-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uxhb2eiynar5tfT4FI5Ddsv8h8grIcE9Tw8hOyoipP772C5IyjQB3vyOsk/5FNwW /yBqQEGOAJ4Fx39a6YLNGw== /in/edgar/work/0001005409-00-000030/0001005409-00-000030.txt : 20000930 0001005409-00-000030.hdr.sgml : 20000930 ACCESSION NUMBER: 0001005409-00-000030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIME COMMUNITY BANCSHARES INC CENTRAL INDEX KEY: 0001005409 STANDARD INDUSTRIAL CLASSIFICATION: [6035 ] IRS NUMBER: 113297463 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27782 FILM NUMBER: 730887 BUSINESS ADDRESS: STREET 1: 209 HAVEMEYER ST STREET 2: C/O DIME SAVINGS BANK OF WILLIAMSBURGH CITY: BROOKLYN STATE: NY ZIP: 11211 BUSINESS PHONE: 7187826200 MAIL ADDRESS: STREET 1: 209 HAVEMEYER STREET CITY: BROOKLYN STATE: NY ZIP: 11211 FORMER COMPANY: FORMER CONFORMED NAME: DIME COMMUNITY BANCORP INC DATE OF NAME CHANGE: 19951227 10-K 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ( ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED JUNE 30, 2000 ( TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transaction period from to Commission file Number 0-27782 DIME COMMUNITY BANCSHARES, INC. (Exact Name of registrant as specified in its charter) Delaware 11-3297463 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 209 Havemeyer Street, Brooklyn, NY 11211 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (718) 782-6200 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class) PREFERRED STOCK PURCHASE RIGHTS (Title of Class) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ X] As of September 22, 2000, there were 11,544,774 shares of the Company's common stock, $0.01 par value, outstanding. The aggregate market value of the voting stock held by non-affiliates of the Company as of September 22, 2000 was approximately $211,607,500. This figure is based upon the closing price on the NASDAQ National Market for a share of the Company's common stock on September 22, 2000, which was $22.56 as reported in the Wall Street Journal on September 23, 2000. DOCUMENTS INCORPORATED BY REFERENCE (1) The Annual Report to Shareholders for the fiscal year ended June 30, 2000 (Item 1 of Part I, and Items 5 through 8 of Part II) and (2) the definitive Proxy Statement dated October 6, 2000 to be distributed on behalf of the Board of Directors of Registrant in connection with the Annual Meeting of Shareholders to be held on November 9, 2000 and any adjournment thereof and which is expected to be filed with the Securities and Exchange Commission on or about October 6, 2000 (Part III) TABLE OF CONTENTS PAGE PART I ITEM 1. BUSINESS GENERAL..........................................................3 ACQUISITION OF FINANCIAL BANCORP, INC............................3 ACQUISITION OF CONESTOGA BANCORP, INC............................4 MARKET AREA AND COMPETITION......................................4 LENDING ACTIVITIES...............................................5 ASSET QUALITY...................................................11 ALLOWANCE FOR LOAN LOSSES.......................................14 INVESTMENT ACTIVITIES...........................................17 SOURCES OF FUNDS................................................21 SUBSIDIARY ACTIVITIES...........................................24 PERSONNEL.......................................................24 FEDERAL , STATE AND LOCAL TAXATION FEDERAL TAXATION.........................................25 STATE AND LOCAL TAXATION..................................25 REGULATION GENERAL...................................................26 IMPACT OF ENACTMENT OF THE GRAMM-LEACH-BLILEY ACT ........26 REGULATION OF FEDERAL SAVINGS ASSOCIATIONS................27 REGULATION OF HOLDING COMPANY.............................34 FEDERAL SECURITIES LAWS...................................35 ITEM 2. PROPERTIES............................................................35 ITEM 3. LEGAL PROCEEDINGS.............................................36 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........36 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...................................................36 ITEM 6. SELECTED FINANCIAL DATA.......................................36 ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................36 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..........................37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..............37 ITEM 11. EXECUTIVE COMPENSATION.......................................37 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................37 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..............................................38 SIGNATURES............................................40 Statements contained in this Annual Report on Form 10-K relating to plans, strategies, economic performance and trends, and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking information is inherently subject to various factors which could cause actual results to differ materially from these estimates. These factors include: changes in general, economic and market conditions, or the development of an adverse interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments. The Company has no obligation to update these forward looking statements. -2- PART I ITEM 1. BUSINESS General Dime Community Bancshares, Inc. (the "Company") is a Delaware corporation organized in December, 1995 at the direction of the Board of Directors of The Dime Savings Bank of Williamsburgh (the "Bank") for the purpose of acquiring all of the capital stock of the Bank issued in the conversion of the Bank, on June 26, 1996, from a federal mutual savings bank to a federal stock savings bank (the "Conversion"). In connection with the Conversion, the Company issued 14,547,500 shares (par value $0.01) of common stock at a price of $10.00 per share to certain of the Bank's eligible depositors who subscribed for shares and to an Employee Stock Ownership Plan ("ESOP") established by the Company. The Company is a unitary savings and loan holding company, which, under existing law, is generally not restricted as to the types of business activities in which it may engage, provided that the Bank continues to be a qualified thrift lender. The primary business of the Company is the operation of its wholly-owned subsidiary, the Bank. Under regulations of the Office of Thrift Supervision ("OTS") the Bank is a qualified thrift lender if its ratio of qualified thrift investments to portfolio assets ("QTL Ratio") is 65% or more, on a monthly average basis in nine of every twelve months. At June 30, 2000, the Bank's QTL Ratio was 89.0%, and the Bank has maintained more that 65% of its portfolio assets in qualified thrift investments in at least nine of the preceding twelve months. The Company neither owns nor leases any property but instead uses the premises and equipment of the Bank. At the present time, the Company does not employ any persons other than certain officers of the Bank who do not receive any extra compensation as officers of the Company. The Company utilizes the support staff of the Bank from time to time, as needed. Additional employees may be hired as deemed appropriate by the management of the Company. The Bank's principal business has been, and continues to be, gathering deposits from customers within its market area, and investing those deposits, primarily in multi-family and one-to-four family residential mortgage loans, mortgage-backed securities, and obligations of the U.S. Government and Government Sponsored Entities ("GSEs"). The Bank's revenues are derived principally from interest on its loan and securities portfolios. The Bank's primary sources of funds are: deposits; loan amortization, prepayments and maturities; amortization, prepayments and maturities of mortgage-backed and investment securities; and borrowings, and, to a lesser extent, the sale of fixed-rate mortgage loans to the secondary market. The Bank is also a member of the Federal Home Loan Bank of New York ("FHLBNY"). ACQUISITION OF FINANCIAL BANCORP, INC. On January 21, 1999, the Company completed the acquisition of Financial Bancorp, Inc., ("FIBC") the holding company for Financial Federal Savings Bank, F.S.B (the "FIBC Acquisition"). Based upon the closing price of the Company's common stock on January 21, 1999, of $21.25 per share, the total consideration paid to FIBC stockholders, in the form of cash or the Company's common stock, was $66.8 million, and was comprised of -3- $34.5 million in cash and 1,504,704 shares of the Company's common stock. The Company's operating results for the fiscal year ended June 30, 1999 reflect the addition of earnings from the acquisition of FIBC for the period January 22, 1999 through June 30, 1999. The FIBC Acquisition is being accounted for as a purchase transaction, and goodwill of $44.2 million generated from the transaction is being amortized on a straight-line basis over 20 years. ACQUISITION OF CONESTOGA BANCORP, INC. On June 26, 1996 the Bank completed the acquisition of Conestoga Bancorp, Inc. ("Conestoga"), resulting in the merger of Conestoga's wholly-owned subsidiary, Pioneer Savings Bank, F.S.B. ("Pioneer") with and into the Bank, with the Bank as the resulting financial institution (the "Conestoga Acquisition"). The Conestoga Acquisition was accounted for in the financial statements using the purchase method of accounting. Under purchase accounting, the acquired assets and liabilities of Conestoga are recognized at their fair value as of the date of the Conestoga Acquisition. Shareholders of Conestoga were paid approximately $101.3 million in cash, resulting in goodwill of $28.4 million, which is being amortized on a straight line basis over a 12 year period. Since the Conestoga Acquisition occurred on June 26, 1996, its impact upon the Company's consolidated results of operations for the fiscal year ended June 30, 1996 was minimal. There are currently no other arrangements, understandings or agreements regarding any such additional acquisition or expansion. MARKET AREA AND COMPETITION The Bank has been, and intends to continue to be, a community-oriented financial institution providing financial services and loans for housing within its market areas. The Bank maintains its headquarters in the Williamsburgh section of the borough of Brooklyn. Currently, seventeen additional offices are located in the boroughs of Brooklyn, Queens, and the Bronx, and in Nassau County. The Bank gathers deposits primarily from the communities and neighborhoods in close proximity to its branches. The Bank's primary lending area is larger, and includes much of New York City, Nassau County and eastern New Jersey. Most of the Bank's mortgage loans are secured by properties located in its primary lending area. Since 1993, the Bank's local economy has experienced strong performance. Unemployment has remained low, home sales have increased, residential apartment and commercial property vacancy rates have declined considerably, and local real estate values have increased. A strong local economy existed throughout the Company's entire fiscal year ended June 30, 2000. Despite these encouraging trends, the outlook for the local economy remains uncertain. During the fiscal year ended June 30, 1999, troubled economic conditions in several nations throughout Europe, Asia and South and Central America created interest rate volatility for U.S. government and agency obligations. As a result of this interest rate volatility, the U.S. stock market, especially amongst financial institutions, experienced even greater volatility. Due to increased interest rate uncertainty, the overall performance of financial institutions stocks trailed the overall performance of the aggregate U.S. stock markets during the period July, 1998 through June, 1999. During the fiscal year ended June 30, 2000, the Federal Reserve Board instituted a series of interest rate increases in an effort to combat potential inflationary concerns. As a result of these interest rate increases, the overall interest rate environment remained uncertain, and the financial institution stock performance continued to trail the aggregate performance of the U.S. stock market. The Bank faces significant competition both in making loans and in attracting deposits. The Bank's market area has a high density of financial institutions, many of which have greater financial resources than the Bank, and all of which are competitors of the Bank to varying degrees. The Bank's competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies and insurance companies. The Bank has recently faced increased competition for the origination of multi-family loans, which comprised 78.3% of the Bank's loan portfolio at June 30, 2000. Management anticipates that competition for both multi-family and one-to four-family loans will continue to increase in the future. Thus, no assurances can be made that the Bank will be able to maintain its current level of such loans. The Bank's most direct competition for -4- deposits has historically come from savings and loan associations, savings banks, commercial banks and direct purchases of government securities. The Bank faces additional competition for deposits from short-term money market funds and other corporate and government securities funds, and from other financial institutions such as brokerage firms and insurance companies. Competition may also increase as a result of the lifting of restrictions on the overall operations of financial institutions, which may permit additional firms to compete for deposits. LENDING ACTIVITIES LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily of multi-family loans secured by apartment buildings (including loans underlying apartment buildings organized under cooperative form of ownership, "underlying cooperatives"), conventional first mortgage loans secured primarily by one- to four-family residences, including condominiums and cooperative apartment share loans, and non-residential (commercial) property loans. At June 30, 2000, the Bank's loan portfolio totaled $1.72 billion. Within the loan portfolio, $1.35 billion or 78.3% were multi-family loans, $239.7 million or 13.9% were loans to finance the purchase of one-to four-family properties and cooperative apartment share loans, $118.6 million or 6.9% were loans to finance the purchase of commercial properties, primarily small shopping centers, warehouses and nursing homes, and $7.5 million or 0.4% were loans to finance multi-family and residential properties with either full or partial credit guarantees provided by either the Federal Housing Administration (''FHA'') or the Veterans' Administration (''VA''). Of the total mortgage loan portfolio outstanding at that date, 30.0% were fixed-rate loans and 70.0% were adjustable-rate loans (''ARMs''), of which 92.1% are multi-family and non- residential property loans which carry a maturity of 10 years, and an amortization period of no longer than 25 years. At June 30, 2000, the Bank's loan portfolio also included $1.9 million in passbook loans, $3.4 million in home improvement loans, and $2.3 million in other consumer loans. The types of loans that the Bank may originate are subject to federal and state laws and regulations. Interest rates charged by the Bank on loans are affected principally by the demand for such loans, the supply of money available for lending purposes, and the rates offered by the Bank's competitors. These factors are, in turn, affected by general and economic conditions, and the fiscal and monetary policy of the federal government. -5- The following table sets forth the composition of the Bank's mortgage and other loan portfolios in dollar amounts and percentages at the dates indicated.
At June 30, - ---------------------------------------------------------------------------------------------------------------------------------- Percent Percent Percent Percent Percent 2000 of 1999 of 1998 of 1997 of 1996 of Total Total Total Total Total - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Mortgage loans: One-to-four family $212,238 12.32% $246,075 17.75% $125,704 13.18% $140,798 18.68% $170,182 29.05% Multi-family and underlying cooperative 1,349,854 78.33 1,000,859 72.20 717,638 75.26 498,536 66.15 296,630 50.63 Non-residential 118,576 6.88 88,837 6.41 50,062 5.25 43,180 5.73 37,708 6.44 FHA/VA insured 7,536 0.44 9,699 0.70 11,934 1.25 14,153 1.88 16,686 2.85 Cooperative apartment 27,465 1.59 32,893 2.37 42,553 4.46 50,931 6.76 59,083 10.08 - ---------------------------------------------------------------------------------------------------------------------------------- Total mortgage loans 1,715,669 99.56 1,378,363 99.43 947,891 99.40 747,598 99.20 580,289 99.05 - ---------------------------------------------------------------------------------------------------------------------------------- Other loans: Student loans 990 0.05 794 0.06 677 0.07 1,005 0.13 1,307 0.22 Passbook savings (secured by savings and time deposits) 1,900 0.11 2,271 0.16 2,367 0.25 2,801 0.37 3,044 0.52 Home improvement loans 3,410 0.20 3,666 0.27 1,753 0.18 1,243 0.16 891 0.15 Consumer installment and 1,348 0.08 1,100 0.08 919 0.10 1,027 0.14 323 0.06 Other - ---------------------------------------------------------------------------------------------------------------------------------- Total other loans 7,648 0.44 7,831 0.57 5,716 0.60 6,076 0.80 5,565 0.95 - ---------------------------------------------------------------------------------------------------------------------------------- Gross loans 1,723,317 100.00% 1,386,194 100.00% 953,607 100.00% 753,674 100.00% 585,854 100.00% Less: Unearned discounts and net deferred loan fees 2,017 2,853 3,486 3,090 2,168 Allowance for loan losses 14,785 15,081 12,075 10,726 7,812 - ---------------------------------------------------------------------------------------------------------------------------------- Loans, net $1,706,515 $1,368,260 $938,046 $739,858 $575,874 ================================================================================================================================== Loans serviced for others: One-to-four family and cooperative apartment $47,909 $53,564 $55,802 $60,242 $63,360 Multi-family and underlying cooperative 281 293 2,817 9,406 27,690 - ---------------------------------------------------------------------------------------------------------------------------------- Total loans serviced for others $48,190 $53,857 $58,619 $69,648 $91,050 ================================================================================================================================== Includes acquisition of $192.3 million loans from FIBC on January 21, 1999, which were comprised primarily of one-to-four family loans. Includes acquisition of $113.1 million loans from Conestoga on June 26, 1996, substantially all of which were one-to-four family loans. Includes loans held for sale.
-6- LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. The Bank originates both ARMs and fixed-rate loans, which activity is dependent upon customer demand and market rates of interest, and generally does not purchase whole mortgage loans or loan participations. Generally, the Bank sells all originated one-to-four family fixed-rate mortgage loans in the secondary market to the Federal National Mortgage Association (''Fannie Mae''), the Federal Home Loan Mortgage Corporation (''Freddie Mac''), the State of New York Mortgage Agency (''SONYMA'') and other private secondary market purchasers. ARMs, including adjustable-rate multi-family loans, and fixed-rate multi-family and non- residential mortgage loans with maturities up to 15 years, are retained for the Bank's portfolio. For the fiscal year ended June 30, 2000 origination of ARMs totaled $411.0 million or 84.5% of all loan originations. Originations of fixed-rate mortgage loans totaled $75.4 million, virtually all of which were multi-family and non-residential real estate loans. Sales of fixed-rate one-to four-family mortgage and student loans totaled $1.5 million. The Bank generally sells all fixed-rate loans without recourse and retains the servicing rights. As of June 30, 2000, the Bank was servicing $48.2 million of loans for non- related institutions. The Bank generally receives a loan servicing fee equal to 0.25% of the outstanding principal balance for servicing loans sold. The following table sets forth the Bank's loan originations, loan sales and principal repayments for the periods indicated.
For the Years Ended June 30, --------------------------------- (Dollars in Thousands) 2000 1999 1998 -------- -------- -------- Loans (gross): At beginning of period $1,386,194 $953,607 $753,674 Mortgage loans originated: One-to four-family 3,165 16,657 11,438 Multi-family and underlying cooperative 453,682 424,276 292,555 Non-residential 28,824 28,253 15,929 Cooperative apartment 744 2,187 1,281 Construction 24 130 - -------- -------- -------- Total mortgage loans originated 486,439 471,503 321,203 Other loans originated 8,937 6,567 5,101 -------- -------- -------- Total loans originated 495,376 478,070 326,304 -------- -------- -------- Loans acquired - 192,318 - Less: Principal repayments 156,306 230,482 120,240 Loans sold 1,518 6,977 5,352 Loans transferred from real estate pending foreclosure - - - Mortgage loans transferred to Other Real Estate Owned 429 342 779 -------- -------- -------- Unpaid principal balance at end of period $1,723,317 $1,386,194 $953,607 ======== ======== ======== Comprised primarily of one-to-four family mortgage loans received in the FIBC Acquisition. Includes fixed-rate mortgage loans and student loans.
-7- LOAN MATURITY AND REPRICING. The following table shows the earlier of maturity or repricing period of the Bank's loan portfolio at June 30, 2000. Loans that have adjustable rates are shown as being due in the period during which the interest rates are next subject to change. The table does not include prepayments or scheduled principal amortization. Prepayments and scheduled principal amortization on the Bank's loan portfolio totaled $156.3 million for the year ended June 30, 2000.
At June 30, 2000 - -------------------------------------------------------------------------------------------------------------------------------- Mortgage Loans ----------------------------------------------------------------------- Multi- family and Underlying One-to-Four- Cooperative Non- FHA/VA Cooperative Other Total Family Loans Residential Insured Apartment Loans Loans - -------------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Amount due: One year or less $33,202 $29,649 $4,479 $14 $17,431 $7,008 $91,783 - -------------------------------------------------------------------------------------------------------------------------------- After one year: One to three years 18,500 173,399 20,022 16 7,021 640 219,598 More than three years to five years 9,273 265,753 34,456 75 533 - 310,090 More than five years to ten years 38,546 810,126 51,473 2,126 104 - 902,375 More than ten years to twenty years 51,992 70,927 8,146 5,305 2,376 - 138,746 Over twenty years 60,725 - - - - - 60,725 - -------------------------------------------------------------------------------------------------------------------------------- Total due or repricing after one year 179,036 1,320,205 114,097 7,522 10,034 640 1,631,534 - -------------------------------------------------------------------------------------------------------------------------------- Total amounts due or repricing, gross $212,238 $1,349,854 $118,576 $7,536 $27,465 $7,648 $1,723,317 ================================================================================================================================
The following table sets forth the dollar amounts in each loan category at June 30, 2000 that are due after June 30, 2001, and whether such loans have fixed or adjustable-interest rates.
Due after June 30, 2001 --------------------------------------------------- Fixed Adjustable Total --------- --------- --------- (Dollars In Thousands) Mortgage loans: One-to-four family $148,763 $30,273 $179,036 Multi-family and underlying cooperative 325,050 995,155 1,320,205 Non-residential 30,879 83,218 114,097 FHA/VA insured 7,522 - 7,522 Cooperative apartment 2,502 7,532 10,034 Other loans - 640 640 --------- --------- --------- Total loans $514,716 $1,116,818 $1,631,534 ========= ========= =========
MULTI-FAMILY AND NON-RESIDENTIAL LENDING. The Bank originates adjustable- rate and fixed-rate multi-family (five or more units) and non-residential loans which are secured primarily by apartment buildings, underlying cooperatives, mixed-use (residential combined with commercial) and other non-residential properties, generally located in the Bank's primary lending area. The main competitors for loans in this market tend to be other small- to medium-sized local savings institutions. Multi-family and non-residential loans in the Bank's portfolio generally range in amount from $100,000 to $8.7 million, and have an average loan size of approximately $827,000. Multi-family loans in this range generally have between 5 and 100 apartments per building. The Bank had a total of $1.22 billion of multi-family loans in its portfolio on buildings with under 100 units as of June 30, 2000. Mostly as a result of rent control and rent stabilization, the associated rent rolls for buildings of this type indicate a rent range that would be considered affordable for low- to moderate-income households. In addition, at June 30, 2000, the Bank had a total of $180.7 million in loans secured by mortgages on underlying cooperative apartment buildings. -8- The Bank originated multi-family loans totaling $453.7 million during the fiscal year ended June 30, 2000, versus $424.3 million during the year ended June 30, 1999. At June 30, 2000, the Bank had $57.5 million of commitments outstanding to originate mortgage loans, which included $2.4 million of commitments to refinance existing mortgage loans. This compares to $125.3 million of commitments outstanding at June 30, 1999, as recent increases in interest rates have significantly reduced the multi-family loan origination and refinance activities. All the mortgage commitments outstanding at June 30, 2000 were issued to borrowers within the Bank's service area, $56.2 million of which are secured by multi-family and underlying cooperative apartment buildings. As part of the underwriting process for multi-family and non-residential loans, the Bank considers the financial resources and income level of the borrower, the borrower's experience in owning or managing similar properties, the market value of the property and the Bank's lending experience with the borrower. The typical adjustable-rate multi-family loan carries a maturity of 10 years, and an amortization period of no longer than 25 years. These loans have a fixed interest rate that adjusts after the fifth year indexed to the 5- year FHLBNY advance rate, but may not adjust below the initial interest rate of the loan. Prepayment penalties are assessed throughout the life of the loans. The Bank also offers fixed-rate, self-amortizing, multi-family and non- residential loans with maturities of up to 15 years. At June 30, 2000, the Bank had multi-family and underlying cooperative loans totaling $1.35 billion in its portfolio, comprising 78.3% of the gross loan portfolio. The underwriting standards for new loans generally require (1) a maximum loan-to-value ratio of 75% based on an appraisal performed by an independent, state-certified appraiser and (2) sufficient cash flow from the underlying property to adequately service the debt, represented by a debt service ratio not below 1.15. Of the Bank's multi-family loans, $1.17 billion, or 86.6%, were secured by apartment buildings and $180.7 million, or 13.4%, were secured by underlying cooperatives at June 30, 2000. Multi-family loans are generally viewed as exposing the Bank to a greater risk of loss than one- to four-family residential loans and typically involve higher loan principal amounts. At June 30, 2000, the Bank had 127 multi-family and non-residential loans with principal balances greater than $2.0 million, totaling $419.1 million. These loans, while underwritten to the same standards as all other multi-family and non-residential loans, tend to expose the Bank to a higher degree of risk due to the potential impact of losses from any one loan relative to the size of the Bank's capital position. As of June 30, 2000, none of these loans were in arrears nor in the process of foreclosure. See ''- Asset Quality.'' Repayment of multi-family loans is dependent, in large part, on sufficient cash flow from the property to cover operating expenses and debt service. Economic events and government regulations, such as rent control and rent stabilization laws, which are outside the control of the borrower or the Bank, could impair the value of the security for the loan or the future cash flow of such properties. As a result, rental income might not rise sufficiently over time to meet increases in the loan rate at repricing, or increases in overhead expenses (I.E., utilities, taxes). During the last five fiscal years, the Bank's charge-offs related to its multi-family loan portfolio totaled $1.7 million. As of June 30, 2000, the Bank had $2.6 million of non-performing multi-family loans. See "- Asset Quality and - Allowance for Loan Losses" for discussions of the Bank's underwriting procedures utilized in originating multi-family loans. The Bank's loan portfolio also includes $118.6 million in non-residential real estate mortgage loans which represented 6.88% of gross loans at June 30, 2000. This portfolio is comprised of commercial and industrial properties, and shopping centers. The Bank utilizes, where appropriate, rent or lease income, business receipts, the borrowers' credit history and business experience, and comparable appraisal values when underwriting non-residential applications. As of June 30, 2000, there were no non-performing non-residential loans in the Bank's portfolio. Like multi-family loans, the repayment of non-residential real estate mortgage loans is dependent, in large part, upon sufficient cash flows from the property to cover operating expenses and debt service. For this reason, non-residential real estate mortgage loans are considered to include greater risk than one to four-family residential loans. The Bank's three largest loans at June 30, 2000, consisted of a $8.7 million loan secured by a first mortgage on a 276 unit apartment building located in midtown Manhattan originated in May, 1997; an $8.3 million first mortgage loan, originated in June, 1997, secured by a 631 unit apartment building located in the Forest Hills section of Queens; and a $7.8 million first mortgage loan, originated in September, 1998, secured by a 129 unit apartment building located in Manhattan. As of June 30, 2000, all of these loans were performing in accordance with their terms. See "-Regulation of Federal Savings Associations - - Loans to One Borrower." While the loans are current, their large loan balances subject the Bank to greater potential losses in the event of non- compliance by the borrower. -9- The Bank also currently services a total of $281,000 in multi-family loans for various private investors. These loans were sold in the late 1980s, without recourse. ONE-TO FOUR-FAMILY MORTGAGE AND COOPERATIVE APARTMENT LENDING. The Bank offers residential first mortgage loans secured primarily by owner-occupied, one-to-four family residences, including condominiums, and cooperative apartment share loans. Lending is primarily confined to an area covered by a 50-mile radius from the Bank's Main Office in Brooklyn. The Bank offers conforming and non-conforming fixed-rate mortgage loans and adjustable-rate mortgage loans with maturities of up to 30 years and a maximum loan amount of $500,000. The Bank's residential mortgage loan originations are generally obtained from existing or past loan customers, depositors of the Bank, members of the local community and referrals from attorneys, realtors and independent mortgage brokers who refer members of the communities located in the Bank's primary lending area. The Bank is a participating seller/servicer with several government-sponsored mortgage agencies: Fannie Mae, Freddie Mac, and SONYMA, and generally underwrites its one-to-four family residential mortgage loans to conform with standards required by these agencies. Although the collateral for cooperative apartment loans is comprised of shares in a cooperative corporation (a corporation whose primary asset is the underlying real estate), cooperative apartment loans generally are treated as one-to-four family loans. The Bank's portfolio of such loans is $27.5 million, or 1.6% of total loans as of June 30, 2000. The market for cooperative apartment loan financing has improved over the past five years with the support of certain government agencies, particularly SONYMA and Fannie Mae, who are insuring and purchasing, respectively, cooperative apartment share loans in qualifying buildings. The Bank adheres to underwriting guidelines established by SONYMA and Fannie Mae for all fixed-rate cooperative apartment loans which are originated for sale. Adjustable-rate cooperative apartment loans continue to be originated both for portfolio and for sale. At June 30, 2000, $239.7 million, or 13.9%, of the Bank's loans consisted of one-to-four family and cooperative apartment mortgage loans. ARMs represented 36.5% of total one-to-four-family and cooperative apartment loans, while fixed- rate mortgages comprised 63.5% of the total. The majority of these loans were obtained through the acquisitions of Conestoga and FIBC. The Bank, which is not an aggressive one-to-four-family mortgage lender, currently offers one-to four-family and cooperative apartment mortgage ARMs secured by residential properties with rates that adjust every one or three years. One-to-four family ARMs are offered with terms of up to 30 years. The interest rate at repricing on one-to-four family ARMs currently offered fluctuates based upon a spread above the average yield on United States Treasury securities, adjusted to a constant maturity which corresponds to the adjustment period of the loan (the ''U.S. Treasury constant maturity index'') as published weekly by the Federal Reserve Board. Additionally, one and three-year one-to-four family ARMs are generally subject to limitations on interest rate increases of 2% and 3%, respectively, per adjustment period, and an aggregate adjustment of 6% over the life of the loan. The volume and types of ARMs originated by the Bank have been affected by such market factors as the level of interest rates, competition, consumer preferences and availability of funds. During the fiscal years ended June 30, 1998 and 1999, demand for one-to-four family ARMs was relatively weak due to the prevailing low interest rate environment and consumer preference for fixed- rate loans. For the year ended June 30, 2000, since the Bank continued to not aggressively pursue ARM one- to four-family loans, it originated only $383,000 of one-to four-family and cooperative apartment mortgage ARMs. Accordingly, although the Bank will continue to offer one-to four-family ARMs, there can be no assurance that in the future the Bank will be able to originate or will desire to originate a sufficient volume of one-to four- family ARMs to increase or maintain the proportion that these loans bear to total loans. The Bank currently offers fixed-rate mortgage loans with terms of 10 to 30 years secured by one-to four-family residences and cooperative apartments. Interest rates charged on fixed-rate loans are based upon market conditions. The Bank generally originates fixed-rate loans for sale in amounts up to the maximum allowed by Fannie Mae, Freddie Mac and SONYMA, with private mortgage insurance required for loans with loan-to-value ratios in excess of 80%. For the year ended June 30, 2000, the Bank originated $3.8 million of fixed-rate, one-to four-family residential mortgage and cooperative apartment loans. The Bank generally sells its newly originated conforming fixed-rate mortgage loans either to its wholly-owned subsidiary, DSBW Residential Preferred Funding, or in the secondary market to federal and state agencies such as Fannie Mae, Freddie Mac and SONYMA, and its non-conforming fixed-rate mortgage loans to various private sector secondary market purchasers. With few exceptions, such as SONYMA, the Bank retains the servicing rights on all such loans sold. For the year ended June 30, 2000, the Bank sold mortgage loans totaling $1.2 million to non-affiliates. As of June 30, 2000, the Bank's portfolio of one-to-four family fixed-rate mortgage loans serviced for others totaled $47.9 million. -10- Originated mortgage loans in the Bank's one-to-four family portfolio generally include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent. It is the Bank's policy to enforce due-on-sale provisions within the applicable regulations and guidelines imposed by New York law and secondary market purchasers. Home equity loans currently are originated to a maximum of $250,000. When combined with the balance of the first mortgage lien, the home equity loan may not exceed 75% of the appraised value of the property at the time of the loan commitment. The Bank's home equity loans outstanding at June 30, 2000, totaled $8.7 million against total available credit lines of $16.4 million. During the fiscal years ended June 30, 1998 and 1999, the Bank offered home-equity line promotions to selected mortgage customers, which resulted in the increase in credit lines from $1.2 million at June 30, 1997 to $8.7 million at June 30, 2000. OTHER LENDING. The Bank also originates other loans, primarily student and passbook loans. Total other loans outstanding at June 30, 2000, amounted to $7.6 million, or 0.44%, of the Bank's loan portfolio. Passbook loans, totaling $1.9 million, and home improvement loans, totaling $3.4 million, comprise the majority of the Bank's other loan portfolio. LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Board of Directors establishes lending authorities for individual officers as to its various types of loan products. For multi-family and one- to four-family mortgage loans, including cooperative apartment and condominium loans, the Loan Operating Committee, which is comprised of the Chief Executive Officer, President, and Executive Vice President, and the heads of both the residential loan and multi- family loan origination departments, has the authority to approve loans in amounts up to $3.0 million. Any loan in excess of $3.0 million, however, must be approved by the Board of Directors. All loans in excess of $500,000 are presented to the Board of Directors for their review. In addition, regulatory restrictions imposed on the Bank's lending activities limit the amount of credit that can be extended to any one borrower to 15% of total capital. See ''- Regulation - Regulation of Federal Savings Associations - Loans to One Borrower.'' For all one-to four-family loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered, income, assets and certain other information are verified by an independent credit agency, and if necessary, additional financial information is required to be submitted by the borrower. An appraisal of the real estate intended to secure the proposed loan is required, which currently is performed by an independent appraiser designated and approved by the Board of Directors. In certain cases, the Bank may also require certain environmental hazard reports on multi-family properties. It is the Bank's policy to require appropriate insurance protection, including title and hazard insurance, on all real estate mortgage loans prior to closing. Borrowers generally are required to advance funds for certain items such as real estate taxes, flood insurance and private mortgage insurance, when applicable. ASSET QUALITY DELINQUENT LOANS AND FORECLOSED ASSETS. Management reviews delinquent loans on a continuous basis and reports monthly to the Board of Directors regarding the status of all delinquent and non-accrual loans in the Bank's portfolio. The Bank's real estate loan servicing policies and procedures require that the Bank initiate contact with a delinquent borrower as soon after the tenth day of delinquency as possible. Generally, the policy calls for a late notice to be sent 10 days after the due date of the late payment. If payment has not been received within 30 days of the due date, a letter is sent to the borrower. Thereafter, periodic letters and phone calls are placed to the borrower until payment is received. In addition, Bank policy calls for the cessation of interest accruals on loans delinquent 90 days or more. When contact is made with the borrower at any time prior to foreclosure, the Bank will attempt to obtain the full payment due, or work out a repayment schedule with the borrower to avoid foreclosure. Generally, foreclosure proceedings are initiated by the Bank when a loan is 90 days past due. As soon as practicable after initiating foreclosure proceedings on a loan, the Bank prepares an estimate of the fair value of the underlying collateral. It is the Bank's general policy to dispose of properties acquired through foreclosure or deeds in lieu thereof as quickly and as prudently as possible in consideration of market conditions, the physical condition of the property, and any other mitigating conditions. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan is generally sold at foreclosure or by the Bank as soon thereafter as practicable. -11- The Bank retains outside counsel experienced in foreclosure and bankruptcy procedures to institute foreclosure and other actions on the Bank's delinquent loans. Non-performing loans totaled $4.4 million at June 30, 2000, as compared to $3.0 million at June 30, 1999. Of the $4.4 million non-performing loans at June 30, 2000, $1.6 million relates to one multi-family loan which entered foreclosure in June, 2000. The Company had 25 loans totaling $754,000 delinquent 60-89 days at June 30, 2000, as compared to 23 such delinquent loans totaling $819,000 at June 30, 1999. The Company has experienced a shift in the composition of its 60-89 day delinquencies from its conventional mortgage portfolio, which loans typically carry larger average balances, to smaller balance FHA/VA insured and consumer loans. Under Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan," ("SFAS 114"), the Company is required to account for certain loan modifications or restructurings as ''troubled-debt restructurings.'' In general, the modification or restructuring of a debt constitutes a troubled-debt restructuring if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Debt restructurings or loan modifications for a borrower do not necessarily always constitute troubled-debt restructurings, however, and troubled-debt restructurings do not necessarily result in non-accrual loans. The Company had one loan classified as troubled-debt restructuring at June 30, 2000, totaling $700,000, which was on accrual status as it has been performing in accordance with the restructuring terms for over one year. Troubled-debt restructurings totaled $1.3 million at June 30, 1999, consisting of 2 loans, as one troubled- debt restructuring totaling $590,000 was paid-in-full during the fiscal year ended June 30, 2000. The current regulations of the Office of Thrift Supervision require that troubled-debt restructurings remain classified as such until either the loan is repaid or returns to its original terms. The Company did not have any new troubled-debt restructurings during the fiscal year ended June 30, 2000. Under SFAS 114, the Bank established guidelines for determining and measuring impairment in loans. In the event the carrying balance of the loan, including all accrued interest, exceeds the estimate of fair value, the loan is considered to be impaired and a reserve is established. The recorded investment in loans deemed impaired was approximately $2.6 million as of June 30, 2000, compared to $1.6 million at June 30, 1999, and the average balance of impaired loans was $1.5 million for the year ended June 30, 2000 compared to $2.3 million for the year ended June 30, 1999. At June 30, 2000, reserves have been provided on all impaired loans within specific reserves totaling $130,000 allocated within the allowance for loan losses. Generally, the Bank considers non-performing loans to be impaired loans. However, at June 30, 2000, $1.8 million of one-to four-family, cooperative apartment and consumer loans on nonaccrual status are not deemed impaired under SFAS 114. All of these loans have outstanding balances less than $227,000, and are considered a homogeneous loan pool not covered by SFAS 114. -12- NON-PERFORMING ASSETS AND TROUBLED-DEBT RESTRUCTURINGS. The following table sets forth information regarding the Bank's non-performing assets and troubled-debt restructurings at the dates indicated.
At June 30, 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- (Dollars In Thousands) Non-performing loans: One-to-four family $1,769 $1,577 $471 $1,123 $1,149 Multi-family and underlying cooperative 2,591 1,248 236 1,613 4,734 Cooperative apartment 54 133 133 415 668 Other loans 7 43 44 39 - --------- --------- --------- --------- --------- Total non-performing loans 4,421 3,001 884 3,190 6,551 Total Other Real Estate Owned 381 866 825 1,697 1,946 --------- --------- --------- --------- --------- Total non-performing assets $4,802 $3,867 $1,709 $4,887 $8,497 ========= ========= ========= ========= ========= Troubled-debt restructurings $700 $1,290 $3,971 $4,671 $4,671 Total non-performing assets and troubled- debt restructurings $5,502 $5,157 $5,680 $9,558 $13,168 ========= ========= ========= ========= ========= Impaired loans $2,591 $1,563 $3,136 $4,294 $7,419 Total non-performing loans to total loans 0.26% 0.22% 0.09% 0.43% 1.12% Total non-performing loans and troubled- debt restructurings to total loans 0.30 0.31 0.51 1.05 1.92 Total non-performing assets to total assets 0.19 0.17 0.11 0.37 0.62 Total non-performing assets and troubled- debt restructurings to total assets 0.22 0.23 0.35 0.73 0.96 - -------------------------- Adjusting total assets at June 30, 1996, for $131.0 million of excess subscription proceeds related to the Company's initial public offering, total non-performing assets to total assets were 0.68% at June 30, 1996. The excess subscription proceeds were refunded by the Company on July 1, 1996.
OTHER REAL ESTATE OWNED ("OREO"). Property acquired by the Bank as a result of a foreclosure on a mortgage loan is classified as OREO and is recorded at the lower of the recorded investment in the related loan or the fair value of the property at the date of acquisition, with any resulting write down charged to the allowance for loan losses. The Bank obtains an appraisal on an OREO property as soon as practicable after it takes possession of the real property. The Bank will generally reassess the value of OREO at least annually thereafter. The balance of other real estate owned ("OREO")was $381,000, consisting of 7 properties, at June 30, 2000 compared to $866,000, consisting of 13 properties, at June 30, 1999. During the year ended June 30, 2000, total additions to OREO were $429,000. Offsetting these additions, were OREO sales and charge-offs of $1.0 million during the year ended June 30, 2000. All charge-offs were recorded against the allowance for losses on real estate owned, which was $45,000 as of June 30, 2000. CLASSIFIED ASSETS. The Bank's Loan Loss Reserve Committee meets every other month to review all problem loans in the portfolio to determine whether any loans require reclassification in accordance with applicable regulatory guidelines. Recommendations are reported by the Loan Loss Reserve Committee to the Board of Directors on a quarterly basis. The Loan Loss Reserve Committee, subject to Board approval, establishes policies relating to the internal classification of loans and believes that its classification policies are consistent with regulatory policies. All non-performing loans and OREO are considered to be classified assets. In addition, the Bank maintains a "watch list" comprised of 37 loans totaling $3.6 million at June 30, 2000 which, while performing, are characterized by weaknesses which require special attention from management and are considered to be potential problem loans. All loans on the watch list are considered to be classified assets or are otherwise categorized as "Special Mention" as discussed below. As a result of its bi- monthly review of the loan portfolio, the Loan Loss Reserve Committee may decide to reclassify one or more of the loans on the watch list. Federal regulations and Bank policy require that loans and other assets considered to be of lesser quality be classified as ''Substandard,'' ''Doubtful'' or ''Loss'' assets. An asset is considered ''Substandard'' if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. ''Substandard'' assets have a well-defined weakness or weaknesses and are characterized by the distinct possibility that the Bank will sustain ''some loss'' if deficiencies are not corrected. Assets classified as ''Doubtful'' have all of the weaknesses inherent in those classified ''Substandard'' with the added characteristic that the weaknesses present make ''collection or liquidation in full,'' on the basis -13- of current existing facts, conditions, and values, ''highly questionable and improbable.'' Assets classified as ''Loss'' are those considered ''uncollectible'' and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess potential weaknesses that deserve management's attention are designated ''Special Mention'' by management. At June 30, 2000 the Bank had $2.1 million of loans designated Special Mention. At June 30, 2000, the Bank had $7.3 million of assets classified Substandard, consisting of 39 loans and 7 other real estate owned properties, and no assets classified as Doubtful or Loss. At June 30, 1999, the Bank had $4.0 million of assets classified Substandard, consisting of 29 loans and 9 other real estate owned properties, $328,000 of assets classified as Doubtful, consisting of 1 loan, and no assets classified as Loss. The following table sets forth at June 30, 2000 the Bank's aggregate carrying value of the assets classified as Substandard, Doubtful or Loss or designated as Special Mention.
Special Mention Substandard Doubtful Loss - --------------------------------------------------------------------------------------------------------------------------------- Number Amount Number Amount Number Amount Number Amount - --------------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Mortgage Loans: One-to-four family 3 $357 27 $2,976 - $- - $- Multi-family and underlying cooperative 2 1,476 6 3,646 - - - - Cooperative apartment 7 272 6 298 - - - - ------ ------ ------ ------ ------ ------ ------ ------ Total Mortgage Loans 12 2,105 39 6,920 - - - - ------ ------ ------ ------ ------ ------ ------ ------ Other Real Estate Owned: One-to-four family - - 1 134 - - - - Cooperative apartment - - 6 247 - - - - ------ ------ ------ ------ ------ ------ ------ ------ Total Other Real Estate Owned - - 7 381 - - - - ------ ------ ------ ------ ------ ------ ------ ------ Total 12 $2,105 46 $7,301 - $- - $- ====== ====== ====== ====== ====== ====== ====== ======
ALLOWANCE FOR LOAN LOSSES The Bank has established a Loan Loss Reserve Committee and has charged it with, among other things, specific responsibility for monitoring the adequacy of the loan loss reserve. The Loan Loss Reserve Committee's findings, along with recommendations for additional loan loss reserve provisions, if any, are reported directly to senior management of the Bank, and to the Board of Directors. The Allowance for Loan Losses is supplemented through a periodic provision for loan losses based on the Loan Loss Reserve Committee's evaluation of several variables, including the level of non-performing loans, the ratio of reserves to total performing loans, the level and composition of new loan activity, and an estimate of future losses determinable at the date the portfolio is evaluated. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters, the fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses, its valuation of OREO, and both the level of loans in foreclosure and pending foreclosure. Based on their judgments about information available to them at the time of their examination, the regulators may require the Bank to recognize additions to the allowance. Loan loss reserves are established based upon a review of the two componentsof the Bank's loan portfolio, performing loans and non-performing loans. Performing loans are reviewed based upon the premise that certain loans within the loan portfolio have incurred losses as of the balance sheet date which have not yet been identified. The evaluation process is thus based upon the Bank's historical loss experience. Non-performing loans are reviewed individually to determine if the liquidation value of the underlying collateral is sufficient to pay off the existing debt. Should the bank determine that a non-performing loan is likely to result in a principal -14- loss, the loan is then placed into one of four classifications. The particular classification assigned to any one loan, or proportion thereof, (loss, doubtful, substandard or special mention) is based upon the actual level of loss attributable to that loan, as determined by the Loan Loss Reserve Committee. The Bank will then increase its general valuation allowance in an amount established by the Loan Loss Reserve Committee to appropriately reflect the anticipated loss from each loss classification category. Specific reserves are established against loans classified as ''loss.'' Rather than an estimation of potential loss, the establishment of a specific reserve represents the identification of an actual loss which will result in a charge-off. This loss amount will be set aside on the Bank's balance sheet as a specific reserve and will serve to reduce the carrying value of the associated loan. The Bank's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by various regulatory agencies which can order the establishment of additional general or specific loss allowances. The Bank has maintained its allowance for loan losses to a level which management believes is adequate to absorb probable losses that may be incurred within the Bank's loan portfolio. The allowance for loan losses decreased $296,000 from June 30, 1999 to June 30, 2000, as net charge-offs of $536,000 were partially offset by provisions to the allowance of $240,000. Of the total net charge-offs during the fiscal year ended June 30, 2000, $454,000 related to a loan pool participation investment acquired from FIBC. Upon consummating the FIBC acquisition, we provided reserves within our overall loan loss allowance to cover this potential loss on the loan pool investment. After attempting to recover this portion of the total investment, we determined in November, 1999, that it would not be collectible and should be charged-off. -15- The following table sets forth activity in the Bank's allowance for loan losses at or for the dates indicated.
At or for the Year Ended June 30, ------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (Dollars In Thousands) Total loans outstanding at end of period $1,721,200 $1,383,341 $950,121 $750,584 $583,686 ======== ======== ======== ======== ======== Average total loans outstanding $1,563,656 $1,164,982 $843,148 $648,357 $449,063 ======== ======== ======== ======== ======== ALLOWANCE FOR LOAN LOSSES: Balance at beginning of period $15,081 $12,075 $10,726 $7,812 $5,174 Provision for loan losses 240 240 1,635 4,200 2,979 Charge-offs One-to-four family (500) (10) (165) (104) (21) Multi-family and underlying cooperative - (98) (49) (985) (553) Non-residential - - - - (274) FHA/VA insured - - - - - Cooperative apartment (24) (62) (112) (276) (170) Other (21) (38) (2) (23) (5) -------- -------- -------- -------- -------- Total charge-offs (545) (208) (328) (1,388) (1,023) -------- -------- -------- -------- -------- Recoveries 9 7 42 102 14 -------- -------- -------- -------- -------- Reserve acquired in purchase acquisition - 2,967 - - 668 -------- -------- -------- -------- -------- Balance at end of period $14,785 $15,081 $12,075 $10,726 $7,812 ======== ======== ======== ======== ======== Allowance for loan losses to total loans at end of period 0.86% 1.09% 1.27% 1.43% 1.34% Allowance for loan losses to total non- performing loans at end of period 334.43 502.53 1,365.95 336.24 119.25 Allowance for loan losses to total non- performing loans and troubled-debt restructurings at end of period 288.71 351.46 248.71 136.45 69.61 Ratio of net charge-offs to average loans outstanding during the period 0.03 0.03 0.03 0.20 0.22 ALLOWANCE FOR LOSSES ON OTHER REAL ESTATE OWNED: Balance at beginning of period $149 $164 $187 $114 $- Provision charged to operations 25 16 114 450 586 Charge-offs, net of recoveries (129) (31) (137) (377) (472) -------- -------- -------- -------- -------- Balance at end of period $45 $149 $164 $187 $114 ======== ======== ======== ======== ======== _______________________________________ Total loans represents loans, net, plus the allowance for loan losses. During the fiscal year ended June 30, 1999, the Bank acquired $192.3 million of loans from FIBC.
-16- The following table sets forth the Bank's allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated.
At June 30, - --------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Percent Percent Percent Percent Percent of Loan of Loan of Loan of Loan of Loan in Each in Each in Each in Each in Each Category Category Category Category Category Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total Amount Loans(1) Amount Loans Amount Loans Amount Loans Amount Loans - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Impaired loans $130 0.15 $62 0.11% $23 0.33% $122 0.58% $955 1.30% One-to-four family 3,176 12.23 4,112 17.86 669 13.32 820 19.04 1,171 29.90 Multi-family and underlying cooperative 10,000 78.65 9,652 72.63 10,160 75.90 7,398 66.83 3,808 50.81 Non- residential 1,095 6.92 699 6.45 445 5.32 862 5.84 605 6.63 Cooperative apartment 254 1.60 414 2.39 605 4.52 1,355 6.89 1,085 10.38 Other 130 0.45 142 0.56 173 0.61 169 0.82 188 0.98 - --------------------------------------------------------------------------------------------------------------------------------- Total $14,785 100.00% $15,081 100.00% $12,075 100.00% $10,726 100.00% $7,812 100.00% ================================================================================================================================= Total loans represent gross loans less FHA and VA loans, which are government guaranteed loans. The Bank adopted SFAS 114 effective July 1, 1995. Prior to this date, impaired loans were not measured. At June 30, 1999, 1998, 1997 and 1996, impaired loans represent 0.11%, 0.33%, 0.57% and 1.27% of total loans.
INVESTMENT ACTIVITIES INVESTMENT STRATEGIES OF THE COMPANY - The Company's principal asset is its investment in the Bank's common stock, which amounted to $194.4 million at June 30, 2000. The Company's other investments at that date totaled $60.1 million. The largest component of these investments were Ginnie Mae adjustable rate mortgage-backed securities totaling $42.0 million, which are tied closely to short-term borrowings. The remaining $18.9 of investment securities are utilized for general business activities, which may include, but are not limited to: (1) repurchases of Common Stock, (2) acquisition of other companies, (3) subject to applicable limitations, the payment of dividends, and/or (4) investments in the equity securities of other financial institutions and other investments not permitted for federally-insured institutions. There can be no assurance that the Company will engage in any of these activities in the future. Otherwise, the investment policy of the Company calls for investments in relatively short-term, liquid securities similar to such securities defined in the securities investment policy of the Bank. INVESTMENT POLICY OF THE BANK. The securities investment policy of the Bank, which is established by its Board of Directors, is designed to help the Bank achieve its overall asset/liability management objectives. Generally, the policy calls for management to emphasize principal preservation, liquidity, diversification, short maturities and/or repricing terms, and a favorable return on investment when selecting new investments for the Bank's portfolio. The Bank's current securities investment policy permits investments in various types of liquid assets including obligations of the U.S. Treasury and federal agencies, investment grade corporate obligations, various types of mortgage- backed securities, commercial paper, certificates of deposit, and federal funds sold to select financial institutions periodically approved by the Board of Directors. Investment strategies are implemented by the Asset and Liability Management Committee ("ALCO") comprised of the Chief Executive Officer, President, Executive Vice President and other senior management officers. The strategies take into account the overall composition of the Bank's balance sheet, including loans and deposits, and are intended to protect and enhance the Company's earnings and market value. The strategies are reviewed monthly by the ALCO and reported regularly to the Board of Directors. The Company did not engage in any hedging transactions utilizing derivative instruments (such as interest rate swaps and caps) during the fiscal year ended June 30, 2000, and did not have any such hedging transactions in place at June 30, 2000. In the future, the Company may, with Board approval, engage in hedging transactions utilizing derivative instruments. -17- MORTGAGE-BACKED SECURITIES. In its securities investment activities over the past few years the Company has increased its purchases of mortgage-backed securities, which provide the portfolio with investments consisting of desirable repricing, cash flow and credit quality characteristics. Mortgage- backed securities generally yield less than the loans that underlie the securities because of the cost of payment guarantees and credit enhancements that reduce credit risk to the investor. While mortgage-backed securities backed by federally sponsored agencies carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that fluctuating interest rates, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. However, mortgage-backed securities are more liquid than individual mortgage loans and may readily be used to collateralize borrowings of the Company. The Company's investment in mortgage-backed securities totaled $442.7 million, or 17.7% of total assets at June 30, 2000. Approximately 36.8% of the mortgage- backed securities portfolio, was comprised of securities backed by either the Governmental National Mortgage Association (''Ginnie Mae''), Freddie Mac, or Fannie Mae. In addition to the superior credit quality provided by the agency backing, the mortgage-backed securities portfolio also provides the Company with important interest rate risk management features. At June 30, 2000, the Company had $279.9 million in CMOs and REMICs, which comprise the largest component of the Bank's mortgage-backed securities. All of the securities are either backed by U.S agency obligations or have been issued by highly reputable financial institutions. In addition, all of the non-agency backed obligations had been rated in the highest rating category by at least one nationally recognized rating agency at the time of purchase. In addition, none of these securities have stripped principal and interest components and the Company is positioned in priority tranches in all securities. The majority of these securities have been purchased using funds from short-term borrowings as part of reverse repurchase transactions, in which these securities act as collateral for the borrowed funds. As of June 30, 2000, the fair value of these securities was approximately $7.8 million below their cost basis, due primarily to reductions in market values associated with increased short-term interest rates during the period May, 1999 through June, 2000. The Company's remaining mortgage-backed securities portfolio is comprised of a $116.0 million investment in adjustable rate Ginnie Mae, Freddie Mac and Fannie Mae pass-through securities which have an average term to next rate adjustment of less than one year, a $31.9 million investment in seasoned fixed- rate Ginnie Mae, Fannie Mae and Freddie Mac pass-through securities, with an estimated remaining life of less than three years, and a $15.2 million investment in mortgage-backed securities, which provide a return of principal and interest on a monthly basis, and have original maturities of between five to seven years, at which point the entire remaining principal balance is repaid (the ''balloon'' payment). GAAP requires that investments in equity securities that have readily determinable fair values and all investments in debt securities be classified in one of the following three categories and accounted for accordingly: trading securities, securities available for sale, or securities held to maturity. The Company had no securities classified as trading securities during the year ended June 30, 2000, and does not intend to trade securities. Unrealized gains and losses on available for sale securities are excluded from earnings and are reported as a separate component of stockholders' equity referred to as other comprehensive income, net of deferred taxes. At June 30, 2000, the Company had $550.5 million of securities classified as available for sale which represented 22.00% of total assets at June 30, 2000. Given the size of the available for sale portfolio, future fluctuations in market values of these securities could result in fluctuations in the Company's stockholders' equity. The maturities on the Bank's fixed-rate mortgage-backed securities (balloon payment securities, seasoned Ginnie Mae's and Freddie Mac's) are relatively short as compared to the final maturities on its ARMs and CMO portfolios. Except for fixed rate mortgage backed securities acquired from Conestoga, which were generally classified as available for sale, the Company typically classifies purchased fixed rate mortgage-backed securities as held-to-maturity, and carries the securities at amortized cost. The Company has the intent and ability to hold these securities to final maturity. The Company typically classifies purchased ARMs and CMOs as available for sale, in recognition of the greater prepayment uncertainty associated with these securities, and carries these securities at fair market value. The following table sets forth activity in the Company's mortgage-backed securities portfolio for the periods indicated. -18-
For the Year Ended June 30, --------------------------------------------------- 2000 1999 1998 --------- --------- --------- (Dollars In Thousands) Amortized cost at beginning of period $530,306 $408,086 $306,164 Purchases/ Sales (net) 247 263,644 193,086 Principal repayments (78,874) (179,434) (90,686) Premium and discount amortization, net (190) 230 (478) Securities acquired in purchase of FIBC(1) - 37,780 - --------- --------- --------- Amortized cost at end of period $451,489 $530,306 $408,086 ========= ========= ========= Amount comprised of $13.8 million of Freddie Mac securities, $8.7 million of Fannie Mae securities and $15.3 of Ginnie Mae securities.
The following table sets forth the amortized cost and fair value of the Company's securities at the dates indicated.
At June 30, ------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------------- Amortized Amortized Amortized Cost Fair Value Cost Fair Value Cost Fair Value --------- --------- --------- --------- --------- --------- (Dollars In Thousands) Mortgage-backed securities: Ginnie Mae $133,222 $132,477 $133,057 $133,337 $87,889 $89,706 Fannie Mae 15,558 15,427 25,317 25,355 33,085 33,420 Freddie Mac 14,929 14,853 22,994 23,093 31,778 32,016 CMOs 287,780 279,867 348,938 344,254 255,334 256,176 --------- --------- --------- --------- --------- --------- Total mortgage-backed Securities 451,489 442,624 530,306 526,039 408,086 411,318 --------- --------- --------- --------- --------- --------- Investment securities: U.S. treasury and agency 67,686 65,788 87,475 86,553 92,825 93,302 Other 58,860 57,194 77,746 76,704 57,981 58,322 --------- --------- --------- --------- --------- --------- Total investment securities 126,546 122,982 165,221 163,257 150,806 151,624 Equity securities 14,948 15,490 14,162 15,142 10,425 12,675 Net unrealized(loss)gain (11,683) - (5,692) - 5,069 - --------- --------- --------- --------- --------- --------- Total securities, net $581,300 $581,096 $703,997 $704,438 $574,386 $575,617 ========= ========= ========= ========= ========= ========= Includes $13.8 million of Freddie Mac securities, $8.7 million of Fannie Mae securities, $15.3 million in Ginnie Mae securities, $37.2 million in agency obligations, and $6.6 million in equity securities acquired from FIBC. The net unrealized (loss) gain at June 30, 2000, 1999 and 1998 relates to available for sale securities in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Investments in Debt and Equity Securities" ("SFAS 115"). The net unrealized gain is presented in order to reconcile the ''Amortized Cost'' of the Company's securities portfolio to the recorded value reflected in the Consolidated Statements of Condition.
CORPORATE DEBT OBLIGATIONS. The Company invests in the short-term investment grade debt obligations of various corporations. Corporate debt obligations generally carry both a higher rate of return and a higher degree of credit risk than U.S. Treasury securities with comparable maturities. In addition, corporate securities are generally less liquid than comparable U.S. Treasury securities. In recognition of the additional risks associated with investing in these securities, the Company's investment policy limits new investments in corporate obligations to those companies which are rated single ''A'' or better by one of the nationally recognized rating agencies, and limits investments in any one corporate entity to the lesser of 1% of total assets or 15% of the Company's equity. At June 30, 2000, the Company's portfolio of corporate debt obligations totaled $55.0 million, or 2.20% of total assets. The following table sets forth the amortized cost and fair value of the Company's securities, by accounting classification and by type of security, at the dates indicated. -19-
At June 30, ----------------------------------------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------------------------------------- Amortized Amortized Amortized Cost Fair Value Cost Fair Value Cost Fair Value --------- --------- --------- --------- --------- --------- (Dollars In Thousands) Held-to-Maturity: Mortgage-backed securities: Pass through securities $13,329 $13,263 $22,820 $23,192 $46,714 $47,443 --------- --------- --------- --------- --------- --------- Total mortgage-backed securities 13,329 13,263 22,820 23,192 46,714 47,443 Investment securities 17,489 17,351 31,698 31,768 78,091 78,593 --------- --------- --------- --------- --------- --------- Total Held-to Maturity $30,818 $30,614 $54,518 $54,960 $124,805 $126,036 ========= ========= ========= ========= ========= ========= Available-for-Sale: Mortgage-backed securities: Pass through securities $150,380 $149,494 $158,548 $158,593 $106,038 $107,699 CMOs 287,780 279,867 348,938 344,254 255,334 256,176 --------- --------- --------- --------- --------- --------- Total mortgage-backed securities 438,160 429,361 507,486 502,847 361,372 363,875 Investment securities 109,057 105,631 133,523 131,489 72,715 73,031 Equity securities 14,948 15,490 14,162 15,142 10,425 12,675 Net unrealized(loss)gain (11,683) - (5,692) - 5,069 - --------- --------- --------- --------- --------- --------- Total Available-for-Sale $550,482 $550,482 $649,479 $649,478 $449,581 $449,581 ========= ========= ========= ========= ========= ========= Total securities, net $581,300 $581,096 $703,997 $704,438 $574,386 $575,617 ========= ========= ========= ========= ========= ========= Includes $37.8 million of mortgage-backed pass-through securities, $37.2 million in investment securities and $6.6 million in equity securiies acquired from FIBC, all of which were classified as available for sale. Mortgage-backed securities include investments in CMOs and REMICs. Includes corporate debt obligations. The net unrealized (loss) gain at June 30, 2000, 1999 and 1998 relates to available for sale securities in accordance with SFAS No. 115. The net unrealized gain is presented in order to reconcile the ''Amortized Cost'' of the Company's securities portfolio to the recorded value reflected in the Consolidated Statements of Condition.
-20- The following table sets forth certain information regarding the amortized cost, fair value and weighted average yield of the Company's securities at June 30, 2000, by remaining period to contractual maturity. With respect to mortgage-backed securities, the entire amount is reflected in the maturity period that includes the final security payment date and, accordingly, no effect has been given to periodic repayments or possible prepayments. Other than obligations of federal agencies and GSEs, the Company has no investments in securities issued by any one entity in excess of 10% of stockholders' equity at June 30, 2000.
At June 30, 2000 ----------------------------------------------------------------------------------------- Held-to-Maturity Available-for Sale ----------------------------------------------------------------------------------------- Weighted Weighted Amortized Average Amortized Average Cost Fair Value Yield Cost Fair Value Yield -------- -------- ------ -------- -------- ------ (Dollars In Thousands) Mortgage-backed securities: Due within 1 year $593 $588 6.19% $2,506 $2,327 6.00% Due after 1 year but within 5 years 10,054 9,998 7.04 3,043 3,014 6.98 Due after 5 years but within 10 years 2,682 2,677 7.96 8,094 7,856 6.46 Due after ten years - - - 424,517 416,164 6.69 -------- -------- -------- -------- Total 13,329 13,263 7.19 438,160 429,361 6.69 -------- -------- -------- -------- U.S. Treasury and Agency: Due within 1 year - - - 998 997 5.89 Due after 1 year but within 5 years 12,440 12,296 6.58 54,249 52,496 6.03 Due after 5 years but within 10 years - - - - - - Due after ten years - - - - - - -------- -------- -------- -------- Total 12,440 12,296 6.58 55,247 53,493 6.02 -------- -------- -------- -------- Corporate and Other Due within 1 year 3,172 3,171 6.10 12,175 12,152 6.26 Due after 1 year but within 5 years 748 747 6.04 41,635 39,986 6.22 Due after 5 years but within 10 years 1,129 1,137 7.30 - - - Due after ten years - - - - - - -------- -------- -------- -------- Total 5,050 5,056 6.36 53,810 52,138 6.23 -------- -------- -------- -------- Equity Securities Due within 1 year - - - 7,372 8,638 - Due after 1 year but within 5 years - - - - - - Due after 5 years but within 10 years - - - - - - Due after ten years - - - 7,576 6,852 - -------- -------- -------- -------- Total - - 6.36 14,948 15,490 - -------- -------- -------- -------- Total: Due within 1 year 3,765 3,759 6.12 23,051 24,114 6.20 Due after 1 year but within 5 years 23,242 23,041 6.76 98,927 95,496 6.13 Due after 5 years but within 10 years 3,811 3,814 7.77 8,094 7,856 6.46 Due after ten years - - - 432,093 423,016 6.69 -------- -------- -------- -------- Total $30,819 $30,614 6.81% $562,165 $550,482 6.57% ======== ======== ======== ========
SOURCES OF FUNDS GENERAL. Deposits, repayments of loans and mortgage-backed securities, investment security maturities and redemptions, and short- to medium-term borrowings from the FHLBNY, which include both advances and repurchase agreements treated as financings, are the Bank's primary sources of funding for its lending and investment activities. The -21- Bank is also active in the secondary mortgage market, selling substantially all of its new long-term, fixed-rate residential mortgage product to either Fannie Mae, Freddie Mac, or SONYMA. DEPOSITS. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank presently offers savings accounts, money market accounts, checking accounts, NOW and Super NOW accounts, and certificates of deposit. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, and competition from other financial institutions and investment products. Traditionally, the Bank has relied upon customer service, convenience and long- standing relationships with customers. The communities in which the Bank maintains branch offices have historically provided the Bank with nearly all of its deposits. At June 30, 2000, the Bank had deposit liabilities of $1.22 billion, down $27.9 million from June 30, 1999. Within total deposits, $75.6 million, or 6.2%, consisted of certificates of deposit with balances of $100,000 or greater. Individual Retirement Accounts (''IRA's'') totaled $108.7 million, or 8.9% of total deposits. In June, 2000, the Bank's Board of Directors approved acceptance of brokered certificates of deposits up to an aggregate limit of $120.0 million. As of June 30, 2000, no brokered certificates of deposit had been acceptance. Brokered certificates of deposits, if accepted by the Bank, would be utilized by the Bank solely as a funding alternative to borrowings. The following table presents the deposit activity of the Bank for the periods indicated.
For the Year Ended June 30, ----------------------------------------------------- 2000 1999 1998 --------- --------- --------- (Dollars In Thousands) Deposits $2,178,658 $1,686,616 $1,373,072 Withdrawals 2,223,597 1,754,874 1,345,095 --------- --------- --------- Deposits (Withdrawals) in excess of (deposits) (44,939) (68,258) 27,977 withdrawals Deposits acquired in purchase of FIBC - 230,627 - Deposits relinquished in sale (17,949) - - Interest credited 43,103 42,479 42,713 --------- --------- --------- TOTAL (DECREASE) INCREASE IN DEPOSITS $(19,785) $204,848 $70,690 ========= ========= ========= Amount comprised of $123.0 million in certificates of deposit, $67.4 in savings accounts, $15.1 million in checking accounts, $16.7 million in money market accounts, and $7.5 million in NOW and Super NOW accounts.
At June 30, 2000 the Bank had $75.6 million in certificate of deposit accounts over $100,000 maturing as follows: Weighted Average Amount Rate --------- --------- (Dollars In Thousands) Maturity Period Within three months $15,246 5.07% After three but within six months 9,593 5.12 After six but within twelve months 24,557 5.69 After 12 months 26,229 5.99 --------- Total $75,625 5.60% ========= -22- The following table sets forth the distribution of the Bank's deposit accounts and the related weighted average interest rates at the dates indicated.
At June 30, ------------------------------------------------------------------------------------------------------ 2000 1999 1998 ----------------------------------- ------------------------------- ----------------------------- Percent Weighted Percent Weighted Percent Weighted of Total Average of Total Average of Total Average Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ---------- -------- --------- -------- -------- -------- -------- -------- -------- (Dollars In Thousands) Checking accounts $54,358 4.46% -% $50,414 4.70% -% $32,782 3.57% -% NOW and Super NOW accounts 26,787 2.20 1.24 25,687 2.06 1.22 17,927 1.73 1.24 Money market accounts 146,066 11.98 4.37 52,979 4.25 3.55 30,567 2.94 3.09 Savings accounts 373,772 30.66 2.08 406,602 32.60 2.09 340,481 32.79 2.27 Certificates of deposit 618,165 50.70 5.51 703,251 56.39 5.31 612,328 58.97 5.84 ---------- -------- -------- -------- -------- -------- Totals $1,219,148 100.00% $1,238,933 100.00% $1,034,085 100.00% ========== ======== ======== ======== ======== ========
The following table presents, by interest rate ranges, the amount of certificate accounts outstanding at the dates indicated and the period to maturity of the certificate accounts outstanding at June 30, 2000.
Period to Maturity at June 30, 2000 Total at June 30, ------------------------------------------------------- ------------------------------------ Less than One to Four to Over Five Interest Rate Range One Year Three Years Five Years Years 2000 1999 1998 - --------------- --------- --------- --------- -------- -------- -------- -------- (Dollars In Thousands) 4.00% and below $38,686 $- $- $- $38,686 $29,558 $1 4.01% to 5.00% 179,076 5,429 354 - 184,859 346,694 135,153 5.01% to 6.00% 158,094 121,575 10,299 167 290,135 178,183 233,082 6.01% to 7.00% 33,085 54,013 11,226 3 98,327 120,238 231,204 7.01% and above 5,997 161 - - 6,158 28,578 12,888 --------- --------- --------- -------- -------- -------- -------- Total $414,938 $181,178 $21,879 170 $618,165 $703,251 $612,328 ========= ========= ========= ======== ======== ======== ========
BORROWINGS. The Bank has been a member and shareholder of the FHLBNY since February 14, 1980. One of the privileges accorded FHLBNY shareholders is the ability to borrow money under various lending (referred to as Advances) programs at competitive interest rates. The Bank, as a member of the FHLBNY, is provided with a borrowing line which equaled $724.8 million at June 30, 2000. From time to time, the Bank borrows from the FHLBNY for various purposes. The Bank had borrowings from the Federal Home Loan Bank of New York totaling $555.0 million and $250.0 million at June 30, 2000 and 1999, respectively. The average cost of FHLB Advances was 5.89% and 5.96%, respectively, during the years ended June 30, 2000 and 1999, and the average interest rate on outstanding FHLBNY Advances was 6.07% and 5.52%, respectively, at June 30, 2000 and 1999. At June 30, 2000, the Bank maintained in excess of $610.5 million of qualifying collateral (principally real estate loans), as defined by the FHLBNY, to secure such advances. Securities sold with agreement to repurchase totaled $434.0 million at June 30, 2000. The investment and mortgage-backed securities sold with agreement to repurchase mature at various periods beginning in September, 2000. Borrowings under such reverse repurchase agreements involve the delivery of securities to broker-dealers who arrange the transactions. The securities remain registered in the name of the Bank, and are returned upon the maturities of the agreements. Funds to repay the Bank's securities sold with agreement to repurchase at maturity will be provided primarily by cash received from the maturing securities. -23- Presented below is information concerning securities sold with agreements to repurchase and FHLB Advances for the years ended June 30, 2000, 1999 and 1998: Securities Sold Under Agreements to Repurchase:
At or For the Year Ended June 30, ----------------------------------------------------- 2000 1999 1998 --------- --------- --------- (Dollars In Thousands) Balance outstanding at end of period $434,027 $481,660 $256,601 Average interest cost at end of period 6.37% 5.28% 5.74% Average balance outstanding 456,155 381,996 145,676 Average interest cost during the year 5.66% 5.45% 5.95% Carrying value of underlying collateral $456,844 $496,500 $267,469 Estimated market value of underlying collateral 447,715 491,750 268,991 Maximum balance outstanding at month end during period 486,936 481,660 256,601
FHLB Advances:
At or For the Year Ended June 30, ----------------------------------------------------- 2000 1999 1998 --------- --------- --------- Balance outstanding at end of period $555,000 $250,000 $103,505 Average interest cost at end of period 6.07% 5.52% 6.05% Average balance outstanding 466,158 201,494 86,709 Average interest cost during the year 5.89% 5.96% 6.04% Maximum balance outstanding at month end during period 560,000 260,000 103,505
SUBSIDIARY ACTIVITIES In addition to the Bank, the Company's direct and indirect subsidiaries consist of six active wholly-owned subsidiary corporations, one of which is directly owned by the Company and five of which are directly owned by the Bank. In addition, DSBW Preferred Funding Corp. is a direct subsidiary of Havemeyer Equities Inc., a direct subsidiary of the Bank. The following table presents an overview of the Company's subsidiaries as of June 30, 2000.
Year/ State of COMPANY Incorporation Primary Business Activities Havemeyer Equities Inc. 1977 / New York Ownership of DSBW Preferred Funding Corp. Boulevard Funding Corp. 1981 / New York Currently Inactive Havemeyer Investments Inc. 1997 / New York Sale of annuity products DSBW Preferred Funding Corp. 1998 / Delaware Real Estate Investment Trust investing in multi- family and non-residential real estate loans. DSBW Residential Preferred Funding Corp. 1998 / Delaware Real Estate Investment Trust investing in one- to four-family real estate loans 842 Manhattan Avenue Corp. (1) 1995/ New York Management and ownership of real estate. Acquired from FIBC on January 21, 1999.
PERSONNEL As of June 30, 2000, the Company had 248 full-time employees and 81 part- time employees. The employees are not represented by a collective bargaining unit, and the Company considers its relationship with its employees to be good. -24- FEDERAL, STATE AND LOCAL TAXATION FEDERAL TAXATION GENERAL. The following is a discussion of material tax matters and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. The Bank was last audited for its taxable year ended December 31, 1988. For federal income tax purposes, the Company and the Bank file consolidated income tax returns on a June 30 fiscal year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts, discussed below. TAX BAD DEBT RESERVES. The Bank, as a "large bank" (one with assets having an adjusted basis of more than $500 million), is unable to make additions to its tax bad debt reserve, is permitted to deduct bad debts only as they occur and is required to recapture (i.e. take into income), over a multi-year period, a portion of the balance of its bad debt reserves as of June 30, 1997. Since the Bank has already provided a deferred income tax liability for this tax for financial reporting purposes, there was no adverse impact to the Bank's financial condition or results of operations from the enactment of the federal legislation that imposed such recapture. The recapture is suspended during the tax years ended June 30, 1997 and 1998, based upon the Bank's origination levels for certain residential loans which met the minimum levels required by the Small Business Job Protection Act of 1996, (the "1996 Act") to suspend recapture for that tax year. DISTRIBUTIONS. To the extent that the Bank makes "non-dividend distributions" to shareholders, such distributions will be considered to result in distributions from the Bank's "base year reserve," i.e. its reserve as of June 30, 1989, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Bank's current or accumulated earnings and profits will not be so included in the Bank's income. The amount of additional taxable income created from a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. See "Regulation" and "Dividend Policy" for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserves. CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Bank's AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). STATE AND LOCAL TAXATION STATE OF NEW YORK. The Bank and the Company are subject to New York State franchise tax on one of several alternative bases, whichever results in the highest tax, and will file combined returns for purposes of this tax. The basic tax is measured by "entire net income," which is federal taxable income with adjustments. For New York State tax purposes, so long as the Bank continues to meet certain definitional tests relating to its assets and the nature of its business, it will be permitted deductions, within specified formula limits, for additions to its bad debt reserves for purposes of computing its entire net income. The Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, may be computed using an amount based on the Bank's actual loss experience (the "Experience Method") or an amount equal to 32% of the Bank's entire net income (the "PTI Method"), computed without regard to this deduction and reduced by the amount of any permitted addition to the Bank's reserve for non-qualifying loans. New York State (the "State") enacted legislation, which enables the Bank to avoid the recapture into income of the State tax bad debt reserves unless one of the following events occur: 1) the Bank's retained earnings represented by the reserve is used for purposes other than to absorb losses from bad debts, including dividends in excess of the Bank's earnings and profits or -25- distributions in liquidation or in redemption of stock; 2) the Bank fails to qualify as a thrift as provided by the State tax law, or 3) there is a change in state tax law. The Bank's deduction with respect to non-qualifying loans must be computed under the Experience Method which is based on the Bank's actual charge-offs. Each year the Bank will review the most favorable way to calculate the deduction attributable to an addition to the tax bad debt reserves. The New York State tax rate for the 1999 calendar year is 10.53% (including a commuter transportation surcharge) of net income. In general, the Company will not be required to pay New York State tax on dividends and interest received from the Bank. CITY OF NEW YORK. The Bank and the Company are also subject to a similarly calculated New York City banking corporation tax of 9% on income allocated to New York City. New York City also enacted legislation which conformed its tax law regarding bad debt deductions to New York State's tax law. STATE OF DELAWARE. As a Delaware holding company not earning income in Delaware, the Company is exempted from Delaware corporate income tax, but is required to file an annual report and pay an annual franchise tax to the State of Delaware. REGULATION GENERAL The Bank is subject to extensive regulation, examination, and supervision by the OTS, as its chartering agency, and the FDIC, as its deposit insurer. The Bank's deposit accounts are insured up to applicable limits by the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") which are administered by the FDIC, and the Bank is a member of the FHLBNY. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS and the FDIC conduct periodic examinations to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily for the protection of the insurance fund and depositors. The Company, as a publicly- held unitary savings and loan holding company, is required to file certain reports with, and otherwise comply with, the rules and regulations of the Securities and Exchange Commission (the ''SEC'') under the federal securities laws and of the OTS. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank, and the operations of both. The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations, and it does not purport to be a comprehensive description of all such statutes and regulations. IMPACT OF ENACTMENT OF THE GRAMM-LEACH-BLILEY ACT On November 12, 1999, the Gramm-Leach-Bliley Act, or Gramm-Leach was signed into law. Among other things, Gramm-Leach establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies and other financial service providers. Generally, the new law (i) repeals the historical restrictions and eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies and other financial service providers, (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies, (iii) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies, (iv) provides an enhanced framework for protecting the privacy of consumer's information, (v) adopts a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB system, (vi) requires public disclosure of certain agreements relating to funds expended in connection with the Community Reinvestment Act and (vii) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions, including the functional regulation of bank securities activities. -26- Gramm-Leach also restricts the powers of new unitary savings and loan association holding companies. Unitary savings and loan holding companies that are "grandfathered," I.E., became a unitary savings and loan holding company pursuant to an application filed with the OTS before May 4, 1999, such as us, retain their authority under the prior law. All other savings and loan holding companies would be limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach. Gramm Leach also prohibits non-financial companies from acquiring grandfathered savings and loan association holding companies. Gramm-Leach also requires financial institutions to disclose, on ATM machines, any non-customer fees and to disclose to their customers upon the issuance of an ATM card any fees that may be imposed by the institution on ATM users. For older ATMs, financial institutions will have until December 31, 2004 to provide such notices. Bank holding companies are permitted to engage in a wider variety of financial activities than permitted under the prior law, particularly with respect to insurance and securities activities. In addition, in a change from the prior law, bank holding companies will be in a position to be owned, controlled or acquired by any company engaged in financially related activities. We do not believe that the new law will have a material adverse affect upon our operations in the near term. However, to the extent the new law permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than we currently offer and that can aggressively compete in the markets we currently serve. REGULATION OF FEDERAL SAVINGS ASSOCIATIONS BUSINESS ACTIVITIES. The Bank derives its lending and investment powers from the Home Owner's Loan Act, as amended (''HOLA''), and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations, including (a) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (b) a limit of 400% of an association's capital on the aggregate amount of loans secured by non-residential real estate property; (c) a limit of 20% of an association's assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans; (d) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (e) a limit of 5% of assets on non-conforming loans (loans in excess of the specific limitations of HOLA); and (f) a limit of the greater of 5% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. LOANS TO ONE BORROWER. Under HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. At June 30, 2000, the Bank's limit on loans to one borrower was $29.1 million. At June 30, 2000, the Bank's largest aggregate amount of loans to one borrower was $15.7 million and the second largest borrower had an aggregate balance of $14.3 million. -27- QTL TEST. HOLA requires a savings association to meet a QTL test. A savings association may satisfy the QTL test by maintaining at least 65% of its ''portfolio assets'' in certain ''qualified thrift investments'' in at least nine months of the most recent twelve-month period. ''Portfolio assets'' means, in general, an association's total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) certain intangibles, including goodwill and credit card and purchased mortgage servicing rights, and (c) the value of property used to conduct the association's business. ''Qualified thrift investments'' includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage- backed and related securities, small business loans, education loans, and credit card loans. At June 30, 2000, the Bank maintained 89.0% of its portfolio assets in qualified thrift investments. The Bank had also satisfied the QTL test in each of the prior 12 months and, therefore, was a qualified thrift lender. A savings association may also satisfy the QTL test by qualifying as a "domestic building and loan association" as defined in the Internal Revenue Code of 1986. A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. The initial restrictions include prohibitions against (a) engaging in any new activity not permissible for a national bank, (b) paying dividends not permissible under national bank regulations, (c) obtaining new advances from any FHLB, and (d) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, within one year of the date a savings association ceases to meet the QTL test, any company controlling the association would have to register under, and become subject to the requirements of, the Bank Holding Company Act of 1956, as amended. If the savings association does not requalify under the QTL test within the three-year period after it failed the QTL test, it would be required to terminate any activity and to dispose of any investment not permissible for a national bank and would have to repay as promptly as possible any outstanding advances from any FHLB. A savings association that has failed the QTL test may requalify under the QTL test and be free of such limitations, but it may do so only once. CAPITAL REQUIREMENTS. The OTS regulations require savings associations to meet three minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations and a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-based assets. The OTS regulations also provide that the minimum leverage capital ratio, or core capital to total adjusted assets, under Office of Thrift Supervision regulations for a depository institution that has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating is 3% and that the minimum leverage capital ratio for any other depository institution is 4%, unless a higher capital ratio is warranted by the particular circumstances or risk profile of the depository institution. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies, to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. Tangible capital is defined, generally, as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangibles other than certain purchased mortgage servicing rights and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, and the allowance for possible loan losses. The OTS and other federal banking regulators adopted, effective October 1, 1998, an amendment to their risk-based capital guidelines that permits insured depository institutions to include in supplementary capital up to 45% of the pretax net unrealized holding gains on certain available-for-sale equity securities, as such gain are computed under the guidelines. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. The OTS regulations require a savings association with ''above normal'' interest rate risk to deduct a portion of such capital from its total capital to account for the ''above normal'' interest rate risk. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (I.E., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) resulting from a hypothetical 2% increase or decrease in market rates of interest, divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. At the times when the 3-month Treasury bond equivalent yield falls below 4%, an association may compute its interest rate risk on the basis of a decrease equal to one-half of that Treasury rate rather than on the basis of 2%. A savings association whose measured interest rate risk exposure exceeds 2% would be considered to have -28- ''above normal'' risk. The interest rate risk component is an amount equal to one-half of the difference between the association's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Any required deduction for interest rate risk becomes effective on the last day of the third quarter following the reporting date of the association's financial data on which the interest rate risk was computed. The OTS has indefinitely deferred the implementation of the intrest rate risk component in the computation of an institution's risk-based capital requirements. The OTS continues to monitor the interest rate risk of individual institutions and retains the right to impose additional capital requirements on individual institutions. The table below presents the Bank's regulatory capital as compared to the OTS regulatory capital requirements at June 30, 2000:
Actual Minimum Capital Requirement ----------------------------- ---------------------------- Amount Ratio Amount Ratio --------- --------- ---------- ---------- As of June 30, 2000: (Dollars In Thousands) Tangible $136,772 5.76% $35,600 1.5% Leverage Capital 136,772 5.76 94,934 4.0% Risk-based capital 151,556 11.62 104,386 8.0%
The following is a reconciliation of generally accepted accounting principles (GAAP) capital to regulatory capital for the Bank:
At June 30, 2000 Tangible Leverage Risk-Based Capital Capital Capital --------- --------- --------- (Dollars In Thousands) GAAP capital $194,236 $194,236 $194,236 --------- --------- --------- Non-allowable assets: Unrealized loss on available for sale securities 6,550 6,550 6,550 Goodwill (60,254) (60,254) (60,254) Core deposit intangible (3,760) (3,760) (3,760) General valuation allowance - - 14,784 --------- --------- --------- Regulatory capital 136,772 136,772 151,556 Minimum capital requirement 35,600 94,934 104,386 --------- --------- --------- Regulatory capital excess $101,172 $41,838 $47,170 ========= ========= =========
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose limitations upon capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger, and other distributions charged against capital. Under the OTS regulations governing capital distributions, certain savings associations are permitted to pay capital distributions during a calendar year that do not exceed the association's net income for the year plus its retained net income for the prior two years, without notice to, or the approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Company, will continue to have to file an application to receive the approval of the OTS. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described above. See '' - Prompt Corrective Regulatory Action.'' LIQUIDITY. The Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a monthly average of not less than a specified percentage of -29- its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 4%. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's average liquidity ratio for the month ended June 30, 2000 was 12.1% which exceeded the applicable requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. ASSESSMENTS. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a semi-annual basis, is computed upon the savings association's total assets, including consolidated subsidiaries, as reported in the association's latest quarterly Thrift Financial Report. The Bank's assessment expense during the year ended June 30, 2000 totaled $360,000. The OTS has adopted amendments to its regulations, effective January 1, 1999, that are intended to assess savings associations on a more equitable basis. The regulations base the assessment for an individual savings association on three components: the size of the association, on which the basic assessment is based; the association's supervisory condition, which results in percentage increases for any savings institution with a composite rating of 3, 4 or 5 in its most recent safety and soundness examination; and the complexity of the association's operations, which results in percentage increases for a savings association that managed over $1 billion in trust assets, serviced for others loans aggregating more than $1 billion, or had certain off-balance sheet assets aggregating more than $1 billion. In order to avoid a disproportionate impact upon the smaller savings institutions, which are those whose total assets never exceeded $100.0 million, the regulations provide that the portion of the assessment based on asset size will be the lesser of the assessment under the amended regulations or the regulations before the amendment. BRANCHING. Subject to certain limitations, HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (a) in states that expressly authorize branches of savings associations located in another state and (b) to an association that either satisfies the QTL test for a "qualified thrift lender," or qualifies as a ''domestic building and loan association'' under the Internal Revenue Code of 1986, which imposes qualification requirements similar to those for a ''qualified thrift lender'' under HOLA. See ''QTL Test.'' The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. COMMUNITY REINVESTMENT. Under the CRA, as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an "Outstanding" CRA performance rating and a ''Satisfactory'' CRA compliance rating in its most recent examination. In May, 2000, the OTS proposed regulations implementing the requirements under Gramm-Leach tha insured depository institutions publicly disclose certain agreements that are in fulfillment of CRA. We have no such agreement in place at this time. In April 1995, the OTS and the other federal banking agencies adopted amendments revising their CRA regulations. Among other things, the amended CRA regulations substitute for the prior process-based assessment factors a new evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the amended system focuses on three tests: (a) a lending test, to evaluate the institution's record of making loans in its service areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs, and other offices. The amended CRA regulations also clarify how an institution's CRA performance would be considered in the application process. TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in transactions with its ''affiliates'' is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act (''FRA''). In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding the Bank's subsidiaries other than those that are insured depository institutions. Currently, a subsidiary of a bank that is not also a depository institution is not treated as an affiliate of the bank for purposes of Sections 23A and 23B, but the Federal Reserve -30- Bank has proposed treating any subsidiary of a bank that is engaged in activities not permissible for bank holding companies under the BHCA as an affiliate for purposes of Sections 23A and 23B. The OTS regulations prohibit a savings association (a) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act (''BHC Act'') and (b) from purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Bank's authority to extend credit to its directors, executive officers, and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board (''FRB'') thereunder. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. In addition, extensions of credit in excess of certain limits must be approved by the association's board of directors. ENFORCEMENT. Under the Federal Deposit Insurance Act (''FDI Act''), the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all ''institution-affiliated parties,'' including any controlling stockholder or any shareholder, attorney, appraiser and accountant who knowingly or recklessly participates in any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause a more than a minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide range of violations and actions and range from $5,000 for each day during which violations of law, regulations, orders, and certain written agreements and conditions continue, up to $1 million per day for such violations if the person obtained a substantial pecuniary gain as a result of such violation or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines of up to $1 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship, or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances. STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the requirements of the FDI Act, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994 (''Community Development Act''), the OTS, together with the other federal bank regulatory agencies, have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the OTS adopted regulations pursuant to FDICIA that authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the ''prompt corrective action'' provisions of FDICIA. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. -31- REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking agencies adopted regulations to prescribe standards for extensions of credit that (a) are secured by real estate or (b) are made for the purpose of financing the construction of improvements on real estate. The OTS regulations require each savings association to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying OTS guidelines, which include loan-to-value ratios for the different types of real estate loans. Associations are also permitted to make a limited amount of loans that do not conform to the proposed loan-to- value limitations so long as such exceptions are reviewed and justified appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standards are justified. PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective action regulations, the OTS is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings association would be placed in one of five categories based on the association's capital. Generally, a savings association is treated as ''well capitalized'' if its ratio of total capital to risk- weighted assets is at least 10.0%, its ratio of core capital to risk-weighted assets is at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings association will be treated as ''adequately capitalized'' if its ratio of total capital to risk-weighted assets is at least 8.0%, its ratio of core capital to risk-weighted assets is at least 4.0%, and its ratio of core capital to total assets is at least 4.0% (3.0% if the association receives the highest rating on the CAMEL financial institutions rating system). A savings association that has a total risk-based capital of less than 8.0% or Tier 1 risk-based capital ratio that is less than 4.0% or a leverage ratio (3.0% leverage ratio if the association receives the highest rating on the CAMEL financial institutions rating system) is considered to be ''undercapitalized.'' A savings association that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based capital ratio or a leverage ratio of less than 3.0% is considered to be ''significantly undercapitalized.'' A savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be ''critically undercapitalized.'' The elements of an association's capital for purposes of the prompt corrective action regulations are defined generally as they are under the regulations for minimum capital requirements. As of the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. See ''- Capital Requirements.'' The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as an association's capital deteriorates within the three undercapitalized categories. All associations are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the association would be undercapitalized. An undercapitalized association is required to file a capital restoration plan within 45 days of the date the association receives notice that it is within any of the three undercapitalized categories. The OTS is required to monitor closely the condition of an undercapitalized association and to restrict the asset growth, acquisitions, branching, and new lines of business of such an association. Significantly undercapitalized associations are subject to restrictions on compensation of senior executive officers; such an association may not, without OTS consent, pay any bonus or provide compensation to any senior executive officer at a rate exceeding the officer's average rate of compensation (excluding bonuses, stock options and profit-sharing) during the 12 months preceding the month when the association became undercapitalized. A significantly undercapitalized association may also be subject, among other things, to forced changes in the composition of its board of directors or senior management, additional restrictions on transactions with affiliates, restrictions on acceptance of deposits from correspondent associations, further restrictions on asset growth, restrictions on rates paid on deposits, forced termination or reduction of activities deemed risky, and any further operational restrictions deemed necessary by the OTS. If one or more grounds exist for appointing a conservator or receiver for an association, the OTS may require the association to issue additional debt or stock, sell assets, be acquired by a depository association holding company or combine with another depository association. The OTS and the FDIC have a broad range of grounds under which they may appoint a receiver or conservator for an insured depository association. Under FDICIA, the OTS is required to appoint a receiver (or with the concurrence of the FDIC, a conservator) for a critically undercapitalized association within 90 days after the association becomes critically undercapitalized or, with the concurrence of the FDIC, to take such other action that would better achieve the purposes of the prompt corrective action provisions. Such alternative action can be renewed for successive 90-day periods. However, if the association continues to be critically undercapitalized on average during the quarter that begins 270 days after it first became critically undercapitalized, a receiver must be appointed, unless the OTS makes certain -32- findings with which the FDIC concurs and the Director of the OTS and the Chairman of the FDIC certify that the association is viable. In addition, an association that is critically undercapitalized is subject to more severe restrictions on its activities, and is prohibited, without prior approval of the FDIC from, among other things, entering into certain material transactions or paying interest on new or renewed liabilities at a rate that would significantly increase the association's weighted average cost of funds. When appropriate, the OTS can require corrective action by a savings association holding company under the ''prompt corrective action'' provisions of FDICIA. INSURANCE OF DEPOSIT ACCOUNTS. Savings associations are subject to a risk- based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the risk-based assessment system, which began in 1993, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the reporting period ending seven months before the assessment period. The three capital categories consist of (a) well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC also assigns an institution to one of the three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based upon a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%. Both the BIF and SAIF currently satisfy the reserve ratio requirement. If the FDIC determines that assessment rates should be increased, institutions in all risk categories could be affected. The FDIC has exercised this authority several times in the past and could raise insurance assessment rates in the future. If such action is taken, it could have an adverse effect upon the earnings of the Bank. The Funds Act of 1996 also amended the FDIA to recapitalize the SAIF and to expand the assessment base for the payments of FICO bonds. Beginning January 1, 1997, the assessment base included the deposits of both BIF and SAIF-insured institutions. Until December 31, 1999, or such earlier date on which the last savings association ceases to exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. For the semi-annual period beginning on July 1, 1997, the rates of assessment for FICO bonds are 0.0126% for BIF-assessable deposits and 0.0630% for SAIF- assessable deposits. For the semi-annual period beginning July 1, 1998, the rates of assessment for the FICO bonds is 0.0122% for BIF-assessable deposits and 0.0610 for SAIF-assessable deposits. PRIVACY PROTECTION. The OTS has recently adopted regulations implementing the privacy protection provisions of Gramm-Leach. The regulations, which require each financial institution to adopt procedures to protect customers' and customers' "non-public personal information" will become effective November 13, 2000, however, full compliance will be optinal until July 1, 2001. The Bank will be required to disclose our privacy policy, including identifying with whom we share "non-public personal information," to customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank will be required to provide its customers with the ability to "opt-out" of having us share their personal information with unaffiliated third parties. The Bank currently has a privacy protection policy in place and intends to review and amend this policy, if necessary for compliance with the regulations. We do not believe that these regulations will have a material impact on our business, financial condition or results of operations. Gramm-Leach also provides for the ability of each state to enact legislation that is more protective of consumers' personal information. Currently there are a number of privacy bills pending in the New York legislature. No action has been taken on any of these bills, and we cannot predict what impact, if any, these bills will have. INSURANCE ACTIVITIES. As a federal savings bank, we are generally permitted to engage in certain insurance activities through subsidiaries. In August, 2000, the OTS and the other federal banking agencies proposed regulations pursuant to Gramm-Leach which would prohibit depository institutions from conditioning the extension of credit to individuals upon either the purchase of an insurance product or annuity or an agreement by the consumer not to purchase an insurance product or annuity from an entity that is not affiliated with the depository institution. The proposed regulations would also require -33- prior disclosure of this prohibition to potential insurance product or annuity customers. We do not believe that these regulations, if adopted as proposed, would have a material impact on our operations. FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLBNY, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLBNY, is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or one-twentieth{ }of its advances (borrowings) from the FHLBNY. The Bank was in compliance with this requirement with an investment in FHLB stock at June 30, 2000, of $42.4 million. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance. The FHLBNY paid dividends on the capital stock of $2.6 million during the fiscal year ended June 30, 2000, $1.5 million during the fiscal year ended June 30, 1999, and $663,000 during the years ended June 30, 1998. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would likely also be reduced. Further, there can be no assurance that the impact of FDICIA and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (''FIRREA'') on the FHLBs will not also cause a decrease in the value of the FHLB stock held by the Bank. FEDERAL RESERVE SYSTEM. The Bank is subject to provisions of the FRA and the FRB's regulations pursuant to which depository institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained in the amount of 3% of the aggregate of transaction accounts up to $44.3 million. The amount of aggregate transaction accounts in excess of $44.3 million are currently subject to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 14%. The FRB regulations currently exempt $4.9 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the FRB at the end of each year. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve ''discount window,'' but FRB regulations require such institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. REGULATION OF HOLDING COMPANY The Company is a non-diversified unitary savings association holding company within the meaning of HOLA, as amended. As such, the Company is required to register with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, if any. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness, or stability of a subsidiary savings association. HOLA prohibits a savings association holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings association or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non- subsidiary savings association, a non-subsidiary holding company, or a non- subsidiary company engaged in activities other than those permitted by HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating an application by a holding company to acquire a savings association, the OTS must consider the financial and managerial resources and future prospects of the company and savings association involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, and competitive factors. As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to satisfy the QTL test. See ''- Regulation of Federal Savings Associations - QTL Test'' for a discussion of the QTL requirements. Upon any non-supervisory acquisition by the Company of another savings association or of a savings bank that meets the QTL test and is deemed to be a savings association by the OTS and that will be held as a separate subsidiary, the Company will become a multiple savings association holding company and will be subject to limitations on the types of business activities in which it can engage. HOLA limits the activities of a multiple savings association holding company and its non-insured association subsidiaries primarily to activities -34- permissible for bank holding companies under Section 4(c)(8) of the BHC Act, subject to the prior approval of the OTS, and to other activities authorized by OTS regulation. The OTS is prohibited from approving any acquisition that would result in a multiple savings association holding company controlling savings associations in more than one state, subject to two exceptions: an acquisition of a savings association in another state (a) in a supervisory transaction, and (b) pursuant to authority under the laws of the state of the association to be acquired that specifically permit such acquisitions. The conditions imposed upon interstate acquisitions by those states that have enacted authorizing legislation vary. Some states impose conditions of reciprocity, which have the effect of requiring that the laws of both the state in which the acquiring holding company is located (as determined by the location of its subsidiary savings association) and the state in which the association to be acquired is located, have each enacted legislation allowing its savings associations to be acquired by out-of-state holding companies on the condition that the laws of the other state authorize such transactions on terms no more restrictive than those imposed on the acquiror by the state of the target association. Some of these states also impose regional limitations, which restrict such acquisitions to states within a defined geographic region. Other states allow full nationwide banking without any condition of reciprocity. Some states do not authorize interstate acquisitions of savings associations. Transactions between the Company and the Bank, including any of its subsidiaries, and any of its affiliates are subject to various conditions and limitations. See '' Regulation of Federal Savings Associations - Transactions with Related Parties.'' The Bank must file an application with the OTS prior to any declaration of the payment of any dividends or other capital distributions to the Company. See ''- Regulation of Federal Savings Associations - Limitation on Capital Distributions.'' FEDERAL SECURITIES LAWS The Company's Common stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. ITEM 2 - PROPERTIES The Bank conducts its business through eighteen full-service offices, including six offices acquired from Conestoga in June, 1996, and five offices acquired from FIBC in January, 1999. The Bank's Main Office and headquarters is located at 209 Havemeyer Street, Brooklyn, New York. The Bank believes that its current facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Company.
Leased or Date Leased Lease Expiration Net Book Value Owned or Acquired Date at June 30, 2000 - ----------------------------------------------------------------------------------------------------------------------- ADMINISTRATIVE OFFICE Owned 1989 - $3,607,488 275 South 5{th} Street Brooklyn. New York 11211 MAIN OFFICE Owned 1906 - $1,005,424 209 Havemeyer Street Brooklyn, New York 11211 AVENUE M BRANCH Owned 1993 - $462,282 1600 Avenue M at East 16{th} Street Brooklyn, New York 11230 BAYSIDE BRANCH Leased 1974 May, 2004 $44,964 61-38 Springfield Boulevard Bayside, New York 11364 BELLMORE BRANCH Owned 1973 - $464,589 2412 Jerusalem Avenue Bellmore, New York 11710 BENSONHURST BRANCH Owned 1978 - $1,195,463 1545 86{th} Street Brooklyn, New York 11228 BRONX BRANCH (1) Leased 1965 October, 2006 $124,184 1931 Turnbull Avenue Bronx, New York 10473 FLUSHING BRANCH Leased 1974 November, 2013 $194,836 59-23 Main Street -35- Flushing, New York 11355 GREENPOINT BRANCH Owned 1995 - $872,597 814 Manhattan Avenue Brooklyn, NY 11222 HELP CENTER Leased 1998 May, 2003 $78,092 1379 Jerusalem Avenue Merrick, New York 11566 HILLCREST BRANCH Leased 1971 May, 2001 $35,317 176-47 Union Turnpike Flushing, New York 11366 JACKSON HEIGHTS BRANCH Leased 1990 August, 2005 $520,180 75-23 37{th} Avenue Jackson Heights, New York 11372 PROPERTIES (CONTINUED) KINGS HIGHWAY BRANCH Owned 1976 - $708,107 1902-1904 Kings Highway Brooklyn, New York 11229 LONG ISLAND CITY BRANCH Leased 1976 April, 2001 $64,418 45-14 46{th} Street Long Island City, New York 11104 MARINE PARK BRANCH Owned 1993 - $795,549 2172 Coyle Street Brooklyn, NY 11229 MERRICK BRANCH Owned 1960 - $220,067 1775 Merrick Avenue Merrick, New York 11566 PORT WASHINGTON BRANCH Owned 1971 - $371,312 1000 Port Washington Boulevard Port Washington, New York 11050 SUNNYSIDE BRANCH Owned 1962 - $2,769,619 42-25 Queens Boulevard Long Island City, New York 11104 WESTBURY BRANCH (2) 1994 - $477,788 622 Old Country Road Westbury, New York 11590 WHITESTONE BRANCH Owned 1979 - $758,743 24-44 Francis Lewis Boulevard Whitestone, New York 11357 The Bank has an option to extend this lease for an additional ten year term at fair market rent, as determined by the agreement of the parties or, if the parties cannot agree, by arbitration This branch office opened April 29, 1995. Building owned, land leased. Lease expires in October, 2003.
ITEM 3 - LEGAL PROCEEDINGS The Bank is not involved in any pending legal proceedings other than legal actions arising in the ordinary course of its business which, in the aggregate, involve amounts which are believed to be immaterial to the financial condition and results of operations of the Bank. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None PART II ITEM 5- MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS -36- Information regarding the market for the Company's common stock and related stockholder matters appears in the 2000 Annual Report under the caption "Market for the Company's Common Stock and Related Stockholder Matters," and is incorporated herein by this reference. ITEM 6. - SELECTED FINANCIAL DATA Information regarding selected financial data appears in the 2000 Annual Report to Shareholders for the year ended June 30, 2000 ("2000 Annual Report") under the caption "Financial Highlights," and is incorporated herein by this reference. ITEM 7. -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information regarding management's discussion and analysis of financial condition and results of operations appears in the 2000 Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is incorporated herein by this reference. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Information regarding market risk appears in the 2000 Annual Report to Shareholders under the caption "Discussion of Market Risk" and is incorporated herein by reference. ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information regarding financial statements and supplementary data, including the Independent Auditors' Report appears in the 2000 Annual Report under the captions: "Independent Auditors' Report," "Consolidated Statements of Financial Condition at June 30, 2000 and 1999," "Consolidated Statements of Operations for each of the years in the three year period ended June 30, 2000," "Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years in the three year period ended June 30, 2000," "Consolidated Statements of Cash Flows for each of the years in the three year period ended June 30,2000,"and "Notes to Consolidated Financial Statements," and is incorporated herein by this reference. ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information regarding directors and executive officers of the Company is presented under the headings "Proposal 1 - Election of Directors - General, "- Information as to Nominees and Continuing Directors,""- Nominees for Election as Director," "-Continuing Directors," "-Meetings and Committees of the Board of Directors," "-Executive Officers," "-Directors' Compensation," "-Executive Compensation," and "-Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on November 9, 2000 (the "Proxy Statement") which will be filed with the SEC within 120 days of June 30, 2000, and is incorporated herein by reference. ITEM 11. - EXECUTIVE COMPENSATION Information regarding executive and director compensation is presented under the headings "Election of Directors - Directors' Compensation," "- Executive Compensation," "-Summary Compensation Table," "Employment Agreements," "- Employee Retention Agreements," "-Employee Severance Compensation Plan," and "- Benefits," in the Proxy Statement and is incorporated herein by reference. ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -37- Information regarding security ownership of certain beneficial owners and management is included under the headings "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement and is incorporated herein by reference. ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding certain relationships and related transactions is included under the heading "Transactions with Certain Related Persons" in the Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements and schedules of the Company, and the independent auditors' report thereon are included in the Company's Annual Report to Shareholders for the year ended June 30, 2000, and are incorporated herein by reference: Independent Auditors' Report Consolidated Statements of Financial Condition at June 30, 2000 and 1999 Consolidated Statements of Operations for each of the years in the three year period ended June 30, 2000 Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years in the three year period ended June 30, 2000 Consolidated Statements of Cash Flows for each of the years in the three year period ended June 30,2000 Notes to Consolidated Financial Statements Quarterly Results of Operations (Unaudited) for each of the years in the two year period ended June 30, 2000 The remaining information appearing in the 2000 Annual Report is not deemed to be filed as a part of this report, except as expressly provided herein. 2. Financial Statement Schedules Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. (b) Reports on Form 8-K filed during the quarter ended June 30, 2000 On April 6, 2000, the Company filed a Current Report on Form 8-K regarding the issuance of its preliminary earnings for the quarter ended March 31, 2000. On April 12, 2000, the Company filed a Current Report on Form 8-K regarding the issuance of $25.0 million in subordinated notes. (c) Exhibits Required by Item 601 of Securities and Exchange Commission Regulation S-K: EXHIBIT NUMBER - ------------ 3.1 Certificate of Incorporation of Dime Community Bancshares, Inc.(1) -38- 3.2 Bylaws of Dime Community Bancshares, Inc. (1) 4.1 Certificate of Incorporation of Dime Community Bancshares, Inc. (See Exhibit 3.1 hereto). 4.2 Bylaws of Dime Community Bancshares, Inc. (See Exhibit 3.2 hereto). 4.3 Draft Stock Certificate of Dime Community Bancshares, Inc. (1) 4.4 Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock (2) 4.5 Rights Agreement, dated as of April 9, 1998, between Dime Community Bancorp, Inc. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (2) 4.6 Form of Rights Certificate (2) 10.1 Agreement and Plan of Merger, dated as of July 18, 1998, by and between Dime Community Bancshares, Inc. and Financial Bancorp, Inc.(3) 10.2 Amended and Restated Employment Agreement between The Dime Savings Bank of Williamsburgh and Vincent F. Palagiano (4) 10.3 Amended and Restated Employment Agreement between The Dime Savings Bank of Williamsburgh and Michael P. Devine (4) 10.4 Amended and Restated Employment Agreement between The Dime Savings Bank of Williamsburgh and Kenneth J. Mahon (4) 10.5 Employment Agreement between Dime Community Bancorp, Inc. and Vincent F. Palagiano (4) 10.6 Employment Agreement between Dime Community Bancorp, Inc. and Michael P. Devine (4) 10.7 Employment Agreement between Dime Community Bancorp, Inc. and Kenneth J. Mahon (4) 10.8 Form of Employee Retention Agreements by and among The Dime Savings Bank of Williamsburgh, Dime Community Bancorp, Inc. and certain executive officers (4) 10.9 The Benefit Maintenance Plan of Dime Community Bancorp, Inc. (5) 10.10 Severance Pay Plan of The Dime Savings Bank of Williamsburgh (4) 10.11 Retirement Plan for Board Members of Dime Community Bancorp, Inc. (5) 10.12 Dime Community Bancorp, Inc. Stock Option Plan for Outside Directors , Officers and Employees, as amended by amendments number 1 and 2.(5) 10.13 Recognition and Retention Plan for Outside Directors, Officers and Employees of Dime Community Bancorp, Inc., as amended by amendments number 1 and 2. (5) 10.14 Form of stock option agreement for Outside Directors under Dime Community Bancorp, Inc. 1996 Stock Option Plan for Outside Directors, Officers and Employees. (5) 10.15 Form of stock option agreement for officers and employees under Dime Community Bancorp, Inc. 1996 Stock Option Plan for Outside Directors,Officers and Employees (5) 10.16 Form of award notice for outside directors under the Recognition and Retention Plan for Outside Directors, Officers and Employees of Dime Community Bancorp, Inc. (5) 10.17 Form of award notice for officers and employees under the Recognition and Retention Plan for Outside Directors, Officers and Employees of Dime Community Bancorp, Inc. (5) 10.18 Financial Federal Savings Bank Incentive Savings Plan in RSI Retirement Trust. 10.19 Financial Federal Savings Bank Employee Stock Ownership Plan. 10.20 Option Conversion Certificates between Dime Community Bancshares, Inc. and each of Messrs: Russo, Segrete, Calamari, Latawiec, O'Gorman, and Ms. Swaya pursuant to Section 1.6(b) of the Agreement and Plan of Merger, dated as of July 18, 1998 by and between Dime Community Bancshares, Inc. and Financial Bancorp, Inc. 11.0 Statement Re: Computation of Per Share Earnings 13.1 2000 Annual Report to Shareholders 21.1 Subsidiaries of the Registrant 27.1 Financial Data Schedule (EDGAR filing only) (1) Incorporated by reference to the registrant's Annual Report of Form 10K for the fiscal year ended June 30, 1998, and filed on September 28, 1998. (2) Incorporated by reference to the registrant's Current Report on Form 8-K dated April 9, 1998, and filed on April 16, 1998. (3) Incorporated by reference to the registrant's Current Report on Form 8-K, dated July 18, 1998, and filed on July 20, 1998, and amended in July 27, 1998. -39- (4) Incorporated by reference to Exhibits to the Annual Report on Form 10-K for the fiscal year ended June 30, 1997 and filed on September 26, 1997. (5) Incorporated by reference to the registrant's Annual Report of Form 10K for the fiscal year ended June 30, 1997, and filed on September 26, 1997. (6) Incorporated by reference to the registrant's Current Report on Form 8-K, dated July 18, 1998, and filed on July 20, 1998, and amended in July 27, 1998. -40- SIGNATURES Pursuant to the requirements of Section 13 or 15 of the Securities Exchange Act of 1934, as amended, the Registrant certifies that it has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on September 28, 2000. Dime Community Bancshares, Inc. By: /S/ VINCENT F. PALAGIANO Vincent F. Palagiano Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE /S/ VINCENT F. PALAGIANO Vincent F. Palagiano Chairman of the Board and Chief September 28, 2000 Executive Officer (Principal executive officer) /S/ MICHAEL P. DEVINE Michael P. Devine President and Chief Operating September 28, 2000 Officer and Director /S/ KENNETH J. MAHON Kenneth J. Mahon Executive Vice President, and September 28, 2000 Chief Financial Officer (Principal financial officer) /S/ ANTHONY BERGAMO Anthony Bergamo Director September 28, 2000 /S/ GEORGE L. CLARK, JR. George L. Clark, Jr. Director September 28, 2000 /S/ STEVEN D. COHN Steven D. Cohn Director September 28, 2000 /S/ PATRICK E. CURTIN Patrick E. Curtin Director September 28, 2000
-40- /S/ JOSEPH H. FARRELL Director September 28, 2000 Joseph H. Farrell /S/ FRED P. FEHRENBACH Fred P. Fehrenbach Director September 28, 2000 /S/ JOHN J. FLYNN John J. Flynn Director September 28, 2000 /S/ MALCOLM T. KITSON Malcolm T. Kitson Director September 28, 2000 /S/ STANLEY MEISELS Stanley Meisels Director September 28, 2000 /S/ LOUIS V. VARONE Louis V. Varone Director September 28, 2000
-41- EX-11 2 0002.txt DIME COMMUNITY BANCORP, INC. AND SUBSIDIARY STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (In Thousands)
Fiscal Year Ended June 30, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ NUMERATOR: Net Income $22,374 $19,861 $13,098 - ------------------------------------------------------------------------------------------------------------------ DENOMINATOR: Average shares outstanding utilized in the calculation of basic earnings per share 11,256 10,951 11,001 - ------------------------------------------------------------------------------------------------------------------ Unvested shares of Recognition and Retention Plan 268 372 517 Common stock equivalents due to the dilutive effect of stock options 252 528 523 - ------------------------------------------------------------------------------------------------------------------ Average shares outstanding utilized in the calculation of diluted earnings per share 11,796 11,851 12,041 - ------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE: BASIC $1.98 $1.81 $1.19 - ------------------------------------------------------------------------------------------------------------------ DILUTED $1.90 $1.68 $1.09 - ------------------------------------------------------------------------------------------------------------------
EX-13 3 0003.txt FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Our consolidated financial and other data set forth below is derived in part from, and should be read in conjunction with our Consolidated Financial Statements and Notes thereto. Our earnings per share information for the fiscal year ended June 30, 1996 is not meaningful since the sale of our common stock and acquisition of Conestoga Bancorp, Inc. occurred on June 26, 1996. We acquired Financial Bancorp, Inc. on January 21, 1999. Certain amounts as of and for the years ended June 30, 1999, 1998, 1997 and 1996 have been reclassified to conform to their June 30, 2000 presentation.
At or for the fiscal years ended June 30, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL CONDITION DATA : Total assets $2,502,139 $2,247,615 $1,623,926 $1,315,026 $1,371,821 Loans, net 1,706,515 1,368,260 938,046 739,858 575,874 Mortgage-backed securities 442,690 525,667 410,589 308,525 209,941 Investment securities 181,033 206,611 174,551 168,596 392,450 Federal funds sold and other short-term 9,449 11,011 9,329 18,902 115,130 investments Goodwill 60,254 64,871 24,028 26,433 28,438 Deposits 1,219,148 1,238,933 1,034,085 963,395 950,114 Borrowings 1,014,027 731,660 360,106 139,543 27,708 Stockholders' equity 207,169 211,695 186,349 190,889 213,071 Tangible Stockholders' equity 149,464 145,562 159,558 162,361 184,188 SELECTED OPERATING DATA: Interest income $165,623 $135,390 $107,127 $89,533 $52,952 Interest expense on deposits and borrowings 98,820 77,219 56,935 41,564 23,516 Net interest income 66,803 58,171 50,192 47,969 29,436 Provision for losses 240 240 1,635 4,200 2,979 Net interest income after provision for loan losses 66,563 57,931 48,557 43,769 26,457 Non-interest income 5,043 6,438 6,344 3,630 1,042 Non-interest expense 34,015 30,493 29,937 27,492 14,021 Income before income tax expense and cumulative effect of changes in accounting principle 37,591 33,876 24,964 19,907 13,478 Income tax expense 15,217 14,015 11,866 7,591 6,181 Income before cumulative effect of changes in accounting principle 22,374 19,861 13,098 12,316 7,297 Cumulative effect on prior years of changing to a different method of accounting for postretirement benefits other than than pensions : - - - - (1,032) Net income $22,374 $19,861 $13,098 $12,316 $6,265 SELECTED FINANCIAL RATIOS AND OTHER DATA : FINANCIAL AND PERFORMANCE RATIOS: Return on average assets 0.93% 1.02% 0.90% 1.00% 1.07% Return on average stockholders' equity 10.65 10.34 7.06 5.94 9.07 Stockholders' equity to total assets at end of period 8.28 9.42 11.48 14.52 15.53 Tangible equity to tangible assets at end of period 6.11 6.67 9.99 12.62 13.72 Loans to deposits at end of period 141.18 111.66 91.88 77.91 61.43 Loans to earning assets at the end of the period 73.10 65.05 61.51 60.21 46.21 Average interest rate spread 2.48 2.61 2.97 3.37 3.85 Net interest margin 2.91 3.11 3.58 4.09 4.43 Average interest earning assets to average interest bearing liabilities 110.04 112.33 115.13 120.13 116.53 Non-interest expense to average assets 1.41 1.57 2.05 2.24 2.06 Core non-interest expense to average assets 1.24 1.37 1.73 1.87 2.06 Efficiency ratio 46.33 47.84 56.09 54.32 45.98 Core efficiency ratio 40.77 41.96 47.39 45.55 45.98 Effective tax rate 40.48 41.37 47.53 38.13 45.86 Dividend payout ratio 34.74 30.36 21.10 0.05 N/A PER SHARE DATA: Diluted Earnings per share $1.90 $1.68 $1.09 $0.95 N/A Cash dividends per share 0.66 0.51 0.23 0.045 $- Book value per share 17.76 16.57 15.30 14.58 14.65 Tangible book value per share 12.81 11.39 13.10 12.40 12.66
-1-
DOLLARS IN THOUSANDS,EXCEPT PER SHARE DATA 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- CASH EARNINGS INFORMATION: Cash earnings $31,911 $28,124 $20,944 $17,847 $6,472 Diluted cash earnings per share 2.71 2.37 1.75 1.37 N/A Cash return on average assets 1.33% 1.45% 1.44% 1.45% 1.10% Cash return on average stockholders' equity 15.19 14.65 11.29 8.61 9.32 Cash non-interest expense to average assets 1.07 1.14 1.41 1.63 2.03 Cash efficiency ratio 35.19 34.88 38.46 39.51 45.30 ASSET QUALITY RATIOS AND OTHER DATA: Net charge-offs $536 $201 $286 $1,286 $1,009 Total non-performing loans 4,421 3,001 884 3,190 6,551 Other real estate owned, net 381 866 825 1,697 1,946 Ratios: Non-performing loans to total loans 0.26% 0.22% 0.09% 0.43% 1.12% Non-performing loans and real estate owned to total assets 0.19 0.17 0.11 0.37 0.62 ALLOWANCE FOR LOAN LOSSES TO: Non-performing loans 334.43% 502.53% 1,365.95% 336.24% 119.25% Total loans 0.86 1.09 1.27 1.43 1.34 REGULATORY CAPITAL RATIOS: (Bank only) Tangible capital 5.76% 5.83% 8.32% 9.86% 9.49% Core capital 5.76 5.83 8.32 9.87 9.50 Risk-based capital 11.62 11.45 16.58 19.99 21.24 Earnings to Fixed Charges Ratios : Including interest on deposits 1.38X 1.44x 1.44x 1.48x 1.57x Excluding interest on deposits 1.70 2.03 2.79 7.59 14.37 FULL SERVICE BRANCHES 18 19 14 15 15 Loans, net, represents gross loans less net deferred loan fees and allowance for loan losses. Amount includes investment in Federal Home Loan Bank of New York capital stock. Excluding a non-recurring charge of $2.0 million related to the recapitalization of the Savings Association Insurance Fund (referred to as SAIF) of the Federal Deposit Insurance Corporation, non-interest expense was $25.5 million during the year ended June 30, 1997. Excluding non-recurring New York State and New York City income tax recoveries of $1.9 million and $1.0 million, respectively, income tax expense was $10.5 million during the fiscal year ended June 30, 1997. We adopted Statement of Financial Accounting Standards No. 106, ''Employers' Accounting for Postretirement Benefits Other Than Pensions'' effective July 1, 1995. We elected to record the full accumulated post retirement benefit obligation upon adoption. This resulted in a cumulative effect adjustment of $1,032,000 (after reduction for income taxes of $879,000) to apply retroactively to previous years the new method of accounting, which is shown in the consolidated statement of income for the year ended June 30, 1996. Excluding a non-recurring charge of $2.0 million relating to the recapitalization of the SAIF and the recovery of New York State and City deferred income taxes previously provided, net income would have been $10.5 million, and the return on average assets, return on average stockholders' equity, return on average tangible stockholders' equity, non-interest expense to average assets, the efficiency ratio, and earnings per share would have been 0.86%, 5.08%, 5.85%, 2.07%, 50.30% and $0.81, respectively, for the year ended June 30, 1997. With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods. Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios. Income before cumulative effect of changes in accounting principles is used to calculate return on average assets and return on average equity ratios. Average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities. The net interest margin represents net interest income as a percentage of average interest-earning assets. The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income, excluding any gains or losses on sales of assets. In calculating these ratios, amortization expense related to goodwill and the SAIF recapitalization charge are excluded from non-interest expense. In calculating these ratios, non-interest expense excludes expenses such as goodwill amortization and compensation expense related to our s stock benefit plans which are accretive to book value. Excluding the effects of the SAIF Special Assessment and the recovery of New York State and City deferred income taxes previously provided, cash return on average assets, cash return on average stockholders' equity, cash return on average tangible stockholders' equity, and cash earnings per share would have been 1.31%, 7.75%, 8.92%, and $1.24 for the year ended June 30, 1997. Total loans represents loans, net, plus the allowance for loan losses. For purposes of computing the ratios of earnings to fixed charges, earnings represent income before taxes, extraordinary item and cumulative effect of accounting changes plus fixed charges. Fixed charges represent total interest expense, including and excluding interest on deposits.
-2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Dime Community Bancshares, Inc.'s (hereafter referred to as the "Company," "us" and "we") primary business is the operation of its wholly owned subsidiary, The Dime Savings Bank of Williamsburgh (hereafter referred to as the "Bank"). Our principal business has been, and continues to be, gathering deposits from customers within our market area, and investing those deposits primarily in multi-family and one-to-four family residential mortgage loans, mortgage-backed securities, and obligations of the U.S. Government and Government Sponsored Entities. Our revenues are derived principally from interest on loan and securities portfolios. Our primary sources of funds are: deposits; loan amortization, prepayments and maturities; amortization, prepayments and maturities of mortgage-backed and investment securities; borrowed funds; and, to a lesser extent, occasional sales of investments and mortgage-backed securities. Our consolidated results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on our interest-earning assets, such as loans and securities, and the interest expense paid on our interest-bearing liabilities, such as deposits. We also generate non-interest income such as service charges and other fees. Our non-interest expenses primarily consist of employee compensation and benefits, occupancy expenses, federal deposit insurance premiums, net costs of other real estate owned, data processing fees, amortization of goodwill associated with purchase acquisition accounting and other operating expenses. Our results of operations are also significantly affected by general economic and competitive conditions (particularly changes in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies. MANAGEMENT STRATEGY Our primary strategy is to increase our household and deposit market shares in the communities we serve, either through acquisitions or purchases of deposits, or by direct marketing, and to increase our product and service utilization for each individual depositor. In addition, our primary strategy includes the origination of, and investment in, mortgage loans, with an emphasis on multi- family loans. Multi-family lending is a significant business for us and reflects the fact that much of the housing in our primary lending area is multi-family housing. We also strive to provide a stable source of liquidity and earnings through the purchase of investment grade securities; seek to maintain our asset quality for loans and other investments; and use appropriate portfolio and asset/liability management techniques in an effort to manage the effects of interest rate volatility on our profitability and capital. LOAN ORIGINATIONS WITH AN EMPHASIS ON MULTI-FAMILY LENDING. We believe that multi-family loans provide advantages as portfolio investments. First, they provide a higher yield than single-family loans or investment securities of comparable maturities or terms to repricing. Second, our market area generally has provided a stable flow of new and refinanced multi-family loan originations. In addition to our emphasis on multi-family lending, we will continue to market and originate residential first mortgage loans secured primarily by owner-occupied, one-to-four family residences, including condominiums and cooperative apartments. Third, origination and processing costs for our multi-family loans are lower per thousand dollars of originations than comparable single-family costs. In addition, to address the higher credit risk associated with multi-family lending, we have developed what we believe are reliable underwriting standards for loan applications in order to maintain a consistent credit quality for new loans. FRANCHISE EXPANSION. On January 21, 1999, we completed the acquisition of Financial Bancorp, Inc. (hereafter referred to as "FIBC"), the holding company for Financial Federal Savings Bank, F.S.B. (hereafter referred to as the "FIBC Acquisition"). The total consideration paid to FIBC stockholders, in the form of cash or our common stock, was $66.8 million and was comprised of $34.5 million in cash and 1,504,704 shares of our common stock. Our operating results for the fiscal year ended June 30, 1999 reflect the addition of earnings from the acquisition of FIBC for the period January 22, 1999 through June 30, 1999. The FIBC Acquisition was accounted for as a purchase transaction. On June 26, 1996, we completed the acquisition of Conestoga Bancorp, Inc. (hereafter referred to as "Conestoga") resulting in the merger of Conestoga's wholly owned subsidiary, Pioneer Savings Bank, F.S.B. (hereafter referred to as the "Conestoga Acquisition"). The Conestoga Acquisition was accounted for in the financial statements using the purchase method of accounting. Shareholders of Conestoga were paid approximately $101.3 million in cash. Since the Conestoga Acquisition occurred on June 26, 1996, its impact upon our consolidated results of operations for the fiscal year ended June 30, 1996 was minimal. -3- We continue to evaluate acquisition and other growth opportunities as they become available. Additionally, we plan to supplement this strategy with direct marketing efforts designed to increase customer household and/or deposit balances and the number of our services used per household among our existing customers. CAPITAL LEVERAGE STRATEGY. As a result of the initial public offering in June 1996, our capital level significantly exceeded all regulatory requirements. A portion of the "excess" capital generated by the initial public offering has been deployed through the use of a capital leverage strategy whereby we invest in high quality mortgage-backed securities ("leverage assets") funded by short- term borrowings from various third party lenders. The capital leverage strategy generates additional earnings for us by virtue of a positive interest rate spread between the yield on the leverage assets and the cost of the borrowings. Since the average term to maturity of the leverage assets exceeds that of the borrowings used to fund their purchase, the net interest income earned on the leverage strategy would be expected to decline in a rising interest rate environment. See "Discussion of Market Risk." To date, the capital leverage strategy has been undertaken in accordance with limits established by the Board of Directors, aimed at enhancing profitability under moderate levels of interest rate exposure. The assets under the capital leverage program approximate $445.8 million, $489.6 million and $282.9 million, respectively, at June 30, 2000, 1999 and 1998. During the fiscal year ended June 30, 2000, we reduced our level of new capital leverage strategy activity in response to reduced pre-tax interest rate spreads on these transactions. In addition to the capital leverage strategy, we undertook additional medium- term borrowings of $305.0 million, $146.5 million and $40.3 million from the Federal Home Loan Bank of New York (referred to as the FHLBNY) during the years ended June 30, 2000, 1999 and 1998 in order to fund multi-family and underlying cooperative loan originations and other operations. We earn a net interest rate spread between the yield on the multi-family and underlying cooperative loans and the cost of the borrowings. In addition, the medium-term maturities on a portion of the underlying borrowings have helped us reduce our exposure to interest rate risk. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of funds are deposits, proceeds from principal and interest payments on loans, mortgage-backed securities and investments, borrowings, and, to a lesser extent, proceeds from the occasional sale of investment and mortgage-backed securities. While maturities and scheduled amortization of loans and investments are a predictable source of funds, deposit flows, mortgage prepayments and securities sales are influenced by interest rates, economic conditions and competition. Our primary investing activities are the origination of multi-family and single-family mortgage loans, and the purchase of mortgage-backed and other securities. During the year ended June 30, 2000, we originated $495.4 million in total loans, compared to $478.1 million during the year ended June 30, 1999. Purchases of mortgage-backed and other securities totaled $219.7 million for the year ended June 30, 2000 compared to $410.4 million for the year ended June 30, 1999, as a reduction in the level of additional capital leverage transactions during the fiscal year ended June 30, 2000, resulted in a reduction in mortgage-backed securities purchases. These activities were funded primarily by principal repayments on loans and mortgage-backed securities, maturities of investment securities, and borrowings by means of repurchase agreements and FHLBNY Advances. Principal repayments on real estate loans and mortgage-backed securities totaled $235.7 million during the year ended June 30, 2000, compared to $315.6 million for the year ended June 30, 1999. Maturities of investment securities totaled $136.1 million during the fiscal year ended June 30, 2000, and $90.8 million during the fiscal year ended June 30, 1999. Loan and security sales, which totaled $108.3 million and $16.9 million during the fiscal years ended June 30, 2000 and 1999, provided additional cash flows. The increase in sales activity during the year ended June 30, 2000, reflected a re-positioning of our investment and mortgage-backed securities portfolios to create a closer interest rate repricing match between these assets and their underlying liabilities. This increase also reflected added sales activity during the quarter ended December 31, 1999, intended to increase our overall liquidity at December 31, 1999 due to potential customer liquidity concerns regarding the Year 2000 computer concerns. See "Discussion of Market Risk." Deposits decreased $19.8 million during the year ended June 30, 2000. This decrease in deposits primarily reflects the sale of $18.0 million of deposits formerly housed at our Gates Avenue, Brooklyn branch in November, 1999. The deposit decline during the fiscal year ended June 30, 2000 also reflects runoff of maturing higher cost certificates of deposits gathered during deposit rate promotions which occurred and ended during the fiscal year ended June 30, 1998. Deposits increased $204.8 million during the fiscal year ended June 30, 1999, due primarily to the acquisition of $230.7 million in deposits from FIBC. Deposit flows are affected by the level of interest rates, the interest rates and products offered by local competitors, and other factors. Certificates of deposit scheduled to mature in one year or less from June 30, 2000, -4- totaled $414.9 million. Based upon our current pricing strategy and deposit retention experience, we believe that we will retain a significant portion of such deposits. Net borrowings increased $257.4 million during the fiscal year ended June 30, 2000, with all of the growth occurring in medium-term FHLBNY advances, which were utilized to fund loan originations during the period. Borrowings increased $371.6 million during the fiscal year ended June 30, 1999, with the majority of this growth experienced in securities sold under agreement to repurchase ("Repo Borrowings"), consistent with our capital leverage strategy. Stockholders' equity decreased $4.5 million during the fiscal year ended June 30, 2000. This decrease resulted primarily from repurchases of common stock into treasury of $19.3 million, cash dividends paid of $7.7 million during the period and an increase in the accumulated other comprehensive loss of $3.0 million related to the decline in market value of investment and mortgage backed securities available for sale. Offsetting these decreases, was net income of $22.4 million and stock benefit plan amortization of $4.1 million, related to vesting of shares in our ESOP and RRP benefit plans. During the year ended June 30, 2000, we paid four cash dividends totaling $7.7 million, or $0.66 per outstanding common share on the respective dates of record, compared to $5.9 million, or $0.51 per outstanding common share on the respective dates of record during the fiscal year ended June 30, 1999. On July 20, 2000, we declared a cash dividend of $0.19 per common share to all shareholders of record on July 28, 2000. This dividend was paid on August 8, 2000. In addition, in April, 2000, we issued $25.0 million in subordinated notes payable, with a stated annual coupon rate of 9.25%. The proceeds of the issuance are intended to fund general corporate activities including cash dividend payments and stock repurchases. However, the provisions of the issuance require that we first meet the interest obligation on these notes, which approximates $2.3 million annually, prior to our authorization and payment of common stock cash dividends. As of June 30, 2000, we had 133,858 shares remaining to be repurchased under our sixth stock repurchase program, which was initiated in April, 2000. On July 20, 2000, we authorized a Seventh Repurchase Program, which allows for the repurchase of up to an additional 576,516 shares of our common stock. All shares acquired for the Sixth and Seventh Repurchase Programs will be purchased in open market or privately negotiated transactions at the discretion of management and placed into treasury. No deadline has been established for the completion of the Sixth or Seventh Repurchase Programs. Based upon the closing market price of $16.25 per share for our common stock as of June 30, 2000, we would utilize approximately $11.5 million in funds in order to repurchase all of the remaining authorized shares under the Sixth and Seventh Repurchase Program. The Bank is required to maintain a minimum average daily balance of liquid assets as a percentage of net withdrawable deposit accounts plus short-term borrowings by Office of Thrift Supervision ("OTS") regulations. The minimum required liquidity ratio is currently 4.0%. At June 30, 2000, the Bank's liquidity ratio was 12.07%. The levels of the Bank's short-term liquid assets are dependent on its operating, financing and investing activities during any given period. The Bank monitors its liquidity position on a daily basis. Excess short-term liquidity is invested in overnight federal funds sales and various money market investments. In the event that it should require funds beyond its ability to generate them internally, additional sources of funds are available through the use of the Bank's $724.8 million borrowing limit at the FHLBNY. At June 30, 2000, the Bank had $572.5 million in short- and medium-term advances outstanding at the FHLBNY. The Bank is also subject to minimum regulatory capital requirements imposed by the OTS, which, as a general matter, are based on the amount and composition of its assets. At June 30, 2000, the Bank was in compliance with all applicable regulatory capital requirements. Tangible capital totaled $136.8 million, or 5.76% of total tangible assets, compared to a 1.50% regulatory requirement; leverage capital, at 5.76% of adjusted assets, exceeded the required 4.0% regulatory minimum, and total risk-based capital, at 11.62% of risk weighted assets, exceeded the 8.0% regulatory minimum. In addition, at June 30, 2000, the Bank was considered "well-capitalized" for all regulatory purposes. DISCUSSION OF MARKET RISK As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of our assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. During the years ended June 30, 2000, 1999 and 1998, we operated under a challenging interest rate environment, which features little difference between rates offered on short- term and long-term investments. Under this "flat yield curve environment," financial institutions often experience both increased interest rate competition related to loan originations, and above-average prepayment activities related to mortgage-backed investments, both of which adversely impact long-term -5- profitability. The flat yield curve environment experienced during the 1998, 1999 and 2000 fiscal years was a primary factor in the continued reduction of our interest rate spread. Since a substantial majority of our interest-earning assets and interest- bearing liabilities are located at the Bank, virtually all of our interest rate risk exposure lies at the Bank level. As a result, all of our significant interest rate risk procedures are performed at the Bank level. Based upon our nature of operations, we are not subject to foreign currency exchange or commodity price risk. Our real estate loan portfolio, concentrated primarily within New York City, is subject to risks associated with the local economy. See "Asset Quality." In addition, we do not own any trading assets, nor did we engage in any hedging transactions utilizing derivative instruments (such as interest rate swaps and caps) during the fiscal year ended June 30, 2000, and did not have any such hedging transactions in place at June 30, 2000. In the future, we may, with Board approval, engage in hedging transactions utilizing derivative instruments. Our interest rate risk management strategy is designed to stabilize net interest income and preserve capital over a broad range of interest rate movements and has three primary components: ASSETS. Our largest single asset type is the adjustable-rate multi-family real estate loan. Multi-family loans typically carry a shorter average term to maturity than one-to-four family residential loans, thus significantly reducing the overall level of interest rate risk. Approximately 84.5% of multi-family loans originated during the year ended June 30, 2000, were adjustable rate, with repricing typically occurring after five or seven years, compared to 75% during the previous year. In addition, we have sought to include various types of adjustable-rate single-family (including cooperative apartment) whole loans and adjustable and floating-rate investment securities in our portfolio, which generally have repricing terms of three years or less. At June 30, 2000, adjustable-rate whole loans totaled $1.21 billion, or 48.2% of total assets, and adjustable-rate investment securities (CMO's, REMIC's, mortgage-backed securities issued by GSEs and other securities) totaled $148.9 million, or 6.0% of total assets. At June 30, 1999, adjustable-rate whole loans totaled $821.3 million, or 36.5% of total assets, and adjustable-rate securities totaled $149.3 million, or 6.6% of total assets. DEPOSIT LIABILITIES. As a traditional community-based savings bank we are largely dependent upon our base of competitively priced core deposits (consisting of all deposits except certificates of deposit) to provide stability on the liability side of the balance sheet. We have retained many loyal customers over the years through a combination of quality service, convenience, and a stable and experienced staff. Core deposits, at June 30, 2000, were $601.0 million, or 49.3% of total deposits. The balance of certificates of deposit as of June 30, 2000 was $618.2 million, or 50.7% of total deposits, of which $414.9 million, or 67.1% mature within one year. Depending on market conditions, we generally price our certificates of deposit in an effort to encourage the extension of the average maturities of deposit liabilities beyond one year. During the fiscal years ended June 30, 2000 and 1999, we experienced significant runoff in higher-cost certificate of deposit accounts which related to specific rate promotions offered in previous periods. Excluding this decrease, we experienced a strong retention rate on maturing certificates of deposit during both the fiscal years ended June 30, 2000 and 1999. WHOLESALE FUNDS. In June, 2000, we received approval from our Board to accept brokered deposits as a source of funds, although we did not accept any such deposits during the fiscal year ended June 30, 2000. The Bank is a member of the FHLBNY which provides it with a borrowing line equal to $724.8 million. The Bank borrows from the FHLBNY for various purposes. At June 30, 2000, the Bank had outstanding advances of $572.5 million with the FHLBNY. GAP ANALYSIS We actively manage interest rate risk through the use of a simulation model which measures the sensitivity of future net interest income and the net portfolio value to changes in interest rates. In addition, we regularly monitor interest rate sensitivity through GAP Analysis, which measures the terms to maturity or next repricing date of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of our consolidated interest-earning assets and interest-bearing liabilities, outstanding at June 30, 2000, which are anticipated, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown repricing or maturing during a particular period reflect the earlier of term to repricing or term to repayment of the asset or liability. The table is intended to provide an approximation of the projected repricing of assets and liabilities at June 30, 2000 on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. For purposes of presentation in the following table, we utilized our historical deposit decay rate experience, which for savings accounts was 13% in the one year or less category. For NOW and Super NOW -6- accounts and money market accounts, we utilized the most recent decay rates published by the OTS, which, in the one year or less category, were 37% and 79%, respectively. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated early payoffs of adjustable- and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. The amounts attributable to mortgage-backed securities reflect principal balances expected to be redeployed and/or repriced as a result of anticipated principal repayments, and as a result of contractual rate adjustments on adjustable-rate mortgage-backed securities.
More than More than More than Non- 3 Months 3 Months 6 Months to 1 Year to 3 Years to More than interest At June 30, 2000 or Less to 6 Months 1 Year 3 Years 5 Years to 5 Years bearing Total - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING (DOLLARS IN THOUSANDS) ASSETS Mortgages and other loans $53,590 $52,600 $105,200 $353,579 $416,497 $739,835 $- $1,721,300 Investment securities 1,285 3,993 16,131 52,919 47,663 16,619 - 138,610 Mortgage-backed securities 66,653 37,879 75,758 57,395 42,795 163,211 - 442,690 Federal funds sold 7,488 1,961 - - - - - 9,449 FHLB capital stock 42,423 - - - - - - 42,423 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 170,439 96,433 197,088 463,893 506,955 919,665 - 2,354,472 LESS: Allowance for loan losses - - - - - - (14,785) (14,785) - ---------------------------------------------------------------------------------------------------------------------------------- Net interest-earning assets 170,439 96,433 197,088 463,893 506,955 919,665 (14,785) 2,339,687 Non-interest-earning assets - - - - - - 162,452 162,452 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $170,439 $96,433 $197,088 $463,893 $506,955 $919,665 $147,667 $2,502,139 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Savings Accounts $11,933 $12,719 $22,004 $74,992 $57,800 $194,324 $- $373,772 NOW and Super NOW accounts 2,478 2,249 3,893 8,844 2,737 6,586 - 26,787 Money market accounts 28,848 23,151 33,487 28,807 15,109 16,664 - 146,066 Certificates of Deposit 131,865 99,033 184,040 181,179 21,879 169 - 618,165 Borrowed funds 383,319 80,842 30,132 265,029 109,664 120,041 - 989,027 Subordinated Notes - - - - - 25,000 - 25,000 Interest-bearing escrow - - - - - 3,392 - 3,392 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest- bearing liabilities 558,443 217,994 273,556 558,851 207,189 366,176 - 2,182,209 Checking accounts - - - - - - 54,358 54,358 Other non-interest bearing liabilities - - - - - - 58,403 58,403 Stockholders' equity - - - - - - 207,169 207,169 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $558,443 $217,994 $273,556 $558,851 $207,189 $366,176 $319,930 $2,502,139 - ---------------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap per period $(388,005) $(121,562) $(76,468) $(94,958) $299,766 $553,489 - - ------------------------------------------------------------------------------------------------------------------ Cumulative interest sensitivity gap $(388,005) $(509,566) $(586,034) $(680,992) $(381,226) $172,263 - - ------------------------------------------------------------------------------------------------------------------ Cumulative interest sensitivity gap as a percent of total assets (15.51)% (20.37)% (23.42)% (27.22)% (15.24)% 6.88% - Cumulative total interest- earning assets as a percent of cumulative total interest bearing liabilities 30.52% 34.37% 44.19% 57.67% 79.01% 107.89% - Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as result of anticipated pre-payments, scheduled rate adjustments, and contractual maturities. Based upon historical repayment experience.
-7- Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate with changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features, like annual and lifetime rate caps, which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in the table. Finally, the ability of certain borrowers to make scheduled payments on their adjustable-rate loans may decrease in the event of an interest rate increase. Our balance sheet is primarily comprised of assets which mature or reprice within five years, with a significant portion maturing or repricing within one year. In addition, our deposit base is comprised primarily of savings accounts, and certificates of deposit with maturities of three years or less. At June 30, 2000, our interest-bearing liabilities maturing or repricing within one year totaled $1.05 billion, while interest-earning assets maturing or repricing within one year totaled $464.0 million, resulting in a negative one- year interest sensitivity gap of $586.0 million, or 23.4% of total assets. The increase in the level of the negative one-year interest sensitivity gap resulted from an increase in the proportion of borrowings maturing or callable within one year or less. In comparison, at June 30, 1999, we had a negative one-year interest sensitivity gap of $366.8 million, or 16.3% of total assets. Under interest rate scenarios other than that which existed on June 30, 2000, the gap ratio for our assets and liabilities could differ substantially based upon different assumptions about how core deposit decay rates and loan prepayments would change. For example, our interest rate risk management model assumes that in a rising rate scenario, by paying competitive rates on non-core deposits, a large share of core deposits will transfer to certificates of deposit and be retained, although at higher cost to us. Also, loan and mortgage-backed security prepayment rates would be expected to slow, as borrowers postpone property sales or loan refinancings until rates again decline. INTEREST RATE RISK EXPOSURE COMPLIANCE Increases in the level of interest rates also may adversely affect the fair value of our securities and other interest earning assets. Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of our interest-earning assets, which could adversely affect our results of operations if they were to be sold, or, in the case of interest- earning assets classified as available for sale, reduce our stockholders' equity, if retained. Under Generally Accepted Accounting Principles ("GAAP"), changes in the unrealized gains and losses, net of taxes, on securities classified as available for sale will be reflected in our stockholders' equity through other comprehensive income. As of June 30, 2000, our securities portfolio included $550.5 million in securities classified as available for sale, which possess a gross unrealized loss of $11.7 million. Accordingly, due to the magnitude of our holdings of securities available for sale, changes in interest rates could produce significant changes in the value of such securities and could produce significant fluctuations in our stockholders' equity through other comprehensive income. We do not own any trading assets. On a quarterly basis, an interest rate risk exposure compliance report is prepared and presented to our Board of Directors. This report, prepared in accordance with Thrift Bulletin #13a issued by the OTS, presents an analysis of the net portfolio value resulting from an increase or decrease in the level of interest rates. The calculated estimates of net portfolio value are compared to current limits established by management and approved by the Board of Directors. The following is a summary of the Bank's interest rate exposure report as of June 30, 2000: -8- Projected Net Portfolio Value ---------------------------------------- Calculated as of Limit June 30, 2000 - ------------------------------------------------------------------------ Change in Interest Rate - - 300 Basis Points 7.00% 11.47% - - 200 Basis Points 6.50 11.11 - - 100 Basis Points 6.00 10.57 Flat Rate 5.50 9.56 + 100 Basis Points 5.00 8.26 + 200 Basis Points 4.50 6.82 + 300 Basis Points 4.00 5.30 The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flows from principal repayments on loans and mortgage-backed securities and/or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In addition, the limits stated above do not necessarily represent the level of change under which we would undertake specific measures to realign our portfolio in order to reduce the projected level of change. ASSET QUALITY Our real estate loan servicing policies and procedures require that we initiate contact with a delinquent borrower as soon as possible after a payment is ten days late. Generally, the policy calls for a late notice to be sent ten days after the due date of the payment. If payment has not been received within 30 days of the due date, a letter is sent to the borrower. Thereafter, periodic letters and phone calls are placed to the borrower until payment is received. In addition, our policy calls for the cessation of interest accruals on loans delinquent 90 days or more. When contact is made with the borrower at any time prior to foreclosure, we will attempt to obtain the full payment due, or work out a repayment schedule with the borrower to avoid foreclosure. Generally, we initiate foreclosure proceedings when a loan is 90 days past due. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real estate property securing the loan is generally either sold at foreclosure or as soon thereafter as practicable. Management reviews delinquent loans on a periodic basis and reports monthly to the Board of Directors regarding the status of all delinquent and non-accrual loans in our portfolio. We retain outside counsel experienced in foreclosure and bankruptcy procedures to institute foreclosure and other actions on our delinquent loans. As soon as practicable after initiating foreclosure proceedings on a loan, we prepare an estimate of the fair value of the underlying collateral. It is also our general policy to dispose of properties acquired through foreclosure or deeds in lieu thereof as quickly and as prudently as possible in consideration of market conditions, the physical condition of the property, and any other mitigating conditions. Non-performing loans totaled $4.4 million at June 30, 2000, as compared to $3.0 million at June 30, 1999. The increase in non-performing loans related primarily to the addition of one multi-family and underlying cooperative loan with an aggregate principal amount of $1.6 million in June, 2000. We had 25 loans totaling $754,000 delinquent 60-89 days at June 30, 2000, as compared to 23 such delinquent loans totaling $819,000 at June 30, 1999. Under GAAP, we are required to account for certain loan modifications or restructurings as "troubled-debt restructurings.'' In general, the modification or restructuring of a debt constitutes a troubled-debt restructuring if we, for economic or legal reasons related to the borrower's financial difficulties, grant a concession to the borrower that we would not otherwise consider. We had one loan classified as troubled-debt restructuring at June 30, 2000, totaling $700,000, which is on accrual status as it has been performing in accordance with the restructuring terms for over one year. The current regulations of the Office of Thrift Supervision require that troubled-debt restructurings remain classified as such until either the loan is repaid or returns to its original terms. We did not have any new troubled-debt restructurings during the fiscal year ended June 30, 2000. Troubled-debt restructurings totaled $1.3 million at June 30, 1999, consisting of two loans. One troubled-debt restructuring totaling $590,000 was paid-in-full during the fiscal year ended June 30, 2000. -9- SFAS 114 provides guidelines for determining and measuring impairment in loans. For each loan that we determine to be impaired, impairment is measured by the amount the carrying balance of the loan, including all accrued interest, exceeds the estimate of fair value. A specific reserve is established within the allowance for loan losses. Generally, we consider non-performing loans to be impaired loans. The recorded investment in loans deemed impaired was approximately $2.6 million as of June 30, 2000, consisting of three loans, compared to $1.6 million at June 30, 1999, consisting of six loans. The average balance of impaired loans was $1.5 million for the year ended June 30, 2000 compared to $2.3 million for the year ended June 30, 1999. At June 30, 2000, reserves totaling $130,000 have been allocated within the allowance for loan losses for impaired loans. At June 30, 2000, $1.8 million of one-to-four family, cooperative apartment and consumer loans on nonaccrual status are not deemed impaired. All of these loans have outstanding balances less than $227,000, and are considered a homogeneous loan pool which are not required to be evaluated for impairment. See "Notes to Consolidated Financial Statements" for a further discussion of impaired loans. The balance of other real estate owned ("OREO")was $381,000, consisting of 7 properties, at June 30, 2000 compared to $866,000, consisting of 13 properties, at June 30, 1999. During the year ended June 30, 2000, total additions to OREO were $429,000. Offsetting these additions, were OREO sales and charge-offs of $1.0 million during the year ended June 30, 2000. All charge-offs were recorded against the allowance for losses on real estate owned, which was $45,000 as of June 30, 2000. The following table sets forth information regarding our non-performing loans, non-performing assets, impaired loans and troubled-debt restructurings at the dates indicated.
At Year Ended June 30, 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Non-performing loans: One-to-four family $1,769 $1,577 $471 $1,123 $1,149 Multi-family and underlying cooperative 2,591 1,248 236 1,613 4,734 Cooperative apartment 54 133 133 415 668 Other 7 43 44 39 - - --------------------------------------------------------------------------------------------------------------------------------- Total non-performing loans 4,421 3,001 884 3,190 6,551 Other Real Estate Owned 381 866 825 1,697 1,946 - --------------------------------------------------------------------------------------------------------------------------------- Total non-performing assets $4,802 $3,867 $1,709 $4,887 $8,497 ================================================================================================================================= Troubled-debt restructurings $700 $1,290 $3,971 $4,671 $4,671 Total non-performing assets and troubled-debt restructurings $5,502 $5,157 $5,680 $9,558 $13,168 Impaired loans $2,591 $1,563 $3,136 $4,294 $7,419 RATIOS: Total non-performing loans to total loans 0.26% 0.22% 0.09% 0.43% 1.12% Total non-performing loans and troubled-debt restructurings to total loans 0.30 0.31 0.51 1.05 1.92 Total non-performing assets to total assets 0.19 0.17 0.11 0.37 0.62 Total non-performing assets and troubled- debt restructurings to total assets 0.22 0.23 0.35 0.73 0.96
ANALYSIS OF NET INTEREST INCOME Our profitability, like that of most financial institutions, is dependent to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends upon the relative amounts of interest- earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following table sets forth certain information relating to our consolidated statements of operations for the years ended June 30, 2000, 1999 and 1998, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields and costs include fees which are considered adjustments to yields. -10-
For the years ended June 30, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- AVERAGE Average Average AVERAGE YIELD/ Average Yield/ Average Yield/ BALANCE INTEREST COST Balance Interest Cost Balance Interest Cost - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) ASSETS: Interest-earning assets Real estate loans $1,556,202 $118,436 7.61% $1,158,549 $91,569 7.90% $837,755 $69,824 8.33% Other loans 7,454 616 8.26 6,433 558 8.67 5,393 487 9.03 Investment securities 155,262 9,715 6.26 176,205 10,654 6.05 164,265 10,798 6.57 Mortgage-backed securities 473,364 30,750 6.50 478,166 29,683 6.21 349,910 23,463 6.71 Federal funds sold 101,521 6,106 6.01 52,900 2,926 5.53 44,773 1,892 5.32 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest- earning assets 2,293,803 165,623 7.22 1,872,253 $135,390 7.24% 1,402,096 $106,464 7.65% - ---------------------------------------------------------------------------------------------------------------------------------- Non-interest earning assets 112,700 73,625 56,775 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $2,406,503 $1,945,878 $1,458,871 ================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: NOW, Super NOW and Money market accounts $124,188 $4,409 3.55 $62,463 $1,542 2.47% $48,556 $1,131 2.33% Savings accounts 390,498 7,965 2.04 372,050 7,814 2.10 342,762 7,628 2.26 Certificates of deposit 642,017 32,662 5.09 648,776 35,061 5.40 594,098 34,174 5.75 Borrowed funds 927,808 53,784 5.80 583,490 32,802 5.62 232,385 13,908 5.98 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest- bearing liabilities 2,084,511 98,820 4.74% 1,666,779 $77,219 4.63% 1,217,801 $56,935 4.68% - ---------------------------------------------------------------------------------------------------------------------------------- Checking accounts 76,452 51,496 31,457 Other non-interest- bearing liabilities 35,435 35,603 24,097 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 2,196,398 1,753,878 1,273,355 Stockholders' equity 210,105 192,000 185,516 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,406,503 1,945,878 $1,458,871 ================================================================================================================================== Net interest income/ interest rate spread $66,803 2.48% $58,171 2.61% $50,192 2.97% ================================================================================================================================== Net interest-earning assets/net interest margin $209,292 2.91% $205,474 3.11% $184,295 3.58% ================================================================================================================================== Ratio of interest- earning assets to interest-bearing liabilities 110.04% 112.33% 115.13% ================================================================================================================================== In computing the average balance of loans, non-accrual loans have been included. Interest income includes loan servicing fees as defined under SFAS 91. Includes interest bearing deposits in other banks and FHLB stock. Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-earning assets.
-11- RATE/VOLUME ANALYSIS Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities and changes in the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) variances attributable to changes in volume (change in volume multiplied by prior rate), (ii) variances attributable to rate (changes in rate multiplied by prior volume), and (iii) the net change. Variances attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to the volume and the changes due to rate.
YEAR ENDED Year Ended Year Ended JUNE 30, 2000 June 30, 1999 June 30, 1998 COMPARED TO Compared to Compared to YEAR ENDED Year Ended Year Ended JUNE 30, 1999 June 30, 1998 June 30, 1997 INCREASE/(DECREASE) Increase/(Decrease) Increase/(Decrease) DUE TO Due to Due to - --------------------------------------------------------------------------------------------------------------------------------- VOLUME RATE NET Volume Rate Net Volume Rate Net - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) INTEREST-EARNING ASSETS: Real estate loans $30,829 $(3,962) $26,867 $26,042 $(4,297) $21,745 $16,466 $(1,607) $14,859 Other loans 87 (29) 58 92 (21) 71 (5) 32 27 Investment securities (1,288) 349 (939) 748 (892) (144) (3,317) 462 (2,855) Mortgage-backed securities (309) 1,376 1,067 8,285 (2,065) 6,220 5,973 (215) 5,758 Other 2,808 373 3,181 458 (87) 371 (199) 4 (195) - --------------------------------------------------------------------------------------------------------------------------------- Total $32,127 $(1,893) $30,233 $35,625 $(7,362) $28,263 $18,918 $(1,324) $17,594 ================================================================================================================================= INTEREST-BEARING LIABILITIES: NOW, Super NOW and Money market $1,858 $1,009 $2,867 $333 $78 $411 $(164) $(109) $(273) accounts Savings accounts 381 (230) 151 633 (541) 92 (243) (306) (549) Certificates of Deposit (377) (2,022) (2,399) 3,056 (2,169) 887 4,465 840 5,305 Borrowed funds 19,644 1,338 20,982 20,372 (1,478) 18,894 10,558 330 10,888 - --------------------------------------------------------------------------------------------------------------------------------- Total 21,506 95 21,601 24,394 (4,110) 20,284 14,616 755 15,371 ================================================================================================================================= Net change in net interest income $10,621 $(1,988) $8,632 $11,231 $(3,252) $7,979 $4,302 $(2,079) $2,223 =================================================================================================================================
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND JUNE 30, 1999 Assets. Our assets totaled $2.50 billion at June 30, 2000, an increase of $254.5 million from total assets of $2.25 billion at June 30, 1999. The growth in assets was experienced primarily in real estate loans which increased $338.0 million since June 30, 1999. The increase in real estate loans resulted largely from real estate loan originations of $486.4 million during the fiscal year ended June 30, 2000, of which $453.7 million were multi-family and underlying cooperative and non-residential real estate loans. Offsetting the increase in real estate loans was an aggregate decline of $99.0 million in investment and mortgage-backed securities available for sale, of which $73.5 million was experienced in mortgage-backed securities available- for-sale. The decline in available for sale securities reflects the sale of $39.9 million of investment securities and $64.9 million of mortgage-backed securities during the fiscal year ended June 30, 2000. These sales were utilized both to generate additional liquidity at December 31, 1999, in response to concerns regarding possible increased deposit outflows attributable to customer concerns over the Year 2000, and a re-positioning of assets in response to interest rate increases during the fiscal year ended June 30, 2000. Additionally, the decline in mortgage-backed securities available for sale reflects the reduced level of purchase -12- activity for such securities during the fiscal year ended June 30, 2000, as we reduced our capital leverage transaction level during this period. See "Capital Leverage Strategy." Additionally, investment securities held to maturity declined $14.2 million and mortgage-backed securities held to maturity declined $9.5 million during the fiscal year ended June 30, 2000, due to scheduled principal repayments on these securities. The proceeds from payments on these securities were utilized primarily to fund either real estate loan originations or purchases of investment and mortgage-backed securities available for sale. Other assets increased by $34.1 million due primarily to our purchase of $30.2 million in Bank Owned Life Insurance premiums for eligible employees in May, 2000. LIABILITIES. Total liabilities increased $259.1 million during the fiscal year ended June 30, 2000, due primarily to an increase in FHLBNY advances of $305.0 million during the period. The increased FHLBNY advances were utilized to replace deposit outflows and fund real estate loan originations. Offsetting the increase in FHLBNY advances were declines in deposits and Repo borrowings. The emphasis on FHLBNY advances versus Repo borrowings reflects our desire to manage interest rate risk by more closely matching the maturities of underlying borrowings to their funded assets, primarily real estate loans and mortgage- backed securities. Deposits decreased $19.8 million to $1.22 billion at June 30, 2000 from $1.24 billion at June 30, 1999, due to both the sale of $18.0 million in deposits formerly housed at our Gates Avenue, Brooklyn branch in November, 1999, and the cessation of a deposit rate promotion that we maintained from July, 1997 to June, 1998. Repos declined $47.6 million during the fiscal year ended June 30, 2000, due to our decreased capital leverage activity during the period. See "Capital Leverage Strategy." In addition, in April, 2000, we issued $25.0 million in subordinated notes payable, with a stated annual interest rate of 9.25%. The proceeds of the issuance are being utilized to fund general corporate activities including cash dividend payments and stock repurchases. STOCKHOLDERS' EQUITY. Stockholders' equity decreased $4.5 million during the fiscal year ended June 30, 2000. This decrease resulted primarily from repurchases of common stock into treasury of $19.3 million, cash dividends paid of $7.7 million during the period, and an increase in the accumulated other comprehensive loss of $3.0 million. The increase in the other comprehensive loss related to the decline in market value of investment and mortgage backed securities available for sale, due primarily to the general increase in market interest rates during the past year. Offsetting these decreases was net income of $22.4 million and stock benefit plan amortization of $4.1 million related to vesting of ESOP and RRP benefits during the fiscal year ended June 30, 2000. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND JUNE 30, 1998 ASSETS. Our assets totaled $2.25 billion at June 30, 1999, an increase of $623.7 million from total assets of $1.62 billion at June 30, 1998. The growth in assets was experienced primarily in real estate loans and mortgage-backed securities available for sale, which increased $431.6 million and $139.0 million, respectively. The increase in real estate loans resulted primarily from originations of $471.5 million during the fiscal year ended June 30, 1999, of which $452.6 million were multi-family and underlying cooperative and non-residential loans. The increased loan originations resulted from both an active local real estate market and a continuation of local competition for interest rates on new loan originations throughout the year. The increase in real estate loans also resulted from the acquisition of $192.3 million of such loans from FIBC. The increase in mortgage-backed securities available for sale resulted from purchases of $263.6 million during the year ended June 30, 1999, primarily attributable to the capital leverage program, and $37.8 million of mortgage- backed securities acquired from FIBC. See "Management Strategy." These purchases were partially offset by principal repayments of $155.6 million on these securities. Investment securities available for sale and goodwill increased $58.5 million and $40.8 million due primarily to the acquisition of $43.5 million in such securities and the addition of $44.2 million in goodwill from the FIBC acquisition, which is being amortized over a 20-year period. Offsetting these increases, investment securities and mortgage-backed securities held-to-maturity declined $46.4 million and $23.9 million, respectively, as proceeds from sales, calls, maturities and principal repayments on these securities were utilized to fund loan originations and purchases of mortgage-backed securities available for sale. LIABILITIES. Liabilities increased $598.3 million during the fiscal year ended June 30, 1999. The largest components of this increase were deposits, FHLBNY advances and securities sold under agreement to repurchase, which increased $204.8 million, $146.5 million, and $225.1 million, respectively. The acquisition of FIBC resulted in the addition of $230.7 million in deposits and $42.0 million in securities sold under agreements to repurchase. The growth in FHLBNY advances of $146.5 million during the fiscal year ended June 30, 1999, was -13- utilized to fund both loan originations and a significant portion of the cash consideration related to the FIBC acquisition. The increase in securities sold under agreement to repurchase of $183.0 million, exclusive of the FIBC acquisition, was utilized primarily to fund purchases of mortgage-backed securities available for sale. Deposits, excluding the effects of the FIBC acquisition, decreased $25.9 million during the fiscal year ended June 30, 1999, due primarily to the cessation of a deposit rate promotion that we maintained from July 1997 to June 1998. STOCKHOLDERS' EQUITY. Stockholders' equity increased $25.3 million during the fiscal year ended June 30, 1999. This increase resulted primarily from the addition of $34.7 million in equity resulting from the FIBC acquisition and net income of $19.9 million. Offsetting these increases, were repurchases of common stock into treasury of $21.2 million and cash dividends paid of $5.9 million, and a decline of $6.1 million in accumulated other comprehensive income related to the net unrealized gain or loss on securities available-for-sale. COMPARISON OF THE OPERATING RESULTS FOR THE FISCAL YEAR ENDED JUNE 30, 2000 AND 1999 GENERAL. Net income increased $2.5 million to $22.4 million during the fiscal year ended June 30, 2000, compared to $19.9 million during the year ended June 30, 1999. The increase in net income resulted from increases of $8.6 million in net interest income, which was partially offset by a decrease of $1.4 million in non-interest income and increases of $3.5 million in non-interest expense and $1.2 million in income tax expense. NET INTEREST INCOME. Net interest income for the year ended June 30, 2000 increased $8.6 million to $66.8 million from $58.2 million during the year ended June 30, 1999. The increase was attributable primarily to an increase of $421.6 million in average interest-earning assets. The interest rate spread declined 13 basis points from 2.61% for the year ended June 30, 1999 to 2.48% for the year ended June 30, 2000, and the net interest margin declined 20 basis points from 3.11% to 2.91% during the same period. The decline in interest rate spread and interest margin both reflect the $344.3 million increase in average borrowed funds, which possess a higher average cost than deposits, and the ongoing effects of our continued capital leverage strategy. The interest rate differential between assets and underlying liabilities under the capital leverage strategy are significantly less than the interest rate differential between our other interest-earning assets and interest-bearing liabilities. While we recently reduced our new activity related to the capital leverage strategy, the average balance of the capital leverage assets increased $73.0 million during the fiscal year ended June 30, 2000, due to the retention of a significant portion of the leverage growth accumulated during the fiscal years ended June 30, 1998 and 1999. The declines in interest rate spread and net interest margin also reflect the decline of 29 basis points in the average yield on real estate loans. The effects of interest rate increases by the Federal Reserve only minimally impacted the yield on our real estate loans during the fiscal year ended June 30, 2000, since real estate loans, on average, have a longer term to repricing than our other interest- earning assets. Also contributing to the decline in net interest margin was a reduction from 112.3% to 110.0% in the ratio of interest earning assets to interest bearing liabilities, which resulted from a reduction in interest earning assets funded by stockholders' equity (which bear no offsetting interest expense), as the percentage of stockholders' equity to total assets has declined due to ongoing capital leverage and stock repurchase activities. INTEREST INCOME. Interest income for the fiscal year ended June 30, 2000, was $165.6 million, an increase of $30.2 million from $135.4 million during the fiscal year ended June 30, 1999. The increase in interest income was primarily attributable to increased interest income on real estate loans of $26.9 million, on mortgage backed securities of $1.1 million, and other interest income (comprised of commercial paper, federal funds sold and FHLBNY capital stock income) of $3.2 million. The increase in interest income on real estate loans was attributable primarily to an increase of $397.7 million in the average balance of real estate loans, resulting from $486.4 million of real estate loans originated during the fiscal year ended June 30, 2000. The average balance of other interest earning assets increased $48.6 million due to an increase in liquid securities maintained near December 31, 1999, due to liquidity concerns related to the Year 2000, as well as an increase of $1.2 million in average balance of FHLBNY capital stock. The average yield on mortgage backed securities and other interest earnings assets increased by 29 basis points and 48 basis points, respectively due to recent general increases in interest rates. Overall, the yield on interest-earning assets declined 2 basis points from 7.24% during the fiscal year ended June 30, 1999 to 7.22% during the fiscal year ended June 30, 2000. The decline was attributable primarily to a decline in average yield on real estate loans of 29 basis points, reflecting continued competition on lending in our local market. Further, since real estate loans, on average, have a longer term to repricing -14- than our other interest-earning assets, the effects of recent market interest rate increases take longer to impact their overall yield. In addition, the yield on real estate loans during the most recent fiscal year experienced the delayed effect of high prepayment activity which occurred during the fiscal year ended June 30, 1999, which lowered the overall portfolio yield. We expect the effects of recent interest rate increases and slower prepayment levels to be recognized more fully in the overall real estate loan portfolio yield during the fiscal year ended June 30, 2001. INTEREST EXPENSE. Interest expense increased $21.6 million, to $98.8 million during the fiscal year ended June 30, 2000, from $77.2 million during the fiscal year ended June 30, 1999. This increase resulted primarily from increased interest expense of $21.0 million on borrowed funds, which resulted from an increase in the average balance of $344.3 million during the fiscal year ended June 30, 2000, compared to the fiscal year ended June 30, 1999. The increase in the average balance of borrowed funds resulted primarily from growth of $305.0 million in FHLBNY advances during the period July 1, 1999 to June 30, 2000. The FHLBNY advances are generally medium-term interest-bearing liabilities, which are utilized to fund loan originations and replace deposit outflows. Additionally, the interest expense on NOW, Super Now and Money Market accounts increased $2.9 million due to increased average balance and cost related to our recent money market promotion. This increase was partially offset by a decline in interest expense on certificates of deposits of $2.4 million, which resulted from a reduction of 31 basis points in average cost on certificates of deposits, which resulted from the cessation of deposit rate promotions that we maintained from July 1997 to June 1998. The average cost of interest-bearing liabilities increased 11 basis points to 4.74% during the year ended June 30, 2000, from 4.63% during the fiscal year ended June 30, 1999, due primarily to the increase in the average cost of borrowed funds of 18 basis points during the period. PROVISION FOR LOAN LOSSES. The provision for loan losses was $240,000 during both the fiscal years ended June 30, 2000 and 1999. See "Asset Quality." The increase in non-performing loans of $1.4 million during the fiscal year ended June 30, 2000, resulted solely from the addition of one multi-family loan totaling $1.8 million to non-performing loans in June, 2000. This loan entered non-performing status as a result of the unanticipated deterioration of a portion of the underlying collateral, and not as a result of real estate market declines. Excluding this loan, non-performing loans experienced general decline during the fiscal year ended June 30, 2000, reflecting continued stability in the local real estate market. The allowance for loan losses declined $296,000 during the fiscal year ended June 30, 2000, as net charge- offs of $536,000 exceeded the provision of $240,000 during the period. Of the total net charge-offs during the fiscal year ended June 30, 2000, $454,000 related to a loan pool participation investment acquired from FIBC. Upon consummating the FIBC acquisition, we provided reserves within our overall loan loss allowance in anticipation of this potential loss on the loan pool investment. After attempting to recover this portion of the total investment, we determined in November, 1999, that it would not be collectible and should be charged-off. While we have continued our loan loss provisions in response to our continued growth in real estate loans, we have allowed our allowance for loan losses to decline as a percentage of loans due to the continuation of low charge-off and non-performing loan to average loan percentages. NON-INTEREST INCOME. Non-interest income declined $1.4 million to $5.0 million during the fiscal year ended June 30, 2000, from $6.4 million during the fiscal year ended June 30, 1999. The net gain or loss on sales of investment and mortgage-backed securities and other assets, declined $2.4 million during this period, as a net loss of $1.6 million was recorded during the fiscal year ended June 30, 2000, compared to a net gain of $804,000 recorded during the fiscal year ended June 30, 1999. The securities sales transactions during the fiscal year ended June 30, 1999, which resulted in a net gain of $668,000, related primarily to disposals of equity investments which we felt were at attractive sales values. The securities sales transactions during the fiscal year ended June 30, 2000, which resulted in a net loss of $2.6 million, were made primarily to generate additional liquidity at December 31, 1999, related to possible increased deposit outflows resulting from consumer concerns over the Year 2000, as well as the re-positioning of assets in response to interest rate increases during the most recent fiscal year. See "Liquidity and Capital Resources." The loss on the sale of securities during the fiscal year ended June 30, 2000, was partially offset by a gain of $1.2 million on the sale of deposits formerly housed at our Gates Avenue, Brooklyn branch. In addition, other income also decreased $189,000, due primarily to a reduction of $566,000 in prepayment penalty income, as increased interest rates during the most recent fiscal year have substantially reduced the level of loan prepayment activity. -15- Offsetting these decreases was an increase in service charges and fees of $1.2 million due mainly to increased service fees and charges on deposits of $984,000, resulting primarily from adjustments in our deposit fee and service charges and the addition of the five branches acquired from FIBC. NON-INTEREST EXPENSE. Non-interest expense increased $3.5 million, from $30.5 million during the fiscal year ended June 30, 1999, to $34.0 million during the fiscal year ended June 30, 2000. The increase in non-interest expense reflects increases of $270,000 related to salaries and benefits expense, $756,000 related to occupancy and equipment expense, $340,000 related to data processing costs, $1.2 million related to goodwill amortization, and $1.4 million related to other expenses. Excluding a non-recurring reduction in compensation expense of $1.4 million, which related to a gain on the curtailment of our defined benefit pension plan, salaries and benefits would have increased $1.6 million and non-interest expense would have increased by $4.9 million during the fiscal year ended June 30, 2000 compared to 1999. A significant portion of the increase in salaries and benefits and occupancy and equipment expenses resulted from the addition of new employees, property and equipment in the FIBC acquisition. The remaining salary and benefit expense increase reflects base salary and staff increases during the past fiscal year. The remaining increase in occupancy and equipment expense reflects non-recurring real estate tax refunds of $190,000 on branch properties, which were recorded as a reduction of occupancy and equipment expense during the fiscal year ended June 30, 1999. Increased data processing costs of $340,000 resulted from additional systems activity related to growth in both loan activity due to originations over the past twelve months and deposit activity related to the acquisition of the five branches from FIBC. The increase in goodwill amortization expense of $1.2 million and core deposit intangible expense of $460,000 (included in other expense), resulted from goodwill of $44.2 million and core deposit intangible of $4.9 million added in the FIBC acquisition, for which five months of amortization expense are reflected during the fiscal year ended June 30, 1999, compared to a full year of amortization expense reflected in the fiscal year ended June 30, 2000. The increase in other expenses resulted primarily from increased supplies, postage and telephone expenses associated with operations of the branches acquired from FIBC, and increased advertising expenses associated with recent customer promotions. INCOME TAX EXPENSE. Income tax expense increased $1.2 million, or 9%, during the fiscal year ended June 30, 2000 compared to the fiscal year ended June 30, 1999, due primarily to the increase of $3.7 million, or 11%, in pre-tax income during the same period. Our effective tax rate declined slightly during this period, as additional tax benefits realized during the fiscal year ended June 30, 2000, associated with activities of subsidiary companies, were offset by a decline in non-recurring income tax benefits from $398,000 during the fiscal year ended June 30, 1999 to $256,000 during the fiscal year ended June 30, 2000. These income tax recoveries are related to adjustments associated with reconciling the recorded income tax expense to the income tax expense reflected in the subsequent tax return filing for the respective prior year. COMPARISON OF THE OPERATING RESULTS FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AND 1998 GENERAL. Net income for the fiscal year ended June 30, 1999, totaled $19.9 million compared to $13.1 million for the fiscal year ended June 30, 1998. The increase in net income resulted primarily from an increase of $8.0 million in net interest income, a decline of $1.4 million in the provision for loan losses, and an increase of $94,000 in non-interest income. NET INTEREST INCOME. Net interest income for the fiscal year ended June 30, 1999 increased $8.0 million to $58.2 million from $50.2 million during the fiscal year ended June 30, 1998. The increase was attributable primarily to an increase of $470.2 million in average interest-earning assets, offset by a decline in the net interest rate spread of 37 basis points. The net interest margin declined 47 basis points from 3.58% for the fiscal year ended June 30, 1998 to 3.11% for the fiscal year ended June 30, 1999. The narrowing interest rate spread and margin reflect, in part, our exposure to interest rate risk resulting from certain changes in the shape of the yield curve (particularly a flattening or inverting of the yield curve) and to differing indices upon which the yield on our interest-earning assets and the cost of its interest-bearing liabilities are based. For example, over the period July 1, 1997 to June 30, 1999, the market experienced a more significant -16- reduction in interest rates on long-term instruments as compared to the reduction in interest rates on short-term instruments resulting in rates on long-term instruments approximating (and in some cases, going below) the rates on short-term instruments. More importantly, the spreads earned on the rate differential between assets and the liabilities funding such assets have narrowed more with respect to long-term assets as compared to short-term assets. Since a larger percentage of our assets are longer term, we experienced a continuous narrowing of spreads as well as a negative impact on net interest income that was more than offset by our growth in interest-earning assets. The narrowing of the spread and margin also reflects the continued activities of the capital leverage program, as the interest rate spread between assets and underlying liabilities under the capital leverage program are significantly less than the interest rate spread between our other interest-earning assets and interest-bearing liabilities. INTEREST INCOME. Interest income for the fiscal year ended June 30, 1999, was $135.4 million, an increase of $28.3 million from $107.1 million during the fiscal year ended June 30, 1998. The increase in interest income was attributable to increased interest income on real estate loans and mortgage- backed securities of $21.7 million and $6.2 million, respectively. The increase in interest income on real estate loans was attributable primarily to an increase of $320.8 million in the average balance of real estate loans, resulting from both $471.5 million of real estate loans originated during the fiscal year ended June 30, 1999, and $192.3 million of real estate loans acquired from FIBC on January 21, 1999. The increase in interest income on mortgage-backed securities was also attributable primarily to an increase in the average balance of $313.9 million, resulting from mortgage-backed securities purchased in accordance with our capital leverage program during the fiscal year ended June 30, 1999, and $37.8 million added in the FIBC Acquisition. Overall, the yield on interest-earning assets decreased 41 basis points from 7.64% during the fiscal year ended June 30, 1998 to 7.23% during the fiscal year ended June 30, 1999. The decline was attributable primarily to a decrease of 43 basis points in the average yield on real estate loans resulting primarily from continued competition in the real estate lending market and the continued flat yield curve environment. The decline also reflects declines in the average yield on mortgage-backed securities and investment securities of 50 basis points and 52 basis points, respectively, due to declines in overall interest rates during the fiscal year ended June 30, 1999. INTEREST EXPENSE. Interest expense increased $20.3 million, to $77.2 million during the fiscal year ended June 30, 1999, from $56.9 million during the fiscal year ended June 30, 1998. This increase resulted primarily from increased interest expense of $18.9 million on borrowed funds, which resulted from an increase in the average balance of $351.1 million during the fiscal year ended June 30, 1999 compared to the fiscal year ended June 30, 1998. The increase in the average balance of borrowed funds resulted primarily from $183.0 million of borrowed funds added during the fiscal year ended June 30, 1999 under the capital leverage program. The increase in the average balance of borrowed funds also reflects our use of FHLBNY advances, which generally are medium-term interest-bearing liabilities, to fund our loan originations. In addition, the average cost of interest-bearing liabilities decreased five basis points to 4.63% during the fiscal year ended June 30, 1999, from 4.68% during the fiscal year ended June 30, 1998, reflecting the decline in the average cost of certificates of deposit and borrowed funds of 35 basis points and 36 basis points, respectively. The decline in the average cost of borrowed funds resulted from reductions in overall interest rates, while the reduction in the average cost of certificates of deposit resulted from both lower overall interest rates and the cessation of deposit rate promotions that we maintained from July 1997 to June 1998. While the decline in the average cost of certificates of deposits and borrowed funds helped reduce the average cost of interest-bearing liabilities during the fiscal year ended June 30, 1999, their respective average balances increases of $54.7 million and $351.1 million contributed to the increase in the average cost of interest-bearing liabilities. PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $1.4 million to $240,000 for the fiscal year ended June 30, 1999, from $1.6 million for the fiscal year ended June 30, 1998. The allowance for loan losses has increased $3.0 million from June 30, 1998 to June 30, 1999, due primarily to the addition of $3.0 million in loan loss reserves from FIBC which we determined was adequate to cover potential losses on the loans acquired from FIBC. The reduction in our loan loss provision from the prior fiscal year resulted from continued stability of non-performing loan and charge-offs which totaled $201,000 during the fiscal year ended June 30, 1999, compared to $286,000 during the fiscal year ended June 30, 1998. See "Asset Quality." NON-INTEREST INCOME. Non-interest income increased $94,000 to $6.4 million during the fiscal year ended June 30, 1999, from $6.3 million during the fiscal year ended June 30, 1998. Service charges and fees increased $471,000 due primarily to increased service fees and charges on deposits of $619,000, resulting primarily from adjustments in our deposit fee and service charges. Other income increased $1.7 million due primarily to -17- increased loan prepayment penalties of $1.6 million, which resulted from increased interest rate competition on new loans. Offsetting these increases was a reduction in the gains on sales and redemptions of securities and other assets of $2.1 million, due primarily to a non-recurring gain of $2.0 million from the sale of a branch premise in Roslyn, New York during the fiscal year ended June 30, 1998. NON-INTEREST EXPENSE. Non-interest expense increased $556,000, from $29.9 million during the fiscal year ended June 30, 1998, to $30.5 million during the fiscal year ended June 30, 1999. During the fiscal year ended June 30, 1998, we recorded one-time charges of $1.6 million of benefit costs and $598,000 of RRP costs associated with an early retirement option that we offered and was accepted by eligible employees. Excluding this charge to expense, non-interest expense increased $2.8 million during the fiscal year ended June 30, 1999. Salaries and employee benefit expense increased $1.2 due to staffing and salary increases during the past 12 months and additional salary expense resulting from the FIBC acquisition. Compensation expense related to our ESOP and RRP decreased by approximately $263,000 due to the reduction in our average stock price. Occupancy and equipment expense declined $28,000 due primarily to refunds of $190,000 related to real estate taxes on branch properties, which were recorded as a reduction of occupancy and equipment expense during the fiscal year ended June 30, 1999, and cost savings associated with the sale of our Roslyn office in May 1998. These cost savings were partially offset by increased expenses associated with the five branch offices obtained in the FIBC acquisition. Data processing costs increased $147,000 during the fiscal year ended June 30, 1999, compared to the fiscal year ended June 30, 1998, due primarily to increased loan activity resulting from the FIBC acquisition and Year 2000 compliance costs. The provision for losses on other real estate owned declined $98,000 due to the low level of real estate owned during the fiscal year ended June 30, 1999. Goodwill expense increased $977,000 due to the increased goodwill of $44.2 million associated with the FIBC acquisition. Other expenses increased $748,000 due primarily to increased expenses associated with former operations of FIBC and an increase of $301,000 in core deposit premium amortization. INCOME TAX EXPENSE. Income tax expense totaled $14.0 million for the fiscal year ended June 30, 1999, compared to $11.9 million for the fiscal year ended June 30, 1998, an increase of $2.1 million. During the fiscal year ended June 30, 1999, we recorded income tax expense benefits totaling $670,000 related to recoveries of previously recorded deferred taxes and adjustments from the filing of its June 1998 tax returns. Excluding these income tax benefits, our income tax expense would have increased $2.8 million, reflecting an increase of $8.9 million in pretax income, offset by a reduction in the effective tax rate from 47.5% during the fiscal year ended June 30, 1998, to 43.3% during the fiscal year ended June 30, 1999. YEAR 2000 COMPUTER CONCERN We did not experience any significant interruptions in any computer operations related to the Year 2000 computer concern. Our loan and deposit functions were not affected by the change into the Year 2000. Additionally, we did not encounter any significant delays in loan payments from borrowers due to difficulties they may have encountered as a result of the Year 2000 computer concern. IMPACT OF INFLATION AND CHANGING PRICES The Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased costs of our operations. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. -18- IMPACT OF ENACTMENT OF THE GRAMM-LEACH-BLILEY ACT On November 12, 1999, the Gramm-Leach-Bliley Act, or Gramm-Leach was enacted. Gramm-Leach establishes, among other things, a comprehensive framework to permit affiliations among commercial banks, insurance companies and other financial service providers. Generally, the new law (i) repeals the historical restrictions and eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies and other financial service providers, (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies, (iii) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies, (iv) provides an enhanced framework for protecting the privacy of consumer's information, (v) adopts a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB system, (vi) requires public disclosure of certain agreements relating to funds expended in connection with the Community Reinvestment Act and (vii) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions, including the functional regulation of bank securities activities. Gramm-Leach also restricts the powers of new unitary savings and loan association holding companies. Unitary savings and loan holding companies that are "grandfathered," I.E., became a unitary savings and loan holding company pursuant to an application filed with the OTS before May 4, 1999, such as us, retain their authority under the prior law. All other savings and loan holding companies would be limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach. Gramm Leach also prohibits non-financial companies from acquiring grandfathered savings and loan association holding companies. Gramm-Leach also requires financial institutions to disclose, on ATM machines, any non-customer fees and to disclose to their customers upon the issuance of an ATM card any fees that may be imposed by the institution on ATM users. For older ATMs, financial institutions will have until December 31, 2004 to provide such notices. Bank holding companies are permitted to engage in a wider variety of financial activities than permitted under the prior law, particularly with respect to insurance and securities activities. In addition, in a change from the prior law, bank holding companies will be in a position to be owned, controlled or acquired by any company engaged in financially related activities. We do not believe that the new law will have a material adverse affect upon our operations in the near term. However, to the extent the new law permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than we currently offer and that can aggressively compete in the markets we currently serve. IMPACT OF RECENT ACCOUNTING STANDARDS In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities" as amended in June, 1999 by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. SFAS 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 effective July 1, 2000. No adjustment was required as a result of the change in accounting principle. -19- In December, 1999, the Securities and Exchange Commission (referred to as the SEC) issued Staff Accounting Bulletin No. 101 (referred to as SAB 101), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views on applying generally accepted accounting principles to revenue recognition in financial statements. On June 26, 2000, the SEC issued SAB 101B to defer the effective date of implementation of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 31, 1999. The Company is required to adopt SAB 101 by June 30, 2001. The Company does not expect the adoption of SAB 101 to have a material impact on the consolidated financial statements. MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq National Market and quoted under the symbol "DCOM." Prior to June 15, 1998, our common stock was quoted under the symbol "DIME." The following table shows the high and low sales price for our common stock and dividends declared during the period indicated. Our common stock began trading on June 26, 1996, the date of the initial public offering.
Fiscal Year End June 30, 2000 Fiscal Year End June 30, 1999 Quarter Ended High Low High Low Dividends Sales Sales Dividends Sales Sales Declared Price Price Declared Price Price - -------------------------------------------------------------------------------------------------------------------------------- September 30{th} $0.15 $23{1/2} $20{1/8} $0.10 $28{1/2} $15{1/4} December 31{st} 0.17 22{1/8} 17 0.12 27{7/16} 14{3/4} March 31{st} 0.17 17{7/8} 13{1/4} 0.14 25{3/8} 19{3/4} June 30{th} 0.17 18{1/2} 15{3/8} 0.15 23{7/8} 20
On June 30, 2000, the last trading date in the fiscal year, our stock closed at $16{1/4}. At September 22, 2000, we had approximately XXX shareholders of record, not including the number of persons or entities holding stock in nominee or street name through various brokers and banks. There were 11,664,174 shares of common stock outstanding at June 30, 2000. As the principal asset of the Company, the Bank could be called upon to provide the principal source of funds for payment of dividends by the Company. The Bank will not be permitted to pay dividends on its capital stock if its stockholders' equity would be reduced below applicable regulatory requirements or the amount required for the liquidation account established during the Bank's conversion. See Note 2 to the Consolidated Financial Statements of the Company for a further discussion of the liquidation account. The OTS limits all capital distributions by the Bank directly or indirectly to us, including dividend payments. As the subsidiary of a savings and loan holding company, the Bank must file a notice with the OTS for each capital distribution. However, if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for the calendar year to date plus the retained net income (i.e., net income after deducting prior capital distributions) for the preceding two years, then the Bank must file an application to receive the approval of thew OTS for the proposed capital distribution. In addition, capital distributions from the Bank to the Company, if in excess of established limits, could result in recapture of the Bank's New York State and City bad debt reserves. Unlike the Bank, we are not subject to OTS regulatory restrictions on the payment of dividends to our shareholders, although the source of such dividends will be dependent on the net proceeds retained by us and earnings thereon and may be dependent, in part, upon dividends from the Bank. We are subject, however, to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of our net assets (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. RESEARCH REPORTS As of the date of this report, the following investment firms have issued research reports on us: Advest, Inc.; Friedman, Billings, Ramsey & Co., Inc.; Keefe Bruyette & Woods, Inc.; Lehman Brothers, Inc. McConnell Budd & Downes; Merrill Lynch & Co.; Ryan, Beck & Co.; Sandler O'Neill & Partners, L.P. -20- Copies of these research reports are available upon request to: Dime Community Bancshares, Inc. Investor Relations, 209 Havemeyer Street, Brooklyn, NY 11211 -21- INDEPENDENT AUDITORS' REPORT To the Stockholders and the Board of Directors of Dime Community Bancshares, Inc. and Subsidiaries We have audited the accompanying consolidated statements of financial condition of Dime Community Bancshares, Inc. and Subsidiaries (the ''Company'') as of June 30, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended June 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States of America. /S/ DELOITTE & TOUCHE LLP New York, New York August 11, 2000 -22- DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands except share amounts)
JUNE 30, 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $15,371 $17,801 Investment securities held-to-maturity (estimated fair value of $17,351 and $31,768 at June 30, 2000 and 1999, respectively) (Note 4) 17,489 31,698 Investment securities available for sale (at estimated fair value) (Note 4): Bonds and notes (amortized cost of $109,057 and $133,523 at June 30, 2000 and 1999, respectively) 105,631 131,490 Marketable equity securities (historical cost of $14,948 and $14,162 at June 30, 2000 and 1999, respectively) 15,490 15,142 Mortgage-backed securities held-to-maturity (estimated fair value of $13,263 and $23,192 at June 30, 2000 and 1999, respectively) (Note 5) 13,329 22,820 Mortgage backed securities available for sale (at estimated fair value) (amortized cost of $438,160 and $507,486 at June 30, 2000 and 1999, respectively)(Note 5) 429,361 502,847 Federal funds sold and short-term investments 9,449 11,011 Loans (Note 6): Real estate 1,713,552 1,375,510 Other loans 7,648 7,831 Less allowance for loan losses (Note 7) (14,785) (15,081) - ---------------------------------------------------------------------------------------------------------------------------------- Total loans, net 1,706,415 1,368,260 - ---------------------------------------------------------------------------------------------------------------------------------- Loans held for sale 100 - Premises and fixed assets, net (Note 9) 14,771 14,975 Federal Home Loan Bank of New York capital stock (Note 10) 42,423 28,281 Other real estate owned, net (Note 7) 381 866 Goodwill (Note 3) 60,254 64,871 Other assets (Notes 15 and 16) 71,675 37,553 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $2,502,139 $2,247,615 ================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Due to depositors (Note 11) $1,219,148 $1,238,933 Escrow and other deposits 35,161 44,705 Securities sold under agreements to repurchase (Note 12) 434,027 481,660 Federal Home Loan Bank of New York advances (Note 13) 555,000 250,000 Subordinated notes payable (Note 14) 25,000 - Other liabilities (Note 16) 26,634 20,622 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 2,294,970 2,035,920 - ---------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Note 17) Stockholders' Equity Preferred stock ($0.01 Par, 9,000,000 shares authorized, none issued outstanding at June 30, 2000 and 1999) - - Common stock ($0.01 par, 45,000,000 shares authorized, 14,583,765 shares and 14,583,400 shares issued at June 30, 2000 and 1999, respectively, and 11,664,174 and 12,775,588 shares outstanding at June 30, 2000 and 1999, respectively) 145 145 Additional paid-in capital 150,034 148,865 Retained earnings (Note 2) 133,769 119,100 Accumulated other comprehensive loss, net of deferred taxes (6,309) (3,323) Unallocated common stock of Employee Stock Ownership Plan (Note 16) (6,853) (8,016) Unearned common stock of Recognition and Retention Plan (Note 16) (4,324) (6,040) Common stock held by Benefit Maintenance Plan (Note 16) (1,790) (831) Treasury stock, at cost (2,919,591 shares and 1,807,812 shares at June 30, 2000 and 1999, respectively ) (Note 19) (57,503) (38,205) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 207,169 211,695 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,502,139 $2,247,615 ==================================================================================================================================
See Notes to consolidated financial statements. -23- DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share amounts)
FOR THE YEARS ENDED JUNE 30, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans secured by real estate $118,436 $91,569 $69,824 Other loans 616 558 487 Investment securities 9,715 10,654 10,798 Mortgage-backed securities 30,750 29,683 23,463 Other 6,106 2,926 2,555 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME 165,623 135,390 107,127 - -------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits and escrow 45,036 44,417 43,027 Borrowed funds 53,784 32,802 13,908 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 98,820 77,219 56,935 - -------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 66,803 58,171 50,192 - -------------------------------------------------------------------------------------------------------------------------------- Provision for loan losses 240 240 1,635 - -------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 66,563 57,931 48,557 - -------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Service charges and other fees 4,065 2,823 2,352 Net (loss) gain on sales of loans (11) 66 108 Net (loss) gain on sales and redemptions of securities, deposits and other assets (1,567) 804 2,873 Other 2,556 2,745 1,011 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST INCOME 5,043 6,438 6,344 - -------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits 12,635 12,365 12,748 ESOP and RRP compensation expense 4,095 4,517 5,378 Occupancy and equipment 3,739 2,983 3,011 Federal deposit insurance premiums 360 404 350 Data processing costs 1,656 1,316 1,169 Provision for losses on other real estate owned 25 16 114 Goodwill amortization 4,617 3,382 2,405 Other 6,888 5,510 4,762 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST EXPENSE 34,015 30,493 29,937 - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 37,591 33,876 24,964 Income tax expense 15,217 14,015 11,866 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $22,374 $19,861 $13,098 ================================================================================================================================ EARNINGS PER SHARE: BASIC $1.98 $1.81 $1.19 ================================================================================================================================ DILUTED $1.90 $1.68 $1.09 ================================================================================================================================
See Notes to consolidated financial statements. -24- DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Dollars in thousands except per share data)
FOR THE YEARS ENDED JUNE 30, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK (PAR VALUE $0.01): Balance at beginning and end of period $145 $145 $145 - -------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of period 148,865 143,322 141,716 Issuance of common stock - 3,327 - Stock options exercised 2 468 52 Tax benefit of RRP shares 164 312 33 Amortization of excess fair value over cost - ESOP stock 1,003 1,436 1,521 - -------------------------------------------------------------------------------------------------------------------------------- Balance at end of period 150,034 148,865 143,322 - -------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS: Balance at beginning of period 119,100 105,158 94,695 Net income for the period 22,374 19,861 13,098 Cash dividends declared and paid (7,705) (5,919) (2,635) - -------------------------------------------------------------------------------------------------------------------------------- Balance at end of period 133,769 119,100 105,158 - -------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET: Balance at beginning of period (3,323) 2,763 2,031 Change in other comprehensive income (loss) during the period, net of deferred taxes (2,986) (6,086) 732 - -------------------------------------------------------------------------------------------------------------------------------- Balance at end of period (6,309) (3,323) 2,763 - -------------------------------------------------------------------------------------------------------------------------------- EMPLOYEE STOCK OWNERSHIP PLAN: Balance at beginning of period (8,016) (9,175) (10,324) Amortization of earned portion of ESOP stock 1,163 1,159 1,149 - -------------------------------------------------------------------------------------------------------------------------------- Balance at end of period (6,853) (8,016) (9,175) - -------------------------------------------------------------------------------------------------------------------------------- RECOGNITION AND RETENTION PLAN: Balance at beginning of period (6,040) (6,963) (9,671) Common stock acquired by RRP (212) (999) - Amortization of earned portion of RRP stock 1,928 1,922 2,708 - -------------------------------------------------------------------------------------------------------------------------------- Balance at end of period (4,324) (6,040) (6,963) - -------------------------------------------------------------------------------------------------------------------------------- TREASURY STOCK: Balance at beginning of period (38,205) (48,470) (27,703) Issuance of stock in acquisition - 31,463 - Purchase of treasury shares, at cost (19,298) (21,198) (20,767) - -------------------------------------------------------------------------------------------------------------------------------- Balance at end of period (57,503) (38,205) (48,470) - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK HELD BY BENEFIT MAINTENANCE PLAN: Balance at beginning of period (831) (431) - Common stock acquired (959) (400) (431) - -------------------------------------------------------------------------------------------------------------------------------- Balance at end of period (1,790) (831) (431) - -------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF COMPREHENSIVE INCOME Net Income 22,374 19,861 13,098 Reclassification adjustment for securities sold, net of taxes of $(1,194), $263 and $436 during the years ended June 30, 2000, 1999 and 1998 1,402 (309) (512) Net unrealized securities gains (losses) arising during the period, net of taxes of $(3,738), $(4,921) and $624 during the years ended June 30, 2000, 1999 an 1998 (4,388) (5,777) 732 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $19,388 $13,775 $13,318 ================================================================================================================================
See Notes to consolidated financial statements. -25- DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In thousands)
FOR THE YEARS ENDED JUNE 30, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $22,374 $19,861 $13,098 Adjustments to reconcile net income to net cash provided by operating activities: Net gain on investment and mortgage backed securities called - (113) (9) Net loss (gain) on investment and mortgage backed securities sold 2,599 (555) (1,123) Net loss (gain) on sale of loans held for sale 11 (66) (108) Net loss (gain) on sales and disposals of other assets 191 - (1,973) Net depreciation and amortization 716 1,660 847 ESOP and RRP compensation expense 4,095 4,517 5,378 Provision for loan losses 240 240 1,635 Goodwill amortization 4,617 3,382 2,405 Originations of loans held for sale (1,258) (6,468) (5,009) Proceeds from sales of loans held for sale 1,147 7,075 4,838 Increase in other assets and other real estate owned (30,612) (3,005) (3,476) Decrease (increase) in receivable for securities sold - 18,008 (18,008) (Decrease) increase in payable for securities purchased - (12,062) 12,062 Increase in other liabilities 6,012 6,617 5,447 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by Operating Activities 10,132 39,091 16,004 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in short-term investments 1,562 37,618 9,573 Proceeds from maturities of investment securities held to maturity 4,220 4,830 10,250 Proceeds from maturities of investment securities available for sale 131,922 85,979 63,145 Proceeds from calls of investment securities held to maturity 10,000 41,660 42,500 Proceeds from calls of investment securities available for sale 2,400 30,268 11,500 Proceeds from sales of investment securities available for sale 39,867 9,373 13,437 Proceeds from sales of mortgage backed securities held to maturity 1,955 - 5,317 Proceeds from sales and calls of mortgage backed securities available for sale 64,937 - 92,776 Purchases of investment securities held to maturity - - (29,082) Purchases of investment securities available for sale (150,751) (146,786) (112,930) Purchases of mortgage backed securities available for sale (68,960) (263,644) (290,576) Principal collected on mortgage backed securities held to maturity 7,532 23,822 26,216 Principal collected on mortgage backed securities available for sale 71,342 155,612 64,470 Net increase in loans (338,395) (241,114) (199,545) Cash disbursed in acquisitions, net of cash acquired - (33,644) - (Purchases) sales of fixed assets, net (1,080) (819) 4,262 Purchase of Federal Home Loan Bank stock (14,142) (15,417) (2,432) - --------------------------------------------------------------------------------------------------------------------------------- Net cash used in Investing Activities (237,591) (312,262) (291,119) - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in due to depositors (27,913) (21,978) 74,947 Net (decrease) increase in escrow and other deposits (1,416) 19,893 421 (Decrease) Increase in securities sold under agreements to repurchase (47,633) 157,906 180,268 Proceeds from Federal Home Loan Bank of New York Advances 305,000 146,495 40,295 Proceeds from subordinated notes payable 25,000 - - Common stock issued for exercise of Stock Options and tax benefits of RRP 164 906 85 Purchase of common stock by the Recognition and Retention Plan (212) (999) - Purchase of common stock by Benefit Maintenance Plan (959) (400) (431) Cash dividends paid to stockholders (7,704) (5,919) (2,635) Purchase of treasury stock (19,298) (21,198) (20,767) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by Financing Activities 225,029 274,706 272,183 - --------------------------------------------------------------------------------------------------------------------------------- (DECREASE) INCREASE IN CASH AND DUE FROM BANKS (2,430) 1,535 (2,932) CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 17,801 16,266 19,198 - --------------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS, END OF PERIOD $15,371 $17,801 $16,266 ================================================================================================================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $12,800 $11,462 $10,984 ================================================================================================================================= Cash paid for interest $97,421 $74,939 $54,941 ================================================================================================================================= Transfer of loans to Other real estate owned $429 $342 $779 ================================================================================================================================= Change in unrealized gain (loss) on available for sale securities, net of deferred taxes $(2,986) $(6,086) $732 =================================================================================================================================
On January 21, 1999, the Bank acquired all of the outstanding common stock of Financial Bancorp, Inc. in exchange for a combination of cash and common stock of Dime Community Bancshares, Inc. In connection with this acquisition, the following assets were acquired and liabilities assumed: Fair Value of Investments, Loans and Other Assets Acquired, net $369,398 Dime Community Bancshares, Inc. Common Stock Issued (34,664) Cash paid (33,251) -------- Deposits and Other Liabilities Assumed $301,483 ======== See Notes to consolidated financial statements. -26- DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS - Dime Community Bancshares, Inc. (the "Company" OR "DCB"), is a Delaware corporation organized by The Dime Savings Bank of Williamsburgh (the "Bank") for the purpose of acquiring all of the capital stock of the Bank issued in the Conversion on June 26, 1996. Presently, the significant assets of the Company are the capital stock of the Bank, the Company's loan to the Bank's ESOP, investments retained by the Company, and an investment real estate property owned through the Company's wholly-owned subsidiary, 842 Manhattan Avenue Corporation. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended. The Bank was originally founded in 1864 as a New York State-chartered mutual savings bank. On November 1995, the Bank converted to a federal stock savings bank. The Bank has been, and intends to continue to be, a community-oriented financial institution providing financial services and loans for housing within its market areas. The Bank maintains its headquarters in the Williamsburgh section of the borough of Brooklyn. Seventeen additional offices are located in the boroughs of Brooklyn, Queens, and the Bronx, and in Nassau County. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The accounting and reporting policies of the Company conform to generally accepted accounting principles. The following is a description of the significant policies: PRINCIPLES OF CONSOLIDATION - The accompanying 2000, 1999 and 1998 consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, the Bank and 842 Manhattan Avenue Corp. All financial statements presented also include the accounts of the Bank's four wholly-owned subsidiaries, Havemeyer Equities Corp. (''HEC''), Boulevard Funding Corp. (''BFC''), Havemeyer Investments Inc. ("HII") and DSBW Residential Preferred Funding Corp. ("DRPFC"). 842 Manhattan Avenue Corp. owns and manages a real estate property which housed a former branch premise of Financial Bancorp, Inc. ("FIBC"), which the Company acquired on January 21, 1999 in connection with its acquisition of FIBC. DRPFC, established in March, 1998, invests in real estate loans and is intended to qualify as a real estate investment trust for federal tax purposes. BFC was established in order to invest in real estate joint ventures and other real estate assets. BFC has no investments in real estate at June 30, 2000, and is currently inactive. HEC was also originally established in order to invest in real estate joint ventures and other real estate assets. In June, 1998, HEC assumed direct ownership of DSBW Preferred Funding Corp. ("DPFC"). DPFC, established as a direct subsidiary of the Bank in March, 1998, invests in real estate loans and is intended to qualify as real estate investment trust for federal tax purposes. HEC has no other investments as of June 30, 2000. All significant intercompany accounts and transactions have been eliminated in consolidation. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES - Purchases and sales of investments and mortgage-backed securities are recorded on trade date. Gains and losses on sales of investment and mortgage-backed securities are recorded on the specific identification basis. SFAS No. 115, ''Accounting for Investments in Debt and Equity Securities'' (''SFAS 115'') requires that debt and equity securities that have readily determinable fair values be carried at fair value unless they are held to maturity. Debt securities are classified as held to maturity and carried at amortized cost only if the reporting entity has a positive intent and ability to hold these securities to maturity. If not classified as held to maturity, such securities are classified as securities available for sale or as trading securities. Unrealized holding gains or losses on securities available for sale are excluded from net income and reported net of income taxes as other comprehensive income. At June 30, 2000 and 1999, all equity securities are classified as available for sale. The Company does not acquire securities for the purpose of engaging in trading activities. LOANS HELD FOR SALE - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Gains and losses on sales of loans are also accounted for in accordance with Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). -27- SFAS 134 requires that an entity engaged in mortgage banking activities classify the retained mortgage-backed security or other interest, which resulted from the securitization of a mortgage loan held for sale based upon its ability and intent to sell or hold these investments. ALLOWANCE FOR LOAN LOSSES - It is the policy of the Bank to provide a valuation allowance for estimated losses on loans based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations which may affect the borrower's ability to repay, estimated value of underlying collateral and current economic conditions in the Bank's lending area. The allowance is increased by provisions for loan losses charged to operations and is reduced by charge-offs, net of recoveries. While management uses available information to estimate losses on loans, future additions to or reductions in the allowance may be necessary based on changes in economic conditions beyond management's control. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to or reductions in the allowance based on judgments different from those of management. Management believes, based upon all relevant and available information, that the allowance for loan losses is adequate to absorb losses inherent in the portfolio. SFAS No. 114, ''Accounting by Creditors for Impairment of a Loan'' (''SFAS 114'') requires all creditors to account for impaired loans, except those loans that are accounted for at fair value or at the lower of cost or fair value, at the present value of expected future cash flows discounted at the loan's effective interest rate. As an expedient, creditors may account for impaired loans at the fair value of the collateral or at the observable market price of the loan if one exists. If the estimated fair value of the impaired loan is less than the recorded amount, a specific valuation allowance is established or a write-down is charged against the allowance for loan losses if the impairment is considered to be permanent. LOANS - Loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Interest income on loans is recorded using the level yield method. Under this method, discount accretion and premium amortization are included in interest income. Accrual of interest is discontinued when its receipt is in doubt, generally, when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, any interest credited to income in the current year is reversed. Payments on nonaccrual loans are applied to principal. Management may elect to continue the accrual of interest when a loan is in the process of collection and the estimated fair value of collateral is sufficient to cover the principal balance and accrued interest. Loans are returned to accrual status once the doubt concerning collectibility has been removed and the borrower has demonstrated performance in accordance with the loan terms and conditions. LOAN FEES - Loan origination fees and certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual loan terms. OTHER REAL ESTATE OWNED, NET - Properties acquired as a result of foreclosure on a mortgage loan are classified as other real estate owned and are recorded at the lower of the recorded investment in the related loan or the fair value of the property at the date of acquisition, with any resulting write down charged to the allowance for loan losses and any disposition expenses charged to the valuation allowance for possible losses on other real estate owned. Subsequent write downs are charged directly to operating expenses. PREMISES AND FIXED ASSETS - Land is stated at original cost. Buildings and furniture and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the properties as follows: Buildings 2.22% to 2.50% per year Furniture and equipment 10% per year Computer equipment 33.33% per year Leasehold improvements are amortized over the remaining non-cancelable terms of the related leases. EARNINGS PER SHARE ("EPS")- Earnings per share are calculated and reported in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share'' ("SFAS 128"). SFAS 128, requires disclosure of -28- basic earnings per share and diluted earnings per share, for entities with complex capital structures, on the face of the income statement, along with a reconciliation of the numerator and denominator of basic and diluted earnings per share. The following is a reconciliation of the numerator and denominator of basic earnings per share for the years ended June 30, 2000, 1999 and 1998 (in thousands).
Fiscal Year Ended June 30, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- NUMERATOR: Net Income $22,374 $19,861 $13,098 DENOMINATOR: Average shares outstanding utilized in the calculation of basic earnings per share 11,276 10,951 11,001 Unvested shares of Recognition and Retention Plan 268 372 517 Common stock equivalents due to the dilutive effect of stock options 252 528 523 - ---------------------------------------------------------------------------------------------------------------------- Average shares outstanding utilized in the calculation of diluted earnings per share 11,796 11,851 12,041 ======================================================================================================================
Common stock equivalents due to the dilutive effect of stock options are calculated based upon the average market value of the Company's common stock during the fiscal years ended June 30, 2000, 1999 and 1998. GOODWILL - Goodwill generated from the Company's acquisition of Conestoga Bancorp, Inc. on June 26, 1996 is recorded on a straight line basis over a twelve year period. Goodwill generated from the Company's acquisition of Financial Bancorp, Inc. on January 21, 1999 is recorded on a straight line basis over a twenty year period. In March 1995, the FASB issued SFAS No. 121, ''Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of'' which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment and reported at the lower of carrying amount or fair value, less cost to sell, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No such event or change in circumstance has occurred which has caused the Company to review its recorded level of goodwill associated with assets acquired from either Conestoga Bancorp, Inc. or Financial Bancorp, Inc. INCOME TAXES - Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109") which requires that deferred taxes be provided for temporary differences between the book and tax bases of assets and liabilities. CASH FLOWS - For purposes of the Consolidated Statement of Cash Flows, the Company considers cash and due from banks to be cash equivalents. EMPLOYEE BENEFITS - The Company maintains a Retirement Plan and 401(k) Plan for substantially all of its employees, both of which are tax qualified under the Employee Retirement Income Security Act of 1974 ("ERISA"). The Company provides additional postretirement benefits to employees, which are recorded in accordance with Statement of Financial Accounting Standards No. 106, ''Employers' Accounting for Postretirement Benefits Other Than Pensions'' ("SFAS 106"). This Statement requires accrual of postretirement benefits (such as health care benefits) during the years an employee provides services. The Company maintains an Employee Stock Ownership Plan for employees ("ESOP"). Compensation expense related to the ESOP is recorded in accordance with SOP 93- 6, which requires the compensation expense to be recorded during the period in which the shares become committed to be released to participants. The compensation expense is measured based upon the fair market value of the stock during the period, and, to the extent that the fair value of the shares committed to be released differs from the original cost of such shares, the difference is recorded as an adjustment to additional paid-in capital. -29- In December, 1996, the Company adopted a Recognition and Retention Plan for employees and outside directors ("RRP") and a Stock Option Plan for Employees and Outside Directors (the "Stock Option Plan"), which are subject to the accounting requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"). SFAS 123 encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB 25"). Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. To date, no compensation expense has been recorded for stock options, since, for all granted options, the market price on the date of grant equals the amount employees must pay to acquire the stock. In accordance with APB 25, compensation expense related to the RRP is recorded for all shares earned by participants during the period at $18.64 per share, the average historical acquisition cost of all allocated RRP shares. FINANCIAL INSTRUMENTS - Statement of Financial Accounting Standards No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS 119") requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On balance sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS 119 at June 30, 2000, 1999 or 1998. COMPREHENSIVE INCOME - Comprehensive income for the fiscal years ended June 30, 2000, 1999 and 1998 is determined in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income.'' Comprehensive income includes revenues, expenses, and gains and losses which, under current GAAP, bypass net income and are typically reported as a component of stockholders' equity. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - The Company's financial statements reflect the adoption of Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("SFAS 131")". SFAS 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The statement also requires that public enterprises report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. It also requires that information be reported about revenues derived from the enterprises' products or services, or about the countries in which the enterprises earn revenues and holds assets, and about major customers, regardless of whether that information is used in making operating decisions. The Company has one reportable segment, "Community Banking." All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit. General information required by SFAS 131 is disclosed in the Consolidated Financial Statements and accompanying notes. Additionally, for the years ended June 30, 2000, 1999, and 1998, there is no customer that accounted for more than 10% of the Company's revenue. -30- RECENTLY ISSUED ACCOUNTING STANDARDS REVENUE RECOGNITION IN FINANCIAL STATEMENTS - In December, 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views on applying generally accepted accounting principles to revenue recognition in financial statements. On June 26, 2000, the SEC issued SAB 101B to defer the effective date of implementation of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 31, 1999. The Company is required to adopt SAB 101 by June 30, 2001. The Company does not expect the adoption of SAB 101 to have a material impact on the consolidated financial statements. DERIVATIVE INSTRUMENTS - In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities" as amended in June, 1999 by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. SFAS 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 on July 1, 2000. No adjustment was required as a result of the change in accounting principle. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas in the accompanying financial statements where estimates are significant include the allowance for loans losses, the carrying value of other real estate, purchase accounting adjustments related to the acquisitions of Conestoga and FIBC and the fair value of financial instruments. RECLASSIFICATION - Certain June 30, 1999, and 1998 amounts have been reclassified to conform to the June 30, 2000 presentation. 2. CONVERSION TO STOCK FORM OF OWNERSHIP On November 2, 1995, the Board of Directors of the Bank adopted a Plan of Conversion to convert from mutual to stock form. As part of the conversion, the Company was incorporated under Delaware law for the purpose of acquiring and holding all of the outstanding stock of the Bank. On June 26, 1996, the Company completed its initial public offering and issued 14,547,500 shares of common stock (par value $.01 per share) at a price of $10.00 per share, resulting in net proceeds of approximately $141,368 prior to the acquisition of stock by the Employee Stock Ownership Plan. Costs related to the conversion were charged against the Company's proceeds from the sale of the stock. At the time of conversion, the Bank established a liquidation account in an amount equal to the retained earnings of the Bank as of the date of the most recent financial statements contained in the final conversion prospectus. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. -31- The Company acquired Conestoga Bancorp, Inc. on June 26, 1996. The liquidation account previously established by Conestoga's subsidiary, Pioneer Savings Bank, F.S.A. during its initial public offering in March, 1993, was assumed by the Company in the acquisition. The Company acquired FIBC on January 21, 1999. The liquidation account previously established by FIBC's subsidiary, Financial Federal Savings Bank during its initial public offering was assumed by the Company in the acquisition. The Company may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause stockholders' equity to be reduced below applicable regulatory capital maintenance requirements, the amount required for the liquidation account, or if such declaration and payment would otherwise violate regulatory requirements. 3. ACQUISITION OF FINANCIAL BANCORP, INC. On January 21, 1999, the Company completed the acquisition of FIBC, the holding company for Financial Federal Savings Bank, F.S.B. Pursuant to the Merger Agreement, each FIBC stockholder who submitted a valid election for cash received $39.14 in cash and each FIBC stockholder who submitted a valid election for DCB common stock received 1.8282 shares of DCB common stock, plus cash in lieu of any fractional shares, in exchange for each of their shares of FIBC common stock. The remaining shares of FIBC common stock for which a valid election was not submitted were converted into, pursuant to the Merger Agreement, a combination of DCB stock and cash such that each such shareholder received $31.257 in cash and 0.3682 shares of DCB common stock for each share of FIBC common stock, except that all stockholders of FIBC who owned less than 50 shares of FIBC common stock received cash. Upon consummation of the acquisition, shares of FIBC common stock that were owned by FIBC as treasury, that were unallocated shares held in FIBC's Recognition and Retention Plan or that were held directly by DCB other than in a fiduciary capacity or in satisfaction of a debt previously contracted were canceled and retired. No payment was be made with respect to such shares of FIBC common stock. Holders of stock options which had been granted by FIBC to purchase 60,133 shares of FIBC common stock were paid an amount in cash computed by multiplying (i) any positive difference obtained by subtracting the per share exercise price applicable to such option from $39.14, by (ii) the number of shares of FIBC common stock subject to such option. These payments totaled approximately $1,545. In addition, holders of stock options which had been granted by FIBC to purchase 96,975 shares of FIBC common stock were converted into options to purchase 177,286 shares DCB common stock (the "Converted Options"). The expiration dates on all Converted Options remained unchanged from initial grant by FIBC. Based upon the closing price of DCB common stock on January 21, 1999, the total consideration paid to FIBC stockholders, in the form of cash or DCB stock, was $66,750. The Bank received approximately $189,000, $43,800, and $37,800 of net loans, investment securities, and mortgage-backed securities, respectively, at fair value and assumed approximately $230,700 of customer deposit liabilities. A core deposit premium of $4,950 was recorded related to the deposits assumed and is being amortized on a straight line basis over six years. The acquisition was recorded using the purchase method of accounting; accordingly, the purchase price was allocated to the respective assets acquired and liabilities assumed based on their estimated fair values. Goodwill generated in the transaction of $44,200 is being amortized on a straight line basis over 20 years for financial reporting purposes. The information below presents, on an unaudited pro forma basis, the consolidated statement of operations for the Company for the years ended June 30, 1999 and 1998. All information below is adjusted for the acquisition of FIBC, as if the transaction had been consummated on July 1, 1997. -32-
Actual Consolidated Pro-Forma Pro Forma Pro Forma for the Six for the Six for the for the Months Ended Months Ended Year Ended Year Ended June 30, 1999(A) December 31, 1998 June 30, 1999 June 30, 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $31,607 $29,805 $61,412 $58,682 Provision for possible loan losses 120 292 412 2,068 Non-interest income 4,255 4,137 8,392 8,033 Non-interest expense: Goodwill and core deposit amortization 2,543 1,804 4,347 3,636 Other non-interest expense 14,184 15,404 29,588 33,219 Total non-interest expense 16,727 17,208 33,935 36,855 Income before income taxes $19,015 $16,442 $35,457 $27,792
(A) Amounts exclude the operations of FIBC during the period January 1, 1999 through January 21, 1999, which are not material to the total combined operations for the year ended June 30, 1999. 4. INVESTMENT SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE The amortized cost, gross unrealized gains and losses and estimated fair value of investment securities held to maturity at June 30, 2000 were as follows:
Investment Securities Held to Maturity Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------ DEBT SECURITIES: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $12,440 $- $(144) $12,296 Obligations of state and political subdivisions 554 15 - 569 Corporate securities 4,495 - (9) 4,486 - ------------------------------------------------------------------------------------------------------------------------------ $17,489 $15 $(153) $17,351 - ------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of investment securities held to maturity at June 30, 2000, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Estimated Cost Fair Value - ----------------------------------------------------------------------------- Due in one year or less $3,172 $3,171 Due after one year through five years 13,188 13,043 Due after five years through ten years 1,129 1,137 - ----------------------------------------------------------------------------- $17,489 $17,351 - ----------------------------------------------------------------------------- During the year ended June 30, 2000, proceeds from the calls of investment securities held to maturity totaled $10,000. No gain or loss resulted on these calls. There were no sales of investment securities held to maturity during the year ended June 30, 2000. The amortized/historical cost, gross unrealized gains and losses and estimated fair value of investment securities available for sale at June 30, 2000 were as follows: -33-
Investment Securities Available for Sale Amortized/ Gross Gross Historical Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------ DEBT SECURITIES: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $55,246 $215 $(1,969) $53,492 Corporate securities 52,167 41 (1,654) 50,554 Public utilities 1,644 - (59) 1,585 109,057 256 (3,682) 105,631 - ------------------------------------------------------------------------------------------------------------------------------ EQUITY SECURITIES 14,948 1,633 (1,091) 15,490 - ------------------------------------------------------------------------------------------------------------------------------ $124,005 $1,889 $(4,773) $121,121 - ------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of investment securities available for sale at June 30, 2000, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Estimated Cost Fair Value - ----------------------------------------------------------------------------- Due in one year or less $13,173 $13,149 Due after one year through five years 95,884 92,482 Due in five years to ten years - - - ----------------------------------------------------------------------------- $109,057 $105,631 - ----------------------------------------------------------------------------- During the year ended June 30, 2000, proceeds from the sales and calls of investment securities available for sale totaled $39,867 and $2,400, respectively. Net losses of $777 resulted from the sales. No gain or loss resulted from the calls. The amortized cost, gross unrealized gains and losses and estimated fair value of investment securities held to maturity at June 30, 1999 were as follows:
Investment Securities Held to Maturity Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------ DEBT SECURITIES: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $22,401 $34 $(35) $22,400 Obligations of state and political subdivisions 1,819 30 - 1,849 Corporate securities 7,478 41 - 7,519 - ------------------------------------------------------------------------------------------------------------------------------ $31,698 $105 $(35) $31,768 - ------------------------------------------------------------------------------------------------------------------------------
During the year ended June 30, 1999, proceeds from the calls of investment securities held to maturity totaled $41,660. A gain of $86 resulted on these calls. There were no sales of investment securities held to maturity during the year ended June 30, 1999. The amortized/historical cost, gross unrealized gains and losses and estimated fair value of investment securities available for sale at June 30, 1999 were as follows: -34-
Investment Securities Available for Sale Amortized/ Gross Gross Historical Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------ DEBT SECURITIES: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $65,074 $439 $(1,360) $64,153 Corporate securities 63,402 141 (1,167) 62,376 Public utilities 5,047 - (86) 4,961 133,523 580 (2,613) 131,490 - ------------------------------------------------------------------------------------------------------------------------------ EQUITY SECURITIES: 14,162 1,614 (634) 15,142 - ------------------------------------------------------------------------------------------------------------------------------ $147,685 $2,194 $(3,247) $146,632 - ------------------------------------------------------------------------------------------------------------------------------
During the year ended June 30, 1999, proceeds from the sales and calls of investment securities available for sale totaled $9,373 and $30,268, respectively. Net gains of $555 and $27, respectively, resulted from the sales and calls. 5. MORTGAGE-BACKED SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE The amortized cost, gross unrealized gains and losses and the estimated fair value of mortgage-backed securities held to maturity at June 30, 2000 were as follows:
Mortgage-Backed Securities Held to Maturity Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------ GNMA pass-through certificates $2,749 $- $(6) $2,743 FHLMC pass-through certificates 5,552 - (39) 5,513 FNMA pass-through certificates 5,028 4 (25) 5,007 - ------------------------------------------------------------------------------------------------------------------------------ $13,329 $4 $(70) $13,263 - ------------------------------------------------------------------------------------------------------------------------------
During the year ended June 30, 2000, proceeds from the sales of mortgage-backed securities held to maturity totaled $1,955. Net losses of $4 resulted from these sales. The unpaid principal of the securities at the dates of sale were less than 15% of their acquired par value, and thus were permissible sales under SFAS 115. The amortized cost, gross unrealized gains and losses and the estimated fair value of mortgage-backed securities available for sale at June 30, 2000 were as follows:
Mortgage-Backed Securities Available for Sale Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------ Collateralized mortgage obligations $287,780 $176 $(8,089) $279,867 GNMA pass-through certificates 130,473 182 (921) 129,734 FHLMC pass-through certificates 9,377 70 (107) 9,340 FNMA pass-through certificates 10,530 59 (169) 10,420 - ------------------------------------------------------------------------------------------------------------------------------ $438,160 $487 $(9,286) $429,361 - ------------------------------------------------------------------------------------------------------------------------------
During the year ended June 30, 2000, proceeds from the sales of mortgage-backed securities available for sale totaled $64,937. Net losses of $1,818 resulted from these sales. The amortized cost, gross unrealized gains and losses and the estimated fair value of mortgage-backed securities held to maturity at June 30, 1999 were as follows:
Mortgage-Backed Securities Held to Maturity Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------ GNMA pass-through certificates $5,772 $259 $- $6,031 FHLMC pass-through certificates 9,140 68 - 9,208 FNMA pass-through certificates 7,908 57 (12) 7,953 - ------------------------------------------------------------------------------------------------------------------------------ $22,820 $384 $(12) $23,192 - ------------------------------------------------------------------------------------------------------------------------------
-35- The amortized cost, gross unrealized gains and losses and the estimated fair value of mortgage-backed securities available for sale at June 30, 1999 were as follows:
Mortgage-Backed Securities Available for Sale Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------ Collateralized mortgage obligations $348,938 $220 $(4,904) $344,254 GNMA pass-through certificates 127,285 730 (709) 127,306 FHLMC pass-through certificates 13,854 105 (74) 13,885 FNMA pass-through certificates 17,409 127 (134) 17,402 - ------------------------------------------------------------------------------------------------------------------------------ $507,486 $1,182 $(5,821) $502,847 - ------------------------------------------------------------------------------------------------------------------------------
There were no sales or calls of mortgage-backed securities held to maturity or available for sale during the year ended June 30, 1999. 6. LOANS The Company's real estate loans are comprised of the following: At June 30, 2000 1999 - ------------------------------------------------------------------------------ One-to-four family $212,138 $246,075 Multi-family and underlying cooperative 1,349,854 1,000,859 Nonresidential 118,576 88,837 F.H.A. and V. A. insured mortgage loans 7,536 9,699 Co-op loans 27,465 32,893 - ------------------------------------------------------------------------------ 1,715,569 1,378,363 Net unearned fees (2,017) (2,853) - ------------------------------------------------------------------------------ $1,713,552 $1,375,510 ============================================================================== The Bank originates both adjustable and fixed interest rate real estate loans. At June 30, 2000, the approximate composition of these loans was as follows: Fixed Rate Variable Rate - ----------------------------------- ------------------------------------- Period to Maturity Period to Maturity Book Value or Next Repricing Book Value - ----------------------------------- ------------------------------------- 1 month-1 year $2,005 1 month-1 year $82,669 1 year-3 years 2,702 1 year-3 years 216,256 3 years-5 years 12,581 3 years-5 years 297,508 5 years-10 years 299,961 5 years-10 years 602,416 Over 10 years 199,471 Over 10 years - - ----------------------------------- ------------------------------------- $516,720 $1,198,849 - ----------------------------------- ------------------------------------- The adjustable rate loans have interest rate adjustment limitations and are generally indexed to the Federal Home Loan Bank of New York ("FHLBNY") five- year borrowing funds rate, the one-year constant maturity Treasury index, or the Federal Home Loan Bank national mortgage contract rate. A concentration of credit risk exists within the Bank's loan portfolio, as the majority of real estate loans are collateralized by multi-family and underlying cooperative properties located in the New York City metropolitan area. The Company's other loans are comprised of the following: At June 30, 2000 1999 - ------------------------------------------------------------------------------ Student loans $990 $794 Passbook loans (secured by savings and time deposits) 1,900 2,271 Home improvement loans 3,410 3,666 Consumer installment and other loans 1,348 1,100 - ------------------------------------------------------------------------------ $7,648 $7,831 - ------------------------------------------------------------------------------ -36- Loans on which the accrual of interest has been discontinued were $4,421 and $3,001 at June 30, 2000 and 1999, respectively. Interest income foregone on nonaccrual loans was not material during the fiscal years ended June 30, 2000 and 1999. The Bank had outstanding loans considered troubled-debt restructurings of $700 and $1,290 at June 30, 2000 and 1999, respectively. Income recognized on these loans was approximately $56 and $125 for the years ended June 30, 2000 and 1999, respectively, compared to interest income of $70 and $183 calculated under the original terms of the loans, for the years ended June 30, 2000 and 1999, respectively. The recorded investment in loans for which impairment has been recognized under the guidance of SFAS 114 was approximately $2,591 and $1,563 at June 30, 2000 and 1999, respectively. The average balance of impaired loans was approximately $1,482 and $2,329 for the years ended June 30, 2000 and 1999, respectively. Write-downs on impaired loans were not material during the years ended June 30, 2000 and 1999. At June 30, 2000 and 1999, specific reserves totaling $130 and $62 were allocated within the allowance for loan losses for impaired loans. Net principal received and interest income recognized on impaired loans during the years ended June 30, 2000 and 1999 were not material. The following assumptions were utilized in evaluating the loan portfolio pursuant to the provisions of SFAS 114: HOMOGENOUS LOANS - One-to-four family residential mortgage loans and loans on cooperative apartments having a balance of less than $227 and consumer loans are considered to be small balance homogenous loan pools and, accordingly, are not covered by SFAS 114. LOANS EVALUATED FOR IMPAIRMENT - All non-homogeneous loans greater than $1,000 are individually evaluated for potential impairment. Additionally, residential mortgage loans exceeding $227 and delinquent in excess of 60 days are evaluated for impairment. A loan is considered impaired when it is probable that all contractual amounts due will not be collected in accordance with the terms of the loan. A loan is not deemed to be impaired if a delay in receipt of payment is expected to be less than 30 days or if, during a longer period of delay, the Bank expects to collect all amounts due, including interest accrued at the contractual rate during the period of the delay. Factors considered by management include the property location, economic conditions, and any unique circumstances affecting the loan. At June 30, 2000 and 1999, all impaired loans were on nonaccrual status. In addition, at June 30, 2000 and 1999, respectively, approximately $1,830 and $1,437 of one-to-four family residential mortgage loans, loans on cooperative apartments and consumer loans with a balance of less than $227 were on nonaccrual status. These loans are considered as a homogeneous loan pool not covered by SFAS 114. RESERVES AND CHARGE-OFFS - The Bank allocates a portion of its total allowance for loan losses to loans deemed impaired under SFAS 114. All charge-offs on impaired loans are recorded as a reduction in both loan principal and the allowance for loan losses. Management evaluates the adequacy of its allowance for loan losses on a regular basis. At June 30, 2000, management believes that its allowance is adequate to provide for losses inherent in the total loan portfolio, including impaired loans. MEASUREMENT OF IMPAIRMENT - Since all impaired loans are collateralized by real estate properties, the fair value of the collateral is utilized to measure impairment. INCOME RECOGNITION - Accrual of interest is discontinued on loans identified as impaired and past due ninety days. Subsequent cash receipts are applied initially to the outstanding loan principal balance. Additional receipts beyond the recorded outstanding balance at the time interest is discontinued are recorded as recoveries in the Bank's allowance for loan losses. -37- 7. ALLOWANCE FOR LOAN LOSSES AND LOSSES ON OTHER REAL ESTATE OWNED Changes in the allowance for loan losses were as follows: For the year ended June 30, 2000 1999 1998 - ------------------------------------------------------------------------------ Balance at beginning of period $15,081 $12,075 $10,726 Provision charged to operations 240 240 1,635 Loans charged off (545) (208) (328) Recoveries 9 7 42 Reserve acquired in purchase of FIBC - 2,967 - - ------------------------------------------------------------------------------ Balance at end of period $14,785 $15,081 $12,075 - ------------------------------------------------------------------------------ Changes in the allowance for losses on real estate owned were as follows: For the year ended June 30, 2000 1999 1998 - ------------------------------------------------------------------------------ Balance at beginning of period $149 $164 $187 Provision charged to operations 25 16 114 Charge-offs, net of recoveries (129) (31) (137) Balance at end of period $45 $149 $164 8. MORTGAGE SERVICING ACTIVITIES At June 30, 2000 and 1999, the Bank was servicing loans for others having principal amounts outstanding of approximately $48,190 and $53,857 respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. In connection with these loans serviced for others, the Bank held borrowers' escrow balances of approximately $677 and $654 at June 30, 2000 and 1999, respectively. 9. PREMISES AND FIXED ASSETS The following is a summary of premises and fixed assets: At June 30, 2000 1999 - ----------------------------------------------------------------------------- Land $2,457 $2,462 Buildings 10,297 10,689 Leasehold improvements 9,215 8,357 Furniture and equipment 7,814 7,712 - ----------------------------------------------------------------------------- 29,783 29,220 - ----------------------------------------------------------------------------- Less: accumulated depreciation and amortization (15,012) (14,245) - ----------------------------------------------------------------------------- $14,771 $14,975 ============================================================================= Depreciation and amortization expense amounted to approximately $1,080, $954, and $964 for the years ended June 30, 2000, 1999 and 1998, respectively. 10. FEDERAL HOME LOAN BANK OF NEW YORK CAPITAL STOCK The Bank is a Savings Bank Member of the FHLBNY. Membership requires the purchase of shares of FHLBNY capital stock at $100 per share. The Bank owned 424,227 and 282,813 shares at June 30, 2000 and 1999, respectively. The FHLBNY paid dividends on the capital stock of 6.8%, 6.9%, and 7.2% during the years ended June 30, 2000, 1999 and 1998, respectively. 11. DUE TO DEPOSITORS The deposit accounts of each depositor are insured up to $100 by either the Bank Insurance Fund or the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"). -38- Deposits are summarized as follows:
At June 30, 2000 1999 - ---------------------------------------------------------------------------------------------------------------- EFFECTIVE Effective COST LIABILITY Cost Liability - ---------------------------------------------------------------------------------------------------------------- Savings accounts 2.08% $373,772 2.09% $406,602 Certificates of deposit 5.51 618,165 5.31 703,251 Money market accounts 4.37 146,066 3.55 52,979 NOW and Super NOW accounts 1.24 26,787 1.22 25,687 Non-interest bearing checking accounts - 54,358 - 50,414 - ---------------------------------------------------------------------------------------------------------------- 3.98% $1,219,148 3.85% $1,238,933 - ----------------------------------------------------------------------------------------------------------------
The distribution of certificates of deposits by remaining maturity was as follows: At June 30, 2000 1999 - ----------------------------------------------------------------------- Maturity in three months or less $131,865 $221,368 Over 3 through 6 months 99,033 137,654 Over 6 through 12 months 184,040 192,749 Over 12 months 203,227 151,480 - ----------------------------------------------------------------------- Total certificates of deposit $618,165 $703,251 - ----------------------------------------------------------------------- The aggregate amount of certificates of deposits with a minimum denomination of $100 was approximately $75,625 and $78,707 at June 30, 2000 and 1999, respectively. 12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Presented below is information concerning securities sold with agreement to repurchase:
At or for the year ended June 30, 2000 1999 - ----------------------------------------------------------------------------------------------------------------- Balance outstanding at end of period $434,027 $481,660 Average interest cost at end of period 6.37% 5.28% Average balance outstanding during the year $456,155 $381,996 Average interest cost during the year 5.66% 5.45% Carrying value of underlying collateral at end of period $456,844 $496,500 Estimated fair value of underlying collateral $447,715 $491,750 Maximum balance outstanding at month end during period $486,936 $481,660
13. FEDERAL HOME LOAN BANK OF NEW YORK ADVANCES The Bank had borrowings (''Advances'') from the FHLBNY totaling $555,000 and $250,000 at June 30, 2000 and 1999, respectively. The average cost of FHLB advances was 5.89% and 5.96%, respectively, during the years ended June 30, 2000 and 1999, and the average interest rate on outstanding FHLB advances was 6.07% and 5.52%, respectively, at June 30, 2000 and 1999. At June 30, 2000, in accordance with the Advances, Collateral Pledge and Security Agreement with the FHLBNY, the Bank maintained in excess of $610,500 of qualifying collateral with the FHLBNY (principally real estate loans), as defined by the FHLBNY, to secure such advances. 14. SUBORDINATED NOTES PAYABLE On April 12, 2000, the Company issued subordinated notes in the aggregate amount of $25.0 million. The notes have a fixed rate of interest of 9.25% and mature on May 1, 2010. Interest expense recorded on the notes, inclusive of amortization of related issuance costs, was $521 during the year ended June 30, 2000. -39- 15. INCOME TAXES The Company's Federal, State and City income tax provisions were comprised of the following:
Year Ended June 30, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- STATE State State FEDERAL AND CITY TOTAL Federal and City Total Federal and City Total - ---------------------------------------------------------------------------------------------------------------------------- Current $11,569 $677 $12,246 $11,045 $1,685 $12,730 $8,687 $2,698 $11,385 Deferred 2,787 184 2,971 1,915 (630) 1,285 776 (295) 481 - ---------------------------------------------------------------------------------------------------------------------------- $14,356 $861 $15,217 $12,960 $1,055 $14,015 $9,463 $2,403 $11,866 ============================================================================================================================
In accordance with SFAS 109, deferred tax assets and liabilities are recorded for temporary differences between the book and tax bases of assets and liabilities. The components of Federal and net State and City deferred income tax assets and liabilities were as follows:
At June 30, 2000 1999 - ---------------------------------------------------------------------------------------------------------- STATE State FEDERAL AND CITY Federal and City - ---------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS: Excess book bad debt over tax Bad debt reserve $4,027 $2,629 $3,809 $2,691 Employee benefit plans 2,784 1,635 3,921 2,344 Tax effect of other comprehensive loss on securities available 3,271 2,103 1,752 618 for sale Other - - 165 102 - ---------------------------------------------------------------------------------------------------------- Total deferred tax assets 10,082 6,367 9,647 5,755 - ---------------------------------------------------------------------------------------------------------- Less: Valuation allowance on deferred tax assets - - - - - ---------------------------------------------------------------------------------------------------------- Deferred tax assets after valuation allowance $10,082 $6,367 $9,647 $5,755 - ---------------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES: Undistributed earnings of subsidiary $7,172 $16 $4,865 $21 Difference in book and tax carrying value of fixed assets 324 52 192 2 Tax effect of purchase accounting fair value adjustments 861 515 921 549 Other 101 61 - - - ---------------------------------------------------------------------------------------------------------- Total deferred tax liabilities $8,458 $644 $5,978 $572 - ---------------------------------------------------------------------------------------------------------- Net deferred tax asset $1,624 $5,723 $3,669 $5,183 ==========================================================================================================
During the year ended June 30, 2000, deferred tax assets include an increase of $3,004 resulting from adjustments pursuant to SFAS 115. The provision for income taxes differed from that computed at the Federal statutory rate as follows:
Year ended June 30, 2000 1999 1998 - -------------------------------------------------------------------------------------------------- Tax at Federal statutory rate $13,157 $11,856 $8,737 State and local taxes, net of Federal income tax benefit 560 685 1,562 Goodwill amortization 1,616 1,185 843 Benefit plan differences 42 406 532 Adjustments for prior period tax returns (153) - - Other, net (5) (117) 193 - -------------------------------------------------------------------------------------------------- $15,217 $14,015 $11,867 ================================================================================================== Effective tax rate 40.48% 41.37% 47.53% ==================================================================================================
Savings banks that meet certain definitions, tests, and other conditions prescribed by the Internal Revenue Code are allowed to deduct, with limitations, a bad debt deduction. Prior to August, 1996, this deduction could be computed as a percentage of taxable income before such deduction ("PTI Method") or based upon actual loss experience for Federal, New York State and New York City income taxes. -40- Pursuant to SFAS 109, the Bank is not required to provide deferred taxes on its tax loan loss reserve as of December 31, 1987 ("base year reserve"). The amount of this reserve on which no deferred taxes have been provided is approximately $15,280. This reserve could be recognized as taxable income and create a current tax liability using the income tax rates then in effect if one of the following occur: 1) the Bank's retained earnings represented by the reserve is used for purposes other than to absorb losses from bad debts, including dividends or distributions in liquidation; 2) the Bank fails to qualify as a Bank as provided by the Internal Revenue Code, or 3) there is a change in federal tax law. On August 20, 1996, Federal legislation was signed into law which repealed the reserve method of accounting for bad debts, including the percentage of taxable income method used by the Bank. This repeal is effective for the Bank's taxable year beginning January 1, 1996. In addition, the legislation requires the Bank to include in taxable income its bad debt reserves in excess of its base year reserve over a 6 to 8 year period depending upon the maintenance of certain loan origination levels. Since the percentage of taxable income method tax bad debt deduction and the corresponding increase in the tax bad debt reserve in excess of the base year have been treated as temporary differences pursuant to SFAS 109, this change in tax law had no effect on the Company's consolidated statement of operations. 16. EMPLOYEE BENEFIT PLANS EMPLOYEE RETIREMENT PLAN - The Bank is a participant in a tax-qualified noncontributory defined benefit retirement plan with the RSI Retirement Trust. Substantially all full-time employees are eligible for participation after one year of service. In addition, a participant must be at least 21 years of age at the date of enrollment. During the year ended June 30, 1998, the Bank offered an early retirement program to all Plan participants who met certain eligibility criterion. As a result of the early retirement program, a non- recurring charge of $1,611 was recorded. Prior to January 21, 1999, FIBC maintained an employee retirement plan covering all eligible employees (the "FIBC Retirement Plan"). Effective, January 21, 1999, the Bank assumed sponsorship of the FIBC Retirement Plan, for which the projected benefit obligation and plan assets totaled $2,281 and $2,675, respectively. Participants in the FIBC Retirement Plan, by amendment dated August 17, 1999, were provided with full vesting on their benefits through January 21, 1999. The projected benefit obligation and plan assets of the FIBC Retirement Plan are reflected in the projected benefit obligation and plan assets of the Bank's pension plan as of June 30, 1999. Effective April 1, 2000, the Company froze all participant benefits under the employee retirement plan. A gain of $1,360 was recorded in June, 2000 related to this benefit curtailment. The retirement cost for the pension plan includes the following components (including a non-recurring charge of $1,611 related to an early retirement program in 1998, costs associated with the acquired FIBC Retirement Plan obligation during the period January 21, 1999 to June 30, 1999, and a curtailment credit of $1,360 during the fiscal year ended June 30, 2000):
For the year ended June 30, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- Service cost $528 $444 $332 Interest cost 1,129 915 781 Actual return on plan assets (1,433) (1,272) (2,931) Net amortization and deferral (32) (32) 1,843 Expense associated with early retirement program - - 1,611 Curtailment credit (1,360) - - - ----------------------------------------------------------------------------------------------------------- Net periodic (credit) cost $(1,168) $55 $1,636 ===========================================================================================================
-41- The funded status of the plan was as follows:
JUNE 30, 2000 1999 - ----------------------------------------------------------------------------------------------------------------- PROJECTED BENEFIT OBLIGATION: Balance at beginning of period $16,604 $14,286 Service cost 527 444 Interest cost 1,129 915 Actuarial (gain) loss (1,298) (393) Benefit payments (987) (795) Settlements (424) (2) Early retirement obligation - (132) Obligation of acquired plan (1,217) 2,281 - ----------------------------------------------------------------------------------------------------------------- Balance at end of period 14,334 16,604 - ----------------------------------------------------------------------------------------------------------------- Plan assets at fair value (investments in trust funds managed by RSI) Balance at beginning of period 16,263 13,599 Return on plan assets 2,639 786 Contributions 274 - Benefit payments (987) (795) Settlements (424) (2) Assets of acquired plan - 2,675 - ----------------------------------------------------------------------------------------------------------------- Balance at end of period 17,765 16,263 - ----------------------------------------------------------------------------------------------------------------- FUNDED STATUS: Excess (Deficiency) of plan assets over projected benefit obligation 3,431 (341) Unrecognized gain (loss) from experience different from that assumed (1,878) 626 Unrecognized net past service liability - (175) - ----------------------------------------------------------------------------------------------------------------- Prepaid retirement expense included in other assets $1,553 $110 =================================================================================================================
Major assumptions utilized were as follows: At June 30, 2000 1999 - ----------------------------------------------------------------------------- Discount rate 7.75% 7.00% Rate of increase in compensation levels 5.50 5.00 Expected long-term return on plan assets 9.00 9.00 BENEFIT MAINTENANCE PLAN AND DIRECTORS' RETIREMENT PLAN - During the fiscal year ended June 30, 1994, the Bank established a Supplemental Executive Retirement Plan (''SERP'') for its executive officers. The SERP was established to compensate the executive officers for any curtailments in benefits due to the statutory limitations on benefit plans. The SERP exists as a nonqualified plan which supplements the existing qualified plans. Defined benefit and defined contribution costs are incurred annually related to the SERP. During the year ended June 30, 1997, the SERP was renamed the Benefit Maintenance Plan ("BMP"), and sponsorship was transferred to the Company. As of June 30, 2000 and 1999, the Benefit Maintenance Plan has an investment in the Company's common stock of $1,790 and $831, respectively. Accrued benefits under the defined benefit portion of the BMP was suspended when benefit accruals under the tax qualified plan were suspended. Effective July 1, 1996, the Company established a non-qualified Retirement Plan for all of its outside directors, which will provide benefits to each eligible outside director commencing upon their termination of Board service or at age 65. Each outside director who serves or has agreed to serve as an outside director will automatically become a participant in the Plan. The retirement cost for the defined benefit portion of the BMP and Directors' Retirement plan include the following components: For the year ended June 30, 2000 1999 1998 - ----------------------------------------------------------------------------- Service cost $151 $141 $104 Interest cost 282 236 248 Net amortization and deferral 173 175 170 Curtailment credit (131) - - - ----------------------------------------------------------------------------- $475 $552 $522 ============================================================================= The defined contribution costs incurred by the Bank related to the BMP/SERP for the years ended June 30, 2000, 1999 and 1998 were $924, $990 and $522, respectively. -42- The funded status of the defined benefit portion of the plans was as follows:
JUNE 30, 2000 1999 - -------------------------------------------------------------------------------------------------------------------- PROJECTED BENEFIT OBLIGATION: Balance at beginning of period $3,964 $3,562 Service cost 151 141 Interest cost 282 236 Benefit payments - - Actuarial (gain) loss (55) 25 Balance at end of period 4,342 3,964 PLAN ASSETS AT FAIR VALUE: Balance at beginning of period - - Contributions - - Benefit payments - - - -------------------------------------------------------------------------------------------------------------------- Balance at end of period - - - -------------------------------------------------------------------------------------------------------------------- FUNDED STATUS: Deficiency of plan assets over projected benefit obligation (4,342) (3,964) Benefit curtailment 760 - Unrecognized gain from experience different from that assumed 744 1,088 Unrecognized net past service liability 228 739 - -------------------------------------------------------------------------------------------------------------------- Accrued expense included in other liabilities $(2,610) $(2,137) ==================================================================================================================== Amount recognized in statement of financial condition consists of: Accrued liability $(3,271) $(2,887) Intangible asset 661 750 - -------------------------------------------------------------------------------------------------------------------- Net amount recognized $(2,610) $(2,137) ====================================================================================================================
Major assumptions utilized were as follows:
At June 30, 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- DIRECTORS' Directors' RETIREMENT Retirement BMP PLAN BMP Plan - ---------------------------------------------------------------------------------------------------------------------------- Discount rate 7.75% 7.50% 7.00% 7.25% Rate of increase in compensation levels 5.50 4.00 5.00 4.00
401(K) PLAN - The Bank also has a 401(k) plan which covers substantially all employees. Prior to May 31, 1996, under such plan the Bank matched 50% of each participant's contribution up to 6% of the participant's annual compensation for the first four years of participation and thereafter 100% of the participant's contribution up to a maximum of 6%. Effective May 31, 1996, the plan was amended whereby the Bank ceased all contributions to the plan, and effective January 1, 1997, the Bank ceased all participant pre-tax contributions to the Plan. As a result, no expense was recorded related to the 401(k) plan during the fiscal years ended June 30, 2000, 1999 and 1998. Effective July 1, 2000, participant contributions of up to 12% of "covered compensation," as defined by the Plan, and employer profit-sharing type contributions of 3% of "covered compensation" were reinstated for all participants of the 401(k) plan. The 401(k) plan owns participant investments in the Company's common stock for the accounts of participants which totaled $3,532, $5,001 and $6,630 at June 30, 2000, 1999 and 1998, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - The Bank offers additional postretirement benefits to its retired employees who have provided at least five (5) consecutive years of credited service and were active employees prior to April 1, 1991, as follows: (1) Employees who retired prior to April 1, 1991 receive full medical coverage in effect until their death at no cost to such retirees; (2) Eligible employees retiring after April 1, 1991 will be eligible for continuation of their medical coverage in effect at the time of such employees' retirement until their death. Throughout an employee's retirement, the Bank will continue to pay the premiums for this coverage up to the premium amount paid for the first year of retirement coverage. Should the premiums increase, the employee will have to pay the differential to maintain full medical coverage. -43- Postretirement medical benefits are only available to those full-time employees who, upon termination of service, start collecting retirement benefits immediately from the Bank. The Bank reserves the right at any time, and to the extent permitted by law, to change, terminate or discontinue any of the group benefits, and can exercise the maximum discretion permitted by law, in administering, interpreting, modifying or taking any other action with respect to the plan or benefits. The postretirement cost includes the following components: For the year ended June 30, 2000 1999 1998 - ---------------------------------------------------------------- Service cost $50 $48 $37 Interest cost 197 179 178 Unrecognized past service liability (17) (20) (29) - ---------------------------------------------------------------- $230 $207 $186 ================================================================ The funded status of the postretirement benefit plan was as follows:
JUNE 30, 2000 1999 - -------------------------------------------------------------------------------------------------------------------- PROJECTED BENEFIT OBLIGATION: Balance at beginning of period $2,888 $2,714 Service cost 50 48 Interest cost 197 179 Actuarial (gain) loss (678) 80 Benefit payments (150) (133) - -------------------------------------------------------------------------------------------------------------------- Balance at end of period 2,307 2,888 - -------------------------------------------------------------------------------------------------------------------- PLAN ASSETS AT FAIR VALUE: Balance at beginning of period - - Contributions 150 133 Benefit payments (150) (133) - -------------------------------------------------------------------------------------------------------------------- Balance at end of period - - - -------------------------------------------------------------------------------------------------------------------- FUNDED STATUS: Deficiency of plan assets over projected benefit obligation (2,307) (2,888) Unrecognized gain (loss) from experience different from that assumed (238) 451 Unrecognized net past service liability (240) (268) - -------------------------------------------------------------------------------------------------------------------- Accrued expense included in other liabilities $(2,785) $(2,705) ====================================================================================================================
The assumed medical cost trend rates used in computing the accumulated postretirement benefit obligation was 6.50% in 1999 and was assumed to decrease gradually to 5.0% in 2005 and to remain at that level thereafter. Increasing the assumed medical care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation by approximately $102. The assumed discount rate and rate of compensation increase used to measure the accumulated postretirement benefit obligation at June 30, 2000 were 7.75% and 5.50%, respectively. The assumed discount rate and rate of compensation increase used to measure the accumulated postretirement benefit obligation at June 30, 1999 were 7.00% and 5.00%, respectively. EMPLOYEE STOCK OWNERSHIP PLAN - In connection with the Conversion, the Board of Directors of the Company adopted the Dime Community Bancshares Employee Stock Ownership Plan (the "ESOP"). The ESOP borrowed $11,638 from the Company and used the funds to purchase 1,163,800 shares of the Company's common stock. The loan was originally to be repaid principally from the Bank's discretionary contributions to the ESOP over a period of time not to exceed 10 years from the date of the Conversion. Effective July 1, 2000, the loan agreement was amended to extend the repayment period to thirty years from the date of the Conversion, with the right of optional prepayment. The loan had an outstanding balance of $6,853 and $8,016, respectively at June 30, 2000 and 1999, and a fixed rate of 8.0%. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants on the basis of compensation, as described in the plan, in the year of allocation. The ESOP vests at a rate of 25% per year of service beginning after two years with full vesting after five years, or upon attainment of age 65, death, disability, retirement or in the event of a "change of control" of the Company as defined in the ESOP. Shares of common stock allocated to participating employees totaled 116,380, 115,832 and 116,380 during the years ended June 30, 2000, 1999 and 1998. The ESOP benefit expense recorded in -44- accordance with SOP 93-6 for allocated shares totaled $2,167, $2,595 and $2,670, respectively, for the years ended June 30, 2000, 1999 and 1998. STOCK BENEFIT PLANS RECOGNITION AND RETENTION PLAN ("RRP") - In December, 1996, the Company's shareholders approved the RRP, which is designed to encourage key officers and directors of the Company and Bank to remain with the Company, as well as to provide these persons with a proprietary interest in the Company. All allocated RRP shares vest on February 1{st }of each year over a total period of five years, and become 100% vested in the event of death, disability or retirement of the participant, or in the event of a "change of control" of the Company as defined by the RRP. The Company continues to account for compensation expense under the RRP under APB 25, measuring compensation cost based upon the average acquisition value of the RRP shares. The following is a summary of activity related to the RRP for the years ended June 30, 2000, 1999 and 1998: At or for the year ended June 30, 2000 1999 1998 - ---------------------------------------------------------------------------- Shares acquired (a) 13,586 46,770 - Shares vested 103,456 103,456 164,876 Shares forfeited - 3,200 - Unallocated shares - end of period 60,356 46,770 - Unvested allocated shares -end of period 206,912 310,368 417,024 Compensation recorded to expense $1,928 $1,922 $2,708 EFFECTS OF ACCOUNTING FOR COMPENSATION UNDER SFAS 123 INSTEAD OF APB 25: Decrease in compensation expense $428 $422 $601 Increase in Basic EPS $0.02 $0.02 $0.03 Increase in Diluted EPS $0.02 $0.02 $0.02 (a) Represents awarded shares retained for tax withholding. The effects of applying SFAS 123 for disclosing compensation cost may not be representative of the effect on reported net income for future years. STOCK OPTION PLAN - In November, 1996, the Company adopted the Dime Community Bancshares, Inc. 1996 Stock Option Plan for Outside Directors, Officers and Employees (the "1996 Stock Option Plan"), which permits the Company to grant up to 1,454,750 incentive or non-qualified stock options to outside directors, officers and other employees of the Company or the Bank. The Compensation Committee of the Board of Directors administers the Stock Option Plan and authorizes all option grants. On December 26, 1996, 1,393,425 stock options were granted to outside directors, officers and certain employees. All stock options granted under the 1996 Stock Option Plan expire on December 26, 2006. One-fifth of the shares granted to participants under the 1996 Stock Option Plan become exercisable by participants on December 26, 1997, 1998, 1999, 2000 and 2001, respectively. On January 21, 1999, holders of stock options which had been granted by FIBC to purchase 96,975 shares of FIBC common stock were converted into options to purchase 177,286 shares DCB common stock (the "Converted Options"). The expiration dates on all Converted Options remained unchanged from initial grant by FIBC. On January 20, 2000, 66,500 stock options remaining under the 1996 Stock Option Plan were granted to officers and certain employees. All of these stock options expire on January 20, 2010. One-fifth of the shares granted to participants under this grant become exercisable by participants on January 20, 2001, 2002, 2003, 2004 and 2005, respectively. -45- Activity related to the Stock Option Plan for the fiscal years ended June 30, 2000, 1999 and 1998 is as follows:
Year Ended June 30, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Options outstanding - beginning of year 1,525,211 1,388,225 1,393,425 Options granted 66,500 - - FIBC stock options converted into Company stock options - 177,286 - Options exercised 365 32,300 3,600 Options forfeited - 8,000 1,600 Options outstanding - end of year 1,591,346 1,525,211 1,388,225 Remaining options available for grant under the plan 4,425 70,925 62,925 Exercisable options at end of year 1,024,946 771,361 305,225 Weighted average exercise price on exercisable options - end of year $13.45 $13.10 $14.50
The weighted average fair value per option at the date of grant/conversion for stock options granted/converted was estimated as follows:
GRANTED FIBC CONVERTED OPTIONS OPTIONS - ----------------------------------------------------------------------------------------------------------------------- Estimated fair value on date of grant/conversion $5.69 $13.81 Pricing methodology utilized Binomial Option Binomial Option Expected life (in years) 10 10 Interest rate 5.78% 5.25% Volatility 23.42 22.78 Dividend yield 1.54 2.00
[FN] Represents weighted average of stock options granted on December 26, 1996 and January 20, 2000. The Company continues to account for Stock Options under APB 25, accordingly no compensation cost has been recognized. Had the Company recorded compensation expense under the fair value methodology encouraged under SFAS 123, compensation expense would have increased by $1,108, $1,063 and $1,063, respectively, for the years ended June 30, 2000, 1999 and 1998, net income would have decreased by $598, $574 and $574 respectively for the years ended June 30, 2000, 1999 and 1998, both basic and diluted earnings per share would have decreased by $0.05 for the years ended June 30, 2000, 1999 and 1998. The effects of applying SFAS 123 for disclosing compensation cost may not be representative of the effect on reported net income for future years. 17. COMMITMENTS AND CONTINGENCIES MORTGAGE LOAN COMMITMENTS AND LINES OF CREDIT - At June 30, 2000 and 1999, the Bank had outstanding commitments to make mortgage loans aggregating approximately $55,113 and $111,008, respectively. At June 30, 2000, commitments to originate fixed rate and adjustable rate mortgage loans were $345 and $54,768 respectively. Interest rates on fixed rate commitments ranged between 7.0% to 8.5%. Substantially all of the Bank's commitments will expire within two months. A concentration risk exists with these commitments as virtually all of the outstanding mortgage loan commitments involve multi-family and underlying cooperative properties located within the New York City metropolitan area. The Bank had available at June 30, 2000 unused lines of credit with the Federal Home Loan Bank of New York totaling $100,000, expiring on September 13, 2000. LEASE COMMITMENTS - At June 30, 2000, aggregate net minimum annual rental commitments on leases are as follows: Year Ended June 30, Amount - ------------------------------- 2001 $731 2002 588 2003 578 2004 564 2005 458 Thereafter 1,301 -46- Net rental expense for the years ended June 30, 2000, 1999 and 1998 approximated $84, $150, and $183, respectively. LITIGATION - The Company and its subsidiary are subject to certain pending and threatened legal actions which arise out of the normal course of business. Management believes that the resolution of any pending or threatened litigation will not have a material adverse effect on the financial condition or results of operations. 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Standards No. 107, ''Disclosures About Fair Value of Financial Instruments.'' The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. CASH AND DUE FROM BANKS - The fair value is assumed to be equal to their carrying value as these amounts are due upon demand. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES - The fair value of these securities is based on quoted market prices obtained from an independent pricing service. FEDERAL FUNDS SOLD AND SHORT TERM INVESTMENTS - The fair value of these assets, principally overnight deposits, is assumed to be equal to their carrying value due to their short maturity. FEDERAL HOME LOAN BANK OF NEW YORK (FHLBNY) STOCK - The fair value of FHLBNY stock is assumed to be equal to the carrying value as the stock is carried at par value and redeemable at par value by the FHLBNY. LOANS, LOANS HELD FOR SALE AND ACCRUED INTEREST RECEIVABLE - The fair value of loans receivable is determined by utilizing either secondary market prices, or, to a greater extent, by discounting the future cash flows, net of prepayments of the loans using a rate for which similar loans would be originated to new borrowers with similar terms. This methodology is applied to all loans, inclusive of impaired and non-accrual loans. Accrued interest is stated at carrying amount. DEPOSITS AND ACCRUED INTEREST PAYABLE - The fair value of savings, money market, NOW, Super NOW and checking accounts is assumed to be their carrying amount. The fair value of certificates of deposit is based upon the discounted value of contractual cash flows using current rates for instruments of the same remaining maturity. Accrued interest payable is stated at its carrying amount. ESCROW AND OTHER DEPOSITS - The estimated fair value of escrow, other deposits and borrowed funds is assumed to be the amount payable at the reporting date. BORROWED FUNDS - The carrying amount is a reasonable estimate of the fair value for borrowings which are either short term or for which applicable interest rates reprice based upon changes in market rates. For medium and long-term borrowings, fair value is based upon discounted cash flows through contractual maturity, or earlier call date, if expected to be called at rates currently offered at the balance sheet date for similar terms. Accrued interest payable is stated at its carrying amount. OTHER LIABILITIES - The estimated fair value of other liabilities, which primarily include trade accounts payable, is assumed to be their carrying amount. COMMITMENTS TO EXTEND CREDIT - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present -47- creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The estimated fair values of the Company's financial instruments at June 30, 2000 and 1999 were as follows:
CARRYING FAIR JUNE 30, 2000 AMOUNT VALUE - ------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $15,371 $15,371 Investment securities held to maturity 17,489 31,768 Investment securities available for sale 121,121 121,121 Mortgage-backed securities held to maturity 13,329 13,263 Mortgage-backed securities available for sale 429,361 429,361 Loans and loans held for sale 1,706,515 1,726,469 FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS 9,449 9,449 FHLB stock 42,423 42,423 - ------------------------------------------------------------------------------------------------------- LIABILITIES: Savings, money market, NOW Super NOW and checking accounts 600,983 600,983 Certificates of Deposit 618,165 616,159 Escrow and other deposits 35,161 35,161 Borrowed funds 1,014,027 1,009,778 - ------------------------------------------------------------------------------------------------------- OFF BALANCE SHEET Commitments to extend credit - (499) - -------------------------------------------------------------------------------------------------------
CARRYING FAIR JUNE 30, 2000 AMOUNT VALUE - ------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $17,801 $17,801 Investment securities held to maturity 31,698 31,768 Investment securities available for sale 146,632 146,632 Mortgage-backed securities held to maturity 22,820 23,192 Mortgage-backed securities available for sale 502,847 502,847 Loans and loans held for sale 1,368,260 1,375,248 Federal funds sold 11,011 11,011 FHLB stock 28,281 28,281 - ------------------------------------------------------------------------------------------------------- LIABILITIES: Savings, money market, NOW Super NOW and checking accounts 543,810 543,810 Certificates of Deposit 703,251 701,695 Escrow and other deposits 36,577 36,577 Borrowed funds 731,660 682,376 - ------------------------------------------------------------------------------------------------------- OFF BALANCE SHEET Commitments to extend credit - (1,316) - -------------------------------------------------------------------------------------------------------
19. TREASURY STOCK The Company repurchased 1,111,779 shares, 937,929 shares and 919,837 shares of its common stock into treasury during the fiscal years ended June 30, 2000, 1999 and 1998, respectively. All shares were repurchased in accordance with applicable regulations of the Office of Thrift Supervision and Securities and Exchange Commission. On January 21, 1999, the Company reissued 1,504,704 shares of treasury stock in conjunction with its acquisition of FIBC. 20. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. -48- Quantitative measures that have been established by regulation to ensure capital adequacy require the Bank to maintain minimum capital amounts and ratios (set forth in the table below). The Bank's primary regulatory agency, the OTS, requires that the Bank maintain minimum ratios of tangible capital (as defined in the regulations) of 1.5%, leverage capital of 4%, and total risk- based capital (as defined) of 8%. In addition, insured institutions in the strongest financial and managerial condition, with a rating of one (the highest examination of the Office of Thrift Supervision under the Uniform Financial Institutions Rating System) are required to maintain a leverage capital ratio of not less than 3.0% of total assets (the "leverage capital ratio"). For all other banks, the minimum leverage capital requirement is 4.0%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the institution. The Bank is also subject to prompt corrective action requirement regulations set forth by the FDIC. These regulations require the Bank to maintain minimum of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 2000, that the Bank meets all capital adequacy requirements to which it is subject. As of June 30, 2000, the most recent notification from the OTS categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" the Bank must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
TO BE CATEGORIZED AS "WELL CAPITALIZED" FOR CAPITAL UNDER PROMPT ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES PROVISIONS ---------------------------------------------------------------------------------- As of June 30, 2000 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------------------------------------- Tangible capital $136,772 5.76% $35,600 1.5% N/A N/A Leverage capital 136,772 5.76 94,934 4.0% N/A N/A Total risk-based capital (to risk weighted assets) 151,556 11.62 104,386 8.0% $130,483 10.00% Tier I risk-based capital (to risk weighted assets) 136,772 10.48 N/A N/A 78,290 6.00 Tier I leverage capital (to average assets) 136,772 5.82 N/A N/A 117,417 5.00
TO BE CATEGORIZED AS "WELL CAPITALIZED" FOR CAPITAL UNDER PROMPT ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES PROVISIONS ---------------------------------------------------------------------------------- As of June 30, 1999 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------------------------------------- Tangible capital $123,817 5.83% $31,846 1.5% N/A N/A Leverage capital 123,817 5.83 63,693 3.0% N/A N/A Total risk-based capital (to risk weighted assets) 138,123 11.45 96,515 8.0% $120,644 10.00% Tier I risk-based capital (to risk weighted assets) 123,817 10.28 N/A N/A 72,387 6.00 Tier I leverage capital (to average assets) 123,817 6.52 N/A N/A 94,904 5.00
The following is a reconciliation of generally accepted accounting principles (GAAP) capital to regulatory capital for the Bank: -49-
At June 30, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- TANGIBLE LEVERAGE RISK-BASED Tangible Leverage Risk-Based CAPITAL CAPITAL CAPITAL Capital Capital Capital - -------------------------------------------------------------------------------------------------------------------------------- GAAP capital $194,236 $194,236 $194,236 $189,405 $189,405 $189,405 Non-allowable assets: Core deposit intangible (3,760) (3,760) (3,760) (4,585) (4,585) (4,585) Unrealized loss on available for sale securities 6,550 6,550 6,550 3,868 3,868 3,868 Goodwill (60,254) (60,254) (60,254) (64,871) (64,871) (64,871) General valuation allowance - - 14,784 - - 14,306 - -------------------------------------------------------------------------------------------------------------------------------- Regulatory capital 136,772 136,772 151,556 123,817 123,817 138,123 Minimum capital requirement 35,600 94,934 104,386 31,846 63,693 96,515 - -------------------------------------------------------------------------------------------------------------------------------- Regulatory capital excess $101,172 $41,838 $47,170 $91,971 $60,124 $41,608 ================================================================================================================================
21. QUARTERLY FINANCIAL INFORMATION The following represents the unaudited results of operations for each of the quarters during the fiscal years ended June 30, 2000 and 1999.
For the three September 30, December 31, March 31, June 30, Months ended 1999 1999 2000 2000 - ------------------------------------------------------------------------------------------------------------- Net interest income $16,560 $16,729 $16,746 $16,768 Provision for loan losses 60 60 60 60 Net interest income after Provision for loan losses 16,500 16,669 16,686 16,708 Non-interest income 2,103 1,497 1,442 1 Non-interest expense 8,886 9,009 8,811 7,309 - ------------------------------------------------------------------------------------------------------------- Income before income taxes 9,717 9,157 9,317 9,400 Income tax expense 4,157 3,741 3,555 3,764 - ------------------------------------------------------------------------------------------------------------- Net income $5,560 $5,416 $5,762 $5,636 ============================================================================================================= EARNINGS PER SHARE (2): Basic $0.48 $0.47 $0.51 $0.52 ============================================================================================================= Diluted $0.45 $0.45 $0.49 $0.50 =============================================================================================================
For the three September 30, December 31, March 31, June 30, Months ended 1998 1998 1999 1999 - ------------------------------------------------------------------------------------------------------------- Net interest income $12,833 $12,833 $15,913 $16,592 Provision for loan losses 60 60 60 60 Net interest income after provision for loan losses 12,773 12,773 15,853 16,532 Non-interest income 1,021 2,060 1,482 1,875 Non-interest expense: 6,692 7,074 8,172 8,555 - ------------------------------------------------------------------------------------------------------------- Income before income taxes 7,102 7,759 9,163 9,852 Income tax expense 3,119 3,074 3,614 4,208 - ------------------------------------------------------------------------------------------------------------- Net income $3,983 $4,685 $5,549 $5,644 ============================================================================================================= EARNINGS PER SHARE (2): Basic $0.38 $0.46 $0.49 $0.49 ============================================================================================================= Diluted $0.35 $0.42 $0.45 $0.45 =============================================================================================================
(1) On January 21, 1999, the Company completed the FIBC acquisition. (2) The quarterly earnings per share amounts, when added, may not agree to earnings per share reported on the Consolidated Statement of Operations due to differences in the computed weighted average shares outstanding as well as rounding differences. 22. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following statements of condition as of June 30, 2000 and 1999, and the related statements of operations and cash flows for the years ended June 30, 2000, 1999 and 1998 reflect the Company's investment in its wholly-owned subsidiaries, the Bank and 842 Manhattan Avenue Corp., using the equity method of accounting: -50- DIME COMMUNITY BANCSHARES, INC. CONDENSED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands)
At June 30, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS: Cash and due from banks $37 $61 Investment securities available for sale 18,881 9,529 Mortgage-backed securities available for sale 42,015 45,248 Federal funds sold and short term investments 8,830 3,517 ESOP loan to subsidiary 6,853 8,016 Investment in subsidiary 194,422 189,575 Receivable for securities sold - - Other assets 1,256 264 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $272,294 $256,210 ============================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY: Securities sold under agreement to repurchase $39,126 $43,766 Subordinated notes payable 25,000 - Other liabilities 1,125 875 Stockholders' equity 207,043 211,569 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY: $272,294 $256,210 ==============================================================================================================================
DIME COMMUNITY BANCSHARES, INC. CONDENSED STATEMENTS OF OPERATIONS (Dollars in thousands)
For the year ended June 30, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income $1,214 $1,503 $2,041 Dividends received from Bank 18,013 54,000 13,000 Gain on sales of securities 117 555 521 Non-interest expense (447) (431) (481) - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and equity of undistributed (overdistributed) earnings of subsidiaries 18,897 55,627 15,081 Income tax expense 435 752 935 - ------------------------------------------------------------------------------------------------------------------------------- Income before equity of undistributed (overdistributed) earnings of Subsidiaries 18,462 54,875 14,146 Equity in (overdistributed) undistributed earnings of Subsidiaries 3,912 (35,014) (1,048) - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $22,374 $19,861 $13,098 =============================================================================================================================== The equity in overdistributed earnings of subsidiaries for the years ended June 30, 2000, 1999 and 1998, represents dividends paid to the Company by its subsidiaries in excess of the current year's earnings of Subsidiaries.
DIME COMMUNITY BANCSHARES, INC. CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands)
For the year ended June 30, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $22,374 $19,861 $13,098 Adjustments to reconcile net income to net cash provided by operating activities: Equity in (undistributed) overdistributed earnings of (3,912) 35,014 1,048 Subsdiaries Gain on sale of investment securities available for sale (117) (555) (520) Net accretion of discount on securities available for sale 279 (283) (291) Decrease (Increase) in other assets (992) (80) 160 Decrease (Increase) in receivable for securities purchased - 1,264 (1,264) Decrease in other liabilities (9) (747) (71) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 17,623 54,474 12,160 CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) Decrease in federal funds sold and short-term (5,313) (2,226) 4,749 investments Proceeds from sale of investment securities available for sale 341 9,373 13,439 Proceeds from calls and maturities of investment securities available for sale - 5,000 13,500 Purchases of investment securities available for sale (10,069) (5,425) (20,940) Purchases of mortgage-backed securities available for sale (9,906) (54,015) - Principal repayments on mortgage-backed securities available for 12,779 8,485 - sale Principal repayments on ESOP loan 1,164 691 911 Cash disbursed in acquisition of Financial Bancorp, net of cash acquired - (33,068) - - --------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (11,004) (71,185) 11,659 CASH FLOWS FROM FINANCING ACTIVITIES: (Decrease) Increase in securities sold under agreement to (4,640) 43,766 - repurchase Proceeds from issuance of subordinated notes payable 25,000 - - COMMON STOCK ISSUED FOR EXERCISE OF STOCK OPTIONS - 468 52 CASH DIVIDENDS PAID TO STOCKHOLDERS (7,704) (5,919) (2,635) PURCHASE OF TREASURY STOCK (19,299) (21,198) (20,767) PURCHASE OF COMMON STOCK BY BENEFIT MAINTENANCE PLAN - (400) (431) - --------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (6,643) 16,717 (23,781) - --------------------------------------------------------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS (24) 6 38 CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 61 55 17 - --------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS, END OF PERIOD $37 $61 $55 ===========================================================================================================================
* * * * * -51- EX-21 4 0004.txt EXHIBIT 21.1 Subsidiaries of Dime Community Bancshares, Inc. - The following are the significant subsidiaries of Dime Community Bancshares, Inc. Name: The Dime Savings Bank of Williamsburgh Jurisdiction of incorporation: United States of America Names under which it does business: The Dime Savings Bank of Williamsburgh Name: 842 Manhattan Avenue Corporation Jurisdiction of incorporation: New York Names under which it does business: 842 Manhattan Avenue Corporation Subsidiaries of The Dime Savings Bank of Williamsburgh - The following are the significant subsidiaries of The Dime Savings Bank of Williamsburgh. Name: DSBW Preferred Funding Corporation Jurisdiction of incorporation: Delaware Names under which it does business: DSBW Preferred Funding Corporation Name: Havemeyer Equities, Inc. Jurisdiction of incorporation: New York Names under which it does business: Havemeyer Equities, Inc. 1 Name: Havemeyer Investments, Inc. Jurisdiction of incorporation: New York Names under which it does business: Havemeyer Investments, Inc. The remaining subsidiaries, which are all direct or indirect subsidiaries of The Dime Savings Bank of Williamsburgh would not, when considered in the aggregate as a single subsidiary, constitute a significant subsidiary as defined in 17 C.F.R. 210.1-02 (v) Rule 1-02(v) of Regulation S-X as of June 30, 1999. For a description of the Registrant's subsidiaries, see Item 1 of "Business" of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. 2 EX-27 5 0005.txt
9 DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS 12-MOS JUN-30-2000 JUN-30-2000 15,371 0 9,449 0 550,482 30,818 30,614 1,721,300 14,785 2,502,139 1,219,148 494,293 61,795 519,734 0 0 145 207,024 207,169 119,052 40,465 6,106 165,623 45,036 53,784 66,803 240 (2,599) 34,015 37,591 22,374 0 0 22,374 1.98 1.90 7.22 4,421 0 700 3,617 15,081 545 9 14,785 14,785 0 0
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