage backed and
26
mortgage related securities were adjustable rate and 81.4% were fixed rate. The
portfolio of mortgage backed and mortgage related securities had a weighted
average yield of 6.72% and a duration of 4.72 years as of December 31, 2000.
The portfolio of mortgage backed and mortgage related securities
consisted of $717.2 million or 13.7% of total assets of mortgage backed
securities and $632.0 million or 12.0% of assets of CMOs at December 31, 2000.
The mortgage backed securities were issued or guaranteed by GNMA, FHLMC or FNMA
and $221.3 million of the CMOs were issued or guaranteed by FHLMC and GNMA and
$410.7 million were privately issued.
U.S. Government and Agency Obligations
At December 31, 2000, the Company's U.S. Government securities
portfolio totaled $4.4 million with a weighted average maturity of 0.8 years.
The U.S. Government agency securities portfolio, consisting of callable
securities, totaled $173.7 million with a weighted average maturity of 6.0 years
and a weighted average life of 0.7 years to the call date.
Other Securities
At December 31, 2000, the Company's other securities consisted
primarily of $143.3 million in corporate bonds, $12.9 million in asset backed
bonds, $1.4 million in municipal bonds and $250,000 in foreign bonds. The
corporate bonds consist of longer term financial institution bonds of which
$54.1 million have adjustable rates using the three month LIBOR as the index and
$89.2 million have fixed-rates for longer terms. The weighted average maturity
of the corporate bond portfolio is 21.3 years.
The following table sets forth certain information regarding the
contractual maturities of the Bank's U.S. Government Agency obligations and
other securities (all of which were classified as available for sale) at
December 31, 2000.
At December 31, 2000
--------------------
Maturing Weighted Maturing Weighted Maturing Weighted Maturing Weighted
Under 1 Average 1-5 Average 6-10 Average Over 10 Average
Year Yield Years Yield Years Yield Years Yield
---- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
U.S. Government and
federal agency obligations. $ 3,250 7.12% $ 70,480 6.20% $ 105,775 6.48% $ -- --%
Other securities ............. 66 3.34 36,320 5.18 18,860 7.11 125,058 8.69
-------- -------- ---------- ----------
$ 3,316 $106,800 $ 124,635 $ 125,058
======== ======== ========== ==========
27
Equity Securities
At December 31, 2000, the Company's investment in equity securities was
$203.7 million, consisting of $62.9 million of preferred stock, $24.5 million of
common stock, $80.6 million of FHLB stock and $35.7 million of mutual funds. All
equity investments are classified as available for sale.
Sources of Funds
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, proceeds from maturing securities
and cash flows from operations are the primary sources of the Bank's funds for
use in lending, investing and for other general purposes. The Bank also utilizes
borrowings, primarily FHLB advances and reverse repurchase agreements, to fund
its operations when needed.
Deposits. The Bank offers a variety of deposit accounts which have a
range of interest rates and terms. At December 31, 2000, the Bank's deposit
accounts consisted of savings (including club accounts), NOW accounts, checking
accounts, money market accounts and certificates of deposit (including brokered
CDs). The Bank also offers certificates of deposit accounts with balances in
excess of $100,000 at preferential rates (jumbo certificates) and also
Individual Retirement Accounts ("IRA") and other qualified plan accounts. While
jumbo certificate of deposit accounts are accepted by the Bank at preferential
rates, the Bank does not solicit such deposits outside of its market area as
such deposits are more difficult to retain than core deposits. Historically, the
Bank has not used brokers to obtain deposits, however, in 2000 the Bank did
utilize nationally recognized retail brokerage firms to obtain deposits.
Dependent on market conditions, the Bank will continue to use such brokered
deposits primarily to fund asset growth and in its effort to manage interest
rate risk.
At December 31, 2000, the Bank's deposits totaled $2.3 billion, of
which 82.9% were interest bearing deposits at such date. Core deposits (savings
accounts, non-interest bearing commercial and retail demand deposits, money
market accounts and NOW accounts) were $1.4 billion or 59.6% and certificates of
deposit were $947.6 million or 40.4% of total deposits. Included in the Bank's
certificates of deposit were $74.9 million of brokered deposits at December 31,
2000. Although the Bank has a significant portion of its deposits in core
deposits, management monitors the activity in these accounts and, based on
historical experience and the Bank's current pricing strategy, believes it will
continue to retain a large portion of these deposits. The Bank is not limited
with respect to the rates it may offer on deposit products.
The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates and competition. The Bank's
deposits are primarily obtained from the areas in which its branch offices are
located. The Bank relies primarily on competitive pricing of its deposit
products, customer service and long standing relationships with customers to
attract and retain deposits. The Bank also utilizes traditional marketing
methods including radio and print media and direct mail programs to attract new
customers and deposits.
28
In addition, the Bank's business development officers have actively
solicited, through individual meetings and other contacts, deposit accounts,
particularly commercial accounts. To attract and retain commercial deposit
accounts, the Bank offers a complete line of commercial account products and
services. The Bank's lending officers and branch managers have increased their
efforts to solicit new deposits from the Bank's loan customers and other
residents and businesses in their market area.
While total deposits held by banks on Staten Island (the Bank's primary
market area) have declined over the past few years, the Bank has continued to be
the largest depository institution by maintaining over 30% of the market share
on Staten Island.
For the year ended December 31, 2000, deposits, before interest
credited, increased $456.6 million of which $368.4 million was from
acquisitions, compared with an increase of $42.1 million in 1999. Inclusive of
interest credited, deposits increased $525.0 million in 2000 and $91.2 million
in 1999.
The following table sets forth the activity in the Bank's deposits
during the periods indicated.
Year Ended December 31,
-----------------------
2000 1999 1998
---------- ---------- ----------
(Dollars In Thousands)
Beginning balance .................................... $1,820,233 $1,729,060 $1,623,652
Net increase (decrease)
excluding acquired deposits ........................... 88,146 42,065 54,763
Acquired deposits ..................................... 368,438
Interest credited ..................................... 68,396 49,108 50,645
Net increase in deposits .............................. 524,980 91,173 105,408
---------- ---------- ----------
Ending balance ........................................ $2,345,213 $1,820,233 $1,729,060
========== ========== ==========
The following table sets forth, by various interest rate categories,
the certificates of deposit with the Bank at the dates indicated.
At December 31,
---------------
2000 1999 1998
---- ---- ----
Interest Rate Paid (Dollars in Thousands)
0.00% to 2.99%.......................... $ -- $ 343 $ 4,343
3.00% to 3.99%.......................... 292 1,912 3,516
4.00% to 4.99%.......................... 216,385 406,285 253,301
5.00% to 6.99%.......................... 694,684 162,666 273,931
7.00% to 8.99%.......................... 36,223 1,837 2,063
--------- --------- ---------
Total............................... $ 947,584 $ 573,043 $ 537,154
========= ========= =========
29
Weighted Average Rate
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit at December 31, 2000.
Over Six Over One Over Two
Months Year Years
Six Through Through Through Over
Months One Two Three Three
And Less Year Years Years Years
-------- ---- ----- ----- -----
(Dollars In Thousands)
3.00% to 3.99% $ 290 $ 2 $ -- $ -- $ --
4.00% to 4.99% 157,353 39,915 14,787 1,522 2,808
5.00% to 6.99% 285,766 254,406 103,021 19,670 31,821
7.00% to 8.99% 24,928 135 1,710 824 8,626
-------- -------- -------- -------- --------
Total $468,337 $294,458 $119,518 $ 22,016 $ 43,255
======== ======== ======== ======== ========
As of December 31, 2000, the aggregate amount of outstanding
certificates of deposit in amounts greater than or equal to $100,000 was
approximately $226.9 million. The following table presents the maturity of these
certificates of deposit at such date.
December 31, 2000
-----------------
(Dollars in Thousands)
3 months or less...................................... $ 86,168
Over 3 months through 6 months........................ 39,372
Over 6 months through 12 months....................... 68,225
Over 12 months........................................ 33,137
---------
$ 226,902
=========
The following table sets forth the average dollar amount of deposits in
the various types of deposit accounts offered by the Bank at the dates
indicated.
Year to Date Average as of December 31,
---------------------------------------
2000 1999 1998
---- ---- ----
Year to Date Weighted Year to Date Weighted Year to Date Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
Savings accounts ............. $ 793,908 2.45% $ 752,131 2.49% $ 780,536 2.68%
Certificates of deposits..... 827,504 5.41 556,635 4.76 528,686 5.08
Money market accounts......... 129,002 3.20 87,983 2.96 79,832 2.94
NOW accounts ................. 90,085 2.03 77,088 2.01 38,486 1.98
Demand deposits .............. 382,814 -- 321,414 -- 230,297 --
---------- ---- ---------- ---- ---------- ----
Total ................... $2,223,313 3.16% $1,795,251 2.75% $1,657,837 3.07%
========== ==== ========== ==== ========== ====
30
Borrowings. The Bank's primary source of borrowing consists of advances
from the FHLB secured by the Bank's residential loan portfolio and reverse
repurchase agreements entered into with the FHLB and nationally recognized
securities brokerage firms. At December 31, 2000, the Bank had total borrowings
of $2.2 billion of which $1.3 billion were FHLB advances and $893.0 million were
reverse repurchase agreements. In the years 1998 and 1999, the Bank used
borrowings to fund investments at acceptable spreads to leverage its balance
sheet. In the year 2000, borrowings were primarily used to fund the acquisition
of First State Bank and certain higher yielding loan originations when the need
for funds exceeded the amount of funds provided by deposit gathering activities.
The Bank intends to reduce its utilization of borrowings in the year 2001 and to
emphasize more traditional funding sources such as deposit growth, especially in
its new markets.
The following table sets forth information with respect to the
Company's borrowings at and during the periods indicated.
At or For the Year Ended December 31,
-------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Maximum balance $2,249,963 $ 2,049,372 $ 1,349,477
Average balance $2,147,718 $ 1,673,755 $ 664,822
Year end balance $2,241,011 $ 2,049,372 $ 1,344,477
Weighted
average
interest rate:
At end of year 6.28% 5.65% 5.24%
During the year 6.19% 5.35% 5.58%
Trust Activities. The Bank also provides a full range of trust and
investment services, and acts as executor or administrator of estates and as
trustee for various types of trusts. Trust and investment services are offered
through the Bank's Trust Department which was acquired in 1995. Fiduciary and
investment services are provided primarily to persons and entities located in
Staten Island, New York. Services offered include fiduciary services for trusts
and estates, money management, custodial services and pension and employee
benefits consulting. As of December 31, 2000, the Trust Department maintained
approximately 334 trust/fiduciary accounts with an aggregate value of $216.4
million.
The accounts maintained by the Trust/Investment Services Division
consist of "managed" and "non-managed" accounts. "Managed" accounts are those
for which the Bank has responsibility for administration and investment
management and/or investment advice. "Non-managed" accounts are those accounts
for which the Bank merely acts as a custodian. The Company receives fees
depending upon the level and type of service provided. The Trust Department
administers various trust accounts (revocable, irrevocable, charitable trusts,
and trusts under wills), agency accounts (various investment fund products),
estate accounts and employee benefit plan accounts (assorted plans and IRA
accounts). Two trust officers and related staff are assigned to the Trust
Department. The administration of trust and fiduciary accounts are monitored by
the Trust
31
Committee of the Board of Directors of SI Bank & Trust
Subsidiaries
SIB Mortgage Corp., doing business as Ivy Morytgage (SIBMC) is a
wholly-owned subsidiary of the Bank incorporated in the State of New Jersey in
1998. SIBMC was formed to purchase substantially all of the assets of Ivy
Mortgage Corp. SIBMC currently originates loans in 27 states and had assets
totaling $212.1 million at December 31, 2000.
Staten Island Funding Corporation (SIFC) is a wholly-owned subsidiary
of SIBIC incorporated in the State of Maryland in 1998 for the purpose of
establishing a real estate investment trust ("REIT"). The Bank transferred real
estate mortgage loans totaling $648.0 million, net. In return, the Bank received
all the shares of common stock and preferred stock in SIFC. The assets of SIFC
totaled $655.6 million at December 31, 2000.
SIB Investment Corporation (SIBIC) is a wholly-owned subsidiary of the
Bank that was incorporated in the State of New Jersey in 1998 for the purpose of
managing certain investments of the Bank. The Bank transferred the common stock
and a majority of the preferred stock of SIFC to SIBIC. The consolidated assets
of SIBIC at December 31, 2000 were $858.9 million.
SIB Financial Services Corporation (SIBFSC) is a wholly owned
subsidiary of the Bank incorporated in the State of New York in 2000. SIBFSC was
formed as a licensed life insurance agency to sell the products of SBLI USA
Mutual Insurance Company, Inc. SIBFSC has assets of $369,000 as of December 31,
2000.
Employees. The Bank had 1,056 full-time employees and 160 part-time
employees at December 31, 2000. None of these employees are represented by a
collective bargaining agent and the Bank believes that it enjoys good relations
with its personnel.
32
REGULATION
General
The Bank is a federally chartered and insured savings bank subject to
extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the
Bank Insurance Fund ("BIF").
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Company or the Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals.
Regulation of Savings and Loan Holding Companies
Holding Company Acquisitions. The Company is a savings and loan holding
company within the meaning of the Home Owners' Loan Act, as amended ("HOLA").
The HOLA and OTS regulations generally prohibit a savings and loan holding
company, without prior OTS approval, from acquiring, directly or indirectly, the
ownership or control of any other savings association or savings and loan
holding company, or all, or substantially all, of the assets or more than 5% of
the voting shares thereof. These provisions also prohibit, among other things,
any director or officer of a savings and loan holding company, or any individual
who owns or controls more than 25% of the voting shares of such holding company,
from acquiring control of any savings association not a subsidiary of such
savings and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. The Company operates as a unitary savings
and loan holding company. Generally, there are limited restrictions on the
activities of a unitary savings and loan holding company which applied to become
or was a unitary savings and loan holding company prior to May 4, 1999 and its
non-savings association subsidiaries.
Under the enacted Gramm-Leach-Bliley Act of 1999 (the "GLBA"),
companies which applied to the OTS after May 4, 1999 to become unitary savings
and loan holding companies are restricted to engaging in those activities
traditionally permitted to multiple savings and loan holding companies. Under
the GLBA, no company may acquire control of a savings and loan holding company
after May 4, 1999 unless the company is engaged only in activities traditionally
permitted to a multiple savings and loan holding company or newly permitted to a
financial holding company under Section 4(k) of the Bank Holding Company Act.
Corporate reorganizations are permitted, but the transfer of grandfathered
unitary thrift holding company status through acquisition is not permitted.
If the Director of the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings institution, the Director may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings institution; (ii) transactions between the
savings institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the
33
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of grandfathered unitary savings and loan holding companies under the
GLBA, if the savings institution subsidiary of such a holding company fails to
meet the Qualified Thrift Lender ("QTL") test, as discussed under "Regulation of
Federal Savings Banks - Qualified Thrift Lender Test," then such unitary holding
company also shall become subject to the activities restrictions applicable to
multiple savings and loan holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, shall register as, and become
subject to the restrictions applicable to, a bank holding company.
The GLBA also imposed new financial privacy obligations and reporting
requirements on all financial institutions. The privacy regulations require,
among other things, that financial institutions establish privacy policies and
disclose such policies to its customers at the commencement of a customer
relationship and annually thereafter. In addition, financial institutions are
required to permit customers to opt out of the financial institution's
disclosure of the customer's financial information to non-affiliated third
parties. Such regulations become mandatory as of July 1, 2001.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid.
Affiliate Restrictions. Transactions between a savings association and
its "affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B, and OTS regulations issued in
connection therewith limit the extent to which a savings association or its
subsidiaries may engage in certain "covered transactions" with affiliates to an
amount equal to 10% of the association's capital and surplus, in the case of
covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings association and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings association and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings association or its subsidiaries and
an affiliate must be on terms and
34
conditions that are consistent with safe and sound banking practices. With
certain exceptions, each loan or extension of credit by a savings association to
an affiliate must be secured by collateral with a market value ranging from 100%
to 130% (depending on the type of collateral) of the amount of the loan or
extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of affiliate transactions.
Regulation of Federal Savings Banks
Regulatory System. As a federally insured savings bank, lending
activities and other investments of the Bank must comply with various statutory
and regulatory requirements. The Bank is regularly examined by the OTS and must
file periodic reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the BIF, up to applicable limits.
Federal Home Loan Banks. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal to the greater of: 1% of its aggregate outstanding principal amount of its
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each calendar year, or 5% of its FHLB advances (borrowings).
The current investment in FHLB stock is based on 5% of the Bank's borrowings
outstanding from the FHLB.
Liquid Assets. Under OTS regulations, for each calendar month, a
savings bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during the
preceding calendar month. This liquidity requirement, which is currently at
4.0%, may be changed from time to time by the OTS to any amount between 4.0% to
10.0%, depending upon certain factors. OTS regulations also require each savings
association to maintain an average daily balance of short-term liquid assets
equal to not less than 1.0% of the average daily balance of its net withdrawable
accounts and short-term borrowings during the preceding calendar month. The Bank
maintains liquid assets in compliance with these regulations. These requirements
have been terminated by the OTS effective in 2001.
Regulatory Capital Requirements. OTS capital regulations require
savings banks to satisfy minimum capital standards, risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
banks must meet each of these standards in order to be deemed in compliance with
OTS capital requirements. In addition, the OTS may require a savings
35
association to maintain capital above the minimum capital levels.
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings bank is required to maintain
core capital equal to a minimum of 3% of adjusted total assets. A savings bank
is also required to maintain tangible capital in an amount at least equal to
1.5% of its adjusted total assets.
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by the activities or condition of its
holding company, affiliates, subsidiaries or other persons or savings
associations with which it has significant business relationships. The Bank is
not subject to any such individual minimum regulatory capital requirement.
The Bank's tangible capital ratio was 7.53%, its core capital ratio was
7.54% and its total risk-based capital ratio was 15.10% at December 31, 2000.
The OTS and the FDIC generally are authorized to take enforcement
action against a savings association that fails to meet its capital
requirements, which action may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease-and-desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution. In addition, under
current regulatory policy, an association that fails to meet its capital
requirements is prohibited from paying any dividends.
Prompt Corrective Action. The prompt corrective action regulation of
the OTS, promulgated under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), requires certain mandatory actions and authorizes
certain other discretionary actions to be taken by the OTS against a savings
bank that falls within certain undercapitalized capital categories specified in
the regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. The Bank meets the capital requirements of a "well capitalized"
institution under applicable OTS regulations.
36
In general, the prompt corrective action regulation prohibits an
insured depository institution from declaring any dividends, making any other
capital distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept brokered deposits only with a waiver from the FDIC and
are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll-over
brokered deposits.
Institutions that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the institution and periodic review
of the institution's efforts to restore its capital, (ii) a requirement that the
institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time it received notice of being undercapitalized, or the amount
necessary to bring the institution into compliance with applicable capital
standards at the time it fails to comply with the plan, and (iii) a limitation
on the institution's ability to make any acquisition, open any new branch
offices, or engage in any new line of business without the prior approval of the
appropriate federal banking agency for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are necessary to resolve the problems of the
institution at the least possible long-term cost to the deposit insurance fund.
These supervisory actions include: (i) requiring the institution to raise
additional capital or be acquired by another institution or holding company if
certain grounds exist, (ii) restricting transactions between the institution and
its affiliates, (iii) restricting interest rates paid by the institution on
deposits, (iv) restricting the institution's asset growth or requiring the
institution to reduce its assets, (v) requiring replacement of senior executive
officers and directors, (vi) requiring the institution to alter or terminate any
activity deemed to pose excessive risk to the institution, (vii) prohibiting
capital distributions by bank holding companies without prior approval by the
FRB, (viii) requiring the institution to divest certain subsidiaries, or
requiring the institution's holding company to divest the institution or certain
affiliates of the institution, and (ix) taking any other supervisory action that
the agency believes would better carry out the purposes of the prompt corrective
action provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a
timely, acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The regulation
also makes mandatory for significantly undercapitalized institutions certain of
the supervisory actions that are discretionary for institutions classified as
undercapitalized, creates a presumption in favor of certain discretionary
supervisory actions, and subjects significantly undercapitalized institutions to
additional restrictions, including a prohibition on paying bonuses or raises to
senior executive officers without the prior written approval of the appropriate
federal bank regulatory agency. In addition, significantly undercapitalized
institutions may be subjected to certain of the restrictions applicable to
critically undercapitalized institutions.
37
The regulation requires that an institution be placed into
conservatorship or receivership within 90 days after it becomes critically
undercapitalized, unless the OTS, with concurrence of the FDIC, determines that
other action would better achieve the purposes of the prompt corrective action
provisions of FDICIA. Any such determination must be renewed every 90 days. A
depository institution also must be placed into receivership if the institution
continues to be critically undercapitalized on average during the fourth quarter
after the institution initially became critically undercapitalized, unless the
institution's federal bank regulatory agency, with concurrence of the FDIC,
makes certain positive determinations with respect to the institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized institutions
and to a number of other severe restrictions. Critically undercapitalized
institutions may be prohibited from engaging in a number of activities,
including entering into certain transactions or paying interest above a certain
rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
At December 31, 2000, the Bank was in the "well-capitalized" category
for purposes of the above regulations and as such is not subject to any of the
above mentioned restrictions.
Conservatorship/Receivership. In addition to the grounds discussed
under "Prompt Corrective Action," the OTS (and, under certain circumstances, the
FDIC) may appoint a conservator or receiver for a savings association if any one
or more of a number of circumstances exist, including, without limitation, the
following: (i) the institution's assets are less than its obligations to
creditors and others, (ii) a substantial dissipation of assets or earnings due
to any violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books, papers,
records or assets or refusal to submit such items for inspection to any examiner
or lawful agent of the appropriate federal banking agency or state bank or
savings association supervisor, (vi) the institution is likely to be unable to
pay its obligations or meet its depositors' demands in the normal course of
business, (vii) the institution has incurred, or is likely to incur, losses that
will deplete all or substantially all of its capital, and there is no reasonable
prospect for the institution to become adequately capitalized without federal
assistance, (viii) any violation of law or unsafe or unsound practice that is
likely to cause insolvency or substantial dissipation of assets or earnings,
weaken the institution's condition, or otherwise seriously prejudice the
interests of the institution's depositors or the federal deposit insurance fund,
(ix) the institution is undercapitalized and the institution has no reasonable
prospect of becoming adequately capitalized, fails to become adequately
capitalized when required to do so, fails to submit a timely and acceptable
capital restoration plan, or materially fails to implement an accepted capital
restoration plan, (x) the institution is critically undercapitalized or
otherwise has substantially insufficient capital, or (xi) the institution is
found guilty of certain criminal offenses related to money laundering.
38
Enforcement Powers. The OTS and, under certain circumstances the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss; restrict the growth of
the institution; and rescind agreements and contracts.
Capital Distribution Regulation. As a subsidiary of a savings and loan
holding company the Bank is required to provide advance notice to the OTS of any
proposed capital distribution on its capital stock.
Qualified Thrift Lender Test. All savings institutions are required to
meet a QTL test to avoid certain restrictions on their operations. A savings
institution that does not meet the QTL test must either convert to a bank
charter or comply with the following restrictions on its operation. Upon the
expiration of three years from the date the savings institution ceases to be a
QTL, it must cease any activity and not retain any investment not permissible
for a national bank and immediately repay any outstanding FHLB advances (subject
to safety and soundness consideration).
Currently, the QTL test under HOLA regulations requires that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or repair
domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); stock issued by the FHLB; and
direct or indirect obligations of the FDIC. In addition, small business loans,
credit card loans, student loans and loans for personal, family and household
purposes are allowed to be included without limitation as qualified investments.
The following assets, among others, also may be included in meeting the test
subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer and educational loans (limited to 10% of total
portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets.
At December 31, 2000, under the expanded QTL test, approximately 89.5%
of the Bank's portfolio assets were qualified thrift investments.
OTS regulations also permit a savings association to qualify as a QTL
by qualifying under the Code as a "domestic building and loan association." The
Bank is a domestic building and loan association as defined in the Code.
39
FDIC Assessments. The deposits of the Bank are insured to the maximum
extent permitted by the BIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions is made by the FDIC for each semi-annual assessment
period. The Bank paid $446,000 in insurance deposit premiums during 2000.
Community Reinvestment Act and the Fair Lending Laws. Savings
associations have a responsibility under the Community Reinvestment Act ("CRA")
and related regulations of the OTS to help meet the credit needs of their
communities, including low-and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, at a minimum, result in
regulatory restrictions on its activities, and failure to comply with the Fair
Lending Laws could result in enforcement actions by the OTS, as well as other
federal regulatory agencies and the Department of Justice.
Safety and Soundness Guidelines. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
Change of Control. Subject to certain limited exceptions, no company
can acquire control
40
of a savings association without the prior approval of the OTS, and no
individual may acquire control of a savings association if the OTS objects. Any
company that acquires control of a savings association becomes a savings and
loan holding company subject to extensive registration, examination and
regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Companies subject to the Bank Holding Company Act that acquire or own
savings associations are no longer defined as savings and loan holding companies
under the HOLA and, therefore, are not generally subject to supervision and
regulation by the OTS. OTS approval is no longer required for a bank holding
company to acquire control of a savings association, although the OTS has a
consultative role with the FRB in examination, enforcement and acquisition
matters.
TAXATION
Federal Taxation
General. The Company and the Bank are subject to federal income
taxation in the same general manner as other corporations with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Bank. The Bank's
federal income tax returns have been audited or closed without audit by the IRS
through 1996.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its consolidated federal
income tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific chargeoff method in computing its bad debt deduction beginning with its
1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of December 31, 2000 is approximately $3.6
million. The Bank began to recapture the reserve in 1998.
As discussed more fully below, the Bank and subsidiaries file combined
New York State Franchise and New York City Financial Corporation tax returns.
The basis of the determination of each tax is the greater of a tax on entire net
income (or on alternative entire net income) or a tax computed on taxable
assets. However, for state purposes, New York State enacted legislation in 1996,
which among other things, decoupled the Federal and New York State tax laws
regarding thrift bad debt deductions and permits the continued use of the bad
debt reserve method under
41
section 593. Thus, provided the Bank continues to satisfy certain definitional
tests and other conditions, for New York State and City income tax purposes, the
Bank is permitted to continue to use the special reserve method for bad debt
deductions. The deductible annual addition to the state reserve may be computed
using a specific formula based on the Bank's loss history ("Experience Method")
or a statutory percentage equal to 32% of the Bank's New York State or City
taxable income ("Percentage Method").
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a bank
charter.
At December 31, 2000 the Bank's total federal pre-1988 reserve was
approximately $11.7 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 2000, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
State and Local Taxation
New York State and New York City Taxation. The Company and the Bank
report income on a combined calendar year basis to both New York State and New
York City. New York State Franchise Tax on corporations is imposed in an amount
equal to the greater of (a) 9% of "entire net income" allocable to New York
State (b) 3.00% of "alternative entire net income" allocable to New York State
(c) 0.01% of the average value of assets allocable to New York State or (d)
nominal minimum tax. Entire net income is based on federal taxable income,
subject to certain modifications. Alternative entire net income is equal to
entire net income without certain modifications. The New York City Corporation
Tax is imposed using similar alternative taxable income methods and rates.
42
A temporary Metropolitan Transportation Business Tax Surcharge on
Banking corporations doing business in the Metropolitan District has been
applied since 1982. The Bank transacts a significant portion of its business
within this District and is subject to this surcharge. For the tax year ended
December 31, 2000, the surcharge rate is 17% of the State franchise tax
liability.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax, to
the State of Delaware. The tax is imposed as a percentage of the capital base of
the Company with an annual maximum of $150,000. The Delaware tax for 2000 was
$150,000. The Mortgage Company and the Construction Lending Company are subject
to taxes for the additional states that they operate in.
43
PART II
Item 2. Properties
- ------------------
The executive offices of the Company and the Bank are located in an
owned facility in Staten Island, New York. In addition, the Bank operates five
administrative offices located on Staten Island, three of which are owned and
one lending office located in Brooklyn, New York which is leased. The Bank has
30 full service branch offices and three limited service branch offices. The
branch facilities, of which 14 are leased and 19 owned, are located in Staten
Island, New York (20), Brooklyn, New York (2) and New Jersey (11). The final
lease expiration date for its properties is 2015.
In addition, the Bank maintains 52 automated teller machines ("ATMs")
all of which are in Bank facilities.
SIBMC conducts it's business from it's executive and administrative
office in Branchburg, New Jersey and 54 retail loan origination offices in 27
states, all of which are leased with the final lease expiration date in 2005.
ACLS conducts it's business from it's executive and administrative
office in Wallingford, Connecticut and two retail loan origination offices all
of which are leased with the final expiration date in 2005.
SIBIC conducts its business from its executive office located in
Middletown, New Jersey which is leased with an expiration date in 2001.
44
Item 3. Legal Proceedings.
- ---------------------------
The Company is not involved in any legal proceedings other than
immaterial proceedings occurring in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security-Holders.
- -------------------------------------------------------------
Not applicable.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- -------------------------------------------------------------------------------
The information required herein to stockholders, to the extent
applicable, is incorporated by reference from page 35 and 36 of the Company's
2000 Annual Report to Stockholders for the year ended December 31, 2000 ("2000
Annual Report")
Item 6. Selected Financial Data.
- --------------------------------
The information required herein is incorporated by reference from page
9 of the 2000 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
--------------
The information required herein is incorporated by reference from pages
10 to 18 of the 2000 Annual Report.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
- --------------------------------------------------------------------
The information required herein is incorporated by reference from pages
10 to 12 of the 2000 Annual Report.
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
The information required herein is incorporated by reference from pages
19 to 35 of the 2000 Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
---------------------
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
The information required herein is incorporated by reference from pages
3 to 6 of the definitive proxy statement of the Company for the Annual Meeting
of Stockholders to be held on May 10, 2001. ("Definitive Proxy Statement").
45
Item 11. Executive Compensation.
- ---------------------------------
The information required herein is incorporated by reference from pages
10 to 14 of the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
The information required herein is incorporated by reference from pages
7 and 9 of the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The information required herein is incorporated by reference from pages
14 and 15 of the Definitive Proxy Statement.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) Documents Filed as Part of this Report
--------------------------------------
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13.0):
Report of Independent Auditors
Consolidated Statements of Condition as of December 31,
2000 and 1999.
Consolidated Statements of Income for the Years Ended December
31, 2000, 1999 and 1998.
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years ended
December 31, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
46
Exhibit Index
-------------
3.1* Certificate of Incorporation of Staten Island Bancorp, Inc.
3.2* Bylaws of Staten Island Bancorp, Inc.
4.0* Specimen Stock Certificate of Staten Island Bancorp, Inc.
10.1* Form of Employment Agreement among Staten Island Bancorp,
Inc., Staten Island Savings Bank and certain executive
officers.
10.2* Form of Employment Agreement between Staten Island Bancorp,
Inc.and each of Harry P. Doherty and James R. Coyle.
10.3* Form of Employment Agreement between Staten Island Savings
Bank and each of Harry P. Doherty and James R. Coyle.
10.4** Amended and Restated 1998 Stock Option Plan
10.5** Amended and Restated 1998 Recognition and Retention Plan and
Trust Agreement
10.6*** Deferred Compensation Plan
10.7 Employment Agreement between the Bank and Ira Hoberman.
13.0 2000 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is made to "Item 2.
"Business" for the required information
23.0 Consent of Arthur Andersen, LLP
(*) Incorporated herein by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-32113) filed by the Company
with the SEC.
(**) Incorporated herein by reference from the Company's definitive proxy
statement dated March 29, 2001.
(***) Incorporated herein by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.
(b) Reports on Form 8-K
-------------------
On December 15, 2000, the Company filed a Current Report
on Form 8-K, dated as of December 8, 2000, indicating, pursuant to Item
5, that the Company had acquired four branch offices and approximately
$41.0 million of deposits from Unity Bank. A press release regarding
such transaction was included as an exhibit to such Current Report.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STATEN ISLAND BANCORP, INC.
By: /s/Harry P. Doherty
-------------------
Harry P. Doherty
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Harry P. Doherty Chairman and Chief Executive March 30, 2001
- --------------------------- Officer
Harry P. Doherty
/s/ James R. Coyle Director, President and Chief March 30, 2001
- --------------------------- Operating Officer
James R. Coyle
/s/ Edward J. Klingele Senior Vice President and Chief March 30, 2001
- -------------------------- Financial Officer (principal
Edward J. Klingele financial and accounting officer)
/s/ Harold Banks Director March 30, 2001
- --------------------------
Harold Banks
/s/ Charles J. Bartels Director March 30, 2001
- --------------------------
Charles J. Bartels
/s/ William G. Horn Director March 30, 2001
- --------------------------
William G. Horn
/s/ Dennis P. Kelleher Director March 30, 2001
- --------------------------
Dennis P. Kelleher
/s/ Julius Mehrberg Director March 30, 2001
- --------------------------
Julius Mehrberg
/s/ John R. Morris Director March 30, 2001
- --------------------------
John R. Morris
/s/Kenneth W. Nelson Director March 30, 2001
- ---------------------------
Kenneth W. Nelson
/s/ William E. O'Mara Director March 30, 2001
- --------------------------
William E. O'Mara