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, 2001
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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3958850
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15 Beach Street
Staten Island, New York 10304
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(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 $19.22 closing price of the Registrant's common stock as of March
26, 2002, the aggregate market value of the 53,909,765 shares of the
Registrant's common stock deemed to be held by non-affiliates of the Registrant
was $1.0 billion. 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, 2002: 61,874,940
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, 2001 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2002 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 16
Securities Activities 23
Sources of Funds 26
Trust Activities 30
Subsidiaries 30
Employees 31
Regulation General 32
Regulation of Savings and Loan Holding Companies 32
Regulation of Federal Savings Banks 34
Federal Taxation 40
State and Local Taxation 41
PART II
ITEM 2. PROPERTIES 42
ITEM 3. LEGAL PROCEEDINGS 43
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 44
ITEM 5. MARKET OR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 44
ITEM 6. SELECTED FINANCIAL DATA 44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 45
ITEM 11. EXECUTIVE COMPENSATION 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 45
1
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 investment securities.
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 utilizes 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 manages its operations to focus on two strategic goals:
fulfilling its role as a banking institution for both individuals and businesses
and as national provider of single-family mortgage loan products. Accordingly,
the Company is managed through two segments: Community Banking and Mortgage
Banking.
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.
2
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 13
full service branch offices in Ocean, Monmouth, Union and Middlesex counties of
New Jersey. During the second quarter of 2002, the Bank will open an additional
full service branch office in each of Middlesex and Ocean 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 has served the communities and residents of Staten Island
for over 136 years and, more recently, the borough of Brooklyn and certain
counties in the State of New Jersey. As of June 30, 2001 (the latest available
data), the Bank had the largest market share of any depository institution on
Staten Island with over 28.0% of the total deposits. 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 a 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 36
years and 32 years, respectively, of service with the Bank while the other
executive officers of the Bank have an average of 14 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 of such services 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 itself into a full service community
bank and its new name, reflects it geographic and product diversity.
The Bank continues to facilitate its growth and geographic expansion
through acquisitions and denovo branching. On January 14, 2000, The Company
acquired First State Bancorp, the holding company for First State Bank, Howell,
New Jersey. The branch system of First State Bank, which was merged with and
into SI Bank & Trust, 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. Two new branches were opened in February 2002 and two more
new branches are expected to open in New Jersey by June 2002. At the time of its
acquisition, First State Bancorp had $374.0 million in assets and $319.0 million
in deposits.
In August 2000, the Bank opened a new branch in Brooklyn, New York.
During 2001, the deposits at our two Brooklyn locations grew by 50% and now
exceed $147.0 million in the aggregate.
On December 8, 2000, the Company purchased four additional branches
in New Jersey. Three of these branches are located in Union County and one is in
3
Middlesex County, New Jersey. The deposits acquired in this transaction were
$41.0 million. The Bank's deposits in the State of New Jersey grew by 45% in the
year 2001 and now exceed $580.0 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"). In addition, the Bank is 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.
SIB Mortgage Corp.
SIB Mortgage Corp., a wholly owned subsidiary of the Bank,
originates residential mortgage loans in 42 states. SIB Mortgage Corp. (the
"Mortgage Company or SIBMC") was incorporated in 1998 in the State of New Jersey
to acquire the residential lending operations and substantially all of the
assets of Ivy Mortgage Corp. enabling the Bank to enter the mortgage banking
business and become a national originator of single family residential loans.
The Mortgage Company originates loans and sells them into the secondary market
generating fee income for the Bank. The Bank also retains for its portfolio
certain higher yielding loans originated by the Mortgage Company. The
nation-wide mortgage banking operation has reduced the Bank's traditional
dependence on the economy of Staten Island and, to a larger extent, New York
City.
In 1999, the Bank formed American Construction Lending Services,
Inc. ("ACLS") which operated as a wholly owned subsidiary, headquartered in
Wallingford, Ct, until March 2001 when the operation of ACLS was merged with and
into SIBMC to operate as the ACSLS Division of SIBMC. ACLS was formed in 1999 to
provide construction lending in various states, however, in 2001 the Bank
determined to discontinue a majority of the construction lending through ACLS
and merge it into SIBMC and primarily do construction lending through the Bank.
The Bank anticipates that the loans in the ACLS Division will payoff over the
next twelve months.
SIBMC which operates as a separate business segment (Mortgage
Banking) had $4.0 billion in loan originations and loan sales of $2.9 billion
for the twelve months ended December 31, 2001. SIBMC had earnings for the year
2001 of $13.5 million or $0.22 per fully diluted share and at December 31, 2001
the total assets of SIBMC were $1.5 billion.
SIBMC's executive office is located at 3040 Route 22 West,
Branchburg, NJ 08876 and its telephone number is 908-243-2600.
Market Area and Competition
The Company faces significant competition both in making loans and
in attracting deposits. There are a significant number of financial institutions
located within the Company's market area, many of which have greater financial
resources than the Company. The Company's competition for loans comes
principally from commercial banks, other savings banks, savings associations and
mortgage-banking companies. The Company's most direct competition for deposits
4
has historically come from savings associations, other savings banks, commercial
banks and credit unions. The Company faces additional competition for deposits
from short-term money market funds and other corporate and government securities
funds and from other non-depository financial institutions such as brokerage
firms and insurance companies.
Lending Activities
General. At December 31, 2001, the Company's total net loans held
for investment amounted to $2.8 billion or 46.8% 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, 2001, $2.1
billion or 73.5% of the Company's net loan portfolio were secured by
single-family residences of which $802.5 million were located on Staten Island
and an additional $576.4 million were located in other areas of New York City.
Since the acquisition of Ivy Mortgage, the Bank has retained for its portfolio
$425.0 million of higher yielding one-to-four-family residential loans
originated by the Mortgage Company to lessen its dependence on the New York City
economy and increase the yield on its loan portfolio.
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 $335.8 million or 12.0% of the net
loan portfolio at December 31, 2001, construction and land loans, which totaled
$245.5 million or 8.8% of the net loan portfolio at December 31, 2001, home
equity loans, which totaled $12.8 million or 0.5% of the net loan portfolio at
December 31, 2001, and loans secured by multi-family (over four units)
residential properties, which amounted to $48.8 million or 1.7% of the net loan
portfolio at December 31, 2001. In addition to mortgage loans, the Company
originates various other loans including commercial business loans and consumer
loans. At December 31, 2001, the Company's total other loans amounted to $111.0
million or 4.0% of the net loan portfolio.
The types of loans that the Company may originate are subject to
federal and state law and regulations. Interest rates charged by the Company on
loans are affected principally by the demand for such loans, 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.
5
Loan Portfolio Composition. The following table sets forth the composition of
the Company's held for investment loan portfolio at the dates indicated.
At December 31,
---------------------------------------------------------------------------------------
2001 2000 1999 1998
---------------------- --------------------- ------------------- --------------------
Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Mortgage loans: (1)
Single-family residential ............. $ 2,062,336 73.48% $ 2,206,972 77.50% $ 1,737,913 80.83% $ 1,187,212 81.48%
Multi-familyresidential ............... 48,783 1.74 49,034 1.72 42,501 1.98 33,328 2.29
Commercial real estate ................ 335,821 11.97 307,407 10.80 223,809 10.41 137,720 9.45
Construction and land ................. 245,515 8.75 152,956 5.37 60,105 2.80 42,420 2.91
Home equity ........................... 12,815 0.46 10,699 0.38 5,390 0.25 6,121 0.42
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total mortgage loans ................. 2,705,270 96.40% 2,727,068 95.77% 2,069,718 96.27% 1,406,801 96.55%
Other loans:
Student loans ......................... 288 0.01% 333 0.01% 657 0.03% 940 0.06%
Passbook loans ........................ 7,477 0.27 6,237 0.22 5,357 0.25 5,989 0.41
Commercial business loans ............. 42,962 1.53 52,980 1.86 33,646 1.56 36,592 2.51
Other consumer loans .................. 60,292 2.15 63,984 2.25 49,395 2.30 24,070 1.65
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total other loans .................... 111,019 3.96% 123,534 4.34% 89,055 4.14% 67,591 4.63%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total loans receivable ............... 2,816,289 100.36% 2,850,602 100.11% 2,158,773 100.41% 1,474,392 101.18%
Less:
Premium (discount) on loans purchased . 5,135 0.18 5,713 0.20 4,640 0.22 1,194 0.08
Allowance for loan losses ............. (20,041) (0.71) (14,638) (0.51) (14,271) (0.66) (16,617) (1.14)
Deferred loan costs, (fees) net ....... 5,236 0.17 5,983 0.20 897 0.03 (1,910) (0.12)
----------- ----- ----------- ----- ----------- ----- ----------- -----
Loans receivable, net .................... $ 2,806,619 100.00% $ 2,847,660 100.00% $ 2,150,039 00.00% $ 1,457,059 100.00%
=========== ====== =========== ====== =========== ===== =========== ======
At December 31,
-----------------------
1997
-----------------------
Percent of
Amount Total
------ -----
(Dollars in Thousands)
Mortgage loans:
Single-family residential ............. $ 863,694 79.76%
Multi-familyresidential ............... 28,218 2.61
Commercial real estate ................ 120,084 11.09
Construction and land ................. 40,476 3.74
Home equity ........................... 6,538 0.60
----------- ------
Total mortgage loans ................. 1,059,010 97.80%
Other loans:
Student loans ......................... 4,033 0.37%
Passbook loans ........................ 6,929 0.64
Commercial business loans ............. 19,559 1.81
Other consumer loans .................. 13,212 1.22
----------- ------
Total other loans .................... 43,733 4.04%
----------- ------
Total loans receivable ............... 1,102,743 101.84%
Less:
Premium (discount) on loans purchased . (729) (0.07)
Allowance for loan losses ............. (15,709) (1.45)
Deferred loan costs, (fees) net ....... (3,387) (0.32)
----------- ------
Loans receivable, net .................... $ 1,082,918 100.00%
=========== ======
(1) Mortgage loans held for sale, net at December 31, 2001, 2000, 1999 and 1998
were $1.2 billion, $116,000, $47,000 and $78,000, respectively, are not included
in this table.
6
Loan Activity. The following table sets forth the Company's activity in its
total loan portfolio.
Years Ended December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
( Dollars in Thousands)
Total loans held at beginning $2,962,197 $2,203,302 $1,550,834
of period
Originations of loans:
Mortgage loans:
Single-family residential 4,408,052 1,395,115 1,333,757
Multi-family residential 5,069 9,907 14,372
Commercial real estate 77,044 70,665 126,561
Construction and land 344,955 147,212 51,051
Home equity 11,291 7,359 2,545
Other loans:
Student loans 638 871 1,475
Passbook loans 9,865 8,873 5,302
Commercial Business loans 59,442 62,774 56,625
Other consumer loans 5,691 9,681 15,771
---------- ---------- ----------
Total originations
4,922,047 1,712,457 1,607,459
Purchases of loans: (1)
Mortgage loans:
Single-family residential 382,243 55,549 --
Multi-family residential -- 3,020 --
Commercial real estate -- 49,358 --
Construction and land 87,818 35,155 --
Home equity -- 3,566 --
Other loans:
Passbook loans -- 3,608 --
Commercial Business loans -- 5,235 --
Other consumer loans 2,119 12,866 16,088
---------- ---------- ----------
Total purchases 472,180 168,357
16,088
---------- ---------- ----------
Total originations and purchases 5,394,227 1,880,814 1,623,547
---------- ---------- ----------
Loans sold:
Mortgage loans:
Single-family residential 3,179,238 730,506 644,557
---------- ---------- ----------
Total loans sold 3,179,238 730,506 644,557
Transfers to real estate owned 279 930 325
Transfers to repossessed assets 404 244 --
Charge-offs 4,265 1,928 1,260
Repayments 1,184,793 388,311 324,937
---------- ---------- ----------
Net activity in loans 1,025,248 758,895 652,468
---------- ---------- ----------
Gross loans held at end of period $3,987,445 $2,962,197 $2,203,302
========== ========== ==========
(1) The year 2000 includes as purchases 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.
7
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 of
Connecticut, New Jersey and New York, 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. SIBT 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 borrower's or guarantor's total outstanding credit with
the Bank above $2.0 million but not exceeding $10.0 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 $21.5 million at December 31, 2001. As
of December 31, 2001, the Bank's largest concentration of loans to any one
borrower and related entities (excluding intra-company loans) was $16.6 million
($9.3 million outstanding and $7.3 million unfunded) and these loans were
performing in accordance with their terms.
Single-Family Residential Loans. 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 39% of the Company's single-family residential
mortgage loans retained in the portfolio are secured by properties located in
Staten Island and an additional 28% are secured by properties in other areas of
New York City. As of December 31, 2001, $2.1 billion, or 73.5%, of the Company's
net loans consisted of single - family residential mortgage loans. The Bank
originated $659.4 million of single - family residential mortgage loans during
the year ended December 31, 2001 compared to $635.0 million and $714.7 million
in 2000 and 1999, respectively.
During the year 2001, the Bank sold $314.0 million of single family
8
residential loans, primarily fixed rate loans, 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.
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, 2001,
$1.1 billion, or 53.9%, 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, 2001, the Bank's five-year and ten-year ARM loans amounted to $486.5 million
and $242.7 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, 2001, $959.7 million or 46.1% of the Bank's
single-family residential mortgage loans were adjustable-rate loans compared to
$1.1 billion or 48.4% at December 31, 2000.
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 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
9
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's single-family residential mortgage loans generally do not
exceed $1.0 million. 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, 2001, the Company's home equity loans amounted to
$12.8 million or 0.5% of the Company's net loans. The Bank offers floating and
fixed-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, 2001, the Company's commercial real estate loans and multi-family
residential mortgage loans amounted to $335.8 million and $48.8 million,
respectively, or 12.0% 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,
2001, the average size of the Bank's commercial real estate loans was
approximately $400,000. The Bank originated $77.0 million of commercial real
estate loans during the year ended December 31, 2001 compared to $70.7 million
and $126.6 million of commercial real estate loan originations in 2000 and 1999,
respectively.
The Bank's multi-family residential real estate loans are
concentrated in Brooklyn and, to a lesser extent, Staten Island. The Bank
originated $5.1 million of multi-family residential real estate loans during the
year ended December 31, 2001 compared to $9.9 million and $14.4 million of
originations in 2000 and 1999, 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 five or ten - year adjustable-rate loans indexed to the five-year
U.S. Treasury obligation 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
10
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 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 1.25%. 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, 2001, $4.1 million or 1.2% of the Bank's
commercial real estate loans and none of its multi-family residential real
estate loans were on non-accrual status.
Construction and Land Loans. In 1999, the Bank formed American
Construction Lending Services, Inc. ("ACLS") which operated as a wholly owned
subsidiary of the Bank, until March 2001 when the operations of ACLS were merged
with and into SIBMC. ACLS is now operated as a division of SIBMC and is known as
the "ACLS Division" which is operated primarily to meet requests from SIBMC
locations. In 2001 the level of originations was driven by outstanding
construction loan commitments and un-funded balances from previously originated
construction loans. The Bank anticipates the level of originations to decline in
2002 and the majority of the construction lending to be done directly through
the Bank. The current portfolio of the ACLS Division, which totaled $178.2
million at December 31, 2001 consists primarily of residential construction
loans to builders and individuals along with four warehouse funding agreements
for residential construction loans totaling $88.7 million. The loans in the
warehouse funding agreements are serviced by the company that originates the
loan and are paid off when they are sold as permanent loans. SIBMC has informed
these borrowers that they are discontinuing this type of lending and, as a
result, the Company expects these loans to be paid off over the next twelve
11
months. Construction loans in the ACLS Division portfolio have been underwritten
and are serviced under the same guidelines used by the Bank.
The Company originates and services its construction and land loans
through the ACLS division of SIBMC and the Bank. The construction loans
originated by the ACLS Division and the Bank 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 and the Bank 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 ACLS division has a presence in six states. At
December 31, 2001, the Company's construction and land loan portfolio amounted
to $245.5 million or 8.8% of the Company's net loan portfolio of which $120.1
million consisted of residential construction loans, $6.1 million of
multi-family construction loans, $27.7 million of non-residential construction
loans and $91.6 million of land loans. In addition, at such date the Company had
$49.0 million of undisbursed funds for construction loans in process. The Bank
and ACLS disbursed $345.0 million of construction and land loans during the year
ended December 31, 2001 compared to $147.2 million and $51.1 million of
construction loans in 2000 and 1999, respectively. At December 31, 2001 the
outstanding principal balance of construction loans in the ACLS Division loan
portfolio was $143.9 million. The Company anticipates that these loans will
paydown over the next twelve months since there will be limited new loans added
to the portfolio.
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 security 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.
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, when
possible, to obtain personal guarantees from the principals of its corporate
borrowers on its construction and land loans.
At December 31, 2001 the Company had $2.1 million of construction
and land loans that were on non-accrual status. Management also is working
closely with two builders which have loans with outstanding balances of $10.0
million and unfunded commitments of $3.0 million that are more than 30 but less
than 90 days delinquent with regard to interest payments and are likely to
become non-accruing in the first quarter of 2002. These loans are for two
residential construction projects in the State of California and one in the
State of Florida. Based on the current appraised values of the properties
securing these loans, which currently exceed the outstanding balances and monies
due on the loans, management anticipates that the Company would incur minimal
losses, if any, in the event that any or all of these loans are placed in
foreclosure, although significant additional advances may be required in order
to complete construction.
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 $111.0 million or 4.0% of the
Bank's net loan portfolio at December 31, 2001.
At December 31, 2001, the Company's commercial business loans
amounted to $43.0 million or 1.5% 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 is 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.
12
The Bank's commercial business loans include discounted loans, which
amounted to $4.7 million or 0.2% of the Bank's loans at December 31, 2001. 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, 2001, included in total other consumer loans was
$27.9 million of loans primarily secured by manufactured housing. This
represents 1.0% of the Bank's net loan portfolio. The Bank 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 primarily in the northeastern section of
the country. The Bank services the loan, when necessary, and is assisted by a
third party in the collection process. The Bank has discontinued purchasing
these loans and anticipates that the balances these loans will payoff over a
period of time.
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.
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 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, 2001, the Bank had $10.4 million of such net deferred
loan costs.
Mortgage Banking Activities. SIB Mortgage Corp., a wholly owned
subsidiary of the Bank, doing business as "Ivy Mortgage" conducts mortgage
banking in 42 states.
SIBMC's primary business is to originate residential loans and sell
them either into the secondary market with servicing released, or, to a lesser
extent, to the Bank for retention in its portfolio. SIBMC services its loans
held for sale on an interim basis and its loans held for investment which
consist of residential permanent and construction loans. SIBMC has no loan
13
servicing asset recorded on its balance sheet since it currently does not
service loans for third parties.
SIBMC sources loans through approximately 150 retail commissioned
loan officers who solicit business through realtors, financial planners,
insurance agents and other referral sources. 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 one of SIBMC's
network of 72 offices in 42 states. 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 investor's 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. 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.
SIBMC's loan originations for 2001 were $4.0 billion compared to
$760.1 million in 2000 and $708.5 million in 1999. The record level of
originations for 2001 was driven by the level of refinance transactions due to
the favorable interest rate environment during the year and the geographic
expansion of SIBMC into 15 additional states. These origination levels resulted
in record loan sales in 2001 of $2.9 billion compared to loan sales of $503.0
million in 2000 and $643.0 million in 1999. To meet the demands from the
increased loan origination volumes, SIBMC expanded its back office operations to
both service and transfer loans to investors. Based on the level of loan
originations of $1.6 billion during the fourth quarter of 2001 and the projected
decline in mortgage refinance transactions, SIBMC projects that it will
originate $4.7 billion of new loans for the year ending December 31, 2002.
Management will continue to seek new markets to enter either through new offices
or acquisitions.
The Bank has provided SIBMC with a $1.4 billion line of credit to
finance its loan originations and a working capital line of $15.0 million. At
December 31, 2001, $1.3 billion was outstanding on such line of credit for loan
originations. The working capital line of credit to SIBMC for day-to-day
operating expenses was not drawn on as December 31, 2001. Interest paid by SIBMC
on such intra-Company loans is eliminated upon consolidation in the Company's
financial statements.
In the fourth quarter of 2001, SIBMC entered into a mortgage
repurchase agreement with an international bank as an additional source of
funding. The $150.0 million line of credit is collateralized by loans held by
SIBMC. The Bank guarantees the line of credit by agreeing to, among other
things, repurchase loans that remain on the line for more than 60 days. The
balance outstanding on the line as of December 31, 2001 was $66.0 million. In
February 2002, SIBMC entered into a substantially similar agreement for an
additional $150.0 million with a second bank.
14
SIBMC originates loans which conform to the underwriting standards
for purchase by the FHLMC and FNMA ("conforming loans") as well as FHA loans, VA
loans and non-conforming loans. Non-conforming loans generally consist of loans
which, primarily because of size or other underwriting technicalities, do not
satisfy the guidelines for resale to FNMA or FHLMC and other private secondary
market investors at the time of origination. During the year ended December 31,
2001, non-conforming conventional loans represented approximately 20% of SIBMC's
total volume of mortgage loans originated.
Retail 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 retail mortgage loan is originated by SIBMC, the
borrower pays an origination fee. These fees 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,
regulatory considerations and the difficulty of processing the transaction, 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. When a broker loan is originated SIBMC underwrites the loan and commits on
the loan based on various underwriting and closing conditions. The broker is
responsible for taking the application, determining the best loan program for
the applicant and submitting the loan to SIBMC. Once the loan is committed to,
the broker is responsible for clearing all of the conditions.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 direct loan costs 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.
At December 31, 2001 SIBMC had $673.8 million in commitments to
originate single-family residential mortgage loans. In the normal course of
business borrowers are given extended commitments on the interest rate for their
loan. These commitments typically are for periods ranging from thirty to sixty
days prior to the actual sale of the loan. In an effort to protect SIBMC against
adverse interest rate movements during the lock-in period, (the period where the
loan has been approved but the borrower has not yet exercised his option to fix
the interest rate on the loan), loans are sold "forward" in the mortgage-backed
securities market to offset the potential erosion in the value of the commitment
to the borrower and SIBMC should interest rates rise. The mortgage backed
securities market consists of groups of loans that have been exchanged with the
large mortgage agencies (FHLMC, FNMA or GNMA) for a security that is issued and
backed by that agency. SIBMC will sell forward the security that the loan is
targeted to be placed in for conforming conventional loans and FHA/VA mortgage
15
loans. All conforming conventional loans are sold in either FNMA or FHLMC
mortgage backed securities and all FHA/VA loans are sold in GNMA mortgage-backed
securities. In the case of non-conforming loans (loans that are not eligible for
agency mortgage backed securities), SIBMC sells forward whole loan pools that
the loans are targeted to be included. These types of transactions are primarily
with nationally recognized brokerage firms.
The challenge in hedging is estimating the percentage of approved loans that
will eventually close when SIBMC has given a forward interest rate commitment to
the borrower. In a rising interest rate environment, a larger percentage of
loans will close than originally estimated because borrowers will not be able to
get a better rate from another lender. In a declining rate environment, a
smaller percentage of loans will close because borrowers will go to another
lender to get a lower rate or negotiate a lower rate with SIBMC. In the case of
rising rates SIBMC may have insufficient hedges to cover its exposure and in the
case of falling interest rates there will be too many hedges to deliver into,
which means SIBMC would be forced to repurchase a portion of its hedges at a
loss. In an effort to protect itself against the volatility of the closing rate
on its pipeline of mortgage loans, a sensitivity report is run daily to estimate
the effect on earnings given a three percentage point movement in the price of
the underlying mortgage loans. SIBMC uses this report to adjust the forward
sales daily to reduce the fluctuations on estimated earnings, primarily due to
changes in the value of the pipeline of mortgage loans and the corresponding
hedges.
SIBMC had $856.2 million in commitments to sell loans at December
31, 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 2001, SIBMC
repurchased $5.8 million in loans and incurred losses of $1.4 million due to
these recourse obligations. During the year 2000 SIBMC repurchased one loan for
$220,000 and incurred a loss of approximately $5,000.
Asset Quality
General. As a part of the Company's efforts to improve its asset
quality, it has enhanced the loan review area, along with developing and
implementing an asset classification system which now includes single-family
residential loans. 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
Company 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
Company generally prefers to work with borrowers to resolve such problems, when
the account becomes 90 days delinquent, the Company institutes foreclosure or
16
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 Company'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 the
collateral value, payment history of individual secured loans along with the
financial condition of the borrower to determine the accrual status of the loan
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, 2001, the Company had $15.1 million of loans in non-accrual status
compared to $9.8 million as of December 31, 2000 and $12.5 million as of
December 31, 1999.
Real estate acquired by the Company as a result of foreclosure or
deed-in-lieu of foreclosure and repossessed assets 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 expensed. The Company performs ongoing inspections of the
properties and adjusts the carrying value as needed. The Company attempts to
sell all properties through brokers and its own personnel. At December 31, 2001,
the Company had $1.2 million in these properties compared to $893,000 as of
December 31, 2000.
17
Delinquent Loans. The following table sets forth information
concerning delinquent loans in the held for investment and held for sale loan
portfolio at December 31, 2001, in dollar amounts and as a percentage of each
category of the Company'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.
--------------------- -------------------------- --------------------------
30-59 Days 60-89 Days 90 Days or More
--------------------- -------------------------- --------------------------
Percent of Percent of Percent of
Loan Loan Loan
Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Mortgage loans:
Single-family residential $15,634 0.76% $ 5,945 0.29% $ 5,432 0.26%
Multi-family residential 567 1.16% 162 0.33% -- 0.00%
Commercial real estate .. 3,848 1.15% 1,510 0.45% -- 0.00%
Construction and land ... 9,113 3.71% 5,339 2.17% 509 0.21%
Home equity ............. 62 0.48% 258 2.01% 30 0.23%
------- ---- ------- ---- ------- ----
Total mortgage loans ....... 29,224 1.08% 13,214 0.49% 5,971 0.22%
Other loans:
Commercial business loans 1,257 2.93% 42 0.10% 774 1.80%
Other
loans ...................... 2,645 3.89% 586 0.86% 468 0.69%
------- ---- ------- ---- ------- ----
Total other loans ..... 3,902 3.51% 628 0.57% 1,242 1.12%
------- ---- ------- ---- ------- ----
Total delinquent loans $33,126 1.18% $13,842 0.49% $ 7,213 0.26%
======= ==== ======= ==== ======= ====
18
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 in the held for investment and held for sale loan
portfolio.
At December 31,
-----------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------
(Dollars in Thousands)
Non-Accruing Assets
Mortgage loans:
Single-family residential ......................... $ 7,663 $ 3,335 $ 2,899 $ 7,067 $ 9,395
Multi-family residential .......................... -- 340 -- 131 319
Commercial real estate ............................ 4,086 2,979 5,568 6,534 8,436
Construction and land ............................. 2,117 524 1,793 1,761 1,131
Home equity ....................................... 38 5 106 212 545
Other loans:
Commercial business loans ......................... 558 1,482 1,783 346 835
Other consumer loans .............................. 631 1,111 325 181 570
------- ------- ------- ------- -------
Total non-accrual loans ........................... 15,093 9,776 12,474 16,232 21,231
Other real estate owned, net .......................... 996 762 887 849 618
Other repossessed assets, net ......................... 231 131 -- -- --
------- ------- ------- ------- -------
Total non-accruing assets ................................ 16,320 10,669 13,361 17,081 21,849
Loans past due 90 days or more and still accruing ........ 7,213 7,068 6,886 7,422 --
------- ------- ------- ------- -------
Non-accruing assets and loans past due 90 days
or more and still accruing ............................ $23,533 $17,737 $20,247 $24,503 $21,849
======= ======= ======= ======= =======
Non-accruing assets to total loans including held for sale 0.41% 0.36% 0.62% 1.16% 1.98%
Non-accruing assets to total assets ...................... 0.27% 0.20% 0.30% 0.45% 0.82%
Non-accruing loans to total loans
including held for sale ............................... 0.38% 0.33% 0.58% 1.10% 1.93%
Non-accruing loans to total assets ....................... 0.25% 0.19% 0.28% 0.43% 0.80%
Non-accrual loans and other real estate owned at December 31, 2001
totaled $16.3 million, up from $10.7 million at December 31, 2000 and $13.4
million at December 31, 1999.
The interest income that would have been recorded during the year
ended December 31, 2001 if all of the Company's non-accrual loans at the end of
such period had been current in accordance with their terms during such period
was $935,000. The actual amount of interest recorded as income (on a cash basis)
on such loans during 2001 amounted to $46,000.
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
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
19
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.
For the twelve months ended December 31, 2001 classified assets
increased by $34.1 million to $60.1 million at December 31, 2001. The primary
reasons for this increase was the downward trend in the local economy, the
growth and changing mix of the loan portfolio, the increase in past due and
non-accrual loans, the three past-due construction loans previously mentioned
and the increased emphasis placed on loan review as evidenced by the inclusion
of single - family residential mortgage loans in our asset classification
system. In response to this increase, management continues to enhance its loan
servicing and collection procedures along with continued emphasis on loan review
and loan underwriting. The assets were classified into the following categories
at December 31, 2001, substandard $40.1 million, special mention $19.1 million,
doubtful $382,000 and loss $246,000.
Allowance for Loan Losses. The Company's allowance for loan losses
was $20.0 million at December 31, 2001 or 132.8% of non-accrual loans and 0.50%
of the Company's total loans receivable at such date. The level of the allowance
for loan losses is intended to be maintained at a level sufficient to absorb all
estimated and probable losses inherent in the loan portfolio. In determining the
appropriate level of the allowance for loan losses and accordingly, the level of
the provision for loan losses, the Company on a quarterly basis will review the
mix and volume of the portfolio and its inherent risks, the level of
non-accruing loans and delinquencies, historical loss experience, local and
national economic conditions including the direction of real estate values and
current trends in regulatory supervision. As a result of current economic
conditions, an increase in the level of non-accruing loans, the volume of loan
originations, and current events in the Bank's primary market area, the
provision for loan losses was $8.8 million for the year ended December 31, 2001
compared to a provision of $652,000 for the year ended December 31, 2000.
20
Allowance for Loan Losses. The following table sets forth the
activity in the Company's allowance for loan losses during the periods
indicated.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Allowance at beginning of period .............. $ 14,638 $ 14,271 $ 16,617 $ 15,709 $ 9,977
Provisions
(Benefit) ..................................... 8,757 652 (1,843) 1,594 6,003
Increase as a result of acquisition ........... -- 847 -- 96 --
Charge-offs:
Mortgage loans:
Single-family residential ................... 1,854 120 148 358 501
Multi-family residential .................... -- -- -- 31 100
Commercial real estate ...................... -- 134 474 344 210
Construction and land ....................... -- 6 -- -- --
Other loans .................................... 2,411 1,926 1,043 1,386 507
-------- -------- -------- -------- --------
Total charge-offs............................ 4,265 2,186 1,665 2,119 1,318
Recoveries:
Mortgage loans:
Single-family residential ................... 131 19 456 267 533
Multi-family residential .................... -- -- -- -- --
Commercial real estate ...................... -- 27 34 210 251
Construction and land ....................... -- -- -- 3 10
Other loans..................................... 780 1,008 672 857 253
-------- -------- -------- -------- --------
Total recoveries............................. 911 1,054 1,162 1,337 1,047
-------- -------- -------- -------- --------
Allowance at end of period .................... $ 20,041 $ 14,638 $ 14,271 $ 16,617 $ 15,709
======== ======== ======== ======== ========
Allowance for loan losses
to total non-accruing loans at end of period 132.78% 149.73% 114.40% 102.37% 73.69%
======== ======== ======== ======== ========
Allowance for loan losses
to total loans at end of period ............ 0.50% 0.49% 0.66% 1.07% 1.42%
======== ======== ======== ======== ========
21
Allowance for Loan Losses Allocation.
The following table sets forth information concerning the allocation
of the Company's allowance for loan losses by loan category at the dates
indicated.
2001 2000 1999 1998 1997
----------------------- --------------------- ------------------- ----------------------- ------------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
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 8,463 73.94% 2,686 77.88% 5,890 81.08% 5,562 81.90% 5,853 80.36%
Commercial 7,599 23.99% 9,237 19.75% 5,579 16.75% 7,721 17.16% 6,696 19.25%
Other
loans ..... 3,979 2.43% 2,715 2.48% 2,802 2.58% 3,334 2.12% 3,160 2.23%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $20,041 100.36% $14,638 100.11% $14,271 100.41% $16,617 101.18% $15,709 101.84%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
22
The Company 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 Company's level of allowance for loan losses will be sufficient to
absorb future loan losses incurred by the Company, 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
Company's allowance for loan losses. Such agency may require the Company 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, 2001, the Company had securities totaling $1.5
billion or 25.5% of the Company's total assets at such date. The unrealized
appreciation on the Company's securities available for sale amounted to $1.9
million, net of income taxes. The securities investment policy of the Company,
which has been established by the Board of Directors, is designed, among other
things, to assist the Company 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 Holding Company's securities portfolio, on a non-consolidated basis, as
of December 31, 2001 was $69.4 million, consisting of equity investments and
certain corporate bonds which are not permitted investments for a federally
chartered thrift.
At December 31, 2001, all of the Company's securities were classified as
available for sale. Such classification 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.
23
Securities Portfolio Activity.
The following table sets forth the activity in the Company's aggregate
securities portfolio during the periods indicated.
Year Ended December 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
(Dollars in Thousands)
Securities at beginning of period ............ $ 1,888,946 $ 1,963,954 $ 2,029,041
Purchases:
U.S. Government and agencies .............. -- 219,313 121,954
State and
municipals ................................... -- 1,515 --
Agency mortgage-backed securities ......... 193,731 65,589 153,489
Agency CMOs ............................... 13,974 10,981 66,637
Private CMOs .............................. 16 -- --
Other debt securities ..................... 88,844 45,180 44,497
Marketable equity securities .............. 40,479 39,038 92,408
----------- ----------- -----------
Total purchases .............................. 337,028 381,632 517,115
Sales:
U.S. Government and agencies .............. 10,000 198,212 --
State and municipals ...................... -- -- --
Agency mortgage-backed securities ......... 76,410 26,075 --
Agency CMOs ............................... -- 645 --
Private CMOs .............................. -- -- --
Other debt securities ..................... 59,496 39,797 23,681
Marketable equity securities .............. 66,350 45,493 52,576
----------- ----------- -----------
Total sales .................................. 212,256 310,222 76,257
Repayments and prepayments:
U.S. Government and agencies .............. 112,730 8,100 33,050
State and municipals ...................... 115 140 --
Agency mortgage-backed securities ......... 195,000 139,847 240,177
Agency CMOs ............................... 109,018 35,805 46,949
Private CMOs .............................. 76,058 24,592 69,754
Other debt securities ..................... 170 103 --
Marketable equity securities .............. 1,250 -- --
----------- ----------- -----------
Total repayments and prepayments ........ 494,341 208,587 389,930
Accretion of discount and (amortization of
premium) ..................................... 499 1,227 (10,497)
Write-down for permanently impaired securities -- -- (9,069)
Unrealized gains or (losses) on
available-for-sale securities ............. 8,763 60,942 (96,449)
----------- ----------- -----------
Securities at end of period .................. $ 1,528,639 $ 1,888,946 $ 1,963,954
=========== =========== ===========
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, and by GNMA, FNMA and
FHLMC. At December 31, 2001, the Company's securities included $1.1 billion, or
18.6% of total assets, of mortgage-backed and mortgage-related securities. At
such date, 13.1% of the mortgage-backed and mortgage-related
24
securities were adjustable rate and 86.9% were fixed rate. The portfolio of
mortgage-backed and mortgage-related securities had a weighted average yield of
6.42%, and an anticipated or estimated duration of 3.28 years as of December 31,
2001.
The portfolio of mortgage-backed and mortgage-related securities consisted
of $642.6 million, or 10.7% of total assets, of mortgage-backed securities and
$473.3 million, or 7.9% of total assets of CMOs, at December 31, 2001. The
mortgage backed securities were issued or guaranteed by GNMA, FHLMC or FNMA and
$130.1 million of the CMOs were issued or guaranteed by FHLMC and GNMA and
$343.2 million were privately issued and are all rated AAA.
U.S. Government and Agency Obligations
At December 31, 2001, the Company's U.S. Government securities portfolio
totaled $1.1 million with a weighted average maturity of 0.9 years. The U.S.
Government agency securities portfolio, consisting of callable securities,
totaled $56.5 million with a weighted average maturity of 7.2 years and a
weighted average life of 0.6 years to the call date.
Other Securities
At December 31, 2001 the Company's other securities totaled $178.3 million
or 3% of total assets. Other securities consist of $176.8 million in corporate
bonds, $1.3 million in municipal bonds and $250,000 in foreign bonds. The
corporate bonds consist of $126.7 in fixed rate bonds and $50.1 million in
adjustable-rate bonds using three month LIBOR as the primary index. The weighted
average maturity of the corporate bond portfolio is 23.9 years.
In the corporate bond portfolio, the Company holds a number of asset -
backed securities. Two of these issues, with a total par value of $10.0 million
have a market value of $2.3 million as of December 31, 2001, which has been
reflected through an adjustment to the Company's stockholders' equity since all
securities in the portfolio are classified as available for sale. The Company
will continue to monitor the value of the collateral which currently supports
the par value of these two issues and does not anticipate a material loss at
this time. In the event the Company determines that an other than temporary
impairment has occurred in either of these issues, the Company would recognize a
charge to current earnings.
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, 2001.
25
At December 31, 2001
---------------------------------------------------------------------------------------------------------
Maturing in Weighted Maturing in Weighted Maturing in Weighted Maturing in Weighted
Under Average Under Average Under Average Over Average
1 Year Yield 1-5 Years Yield 6-10 Years Yield 10 Years Yield
---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
U.S. Government and
federal agency obligations $ 1,000 11.63% $ -- 0.00% $ 55,775 6.21% $ -- 0.00%
Other securities $ 25 6.75% 23,320 5.74% 37,785 7.17% 140,547 7.84%
-------- --------- -------- -----------
$ 1,025 $ 23,320 $ 93,560 $ 140,547
======== ========= ======== ===========
Equity Securities
At December 31, 2001 the Company's investment in equity securities was
$176.8 million or 3% of assets. The equity investment consisted primarily of
$102.9 million in FHLB stock, $34.3 million in mutual funds, $19.8 million in
preferred stock and $19.7 million in common stock. The required level of
investment in FHLB stock as a member is the higher of 5% of the amount of
advances the Bank has outstanding with the FHLB or 1% of residential mortgage
loans. There is no market for the Company's FHLB stock, however, when the
required level of ownership declines, the FHLB repurchases the stock. 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 Company's funds
for use in lending, investing and for other general purposes. The Company also
utilizes borrowings, primarily FHLB advances and reverse repurchase agreements,
to fund its operations when needed.
Depending upon market conditions and funding needs, the Bank at times will
use brokered CDs as an alternative source of funds. The brokered CDs will be
issued by nationally recognized brokerage firms approved by the Board of
Directors. At December 31, 2001 and 2000 the balance in brokered CDs was $134.9
million and $74.9 million, respectively.
Deposits. The Bank offers a variety of deposit accounts which have a range
of interest rates and terms. At December 31, 2001, 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,
other than brokered CDs, the Bank does not solicit such deposits outside of its
market area as such deposits are more difficult to retain than core deposits. To
enhance the deposit products it offers, build customer relationships and
increase market share in certain markets, the Bank offered a new money market
account (that also required the opening of a corresponding checking account) in
2001.
26
At December 31, 2001, the Bank's deposits totaled $2.9 billion, of which
83.3% 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 $1.8 billion or 62.6% of total deposits
and certificates of deposit were $1.1 billion or 37.4% of total deposits.
Included in the Bank's certificates of deposit were $134.9 million of brokered
deposits at December 31, 2001. 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 television, radio and print media and direct mail programs to
attract new customers and deposits.
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.
The Bank's market areas are Staten Island, New York, Brooklyn, New York and
the following counties in New Jersey, Ocean, Monmouth, Union and Middlesex.
Staten Island, which represents 70.2% of the Bank's total deposits continues to
be the Bank's primary market area. The Bank continues to hold over 28% of the
deposits in the Staten Island market which as of June 30, 2001 was the highest
percentage held by any one institution on Staten Island.
For the year ended December 31, 2001, deposits, before interest credited,
increased $474.3 million compared with an increase of $88.1 million in 2000
excluding the $368.4 million acquired in acquisitions. Inclusive of interest
credited, deposits increased $556.1 million in 2001 and $525.0 million in 2000
including acquired deposits.
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
Years Ended December 31,
-------------------------------------------
2001 2000 1999
-------------------------------------------
(Dollars in Thousands)
Beginning balance ............. $2,345,213 $1,820,233 $1,729,060
Net increase (decrease)
excluding acquired deposits 474,265 88,146 42,065
Acquired deposits ............. -- 368,438
Interest credited ............ 81,850 68,396 49,108
Net increase in deposits ..... 556,115 524,980 91,173
---------- ---------- ----------
Ending
balance ...................... $2,901,328 $2,345,213 $1,820,233
========== ========== ==========
27
The following table sets forth, by various interest rate categories,
the certificates of deposit with the Bank at the dates indicated.
Years Ended December 31,
---------------------------------------
2001 2000 1999
---------------------------------------
(Dollars in Thousands)
0.00 to
2.99%........... $ 250,444 $ -- $ 343
3.00 to
3.99%........... 268,821 292 1,912
4.00 to
4.99%........... 295,784 216,385 406,285
5.00 to
6.99%........... 256,381 694,684 162,666
7.00 to
8.99%........... 12,470 36,223 1,837
---------------------------------------
Total........... $ 1,083,900 $ 947,584 $ 573,043
=======================================
Weighted Average Rate
The following table sets forth the amount and remaining maturities
of the Bank's certificates of deposit at December 31, 2001.
Over Six
Months Over One Year Over Two
Six Months Through One Through Years Through Over Three
And Less Year Two Years Three Years Years
-------------- -------- ------------ --------- ----------
(Dollars in Thousands)
0.00 to $
2.99% ..... $154,520 $ 64,499 $ 14,716 8 $ 16,701
3.00 to
3.99% ..... 104,438 91,311 64,117 8,328 626
4.00 to
4.99% ..... 95,524 152,853 20,589 16,340 10,478
5.00 to
6.99% ..... 134,077 34,437 45,340 13,361 29,166
7.00 to
8.99% ..... 1,395 347 862 -- 9,867
-------- -------- -------- -------- --------
Total ..... $489,954 $343,447 $145,624 $ 38,037 $ 66,838
======== ======== ======== ======== ========
As of December 31, 2001, the aggregate amount of outstanding certificates
of deposit in amounts greater than or equal to $100,000 was approximately $285.2
million. The following table presents the maturity of these certificates of
deposit at such date.
December 31, 2001
------------------
(Dollars in Thousands)
3 months or less............................ $114,746
Over 3 months through 6 months.............. 47,141
Over 6 months through 12 months............. 82,326
Over 12 months.............................. 40,945
--------
$285,158
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.
28
Year to Date Average as of December 31,
----------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- -------------------------- --------------------------------
Weighted Weighted Weighted
Year to Date Average Year to Date Average Year to Date Average
Average Balance Rate Average Balance Rate Average Balance Rate
---------------- ---------- ---------------- -------- ------------------ -----------
(Dollars in Thousands)
Savings accounts ....... $ 817,890 2.18% $ 793,908 2.45% $ 752,131 2.49%
Certificates of deposits 1,017,634 5.22 827,504 5.41 556,635 4.76
Money market accounts .. 228,297 3.70 129,002 3.20 87,983 2.96
NOW accounts ........... 101,981 1.83 90,085 2.03 77,088 2.01
Demand deposits ........ 453,120 382,814 321,414
---------- ---------- ----------
Total ............. $2,618,922 3.10% $2,223,313 3.16% $1,795,251 2.75%
========== ==== ========== ==== ========== ====
Borrowings. The Company's borrowings at December 31, 2001 were $2.5 billion
or 40.9% of assets and consisted of primarily FHLB advances secured by the
Bank's residential loan portfolio and reverse repurchase agreements entered into
with the FHLB and nationally recognized securities brokerage firms. FHLB
advances and reverse repurchase agreements were $1.7 billion and $660.4 million,
respectively, at December 31, 2001. SIBMC entered into repurchase agreements of
$150.0 million each in the fourth quarter of 2001 and first quarter of 2002 with
two individual financial institutions. SIBMC's obligations under these
repurchase agreements are fully guaranteed by the Bank. The outstanding balances
of the repurchase agreement was $66.3 million at December 31, 2001.
In 2001, borrowings were used to fund certain higher yielding loan
originations primarily at SIBMC. The Company intends to reduce borrowings as a
percentage of assets in the year 2002 and to continue to emphasize more
traditional funding sources such as deposit growth in all 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,
2001 2000 1999
---- ---- ----
(Dollars in Thousands)
Maximum month-end balance $2,535,392 $ 2,249,963 $ 2,049,372
Average balance $2,399,963 $ 2,147,718 $ 1,673,755
Year end balance $2,451,762 $ 2,241,011 $ 2,049,372
Weighted average
interest rate:
At end of year 4.64% 6.28% 5.65%
During the year 5.39% 6.19% 5.35%
29
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
our banking branch market area. Services offered include fiduciary services for
trusts and estates, money management, custodial services and pension and
employee benefits consulting. As of December 31, 2001, the Trust Department
maintained approximately 357 trust/fiduciary accounts with an aggregate value of
$289.2 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 Investment Committee of the
Board of Directors of SI Bank & Trust as well as a management committee
consisting of certain senior officers of the Bank.
Subsidiaries
SIB Mortgage Corp., doing business as Ivy Mortgage, (SIBMC) is a
wholly-owned subsidiary of the Bank incorporated in the State of New Jersey in
1998. SIBMC currently originates loans in 42 states and had assets totaling $1.5
billion at December 31, 2001.
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, 2001 were $906.6 million.
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, to SIFC in 1998. In return,
the Bank received all the shares of common stock and preferred stock in SIFC.
The assets of SIFC totaled $655.9 million at December 31, 2001.
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 had assets of $712,000 as of December 31, 2001.
30
Employees. The Bank had 606 full-time employees and 217 part-time employees
at December 31, 2001. SIBMC had 771 full-time employees and 137 part-time
employees at December 31, 2001. None of these employees are represented by a
collective bargaining agreement and the Bank and SIBMC believes that it enjoys
good relations with its personnel.
31
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 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
32
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 became 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 conditions that are consistent with safe and
33
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.
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 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
34
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 6.94%, its core capital ratio was
6.98% and its total risk-based capital ratio was 13.29% at December 31, 2001.
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.
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
35
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.
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,
36
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, 2001, 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.
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.
37
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, 2001, under the expanded QTL test, approximately 93.8% 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.
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
38
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 $465,000 in insurance deposit premiums during 2001.
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 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
39
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, 2001 is approximately $2.4
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 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, 2001 the Bank's total federal pre-1988 reserve was
approximately $11.7 million. This reserve reflects the cumulative effects of
40
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 two taxable years and forward to the
succeeding 20 taxable years. This provision applies to tax years beginning after
August 5, 1997. At December 31, 2001, 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) 8.5% 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.
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,
2001, 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 2001 was
$150,000. SIBMC is subject to taxes for the additional states that they operate
in.
41
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
34 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 (15). The final
lease expiration date for its properties is 2015.
In addition, the Bank maintains 56 automated teller machines ("ATMs") all
of which are in Bank facilities.
SIBMC conducts its business from its executive and administrative office in
Branchburg, New Jersey and 72 retail loan origination offices in 42 states, all
of which are leased with the final lease 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 2002.
42
Item 3. Legal Proceedings.
On July 31,2001, the following complaint was filed with United States
District Court for the Southern District of New York.
Costa et al. v. SIB Mortgage Corp. d/b/a Ivy Mortgage et al.
------------------------------------------------------------
The action against SIB Mortgage Corporation d/b/a Ivy Mortgage, styled
Costa et al. v. SIB Mortgage Corp. d/b/a Ivy Mortgage et al., currently pending
in the United States District Court for the Southern District of New York, is a
putative class action brought under the anti-kickback provisions of Section 8 of
the Real Estate Settlement Procedures Act ("RESPA"). The complaint alleges yield
spread premium fees that SIBMC pays to mortgage brokers are referral fees or
kickbacks prohibited by Section 8 of RESPA. Plaintiffs claim to represent a
class consisting of all persons similarly situated (a) who secured mortgage
financing from SIBMC through mortgage brokers from the period beginning August
1, 2000 to date (claims under Section 8 of RESPA are subject to a one year
statute of limitations), and (b) to whose mortgage broker SIBMC paid a yield
spread premium or other thing of value. Plaintiffs are seeking to recover
damages on behalf of the putative class an amount equal to three times the
amount of any and all charges for settlement services paid "directly or
indirectly by Plaintiffs and all other members of the Class." Plaintiffs are
also seeking reimbursement of costs and attorneys fees in bringing this action.
SIBMC is vigorously defending the lawsuit and believes that it has meritorious
defenses. There has been no ruling on the merits of either the Plaintiffs'
individual claims or the claims of the putative class, and there has been no
ruling on class certification.
On July 21, 2001, a complaint was filed in the Chancery Division of the
Circuit Court of Cooks County, Illinois.
Kotelenets v. SIB Mortgage Corp.
--------------------------------
The action against SIB Mortgage Corporation, styled Kotelenets v. SIB
Mortgage Corp., filed in the Circuit Court of Cook County, Illinois, Chancery
Division, is a putative class action brought under the anti-kickback
43
provisions of Section 8 of the Real Estate Settlement Procedures Act ("RESPA"),
12 U.S.C. ss. 2601 et seq., and the unauthorized practice of law provisions of
Illinois state law. SIBMC has removed the case to the U.S. District Court for
the Northern District of Illinois. The complaint alleges that in connection with
mortgage loans, SIBMC engages in document preparation services constituting the
unauthorized practice of law under Illinois state law, and that fees SIBMC
charges in connection with document preparation are both unlawfully obtained and
unearned. The complaint further alleges that SIBMC charges appraisal review fees
and governmental recording fees that are both unlawfully charged and unearned in
violation of RESPA.
Plaintiffs claim to represent a class consisting of all other persons
similarly situated, i.e., persons with addresses in Illinois, Indiana, Wisconsin
or Michigan who were allegedly charged similar fees. They are seeking damages on
behalf of the putative class an amount equal to three times the amount of all
illegal fees allegedly paid by putative class members, restitution, and other
compensatory and punitive damages. Plaintiffs are also seeking reimbursement of
costs and attorneys fees in bringing this action. SIBMC is vigorously defending
the lawsuit and believes that it has meritorious defenses. There has been no
ruling on the merits of either the plaintiffs' individual claims or the claims
of the putative class, and there has been no ruling on class certification.
In addition to the matters described above, the Company is involved in
legal proceedings occurring in the normal course of business. Although it is
impossible to predict the outcome of any such legal proceedings , the Company
believes that such proceedings, individually and in the aggregate, will not have
a material effect on the Company.
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 36 and inside back cover of the Company's
2001 Annual Report to Stockholders for the year ended December 31, 2001 ("2001
Annual Report")
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from page 9 of
the 2001 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 2001 Annual Report.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
44
The information required herein is incorporated by reference from pages 10
to 13 of the 2001 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from
pages 19 to 36 of the 2001 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 2
to 6 of the definitive proxy statement of the Company for the Annual Meeting of
Stockholders to be held on May 2, 2002. ("Definitive Proxy Statement").
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 6 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
--------------------------------------
45
(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,
2001 and 2000.
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999.
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 2001, 2000
and 1999.
Consolidated Statements of Cash Flows for the Years
ended December 31, 2001, 2000 and 1999.
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.
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., SI Bank & Trust 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 SI Bank & Trust 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.
10.8 Supplemental Executive Retirement Plan (SERP)
10.9 Master Repurchase Agreement by and among Credit Suisse First
Boston Mortgage Capital LLC, SIB Mortgage Corp. and SI Bank &
Trust, dated December 14, 2001.
10.10 Master Repurchase Agreement by and among CDC Mortgage
Capital, Inc., SIB Mortgage Corp. and SI Bank & Trust, dated
February 12, 2002.
13.0 2001 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is made to "Item
1. "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 April 1, 2002.
(***) Incorporated herein by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
(****) Incorporated herein by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.
46
(b) Reports on Form 8-K
-------------------
Not applicable
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 April 1, 2002
- ------------------------ Executive Officer
Harry P. Doherty
/s/ James R. Coyle Director, President and
- ------------------------ Chief Operating Officer April 1, 2002
James R. Coyle
Senior Vice President and
/s/ Edward J. Klingele Chief Financial Officer April 1, 2002
- ------------------------ (principal financial and
Edward J. Klingele accounting officer)
/s/ Harold Banks
- ------------------------
Harold Banks Director April 1, 2002
/s/ William G. Horn
- ------------------------
William G. Horn Director April 1, 2002
/s/ Denis P. Kelleher
- ------------------------
Denis P. Kelleher Director April 1, 2002
/s/ Julius Mehrberg
- ------------------------
Julius Mehrberg Director April 1, 2002
/s/ John R. Morris
- ------------------------
John R. Morris Director April 1, 2002
/s/ William E O'Mara
- ------------------------
William E. O'Mara Director April 1, 2002
48