-----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, B5DopV2Akb/8NThbsaoG1AwCJUAra9wcQdPW9H7Uxh5dkjgi1fq33zSI/QCuFhdE n0wm1FLWKoclJJ1GZYrTFw== 0000914317-99-000218.txt : 20030212 0000914317-99-000218.hdr.sgml : 20030212 19990331191515 ACCESSION NUMBER: 0000914317-99-000218 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STATEN ISLAND BANCORP INC CENTRAL INDEX KEY: 0001042801 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 133958850 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13503 FILM NUMBER: 99584280 BUSINESS ADDRESS: STREET 1: 15 BEACH STREET CITY: STATEN ISLAND STATE: NY ZIP: 10304 BUSINESS PHONE: 7184477900 MAIL ADDRESS: STREET 1: 15 BEACH STREET CITY: STATEN ISLAND STATE: NY ZIP: 10304 10-K 1 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 For the fiscal year ended December 31, 1998 Commission File No.: 1-13503 Staten Island Bancorp, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 13-3958850 - --------------------------------- ---------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 15 Beach Street Staten Island, New York 10304 --------- ---------- (Address) (Zip Code) Registrant's telephone number, including area code: (718) 447-7900 Securities registered pursuant to Section 12(g) of the Act: Not Applicable Securities registered pursuant to Section 12(b) of the Act Common Stock (par value $.01 per share) --------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Based upon the $16.50 closing price of the Registrant's common stock as of March 24, 1998, the aggregate market value of the 37,570,845 shares of the Registrant's common stock deemed to be held by non-affiliates of the Registrant was $619.9 million. Although directors and executive officers of the Registrant and certain of its employee benefit plans were assumed to be "affiliates" of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status. Number of shares of Common Stock outstanding as of March 24, 1999: 42,538,705 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated. (1) Portions of the Annual Report to Stockholders for the year ended December 31, 1998 are incorporated into Part II, Items 5 through 8 of this Form 10-K. (2) Portions of the definitive proxy statement for the 1998 Annual Meeting of Stockholders are incorporated into Part III, Items 9 through 13 of this Form 10-K. PART I Item 1. Business Staten Island Bancorp, Inc. Staten Island Bancorp, Inc. (the "Company") is a Delaware corporation organized in July, 1997 by Staten Island Savings Bank (the "Bank" or "Staten Island Savings") for the purpose of becoming a unitary holding company of the Bank. The Bank's conversion to stock form and the concurrent offer and sale of the Company's common stock was consummated on December 22, 1997. The only significant assets of the Company are the capital stock of the Bank, the Company's loan to the Employee Stock Ownership Plan ("ESOP"), and the portion of the net conversion proceeds retained by the Company for investments. The business and management of the Company consists primarily of the business and management of the Bank. The Company neither owns nor leases any property, but instead uses the premises and equipment of the Bank. At the present time, the Company does not intend to employ any persons other than officers of the Bank, and the Company will utilize the support staff of the Bank from time to time. Additional employees will be hired as appropriate to the extent the Company expands or changes its business in the future. The Company's executive office is located at the executive office of the Bank at 15 Beach Street, Staten Island, New York 10304, and its telephone number is (718) 447-7900. Staten Island Savings Bank The Bank was originally founded as a New York State-chartered savings bank in 1864. The Bank maintains a network of 16 full-service branch offices located in Staten Island and one branch office located in the Bay Ridge area of Brooklyn, New York as well as three limited service branch offices in Staten Island. The Bank also maintains a lending center and Trust Department office on Staten Island along with a commercial lending office in the Bay Ridge Brooklyn branch. The Bank is a traditional, full-service, community oriented savings bank headquartered in Staten Island, New York. Staten Island Savings is primarily engaged in attracting deposits from the general public and using those and other available sources of funds to originate loans secured primarily by single-family (one to four units) residences located in Staten Island and, to a lesser extent, the metropolitan New York area. The Bank has long-standing ties to Staten Island with over 134 years of service to the communities and residents of Staten Island and, more recently, the Bay Ridge area of Brooklyn. As of June 30, 1998 (the latest available data), the Bank was the largest depository institution in terms of deposit market share in Staten Island with 30% of the total deposits and 23% of the total number of branch offices of depository institutions in Staten Island. Historically, the Bank also has been among the leaders in terms of the number and amount of residential mortgage loan originations in Staten Island. Staten Island Savings' operating strategy emphasizes customer service and convenience and, in large part, the Bank attributes its commitment to maintaining customer satisfaction for its market share position. The Bank attempts to differentiate itself from its competitors by providing the type of personalized customer service not generally available from larger banks while offering a greater variety of products and services than is typically available from smaller local depository institutions. The Bank has an experienced management team directing its operations. The Bank's Chairman and Chief Executive Officer and President and Chief Operating Officer have 32 years and 28 years, respectively, of service with the Bank while the other executive officers of the Bank have an average of 15 years of service with Staten Island Savings. In recent years, the Bank has facilitated its growth through acquisitions. In 1998, the Bank's wholly-owned subsidiary, SIB Mortgage Corporation (the "Mortgage Company") acquired the assets of Ivy Mortgage Corp. The Mortgage Company, located in Branchburg, New Jersey, will continue to do business as Ivy Mortgage Corp. in 22 states primarily on the east coast. The Mortgage Company originates loans and sells them to investors generating fee income for the Company. The Bank will also purchase specific adjustable rate loans and higher yielding loans from the Mortgage Company to fill in its portfolio with loan products the Bank requires. The Bank will also use certain of the Mortgage Company locations to offer its commercial loan products including loans to small businesses. This will alleviate some of the reliance of the Bank's business on the economy of Staten Island and to a larger extent New York City. In 1990, the Bank acquired several branch offices of a former savings and loan association from the Resolution Trust Corporation and in August 1995, the Bank acquired, Gateway State Bank, a local commercial bank headquartered on Staten Island. 1 The Bank is subject to examination and comprehensive regulation by the Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority and primary federal regulator. The Bank is also regulated by the Federal Deposit Insurance Corporation ("FDIC"), the administrator of the Bank Insurance Fund ("BIF"). The Bank is also subject to certain reserve requirements established by the Board of Governors of the Federal Reserve System ("FRB") and is a member of the Federal Home Loan Bank ("FHLB") of New York, which is one of the 12 regional banks comprising the FHLB System. Staten Island Savings' executive office is located at 15 Beach Street, Staten Island, New York 10304, and its telephone number is (718) 447-7900. This Form 10-K and the Company's Annual Report to Stockholders contain certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in those and other portions of this document and the Company's Annual Report to Stockholders, the words "anticipate, "believe," "estimate," "expect," "intend," "should" and similar expressions, or the negative thereof, as they relate to the Company or the Company's management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements. Market Area and Competition The Bank faces significant competition both in making loans and in attracting deposits. There are a significant number of financial institutions located within the Bank's market area, many of which have greater financial resources than the Bank. The Bank's competition for loans comes principally from commercial banks, other savings banks, savings associations and mortgage-banking companies. The Bank's most direct competition for deposits has historically come from savings associations, other savings banks, commercial banks and credit unions. The Bank faces additional competition for deposits from short-term money market funds and other corporate and government securities funds and from other non-depository financial institutions such as brokerage firms and insurance companies. Competition for banking services may increase as a result of, among other things, the elimination of restrictions on interstate operations of financial institutions. Lending Activities General. At December 31, 1998, Staten Island Savings' total net loans amounted to $1.5 billion or 38.6% of the Company's total assets at such date. The Bank's primary emphasis has been, and continues to be, the origination of loans secured by first liens on single-family residences (which includes one to four family residences) located primarily in Staten Island and, to a lesser extent, Brooklyn and other areas in New York. At December 31, 1998, $1.2 billion or 81.5% of the Bank's net loan portfolio were secured by one to four family residences of which $797.7 million were located on Staten Island and an additional $316.8 million located in other areas of New York State. In addition to loans secured by single-family residential real estate, the Bank's mortgage loan portfolio includes loans secured by commercial real estate, which amounted to $137.7 million or 9.5% of the net loan portfolio at December 31, 1998, construction and land loans, which totaled $42.4 million or 2.9% at December 31, 1998, home equity loans, which totaled $6.1 million or .4% at December 31, 1998, and loans secured by multi-family (over four units) residential properties, which amounted to $33.3 million or 2.3% of the net loan portfolio at December 31, 1998. In addition to mortgage loans, the Bank originates various other loans including commercial business loans and consumer loans. At December 31, 1998, the Bank's total other loans amounted to $67.6 million or 4.6% of the net loan portfolio. The types of loans that the Bank may originate are subject to federal and state law and regulations. Interest rates charged by the Bank on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by its competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters. 2 Loan Portfolio Composition. The following table sets forth the composition of the Bank's loans at the dates indicated.
At December 31, 1998 1997 1996 ---- ---- ---- Percent of Percent of Percent of Amount Total Amount Total Amount Total ------ ----- ------ ----- ------ ----- (Dollars in Thousands) 1995 ---- Percent of Percent Amount Total Amount of ------ ----- ------ -- (Dollars in Thousands) Mortgage loans: One to four family $ 611,964 76.39% $ 506,397 83.16% residential................ Multi-family residential. 25,977 3.24 24,347 4.00 Commercial real estate... 99,000 12.36 30,037 4.93 Construction and land.... 18,123 2.26 3,003 0.49 Home equity.............. 8,193 1.02 9,858 1.59 ------- ------ ------- ------ Total mortgage loans... 763,257 95.27 573,442 94.17 Other loans: Student loans............ 6,072 0.76 23,398 3.84 Automobile leases (1).... 18,705 2.33 8,344 1.37 Passbook loans........... 5,683 0.71 4,673 0.77 Commercial business loans 15,257 1.90 200 0.03 Other.................... 9,079 1.13 5,972 0.98 ------- ------ ------- ------ Total other loans...... 54,796 6.84 42,587 6.99 ------- ------ ------- ------ Total loans receivable. 818,053 102.11 616,029 101.16 Less: Premium (discount) on (0.36) (0.19) loans purchased.. (2,911) (1,134) Allowance for loan losses (10,704) (1.34) (0.51) (3,124) Deferred loan fees....... (3,301) (0.41) (2,817) ------- ------ ------- ------ (0.46) Loans receivable, net...... $ 801,137 100.00% $ 608,954 100.00% ========= ====== ========= ======
(1) Consists of loans secured by assignments of automobile lease payments. 3
Year Ended December 31, 1998 1997 1996 ---------- ---------- -------- (Dollars In Thousands) Total loans held at beginning of period................................ $ 1,102,743 $ 984,780 $818,053 Originations of loans: Mortgage loans: One to four family residential......... 508,124 194,937 181,200 Multi-family residential............... 9,988 4,603 2,087 Commercial real estate................. 41,294 22,171 35,677 Construction and land.................. 38,514 27,936 32,080 Home equity............................ 2,686 2,744 1,224 Other loans: Student loans.......................... 2,205 3,202 3,469 Passbook loans......................... 5,666 8,614 5,995 Commercial business loans.............. 23,180 9,415 7,806 Other consumer loans (1)............... 12,197 7,666 3,131 ----------- --------- -------- Total originations.................. 643,854 289,512 287,950 Purchases of loans: Mortgage loans: One to four family residential (2)..... 59,412 -- -- Multi-family residential............... -- -- -- Commercial real estate................. -- -- -- Construction and land.................. -- -- -- Home equity............................ -- -- -- Other loans: -- Student loans.......................... -- -- -- Passbook loans......................... -- -- -- Commercial business loans.............. -- -- -- Other consumer loans................... 6,855 -- -- ----------- --------- -------- Total purchases ..................... 66,267 -- -- ----------- --------- -------- Total originations and purchases... 710,121 289,512 287,950 ----------- --------- -------- Year Ended December 31, 1998 1997 1996 ---------- ---------- -------- (Dollars In Thousands) Loans sold: Mortgage loans: One to four family residential(3)...... 57,577 1,104 -- Multi-family residential............... -- -- -- Commercial real estate................. -- -- -- Construction and land.................. -- -- -- Home equity............................ -- -- -- Other loans: Student loans.......................... -- 3,185 3,340 Passbook loans........................ -- -- Commercial business loans.............. -- -- -- Other consumer loans................... -- -- -- ----------- --------- -------- Total sold........................... 57,577 4,289 3,340 Transfers to real estate owned.......... 1,166 1,149 1,629 Charge-offs................................ 2,119 1,022 2,373 Repayments................................. 201,091 165,089 113,881 ----------- --------- -------- Net activity in loans...................... 448,091 117,963 166,727 ----------- --------- -------- Gross loans held at end of period.......... $1,550,834 $1,102,743 $984,780 ========== ========== ========
(1) Includes amounts drawn on overdraft loans. (2) Represents loans purchased in the Ivy Mortgage Corp. acquisition. (3) Loan sales by Ivy Mortgage Corp. 4 The lending activities of Staten Island Savings are subject to written underwriting standards and loan origination procedures established by management and approved by the Bank's Board of Directors. Applications for mortgage and other loans are taken at all of the Bank's branch offices. In addition, the Bank's business development officers, loan officers and branch managers call on individuals in the Bank's market area in order to solicit new loan originations as well as other banking relationships. The Bank also relies on independent mortgage brokers, a group of whom are authorized to accept and process mortgage loan applications on the Bank's behalf, and a non-employee commercial loan solicitor in order to obtain new loan applications. All loan applications are forwarded to the Bank's loan origination center for underwriting and approval. The Bank's employees at the loan origination center supervise the process of obtaining credit reports, appraisals and other documentation involved with a loan. The Bank requires that a property appraisal be obtained in connection with all new mortgage loans. Property appraisals are performed by an independent appraiser from a list approved by the Bank's Board of Directors. Staten Island Savings requires that title insurance and hazard insurance be maintained on all collateral properties (except for home equity loans and home secured loans) and that flood insurance be maintained if the property is within a designated flood plain. Certain officers of the Bank have been authorized by the Board of Directors to approve loans up to certain designated amounts. The Loan Review Committee of the Board of Directors must approve all loans where new monies advanced would increase borrowers or guarantors total outstanding credit with the Bank above $1.5 million but not exceeding $5.0 million. Loans in excess of $5.0 million must be approved by the full Board of Directors of the Bank. A federal savings association generally may not make loans to one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans are fully secured by readily marketable securities. However, the Bank generally maintains a more restrictive limit of loans to any one borrower and related entities of 5% of the Bank's unimpaired capital and surplus, or $21.1 million at December 31, 1998. One to Four Family Residential. Substantially all of the Bank's single-family residential mortgage loans consist of conventional loans. Conventional loans are loans that are neither insured by the Federal Housing Administration ("FHA") or partially guaranteed by the Department of Veterans Affairs ("VA"). The vast majority of the Bank's single-family residential mortgage loans are secured by properties located in Staten Island and, to a lesser extent, Brooklyn and other areas of New York. Historically, the Bank has retained substantially all mortgage loans which it has originated and has not engaged in sales of residential mortgage loans. As of December 31, 1998, $1.2 billion, or 81.5%, of the Bank's net loans consisted of single-family residential mortgage loans. The Bank originated $508.1 million of one to four family residential mortgage loans during the year ended December 31, 1998 and $194.9 million and $181.2 million in 1997 and 1996, respectively. The Bank anticipates that a significant portion of its future new loan originations will continue to be single-family residential mortgage loans. 5 The Bank's residential mortgage loans have either fixed rates of interest or interest rates which adjust periodically during the term of the loan. Fixed-rate loans generally have maturities ranging from 10 to 30 years and are fully amortizing with monthly or bi-weekly loan payments sufficient to repay the total amount of the loan with interest by the end of the loan term. The Bank's fixed-rate loans generally are originated under terms, conditions and documentation which permit them to be sold to U.S. Government-sponsored agencies, such as the Federal Home Loan Mortgage Corporation ("FHLMC"), and other investors in the secondary market for mortgages. At December 31, 1998, $855.5 million, or 72.1%, of the Bank's single-family residential mortgage loans were fixed-rate loans. Substantially all of the Bank's single-family residential mortgage loans contain due-on-sale clauses, which permit the Bank to declare the unpaid balance to be due and payable upon the sale or transfer of any interest in the property securing the loan. The Bank enforces such due-on-sale clauses. The adjustable-rate single-family residential mortgage ("ARM") loans currently offered by the Bank have interest rates which adjust every one, three or five years in accordance with a designated index such as one-, three- or five-year U.S. Treasury obligations adjusted to a constant maturity ("CMT"), plus a stipulated margin. In addition, the Bank offers an ARM with a fixed-rate for the first ten years which adjusts on an annual basis thereafter. At December 31, 1998, the Bank's five-year and ten-year ARM loans amounted to $202.4 million and $93.0 million, respectively. The Bank's adjustable-rate single-family residential real estate loans generally have a cap of 2% thru 5% on any increase or decrease in the interest rate at any adjustment date, and include a specified cap on the maximum interest rate over the life of the loan, which cap generally is 5% or 6% above the initial rate. From time to time, based on prevailing market conditions, the Bank may offer ARM loans with initial rates which are below the fully indexed rate. Such loans generally are underwritten based on the fully indexed rate. The Bank's adjustable-rate loans require that any payment adjustment resulting from a change in the interest rate of an adjustable-rate loan be sufficient to result in full amortization of the loan by the end of the loan term and, thus, do not permit any of the increased payment to be added to the principal amount of the loan, or so-called negative amortization. At December 31, 1998, $331.7 million or 27.9% of the Bank's single-family residential mortgage loans were adjustable-rate loans. Adjustable-rate loans decrease the risks associated with changes in interest rates but involve other risks, primarily because as interest rates increase, the loan payment by the borrower increases to the extent permitted by the terms of the loan, thereby increasing the potential for default. Moreover, as with fixed-rate loans, as interest rates increase, the marketability of the underlying collateral property may be adversely affected by higher interest rates. The Bank believes that these risks, which have not had a material adverse effect on the Bank to date, generally, are less than the risks associated with holding fixed-rate loans in an increasing interest rate environment. The volume and types of ARMs originated by the Bank have been affected by such market factors as the level of interest rates, competition, consumer preferences and availability of funds. In recent periods, demand for single-family ARMs has been relatively weak due to the prevailing low interest rate environment and consumer preference for fixed-rate loans. Accordingly, although the Bank will continue to offer single-family ARMs, there can be no assurance that in the future the 6 Bank will be able to originate a sufficient volume of single-family ARMs to increase or maintain the proportion that these loans bear to total loans. The Bank's single-family residential mortgage loans generally do not exceed $700,000. In addition, the maximum loan-to-value ("LTV") ratio for the Bank's single-family residential mortgage loans generally is 95% of the appraised value of the security property, provided, however, that private mortgage insurance is obtained on the portion of the principal amount that exceeds 80% of the appraised value. At December 31, 1998, the Bank's home equity loans amounted to $6.1 million or 0.4% of the Bank's net loans. The Bank offers floating rate home equity lines of credit. Home equity loans, like single-family residential mortgage loans, are secured by the underlying equity in the borrower's residence. However, the Bank generally obtains a second mortgage position to secure its home equity loans. The Bank's home equity loans generally require LTV ratios of 80% or less after taking into consideration any first mortgage loan. Commercial Real Estate Loans and Multi-Family Residential Loans. At December 31, 1998, the Bank's commercial real estate loans and multi-family residential mortgage loans amounted to $137.7 million and $33.3 million, respectively, or 9.5% and 2.3%, respectively, of the Bank's net loan portfolio. The Bank's commercial real estate loans generally are secured by small office buildings, retail and industrial use buildings, strip shopping centers and other commercial uses located in the Bank's market area. The Bank's commercial real estate loans seldom exceed $1.0 million and, as of December 31, 1998, the average size of the Bank's commercial real estate loans was $325,000. The Bank originated $41.3 million of commercial real estate loans during the year ended December 31, 1998 compared to $22.2 million and $35.7 million, respectively, of commercial real estate loan originations in 1997 and 1996. The Bank's multi-family residential real estate loans are concentrated in Brooklyn and, to a lesser extent, Staten Island. The Bank originated $10.0 million of multi-family residential real estate loans during the year ended December 31, 1998 compared to $4.6 million and $2.1 million, respectively, of originations in 1997 and 1996. The Bank generally has not been a substantial originator of multi-family residential real estate loans due to, among other factors, the relatively limited amount of apartment and other multi-family properties in Staten Island. The Bank's commercial real estate and multi-family residential loans generally are three or five-year adjustable-rate loans indexed to three-or five-year U.S. Treasury obligations adjusted to a CMT, plus a margin. Generally, fees of between 50 basis points and 1.50% of the principal loan balance are charged to the borrower upon closing. The Bank generally charges prepayment penalties on commercial real estate and multi-family residential mortgage loans. Although terms for multi-family residential and commercial real estate loans may vary, the Bank's underwriting standards generally provide for terms of up to 25 years with amortization of principal over the term of the loan and LTV ratios of not more than 75%. Generally, the Bank obtains personal guarantees 7 of the principals as additional security for any commercial real estate and multi-family residential loans. The Bank evaluates various aspects of commercial and multi-family residential real estate loan transactions in an effort to mitigate risk to the extent possible. In underwriting these loans, consideration is given to the stability of the property's cash flow history, future operating projections, current and projected occupancy, position in the market, location and physical condition. The Bank has also generally imposed a debt coverage ratio (the ratio of net cash from operations before payment of debt service to debt service) of not less than 125%. The underwriting analysis also includes credit checks and a review of the financial condition of the borrower and guarantor, if applicable. An appraisal report is prepared by an independent appraiser commissioned by the Bank to substantiate property values for every commercial real estate and multi-family loan transaction. All appraisal reports are reviewed by the Bank prior to the closing of the loan. Commercial real estate and multi-family residential lending entails substantially different risks when compared to single-family residential lending because such loans often involve large loan balances to single borrowers and because the payment experience on such loans is typically dependent on the successful operation of the project or the borrower's business. These risks can also be significantly affected by supply and demand conditions in the local market for apartments, offices, warehouses, or other commercial space. The Bank attempts to minimize its risk exposure by limiting such lending to proven businesses, only considering properties with existing operating performance which can be analyzed, requiring conservative debt coverage ratios, and periodically monitoring the operation and physical condition of the collateral. As of December 31, 1998, $6.5 million or 4.7% of the Bank's commercial real estate loans and $131,000 or 0.4% of its multi-family residential real estate loans were considered non-performing loans. Construction and Land Loans. The Bank originates primarily residential construction loans to local (primarily Staten Island) real estate builders, generally with whom it has an established relationship. To a significantly lesser extent, the Bank originates such loans to individuals who have a contract with a builder for the construction of their residence. The Bank's construction loans are secured by property located primarily in the Bank's market area. At December 31, 1998, construction and land loans amounted to $42.4 million or 2.9% of the Bank's net loan portfolio of which $32.0 million consisted of construction loans and $10.4 million consisted of land loans. In addition, at such date, the Bank had $14.1 million of undisbursed funds for construction loans in process. The Bank originated $38.5 million of construction and land loans during the year ended December 31, 1998, compared to $27.9 million and $32.1 million of construction loans in 1997 and 1996, respectively. The Bank's construction loans generally have floating rates of interest for a term of up to two years. Construction loans to builders are typically made with a maximum loan to value ratio of 75%. The Bank's construction loans to local builders are made on either a pre-sold or speculative (unsold) basis. However, the Bank generally limits the number of unsold homes under construction 8 to its builders, with the amount dependent on the reputation of the builder, the present outstanding obligations of the builder, the location of the property and prior sales of homes in the development and the surrounding area. The Bank generally limits the number of construction loans for speculative units to two to four model homes per project. Prior to making a commitment to fund a construction loan, the Bank requires an appraisal of the property by independent appraiser approved by the Board of Directors. The Bank's staff also reviews and inspects each project at the commencement of construction and prior to every disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspections of the project based on a percentage of completion. The Bank requires monthly interest payments during the construction term. The Bank originates land loans to local developers for the purpose of holding or developing the land (i.e., roads, sewer and water) for sale. Such loans are secured by a lien on the property, are generally limited to 60% of the appraised value of the secured property and are typically made for a period of up to two years with a floating interest rate based on the prime rate. The Bank requires monthly interest payments during the term of the land loan. The principal of the loan is reduced as lots are sold and released. All of the Bank's land loans are secured by property located in its market area. In addition, the Bank generally obtains personal guarantees from its borrowers and originates such loans to developers with whom it has established relationships. Construction and land lending generally is considered to involve a higher level of risk as compared to permanent single-family residential lending, due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on developers and builders. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not pre-sold and thus pose a greater potential risk to the Bank than construction loans to individuals on their personal residences. The Bank has attempted to minimize the foregoing risks by, among other things, limiting the extent of its construction and land lending generally and by limiting its construction and land lending to primarily residential properties. In addition, the Bank has adopted strict underwriting guidelines and other requirements for loans which are believed to involve higher elements of credit risk, by limiting the geographic area in which the Bank will do business to its existing market and by working with builders with whom it has established relationships. It is also the Bank's policy to obtain personal guarantees from the principals of its corporate borrowers on its construction and land loans. Other Loans. The Bank offers a variety of other or non-mortgage loans. Such other loans, which include commercial business loans, passbook loans, student loans, overdraft loans, manufactured home loans and a variety of other personal loans, amounted to $67.6 million or 4.6% of the Bank's loan portfolio at December 31, 1998. 9 At December 31, 1998, the Bank's commercial business loans amounted to $36.6 million or 2.5% of the Bank's net loan portfolio. The Bank's commercial business loans have a term of up to five years and may have either fixed-rates of interest or, to a lesser extent, floating rates tied to the prime rate. The Bank's commercial business loans are made to small- to medium-sized businesses within the Bank's market area. A substantial portion of the Bank's small business loans are unsecured with the remainder generally secured by perfected security interests in accounts receivable and inventory or other corporate assets. In addition, the Bank generally obtains personal guarantees from the principals of the borrower with respect to all commercial business loans. In addition, the Bank may extend loans for a commercial business purpose which are secured by a mortgage on the proprietor's home or the business property. In such cases, the loan, while underwritten to commercial business loan standards, is reported as a single-family or commercial real estate mortgage loan, as the case may be. Commercial business loans generally are deemed to involve a greater degree of risk than single-family residential mortgage loans. The Bank's commercial business loans include discounted loans, which amounted to $8.2 million or 0.6% of the Bank's loans at December 31, 1998. The Bank's discounted loans, which are made primarily to local businesses, are designed to provide an interim source of financing and require no payment of principal or interest until the due date of the loan, which may be up to one year but generally is 60 or 90 days from the date of origination. While the borrower is contractually obligated to repay the entire face amount of the loan at maturity, the Bank advances only a portion of the face amount with the difference constituting the interest component. In addition to personal guarantees, discounted loans may also be secured by perfected security interests in receivables. However, due to the lack of an amortization schedule and, in certain cases, the absence of perfected security interests, discounted loans generally may be deemed to involve a greater risk of loss than single-family residential mortgage loans. At December 31, 1998, included in total other loans as other loans was $6.8 million of loans secured by manufactured housing. This represents 0.46% of the Bank's net loan portfolio. The Bank currently purchases these loans, after a review of the loan documentation and underwriting which is prepared by the company originating the loan. The majority of the loans are secured by manufactured housing and are located in the Northeastern section of the country. The Bank services the loan and is assisted by the originating company in the collection process. At December 31, 1998, the Bank had $1.0 million of student loans in its portfolio. The Bank has been and continues to be an active originator of student loans. Substantially, all of these loans are originated under the auspices of the New York State Higher Education Services Corporation ("NYSHESC"). Under the terms of these loans, no repayment is due until the student's graduation, with 98% of the principal guaranteed by the NYSHESC. The terms and rates of these loans are established by the NYSHESC. Presently, the Bank's general practice is to sell its student loans into the secondary market as the loans are originated. The balance of the Bank's other loans consist of loans secured by passbook accounts, loans on overdraft accounts, home improvement loans and various other personal loans. 10 Loans Held For Sale. At December 31, 1998 the Bank had $77.9 million of loans held for sale. Such loans are originated by the Mortgage Company through its network of retail loan origination offices. The loans are underwritten by the Mortgage Company to meet the standards of its investors. The Bank has provided the Mortgage Company with a warehouse line of credit to fund the loans. The majority of the loans are secured by one to four family residences. The Mortgage Company also has a line of credit with the Bank for its operating cash needs. Both borrowing arrangements have similar terms to other commercial borrowers with similar loan products. Revenues and expenses generated are eliminated on the consolidated financial statements. A majority of the loans are sold within a 45 day period to approved buyers. Revenues and costs in originating and selling the loan are deferred until the loan is sold and the transaction is completed. Revenues generated from the sale are recorded as other income in the Company's consolidated financial statements. Loan Origination and Loan Fees. In addition to interest earned on loans, the Bank receives loan origination fees or "points" for many of the loans it originates. Loan points are a percentage of the principal amount of the mortgage loan and are charged to the borrower in connection with the origination of the loan. In accordance with SFAS No. 91, which addresses the accounting for non-refundable fees and costs associated with originating or acquiring loans, the Bank's loan origination fees and certain related direct loan origination costs are offset, and the resulting net amount is deferred and amortized as interest income over the contractual life, adjusted for prepayments, of the related loans as an adjustment to the yield of such loans. At December 31, 1998, the Bank had $1.9 million of such deferred loan fees and costs, net. Asset Quality General. As a part of the Bank's efforts to improve its asset quality, it has developed and implemented an asset classification system. All of the Bank's assets are subject to review under this classification system. Loans are periodically reviewed and the classifications are reviewed by the Board of Directors on at least a quarterly basis. In addition, the Bank has retained an independent third party consultant to review the Bank's classifications, among other things, on a periodic basis. The Bank has also added staff and enhanced the procedures of the loan administration area in the collection and loan review area. When a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts are generally made 16 days after a payment is due. In most cases, deficiencies are cured promptly. If a delinquency continues, late charges are assessed and additional efforts are made to collect the loan. While the Bank generally prefers to work with borrowers to resolve such problems, when the account becomes 90 days delinquent, the Bank institutes foreclosure or other proceedings, as necessary, to minimize any potential loss. 11 Loans are placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be doubtful and the value of the collateral is not sufficient to satisfy all interest, principal and potential costs due on the loan. Management reviews individual loans to determine their accrual status when they approach 90 days past due. The Bank does not accrue interest on unsecured loans that are 90 days or more past due. When a loan is placed on nonaccrual status previously accrued unpaid interest is deducted from interest income. Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until sold. Pursuant to Statement of Position ("SOP") 92-3 issued by the American Institute of Certified Public Accountants ("AICPA") in April 1992, which provides guidance on determining the balance sheet treatment of foreclosed assets in annual financial statements for periods ending on or after December 15, 1992, there is a rebuttable presumption that foreclosed assets are held for sale and such assets are recommended to be carried at the lower of fair value minus estimated costs to sell the property, or cost (generally the balance of the loan on the property at the date of acquisition). After the date of acquisition, all costs incurred in maintaining the property are expensed and costs incurred for the improvement or development of such property are capitalized up to the extent of their net realizable value. The Bank's accounting for its real estate owned complies with the guidance set forth in SOP 92-3. Delinquent Loans. The following table sets forth information concerning delinquent mortgage loans at December 31, 1998, in dollar amounts and as a percentage of each category of the Bank's loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts which are past due.
December 31, 1998 ----------------- 30-59 Days 60-89 Days 90 Days or More ------------------------- ------------------------ --------------------- Percent of Percent of Percent of Amount Loan Category Amount Loan Category Amount Loan Category ------ ------------- ------ ------------- ------ ------------- (Dollars in Thousands) Mortgage loans: Residential: Single-family .............................. $ 950 0.08% $ 7,814 0.62% $ 2,350 0.20% Multi-family ............................... 145 0.44 168 0.50 -- 0.00% Commercial real estate ....................... 334 0.24 727 0.53 1,495 1.09% Construction and land ........................ 79 0.19 1,168 2.75 3,028 7.14% Home equity .................................. 12 2.58 210 3.43 -- 0.00% ------- ---- ------- ---- ------- ---- Total ...................................... $ 1,520 0.54% $10,087 3.43% $ 6,873 0.49% Other loans: Commercial business loans .................... 2,569 7.02% 1,02 4.10% 50 0.14% Other loans .................................. 860 2.77% 665 .15% 499 1.61% ------- ---- ------- ---- ------- ---- Total other loans ............ 3,429 5.07% 2,167 3.21% 549 0.81% ------- ---- ------- ---- ------- ---- Total loans .............. $ 4,949 0.34% $12,254 0.83% $ 7,422 0.50% ======= ==== ======= ==== ======= ====
12 Non-Performing Assets. The following table sets forth information with respect to non-performing assets identified by the Bank, including nonaccrual loans and other real estate owned, and non-performing investments in real estate at the dates indicated.
At December 31, --------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Thousands) Nonaccrual loans: Mortgage loans: Single-family residential... $7,067 $9,395 $10,417 $11,159(1) $6,692 Multi-family residential.... 131 319 322 98 86 Commercial real estate...... 6,534 8,436 11,102 11,653 560 Construction and land....... 1,761 1,131 -- 379 240 Home equity................. 212 545 644 124 -- Other loans: Automobile leases........... -- -- 15 18 -- Commercial business loans... 346 835 81 49 -- Discounted loans............ 25 126 -- Other loans................. 181 570 144 307 61 -------- -------- -------- -------- -------- Total nonaccruing loans. 16,232 21,231 22,750 23,913 7,639 -------- -------- -------- -------- -------- Total non-performing loans... 16,232 21,316 22,751 24,215 8,054 -------- -------- -------- -------- -------- Other real estate owned, net..... 849 618 1,103 627 373 -------- -------- -------- -------- -------- Total non-performing assets.. $ 17,081 $ 21,934 $ 23,854 $ 24,842 $ 8,427 ======== ======== ======== ======== ======== Non-performing assets to total loans............................. 1.10% 1.98% 2.42% 3.04% 1.37% Non-performing assets to total assets............................ 0.45% 0.82% 1.34% 1.44% 0.61% Non-performing loans to total loans............................. 1.05% 1.93% 2.31% 2.96% 1.31% Non-performing loans to total assets............................ 0.43% 0.80% 1.28% 1.40% 0.59%
(1) The acquisition of Gateway occurred in August 1995. Non-performing assets at December 31, 1998 totaled $17.1 million down from $21.9 million at December 31, 1997 and $23.9 million at December 31, 1996. The primary reason for the increase in non-performing assets in 1995 compared to earlier periods was the acquisition of a local commercial bank. While the Bank has continued to originate commercial real estate loans, construction and land loans, and commercial business loans, and intends to increase the level of originations of such loans, management has implemented loan underwriting policies and procedures which it believes are more conservative than those previously used by this commercial bank. Management has also enhanced the collection and workout procedures and loan administration staff with regard to non-performing assets which is reflected in the decrease achieved in 1998. The interest income that would have been recorded during the year ended December 31, 1998 if all of the Bank's non-performing loans at the end of such period had been current in accordance with their terms during such period was $794,000. The actual amount of interest 13 recorded as income (on a cash basis) on such loans during 1998 amounted to $713,000. Classified and Criticized Assets. Federal regulations require that each insured institution classify its assets on a regular basis. Furthermore, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: "substandard," "doubtful" and "loss." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable and there is a high probability of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated "special mention" also must be established and maintained for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. At December 31, 1998, the Bank had an aggregate of $25.8 million of classified assets of which $14.9 million were classified substandard and $10.9 million of assets which were deemed special mention. Allowance for Loan Losses. The allowance for loan losses is maintained through provisions for loan losses which are determined by management. The provision for loan losses are determined by management's ongoing evaluation of the risks inherent in the portfolio. Such evaluation includes the national and regional economics, the real estate market in the Bank's primary lending area, chargeoff and recovery trends in the portfolio, and the composition of the portfolio. At December 31, 1998, the Bank's allowance for loan losses amounted to $16.6 million or 102.4% and 1.1% of the Bank's non-performing loans and total loans receivable, respectively. The Bank's provision for loan losses amounted to $1.6 million for 1998 and $6.0 million during 1997 which included a non-recurring amount of $4.0 million. Effective December 21, 1993, and reinforced with a joint press release November 24, 1998 the OTS, in conjunction with the Office of the Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued a Policy Statement regarding an institution's allowance for loan and lease losses. The Policy Statement, which reflects the position of the issuing regulatory agencies and does not necessarily constitute GAAP, includes guidance (i) on the responsibilities of management for the assessment and establishment of an adequate allowance and (ii) for the agencies' examiners to use in evaluating the adequacy of such allowance and the policies utilized to determine such allowance. The Policy Statement also sets forth quantitative measures for the allowance with respect to assets classified substandard and doubtful and with respect to the remaining portion of an institution's loan portfolio. Specifically, the Policy Statement sets forth the following quantitative measures which examiners may use to determine the reasonableness of an allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the portfolio that is classified substandard; and (iii) for the portions of the portfolio that have not been classified (including loans designated special mention), estimated credit losses over the upcoming 12 months based on facts and circumstances available on the evaluation date. While the Policy Statement sets forth this quantitative measure, such guidance is not intended as a "floor" or "ceiling." The Bank's policy for establishing loan losses is not inconsistent with the Policy Statement. 14 The following table sets forth the activity in the Bank's allowance for loan losses during the periods indicated.
Year Ended December 31, 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (Dollars in Thousands) Allowance at beginning of period ..................... $15,709 $ 9,977 $10,704 $ 3,124 $ 3,180 Provisions ................... 1,594 6,003 1,000 8,026 76 Increase as a result of ...... 96 -- -- -- -- acquisition Charge-offs: Mortgage loans: Single-family residential .......... 358 501 1,590 606 107 Multi-family residential .......... 31 100 -- -- 36 Commercial real estate . 344 210 376 -- -- Other loans .............. 1,386 507 729 176 275 ------- ------- ------- ------- ------- Total charge-offs ...... 2,119 1,318 2,695 782 418 Recoveries: Mortgage loans: Single-family residential ........... 267 533 408 198 166 Multi-family residential -- -- -- -- 10 Commercial real estate .. 210 251 413 19 -- Construction and land ... 3 10 -- -- -- Other loans .............. 857 253 147 119 110 ------- ------- ------- ------- ------- Total recoveries ....... 1,337 1,047 968 336 286 ------- ------- ------- ------- ------- Allowance at end of period ... $16,617 $15,709 $ 9,977 $10,704 $ 3,124 ======= ======= ======= ======= ======= Allowance for loan losses to total nonperforming loans at end of period .............. 102.37% 73.69% 43.85% 44.20% 38.79% ======= ======= ======= ======= ======= Allowance for loan losses to total loans at end of period . 1.07% 1.42% 1.02% 1.32% 0.51% ======= ======= ======= ======= =======
15 The following table sets forth information concerning the allocation of the Bank's allowance for loan losses by loan category at the dates indicated.
At December 31, 1998 1997 1996 1995 --------------------- ------------------------ --------------------- -------------------- Percent of Percent of Percent of Percent of Loan in Loan in Loan in Loan in Category to Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- (Dollars in Thousands) Residential ........ $ 5,562 84.89% $ 5,853 82.37% $ 3,192 77.20% $ 2,002 77.50% Other............... 7,721 11.74 6,696 15.43 5,842 17.98 7,735 17.77 Other loans......... 3,334 4.40 3,160 4.04 943 6.55 967 6.84 ------- ------ ------- ------ ------ ------ ------- ------ Total.............. $16,617 101.02% $15,709 101.84% $9,977 101.73% $10,704 102.11% ======= ====== ======= ====== ====== ====== ======= ====== At December 31, 1994 ----------------------- Percent of Loan in Category to Amount Total Loans ------ ----------- (Dollars in Thousands) Residential ........ $2,100 85.78% Other............... -- 8.39 Other loans......... 1,024 6.99 ------ ------ Total.............. $3,124 101.16% ====== ======
16 The Bank will continue to monitor and modify its allowance for loan losses as conditions dictate. While management believes that, based on information currently available, the Bank's allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time, no assurance can be given that the Bank's level of allowance for loan losses will be sufficient to absorb future loan losses incurred by the Bank or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses. In addition, the OTS, as an integral part of its examination process, periodically reviews the Bank's allowance for loan losses. Such agency may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management. Securities Activities General. As of December 31, 1998, the Company had securities totaling $2.0 billion or 53.7% of the Company's total assets at such date. The unrealized appreciation on the Company's securities available for sale amounted to $15.5 million, net of income taxes. The securities investment policy of the Bank and Company, which has been established by the Board of Directors, is designed, among other things, to assist the Bank in its asset/liability management policies. The investment policy emphasizes principal preservation, favorable returns on investments, maintaining liquidity within designated guidelines, minimizing credit risk and maintaining flexibility. Interest and dividend income from the Company's securities portfolio is the largest source of income to the Company. The current securities investment policies permit investments in various types of assets including obligations of the U.S. Treasury and federal agencies, investment grade corporate obligations, various types of mortgage-backed and mortgage-related securities, commercial paper, certificates of deposit, equities and federal funds sold to financial institutions approved by the Board of Directors. The Bank converted to a federally chartered mutual savings bank in August 1997. Prior to that date, the Bank operated as a New York State-chartered mutual savings bank. While operating under its New York Charter, the Bank was permitted to make certain investments in equity securities and stock mutual funds. Pursuant to the current law for federally chartered thrifts, the Bank was required to divest or transfer such securities. The Bank transferred these securities with a market value of $60.8 million to the Company during the month of February 1998. The Company's securities portfolio as of December 31, 1998 was $171.6 million, consisting of equity investments and certain corporate bonds which are not legal investments for a federally chartered thrift. The Bank currently does not participate in hedging programs, interest rate swaps, or other activities involving the use of off-balance sheet derivative financial instruments. These activities require the prior approval of the Board of Directors under the Bank's securities investment policy. Similarly, the Bank has not and does not invest in mortgage derivative securities which are deemed to be "high risk," or purchase privately issued securities which are not rated investment grade. The Bank tests its securities on at least a semi-annual basis to ensure that they would not be considered "high risk" securities under Federal banking laws. 17 At December 31, 1998, all of the Company's securities were classified as available for sale. Such classification as available for sale provides the Company with the flexibility to sell securities if deemed appropriate in response to, among other factors, changes in interest rates. Securities classified as available for sale are carried at fair value. Unrealized gains and losses on available for sale securities are recognized as direct increases or decreases in equity, net of applicable income taxes. Securities classified as trading account are carried at market value with any increase or decrease in unrealized appreciation or depreciation included in the Company's income statement. As of December 31, 1998, the Company had no securities that were held in a trading account. In the year ended December 31, 1998 the Company recognized a net gain on security transactions of $524,000 compared to net losses on security transactions of $85,000 and $2.7 million for the years ended December 31, 1997 and 1996, respectively. The Bank's investment policy provides management with the authority to sell securities provided, among other things, any losses on such sales do not exceed $500,000, in which event prior approval of the Board of Directors is required. Generally, management will enter into such securities sales only if it believes that it can replace the securities sold with newly purchased securities that, due to their higher yield, will offset the losses within a twelve month period. During the fourth quarter of 1996, management and the Board of Directors reviewed the Bank's entire securities portfolio and authorized extensive sales as part of its securities restructuring efforts. The Bank substantially replaced the securities sold with securities having a significantly higher (over 75 basis points) projected yield without, in management's view, sacrificing credit quality or liquidity. The Bank does not anticipate that it will, as a matter of course, continue to authorize similar amounts of losses in its securities activities. 18 The following table sets forth the activity in the Bank's aggregate securities portfolio during the periods indicated.
Year Ended December 31, 1998 1997 1996 ----------- ----------- ----------- (Dollars In Thousands) Securities at beginning of period .... $ 1,350,466 $ 703,134 $ 788,622 Purchases: U.S. government and agencies ....... 19,819 25,073 29,670 State and municipals ............... -- -- -- Agency mortgage-backed securities .. 351,465 519,430 212,634 Agency CMOs ........................ 199,852 166,015 35,079 Private CMOs ....................... 374,353 165,137 53,258 Other debt securities .............. 239,128 167 -- Marketable equity securities ....... 119,768 34,483 15,059 ----------- ----------- ----------- Total purchases .................. 1,304,385 910,305 345,700 Sales: U.S. government and agencies ....... -- 30,000 71,051 State and municipals ............... -- -- 70 Agency mortgage-backed securities .. 2,772 18,183 113,617 Agency CMOs ........................ -- -- 16,332 Private CMOs ....................... -- 24,952 -- Other debt securities .............. 88,168 -- 36,042 Marketable equity securities ....... 18,284 24,822 3,305 ----------- ----------- ----------- Total sales ...................... 109,224 97,957 240,417 Repayments and prepayments: U.S. government and agencies ....... 49,943 22,025 46,800 State and municipals ............... -- 3,045 -- Agency mortgage-backed securities .. 263,362 104,187 102,748 Agency CMOs ........................ 134,220 33,366 4,399 Private CMOs ....................... 72,082 16,866 3,466 Other debt securities .............. -- 1,000 31,767 Marketable equity securities ....... 60 -- -- ----------- ----------- ----------- Total repayments and prepayments ... 519,667 180,489 189,180 Accretion of discount and amortization of premium ......................... (2,392) (520) (692) Unrealized gains or (losses) on available-for-sale securities ...... 5,473 16,435 (899) Realized gains and losses on trading assets ............................. -- (442) -- ----------- ----------- ----------- Securities at end of period .......... $ 2,029,041 $ 1,350,466 $ 703,134 =========== =========== ===========
19 Mortgage-Backed and Mortgage-Related Securities. At December 31, 1998, the Company's securities included $913.0 million, or 24.2% of total assets, of mortgage participation certificates (which are also known as mortgage-backed securities). Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages. The principal and interest payments on mortgage-backed securities are passed from the mortgage originators, as servicer, through intermediaries (generally U.S. Government agencies and government-sponsored enterprises) that pool and repackage the participation interests, in the form of securities, to investors such as the Bank. Such U.S. Government agencies and government sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include the FHLMC, the FNMA and the Government National Mortgage Association ("GNMA"). The FHLMC is a private corporation chartered by the U.S. Government. The FHLMC issues participation certificates backed principally by conventional mortgage loans. The FHLMC guarantees the timely payment of interest and the ultimate return of principal on participation certificates. The FNMA is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage loans. The FNMA guarantees the timely payment of principal and interest on FNMA securities. FHLMC and FNMA securities are not backed by the full faith and credit of the United States, but because the FHLMC and the FNMA are U.S. Government-sponsored enterprises, these securities are considered to be among the highest quality investments with minimal credit risks. The GNMA is a government agency within the Department of Housing and Urban Development which is intended to help finance government-assisted housing programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and the timely payment of principal and interest on GNMA securities are guaranteed by the GNMA and backed by the full faith and credit of the U.S. Government. Because the FHLMC, the FNMA and the GNMA were established to provide support for low- and middle-income housing, there are limits to the maximum size of loans that qualify for these programs. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable-rate loans. As a result, the risk characteristics of the underlying pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security thus approximates the life of the underlying mortgages. The Bank's securities also include $711.0 million, or 18.8% of total assets, in collateralized mortgage obligations ("CMOs"), which are also known as mortgage-related securities. CMOs have been developed in response to investor concerns regarding the uncertainty of cash flows associated with the prepayment option of the underlying mortgagor and are typically issued by governmental agencies, governmental sponsored enterprises and special purpose entities, such as trusts, corporations or partnerships, established by financial institutions or other similar institutions. A CMO can be collateralized by loans or securities which are insured or guaranteed by the FHLMC, 21 the FNMA or the GNMA. As of December 31, 1998, $234.6 million of the Bank's CMOs were insured or guaranteed by the FHLMC, FNMA or GNMA and the remaining $476.3 million of the Bank's CMOs were rated "AAA" by national rating agencies. While non-agency private issue CMOs are somewhat less liquid than CMOs insured or guaranteed by the GNMA, FNMA or FHLMC, they generally have a higher yield than agency insured or guaranteed CMOs. In contrast to pass-through mortgage-backed securities, in which cash flow is received pro rata by all security holders, the cash flow from the mortgages underlying a CMO is segmented and paid in accordance with a predetermined priority to investors holding various CMO classes. By allocating the principal and interest cash flows from the underlying collateral among the separate CMO classes, different classes of bonds are created, each with its own stated maturity, estimated average life, coupon rate and prepayment characteristics. The regular interests of some CMOs are like traditional debt instruments because they have stated principal amounts and traditionally defined interest rate terms. Purchasers of certain other CMOs are entitled to the excess, if any, of the issuer's cash inflows, including reinvestment earnings, over the cash outflows for debt service and administrative expenses. These CMOs may include instruments designated as residual interests, which represent an equity ownership interest in the underlying collateral, subject to the first lien of the investors in the other classes of the CMO. Certain residual CMO interests may be riskier than many regular CMO interests to the extent that they could result in the loss of a portion of the original investment. Moreover, cash flows from residual interests are very sensitive to prepayments and, thus, contain a high degree of interest rate risk. As of December 31, 1998, the Bank's CMOs did not include any residual interests, or interest-only or principal-only securities. As a matter of policy, the Bank does not invest in residual interests of CMOs or interest-only and principal-only securities. Mortgage-backed and mortgage-related securities generally yield less than the loans which underlie such securities because of their payment guarantees or credit enhancements which offer nominal credit risk. In addition, mortgage-backed and related securities are more liquid than individual mortgage loans and may be used to collateralize borrowings of the Bank. Mortgage-backed securities issued or guaranteed by the FNMA or the FHLMC (except interest-only securities or the residual interests in CMOs) are weighted at no more than 20.0% for risk-based capital purposes, compared to a weight of 50.0% to 100.0% for residential loans. The Bank generally does not invest in mortgage-backed and mortgage-related securities with estimated average lives exceeding 10 years. At December 31, 1998, the estimated weighted average life of the Bank's mortgage-backed and mortgage-related securities was approximately 4.3 years. The actual maturity of a mortgage-backed or mortgage-related security may be less than its stated maturity due to prepayments of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and adversely affect its yield to maturity. The yield is based upon the interest income and the amortization of any premium or accretion of discount related to the mortgage-backed security. In accordance with GAAP, premiums are amortized and discounts are accreted over the estimated lives of the loans, which decrease and increase interest income, respectively. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed or mortgage-related security, and these assumptions are reviewed periodically to reflect actual prepayments. 21 Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates, generally, is the most significant determinant of the rate of prepayments. During periods of rising mortgage interest rates, if the coupon rates of the underlying mortgages are less than the prevailing market interest rates offered for mortgage loans, refinancings generally decrease and slow the prepayment of the underlying mortgages and the related securities. Conversely, during periods of falling mortgage interest rates, if the coupon rates of the underlying mortgages exceed the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related securities. Under such circumstances, the Bank may be subject to reinvestment risk because to the extent that the Bank's mortgage-backed and mortgage-related securities amortize or prepay faster than anticipated, the Bank may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate. At December 31, 1998, of the $1.6 billion of mortgage-backed and mortgage-related securities, an aggregate of $1.1 billion were secured by fixed-rate securities and an aggregate of $493.9 million were secured by adjustable-rate securities. U.S. Government and Agency Obligations At December 31, 1998, the Company's U.S. Government securities portfolio totaled $30.2 million with a weighted average maturity of 1.1 years. The U.S. Government agency securities portfolio consisting of callable securities totaled $46.1 million with a weighted average maturity of 7.7 years and a weighted average life of 6 months to the call date. Other Securities At December 31, 1998, the Company's other securities consisted primarily of $134.6 million in corporate bonds, $12.4 million in asset backed bonds, and $0.2 million in foreign bonds. The corporate bonds consist of longer term financial institution bonds of which $58.5 million have adjustable rates using the 3 month LIBOR as the index and $76.0 million have fixed rates for longer terms. The weighted average maturity of the corporate bond portfolio is 20.4 years. Equity Securities At December 31, 1998, the Company's investment in equity securities was $181.5 million, consisting of $80.1 million of preferred stock, $31.6 million of common stock, $29.7 million of FHLB stock and $40.0 million of mutual funds. All equity investments are classified as available for sale. 22 The following table sets forth certain information regarding the maturities of the Bank's U.S. Government Agency obligations and other securities (all of which were classified as available for sale) at December 31, 1998.
Contractually Maturing Weighted Weighted Weighted Weighted Under 1 Average 1-5 Average 6-10 Average Over 10 Average Year Yield Years Yield Years Yield Years Yield ---- ----- ----- ----- ----- ----- ----- ----- (Dollars in Thousands) U.S.Government and $17,250 6.54% $27,804 7.42% $30,000 6.70% $ -- --% federal agency obligations Other -- -- 30,100 6.78% 12,000 5.72% 110,837 7.77% ------ ------- ------ --------- $17,250 $57,904 $42,000 $110,837 ======= ======= ======= ========
Sources of Funds. General. Deposits, repayments and prepayments of loans and securities, proceeds from sales of loans and securities, proceeds from maturing securities and cash flows from operations are the primary sources of the Bank's funds for use in lending, investing and for other general purposes. The Bank also utilizes borrowed funds on a short term basis to compensate for reductions in the availability of funds from other sources and on a longer term basis for general business. Deposits. The Bank's deposit products include a broad selection of deposit instruments, including negotiable order of withdrawal ("NOW") accounts, money market accounts, noninterest bearing checking accounts, commercial checking accounts, regular savings accounts and term certificate accounts. The Bank also offers jumbo certificate of deposit accounts and Individual Retirement Accounts ("IRA") and other qualified plan accounts. Deposit account terms vary with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate. At December 31, 1998, the Bank's deposits totaled $1.7 billion, of which 82.3% were interest bearing deposits. Noninterest bearing demand deposits, commercial and retail were $305.4 million or 17.7% of deposits. Core deposits (savings accounts, money market accounts and NOW accounts) were $886.5 million or 51.3% and certificates of deposit were $537.2 million or 31.0% at December 31, 1998. Although the Bank has a significant portion of its deposits in core deposits, management monitors the activity in these accounts and, based on historical experience, believes it will continue to retain a large portion of these deposits. Total deposits held by banks in the Bank's market area have decreased over the past few years. The Bank utilizes traditional marketing methods to attract new customers and savings deposits. In addition, the Bank's business development officers have actively solicited through individual meetings and other contacts, deposit accounts, particularly commercial accounts. The Bank's lending officers and branch managers have increased their efforts to solicit new deposits from the Bank's loan customers and other residents and businesses in their market area. The Bank does not participate in the brokered deposit market. The Bank is the largest depository institution, 23 by deposit market share, in Staten Island. For the year ended December 31, 1998 deposits before interest credited increased $54.8 million compared with a decrease of $9.4 million in 1997. Inclusive of interest credited, deposits increased $105.4 million in 1998 and $45.9 million in 1997. The following table sets forth the activity in the Bank's deposits during the periods indicated.
Year Ended December 31, 1998 1997 1996 ---------- ---------- ---------- (Dollars In Thousands) Beginning balance................... $1,623,652 $1,577,748 $1,535,617 Net increase (decrease) before interest credited................. 54,763 (9,386) (8,397) Interest credited................... 50,645 55,290 50,528 ---------- ---------- ---------- Net increase in deposits............ 105,408 45,904 42,131 Ending balance...................... $1,729,060 $1,623,652 $1,577,748 ========== ========== ==========
The following table sets forth by various interest rate categories the certificates of deposit with the Bank at the dates indicated.
At December 31, 1998 1997 1996 -------- -------- -------- (Dollars in Thousands) 0.00% to 2.99% .............. $ 4,343 $ -- $ -- 3.00% to 3.99% .............. 3,516 9,704 12,314 4.00% to 4.99% .............. 253,301 128,150 223,234 5.00% to 6.99% .............. 273,931 380,820 262,924 7.00% to 8.99% .............. 2,063 2,019 2,098 -------- -------- -------- Total ................... $537,154 $520,693 $500,570 ======== ======== ========
Weighted Average Rate The following table sets forth the amount and remaining maturities of the Bank's certificates of deposit at December 31, 1998. 24
Over Six Over One Over Two Months Year Years Six Months Through One Through Two Through Three Over Three and Less Year Years Years Years -------- ---- ----- ----- ----- (Dollars in Thousands) 0.00% to 2.99%............. $ 4,343 $ -- $ -- $ -- $ -- 3.00% to 3.99%............. 3,037 479 -- -- -- 4.00% to 4.99%............. 156,209 46,070 48,073 1,580 1,369 5.00% to 6.99%............. 133,516 63,769 48,732 11,192 16,722 7.00% to 8.99%............. -- -- 2,063 -- -- ----------- -------- -------- ------- ------- Total.................. $ 297,105 $110,318 $ 98,868 $12,772 $18,091 =========== ======== ======== ======= =======
As of December 31, 1998, the aggregate amount of outstanding time certificates of deposit in amounts greater than or equal to $100,000, was approximately $122.2 million. The following table presents the maturity of these time certificates of deposit at such dates. December 31, 1998 -------- (Dollars in Thousands) 3 months or less............................................ $59,072 Over 3 months through 6 months.............................. 20,288 Over 6 months through 12 months............................. 16,566 Over 12 months.............................................. 26,240 -------- $122,166 ======== The following table sets forth the dollar amount of deposits in various types of deposits offered by the Bank at the dates indicated.
At December 31, 1998 1997 1996 ---- ---- ---- Amount Percentage Amount Percentage Amount Percentage ------ ---------- ------ ---------- ------ ---------- (Dollars in Thousands) Savings accounts .... $ 730,614 42.25% $ 709,074 43.67% $ 735,009 45.27% Certificates of deposits .......... 537,154 31.07 520,693 32.07 500,570 30.83 Money market accounts 82,360 4.76 76,088 4.69 79,704 4.91 NOW accounts ........ 73,541 4.25 67,076 4.13 60,206 3.71 Demand deposits ..... 305,392 17.66 250,721 15.44 202,259 12.46 ---------- ------ ---------- ------ ---------- ------ Total . $1,729,061 100.00% $1,623,652 100.00% $1,577,748 100.00% ========== ====== ========== ====== ========== ======
Borrowings. During 1998, the Bank continued to leverage its capital by utilizing borrowings as an additional source of funds for asset growth. At December 31, 1998 the Bank had borrowings of $1.3 billion which consisted of reverse repurchase agreements with established brokerage firms and the FHLB of New York. These borrowings are collateralized primarily by the Bank's mortgage- backed securities. The Bank had $250.0 million in borrowings at December 31, 1997. 25 The Bank's strategy to invest borrowings at acceptable spreads has increased the overall cost of funds while incrementally increasing net interest income and decreasing the net interest rate spread. The Bank may continue to utilize borrowings through FHLB advances collateralized by the Bank's whole loan portfolio in 1999. The following table sets forth information with respect to the Company's reverse repurchase agreements at and during the periods indicated. The Bank did not have any reverse repurchase agreements at or for the year ended December 31, 1996.
At or For the Year Ended December 31, 1998 1997 ---- ---- (Dollars in Thousands) Maximum balance $ 1,349,477 $250,000 Average balance $ 664,822 $ 81,071 Year end balance $ 1,344,477 $250,000 Weighted average interest rate: At end of year 5.24% 5.86% During the year 5.58% 5.88%
Trust Activities. The Bank also provides a full range of trust and investment services, and acts as executor or administrator of estates and as trustee for various types of trusts. Trust and investment services are offered through the Bank's Trust Department which was acquired in 1995. Fiduciary and investment services are provided primarily to persons and entities located in Staten Island, New York. Services offered include fiduciary services for trusts and estates, money management, custodial services and pension and employee benefits consulting. As of December 31, 1998, the Trust Department maintained approximately 435 trust/fiduciary accounts with an aggregate principal balance of $137.1 million. The accounts maintained by the Trust/Investment Services Division consist of "managed" and "non-managed" accounts. "Managed" accounts are those accounts under custody for which the Bank has responsibility for administration and investment management and/or investment advice. "Non-managed" accounts are those accounts for which the Bank merely acts as a custodian. The Company receives fees dependent upon the level and type of service provided. The Trust Department administers various trust accounts (revocable, irrevocable and charitable trusts, and trusts under wills), agency accounts (various investment fund products), estate accounts and employee benefit plan accounts (assorted plans and IRA accounts). Two trust officers and related staff are assigned to the Trust Department. The administration of trust and fiduciary accounts are monitored by the Trust Committee of the Board of Directors of Staten Island Savings. 26 Savings Bank Life Insurance. The Bank has a Savings Bank Life Insurance ("SBLI") department which issues life insurance to individuals. The financial statements of the SBLI Department are not consolidated with the Bank's. The SBLI Department's activities are segregated from the Bank and, while they do not directly affect the Bank's earnings, management believes that offering SBLI is beneficial to the Bank's relationship with its depositors and the general public. The SBLI Department pays its own expenses and reimburses the Bank for expenses incurred on its behalf. At December 31, 1998, the SBLI Department had policies totaling $1.6 billion in force. Subsidiaries SIB Mortgage Corporation (SIBMC) is a wholly-owned subsidiary of the Bank incorporated in the State of New Jersey in 1998. SIBMC was formed to purchase the assets of Ivy Mortgage Corp. SIBMC currently originates loans in 22 states and had assets totaling $84.4 million at December 31, 1998. Staten Island Funding Corporation (SIFC) is a wholly-owned subsidiary of SIBIC incorporated in the State of Maryland in 1998 for the purpose of establishing a Real Estate Investment Trust ("REIT"). The Bank transferred real estate mortgage loans totaling $648.0 million, net, which included certain other associated assets and liabilities. In return the Bank received all the shares of common stock and preferred stock in SIFC. The assets of SIFC totaled $655.0 million at December 31, 1998. SIB Investment Corporation (SIBIC) is a wholly-owned subsidiary of the Bank that was incorporated in the State of New Jersey in 1998 for the purpose of managing certain investments of the Bank. The Bank transferred the common stock and a majority of the preferred stock of SIFC to SIBIC. The consolidated assets of SIBIC at December 31, 1998 were $686.0 million. Employees The Bank had 538 full-time employees and 102 part-time employees at December 31, 1998. None of these employees is represented by a collective bargaining agent and the Bank believes that it enjoys good relations with its personnel. REGULATION General The Bank is a federally chartered and insured savings bank subject to extensive regulation and supervision by the OTS, as the primary federal regulator of savings associations, and the FDIC, as the administrator of the BIF (Bank Inurance Fund). The federal banking laws contain numerous provisions affecting various aspects of the business and operations of savings associations and savings and loan holding companies. The 27 following description of statutory and regulatory provisions and proposals, which is not intended to be a complete description of these provisions or their effects on the Company or the Bank, is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals. Regulation of Savings and Loan Holding Companies Holding Company Acquisitions. The Company is a savings and loan holding company within the meaning of the Home Owners' Loan Act, as amended ("HOLA"). The HOLA and OTS regulations generally prohibit a savings and loan holding company, without prior OTS approval, from acquiring, directly or indirectly, the ownership or control of any other savings association or savings and loan holding company, or all, or substantially all, of the assets or more than 5% of the voting shares thereof. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings association not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS. Holding Company Activities. The Company operates as a unitary savings and loan holding company. Generally, there are limited restrictions on the activities of a unitary savings and loan holding company and its non-savings association subsidiaries. If the Company ceases to be a unitary savings and loan holding company, the activities of the Company and its non-savings association subsidiaries would thereafter be subject to substantial restrictions. The HOLA requires every savings association subsidiary of a savings and loan holding company to give the OTS at least 30 days' advance notice of any proposed dividends to be made on its guarantee, permanent or other non-withdrawable stock, or else such dividend will be invalid. Affiliate Restrictions. Transactions between a savings association and its "affiliates" are subject to quantitative and qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings association include, among other entities, the savings association's holding company and companies that are under common control with the savings association. In general, Sections 23A and 23B and OTS regulations issued in connection therewith limit the extent to which a savings association or its subsidiaries may engage in certain "covered transactions" with affiliates to an amount equal to 10% of the association's capital and surplus, in the case of covered transactions with any one affiliate, and to an amount equal to 20% of such capital and surplus, in the case of covered transactions with all affiliates. In addition, a savings association and its subsidiaries may engage in covered transactions and certain other transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the savings association or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A "covered transaction" is defined to include a loan or extension of credit to an affiliate; a purchase of investment securities issued by an affiliate; a purchase of assets from an affiliate, with certain exceptions; the acceptance of securities issued by an affiliate as 28 collateral for a loan or extension of credit to any party; or the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition, under the OTS regulations, a savings association may not make a loan or extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies; a savings association may not purchase or invest in securities of an affiliate other than shares of a subsidiary; a savings association and its subsidiaries may not purchase a low-quality asset from an affiliate; and covered transactions and certain other transactions between a savings association or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices. With certain exceptions, each loan or extension of credit by a savings association to an affiliate must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of the loan or extension of credit. The OTS regulation generally excludes all non-bank and non-savings association subsidiaries of savings associations from treatment as affiliates, except to the extent that the OTS or the Federal Reserve Board decides to treat such subsidiaries as affiliates. The regulation also requires savings associations to make and retain records that reflect affiliate transactions in reasonable detail, and provides that certain classes of savings associations may be required to give the OTS prior notice of affiliate transactions. Regulation of Federal Savings Banks Regulatory System. As a federally insured savings bank, lending activities and other investments of the Bank must comply with various statutory and regulatory requirements. The Bank is regularly examined by the OTS and must file periodic reports concerning its activities and financial condition. Although the OTS is the Bank's primary regulator, the FDIC has "backup enforcement authority" over the Bank. The Bank's eligible deposit accounts are insured by the FDIC under the BIF, up to applicable limits. Federal Home Loan Banks. The Bank is a member of the FHLB System. Among other benefits, FHLB membership provides the Bank with a central credit facility. The Bank is required to own capital stock in an FHLB in an amount equal to the greater of: (i) 1% of its aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5% of its FHLB advances (borrowings). The current investment in FHLB stock is based on 5% of the Bank's borrowings outstanding from the FHLB. Liquid Assets. Under OTS regulations, for each calendar month, a savings bank is required to maintain an average daily balance of liquid assets (including cash, certain time deposits and savings accounts, bankers' acceptances, certain government obligations and certain other investments) not less than a specified percentage of the average daily balance of its net 29 withdrawable accounts plus short-term borrowings (its liquidity base) during the preceding calendar month. This liquidity requirement, which is currently at 5.0%, may be changed from time to time by the OTS to any amount between 4.0% to 10.0%, depending upon certain factors. OTS regulations also require each savings association to maintain an average daily balance of short-term liquid assets equal to not less than 1.0% of the average daily balance of its net withdrawable accounts and short-term borrowings during the preceding calendar month. The Bank maintains liquid assets in compliance with these regulations. Regulatory Capital Requirements. OTS capital regulations require savings banks to satisfy minimum capital standards: risk-based capital requirements, a leverage requirement and a tangible capital requirement. Savings banks must meet each of these standards in order to be deemed in compliance with OTS capital requirements. In addition, the OTS may require a savings association to maintain capital above the minimum capital levels. All savings banks are required to meet a minimum risk-based capital requirement of total capital (core capital plus supplementary capital) equal to 8% of risk-weighted assets (which includes the credit risk equivalents of certain off-balance sheet items). In calculating total capital for purposes of the risk-based requirement, supplementary capital may not exceed 100% of core capital. Under the leverage requirement, a savings bank is required to maintain core capital equal to a minimum of 3% of adjusted total assets. A savings bank is also required to maintain tangible capital in an amount at least equal to 1.5% of its adjusted total assets. Under OTS regulations, a savings bank with a greater than "normal" level of interest rate exposure must deduct an interest rate risk ("IRR") component in calculating its total capital for purposes of determining whether it meets its risk-based capital requirement. Interest rate exposure is measured, generally, as the decline in an institution's net portfolio value that would result from a 200 basis point increase or decrease in market interest rates (whichever would result in lower net portfolio value), divided by the estimated economic value of the savings association's assets. The interest rate risk component to be deducted from total capital is equal to one-half of the difference between an institution's measured exposure and "normal" IRR exposure (which is defined as 2%), multiplied by the estimated economic value of the institution's assets. In August 1995, the OTS indefinitely delayed implementation of its IRR regulation. Based on internal measures of interest rate risk at December 31, 1998, the Bank would have been required to deduct $8.2 million pursuant to the IRR component in calculating total risk-based capital had the IRR component of the capital regulations been in effect. However, even in the event of such a deduction, the Bank would still be deemed to be a "well-capitalized" institution. These capital requirements are viewed as minimum standards by the OTS, and most institutions are expected to maintain capital levels well above the minimum. In addition, the OTS regulations provide that minimum capital levels higher than those provided in the regulations may be established by the OTS for individual savings associations, upon a determination that the savings association's capital is or may become inadequate in view of its circumstances. The OTS regulations provide that higher individual minimum regulatory capital requirements may be appropriate in circumstances where, among others: (1) a savings association has a high degree of 30 exposure to interest rate risk, prepayment risk, credit risk, concentration of credit risk, certain risks arising from nontraditional activities, or similar risks or a high proportion of off-balance sheet risk; (2) a savings association is growing, either internally or through acquisitions, at such a rate that supervisory problems are presented that are not dealt with adequately by OTS regulations; and (3) a savings association may be adversely affected by the activities or condition of its holding company, affiliates, subsidiaries or other persons or savings associations with which it has significant business relationships. The Bank is not subject to any such individual minimum regulatory capital requirement. The Bank's tangible capital ratio was 11.31%, its core capital ratio was 11.39% and its total risk-based capital ratio was 26.04% at December 31, 1998. Prompt Corrective Action. The prompt corrective action regulation of the OTS, promulgated under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), requires certain mandatory actions and authorizes certain other discretionary actions to be taken by the OTS against a savings bank that falls within certain undercapitalized capital categories specified in the regulation. The regulation establishes five categories of capital classification: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Under the regulation, the ratio of total capital to risk-weighted assets, core capital to risk-weighted assets and the leverage ratio are used to determine an institution's capital classification. The Bank meets the capital requirements of a "well capitalized" institution under applicable OTS regulations. In general, the prompt corrective action regulation prohibits an insured depository institution from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. In addition, adequately capitalized institutions may accept brokered deposits only with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll-over brokered deposits. Institutions that are classified as undercapitalized are subject to certain mandatory supervisory actions, including: (i) increased monitoring by the appropriate federal banking agency for the institution and periodic review of the institution's efforts to restore its capital, (ii) a requirement that the institution submit a capital restoration plan acceptable to the appropriate federal banking agency and implement that plan, and that each company having control of the institution guarantee compliance with the capital restoration plan in an amount not exceeding the lesser of 5% of the institution's total assets at the time it received notice of being undercapitalized, or the amount necessary to bring the institution into compliance with applicable capital standards at the time it fails to comply with the plan, and (iii) a limitation on the institution's ability to make any acquisition, open any new branch offices, or engage in any new line of business without the prior approval of the appropriate federal banking agency for the institution or the FDIC. 31 The regulation also provides that the OTS may take any of certain additional supervisory actions against an undercapitalized institution if the agency determines that such actions are necessary to resolve the problems of the institution at the least possible long-term cost to the deposit insurance fund. These supervisory actions include: (i) requiring the institution to raise additional capital or be acquired by another institution or holding company if certain grounds exist, (ii) restricting transactions between the institution and its affiliates, (iii) restricting interest rates paid by the institution on deposits, (iv) restricting the institution's asset growth or requiring the institution to reduce its assets, (v) requiring replacement of senior executive officers and directors, (vi) requiring the institution to alter or terminate any activity deemed to pose excessive risk to the institution, (vii) prohibiting capital distributions by bank holding companies without prior approval by the FRB, (viii) requiring the institution to divest certain subsidiaries, or requiring the institution's holding company to divest the institution or certain affiliates of the institution, and (ix) taking any other supervisory action that the agency believes would better carry out the purposes of the prompt corrective action provisions of FDICIA. Institutions classified as undercapitalized that fail to submit a timely, acceptable capital restoration plan or fail to implement such a plan are subject to the same supervisory actions as significantly undercapitalized institutions. Significantly undercapitalized institutions are subject to the mandatory provisions applicable to undercapitalized institutions. The regulation also makes mandatory for significantly undercapitalized institutions certain of the supervisory actions that are discretionary for institutions classified as undercapitalized, creates a presumption in favor of certain discretionary supervisory actions, and subjects significantly undercapitalized institutions to additional restrictions, including a prohibition on paying bonuses or raises to senior executive officers without the prior written approval of the appropriate federal bank regulatory agency. In addition, significantly undercapitalized institutions may be subjected to certain of the restrictions applicable to critically undercapitalized institutions. The regulation requires that an institution be placed into conservatorship or receivership within 90 days after it becomes critically undercapitalized, unless the OTS, with concurrence of the FDIC, determines that other action would better achieve the purposes of the prompt corrective action provisions of FDICIA. Any such determination must be renewed every 90 days. A depository institution also must be placed into receivership if the institution continues to be critically undercapitalized on average during the fourth quarter after the institution initially became critically undercapitalized, unless the institution's federal bank regulatory agency, with concurrence of the FDIC, makes certain positive determinations with respect to the institution. Critically undercapitalized institutions are also subject to the restrictions generally applicable to significantly undercapitalized institutions and to a number of other severe restrictions. For example, beginning 60 days after becoming critically undercapitalized, such institutions may not pay principal or interest on subordinated debt without the prior approval of the FDIC. (However, the regulation does not prevent unpaid interest from accruing on subordinated debt under the terms of the debt instrument, to the extent otherwise permitted by law.) In addition, critically undercapitalized institutions may be prohibited from engaging in a number of activities, 32 including entering into certain transactions or paying interest above a certain rate on new or renewed liabilities. If the OTS determines that an institution is in an unsafe or unsound condition, or if the institution is deemed to be engaging in an unsafe and unsound practice, the OTS may, if the institution is well capitalized, reclassify it as adequately capitalized; if the institution is adequately capitalized but not well capitalized, require it to comply with restrictions applicable to undercapitalized institutions; and, if the institution is undercapitalized, require it to comply with certain restrictions applicable to significantly undercapitalized institutions. Conservatorship/Receivership. In addition to the grounds discussed under "- Prompt Corrective Action," the OTS (and, under certain circumstances, the FDIC) may appoint a conservator or receiver for a savings association if any one or more of a number of circumstances exist, including, without limitation, the following: (i) the institution's assets are less than its obligations to creditors and others, (ii) a substantial dissipation of assets or earnings due to any violation of law or any unsafe or unsound practice, (iii) an unsafe or unsound condition to transact business, (iv) a willful violation of a final cease-and-desist order, (v) the concealment of the institution's books, papers, records or assets or refusal to submit such items for inspection to any examiner or lawful agent of the appropriate federal banking agency or state bank or savings association supervisor, (vi) the institution is likely to be unable to pay its obligations or meet its depositors' demands in the normal course of business, (vii) the institution has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the institution to become adequately capitalized without federal assistance, (viii) any violation of law or unsafe or unsound practice that is likely to cause insolvency or substantial dissipation of assets or earnings, weaken the institution's condition, or otherwise seriously prejudice the interests of the institution's depositors or the federal deposit insurance fund, (ix) the institution is undercapitalized and the institution has no reasonable prospect of becoming adequately capitalized, fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan, or materially fails to implement an accepted capital restoration plan, (x) the institution is critically undercapitalized or otherwise has substantially insufficient capital, or (xi) the institution is found guilty of certain criminal offenses related to money laundering. Enforcement Powers. The OTS and, under certain circumstances, the FDIC, have substantial enforcement authority with respect to savings associations, including authority to bring various enforcement actions against a savings association and any of its "institution-affiliated parties" (a term defined to include, among other persons, directors, officers, employees, controlling stockholders, agents and stockholders who participate in the conduct of the affairs of the institution). This enforcement authority includes, without limitation: (i) the ability to terminate a savings association's deposit insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension, removal, prohibition and criminal proceedings against institution-affiliated parties, and (iv) assess substantial civil money penalties. As part of a cease-and-desist order, the agencies may require a savings association or an institution-affiliated party to take affirmative action to correct conditions resulting from that party's actions, including to make restitution or provide 33 reimbursement, indemnification or guarantee against loss; restrict the growth of the institution; and rescind agreements and contracts. Capital Distribution Regulation. As a subsidiary of a savings and loan holding company the Bank is required to provide advance notice to the OTS of any proposed capital distribution on its capital stock. Qualified Thrift Lender Test. In general, savings associations are required to maintain at least 65% of their portfolio assets in certain qualified thrift investments (which consist primarily of loans and other investments related to residential real estate and certain other assets). A savings association that fails the qualified thrift lender test is subject to substantial restrictions on activities and to other significant penalties. 34 Recent legislation permits a savings association to qualify as a qualified thrift lender not only by maintaining 65% of portfolio assets in qualified thrift investments (the "QTL test") but also, in the alternative, by qualifying under the Code as a "domestic building and loan association." The Bank is a domestic building and loan association as defined in the Code. Recent legislation also expands the QTL test to provide savings associations with greater authority to lend and diversify their portfolios. In particular, credit card and educational loans may now be made by savings associations without regard to any percentage-of-assets limit, and commercial loans may be made in an amount up to 10 percent of total assets, plus an additional 10 percent for small business loans. Loans for personal, family and household purposes (other than credit card, small business and educational loans) are now included without limit with other assets that, in the aggregate, may account for up to 20% of total assets. At December 31, 1998, under the expanded QTL test, approximately 99.97% of the Bank's portfolio assets were qualified thrift investments. FDIC Assessments. The deposits of the Bank are insured to the maximum extent permitted by the BIF, which is administered by the FDIC, and are backed by the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OTS an opportunity to take such action. The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the Bank's deposit insurance. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized and considered healthy pay the lowest premium while institutions that are less than adequately capitalized and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. 35 The FDIC is authorized to increase assessment rates, on a semi-annual basis, if it determines that the reserve ratio of the SAIF (Savings Association Insurance Fund) will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. Effective January 1, 1997, the premium schedule for BIF and SAIF insured institutions ranges from 0 to 27 basis points. However, insured institutions are required to pay a Financing Corporation assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980's, equal to approximately 6 basis points for each $100 in domestic deposits, while BIF insured institutions pay an assessment equal to approximately 1 basis point for each $100 in domestic deposits. The assessment is expected to be reduced to about 2 basis points no later than January 1, 2000, when BIF insured institutions fully participate in the assessment. These assessments, which may be revised based upon the level of BIF and SAIF deposits will continue until the bonds mature in the year 2017. The BIF fund met its target reserve level in September 1995, but the SAIF was not expected to meet its target reserve level until at least 2002. Consequently, in late 1995, the FDIC approved a final rule regarding deposit insurance premiums which, effective with respect to the semi-annual premium assessment beginning January 1, 1996, reduced deposit insurance premiums for BIF member institutions to zero basis points (subject to an annual minimum of $2,000) for institutions in the lowest risk category. Deposit insurance premiums for SAIF members were maintained at their existing levels (23 basis points for institutions in the lowest risk category). On September 30, 1996, President Clinton signed into law legislation to eliminate the premium differential between SAIF-insured institutions and BIF-insured institutions by recapitalizing the SAIF's reserves to the required ratio of 1.25% of insured deposits. The legislation provided that the holders of SAIF-assessable deposits pay a one-time special assessment to recapitalize the SAIF. The legislation also provided for the merger of the BIF and the SAIF, with such merger being conditioned upon the prior elimination of the thrift charter. Effective October 8, 1996, FDIC regulations imposed a one-time special assessment equal to 65.7 basis points for all SAIF-assessable deposits as of March 31, 1995, which was collected on November 27, 1996. Following the imposition of the one-time special assessment, the FDIC lowered assessment rates for SAIF members to reduce the disparity in the assessment rates paid by BIF and SAIF members. Beginning October 1, 1996, effective BIF and SAIF rates both range from zero basis points to 27 basis points. From 1997 through 1999, FDIC-insured institutions will pay approximately 1.3 basis points of their BIF-assessable deposits and 6.4 basis points of their SAIF-assessable deposits to fund the Financing Corporation. The Bank's insurance premiums, which had amounted to the minimum $2,000 annual fee for its BIF-insured deposits, were increased to 1.3 basis points. The Bank paid $204,000 in insurance premiums during 1998. 36 Community Reinvestment Act and the Fair Lending Laws. Savings associations have a responsibility under the Community Reinvestment Act ("CRA") and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution's failure to comply with the provisions of CRA could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. New Safety and Soundness Guidelines. The OTS and the other federal banking agencies have established guidelines for safety and soundness, addressing operational and managerial, as well as compensation matters for insured financial institutions. Institutions failing to meet these standards are required to submit compliance plans to their appropriate federal regulators. The OTS and the other agencies have also established guidelines regarding asset quality and earnings standards for insured institutions. Change of Control. Subject to certain limited exceptions, no company can acquire control of a savings association without the prior approval of the OTS, and no individual may acquire control of a savings association if the OTS objects. Any company that acquires control of a savings association becomes a savings and loan holding company subject to extensive registration, examination and regulation by the OTS. Conclusive control exists, among other ways, when an acquiring party acquires more than 25% of any class of voting stock of a savings association or savings and loan holding company, or controls in any manner the election of a majority of the directors of the company. In addition, a rebuttable presumption of control exists if, among other things, a person acquires more than 10% of any class of a savings association or savings and loan holding company's voting stock (or 25% of any class of stock) and, in either case, any of certain additional control factors exist. Under recent legislation, companies subject to the Bank Holding Company Act that acquire or own savings associations are no longer defined as savings and loan holding companies under the HOLA and, therefore, are not generally subject to supervision and regulation by the OTS. OTS approval is no longer required for a bank holding company to acquire control of a savings association, although the OTS has a consultative role with the FRB in examination, enforcement and acquisition matters. TAXATION Federal Taxation General. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax 37 matters and is not a comprehensive description of the tax rules applicable to the Bank. The Bank's federal income tax returns have been audited or closed without audit by the IRS through 1993. Method of Accounting. For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its consolidated federal income tax returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995. Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the specific chargeoff method in computing its bad debt deduction beginning with its 1996 Federal tax return. In addition, the federal legislation requires the recapture (over a six year period) of the excess of tax bad debt reserves at December 31, 1995 over those established as of December 31, 1987. The amount of such reserve subject to recapture as of December 31, 1998 is approximately $7.0 million. The Bank began to recapture the reserve in 1998. As discussed more fully below, the Bank and subsidiaries file combined New York State Franchise and New York City Financial Corporation tax returns. The basis of the determination of each tax is the greater of a tax on entire net income (or on alternative entire net income) or a tax computed on taxable assets. However, for state purposes, New York State enacted legislation in 1996, which among other things, decoupled the Federal and New York State tax laws regarding thrift bad debt deductions and permits the continued use of the bad debt reserve method under section 593. Thus, provided the Bank continues to satisfy certain definitional tests and other conditions, for New York State and City income tax purposes, the Bank is permitted to continue to use the special reserve method for bad debt deductions. The deductible annual addition to the state reserve may be computed using a specific formula based on the Bank's loss history ("Experience Method") or a statutory percentage equal to 32% of the Bank's New York State or City taxable income ("Percentage Method"). Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income should the Bank fail to meet certain thrift asset and definitional tests. New federal legislation eliminated these thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should the Bank make certain non-dividend distributions or cease to maintain a bank charter. At December 31, 1998 the Bank's total federal pre-1988 reserve was approximately $11.7 million. This reserve reflects the cumulative effects of federal tax deductions by the Bank for which no Federal income tax provision has been made. Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate of 20% on a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI"). The AMT is payable to the extent such AMTI is in excess of an exemption 38 amount. Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Bank has not been subject to the alternative minimum tax and has no such amounts available as credits for carryover. Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding three taxable years and forward to the succeeding 15 taxable years. This provision applies to losses incurred in taxable years beginning after 1986. At December 31, 1998, the Bank had no net operating loss carryforwards for federal income tax purposes. Corporate Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is 80% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf. State and Local Taxation New York State and New York City Taxation. The Company and the Bank report income on a combined calendar year basis to both New York State and New York City. New York State Franchise Tax on corporations is imposed in an amount equal to the greater of (a) 9% of "entire net income" allocable to New York State (b) 3% of "alternative entire net income" allocable to New York State (c) 0.01% of the average value of assets allocable to New York State or (d) nominal minimum tax. Entire net income is based on federal taxable income, subject to certain modifications. Alternative entire net income is equal to entire net income without certain modifications. The New York City Corporation Tax is imposed using similar alternative taxable income methods and rates. A temporary Metropolitan Transportation Business Tax Surcharge on Banking corporations doing business in the Metropolitan District has been applied since 1982. The Bank transacts a significant portion of its business within this District and is subject to this surcharge. For the tax year ended December 31, 1998, the surcharge rate is 17% of the State franchise tax liability Delaware State Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. The tax is imposed as a percentage of the capital base of the Company with an annual maximum of $150,000. The Delaware Tax for 1998 was $122,000. The Mortgage Company is subject to taxes for the additional states that they operate in. 39 PART II Item 2. Properties At December 31, 1998, the Bank conducted its business from its executive and administrative offices in Staten Island, New York, and 16 full service branch offices in Staten Island, one full service branch office in Brooklyn as well as three limited service branch offices, a loan origination center and its Trust Department in Staten Island. In addition, the Bank maintains 36 automated teller machines ("ATMs"), with at least two ATMs at each of the Bank's branch offices, and an office for its SBLI activities. SIBMC conducts its business from its executive and administrative office in Branchburg, New Jersey and eight retail loan origination offices. SIBIC conducts its business in its executive office located in Middletown, New Jersey. The following table sets forth certain information relating to the Bank's offices at December 31, 1998.
Net Book Value of Property and Lease Leasehold Owned or Expiration Improvements at Deposits at Location (1) Leased Date December 31, 1998 December 31, 1998 - ------------ ------ ---- ----------------- ----------------- (Dollars in Thousands) Executive Office: 15 Beach Street Staten Island, NY 10304 Owned 1,893 $ -- Branch Offices: 81-91 Water Street Owned 242 147,623 Staten Island, NY 10304 15 Hyatt Street Owned 128 65,581 Staten Island, NY 10301 257 New Dorp Lane Owned 20 139,526 Staten Island, NY 10305 260 New Dorp Lane Owned 487 (1) Staten Island, NY 10305 1837 Victory Boulevard Owned 177 158,778 Staten Island, NY 10314 1850 Victory Boulevard Owned 157 (2) Staten Island, NY 10314
40
Net Book Value of Property and Lease Leasehold Owned or Expiration Improvements at Deposits at Location (1) Leased Date December 31, 1998 December 31, 1998 - ------------ ------ ---- ----------------- ----------------- (Dollars in Thousands) 1320 Hylan Boulevard Owned 490 157,739 Staten Island, NY 10305 461-465, 475 Forest Avenue Owned 684 109,209 Staten Island, NY 10310 3150 Amboy Road Owned 420 100,917 Staten Island, NY 10308 900 Huguenot Avenue Leased 2000 (3) 356 71,987 Staten Island, NY 10312 5472 Amboy Road Owned 1,197 (4) Staten Island, NY 10309 2700 Hylan Boulevard Leased 2005 (3) 388 125,032 Staten Island, NY 10306 4025 Amboy Road Owned 262 101,137 Staten Island, NY 10308 6975 Amboy Road Owned 1,372 65,808 Staten Island, NY 10309 1630 Forest Avenue Owned 1,125 86,427 Staten Island, NY 10302 43 Richomd Hill Road Leased 1999 (3) 509 70,779 Staten Island, NY 10314 800 Forest Avenue Owned 808 57,928 Staten Island, NY 10310 1630 Richmond Road Owned 1,092 145,317 Staten Island, NY 10304 4310-4312-4320 Amboy Road Leased 2007 (3) 321 62,847 Staten Island, NY 10312 9512-20 3rd Avenue Leased 1999 (3) 305 62,406 Brooklyn, NY 11209
41
Net Book Value of Property and Lease Leasehold Owned or Expiration Improvements at Deposits at Location (1) Leased Date December 31, 1998 December 31, 1998 - ------------ ------ ---- ----------------- ----------------- (Dollars in Thousands) Other Offices: 45 Beach Street Owned 556 (5) Staten Island, NY 10304 260 Christopher Lane Leased 2003 184 (6) Staten Island, NY 10314 96 Prospect Street Owned 939 (5) Staten Island, NY 10304 1591 Richmond Road Owned 634 (7) Staten Island, NY 10304 176 Broadway Leased 2000 - (8) New York, NY 10038 1500 Victory Blvd. Leased 2002(3) - N/A Staten Island, NY 10314 SIB Mortgage Corp. Executive Offices/Branch Leased 2001 26 N/A 1250 Route 28 Branchburg, NJ 08876 99 Merimack Street Leased 2001 5 N/A Haverhill, Ma 86 Summit Avenue Leased 1999 6 N/A Summit, NJ 07901 400 West Cummings Park Leased 2001 10 N/A Suite 4900 Woburn, MA 01801 597 Horsham Road Leased Monthly 0 N/A Horsham, PA Plaza 800 Islington Street Leased 2001 1 N/A Portsmouth, NH 29 Emmons Drive Leased 2002 0 N/A W Windsor, NJ
42
Net Book Value of Property and Lease Leasehold Owned or Expiration Improvements at Deposits at Location (1) Leased Date December 31, 1998 December 31, 1998 - ------------ ------ ---- ----------------- ----------------- (Dollars in Thousands) 1111 Street Road Leased 2000 0 N/A Southampton, NJ 18966 317 Brick Boulevard Leased 2003 4 N/A Brick, NJ 08723 SIB Investment Corporation Leased 2000 0 N/A 1650 Route 35 South Middletown, NJ 07748
(1) Consists of two ATMs and a manned drive-in facility. (2) Consists of three ATMs and a manned drive-in facility. (3) Excludes options to extended term. (4) An automated drive through facility with two ATMs. (5) Administrative office. (6) Loan origination center. (7) Trust Department office. (8) SBLI Department. 43 Item 3. Legal Proceedings. The Company is not involved in any legal proceedings other than immaterial proceedings occurring in the ordinary course of business. Item 4. Submission of Matters to a Vote of Security-Holders. Not applicable. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required herein, to the extent applicable, is incorporated by reference from page 35 and 36 of the Company's 1998 Annual Report ("1998 Annual Report") Item 6. Selected Financial Data. The information required herein is incorporated by reference from page 8 of the 1998 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required herein is incorporated by reference from pages 12 to 18 of the 1998 Annual Report. Item 7A. Quantitative and Qualitative Disclosure about Market Risk. The information required herein is incorporated by reference from pages 9 to 12 of the 1998 Annual Report. Item 8. Financial Statements and Supplementary Data. The information required herein is incorporated by reference from pages 19 to 35 of the 1998 Annual Report. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. PART III. Item 10. Directors and Executive Officers of the Registrant. The information required herein is incorporated by reference from pages 3 to 6 of the definitive proxy statement of the Company for the Annual Meeting of Stockholders to be held on April 29, 1999, which was filed on March 29, 1999 ("Definitive Proxy Statement"). Item 11. Executive Compensation. The information required herein is incorporated by reference from pages 10 to 14 of the Definitive Proxy Statement. 44 Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required herein is incorporated by reference from pages 7 and 9 of the Definitive Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required herein is incorporated by reference from pages 14 and 15 of the Definitive Proxy Statement. PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Documents Filed as Part of this Report (1) The following financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13): Report of Independent Auditors Consolidated Statements of Condition as of December 31, 1998 and 1997. Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996. Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. (2) All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto. 45 (3) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.
Exhibit Index ------------- 3.1* Certificate of Incorporation of Staten Island Bancorp, Inc. 3.2* Bylaws of Staten Island Bancorp, Inc. 4.0* Specimen Stock Certificate of Staten Island Bancorp, Inc. 10.1* Form of Employment Agreement to be entered into among Staten Island Bancorp, Inc., Staten Island Savings Bank and certain executive officers. 10.2* Form of Employment Agreement to be entered into between Staten Island Bancorp, Inc. and each of Harry P. Doherty and James R. Coyle. 10.3* Form of Employment Agreement to be entered into between Staten Island Savings Bank and each of Harry P. Doherty and James R. Coyle. 10.4** Amended and Restated 1998 Stock Option Plan 10.5** Amended and Restated 1998 Recognition and Retention Plan and Trust Agreement 10.6 Deferred Compensation Plan 13.0 1998 Annual Report to Stockholders 21.0 Subsidiaries of the Registrant - Reference is made to "Item 2. "Business" for the required information 23.0 Consent of Arthur Andersen, LLP 27.0 Financial Data Schedule
(*) Incorporated herein by reference from the Company's Registration Statement on Form S-1 (Registration No. 333-32113) filed by the Company with the SEC. (**) Incorporated herein by reference from the Company's Definitive Proxy Statement dated March 29, 1999. 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STATEN ISLAND BANCORP, INC. By: /s/ Harry P. Doherty -------------------- Harry P. Doherty Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ Harry P. Doherty Chairman and Chief Executive March 31, 1999 - --------------------------- Officer Harry P. Doherty /s/ James R. Coyle Director, President and Chief - --------------------------- Operating Officer March 31, 1999 James R. Coyle /s/ Edward J. Klingele Senior Vice President and Chief - --------------------------- Financial Officer (principal Edward J. Klingele financial and accounting officer) March 31, 1999 /s/ Harold Banks Director March 31, 1999 - --------------------------- Harold Banks /s/ Charles J. Bartels Director March 31, 1999 - -------------------------- Charles J. Bartels /s/ William G. Horn Director March 31, 1999 - -------------------------- William G. Horn /s/ Dennis P. Kelleher Director March 31, 1999 - -------------------------- Dennis P. Kelleher /s/ Julius Mehrberg Director March 31, 1999 - --------------------------- Julius Mehrberg /s/ John R. Morris Director March 31, 1999 - -------------------------- John R. Morris /s/Kenneth W. Nelson Director March 31, 1999 - --------------------------- Kenneth W. Nelson /s/ William E. O'Mara Director March 31, 1999 - -------------------------- William E. O'Mara
47 EX-10.6 2 STATEN ISLAND BANCORP, INC. Deferred Compensation Plan STATEN ISLAND BANCORP, INC. Deferred Compensation Plan 1. Purposes..................................................................1 2. Definitions...............................................................1 3. Administration............................................................3 4. Participation.............................................................4 5. Deferrals.................................................................4 6. Deferral Accounts For Non-Stock-Denominated Awards........................5 7. Deferral Accounts For Stock-Denominated Awards............................6 8. Settlement of Deferral Accounts...........................................7 9. Provisions Relating to Section 16 of the Exchange Act and Section 162(m) of the Code...............................................8 10. Statements................................................................9 11. Sources of Stock: Limitation on Account of Stock-Denominated Deferrals....9 12. Amendment/Termination.....................................................9 13. General Provisions.......................................................10 14. Effective Date...........................................................11 STATEN ISLAND BANCORP, INC. Deferred Compensation Plan 1. Purposes. The purpose of this Deferred Compensation Plan (the "Plan") is to provide certain highly compensated employees of Staten Island Bancorp, Inc. (the "Company") and its subsidiaries with the opportunity to elect to defer receipt of specified portions of their compensation and to have such deferred amounts treated as if invested in specified investment vehicles. 2. Definitions. In addition to the terms defined in Section 1 above, the following terms used in the Plan shall have the meanings set forth below: (a) "Administrator" shall mean such person or persons designated pursuant to Section 3(b) hereof to whom the Committee has delegated authority to take action under the Plan, except as may be otherwise required under Section 9 hereof. (b) "Beneficiary" shall mean any person (which may include trusts and is not limited to one person) who has been designated by the Participant in his or her most recent written beneficiary designation form filed with the Company to receive the benefits specified under the Plan in the event of the Participant's death. If no Beneficiary has been designated or if no designated Beneficiary survives the Participant's death, then the Beneficiary shall mean the Participant's estate. (c) "Change in Control" shall be deemed to have occurred if: (i) the acquisition of control of the Company as defined in 12 C.F.R. ss.574.4, unless a presumption of control is successfully rebutted or unless the transaction is exempted by 12 C.F.R. ss.574.3(c)(vii), or any successor to such sections; (ii) an event that would be required to be reported in response to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant to the Exchange Act (as defined below), whether or not any class of securities of the Company is registered under the Exchange Act; (iii) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of the securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; or (iv) during any period of three (3) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended. References to any provision of the Code or regulation (including proposed regulation) thereunder shall include any successor provisions or regulations. 1 (e) "Committee" shall mean two or more non-employee members of the Board of Directors of the Company designated by such Board as the Committee. (f) "Deferral Account" shall mean Non-Stock-Denominated Deferral Accounts and Stock-Denominated Deferral Accounts, collectively. Deferral Accounts will be maintained solely as bookkeeping entries by the Company to evidence the unfunded obligations of the Company hereunder. (g) "Disability" shall mean any physical or mental impairment which qualifies the Participant for disability benefits under the applicable long-term disability plan maintained by the Company (or any subsidiary) or, if no such plan applies, which would qualify the Participant for disability benefits under the Federal Social Security System. (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. References to any provision of the Exchange Act or rule thereunder shall include any successor provisions or rules. (i) "Non-Stock-Denominated Deferral Account" shall mean the accounts or sub-accounts established and maintained by the Company for specified deferrals made by a Participant pursuant to Section 6 hereof. (j) "Non-Qualified Option" means an option or right to purchase Stock granted to the Participant by the Company pursuant to a compensatory plan, program or other such arrangement and such option or right does not constitute an "Incentive Stock Option" within the meaning of Section 422 of the Code. (k) "Participant" shall mean any employee of the Company or any subsidiary who is designated by the Committee as eligible to participate in this plan and who makes an election to participate in the Plan. (l) "Restricted Stock Award" shall mean awards granted pursuant to the Company's Amended and Restated 1998 Recognition and Retention Plan or any similar and/or successor plan. (m) "Retirement" shall mean voluntary termination by the Participant in accordance with the Company's retirement policies, including early retirement, generally applicable to their salaried employees. (n) "Stock" shall mean the Common Stock, with a par value of $0.01 per share, of Staten Island Bancorp, Inc. or any other equity securities of the Company designated by the Committee. 2 (o) "Stock-Denominated Awards" shall mean a Non-Qualified Option, a Restricted Stock Award or similar type of award which is determined by the Committee to be appropriate for deferral under the terms of this Plan. (p) "Stock-Denominated Deferral Account" shall mean the accounts or sub-accounts established and maintained by the Company for specified deferrals made by a Participant pursuant to Section 7 hereof. (q) "Trust" shall mean the trust or trusts established by the Company pursuant Sections 6 and 7 hereof. (r) "Trustee(s)" shall mean the trustee(s) of the Trust(s). (s) "Trust Agreement" shall mean the agreement(s) entered into between the Company and the Trustee(s), as amended or restated from time to time. (t) "Valuation Date" shall mean the close of business on the last business day of each calendar quarter; provided however, that in the case of termination of employment for reasons other than Retirement, death or Disability, the Valuation Date shall mean the close of business on the last day of business of the month in which employment terminates, and in the case of a Change in Control of the Company, the Valuation Date shall be the effective date of such Change in Control. 3. Administration. (a) Committee Authority. The Committee shall administer the Plan in accordance with its terms and shall have all powers necessary to accomplish such purpose, including the power and authority to construe and interpret the Plan, to define the terms used herein, to prescribe, amend and rescind rules and regulations, agreements, forms and notices relating to the administration of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. (b) Delegation of Duties; Powers. The Committee may delegate its duties and responsibilities hereunder, as it deems reasonable and appropriate, to the Administrator. If an Administrator is appointed by the Committee, such Administrator shall serve at the will of, and may be removed (with or without cause) by the Committee. Any actions of the Committee or the Administrator with respect to the Plan shall be conclusive and binding upon all persons interested in the Plan, except that any action of the Administrator will not be binding on the Committee. The Committee and Administrator may each appoint agents and delegate thereto powers and duties under the Plan, except as otherwise limited by the Plan. 3 (c) Limitation of Liability. Each member of the Committee and the Administrator shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or other employee of the Company or any subsidiary, the Company's independent public accountants or any compensation consultant, legal counsel, or other professional retained by the Company to assist in the administration of the Plan. To the maximum extent permitted by law, no member of the Committee or the Administrator, nor any person to whom ministerial duties have been delegated, shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan. To the maximum extent permitted by law, the Company shall indemnify the members of the Committee and the Administrator against any and all claims, losses, damages, expenses, including any counsel fees and costs incurred by them, and any liability, including any amounts paid in settlement with their approval, arising from their action or failure to act. 4. Participation. The Administrator will notify each person of his or her participation or eligibility to participate in the Plan not less than 30 days (or such lesser period as may be reasonable and practicable in the circumstances) prior to any deadline for filing an election form. 5. Deferrals. (a) Deferrals. A Participant may elect to defer taxable compensation or awards which may be in the form of cash or Stock to be received from the Company or a subsidiary, including salary, annual incentive awards, Stock-Denominated Awards and taxable compensation payable under other plans and programs, employment agreements or other arrangements or as designated by the Committee; provided however, that a Participant may only defer, with respect to a given year, receipt of only that portion of the Participant's salary, annual incentive awards, Stock-Denominated Awards and compensation payable under all plans and programs, employment agreements or other arrangements that exceeds the FICA maximum taxable wage base plus the amount necessary to satisfy Medicare and all other payroll taxes (other than Federal, state or local income tax withholding) imposed on the wages of such Participant from the Company and its subsidiaries. In addition to such limitation, and any terms and conditions of deferral set forth under plans and programs, employment agreements or other such arrangements from which receipt of compensation or awards is deferred, the Committee may impose limitations on the amounts permitted to be deferred and other terms and conditions of deferral under the Plan. Any such limitations, and other terms and conditions of deferral, shall be set forth in the rules relating to the Plan, or election forms, other forms, or instructions published by the Committee and/or the Administrator. In addition, in the event that a Participant is a "covered employee" for purposes of Section 162(m) of the Code and such Participant's applicable employee remuneration in a particular tax year exceeds the limitation as specified in Section 162(m) of the Code, the Committee may request that such Participant defer the payment, in accordance with the Plan, of all or a portion of the Participant's compensation and awards to be received under such plans and programs, employment agreements and arrangements of the Company to the extent necessary to avoid the payment of employee remuneration for such tax year in excess of the Section 162(m) limit. 4 (b) Elections. Once an election form, properly completed, is received by the Company, such election of the Participant shall be irrevocable; provided however, that the Committee and/or Administrator may, in its discretion, permit a Participant to elect to increase the amount to be deferred and credited to a Deferral Account by filing a later election form; provided, that such later election form is received by the Committee prior to the applicable election deadline pursuant to Section 5(b) hereof. Furthermore, upon a Participant's initial deferral election, such Participant shall also elect the number of installments in which the settlement of his or her Deferral Account shall be completed. An election to change a Participant's settlement election must be made, in writing, while the Participant is an active employee and prior to the commencement of distribution. However, the change shall not become effective until the one (1) year anniversary of such election, provided the Participant remains an active employee of the Company or its subsidiary for the entire one (1) year period. (c) Date of Election. An election to defer compensation or awards hereunder must be received by the Administrator prior to the date specified by the Administrator; provided however, that unless otherwise approved by the Committee, any elections to defer (i) salary, cash compensation and annual incentive awards shall be made on or prior to the December 31st preceding the calendar year in which such income shall be earned, (ii) Restricted Stock Awards shall be made on or prior to the December 31st preceding the calendar year in which the Restricted Stock Awards vest; and (iii) Non-Qualified Options shall be made at least six (6) months prior to the exercise of such option. Under no circumstances may a Participant defer compensation or awards to which the Participant has already attained, at the time of deferral, a legally enforceable right to receive such compensation or awards. 6. Deferral Accounts For Non-Stock-Denominated Awards. The following provisions will apply to Deferral Accounts other than those established under Section 7: (a) Establishment; Crediting of Amounts Deferred. A Non-Stock-Denominated Deferral Account will be established for each Participant for any deferrals made by a Participant hereunder. The amount of compensation or awards deferred with respect to each Non-Stock-Denominated Deferral Account will be credited to such account as of the date on which such amounts would have been paid to the Participant but for deferral hereunder. Amounts credited to a Non-Stock-Denominated Deferral Account shall be deemed to be invested in such hypothetical investment vehicles as selected by the Participant from the list authorized by the Committee pursuant to Section 6(b) hereof. The amounts of hypothetical income and appreciation and depreciation in value of such accounts will be credited and debited to such accounts from time to time. Unless otherwise determined by the Committee, amounts credited to a Non-Stock-Denominated Deferral Account shall be deemed invested in such hypothetical investment vehicles within five (5) business days following the effective date of the deferral. (b) Hypothetical Investment Vehicles. The Committee shall establish one or more hypothetical investment vehicles under this Plan and may add to or change or discontinue any hypothetical investment vehicle included in the list of available hypothetical investment vehicles in its discretion. 5 (c) Allocation and Reallocation of Hypothetical Investments. A Participant may allocate amounts credited to his or her Non-Stock-Denominated Deferral Account to one or more of the hypothetical investment vehicles authorized under the Plan. Subject to the rules established by the Administrator, a Participant may reallocate amounts credited to his or her Non-Stock-Denominated Deferral Account (to be effective as of the Valuation Date immediately following the Participant's election) to one or more of such hypothetical investment vehicles, by filing with the Administrator a notice, in such form as may be specified by the Administrator, not later than the 15th day of the month preceding such Valuation Date. The Committee or Administrator may restrict allocations or reallocations by specified Participants into or out of specified investment vehicles or specify minimum amounts that may be allocated or reallocated by Participants; however, any such allocation or reallocation shall be made in accordance with all applicable provisions of the Exchange Act and the regulations promulgated thereunder, including but not limited to, Section 16(b) and the regulations thereunder. (d) Investment Return. In order to simulate an investment return for the amounts held in each Participant's Non-Stock-Denominated Deferral Account, the account balance shall be reduced for the reasonable transaction costs associated with the Participant's investment directions and be adjusted to recognize the hypothetical income, appreciation and depreciation generated by the hypothetical investments that the Non-Stock-Denominated Deferral Account is deemed to be invested in. Furthermore, the amounts of hypothetical income, appreciation and depreciation credited to each Non-Stock-Denominated Deferral Account shall be reduced for the hypothetical tax liability created by the generation of such income, appreciation and depreciation. The hypothetical tax liability shall be determined by the Committee or the Administrator, based on, among other factors, the amounts, if any, of increased tax liability incurred by the Company as a result of the implementation of this Plan and any increase in the Company's taxable income resulting from investment activity hereunder. The reasonable transaction costs shall be determined by the Committee or the Administrator, based on, among other factors, the estimated transaction costs associated with an investment similar to the one directed by the Participant. (e) Trusts. The Committee may, in its discretion, establish one or more Trusts and deposit therein amounts of cash, Stock, or other property not exceeding the amount of the Company's obligations with respect to the Participants' Non-Stock-Denominated Deferral Account established under Section 6 hereof. 6 7. Deferral Accounts For Stock-Denominated Awards. (a) Establishment. Subject to any terms and conditions imposed by the Committee, Participants may elect to defer, under the Plan, amounts which would otherwise be taxable income of a Participant as a result of the exercise, earning, vesting, or such similar event with respect to Stock-Denominated Awards. In connection with such deferral of a Stock-Denominated Award, a Stock-Denominated Deferral Account shall be established for such Participant. On terms determined by the Committee, the Stock-Denominated Deferral Account will, as of the date that taxable income from a Stock-Denominated Award would otherwise be recognized by a Participant, be credited with a number of share units corresponding to the number of shares of Stock represented in the amount of Stock-Denominated Award being deferred hereunder. With respect to any fractional shares, the Committee or the Administrator may pay such fractional shares to the Participant in cash or credit the Participant's Non-Stock-Denominated Deferral Account with such amount in lieu of depositing such fractional shares into the Stock-Denominated Deferral Account. (b) Investment Return. Hypothetical appreciation and depreciation in value of the Stock-Denominated Deferral Account shall be equal to the actual appreciation and depreciation of the Stock. Cash dividends and distributions with respect to share units in the Stock-Denominated Deferral Account shall be credited to a Participant's Non-Stock-Denominated Deferral Account. (c) Allocation of Hypothetical Investment. Stock-Denominated Awards deferred pursuant to this Section 7 shall continuously be deemed invested in Stock share units until settlement of the Stock-Denominated Deferral Account pursuant to Section 8 hereof and the Participant shall not be entitled to reallocate Stock-denominated deferrals into any other hypothetical investments. (d) Trusts. The Committee may, in its discretion, establish one or more Trusts (including sub-accounts under such Trusts), and deposit therein amounts of cash, Stock, or other property not exceeding the amount of the Company's obligations with respect to a Participants' Stock-Denominated Deferral Account established under Section 7. 8. Settlement of Deferral Accounts. (a) Form of Payment. The Company shall settle a Participant's Deferral Account, and discharge all of its obligations to pay deferred compensation under the Plan with respect to such Deferral Account, by payment of cash, or in the discretion of the Committee, by delivery of Stock. (b) Forfeited Awards. To the extent that a Stock-Denominated Award is forfeited pursuant to the terms and conditions of another plan, program, employment agreement or other such arrangement, the Participant shall not be entitled to the value of such Stock and other property related thereto (including without limitation, dividends, income and distributions thereon). Any Stock-Denominated Award deferred hereunder and forfeited by a Participant shall be returned to the Company. (c) Timing of Payments. Payments in settlement of a Deferral Account shall be made as soon as practicable after the date or dates (including upon the occurrence of specified events), and in such number of installments, as may be directed by the Participant in his or her election relating to such Deferral Account(s), or earlier in the event of termination of employment by the Participant in the following circumstances: (i) In the event of termination of employment for reasons other than Retirement or Disability, a single lump sum payment in settlement of any Deferral Account (including a Deferral Account with respect to which one or more installment payments have previously been made) shall be made as promptly as practicable following the Valuation Date, unless otherwise determined by the Administrator; or 7 (ii) In the event of a Change in Control, payments in settlement of any Stock-Denominated Deferral Account (including a Deferral Account with respect to which one or more installment payments have previously been made) shall be made within fifteen (15) business days following the effective date of such Change in Control. (d) Financial Emergency and Other Payments. Other provisions of the Plan (except Section 9) notwithstanding, if, upon the written application of a Participant, the Committee determines that the Participant has a financial emergency of such substantial nature and beyond the individual's control that payment of amounts previously deferred under the Plan is warranted, the Committee may direct the payment to the Participant of all or a portion of the balance of a Deferral Account and the time and manner of such payment, and the Committee may direct such payments in other circumstances if, in the exercise of its independent judgment, it determines that circumstances beyond the individual's control warrant such action. 9. Provisions Relating to Section 16 of the Exchange Act and Section 162(m) of the Code. (a) Compliance with Section 16. With respect to a Participant who is then subject to the reporting requirements of Section 16(a) of the Exchange Act: (i) Any function of the Committee under the Plan relating to such Participant shall be performed solely by the Committee, if and to the extent required to ensure the availability of an exemption under Rule 16b-3 or exclusion under Rule 16a-1(c) for such Participant with respect to the Plan. (ii) Participants may not reallocate amounts credited to any Stock- Denominated Deferral Account established pursuant to Section 7 hereof. (iii) To the extent necessary so that transactions by and rights of such a Participant under the Plan are excluded from reporting under Rule 16a-1(c) (unless acknowledged by the Participant in writing with respect to a specified transaction not to be excluded), if any provision of this Plan or any rule, election form or other form, or instruction does not comply with the requirements of such rule as then applicable to such transaction or right under the Plan, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements. 8 (b) Compliance with Code Section 162(m). It is the intent of the Company that any compensation (including any award) deferred under the Plan by a person who is, with respect to any year of settlement, deemed by the Committee to be a "covered employee" within the meaning of Code Section 162(m) and the regulations thereunder, which compensation constitutes either "qualified performance-based compensation" within the meaning of Code Section 162(m) and the regulations thereunder or compensation not otherwise subject to the limitation on deductibility under Section 162(m) and the regulations thereunder, shall not, as a result of deferral hereunder, become compensation with respect to which the Company in fact would not be entitled to a tax deduction under Code Section 162(m) and the regulations thereunder. Accordingly, unless otherwise determined by the Committee, if any compensation would become so disqualified under Section 162(m) and the regulations thereunder as a result of deferral hereunder, the terms of such deferral shall be automatically modified to the extent necessary to ensure that the compensation would not, at the time of settlement, be so disqualified. 10. Statements. The Administrator will furnish statements to each Participant reflecting the amount credited to a Participant's Deferral Account(s) and the transactions thereof not less frequently than once each calendar year. 11. Sources of Stock: Limitation on Amount of Stock-Denominated Deferrals. If Stock is deposited under the Plan in a Trust, pursuant to Section 7 hereof, in connection with a deferral of a Stock-Denominated Award under another plan, program, or other such arrangement that provides for the issuance of Stock, the Stock so deposited shall be deemed to have originated from and shall be counted against the number of shares reserved under such other plan, program or other arrangement. Stock placed in such a Trust and subsequently forfeited by a Participant shall be released by the Trust and be treated as a failed award for purposes of the other plan, program, or arrangement which the Stock-Denominated Award originated. 12. Amendment/Termination. The Committee may, with prospective or retroactive effect, amend, alter, suspend, discontinue, or terminate the Plan at any time without the consent of Participants, stockholders, or any other person; provided however, that, without the consent of a Participant, no such action shall materially or adversely affect the rights of such Participant with respect to any rights to receive payment of amounts credited to such Participant's Deferral Account(s). Notwithstanding the foregoing, the Committee, may, at any time and in its sole discretion, terminate the Plan and distribute to Participants the amounts credited to their Deferral Accounts. Upon the effective date of Change and Control, this Plan shall terminate. 9 13. General Provisions. (a) Limits on Transfer of Awards. Other than by will or the laws of descent and distribution, no right, title or interest of any kind in the Plan shall be transferable or assignable by a Participant or his or her Beneficiary or be subject to alienation, anticipation, encumbrance, garnishment, attachment, levy, execution or other legal or equitable process, nor subject to the debts, contracts, liabilities or engagements, or torts of any Participant or his or her Beneficiary. Any attempt to alienate, sell, transfer, assign, pledge, garnish, attach or take any other action subject to legal or equitable process or encumber or dispose of any interest in the Plan shall be void. (b) Receipt and Release. Payments (in any form) to any Participant or Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims for the compensation or awards deferred and relating to the Deferral Account(s) to which the payments relate against the Company or any subsidiary thereof, the Committee, or the Administrator. The Committee or the Administrator may require a Participant or Beneficiary, as a condition to a payment, to execute a receipt and release to such effect. (c) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to constitute an "unfunded" plan for deferred compensation and Participants shall rely solely on the unsecured promise of the Company for payment hereunder. With respect to any payment not yet made to a Participant under the Plan, nothing contained in the Plan shall give a Participant any rights greater than those of a general unsecured creditor of the Company; provided however, that nothing herein shall restrict or prohibit the Committee from authorizing the creation of Trusts, including but not limited to the Trusts referred to in Sections 6 and 7 hereof, or make other arrangements to meet the Company's obligations under the Plan, which Trusts and/or other arrangements shall be consistent with the "unfunded" status of the Plan, unless the Committee otherwise determines with the consent of each affected Participant. (d) Compliance. The Company shall impose such restrictions on Stock delivered to a Participant hereunder and any other interest constituting a security as it may deem advisable in order to comply with the Securities Act of 1933, as amended, the requirements of the Exchange Act, the requirements of the New York Stock Exchange or any other stock exchange or automated quotation system upon which the Stock is then listed or quoted, any state securities laws applicable to such a transfer, any provisions of the Company's Certificate of Incorporation or Bylaws, or any other law, regulation, or binding contract to which the Company is a party. 10 (e) Other Participant Rights. No Participant shall have any of the rights or privileges of a stockholder of the Company under the Plan, including as a result of crediting of Stock equivalents or other amounts to a Deferral Account, or the creation of any Trust and the deposit of such Stock thereof, except at such time as Stock may be actually delivered in settlement of a Deferral Account. No provision of the Plan or transaction hereunder shall confer upon any Participant any right to be employed by the Company or a subsidiary thereof, or to interfere in any way with the right of the Company or a subsidiary to increase or decrease the amount of any compensation payable to such Participant. Subject to the limitations set forth in Section 13(a) hereof, the Plan shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns. (f) Tax Withholding. The Company and any subsidiary shall have the right to deduct from amounts otherwise payable in settlement of a Deferral Account any sums that Federal, state, local or foreign tax law requires to be withheld with respect to such payment. Stock or other property may be withheld to satisfy such obligations in any case where taxation would be imposed upon delivery of such Stock and other property. (g) Payment of Legal Fees. All reasonable legal fees and costs paid or incurred by a Participant pursuant to any dispute or question or interpretation relating to this Agreement shall be paid or reimbursed by the Company if the Participant is successful on the merits pursuant to a legal judgment, arbitration or settlement. (h) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of New York, without giving effect to principles of conflicts of laws, and applicable provisions of federal law. (i) Limitation. A Participant and his or her Beneficiary shall assume all risk in connection with any decrease in value of his or her Deferral Account(s) and neither the Company, the Committee nor the Administrator shall be liable or responsible therefor. (j) Construction. The captions and numbers preceding the sections of the Plan are included solely as a matter of convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of the Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. (k) Severability. In the event that any provision of the Plan shall be declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of the Plan but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein. (l) Status. The establishment and maintenance of, or allocations and credits to, the Deferral Account(s) of any Participant shall not vest in any Participant any right, title or interest in and to any Plan assets or benefits except at the time or times and upon the terms and conditions and to the extent expressly set forth in the Plan and in accordance with the terms of the Trust. 14. Effective Date. The Plan shall be effective as of December 31, 1998. 11 EX-13 3 Staten Island Bancorp, Inc. A timeless tradition of excellence in community banking. 1998 Annual Report Staten Island Bancorp, Inc. Profile Staten Island Bancorp, Inc. was organized in 1997 and is the holding company for Staten Island Savings Bank, a federally chartered, FDIC insured thrift institution, originally organized in 1864. Headquartered in Staten Island, New York, the bank operates 16 full service branches and a trust department in Staten Island, and one branch office in Bay Ridge, Brooklyn, New York. The principal business of the Bank consists of attracting deposits from consumers and businesses in its market area and originating consumer, residential, multi-family and commercial real estate loans, as well as other business loans. Staten Island Bancorp, Inc.'s common stock is publicly traded on the New York Stock Exchange under the symbol "SIB". Mission Staten Island Savings Bank will continue to be a strong financial services company committed to improving shareholder value, while delivering the highest quality products and services responsive to the changing needs of our consumer and business markets. As we grow, we will consistently strive to give extraordinary service to our customers by providing our employees with the means and opportunities to make full use of their skills and capabilities. These commitments to our shareholders, customers and employees will enable the Company to maintain a level of profitability necessary to remain independent for the benefit of the communities we serve. Letter to Shareholders ..................................................... 2 Selected Consolidated Financial and Other Data ............................. 8 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................ 9 Financial Statements ....................................................... 19 Report of Independent Public Accountants ................................... 35 Services Available ......................................................... 36 Directors and Officers, Shareholder Information ............................ IBC Banking Locations .......................................................... BC Financial Highlights Staten Island Bancorp, Inc. and Subsidiary
At or For the Years Ended December 31, - ---------------------------------------------------------------------------------------------- ($ in thousands, except per share data) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Operations Data Net interest income ..................... $ 121,072 $ 86,755 $ 73,993 Provision for loan losses ............... 1,594 6,003 1,000 Total other income ...................... 10,380 7,454 3,929 Contribution to SISB Community Foundation -- 25,817 -- Total other expense ..................... 55,918 42,908 40,066 ------------------------------------------ Income before provision for income taxes 73,940 19,481 36,856 Provision for income taxes .............. 29,678 4,932 15,081 -------------------------------------------------------------------------------------- Net income .............................. $ 44,262 $ 14,549 $ 21,775 -------------------------------------------------------------------------------------- Financial Condition Data Total assets ............................ $ 3,776,947 $ 2,651,170 $ 1,782,323 Loans receivable, net ................... 1,535,001 1,082,918 968,015 Securities available for sale ........... 2,029,041 1,350,467 703,134 Deposits ................................ 1,729,061 1,623,652 1,577,748 Borrowed funds .......................... 1,344,517 250,042 54 Stockholders' equity .................... 669,042 685,886 171,080 Non-performing assets ................... 17,081 21,943 23,854 Net loan chargeoffs ..................... 782 271 1,727 Allowance for loan losses ............... 16,617 15,709 9,977 -------------------------------------------------------------------------------------- Selected Financial Ratios Stockholders' equity to total assets .... 17.71% 25.87% 9.60% Tangible equity to assets ............... 16.84 24.78 8.55 Total risk-based capital ................ 35.93 59.62 20.66 Net interest margin ..................... 4.13 4.39 4.46 Interest rate spread .................... 2.93 3.82 3.84 Return on average assets ................ 1.45 0.70 1.24 Return on average equity ................ 6.39 7.79 14.03 Efficiency ratio ........................ 41.11 43.30 47.12 Non-performing assets to total assets ... 0.45 0.83 1.34 -------------------------------------------------------------------------------------- Per Common Share Data Basic earnings .......................... $ 1.06 $ (0.29) -- Fully diluted earnings .................. 1.06 (0.29) -- Tangible book value ..................... 14.90 14.79 -- Market value ............................ 19.94 20.94 -- Cash dividends declared ............... 0.32 -- -- --------------------------------------------------------------------------------------
[GRAPHIC -- BAR GRAPHS REPRESENTING TOTAL ASSETS, TOTAL LOANS AND TOTAL DEPOSITS] -1- To Our Shareholders: The completion of Staten Island Bancorp, Inc.'s first year as a public company was both exciting and rewarding. The year was highlighted by the implementation of capital management strategies intended to enhance shareholder value, as well as continued growth in key business lines that strengthened our dominant community bank franchise. This performance resulted in steady quarter-to-quarter increases in net income. The Financial Year in Review Net income for the year 1998 of $44.3 million, or $1.06 per share, represented a 56% increase over adjusted earnings due to the one-time contribution to the SISB Community Foundation in 1997. Total assets increased by 42.46% to $3.8 billion--primarily through growth in the securities portfolio of $678.6 million, and a record $452.1 million of net growth in loans. The asset growth was mainly funded by an increase of $1.1 billion in borrowed funds, a capital management strategy that was implemented in an effort to prudently generate earnings on the expanded capital base resulting from our stock conversion in December 1997. Our net loan growth of 42% was accomplished through a significant increase in loan originations for 1998, primarily with respect to loans on 1-4 family residential properties, the traditional backbone of our lending operations. We also continued to diversify our loan portfolio by pursuing commercial real estate and other business lending opportunities, including the implementation of a Small Business Loan program targeting borrowers in need of less than $100,000. In total, we originated over $640 million in loans, and we remain the leading lender on Staten Island. Loan growth has also been accomplished with careful attention to quality. The continued reduction of non-performing loans to $16.2 million, or 1.05% of loans and the corresponding reduction in the provision for loan losses to $1.6 million for the current year, is evidence of our success in meeting this objective. While falling interest rates presented opportunities for loan growth, the flattening of the yield curve also created compression on interest margins. To counter this compression, we focused on increasing non-interest income. To that end, we are pleased with the 30% increase we achieved in this area--largely a result of the fee income generated through the mortgage company acquired in 1998 and ongoing expansion of the commercial customer base, as well as modest changes to the pricing of consumer services. Capital Management Strategies As a result of our highly successful initial public offering in December 1997, management was faced with the challenge of implementing strategies that would effectively utilize the new capital, while increasing earnings and enhancing shareholder value. These strategies included the payment of regular quarterly dividends, the initiation of a stock repurchase program, the acquisition of a mortgage company, and prudent leveraging of the balance sheet. Regular quarterly dividend payments were initiated in the first quarter 1998. Total dividends of $0.23 per share were paid in 1998. In the first quarter of 1999, the Company increased the regular quarterly dividend to $0.09 from $0.08 per share, representing a 12.5% increase. We also implemented a Dividend Reinvestment Plan beginning with the dividend payments in the third quarter of 1998. In the fourth quarter of 1998, the Company instituted a 5% stock repurchase program. This program was completed in the first quarter of 1999 and resulted in the repurchase of 2.3 million shares. In addition, the Company commenced a new 5% stock buyback during the first quarter of 1999. We also completed the acquisition of Ivy Mortgage Corp. in the fourth quarter, which has loan origination offices in 22 states. This acquisition will enable Staten Island Savings Bank to generate additional fee income, increase the product mix in our own market area, and diversify the loan portfolio beyond the local market. -2- Commitment to Community Banking We are pleased that our officers and staff continue to respond to the challenges that emerge as we expand our services to the business community and enhance services to our core consumer base. Our success in serving these markets is demonstrated by our ongoing leadership role in residential and business lending in the communities we serve, along with our 30% share of the Staten Island deposit market. Deposit growth of $55 million, exclusive of interest, and the continued growth of our office in Bay Ridge, Brooklyn, further demonstrate this success. Core deposits continue to comprise approximately two-thirds of our deposit base and give us the ability to minimize the compression in our net interest spread. This solid base is made up of 17.7% of non-interest checking, up from 15.4% in December 1997. At year-end 1998, our weighted average cost of deposits, including non-interest DDA accounts, of 2.96% places us among the top performers in our peer group. Our ability to successfully serve the financial needs of individuals and businesses in our markets is due to a number of factors. More aggressive business development programs, the addition of experienced commercial lenders, and new products and services are just a few examples. By year-end, new small business loan products, debit cards, and on-line banking and bill payment services were introduced. The scope of services, which also include a full service trust department as well as savings bank life insurance, continue to be evaluated and enhanced based on responses from our customer base. Enhancements to Technology Cost efficient and flexible technology is critical in the delivery of banking services in this rapidly changing environment. A major conversion to a new data processing service provider was completed in August 1998. This conversion is expected to reduce our data processing costs and improve the flexibility of our technical support systems. At this time, the Company is continuing its dedicated efforts to be ready for the Year 2000. Conversion to this new system was a significant step in this process and we have the utmost confidence that we will be ready for the century date change. - -------------------------------------------------------------------------------- The year was highlighted by the implementation of capital management strategies intended to enhance shareholder value, as well as continued growth in key business lines that strengthened our dominant community bank franchise. - -------------------------------------------------------------------------------- More importantly, our new systems provide the platform for us to build upon our service and sales orientation, and enable us to expand and compete more effectively and efficiently beyond the turn of the century. This system will also facilitate the identification of profitable growth opportunities that exist within our customer base due to our significant market penetration. Looking Ahead We began this report by stating that the past year had been exciting and rewarding. Well, our first year as a public company has also been encouraging. We have demonstrated our ability to prioritize and execute plans that have enhanced shareholder value, while simultaneously improving the delivery of banking services within our market area. At the same time, those decisions will enable us to proceed with our plans for growth and profitability. We will continue to focus on active management of our balance sheet and capital. Our new mortgage company will also play an important role in achieving growth in income and new business opportunities. And of course, we will continue to seek to create opportunities through expansion into new markets and new product development, provided they are in alignment with our strategic objectives. As always, the contribution of our directors, officers and staff must be recognized as we manage change and growth. We also remain grateful to you, our shareholders and customers, for your confidence in us, and we are confident in our ability to continue to earn your support and loyalty. /s/HARRY P. DOHERTY /s/JAMES R. COYLE HARRY P. DOHERTY JAMES R. COYLE Chairman and President and Chief Executive Officer Chief Operating Officer -3- Personal Banking The timeless tradition of our successful community banking franchise centers on Staten Island Savings Bank's network of 17 branch locations. The 16 locations on Staten Island and one in Bay Ridge, Brooklyn provide unrivaled access to THE bank's full range of deposit and loan services. This extensive branch network is one reason why we continue to maintain our 30% share of the deposit market on Staten Island. Another reason, is the unparalleled customer service that has been a tradition at THE bank for over a century. Responses to regularly scheduled surveys continue to reflect high levels of customer satisfaction among the 70,000 plus households doing business with THE bank. While the bank prides itself on the personal service provided at all of our locations, our electronic delivery systems, including a network of 36 ATMs, bank-by-phone and PC direct, our new on-line banking service, offer 24 hour/7 day access to transactions and information. In addition, the benefits of the ATM card were expanded for over 20,000 cardholders through the introduction of the Visa Check Card program in December 1998. With this new feature, cardholders can now use THE bankCard at all retail and merchant locations that accept Visa. Single-family residential loan volume remains at record levels with $508 million in loan originations during the year, once again placing Staten Island Savings Bank as the leading lender in our market. Several outreach programs implemented in 1997 continue to have a significant impact on new loan production. A full-time residential loan originator is available for consultation at times and locations most convenient to the applicant. This program has been very well received in our market and accounted for $28 million in new loan business in 1998. In addition, our Priority Access Broker Program accounts for approximately 70% of the total loan volume. A full-time manager of the program has improved the awareness of our products with mortgage and real estate brokers. Program members have indicated that our increased presence in the market has enabled us to respond more quickly to pricing and product changes dictated by changing market conditions. We are also more aggressive in enlisting new productive members into the program. The service delivered by loan origination staff also continues to receive high marks from the borrowers who respond to our customer service surveys. Personal and business customers also have access to services which include trust and estate planning, retirement planning, and investment management planning services. We currently have $137 million in assets under management. The availability of Trust services is another source for establishing profitable relationships. -4- Single-family residential loan volume remains at record levels with $508 million in loan originations during the year, once again placing STATEN ISLAND SAVINGS BANK as the leading lender in our market. -5- Efforts to enhance services and expand products targeting local businesses continue to be effective. With over 10,000 business checking accounts, no one knows the needs of businesses in our market area better than we do. -6- Business Banking Efforts to enhance services and expand products targeting local businesses continue to be effective. Ninety percent of businesses in Staten Island have sales volumes of less than $5 million per year. With over 10,000 business checking accounts, no one knows the needs of businesses in our market area better than we do. In 1998, we established a Small Business Loan unit dedicated to the borrowing needs of businesses seeking less than $100,000. Four products were designed for this customer segment and the application process was simplified. The operation of this unit will enable our commercial lenders to spend more time with larger borrowers, thereby accelerating relationship management and business development efforts. Originations of commercial loans increased to $112 million, or 65% over 1997 activity. This includes multi-family, commercial real estate, construction and land, and other commercial loans. The employees in each of our branches continue to support the growth in commercial accounts with their understanding of the importance of time and flexibility to the small business owner. Unique services, like phone calls for checks presented against insufficient or uncollected funds are valuable to small businesses and are a source of fee income. Business customers with special investment and banking needs receive personal service through our Personal Financial Center, and may be referred to the Trust Department for retirement planning or other investment management services. We know that business people need a bank at all times of the day or week. The availability of ATM cards for select businesses and bank-by-phone for all businesses, allow 24 hour access to transactions and information. Businesses will also benefit from PC banking, which allows them to review account history, transfer money between accounts, and pay bills. New business development is accomplished through the full-time efforts of a team of officers. Branch managers are actively involved in calling on current customers in order to seek new opportunities or handle current needs. We will continue to integrate the activities of our branch network, loan officers, business development staff and back-office operations to provide seamless service to this important and profitable group of customers. We also recognize that our high penetration into the local business market presents excellent opportunities for growth in personal banking and trust services. Staff training directed toward cross selling loan and non-loan products continues, and enables THE bank to strengthen the overall relationship with our business customers. -7- Staten Island Bancorp, Inc. and Subsidiary SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following selected historical financial data for the five years ended December 31, 1998 is derived in part from the audited financial statements of the Company. The selected historical financial data set forth below should be read in conjunction with the historical financial statements of the Company, including the related notes, included elsewhere herein.
December 31, -------------------------------------------------------------------------- (000's omitted except share data) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Selected Financial Condition Data: Total assets $ 3,776,947 $ 2,651,170 $1,782,323 $1,728,130 $1,376,220 Securities held to maturity -- -- -- -- 321,263 Securities available for sale 2,029,041 1,350,467 703,134 788,622 378,207 Loans receivable, net 1,535,001 1,082,918 968,015 801,137 608,954 Intangible assets(1) 17,701 18,414 20,490 22,633 492 Deposits 1,729,061 1,623,652 1,577,748 1,535,617 1,225,918 Borrowings 1,344,517 250,042 54 46 47 Stockholders' equity 669,042 685,886 171,080 150,082 125,444 Tangible book value per share 14.90 14.79 -- -- -- Common shares outstanding 43,704,812 45,130,312 -- -- -- For the Year Ended December 31, -------------------------------------------------------------------------- Selected Operating Data: 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 121,072 $ 86,755 $ 73,993 $ 60,122 $ 53,747 Provision for loan losses 1,594 6,003 1,000 -- 76 Other income 10,380 7,454 3,929 4,040 2,048 Charitable contribution to SISB Community Foundation -- 25,817 -- -- -- Other expenses 55,918 42,908 40,066 32,953 25,557 Provision for income taxes 29,678 4,932 15,081 13,284 13,958 Net income $ 44,262 $ 14,549 $ 21,775 $ 13,225 $ 16,204 Earnings (loss) per share basic and fully diluted $ 1.06 $ (0.29)(3) -- -- -- Dividends paid $ 0.23 -- -- -- -- At or For the Year Ended December 31, -------------------------------------------------------------------------- Key Operating Ratios: 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Performance Ratios:(2)(3) Return on average assets 1.45% 0.70% 1.24% 0.88% 1.17% Return on average equity 6.39 7.79 14.03 9.54 13.27 Average interest-earning assets to average interest-bearing liabilities 139.98 118.70 120.24 117.17 113.05 Interest rate spread(4) 2.93 3.82 3.84 3.63 3.64 Net interest margin(4) 4.13 4.39 4.46 4.16 4.00 Noninterest expenses, exclusive of amortization of intangible assets, to average assets 1.76 1.96 2.16 2.11 1.81 Asset Quality Ratios: Non-performing assets to total assets at end of period(5) 0.45% 0.83% 1.34% 1.44% 0.61% Allowance for loan losses to non-performing loans at end of period 102.37 73.69 43.85 44.20 38.79 Allowance for loan losses to total loans at end of period 1.07 1.42 1.02 1.32 0.51 Capital Ratios: Average equity to average assets(3) 22.64% 8.96% 8.85% 9.21% 8.84% Tangible equity to assets at end of period 16.84 24.78 8.55 7.09 9.55 Total capital to risk-weighted assets 35.93 59.62 20.66 19.65 17.16
(1) Consists of excess of cost over fair value of net assets acquired ("goodwill") and core deposit intangibles which amounted to $14.6 million and $3.1 million at December 31, 1998, respectively. (2) With the exception of end of period ratios, all ratios are based on average daily balances during the respective periods. (3) The conversion proceeds were received on December 22, 1997 and have been reflected in the performance and other ratios as of that date. Per share information for 1997 is since conversion. (4) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities; net interest margin represents net interest income as a percentage of average interest-earning assets. (5) Non-performing assets consist of nonaccrual loans and real estate acquired through foreclosure or by deed-in-lieu thereof. -8- Staten Island Bancorp, Inc. and Subsidiary MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General. The following discussion is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Financial Statements and the accompanying Notes to Financial Statements and the other sections contained in this Annual Report. The Company's results of operations depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, which principally consist of loans and mortgage-backed and investment securities, and interest expense on interest-bearing liabilities which principally consist of deposits and borrowed funds. The Company's results of operations are also affected by the provision for loan losses, the level of its noninterest income and expenses, and income tax expense. Asset and Liability Management. The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained during fluctuations in prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing "gap", provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income, and during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income while a positive gap within shorter maturities would have the opposite effect. As of December 31, 1998, the ratio of the Company's one-year gap to total assets was a negative 14.35% and its ratio of interest-earning assets to interest-bearing liabilities maturing or repricing within one year was 64.84%. The static gap analysis alone is not a complete representation of interest rate risk since it fails to account for changes in prepayment speeds on the Company's loan and investment portfolios in different rate environments. The behavior of deposit balances will also vary with changes in the customer mix, management's pricing strategies, and changes in the general level of interest rates. The gap analysis does not provide a clear presentation of the risks to income embedded in the balance sheet, customer structure and various management strategies. To measure earnings at risk, the Asset and Liability Management Committee (ALCO) makes extensive use of an earnings simulation model in the formation of its interest rate risk management strategies. The model uses management assumptions concerning the repricing of assets and liabilities as well as business volumes, projected under a variety of interest rate scenarios. These scenarios incorporate interest rate increases and decreases of 200 basis points over a twelve month period. Management's assumptions for prepayments in the loan portfolio and pricing of the Company's deposit products are based on management's review of past behavior of the Company's borrowers and depositors in response to changes in both general market interest rates and rates offered by the Bank. These assumptions represent management's estimates and do not necessarily reflect actual results. At December 31, 1998, based on this model, the Company's potential earnings at risk to a gradual 200 basis point rise or decline in market interest rates over the next twelve months was a 2.52% decrease in projected net income for the year 1999 in a rising rate environment and a 1.38% increase in projected net income in a declining rate environment. Actual interest rate changes during the past three years have fallen within this range and management expects that any changes over the next year will not exceed this range. Management has included all financial instruments and assumptions that have a material effect in calculating the Company's potential net income. These measures of risk represent the Company's exposure to interest rate movements at a particular point in time. ALCO monitors the Company's risk profile on a quarterly basis or as needed to monitor the effects of movements in interest rates and also any changes or developments in the Company's core business. The Company also reviews the market value of portfolio equity (MVPE) which is defined as the net present value of an institution's existing assets, liabilities and off balance sheet instruments, on a quarterly basis. The Office of Thrift Supervision (OTS) monitors the Bank's interest rate risk through this calculation which they prepare quarterly based on information provided by the Bank. In addition the Company prepares its MVPE calculation based on its own assumptions which could vary from those used by the OTS. In order to minimize the potential for adverse effects of material and prolonged increases or decreases in interest rates on the Company's results of operations, -9- the Company has adopted asset and liability management policies to better match the maturities and repricing terms of the Company's interest-earning assets and interest-bearing liabilities. The Finance and Planning Committee, a Board committee, sets and recommends the asset and liability policies along with limits for earnings at risk and MVPE of the Company which are implemented by the ALCO. The ALCO is chaired by the Chief Financial Officer and is comprised of members of the Company's management. The purpose of the ALCO is to communicate, coordinate and control asset/liability management consistent with the Company's business plan and Board approved policies and limits. The ALCO establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals. The ALCO generally meets on a quarterly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital positions, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to gap analysis and income simulations. At each meeting, the ALCO recommends appropriate strategy changes based on such review. The Chief Financial Officer or his designate is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Finance and Planning Committee at least quarterly. The ALCO regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and MVPE, and evaluating such impacts against the maximum potential change in net interest income and MVPE that is authorized by the Board of Directors of the Company. -10- The following table summarizes the anticipated maturities or repricing of the Company's interest-earning assets and interest-bearing liabilities as of December 31, 1998, based on the information and assumptions set forth in the notes below.
More More than Within Three to than One Three Years Over Three Twelve Year to to Five Five Months Months Three Years Years Years Total - ------------------------------------------------------------------------------------------------------------------------------------ (000's omitted) Interest-earning assets(1): Loans receivable(2): Mortgage loans: Fixed $ 26,528 $ 70,696 $ 168,935 $ 144,231 $ 465,459 $ 875,850 Adjustable 180,428 109,805 137,610 102,275 68,806 598,923 Other loans 26,788 11,510 17,338 2,050 1,294 58,980 Securities: Non-mortgage(3) 96,969 12,302 21,326 1,115 247,543 379,295 Mortgage-backed fixed(4) 47,179 129,605 240,586 219,605 493,935 1,130,910 Mortgage-backed adjustable(4) 77,406 165,198 199,433 46,948 -- 488,985 Other interest-earning assets 45,050 -- -- -- -- 45,050 ------------------------------------------------------------------------------------------ Total interest-earning assets $500,347 $ 499,116 $ 785,228 $ 516,264 $1,277,037 $3,577,993 ========================================================================================== Interest-bearing liabilities: Deposits: NOW accounts(5) $ 7,458 $ 22,375 $ 27,415 $ 7,257 $ 16,126 $ 80,632 Savings accounts(5) 31,051 93,153 189,960 124,204 292,246 730,614 Money market deposit accounts(5) 16,266 48,798 9,059 4,324 3,912 82,359 Certificates of deposit 179,712 227,711 111,640 18,091 -- 537,154 Other borrowings 268,000 646,977 299,500 130,040 -- 1,344,517 ------------------------------------------------------------------------------------------ Total interest-bearing liabilities $502,487 $1,039,014 $ 637,574 $ 283,916 $ 312,284 $2,775,276 ========================================================================================== Excess (deficiency) of interest-earning assets over interest-bearing liabilities $ (2,140) $ (539,898) $ 147,654 $ 232,348 $ 964,753 $ 802,717 ========================================================================================== Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities $ (2,140) $ (542,038) $(394,384) $(162,036) $ 802,717 ========================================================================== Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities as a percent of total assets (0.06)% (14.35)% (10.44)% (4.29)% 21.25% ==========================================================================
(1) Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed-rate loans are included in the periods in which they are scheduled to be repaid, based on scheduled amortization, as adjusted to take into account estimated prepayments in the current rate environment. (2) Balances have been reduced for non-performing loans, which amounted to $17.1 million at December 31, 1998. (3) Based on contractual maturities. (4) Reflects estimated prepayments in the current interest rate environment. (5) Although the Company's NOW accounts, savings accounts and money market deposit accounts are subject to immediate withdrawal, management considers a substantial amount of such accounts to be core deposits having significantly longer effective maturities. The decay rates used on these accounts are based on the latest available OTS assumptions and should not be regarded as indicative of the actual withdrawals that may be experienced by the Company. If all of the Company's NOW accounts, savings accounts and money market deposit accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which were estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics by $1.2 billion or 32.2% of total assets. -11- Certain assumptions are contained in the previous table which affect the presentation therein. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates of other types of assets and liabilities lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. CHANGES IN FINANCIAL CONDITION General. The Company recorded total assets of $3.8 billion at December 31, 1998, representing a $1.1 billion, or 42.46% increase from the level recorded at December 31, 1997. The primary source of asset growth was a $678.6 million or 50.24% increase in securities and a $452.1 million or 41.75% increase in net loans. Such net increases were funded primarily by an increase in borrowed funds of $1.1 billion and an increase in deposits of $105.4 million partially offset by a decrease of $59.7 million in other liabilities. Cash and Cash Equivalents. Cash and cash equivalents, which consist of cash and due from banks, money market accounts and federal funds sold, amounted to $133.1 million and $148.9 million at December 31, 1998 and December 31, 1997, respectively. The decrease of $15.8 million or 10.63% between December 31, 1997 and December 31, 1998 was primarily due to the investment of funds into loans and securities. Loans. The Company's net loan portfolio increased $452.1 million or 41.75% to $1.5 billion at December 31, 1998. The increase in the loan portfolio was due to record loan originations of $643.9 million or $354.3 million more than last year. Loan demand was primarily in one-to-four family residential loans and to a lesser extent, commercial real estate, construction and land loans and commercial business lending. The Company continued its efforts to expand its lending activities through the use of business development officers, commercial loan officers and mortgage loan originators. The purchase of substantially all of the assets of Ivy Mortgage Corp. ("Ivy Mortgage") has provided the Company with greater flexibility to further increase its loan portfolio. Securities. Securities amounted to $2.0 billion and $1.4 billion at December 31, 1998 and December 31, 1997, respectively. All of the Company's securities were classified available for sale at such dates. The securities portfolio increased $678.6 million or 50.25% during the period between December 31, 1997 and December 31, 1998. The increase was primarily due to the Company's strategy to fund asset growth through borrowings at acceptable spreads to leverage the balance sheet. Deposits. Deposits rose $105.4 million to $1.7 billion at December 31, 1998 primarily reflecting increases of $54.7 million in demand deposits to $305.4 million, $21.5 million in savings accounts to $730.6 million, $16.5 million in certificates of deposit to $537.2 million, $6.3 million in money market accounts to $82.4 million and $6.5 million in NOW accounts to $73.5 million. Deposit growth especially in demand deposits is a result of the Bank's continued efforts in business development as well as continued and ever increasing customer loyalty which management attributes to the service provided by the Bank. Borrowed Funds. The Company's borrowings amounted to $1.3 billion at December 31, 1998 representing a $1.1 billion increase from the level at December 31, 1997. The Company utilizes borrowings as an additional source of funds to fund asset growth in both the securities and loan portfolios. Stockholders' Equity. Stockholders' equity amounted to $669.0 million at December 31, 1998 and $685.9 million at December 31, 1997 or 17.71% and 25.87% of total assets at such dates, respectively. The decrease of $16.8 million was due to the use of $31.4 million to purchase shares on the open market for the Recognition and Retention Plan, initiation of a 5% stock repurchase program which resulted in a reduction of $27.4 million and aggregate cash dividend payments of $10.3 million. These decreases were partially offset by net income of $44.3 million, an increase of $2.8 million in unrealized appreciation on securities available for sale net of taxes, and an allocation of ESOP and RRP shares, resulting in an increase of $5.2 million. -12- AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods.
Year Ended December 31, --------------------------------------------------------------------------- 1998 1997 --------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost - ----------------------------------------------------------------------------------------------------------- (000's omitted) Interest-earning assets: Loans receivable(1): Real estate loans $1,213,098 $ 95,742 7.89% $ 982,569 $ 79,521 8.09% Other loans 48,212 5,433 11.27 47,150 4,510 9.57 ------------------------ ----------------------- Total loans 1,261,310 101,175 8.02 1,029,719 84,031 8.16 Securities 1,631,050 106,025 6.50 822,045 55,973 6.81 Other earning assets(2) 36,648 1,941 5.30 126,208 6,808 5.39 ------------------------ ----------------------- Total interest- earning assets 2,929,008 209,141 7.14 1,977,972 146,812 7.42 -------- ------- Noninterest- earning assets 132,995 105,101 ---------- ---------- Total assets $3,062,003 $2,083,073 ========== ========== Interest-bearing liabilities: Deposits: NOW and money market deposits $ 118,318 3,114 2.63 $ 102,837 2,824 2.75 Savings deposits 780,536 20,953 2.68 951,188 25,281 2.66 Certificates of deposit 528,686 26,875 5.08 531,293 27,185 5.12 ------------------------ ----------------------- Total deposits 1,427,540 50,942 3.57 1,585,318 55,290 3.49 Total other borrowings 664,863 37,127 5.58 81,071 4,767 5.88 ------------------------ ----------------------- Total interest- bearing liabilities 2,092,403 88,069 4.21 1,666,389 60,057 3.60 -------- ------ Noninterest-bearing liabilities(3) 276,455 230,017 Total liabilities 2,368,858 1,896,406 Stockholders' equity 693,145 186,667 Total liabilities and stockholders' equity $3,062,003 $2,083,073 ========== ========== Year Ended December 31, ---------------------------------- 1996 ---------------------------------- Average Average Yield/ Balance Interest Cost - ------------------------------------------------------------------ (000's omitted) Interest-earning assets: Loans receivable(1): Real estate loans $ 833,770 $ 68,600 8.23% Other loans 57,913 5,144 8.88 ----------------------- Total loans 891,683 73,744 8.27 Securities 737,796 49,083 6.65 Other earning assets(2) 29,853 1,603 5.37 ----------------------- Total interest- earning assets 1,659,332 124,430 7.49 ------ Noninterest- earning assets 93,611 ---------- Total assets $1,752,943 ========== Interest-bearing liabilities: Deposits: NOW and money market deposits $ 134,600 3,479 2.58 Savings deposits 752,190 21,192 2.82 Certificates of deposit 493,180 25,760 5.22 ----------------------- Total deposits 1,379,970 50,431 3.65 Total other borrowings 47 6 12.77 ----------------------- Total interest- bearing liabilities 1,380,017 50,437 3.65 ------- Noninterest-bearing liabilities(3) 217,740 Total liabilities 1,597,757 Stockholders' equity 155,186 Total liabilities and stockholders' equity $1,752,943 ========== Year Ended December 31, ---------------------------------------------------------------------------- 1998 1997 ---------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------ (000's omitted) Net interest-earning assets $ 836,605 $ 311,583 ========== ========== Net interest income/interest rate spread $121,072 2.93% $86,755 3.82% ================== ================= Net interest margin 4.13% 4.39% ====== ====== Ratio of average interest-earning assets to average interest- bearing liabilities 139.98% 118.70% ====== ====== Year Ended December 31, ---------------------------------- 1996 ---------------------------------- Average Average Yield/ Balance Interest Cost - ------------------------------------------------------------------ (000's omitted) Net interest-earning assets $ 279,315 ========== Net interest income/interest rate spread $73,993 3.84% ================= Net interest margin 4.46% ====== Ratio of average interest-earning assets to average interest- bearing liabilities 120.24% ======
(1) The average balance of loans receivable includes non-performing loans, interest on which is recognized on a cash basis. (2) Includes money market accounts, Federal Funds sold and interest-earning bank deposits. (3) Consists primarily of demand deposit accounts. -13- RATE/VOLUME ANALYSIS The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume).
For the Year Ended December 31, -------------------------------------------------------------------------------------------- 1998 compared to 1997 1997 compared to 1996 -------------------------------------------------------------------------------------------- Increase (decrease) due to Increase (decrease) due to ------------------------------- Total Net ------------------------------- Total Net Rate/ Increase Rate/ Increase Rate Volume Volume (Decrease) Rate Volume Volume (Decrease) - ------------------------------------------------------------------------------------------------------------------------------------ (000's omitted) Interest-earning assets: Loans receivable: Real estate loans .............. $ (1,973) $ 18,657 $ (463) $ 16,221 $ (1,122) $ 12,243 $ (200) $ 10,921 Other loans .................... 803 101 18 922 395 (956) (73) (634) --------------------------------------------------------------------------------------------- Total loans receivable ......... (1,170) 18,758 (445) 17,143 (727) 11,287 (273) 10,287 Securities ....................... (2,357) 55,085 (2,496) 50,052 1,037 5,732 121 6,890 Other earning assets ............. (125) (4,831) 89 (4,867) 32 5,072 101 5,205 --------------------------------------------------------------------------------------------- Total net change in income on interest-earning assets (3,832) 69,012 (2,852) 62,328 342 22,091 (51) 22,382 --------------------------------------------------------------------------------------------- Interest-bearing liabilities: Deposits: NOW and money market deposits .............. (117) 425 (18) 290 217 (821) (51) (655) Savings accounts ............... 252 (4,536) (45) (4,329) (1,200) 5,607 (318) 4,089 Certificates of deposit ........ (177) (133) -- (310) (525) 1,991 (41) 1,425 --------------------------------------------------------------------------------------------- Total deposits ............... (42) (4,244) (63) (4,349) (1,508) 6,777 (410) 4,859 Other borrowings ................. (240) 34,325 (1,725) 32,360 (3) 10,343 (5,579) 4,761 Total net change in expense on interest-bearing liabilities (282) 30,081 (1,788) 28,011 (1,511) 17,120 (5,989) 9,620 --------------------------------------------------------------------------------------------- Net change in net interest income .. $ (3,550) $ 38,931 $ (1,064) $ 34,317 $ 1,853 $ 4,971 $ 5,938 $ 12,762 =============================================================================================
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 General. The Company reported net income of $44.3 million or $1.06 per share for the year ended December 31, 1998 compared to net income of $14.5 million for the year ended December 31, 1997, an increase of $29.8 million or 205.5%. The earnings for the year ended December 31, 1997 included a one time non-recurring contribution to the SISB Community Foundation (the Foundation) of $25.8 million ($13.8 million net of taxes). The Foundation was established as part of the Conversion to enhance the Company's visibility and reputation in the communities that it serves. The Foundation will continue the Bank's previously demonstrated commitment to the housing, civic and special needs of the community. The Company's net income for 1998 represents a $15.9 million or 56.0% increase over 1997 net income as adjusted to exclude the effect of the contribution to the Foundation. The increase in net income for the year ended December 31, 1998 was primarily due to an increase in net interest income of $34.3 million and a decrease in the provision for loan losses of $4.4 million, partially offset by an increase of $13.0 million in total other expenses and an increase of $12.7 million in the provision for income taxes exclusive of related deferred tax benefit from the contribution to the Foundation. These and other significant fluctuations in the Company's results of operations are discussed below. Interest Income. The increase in interest income of $62.3 million for the year ended December 31, 1998 was primarily due to an increase in the average balance of the Company's earning assets partially offset by a decrease in the average yield on loans and securities. The average balance of the loan portfolio increased $231.6 million or 22.49% to $1.3 billion primarily as a result of increased loan demand and the Company's continued efforts to expand its lending activity including the purchase of assets from Ivy Mortgage in the fourth quarter of 1998. The average balance of the securities portfolio increased $809.0 million or 98.41% to $1.6 billion for 1998 primarily as a result of the use of the net proceeds from the -14- Conversion and the Company's leveraging strategy. These increases were partially offset by a decrease in the average balance of other interest-earning assets of $89.6 million or 70.96%. The average yield earned on the Company's loan portfolio decreased from 8.16% in 1997 to 8.02% in 1998. This decrease in the average yield on the loan portfolio was a result of declining interest rates during the year resulting in the payoff of higher yielding loans and the origination of loans at market interest rates which are currently lower than the average yield on the Bank's loan portfolio. The average yield was also reduced by downward pricing of certain of the Company's adjustable rate loans. The yield on the securities portfolio decreased 31 basis points to 6.50% in 1998 from 6.81% in 1997. The decrease was a result of declining interest rates in 1998 and the accelerated payoff of higher yielding mortgage backed securities. Interest Expense. The Company recorded interest expense of $88.1 million for 1998 compared to $60.1 million for 1997, an increase of $28.0 million or 46.64%. Interest on borrowed funds increased $32.4 million due to a $583.8 million increase in the average balance of borrowings in 1998. The increase in the average balance of borrowings reflects the Bank's leveraging strategy which was instituted in 1997 to fund asset growth through borrowings at acceptable spreads. The average cost of borrowings decreased 30 basis points from 5.88% in 1997 to 5.58% in 1998 primarily due to the declining interest rate environment and the use of certain callable borrowings. The average balance of interest-bearing deposits decreased $157.8 million as a result of the withdrawal of temporary deposits held in anticipation of the Company's stock conversion in the fourth quarter of 1997. The average cost of interest-bearing deposits increased to 3.57% due to the change in the mix of the interest-bearing deposit base. Net Interest Income. Net interest income was $121.1 million for 1998 compared to $86.8 million for 1997. This represents an increase of $34.3 million or 39.56%. The increase was a result of a $62.3 million increase in interest income partially offset by a $28.0 million increase in interest expense. The increase in interest income was the result of an increase of $951.0 million in the average balance of interest- earning assets partially offset by a decrease in the average yield of interest-earning assets of 27 basis points from 7.41% in 1997 to 7.14% in 1998. Interest expense increased due to a $426.0 million increase in the average balance of interest-bearing liabilities and a 61 basis point increase in the average cost from 3.60% in 1997 to 4.21% in 1998 due to a change in the composition of the Company's interest-bearing liabilities and the respective costs of the funding sources found within the mix. The net interest rate spread and margin decreased to 2.93% and 4.13%, respectively, for the period ended December 31, 1998 from 3.82% and 4.39%, respectively, as of December 31, 1997. Such decreases were primarily due to the Bank's continued use of borrowed funds to leverage the balance sheet coupled with the current rate environment which has resulted in lower interest-earning asset yields. Provision for Loan Losses. For the year ended December 31, 1998 the provision for loan losses was $1.6 million compared to $6.0 million for the year ended December 31, 1997. The provision in 1997 included a non-recurring amount of $4.0 million based on management's review of the risk elements in the loan portfolio and also the longer-than-anticipated workout periods for the commercial portfolio that was acquired from Gateway State Bank in 1995. Management determined that in certain circumstances more aggressive work-out procedures for such non-performing loans would be warranted; which could increase the risk of loss with respect to such loans. As a result, management decided to increase the reserve levels in 1997. The provision in 1998 was based on management's continuing review of the risk elements in the Bank's loan portfolio and past history related to chargeoffs and recoveries. In particular, management considered the continued growth in the loan portfolio, as well as the decrease in its non-performing loans in determining the level of the provision in 1998. Other Income. Other income amounted to $10.4 million and $7.5 million for the years ended December 31, 1998 and 1997, respectively. The increase of $2.9 million or 39.27% was primarily due to an increase of $2.3 million in service and fee income and a $0.6 million increase in net gains on securities. The increase in service and fee income was due to the fees generated by the operations of Ivy Mortgage, increased fees due to the growth of checking accounts along with the related transaction growth and increased gains related to the disposition of Other Real Estate Owned ("ORE") properties. The increase in net gains on security transactions reflects management's decision to adjust the mix of the Company's investment portfolio in the normal course of business. Other Expenses. Other expenses for the year ended December 31, 1998 were $55.8 million or 30.30% more than the other expenses of $42.9 million for the year ended December 31, 1997, exclusive of the $25.8 million contribution to the Foundation. The primary reasons for the increase in other expenses were increases in personnel costs of $9.3 million, data processing of $1.0 million, professional fees of $1.5 million and other expenses of $0.9 million. The increase in personnel costs was primarily due to the $7.1 million non-cash expense generated by the allocation and appreciation of shares held in the Company's stock related benefit plans during the year and staff -15- additions to the Bank's lending operations to enhance credit administration and process the substantial increase in new loan originations. The increase in data processing costs was primarily due to non-recurring costs related to the conversion to a new data processing system in the third quarter of 1998. The increase in professional fees was primarily due to the costs related to forming a passive Real Estate Investment Trust (REIT) and a New Jersey investment company in connection with certain of the Company's tax planning strategies. Professional fees also increased due to increased audit and legal fees associated with operating as a public company. Other expenses increased primarily as a result of additional costs related to regulatory and reporting requirements as a public company. Provision for Income Taxes. The provision for income taxes amounted to $29.7 million for the year ended December 31, 1998 compared to $4.9 million for the year ended December 31, 1997. The Company in 1997 recorded a $12.0 million deferred tax benefit from the $25.8 million contribution to the Foundation along with a $2.6 million reversal of previously deferred income taxes related to bad debt reserves accumulated for New York City purposes, resulting in an adjusted tax provision of $19.5 million. The effective tax rate in 1998 was 40.1% compared to 43.1% in 1997. The decrease in the effective tax rate was primarily a result of the Bank's tax planning strategies put in place in 1998. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 General. The Company reported net income of $14.5 million for the year ended December 31, 1997 compared to net income of $21.8 million for the year ended December 31, 1996, a decrease of $7.2 million or 33.2%. The earnings for the year ended December 31, 1997 included a one-time non-recurring contribution of $25.8 million ($13.8 million net of taxes) for the funding of the Foundation. At the close of the Conversion in December 1997, the Company funded the Foundation with a one-time donation of 2,149,062 shares of common stock. Excluding the effect of this contribution to the Foundation, net income would have been $28.4 million. In addition to this one-time charge, the loan loss provision increased by $5.0 million and total other expenses increased $2.8 million, net of the one-time contribution to the Foundation. These increases were partially offset by an increase in net interest income of $12.8 million and a decrease in the provision for income taxes of $10.1 million. Interest Income. The increase in interest income for the year ended December 31, 1997 was primarily due to an increase in the average balance of the Company's earning assets and an increase in the average yield on securities partially offset by a decrease in the average yield on loans. The average balance of the loan portfolio increased $138.0 million or 15.48% to $1.0 billion primarily as a result of increased loan demand and the Company's continued efforts to expand its lending activity. The average balance of the Company's securities portfolio increased $84.2 million or 11.42% to $822.0 million for 1997 primarily as a result of the use of a portion of the net proceeds from the Conversion and, to a lesser extent, the Company's leveraging strategy. The increase in the average balance of other earning assets to $126.2 million for 1997 is directly related to the funds generated during the Conversion. The average yield earned on the Company's loan portfolio decreased from 8.27% for 1996 to 8.16% for 1997. This decrease in the average yield on the loan portfolio was primarily due to the increased loan repayment activity in higher yielding loans and the downward pricing of certain of the Company's adjustable rate loans. The yield on the securities portfolio increased to 6.81% for 1997 compared to 6.65% for 1996 which reflects the sale of lower rate securities in connection with the Company's restructuring of its investment portfolio during 1996 and 1997, along with the investment in higher yielding mortgage-backed securities. Interest Expense. Interest expense was $60.1 million for 1997 compared to $50.4 million for 1996, an increase of $9.6 million or 19.07%. Interest on borrowed funds increased $4.8 million due to a $81.1 million increase in the average balance of borrowings in 1997. The average balance of borrowings for 1996 was $47,000. The significant increase in the average balance of borrowings reflects the leveraging strategy instituted by the Company during the year ended December 31, 1997. The average balance of interest bearing deposits increased by $205.3 million from December 31, 1996 to December 31, 1997 while the average cost of these deposits decreased from 3.65% for 1996 to 3.49% for 1997. The increase in the average balance of deposits and the decrease in the average cost was a result of the Company's continued business development efforts for demand deposits along with deposits made in anticipation of payment for the Company's common stock in the Conversion. Net Interest Income. Net interest income was $86.8 million for 1997 compared to $74.0 million for 1996. This represents an increase of $12.8 million or 17.2%. The increase was a result of a $22.4 million increase in interest income which was partially offset by a $9.6 million increase in interest expense. The increase in interest income was the result of an increase of $318.6 million in the average balance of interest earning assets partially offset by a decrease of seven basis points from 7.49% for 1996 to 7.42% for -16- 1997 in the average yield on interest earning assets. Interest expense increased due to a $286.4 million increase in the average balance of interest bearing liabilities which was partially offset by a decrease of five basis points in the average rate paid from 3.65% to 3.60% for the years 1996 and 1997, respectively. The net interest rate spread and margin decreased to 3.82% and 4.39%, respectively, for the year ended December 31, 1997 compared to 3.84% and 4.46%, respectively, for the year ended December 31, 1996. Provision for Loan Losses. For the year ended December 31, 1997 the provision for loan losses was $6.0 million compared to $1.0 million for the year ended December 31, 1996. The provision for loan losses in 1997 was based on management's continued review of the risk elements in the Company's loan portfolio. As part of its 1997 review, management considered a report prepared by an independent third-party consultant with respect to the risk elements in the Company's loan portfolio and an analysis prepared by the Company's management with respect to certain trends affecting the Company's loan portfolio such as charge-offs, delinquencies and other external economic factors including interest rates. Such trend analysis and third-party report indicated certain additional potential risk factors to be considered in estimating the level of the allowance for loan losses. In establishing the provision in 1997, management of the Company also considered the overall increase in the Company's loan portfolio, the potential increased risk of loss generally attributed to commercial real estate loans, construction and land loans and commercial business loans as well as management's continuing experience with the loan portfolio acquired from Gateway. The Company experienced a longer than anticipated work-out period with respect to such loans, and charged-off $1.3 million in 1997 and $2.7 million in 1996. Based on the various factors considered in its 1997 review of risk elements, and in particular the longer than anticipated work-out periods for the Gateway portfolio, management determined that in certain circumstances more aggressive work-out procedures for non-performing loans would be warranted. The fact that more aggressive work-out procedures could increase the risk of loss with respect to such loans also affected management's determination to increase the provision levels during 1997. In addition to general provisions of approximately $2.0 million during 1997, management determined that an additional provision of approximately $4.0 million was necessary in light of estimated losses with respect to the loans acquired from Gateway and with respect to the Company's portfolio of non-performing loans. Other Income. Other income increased $3.5 million or 89.7% to $7.5 million for 1997 from $3.9 million for 1996. Such increase was primarily due to a $2.7 million net loss on securities transactions in 1996 compared to a net loss of $85,000 in 1997. The Company's program of restructuring its securities was the primary cause of these losses. Service and fee income increased $900,000 to $7.5 million for 1997 from $6.6 million in 1996. The increase in service and fee income was due to an increase in the volume of transactions as well as an increase in demand deposit accounts. Other Expenses. Other expenses, exclusive of the $25.8 million contribution to the Foundation, were $42.9 million for the year ended December 31, 1997, an increase of $2.8 million or 7.1% compared to $40.1 million for the year ended December 31, 1996. The primary reasons for the increase were an increase in personnel costs of $1.3 million, data processing of $1.1 million, miscellaneous other expenses of $327,000 and marketing expenses of $318,000. The increase in personnel expense was the result of normal salary increases as well as the payment of special bonus payments aggregating $600,000 to all officers and employees. The increase in data processing reflects a one time write-off of the $969,000 investment in the Company's data processing provider. In 1997, the Company determined that the service bureau should be liquidated and the conversion to a new data processing system took place in 1998. The increase in miscellaneous other expenses was due to an increase in stationery and supplies. The increase in marketing expense was a result of the Company's efforts to penetrate new business opportunities particularly in the commercial business development area, and trust services. Provision for Income Taxes. The provision for income taxes amounted to $4.9 million for 1997 compared with $15.1 million for 1996. The decrease in the provision for income taxes for the year was due to the reduction of income before taxes due to the $25.8 million contribution to the Foundation and a $2.6 million reversal of previously deferred income taxes related to bad debt reserves accumulated for New York City purposes. For a further discussion of the reversal of such income taxes related to bad debt reserves, see Note 11 of the Notes to Consolidated Financial Statements. LIQUIDITY AND COMMITMENTS The Company's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. The Company's primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-related -17- securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, the Company invests excess funds in federal funds sold and other short-term interest-earning assets which provide liquidity to meet lending requirements. Historically, the Company has been able to generate sufficient cash through its deposits and has only utilized borrowings to fund asset growth at acceptable spreads to leverage the balance sheet. During the year ended December 31, 1998, the Company entered into repurchase agreements as an alternative funding source. At December 31, 1998, such borrowings amounted to $1.3 billion. The Company intends to continue to utilize repurchase agreements and FHLB advances to leverage its capital base and provide funds for its lending and investing activities. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as federal funds sold or U.S. Treasury securities. On a longer term basis, the Company maintains a strategy of investing in various lending products. The Company uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed and mortgage-related securities and investment securities. At December 31, 1998, the total approved loan origination commitments outstanding amounted to $243.3 million and unused credit lines equaled $39.5 million. At the same date, the unadvanced portion of construction loans totaled $14.1 million. Certificates of deposit scheduled to mature in one year or less at December 31, 1998, totaled $407.4 million. Investment securities scheduled to mature in one year or less at December 31, 1998 totaled $17.3 million and amortization from the amortizing investments is projected at $303.0 million for the year 1999. Based on historical experience, management believes that a significant portion of maturing deposits will remain with the Company. The Company anticipates that it will continue to have sufficient funds, together with borrowings, to meet its current commitments. YEAR 2000 In the third quarter of 1998, the Company converted most of its mission critical systems, such as deposits and loans to a Year 2000-compliant platform provided by a new data processing servicer. The cost of this Year 2000 compliance is born by the server under terms of the Company's contract with them. A comprehensive test of the Year 2000 functionality of this system will be substantially completed by the end of the first quarter of 1999. The Company's other information technology systems have been substantially upgraded to be tested for Year 2000 compliance. In accordance with regulatory guidelines, the Company is developing a Year 2000 business resumption contingency plan which it expects to complete and test by the end of the second quarter of 1999. During 1998, the Company spent approximately $50,000 in connection with Year 2000 compliance and anticipates additional cost of $150,000 to $200,000 for 1999. This amount could increase materially if problems are noted in the test process or contingency plan that have not yet been identified. All such costs are charged to expense as incurred. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company's assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than does the effect of inflation. -18- STATEN ISLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997 1998 1997 - ------------------------------------------------------------------------------------------ ASSETS (000's omitted) Assets: Cash and due from banks ..................................... $ 88,059 $ 58,435 Federal funds sold .......................................... 45,050 90,500 Securities available for sale ............................... 2,029,041 1,350,467 Loans, net .................................................. 1,457,058 1,082,918 Loans held for sale, net .................................... 77,943 -- Accrued interest receivable ................................. 19,389 15,707 Bank premises and equipment, net ............................ 22,163 19,737 Intangible assets, net ...................................... 17,701 18,414 Other assets ................................................ 20,543 14,992 -------------------------- Total assets ............................................ $ 3,776,947 $ 2,651,170 ========================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Due depositors-- Savings ................................................... $ 730,614 $ 709,074 Time ...................................................... 537,154 520,693 Money market .............................................. 82,360 76,088 NOW accounts .............................................. 73,541 67,076 Demand deposits ........................................... 305,392 250,721 -------------------------- 1,729,061 1,623,652 Borrowed funds .............................................. 1,344,517 250,042 Advances from borrowers for taxes and insurance ............. 7,091 4,623 Accrued interest and other liabilities ...................... 27,236 86,967 -------------------------- Total liabilities ....................................... 3,107,905 1,965,284 -------------------------- Commitments and Contingencies (Note 12) Stockholders' Equity: Common stock, par value $.01 per share, 100,000,000 shares authorized, 45,130,312 issued and 43,704,812 outstanding at December 31, 1998 and 45,130,312 issued and outstanding at December 31, 1997 ...................................... 451 451 Additional paid-in-capital .................................. 534,464 532,521 Retained earnings--substantially restricted ................. 215,414 181,499 Unallocated common stock held by ESOP ....................... (38,456) (41,262) Unearned common stock held by RRP ........................... (30,873) -- Less--Treasury Stock (1,425,500 shares), at cost ............ (27,480) -- Accumulated other comprehensive income, net of taxes ........ 15,522 12,677 -------------------------- Total stockholders' equity .............................. 669,042 685,886 -------------------------- Total liabilities and stockholders' equity .............. $ 3,776,947 $ 2,651,170 ==========================
The accompanying notes are an integral part of these statements. -19- STATEN ISLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- (000's omitted) Interest Income: Loans ............................................... $ 101,175 $ 84,031 $ 73,744 Securities available for sale ....................... 106,025 55,973 49,083 Other Earning Assets ................................ 1,941 6,808 1,603 ------------------------------------------ Total interest income ............................. 209,141 146,812 124,430 ------------------------------------------ Interest Expense: Savings and escrow .................................. 20,953 25,281 21,192 Time ................................................ 26,875 27,185 25,760 Money market and NOW ................................ 3,114 2,824 3,479 Borrowed funds ...................................... 37,127 4,767 6 ------------------------------------------ Total interest expense ............................ 88,069 60,057 50,437 ------------------------------------------ Net interest income ............................... 121,072 86,755 73,993 Provision for Loan Losses ............................. 1,594 6,003 1,000 ------------------------------------------ Net interest income after provision for loan losses 119,478 80,752 72,993 ------------------------------------------ Other Income (Loss): Service and fee income .............................. 9,856 7,539 6,639 Securities transactions ............................. 524 (85) (2,710) ------------------------------------------ Total other income ................................ 10,380 7,454 3,929 ------------------------------------------ Other Expenses: Personnel ........................................... 30,248 20,934 19,684 Occupancy and equipment ............................. 6,150 5,666 5,397 Amortization of intangible assets ................... 2,089 2,076 2,143 FDIC Insurance ...................................... 204 248 2 Data processing ..................................... 4,915 3,950 2,842 Marketing ........................................... 1,266 1,430 1,112 Professional fees ................................... 2,403 933 1,542 Contribution to SISB Community Foundation ........... -- 25,817 -- Other ............................................... 8,643 7,671 7,344 ------------------------------------------ Total other expenses .............................. 55,918 68,725 40,066 ------------------------------------------ Income before provision for income taxes .......... 73,940 19,481 36,856 Provision for Income Taxes ............................ 29,678 4,932 15,081 ------------------------------------------ Net income ........................................ $ 44,262 $ 14,549 $ 21,775 ========================================== Earnings (Loss) Per Share: Basic ............................................... $ 1.06 $ (.29)(1) N/A Fully diluted ....................................... $ 1.06 $ (.29) N/A
(1) Since conversion on December 22, 1997 The accompanying notes are an integral part of these statements. -20- STATEN ISLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unallocated Common For the Years Ended Additional Stock Compre- December 31, 1998, Common Paid-In Held by Unearned Treasury hensive 1997 and 1996 Stock Capital ESOP RRP Shares Shares Income - -------------------------------------------------------------------------------------------------------- (000's omitted) Balance, January 1, 1996 $ -- $ -- $ -- $ -- $ -- $ -- Change in net unrealized appreciation (depreciation) on securities, net of tax -- -- -- -- -- (777) Net income -- -- -- -- -- 21,775 - -------------------------------------------------------------------------------------------------------- Comprehensive income $20,998 ======= Balance, December 31, 1996 -- -- -- -- -- -- Net proceeds from common stock issued in conversion 451 532,521 -- -- -- -- Purchase of common stock by ESOP -- -- (41,262) -- -- -- Change in net unrealized appreciation (depreciation) on securities, net of tax -- -- -- -- -- 8,547 Net income -- -- -- -- -- 14,549 - -------------------------------------------------------------------------------------------------------- Comprehensive income $23,096 ======= Balance, December 31, 1997 451 532,521 (41,262) -- -- -- Allocation of 233,843 ESOP shares -- 1,886 2,806 -- -- -- Purchase of RRP shares -- -- -- (31,397) -- -- Earned RRP shares -- 57 -- 524 -- -- Treasury stock (1,425,500 shares), at cost -- -- -- -- (27,480) -- Dividends paid -- -- -- -- -- -- Change in unrealized appreciation (depreciation) on securities, net of tax -- -- -- -- -- 2,845 Net income -- -- -- -- -- 44,262 - -------------------------------------------------------------------------------------------------------- Comprehensive income $47,107 ======= Balance, December 31, 1998 $451 $534,464 $(38,456) $(30,873) $(27,480) ======================================================================================================== Accumulated Other For the Years Ended Compre- December 31, 1998, Retained hensive 1997 and 1996 Earnings Income, Net Total - --------------------------------------------------------------------- (000's omitted) Balance, January 1, 1996 $145,175 $ 4,907 $150,082 Change in net unrealized appreciation (depreciation) on securities, net of tax -- (777) (777) Net income 21,775 -- 21,775 - --------------------------------------------------------------------- Comprehensive income Balance, December 31, 1996 166,950 4,130 171,080 Net proceeds from common stock issued in conversion -- -- 532,972 Purchase of common stock by ESOP -- -- (41,262) Change in net unrealized appreciation (depreciation) on securities, net of tax -- 8,547 8,547 Net income 14,549 -- 14,549 - --------------------------------------------------------------------- Comprehensive income Balance, December 31, 1997 181,499 12,677 685,886 Allocation of 233,843 ESOP shares -- -- 4,692 Purchase of RRP shares -- -- (31,397) Earned RRP shares -- -- 581 Treasury stock (1,425,500 shares), at cost -- -- (27,480) Dividends paid (10,347) -- (10,347) Change in unrealized appreciation (depreciation) on securities, net of tax -- 2,845 2,845 Net income 44,262 -- 44,262 - --------------------------------------------------------------------- Comprehensive income Balance, December 31, 1998 $215,414 $15,522 $669,042 =====================================================================
The accompanying notes are an integral part of these statements. -21- STATEN ISLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ (000's omitted) Cash Flows from Operating Activities: Net income ................................................................... $ 44,262 $ 14,549 $ 21,775 Adjustments to reconcile net income to net cash provided by operating activities-- Charitable contribution to SISB Community Foundation ..................... -- 25,817 -- Depreciation and amortization ............................................ 1,983 1,724 1,581 Accretion and Amortization of bond and mortgage premiums .......................................................... (1,258) (1,772) 1,053 Amortization of intangible assets ........................................ 2,089 2,076 2,143 Loss (gain) on sale of available for sale securities ..................... (524) 85 2,710 Expense charge relating to allocation and earned portions of employee benefit plans ..................................... 7,583 -- -- Other noncash expense (income) ........................................... (2,374) (2,707) (3,529) Provision for loan losses ................................................ 1,594 6,003 1,000 Increase in deferred loan fees ........................................... 1,477 74 578 Decrease (increase) in accrued interest receivable ....................... (3,682) (3,969) 2,036 Decrease (increase) in other assets ...................................... (5,528) (4,691) 197 (Decrease) increase in accrued interest and other liabilities ............ (55,611) 62,337 (8,023) (Increase) decrease in deferred income taxes ............................. (6,769) (13,327) (190) Recoveries of loans ...................................................... 1,337 1,047 968 ----------------------------------------------- Net cash (used in) provided by operating activities .................... (15,421) 87,246 22,299 ----------------------------------------------- Cash Flows from Investing Activities: Maturities of available for sale securities .................................. 519,667 180,489 189,180 Sales of available for sale securities ....................................... 109,224 97,757 240,417 Purchases of available for sale securities ................................... (1,304,385) (910,305) (345,700) Principal collected on loans ................................................. 201,091 167,260 113,881 Loans made to customers ...................................................... (643,854) (289,512) (287,950) Purchase of loans ............................................................ (66,267) -- -- Sales of loans ............................................................... 57,577 4,289 3,340 Capital expenditures ......................................................... (4,392) (2,786) (3,448) Acquisition of Ivy Mortgage Company, net of cash acquired .................... (2,194) -- -- ----------------------------------------------- Net cash (used in) investing activities ................................ (1,133,533) (752,808) (90,280) ----------------------------------------------- For the Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ (000's omitted) Cash Flows from Financing Activities: Net increase in deposit accounts ............................................. 107,877 45,964 43,340 Borrowings ................................................................... 1,094,475 249,988 -- Issuance of common stock ..................................................... -- 507,185 -- Dividends paid ............................................................... (10,347) -- -- Purchase of shares for ESOP .................................................. -- (41,262) -- Purchase of Treasury Stock ................................................... (27,480) -- -- Purchase of shares for RRP ................................................... (31,397) -- -- ----------------------------------------------- Net cash provided by financing activities ................................ 1,133,128 761,875 43,340 ----------------------------------------------- Net increase (decrease) in cash and cash equivalents ..................... (15,826) 96,313 (24,641) Cash and Cash Equivalents, beginning of year ................................. 148,935 52,622 77,263 ----------------------------------------------- Cash and Cash Equivalents, end of year ....................................... $ 133,109 $ 148,935 $ 52,622 =============================================== Supplemental Disclosures of Cash Flow Information: Cash paid for-- Interest ................................................................... $ 80,540 $ 60,054 $ 50,450 Income taxes ............................................................... 30,529 14,298 14,381 Acquisition of Ivy Mortgage Company-- Fair value of assets acquired .............................................. 65,823 -- -- Fair value of liabilities assumed .......................................... 63,937 -- -- ===============================================
The accompanying notes are an integral part of these statements. -22- STATEN ISLAND BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Staten Island Bancorp, Inc. (the "Company") and subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. The following is a description of the more significant policies which the Company follows in preparing and presenting its consolidated financial statements. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Staten Island Savings Bank (the "Bank"). The Bank's wholly owned subsidiaries are SIB Mortgage Corporation (the "Mortgage Company"), SIB Investment Corporation and Staten Island Funding Corporation. All significant intercompany transactions and balances are eliminated in consolidation. The SIB Mortgage Corporation was set up to acquire the operations of Ivy Mortgage Company as discussed in Note 3. The Staten Island Funding Corporation was set up as a Real Estate Investment Trust and the SIB Investment Corporation was set up to hold certain Bank investments. As more fully discussed in Note 2, Staten Island Bancorp, Inc., a Delaware corporation, was organized by the Bank for the purpose of acquiring all of the capital stock of the Bank pursuant to the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported assets, liabilities, revenues and expenses as of the dates of the financial statements. Actual results could differ significantly from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, money market deposits and federal funds sold for the years ended December 31, 1998, 1997 and 1996. Securities Available for Sale In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," debt and equity securities used as part of the Company's asset/liability management that may be sold in response to changes in interest rates, are reported at fair value, with unrealized gains and losses excluded from earnings and reported on an after-tax basis in a separate component of stockholders' equity. Gains and losses on the disposition of securities are recognized on the specific-identification method in the period in which they occur. Premiums and discounts on mortgage-backed securities are amortized over the average life of the security using a method which approximates the level-yield method. Loans Loans are stated at the principal amount outstanding, net of unearned income, loan origination fees and costs, and an allowance for loan losses. Loan origination fees and costs are recognized in interest income as an adjustment to yield over the life of the loan or at the time of the sale of the loan for loans held in the portfolio. Fees and costs related to loans originated by the Mortgage Company and held for sale are included in other income and expense at the time of the settlement of the loan sale. Premiums and discounts on purchased mortgages are amortized over the average life of the loan using a method which approximates the level yield method. Loans are placed on nonaccrual status when management has determined that the borrower will be unable to meet contractual principal or interest obligations or when unsecured interest or principal payments are 90 days past due. When interest accruals are discontinued, the recognition of interest income ceases and previously accrued interest remaining unpaid is reversed against income. Cash payments received are applied to principal, and interest income is recognized when management determines that the financial condition and payment record of the borrower warrant the recognition of income. The Bank has defined its impaired loans as its nonaccrual loans under the guidance of SFAS 114, entitled, "Accounting by Creditors for Impairment of a Loan." Pursuant to this accounting guidance, a valuation allowance is recorded on impaired loans to reflect the difference, if any, between the loan face value and the present value of projected cash flows, observable fair value or collateral value. This valuation allowance is reported within the overall allowance for loan losses. Loans Held for Sale Loans held for sale are carried at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements. Allowance for Loan Losses The allowance for loan losses is established by management through provisions for loan losses charged against income. Amounts deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The amount of the allowance for loan losses is inherently subjective, as it requires making material estimates and the ultimate losses may vary from the estimates. These estimates are evaluated periodically and, as adjustments become necessary, they are reflected in operations in the periods in which they become known. Considerations in this evaluation include past and anticipated loss experience, evaluation of real estate collateral, as well as current and anticipated economic conditions. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb estimated loan losses inherent in the Bank's entire portfolio. -23- Bank Premises and Equipment Bank premises and equipment are carried at cost, less allowance for depreciation and amortization applied on a straight-line basis over the estimated useful lives of 10 to 50 years for buildings and improvements and 3 to 10 years for furniture, fixtures and equipment. Core Deposit Intangibles Core deposit intangibles, which resulted from acquisitions, are being amortized on a straight-line basis to expense over the estimated periods benefited, not exceeding six years. Core deposit intangibles of $3,111,000 and $4,278,000 as of December 31, 1998 and 1997, respectively, are included in intangible assets in the accompanying consolidated financial statements. Investments in Real Estate Investments in real estate consist of real estate acquired through foreclosure or by deed in lieu of foreclosure ("real estate owned" or "REO"). REO properties are carried at the lower of cost or fair value at the date of foreclosure (new cost basis) and at the lower of the new cost basis or fair value less estimated selling costs thereafter. Demand Deposits Each of the Bank's commercial and personal demand (checking) accounts and NOW accounts has a related interest bearing money market sweep account. The sole purpose of the sweep accounts is to reduce the noninterest bearing reserve balances that the Bank is required to maintain with the Federal Reserve Bank, and thereby increase funds available for investment. Although the sweep accounts are classified as money market accounts for regulatory purposes, they are included in demand deposits and NOW accounts in the accompanying consolidated balance sheets. Comprehensive Income The Company adopted SFAS No. 130 "Reporting Comprehensive Income" in the first quarter of 1998. All comparative financial statements provided for earlier periods have been reclassified to reflect application of the provisions of this statement. Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distribution to owners. Other comprehensive income includes revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Comprehensive income and accumulated other comprehensive income are reported net of related income taxes. Accumulated other comprehensive income consists solely of unrealized holding gains and losses on available for sale securities. Income Taxes Deferred income taxes are provided for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Earnings Per Share Earnings per share is computed by dividing net income by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding, adjusted for the unallocated portion of shares held by the Employee Stock Ownership Plan (ESOP) and Recognition and Retention Plan (RRP) in accordance with the American Institute of Certified Public Accountants Statement of Position 93-6. For the year ended December 31, 1998, the basic and fully diluted weighted average common stock outstanding was 41,567,051 shares. From the conversion on December 22, 1997 to December 31, 1997, the basic and fully diluted weighted average common stock outstanding was 41,691,812 shares. Stock-Based Compensation SFAS No. 123 "Accounting for Stock Based Compensation" encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value rather than the intrinsic value-based method that is contained in Accounting Principles Board Opinion No. 25. "Accounting for Stock Issued to Employees" ("APB No. 25") and related Interpretations. The Company has chosen to account for stock-based compensation using the intrinsic value method as prescribed in APB No. 25, measuring compensation cost for stock options 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. Treasury Stock Repurchases of common stock are recorded as treasury stock at cost. New Accounting Pronouncements In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires disclosures for each segment that are similar to those required under current standards with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures About Pension and Other Postretirement Benefits." SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits and requires additional information on changes in benefit obligations and fair values of plan assets. The Company adopted SFAS Nos. 131 and 132 in 1998 and the adoption did not affect the Company's results of operations or financial condition. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. -24- As the Company does not engage in derivatives trading and does not hold any derivative positions as of December 31, 1998, this statement did not have an effect on the Company's financial statements. Reclassifications Certain reclassifications have been made to the December 31, 1997 and 1996 financial statements to conform with current year presentation. 2. ORGANIZATION/FORM OF OWNERSHIP The Bank was originally founded as a New York State chartered savings bank in 1864. In August 1997, the Bank converted to a federally chartered mutual savings bank and is now regulated by the Office of Thrift Supervision (OTS). The Bank is a community bank providing a complete line of retail and commercial banking services along with trust services. Individual customer deposits are insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). On April 16, 1997, the Board of Directors of the Bank adopted a Plan of Conversion to convert from a federally chartered mutual savings bank to a federally chartered stock savings bank with the concurrent formation of a holding company. As part of the conversion, the Company was incorporated under Delaware law in July 1997. The Company completed its initial public offering on December 22, 1997 and issued 42,981,250 shares of common stock resulting in proceeds of approximately $532,972,000, net of expense totaling $8,591,000, before the contribution to the SISB Community Foundation. The Company used $253,592,000 or 50% of the net proceeds to purchase all of the outstanding stock of the Bank. The Company also loaned $41,262,000 to the Bank to establish an ESOP which purchased 3,438,500 shares of the Company's stock in the initial public offering. As part of the Plan of Conversion, the Company formed the SISB Community Foundation and donated 2,149,062 shares of the Company valued at approximately $25,789,000. The Company recorded a contribution expense charge and a corresponding deferred tax benefit of $11,987,000 for this donation. In addition, the Bank paid expenses on behalf of the Foundation totaling approximately $28,000 in 1997. The formation of this private charitable foundation is to further the Bank's commitment to the communities that it serves. Additionally, the Bank established, in accordance with the requirements of the OTS, a liquidation account for $183,947,000 which was equal to its capital as of the date of the latest consolidated statement of financial condition (September 30, 1997) appearing in the IPO prospectus supplement. The liquidation account is reduced as and to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases in deposits do not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying balances for accounts then held. This account had a balance of $147,158,000 at December 31, 1998. In addition to the restriction described above, 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 or if such declaration and payment would otherwise violate regulatory requirements. 3. ACQUISITION On November 20, 1998, the SIB Mortgage Company acquired the assets of Ivy Mortgage Company, a New Jersey-based mortgage loan originator which has branch offices primarily throughout the Northeastern United States. The acquisition by SIB Mortgage Company was funded by the Bank. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based upon the fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $1,775,000 and has been recorded as goodwill. Included as part of the purchase price is a noncompete agreement (the "Agreement") with the sellers of Ivy Mortgage Company. The noncompete agreement, which is recorded as goodwill, is being amortized over 5 years on a straight-line basis and the remaining goodwill is being amortized over 15 years on a straight-line basis. The Agreement contains provisions for payments which are contingent upon future earnings. The Agreement provisions require payment of 100%, 75% and 50% of the net income, as defined in the Agreement, of SIB Mortgage Company for the first, second and third years, respectively. Such contingent payments will be recorded as additional purchase price or compensation as is appropriate for the nature of the payments. The amount of goodwill amortization for 1998 of $13,000 is included in other expenses. Results of operations after the acquisition date are included in the 1998 statement of income. The following pro forma information has been prepared assuming that this acquisition had taken place at the beginning of 1997 after giving effect to certain pro forma adjustments, including, among others, the implied cost of capital and the amortization of intangibles resulting from the transaction. The pro forma financial information is not necessarily indicative of the results of operations as they would have been if the Bank and Ivy Mortgage Company had been a single entity during all of 1998 and 1997, nor is it necessarily indicative of the results of operations which may occur in the future. 1998 1997 ------------------------ Net interest income $120,892 $86,820 Other income 26,457 18,518 Other expenses 72,388 80,065 Net income 43,922 14,403 Earnings per share 1.06 (0.29) -25- 4. REGULATORY MATTERS The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) imposes a number of mandatory supervisory measures on banks and thrift institutions. One of the items FDICIA imposed was certain minimum capital requirements or classifications. Such classifications are used by the FDIC and other bank regulatory agencies to determine matters ranging from each institution's semiannual FDIC deposit insurance premium assessments, to approvals of applications authorizing institutions to grow their asset size or otherwise expand business activities. Under OTS capital regulations, the Bank is required to comply with each of three separate capital adequacy standards. Set forth below is a summary of the Bank's compliance with OTS capital standards as of December 31, 1998 and 1997 (000's omitted): Staten Island Savings Bank December 31, 1998 ----------------------------------------------- Actual % Required % ----------------------------------------------- Tangible capital $402,472 11.31% $ 53,355 1.50% Core capital 405,583 11.39 142,404 4.00 Risk-based capital 422,512 26.04 129,794 8.00 December 31, 1997 ----------------------------------------------- Actual % Required % ----------------------------------------------- Tangible capital $388,889 14.87% $ 39,233 1.50% Core capital 393,167 15.01 78,594 3.00 Risk-based capital 407,091 36.60 88,973 8.00 Staten Island Bancorp, Inc. December 31, 1998 ----------------------------------------------- Actual % Required % ----------------------------------------------- Tangible capital $629,519 16.84% $ 56,061 1.50% Core capital 632,630 16.91 149,621 4.00 Risk-based capital 649,247 35.93 144,565 8.00 December 31, 1997 ----------------------------------------------- Actual % Required % ----------------------------------------------- Tangible capital $647,495 24.78% $ 39,192 1.50% Core capital 651,773 24.90 78,383 3.00 Risk-based capital 665,732 59.62 89,336 8.00 5. INVESTMENT SECURITIES Securities Available for Sale The amortized cost and approximate market value of securities available for sale are summarized as follows: December 31, 1998 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value - -------------------------------------------------------------------------------- (000's omitted) Debt securities: U.S. Government and agencies $ 75,310 $ 1,032 $ -- $ 76,342 GNMA, FNMA and FHLMC mortgage partici- pation certificates 901,536 11,683 (198) 913,021 Agency CMOs 232,070 2,569 (1) 234,638 Privately issued CMOs 473,424 3,224 (319) 476,329 Other 151,219 1,695 (5,684) 147,230 -------------------------------------------------------- 1,833,559 20,203 (6,202) 1,847,560 ======================================================== Marketable equity securities: Common stocks 58,995 7,695 (5,407) 61,283 Preferred stocks 79,010 2,040 (901) 80,149 IIMF Capital Appreciation Fund 27,626 12,423 -- 40,049 -------------------------------------------------------- 165,631 22,158 (6,308) 181,481 -------------------------------------------------------- Total securities available for sale $1,999,190 $42,361 $(12,510) $2,029,041 ======================================================== December 31, 1997 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value - -------------------------------------------------------------------------------- (000's omitted) Debt securities: U.S. Government and agencies $ 105,491 $ 1,128 $ -- $ 106,619 GNMA, FNMA and FHLMC mortgage participation certificates 818,501 11,334 (90) 829,745 Agency CMOs 166,587 1,133 -- 167,720 Privately issued CMOs 171,034 402 (215) 171,221 Other 269 -- (1) 268 -------------------------------------------------------- 1,261,882 13,997 (306) 1,275,573 -------------------------------------------------------- Marketable equity securities: Common stocks 23,643 4,424 (841) 27,226 Preferred stocks 15,965 584 -- 16,549 IIMF capital appreciation 24,599 6,520 -- 31,119 -------------------------------------------------------- 64,207 11,528 (841) 74,894 -------------------------------------------------------- Total securities available for sale $1,326,089 $25,525 $(1,147) $1,350,467 ======================================================== The amortized cost and market value of debt securities available for sale at December 31, 1998 and 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. -26- December 31, 1998 December 31, 1997 ------------------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value - -------------------------------------------------------------------------------- (000's omitted) Due in one year or less $ 17,297 $ 17,447 $ 30,329 $ 30,416 Due after one year through five years 43,058 40,509 45,284 47,153 Due after five years through ten years 56,479 56,889 29,978 29,149 Due after ten years 583,119 585,056 171,204 171,391 ------------------------------------------------------- 699,953 699,901 276,795 278,109 GNMA, FNMA and FHLMC mortgage participation certificates and agency CMOs 1,133,606 1,147,659 985,087 997,464 -------------------------------------------------------- $1,833,559 $1,847,560 $1,261,882 $1,275,573 ======================================================== Proceeds from sales of securities available for sale during 1998, 1997 and 1996 were $109,224,000, $97,957,000 and $240,417,000 with realized gross gains of $2,374,000, $945,000 and $488,000 and realized gross losses of $1,850,000, $1,030,000 and $3,198,000, respectively. Other Under a securities lending agreement, the Bank's investment custodian made loans of the Bank's available for sale securities with a market value of approximately $65,563,000 as of December 31, 1997. There were no securities on loan as of December 31, 1998. Cash collateral received for such loans exceeded 100% of the market value of all loaned securities. 6. LOANS A significant portion of the Bank's loans are to borrowers who are domiciled on Staten Island. The income of many of those customers is dependent on the New York City economy. In addition, most of the Bank's real estate loans involve mortgages on Staten Island properties. Thus, the majority of the Bank's loan portfolio is susceptible to the economy of Staten Island, a borough of New York City, which is its primary marketplace. While management uses available information to provide for losses of value on loans and foreclosed properties, future loss provisions may be necessary based on changes in economic conditions. In addition, the Bank's regulators, as an integral part of their examination process, periodically review the valuation of the Bank's loans and foreclosed properties. Such regulators may require the Bank to recognize write-downs based on judgments different from those of management. Loans, net, consist of the following at December 31, 1998 and 1997: 1998 1997 - -------------------------------------------------------------------------------- (000's omitted) Loans secured by mortgages on real estate: 1-4 family residential ......................... $ 1,187,212 $ 863,694 Multifamily properties ......................... 33,328 28,218 Commercial properties .......................... 137,720 120,084 Home equity .................................... 6,121 6,538 Construction and land .......................... 42,420 40,476 Deferred origination fees and unearned income, net ......................... (717) (4,116) --------------------------- Net loans secured by mortgages on real estate ................................ 1,406,084 1,054,894 --------------------------- Other loans: Student ........................................ 940 4,033 Passbook ....................................... 5,989 6,929 Commercial ..................................... 36,592 19,559 Other .......................................... 24,070 13,212 --------------------------- Net other loans .............................. 67,591 43,733 --------------------------- Net loans before the allowance for loan losses ..................................... 1,473,675 1,098,627 Allowance for loan losses ...................... (16,617) (15,709) --------------------------- Net loans .................................... $ 1,457,058 $ 1,082,918 =========================== A summary of activity in the allowance for loan losses for the years ended December 31, 1998, 1997 and 1996, is as follows: 1998 1997 1996 - -------------------------------------------------------------------------------- Beginning balance .................... $15,709 $ 9,977 $10,704 Increase as a result of acquisition ................... 96 -- -- Provision charged to operations .................... 1,594 6,003 1,000 Charge-offs ........................ (2,119) (1,318) (2,695) Recoveries ......................... 1,337 1,047 968 ---------------------------------- Ending balance ....................... $16,617 $15,709 $ 9,977 ================================== Nonaccrual loans totaled approximately $16,232,000 at December 31, 1998, which is also the Bank's recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 and SFAS No. 118. Nonaccrual loans totaled approximately $21,316,000 at December 31, 1997. The loss of interest income associated with loans on nonaccrual status was approximately $794,000, $899,000 and $696,000 for the years ended December 31 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, the valuation allowance related to all impaired loans totaled $5,898,000 and $6,258,000, respectively, and is included in the allowance for loan losses shown on the balance sheet. The average recorded investment in impaired loans for the twelve months ended December 31, 1998 and 1997, was approximately $18,693,000 and $23,154,000, respectively. At December 31, 1998 and 1997, the Bank has other real estate totaling approximately $849,000 and $618,000, respectively, classified in other assets. -27- At December 31, 1998 and 1997, the Bank was servicing mortgages for others totaling approximately $140,748,000 and $156,865,000, respectively. At December 31, 1998 and 1997, the Bank has balances outstanding from various officers totaling approximately $2,999,000 and $2,472,000, respectively. 7. BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 31, 1998 and 1997, are summarized as follows: 1998 1997 - -------------------------------------------------------------------------------- (000's omitted) Land, building and leasehold improvements ................... $ 22,499 $ 21,662 Furniture, fixtures and equipment ................................ 14,922 11,434 --------------------------- 37,421 33,096 Less--Accumulated depreciation and amortization ............................. (15,258) (13,359) --------------------------- $ 22,163 $ 19,737 =========================== 8. DUE DEPOSITORS Scheduled maturities of time deposits at December 31, 1998, are summarized as follows (000's omitted): Weighted Average Amount Rate - -------------------------------------------------------------------------------- 1999 ............................................... $407,423 4.85% 2000 ............................................... 98,867 5.14 2001 ............................................... 12,773 5.30 2002 ............................................... 8,621 5.53 2003 and thereafter ................................ 9,470 5.38 ------------------------ $537,154 4.94% ======================== The aggregate amounts of outstanding time certificates of deposit in denominations of $100,000 or more at December 31, 1998 and 1997 were approximately $122,166,000 and $99,915,000, respectively. 9. BORROWED FUNDS The Bank was obligated for borrowings as follows (000's omitted): December 31 ----------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Rate Amount Rate Amount - -------------------------------------------------------------------------------- Reverse Repurchase Agreements Non-FHLB ........... 5.19 $ 773,477 5.84 $ 140,000 Reverse Repurchase Agreements FHLB ............... 5.30 571,000 5.88 110,000 Mortgage payable ............ 12.00 40 12.00 42 ------------------------------------------------ 5.24 $1,344,517 5.86 $ 250,042 ================================================ The average balance of borrowings for December 31, 1998 and 1997 was $664,863,000 and $81,071,000, respectively. The reverse repurchase agreements at December 31, 1998 have contractual maturities as follows (000's omitted): 1999 ................................ $ 826,477 2000 ................................ 28,500 2003 ................................ 111,500 2008 ................................ 378,000 ---------- $1,344,477 ========== 10. EMPLOYEE BENEFIT PLANS Pension Plan The Bank maintains a noncontributory defined benefit pension plan (the "Plan") covering substantially all full-time employees 21 years of age or older. The benefits are computed as 2% of the highest three-year average annual earnings multiplied by credited service, to a maximum of 60% of average annual earnings. The annual benefit is reduced by 5% for each year the benefit payments commence before age 65. The amounts contributed to the Plan are determined annually on the basis of (a) the maximum amount that can be deducted for federal income tax purposes, or (b) the amount certified by a consulting actuary as necessary to avoid an accumulated funding deficiency in accordance with federal law and regulations. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Assets of the Plan are primarily invested in various equity and fixed income funds. Costs of the Bank's retirement plan are accounted for in accordance with SFAS No. 87. The following table sets forth the Plan's funded status and amounts recognized in the Bank's financial statements at December 31, 1998 and 1997, based upon the latest available actuarial measurement dates of September 30, 1998 and 1997, respectively. 1998 1997 - -------------------------------------------------------------------------------- (000's omitted) Projected benefit obligation, beginning of year .................................. $ 18,630 $ 17,237 Service cost ............................... 1,172 981 Interest cost .............................. 1,350 1,243 Benefits paid .............................. (919) (875) Actuarial loss (gain) ...................... 2,250 44 -------------------------- Projected benefit obligation, end of year .............................. $ 22,483 $ 18,630 ========================== -28- The following table sets forth the Plan's change in plan assets: 1998 1997 - -------------------------------------------------------------------------------- (000's omitted) Fair value of the plan assets, beginning of year .......................... $ 23,002 $ 18,582 Actual return on plan assets ................. 21 4,213 Employer contributions ....................... 403 1,082 Benefits paid ................................ (919) (875) ------------------------- Fair value of the plan assets, end of year ................................ $ 22,507 $ 23,002 ========================= Funded status ................................ $ 25 $ 4,372 Unrecognized net asset ....................... (62) (191) Unrecognized prior service cost .............. 393 440 Unrecognized net actuarial loss (gain) ................................ 871 (3,221) ------------------------- Prepaid cost ................................ $ 1,227 $ 1,400 ========================= The components of net pension expense are as follows: 1998 1997 1996 - -------------------------------------------------------------------------------- (000's omitted) Service cost-benefits earned during the year .................... $ 1,172 $ 981 $ 908 Interest cost on projected benefit obligation ................. 1,350 1,243 1,206 Net amortization and deferral ....................... (125) (82) (81) Actual return on plan assets ......... (21) (4,213) (2,275) Deferred investment gain (loss) ........................ (1,799) 2,714 1,007 ----------------------------------- Net pension expense ................ $ 577 $ 643 $ 765 =================================== Major assumptions utilized: 1998 1997 1996 - -------------------------------------------------------------------------------- Weighted average discount rate ........................ 6.50% 7.25% 7.50% Rate of increase in compensation levels ................ 4.50 5.00 5.50 Expected long-term rate of return on assets ................ 8.00 8.00 8.00 ================================ Postretirement Benefits The Bank provides postretirement benefits, including medical care and life insurance, which cover substantially all active employees upon their retirement. The Bank's postretirement benefits are unfunded. The following table shows the components of the Plan's accrued postretirement benefit cost included in other liabilities on the statements of financial condition as of December 31, 1998 and 1997: 1998 1997 - -------------------------------------------------------------------------------- (000's omitted) Accumulated postretirement benefit obligation: Retiree's ............................................. $ 1,324 $ 1,514 Other fully eligible participants ..................... 2,249 2,592 Unrecognized gain (loss) .............................. 50 (747) Unrecognized past service liability ................................... 583 657 ------------------- Accrued postretirement benefit cost ................... $ 4,206 $ 4,016 =================== Net periodic postretirement benefit cost for 1998, 1997 and 1996 included the following components: 1998 1997 1996 - -------------------------------------------------------------------------------- (000's omitted) Service cost--benefits attributed to service during period ......................... $ 173 $ 204 $ 175 Interest cost on accumulated postretirement benefit obligation ............................ 205 269 297 Amortization of: Unrecognized (gain) loss .............. (13) 10 51 Unrecognized past service liability ................... (75) (75) (75) ------------------------------- Net periodic postretirement benefit cost .......................... $ 290 $ 408 $ 448 =============================== The average health care cost trend rate assumption significantly affects the amounts reported. For example, a 1% increase in this rate would increase the accumulated benefit obligation by $280,000, $196,000 and $128,200 at December 31, 1998, 1997 and 1996, respectively, and increase the net periodic cost by $37,000, $27,700 and $7,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The postretirement benefit cost components for 1998 were calculated assuming average health care cost trend rates ranging up to 6.5% and grading to 5% in 2005 and thereafter. 401(k) Plan The Bank has a 401(k) plan (the "Plan") covering substantially all full-time employees. The Plan provides for employer matching contributions subject to a specified maximum, and also contains a profit-sharing feature which provides for contributions at the discretion of the Bank. The Plan expense in 1998 was matched through stock contributions under the ESOP. Amounts charged to operations for the years ended December 31, 1998, 1997 and 1996 were approximately $514,000 $1,266,000 and $1,427,000, respectively. Employee Stock Ownership Plan The ESOP borrowed $41,262,000 from the Company and used the funds to purchase 3,438,500 shares of the Company's stock issued in the conversion. The loan has an interest rate of 8.25% and will be repaid over a 15-year period. The loan was issued on December 19, 1997. Shares purchased are held in a suspense account for allocation among the participants as the loan is paid. Contributions to the ESOP and shares released from the loan collateral will be in an amount proportional to repayment of the ESOP loan. Shares allocated will first be used for the employer matching contribution for the 401(k) plan with the remaining shares allocated to the participants based on compensation as described in the plan, in the year of allocation. The vesting schedule will be the same as the Bank's current 401(k) plan. Forfeitures from the 401(k) matching contributions will be used to reduce future employer 401(k) matching contributions while -29- forfeitures from shares allocated to the participants will be allocated among the participants the same as contributions. There were 233,843 and 0 shares allocated in 1998 and 1997, respectively. The Company recorded compensation expense of $4,020,000 and $0 for the ESOP for the years ended December 31, 1998 and 1997, respectively. Recognition and Retention Plan (RRP) The Company maintains the 1998 Recognition and Retention Plan (RRP) for the directors and officers of the Bank which was implemented in July 1998. The objective of the RRP is to enable the Company to provide officers, key employees and directors of the Bank with a proprietary interest in the Company as an incentive to contribute to its success. During 1998, the RRP purchased 1,719,250 shares of the Company or 4% of the Common Stock sold in the Conversion on the open market. These purchases were funded by the Bank. On July 31, 1998, 1,501,725 shares were granted to the directors and officers of the Company. Awards vest at a rate of 20% per year for directors and officers, commencing one year from the date of award. Awards become 100% vested upon termination of employment due to death or disability. In 1998, 28,700 shares vested due to the death of two participants. The Company recorded compensation expense of $3,049,000 and $0 for the RRP for the years ended December 31, 1998 and December 31, 1997, respectively. Stock Option Plan The Company maintains the 1998 Stock Option Plan (the "Option Plan"). The Company has reserved for future issuance pursuant to the Option Plan 4,298,125 shares of Common Stock, which is equal to 10% of the Common Stock sold in the Conversion. Under the Option Plan, stock options (which expire ten years from the date of grant) have been granted to the directors and officers of the Bank. Each option entitles the holder to purchase one share of the Company's common stock at an exercise price equal to the fair market value of the stock at the date of the grant. Options will be exercisable in whole or in part over the vesting period. The options vest ratably over a 5-year period. However, all options become 100% exercisable in the event the employee terminates his employment due to death or disability. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in APB No. 25. Since each option granted at a price equal to the fair market value of one share of the Company's stock on the date of the grant, no compensation cost has been recognized. The following table compares reported net income and earnings per share to net income and earnings per share on a pro forma basis assuming that the Company accounted for stock-based compensation under SFAS No. 123. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. 1998 - -------------------------------------------------------------------------------- Net Income-- As reported ........................................................ $44,262 Pro forma .......................................................... 40,108 Earnings per share-- As reported-- Basic .............................................................. 1.06 Diluted ............................................................ 1.06 Pro forma-- Basic .............................................................. .97 Diluted ............................................................ .97 ================================================================================ Stock Option Activity The following table sets forth stock option activity and the weighted average fair value of options granted. Year Ended December 31, 1998 ------------------------ Exercise Shares Price - -------------------------------------------------------------------------------- Outstanding, beginning of year-- Granted 3,056,000 $22.875 ------- Exercised -- Forfeited -- --------- Outstanding end of year 3,056,000 $22.875 ----------------------- Options exercisable as of December 31, 1998 70,000 Weighted average fair value of options granted $ 8.34 ======================= The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: risk free interest rates of 5.21%, volatility of 35.57%, expected dividend yield of 1.8% and expected life of six years. Supplemental Executive Retirement Plan In 1993, the Bank adopted a Supplemental Executive Retirement Plan (the "Executive Plan") for certain senior officers that provides for payments upon retirement, death or disability. The annual benefit is based upon annual salary (as defined) plus interest. Amounts charged to operations for the years ended December 31, 1998, 1997 and 1996 were approximately $436,000, $186,000 and $255,000, respectively. -30- 11. INCOME TAXES The provision for income taxes consists of the following: 1998 1997 1996 - -------------------------------------------------------------------------------- (000's omitted) Current: Federal ................. $ 21,299 $ 14,137 $ 11,213 State ................... 2,610 3,150 2,489 City .................... 2,676 227 3,294 ------------------------------------------- 26,585 17,514 16,996 Deferred .................. 3,093 (12,582) (1,915) ------------------------------------------- $ 29,678 $ 4,932 $ 15,081 =========================================== The following table reconciles the federal statutory rate to the Bank's effective tax rate (000's omitted): December 31, 1998 -------------------------- Percentage of Pretax Amount Income - -------------------------------------------------------------------------------- Federal tax at statutory rate $25,879 35.0% State and local income taxes 2,837 3.8 Tax-exempt dividend income (436) (0.6) Amortization of goodwill 318 0.4 Nondeductible expense of ESOP 407 0.6 Other 673 0.9 -------------------------- Income tax provision $29,678 40.1% ========================== December 31, 1997 -------------------------- Percentage of Pretax Amount Income - -------------------------------------------------------------------------------- Federal tax at statutory rate $ 6,818 35.0% State and local income taxes (2,313) (11.9) Tax-exempt dividend income (305) (1.5) Amortization of goodwill 318 1.6 Other 414 2.1 -------------------------- Income tax provision $ 4,932 25.3% ========================== December 31, 1996 -------------------------- Percentage of Pretax Amount Income - -------------------------------------------------------------------------------- Federal tax at statutory rate $13,022 35.0% State and local income taxes 2,057 5.5 Tax-exempt interest (69) (.2) Tax-exempt dividend income (276) (.7) Amortization of goodwill 318 0.2 Other 29 .8 -------------------------- Income tax provision $15,081 40.6% ========================== The following is a summary of the income tax (liability) receivable at December 31, 1998 and 1997 (000's omitted): 1998 1997 - -------------------------------------------------------------------------------- Current taxes ............................ $1,257 $ 86 Deferred taxes ........................... 1,861 2,653 ------------------------- $3,118 $2,739 ========================= The components of the net deferred tax asset at December 31, 1998 and 1997 are as follows (000's omitted): 1998 1997 - -------------------------------------------------------------------------------- Assets: Contribution to Foundation ....................... $ 6,571 $10,105 Allowance for loan losses ........................ 7,005 6,598 Postretirement accrual ........................... 1,809 1,672 Nonaccrual loans ................................. 583 706 Deferred compensation ............................ 1,031 813 Investment in data processing entity .............................. 381 381 ESOP shares ...................................... 565 -- Deferred loan fees ............................... 170 339 Other ............................................ 832 827 ---------------------- Gross deferred tax asset ....................... 18,947 21,441 Valuation Allowance .............................. -- -- ---------------------- Total assets ................................... 18,947 21,441 ---------------------- Liabilities: Bad debt recapture under Section 593 ............. 2,354 2,950 Deposit premium .................................. 1,009 1,797 Unrealized gain on AFS securities ................ 12,537 10,239 Pension plan ..................................... 499 572 Bond discounts ................................... 303 331 Other ............................................ 384 2,899 ---------------------- Gross deferred tax liability ................... 17,086 18,788 ---------------------- Net deferred tax asset ......................... $ 1,861 $ 2,653 ====================== At December 31, 1998 and 1997, the deferred tax asset is included in other assets in the accompanying consolidated financial statements. Bad Debt Deduction Through January 1, 1996, under Section 593 of the Internal Revenue Code, thrift institutions such as the Bank which met certain definitional tests, primarily relating to their assets and the nature of their business, were permitted to establish a tax reserve for bad debts and to make annual additions thereto, which additions may, within specified limitations, be deducted in arriving at their taxable income. The Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, was computed using an amount based on the Bank's actual loss experience (the "Experience Method"), or a percentage equal to 8% of the Bank's taxable income (the "PTI Method"), computed without regard to this deduction and with additional modifications and reduced by the amount of any permitted addition to the nonqualifying reserve. Similar deductions or additions to the Bank's bad debt reserve are permitted under the New York State Bank Franchise Tax; however, for purposes of these taxes, the effective allowable percentage under the PTI Method was approximately 32% rather than 8%. Effective January 1, 1996, Section 593 was amended, and the Bank is unable to make additions to its federal tax bad debt reserve, is permitted to deduct bad debts only as they occur and is additionally required to recapture (that is, take into taxable income) over a six-year period, beginning with the Bank's taxable year beginning on January 1, 1996, the -31- excess of the balance of its bad debt reserves as of December 31, 1995 over the balance of such reserves as of December 31, 1987, or over a lesser amount if the Bank's loan portfolio has decreased since December 31, 1987. Such recapture requirements have been deferred for taxable years through December 31, 1997, as the Bank originated a minimum amount of certain residential loans based upon the average of the principal amounts of such loans originated by the Bank during its six taxable years preceding January 1, 1996. The recapture requirement amount for the year 1998 was $1,405,000. The New York State tax law has been amended to prevent a similar recapture of the Bank's bad debt reserve, and to permit continued future use of the bad debt reserve method for purposes of determining the Bank's New York State tax liability. In connection with this change, which also provides for an indefinite deferral of the recapture of the bad debt reserves generated for New York State purposes, the Bank reversed $2.1 million in 1996 of previously deferred income taxes related to the bad debt reserves accumulated for New York State purposes. The New York City tax law was amended in the first quarter of 1997 and is now similar to the New York State tax law regarding bad debt reserves and provides for the indefinite deferral of the recapture of bad debt reserves generated for New York City purposes. The Bank reversed $2.6 million in 1997 of previously deferred income taxes related to the bad debt reserve accumulated for New York City purposes. Prior to the tax law changes mentioned above, for New York State and New York City purposes, the bad debt deduction was equal to a multiple of the federal bad debt deduction, which is approximately four times the federal amount. State, Local and Other Taxes The Company files state and local tax returns on a calendar-year basis. State and local taxes imposed on the Company consist primarily of New York State franchise tax, New York City Financial Corporation tax, Delaware franchise tax and state taxes for an additional 22 states. These additional state taxes are attributable to the purchase of SIB Mortgage Company which has offices in these additional locations. The Company's annual liability for New York State and New York City purposes is the greater of a tax on income or an alternative tax based on a specified formula. Liability for other state taxes are determined in accordance with the applicable local tax code. The Company's liability for Delaware franchise tax is based on the lesser of a tax based on an authorized shares method or an assumed par value capital method, however, under each method, the Company's total tax will not exceed $150,000. Taxes for the additional states that the Mortgage Company operates in are not deemed to be material to these financial statements. 12. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS In the normal course of business, there are various outstanding commitments and contingent liabilities, such as standby letters of credit and commitments to extend credit, which are not reflected in the accompanying consolidated financial statements. The Bank uses the same policies in making commitments as it does for on-balance sheet instruments. No material losses are anticipated as a result of these transactions. The Bank is contingently liable under standby letters of credit in the amount of $1,777,000 and $1,636,000 at December 31, 1998 and 1997, respectively. In addition, at December 31, 1998 and 1997, mortgage loan commitments and unused balances under revolving credit lines approximated $297,000,000 and $81,100,000, respectively. Total operating rental commitments on bank facilities, which expire at various dates through June 2007, exclusive of renewal options, are as follows (000's omitted): 1999 .................................. $1,134 2000 .................................. 902 2001 .................................. 851 2002 .................................. 366 2003 and thereafter ................... 765 ------ $4,018 ====== Rental expense included in the statements of income was approximately $768,000, $702,000 and $708,000 for the years ended December 31, 1998, 1997 and 1996, respectively. In October 1997, the Company became the primary owner of an entity that provides data processing services to the Bank. Based on its assessment of the continuing viability of this company, the Bank had earlier in 1997, written off its entire investment of $969,000 which is reflected in data processing expense. The Company intends to liquidate this company with no material effect on the Company's financial statements. As a result, this data processing company is not included in the consolidated financial statements of the Company. In 1998, the Bank signed a 5-year contract to outsource substantially all of its data processing to another data service provider. -32- 13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Due From Banks and Federal Funds Sold For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Accrued Interest The carrying amount is a reasonable estimate of fair value. Securities Available for Sale Fair values for securities are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans For loans, fair value is based on the credit and interest rate characteristics of individual loans. These loans are stratified by type, maturity, interest rate, underlying collateral where applicable, and credit quality ratings. Fair value is estimated by discounting scheduled cash flows through estimated maturities using discount rates which in management's opinion best reflect current market interest rates that would be charged on loans with similar characteristics and credit quality. Credit risk concerns are reflected by adjusting cash flow forecasts, by adjusting the discount rate or by adjusting both. Deposit Liabilities The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Demand deposits, savings accounts and certain money market deposits are valued at their carrying value. In the Bank's opinion, these deposits could be sold at a premium based on management's knowledge of the results of recent sales of financial institutions in the New York City area. Advances From Borrowers for Taxes and Insurance The carrying amount is a reasonable estimate of fair value. Commitments to Extend Credit The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values of the Bank's financial instruments are as follows: December 31, 1998 ------------------------------ Carrying Fair Amount Value - -------------------------------------------------------------------------------- (000's omitted) Financial assets: Cash and due from banks .................. $ 88,059 $ 88,059 Federal funds sold ....................... 45,050 45,050 Securities available for sale ............ 2,029,041 2,029,041 Loans .................................... 1,551,618 1,567,486 Less--Allowance for loan losses ............................ (16,617) (16,617) Accrued interest receivable .............. 19,389 19,389 Financial liabilities: Savings and demand deposits ............................... 1,191,906 1,191,906 Time deposits ............................ 537,154 540,144 Borrowed funds ........................... 1,345 1,345 Advances from borrowers for taxes and insurance ................ 7,091 7,091 Accrued interest payable ................. 8,464 8,464 Unrecognized financial instruments: Commitments to extend credit ................................. -- 1,257 December 31, 1998 ------------------------------ Carrying Fair Amount Value - -------------------------------------------------------------------------------- (000's omitted) Financial assets: Cash and due from banks .................. $ 58,435 $ 58,435 Federal funds sold ....................... 90,500 90,500 Securities available for sale ............ 1,350,467 1,350,467 Loans .................................... 1,098,627 1,107,013 Less--Allowance for loan losses ............................ (15,709) -- Accrued interest receivable .............. 15,707 15,707 Financial liabilities: Savings and demand deposits .............. 1,102,961 1,102,961 Time deposits ............................ 520,693 521,841 Borrowed funds ........................... 250,000 250,000 Advances from borrowers for taxes and insurance ................ 4,623 4,623 Accrued interest payable ................. 972 972 Unrecognized financial instruments: Commitments to extend credit .......................... -- 131 14. STATEN ISLAND BANCORP, INC. The following condensed statements of financial condition as of December 31, 1998 and 1997 and condensed statements of income and cash flows for the years ended December 31, 1998 and 1997 should be read in conjunction with the consolidated financial statements and the notes thereto. -33- Condensed Statements of Financial Condition December 31 -------------------------- 1998 1997 - -------------------------------------------------------------------------------- (000's omitted) Assets: Cash ......................................... $ 14,008 $ 212,301 Securities available for sale ................ 171,563 -- Investment in subsidiary ..................... 435,258 420,349 ESOP loan receivable from subsidiary ............................ 39,801 41,262 Other assets ................................. 9,524 11,974 -------------------------- $ 670,154 $ 685,886 ========================== Liabilities: Accrued interest and other liabilities .......................... $ 1,112 -- Stockholders' equity: Common stock ................................. 451 451 Additional paid in capital ................... 534,464 532,521 Retained earnings (substantially restricted) ................. 215,414 181,499 Unallocated ESOP shares ...................... (38,456) (41,262) Unearned RRP shares .......................... (30,873) -- Less--Treasury stock (1,425,500 shares, at cost) ................ (27,480) -- Accumulated other comprehensive income, net of taxes ............................... 15,522 12,677 -------------------------- Total liabilities and equity ............. $ 670,154 $ 685,886 ========================== Condensed Statements of Income December 31 -------------------------- 1998 1997 - -------------------------------------------------------------------------------- (000's omitted) Income: Investment income .......................... $ 7,810 $ -- Other interest income ...................... 287 -- Interest income ESOP loan receivable .......................... 3,464 -- Loss on sale of investments ................ (646) -- -------------------------- 10,915 -- Expenses: Interest expense ........................... 657 -- Other expense .............................. 598 -- Contribution to SISB Community Foundation ..................... -- 25,817 -------------------------- Income (loss) before taxes and equity in undistributed earnings of subsidiary ................... 9,660 (25,817) Provision (benefit) for income taxes ............................. 3,107 (11,974) -------------------------- Income (loss) before equity in undistributed earnings of subsidiary ............................ 6,553 (13,843) Equity in undistributed earnings of subsidiary ................... 37,709 1,642 -------------------------- Net income (loss) .......................... $ 44,262 $(12,201) ========================== Condensed Statements of Cash Flows December 31 -------------------------- 1998 1997 - -------------------------------------------------------------------------------- (000's omitted) Cash flows from operating activities: Net income ..................................... $ 44,262 $ (21,201) Adjustments to reconcile net loss to net cash (used in) provided by operating activities-- Undistributed earnings of subsidiary bank ............................ (37,709) (1,642) Amortization of bond and mortgage premium ............................. 28 -- Loss on sale of available for sale securities .......................... 646 -- Other noncash expense (income) ..................................... (51) -- Decrease (increase) in accrued interest ............................. (683) -- Decrease (increase) in other assets ................................. 1,868 (1,869) (Decrease) increase in accrued interest and other liabilities .......................... 1,112 -- (Increase) decrease in deferred income taxes ........................ 1,684 10,105 -------------------------- Net cash (used in) provided by operating activities ...................... 11,157 (14,607) -------------------------- Cash flows from investing activities: (Increase) decrease in Investment in Subsidiary ..................... -- (253,592) Sales of available for sale securities .............................. 99,627 -- Purchases of available for sale securities .......................... (272,711) -- Principal collected on loans ................. 1,461 -- Loan made to SISB Employee Stock Ownership Plan ............................... -- (41,262) -------------------------- Net cash (used in) investing activities ......................... (171,623) (294,854) ========================== December 31 -------------------------- 1998 1997 - -------------------------------------------------------------------------------- (000's omitted) Cash flows from financing activities: Net proceeds from issuance of common stock in initial public offering ................... $ -- $ 532,972 Cash dividends ................................. (10,347) -- Purchase of treasury stock ..................... (27,480) -- -------------------------- Net cash (used in) provided by financing activities ...................... (37,827) 532,972 -------------------------- Net (decrease) increase in cash and cash equivalents .................... (198,293) 212,301 Cash and equivalents, beginning of year ............................ 212,301 -- -------------------------- Cash and equivalents, end of year .................................. $ 14,008 $ 212,301 ========================== -34- 15. QUARTERLY FINANCIAL DATA (UNAUDITED) Selected unaudited quarterly financial data for the years ended December 31, 1998 and 1997 is presented below: Fourth Third Second First Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- 1998: Interest income ............... $62,557 $54,068 $48,050 $44,466 Interest expense .............. 28,953 24,143 18,883 16,090 Net interest income ............... 33,604 29,925 29,167 28,376 Provision for loan losses .......... 92 500 501 501 Noninterest income ............... 3,663 1,916 2,069 2,732 Noninterest expense .............. 18,142 13,327 12,277 12,172 Income before income taxes ......... 19,033 18,014 18,458 18,435 Income taxes ........... 7,259 7,066 7,515 7,838 Net income (loss) ............... 11,774 10,948 10,943 10,597 Earnings per share-- Basic .............. .28 .26 .27 .25 Diluted ............ .28 .26 .27 .25 Dividends declared per common share ......... .09 .08 .08 .07 Stock price per common share High 21-3/4 23-1/8 23-5/8 21-1/8 Low 14-1/8 15-9/16 20-5/8 18-13/16 Close 19-15/16 18 22-3/4 20-3/8 Fourth Third Second First Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- 1997: Interest income ................. $ 46,495 $ 35,231 $ 33,210 $ 31,876 Interest expense ................ 19,187 15,082 13,272 12,516 Net interest income ................. 27,308 20,149 19,938 19,360 Provision for loan losses ............ 501 501 2,501 2,500 Noninterest income ................. 2,285 2,118 1,840 1,210 Noninterest expense ................ 35,820* 11,468 10,589 10,847 Income before income taxes ........... (6,728) 10,298 8,688 7,223 Income taxes ............. (4,280) 4,261 3,655 1,296 Net income (loss) ................. (2,448) 6,037 5,033 5,927 Earnings (loss) per share since conversion: Basic ................ (.29) -- -- -- Diluted .............. (.29) -- -- -- *Fourth quarter of 1997 includes one-time contribution of $25,789 to the SISB Community Foundation formed as part of the Conversion. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Staten Island Bancorp, Inc.: We have audited the accompanying consolidated statements of financial condition of Staten Island Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholder's equity and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 Staten Island Bancorp, Inc. and Subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP New York, New York January 20, 1999 -35- CORPORATE INFORMATION Corporate Office 15 Beach Street Staten Island, New York 10304 ANNUAL MEETING The annual meeting of stockholders will be held on April 29, 1999 at 10:00 a.m. at: The Excelsior Grand 2380 Hylan Boulevard Staten Island, New York 10306 Notice of the meeting and a proxy form are included with this mailing to shareholders of record as of March 19, 1999. INVESTOR RELATIONS Shareholders, analysts and others interested in additional information may contact: Donald C. Fleming Senior Vice President at 15 Beach Street Staten Island, New York 10304 (718) 447-7900 TRANSFER AGENT AND REGISTRAR Inquiries regarding stock transfer, lost certificates, or changes in name and/or address should be directed to the stock and transfer agent and registrar: Registrar and Transfer Company Investor Relations 10 Commerce Drive Cranford, New Jersey 07016 (800) 368-5948 STOCK LISTING Staten Island Bancorp Inc.'s common stock is traded on the New York Stock Exchange (NYSE) under the symbol SIB. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Arthur Andersen LLP 1345 Avenue of the Americas New York, New York 10105 COUNSEL The Law Firm of Hall & Hall 57 Beach Street Staten Island, New York 10304 Elias, Matz, Tiernan and Herrick 734 15th Street N.W., 12th floor Washington, D.C. 20005 SERVICES AVAILABLE PERSONAL BANKING SERVICES Day of Deposit-Day of Withdrawal Savings Accounts Holiday Club Accounts Insured Money Market Accounts Time Savings Accounts Checking Accounts Checking with Interest Checking Overdraft Retirement Plans Mortgage Loans Bi-weekly Mortgage Loans Home Equity Loans Home Improvement Loans HomeSecured Advantage Loans Personal Loans Passbook Loans Student Loans Automated Payment System Bank-by-Phone Bill Pay-by-Phone THE bankCard 24 Hour Automated Teller Machines Direct Deposit of Payroll and Government Checks Safe Deposit Boxes Savings Bank Life Insurance Money Orders Banking by Mail U.S. Savings Bonds Travelers Checks Utility Bill Payments Drive-thru Banking PC Banking Visa Check Card Drive-thru ATM BUSINESS BANKING SERVICES Business Checking Accounts Business Checking with Interest Business Overdraft Checking Business Savings Accounts Retirement Accounts Lawyer Escrow Accounts (IOLA) Bank-by-Phone Bill Pay-by-Phone Automatic Transfers and Payments Direct Payroll Deposit Payroll Check Cashing Night Deposit Boxes Safe Deposit Boxes 24 Hour Automated Teller Machines Merchant Card Services Treasury Tax and Loan Payment Secured Lines of Credit Unsecured Lines of Credit Business Term Loans Commercial Mortgage Loans Tailored Business Loans Small Business Administration (SBA) Loans PC Banking for Business TRUST AND INVESTMENT SERVICES Estate Management Trust Management Custody Record Keeping Income Collection Security Processing and Safekeeping Investment Management -36- CORPORATE INFORMATION STATEN ISLAND BANCORP, INC. BOARD OF DIRECTORS Harold Banks Charles J. Bartels James R. Coyle Harry P. Doherty William G. Horn Denis P. Kelleher Julius Mehrberg John R. Morris Kenneth W. Nelson William E. O'Mara DIRECTORS EMERITI Elliott L. Chapin Pio Paul Goggi Dennis E. Knudsen Edward J. Maloy, Jr. Edward F. Norton, Jr. Edward F. Vitt Raymond A. Vomero EXECUTIVE OFFICERS Harry P. Doherty Chief Executive Officer James R. Coyle Chief Operating Officer Edward Klingele Chief Financial Officer Patricia J. Villani Corporate Secretary STATEN ISLAND SAVINGS BANK--A Staten Island Bancorp Company CHAIRMAN AND CHIEF EXECUTIVE OFFICER Harry P. Doherty PRESIDENT AND CHIEF OPERATING OFFICER James R. Coyle EXECUTIVE VICE PRESIDENT John P. Brady SENIOR VICE PRESIDENTS Frank J. Besignano Donald C. Fleming Edward Klingele Deborah Pagano FIRST VICE PRESIDENTS Dorothy A. MacIver William McMahon Catherine M. Paulo Robert S. Ryan Harvey B. Singer Vice Presidents Diana J. Alore Catherine Arcuri Marlene Blum Michael J. Brennan Andrea R. Cicero Robert C. Dunn Thomas Longendyke Lawerence Nelson Barbara Tichenor Frederick A. Volk Anna Williams AUDITOR Suzanne Lackow CONTROLLER Scott Salner CORPORATE SECRETARY Patricia J. Villani ASSISTANT VICE PRESIDENTS Paula Armband Arlene Brown Richard G. Budalich Karen Capela Mary Cautela Zenaida Cordero Maureen DeAngelo Barbara Giardiello Joseph Gilroy Maryann Hurley George P. Keogh Therese Marks Eileen Merkent Robin Mollica Jose Nieves Mary Palmieri Barbara Palomba Patricia Phoel Helena V. Pizzuto Usha Ramaswamy Jean Ringhoff William Robinson Lynne Sigona Carmela Taliento Carl Tullis Clifford Zoller ASSISTANT CONTROLLER Barbara Corbett ASSISTANT SECRETARIES Annette Ackerson Dorri Aspinwall Nina Brancato Donna Bruen Kathleen Geosits David E. Kennedy Maryanne Sexton Donald Thorsen Mary Ann Young SIB MORTGAGE CORPORATION--d/b/a IVY MORTGAGE PRESIDENT AND CHIEF EXECUTIVE OFFICER Richard W. Payne CHIEF OPERATING OFFICER Paul Hechman CHIEF FINANCIAL OFFICER Ralph Piccarello SIB INVESTMENT CORPORATION PRESIDENT Bernard Durnin Designed by Curran & Connors, Inc. / www.curran-connors.com 15 BEACH STREET, STATEN ISLAND, NY 10304 Member F.D.I.C. Equal Opportunity Employer Equal Housing Lender EX-23 4 ARTHUR ANDERSEN LLP CONSENT OF INDPENDENT PUBLIC ACCOUNTANTS As indpendent public accountants, we hereby consent to the incorporation of our report dated January 20, 1999 incorporated by reference in this Form 10-K of Staten Island Bancorp, Inc. ("Bancorp"), into Bancorp's previously filed Registration Statements on Form S-8 (File Nos. 333-46693 and 333-75133) /s/Arthur Andersen LLP New York, New York March 29, 1999 EX-27 5
9 1,000 YEAR DEC-31-1998 DEC-31-1998 44,760 43,299 45,050 0 2,029,041 0 0 1,551,618 16,617 3,776,947 1,729,061 826,477 34,327 518,040 0 0 451 668,591 3,776,947 101,175 106,025 1,941 209,141 50,942 88,069 121,072 1,594 524 55,918 73,940 73,940 0 0 44,262 1.06 1.06 7.14 16,232 7,423 0 1,289 15,709 2,119 1,338 16,617 16,617 0 0
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