-----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, Bv9IQjDMLlMIrsgemWfr63eumxMEB6ZcWB4bBFP2lZ5lJOuQ2u+EAf5x0L6WMf4W ouDZDjTETVuF5aBN+1Nk7A== 0000882377-00-000245.txt : 20000510 0000882377-00-000245.hdr.sgml : 20000510 ACCESSION NUMBER: 0000882377-00-000245 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 DATE AS OF CHANGE: 20000509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARWICK COMMUNITY BANCORP INC CENTRAL INDEX KEY: 0001046209 STANDARD INDUSTRIAL CLASSIFICATION: 6036 IRS NUMBER: 061497903 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23293 FILM NUMBER: 590999 BUSINESS ADDRESS: STREET 1: 18 OAKLAND AVE STREET 2: PO BOX 591 CITY: WARWICK STATE: NY ZIP: 10990-0591 BUSINESS PHONE: 9149862206 MAIL ADDRESS: STREET 1: 18 OAKLAND AVE STREET 2: PO BOX 591 CITY: WARWICK STATE: NY ZIP: 10990-0591 10-K 1 WARWICK COMMUNITY BANCORP, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 0-23293 (COMMISSION FILE NUMBER) WARWICK COMMUNITY BANCORP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06-1497903 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 18 OAKLAND AVENUE, 10990-0591 WARWICK, NEW YORK (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (914) 986-2206 (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days. YES X NO ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] As of March 17, 2000, there were 5,536,790 shares of the Registrant's common stock outstanding. The aggregate market value of the Registrant's common stock (based on closing price quoted on March 17, 2000) held by non-affiliates was approximately $53,679,518. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999 are incorporated by reference into Items 5, 6, 7, 7A and 8 of Part II hereof and Item 14 of Part IV hereof. (2) Portions of the definitive Proxy Statement for the Registrant's 2000 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof. ================================================================================ PART I ------ ITEM 1. BUSINESS General - - ------- Warwick Community Bancorp, Inc. (the "Registrant") is a bank holding company incorporated in September 1997 under the laws of the State of Delaware and is registered under the Bank Holding Company Act of 1956, as amended ("BHCA"). The Registrant was organized for the purpose of acquiring all of the outstanding capital stock of The Warwick Savings Bank (the "Savings Bank"). On December 23, 1997, the Savings Bank completed its conversion from a New York State chartered mutual savings bank to a New York State chartered stock savings bank, the Registrant completed the sale of 6,414,125 shares of common stock at $10.00 per share and the Registrant made a charitable contribution of 192,423 shares of its common stock to the Warwick Savings Foundation, a charitable foundation organized by the Registrant and the Savings Bank The Registrant's operations commenced on December 23, 1997 and consist principally of the operations of the Savings Bank, and, as of October 26, 1999, The Towne Center Bank, a de novo commercial bank formed by the Registrant under the laws of the State of New Jersey and headquartered in Lodi, New Jersey (the "Commercial Bank"). The Savings Bank was organized in 1875 as a New York State chartered mutual savings bank and became a New York State chartered stock savings bank on December 23, 1997. The Savings Bank's deposits are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") up to the maximum amounts permitted by law. The Savings Bank's principal business has been and continues to be attracting retail deposits from the general public in the area surrounding its five branches and investing those deposits, together with funds generated from operations and borrowings, primarily in one- to four-family residential mortgage loans, mortgage-backed securities, commercial business and commercial real estate loans and various debt and equity securities. The Savings Bank also originates home equity loans (Good Neighbor Home Loans) and lines of credit, consumer loans, student loans and its own credit card loans. Additionally, the Savings Bank sells Savings Bank Life Insurance. The Savings Bank's revenues are derived principally from the interest on its mortgage loans, securities, commercial and consumer loans and, to a lesser degree, from its mortgage banking activities, loan and securities sales, servicing fee income and income derived from non-traditional investment products offered through its wholly owned subsidiary, WSB Financial Services, Inc. ("WSB Financial"). The Savings Bank's primary sources of funds are deposits, borrowings, principal and interest payments on loans and securities and proceeds from the sale of loans and securities. The Commercial Bank opened for business on October 26, 1999. The Commercial Bank's principal business consists of taking business and consumer deposits and making consumer and commercial loans. The Commercial Bank also invests in short duration U.S. Treasury and agency securities, mortgage-backed securities and other conservative investments deemed prudent by its -2- board of directors. The deposits of the Commercial Bank are insured by the BIF of the FDIC up to the maximum amounts permitted by law. While the following discussion of the Registrant's business includes the Registrant, the Savings Bank and the Commercial Bank collectively, this discussion reflects primarily the Savings Bank's activities because the Commercial Bank has not yet contributed significantly to the Registrant's operations. Unless otherwise disclosed, the information presented herein reflects information regarding the Registrant, the Savings Bank and the Commercial Bank on a consolidated basis, and, as used herein, the "Registrant" refers to the Registrant and its subsidiaries collectively. Market Area - - ----------- The Savings Bank has been, and intends to continue to be, a community-oriented savings institution offering a variety of financial services to meet the needs of the communities it serves. The Savings Bank maintains its headquarters in the village of Warwick in Orange County, New York and operates four additional branch offices located in the village of Monroe, the town of Woodbury, the town of Wallkill and the town of Newburgh, Orange County, New York. The Savings Bank's primary deposit gathering areas are currently concentrated in proximity to its full-service banking offices. The Savings Bank's current primary lending market includes not only Orange County, New York, but also Rockland, Dutchess and, to a lesser extent, Westchester, Putnam and Sullivan Counties, New York, by virtue of the various loan originators servicing these areas. In addition, with its mortgage banking subsidiary, The Towne Center Mortgage Company, Inc. ("Towne Center Mortgage"), and its attendant loan production offices in West Milford, Passaic County, New Jersey, and Mahwah, Bergen County, New Jersey, the Savings Bank has expanded its mortgage banking operations into the northeastern New Jersey market. Although the Savings Bank's market area is predominantly rural with many small towns, many of the area's residents work in northern New Jersey, western Connecticut and New York City. Some of the county's major employers are ShopRite Supermarkets, the Arden Hill Hospital and related life care complex, Horton Memorial Hospital, Yellow Freight, the Wakefern Corporation and the United States Military Academy at West Point. The Savings Bank's market area grew significantly in population during the 1980's as rising housing prices closer to New York City, coupled with the abundance of vacant land in Orange County, led to a boom in housing construction. As the economy throughout the region declined in the late 1980's and early 1990's, communities surrounding the Savings Bank's offices, particularly in the Warwick area, continued to experience growth, but more slowly. The conversion of Stewart International Airport, approximately 20 miles to the northeast of the Savings Bank's main office in Warwick, into a full-service commercial airport in 1990 gave the Savings Bank's market area an additional boost. However, the health of the economy in the New York City metropolitan area has, and will continue to have, a direct impact on the economic well-being of residents and businesses in the Savings Bank's market area. -3- Competition - - ----------- The Registrant faces substantial competition for both deposits and loans. The deregulation of the financial services industry has led to increased competition among savings banks and other financial institutions for a significant portion of the deposit and lending activity that had traditionally been the arena of savings banks and savings and loan associations. The Registrant competes for savings deposits with other savings banks, savings and loan associations, commercial banks, credit unions, money market mutual funds, insurance companies, brokerage firms and other financial institutions, many of which are substantially larger in size than the Registrant. The Registrant's competition for loans comes principally from savings banks, savings and loan associations, commercial banks, mortgage bankers, finance companies and other institutional lenders, many of whom maintain offices in the Registrant's market area. The Registrant's principal methods of competition include providing personal customer service, a variety of financial services and competitive loan and deposit pricing, as well as implementing advertising and marketing programs. While the Registrant is subject to competition from other financial institutions, some of which have much greater financial and marketing resources, the Registrant believes it benefits by its community bank orientation as well as its relatively high core deposit base. Management believes that the variety, depth and stability of the communities in which the Registrant is located support the service and lending activities conducted by the Registrant. The relative economic stability of the Registrant's lending area is reflected in the small number of mortgage delinquencies experienced by the Registrant. Lending Activities - - ------------------ LOAN PORTFOLIO COMPOSITION. The Registrant's loan portfolio consists primarily of conventional first mortgage loans secured by one- to four-family residences. At December 31, 1999, the Registrant had total gross loans outstanding of $351.7 million (before deducting the allowance for loan losses and net deferred loan fees), of which $239.5 million, or 68.1%, were conventional one- to four-family, owner-occupied residential first mortgage loans. The remainder consisted of $45.6 million of commercial business and commercial real estate loans, or 13.0% of total loans, $22.3 million in home equity loans, or 6.3% of total loans, $9.8 million in residential construction mortgage loans (net of undisbursed portion), or 2.8% of total loans, and $30.1 million in consumer loans, or 8.6% of total loans. Additionally, the Savings Bank originates Veterans Administration ("VA") guaranteed loans and Federal Housing Authority ("FHA") insured loans. For the year ended December 31, 1999, the Savings Bank originated $3.7 million of such loans. The Savings Bank is active in the origination of State of New York Mortgage Association ("SONYMA") loans, which are subject to certain customer eligibility requirements and are subsequently sold to the State of New York. For the year ended December 31, 1999, the Savings Bank originated $11.5 million in SONYMA loans. The Savings Bank continues to service these loans for such agency and, instead of a servicing fee, the Savings Bank obtains a state (franchise) income tax credit. The types of loans that the Registrant may originate are subject to federal and state laws and regulations. Interest rates charged by the Registrant on loans are affected by the demand for such -4- loans, the supply of money available for lending purposes and the rates offered by competitors. These factors are in turn affected by, among other things, economic conditions, monetary policies of the federal government, including the Board of Governors of the Federal Reserve System ("FRB"), and legislative tax policies. The following table sets forth the composition of the Registrant's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated:
AT DECEMBER 31, --------------- 1999 1998 1997 ---- ---- ---- PERCENT PERCENT PERCENT OF OF OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) MORTGAGE LOANS: Conventional one- to-four-family loans............................................ $239,522 68.10% $167,147 63.43% $114,219 62.91% Mortgage loans held for sale........................ 4,163 1.18 13,737 5.21 5,348 2.94 VA or FHA loans..................................... 213 0.06 641 0.24 554 0.31 Home equity loans................................... 22,317 6.35 18,061 6.85 15,618 8.60 Residential construction loans...................... 18,222 5.18 16,105 6.11 6,159 3.39 Undisbursed portion of construction loans............................... (8,399) (2.39) (6,304) (2.39) (2,510) (1.38) -------- ------ -------- ------ -------- ------ Total mortgage loans........................... 276,037 78.48 209,387 79.45 139,385 76.77 -------- ------ -------- ------ -------- ------ CONSUMER AND OTHER LOANS: Commercial.......................................... 45,553 12.95 35,381 13.43 28,467 15.68 Automobile.......................................... 26,994 7.67 13,788 5.23 8,125 4.47 Student............................................. 195 0.06 332 0.13 1,195 0.66 Credit card......................................... 1,196 0.34 1,296 0.49 1,402 0.77 Other consumer loans................................ 1,747 0.50 3,345 1.27 2,995 1.65 -------- ------ -------- ------ -------- ------ Total consumer and other loans................... 75,685 21.52 54,142 20.55 42,184 23.23 -------- ------ -------- ------ -------- ------ Total loans...................................... 351,722 100.00% 263,529 100.00% 181,569 100.00% ====== ====== ====== Discounts, premiums and deferred loan fees, net................................... (460) (339) (243) Allowance for loan losses........................... (1,941) (1,727) (1,372) -------- -------- -------- Total loans, net.................................... $349,321 $261,463 $179,954 ======== ======== ========
AT DECEMBER 31, -------------- 1996 1995 ---- ---- PERCENT PERCENT OF OF AMOUNT TOTAL AMOUNT TOTAL ------ ----- ------ ----- (DOLLARS IN THOUSANDS) MORTGAGE LOANS: Conventional one- to-four-family loans............................................ $74,503 56.86% $94,179 65.18% Mortgage loans held for sale........................ 2,496 1.91 1,859 1.29 VA or FHA loans..................................... 1,267 0.97 3,313 2.29 Home equity loans................................... 12,925 9.86 9,842 6.81 Residential construction loans...................... 2,791 2.13 4,056 2.80 Undisbursed portion of construction loans............................... (1,307) (1.00) (1,001) (0.69 -------- ------ -------- ------ Total mortgage loans........................... 92,675 70.73 112,248 77.68 -------- ------ -------- ------ CONSUMER AND OTHER LOANS: Commercial.......................................... 21,217 16.19 18,849 13.05 Automobile.......................................... 11,170 8.53 7,397 5.12 Student............................................. 1,205 0.92 1,638 1.13 Credit card......................................... 1,441 1.10 1,232 0.85 Other consumer loans................................ 3,311 2.53 3,128 2.17 -------- ------ -------- ------ Total consumer and other loans................... 38,344 29.27 32,244 22.32 -------- ------ -------- ------ Total loans...................................... 131,019 100.00% 144,492 100.00% ====== ====== Discounts, premiums and deferred loan fees, net................................... (157) (106) Allowance for loan losses........................... (1,183) (1,336) -------- -------- Total loans, net.................................... $129,679 $143,050 ======== ========
LOAN MATURITY. The following table shows the contractual maturity of the Registrant's loans at December 31, 1999. The table reflects the entire unpaid principal balance in the maturity period that includes the final loan payment date and, accordingly, does not give effect to periodic principal repayments or possible prepayments. Principal repayments and prepayments totaled $66.6 million, $46.7 million and $41.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. Additionally, since the Savings Bank regularly sells and securitizes residential mortgage loans as part of its mortgage banking operations, these activities have resulted in loan sales and securitizations of $14.1 million and $69.9 million, respectively, for the year ended December 31, 1999, $14.0 million and $75.4 million, respectively, for the year ended December 31, 1998, and $7.1 million and $13.8 million, respectively, for the year ended December 31, 1997. -5-
AT DECEMBER 31, 1999 -------------------- MORTGAGE LOANS -------------- HOME ADJUSTABLE EQUITY FIXED RATE RATE COMMERCIAL LINES OF CONSUMER OTHER TOTAL LOANS MORTGAGES MORTGAGES LOANS CREDIT LOANS LOANS RECEIVABLE --------- --------- ----- ------ ----- ----- ---------- (IN THOUSANDS) Amounts due: Within one year..................... $ 8,222 $ -- $ 10,732 $ -- $ 2,107 $ -- $ 21,061 --------- --------- --------- --------- --------- --------- --------- After one year: One to three years............. 314 15 7,849 -- 18,191 283 26,652 Three to five years............ 726 12 14,051 -- 10,764 -- 25,553 Five to 10 years............... 5,117 662 5,860 695 6,880 -- 19,214 Over 10 years.................. 175,078 63,574 7,061 8,941 3,392 1,196 259,242 --------- --------- --------- --------- --------- --------- --------- Total due after one year... 181,235 64,263 34,821 9,636 39,227 1,479 330,661 --------- --------- --------- --------- --------- --------- --------- Total amounts due.......... $ 189,457 $ 64,263 $ 45,553 $ 9,636 $ 41,334 $ 1,479 351,722 ========= ========= ========= ========= ========= ========= Discounts, premiums and deferred loan fees, net................. (460) Allowance for loan losses........... (1,941) ---------- Loans receivable, net............... $ 349,321 =========
The following table sets forth the dollar amounts in each loan category at December 31, 1999 that are contractually due after December 31, 2000, and whether such loans have fixed interest rates or adjustable interest rates. DUE AFTER DECEMBER 31, 2000 --------------------------- FIXED ADJUSTABLE TOTAL ----- ---------- ----- (IN THOUSANDS) Mortgage loans............... $181,235 $64,263 $245,498 Commercial loans............. 24,542 10,279 34,821 Home equity lines of credit.. -- 9,636 9,636 Consumer loans............... 39,227 -- 39,227 Other loans.................. 1,479 -- 1,479 -------- ------- -------- Total loans.................. $246,483 $84,178 $330,661 ======== ======= ======== ORIGINATION, PURCHASE, SALE AND SERVICING OF LOANS. The Savings Bank's residential lending activities are conducted through its team of commissioned loan originators, who regularly call upon realtors, builders and others in the real estate business in an effort to solicit mortgage loan applications. The loans are all self-originated, as the Savings Bank does not use mortgage brokers, with applications taken at the Savings Bank's various branch offices and loan production offices. Thereafter, the applications are processed, underwritten and prepared for closing at the Newburgh loan production office, and the data is electronically linked together during the various stages of the application process to facilitate tracking and monitoring at the Savings Bank's Warwick office. The Savings Bank originates both adjustable-rate and fixed-rate mortgage loans. Its ability to originate loans is dependent upon the relative customer demand for fixed-rate or adjustable-rate mortgage loans, which is affected by the current and expected future levels of interest rates. During the year ended December 31, 1999, the Savings Bank experienced an increase in adjustable-rate, and -6- a decrease in fixed-rate, mortgage loan originations. The Savings Bank currently holds for its portfolio most of its fixed-rate and all adjustable-rate, bi-weekly mortgage loans and any non- conforming loans it originates. Periodically, the Savings Bank considers the possible sale of its jumbo loans; however, management believes it has the ability to build relationships with jumbo mortgage customers to create cross-selling opportunities. The residential loan products currently offered by the Savings Bank include VA guaranteed and FHA insured mortgage loans, a variety of loans that conform to the underwriting standards specified by the Federal National Mortgage Association ("FNMA") ("conforming loans"), SONYMA loans and, to a much lesser extent, non-conforming loans, I.E., jumbo loans. The Savings Bank sells most of the conforming mortgage loans it originates to FNMA in exchange for FNMA mortgage-backed securities through purchase and guarantee programs sponsored by FNMA. The Savings Bank then sells such FNMA mortgage-backed securities to private investors and retains the servicing rights. In those cases in which non-conforming loans are sold to private institutional investors, servicing rights are typically released. SONYMA loans are all originated for sale back to SONYMA, with servicing retained in exchange for tax credits. During the time between the processing of a residential mortgage loan application and the final disposition or sale of such loan after it is closed, the Savings Bank is exposed to movements in the market price due to changes in market interest rates. The Savings Bank attempts to manage this risk by utilizing forward sales of mortgage-backed securities and put options on mortgage- backed securities to securities brokers and dealers, as well as cash sales to FNMA. Depending upon market conditions, interest rate expectations, economic data and other factors, the Savings Bank's Hedging Committee, comprised of various members of senior operating management, which meets daily, attempts to cover certain percentages of its pipeline and warehouse. However, there can be no assurance that the Savings Bank will be successful in its efforts to mitigate the risk of interest rate fluctuation between the time of origination and the ultimate disposition or sale of such loans. At December 31, 1999, there were no forward sale commitments. Currently, the Savings Bank services all of its one- to four-family loans, commercial business and commercial real estate, home equity and consumer loans. All FHA and VA loans are sold on a servicing-released basis, as are other selected loans sold to private institutional investors. Additionally, the Savings Bank services a large volume of conforming fixed-rate and adjustable-rate loans that it has previously securitized and kept in its securities portfolio or sold to private investors. At December 31, 1999, the Savings Bank was servicing $248.7 million of residential mortgage loans for others. For the years ended December 31, 1999, 1998 and 1997, loan servicing fees totaled $576 thousand, $409 thousand and $356 thousand, respectively. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections as required of mortgaged premises, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, ensuring the status of insurance and tax payments on behalf of the borrowers and generally administering the loans. -7- The following table sets forth the Registrant's loan originations, repayments and other portfolio activity for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) MORTGAGE LOANS (GROSS): At beginning of period............................... $191,326 $123,767 $ 79,750 Mortgage loans originated: Fixed-rate mortgages................................. 147,714 167,214 62,213 Adjustable-rate mortgages............................ 23,610 9,051 15,195 -------- -------- -------- Total mortgage loans originated.................. 171,324 176,265 77,408 Principal repayments................................. (24,977) (19,327) (12,536) Sale of loans........................................ (14,100) (13,989) (7,074) Securitizations...................................... (69,853) (75,390) (13,781) -------- -------- -------- At end of period..................................... $253,720 $191,326 $123,767 ======== ======== ======== OTHER LOANS (GROSS): At beginning of period............................... $ 72,203 $ 57,802 $ 51,269 Commercial loans originated.......................... 35,957 24,605 22,441 Consumer loans originated............................ 31,467 17,456 13,921 Commercial repayments................................ (25,775) (17,693) (15,191) Consumer repayments.................................. (15,850) (9,967) (14,638) Other loans sold..................................... -- -- -- -------- -------- -------- At end of period..................................... $ 98,002 $ 72,203 $ 57,802 ======== ======== ========
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Savings Bank offers both fixed-rate and adjustable-rate mortgage and construction loans, with maturities up to 30 years, which are secured by one- to four-family, owner-occupied residences. The majority of such loans are secured by property located in Orange County, New York; however, there are a number of loans secured by property located in Rockland and Dutchess Counties, New York, and, to a lesser extent, in Westchester, Putnam and Sullivan Counties, New York. At December 31, 1999, the Registrant's total gross loans outstanding were $351.7 million, of which $253.7 million, or 72.1%, were mortgage and construction loans secured by one- to four- family owner-occupied residences. Of the one- to four-family residential mortgage loans outstanding at that date, 74.7%, or $189.5 million, were fixed-rate loans, and 25.3%, or $64.3 million, were adjustable-rate loans. The interest rates for the majority of the Savings Bank's adjustable-rate mortgage loans are indexed to the yield on one-year U.S. Treasury securities. The Savings Bank currently offers adjustable-rate mortgage loan programs with interest rates that adjust either every one or three years. An adjustable-rate mortgage loan may carry an initial interest rate that is less than the fully-indexed rate for the loan. All adjustable-rate mortgage loans offered have lifetime interest -8- rate caps or ceilings. Generally, adjustable-rate mortgage loans pose credit risks somewhat greater than the credit risk inherent in fixed-rate loans primarily because, as interest rates rise, the underlying payments of the borrowers rise, increasing the potential for default. The Savings Bank currently has no mortgage loans that are subject to negative amortization. COMMERCIAL LENDING. As part of the Registrant's commercial lending program, the Registrant originates various types of secured and unsecured commercial business loans and lines of credit and commercial real estate and construction loans. The Registrant's commercial loan portfolio consisted of the following types of commercial loans at the dated indicated.
AT DECEMBER 31, --------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- PERCENT PERCENT PERCENT PERCENT PERCENT OF OF OF OF OF TOTAL TOTAL TOTAL TOTAL TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) COMMERCIAL LOANS BY TYPE: Non-farm and non- residential............ $23,820 6.77% $17,170 6.52% $13,278 7.31% $8,098 6.18% $ 6,616 4.58% One- to four-family...... 1,961 0.56 2,142 0.81 1,128 0.62 1,177 0.90 1,180 0.82 Multi-family............. 2,231 0.63 3,988 1.51 3,664 2.02 1,599 1.22 1,135 0.78 Farm..................... 794 0.23 996 0.38 411 0.23 324 0.25 159 0.11 Acquisition, development & construction......... 5,074 1.44 4,339 1.65 2,841 1.57 3,099 2.36 3,740 2.59 Term loans............... 338 0.10 411 0.16 444 0.24 155 0.12 44 0.03 Installment loans........ 4,488 1.28 2,435 0.92 2,037 1.12 1,610 1.23 1,714 1.19 Demand loans............. 335 0.10 853 0.32 497 0.27 608 0.46 550 0.38 Time loans............... 729 0.21 80 0.03 87 0.05 138 0.10 168 0.12 S.B.A. loans............. 205 0.06 328 0.13 533 0.29 563 0.43 604 0.42 Lines of credit.......... 4,833 1.37 2,327 0.88 2,906 1.60 3,336 2.55 2,939 2.03 Loans and draws disbursed 327 0.09 194 0.07 430 0.24 484 0.37 -- -- -- -- Non-accrual.............. 418 0.12 118 0.04 211 0.12 26 0.02 0.12 ------- ------ ------- ------- ------- ------- ------- ------- ------- ------- TOTAL.................. $45,553 12.95% $35,381 13.42% $28,467 15.68% $21,217 16.19% $18,849 13.05% ======= ====== ======= ======= ======= ======= ======= ======= ======= =======
Commercial business loans generally carry greater credit risks than residential mortgage loans because their repayment is more dependent on (i) the underlying financial condition of the borrower and/or the value of any property or the cash flow from any property securing the loan or the business being financed and (ii) general as well as local economic conditions. Mortgage loans secured by commercial real estate properties, including construction and development lending, are generally larger and involve a higher degree of risk than one- to four-family residential mortgage loans. This risk is attributable to the uncertain realization of projected income-producing cash flows, which are affected by vacancy rates, the ability to maintain rent levels against competitively-priced properties and the ability to collect rent from tenants on a timely basis. Also, in the case of construction and development lending, risk is largely dependent upon the accuracy of the initial estimate of the -9- property's value at completion of construction or development compared to the estimated cost (including interest payments) of construction and other assumptions. In addition, commercial construction loans are subject to many of the same risks as residential construction loans. COMMERCIAL BUSINESS LENDING. The Registrant also offers various types of short-term and medium-term commercial business loans on a secured and unsecured basis to borrowers located in the Registrant's market area. Borrowers in the commercial market are generally local companies engaged in retailing and construction that require traditional working capital financing with cyclical repayments coming primarily from asset conversion. These loans include time and demand loans, term loans and lines of credit. The Registrant is also an approved Small Business Administration ("SBA") lender. At December 31, 1999, the Registrant's commercial business loan portfolio amounted to $11.7 million, or 3.3% of total gross loans outstanding. The largest commercial business loan outstanding at December 31, 1999 was a $500 thousand loan to a church in Goshen, New York, In addition, the Savings Bank has committed a line of credit of $2.5 million to the Warwick Valley Telephone Company. At December 31, 1999, $900 thousand of such line was outstanding. The Registrant's lines of credit are typically established for one year and are subject to renewal upon satisfactory review of the borrower's financial statements and credit history. Secured short-term commercial business loans are usually collateralized by real estate and are generally guaranteed by a principal of the borrower. Interest on these loans is usually payable monthly at fixed rates or rates that fluctuate based on a spread above the prime rate. The Registrant offers term loans with terms generally not exceeding five years. Typically, term loans have floating interest rates based on a spread above the prime rate. The Registrant also offers business loans on a revolving basis, whereby the borrower pays interest only. Interest on such loans fluctuates based on the prime rate. Normally these loans require periodic interest payments during the loan term, with full repayment of principal and interest at maturity. The Registrant offers business and merchant credit cards to its corporate customers; however, these services are provided through third party vendors. The Registrant bears the credit risk in the case of business credit cards, but credit risk is borne by the third party on merchant credit cards, with the Registrant receiving a fee in the latter case. In approving a commercial business loan the Registrant will consider the borrower's sources of cash flow to repay the loan, a secondary source of repayment and the borrower's credit standing. COMMERCIAL REAL ESTATE AND CONSTRUCTION LENDING. The Registrant originates commercial real estate mortgage loans that are generally secured by a combination of residential property for development and retail facilities and properties used for business purposes, such as small office buildings and apartment buildings located in the Registrant's market area. Loans are also made to develop land and for land acquisition. The Registrant's loan policy and underwriting procedures provide that commercial real estate loans may be made in amounts up to the lesser of (i) 80% of the lesser of the appraised value or purchase price of the property, in the case of improved, existing commercial, investment property, (ii) 75% of the lesser of the appraised value or purchase price of the property, in the case of commercial, multi-family and non-residential construction property, (iii) 70% of the lesser of the appraised value or purchase price of the property, in the case of commercial land development, generally for subdivision or industrial park land development property and (iv) 60% of the lesser of the appraised value or purchase price of the property in the case of raw land. In addition to restrictions on loan to value, the Registrant's underwriting procedures provide that -10- commercial real estate loans may be made in amounts up to the lesser of (i) $2.5 million or (ii) the Registrant's current loans-to-one borrower limit. Regarding (iii) and (iv), the Registrant usually engages in this type of lending only with experienced local developers operating in the Registrant's primary market area. Such loans are typically offered for the construction of properties that are pre- sold or for which permanent financing has been secured. At December 31, 1999, the Registrant had $5.7 million in a variety of acquisition, development and construction ("ADC") loans in its commercial lending area. The Registrant's policy is not to make construction loans for purposes of speculation, so that the borrower must have secured permanent financing commitments from generally recognized lenders for an amount greater than the amount of the loan. In most cases, the Registrant itself provides the permanent financing. While the number and volume of this type of specialized lending is presently limited, it should be noted that the Registrant intends to continue to emphasize its commercial real estate, including ADC, loan activity as it expands its mortgage origination operations into New Jersey through Towne Center Mortgage. The largest commercial real estate loan in the Registrant's portfolio as of December 31, 1999 was a $3.1 million loan secured by a medical office building used primarily as a radiation, oncology and cancer research center in Goshen, New York. The Registrant's commercial mortgage loans are generally prime-rate based and may be made with terms up to ten years, generally with a five-year or ten-year balloon maturity and a 30-year amortization schedule. In reaching its decision as to whether to make a commercial real estate loan, the Registrant considers the qualifications of the borrower as well as the underlying property. Some of the factors considered are: the net operating income of the mortgaged premises before debt service and depreciation, the debt service ratio (the ratio of the property's net cash flow to debt service requirements), which must be a minimum of 1.25, the ratio of loan amount to appraised value and the credit worthiness of the borrower. RESIDENTIAL CONSTRUCTION LENDING. The Savings Bank originates loans for the acquisition and development of property to individuals in its market area. The Savings Bank's residential construction loans primarily have been made to finance the construction of one- to four-family, owner-occupied residential properties. The Savings Bank offers construction to permanent financing loans with one or two closings, and will not make residential construction loans unless the borrower has been approved for permanent financing. The interest rate charged during the construction phase of the loan is based on the 30-year fixed mortgage rate. The Savings Bank's policies provide that construction loans may be made in amounts up to 95% of the appraised value of the completed property. At December 31, 1999, the Savings Bank had $9.8 million of residential construction loans (net of undisbursed portion), which amounted to 2.8% of the Registrant's gross loans outstanding. Construction lending generally involves additional risks to the lender as compared with residential mortgage lending. These risks are attributable to the fact that loan funds are advanced upon the security of the project under construction, predicated on the present value of the property and the anticipated future value of the property upon completion of construction or development. Moreover, because of the uncertainties inherent in delays resulting from labor problems, materials shortages, weather conditions and other contingencies, it is relatively difficult to evaluate the total funds required to complete a project and to establish the loan-to-value ratio. If the Savings Bank's -11- initial estimate of the property's value at completion is inaccurate, the Savings Bank may be confronted with a project that, when completed, has an insufficient value to assure full repayment. HOME EQUITY LENDING. The Registrant offers fixed-rate, fixed-term home equity loans, called the Good Neighbor Home Loan, and adjustable-rate home equity lines of credit in its market area. Both the home equity loans and lines of credit are offered in amounts up to 80% of the appraised value of the property (reduced by any existing first mortgage) with a maximum loan amount of up to $100 thousand. The fixed-rate, fixed-term Good Neighbor Home Loan is offered with terms of up to 15 years. The home equity line of credit is offered for terms up to 20 years, with the first five years being offered on a revolving basis, requiring payments of interest only; thereafter, the line converts to an amortizing loan. As of December 31, 1999, $22.3 million, or 6.3%, of the Registrant's gross loans were home equity loans. CONSUMER LENDING. The Registrant offers various types of secured and unsecured consumer loans, including automobile loans, home improvement loans, personal loans, student loans and credit cards (VISA). The Registrant's consumer loans have original maturities of not more than five years. Interest rates charged on such loans are set at competitive rates, taking into consideration the type and term of the loan. Consumer loan applications are reviewed and approved in conformance with the Registrant's Board-approved lending policy. At December 31, 1999, the Registrant's consumer loan portfolio totaled $30.1 million, or 8.6% of the total gross loans outstanding. LOAN APPROVAL PROCEDURES AND AUTHORITY. The Savings Bank's Board of Directors establishes the lending policies and loan approval limits of the Savings Bank. Conforming residential mortgage loans are approved in accordance with FNMA guidelines by the Savings Bank's underwriting group. Certain conforming loans and all non-conforming loans are approved by either the Savings Bank's Executive Director or President. The Savings Bank's Board of Directors has established the following lending authority for commercial lending, including commercial real estate lending: (i) various officers have limited individual authority up to $50 thousand; (ii) certain officers have joint authority up to $250 thousand; (iii) certain officers have joint authority up to $500 thousand; and (iv) the Savings Bank's Commercial Loan Committee has authority to approve loans of up to $1.0 million. Loans in excess of $1 million must be approved by the full Board of Directors of the Savings Bank, which meets on a bi-weekly basis. The approval of consumer loans generally requires the dual authorization of two lending officers for loans over certain amounts ($5 thousand for unsecured loans and $25 thousand for secured loans). The foregoing lending limits are reviewed and reaffirmed annually by the Savings Bank's Board of Directors. The Commercial Bank's Board of Directors has established the following lending authority for commercial lending, including commercial real estate lending: (i) certain officers have joint authority up to $250 thousand; and (ii) certain officers have joint authority up to $500 thousand. Loans in excess of $500 thousand must be approved by the full Board of Directors of the Commercial Bank, which meets on a bi-weekly basis. The approval of consumer loans generally requires the dual authorization of two lending officers for loans over certain amounts ($10 thousand for unsecured loans and $25 thousand for secured loans). The foregoing lending limits are reviewed and reaffirmed annually by the Commercial Bank's Board of Directors. -12- For all loans originated by the Registrant, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered and certain other information is verified by an independent credit agency, and, if necessary, additional financial information is required to be submitted by the borrower. An appraisal of any real estate intended to secure the proposed loan is required, which currently is performed by an independent appraiser designated and approved by the Board of Directors of the Savings Bank or the Commercial Bank, as applicable. The Board of Directors annually approves the independent appraisers used by the Registrant and approves the Registrant's appraisal policy. It is the Registrant's policy to obtain title and hazard insurance on all real estate loans. In connection with a borrower's request for a renewal of a multi-family or commercial mortgage loan with a balloon maturity, the Registrant evaluates both the borrower's ability to service the renewed loan applying an interest rate that reflects prevailing market conditions, as well as the value of the underlying collateral property. The reevaluation of the property typically requires a new appraisal, depending upon the loan amount and other factors. It is the Registrant's policy to note all exceptions to policy in the respective credit files and report such exceptions to the original decision-making body (I.E., the Commercial Loan Committee, Executive Committee or Board of Directors) prior to closing if a condition of the original approval is not met. Asset Quality - - ------------- NON-PERFORMING LOANS. The Registrant performs a monthly review of delinquent loans. The actions taken by the Registrant with respect to delinquencies vary depending on the nature of the loan and period of delinquency. The Savings Bank's policies on residential mortgage loans provide that delinquent mortgage loans be reviewed and that a late charge notice be mailed no later than the 15th day of delinquency, with the delinquency charge assessed on the 16th day. The Savings Bank's collection policies on residential mortgage loans essentially mirror those shown in the FNMA servicing agreements. On other loans, telephone contact and various delinquency notices at different intervals are the methods used to collect past due loans. It is the Registrant's general policy to discontinue accruing interest on all loans when management has determined that the borrower will be unable to meet contractual obligations or when unsecured interest or principal payments are 90 days past due. Generally, when residential mortgage or secured consumer loans are delinquent 90 days, they are classified as non-accrual. When a loan is classified as non-accrual, the recognition of interest income ceases. Interest previously accrued and remaining unpaid is reversed against income. Cash payments received are applied to principal, and interest income is not recognized unless management determines that the financial condition and payment record of the borrower warrant the recognition of income. If a foreclosure action is commenced and the loan is not brought current, paid in full or an acceptable workout arrangement is not agreed upon before the foreclosure sale, the real property securing the loan is generally sold at foreclosure. Property acquired by the Savings Bank as a result of foreclosure on a mortgage loan is classified as "real estate owned" and is recorded at the lower of the unpaid balance or fair value less costs to sell at the date of acquisition and thereafter. Upon foreclosure, it is the Savings Bank's policy to generally require an appraisal of the property and, thereafter, appraise the property on an as-needed basis. -13- The following table sets forth information regarding non-accrual loans, other past due loans and other real estate owned ("OREO'). There were no troubled debt restructurings within the meaning of Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings," at any of the dates presented below.
AT DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Non-accrual mortgage loans delinquent more than 90 days...................... $ 693 $ 631 $ 1,165 $ 1,247 $ 531 Non-accrual other loans delinquent more than 90 days...................... 521 88 246 28 3 -------- -------- -------- -------- -------- Total non-accrual loans.................. 1,214 719 1,411 1,275 534 Total 90 days or more delinquent and still accruing interest............ 822 1,362 114 383 424 -------- -------- -------- -------- -------- Total non-performing loans............... 2,036 2,081 1,525 1,658 958 Total foreclosed real estate, net of related allowance for losses............. 415 371 562 433 573 -------- -------- -------- -------- -------- Total non-performing assets.............. $ 2,451 $ 2,453 $ 2,087 $ 2,091 $ 1,531 ======== ======== ======== ======== ======== Non-performing loans to total loans...... 0.58% 0.81% 0.84% 1.28% 0.66% Total non-performing assets to total assets................................... 0.41% 0.55% 0.61% 0.73% 0.59%
Interest income that would have been recorded if the non-accrual mortgage loans had been performing in accordance with their original terms aggregated approximately $72,000, $90,000 and $129,700 for the year ended December 31, 1999, 1998 and 1997, respectively. OTHER REAL ESTATE OWNED. At December 31, 1999, the Savings Bank's OREO, net, which consisted of seven single-family residential properties, totaled $415 thousand and was held directly by the Savings Bank. CLASSIFIED ASSETS. Federal regulations and the Registrant's Internal Loan Review and Grading System, which is a part of the Registrant's loan policy, require that the Registrant utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Savings Bank limits its loan review procedure to the higher-risk commercial business and commercial real estate loans, commercial loans greater than $25,000 and jumbo residential mortgage loans. The Commercial Bank reviews all commercial loans in excess of $250,000 and are subject to review and grading on at least an annual basis, and more frequently if conditions dictate. At each regularly scheduled Board of Directors meeting, a watch list is presented, showing all loans listed as "Special Mention," "Substandard," "Doubtful" and "Loss." An asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets -14- classified as Loss are those considered uncollectible and viewed as non-bankable assets, worthy of charge-off. Assets which do not currently expose the Registrant to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses which may or may not be out of the control of management, are deemed to be "Special Mention." When an insured institution classifies one or more assets, or portions thereof, as Substandard or Doubtful, it is required to establish a general valuation allowance for loan losses in an amount deemed prudent by management. General valuation allowances, which is a regulatory term, represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to specific problem assets. When an insured institution classifies one or more assets, or portions thereof, as Loss, it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge-off such amount. The Registrant's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the FDIC, the Banking Department of the State of New York ("NYSBD") and the New Jersey Department of Banking and Insurance ("NJBD"), which can order the establishment of additional general or specific loss allowances. The FDIC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that (i) institutions have effective systems and controls to identify, monitor and address asset quality problems; (ii) management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and (iii) management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Management believes it has established an adequate allowance for possible loan and lease losses and analyzes its process regularly, with modifications made if needed, and reports those results four times per year at the Board of Directors meetings. However, there can be no assurance that the regulators, in reviewing the Registrant's loan portfolio, will not request the Registrant to materially increase its allowance for loan and lease losses at that time. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary. At December 31, 1999, the Registrant had $359 thousand of assets classified as Substandard and $1.3 million of assets classified as Special Mention. There were no assets classified as Doubtful or Loss as of December 31, 1999. The $359 thousand of loans classified as Substandard were also impaired under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition Disclosures," which was adopted in fiscal 1995. SFAS No. 114 defines an impaired loan as a loan for which it is probable, based on current information, that the lender will not collect all amounts due under the contractual terms of the loan agreement. -15- The following table sets forth delinquencies in the Registrant's loan portfolio at the dates indicated:
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 -------------------------------------------- ------------------------------------------- 60-89 DAYS 90 DAYS MORE 60-89 DAYS 90 DAYS OR MORE -------------------- -------------------- -------------------- --------------------- PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) One- to four-family........... 3 $ 373 8 $ 693 11 $1,263 12 $ 631 Multi-family.................. -- -- -- -- -- -- -- -- Commercial loans.............. 4 594 9 1,240 4 279 6 1,405 Home equity lines of credit... -- -- 1 36 -- -- 1 16 Other loans................... 26 78 16 67 16 48 8 30 ------- ------ ------- ------ --------- -------- ------- ------ Total loans.......... 33 $1,045 34 $2,036 31 $1,590 27 $2,082 ======= ====== ======= ====== ========= ====== ======= ======
AT DECEMBER 31, 1997 ------------------------------------------- 60-89 DAYS 90 DAYS OR MORE --------------------- -------------------- PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS -------- -------- -------- -------- (DOLLARS IN THOUSANDS) One- to four-family........... 8 $ 624 19 $1,165 Multi-family.................. -- -- -- -- Commercial loans.............. 5 627 4 325 Home equity lines of credit... -- -- -- -- Other loans................... 12 15 7 35 ------- ------ -------- --------- Total loans.......... 25 $1,267 30 $1,525 ======= ====== ======== ========= ALLOWANCE FOR LOAN AND LEASE LOSSES. The allowance for loan and lease losses is based upon management's periodic evaluation of the loan portfolio under current economic conditions, considering factors such as asset classifications, the Registrant's past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay and the estimated value of the underlying collateral. The allowance for loan and lease losses is maintained at an amount management considers adequate to cover loan and lease losses that are deemed probable and estimable. At December 31, 1999, the Registrant's allowance for loan and lease losses was $1.9 million, or 0.55% of total loans, as compared to $1.7 million, or 0.67%, at December 31, 1998 and $1.4 million, or 0.76%, at December 31, 1997. The Registrant had non- performing loans of $2.0 million, $2.1 million and $1.5 million at December 31, 1999, 1998 and 1997, respectively. The Registrant will continue to monitor and modify its allowance for loan losses as conditions dictate. Various regulatory agencies, as an integral part of their examination process, periodically review the Registrant's allowance for loan losses. These agencies may require the Registrant to establish additional valuation allowances, based on their judgments of the information available at the time of the examination. -16- The following table sets forth activity in the Registrant's allowance for loan losses for the periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) ALLOWANCE FOR LOAN LOSSES: Balance at beginning of period.... $1,727 $1,372 $ 1,184 $ 1,336 $ 1,095 CHARGE-OFFS: Real estate mortgage loans........ (157) (30) (160) (128) (14) Commercial loans.................. (161) (56) (1) -- -- Consumer loans.................... (54) (89) (118) (97) (106) ------ ------ ------ ------ ------ Total charge-offs........ (372) (175) (279) (225) (120) RECOVERIES: Real estate mortgage loans........ 23 -- 1 9 27 Commercial loans................. 42 9 -- -- 76 Consumer loans.................... 21 21 12 4 18 ------ ------ ------ ------ ------ Total recoveries......... 86 20 13 13 121 Provision for loan losses......... 500 500 454 60 240 ------ ------ ------ ------ ------ Balance at end of period.......... $1,941 $1,727 $1,372 $1,184 $1,336 ====== ====== ====== ====== ====== Ratio of net charge-offs during the period to average loans outstanding...................... 0.10% 0.07% 0.17% 0.17% 0.14% Ratio of allowance for loan losses to total loans at end of period........................... 0.55% 0.67% 0.76% 0.90% 0.79% Ratio of allowance for loan losses to non-performing loans... 95.33% 82.95% 89.79% 71.35% 118.58%
-17- The following table sets forth the Registrant's allowance for loan losses allocated by loan category, the percent of the allocated allowances to the total allowance and the percent of loans in each category to total loans at the dates indicated.
AT DECEMBER 31, --------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------------- ---------------- ---------------- ---------------- --------------- % OF % OF % OF % OF % OF LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Allowance for mortgage loan loss............... $ 379 78.48% $ 373 79.46% $ 288 76.77% $ 203 70.73% $ 497 77.68% Allowance for consumer loan loss............... 461 8.57 375 7.12 373 7.55 399 13.08 237 9.27 Allowance for commercial loan loss............... 1,101 12.95 979 13.42 711 15.68 582 16.19 602 13.05 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total allowances for loan loss...... $1,941 100.00% $1,727 100.00% $1,372 100.00% $1,184 100.00% $1,336 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Environmental Issues - - -------------------- The Registrant encounters certain environmental risks in its lending activities. Under federal and state environmental laws, lenders may become liable for costs of cleaning up hazardous materials found on properties securing their loans. In addition, the existence of hazardous materials may make it unattractive for a lender to foreclose on such properties. Although environmental risks are usually associated with loans secured by commercial real estate, risks also may be substantial for residential real estate loans if environmental contamination makes security property unsuitable for use. As of December 31, 1999, the Registrant was not aware of any environmental issues that would subject the Registrant to material liability. No assurance, however, can be given that the values of properties securing loans in the Registrant's portfolio will not be adversely affected by unforseen environmental contamination. Investment Activities - - --------------------- INVESTMENT POLICIES. The investment policy of the Savings Bank, which is established by its Board of Directors, is contained in the Savings Bank's Liquidity and Funds Management Policy. It is based upon asset/liability management goals and emphasizes high credit quality and diversified investments while seeking to optimize net interest income within acceptable limits of safety and liquidity. The Savings Bank also considers the investment advice it receives from some of its outside investment advisers. Recently, the Savings Bank has engaged in leveraging activities to enhance returns on equity. The policy is designed to provide and maintain liquidity to meet day-to-day, cyclical and long-term changes in the Savings Bank's asset/liability structure, and to provide needed flexibility to meet loan demand. The Commercial Bank's investment policy is similar to that of the Savings Bank, except that it does not engage in hedging activities and is not permitted to invest in mutual funds. Approximately 98% of the Registrant's debt security portfolio at December 31, 1999 is classified as available-for-sale. -18- The investment policy permits investment in U.S. government obligations, securities of various government-sponsored agencies, including mortgage-backed securities issued/guaranteed by FNMA, the Federal Home Loan Mortgage Corporation ("FHLMC") and the Government National Mortgage Association ("GNMA"), certain types of equity securities (such as institutional mutual funds), certificates of deposit of insured banks, federal funds and investment grade corporate debt securities and commercial paper. The investment policy prohibits investment in certain types of mortgage derivative securities that management considers to be high risk. The Registrant generally purchases only short- and medium-term classes of CMOs guaranteed by FNMA or FHLMC. At December 31, 1999, the Registrant held no securities issued by any one entity with a total carrying value in excess of 10% of the Registrant's equity at that date, except for obligations of the U.S. government and government-sponsored agencies and certain mortgage-backed securities, which are fully collateralized by mortgages held by single purpose entities and guaranteed by government-sponsored agencies. MORTGAGE-BACKED SECURITIES. The Registrant invests in mortgage-backed securities and uses such investments to complement its mortgage lending activities. At December 31, 1999, the amortized cost of mortgage-backed securities totaled $93.5 million, or 15.7% of total assets. The market value of all mortgage-backed securities totaled $89.6 million at December 31, 1999. All of the Registrant's mortgage-backed securities are included in its available-for-sale portfolio. Additionally, the Registrant's securities portfolio includes CMOs, with an amortized cost of $16.5 million and a market value of $15.6 million at December 31, 1999. A CMO is a special type of debt security in which the stream of principal and interest payments on the underlying mortgages or mortgage-backed securities is used to create classes with different maturities and, in some cases, amortization schedules as well as a residual interest, with each class possessing different risk characteristics. However, management regularly monitors the risks inherent in its CMOs and believes these securities may represent attractive alternatives relative to other investments due to the wide variety of maturity, repayment and interest rate options available. At December 31, 1999, all securities in the Registrant's mortgage-backed securities portfolio were directly or indirectly insured or guaranteed by GNMA, FNMA or FHLMC. The Registrant's mortgage-backed securities portfolio had a weighted average yield of 7.13% at December 31, 1999. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees or credit enhancements that reduce credit risk. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize borrowings of the Registrant. In general, mortgage-backed securities issued or guaranteed by GNMA, FNMA and FHLMC are weighted at no more than 20% for risk-based capital purposes, compared to the 50% risk weighting assigned to most non-securitized residential mortgage loans. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors, such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed and value of such -19- securities. In contrast to mortgage-backed pass-through securities in which cash flow is received (and, hence, prepayment risk is shared) pro rata by all securities holders, the cash flows from the mortgages or mortgage-backed securities underlying CMOs are segmented and paid in accordance with a pre-determined priority to investors holding various tranches of such securities or obligations. A particular tranche of a CMO may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. It is the Registrant's strategy to purchase tranches of CMOs that are categorized as "planned amortization classes," "targeted amortization classes" or "very accurately defined maturities" and are intended to produce stable cash flows in different interest rate environments. The following table sets forth activity in the Registrant's securities portfolio for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) BEGINNING BALANCE............................................ $155,490 $127,563 $138,410 -------- -------- -------- Debt securities purchased-- held-to-maturity................. 1,393 5,536 560 Debt securities purchased-- available-for-sale............... 48,340 39,179 25,464 Equity securities purchased-- available-for-sale............. 1,078 12,923 5,440 Mortgage-backed securities purchased-- held-to-maturity...... -- -- -- Mortgage-backed securities purchased-- available-for-sale.... 10,192 39,772 15,651 Mortgage-backed securities formed by securitizing originated mortgage loans........................... 69,131 70,627 13,608 LESS: Sale of debt securities-- available-for-sale................. -- 6,568 15,020 Sale of equity securities-- available-for-sale............... 10,979 1,782 4,362 Sale of mortgage-backed securities available-for-sale........ 3,732 11,237 13,433 Sale of mortgage-backed securities formed by securitizing originated mortgage loans-- trading................. 26,969 70,933 20,493 Principal repayments on mortgage-backed securities and debt securities................................. 20,722 25,479 11,759 Maturities and called debt securities........................ 24,000 24,888 7,800 Accretion of discount/amortization of (premium).............. 1,533 627 19 Change in gross unrealized gains (losses) on available-for-sale securities.......................................... (14,265) 150 1,278 -------- -------- -------- ENDING BALANCE............................................... $186,490 $155,490 $127,563 ======== ======== ========
-20- The following table sets forth the amortized cost and market value of the Registrant's securities by accounting classification category and by type of security, at the dates indicated:
AT DECEMBER 31, ------------------------------------------------------------------ 1999 1998 1997 --------------------- ------------------- ------------------- AMORITZED MARKET AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE COST VALUE ---- ----- ---- ----- ---- ----- (IN THOUSANDS) Debt securities held-to-maturity: U.S. Government obligations......... $ 645 $ 644 $ 895 $ 899 $ 722 $ 722 Agency securities................... 700 693 5,000 4,962 4,000 3,994 Municipal bonds..................... 73 73 104 106 666 668 Other debt obligations.............. -- -- -- -- 17,954 17,876 -------- -------- -------- -------- -------- ------- Total debt securities held-to-maturity................... 1 ,418 1,410 5,999 5,967 23,342 23,260 -------- -------- -------- -------- -------- ------- Debt securities available-for-sale: U.S. Government obligations......... 2,016 2,053 3,023 3,165 4,062 4,189 Agency securities................... 57,328 52,224 38,430 38,694 21,503 21,868 Municipal bonds..................... 4,963 4,750 104 106 -- -- Other debt obligations.............. 14,181 12,896 8,045 82,300 1,874 1,955 -------- -------- -------- -------- -------- ------- Total debt securities available-for-sale................. 78,488 71,923 49,498 50,089 27,439 28,012 -------- -------- -------- -------- -------- ------- Equity securities available-for-sale: Preferred stock..................... 1,112 951 1,112 1,120 102 105 Common stock........................ 2,851 2,167 2,275 1,941 -- -- Mutual funds........................ 3,973 4,848 14,449 16,232 6,594 7,223 -------- -------- -------- -------- -------- ------- Total equity securities available-for-sale................. 7,936 7,966 17,836 19,293 6,696 7,328 -------- -------- -------- -------- -------- ------- Total debt and equity securities......................... 87,842 81,299 73,333 75,349 57,477 58,600 -------- -------- -------- -------- -------- ------- Mortgage-backed securities available-for-sale: FHLMC............................... 1,903 1,888 7,018 7,145 13,434 13,637 GNMA................................ 33,611 32,097 33,849 33,824 29,110 29,512 FNMA................................ 58,054 55,590 20,436 21,036 24,819 25,732 CMOs................................ 16,466 15,608 17,976 18,104 -- -- -------- -------- -------- -------- -------- ------- Total mortgage-backed securities available-for-sale............. 110,034 105,183 79,279 80,109 67,363 68,881 -------- -------- -------- -------- -------- ------- Total mortgage-backed securities..................... 110,034 105,183 79,279 80,109 67,363 68,881 -------- -------- -------- -------- -------- ------- Net unrealized (losses) gains on trading securities.............................. -- -- -- Net unrealized (losses) gains on available-for-sale and trading securities.............................. (11,386) 2,878 2,723 -------- -------- -------- Total securities............... $186,490 $186,482 $155,490 $155,458 $127,563 $127,481 ======== ======== ======== ======== ======== ========
-21- The following table sets forth the composition of the Registrant's securities portfolio at the dates indicated.
AT DECEMBER 31, ------------------------------------------------------------------- 1999 1998 1997 -------------------- --------------------- -------------------- CARRYING PERCENT OF CARRYING PERCENT OF CARRYING PERCENT OF VALUE TOTAL VALUE TOTAL VALUE TOTAL ----- ----- ----- ----- ----- ----- (DOLLARS IN THOUSANDS) Debt securities: U.S. Government obligations. $ 2,698 1.45% $ 4,060 2.61% $ 4,911 3.85% Agency securities........... 52,924 28.38 43,694 28.10 25,868 20.28 Municipal bonds............. 4,823 2.59 104 0.07 666 0.52 Other debt obligations...... 12,896 6.91 8,230 5.29 19,909 15.61 -------- ------ -------- ------ -------- ------ Total debt securities... 73,341 39.33 56,088 36.07 51,354 40.26 -------- ------ -------- ------ -------- ------ Equity securities: Preferred stock............. 951 0.51 1,120 0.72 105 0.08 Common stock................ 2,167 1.16 1,941 1.25 -- -- Mutual funds................ 4,848 2.60 16,232 10.44 7,223 5.66 -------- ------ -------- ------ -------- ------ Total equity securities 7,966 4.27 19,293 12.41 7,328 5.74 -------- ------ -------- ------ -------- ------ Mortgage-backed securities....... FHLMC....................... 1,888 1.01 7,145 4.60 13,637 10.69 GNMA........................ 32,097 17.21 33,824 21.75 29,512 23.14 FNMA........................ 55,590 29.81 21,036 13.53 25,732 20.17 CMOs........................ 15,608 8.37 18,104 11.64 -- -- -------- ------ -------- ------ -------- ------ Total mortgage-backed securities.............. 105,183 56.40 80,109 51.52 68,881 54.00 -------- ------ -------- ------ -------- ------ Total securities........ $186,490 100.00% $155,490 100.00% $127,563 100.00% ======= ====== ======== ====== ======== ====== Debt and equity securities available-for-sale.......... $79,889 42.84% $69,382 44.62% $35,340 27.70% Debt and equity securities held-to-maturity............ 1,418 0.76 5,999 3.86 23,342 18.30 -------- ------ -------- ------ -------- ------ Total debt and equity securities.................. 81,307 43.60 75,381 48.48 58,682 46.00 -------- ------ -------- ------ -------- ------ Mortgage-backed securities available-for-sale.......... 105,183 56.40 80,109 51.52 68,881 54.00 -------- ------ -------- ------ -------- ------ Total mortgage-backed securities.............. 105,183 56.40 80,109 51.52 68,881 54.00 -------- ------ -------- ------ -------- ------ Total securities........ $186,490 100.00% $155,490 100.00% $127,563 100.00% ======== ====== ======== ====== ======== ======
-22- The following table sets forth certain information regarding the carrying value and weighted average yield of the Registrant's securities at December 31, 1999, by remaining period to contractual maturity. Actual maturities may differ from contractual maturities because certain security issuers may have the right to call or prepay their obligations.
AT DECEMBER 31, 1999 ----------------------------------------------------------------------------------------------------- MORE THAN ONE YEAR MORE THAN FIVE YEARS MORE THAN ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS TEN YEARS TOTAL ---------------- ------------- ------------ --------- ----- WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (DOLLARS IN THOUSANDS) Held-to-maturity: Municipal bonds............ $ -- --% $ -- --% $ -- --% $ 73 5.37% $ 73 5.37% U.S. Government obligations 645 4.70 -- -- -- -- -- -- 645 4.70 Agency securities.......... -- -- 700 5.82 -- -- -- -- 700 5.82 ---- ------ ------ -------- -------- Total held-to-maturity 645 4.70 700 5.82 -- -- 73 5.37 1,418 5.29 ---- ------ ------ -------- -------- Available-for-sale: Mortgage backed securities: Variable Rate: FHLMC................. -- -- -- -- -- -- -- -- -- -- GNMA.................. -- -- -- -- -- -- 404 6.57 404 6.57 FNMA.................. -- -- -- -- -- -- 739 7.11 739 7.11 Fixed Rate: FHLMC................. -- -- 1 9.48 299 7.30 1,588 7.44 1,888 7.42 GNMA.................. -- -- 1 8.00 30 8.00 31,662 7.54 31,693 7.54 FNMA.................. -- -- -- -- 453 8.29 54,399 6.90 54,852 6.91 CMOs.................. -- -- -- -- -- -- 15,608 7.04 15,608 7.04 ---- ------ ------ -------- -------- Total mortgage-backed securities......... -- -- 2 8.74 782 7.90 104,400 7.12 105,184 7.13 ---- ------ ------ -------- -------- Debt securities: Municipal bonds.......... -- -- -- -- -- -- 4,750 8.11 4,750 8.11 U.S. Government obligations............. -- -- 2,053 7.30 -- -- -- -- 2,053 7.30 Agency securities........ -- -- -- -- 4,950 8.23 47,273 7.58 52,223 7.64 Other debt obligations... -- -- 752 7.04 -- -- 12,143 8.35 12,895 8.27 ---- ------ ------ -------- -------- Total debt securities. -- -- 2,805 7.23 4,950 8.23 64,166 7.76 71,921 7.78 ---- ------ ------ -------- -------- Equity Securities: Preferred stock.......... -- -- -- -- -- -- 951 7.18 951 7.18 Common stock ............ -- -- -- -- -- -- 2,167 1.11 2,167 1.11 Mutual funds............. -- -- -- -- -- -- 4,848 10.51 4,848 10.51 ---- ------ ------ -------- -------- Total equity securities........... -- -- -- -- -- -- 7,966 7.56 7,966 7.56 ---- ------ ------ -------- -------- Total available-for- sale................. -- -- 2,807 7.23 5,732 8.19 176,532 7.38 185,071 7.40 ---- ------ ------ -------- -------- TOTAL SECURITIES...... $645 4.70 $3,507 6.95 $5,732 8.19 $176,605 7.38 $186,489 7.38 ==== ====== ====== ======== ========
Sources of Funds - - ---------------- GENERAL. Deposits, borrowings, loan and security repayments and prepayments, proceeds from sales of securities and cash flows generated from operations are the primary sources of the -23- Registrant's funds for use in lending, investing and for other general purposes. Management of the Savings Bank intends to increase its deposit base through competitive pricing but continually evaluates wholesale funding through Federal Home Loan Bank of New York ("FHLBNY") advances and other sources, depending upon market conditions. DEPOSITS. The Registrant offers a variety of deposit accounts with a range of interest rates and terms. The Registrant's deposits consist of regular (passbook) savings accounts, statement savings accounts, checking accounts, NOW accounts, basic banking accounts, money market accounts and certificates of deposit. The Registrant also offers certificates of deposit with maturities of up to 60 months. At December 31, 1999, the Registrant's core deposits, which the Registrant considers to consist of checking accounts, NOW accounts, money market accounts, regular savings accounts and statement savings accounts, constituted 69.9% of total deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Registrant's deposits are obtained predominantly from the areas in proximity to its office locations. The Registrant relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Registrant's ability to attract and retain deposits. Certificate accounts in excess of $100 thousand are not actively solicited by the Registrant, nor does the Registrant use brokers to obtain deposits. The following table presents the deposit activity of the Registrant for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 ---- ---- ---- (IN THOUSANDS) Deposits ................................... $1,353,829 $1,304,048 $953,077 Withdrawals................................. (1,325,253) (1,277,839) (964,120) ---------- ---------- -------- (Withdrawals) in excess of deposits......... 28,576 26,209 (11,043) Interest credited on deposits............... 7,611 7,164 7,335 ---------- ---------- -------- Net increase (decrease) in deposits......... $ 36,187 $ 33,373 $ 3,708 ========== ========== ========
At December 31, 1999 the Registrant had $11.8 million in certificates of deposit accounts in amounts of $100 thousand or more, maturing as follows: WEIGHTED AMOUNT AVERAGE RATE ------ ------------ (DOLLARS IN THOUSANDS) Maturity Period: Three months or less............ $ 2,735 4.47% Over 3 through 6 months......... 2,140 4.86 Over 6 through 12 months........ 3,785 5.89 Over 12 months.................. 3,186 5.93 -------- --------- Total.................. $ 11,846 5.39% ======== ========= -24- The following table sets forth the distribution of the Registrant's deposit accounts and the related weighted average interest rates for the periods indicated.
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------------- 1999 1998 1997 --------------------------- ------------------------------ ----------------------------- WEIGHTED WEIGHTED WEIGHTED PERCENT OF AVERAGE PERCENT OF AVERAGE PERCENT OF AVERAGE AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE ------- -------- ---- ------- -------- ---- ------- -------- ---- (DOLLARS IN THOUSANDS) Checking accounts........... $ 24,575 9.78% -- $ 20,277 9.21% -- $ 18,936 8.79% -- -------- ------ ---- -------- ------ ---- -------- ------ ---- Passbook accounts........... 85,379 33.97 2.64% 79,404 36.08 2.93% 78,017 36.22 2.96% NOW accounts................ 11,767 4.68 2.03 8,500 3.86 2.23 7,091 3.29 2.23 Interest-on-checking accounts.................... 10,909 4.34 0.99 8,772 3.99 0.99 7,335 3.41 0.98 -------- ------ -------- ------ -------- ------ Total passbook, NOW and interest-on- checking accounts........... 108,054 42.99 2.41 96,676 43.93 2.69 92,444 42.92 2.75 -------- ------ -------- ------ -------- ------ Money market accounts....... 43,002 17.11 3.89 29,986 13.63 3.60 26,200 12.16 3.28 -------- ------ -------- ------ -------- ------ Certificate accounts: Certificates of deposit -- one year and less.................. 53.909 21.45 4.60 53,258 24.20 4.93 57,610 26.74 5.09 IRA Certificates of deposit -- one year and less.............. 7,771 3.09 4.58 7,702 3.50 4.91 7,925 3.68 5.11 Certificates of deposit -- more than one year.................. 8,243 3.28 5.32 6,354 2.89 5.15 6,682 3.10 5.21 IRA Certificates of deposit -- more than one year......... 3,831 1.52 5.02 4,030 1.83 5.16 4,419 2.05 5.22 -------- ------ -------- ------ -------- ------ Total certificates.......... 73,755 39.34 4.70 71,344 32.42 4.96 76,636 35.58 5.11 -------- ------ -------- ------ -------- ------ Escrow deposits............. 1,985 0.79 2.00 1,771 0.80 2.00 1,194 0.55 2.00 -------- ------ -------- ------ -------- ------ Total deposits.............. $251,371 100.00% 3.12% $220,054 100.00% 3.32% $215,409 100.00% 3.43 ======== ====== ======== ====== ======== ======
The following table presents, by interest rate ranges, the amount of certificate accounts outstanding at the dates indicated and the period to maturity of the certificate accounts outstanding at December 31, 1999.
PERIOD TO MATURITY FROM DECEMBER 31, 1999 AT DECEMBER 31, ----------------------------------------- --------------- LESS OVER THAN ONE TO TWO TO THREE ONE YEAR TWO YEARS THREE YEARS YEARS 1999 1998 1997 -------- --------- ----------- ----- ---- ---- ---- (IN THOUSANDS) Certificate accounts: 3.99% or less........ $ -- $ -- $ -- $ -- $ -- $ -- $ -- 4.00% to 4.99%....... 45,169 2,033 262 -- 47,464 42,424 3 5.00% to 5.99%....... 15,482 6,376 806 2,028 24,692 28,571 21,143 6.00% to 6.99%....... 14,274 2,793 -- -- 17,067 -- 54,374 7.00% to 7.99%....... -- -- -- -- -- -- -- 8.00% to 8.99%....... -- -- -- -- -- -- -- -------- ------- --------- ---------- -------- --------- -------- Total.......... $ 74,925 $11,202 $ 1,068 $ 2,028 $ 89,223 $ 70,995 $ 75,520 ======== ======= ========= ========== ======== ========= ========
BORROWINGS. The Savings Bank historically had not used borrowings as a source of funds. However, the Savings Bank became a member of the FHLBNY in 1995 and has used this source considerably since then. FHLBNY advances may also be used to acquire certain other assets as may be deemed appropriate for investment purposes, including leveraging opportunities. This form of leveraging allows for a reasonable net margin of return, the majority of which is locked in for a specified period. Since the locked-in period might cover only a part of the investment's term (up to its call date in the majority of the transactions), such a practice might result in a limited degree -25- of interest rate risk, since the earlier maturing borrowings are required to be rolled over to fund the remaining lives of the particular investments. FHLBNY advances are to be collateralized primarily by certain of the Savings Bank's mortgage loans and mortgage-backed securities and secondarily by the Savings Bank's investment in capital stock of the FHLBNY. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLBNY will advance to member institutions, including the Savings Bank, fluctuates from time to time in accordance with the policies of the FHLBNY. At December 31, 1999, the Savings Bank had $201.7 million in FHLBNY advances and the capability to borrow additional funds of $50.2 million from the FHLBNY upon complying with the FHLBNY collateral requirements. The Savings Bank at times sells securities under agreements to repurchase, which transactions are treated as financings, and the obligation to repurchase the securities sold is reflected as a liability in the statements of financial condition. The dollar amount of securities underlying the agreements remains in the asset account and are held in safekeeping. There were $37.4, $25.3 million and $22.8 million of securities sold under repurchase agreements outstanding at December 31, 1999, 1998 and 1997, respectively. The following table sets forth certain information regarding borrowed funds for the dates indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 ---- ---- ---- (DOLLARS IN THOUSANDS) FHLBNY Advances: Average balance outstanding......................... $140,378 $56,346 $ 11,740 Maximum amount outstanding at any month-end during the period.......................... 201,675 84,375 23,300 Balance outstanding at end of period................ 201,675 79,480 5,250 Weighted-average interest rate during the period.... 5.50% 5.36% 5.85% Weighted-average interest rate at end of period..... 5.40% 5.38% 5.72% Other Borrowings: Average balance outstanding......................... $26,779 $25,764 $ 23,086 Maximum amount outstanding at any month-end during the period.......................... 37,375 27,500 23,300 Balance outstanding at end of period................ 37,375 25,310 22.755 Weighted-average interest rate during the period.... 5.56% 5.87% 6.40% Weighted-average interest rate at end of period..... 5.66% 6.19% 6.36% Total Borrowings: Average balance outstanding......................... $167,157 $82,110 $34,826 Maximum amount outstanding at any month-end during the period.......................... 239,050 55,000 46,600 Balance outstanding at end of period................ 239,050 104,790 28,005 Weighted-average interest rate during the period.... 5.50% 5.48% 6.29% Weighted-average interest rate at end of period..... 5.45% 5.64% 6.15%
-26- Subsidiary Activities - - --------------------- The Savings Bank has three wholly owned subsidiaries, WSB Financial, Warsave Development Corp. ("Warsave") and Towne Center Mortgage. The Savings Bank offers mutual funds and tax deferred annuities through WSB Financial to the Savings Bank's customers and members of the community. WSB Financial contributed $88 thousand, $121 thousand and $93 thousand in net income, before taxes, to the Savings Bank's net income for the years ended December 31, 1999, 1998 and 1997, respectively. Warsave was formed to acquire and hold real estate. Its single asset as of December 31, 1999 is a two-story house situated adjacent to the Savings Bank's Warwick office. The building, which may ultimately be used for future expansion, is presently rented for the purpose of generating rental income. Towne Center Mortgage, formerly known as WSB Mortgage Company of New Jersey, Inc., was formed in New Jersey in 1997 for the purpose of engaging in mortgage banking operations in New Jersey. Towne Center Mortgage contributed $76 thousand and $63 thousand, before taxes, to the Savings Bank's net income for the years ended December 31, 1999 and 1998, respectively. The Savings Bank also has a real estate investment trust subsidiary, WSB Funding Corp., which was incorporated in the State of Delaware on July 7, 1999 for the purpose of the investment and reinvestment of its assets in mortgage loans secured by real property, interest in mortgage loans secured by real property and possibly mortgage-backed and mortgage-related securities and U.S. government and agency obligations. Personnel - - --------- As of December 31, 1999, the Savings Bank had 133 full-time and 33 part-time employees. The Savings Bank has experienced a very low turnover rate among its employees and, as of December 31, 1999, 55 of the Savings Bank's employees had been with the Savings Bank for more than five years. The employees are not represented by a collective bargaining unit, and the Savings Bank considers its relationship with its employees to be good. FEDERAL AND STATE TAXATION Federal Taxation - - ---------------- GENERAL. The following is intended only as a discussion of material federal income tax matters and does not purport to be a comprehensive description of the federal income tax rules applicable to the Savings Bank, the Commercial Bank or the Registrant. For federal income tax purposes, the Registrant, the Savings Bank and the Commercial Bank file or will file consolidated income tax returns and report their income on a calendar year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Savings Bank's tax reserve for bad debts, discussed below. -27- BAD DEBT RESERVES. Prior to its taxable year beginning January 1, 1999, the Savings Bank was a "small bank" (one with assets having an adjusted tax basis of $500 million or less) and was permitted to maintain a reserve for bad debts with respect to "qualifying loans," which, in general, are loans secured by certain interests in real property, and to make, within specified formula limits, annual additions to the reserve which are deductible for purposes of computing the Savings Bank's taxable income. Pursuant to the Small Business Job Protection Act of 1996, the Savings Bank is now recapturing (taking into income) over a multi-year period a portion of the balance of its bad debt reserve as of December 31, 1995. In 1999, the Savings Bank became a "large bank" (one with assets having an adjusted tax basis of more than $500 million) and therefore may no longer use the bad debt reserve method described above. Instead, the Savings Bank may now deduct loan losses only as they are incurred and may also be required to recapture an additional portion of its bad debt reserve. As a commercial bank, the Commercial Bank is required to deduct loan losses only as they are incurred. DISTRIBUTIONS. To the extent that the Savings Bank makes "non-dividend distributions" to the Registrant, such distributions will be considered to have been made from the Savings Bank's "base year reserve," I.E., its reserve as of December 31, 1987, and then from the Savings Bank's supplemental reserve for losses on loans, to the extent thereof, and an amount based on the amount distributed (but not in excess of the amount of such reserves) will be included in the Savings Bank's income. Non-dividend distributions include distributions in excess of the Savings Bank's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Savings Bank's current or accumulated earnings and profits will not be so included in the Savings Bank's income. The amount of additional taxable income created from a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Savings Bank makes a non-dividend distribution to the Registrant, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includible in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. See "Regulation and Supervision" herein for limits on the payment of dividends by the Savings Bank. The Savings Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserves. CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers of which both the Savings Bank and the Commercial Bank currently have none. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, a bank's AMTI is increased by an amount equal to 75% of the amount by which its adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). Neither the Savings Bank nor the Commercial Bank expects to be subject to the AMT. -28- ELIMINATION OF DIVIDENDS; DIVIDENDS RECEIVED DEDUCTION. The Registrant may exclude from its income 100% of dividends received from the Savings Bank and the Commercial Bank as a member of the same affiliated group of corporations. State Taxation - - -------------- NEW YORK STATE TAXATION. The Savings Bank is subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to the greater of (i) 9% of the Savings Bank's "entire net income" allocable to New York State during the taxable year (8.5% effective for tax years beginning after July 1, 1999, 8.0% effective for tax years beginning after July 1, 2000 and 7.5% effective for tax years beginning after July 1, 2001), or (ii) the applicable alternative minimum tax. The alternative minimum tax is generally the greatest of (a) 0.01% of the value of the taxable assets allocable to New York State with certain modifications, (b) 3% of the Savings Bank's "alternative entire net income" allocable to New York State or (c) $250. Entire net income is similar to federal taxable income, subject to certain modifications and alternative entire net income is equal to entire net income without certain adjustments. For purposes of computing its entire net income, the Savings Bank is permitted a deduction for an addition to the reserve for losses on qualifying real property loans. For New York State purposes, the applicable percentage to calculate bad debt deduction under the percentage of taxable income method is 32%. New York State passed legislation that enabled the Savings Bank to avoid the recapture of the New York State tax bad debt reserves that otherwise would have occurred as a result of changes in federal law and to continue to utilize either the federal method or a method based on a percentage of its taxable income for computing its additions to bad debt reserve. However, the New York bad debt reserve is subject to recapture for "non-dividend distributions" in a manner similar to the recapture of federal bad debt reserves for such distributions. Also, the New York bad debt reserve is subject to recapture in the event that the Savings Bank fails to satisfy certain definitional tests relating to its assets and the nature of its business. A Metropolitan Business District Surcharge on banking corporations doing business in the metropolitan district has been applied since 1982. The Savings Bank does all of its business within this District and is subject to this surcharge. For the tax year ending December 31, 1999 the surcharge rate is 17%. NEW JERSEY STATE TAXATION. The Commercial Bank will file New Jersey income tax returns. Generally, the income of financial institutions in New Jersey, which is calculated based on federal taxable income, subject to certain adjustments, is subject to New Jersey tax. DELAWARE STATE TAXATION. As a Delaware holding company not earning income in Delaware, the Registrant is exempted from Delaware Corporate income tax but is required to file annual returns and pay annual fees and a franchise tax to the State of Delaware. -29- REGULATION AND SUPERVISION General - - ------- The Savings Bank is a New York State chartered stock savings bank, and its deposit accounts are insured up to applicable limits by the FDIC under the BIF. The Savings Bank is subject to extensive regulation, examination and supervision by the NYSBD as its chartering agency, and by the FDIC as the deposit insurer. The Savings Bank must file reports with the NYSBD and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. The Commercial Bank is a New Jersey State chartered commercial bank, and its deposit accounts are insured up to applicable limits by the FDIC under the BIF. The Commercial Bank is subject to extensive regulation, examination and supervision by the Commissioner of the NJBD as its chartering agency, and by the FDIC as the deposit insurer. The Commercial Bank must file reports with the NJBD and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. The NYSBD and the FDIC conduct periodic examinations to assess the Savings Bank's compliance with, and the NJBD and the FDIC conduct periodic examinations to assess the Commercial Bank's compliance with, various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank and a commercial bank can engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The Registrant, as a bank holding company controlling the Savings Bank and the Commercial Bank, is subject to the BHCA and the rules and regulations of the Federal Reserve Board ("FRB") under the BHCA. The Registrant is required to file reports with, and otherwise comply with the rules and regulations of, the FRB. The Registrant is also required to file certain reports with, and otherwise comply with the rules and regulations of, the Securities and Exchange Commission ("SEC") under the federal securities laws. In addition, the Registrant must also comply with certain federal and state laws and regulations applicable to corporations generally. Certain of the laws and regulations applicable to the Registrant, the Savings Bank and the Commercial Bank are summarized below or elsewhere herein, and the following discussion focuses primarily on the laws and regulations applicable to the Savings Bank and the Registrant. These summaries do not purport to be complete and are qualified in their entirety by reference to such laws and regulations. Any change in such laws and regulations could have a material adverse impact on the Registrant, the Savings Bank and the Commercial Bank and their respective operations and stockholders. -30- New York Banking Regulation - - --------------------------- ACTIVITY POWERS. The Savings Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New York Banking Law ("Banking Law") and the regulations adopted thereunder. Under these laws and regulations, the savings banks, including the Savings Bank, generally may invest in real estate mortgages, consumer and commercial loans, specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies, certain types of corporate equity securities, and certain other assets. A savings bank may also invest pursuant to a "leeway" power that permits investments not otherwise permitted by the Banking Law. "Leeway" investments must comply with a number of limitations on the individual and aggregate amounts of "leeway" investments. A savings bank may also exercise trust powers upon approval of the NYSBD. The exercise of these lending, investment and activity powers are limited by federal law and the adopted thereunder. See "-- Federal Banking Regulation -- Activity Restrictions on State-Chartered Banks" below. LOANS-TO-ONE-BORROWER LIMITATIONS. With certain specified exceptions, a New York State chartered savings bank may not make loans or extend credit to a single borrower and to entities related to the borrower in an aggregate amount that would exceed 15% of the bank's net worth. A savings bank may lend an additional 10% of its net worth if secured by collateral meeting the requirements of the Banking Law. The Savings Bank currently complies with all applicable loans-to-one-borrower limitations. COMMUNITY REINVESTMENT ACT. The Savings Bank is also subject to provisions of the Banking Law that, like the provisions of the federal Community Reinvestment Act ("CRA"), impose continuing and affirmative obligations upon a banking institution organized in the State of New York to serve the credit needs of its local community ("NYCRA"). The obligations under the NYCRA are similar to those imposed by the CRA, and the New York Banking Board adopted new regulations, effective December 10, 1997, to implement the NYCRA, which regulations are consistent with the federal regulations implementing the CRA. The New York Banking Board's regulations require a biennial assessment of a bank's compliance with the NYCRA, utilizing a four-tiered rating system, and require the NYSBD to make available to the public such rating and a written summary of the assessment results. Pursuant to the NYCRA, a bank must file with the NYSBD an annual NYCRA report and copies of all federal CRA reports. The Savings Bank's latest NYCRA rating, received by letter dated April 27, 1998 from the NYSBD, was a rating of "Satisfactory." The NYCRA also requires the Superintendent of Banks of the State of New York ("Superintendent") to consider a bank's NYCRA rating when reviewing a bank's application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller machines, and provides that such assessment may serve as a basis for the denial of any such application. DIVIDENDS. Under the Banking Law, the Savings Bank may declare and pay a dividend on its capital stock only out of its net profits. The approval of the Superintendent is required if the total of all dividends declared by the Savings Bank in any calendar year will exceed the net profits for that year plus the retained net profits of the preceding two years less any required transfer to surplus or a fund for the retirement of preferred stock. In addition, the Savings Bank may not pay declare, credit or pay any dividend if the effect thereof would cause its capital to be reduced below the amount required by the Superintendent or the FDIC. -31- ENFORCEMENT. Under the Banking Law, the Superintendent may issue an order to a New York State-chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep prescribed books and accounts. Upon a finding by the Superintendent that any director, trustee or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices, the Superintendent may remove such director, trustee or officer from office after notice and an opportunity to be heard. The Savings Bank does not know of any past or current practice, condition or violation that might lead to any proceeding by the Superintendent or the NYSBD against the Savings Bank or any of its directors or officers. CHANGE IN BANK CONTROL RESTRICTIONS The Banking Law generally requires prior approval of the New York Banking Board before any action is taken that causes any company to acquire direct or indirect control of a banking institution that is organized in the State of New York. For this purpose, the term "company" is defined to include corporations, partnerships and other types of business entities, chartered or doing business in New York, and an individual or combination of individuals acting in concert and residing or doing business in New York, and the term "control" is defined generally to mean the power to direct or cause the direction of the management and policies of the banking institution and is presumed to exist if the company owns, controls or holds with power to vote 10% or more of the voting stock of the banking institution. Federal Banking Regulation - - -------------------------- CAPITAL REQUIREMENTS. FDIC regulations require BIF-insured banks, such as the Savings Bank and the Commercial Bank, to maintain minimum levels of capital. The FDIC regulations define two Tiers, or classes, of capital. Tier 1 capital is comprised of the sum of common stockholders' equity (excluding the net unrealized appreciation or depreciation, net of tax, from available-for-sale securities), non-cumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets (other than qualifying servicing rights), and any net unrealized loss on marketable equity securities. The components of Tier 2 capital currently include cumulative perpetual preferred stock, certain perpetual preferred stock for which the dividend rate may be reset periodically, mandatory convertible securities, subordinated debt, intermediate preferred stock and allowance for possible loan losses. Allowance for possible loan losses includible in Tier 2 capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be included in total capital cannot exceed 100% of Tier 1 capital. The FDIC regulations establish a minimum leverage capital requirement for banks in the strongest financial and managerial condition, with a rating of 1 (the highest examination rating of the FDIC for banks) under the Uniform Financial Institutions Rating System, and that are not experiencing or anticipating significant growth, of a ratio of Tier 1 capital to total assets of not less than 3%. For all other banks, the minimum leverage capital requirement is 4.0%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. The FDIC regulations also require that banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of a ratio of total capital (which is defined as the sum of Tier 1 capital and Tier 2 capital) to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In determining the amount of risk-weighted assets, -32- all assets, plus certain off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The federal banking agencies, including the FDIC, have also adopted regulations to require an assessment of an institution's exposure to declines in the economic value of a bank's capital due to changes in interest rates when assessing the bank's capital adequacy. Under such a risk assessment, examiners will evaluate a bank's capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. According to the agencies, applicable considerations include the quality of the bank's interest rate risk management process, the overall financial condition of the bank and the level of other risks at the bank for which capital is needed. Institutions with significant interest rate risk may be required to hold additional capital. The agencies also issued a joint policy statement providing guidance on interest rate risk management, including a discussion of the critical factors affecting the agencies' evaluation of interest rate risk in connection with capital adequacy. The following table shows the Savings Bank's actual capital amounts and its capital ratios at December 31, 1999, as compared to the minimum amounts and ratios and the amounts and ratios required to be classified as "well capitalized" under the FDIC's prompt corrective action regulations:
MINIMUM CAPITAL FOR CLASSIFICATION AS BANK ACTUAL ADEQUACY WELL CAPITALIZED ----------- -------- ---------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Leverage (Tier 1) capital...... $54,629 9.38% $23,291 4.00% $29,114 5.00% Risk-based capital: Tier 1..................... 54,629 17.60 12,418 4.00 18,628 6.00 Total...................... 56,933 18.34 24,837 8.00 31,046 10.00
As the preceding table shows, the Savings Bank exceeded the minimum capital adequacy requirements, and the requirements to be classified as well capitalized, at the date indicated. The following table shows the Commercial Bank's actual capital amounts and its capital ratios at December 31, 1999, as compared to the minimum amounts and ratios and the amounts and ratios required to be classified as "well capitalized" under the FDIC's prompt corrective action regulations:
MINIMUM CAPITAL FOR CLASSIFICATION AS BANK ACTUAL ADEQUACY WELL CAPITALIZED ----------- -------- ---------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Leverage (Tier 1) capital...... $5,728 87.72% $261 4.00% $327 5.00% Risk-based capital: Tier 1..................... 5,728 211.83 108 4.00 162 6.00 Total...................... 5,728 211.83 216 8.00 270 10.00
As the preceding table shows, the Commercial Bank exceeded the minimum capital adequacy requirements, and the requirements to be classified as well capitalized, at the date indicated. -33- ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. Section 24 of the Federal Deposit Insurance Act, as amended ("FDIA"), which was added by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), generally limits the activities and investments of state-chartered FDIC-insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by Section 24 or consented to by the FDIC. Section 24 provides an exception for investments by a bank in common and preferred stocks listed on a national securities exchange or the shares of registered investment companies if (1) the bank held such types of investments during the 14-month period from September 30, 1990 through November 26, 1991, (2) the state in which the bank is chartered permitted such investments as of September 30, 1991, and (3) the bank notifies the FDIC and obtains approval from the FDIC to make or retain such investments. Upon receiving such FDIC approval, an institution's investment in such equity securities will be subject to an aggregate limit up to the amount of its Tier 1 capital. The Savings Bank received approval from the FDIC to retain and acquire such equity investments subject to a maximum permissible investment equal to the lesser of 100% of the Savings Bank's Tier 1 capital or the maximum permissible amount specified by the Banking Law. Section 24 also provides an exception for majority owned subsidiaries of a bank, but Section 24 limits the activities of such subsidiaries to those permissible for a national bank under Section 24 and the FDIC regulations issued pursuant thereto, or as approved by the FDIC. Before making a new investment or engaging in a new activity not permissible for a national bank or otherwise permissible under Section 24 or the FDIC regulations thereunder, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the FDIC insurance funds. The Gramm-Leach-Bliley Act ("GLB Act"), which was enacted on November 12, 1999, permits a state-chartered bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the GLB Act permits a national bank that is well-capitalized and well- managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank's total assets or $50 billion. The bank must have policies and procedures to assess the financial subsidiary's risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary's assets with the bank's and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. State chartered banks may retain, after March 11, 2000, existing subsidiaries engaged in activities that are not authorized under the GLB Act; otherwise, the GLB Act will preempt all state laws regarding the permissibility of certain activities for state chartered banks if such state law is in conflict with the provisions of the GLB Act (with the exception of certain insurance activities), regardless of whether the state law would authorize broader or more restrictive activities. Although the Savings Bank and the Commercial Bank meet all conditions necessary to establish and engage in permitted activities through financial subsidiaries, they have not yet determined whether or the extent to which they will seek to engage in such activities. -34- ENFORCEMENT. The FDIC has extensive enforcement authority over insured banks, including the Savings Bank and the Commercial Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers, to order divestitures and withhold approval of the acquisition of business or the exercise of powers, to terminate deposit insurance coverage and to place a depository institution in receivership. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state bank if that bank is "critically undercapitalized." For this purpose, "critically undercapitalized" means having a ratio of tangible capital to total assets of less than 2%. The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution's financial condition or upon the occurrence of certain events, including : (i) insolvency (whereby the assets of the bank are less than its liabilities to depositors and others), (ii) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices, (iii) existence of an unsafe or unsound condition to transact business, (iv) likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business, and (v) insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution's capital with no reasonable prospect of replenishment of capital without federal assistance. SAFETY AND SOUNDNESS STANDARDS. Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal stockholder. In addition, the FDIC adopted regulations to require a bank that is given notice by the FDIC that it is not satisfying any of such safety and soundness standards to submit a compliance plan to the FDIC. If, after being so notified, a bank fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the FDIC may issue an order directing corrective and other actions of the types to which a significantly undercapitalized institution is subject under the "prompt corrective action" provisions of FDICIA. If a bank fails to comply with such an order, the FDIC may seek to enforce such an order in judicial proceedings and to impose civil monetary penalties. PROMPT CORRECTIVE ACTION. FDICIA also established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the bank regulators are required to take certain supervisory actions against undercapitalized institutions, based upon five categories of capitalization which FDICIA created: "well capitalized," "adequately capitalized," "undercapitalized," significantly undercapitalized" and "critically capitalized." -35- The FDIC's regulations defines the five capital categories as follows: Generally, an institution will be treated as "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is at least 6%, its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by the FDIC to meet a specific capital level. An institution will be treated as "adequately capitalized" if its ratio of total capital to risk-weighted assets is at least 8%, its ratio of Tier 1 capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital to total assets is at least 4% (3% if the bank receives the highest rating under the Uniform Financial Institutions Rating System) and it is not a well capitalized institution. An institution that has total risk-based capital of less than 8%, Tier 1 risk-based capital of less than 4% or a leverage ratio that is less than 4% (or less than 3% if the bank receives the highest rating under the Uniform Financial Institutions Rating System) would be considered to be "undercapitalized." An institution that has total risk-based capital of less than 6%, Tier 1 capital of less than 3% or a leverage ratio that is less than 3% would be considered to be "significantly undercapitalized," and an institution that has a tangible capital to assets ratio equal to or less than 2% would be deemed to be "critically undercapitalized." The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as a bank's capital decreases within the three undercapitalized categories. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be undercapitalized. The FDIC is required to monitor closely the condition of an undercapitalized bank and to restrict the growth of its assets. An undercapitalized bank is required to file a capital restoration plan within 45 days of the date the bank receives notice that it is within any of the three undercapitalized categories, and the plan must be guaranteed by any parent holding company. The aggregate liability of a parent holding company is limited to the lesser of: (1) an amount equal to five percent of the bank's total assets at the time it became "undercapitalized"; and (2) the amount that is necessary (or would have been necessary) to bring the bank into compliance with all capital standards applicable with respect to such bank as of the time it fails to comply with the plan. If a bank fails to submit an acceptable plan, it is treated as if it were "significantly undercapitalized." Banks that are significantly or critically undercapitalized are subject to a wider range of regulatory requirements and restrictions. DEPOSIT INSURANCE. Pursuant to FDICIA, the FDIC established a system for setting deposit insurance premiums based upon the risks a particular bank or savings association posed to its deposit insurance funds. Under the risk-based deposit insurance assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending six months before the assessment period. The three capital categories are (1) well capitalized, (2) adequately capitalized and (3) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. With respect to the capital ratios, institutions are classified as well capitalized, adequately capitalized or undercapitalized, using ratios that are substantially similar to the prompt corrective action capital ratios discussed above. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the institution's state supervisor). -36- An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the final risk-based assessment system, there are nine assessment risk classifications (I.E., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates for deposit insurance currently range from 0 basis points to 27 basis points. The capital and supervisory subgroup to which an institution is assigned by the FDIC is confidential and may not be disclosed. Any increase in insurance assessments could have an adverse effect on the earnings of an insured institution. Under the Deposit Insurance Funds Act of 1996 ("Funds Act"), the assessment base for the payments on the bonds ("FICO bonds") issued in the late 1980's by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation was expanded to include, beginning January 1, 1997, the deposits of BIF-insured institutions, such as the Savings Bank and the Commercial Bank. The Savings Bank's and the Commercial Bank's total expense in 1999 for the assessment for deposit insurance and the FICO payments was $30,678. Under the FDIA, the FDIC may terminate the insurance of an institution's deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Neither the management of the Savings Bank nor the management of the Commercial Bank knows of any practice, condition or violation that might lead to termination of deposit insurance. Under the FDIA, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, purchase of assets from or issuance of letter of credit on behalf of the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such bank holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and FRB regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the bank holding company or its subsidiaries and related interests of such persons. Moreover, banks are prohibited from engaging in certain tie-in arrangements (with the bank's parent holding company or any of the holding company's subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services. TRANSACTIONS WITH AFFILIATES OF THE BANK. Transactions between an insured bank and any of its affiliates is governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. Currently, a subsidiary of a bank that is not also a depository institution is not treated as an affiliate of the bank for purposes of Sections 23A and 23B, but the FRB has proposed treating any subsidiary of a bank that is engaged in activities not permissible for bank holding companies under the BHCA as an affiliate for purposes of Sections 23A and 23B. Generally, Sections 23A and 23B (i) limit the extent to which the bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, and limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and -37- (ii) require that all such transactions be on terms that are consistent with safe and sound banking practices. The term "covered transaction" includes the making of loans, purchase of assets, issuance of guarantees and other similar types of transactions. Further, most loans by a bank to any of its affiliate must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amounts. In addition, any covered transaction by a bank with an affiliate and any purchase of assets or services by a bank from an affiliate must be on terms that are substantially the same, or at least as favorable, to the institution as those that would be provided to a non-affiliate. In addition, provisions of the BHCA prohibit extensions of credit to a bank's insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. PROHIBITIONS AGAINST TYING ARRANGEMENTS. Banks are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements and extensions of credit by correspondent banks. In general, a depository institution is prohibited, subject to certain exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution. PRIVACY STANDARDS. Pursuant to the GLB Act, financial institutions are required to establish a policy governing the collection, use and protection of non-public information about their customers and consumers, provide notice of such policy to consumers and provide a mechanism for consumers to opt out of any practice of the institution whereby nonpublic personal information would otherwise be disclosed to unaffiliated third parties. The federal banking agencies, jointly with the Federal Trade Commission and the SEC, have published proposed regulations to implement the privacy standards of the GLB Act. Under the regulations, the Registrant, the Savings Bank and the Commercial Bank will be required to adopt and implement a privacy policy no later than November 13, 2000. The Registrant has not yet determined the extent to which the privacy standards will affect its operations. UNIFORM REAL ESTATE LENDING STANDARDS. Pursuant to FDICIA, the federal banking agencies adopted uniform regulations prescribing standards for extensions of credit that are secured by liens on interests in real estate or made for the purpose of financing the construction of a building or other improvements to real estate. Under the joint regulations adopted by the federal banking agencies, all insured depository institutions must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to- value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted by the federal bank regulators. The Interagency Guidelines, among other things, require a depository institution to establish internal loan-to-value limits for real estate loans that are not in excess of the following supervisory limits: (i) for loans secured by raw land, the supervisory loan-to-value limit is 65% of the value of -38- the collateral, (ii) for land development loans (I.E., loans for the purpose of improving unimproved property prior to the erection of structures), the supervisory limit is 75%, (iii) for loans for the construction of commercial, multi-family or other non-residential property, the supervisory limit is 80%, (iv) for loans for the construction of one- to four-family properties, the supervisory limit is 85%, and (v) for loans secured by other improved property (E.G., farmland, completed commercial property and other income-producing property, including non-owner occupied, one- to four-family property), the limit is 85%. Although no supervisory loan-to-value limit has been established for owner-occupied, one- to four-family and home equity loans, the Interagency Guidelines state that for any such loan with a loan-to-value ratio that equals or exceeds 90% at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral. COMMUNITY REINVESTMENT ACT. Under the CRA, an insured depository institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FDIC, in connection with its examination of a savings bank, to assess the depository institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications for additional branches and acquisitions. Pursuant to current CRA regulations, an institution is evaluated based on its actual performance in meeting community needs, as compared to the process-based assessment factors used under prior CRA regulations. This new evaluation system focuses on three tests: (a) a lending test, to evaluate the institution's record of making loans in its service areas, (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefitting low or moderate income individuals and businesses, and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices. Small banks are assessed pursuant to a streamlined approach focusing on a lesser range of information and performance standards. The CRA requires the FDIC to provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system and requires public disclosure of an institution's CRA rating. The Savings Bank received a "satisfactory" rating in its most recent CRA examination. Federal Home Loan Bank System - - ----------------------------- The Savings Bank is a member of the FHLBNY, which is one of the twelve regional Federal Home Loan Banks ("FHLBs") that comprise the FHLB System. Each of the FHLB's is subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The FHLB System provides a central credit facility primarily for member thrift institutions, as well as other entities involved in home mortgage lending. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLBs. It makes loans to members (i.e., advances) in accordance with policies and procedures, including collateral requirements, established by the respective boards of directors of the FHLBs. These policies and procedures are subject to the regulation and oversight of the FHFB. Long-term advances may only be made for the purpose of providing funds for -39- residential home financing. The FHFB has also established standards of community or investment service that members must meet to maintain access to such long-term advances. The Savings Bank, as a member of the FHLBNY, is required to purchase and hold shares of capital stock in the FHLBNY in an amount at least equal to the greater of (i) 1% of the aggregate principal amount of its unpaid mortgage loans, home purchase contracts and similar obligations at the beginning of each year; (ii) 0.3% of its assets; or (iii) 5% (or such greater fraction as established by the FHLB) of its advances from the FHLBNY. Pursuant to the GLB Act, the foregoing minimum share ownership requirement will be replaced by regulations to be promulgated by the FHFB. The GLB Act specifically provides that the minimum requirement in existence immediately prior to adoption of the GLB Act shall remain in effect until such regulations are adopted. The Savings Bank was in compliance with this requirement with an investment in FHLBNY stock at December 31, 1999 of $11.8 million. Federal Reserve System - - ---------------------- Under FRB regulations, each of the Savings Bank and the Commercial Bank is required to maintain non-interest-earning reserves against its transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves of 3% must be maintained against aggregate transaction accounts of $46.5 million or less (subject to adjustment by the FRB) and an initial reserve of $1.4 million plus 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of $46.5 million. The first $4.9 million of otherwise reservable balances (subject to adjustments by the FRB) are exempted from the reserve requirements. The Savings Bank is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a FRB or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Savings Bank's and the Commercial Bank's interest-earning assets. Federal Bank Holding Company Regulation - - --------------------------------------- GENERAL. The Registrant is a bank holding company subject to examination, regulation and periodic reporting under the BHCA, as administered by the FRB. IMPACT OF ENACTMENT OF THE GRAMM-LEACH-BLILEY ACT. Among other things, the GLB Act establishes a comprehensive- framework to permit affiliations among commercial banks, insurance companies and securities firms. Generally, the new law (i) repeals the historical restrictions and eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies and other financial service providers, (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies, (iii) broadens the activities that may be conducted by subsidiaries of national banks and state banks, (iv) provides an enhanced framework for protecting the privacy of information gathered by financial institutions regarding their customers and consumers, (v) adopts a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB System, (vi) requires public disclosure of certain agreements relating to funds expended in connection with an institution's compliance with the Community Reinvestment Act, and (vii) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions, including the functional regulation of bank securities and insurance activities. -40- Bank holding companies are now permitted to engage in a wider variety of financial activities than permitted under the prior law, particularly with respect to insurance and securities activities. In addition, in a change from the prior law, bank holding companies are in a position to be owned, controlled or acquired by any company engaged in financially related activities. ACTIVITY RESTRICTIONS. The BHCA generally limits the Registrant's activities to managing or controlling banks, furnishing services to or performing services for its subsidiaries and engaging in other activities that the FRB determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the FRB must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits include greater convenience, increased competition and gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest and unsound banking practices. Some of the principal activities that the FRB has determined by regulation to be so closely related to banking as to be a proper incident thereto are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association. The FRB may require that the Registrant terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The FRB also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Effective March 11, 2000, the GLB Act expands the range of permitted activities of certain bank holding companies to include the offering of virtually any type of service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency), merchant banking, acquisitions of and combinations with insurance companies and securities firms and additional activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In order to engage in these new activities, a bank holding company must qualify and register with the FRB as a financial holding company. To qualify as a financial holding company, a bank holding company must demonstrate that each of its bank subsidiaries is well-capitalized and well-managed and has a rating of "satisfactory" or better under the CRA. Certain of the additional activities authorized under the GLB Act may also be undertaken by a financial subsidiary of a bank. Under the GLB Act, a functional system of regulation will apply to financial holding companies under which banking activities will be regulated by the federal banking regulators, securities activities will be regulated by the federal securities regulators, and insurance activities will be subject to regulation by the appropriate state insurance authorities. Although the Registrant currently meets all standards required for qualification as a financial holding company, it has not yet determined whether it will seek to qualify as, or engage in any of the additional activities authorized for, a financial holding company. The Registrant is examining its business plan to determine whether, based on market conditions, the financial condition of the -41- Registrant and its subsidiaries, regulatory capital requirements, general economic conditions and other requirements, it desires to utilize any of the expanded powers permitted by the GLB Act. ACQUISITION AND SALE OF CONTROL. Under the federal Change in Bank Control Act ("CBCA"), any person (including a company), or group acting in concert, seeking to acquire 10% or more of the outstanding shares of the Registrant's common stock will be required to submit prior notice to the FRB, unless the FRB has found that the acquisition of such shares will not result in a change in control of the Registrant. Under the CBCA, the FRB has 60 days within which to act on such notice, taking into consideration certain factors, including the financial and managerial resources of the acquiror, the convenience and needs of the communities served by the Registrant and the Savings Bank, and the antitrust effects of the acquisition. Under the BHCA, any company would be required to obtain prior approval from the FRB before it may obtain "control" of the Registrant within the meaning of the BHCA. Control generally is defined under the BHCA to mean the ownership or power to vote 25% or more of any class of voting securities of the Registrant or the ability to control in any manner the election of a majority of the Registrant's directors. The Registrant is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval will be required for the Registrant to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. CAPITAL; DIVIDENDS; SHARE REPURCHASES; SOURCE OF STRENGTH. The FRB imposes certain capital requirements on the Registrant under the BHCA, including a minimum leverage ratio and a minimum ratio of "qualifying" capital to risk-weighted assets. These minimum requirements are substantially the same as the FDIC's minimum capital requirements described above under "Federal Banking Regulation -- Capital Requirements." Subject to its capital requirements and certain other restrictions, the Registrant is able to borrow money to make a capital contribution to the Savings Bank or the Commercial Bank, and such loans may be repaid from dividends paid from the Savings Bank or the Commercial Bank to the Registrant. The Registrant is also able to raise capital for contribution to the Savings Bank or the Commercial Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws. The following table shows the Registrant's actual capital amounts and its capital ratios at December 31, 1999, as compared to the minimum amounts and ratios:
MINIMUM CAPITAL COMPANY ACTUAL ADEQUACY -------------- -------- AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Leverage (Tier 1) capital...... $73,214 12.67% $23,122 4.00% Risk-based capital: Tier 1..................... 73,214 23.94 12,231 4.00 Total...................... 75,168 24.58 24,462 8.00
-42- As the table shows, the Registrant exceeded the minimum capital adequacy requirements at the date indicated. The Registrant is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, will be equal to 10% or more of the company's consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. Such notice and approval is not required for a bank holding company that would be treated as "well capitalized" under applicable regulations of the FRB, that has received a composite "1" or "2" rating at its most recent bank holding company examination by the FRB, and that is not the subject of any unresolved supervisory issues. Regulations of the FRB provide that a bank holding company must serve as a source of strength to any of its subsidiary banks and must not conduct its activities in an unsafe or unsound manner. A bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. Under the prompt corrective action provisions of FDICIA, a bank holding company parent of an undercapitalized subsidiary bank would be directed to guarantee, within limitations, the capital restoration plan that is required of such an undercapitalized bank. See "Federal Banking Regulation -- Prompt Corrective Action" above. If the undercapitalized bank fails to file an acceptable capital restoration plan or fails to implement an accepted plan, the FRB may prohibit the bank holding company parent of the undercapitalized bank from paying any dividend or making any other form of capital distribution without the prior approval of the FRB. New York Holding Company Regulation - - ----------------------------------- Under the Banking Law, certain companies owning or controlling banks are regulated as a bank holding company. For purposes of the Banking Law, the term "bank holding company" is defined generally to include any "company" that, directly or indirectly, either (a) controls the election of a majority of the directors or (b) owns, controls or holds with power to vote more than 10% of the voting stock of a bank holding company or, if the company is a banking institution, another banking institution, or 10% or more of the voting stock of each of two or more banking institutions. The term "company" is defined to include corporations, partnerships and other types of business entities, chartered or doing business in New York, and the term "banking institution" is defined to include commercial banks, stock savings banks and stock savings and loan associations. A company controlling, directly or indirectly, only one banking institution will not be deemed to be a bank holding company for the purposes of the Banking Law. Under the Banking Law, the prior approval of the New York Banking Board is required before: (1) any action is taken that causes any company to become a bank holding company; (2) any action is taken that causes any banking institution to become or to be merged or consolidated with a subsidiary of a bank holding company; (3) any bank holding company acquires direct or indirect ownership or control of more than 5% of the voting stock of a banking institution; (4) any bank holding company or subsidiary thereof acquires all or substantially all of the assets of a banking institution; or (5) any action is taken that causes any bank holding company to merge or consolidate with another bank holding company. -43- Additionally, certain restrictions apply to New York State bank holding companies regarding the acquisition of banking institutions that have been chartered for five years or less and are located in smaller communities. Directors, officers and employees of a New York State bank holding company are subject to limitations regarding their affiliation with securities underwriting or distribution firms and with other bank holding companies, and directors and executive officers are subject to limitations regarding loans obtained from certain of the holding company's banking subsidiaries. Although the Registrant is not a bank holding company for purposes of the Banking Law, any future acquisition of ownership, control, or the power to vote 10% or more of the voting stock of another banking institution or bank holding company having its principal office in the State of New York would cause it to become such. Interstate Banking and Branching - - -------------------------------- In the past, interstate banking was limited under the BHCA to those states that permitted interstate banking by statute. New York was one of a number of states that permitted, subject to the reciprocity conditions of the Banking Law, out-of-state bank holding companies to acquire New York banks. By 1995, most states had adopted statutes permitting multistate bank holding companies. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Banking Act") was enacted on September 29, 1994. As of September 29, 1995, the Interstate Banking Act permitted approval under the BHCA of the acquisition by a bank holding company that is well capitalized and managed of a bank outside of the holding company's home state regardless of whether the acquisition was permitted under the law of the state of the bank to be acquired. The FRB may not approve an acquisition under the BHCA that would result in the acquiring holding company controlling more than 10% of the deposits in the United States or more than 30% of the deposits in any particular state. In the past, branching across state lines was not generally available to a state bank, such as the Savings Bank. While out-of-state branches were authorized under the Banking Law, similar authority was not generally available under the laws of most other states. Beginning June 1, 1997, the Interstate Banking Act, permitted the responsible federal banking agencies to approve merger transactions between banks located in different states, regardless of whether the merger would be prohibited under state law. Accordingly, the Interstate Banking Act permits a bank to have branches in more than one state. Before any bank acquisition can be completed, prior approval thereof may also be required to be obtained from other agencies having supervisory jurisdiction over the bank to be acquired, including the NYSBD. The Interstate Banking Act will facilitate the consolidation of the banking industry that has taken place over recent years and will allow the creation of larger, presumably more efficient, banking networks. -44- Federal Securities Law - - ---------------------- The Registrant's securities are registered with the SEC under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and the Registrant is subject to the information, proxy solicitation, insider trading and other requirements and restrictions of the Exchange Act. ITEM 2. PROPERTIES The Savings Bank conducts its business through its main office in Warwick, New York and its four branch offices located in Monroe, Woodbury, Wallkill and Newburgh, New York. The Commercial Bank conducts its business through its office in Lodi, New Jersey. Management believes that the Savings Bank's and the Commercial Bank's current facilities are adequate to meet the present and immediately foreseeable needs of the Savings Bank, the Commercial Bank and the Registrant. The following sets forth information regarding the Savings Bank's branches and loan production offices and the Commercial Bank's office at December 31, 1999.
LEASED DATE LEASE OR LEASED OR EXPIRATION OWNED ACQUIRED DATE ----- -------- ---- SAVINGS BANK - - ------------ Main Office: 18 Oakland Avenue Warwick, New York 10990 Owned 1972 N/A Branches: 591 Route 17M Monroe, New York 10950 Owned 1976 N/A 556 Route 32 Highland Mills, New York 10930 Owned 1979 N/A 1 Industrial Avenue Wallkill, New York 10940 Owned 1998 N/A 1425 Route 300 Newburgh, New York 12550 Land Leased 1999 12/06/29 Loan Production Offices: 263 NYS Route 17K Newburgh, New York Leased 1998 09/20/01 Taconic Plaza Shopping Center, Store #10 Route 52 East Fishkill, New York Leased 1997 01/31/01 151 South Main Street, Suite 104 New City, New York Leased 1997 04/30/00
-45-
LEASED DATE LEASE OR LEASED OR EXPIRATION OWNED ACQUIRED DATE ----- -------- ---- 799 Franklin Avenue Franklin Lakes, New Jersey Leased 1999 09/20/01 COMMERCIAL BANK - - --------------- Leased 1999 03/31/02 The Towne Center Bank 15 Washington Street Lodi, New Jersey 07644
ITEM 3. LEGAL PROCEEDINGS The Registrant is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which in the aggregate involve amounts which management believes to be immaterial to the financial condition and results of operations of the Registrant. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS The information required by this item appears under the caption "Market for Common Stock" on page F15 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999 and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item appears on pages F2 through F3, inclusive, of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999 and is incorporated herein by reference. -46- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item appears on pages F4 through F15, inclusive, of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999 and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item appears on pages F5 through F7, inclusive, of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999 and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item appears on pages F16 through F39, inclusive, of the Registrant's Annual Report to Shareholders for the year ended December 31,1999 and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The information required by this item appears under the caption "Election of Directors" on pages 5 through 10, inclusive, and under the caption "Compliance with Section 16(a) of the Exchange Act" on pages 21 and 22 of the Registrant's Proxy Statement ("Proxy Statement") for its 2000 Annual Meeting of Shareholders to be held on April 18, 2000 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears on pages 13 through 21, inclusive, of the Registrant's Proxy Statement and is incorporated herein by reference. -47- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears under the captions "Stock Ownership of Certain Beneficial Owners" on pages 2 and 3, inclusive, and "Stock Ownership of Management" on pages 4 and 5, inclusive, of the Registrant's Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears under the caption "Transactions with Certain Related Persons" on page 21 of the Registrant's Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. The following consolidated financial statements of the Registrant and its subsidiaries, and the independent auditors' report thereon, included on pages F16 through F40 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999 are incorporated herein by reference: Consolidated Statements of Financial Condition as of December 31, 1999 and December 31, 1998; Consolidated Statements of Income for Each of the Years in the Three-Year Period Ended December 31, 1999; Consolidated Statements of Changes in Stockholders' Equity for Each of the Years in the Three-Year Period Ended December 31, 1999; Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 1999; Notes to Consolidated Financial Statements 2. All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. 3. The following exhibits are filed as part of this report, except as otherwise indicated. 3.1 Certificate of Incorporation of Warwick Community Bancorp, Inc. (1) 3.2 Bylaws of Warwick Community Bancorp, Inc. (1) -48- 4.1 Certificate of Incorporation of Warwick Community Bancorp, Inc. (See Exhibit 3.1 hereto) 4.2 Bylaws of Warwick Community Bancorp, Inc. (See Exhibit 3.2 hereto) 4.3 Restated Organization Certificate of The Warwick Savings Bank (1) 4.4 Bylaws of The Warwick Savings Bank, as amended (1) 4.5 Stock Certificate of Warwick Community Bancorp, Inc. (1) 10.1 Employment Agreement by and between Warwick Community Bancorp, Inc. and Timothy A. Dempsey (2) 10.2 Employment Agreement by and between Warwick Community Bancorp, Inc. and Ronald J. Gentile (2) 10.3 Employment Agreement by and between Warwick Community Bancorp, Inc. and Arthur W. Budich (2) 10.4 Employment Agreement by and between Warwick Community Bancorp, Inc. and Nancy L. Sobotor-Littell (2) 10.5 Employee Retention Agreement by and between The Warwick Savings Bank and Donna M. Lyons (2) 10.6 Employee Retention Agreement by and between The Warwick Savings Bank and Barbara A. Rudy (2) 10.7 Employee Retention Agreement by and between The Warwick Savings Bank and Arthur S. Anderson (2) 10.8 Recognition and Retention Plan of Warwick Community Bancorp, Inc. (3) 10.9 Trust Agreement between Warwick Community Bancorp, Inc. and Orange County Trust Company for the Recognition and Retention Plan of Warwick Community Bancorp, Inc. (2) 10.10 Stock Option Plan of Warwick Community Bancorp, Inc. (3) 10.11 Warwick Community Bancorp, Inc. Employee Stock Ownership Plan (1) 10.12 Trust Agreement between Warwick Community Bancorp, Inc. and Marine Midland Bank for the Warwick Community Bancorp, Inc. Employee Stock Ownership Plan (2) -49- 10.13 Loan Agreement by and between the Warwick Community Bancorp, Inc. Employee Stock Ownership Trust and Warwick Community Bancorp, Inc. (2) 10.14 Benefit Restoration Plan of The Warwick Savings Bank (1) 10.15 Grantor Trust Agreement by and between The Warwick Savings Bank and Marine Midland Bank for the Benefit Restoration Plan of The Warwick Savings Bank (2) 10.16 The Warwick Savings Bank 401(k) Savings Plan (1) 10.17 Trust Agreement between The Warwick Savings Bank and Marine Midland Bank for The Warwick Savings Bank 401(k) Savings Plan Employer Stock Fund (2) 10.18 First Amendment to Employment Agreement by and between Warwick Community Bancorp, Inc. and Timothy A. Dempsey (4) 10.19 First Amendment to Employment Agreement by and between Warwick Community Bancorp, Inc. and Ronald J. Gentile (4) 10.20 First Amendment to Employment Agreement by and between Warwick Community Bancorp, Inc. and Arthur W. Budich (4) 10.21 First Amendment to Employment Agreement by and between Warwick Community Bancorp, Inc. and Nancy L. Sobotor-Littell (4) 10.22 First Amendment to the Stock Option Plan of Warwick Community Bancorp, Inc. (5) 10.23 First Amendment to the Recognition and Retention Plan of Warwick Community Bancorp, Inc. (5) 10.24 Employment Agreement by and among Warwick Community Bancorp, Inc., The Towne Center Bank and Fred G. Kowal 10.25 Employment Agreement by and among Warwick Community Bancorp, Inc., The Towne Center Bank and Lawrence D. Haggerty 11.1 Statement re: Computation of per share earnings 13.1 1999 Annual Report to Shareholders 21.1 Subsidiaries of the Registrant -50- 27.1 Financial Data Schedule (EDGAR filing only) 99.1 Proxy Statement for the 2000 Annual Meeting of Shareholders - - --------------------------- (1) Incorporated herein by reference to the Exhibits to the Registrant's Registration Statement on Form S-1, filed on September 19, 1997, Registration No. 333-36021. (2) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1998. (3) Incorporated herein by reference to the Registrant's definitive Proxy Statement for the Special Meeting of Shareholders held on June 24, 1998. (4) Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K for the transition period from June 1, 1998 to December 31, 1998. (5) Incorporated herein by reference to the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders held on April 20, 1999. (b) No reports on Form 8-K have been filed during the last quarter of the period covered by this report. -51- 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. WARWICK COMMUNITY BANCORP, INC. Dated: March 30, 2000 BY:/s/ Timothy A. Dempsey ------------------------------------ Timothy A. Dempsey Chairman of the Board and Chief Executive Officer BY:/s/ Arthur W. Budich ------------------------------------ Arthur W. Budich Senior Vice President, Treasurer and Chief Financial Officer -52- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date Chairman of the Board and Chief March 30, 2000 /s/ Timothy A. Dempsey Executive Officer and Director - - ----------------------------------------------- Timothy A. Dempsey President and Chief Operating March 30, 2000 /s/ Ronald J. Gentile Officer and Director - - ----------------------------------------------- Ronald J. Gentile Director March 30, 2000 /s/ Frances M. Gorish - - ----------------------------------------------- Frances M. Gorish Director - - ----------------------------------------------- R. Michael Kennedy Director - - ----------------------------------------------- Fred M. Knipp Director - - ----------------------------------------------- Emil R. Krahulik Director March 30, 2000 /s/ Thomas F. Lawrence, Jr. - - ----------------------------------------------- Thomas F. Lawrence, Jr. Director - - ----------------------------------------------- John J. McDermott III Director March 30, 2000 /s/ Henry L. Nielsen, Jr. - - ----------------------------------------------- Henry L. Nielsen, Jr. Director March 30, 2000 /s/ John W. Sanford III - - ----------------------------------------------- John W. Sanford III Director March 30, 2000 /s/ Robert N. Smith - - ----------------------------------------------- Robert N. Smith
-53- EX-10.24 2 MATERIAL CONTRACTS Employment Agreement This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of October 26, 1999 by and among WARWICK COMMUNITY BANCORP, INC., a business corporation organized and existing under the laws of the State of Delaware and having an office at 18 Oakland Avenue, Warwick, New York 10990-0591 ("Company"), THE TOWNE CENTER BANK, a commercial bank organized and existing under the laws of the State of New Jersey and a subsidiary of the Company ("Commercial Bank"), and FRED G. KOWAL, an individual residing at 15 Rutland Road, Glen Rock, New Jersey 07452 ("Executive"). W I T N E S S E T H : WHEREAS, the Executive has accepted the Company's offer to become the President and Chief Executive Officer of the Commercial Bank; and WHEREAS, the Company and the Commercial Bank desire to assure for themselves and their respective subsidiaries and affiliates the continued availability of the Executive's services as provided in this Agreement and the ability of the Executive to perform such services with a minimum of personal distraction in the event of a pending or threatened Change of Control (as hereinafter defined); and WHEREAS, the Executive is willing to continue to serve the Company, the Commercial Bank and their respective subsidiaries and affiliates on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Company, the Commercial Bank and the Executive hereby agree as follows: SECTION 1. EMPLOYMENT. The Company and the Commercial Bank agree to continue to employ the Executive, and the Executive hereby agrees to such continued employment, during the period and upon the terms and conditions set forth in this Agreement. SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD. (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this section 2 ("Employment Period"). The Employment Period shall be for a term of two years beginning on the date of this Agreement and ending on the second anniversary date of this Agreement, plus such extensions, if any, as are provided pursuant to section 2(b). (b) Except as provided in section 2(c) and subject to section 11(b), in the event a Change of Control as defined in section 11 has occurred, beginning on the date of such Change of Control, the Employment Period shall automatically be extended to the second anniversary of the date of the Change of Control, and the Employment Period shall automatically be extended for one additional day each day, unless the Company or the Commercial Bank or the Executive elects not to extend the Agreement further by giving written notice thereof to the other two parties, in which case the Employment Period shall end on the second anniversary of the date on which such written notice is given. For all purposes of this Agreement, the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on the last day of the Employment Period taking into account any extensions under this section 2(b). Upon termination of the Executive's employment with the Company or the Commercial Bank for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Company or the Commercial Bank at any time from terminating the Executive's employment during the Employment Period with or without notice for any reason; PROVIDED, HOWEVER, that the relative rights and obligations of the Company, the Commercial Bank and the Executive in the event of any such termination shall be determined under this Agreement. SECTION 3. DUTIES. The Executive shall serve as President and Chief Executive Officer of the Commercial Bank, having such power, authority and responsibility and performing such duties as are prescribed by or under the By-Laws of the Commercial Bank and as are customarily associated with such position. The Executive shall devote his full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Commercial Bank and shall use his best efforts to advance the interests of the Company and the Commercial Bank. In the event that the business and affairs of the Commercial Bank do not require the Executive's full business time and attention, as reasonably determined by the Board of Directors of the Company ("Company Board"), the Executive shall, in addition to performing the duties as President and Chief Executive Officer of the Commercial Bank described above, have such power, authority and responsibility and perform such duties for the Company, or any subsidiary or affiliate of the Company, as may be reasonably assigned to him by the Company Board in its discretion, or the board of directors of such subsidiary or affiliate in its discretion, as the case may be. SECTION 4. CASH COMPENSATION. In consideration for the services to be rendered by the Executive hereunder, the Commercial Bank shall pay to him a salary at an initial annual rate of one hundred and twenty-five thousand dollars ($125,000), payable in approximately equal installments in accordance with the Company's customary payroll practices for senior officers. The Board of Directors of the Commercial Bank ("Commercial Bank Board") shall review the Executive's annual rate of salary at such times during the Employment Period as it deems appropriate, but not less frequently than once every twelve months, and may, in its discretion, approve an increase therein. In addition to salary, the Executive may receive other cash compensation from the Company or the Commercial Bank for services hereunder at such times, in such amounts and on such terms and conditions as the Company Board or the Commercial Bank Board, as applicable, may determine from time to time. SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS. During the Employment Period, the Executive shall be treated as an employee of the Company and the Commercial Bank and shall be entitled to participate in and receive benefits under -2- any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Company and the Commercial Bank, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Company's and the Commercial Bank's customary practices. SECTION 6. INDEMNIFICATION AND INSURANCE. (a) During the Employment Period and for a period of six years thereafter, the Company or the Commercial Bank shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Company or the Commercial Bank or service in other capacities at the request of the Company or the Commercial Bank. The coverage provided to the Executive pursuant to this section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Company and the Commercial Bank. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six years thereafter, the Company and the Commercial Bank shall indemnify the Executive against and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Company and the Commercial Bank or any subsidiary or affiliate thereof. SECTION 7. OUTSIDE ACTIVITIES. The Executive may serve as a member of the boards of directors of such business, community and charitable organizations as he may disclose to and as may be approved by the Company Board or the Commercial Bank Board (which approval shall not be unreasonably withheld); PROVIDED, HOWEVER, that such service shall not materially interfere with the performance of his duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially interfere with the performance of his duties hereunder; PROVIDED, HOWEVER, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Company or the Commercial Bank and generally applicable to all similarly situated Executives. The Executive may also serve as an officer or director of the Company or any subsidiary or affiliate of the Company on such terms and conditions as the Company and the Commercial Bank may mutually agree upon, and such service shall not be deemed to materially interfere with the Executive's performance of his duties hereunder or otherwise result in a material breach of this Agreement. If the Executive is discharged or suspended, or is subject to any regulatory prohibition or restriction with respect to participation in the affairs of the Commercial Bank, he shall continue to perform services for the Company in accordance with this Agreement but shall not directly or indirectly provide services to or participate in the affairs of the Commercial Bank in a manner inconsistent with the terms of such discharge or suspension or any applicable regulatory order. -3- SECTION 8. WORKING FACILITIES AND EXPENSES. The Executive's principal places of employment shall be at either the Company's or the Commercial Bank's principal executive offices, or at such other location within 50 miles of the addresses at which the Company and the Commercial Bank shall maintain their respective principal executive offices, or at such other location as the Company, the Commercial Bank and the Executive may mutually agree upon. The Commercial Bank shall provide the Executive at his principal place of employment with a private office, secretarial services and other support services and facilities suitable to his position with the Commercial Bank and necessary or appropriate in connection with the performance of his assigned duties under this Agreement. The Commercial Bank shall reimburse the Executive for his ordinary and necessary business expenses, including, without limitation, the Executive's travel and entertainment expenses incurred in connection with the performance of his duties under this Agreement, in each case upon presentation to the Commercial Bank of an itemized account of such expenses in such form as the Commercial Bank may reasonably require. SECTION 9. TERMINATION OF EMPLOYMENT WITH SEVERANCE BENEFITS. (a) The Executive shall be entitled to the severance benefits described in section 9(b) in the event that: (i) his employment with the Company or the Commercial Bank terminates during the Employment Period as a result of the Executive's voluntary resignation within 90 days following: (A) the failure of the Commercial Bank Board to appoint or re- appoint or elect or re-elect the Executive to the position with the Commercial Bank stated in section 3 of this Agreement (or a more senior office); (B) the failure of the shareholders of the Commercial Bank to elect or re-elect the Executive to the Commercial Bank Board; (C) the expiration of a 30-day period following the date on which the Executive gives written notice to the Company of its or the Commercial Bank's material failure, whether by amendment of the Company's Certificate of Incorporation, the Commercial Bank's Certificate of Incorporation, the Company's By-Laws or the Commercial Bank's By-Laws, action of the Company Board or the Commercial Bank Board or the Company's shareholders or the Commercial Bank's shareholders or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in section 3 of this Agreement, unless, during such 30-day period, the Company or the Commercial Bank cures such failure; or (D) the expiration of a 30-day period following the date on which the Executive gives written notice to the Company of its or the Commercial Bank's material breach of any term, condition or covenant contained in this Agreement (including, without limitation, any reduction of the Executive's rate of base salary in effect from time to time and any change in the terms and -4- conditions of any compensation or benefit program in which the Executive participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation package), unless, during such 30-day period, the Company or the Commercial Bank cures such failure; or (ii) the Executive's employment with the Commercial Bank is terminated by the Company or the Commercial Bank for any reason other than for "cause" as provided in section 10(a); or (iii) a Change of Control as defined in section 11 has occurred. (b) Upon the occurrence of any of the events described in section 9(a) of this Agreement, the Company or the Commercial Bank shall pay and provide to the Executive (or, in the event of his death, to his estate): (i) his earned but unpaid salary (including, without limitation, all items which constitute wages under applicable law and the payment of which is not otherwise provided for in this section 9(b)) as of the date of the termination of his employment with the Commercial Bank, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after termination of employment; (ii) the benefits, if any, to which he is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the Company's and the Commercial Bank's officers and employees; (iii) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits, in addition to that provided pursuant to section 9(b)(ii), and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide for the Executive, for the Remaining Unexpired Employment Period, coverage equivalent to the coverage to which he would have been entitled under such plans (as in effect on the date of his termination of employment, or, if his termination of employment occurs after a Change of Control, on the date of such Change of Control, whichever benefits are greater), if he had continued working for the Commercial Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period; (iv) within 30 days following the Executive's termination of employment with the Commercial Bank, a lump sum payment, in an amount equal to the present value of the salary (excluding any additional payments made to the Executive in lieu of the use of an automobile) that the Executive would have earned if he had continued working for the Commercial Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) -5- of the Internal Revenue Code of 1986, as amended ("Code"), compounded using the compounding periods corresponding to the Company's regular payroll periods for its officers, such lump sum to be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination; (v) within 30 days following the Executive's termination of employment with the Commercial Bank, a lump sum payment in an amount equal to the excess, if any, of: (A) the present value of the aggregate benefits to which he would be entitled, if any, under The Warwick Savings Bank Defined Benefit Pension Plan (together with the defined benefit portion of the Benefit Restoration Plan of The Warwick Savings Bank and any other supplemental defined benefit plan) and any and all other qualified and non-qualified defined benefit pension plans maintained by, or covering employees of, the Company, the Commercial Bank or The Warwick Savings Bank, if he were 100% vested thereunder and had continued working for the Commercial Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period; over (B) the present value of the benefits to which he is actually entitled under such defined benefit pension plans as of the date of his termination; where such present values are to be determined using the mortality tables prescribed under section 415(b)(2)(E)(v) of the Code and a discount rate, compounded monthly equal to the annualized rate of interest prescribed by the Pension Benefit Guaranty Corporation for the valuation of immediate annuities payable under terminating single-employer defined benefit plans for the month in which the Executive's termination of employment occurs ("Applicable PBGC Rate"); (vi) within 30 days following the Executive's termination of employment with the Commercial Bank, a lump sum payment in an amount equal to the present value of the estimated employer contributions which would have been made to his account, if any, under The Warwick Savings Bank 401(k) Savings Plan, and the estimated value of the annual allocations that would have been made to his account in the Employee Stock Ownership Plan of Warwick Community Bancorp, Inc. (together with the defined contribution portion of the Benefit Restoration Plan of The Warwick Savings Bank or any other supplemental defined contribution plan) and any and all other qualified and non-qualified defined contribution plans maintained by, or covering employees of, the Commercial Bank, as if he were 100% vested thereunder and had continued working for the Commercial Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period, making the maximum amount of employee contributions, if any, required under any such plan or plans and taking into account his estimated compensation as determined under any such plan or plans, such present value to be determined on the basis of a discount rate, compounded using the -6- compounding period that corresponds to the frequency with which employer contributions are made to the relevant plan, equal to the Applicable PBGC Rate; (vii) the payments that would have been made, if any, to the Executive under any cash or stock bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Commercial Bank if he had continued working for the Commercial Bank during the Remaining Unexpired Employment Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Remaining Unexpired Employment Period, such payments to be equal to the product of: (A) the maximum percentage rate at which an award was ever available to the Executive under such incentive compensation plan; multiplied by (B) the salary that would have been paid to the Executive during each such calendar year at the highest annual rate of salary achieved during the Employment Period; such payments to be made (without discounting for early payment) within 30 days following the Executive's termination of employment; (viii) at the election of the Company made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of options or appreciation rights issued to the Executive, if any, under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Company or the Commercial Bank, a lump sum payment in an amount equal to the product of: (A) the excess of (I) the fair market value of a share of stock of the same class as the stock subject to the option or appreciation right, determined as of the date of termination of employment, over (II) the exercise price per share for such option or appreciation right, as specified in or under the relevant plan or program; multiplied by (B) the number of shares with respect to which options or appreciation rights are being surrendered. For purposes of this section 9(b)(viii), the Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Company or the Commercial Bank, even if he is not vested under such plan or program; and (ix) at the election of the Company made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of any shares awarded to the Executive, if any, under any restricted stock plan maintained by, or covering employees of, the Company or the Commercial Bank, a lump sum payment in an amount equal to the product of: -7- (A) the fair market value of a share of stock of the same class of stock granted under such plan, determined as of the date of the Executive's termination of employment; multiplied by (B) the number of shares which are being surrendered. For purposes of this section 9(b)(ix), the Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Company or the Commercial Bank, even if he is not vested under such plan. The Company, the Commercial Bank and the Executive hereby stipulate that the damages which may be incurred by the Executive following any such termination of employment are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this section 9(b) constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Company, the Commercial Bank and the Executive further agree that the Company or the Commercial Bank may condition the payments and benefits (if any) due under sections 9(b)(iii), (iv), (v), (vi) and (vi) on the receipt of the Executive's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Company, the Commercial Bank or any subsidiary or affiliate of either of them. SECTION 10. TERMINATION WITHOUT ADDITIONAL COMPANY LIABILITY. In the event that the Executive's employment with the Company or the Commercial Bank shall terminate during the Employment Period on account of: (a) the discharge of the Executive for "cause," which, for purposes of this Agreement, shall mean a discharge because the Company Board or the Commercial Bank Board, as the case may be, determines that the Executive: (i) has willfully and intentionally failed to perform his assigned duties under this Agreement (including for these purposes, the Executive's inability to perform such duties as a result of drug or alcohol dependency); (ii) has willfully and intentionally engaged in dishonest or illegal conduct in connection with his performance of services for the Company or the Commercial Bank or has been convicted of a felony; (iii) has willfully violated, in any material respect, any law, rule, regulation, written agreement or final cease-and-desist order with respect to his performance of services for the Company or the Commercial Bank, as determined by the Company Board or the Commercial Bank Board, as the case may be; or (iv) has willfully and intentionally breached the material terms of this Agreement; PROVIDED, HOWEVER, that, if the Executive engages in any of the acts described in section 10(a)(i) or (a)(iv) above, the Company or the Commercial Bank, as the case may be, shall provide the Executive with written notice of its intent to discharge the Executive for cause, and the Executive shall have 30 days from the date on which the Executive receives such notice to cure any such acts; AND PROVIDED, FURTHER, that on and after the date that a Change of Control occurs, a determination under this section 10 shall require the affirmative vote of at least three-fourths of the members of the Company Board or the Commercial Bank Board, as the case may be, acting in good faith and such vote shall not be made prior to the expiration of a 60-day period following the date on which the Company Board or the Commercial Bank Board, as the case may be, shall, by written notice to the Executive, furnish to him a statement of its grounds for proposing to make such -8- determination, during which period the Executive shall be afforded a reasonable opportunity to make oral and written presentations to the members of the Company Board or the Commercial Bank Board, as the case may be, and to be represented by his legal counsel at such presentations, to refute the grounds for the proposed determination; (b) the Executive's voluntary resignation from employment with the Company or the Commercial Bank, as the case may be, for reasons other than those specified in section 9(a)(i); or (c) the death of the Executive while employed by the Company or the Commercial Bank or the termination of the Executive's employment because of "total and permanent disability" within the meaning of the long-term disability plan covering employees of the Commercial Bank; then the Company and the Commercial Bank shall have no further obligations under this Agreement, other than the payment to the Executive of his earned but unpaid salary as of the date of the termination of his employment and the provision of such other benefits, if any, to which he is entitled as a former employee under the Company's and the Commercial Bank's employee benefit plans and programs and compensation plans and programs. For purposes of this section 10, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company and the Commercial Bank. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Company Board or the Commercial Bank Board or based upon the written advice of counsel for the Company or the Commercial Bank shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company and the Commercial Bank. The cessation of employment of the Executive shall not be deemed to be for "cause" within the meaning of section 10(a) unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of three-fourths of the members of the Company Board or the Commercial Bank Board, as the case may be, at a meeting of the Company Board or the Commercial Bank Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Company Board or the Commercial Bank Board), finding that, in the good faith opinion of the Company Board or the Commercial Bank Board, the Executive is guilty of the conduct described in section 10(a) above, and specifying the particulars thereof in detail. SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE OF CONTROL. (a) A Change of Control of the Company ("Change of Control") shall be deemed to have occurred upon the happening of any of the following events: (i) the reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by -9- persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert; (iii) a complete liquidation or dissolution of the Company; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Company Board do not belong to any of the following groups: (A) individuals who were members of the Company Board on the date of this Agreement; or (B) individuals who first became members of the Company Board after the date of this Agreement either: (1) upon election to serve as a member of the Company Board by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or (2) upon election by the shareholders of the Company to serve as a member of the Company Board, but only if nominated for election by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first nomination; PROVIDED, HOWEVER, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Company Board; or -10- (v) any event which would be described in section 11(a)(i), (ii), (iii) or (iv) if the term "Commercial Bank" were substituted for the term "Company" therein and the term "Commercial Bank Board" were substituted for the term "Company Board" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Commercial Bank, or a subsidiary of either of them, by the Company, the Commercial Bank, or any subsidiary of either of them, or by any employee benefit plan or trust maintained by any of them. For purposes of this section 11(a), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) In the event of a Change of Control, the Executive shall be entitled to the payments and benefits described in section 9(b), regardless of whether his employment terminates; PROVIDED, HOWEVER, that the term "Remaining Unexpired Employment Period" shall mean the period beginning on the effective date of the Change of Control and ending on the second anniversary of such date. (c) Notwithstanding any contrary provision in this Agreement, if, prior to the occurrence of a Change of Control, the Executive's employment with the Company or the Commercial Bank is terminated (other than for "cause" as defined in section 10(a)) and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of any person, party or entity who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then, for all purposes of this Agreement, the "Change of Control" shall be deemed to have occurred on the date immediately prior to the date of the Executive's termination of employment. SECTION 12. TAX INDEMNIFICATION. (a) This section 12 shall apply if the Executive's employment is terminated upon or following (i) a Change of Control (as defined in section 11 of this Agreement); or (ii) a change "in the ownership or effective control" of the Company or the Commercial Bank or "in the ownership of a substantial portion of the assets" of the Company or the Commercial Bank within the meaning of section 280G of the Code. If this section 12 applies, then, if for any taxable year, the Executive shall be liable for the payment of an excise tax under section 4999 of the Code with respect to any payment in the nature of compensation made by the Company, the Commercial Bank or any direct or indirect subsidiary or affiliate of the Company or the Commercial Bank to (or for the benefit of) the Executive, the Company shall pay to the Executive an amount equal to X determined under the following formula: X = E x P ------------------------------------ 1 - [(FI x (1 - SLI)) + SLI + E + M] where E = the rate at which the excise tax is assessed under section 4999 of the Code; -11- P = the amount with respect to which such excise tax is assessed, determined without regard to this section 12; FI = the highest marginal rate of income tax applicable to the Executive under the Code for the taxable year in question (taking into account any phase-out or loss of deductions, personal exemptions and other similar adjustments); SLI = the sum of the highest marginal rates of income tax applicable to the Executive under all applicable state and local laws for the taxable year in question (taking into account any phase-out or loss of deductions, personal exemptions and other similar adjustments); and M = the highest marginal rate of Medicare tax applicable to the Executive under the Code for the taxable year in question. With respect to any payment in the nature of compensation that is made to (or for the benefit of) the Executive under the terms of this Agreement, or otherwise, and on which an excise tax under section 4999 of the Code will be assessed, the payment determined under this 12(a) shall be made to the Executive on the earlier of (i) the date the Company, the Commercial Bank or any direct or indirect subsidiary or affiliate of the Company or the Commercial Bank is required to withhold such tax, or (ii) the date the tax is required to be paid by the Executive. (b) Notwithstanding anything in this section 12 to the contrary, in the event that the Executive's liability for the excise tax under section 4999 of the Code for a taxable year is subsequently determined to be different than the amount determined by the formula (X + P) x E, where X, P and E have the meanings provided in section 12(a), the Executive or the Company, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made under section 12(a), when increased by the amount of the payment made to the Executive under this section 12(b) by the Company or the Commercial Bank, or when reduced by the amount of the payment made to the Company or the Commercial Bank under this section 12(b) by the Executive, equals the amount that should have properly been paid to the Executive under section 12(a). The interest paid under this section 12(b) shall be determined at the rate provided under section 1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid to the Executive under this section 12, the Executive shall furnish to the Company and the Commercial Bank a copy of each tax return which reflects a liability for an excise tax payment made by the Company or the Commercial Bank, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. SECTION 13. [Reserved] -12- SECTION 14. CONFIDENTIALITY. Unless he obtains the prior written consent of the Company and the Commercial Bank, the Executive shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Company, the Commercial Bank or any entity which is a subsidiary or affiliate of the Company, the Commercial Bank or of which the Company or the Commercial Bank is a subsidiary or affiliate, any material document or information obtained from the Company, the Commercial Bank or from any of their respective parents, subsidiaries or affiliates, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); PROVIDED, HOWEVER, that nothing in this section 14 shall prevent the Executive, with or without the Company's or the Commercial Bank's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. SECTION 15. SOLICITATION. The Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Commercial Bank, he shall not, without the written consent of the Commercial Bank, directly solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any executive officer of the Company, the Commercial Bank or any of their respective subsidiaries or affiliates to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, commercial bank, bank holding company, savings and loan holding company, credit union, any other institution engaged in the business of accepting deposits, making loans or doing a banking business within the counties in which the Company or the Commercial Bank maintains an office or any direct or indirect subsidiary or affiliate of any of the foregoing; -13- SECTION 16. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS. The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Company, by the Commercial Bank or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Company's or the Commercial Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Company or the Commercial Bank from time to time; PROVIDED, HOWEVER, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any agreement, plan or program covering the Executive to which the Company is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. SECTION 17. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of and be binding upon the Executive, his legal representatives and testate or intestate distributees, and the Company and the Commercial Bank and their respective successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company or the Commercial Bank may be sold or otherwise transferred. Failure of the Company or the Commercial Bank to obtain from any successor its express written assumption of the Company's or the Commercial Bank's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. SECTION 18. NOTICES. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, -14- addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: Fred G. Kowal 15 Rutland Road Glen Rock, New Jersey 07452 If to the Company or the Commercial Bank: Warwick Community Bancorp, Inc. 18 Oakland Avenue Warwick, New York 10990-0591 Attention: President WITH A COPY TO: Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 Attention: Douglas J. McClintock, Esq. -------------------------- SECTION 19. INDEMNIFICATION FOR ATTORNEYS' FEES. (a) The Company and the Commercial Bank shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees and expenses, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Company's or the Commercial Bank's obligations hereunder shall be conclusive evidence of the Executive's entitlement to indemnification hereunder, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. (b) The Company's and the Commercial Bank's obligations to make the payments provided for in this Agreement and otherwise to perform their respective obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or the Commercial Bank may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. Unless it is determined that a claim made by the Executive was either frivolous or made in bad faith, the Company and the Commercial Bank agree to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of or in connection with his consultation with legal counsel or arising out of any action, suit, proceeding or contest -15- (regardless of the outcome thereof) by the Company or the Commercial Bank, the Executive or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. This section 19(b) shall apply whether such consultation, action, suit, proceeding or contest arises before, on, after or as a result of a Change of Control. SECTION 20. SEVERABILITY. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. SECTION 21. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. SECTION 22. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. SECTION 23. GOVERNING LAW. Except to the extent preempted by federal law, this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. SECTION 24. HEADINGS AND CONSTRUCTION. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. SECTION 25. ENTIRE AGREEMENT; MODIFICATIONS. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. -16- SECTION 26. NON-DUPLICATION. In the event that the Executive shall perform services for any direct or indirect subsidiary or affiliate of the Company or the Commercial Bank, any compensation or benefits provided to the Executive by such other employer shall be applied to offset the obligations of the Company and the Commercial Bank hereunder, it being intended that this Agreement set forth the aggregate compensation and benefits payable to the Executive for all services to the Company, the Commercial Bank and all of their respective direct or indirect subsidiaries and affiliates. SECTION 27. IF THE COMMERCIAL BANK SHALL CEASE TO EXIST. Notwithstanding any other provision in this Agreement to the contrary, in the event that the Commercial Bank shall, for whatever reason, cease to exist, whether by merger into The Warwick Savings Bank ("Savings Bank") or another entity, dissolution, liquidation, sale or other transfer of assets and liabilities or otherwise, then the Company Board may, in its sole discretion, cause the election or appointment of the Executive to what it reasonably believes to be an equivalent officer's position with equivalent compensation at the Savings Bank, as compared to his position and compensation at the Commercial Bank, and such action shall not be considered to be a violation or a breach of this Agreement and shall not permit the Executive to resign under section 9(a)(i). In such case, this Agreement shall continue in full force and effect, but (i) the words "The Warwick Savings Bank" and "Savings Bank," respectively, shall be substituted for "The Towne Center Bank" and "Commercial Bank," respectively, where applicable, (ii) references to the Executive's position and compensation at the Commercial Bank shall become references to the Executive's position and compensation at the Savings Bank (except that the Company Board shall not be required to elect the Executive to the Board of Directors of the Savings Bank) and (iii) such other adjustments to this Agreement as are necessary shall be made so as to continue this Agreement in effect, the intent being that, if the Commercial Bank shall cease to exist, the rights and obligations under this Agreement shall be shifted from the Commercial Bank to the Savings Bank and otherwise continue to protect the Executive, the Company and the Savings Bank. SECTION 28. REQUIRED REGULATORY PROVISIONS. Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. ss.1828(k), and any regulations promulgated thereunder. -17- IN WITNESS WHEREOF, the Company and the Commercial Bank have caused this Agreement to be executed and the Executive has hereunto set his hand, all as of the day and year first above written. /s/ Fred G. Kowal ----------------- Fred G. Kowal WARWICK COMMUNITY BANCORP, INC. Attest: By /s/ Nancy L. Sobotor-Littell By /s/ Timothy A. Dempsey ------------------------------------- ----------------------- Nancy L. Sobotor-Littell Timothy A. Dempsey Corporate Secretary Chairman of the Board and Chief Executive Officer [Seal] THE TOWNE CENTER BANK Attest: By /s/ Lois E. Ulatowski By /s/ Timothy A. Dempsey ------------------------------------- ------------------------ Lois E. Ulatowski Timothy A. Dempsey Corporate Secretary Chairman of the Board [Seal] -18- STATE OF NEW YORK ) : ss.: COUNTY OF ORANGE ) On this 26th day of October, 1999, before me personally came FRED G. KOWAL, to me known, and known to me to be the individual described in the foregoing instrument, who, being by me duly sworn, did depose and say that he resides at the address set forth in said instrument, and that he signed his name to the foregoing instrument. /s/ Lisette Cuba ----------------- Notary Public STATE OF NEW YORK ) : ss.: COUNTY OF ORANGE ) On this 26th day of October, 1999, before me personally came Timothy A. Dempsey, to me known, who, being by me duly sworn, did depose and say that he resides at 36 Waterbury Road, Warwick, New York 10990, that he is Chairman of the Board and Chief Executive Officer of WARWICK COMMUNITY BANCORP, INC., the Delaware corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such seal; that it was so affixed by order of the Board of Directors of said corporation; and that he signed his name thereto by like order. /s/ Lisette Cuba ----------------- Notary Public STATE OF NEW YORK ) : ss.: COUNTY OF ORANGE ) On this 26th day of October, 1999, before me personally came Timothy A. Dempsey, to me known, who, being by me duly sworn, did depose and say that he resides at 36 Waterbury Road, Warwick, New York 10990, that he is Chairman of the Board of THE TOWNE CENTER BANK, the New Jersey commercial bank described in and which executed the foregoing instrument; that he knows the seal of said commercial bank; that the seal affixed to said instrument is such seal; that it was so affixed by order of the Board of Directors of said commercial bank; and that he signed his name thereto by like order. /s/ Lisette Cuba ----------------- Notary Public -19- EX-10.25 3 MATERIAL CONTRACTS EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of October 26, 1999 by and among WARWICK COMMUNITY BANCORP, INC., a business corporation organized and existing under the laws of the State of Delaware and having an office at 18 Oakland Avenue, Warwick, New York 10990-0591 ("Company"), THE TOWNE CENTER BANK, a commercial bank organized and existing under the laws of the State of New Jersey and a subsidiary of the Company ("Commercial Bank"), and LAURENCE D. HAGGERTY, an individual residing at 198 West Shore Trail, Sparta, New Jersey 07871 ("Executive"). W I T N E S S E T H : WHEREAS, the Executive has accepted the Company's offer to become Executive Vice President and Chief Lending Officer of the Commercial Bank; and WHEREAS, the Company and the Commercial Bank desire to assure for themselves and their respective subsidiaries and affiliates the continued availability of the Executive's services as provided in this Agreement and the ability of the Executive to perform such services with a minimum of personal distraction in the event of a pending or threatened Change of Control (as hereinafter defined); and WHEREAS, the Executive is willing to continue to serve the Company, the Commercial Bank and their respective subsidiaries and affiliates on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Company, the Commercial Bank and the Executive hereby agree as follows: SECTION 1. EMPLOYMENT. The Company and the Commercial Bank agree to continue to employ the Executive, and the Executive hereby agrees to such continued employment, during the period and upon the terms and conditions set forth in this Agreement. SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD. (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this section 2 ("Employment Period"). The Employment Period shall be for a term of two years beginning on the date of this Agreement and ending on the second anniversary date of this Agreement, plus such extensions, if any, as are provided pursuant to section 2(b). (b) Except as provided in section 2(c) and subject to section 11(b), in the event a Change of Control as defined in section 11 has occurred, beginning on the date of such Change of Control, the Employment Period shall automatically be extended to the second anniversary of the date of the Change of Control, and the Employment Period shall automatically be extended for one additional day each day, unless the Company or the Commercial Bank or the Executive elects not to extend the Agreement further by giving written notice thereof to the other two parties, in which case the Employment Period shall end on the second anniversary of the date on which such written notice is given. For all purposes of this Agreement, the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on the last day of the Employment Period taking into account any extensions under this section 2(b). Upon termination of the Executive's employment with the Company or the Commercial Bank for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Company or the Commercial Bank at any time from terminating the Executive's employment during the Employment Period with or without notice for any reason; PROVIDED, HOWEVER, that the relative rights and obligations of the Company, the Commercial Bank and the Executive in the event of any such termination shall be determined under this Agreement. SECTION 3. DUTIES. The Executive shall serve as Executive Vice President and Chief Lending Officer of the Commercial Bank, having such power, authority and responsibility and performing such duties as are prescribed by or under the By-Laws of the Commercial Bank and as are customarily associated with such position. The Executive shall devote his full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Commercial Bank and shall use his best efforts to advance the interests of the Company and the Commercial Bank. In the event that the business and affairs of the Commercial Bank do not require the Executive's full business time and attention, as reasonably determined by the Board of Directors of the Company ("Company Board"), the Executive shall, in addition to performing the duties as Executive Vice President and Chief Lending Officer of the Commercial Bank described above, have such power, authority and responsibility and perform such duties for the Company, or any subsidiary or affiliate of the Company, as may be reasonably assigned to him by the Company Board in its discretion, or the board of directors of such subsidiary or affiliate in its discretion, as the case may be. SECTION 4. CASH COMPENSATION. In consideration for the services to be rendered by the Executive hereunder, the Commercial Bank shall pay to him a salary at an initial annual rate of one hundred and fifteen thousand dollars ($115,000), payable in approximately equal installments in accordance with the Company's customary payroll practices for senior officers. The Board of Directors of the Commercial Bank ("Commercial Bank Board") shall review the Executive's annual rate of salary at such times during the Employment Period as it deems appropriate, but not less frequently than once every twelve months, and may, in its discretion, approve an increase therein. In addition to salary, the Executive may receive other cash compensation from the Company or the Commercial Bank for services hereunder at such times, in such amounts and on such terms and conditions as the Company Board or the Commercial Bank Board, as applicable, may determine from time to time. SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS. During the Employment Period, the Executive shall be treated as an employee of the Company and the Commercial Bank and shall be entitled to participate in and receive benefits under -2- any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Company and the Commercial Bank, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Company's and the Commercial Bank's customary practices. SECTION 6. INDEMNIFICATION AND INSURANCE. (a) During the Employment Period and for a period of six years thereafter, the Company or the Commercial Bank shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Company or the Commercial Bank or service in other capacities at the request of the Company or the Commercial Bank. The coverage provided to the Executive pursuant to this section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Company and the Commercial Bank. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six years thereafter, the Company and the Commercial Bank shall indemnify the Executive against and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Company and the Commercial Bank or any subsidiary or affiliate thereof. SECTION 7. OUTSIDE ACTIVITIES. The Executive may serve as a member of the boards of directors of such business, community and charitable organizations as he may disclose to and as may be approved by the Company Board or the Commercial Bank Board (which approval shall not be unreasonably withheld); PROVIDED, HOWEVER, that such service shall not materially interfere with the performance of his duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially interfere with the performance of his duties hereunder; PROVIDED, HOWEVER, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Company or the Commercial Bank and generally applicable to all similarly situated Executives. The Executive may also serve as an officer or director of the Company or any subsidiary or affiliate of the Company on such terms and conditions as the Company and the Commercial Bank may mutually agree upon, and such service shall not be deemed to materially interfere with the Executive's performance of his duties hereunder or otherwise result in a material breach of this Agreement. If the Executive is discharged or suspended, or is subject to any regulatory prohibition or restriction with respect to participation in the affairs of the Commercial Bank, he shall continue to perform services for the Company in accordance with this Agreement but shall not directly or indirectly provide services to or participate in the affairs of the Commercial Bank in a manner inconsistent with the terms of such discharge or suspension or any applicable regulatory order. -3- SECTION 8. WORKING FACILITIES AND EXPENSES. The Executive's principal places of employment shall be at either the Company's or the Commercial Bank's principal executive offices, or at such other location within 50 miles of the addresses at which the Company and the Commercial Bank shall maintain their respective principal executive offices, or at such other location as the Company, the Commercial Bank and the Executive may mutually agree upon. The Commercial Bank shall provide the Executive at his principal place of employment with a private office, secretarial services and other support services and facilities suitable to his position with the Commercial Bank and necessary or appropriate in connection with the performance of his assigned duties under this Agreement. The Commercial Bank shall reimburse the Executive for his ordinary and necessary business expenses, including, without limitation, the Executive's travel and entertainment expenses incurred in connection with the performance of his duties under this Agreement, in each case upon presentation to the Commercial Bank of an itemized account of such expenses in such form as the Commercial Bank may reasonably require. SECTION 9. TERMINATION OF EMPLOYMENT WITH SEVERANCE BENEFITS. (a) The Executive shall be entitled to the severance benefits described in section 9(b) in the event that: (i) his employment with the Company or the Commercial Bank terminates during the Employment Period as a result of the Executive's voluntary resignation within 90 days following: (A) the failure of the Commercial Bank Board to appoint or re- appoint or elect or re-elect the Executive to the position with the Commercial Bank stated in section 3 of this Agreement (or a more senior office); (B) the expiration of a 30-day period following the date on which the Executive gives written notice to the Company of its or the Commercial Bank's material failure, whether by amendment of the Company's Certificate of Incorporation, the Commercial Bank's Certificate of Incorporation, the Company's By-Laws or the Commercial Bank's By-Laws, action of the Company Board or the Commercial Bank Board or the Company's shareholders or the Commercial Bank's shareholders or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in section 3 of this Agreement, unless, during such 30-day period, the Company or the Commercial Bank cures such failure; or (C) the expiration of a 30-day period following the date on which the Executive gives written notice to the Company of its or the Commercial Bank's material breach of any term, condition or covenant contained in this Agreement (including, without limitation, any reduction of the Executive's rate of base salary in effect from time to time and any change in the terms and conditions of any compensation or benefit program in which the Executive participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation -4- package), unless, during such 30-day period, the Company or the Commercial Bank cures such failure; or (ii) the Executive's employment with the Commercial Bank is terminated by the Company or the Commercial Bank for any reason other than for "cause" as provided in section 10(a); or (iii) a Change of Control as defined in section 11 has occurred. (b) Upon the occurrence of any of the events described in section 9(a) of this Agreement, the Company or the Commercial Bank shall pay and provide to the Executive (or, in the event of his death, to his estate): (i) his earned but unpaid salary (including, without limitation, all items which constitute wages under applicable law and the payment of which is not otherwise provided for in this section 9(b)) as of the date of the termination of his employment with the Commercial Bank, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after termination of employment; (ii) the benefits, if any, to which he is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the Company's and the Commercial Bank's officers and employees; (iii) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits, in addition to that provided pursuant to section 9(b)(ii), and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide for the Executive, for the Remaining Unexpired Employment Period, coverage equivalent to the coverage to which he would have been entitled under such plans (as in effect on the date of his termination of employment, or, if his termination of employment occurs after a Change of Control, on the date of such Change of Control, whichever benefits are greater), if he had continued working for the Commercial Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period; (iv) within 30 days following the Executive's termination of employment with the Commercial Bank, a lump sum payment, in an amount equal to the present value of the salary (excluding any additional payments made to the Executive in lieu of the use of an automobile) that the Executive would have earned if he had continued working for the Commercial Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Internal Revenue Code of 1986, as amended ("Code"), compounded using the compounding periods corresponding to the Company's regular payroll periods for its -5- officers, such lump sum to be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination; (v) within 30 days following the Executive's termination of employment with the Commercial Bank, a lump sum payment in an amount equal to the excess, if any, of: (A) the present value of the aggregate benefits to which he would be entitled, if any, under The Warwick Savings Bank Defined Benefit Pension Plan (together with the defined benefit portion of the Benefit Restoration Plan of The Warwick Savings Bank and any other supplemental defined benefit plan) and any and all other qualified and non-qualified defined benefit pension plans maintained by, or covering employees of, the Company, the Commercial Bank or The Warwick Savings Bank, if he were 100% vested thereunder and had continued working for the Commercial Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period; over (B) the present value of the benefits to which he is actually entitled under such defined benefit pension plans as of the date of his termination; where such present values are to be determined using the mortality tables prescribed under section 415(b)(2)(E)(v) of the Code and a discount rate, compounded monthly equal to the annualized rate of interest prescribed by the Pension Benefit Guaranty Corporation for the valuation of immediate annuities payable under terminating single-employer defined benefit plans for the month in which the Executive's termination of employment occurs ("Applicable PBGC Rate"); (vi) within 30 days following the Executive's termination of employment with the Commercial Bank, a lump sum payment in an amount equal to the present value of the estimated employer contributions which would have been made to his account, if any, under The Warwick Savings Bank 401(k) Savings Plan, and the estimated value of the annual allocations that would have been made to his account in the Employee Stock Ownership Plan of Warwick Community Bancorp, Inc. (together with the defined contribution portion of the Benefit Restoration Plan of The Warwick Savings Bank or any other supplemental defined contribution plan) and any and all other qualified and non-qualified defined contribution plans maintained by, or covering employees of, the Commercial Bank, as if he were 100% vested thereunder and had continued working for the Commercial Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period, making the maximum amount of employee contributions, if any, required under any such plan or plans and taking into account his estimated compensation as determined under any such plan or plans, such present value to be determined on the basis of a discount rate, compounded using the compounding period that corresponds to the frequency with which employer contributions are made to the relevant plan, equal to the Applicable PBGC Rate; -6- (vii) the payments that would have been made, if any, to the Executive under any cash or stock bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Commercial Bank if he had continued working for the Commercial Bank during the Remaining Unexpired Employment Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Remaining Unexpired Employment Period, such payments to be equal to the product of: (A) the maximum percentage rate at which an award was ever available to the Executive under such incentive compensation plan; multiplied by (B) the salary that would have been paid to the Executive during each such calendar year at the highest annual rate of salary achieved during the Employment Period; such payments to be made (without discounting for early payment) within 30 days following the Executive's termination of employment; (viii) at the election of the Company made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of options or appreciation rights issued to the Executive, if any, under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Company or the Commercial Bank, a lump sum payment in an amount equal to the product of: (A) the excess of (I) the fair market value of a share of stock of the same class as the stock subject to the option or appreciation right, determined as of the date of termination of employment, over (II) the exercise price per share for such option or appreciation right, as specified in or under the relevant plan or program; multiplied by (B) the number of shares with respect to which options or appreciation rights are being surrendered. For purposes of this section 9(b)(viii), the Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Company or the Commercial Bank, even if he is not vested under such plan or program; and (ix) at the election of the Company made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of any shares awarded to the Executive, if any, under any restricted stock plan maintained by, or covering employees of, the Company or the Commercial Bank, a lump sum payment in an amount equal to the product of: -7- (A) the fair market value of a share of stock of the same class of stock granted under such plan, determined as of the date of the Executive's termination of employment; multiplied by (B) the number of shares which are being surrendered. For purposes of this section 9(b)(ix), the Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Company or the Commercial Bank, even if he is not vested under such plan. The Company, the Commercial Bank and the Executive hereby stipulate that the damages which may be incurred by the Executive following any such termination of employment are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this section 9(b) constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Company, the Commercial Bank and the Executive further agree that the Company or the Commercial Bank may condition the payments and benefits (if any) due under sections 9(b)(iii), (iv), (v), (vi) and (vi) on the receipt of the Executive's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Company, the Commercial Bank or any subsidiary or affiliate of either of them. SECTION 10. TERMINATION WITHOUT ADDITIONAL COMPANY LIABILITY. In the event that the Executive's employment with the Company or the Commercial Bank shall terminate during the Employment Period on account of: (a) the discharge of the Executive for "cause," which, for purposes of this Agreement, shall mean a discharge because the Company Board or the Commercial Bank Board, as the case may be, determines that the Executive: (i) has willfully and intentionally failed to perform his assigned duties under this Agreement (including for these purposes, the Executive's inability to perform such duties as a result of drug or alcohol dependency); (ii) has willfully and intentionally engaged in dishonest or illegal conduct in connection with his performance of services for the Company or the Commercial Bank or has been convicted of a felony; (iii) has willfully violated, in any material respect, any law, rule, regulation, written agreement or final cease-and-desist order with respect to his performance of services for the Company or the Commercial Bank, as determined by the Company Board or the Commercial Bank Board, as the case may be; or (iv) has willfully and intentionally breached the material terms of this Agreement; PROVIDED, HOWEVER, that, if the Executive engages in any of the acts described in section 10(a)(i) or (a)(iv) above, the Company or the Commercial Bank, as the case may be, shall provide the Executive with written notice of its intent to discharge the Executive for cause, and the Executive shall have 30 days from the date on which the Executive receives such notice to cure any such acts; AND PROVIDED, FURTHER, that on and after the date that a Change of Control occurs, a determination under this section 10 shall require the affirmative vote of at least three-fourths of the members of the Company Board or the Commercial Bank Board, as the case may be, acting in good faith and such vote shall not be made prior to the expiration of a 60-day period following the date on which the Company Board or the Commercial Bank Board, as the case may be, shall, by written notice to the Executive, furnish to him a statement of its grounds for proposing to make such -8- determination, during which period the Executive shall be afforded a reasonable opportunity to make oral and written presentations to the members of the Company Board or the Commercial Bank Board, as the case may be, and to be represented by his legal counsel at such presentations, to refute the grounds for the proposed determination; (b) the Executive's voluntary resignation from employment with the Company or the Commercial Bank, as the case may be, for reasons other than those specified in section 9(a)(i); or (c) the death of the Executive while employed by the Company or the Commercial Bank or the termination of the Executive's employment because of "total and permanent disability" within the meaning of the long-term disability plan covering employees of the Commercial Bank; then the Company and the Commercial Bank shall have no further obligations under this Agreement, other than the payment to the Executive of his earned but unpaid salary as of the date of the termination of his employment and the provision of such other benefits, if any, to which he is entitled as a former employee under the Company's and the Commercial Bank's employee benefit plans and programs and compensation plans and programs. For purposes of this section 10, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company and the Commercial Bank. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Company Board or the Commercial Bank Board or based upon the written advice of counsel for the Company or the Commercial Bank shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company and the Commercial Bank. The cessation of employment of the Executive shall not be deemed to be for "cause" within the meaning of section 10(a) unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of three-fourths of the members of the Company Board or the Commercial Bank Board, as the case may be, at a meeting of the Company Board or the Commercial Bank Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Company Board or the Commercial Bank Board), finding that, in the good faith opinion of the Company Board or the Commercial Bank Board, the Executive is guilty of the conduct described in section 10(a) above, and specifying the particulars thereof in detail. SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE OF CONTROL. (a) A Change of Control of the Company ("Change of Control") shall be deemed to have occurred upon the happening of any of the following events: (i) the reorganization, merger or consolidation of the Company with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by -9- persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert; (iii) a complete liquidation or dissolution of the Company; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Company Board do not belong to any of the following groups: (A) individuals who were members of the Company Board on the date of this Agreement; or (B) individuals who first became members of the Company Board after the date of this Agreement either: (1) upon election to serve as a member of the Company Board by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or (2) upon election by the shareholders of the Company to serve as a member of the Company Board, but only if nominated for election by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first nomination; PROVIDED, HOWEVER, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Company Board; or -10- (v) any event which would be described in section 11(a)(i), (ii), (iii) or (iv) if the term "Commercial Bank" were substituted for the term "Company" therein and the term "Commercial Bank Board" were substituted for the term "Company Board" therein. In no event, however, shall a Change of Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Commercial Bank, or a subsidiary of either of them, by the Company, the Commercial Bank, or any subsidiary of either of them, or by any employee benefit plan or trust maintained by any of them. For purposes of this section 11(a), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) In the event of a Change of Control, the Executive shall be entitled to the payments and benefits described in section 9(b), regardless of whether his employment terminates; PROVIDED, HOWEVER, that the term "Remaining Unexpired Employment Period" shall mean the period beginning on the effective date of the Change of Control and ending on the second anniversary of such date. (c) Notwithstanding any contrary provision in this Agreement, if, prior to the occurrence of a Change of Control, the Executive's employment with the Company or the Commercial Bank is terminated (other than for "cause" as defined in section 10(a)) and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of any person, party or entity who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then, for all purposes of this Agreement, the "Change of Control" shall be deemed to have occurred on the date immediately prior to the date of the Executive's termination of employment. SECTION 12. TAX INDEMNIFICATION. (a) This section 12 shall apply if the Executive's employment is terminated upon or following (i) a Change of Control (as defined in section 11 of this Agreement); or (ii) a change "in the ownership or effective control" of the Company or the Commercial Bank or "in the ownership of a substantial portion of the assets" of the Company or the Commercial Bank within the meaning of section 280G of the Code. If this section 12 applies, then, if for any taxable year, the Executive shall be liable for the payment of an excise tax under section 4999 of the Code with respect to any payment in the nature of compensation made by the Company, the Commercial Bank or any direct or indirect subsidiary or affiliate of the Company or the Commercial Bank to (or for the benefit of) the Executive, the Company shall pay to the Executive an amount equal to X determined under the following formula: X = E x P ------------------------------------ 1 - [(FI x (1 - SLI)) + SLI + E + M] where E = the rate at which the excise tax is assessed under section 4999 of the Code; -11- P = the amount with respect to which such excise tax is assessed, determined without regard to this section 12; FI = the highest marginal rate of income tax applicable to the Executive under the Code for the taxable year in question (taking into account any phase-out or loss of deductions, personal exemptions and other similar adjustments); SLI = the sum of the highest marginal rates of income tax applicable to the Executive under all applicable state and local laws for the taxable year in question (taking into account any phase-out or loss of deductions, personal exemptions and other similar adjustments); and M = the highest marginal rate of Medicare tax applicable to the Executive under the Code for the taxable year in question. With respect to any payment in the nature of compensation that is made to (or for the benefit of) the Executive under the terms of this Agreement, or otherwise, and on which an excise tax under section 4999 of the Code will be assessed, the payment determined under this 12(a) shall be made to the Executive on the earlier of (i) the date the Company, the Commercial Bank or any direct or indirect subsidiary or affiliate of the Company or the Commercial Bank is required to withhold such tax, or (ii) the date the tax is required to be paid by the Executive. (b) Notwithstanding anything in this section 12 to the contrary, in the event that the Executive's liability for the excise tax under section 4999 of the Code for a taxable year is subsequently determined to be different than the amount determined by the formula (X + P) x E, where X, P and E have the meanings provided in section 12(a), the Executive or the Company, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made under section 12(a), when increased by the amount of the payment made to the Executive under this section 12(b) by the Company or the Commercial Bank, or when reduced by the amount of the payment made to the Company or the Commercial Bank under this section 12(b) by the Executive, equals the amount that should have properly been paid to the Executive under section 12(a). The interest paid under this section 12(b) shall be determined at the rate provided under section 1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid to the Executive under this section 12, the Executive shall furnish to the Company and the Commercial Bank a copy of each tax return which reflects a liability for an excise tax payment made by the Company or the Commercial Bank, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. SECTION 13. COVENANT NOT TO COMPETE. The Executive hereby covenants and agrees that, in the event of his termination of employment with the Company or the Commercial Bank prior to the expiration of the Employment Period, for a period of one year following the date of such termination of employment (or, if less, for the Remaining Unexpired Employment Period), he shall not, without the written consent of the Company and the Commercial Bank, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, commercial -12- bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working within Bergen, Passaic, Sussex, Morris, Essex, Union, Warren, Hudson, Hunterdon, Somerset and Middlesex counties in New Jersey, Orange, Dutchess, Rockland or Putnam counties in New York or any other county in which the Company or the Commercial Bank maintains an office; PROVIDED, HOWEVER, that this section 13 shall not apply if the Executive's employment is terminated for the reasons set forth in section 9(a). SECTION 14. CONFIDENTIALITY. Unless he obtains the prior written consent of the Company and the Commercial Bank, the Executive shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Company, the Commercial Bank or any entity which is a subsidiary or affiliate of the Company, the Commercial Bank or of which the Company or the Commercial Bank is a subsidiary or affiliate, any material document or information obtained from the Company, the Commercial Bank or from any of their respective parents, subsidiaries or affiliates, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); PROVIDED, HOWEVER, that nothing in this section 14 shall prevent the Executive, with or without the Company's or the Commercial Bank's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. SECTION 15. SOLICITATION. The Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Commercial Bank, he shall not, without the written consent of the Commercial Bank, either directly or indirectly: (a) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company, the Commercial Bank or any of their respective subsidiaries or affiliates to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, commercial bank, bank holding company, savings and loan holding company, credit union, any other institution engaged in the business of accepting deposits, making loans or doing a banking business within the counties specified in section 13, or any direct or indirect subsidiary or affiliate of any of the foregoing; (b) provide any information, advice or recommendation with respect to any such officer or employee of any savings bank, savings and loan association, commercial bank, bank holding company, savings and loan holding company, or either institution engaged in the business of accepting deposits, making loans or doing a banking business within the counties specified in section 13 that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company, the Commercial Bank, or any of -13- their respective subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, commercial bank, bank holding company, savings and loan holding company, credit union, any other institution engaged in the business of accepting deposits, making loans or doing a banking business within the counties specified in section 13, or any direct or indirect subsidiary or affiliate of any of the foregoing; or (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Company or the Commercial Bank to terminate an existing business or commercial relationship with the Company or the Commercial Bank. SECTION 16. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS. The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Company, by the Commercial Bank or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Company's or the Commercial Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Company or the Commercial Bank from time to time; PROVIDED, HOWEVER, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any agreement, plan or program covering the Executive to which the Company is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. SECTION 17. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of and be binding upon the Executive, his legal representatives and testate or intestate distributees, and the Company and the Commercial Bank and their respective successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company or the Commercial Bank may be sold or otherwise transferred. Failure of the Company or the Commercial Bank to obtain from any successor its express written assumption of the Company's or the Commercial Bank's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. SECTION 18. NOTICES. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, -14- addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: Laurence D. Haggerty 198 West Shore Trail Sparta, New Jersey 07871 If to the Company or the Commercial Bank: Warwick Community Bancorp, Inc. 18 Oakland Avenue Warwick, New York 10990-0591 Attention: President WITH A COPY TO: Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 Attention: Douglas J. McClintock, Esq. -------------------------- SECTION 19. INDEMNIFICATION FOR ATTORNEYS' FEES. (a) The Company and the Commercial Bank shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees and expenses, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Company's or the Commercial Bank's obligations hereunder shall be conclusive evidence of the Executive's entitlement to indemnification hereunder, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. (b) The Company's and the Commercial Bank's obligations to make the payments provided for in this Agreement and otherwise to perform their respective obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or the Commercial Bank may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. Unless it is determined that a claim made by the Executive was either frivolous or made in bad faith, the Company and the Commercial Bank agree to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of or in connection with his consultation with legal counsel or arising out of any action, suit, proceeding or contest -15- (regardless of the outcome thereof) by the Company or the Commercial Bank, the Executive or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. This section 19(b) shall apply whether such consultation, action, suit, proceeding or contest arises before, on, after or as a result of a Change of Control. SECTION 20. SEVERABILITY. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. SECTION 21. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. SECTION 22. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. SECTION 23. GOVERNING LAW. Except to the extent preempted by federal law, this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. SECTION 24. HEADINGS AND CONSTRUCTION. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. SECTION 25. ENTIRE AGREEMENT; MODIFICATIONS. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof and supersedes in its entirety the Employee Retention Agreement by and among the Executive, the Company and The Warwick Savings Bank dated as of December 23, 1997. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. -16- SECTION 26. NON-DUPLICATION. In the event that the Executive shall perform services for any direct or indirect subsidiary or affiliate of the Company or the Commercial Bank, any compensation or benefits provided to the Executive by such other employer shall be applied to offset the obligations of the Company and the Commercial Bank hereunder, it being intended that this Agreement set forth the aggregate compensation and benefits payable to the Executive for all services to the Company, the Commercial Bank and all of their respective direct or indirect subsidiaries and affiliates. SECTION 27. IF THE COMMERCIAL BANK SHALL CEASE TO EXIST. Notwithstanding any other provision in this Agreement to the contrary, in the event that the Commercial Bank shall, for whatever reason, cease to exist, whether by merger into The Warwick Savings Bank ("Savings Bank") or another entity, dissolution, liquidation, sale or other transfer of assets and liabilities or otherwise, then the Company Board may, in its sole discretion, cause the election or appointment of the Executive to what it reasonably believes to be an equivalent officer's position with equivalent compensation at the Savings Bank, as compared to his position and compensation at the Commercial Bank, and such action shall not be considered to be a violation or a breach of this Agreement and shall not permit the Executive to resign under section 9(a)(i). In such case, this Agreement shall continue in full force and effect, but (i) the words "The Warwick Savings Bank" and "Savings Bank," respectively, shall be substituted for "The Towne Center Bank" and "Commercial Bank," respectively, where applicable, (ii) references to the Executive's position and compensation at the Commercial Bank shall become references to the Executive's position and compensation at the Savings Bank and (iii) such other adjustments to this Agreement as are necessary shall be made so as to continue this Agreement in effect, the intent being that, if the Commercial Bank shall cease to exist, the rights and obligations under this Agreement shall be shifted from the Commercial Bank to the Savings Bank and otherwise continue to protect the Executive, the Company and the Savings Bank. SECTION 28. REQUIRED REGULATORY PROVISIONS. Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. ss.1828(k), and any regulations promulgated thereunder. -17- IN WITNESS WHEREOF, the Company and the Commercial Bank have caused this Agreement to be executed and the Executive has hereunto set his hand, all as of the day and year first above written. /s/ Laurence D. Haggerty ------------------------ Laurence D. Haggerty WARWICK COMMUNITY BANCORP, INC. Attest: By /s/ Nancy L. Sobotor-Littell By /s/ Timothy A. Dempsey ------------------------------------ ----------------------- Nancy L. Sobotor-Littell Timothy A. Dempsey Corporate Secretary Chairman of the Board and Chief Executive Officer [Seal] THE TOWNE CENTER BANK Attest: By /s/ Lois E. Ulatowski By /s/ Timothy A. Dempsey ------------------------------------ ----------------------- Lois E. Ulatowski Timothy A. Dempsey Corporate Secretary Chairman of the Board [Seal] -18- STATE OF NEW YORK ) : ss.: COUNTY OF ORANGE ) On this 29th day of November, 1999, before me personally came LAURENCE D. HAGGERTY, to me known, and known to me to be the individual described in the foregoing instrument, who, being by me duly sworn, did depose and say that he resides at the address set forth in said instrument, and that he signed his name to the foregoing instrument. /s/ Lisette Cuba ----------------- Notary Public STATE OF NEW YORK ) : ss.: COUNTY OF ORANGE ) On this 29th day of November, 1999, before me personally came Timothy A. Dempsey, to me known, who, being by me duly sworn, did depose and say that he resides at 36 Waterbury Road, Warwick, New York 10990, that he is Chairman of the Board and Chief Executive Officer of WARWICK COMMUNITY BANCORP, INC., the Delaware corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such seal; that it was so affixed by order of the Board of Directors of said corporation; and that he signed his name thereto by like order. /s/ Lisette Cuba ----------------- Notary Public STATE OF NEW YORK ) : ss.: COUNTY OF ORANGE ) On this 29th day of November, 1999, before me personally came Timothy A. Dempsey, to me known, who, being by me duly sworn, did depose and say that he resides at 36 Waterbury Road, Warwick, New York 10990, that he is Chairman of the Board of THE TOWNE CENTER BANK, the New Jersey commercial bank described in and which executed the foregoing instrument; that he knows the seal of said commercial bank; that the seal affixed to said instrument is such seal; that it was so affixed by order of the Board of Directors of said commercial bank; and that he signed his name thereto by like order. /s/ Lisette Cuba ----------------- Notary Public -19- EX-11.1 4 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Exhibit 11.1 ------------ STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS For the year ended December 31, 1999 1. Net income $ 3,142,686 2. Total weighted average common shares outstanding $ 5,476,926 3. Basic earnings per share $ 0.57 4. Diluted earnings per share $ 0.57 EX-13.1 5 A/R SECURITY HOLDERS WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS INDEX F2-F3 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA F4-F15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS F16 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION F17 CONSOLIDATED STATEMENTS OF INCOME F18 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY F19 CONSOLIDATED STATEMENTS OF CASH FLOWS F20-F39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F1
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA At December 31, ---------------------------------------------------------------------- 1999 1998 1997(7) 1996(7) 1995(7) ---------- ------------ ------------- ----------- ------------- (In thousands) Selected Financial Data: Total assets $597,714 $445,139 $340,809 $287,363 $258,322 Loan receivable, net (1) 349,321 261,463 179,954 129,681 143,049 Investment securities 186,490 155,490 127,563 138,526 91,097 Real estate owned, net 415 371 322 106 419 Deposits 283,072 246,886 213,513 217,221 227,422 FHLBNY advances 201,675 79,480 5,250 13,400 - Securities sold under repurchase agreements 37,375 25,310 22,755 23,300 - Stockholders' equity 66,572 84,238 86,190 27,304 24,459 For the Years Ended December 31, ---------------------------------------------------------------------- 1999 1998 1997 1996(7) 1995(7) ---------- ------------ ------------- ----------- ------------- (In thousands) Selected Operating Data: Interest income $ 35,562 $ 28,408 $ 21,386 $ 19,596 $ 17,885 Interest expense 16,951 11,939 9,539 8,811 8,698 -------- -------- -------- -------- -------- Net interest income 18,611 16,469 11,847 10,785 9,187 Provision for loan losses 500 500 454 60 240 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 18,111 15,969 11,393 10,725 8,947 Non-interest income Service and fee income 2,914 2,336 2,034 2,001 1,603 Securities transactions 524 1,109 326 828 27 Loan transactions 109 168 128 190 5 Other income (loss) 258 74 199 (82) (107) -------- -------- -------- -------- -------- Total other income, net 3,805 3,687 2,687 2,937 1,528 -------- -------- -------- -------- -------- Non-interest expense Salaries and employee benefits 9,536 7,795 6,359 5,159 4,927 FDIC insurance 31 28 28 2 245 Occupancy and equipment 1,452 1,160 1,213 1,120 1,077 Data processing 974 796 636 600 455 Advertising 500 336 175 124 147 Professional fees 1,006 920 339 264 338 Contribution to The Warwick Savings Foundation - - 1,924 - - Other operating expenses 3,208 2,470 1,849 1,915 2,045 -------- -------- -------- -------- -------- Total other expenses 16,707 13,505 12,523 9,184 9,234 Income before income tax expense 5,209 6,151 1,557 4,478 1,241 Income tax expense 2,066 2,530 658 2,031 552 -------- -------- -------- -------- -------- Net income $ 3,143 $ 3,621 $ 899 $ 2,447 $ 689 ======== ======== ======== ======== ========
F2
WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES At or For the Years Ended December 31, ----------------------------------------------------------- 1999 1998 1997(7) 1996(7) 1995(7) ---------- ---------- ---------- ---------- --------- Selected Financial Ratios and Other Data (2): Performance Ratios: Return on average assets 0.62% 0.90% 0.31% 0.89% 0.27% Return on average equity 4.15 4.21 3.08 9.75 2.99 Average equity to average assets 14.83 21.37 9.96 9.18 9.02 Equity to total assets 11.14 18.92 25.29 9.50 9.47 Core deposits to total deposits (3) 68.48 71.24 64.44 64.07 63.04 Net interest spread (4) 3.10 3.27 3.67 3.95 3.68 Net interest margin (5) 3.87 4.36 4.32 4.21 3.87 Operating expense to average assets 3.27 3.36 4.28 3.36 3.62 Average interest-earning assets to average interest-bearing liabilities 121.98 134.14 118.70 107.63 105.02 Efficiency ratio (6) 76.70 71.53 88.94 72.29 86.43 Book Value (8) 13.18 12.75 - - - Regulatory Capital Ratios: Bank: Tangible capital 9.38 11.99 16.15 9.29 9.24 Core capital 17.60 22.82 29.86 19.87 16.82 Risk-based capital 18.34 23.90 30.63 20.76 17.75 Company: Tangible capital 12.67 18.87 - - - Core capital 23.94 35.88 - - - Risk-based capital 24.58 36.94 - - - Asset Quality Ratios: Non-performing loans to total loans 0.58 0.81 0.84 1.28 0.66 Non-performing loans to total assets 0.34 0.47 0.45 0.58 0.37 Non-performing assets to total assets 0.41 0.55 0.61 0.73 0.59 Allowance for loan losses to total loans 0.55 0.67 0.76 0.90 0.79 Allowance for loan losses to non- performing loans 95.33 82.95 89.79 71.35 118.58 Other Data: Branch Offices 6 4 4 4 4
(1) Loans receivable, net, represents total loans less net deferred loan fees and the allowance for loan losses. (2) Regulatory Capital Ratios and Asset Quality Ratios are end of period ratios. With the exception of period-end ratios, all ratios are based on average monthly balances during the periods indicated. (3) The Bank considers the following to be core deposits: checking accounts, passbook accounts, NOW accounts and money market accounts. (4) The interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (5) The net interest margin represents net interest income as a percentage of average interest-earning assets. (6) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income excluding any gains or losses on sales of assets. (7) The selected financial data of the Company at or for the years ended December 31, 1997, 1996 and 1995 are not derived from audited financial statements. (8) Book value represents total stockholders' equity divided by the shares outstanding for the period, net of unearned shares held by the ESOP and RRP. F3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Warwick Community Bancorp, Inc. ("Company") is a bank holding company incorporated in September 1997 under the laws of the State of Delaware and is registered under the Bank Holding Company Act of 1956, as amended. The Company was organized at the direction of The Warwick Savings Bank ("Bank") for the purpose of acquiring all of the common stock of the Bank issued in connection with the conversion of the Bank from mutual to stock form ("Conversion"). On December 23, 1997, the Bank completed its Conversion, and the Company sold 6,414,125 shares of its common stock at a price of $10.00 per share in a subscription offering ("Offering") to certain depositors of the Bank. In connection with the Conversion and Offering, the Company established The Warwick Savings Foundation ("Foundation") and made a charitable contribution of 192,423 shares of the Company's common stock to the Foundation, which resulted in a one-time charge relating to the funding of the Foundation of $1.9 million ($1.2 million net of tax). The net proceeds from the Offering amounted to $61.5 million, and the Company contributed 50% of the net proceeds from the Offering to the Bank in exchange for all of the issued and outstanding shares of common stock of the Bank. The remaining net proceeds were retained by the Company and invested primarily in federal funds, government and federal agency mortgage-backed securities, other debt securities and equity securities. Prior to the Offering, the Company had no significant assets, liabilities or operations. The primary business of the Company is the operation of its wholly owned subsidiary, the Bank, and The Towne Center Bank, a de novo commercial bank formed by the Company under the laws of the State of New Jersey ("Commercial Bank"), which opened for business on October 26, 1999. Presently, the only significant assets of the Company are the capital stock of the Bank and the Commercial Bank, the note evidencing the loan the Company made to the Warwick Community Bancorp, Inc. Employee Stock Ownership Plan ("ESOP") to allow the ESOP to purchase 8% of the Company's common stock issued in the Offering and the investment of the net proceeds of the Offering retained by the Company. The Bank's principal business has been and continues to be attracting retail deposits from the general public in the areas surrounding its five branches and investing those deposits, together with funds generated from operations and borrowings, primarily in one- to four-family residential mortgage loans, mortgage-backed securities, commercial business and real estate loans and various debt and equity securities. The Commercial Bank's principal business consists of taking business and consumer deposits and making consumer and commercial loans. The Commercial Bank also invests in short duration U.S. Treasury and agency securities, mortgage-backed securities and other conservative investments deemed prudent by its Board of Directors. While the following discussion of financial condition and results of operations includes the collective results of the Company, the Bank and the Commercial Bank, this discussion reflects primarily the Bank's activities. Unless otherwise disclosed, the information presented in this Annual Report reflects the financial condition and results of operations of the Company, the Bank and the Commercial Bank on a consolidated basis. The Bank's results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits and borrowed funds. The Bank also generates other income, such as service charges and other fees, which are primarily servicing fees received from residential mortgage loans that are sold with servicing retained. Other expenses primarily consist of employee compensation and benefits, occupancy expenses, federal deposit insurance premiums, net costs of real estate owned, data processing fees and other operating expenses. The Bank's results of operations are also significantly affected by general economic and competitive conditions (particularly changes in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies. MANAGEMENT STRATEGY The Bank has historically employed an operating strategy that emphasizes the origination of one- to four-family residential mortgage loans in its market area with both fixed and variable rates and, to an increasing degree over the past 10 years, its commercial lending business, with mostly prime rate based loans secured by real estate located mainly in Orange County, New York. Due in part to this strategy, the Bank historically has had profitable operations, resulting in a strong regulatory capital position. The Bank's goal of maintaining this position has led to an overall strategy of managed growth in both deposits and assets. The major elements of the Bank's operating strategy are to: (i) grow and diversify the Bank's loan portfolio by continuing to originate owner-occupied residential mortgage loans, commercial business and commercial real estate loans, construction loans and consumer loans in its market area; (ii) complement the Bank's mortgage lending activities by investing in mortgage-backed and other securities; (iii) maintain the Bank's relatively low cost of funds and (iv) manage the Bank's level of interest rate risk. From time to time, the Bank employs a leveraging strategy, whereby borrowings are used to fund specific investments in order to provide for a reasonable net margin of return. The Bank also seeks to attract and retain F4 WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES customers through extended office hours, low turnover of employees and prompt, flexible and personalized production of a variety of loan products. In addition, it is a goal of the Bank to increase its market share in the communities it serves through the acquisition or establishment of branch offices, and, if appropriate, the acquisition of smaller financial institutions. Additionally, it is a goal of the Bank to expand into new markets. For this reason, the Bank expanded its mortgage banking operations and lending into New Jersey, which is one of the reasons why the Company formed the Commercial Bank, which is headquartered in Bergen County, New Jersey. MANAGEMENT OF INTEREST RATE RISK The principal objectives of the Bank's interest rate risk management activities are to: (i) evaluate the interest rate risk included in certain balance sheet accounts, (ii) determine the level of risk appropriate given the Bank's business focus, operating environment, capital and liquidity requirements and performance objectives, (iii) establish prudent asset concentration guidelines and (iv) manage the risk consistent with Board approved policies and guidelines. Through such management, the Bank seeks to reduce the vulnerability of its operating results to changes in interest rates and to manage the ratio of interest rate sensitive assets to interest rate sensitive liabilities within specified maturities or repricing dates. The Bank closely monitors its interest rate risk as such risk relates to its operating strategies. The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a negative impact on the earnings of the Bank. Historically, the Bank has been a traditional thrift lender, but differentiated itself from other thrifts by also focusing on commercial lending since the late 1980's and commission-based mortgage banking operations since 1995. The Bank also adopted a more competitive pricing policy, more efficient lock-in policies to close loans faster and more streamlined Federal National Mortgage Association ("FNMA") approved processing and underwriting procedures. Additionally, the Bank's array of products has expanded to include Federal Housing Authority ("FHA"), Veterans Administration ("VA") and State of New York Mortgage Association ("SONYMA") loans. As a result, the Bank has invested a relatively large amount of its earning assets in fixed-rate loans and fixed-rate mortgage-backed securities with contractual maturities of up to 30 years. At December 31, 1999, an aggregate of $272.8 million, or 50.15% of total earning assets, were invested in such assets. Based upon the assumptions used in the following table, at December 31, 1999, the Company's total interest-bearing liabilities maturing or repricing within one year exceeded its total interest-earning assets maturing or repricing within the same time period by $152.2 million, representing a one-year cumulative "gap," as defined below, as a percentage of total assets of negative 25.46%. Accordingly, management views the Company as having a manageable gap position, but still slightly vulnerable to a rising interest rate environment. The Bank has taken several actions, under various market conditions, designed to manage its level of interest rate risk. These actions have included: (i) increasing the percentage of the loan portfolio consisting of adjustable-rate mortgage loans and prime rate based commercial loans through originations, as market conditions permit, (ii) selling fixed-rate loans, but retaining the servicing rights, (iii) purchasing shorter-term investment securities and (iv) seeking to increase the percentage of checking accounts in its deposit base. Additionally, in the normal course of business, the Bank uses off-balance sheet financial instruments primarily as part of mortgage banking hedging strategies. Such instruments generally include put options purchased and forward commitments to sell mortgage loans. As a result of interest rate fluctuations, these financial instruments will develop unrealized gains or losses that mitigate changes in the underlying hedged portion of the balance sheet. When effectively used, these instruments are designed to moderate the impact on earnings as interest rates move up or down. GAP ANALYSIS. The matching of assets and liabilities may be analyzed by examining the extent to which such assets or liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, therefore, a negative gap would tend to adversely affect net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1999, which are anticipated by the Bank, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of term to repricing or the term to repayment of the asset or liability. The table is intended to provide an approximation of the projected repricing of assets and liabilities at December 31, 1999 on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be reinvested and/or repriced as a result of contractual amortization and anticipated early payoffs of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. For loans on one- to four- family residential properties and mortgage-backed securities, assumed average annual prepayment rates of 12.30% and 15.49%, respectively, were utilized. F5
At December 31, 1999 ------------------------------------------------------------------------------------------------------ More Than Three Months to More Than More Than More Than Three Months Twelve One Year to Three Years Five Years to More Than Ten or Less Months Three Years to Five Years Ten Years Years Total ------------ ----------- ----------- ------------- ------------- -------------- --------- (Dollars in thousands) Interest-earning assets: Mortgage loans (1) (5) $ 33,308 $ 19,042 $ 20,400 $ 18,401 $ 4,544 $158,025 $253,720 Other loans (1) (2) 31,513 606 22,535 23,706 17,996 1,645 98,001 Mortgage-backed securities, fixed (5) 4,907 12,136 2 - 12,433 63,569 93,047 Mortgage-backed securities, variable (5) - 2,565 - - - - 2,565 Federal funds sold 7,665 - - - - - 7,665 Mutual funds, common and preferred stock - 4,848 - - - 3,118 7,966 Investment securities: held-to-maturity 645 - 700 - - 73 1,418 Investment securities: available-for-sale 3,925 - 2,053 752 4,950 69,814 81,494 -------- --------- --------- --------- --------- -------- -------- Total interest- earning assets 81,963 39,197 45,690 42,859 39,923 296,244 545,876 Net deferred loan fees and costs (3) (44) (29) (60) (59) (30) (239) (461) -------- --------- --------- --------- --------- -------- -------- Net interest- earning assets 81,919 39,168 45,630 42,800 39,893 296,005 545,415 -------- --------- --------- --------- --------- -------- -------- Interest-bearing liabilities: Passbook accounts (4) - 16,844 - - - 67,378 84,222 Escrow accounts - - - - - 1,487 1,487 NOW accounts - - - - - 24,976 24,976 Money market accounts 44,479 - - - - - 44,479 Certificates of deposit 20,807 54,120 12,733 1,563 - - 89,223 Borrowed funds 81,390 55,615 24,045 13,000 65,000 - 239,050 -------- --------- --------- ---------- --------- -------- -------- Total interest- bearing liabilities 146,676 126,579 36,778 14,563 65,000 93,841 483,437 -------- --------- --------- ---------- --------- -------- -------- Interest rate sensitivity gap $(64,757) $ (87,411) $ 8,852 $ 28,237 $ (25,107) $202,164 $ 61,978 ======== ========= ========= ========= ========= ======== ======== Cumulative interest rate sensitivity gap $(64,757) $(152,168) $(143,316) $(115,079) $(140,186) $ 61,978 ======== ========= ========= ========= ========= ======== Cumulative interest rate sensitivity gap as a percentage of total assets (10.83)% (25.46)% (23.98)% (19.25)% (23.45)% 10.37% Cumulative net interest-earning assets as a percentage of cumulative interest- bearing liabilities 55.85% 44.31% 53.77% 64.55% 64.02% 112.82%
(1) For purposes of the gap analysis, mortgage and other loans are not reduced for the allowance for loan losses and non-performing loans. (2) For purposes of the gap analysis, second mortgage loans are included in the "Other Loans" category. (3) For purposes of the gap analysis, unearned fees and deferred loan origination costs are prorated. (4) For purposes of the gap analysis, based upon the Bank's historical experience, management traditionally slots 20% of the Bank's total savings account balances into the twelve-month time horizon. The remaining 80% are viewed as long-term deposits. (5) For loans on residential properties an average annual prepayment rate of 12.30% is utilized. Mortgage-backed securities are assumed to prepay at an average annual rate of 15.49%. F6 WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to make scheduled payments on their adjustable-rate loans may decrease in the event of an interest rate increase. The Company's interest rate sensitivity is also monitored by management through the use of a model which internally generates estimates of the change in net portfolio value ("NPV") over a range of interest rate change scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. For purposes of the NPV table, prepayment speeds similar to those used in the "gap" table were used, reinvestment rates were those in effect for similar products being offered and rates on core deposits were modified to reflect recent trends. The following table sets forth the Company's NPV as of December 31, 1999, as calculated by the Company. Net Portfolio Value Portfolio Value of Assets ------------------------------------ -------------------------- (Dollars in thousands) Rate in Basis Points (Rate Shock) $ Amount $ Change % Change NPV Ratio % Change(1) - - -------------- ---------- ------------ ---------- ------------ ------------ 200 $30,925 $(31,061) (50)% 5.68 (4.80)% 100 47,178 (14,808) (24) 8.30 (2.18) Static 61,986 -- -- 10.48 -- (100) 74,596 12,610 20 12.20 1.72 (200) 75,435 13,449 22 12.09 1.61 (1) Based upon the portfolio value of the Company's assets assuming no change in interest rates. As is the case with the "gap" table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV requires the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in actual market interest rates. In this regard, the NPV model presented assumes that the composition of the Company's interest rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company's net interest income and will differ from actual results. ANALYSIS OF NET INTEREST INCOME Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. AVERAGE BALANCE SHEETS. The table on the following page sets forth certain information relating to the Company for the years ended December 1999, 1998 and 1997. The yields and costs were derived by dividing interest income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances were computed based on average daily balances. The yields include deferred fees and discounts which are considered yield adjustments. F7
For the Years Ended December 31, ---------------------------------------------------------------------------- 1999 1998 ----------------------------------- --------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ---------- ---------- ----------- ---------- ----------- ------------- ASSETS: Interest-earning assets: Mortgage loans, net (1) $231,444 $17,077 7.38% $169,035 $12,693 7.51% Consumer and other loans, net(l) 63,508 5,431 8.55 46,649 4,264 9.14 Mortgage-backed securities 87,804 6,145 7.00 83,271 5,953 7.15 Federal funds sold 379 14 3.69 1,286 70 5.44 Interest earning accounts at banks 462 23 4.98 597 35 5.86 Investment securities 96,932 6,872 7.09 77,292 5,393 6.98 -------- ------- -------- ------- Total interest- earning assets 480,529 35,562 7.40 378,130 28,408 7.51 ------- ------- Non-interest earning assets 30,065 24,027 -------- -------- Total assets $510,594 $402,157 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Passbook accounts $ 85,379 $2,251 2.64% $ 79,404 $ 2,323 2.93% Escrow deposits 1,985 112 5.64 1,771 94 5.31 NOW accounts 22,676 346 1.53 17,272 277 1.60 Money market accounts 43,002 1,673 3.89 29,986 1,078 3.60 Certificate accounts 73,755 3,467 4.70 71,344 3,540 4.96 -------- ------- -------- ------- Total deposits 226,797 7,849 3.46 199,777 7,312 3.66 Borrowed funds 167,157 9,102 5.45 82,110 4,627 5.64 -------- ------- -------- ------- Total interest-bearing liabilities 393,954 16,951 4.30 281,887 11,939 4.24 ------- ------- Non-interest bearing liabilities 40,901 34,342 -------- -------- Total liabilities 434,855 316,229 STOCKHOLDERS' EQUITY 75,739 85,928 -------- -------- Total liabilities and stockholders' equity $510,594 $402,157 ======== ======== Net interest income/ interest rate spread(2) $18,611 3.10% $16,469 3.27% ======= ====== ======= ======= Net interest-earning assets/net interest margin(3) $ 86,575 3.87% $ 96,243 4.36% ======== ======= ======== ======= Ratio of interest-earning assets to interest- bearing liabilities 121.98% 134.14% ======= =======
For the Years Ended December 31, ---------------------------------------- 1997 ---------------------------------------- Average Average Balance Interest Yield/Cost ----------- ----------- ------------- ASSETS: Interest-earning assets: Mortgage loans, net (1) $110,458 $ 8,756 7.93% Consumer and other loans, net(l) 38,444 3,620 9.42 Mortgage-backed securities 73,346 5,454 7.44 Federal funds sold 1,980 110 5.56 Interest earning accounts at banks 537 26 4.84 Investment securities 49,782 3,420 6.87 -------- ------- Total interest- earning assets 274,547 21,386 7.79 ------- Non-interest earning assets 18,356 -------- Total assets $292,903 ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Passbook accounts $78,017 $ 2,312 2.96% Escrow deposits 1,194 78 6.53 NOW accounts 14,426 230 1.59 Money market accounts 26,200 860 3.28 Certificate accounts 76,636 3,918 5.11 -------- ------- Total deposits 196,473 7,398 3.77 Borrowed funds 34,826 2,141 6.15 -------- ------- Total interest-bearing liabilities 231,299 9,539 4.12 ------- Non-interest bearing liabilities 32,419 -------- Total liabilities 263,718 STOCKHOLDERS' EQUITY 29,185 -------- Total liabilities and stockholders' equity $292,903 ======== Net interest income/ interest rate spread(2) $11,847 3.67% ======= ======= Net interest-earning assets/net interest margin(3) $ 43,248 4.32% ======== ======= Ratio of interest-earning assets to interest- bearing liabilities 118.70% ======= (1) In computing the average balance of loans, non-accrual loans have been included. (2) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net interest margin on interest-bearing assets represents net interest income as a percentage of average-earning assets. F8 WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES RATE/VOLUME ANALYSIS. The following table presents the extent to which changes in interest rates and changes in the volume of interest- earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31, 1999 Year Ended December 31, 1998 Compared to Compared to Year Ended December 31, 1998 Year Ended December 31, 1997 -------------------------------------------------------------------------- Increase (Decrease) Increase (Decrease) In Net Interest Income In Net Interest Income Due to Due to ------------------------------------------------------------------------ Volume Rate Net Volume Rate Net ----------- -------- -------- --------- -------- --------- (In thousands) Interest-earning assets: Mortgage loans, net $ 4,686 $ (302) $ 4,384 $ 4,643 $ (706) $ 3,937 Consumer and other loans, net 1,541 (374) 1,167 773 (129) 644 Mortgage-backed securities 324 (132) 192 738 (239) 499 Federal funds sold (49) (7) (56) (39) (1) (40) Interest earning accounts at banks (8) (4) (12) 3 6 9 Investment securities 1,370 109 1,479 1,890 83 1,973 ------- ------- ------- ------- ------ ------- Total 7,864 (710) 7,154 8,008 (986) 7,022 ------- ------- ------- ------- ------- ------- Interest-bearing liabilities: Passbook accounts 175 (247) (72) 41 (30) 11 Escrow accounts 11 7 18 38 (22) 16 NOW accounts 87 (18) 69 45 2 47 Money market accounts 468 127 595 124 94 218 Certificates of deposits 120 (193) (73) (271) (107) (378) Borrowed funds 4,793 (318) 4,475 2,907 (421) 2,486 ------- ------- ------- ------- ------ ------- Total 5,654 (642) 5,012 2,884 (484) 2,400 ------- ------- ------- ------- ------- ------- Net change in net interest income $ 2,210 $ (68) $ 2,142 $ 5,124 $ (502) $ 4,622 ======= ======= ======= ======= ====== =======
ASSET QUALITY NON-PERFORMING LOANS. The Bank's management and Board of Directors perform a monthly review of delinquent loans. The actions taken by the Bank with respect to the delinquencies vary depending on the nature of the loan and period of delinquency. The Bank's policies on residential mortgage loans provide that delinquent mortgage loans be reviewed and that a late charge notice be mailed no later than the 15th day of delinquency, with the delinquency charge assessed on the 16th day. The Bank's collection policies on residential mortgage loans essentially mirror those shown in the FNMA servicing agreements. On other loans, telephone contact and various delinquency notices at different intervals are the methods used to collect past due loans. It is the Bank's general policy to discontinue accruing interest on all loans when management has determined that the borrower will be unable to meet contractual obligations or when interest or principal payments are 90 days past due. When a loan is classified as non-accrual, the recognition of interest income ceases. Interest previously accrued and remaining unpaid is reversed against income. Cash payments received are applied to principal, and interest income is not recognized unless management determines that the financial condition and payment record of the borrower warrant the recognition of income. If a foreclosure action is commenced and the loan is not brought current, paid in full or an acceptable workout arrangement is not agreed upon before the foreclosure sale, the real property securing the loan is generally sold at foreclosure. Property acquired by the Bank as a result of foreclosure on a mortgage loan is classified as "other real estate owned" ("OREO") and is recorded at the lower of the unpaid balance or fair value less costs to sell at the date of acquisition and thereafter. Upon foreclosure, it is the Bank's policy to generally require an appraisal of the property and, thereafter, appraise the property on an as-needed basis. OTHER REAL ESTATE OWNED. At December 31, 1999, the Bank's OREO, net, which consisted of seven single-family residential properties, totaled $415 thousand and was held directly by the Bank. The following table sets forth information regarding non-accrual loans, other past due loans and OREO. There were no troubled debt restructurings within the meaning of Statement of Financial Accounting Standards ("SFAS") No. 15 at any of the dates presented below. F9 At December 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 ----------------------------------------------------- (Dollars in thousands) Non-accrual mortgage loans delinquent more than 90 days $ 693 $ 631 $1,165 $1,247 $ 531 Non-accrual other loans delinquent more than 90 days 521 88 246 28 3 ------ ------ ------ ------ ------ 719 Total non-accrual loans 1,214 1,411 1,275 534 Total 90 days or more delinquent and still accruing 822 1,363 114 383 424 ------ ------ ------ ------ ------ Total non-performing loans 2,036 2,082 1,525 1,658 958 Total foreclosed real estate, net 415 371 562 433 573 ------ ------ ------ ------ ------ Total non-performing assets $2,451 $2,453 $2,087 $2,091 $1,531 ====== ====== ====== ====== ====== Non-performing loans to total loans 0.58% 0.81% 0.84% 1.28% 0.66% Non-performing assets to total assets 0.41% 0.55% 0.61% 0.73% 0.59% COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31, 1998 Total assets increased $152.6 million to $597.7 million at December 31, 1999 from $445.1 million at December 31, 1998, reflecting the Bank's ongoing strategy of managed growth. The increase in total assets was primarily the result of increases in the Bank's interest-earning assets, as the Bank grew both its loan and investment securities portfolios. The asset growth was also funded through borrowings, which increased $134.3 million to $239.1 million at December 31, 1999. At December 31,1999, the Bank had $37.4 million in securities sold under repurchase agreements and $201.7 million in term loans from the Federal Home Loan Bank of New York ("FHLBNY"). Deposit liabilities increased by $36.2 million to $283.1 million at December 31, 1999 from $246.9 million at December 31, 1998, primarily due to increases in time certificates, demand checking accounts, money market accounts and NOW accounts. Asset growth was concentrated in mortgage loans, net, which increased $76.1 million to $270.7 million at December 31, 1999 from $194.6 million at December 31, 1998. Other loans, net, showed an increase of $21.4 million to $74.5 million at December 31, 1999 from $53.1 million at December 31, 1998. Total securities were $186.5 million at December 31, 1999 compared to $155.5 million at December 31, 1998. Securities held-to-maturity at December 31, 1999 totaled $1.4 million as compared to $6.0 million at December 31, 1998. Securities available-for-sale at December 31, 1999 totaled $185.1 million as compared to $149.5 million at December 31, 1998. This increase is primarily the result of the Bank's utilization of additional wholesale leveraging transactions. Bank premises and equipment, net, increased $1.6 million, or 26.2%, from $6.2 million at December 31, 1998 to $7.8 million at December 31, 1999. This increase was primarily the result of costs associated with the opening of the Bank's newly constructed full-service branch located in the town of Newburgh, and the formation of the Commercial Bank. The FHLBNY stock portfolio increased by $7.1 million in conjunction with the increased FHLBNY advances obtained to effect the utilization of wholesale leveraging transactions. Total stockholders' equity decreased $17.7 million to $66.6 million at December 31, 1999 from $84.2 million at December 31, 1998. This decrease was primarily attributable to the $12.3 million in open market purchases of 967,258 shares, or 14.64%, of the Company's outstanding common stock in conjunction with the Company's stock repurchase programs and the decline in accumulated other comprehensive income of $8.6 million. Also contributing to the decrease in stockholders' equity was the payment of quarterly cash dividends to shareholders amounting to $1.2 million. The decrease in stockholders' equity was partially offset by net income of $3.1 million. F10 WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 GENERAL. Net income for the year ended December 31, 1999 totaled $3.1 million, or $0.57 per share, as compared to net income of $3.6 million, or $0.60 per share, for the comparable period in 1998. This decrease was primarily attributable to the increase of 23.7% in non-interest expenses, which was partially offset by the 13.0% increase in net interest income. NET INTEREST INCOME. Net interest income for the year ended December 31, 1999 increased $2.1 million, or 13.0%, to $18.6 million, from $16.5 million for the year ended December 31, 1998. Net interest margin is net interest income expressed as a percentage of total average earning assets. For the year ended December 31, 1999, the net interest margin was 3.87%, as compared to 4.36% for the year ended December 31, 1998. This decrease was primarily attributable to an 11 basis point decrease in the average yield earned on interest-earning assets coupled with a 6 basis point increase in the average rate paid on interest-bearing liabilities. The increase in the rate paid on interest-bearing liabilities was primarily attributable to a 29 basis point increase in the average rate paid on money market accounts and a 33 basis point increase in the average rate paid on escrow accounts, as compared to the year ended December 31, 1998. Excluding money market accounts, the rates paid on other interest-bearing liabilities decreased. Average interest-earning assets increased $102.4 million from $378.1 million for the year ended December 31, 1998 to $480.5 million for the year ended December 31, 1999, while average interest-bearing liabilities increased $112.1 million from $281.9 million to $394.0 million for the same period. In addition to the increase in average interest-bearing liabilities, average non-interest bearing liabilities increased $6.6 million from $34.3 million for the year ended December 31, 1998 to $40.9 million for the year ended December 31, 1999. INTEREST INCOME. For the year ended December 31, 1999, interest income totaled $35.6 million as compared to $28.4 million for the year ended December 31, 1998. The $7.2 million, or 25.2%, increase was primarily attributable to a $4.4 million, or 34.5%, increase in the amount of interest earned on the Bank's mortgage loan portfolio, which resulted primarily from an increase in the average balance of the Bank's mortgage loans from $169.0 million for the year ended December 31, 1998 to $231.4 million for the year ended December 31, 1999 as home purchasers capitalized on the opportunities afforded by relatively low mortgage loan interest rates throughout much of the year. The increase in interest income was also attributable, to a lesser extent, to growth in the Bank's commercial and consumer loan portfolios. Interest earned on other loans during the year ended December 31, 1999 increased by $1.2 million, compared to the year ended December 31, 1998. The growth experienced resulted from strong loan demand as discussed above. Interest earned on mortgage-backed securities and investment securities increased by $1.7 million over the same period and resulted largely from the Bank's utilization of additional wholesale leveraging transactions in order to enhance earnings. Total interest income was further bolstered by increases in interest and dividends earned on securities, which were derived mainly from such wholesale leveraging transactions. The average yield on interest-earning assets decreased to 7.40% for the year ended December 31, 1999, as compared to 7.51% for the year ended December 31, 1998. This was primarily due to lower yields earned on the Bank's loan and mortgage-backed securities portfolios due to lower long-term interest rates during the year ended December 31, 1999. INTEREST EXPENSE. Interest expense for the year ended December 31, 1999 was $17.0 million, compared to $11.9 million for the year ended December 31, 1998. This increase was due primarily to an increase of $85.0 million in the average balance of borrowed funds, a 33 basis point increase in the average rate paid on escrow deposits, a $6.0 million increase in the average balance of passbook accounts, a 29 basis point increase in the average rate paid on money market accounts, and a $13.0 million increase in the average balance of money market accounts. These increases were partially offset by a 29 basis point decrease in the average rate paid on passbook accounts, a 26 basis point decrease in the average rate paid on certificate accounts and a 19 basis point decrease in the average rate paid on borrowed funds. The increase in interest expense is also attributable to an increase of $4.5 million in the interest paid on borrowings associated with the aforementioned wholesale leveraging transactions. PROVISION FOR LOAN LOSSES. The provision for loan losses for the years ended December 31, 1999 and 1998 was $500 thousand. This provision is a result of management's assessment of the growth in the loan portfolio, the level of the Bank's allowance for possible loan losses and its assessment of the local economy and market conditions. At December 31, 1999, the allowance for possible loan losses totaled $1.9 million, and the ratio of such allowance to non-performing loans was 95.33%. NON-INTEREST INCOME. Non-interest income, consisting primarily of service and fee income and gains and losses on securities and loan transactions, increased by $118 thousand, or 3.2%, to $3.8 million for the year ended December 31, 1999, as compared to $3.7 million for the year ended December 31, 1998. This increase was primarily attributable to an increase of $578 thousand in service and fee income due to deposit and loan growth, growth in the amount of mortgage loans serviced and the new fee income associated with the Bank's debit card and a $184 thousand increase in other income due to the absence of non-recurring expenses attributable to the Bank's town of Wallkill branch relocation incurred one year earlier. These increases were offset by a $585 thousand decrease in gains on securities transactions and a $59 thousand decrease in net gains on loan sales as the Bank elected to restructure approximately $10.0 million of the Bank's lower yielding investments into higher yielding assets and entered into fewer mortgage banking transactions. F11 NON-INTEREST EXPENSE. Non-interest expense increased by $3.2 million, or 23.7%, to $16.7 million for the year ended December 31, 1999, as compared to $13.5 million for the year ended December 31, 1998. This increase resulted primarily from an increase in salaries and employee benefits of $1.7 minion attributable to additions to staff necessary to attract and service a growing number of loan account and deposit account customers, and to hiring new staff members for the Company's expansion into Bergen County, New Jersey, through the formation of the Commercial Bank, and the addition of the Bank's fifth full-service branch in the town of Newburgh. Occupancy expense and data processing expense increased $292 thousand and $179 thousand, respectively, due primarily to the formation of the Commercial Bank and the Bank's expansion into the town of Newburgh. Other expenses for the year ended December 31, 1999 increased by $739 thousand primarily due to start-up expenses associated with the formation of the Commercial Bank and the town of Newburgh branch. Professional fees increased $86 thousand due to legal expenses and consulting fees associated with the Bank's implementation of a tax planning strategy to reduce its effective marginal tax rate. Advertising expense increased $164 thousand for the year ended December 31, 1999 in order to support the Bank's new full-service branch and the Company's expansion into New Jersey with the opening of the Commercial Bank, as well as to promote the Bank's name in the highly competitive mortgage loan and commercial loan arenas. PROVISION FOR INCOME TAXES. The provision for income taxes decreased from $2.5 million for the year ended December 31, 1998 to $2.1 million for the year ended December 31, 1999. This decrease was attributable to the decrease in pre-tax income and the Bank's implementation of a tax planning strategy. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997 Total assets increased $104.3 million to $445.1 million at December 31, 1998 from $340.8 million at December 31, 1997, reflecting the Bank's ongoing strategy of managed growth. This increase in total assets was primarily the result of increases in the Bank's interest-earning assets, as the Bank grew both its loan and investment securities portfolios. The asset growth was also funded through borrowings, which increased $76.8 million to $104.8 million at December 31, 1998. At December 31, 1998, the Bank had $25.3 million in securities sold under repurchase agreements and $79.5 million in term loans from the FHLBNY. Deposit liabilities increased by $33.4 million to $246.9 million at December 31, 1998 from $213.5 million at December 31, 1997, primarily due to increases in demand checking accounts, money market accounts and NOW accounts. Asset growth was concentrated in mortgage loans, net, which increased $61.3 million to $194.6 million at December 31, 1998 from $133.3 million at December 31, 1997. Other loans, net, showed an increase of $11.8 million to $53.1 million at December 31, 1998 from $41.3 million at December 31, 1997. Total securities were $155.5 million at December 31, 1998 compared to $127.6 million at December 31, 1997. Securities held-to-maturity at December 31, 1998 totaled $6.0 million as compared to $5.4 million at December 31, 1997. Securities available-for-sale at December 31, 1998 totaled $149.5 million as compared to $122.2 million at December 31, 1997. This increase is primarily the result of the Bank's utilization of additional wholesale leveraging transactions in order to enhance earnings. Bank premises and equipment, net, increased $3.0 million, or 93.8%, from $3.2 million at December 31, 1997 to $6.2 million at December 31, 1998. This increase was primarily the result of the costs associated with the opening of the Bank's newly constructed full-service branch in the town of Wallkill, and from the upgrading and replacement of much of the Bank's electronic data processing hardware and software in connection with the Bank's Year 2000 compliance plan. The FHLBNY stock portfolio increased by $2.9 million in conjunction with both the Bank's larger asset size and the utilization of wholesale leveraging transactions. Total stockholders' equity decreased $2.0 million to $84.2 million at December 31,1998 from $86.2 million at December 31, 1997. This decrease was primarily attributable to the $4.6 million in open market purchases of the Company's common stock in conjunction with the establishment of the Recognition and Retention Plan of the Company ("RRP"). Also contributing to this decrease was the payment of the Company's cash dividend to shareholders of $545 thousand. The decrease in total stockholders' equity was partially offset by net income of $3.6 million for the year ended December 31, 1998. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 GENERAL. Net income for the year ended December 31, 1998 totaled $3.6 million, or $0.60 per share, as compared to net income of $899 thousand for the comparable period in 1997. The year ended December 31, 1997 included a one-time after tax charge of $1.2 million for the establishment of the Foundation in connection with the Bank's Conversion from mutual to stock form in December 1997. Excluding the one-time charge for the Foundation, net income for the year ended December 31, 1997 would have been $2.1 million. Earnings per share results are not available for the year ended December 31, 1997 since the Company did not complete its Offering until December 23, 1997. F12 WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES NET INTEREST INCOME. Net interest income for the year ended December 31, 1998 increased $4.6 million, or 39.0% to $16.5 million, from $11.8 million for the year ended December 31, 1997. Net interest margin is net interest income expressed as a percentage of total average earning assets. For the year ended December 31, 1998 the net interest margin was 4.36%, as compared to 4.32% for the year ended December 31, 1997. This increase was primarily attributable to the $103.6 million increase in average interest-earning assets from $274.5 million at the year ended December 31, 1997 to $378.1 million at December 31, 1998, while average interest-bearing liabilities increased only $50.6 million from $231.3 million to $281.9 million over the same period. In addition, funding for the increase in average interest-earning assets was primarily provided by a $56.7 million increase in average stockholders' equity, which included the infusion of capital derived from the Offering, from $29.2 million for the year ended December 31, 1997, to $85.9 million for the comparable period ended December 31, 1998. The increase in interest income resulted primarily from the significant growth of the mortgage loan portfolio, as home purchasers and existing homeowners capitalized on the opportunities afforded by lower mortgage loan interest rates. Concurrently, the more modest increase in interest expense resulted primarily from an increase in interest on borrowed funds, coupled with a decrease in time deposit interest expense. INTEREST INCOME. For the year ended December 31, 1998 interest income was $28.4 million, as compared to $21.4 million for the year ended December 31, 1997. The $7.0 million, or 32.8%, increase was attributable to a $3.9 million, or 45.0%, increase in the amount of interest earned on the Bank's mortgage loan portfolio, which resulted primarily from an increase in the average balance of the Bank's mortgage loans from $110.5 million for the year ended December 31, 1997 to $169.0 million for the year ended December 31, 1998. The increase in interest income was also attributable, to a lesser extent, to growth in the Bank's commercial and consumer loan portfolios. Interest earned on other loans during the year ended December 31, 1998 increased by $644 thousand, compared to the year ended December 31, 1997. Interest earned on investment and mortgage-backed securities during the year ended December 31, 1998 increased by $2.5 million over the same period, largely as a result of the Bank's utilization of additional wholesale leveraging transactions in order to enhance earnings. Total interest income was further bolstered by increases in interest and dividends earned on securities, which were derived mainly from such wholesale leveraging transactions. The average yield on interest-earning assets decreased to 7.51% for the year ended December 31, 1998, as compared to 7.79% for the year ended December 31, 1997. This was primarily due to the lower yields earned on the Bank's loan portfolio and mortgage-backed securities portfolio due to lower long-term interest rates during the year ended December 31, 1998. INTEREST EXPENSE. Interest expense for the year ended December 31, 1998 was $11.9 million, compared to $9.5 million for the year ended December 31, 1997. This increase was due primarily to an increase of $47.3 million in the average balance of borrowed funds, a 32 basis point increase in the average rate paid on money market accounts and a $3.8 million increase in the average balance of money market accounts. These increases were partially offset by a $5.3 million decrease in the average balance of certificate accounts and by a 51 basis point decrease in the average rate paid on borrowed funds. The increase in interest expense is also attributable to an increase of $2.5 million in the interest paid on borrowings associated with the aforementioned wholesale leveraging transactions. PROVISION FOR LOAN LOSSES. The provision for loan losses for the year ended December 31, 1998 increased to $500 thousand, as compared to $454 thousand for the year ended December 31, 1997. This increase resulted from management's assessment of the growth in the loan portfolio, the level of the Bank's allowance for possible loan losses and its assessment of the local economy and market conditions. At December 31, 1998, the allowance for possible loan losses totaled $1.7 million, and the ratio of such allowance to non-performing loans was 82.95%. NON-INTEREST INCOME. Non-interest income, consisting of service and fee income and gains and losses on securities and loan transactions, increased by $1.0 million, or 37.2%, to $3.7 million for the year ended December 31, 1998, as compared to $2.7 million for the year ended December 31, 1997. This increase was primarily attributable to an increase of $782 thousand in gains on securities transactions, an increase of $301 thousand in service and fee income due to growth in checking account deposits during 1998 and an increase of $40 thousand in net gains on loan sales, and was partially offset by a $125 thousand reduction in other income associated with write-offs of leasehold improvements and equipment that resulted from the closing of the Bank's full-service leased branch and the simultaneous opening of the Bank's new full-service branch in the town of Wallkill. NON-INTEREST EXPENSE. Non-interest expense increased by $981 thousand to $13.5 million for the year ended December 31, 1998, as compared to $12.5 million for the year ended December 31, 1997. This increase resulted primarily from an increase in salaries and employee benefits of $1.4 million attributable to additions to staff necessary to attract and service a growing number of loan account and deposit account customers. Professional fees increased $581 thousand primarily as a result of ongoing consultation and audit activities in connection with the Company's new legal structure following the Offering and the Bank's Conversion. Advertising expense increased $161 thousand in order to support the Bank's branch relocation and grand opening, and to promote the Bank's name in the highly competitive mortgage loan and commercial loan arenas. Data processing expense increased $159 thousand due to expense associated with becoming Year 2000 compliant. Other expenses increased $621 thousand due to increased costs associated with the increase in the loan portfolio. Partially offsetting these increases was the decrease of $1.9 million in contribution to the Foundation for the year ended December 31, 1998 due to the one-time charge for the contribution to the Foundation during 1997. PROVISION FOR INCOME TAXES. The provision for income taxes increased from $658 thousand for the year ended December 31, 1997 to $2.5 million for the year ended December 31, 1998. This increase was attributable to the increase in pre-tax income. F13 LIQUIDITY AND CAPITAL RESOURCES Following the completion of the Bank's Conversion and the Company's Offering in December 1997, the Company's principal business was that of its subsidiary, the Bank. The Company invested 50% of the net proceeds from the Offering in the Bank and retained the remaining net proceeds. The remaining net proceeds were initially invested primarily in federal funds, government and federal agency mortgage-backed securities, other debt securities, equity securities and a loan to the trustee of the ESOP. The Bank can pay dividends to the Company, to the extent such dividends are permitted by law, which serves as an additional source of liquidity for the Company. The Company's liquidity is available to, among other things, support future expansion of operations or diversification into other banking related businesses, pay dividends or repurchase its common stock. On April 6, 1999, the Company's Board of Directors authorized its second stock repurchase program covering the repurchase of up to 313,811 shares (5%) of the Company's outstanding common stock. On September 27, 1999, the Company's Board of Directors authorized its third stock repurchase program covering the repurchase of up to 298,120 shares (5%) of the Company's outstanding common stock. On December 14, 1999, the Company's Board of Directors authorized its fourth stock repurchase program covering the repurchase of up to 283,214 shares (5%) of the Company's outstanding common stock. During 1999, the Company utilized its liquidity to repurchase a total of 967,258 shares of the Company's outstanding common stock at a total cost of $12.3 million. During 1999, the Company's Board of Directors declared and the Company paid four quarterly cash dividends aggregating $0.195 per share, or a total of $1.2 million. Restrictions on the amount of dividends the Company and the Bank may declare can affect the Company's liquidity and cash flow needs. Dividend payments by the Company must be within certain guidelines of the Federal Reserve Board. In addition, under Delaware law, the Company may generally only pay dividends from its capital surplus, or if no such surplus exists, from its net profits for the current and preceding year. The Bank's primary sources of funds are retail deposits, wholesale funding from FHLBNY or other bank borrowings, securities sold under repurchase agreements, principal and interest payments on loans and securities and, to a lesser extent, proceeds from the sale of securities. While maturities and scheduled amortization of loans and securities provide an indication of the timing of the receipt of funds, changes in interest rates, economic conditions and competition strongly influence mortgage prepayment rates and deposit flows, reducing the predictability of the timing of sources of funds. The Bank adheres to a Liquidity and Funds Management Policy approved by its Board of Directors, which sets minimum internal guidelines for liquidity purposes. As a member of the FHLBNY, the Bank has the availability of two lines of credit for borrowings in the amounts of $39.0 million and $22.0 million, one on an overnight basis and the other on a 30-day term basis. In accordance with the FHLBNY's credit policy, the Bank now has total credit facilities available of nearly $296.0 million, inclusive of the aforementioned amounts, before the delivery of qualifying collateral is required. Additionally, the Bank has other sources of liquidity if the need arises. One source is to borrow up to $5 million from a commercial bank on an unsecured basis and the other is the ability to sell securities under repurchase agreements in an amount up to $10 million from a securities investment company. The primary investing activities of the Bank are the origination of one- to four-family residential mortgage loans, commercial real estate and commercial business loans, a variety of consumer loans, and the purchase of mortgage-backed securities and debt and equity securities. During the years ended December 31, 1999, 1998 and 1997, the Bank's disbursements for loan originations totaled $214.4 million, $218.3 million and $113.8 million, respectively. Purchases of mortgage-backed securities totaled $79.6 million, $110.4 million and $29.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. Other debt and equity securities purchased during the years ended December 31, 1999, 1998 and 1997, were $50.5 million, $57.6 million and $31.5 million, respectively. The Bank's investing activities are funded primarily by borrowings, net deposit inflows, sales of loans and securities and principal repayments on loans and securities. The Bank increased borrowings at December 31, 1999 and 1998 by $134.3 million and $76.8 million, respectively, to fund its investments. At December 31, 1999, the Bank's total approved loan origination commitments outstanding totaled $70.9 million and the unadvanced/unused portion of commercial lines of credit totaled $9.2 million. The Bank believes it will have sufficient funds available to meet its current originations and other lending commitments. Certificates of deposit scheduled to mature in one year or less from December 31, 1999 totaled $74.9 million. Based on historical experience and pricing strategy, management believes that a significant portion of such deposits will remain with the Bank. At December 31, 1999, the Bank had cash and due from banks of $22.2 million, Federal funds sold of $7.7 million and securities available-for-sale of $185.1 million. Management believes these amounts, together with the Bank borrowing capabilities, to be more than adequate to meet its short-term cash needs. The Bank's ability to pay dividends to the Company is also subject to certain restrictions. Under the New York State Banking Law, dividends may generally be paid only from the net profits of the Bank. The approval of the Superintendent of Banks of the State of New York (the "Superintendent") is required if the total of all dividends declared in any calendar year will exceed the net profits for that year plus the retained net profits of the preceding two years, less any required transfers. In addition, no dividends may be declared, credited or paid if the effect thereof would cause the Bank's capital to be reduced below the amount required by the Superintendent or the FDIC. During 1999, the Board of Directors of the Bank declared and paid a dividend to the Company on December 10, 1999 totaling $1.0 million. F14 WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES REGULATORY CAPITAL POSITION The Bank is subject to minimum regulatory capital requirements imposed by the Federal Deposit Insurance Corporation which vary according to an institution's capital level and the composition of its assets. An insured institution is required to maintain Tier I capital of not less than 3.00% of total assets plus an additional amount of at least 100 to 200 basis points ("leverage capital ratio"). An insured institution must also maintain a ratio of total capital to risk-based assets of at least 8.00%. Although the minimum leverage capital ratio is 3.00%, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") stipulates that an institution with less than a 4.00% leverage capital ratio is deemed to be an "undercapitalized" institution, which results in the imposition of regulatory restrictions. The Bank's capital ratios qualify it to be deemed "well capitalized" under FDICIA. In addition, the Company's capital ratios exceed the minimum regulatory capital requirements imposed by the Federal Reserve Board, which are substantially similar to the requirements of the FDIC. See Note 13 to the Notes to Consolidated Financial Statements for the Bank's, the Commercial Bank's and the Company's regulatory capital position as of December 31, 1999 and 1998. READINESS FOR THE YEAR 2000 AND ACTUAL EXPERIENCE Well in advance of December 31, 1999, the Company established a formal program to identify and assess the effect of the Year 2000 on its software, hardware and business. Much of the Company's data processing is done by outside vendors, and the Company was dependent on them to evaluate and address problems that may arise when computers cannot distinguish between the years with the same final two digits in the current century and in the next. Based on its experience since January 1, 2000, management believes that these vendors modified both software and hardware successfully as no operating problems related to the date have occurred. The expense of modifying systems to identify the Year 2000 correctly will not have a significant effect on the Company's results of operation, financial condition or liquidity, either now or in the future. IMPACT OF INFLATION AND CHANGING PRICES The Financial Statements and Notes thereto 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 the changes in the relative purchasing power of money over time due to inflation. Unlike industrial companies, nearly all of the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. IMPACT OF NEW ACCOUNTING STANDARDS See Note 1 to Notes to the Consolidated Financial Statements. MARKET FOR COMMON STOCK The Company's common stock commenced trading on December 23, 1997. The table below shows the high and low prices of the common stock for the periods indicated, as reported on the National Market System of The Nasdaq Stock Market,sm as well as the dividends paid during such periods. Year Quarter Ending High Low Dividends Paid - - ------------------------------------------------------------------------- 1998 March 31 $17.50 $15.38 N/A June 30 $18.00 $16.25 N/A September 30 $17.63 $11.50 $0.0400 December 31 $17.13 $10.50 $0.0425 1999 March 31 $16.13 $13.25 $0.0450 June 30 $13.75 $12.13 $0.0475 September 30 $12.75 $ 9.75 $0.0500 December 31 $11.06 $10.00 $0.0525 As of February 29, 2000, there were 5,536,790 shares of the Company's common stock outstanding and approximately 1,457 holders of record. The holders of record include banks and brokers who act as nominees, each of whom may represent more than one stockholder. The Board of Directors of the Company declared four quarterly cash dividends during the year ended December 31, 1999, as shown in the table above. The Board will review the dividend regularly and hopes to maintain a regular quarterly dividend in the future, based on the Company's earnings, financial condition and other factors. F15
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, DECEMBER 31, 1999 1998 ASSETS ----------------- ---------------- Cash on hand and in banks $ 22,209,297 $ 10,511,429 Federal funds sold 7,665,000 -- Securities- Available-for-sale, at fair value 185,072,068 149,490,983 Held-to-maturity, at amortized cost (fair value of $1,410,220 in 1999 and $5,967,296 in 1998) 1,417,621 5,998,931 -------------- ------------ Total securities 186,489,689 155,489,914 -------------- ------------ Mortgage loans, net 270,688,069 194,596,355 Mortgage loans held-for-sale 4,162,583 13,736,722 Other loans, net 74,470,059 53,130,139 Mortgage servicing rights 2,018,990 1,463,503 Accrued interest receivable 3,216,362 2,505,976 Federal Home Loan Bank stock 11,752,000 4,632,800 Bank premises and equipment, net 7,789,021 6,173,210 Other real estate owned, net 414,840 370,772 Other assets 6,837,797 2,527,833 -------------- ------------ Total assets $ 597,713,707 $445,138,653 ============== ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits $ 283,072,381 $246,886,382 Mortgage escrow funds 1,487,761 1,965,266 Securities sold under agreements to repurchase 37,375,000 25,310,000 Federal Home Loan Bank advances 201,675,000 79,480,000 Accrued expenses and other liabilities 7,531,500 7,259,224 -------------- ------------ Total liabilities 531,141,642 360,900,872 -------------- ------------ COMMITMENTS AND CONTINGENCIES (NOTE 14) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued Common stock, $.01 par value; 15,000,000 shares authorized; 6,606,548 shares issued; 5,054,281 and 5,924,056 shares outstanding in 1999 and 1998, respectively 66,065 66,065 Additional paid-in capital 62,977,982 63,374,087 Retained earnings - subject to restrictions 32,429,671 30,458,523 Accumulated other comprehensive income (loss), net (6,831,889) 1,726,918 Less-Unallocated common stock held by ESOP (6,515,035) (7,207,901) Less- Unearned common stock held by RRP (3,262,607) (4,179,911) Treasury stock (967,258 shares) (12,292,122) -- -------------- ------------ Total stockholders' equity 66,572,065 84,237,781 -------------- ------------ Total liabilities and stockholders' equity $ 597,713,707 $445,138,653 ============== ============
The accompanying notes are an integral part of these consolidated statements. F16 WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, ---------------------------------------------------- 1999 1998 1997 ---------------------------------------------------- INTEREST INCOME: Interest on mortgage loans $ 17,077,323 $ 12,693,436 $ 8,756,253 Interest on other loans 5,430,705 4,264,370 3,620,033 Interest on securities 13,016,925 11,345,519 8,874,052 Interest on federal funds sold 14,253 69,621 110,103 Interest on short-term money market instruments 22,878 35,258 25,974 ------------ ------------ ------------ Total interest income 35,562,084 28,408,204 21,386,415 ------------ ------------ ------------ INTEREST EXPENSE: Time deposits 3,467,065 3,540,030 3,917,890 Money market deposits 1,672,908 1,078,337 859,537 Savings deposits 2,596,974 2,600,034 2,542,659 Mortgagors' escrow funds 111,953 93,907 78,047 Borrowed funds 9,101,753 4,627,338 2,140,712 ------------ ------------ ------------ Total interest expense 16,950,653 11,939,646 9,538,845 ------------ ------------ ------------ Net interest income before provision for loan losses 18,611,431 16,468,558 11,847,570 PROVISION FOR LOAN LOSSES: 499,800 500,000 454,000 ------------ ------------ ------------ Net interest income after provision for loan losses 18,111,631 15,968,558 11,393,570 ------------ ------------ ------------ NON-INTEREST INCOME: Service and fee income 2,914,268 2,335,893 2,034,529 Securities transactions 523,563 1,108,931 326,538 Net gain on sale of loans 109,426 168,090 127,750 Other income 257,686 74,087 198,645 ------------ ------------ ------------ Total non-interest income, net 3,804,943 3,687,001 2,687,462 ------------ ------------ ------------ NON-INTEREST EXPENSE: Salaries and employee benefits 9,536,265 7,795,269 6,358,603 FDIC insurance 30,678 28,457 27,835 Occupancy 1,451,646 1,159,551 1,212,883 Data processing 974,551 795,554 636,539 Advertising 499,791 335,954 175,273 Professional fees 1,005,801 919,673 338,761 Contribution to The Warwick Savings Foundation - - 1,924,230 Other 3,209,147 2,469,796 1,849,280 ------------ ------------ ------------ Total non-interest expense 16,707,879 13,504,254 12,523,404 ------------ ------------ ------------ Income before provision for income taxes 5,208,695 6,151,305 1,557,628 PROVISION FOR INCOME TAXES: 2,066,009 2,529,870 658,294 ------------ ------------ ------------ Net Income $ 3,142,686 $ 3,621,435 $ 899,334 ============ ============ ============ WEIGHTED AVERAGE: Common shares 5,476,926 6,013,978 N/A Dilutive stock options - - N/A ------------ ------------ 5,476,926 6,013,978 N/A ============ ============ EARNINGS PER SHARE: Basic $ 0.57 $ 0.60 N/A ============ ============ Diluted $ 0.57 $ 0.60 N/A ============ ============
F17
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Accumulated Other Additional Comprehensive Unallocated Common Paid-in Retained Income ESOP Stock Capital Earnings (Loss), Net Common Stock ------- ----------- ----------- ------------- ------------ BALANCE, December 31, 1996 Net income $ - $ - $26,482,795 $ 821,149 $ - Unrealized appreciation on securities available-for-sale, net - - 899,334 - - Comprehensive income - - - 812,954 - Issuance of 6,414,125 shares of $.01 par value common stock in initial public offering, net of conversion related expenses 64,141 61,421,084 - - - Issuance of 192,423 shares of $.01 par value common stock to The Warwick Savings Foundation 1,924 1,922,306 - - - Purchase of common stock by ESOP - - - - (7,079,156) Allocation of ESOP stock - 23,102 - - 820,421 ------- ----------- ----------- ---------- ----------- BALANCE, December 31, 1997 66,065 63,366,492 27,382,129 1,634,103 (6,258,735) Net income - - 3,621,435 - - Unrealized appreciation on securities available-for-sale, net - - - 92,815 - Comprehensive income Purchase of common - - - - (1,430,618) stock by ESOP Allocation of ESOP stock - 7,595 - - 481,452 Cash dividends paid - - (545,041) - - Purchase of common stock by RRP - - - - - Earned portion of RRP - - - - - ------- ----------- ----------- ---------- ----------- BALANCE, December 31, 1998 66,065 63,374,087 30,458,523 1,726,918 (7,207,901) Net income - - 3,142,686 - - Unrealized depreciation on securities available-for-sale, net - - - (8,558,807) - Comprehensive income Allocation of ESOP stock - (155,746) - - 692,866 Cash dividends paid - - (1,171,538) - - Earned portion of RRP - (240,359) - - - Purchase of treasury stock - - - - - ------- ----------- ----------- ---------- ----------- BALANCE, December 31, 1999 66,065 $62,977,982 $32,429,671 $(6,831,889) $(6,515,035) ======= =========== =========== =========== ===========
Unearned RRP Treasury Comprehensive Common Stock Stock Income (Loss) ------------ --------- ------------- BALANCE, December 31, 1996 Net income $ - $ - Unrealized appreciation on securities available-for-sale, net - - $ 899,334 Comprehensive income - - 812,954 ----------- Issuance of 6,414,125 shares of $ 1,712,288 $.01 par value common stock in =========== initial public offering, net of conversion related expenses - - Issuance of 192,423 shares of $.01 par value common stock to The Warwick Savings Foundation - - Purchase of common stock by ESOP - - Allocation of ESOP stock - - ------------ ---------- BALANCE, December 31, 1997 - - Net income - - $ 3,621,435 Unrealized appreciation on securities available-for-sale, net - - 92,815 Comprehensive income $ 3,714,250 =========== Purchase of common - - stock by ESOP Allocation of ESOP stock - - Cash dividends paid - - Purchase of common stock by RRP (4,635,038) - Earned portion of RRP 455,127 - ------------ ---------- BALANCE, December 31, 1998 (4,179,911) - Net income - - $ 3,142,686 Unrealized depreciation on securities available-for-sale, net - - (8,558,807) ----------- Comprehensive income $(5,416,121) ============ Allocation of ESOP stock - - Cash dividends paid - - Earned portion of RRP 917,304 - Purchase of treasury stock - (12.292,122) ------------ --------- BALANCE, December 31, 1999 $ (3,262,607) $(12,292,122) ============ ============ F18 WARWICK COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, ------------------------------------------------------ 1999 1998 1997 ------------------ ----------------- --------------- Cash Flows From Operating Activities: Net income $ 3,142,686 $ 3,621,435 $ 899,334 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation 668,012 491,756 466,220 Charitable contribution of common stock to - - 1,924,230 The Warwick Savings Foundation Amortization of premium /(accretion) of discount (1,533,934) (627,131) (18,861) on investment securities, net Net increase in accrued interest receivable (710,386) (345,061) (116,250) Net increase in mortgage servicing rights and other assets (4,865,451) (657,081) (1,773,831) Provision for loan losses 499,800 500,000 454,000 Net gain on sales of loans (109,426) (168,090) (127,750) Net gain on sales of securities (523,563) (1,108,931) (326,538) Net increase (decrease) in accrued interest payable 838,685 1,366,126 (27,564) Net increase (decrease) in accrued expenses and other liabilities (566,409) (5,677,688) 6,307,043 ----------- ------------- ----------- Net cash used in operating activities (3,159,986) (2,604,665) 7,660,033 ----------- ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities and calls of securities 23,999,619 24,888,132 7,800,000 Purchases of securities (130,133,268) (168,037,295) (60,713,044) Proceeds from sales of trading securities and securities 41,680,350 90,520,153 53,309,648 available-for-sale Principal repayments from mortgage-backed securities 20,722,448 25,468,015 11,758,660 Purchases of Federal Home Loan Bank stock (7,119,200) (2,901,500) (553,200) Net increase in loans (83,665,284) (82,586,456) (50,398,616) Purchases of bank premises and equipment, net (1,076,815) (1,697,921) (1,498,082) ----------- ------------- ----------- Net cash used in investing activities (135,592,150) (114,346,872) (40,294,634) ----------- ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 36,185,999 33,372,925 (3,707,748) Net increase (decrease) in mortgage escrow funds (477,505) 436,444 584,205 Increase (decrease) in borrowed funds 134,260,000 76,785,000 (8,695,000) Cash dividends paid on common stock (1,171,538) (545,041) - Purchase of treasury stock (12,292,122) - - Purchase of common stock by ESOP - (1,430,618) (7,079,156) ESOP allocation 692,866 481,452 820,421 Proceeds from issuance of common stock - - 64,141,250 Payments for conversion costs - - (2,656,025) Purchase of common stock by RRP - (4,635,038) - Earned portion of RRP 917,304 455,127 - ----------- ------------- ----------- Net cash provided by financing activities 158,115,004 104,920,251 43,407,947 ----------- ------------- ----------- Increase (decrease) in cash and cash equivalents 19,362,868 (12,031,286) 10,773,346 CASH AND CASH EQUIVALENTS, beginning of year 10,511,429 22,542,715 11,769,369 ----------- ------------- ----------- CASH AND CASH EQUIVALENTS, end of year $29,874,297 $ 10,511,429 $22,542,715 =========== ============= =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for- Interest on deposits and borrowed funds $17,788,653 $ 10,573,520 $ 9,566,409 Income taxes 1,826,375 2,803,896 1,610,000
The accompanying notes are an integral part of these consolidated statements. F19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a description of the significant accounting policies followed by Warwick Community Bancorp, Inc. and subsidiaries (the "Company") in the preparation of its consolidated financial statements: BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Warwick Community Bancorp, Inc., its savings bank subsidiary, The Warwick Savings Bank (the "Bank"), and its commercial bank subsidiary, The Towne Center Bank (the "Commercial Bank"). All significant intercompany balances and transactions are eliminated in consolidation. As more fully discussed in Note 2, Warwick Community 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 New York chartered mutual savings bank to a New York chartered stock savings bank. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended. CHANGE OF FISCAL YEAR During 1998 the Company changed its fiscal year end from May 31 to December 31. All prior periods have been restated to reflect this change. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported assets and liabilities as of the date of the consolidated statements of financial condition. The same is true of revenues and expenses reported for the period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company generally considers short-term instruments, with original maturities of three months or less, measured from their acquisition date, and highly liquid instruments readily convertible to known amounts of cash to be cash equivalents. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds sold are sold for one-day periods. SECURITIES The Company classifies its securities as trading securities, available-for-sale securities, or held-to-maturity securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Trading securities are debt and equity securities that are bought principally for the purpose of selling them in the near term, and securities classified as held-to-maturity consist of debt securities which the Company has the positive intent and ability to hold to maturity and are carried at amortized cost. Securities considered neither trading nor held-to-maturity are classified as available-for-sale securities and are carried at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity (net of related deferred taxes). Trading securities are carried at fair value with unrealized gains and losses included in earnings. Federal Home Loan Bank stock is considered a restricted stock under SFAS No. 115 and, accordingly, is carried at cost. LOANS Loans are stated at the principal amount outstanding, net of unearned income. Loans are placed on non-accrual 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 a loan is classified as non-accrual, the recognition of interest income ceases. Interest previously accrued and remaining unpaid is reversed against income. Cash payments received are applied to principal and interest income is not recognized unless management determines that the financial condition and payment record of the borrower warrant the recognition of income. F20 ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is a significant estimate based upon management's periodic evaluation of the loan portfolio under current economic conditions, considering factors such as the Company's past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, and the estimated value of the underlying collateral. Establishing the allowance for loan losses involves significant management judgment, utilizing the best available information at the time of review. Those judgments are subject to further review by various sources, including the Bank's and the Commercial Bank's regulators. While management estimates loan losses using the best available information, future adjustments to the allowance may be necessary based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, the identification of additional problem loans, and other factors. SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," defines an impaired loan as a loan for which it is probable, based on current information, that the lender will not collect all amounts due under the contractual terms of the loan agreement. The Company applies the impairment criteria to all loans, except for large groups of smaller balance homogenous loans that are collectively evaluated for impairment, such as residential mortgage and consumer installment loans. At December 31, 1999 and 1998, in addition to the non-accrual loans discussed in Notes 4 and 5, there were $359,109 and $544,953, respectively, of loans identified by the Company as impaired, as defined under SFAS No. 114, with no specific reserves for losses. MORTGAGE LOANS HELD-FOR-SALE Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate, with net unrealized losses (if any) reported in earnings. Realized gains and losses on sales of loans are based on the cost of the specific loans sold. LOAN ORIGINATION FEES AND RELATED COSTS Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized in income using the level-yield method over the contractual life of the loans. Unamortized fees and costs on loans sold or prepaid prior to contractual maturity are recognized as an adjustment to income in the year such loans are sold or prepaid. MORTGAGE SERVICING RIGHTS The cost of mortgage servicing rights (purchased or originated rights with related loans sold) is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. For purposes of measuring impairment, the servicing rights are stratified based on the following predominant risk characteristics of the underlying loans: (a) loan type, and (b) origination or securitization date. BANK PREMISES AND EQUIPMENT Bank premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets. Equipment under capital leases is amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Repairs and maintenance, as well as renewals and replacements of a routine nature, are expensed while costs incurred to improve or extend the life of existing assets are capitalized. OTHER REAL ESTATE OWNED Other real estate owned ("OREO") represents properties acquired through legal foreclosure. Prior to transferring a real estate loan to OREO, the loan is written down to the lower of the recorded investment in the loan or the fair value of the property. Any resulting write-downs are charged to the allowance for loan losses. Thereafter, the property is carried at the lower of cost or fair value less costs to sell, with any adjustments recorded as an increase or decrease to the allowance for losses on OREO. F21 INTEREST INCOME Interest income includes interest income on loans and investment securities and dividend income received on investment securities. The operations of the Company are substantially dependent on its net interest income, which is the difference between the interest income earned on its interest-earning assets and the interest expense paid on its interest-bearing liabilities. Like most savings institutions, the Company's earnings are affected by changes in market interest rates and the economic factors beyond its control. Decreases in the Company's average interest rate spread could adversely affect the Company's net interest income. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax effects attributable to "temporary differences" (differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases) and tax loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if, based on an analysis of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income in the period that includes the enactment date of the change. EMPLOYEE STOCK OWNERSHIP PLAN The Company follows the American Institute for Certified Public Accountants ("AICPA") Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6"), to account for the Warwick Community Bancorp, Inc. Employee Stock Ownership Plan ("ESOP"). SOP 93-6 requires that compensation expense be recognized for shares committed to be released to directly compensate employees equal to the fair value of the shares committed. In addition, SOP 93-6 requires that leveraged ESOP debt and related interest expense be reflected in the employer's financial statements. The application of SOP 93-6 will result in fluctuations in compensation expense as a result of changes in the fair value of the Company's common stock; however, any such compensation expense fluctuations will result in an offsetting adjustment to paid-in capital. Therefore, total capital will not be affected. STOCK OPTIONS The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 applies to all transactions in which an entity acquires goods or services by issuing equity instruments or by incurring liabilities where the payment amounts are based on the entity's common stock price, except for employee stock ownership plans. SFAS No. 123 established a fair value-based method of accounting for stock-based compensation arrangements with employees, 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"). SFAS No. 123 does not require an entity to adopt the new fair value-based method for purposes of preparing its basic financial statements; an entity is allowed to continue to use the APB No. 25 method for preparing its basic financial statements. The Company has chosen to continue to use the APB No. 25 method; however, SFAS No. 123 requires presentation of pro forma net income and earnings per share information, in the notes to the financial statements, as if the fair value-based method had been adopted. EARNINGS PER SHARE Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, adjusted for the unallocated portion of the shares held by the ESOP in accordance with SOP 93-6 and unearned shares held by the Recognition and Retention Plan of Warwick Community Bancorp, Inc. ("RRP"). Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and resulted in the issuance of common stock that then shared in the earnings of the Company, is computed by dividing net income by the weighted average number of common shares and dilutive instruments. As of December 31, 1999 and 1998, the Company had no securities that could be converted into common stock nor does the Company have any contracts that could result in the issuance of common stock, except for those options granted under the Stock Option Plan of Warwick Community Bancorp, Inc. ("Stock Option Plan"). F22 COMPREHENSIVE INCOME Comprehensive income includes net income and all other changes in equity during a period except those resulting from investment by owners and distributions 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 for the Company consists solely of unrealized holding gains or losses on available-for-sale securities. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as later amended by SFAS No. 137, is effective prospectively for the Company on January 1, 2001. The Company is still assessing the impact, if any, of SFAS No. 133 on its accounting or disclosures. RECLASSIFICATIONS Certain reclassifications were made to the accompanying December 31, 1998 and 1997 financial statements to conform to December 31, 1999 presentation. 2. CONVERSION TO STOCK FORM OF OWNERSHIP On July 10, 1997, the Board of Trustees of the Bank adopted a proposed Plan of Conversion ("Plan") to convert the Bank from a New York mutual savings bank to a New York stock savings bank and to become a wholly owned subsidiary of the Company (the "Conversion"). The Company completed its initial public offering on December 23, 1997 and sold 6,414,125 shares of common stock, resulting in proceeds of $61,485,225 net of expenses totaling $2,656,025. The Company used $30,742,613, or 50%, of the net proceeds to purchase all of the outstanding stock of the Bank. The Company also loaned $8,509,774 to the ESOP, which purchased 528,523 shares of the Company's stock. As part of the Plan, the Bank and the Company formed The Warwick Savings Foundation and donated 192,423 shares of the Company's common stock valued at $1,924,230. The Company recorded a contribution expense charge and a corresponding deferred tax benefit of $769,692 for this donation. The formation of this private charitable foundation is to further the Bank's commitment to the communities that it serves. The Company may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause stockholders' equity to be reduced below applicable regulatory capital maintenance requirements, the amount required for the liquidation account established in connection with the Bank's Conversion, or if such declaration and payment would otherwise violate regulatory requirements. F23 3. SECURITIES A summary of securities at December 31, 1999 and 1998 follows:
December 31, 1999 ------------------------------------------------------------------- Gross Gross Unrealized Unrealized Estimated Amortized Cost Gains Losses Fair Value ------------------ ------------- ------------- ------------ Securities available-for-sale: Debt securities-- U.S. Government and agency obligations $ 59,344,411 $ 37,025 $ (5,104,545) $ 54,276,891 Obligations of state and political 4,963,279 - (213,279) 4,750,000 subdivisions Industrial and financial 14,180,416 2,348 (1,286,986) 12,895,778 Collateralized mortgage obligations 16,466,112 - (857,734) 15,608,378 Mortgage-backed securities 93,568,297 72,215 (4,065,250) 89,575,262 ------------- ---------- ------------ ------------ Total debt securities 188,522,515 111,588 (11,527,794) 177,106,309 Common stock 2,851,447 - (684,011) 2,167,436 Preferred stock 1,111,654 - (160,904) 950,750 Mutual fund shares 3,972,934 874,639 - 4,847,573 ------------- ---------- ------------ ------------ Total securities available-for-sale 196,458,550 986,227 (12,372,709) 185,072,068 ------------- ---------- ------------ ------------ Securities held-to-maturity: U.S. Government and agency obligations 1,344,652 - (7,096) 1,337,556 Obligations of state and political subdivisions 72,969 - (305) 72,664 ------------- ---------- ------------ ------------ Total securities held-to-maturity 1,417,621 - (7,401) 1,410,220 ------------- ---------- ------------ ------------ Total securities $ 197,876,171 $ 986,227 $(12,380,110) 186,482,288 ============= ========== ============ ============
December 31, 1998 ------------------------------------------------------------------- Gross Gross Unrealized Unrealized Estimated Amortized Cost Gains Losses Fair Value ------------------ ------------- ------------- ------------ Securities available-for-sale: Debt securities-- U.S. Government and agency obligations $ 41,452,955 $ 405,865 $ - $ 41,858,820 Industrial and financial 8,044,770 185,230 - 8,230,000 Collateralized mortgage obligations 17,976,540 127,369 - 18,103,909 Mortgage-backed securities 61,302,215 846,005 (142,688) 62,005,532 ------------- ---------- ------------ ------------ Total debt securities 128,776,480 1,564,469 (142,688) 130,198,261 Common stock 2,275,592 19,213 (353,955) 1,940,850 Preferred stock 1,111,654 8,596 - 1,120,250 Mutual fund shares 14,449,062 1,828,467 (45,907) 16,231,622 ------------- ---------- ------------ ------------ Total securities available-for-sale 146,612,788 3,420,745 (542,550) 149,490,983 ------------- ---------- ------------ ------------ Securities held-to-maturity: U.S. Government and agency obligations 5,895,145 3,943 (37,500) 5,861,588 Obligations of state and political subdivisions 103,786 1,922 - 105,708 ------------- ---------- ------------ ------------ Total securities held-to-maturity 5,998,931 5,865 (37,500) 5,967,296 ------------- ---------- ------------ ------------ Total securities $ 152,611,719 $3,426,610 $ (580,050) $155,458,279 ============= ========== ============= ============
F24 A summary of the carrying value of debt securities at December 31, 1999 by contractual maturity is shown below. Actual maturities may differ from contractual maturities because certain security issuers may have the right to call or prepay their obligations.
One Year or After One Through After Five Through After Ten Less Five Years Ten Years Years Total ---------------- ----------------- ------------------ --------------- ------------ Securities available-for-sale- U.S. Government and agency obligations $ -- $ 2,053,440 $4,950,40 $ 47,273,052 $ 54,276,892 Obligations of state and political subdivisions -- -- 4,750,000 4,750,000 Industrial and financial -- 752,348 -- 12,143,430 12,895,778 Collateralized mortgage obligations -- -- -- 15,608,378 15,608,378 Mortgage-backed securities -- 1,978 781,768 88,791,515 89,575,261 --------- ------------ ----------- ------------ ------------ Total securities available- for-sale $ -- $ 2,807,766 $ 5,732,168 $168,566,375 $177,106,309 ========= ============ =========== ============ ============ Securities held-to-maturity- U.S. Government and agency obligations $ 644,537 $ 700,115 $ -- $ -- $ 1,344,652 Obligations of state and political subdivisions -- -- -- 72,969 72,969 --------- ------------ ----------- ------------ ------------ Total securities held-to-maturity $ 644,537 $ 700,115 $ -- $ 72,969 $ 1,417,621 ========= ============ =========== ============ ============ Total debt securities $ 644,537 $ 3,507,881 $ 5,732,168 $168,639,344 $178,523,930 ========= ============ =========== ============ ============
Proceeds from sales of securities (trading and available-for-sale) are summarized as follows: YEARS ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ----------- ----------- ----------- Proceeds from sales $41,680,350 $90,520,153 $53,309,648 =========== =========== =========== Gross gains on sales $ 1,044,267 $ 1,338,245 $ 598,500 =========== =========== =========== Gross losses on sales $ 520,704 $ 229,314 $ 271,962 =========== =========== =========== No securities held-to-maturity were sold during the three years ended December 31, 1999. 4. MORTGAGE LOANS A summary of mortgage loans at December 31, 1999 and 1998 follows:
December 31, -------------------------------- 1999 1998 ------------- ------------- Conventional 1-4 family residential loans originated $ 237,993,164 $ 165,329,367 Conventional 1-4 family residential loans purchased 1,528,995 1,817,407 Loans partially guaranteed by VA or insured by FHA 213,060 641,317 Home equity loans 22,316,567 18,060,877 Construction loans 18,221,793 16,104,749 ------------- ------------- 280,273,579 201,953,717 Undisbursed portion of construction loans (8,399,122) (6,303,688) Net deferred loan fees (807,658) (680,668) Allowance for loan losses (378,730) (373,006) ------------- ------------- $ 270,688,069 $ 194,596,355 ============= =============
The Bank has sold certain conventional mortgage loans without recourse and has retained the related servicing rights. The remaining principal balances of mortgage loans serviced for others, which are not included in the accompanying consolidated financial statements, were approximately $248,712,000 and $189,378,000 at December 31, 1999 and 1998, respectively. Mortgage loans on non-accrual status at December 31, 1999 and 1998 were approximately $693,000 and $631,000, respectively. Interest income that would have been recorded if the loans had been performing in accordance with their original terms aggregated approximately $72,000 and $90,000 during the years ended December 31, 1999 and 1998, respectively. F25 5. OTHER LOANS A summary of other loans at December 31, 1999 and 1998 follows: December 31, ------------------------------ 1999 1998 ------------ ------------ Commercial $ 45,553,015 $ 35,380,711 Automobile 26,993,795 13,787,879 Student 195,014 332,407 Credit card 1,195,944 1,295,868 Other consumer loans 1,747,027 3,345,476 ------------ ------------ 75,684,795 54,142,341 Net deferred loan costs 347,691 341,844 Allowance for loan losses (1,562,427) (1,354,046) ------------ ------------ $ 74,470,59 $ 53,130,139 ============ ============ Commercial loans on non-accrual status at December 31, 1999 and 1998 were approximately $418,000 and $55,000, respectively. Consumer loans in arrears three months or more were approximately $103,000 and $33,000 at December 31, 1999 and 1998, respectively. Interest income that would have been recorded if the loans had been performing in accordance with their original terms was $65,000 and $5,000 during the years ended December 31, 1999 and 1998, respectively. 6. ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is as follows: Years Ended December 31, --------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Balance at beginning of period $ 1,727,052 $ 1,371,963 $ 1,184,261 Provision for loan losses 499,800 500,000 454,000 Charge-offs (372,151) (175,372) (278,890) Recoveries 86,456 30,461 12,592 ----------- ----------- ----------- Balance at end of period $ 1,941,157 $ 1,727,052 $ 1,371,963 =========== =========== =========== 7.MORTGAGE SERVICING RIGHTS Mortgage servicing rights as of December 31, 1999 and 1998 consist of the following: December 31, ---------------------------- 1999 1998 ----------- ----------- Mortgage servicing rights $ 2,189,955 $ 1,675,594 Less - Accumulated amortization (170,965) (212,091) ----------- ----------- $ 2,018,990 $ 1,463,503 =========== =========== The Bank capitalized originated mortgage servicing rights of $726,452 and $771,868 for the years ended December 31, 1999 and 1998, respectively. 8.BANK PREMISES AND EQUIPMENT A summary of bank premises and equipment at December 31, 1999 and 1998 follows: December 31, ------------------------------ 1999 1998 ------------ ------------ Land $ 2,017,296 $ 1,995,899 Buildings and improvements 5,194,862 4,151,428 Equipment 4,270,043 3,385,022 Furniture and fixtures 998,578 779,095 ------------ ------------ 12,480,779 10,311,444 Less - Accumulated depreciation (4,691,758) (4,138,234) ------------ ------------ $ 7,789,021 $ 6,173,210 ============ ============ F26 9.DEPOSITOR ACCOUNTS Deposit account balances and stated interest rates at December 31, 1999 and 1998 are summarized as follows:
December 31, 1999 December 31, 1998 -------------------------------- --------------------------------- Stated Rates Account Balances Stated Rates Account Balances ------------- ------------------ --------------- ----------------- Demand checking accounts --% $ 39,722,555 --% $ 33,380,334 Negotiable order of withdrawal accounts (NOW) 1.00--2.00 24,975,864 1.00--2.25 22,761,492 Savings accounts 2.00--3.25 84,671,559 2.00--3.25 82,696,147 Money market accounts 1.75--5.22 44,478,964 2.35--4.23 37,052,916 Time certificates 4.18--6.25 89,223,439 4.50--5.15 70,995,493 ------------ ------------ Total deposits $283,072,381 $246,886,382 ============ ============
Time certificate balances at December 31, 1999 and 1998 are summarized by remaining period to contractual maturity as follows. December 31, --------------------------- 1999 1998 ----------- ----------- Under one year $74,926,774 $64,390,436 One year to under three years 12,734,402 4,857,712 Three years and over 1,562,263 1,747,345 ----------- ----------- $89,223,439 $70,995,493 =========== =========== The aggregate amount of time certificates in denominations of $100,000 or more was approximately $11,546,000 and $5,933,000 at December 31, 1999 and 1998, respectively. 10. INCOME TAXES Provision for income taxes is comprised of the following: Years Ended December 31, --------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Current: Federal $ 1,643,306 $ 1,942,208 $ 1,205,989 State 429,423 781,612 403,150 ----------- ----------- ----------- 2,072,729 2,723,820 1,609,139 ----------- ----------- ----------- Deferred: Federal (9,721) 87,431 (699,741) State 3,001 (281,381) (251,104) ----------- ----------- ----------- (6,720) (193,950) (950,845) ----------- ----------- ----------- $ 2,066,009 $ 2,529,870 $ 658,294 =========== =========== =========== F27 The tax effects of temporary differences that give rise to the Bank's deferred tax assets and deferred tax liabilities, on a combined basis, for federal and state tax purposes at December 31, 1999 and 1998, are as follows: December 31, ------------------ 1999 1998 -------- -------- (000's omitted) Deferred tax assets: Charitable contribution benefit $ 228 $ 437 Allowance for loan losses 796 650 State net operating loss 36 -- Accrued post-retirement benefits 727 676 Net unrealized loss on securities available-for- sale 4,671 -- Other deductible temporary differences 290 235 ------ ------ Total gross deferred tax assets 6,748 1,998 ------ ------ Deferred tax liabilities: Bad debt reserves for income tax purposes in excess of the base-year reserves 82 269 Net unrealized gain on securities available-for- sale -- 1,179 Other taxable temporary differences 89 91 ------ ------ Total gross deferred tax liabilities 171 1,539 ------ ------ Deferred tax asset valuation reserve 36 -- ------ ------ Net deferred tax asset (included in other assets) after valuation reserve $6,541 $ 459 ====== ====== The provision for income taxes differs from that computed at the federal statutory rate as follows:
Years Ended December 31, ------------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Tax at federal statutory rate $1,770,956 $2,091,444 $ 529,594 State taxes, net of federal income tax benefit 285,400 330,152 100,350 Other 9,653 108,274 28,350 ---------- ---------- ---------- Total income tax expense $2,066,009 $2,529,870 $ 658,294 ========== ========== ========== Effective rate 39.66% 41.13% 42.26%
As a thrift institution, the Bank is subject to special provisions in the federal and New York State tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. These deductions historically have been determined using methods based on loss experience or a percentage of taxable income. Tax bad debt reserves are maintained for qualifying real property loans and for non-qualifying loans in amounts equal to the excess of allowable deductions over actual bad debt losses and other reserve reductions. A supplemental reserve is also maintained. The qualifying and non-qualifying loan reserves consist of a defined base-year amount, plus additional amounts ("excess reserves") accumulated after the base year. SFAS No. 109, "Accounting for Income Taxes," requires recognition of deferred tax liabilities with respect to such excess reserves, as well as any portion of the base-year amount or the supplemental reserve which is expected to become taxable (or "recaptured") in the foreseeable future. Certain amendments to the federal tax bad debt provisions were enacted in July 1996. The federal amendments include elimination of the percentage-of-taxable-income method for tax years beginning after December 31, 1995 and imposition of a requirement to recapture into taxable income (over a six-year period) the qualifying and non-qualifying loan reserves in excess of the base-year amounts. However, such recapture requirements were suspended for each of the two successive taxable years beginning January 1, 1996 in which the Bank originates a minimum amount of certain residential loans during such years that is not less than the average of the principal amounts of such loans made by the Bank during its six taxable years preceding January 1, 1996. The Bank previously established, and will continue to maintain, a deferred tax liability with respect to such excess federal reserves. F28 In accordance with SFAS No. 109, deferred tax liabilities have not been recognized with respect to the base-year and supplemental reserves, since the Bank does not expect that these amounts will become taxable in the foreseeable future. Under the tax laws as amended, events that would result in taxation of these reserves include: (i) reductions in the reserves for purposes other than tax bad debt losses, (ii) failure of the Bank to maintain a specified qualifying-assets ratio or meet other thrift definition tests for New York State tax purposes and (iii) certain stock redemptions, partial or complete liquidation or distribution in excess of post-1951 earnings and profits. The reserve balance of $4,713,000 at December 31, 1987 has not been subject to deferred taxes. 11. BENEFIT PLANS PENSION PLAN All eligible employees of the Company are included in a noncontributory defined benefit pension plan ("Pension Plan") administered by Actuarial Pension Analysts, Inc. Under the terms of the Pension Plan, participants vest 100% upon completion of five years of service as defined in the plan document. The Bank's policy is to fund the consulting actuary's recommended contribution. Assets of the Pension Plan are invested in various debt and equity securities. The following table sets forth the Pension Plan's change in benefit obligation: December 31, ---------------------------- 1999 1998 ----------- ----------- Benefit obligation at beginning of period $ 5,487,147 $ 4,988,251 Service cost 387,796 356,616 Interest cost 360,132 319,892 Benefits paid (147,494) (44,372) ----------- ----------- Benefit obligation at end of period $ 6,220,821 $ 5,620,387 =========== =========== The following table sets forth the Pension Plan's change in plan assets:
December 31, ---------------------------- 1999 1998 ----------- ----------- Fair value of plan assets at beginning of period $ 5,487,147 $ 5,820,424 Actual return on plan assets 1,640,672 (288,905) Benefits paid (147,494) (44,372) Actual contributions 102,656 -- ----------- ----------- Fair value of plan assets at end of period $ 7,082,981 $ 5,487,147 =========== =========== Funded status $ 862,160 $ (133,240) Change in census data -- 83,480 Unrecognized prior service cost (30,225) (36,759) Unrecognized actuarial (gain) loss (935,582) 180,730 ----------- ----------- Prepaid/(accrued) cost $ (103,647) $ 94,211 =========== ===========
Years Ended December 31, ----------------------------------------- 1999 1998 1997 --------- --------- --------- Net pension cost includes the following components: Service costs-- benefits earned during the period $ 387,796 $ 356,616 $ 228,068 Interest cost on projected benefit obligation 360,132 319,892 275,763 Actual return on assets (432,580) (430,886) (357,442) Amortization of transition assets -- (12,743) (33,311) Amortization of prior service cost (6,534) (6,534) (6,534) --------- --------- --------- Net pension cost $ 308,814 $ 226,345 $ 106,544 ========= ========= ========= Major assumptions utilized as follows: Discount rate 6.50% 6.50% 7.50% Rate of increase in compensation levels 5.50 5.50 5.50 Expected long-term rate of return on plan assets 8.00 8.00 8.00
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Bank also provides postretirement health care (medical and dental) benefits and life insurance benefits to certain retirees if they meet certain age and length of service requirements prior to retirement. For retirees who retired after April 24, 1996, the continuation of such benefits is conditioned upon the retiree contributing a portion of the cost of such benefits. For retirees who have retired before April 25, 1996, such benefits are not conditioned upon retiree contributions. F29 At December 31, 1999 and 1998, the actuarial and accrued liabilities for postretirement health care and life insurance benefits were as follows:
Accumulated Postretirement Benefit Obligation (APBO): 1999 1998 ----------- ----------- APBO at beginning of period $ 1,486,197 $ 1,273,995 Service cost 88,845 63,209 Interest cost 104,546 91,391 Actuarial loss -- 58,158 Benefits paid (47,790) (556) ----------- ----------- APBO at end of period $ 1,631,798 $ 1,486,197 =========== =========== Funded status: Funded status $ 1,631,798 $ 1,486,197 Unrecognized net actuarial gain 151,752 (97,076) Unrecognized prior service cost -- 260,780 ----------- ----------- Accrued postretirement benefit cost $ 1,783,550 $ 1,649,901 =========== =========== Effect of 1% increase in health care cost trend rate - accumulated postretirement benefit obligation $ 223,546 $ 207,000 =========== =========== Effect of 1% decrease in health care cost trend rate - accumulated postretirement benefit obligation $ 170,223 $ (165,500) =========== ===========
Net periodic postretirement benefit cost is included in the following components:
Years Ended December 31, --------------------------------------- 1999 1998 1997 --------- --------- --------- Service cost--benefits attributed to service during period $ 88,845 $ 63,209 $ 59,341 Interest cost on APBO 104,546 91,391 101,806 Amortization of prior service cost -- (35,240) -- Amortization of (gains) losses (11,952) 4,904 (17,141) --------- --------- --------- Net periodic postretirement benefit cost $ 181,439 $ 124,264 $ 144,006 ========= ========= =========
The accumulated postretirement benefit obligation was determined using the projected unit cost method, as required by SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and a discount rate of 7.71% in 1999 and 6.74% in 1998. The assumed rate of increase in future health care costs was 8.50% in 1999 and 9.00% in 1998, gradually decreasing to 5.0% in the year 2006 and remaining at that level thereafter. 401(K) PLAN The Company has a 401(k) plan (the "401(k) Plan") covering full-time employees who satisfy the eligibility requirements and elect to participate in the 401(k) Plan. The 401(k) Plan provides for employer matching contributions subject to a specified maximum. Amounts charged to operations for the years ended December 31, 1999, 1998, and 1997 were $105,411, $80,648, and $90,602, respectively. BENEFIT RESTORATION PLAN The Bank adopted the Benefit Restoration Plan of The Warwick Savings Bank ("BRP") to provide certain designated employees with the benefits that would be due to such employees under the Pension Plan, the 401(k) Plan and the ESOP if such benefits were not limited under the Internal Revenue Code. Expense related to the BRP included in the consolidated statements of income is $168,255 and $168,601 for the years ended December 31, 1999 and 1998, respectively. EMPLOYEE STOCK OWNERSHIP PLAN The Company has established an ESOP for eligible employees. Generally, full-time employees of the Company or the Bank who have been credited with at least 1,000 hours during a twelve-month period are eligible to participate. The ESOP borrowed $8,509,774 at an interest rate of 8.00% from the Company and used the funds to purchase 528,523 shares of the Company's common stock in connection with the Conversion. Generally, the loan is repaid principally from the Bank's discretionary contributions to the ESOP over a 10-year period. At December 31, 1999 and 1998, the loan had an outstanding balance of $6,445,135 and $7,163,741, respectively. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is paid. Contributions to the F30 ESOP and shares released from the loan collateral in an amount proportional to the repayment of the ESOP loan are allocated among participants on the basis of compensation, as described in the plan, in the year of allocation. Benefits generally become 100% vested after seven years of vesting service and are immediately vested on death, retirement or disability. In addition, in the event of a change in control, as defined in the plan, any unvested portion of benefits shall vest immediately. Forfeitures are used to reduce employer contributions. Benefits are payable upon death, retirement, disability, or separation from service based on vesting status and share allocations made. As of December 31, 1999 and 1998, 52,852 and 44,635 shares, respectively, were allocated to participants and none were committed to be released. As shares are released from collateral, the shares become outstanding for earnings per share computations. As of December 31, 1999, the fair market value of the 400,020 unallocated shares in the ESOP was $4,350,218. RECOGNITION AND RETENTION PLAN The Company maintains the RRP. The RRP acquired an aggregate of 264,261 shares of the Company's common stock in open market purchases, which have been awarded to eligible directors, directors emeritus, officers and employees of the Company. Such awards represent deferred compensation and have been accounted for as a reduction of stockholders' equity. Awards generally vest at a rate of 20% per year, commencing one year from the date of award. Awards become 100% vested upon termination of service due to death, disability or retirement or upon a change of control of the Company. The Company recorded expense for the ESOP and RRP of $1,179,232, $807,636 and $843,523 respectively, for the years ended December 31, 1999, 1998 and 1997, which is included in salary and employee benefits in the consolidated statements of income. STOCK OPTION PLAN The Company maintains the Stock Option Plan and under the Stock Option Plan, stock options (which generally expire ten years from the date of grant) have been granted to eligible employees, directors and officers of the Company and 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 grant. Options generally become exercisable at a rate of 20% per year, commencing one year from the date of grant. However, all options become 100% exercisable upon termination of service due to death, disability or retirement or upon a change of control of the Company. The following table presents options granted, exercised or expired:
Years Ended December 31, ---------------------------------------------- 1999 1998 ----------------------- ---------------------- Option Price Per Option Price Shares Share Shares Per Share ------- --------------- --------- ------------ Balance, beginning of year 561,552 $ 17.00 -- $ -- Options granted -- -- 561,552 17.00 Options exercised -- -- -- -- Options expired or terminated -- -- -- -- - - -------------------------------------------------------------------------------- Balance, at end of year 561,522 $ 17.00 561,552 $ 17.00 - - -------------------------------------------------------------------------------- 112,310 options are currently exercisable. The fair value of each option was estimated on the date granted using the Black-Scholes option pricing model. The fair value of the options granted in 1998 was estimated to be $6.96. The following weighted-average assumptions were used for grants in 1998: risk free interest rate of 5.59%; expected dividend yield of $.08; expected life of seven years; and expected volatility of 25.68%. The Company accounts for the Stock Option Plan under APB No. 25, under which no compensation cost has been recognized. Had compensation cost for the Stock Option Plan been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: Years Ended December 31, ---------------------------------------------- 1999 1998 ----------------------- ---------------------- Net Income: As Reported $3,142,686 $3,621,435 Pro Forma $2,361,006 $2,839,755 Basic EPS: As Reported 0.57 0.60 Pro Forma 0.43 0.47 F31 12. BORROWED FUNDS AND REPURCHASE AGREEMENTS Securities sold under agreements to repurchase at December 31, 1999 and 1998 which were transacted with a major securities firm and the FHLBNY are as follows: December 31, 1999 December 31, 1998 - - -------------------------------------- ---------------------------------------- Amount Rate Maturity Amount Rate Maturity - - ------------- -------- ------------- --------------- --------- ------------ $ 10,117,000 5.77% 02/15/00 $ 4,700,000 6.32% 05/24/99 5,360,000 5.68 02/29/00 1,000,000 6.65 06/19/99 788,000 5.85 03/01/00 4,700,000 6.65 06/30/99 2,500,000 5.85 03/01/00 4,700,000 6.53 08/02/99 5,000,000 5.80 03/08/00 365,000 5.10 09/15/00 900.000 5.87 03/16/00 3,000,000 5.10 09/15/00 2,500,000 6.07 09/01/00 1,945,000 5.22 09/17/01 365,000 5.10 09/15/00 4,900,000 4.70 10/05/01 ----------- 3,000,000 5.10 09/15/00 $25,310,000 =========== 1,945,000 5.22 09/17/01 4,900,000 4.70 10/05/01 - - ------------ $ 37,375,000 ============ Information relating to borrowings under repurchase agreements is summarized as follows: Years Ended December 31, ----------------------------------------------- 1999 1998 1997 -------------- ---------------- --------------- Average balance during the year $26,779,427 $25,764,219 $23,085,664 Average interest rates during the year 5.56% 5.87% 6.40% Maximum month-end balance during the year $37,375,000 $27,500,000 $23,300,000 Securities underlying agreements at year-end: Amortized cost 34,234,968 35,638,720 24,286,442 Estimated market value 33,238,935 35,925,935 24,766,977
FHLBNY advances are as follows at December 31, 1999 and 1998:
December 31, 1999: Available Outstanding Rate Maturity ----------------- ---------------- --------- ------------- Revolving line of credit $38,978,000 $ 30,725,000 5.10% Daily Repricing line of credit 21,978,000 14,000,000 5.10 02/07/00 Repricing line of credit 7,000,000 5.10 02/14/00 Term loans 5,000,000 5.70 02/07/00 10,000,000 5.93 04/21/00 11,000,000 5.98 05/19/00 1,000,000 5.98 05/19/00 250,000 6.96 06/19/00 20,000,000 6.06 08/04/00 7,500,000 6.08 11/08/00 4,700,000 5.58 03/19/01 5,000,000 5.70 05/21/01 7,500,000 6.19 11/08/01 4,000,000 5.26 11/18/03 5,000,000 4.76 01/29/04 4,000,000 6.11 05/10/04 10,000,000 5.47 05/29/08 5,000,000 5.63 04/30/08 5,000,000 5.26 04/30/08 10,000,000 5.48 02/26/08 20,000,000 5.06 01/30/08 5,000,000 5.15 11/12/08 5,000,000 4.69 01/29/09 5,000,000 6.29 08/06/09 ------------ $201,675,000 ============
December 31, 1998: Available Outstanding Rate Maturity ------------- ------------- ------ ---------- Revolving line of credit $16,982,150 $ 5,230,000 5.13% Daily Repricing line of credit 16,982,150 10,000,000 5.63 Monthly Term loans 250,000 6.96 06/19/00 5,000,000 5.79 12/18/01 4,000,000 5.26 11/18/03 10,000,000 5.47 05/29/08 5,000,000 5.63 04/30/08 5,000,000 5.26 04/30/08 10,000,000 5.48 02/26/08 20,000,000 5.06 01/30/08 5,000,000 5.15 11/12/08 ----------- $79,480,000 ===========
FHLBNY advances are made at fixed rates and are collateralized by all FHLBNY stock owned by the Bank in addition to a blanket pledge of eligible assets in an amount required to be maintained so that the estimated fair value of such eligible assets exceeds, at all times, 110% of the outstanding advances. As a member of the FHLBNY, the Bank has the availability of two lines of credit for borrowings in the amounts of $39.0 million and $22.0 million, one on an overnight basis and the other on a 30-day term basis. In accordance with the FHLBNY's credit policy, the Bank now has total credit facilities available of nearly $296.0 million, inclusive of the aforementioned amounts, before the delivery of qualifying collateral is required. Additionally, the Bank has other sources of liquidity if the need arises. One source is to borrow up to $5 million from a commercial bank on an unsecured basis and the other is the ability to sell securities under repurchase agreements in an amount up to $10 million from a securities investment company. 13.REGULATORY CAPITAL REQUIREMENTS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Company, the Bank and the Commercial Bank meet all capital adequacy requirements to which it is subject. The most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are presented in the following table (000's omitted):
To Be Well Capitalized Under Prompt For Capital Adequacy Corrective Actual Purposes Action Provisions ------------------------------- ---------------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio --------------- -------------- ------------- ------------- ------------- ----------- As of December 31, 1999: Total Capital (to risk weighted assets) $56,933 18.34% $24,837 >8.0% $31,046 >10.0% Tier 1 Capital (to risk weighted assets) 54,629 17.60 12,418 >4.0 18,628 >6.0 Tier 1 Capital (to average assets) 54,629 9.38 23,291 >4.0 29,114 >5.0
F33
To Be Well Capitalized Under Prompt For Capital Adequacy Corrective Actual Purposes Action Provisions ------------------------------- ---------------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio --------------- -------------- ------------- ------------- ------------- ----------- As of December 31, 1998: Total Capital (to risk weighted assets) $55,538 23.90% $ 17,918 >8.0% $22,937 >10.0% Tier 1 Capital (to risk weighted assets) 51,106 22.82 8,959 >4.0 13,438 >6.0 Tier 1 Capital (to average assets) 51,106 11.99 17,055 >4.0 21,319 >5.0
The Commercial Bank's actual capital amounts and ratios are presented in the following table (000's omitted):
To Be Well Capitalized Under Prompt For Capital Adequacy Corrective Actual Purposes Action Provisions ------------------------------- ---------------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio --------------- -------------- ------------- ------------- ------------- ----------- As of December 31, 1999: Total Capital (to risk weighted assets) $5,728 211.83% $216 >8.0% $ 270 >10.0% Tier 1 Capital (to risk weighted assets) 5,728 211.83 108 >4.0 162 >6.0 Tier 1 Capital (to average assets) 5,728 87.72 261 >4.0 327 >5.0
The Company's actual capital amounts and ratios are presented in the following table (000's omitted):
To Be Well Capitalized Under Prompt For Capital Adequacy Corrective Actual Purposes Action Provisions ------------------------------- ---------------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio --------------- -------------- ------------- ------------- ------------- ----------- As of December 31, 1999: Total Capital (to risk weighted assets) $75,168 24.58% $24,462 >8.0% $30,578 >10.0% Tier 1 Capital (to risk weighted assets) 73,214 23.94 12,231 >4.0 18,347 >6.0 Tier 1 Capital (to average assets) 73,214 12.67 23,122 >4.0 28,902 >5.0
To Be Well Capitalized Under Prompt For Capital Adequacy Corrective Actual Purposes Action Provisions ------------------------------- ---------------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio --------------- -------------- ------------- ------------- ------------- ----------- As of December 31, 1998: Total Capital (to risk weighted assets) $ 84,796 36.94% $ 18,362 >8.0% $22,953 >10.0% Tier 1 Capital (to risk weighted assets) 82,364 35.88 9,181 >4.0 13,772 >6.0 Tier 1 Capital (to average assets) 82,364 18.87 17,462 >4.0 21,828 >5.0
F34 14.COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS Rental expense included in the statements of income was approximately $54,000, $219,000 and $278,000 for the years ended December 31, 1999, 1998 and 1997, respectively. In 1993, the Bank entered into an agreement with a company to provide data processing services. Such agreement expires in July 2000. The commitment for future payments fluctuates with the level of service provided. The costs incurred in connection with this agreement are included in data processing expenses in the accompanying statements of income. In 1999, the Commercial Bank entered into an agreement with a company to provide data processing services. Such agreement expires in December 2004. The commitment for future payments fluctuates with the level of services provided. The costs incurred in connection with this agreement are included in data processing expenses in the accompanying statement of income. The Company leases certain branches and equipment under various noncancelable operating leases. The future minimum payments by years and the aggregate under all significant noncancelable operating leases with initial or remaining terms of one year or more are as follows: Year ending December 31: 2000 $670,248 2001 173,291 2002 123,669 2003 108,200 2004 and thereafter 1,733,201 ----------- Total $2,808,609 ========== LOAN COMMITMENTS Loan commitments and unused lines of credit as of December 31, 1999 are as follows (with comparative totals as of December 31, 1998): Commitments Unused to Originate Lines of Loans Credit Total ------------ ------------ ------------ Mortgage loans $ 36,563,735 $ -- $ 36,563,735 Construction loans 18,518,790 -- 18,518,790 Commercial loans 6,005,776 9,182,202 15,187,978 Other loans 9,774,448 -- 9,774,448 ------------ ------------ ------------ Total as of December 31, 1999 $ 70,862,749 $ 9,182,202 $ 80,044,951 ============ ============ ============ Total as of December 31, 1998 $ 67,611,485 $ 5,358,847 $ 72,970,332 ============ ============ ============ Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire, the total commitment amounts do not necessarily represent future cash requirements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the loan commitments is represented by their contractual amount. The Bank controls the credit risk of loan commitments through credit approvals, limits and monitoring procedures. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower. CONCENTRATION OF CREDIT RISK The Bank grants residential mortgage loans, construction loans, commercial loans and consumer loans to customers located primarily in Orange County, New York and the surrounding counties of Rockland and Dutchess in New York. The borrowers' ability to repay loan principal and accrued interest is dependent upon, among other things, the economic conditions prevailing in the Bank's lending area. HEDGING In the normal course of business, the Bank uses off-balance sheet financial instruments primarily as part of mortgage banking hedging strategies. Such instruments generally include put options purchased and forward commitments to sell mortgage loans. As a result of interest rate fluctuations, these off-balance sheet financial instruments will develop unrealized gains or losses that mitigate changes in the underlying hedged portion of the balance sheet. When effectively used, these off-balance sheet financial instruments are designed to moderate the impact on earnings as interest rates move up or down. LITIGATION The Bank is involved in legal proceedings incurred in the normal course of business. In the opinion of management, none of these proceedings are expected to have a material effect on the consolidated financial position or results of operations of the Bank. F35 15.DISCLOSURES ABOUT FAIR VALUES 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 AND FHLBNY STOCK The carrying amount is a reasonable estimate of fair value. SECURITIES 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, NET For certain homogeneous categories of loans, such as some residential mortgages and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. For other loan types, 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. DEPOSITOR ACCOUNTS 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. BORROWED FUNDS The estimated fair value of FHLBNY advances and borrowings under repurchase agreements is based on the discounted value of their contractual cash flows. The discount rate used in the present value computation is estimated by comparison to the current interest rates charged by the FHLBNY and other major securities firms for borrowings of similar remaining maturities. MORTGAGE ESCROW FUNDS The carrying amount is a reasonable estimate of fair value. The following is a summary of the carrying values and estimated fair values of the Bank's financial assets and liabilities at December 31, 1999 and 1998 (000's omitted):
December 31, 1999 December 31, 1998 ----------------------- ------------------------ Carrying Fair Carrying Fair Value Value Value Value ----------- ----------- ----------- ------------ Financial assets: Cash on hand and in banks $ 22,209 $ 22,209 $ 10,511 $ 10,511 Federal funds sold 7,665 7,665 -- -- Securities 186,490 186,482 155,490 155,458 Loans, net 349,321 329,849 261,463 262,666 Accrued interest receivable 3,216 3,216 2,506 2,506 Federal Home Loan Bank stock 11,752 11,752 4,633 4,633 Financial liabilities: Demand, NOW, statement savings and $193,849 $193,849 $175,891 $175,891 passbook, and money market accounts Time certificate accounts 89,223 89,325 70,995 71,090 Mortgage escrow funds 1,488 1,488 1,965 1,965 Borrowed funds 239,050 235,531 104,790 107,142 Accrued interest payable 1,574 1,574 736 736
16. WARWICK COMMUNITY BANCORP, INC.- PARENT COMPANY ONLY FINANCIAL STATEMENTS The following statements of financial condition as of December 31, 1999 and 1998, the statements of income for the years ended December 31, 1999 and 1998, and the related statements, of cash flows for the years ended December 31, 1999 and 1998, reflect the Company's investment in the Bank and the Commercial Bank, using the equity method of accounting.
STATEMENTS OF FINANCIAL CONDITION (000's omitted except share amounts) ASSETS December 31, ----------------------- 1999 1998 ----------- ----------- Assets: Cash and cash equivalents $ 1,514 $ 18,941 Investment securities available-for-sale 3,622 4,503 Accrued interest receivable 13 13 Other assets 894 819 ESOP loan to the trustee of the ESOP 6,445 7,164 Investment in subsidiaries 54,182 53,044 -------- -------- Total assets $ 66,670 $ 84,484 ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Other liabilities $ 42 $ -- Income taxes payable 56 247 -------- -------- Total liabilities 98 247 -------- -------- Stockholders' equity: Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 15,000,000 shares authorized, 6,606,548 shares issued; 5,054,281 and 5,924,056 shares outstanding in 1999 and 1998, respectively 66 66 Additional paid-in capital 62,978 63,374 Retained earnings - subject to restrictions 32,430 30,458 Accumulated other comprehensive income (loss), net (6,832) 1,727 Less - Unallocated common stock held by ESOP (6,515) (7,208) Less - Unearned common stock held by RRP (3,263) (4,180) Treasury stock (967,258) shares) (12,292) -- -------- -------- Total stockholders' equity 66,572 84,237 -------- -------- Total liabilities and stockholders' equity $ 66,670 $ 84,484 ======== ========
STATEMENT OF INCOME (000's OMITTED) For the Years Ended December 31, -------------------------------- 1999 1998 ----------------- -------------- Interest income: ESOP loan to the trustee of the ESOP $ 584 $ 641 Investment securities 152 187 ------ ------ Total interest income 736 828 ------ ------ Interest expense: Net interest income before provision for loan losses 736 828 Provision for loan losses -- -- ------ ------ Net interest income after provision for loan losses 736 828 Non-interest income: Gain on sale of investment securities 137 28 Other income 8 -- ------ ------ 145 28 ------ ------ 695 255 ------ ------ Non-interest expense Income before provision for income taxes and undistributed earnings of subsidiary banks 186 601 Equity in undistributed earnings of subsidiary banks 3,093 3,339 Income tax expense 136 319 ------ ------ Net income $3,143 $3,621 ====== ======
STATEMENTS OF CASH FLOWS (000's omitted) For the Years Ended December 31, --------------------------------- 1999 1998 ---------------- ---------------- Cash flows from operating activities: Net income $ 3,143 $ 3,621 Adjustments to reconcile net income to net cash provided by operating activities- Undistributed earnings of subsidiary banks (3,093) (3,339) Gain on sale of securities (137) (28) Increase in assets- Accrued interest receivable -- (13) Other assets (50) (51) Increase (decrease) in liabilities- Other liabilities 42 -- Income taxes payable (191) 247 -------- -------- Net cash provided by (used in) operating activities (286) 437 -------- -------- Cash flows from investing activities: Investment in 99.8% of the outstanding stock of the Commercial Bank, net (5,747) -- Dividend from the Bank 1,000 -- Purchases of securities available-for-sale (641) (6,321) Proceeds from sale of securities available-for-sale 992 1,782 -------- -------- Net cash used in investing activities (4,396) (4,539) -------- -------- Cash flows from financing activities: (Increase) decrease in ESOP loan receivable 719 (793) Purchase of treasury stock (12,292) -- Dividends paid on common stock ( 1,172) (545) -------- -------- Net cash used in financing activities (12,745) (1,338) -------- -------- Net decrease in cash and cash equivalents (17,427) (5,440) Cash and cash equivalents, beginning of year 18,941 24,381 -------- -------- Cash and cash equivalents, end of year $ 1,514 $ 18,941 ======== ========
F38 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1999 and 1998 (000's omitted):
Three Months Ended ------------------------------------------------------------------------ December 31, September 30, June 30, March 31, 1999 1999 1999 1999 -------------- -------------------- ------------------ ----------------- Total interest income $10,605 $ 9,212 $ 8,161 $ 7,584 Total interest expense 5,307 4,435 3,772 3,437 Net interest income 5,298 4,777 4,389 4,147 Provision for loan losses 125 125 125 125 Non-interest income 439 1,210 799 1,357 Non-interest expense and provision for income taxes 4,924 4,926 4,543 4,380 Net income 688 936 520 999 Basic earnings per common share 0.13 0.17 0.10 0.17 Diluted earnings per common share 0.13 0.17 0.10 0.17
Three Months Ended ------------------------------------------------------------------------ December 31, September 30, June 30, March 31, 1998 1998 1998 1998 -------------- -------------------- ------------------ ----------------- Total interest income $7,581 $7,201 $7,262 $6,364 Total interest expense 3,369 3,184 2,933 2,454 Net interest income 4,212 4,017 4,329 3,910 Provision for loan losses 125 125 125 125 Non-interest income 813 1,044 1,058 772 Non-interest expense and provision for income taxes 4,303 4,202 3,964 3,565 Net income 597 734 1,298 992 Basic earnings per common share .10 .12 .22 .16 Diluted earnings per common share .10 .12 .22 .16
F39 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors & Stockholders of Warwick Community Bancorp, Inc: We have audited the accompanying consolidated statements of financial condition of Warwick Community Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. These standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of Warwick Community Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. New York, New York January 25, 2000 SHAREHOLDER INFORMATION STOCK INFORMATION Warwick Community Bancorp, Inc. common stock trades on The Nasdaq Stock Marker(sm) under the symbol WSBI. When trades occur, the stock is listed as either Warwick or WSBI in The Nasdaq Stock Market(sm) section of the TIMES HERALD RECORD, WALL STREET JOURNAL and other leading newspapers. SHAREHOLDER RELATIONS CONTACT: Barbara A. Rudy SENIOR VICE PRESIDENT The Warwick Savings Bank 18 Oakland Avenue, P.O. Box 591 Warwick, NY 10990 914-986-2206, ext. 2238 Shareholders wishing to change the name, address or ownership of stock, to report lost certificates or to consolidate accounts are asked to contact the Company's stock registrar and transfer agent directly: Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 1-800-368-5948 MARKET MAKERS Sandler O'Neill & Partners, L.P. Tucker Anthony, Inc. Advest, Inc. Friedman, Billings, Ramsey & Co., Inc. Knight Securities Ryan Beck & Co. Sherwood Securities Spear-Leeds & Kellogg Capital EX-21.1 6 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 ------------ SUBSIDIARIES OF THE REGISTRANT WARWICK COMMUNITY BANCORP, INC. - owns 100% of the capital stock of The Warwick Savings Bank and 99.75% of the capital stock of The Towne Center Bank. THE WARWICK SAVINGS BANK - owns 100% of the following subsidiary corporations: 1. WSB Financial Services, Inc. (New York) 2. Warsave Development Corp. (New York) 3. The Towne Center Mortgage Company, Inc. (New Jersey) and 100% of the outstanding common stock, and 86.96% of the outstanding preferred stock, of WSB Funding Corp. (Delaware). EX-99.1 7 ADDITIONAL EXHIBITS LOGO 18 OAKLAND AVENUE WARWICK, NEW YORK 10990-0591 (914) 986-2206 March 17, 2000 Dear Shareholder: You are cordially invited to attend the 2000 Annual Meeting of Shareholders ("Annual Meeting") of Warwick Community Bancorp, Inc. ("Company"), the holding company for The Warwick Savings Bank and The Towne Center Bank, which will be held at The Inn at Central Valley, Smith Clove Road, Central Valley, New York 10917, on April 18, 2000 at 9:30 a.m., New York time. The attached Notice of the 2000 Annual Meeting of Shareholders and Proxy Statement describe the formal business to be transacted at the Annual Meeting. Directors and officers of the Company, as well as a representative of Arthur Andersen LLP, the accounting firm appointed by the Board of Directors to be the Company's independent auditors for the fiscal year ending December 31, 2000, will be present at the Annual Meeting to respond to appropriate questions from our shareholders. The Board of Directors of the Company has determined that an affirmative vote on each matter to be considered at the Annual Meeting is in the best interests of the Company and its shareholders and unanimously recommends a vote "FOR" election of each of the four nominees for director and "FOR" each of the other proposals identified in the Notice of the 2000 Annual Meeting of Shareholders. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, THE BOARD OF DIRECTORS URGES YOU TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON AT THE ANNUAL MEETING, BUT WILL ASSURE THAT YOUR VOTE IS COUNTED IF YOU ARE UNABLE TO ATTEND. IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM YOUR RECORD HOLDER TO ATTEND AND TO VOTE PERSONALLY AT THE ANNUAL MEETING. EXAMPLES OF SUCH DOCUMENTATION INCLUDE A BROKER'S STATEMENT, LETTER OR OTHER DOCUMENT CONFIRMING YOUR OWNERSHIP OF SHARES OF THE COMPANY. On behalf of the Board of Directors and the employees of the Company, thank you for your continued support. Sincerely yours, [Facsimile signature] Timothy A. Dempsey Chairman of the Board and Chief Executive Officer LOGO 18 OAKLAND AVENUE WARWICK, NEW YORK 10990-0591 (914) 986-2206 NOTICE OF THE 2000 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 18, 2000 NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Warwick Community Bancorp, Inc. ("Company") will be held at The Inn at Central Valley, Smith Clove Road, Central Valley, New York 10917, on April 18, 2000 at 9:30 a.m., New York time, for the following purposes: 1. To elect four directors, each to serve for a three-year term; 2. To ratify the appointment of Arthur Andersen LLP as independent auditors for the Company for the fiscal year ending December 31, 2000; and 3. To transact such other business as may properly come before the Annual Meeting and any adjournment or postponement thereof. As of the date hereof, the Board of Directors of the Company is not aware of any such other business. The Board of Directors has fixed the close of business on March 1, 2000 as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement thereof. A list of shareholders entitled to vote at the Annual Meeting will be available for inspection at 18 Oakland Avenue, Warwick, New York, for a period of ten days prior to the Annual Meeting and will also be available at the Annual Meeting. A copy of the 1999 Annual Report to Shareholders of the Company, which for purposes of the regulations of the Federal Deposit Insurance Corporation serves as the Annual Disclosure Statement of The Warwick Savings Bank and The Towne Center Bank, subsidiaries of the Company, accompanies this Notice of the 2000 Annual Meeting of Shareholders. Shareholders may obtain, free of charge, an additional copy of the Annual Report by writing to Barbara A. Rudy, Senior Vice President, Shareholder Relations, The Warwick Savings Bank, P.O. Box 591, Warwick, New York 10990-0591. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, THE BOARD OF DIRECTORS URGES YOU TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE. RETURNING THE PROXY CARD WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE ANNUAL MEETING. By Order of the Board of Directors, [Facsimile signature] Nancy L. Sobotor-Littell Corporate Secretary Warwick, New York March 17, 2000 LOGO 18 OAKLAND AVENUE WARWICK, NEW YORK 10990-0591 (914) 986-2206 -------------------------------- PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 18, 2000 GENERAL INFORMATION GENERAL This Proxy Statement and accompanying Proxy Card are being mailed to shareholders of Warwick Community Bancorp, Inc. ("Company") on or about March 17, 2000 in connection with the solicitation of proxies by the Board of Directors of the Company for use at the Annual Meeting of Shareholders of the Company to be held at The Inn at Central Valley, Smith Clove Road, Central Valley, New York 10917, on April 18, 2000 at 9:30 a.m., New York time, and at any adjournment or postponement thereof ("Annual Meeting"). On July 21, 1998, the Company changed its fiscal year from the twelve-month period ending May 31st to the twelve-month period ending December 31st. Due to this change in the Company's fiscal year, certain information presented in this Proxy Statement is measured through the seven-month transition period ended December 31, 1998. RECORD DATE AND VOTING RIGHTS The Board of Directors of the Company has fixed the close of business on March 1, 2000 as the record date ("Record Date") for the determination of the holders of the Company's issued and outstanding common stock, par value $.01 per share ("Common Stock"), entitled to notice of and to vote at the Annual Meeting. Only holders of record of Common Stock at the close of business on the Record Date will be entitled to vote at the Annual Meeting. At the close of business on the Record Date, there were 5,536,790 shares of Common Stock outstanding. The presence, in person or by proxy, of the holders of at least a majority of the total number of outstanding shares of Common Stock entitled to vote at the Annual Meeting is necessary to constitute a quorum thereat. Each holder of shares of Common Stock outstanding on the Record Date will be entitled to one vote for each share held of record (except for Excess Shares, if any, as defined below) upon each matter to be voted upon at the Annual Meeting. As provided in the Company's Certificate of Incorporation, if any person beneficially owns, directly or indirectly, shares of Common Stock in excess of 10% of the then issued and outstanding shares of Common Stock, all such shares beneficially owned by such person in excess of the 10% threshold shall be deemed to be "Excess Shares," and the holder thereof shall be entitled to cast only one one-hundredth (1/100) of a vote per share for each Excess Share. A person or entity is deemed to beneficially own shares owned by an affiliate or associate as well as persons acting in concert with such person or entity. The Company's Certificate of Incorporation authorizes the Board of Directors (i) to interpret and apply the provisions of the Certificate of Incorporation governing Excess Shares and to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to ascertain compliance with such provisions and (ii) to demand that any person who is reasonably believed to beneficially own Excess Shares supply information to the Company to enable the Board of Directors to implement and apply such provisions. If the enclosed Proxy Card is properly executed and received by the Company in time to be voted at the Annual Meeting, the shares represented thereby will be voted in accordance with the instructions indicated thereon. IF NO INSTRUCTIONS ARE GIVEN, EXECUTED PROXIES WILL BE VOTED FOR ELECTION OF EACH OF THE FOUR NOMINEES FOR DIRECTOR AND FOR EACH OF THE OTHER PROPOSALS IDENTIFIED IN THE NOTICE OF THE 2000 ANNUAL MEETING. VOTE REQUIRED Directors are elected by a plurality of the votes cast in person or by proxy at the Annual Meeting. The holders of Common Stock may not vote their shares cumulatively for the election of directors. Ratification of the appointment of Arthur Andersen LLP as the Company's independent auditors requires the affirmative vote of the holders of a majority of the shares of Common Stock represented in person or by proxy at the Annual Meeting and entitled to vote thereon. ACCORDINGLY, SHARES AS TO WHICH THE "ABSTAIN" BOX HAS BEEN SELECTED ON THE PROXY CARD WITH RESPECT TO THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT AUDITORS FOR THE COMPANY WILL BE COUNTED AS PRESENT AND ENTITLED TO VOTE AND WILL HAVE THE EFFECT OF A VOTE AGAINST THAT PROPOSAL. IN CONTRAST, SHARES UNDERLYING BROKER NON-VOTES WILL NOT BE COUNTED AS PRESENT AND ENTITLED TO VOTE AND WILL HAVE NO EFFECT ON THE VOTE FOR SUCH PROPOSAL. REVOCABILITY OF PROXIES The presence of a shareholder at the Annual Meeting will not automatically revoke such shareholder's proxy. However, a shareholder may revoke a proxy at any time before it is voted by (i) filing a written notice of revocation with the Corporate Secretary of the Company prior to the Annual Meeting, (ii) delivering to the Corporate Secretary prior to the Annual Meeting a duly executed proxy bearing a later date or (iii) attending the Annual Meeting, filing a written notice of revocation with the secretary of the Annual Meeting and voting in person. IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED APPROPRIATE DOCUMENTATION FROM YOUR RECORD HOLDER IN ORDER TO BE ADMITTED TO THE ANNUAL MEETING AND TO VOTE AT THE ANNUAL MEETING. Examples of such documentation include a broker's statement, letter or other document that will confirm your ownership of shares of the Company. SOLICITATION OF PROXIES The Company will bear the costs of soliciting proxies from its shareholders. In addition to the solicitation of proxies by mail, Georgeson Shareholder Communications Inc., a proxy solicitation firm, will assist the Company in soliciting proxies for the Annual Meeting and will be paid a fee estimated to be $3,000, plus out-of-pocket expenses. Proxies may also be solicited personally, by telephone, facsimile or other means by directors, officers and employees of the Company or its subsidiaries, without additional compensation. The Company will also request persons, firms and corporations holding shares in their names or in the name of their nominees, which are beneficially owned by others, to forward proxy materials to and obtain proxies from such beneficial owners, and will reimburse such holders for reasonable expenses incurred in connection therewith. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth certain information as to those persons believed by management to be beneficial owners of more than 5% of the Company's outstanding shares of Common Stock as of February 29, 2 2000. Other than those persons listed below, the Company is not aware of any person who is the beneficial owner of more than 5% of the Company's outstanding shares of Common Stock as of February 29, 2000. Except as otherwise indicated, the information provided in the following table was obtained from filings with the Securities and Exchange Commission ("SEC") and with the Company pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act"). For purposes of the following table and the table set forth under "Stock Ownership of Management," in accordance with Rule 13d-3 under the Exchange Act, a person is deemed to "beneficially own" any shares of Common Stock (a) over which such person has, directly or indirectly, sole or shared voting or investment power or (b) of which such person has the right to acquire beneficial ownership, including the right to acquire beneficial ownership by the exercise of stock options, at any time within 60 days after February 29, 2000. As used herein, "voting power" includes the power to vote, or direct the voting of, such shares, and "investment power" includes the power to dispose, or direct the disposition of, such shares.
AMOUNT AND NATURE PERCENT OF TITLE OF CLASS NAME AND ADDRESS OF OF BENEFICIAL COMMON STOCK OF SECURITY BENEFICIAL OWNER OWNERSHIP OUTSTANDING(4) - - ---------------- ------------------------------- ------------------ -------------------- Common Stock Warwick Community Bancorp, Inc. 527,714(1) 9.5% Employee Stock Ownership Plan and Trust ("ESOP") 18 Oakland Avenue Warwick, New York 10990-0591 Common Stock Salomon Smith Barney Inc. 469,920(2) 8.5% 388 Greenwich Street New York, New York 10013 Common Stock Kahn Brothers & Co., Inc. 392,328(3) 7.1% 555 Madison Avenue, 22nd Floor New York, New York 10022
_______________________ (1) The ESOP is administered by The Warwick Savings Bank ("Warwick Savings") as Plan Administrator and by a committee established pursuant to the ESOP ("ESOP Committee"). The assets of the ESOP are held in a trust ("ESOP Trust") for which HSBC Bank USA serves as trustee ("ESOP Trustee"). The ESOP Trust purchased such shares following Warwick Savings' conversion from mutual to stock form ("Conversion") with funds borrowed from the Company. The Common Stock acquired by the ESOP is released from a suspense account and allocated annually to the accounts of participants based upon the contributions made to the ESOP by the Company. The ESOP Committee may instruct the ESOP Trustee regarding investment of assets held in the ESOP Trust. The ESOP Trustee generally votes all allocated shares held in the ESOP Trust in accordance with the instructions of participants. As of December 31, 1999, 126,037 of the 527,714 shares held in the ESOP Trust were allocated to participants. Pursuant to the terms of the ESOP, unallocated shares are generally voted by the ESOP Trustee in a manner calculated to most accurately reflect the voting instructions received from participants regarding the allocated shares so long as such vote is in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. (2) Based on information in a Schedule 13G/A, dated February 14, 2000, filed on behalf of Salomon Smith Barney Inc. ("SSB"), a New York corporation, Salomon Brothers Holding Company Inc. ("SBHC"), a Delaware corporation which is the sole stockholder of SSB, Salomon Smith Barney Holdings Inc. ("SSBH"), a New York corporation which is the sole stockholder of SBHC, and Citigroup Inc. ("Citigroup"), a Delaware corporation which is the sole stockholder of SSBH. SSB, SSHC, SSBH and Citigroup have shared voting and shared dispositive power over all of the shares shown. (3) Based on information in a Schedule 13G/A, dated February 4, 2000, filed on behalf of Kahn Brothers & Co., Inc. ("Kahn"). Kahn has shared dispositive power over all of the shares shown. (4) Percentages have been calculated on the basis of 5,536,790 shares of Common Stock, the number of shares of Common Stock outstanding as of February 29, 2000. 3 STOCK OWNERSHIP OF MANAGEMENT The following table sets forth information with respect to the shares of Common Stock beneficially owned by each director of the Company, by each executive officer of the Company identified in the Summary Compensation Table included on page 14 of this Proxy Statement and by all directors and executive officers of the Company or Warwick Savings as a group as of February 29, 2000. Except as otherwise indicated, each person and each group shown in the table has sole voting and investment power with respect to the shares of Common Stock indicated.
AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNERSHIP COMMON STOCK NAME TITLE(1) (2)(3)(4)(5)(6)(7) OUTSTANDING(8) - - ------------------------------------------------------------------------------------------- Timothy A. Dempsey Chairman of the Board, 105,152 1.9% Chief Executive Officer and Director Ronald J. Gentile President, Chief Operating 91,359 1.6% Officer and Director Arthur W. Budich Senior Vice President, 51,647 * Treasurer and Chief Financial Officer Laurence D. Haggerty Senior Vice President 39,619 * Frances M. Gorish Director 17,963 * R. Michael Kennedy Director 51,769 * Fred M. Knipp Director 28,883 * Emil R. Krahulik Director 18,965 * Thomas F. Lawrence, Jr. Director 14,883 * John J. McDermott III Director 5,000 * Henry L. Nielsen, Jr. Director 14,883 * John W. Sanford III Director 16,457 * Robert N. Smith Director 28,883 * All directors and executive officers as a group (16 persons) 584,304 10.4%
_______________________ * Less than 1.0% of outstanding Common Stock. (1) Titles are for the Company. (2) The figures shown include shares which individuals have the right to acquire beneficial ownership of by the exercise of stock options pursuant to the Stock Option Plan of Warwick Community Bancorp, Inc. ("Option Plan") as follows: Mr. Dempsey, 20,000 shares; Mr. Gentile, 13,000 shares; Mr. Budich, 7,000 shares; Mr. Haggerty, 7,000 shares; each of Mrs. Gorish and Messrs. Kennedy, Knipp, Krahulik, Lawrence, Nielsen, Sanford and Smith, 3,963 shares; and all directors and executive officers as a group, 99,704 shares. See "Election of Directors -- Directors' Compensation -- Option Plan and RRP" and "Election of Directors -- Executive Compensation -- Stock Option Plan." (footnotes continued on next page) 4 (3) The figures shown include shares held in trust pursuant to the ESOP that have been allocated as of December 31, 1999 to individual accounts of ESOP participants as follows: Mr. Dempsey, 3,331 shares; Mr. Gentile, 3,472 shares; Mr. Budich, 3,053 shares; Mr. Haggerty, 3,871 shares; and all executive officers as a group, 20,859 shares. Such persons have voting power (subject to the duties of the ESOP Trustee) but no investment power, except in limited circumstances, as to such shares. The figures shown do not include 401,677 shares held in trust pursuant to the ESOP that have not been allocated to any individual's account and as to which the members of the Company's ESOP Committee (consisting of Messrs. Dempsey, Gentile and Budich, Mrs. Sobotor-Littell and Ms. Rudy) and each of the participants identified in the table may be deemed to share investment power, except in limited circumstances, thereby causing each such person to be deemed a beneficial owner of such shares. Each of the members of the ESOP Committee and the participants identified in the table disclaims beneficial ownership of such shares and, accordingly, such shares are not attributed to the members of the ESOP Committee or the participants identified in the table individually. See "Election of Directors -- Executive Compensation -- Employee Stock Ownership Plan and Trust." (4) The figures shown include shares held pursuant to The Warwick Savings Bank 401(k) Savings Plan ("401(k) Plan") that have been allocated as of February 29, 2000 to individual accounts as follows: Mr. Dempsey, 813 shares; Mr. Gentile, 7,024 shares; Mr. Budich, 4,502 shares; Mr. Haggerty, 3,264 shares; and all executive officers as a group, 19,585 shares. Such persons have shared voting and investment power as to such shares. See "Election of Directors -- Executive Compensation -- 401(k) Plan." (5) The figures shown include shares held under the Recognition and Retention Plan of Warwick Community Bancorp, Inc. ("RRP"), over which each individual has sole voting but no investment power, as follows: Mr. Dempsey, 42,284 shares; Mr. Gentile, 29,598 shares; Mr. Budich, 12,684 shares; Mr. Haggerty, 12,684 shares; each of Mrs. Gorish and Messrs. Kennedy, Knipp, Krahulik, Lawrence, Nielsen, Sanford and Smith, 7,135 shares; and all directors and executive officers as a group, 192,382 shares. See "Election of Directors -- Executive Compensation-- Recognition and Retention Plan." (6) The figures shown include shares held pursuant to the Benefit Restoration Plan of The Warwick Savings Bank ("BRP") as to which each person identified has no voting power, but may be deemed to share investment power, as follows: Mr. Dempsey, 2,571 shares; Mr. Gentile, 864 shares; and all executive officers as a group, 3,435 shares. See "Election of Directors-- Executive Compensation-- Benefit Restoration Plan." (7) The figures shown include shares over which individuals may be deemed to share voting and investment power (other than as disclosed in notes 2, 3, 4 and 5) as follows: Mr. Dempsey, 15,000 shares; Mr. Gentile, 15,000 shares; Mr. Budich, 11,500 shares; Mr. Kennedy, 18,266 shares; Mr. Knipp, 15,000 shares; Mr. Lawrence, 1,000 shares; Mr. Sanford, 2,500 shares; Mr. Smith, 5,500 shares; and all directors and executive officers as a group, 84,766 shares. (8) Percentages with respect to each person or group of persons have been calculated on the basis of 5,536,790 shares of Common Stock, the number of shares of Common Stock outstanding as of February 29, 2000, plus the number of shares of Common Stock which such person or group of persons has the right to acquire within 60 days after February 29, 2000. PROPOSAL ONE ELECTION OF DIRECTORS GENERAL The Certificate of Incorporation and By-Laws of the Company provide that the Board of Directors shall be divided into three classes. The directors of each class serve for a term of three years, with one class elected each year. In all cases, directors serve until their successors are duly elected and qualified. In November 1999, by resolution of the Board of Directors, the size of the Board was increased from 10 to 11 members, and the Board of Directors elected a new director, John J. McDermott III, to fill the vacancy resulting from the increase in the size of the Board. The terms of four directors expire at the Annual Meeting. Each of the four incumbent directors, Frances M. Gorish, R. Michael Kennedy, John W. Sanford III and Robert N. Smith, has been nominated by the Board of Directors to be re-elected at the Annual Meeting, each to serve for a three-year term expiring at the 2003 Annual Meeting and until their successors are otherwise duly elected and qualified. Each nominee has consented 5 to being named in this Proxy Statement and to serve if elected. However, if any nominee should become unable to serve, the proxies received in response to this solicitation that were voted in favor of such nominee will be voted for the election of such other person as shall be designated by the Board of Directors of the Company, unless the Board of Directors shall determine to reduce the number of directors pursuant to the By-Laws of the Company. In any event, proxies cannot be voted for a greater number of persons than the four nominees named. INFORMATION AS TO NOMINEES AND CONTINUING DIRECTORS The following table sets forth certain information with respect to each nominee for election as a director and each continuing director whose term does not expire at the Annual Meeting. There are no arrangements or understandings between the Company and any director or nominee pursuant to which such person was elected or nominated to be a director of the Company. For information with respect to security ownership of directors, see "General Information -- Stock Ownership of Management."
DIRECTOR NAME AGE(1) END OF TERM POSITION HELD WITH THE COMPANY SINCE(2) - - ------------------------------------------------------------------------------------------------ NOMINEES FOR A THREE-YEAR TERM EXPIRING IN 2003 Frances M. Gorish 72 2000 Director 1979 R. Michael Kennedy 48 2000 Director 1997 John W. Sanford III 63 2000 Director 1986 Robert N. Smith 50 2000 Director 1994 CONTINUING DIRECTORS Timothy A. Dempsey 66 2001 Chairman of the Board, Chief 1974 Executive Officer and Director Ronald J. Gentile 50 2002 President, Chief Operating Officer 1990 and Director Fred M. Knipp 69 2001 Director 1992 Emil R. Krahulik 66 2002 Director 1984 Thomas F. Lawrence, Jr. 72 2002 Director 1965 John J. Mcdermott III 65 2003 Director 1999 Henry L. Nielsen, Jr. 73 2001 Director 1962
______________________ (1) At February 29, 2000. (2) Includes terms as trustee of Warwick Savings and of predecessor affiliated institutions prior to the incorporation of the Company on September 10, 1997. 6 The principal occupation and business experience of each nominee for election as director and each continuing director are set forth below. NOMINEES FOR ELECTION AS DIRECTORS FRANCES M. GORISH joined Warwick Savings in 1944 and has served as a director since 1979. Now retired, she served in various capacities for Warwick Savings, most recently as Vice President and Corporate Secretary. In addition, she serves as treasurer of the Salvation Army, Lorena Abbott Service Unit, and as treasurer of the Florida Historical Society. Mrs. Gorish also serves as a director of Warwick Savings' subsidiaries, Warsave Development, Inc. ("Warsave"), WSB Financial Services, Inc. ("WSB Financial") and Towne Center Mortgage Co., Inc. ("Towne Center Mortgage"), and as a director of The Warwick Savings Foundation ("Foundation"). R. MICHAEL KENNEDY has served as a director of Warwick Savings since 1997. Mr. Kennedy is a general partner and manager of various real estate companies, all managed through Kennedy Companies, Inc. He is also the general managing partner of the Fireplace Restaurant. Mr. Kennedy is also a director of the Company's commercial bank subsidiary, The Towne Center Bank ("Towne Center Bank"). JOHN W. SANFORD III has served as a director of Warwick Savings since 1986. Mr. Sanford also serves as President of John W. Sanford & Son, Inc., an insurance agency, and is a partner in Maple Terrace Farms, a dairy beef business. ROBERT N. SMITH has served as a director of Warwick Savings since 1994. Mr. Smith also serves as a director of the Foundation. He is currently the President of Lazear-Smith Funeral Homes, Inc. Mr. Smith is also sole proprietor of Smith and Gesell Associates, a bookkeeping and tax preparation service. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE NOMINEES FOR ELECTION AS DIRECTORS. CONTINUING DIRECTORS TIMOTHY A. DEMPSEY serves as the Chairman of the Board and Chief Executive Officer and a director of the Company and as the Chairman of the Board and a director of Warwick Savings. Mr. Dempsey has been involved in the financial institutions industry for more than 45 years and has served as a director of Warwick Savings since 1974. Mr. Dempsey also served as the Chief Executive Officer of Warwick Savings from 1985 through December 1999. He also serves as a director of Warsave, WSB Financial and Towne Center Mortgage, as Chairman of the Board and a director of Towne Center Bank, and as President and a director of the Foundation. In addition, he serves as a director of the Institutional Investors Capital Appreciation Fund, Inc., a director of the M.S.B. Fund Inc. and as trustee of the Mount Saint Mary College and Chairman of the Foundation Board of St. Anthony Community Hospital. RONALD J. GENTILE serves as the President and Chief Operating Officer and a director of the Company and as the President and Chief Executive Officer and a director of Warwick Savings. Mr. Gentile joined Warwick Savings and has been a director since 1990. Prior to January 1, 2000, Mr. Gentile served as President and Chief Operating Officer of Warwick Savings. In addition, he serves as President of Warsave, WSB Financial and Towne Center Mortgage. He also serves as Executive Vice President of the Foundation. Prior to joining Warwick Savings, Mr. Gentile served as a senior bank examiner for the Federal Deposit Insurance Corporation. He is also a member of the board of directors of the Orange County Chamber of Commerce, Bon Secours Charity Health System (St. Anthony Community Hospital) and Winslow Therapeutic Riding Unlimited, and a former President and current member of the Warwick Valley Rotary Club. 7 FRED M. KNIPP has served as a director of Warwick Savings since 1984. He is the former President and Chief Executive Officer of, and is currently a director of, Warwick Valley Telephone Company, and he is also a director of Centrex Communications Corporation and a director of Towne Center Bank. EMIL R. KRAHULIK has served as a director of Warwick Savings since 1984. He is a partner in the law firm of Bonacic, Blustein & Krahulik, LLP, and he served as Warwick Savings' general counsel until January 2000, when he was succeeded as general counsel by his son, Robert E. Krahulik. THOMAS F. LAWRENCE, JR. has served as a director of Warwick Savings since 1965. Mr. Lawrence, now retired, formerly served as President of Warwick Auto Co. He is also President of the Warwick Cemetery Association. Mr. Lawrence also serves as a director of Warsave, WSB Financial, Towne Center Mortgage and the Foundation. Mr. Lawrence is Nancy L. Sobotor-Littell's father. JOHN J. MCDERMOTT III was elected as a director of the Company and Warwick Savings in December 1999. He is a managing partner in J.D. Blake Company and in Land Investment Group of Newburgh, and he is the President of Hudson West Realty Corp. Mr. McDermott is also a member of the board of directors of The Chamber of Commerce of Orange County, Inc. HENRY L. NIELSEN, JR. has served as a director of Warwick Savings since 1962. He is the President of Nielsen Construction Co., Inc. and is a director of Warwick Valley Telephone Company. He is also the President of the Warwick Historical Society and a trustee of the Warwick Cemetery Association. Mr. Nielsen also serves as a director of Warsave, WSB Financial and Towne Center Mortgage. BOARD AND COMMITTEE MEETINGS The Board of Directors generally meets twice a month and may have additional special meetings from time to time. During the fiscal year ended December 31, 1999, the Board of Directors met 25 times. No current director attended fewer than 75% of the aggregate of (i) the total number of Board meetings held during the period for which he or she was a director and (ii) the total number of meetings held by all committees of the Board on which he or she served during the periods that he or she served. The Board of Directors of the Company maintains the following standing committees: The EXECUTIVE COMMITTEE currently consists of Mr. Gentile, Mr. Nielsen, Mr. Lawrence, Mrs. Gorish, Mr. Krahulik and Mr. Sanford. The Executive Committee generally oversees the affairs of the Company, considers proposals from management in relation to the election of officers and makes recommendations to the Board regarding those individuals nominated to officer positions. The Executive Committee met 5 times during the fiscal year ended December 31, 1999. The AUDIT COMMITTEE currently consists of Mr. Sanford, Mr. Kennedy, Mr. Lawrence, Mrs. Gorish and Mr. Smith. The Audit Committee meets periodically with its independent certified public accountants to arrange the Company's annual financial statement audit and to review and evaluate recommendations made during the annual audit. The Audit Committee also reviews and evaluates the procedures and performances of the Company's internal auditing staff. The Audit Committee met 2 times during the fiscal year ended December 31, 1999. The COMPENSATION COMMITTEE currently consists of Mrs. Gorish, Mr. Kennedy, Mr. Smith and Mr. Sanford. The Compensation Committee is responsible for overseeing the development, implementation and conduct of the Company's employment and personnel policies, notices and procedures, including the administration of the Company's and Warwick Savings' compensation and benefit programs. The Compensation Committee met 4 times during the fiscal year ended December 31, 1999. 8 The NOMINATING COMMITTEE consists of Messrs. Nielsen, Lawrence and Dempsey. The Nominating Committee recommends candidates for election to the Board of Directors. The Nominating Committee met 1 time during the fiscal year ended December 31, 1999. DIRECTORS' COMPENSATION FEE ARRANGEMENTS. Currently, each director of Warwick Savings who is not an employee of Warwick Savings or the Company receives a fee of $500 for each Warwick Savings Board meeting attended and $250 for each committee meeting attended, and the members of the Re-Inspection Committee of Warwick Savings each receive an annual fee of $250. In addition, Messrs. Kennedy and Knipp each receive a fee of $500 for each Towne Center Bank Board meeting attended and $250 for each committee meeting attended. Directors of the Company are not separately compensated for their services as such. In 2000, each non-employee director of the Company will also receive a retainer of $10,000, which will be paid in quarterly installments of $2,500. OPTION PLAN AND RRP. The Stock Option Plan of Warwick Community Bancorp, Inc. ("Option Plan") and the Recognition and Retention Plan of Warwick Community Bancorp, Inc. ("RRP") were adopted by the Board of Directors of the Company and subsequently approved by the Company's shareholders at a special meeting held on June 24, 1998. On such date, each non-officer director of the Company was granted a non- qualified stock option to purchase 19,819 shares of Common Stock under the Option Plan. These options are scheduled to vest, that is, become exercisable, at a rate of 20% per year over a five-year period beginning on June 24, 1999 and will become immediately exercisable upon the director's death, disability or retirement or upon a change in control of the Company, as such terms are defined in the Option Plan. Similarly, on June 24, 1998, each non-officer director was awarded 8,919 shares of Common Stock under the RRP. These awards are also scheduled to vest at a rate of 20% per year over a five-year period beginning on June 24, 1999 and will also become 100% vested upon the director's death, disability or retirement or upon a change in control of the Company, as such terms are defined in the RRP. EXECUTIVE OFFICERS The following individuals are the executive officers of the Company and have the titles set forth across from their names. NAME POSITIONS HELD WITH THE COMPANY - - ---- ------------------------------- Timothy A. Dempsey Chairman of the Board and Chief Executive Officer Ronald J. Gentile President and Chief Operating Officer Arthur W. Budich Senior Vice President, Treasurer and Chief Financial Officer Laurence D. Haggerty Senior Vice President Donna M. Lyons Senior Vice President/Auditor Barbara A. Rudy Senior Vice President, Shareholder Relations Nancy L. Sobotor-Littell Corporate Secretary and Director of Human Resources The executive officers of the Company are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. The Company has entered into employment agreements with certain of its executive officers which set forth the terms of their employment. See "-- Executive Compensation -- Employment Agreements." 9 Biographical information of the executive officers of the Company who are not directors is set forth below. ARTHUR W. BUDICH, age 49, has served as the Senior Vice President, Treasurer and Chief Financial Officer of Warwick Savings since 1992. He has been employed by Warwick Savings in various capacities since 1986. He also serves as Treasurer of Warsave, WSB Financial and Towne Center Mortgage and as Vice President and Treasurer of the Foundation. Mr. Budich also serves as Senior Vice President, Treasurer and Chief Financial Officer of Towne Center Bank. LAURENCE D. HAGGERTY, age 56, served as Senior Vice President in the Commercial Lending department of Warwick Savings since joining Warwick Savings in 1991. Mr. Haggerty now serves as Executive Vice President and Chief Lending Officer of Towne Center Bank. DONNA M. LYONS, age 44, has served as Senior Vice President of Warwick Savings since 1992 and has served as Auditor of Warwick Savings since joining Warwick Savings in 1989. Mrs. Lyons now also serves as Auditor of Towne Center Bank. BARBARA A. RUDY, age 47, has served as a Senior Vice President of Warwick Savings since 1991 and also serves as Vice President of Towne Center Mortgage. Ms. Rudy has been employed by Warwick Savings in various capacities since 1972. NANCY L. SOBOTOR-LITTELL, age 42, has served as the Corporate Secretary and Director of Human Resources of Warwick Savings since 1988. She has been employed by Warwick Savings in various capacities since 1975. In addition, she serves as Corporate Secretary of Warsave, WSB Financial and Towne Center Mortgage and as Secretary of the Foundation. She also serves as Director of Human Resources for Towne Center Bank. Mrs. Sobotor-Littell is Mr. Lawrence's daughter. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION THE FOLLOWING REPORT OF THE COMPANY'S COMPENSATION COMMITTEE IS PROVIDED IN ACCORDANCE WITH THE RULES AND REGULATIONS OF THE SEC. PURSUANT TO SUCH RULES AND REGULATIONS, THIS REPORT SHALL NOT BE DEEMED "SOLICITING MATERIAL" FILED WITH THE SEC SUBJECT TO REGULATION 14A OR 14C OF THE SEC OR SUBJECT TO SECTION 18 OF THE EXCHANGE ACT. Under the rules and regulations of the Securities and Exchange Commission, the Company is required to provide certain information with respect to the compensation and benefits provided to the Company's chief executive officer ("CEO") and other executive officers of the Company for the Company's last completed fiscal year. Because the Company had no significant assets, liabilities or operations until December 23, 1997, the discussion below reflects the policies of the Compensation Committee (previously, the Budget Committee) of Warwick Savings prior to such date and the Compensation Committee of the Company subsequent to such date. The Compensation Committee annually reviews and makes recommendations to the Board of Directors of the Company regarding the policies that govern executive compensation and stock ownership programs, including the compensation of Mr. Dempsey, the Chairman of the Board and CEO of the Company. The Compensation Committee of the Company is comprised of four members of the Board of Directors of the Company who are not officers of Warwick Savings or the Company and for calendar year 1999 consisted of Mrs. Gorish, Mr. Kennedy, Mr. Smith and Mr. Sanford. The overall compensation structure of the Company is aimed at establishing a compensation package that rewards both individual performance and the Company's performance and is competitive with compensation levels 10 at comparable banking institutions. In connection with the conversion of Warwick Savings from mutual to stock form ("Conversion") and the initial public offering of the Company in 1997, Warwick Savings retained a nationally recognized compensation consulting firm as an independent compensation expert with respect to the Company's plans and programs. Based upon published professional survey data of similarly situated publicly-traded financial institutions operating in relevant markets, such firm rendered an opinion to Warwick Savings that, with respect to the total cash compensation for executive officers, such compensation, viewed as a whole and on an individual basis, was reasonable and proper in comparison to the compensation provided to the executive officers at similarly situated publicly-traded financial institutions, and that the shares of stock to be reserved under the ESOP, the RRP and the Option Plan, as a whole, were reasonable in comparison to similar publicly-traded financial institutions. BASE SALARY. In determining base salary levels for 1999, the Compensation Committee compared the salaries of the Company's officers with those of 19 peer banks in New York, 11 peer banks in New Jersey and four peer banks in Connecticut, taking into account asset size and relative performance during the prior year. The peer group used in the Committee's analysis differs from the companies included in the Nasdaq Composite Index and Nasdaq Bank Composite Index used in the Performance Graph on page 13 of this Proxy Statement since these two indices reflect the stock performance of a significantly broader group of companies and financial institutions. Based upon such comparison, the Compensation Committee concluded that, in order to give the Company's executive officers incentives to keep performing at their current and higher levels, the salary levels for the Company's CEO and other executive officers should reflect the level of performance achieved by Warwick Savings and should be aligned with the interests of the Company's shareholders. In addition, the Compensation Committee concluded that salary level should take into account the officer's individual responsibility and performance as well. STOCK OWNERSHIP PROGRAMS. The Compensation Committee believes that providing executive officers with significant stock ownership and stock options aligns the interests of executive officers with the interests of the Company's shareholders. In this regard, the Company adopted the ESOP at the time of the Company's initial public offering in 1997. In addition, as contemplated during Warwick Savings' Conversion and the Company's initial public offering, in April 1998 the Board of Directors of the Company adopted, and in June 1998 the Company's shareholders approved, the Option Plan and the RRP. In June 1998, stock options were granted under the Option Plan to certain officers, including Messrs. Dempsey and Gentile, at an exercise price equal to the fair market value of the Company's shares on the date of grant. These grants were awarded to provide an incentive for future performance by giving the grantees, including the executive officers, equity interests in the Company. The size of the grants to executive officers were based in part on the practices of other similar institutions and in part on the performance and position of the executive officer of the Company. Such stock options are generally granted for a term of 10 years and generally vest (that is, become exercisable) 20% upon the first anniversary of the date of grant, and 20% more on each subsequent anniversary thereof, with 100% vesting in the event of death or disability. There have been no further grants of options under the Option Plan. In June 1998, shares of the Company's stock were awarded under the RRP to certain officers, including Messrs. Dempsey and Gentile. The number of shares awarded to each executive officer was based in part on the practices of other similar institutions and in part on the performance and position of the executive officer of the Company. Such stock awards generally vest (that is, become distributable to the officer) 20% upon the first anniversary of the date of the award, and 20% more on each subsequent anniversary thereof, with 100% vesting in the event of death or disability. There have been no further awards of shares under the RRP. INCENTIVE COMPENSATION. In March 1999, the Compensation Committee recommended, and the Board of Directors adopted, a Performance Compensation Plan to provide certain key officers of the Company and its affiliates, including Messrs. Dempsey and Gentile, with an incentive to achieve business objectives, to attract and 11 retain individuals of outstanding competence and to provide a means of compensating such individuals for their contributions to the Company. The Performance Compensation Plan provides for cash payments to eligible officers based upon the annual performance of the Company during 1999 in comparison to pre-established target goals based upon the Company's pre-tax net income as compared to the prior year. The Performance Compensation Plan was adopted for 1999, with the expectation that subsequent plans would be developed for plan years 2000 and beyond. In January 2000, the Board of Directors established target goals for 2000. CHIEF EXECUTIVE OFFICER. The Compensation Committee reviewed the performance of Mr. Dempsey as the CEO of Warwick Savings and the Company over the prior year and concluded that his performance was excellent, in terms of the continued development and achievement of Warwick Savings' and the Company's overall strategic goals and objectives as set forth in Warwick Savings' business plan, the successful Conversion of Warwick Savings and the initial public offering of the Company, and Warwick Savings' and the Company's successful financial results since the Conversion, including the growth in Warwick Savings' asset base and leveraging of the new capital raised in the Company's initial public offering. Mr. Dempsey also actively participated in a variety of outside organizations and causes, including various community and industry organizations, which served to benefit the Company. Based upon the foregoing, in December 1999, the Compensation Committee recommended, and the Board of Directors agreed, that Mr. Dempsey's annual rate of salary remain at $250,000 for calendar year 2000. This is based on Mr. Dempsey's continued excellent performance as CEO of Warwick Savings and the Company during 1999 and is in light of the adoption of the Performance Compensation Plan which will provide incentive compensation if pre-established target goals are met. The 1999 Compensation Committee: Frances M. Gorish, Chairman R. Michael Kennedy Robert N. Smith John W. Sanford III COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1999, the Compensation Committee consisted of Mrs. Gorish, Mr. Kennedy, Mr. Smith and Mr. Sanford. There are no interlocks, as defined under the rules and regulations of the SEC, between members of the Compensation Committee or executive officers of the Company and corporations with respect to which such persons are affiliated, or otherwise. PERFORMANCE GRAPH Pursuant to the rules and regulations of the SEC, the graph below, prepared by SNL Securities, L.C., compares the performance of the Company's Common Stock with that of the Nasdaq Composite Index (U.S. Companies) and the Nasdaq Bank Composite Index (banks and bank holding companies, over 99% of which are based in the United States) from December 23, 1997, the date of the Company's initial public offering, through December 31, 1999. The graph is based on an investment of $100 in the Company's Common Stock at its closing price of $15.625 on December 23, 1997 and assumes the reinvestment of all dividends in additional shares of the same class of equity securities as those below. 12 WARWICK COMMUNITY BANCORP, INC. Total Return Performance [GRAPHIC OMITTED]
PERIOD ENDING ------------------------------------------------------------ INDEX 12/23/97 12/31/97 6/30/98 12/31/98 6/30/99 12/31/99 - - ------------------------------- -------- -------- -------- -------- ------- --------- Warwick Community Bancorp, Inc. 100.00 111.20 107.20 94.97 82.66 71.17 NASDAQ-- Total US 100.00 104.01 125.07 146.57 179.38 264.79 NASDAQ Bank Index 100.00 103.00 106.65 102.28 105.35 98.37
______________________- Note: There can be no assurance that the stock performance of Warwick Community Bancorp, Inc. will continue into the future with the same or similar trends depicted in the graph above. EXECUTIVE COMPENSATION The following table sets forth the cash compensation paid to the Chief Executive Officer and all executive officers of the Company who received aggregate salary and bonus in excess of $100,000 in 1999 (the "Named Executive Officers") for services rendered in all capacities to the Company and Warwick Savings during the fiscal year ending December 31, 1999, the seven-month period beginning June 1, 1998 and ending December 31, 1998 and the fiscal year ending May 31, 1998. 13
SUMMARY COMPENSATION TABLE LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS(1) ------------------------------- -------------------------------------------- OTHER ALL ANNUAL RESTRICTED OTHER COMPEN- STOCK LTIP COMPEN- NAME AND YEAR SALARY BONUS SATION AWARDS OPTIONS PAY- SATION PRINCIPAL POSITION * ($)(2) ($) ($)(3) ($)(4) (#)(5) OUTS ($)(6) - - -------------------------- ------ -------- ------ ------- ---------- ------- ----- --------- Timothy A. Dempsey 1999 257,624 -- -- -- -- -- 38,177 Chairman of the Board and 1998 133,656 -- -- 918,356 100,000 -- 32,525 Chief Executive Officer 1998 208,067 -- -- -- -- -- 37,430 Ronald J. Gentile 1999 171,669 -- -- -- -- -- 25,679 President and Chief 1998 87,514 -- -- 642,840 65,000 -- 24,395 Operating Officer 1998 135,282 -- -- -- -- -- 23,717 Arthur W. Budich Senior Vice President, 1999 117,954 5,000 -- -- -- -- 16,746 Treasurer and Chief 1998 57,122 -- -- 275,481 35,000 -- 16,047 Financial Officer 1998 88,183 -- -- -- -- -- 16,537 Laurence D. Haggerty 1999 110,592 25,280 -- -- -- -- 22,727 Senior Vice President 1998 57,249 -- -- 275,481 35,000 -- 18,646 1998 85,104 -- -- -- -- -- 21,488
________________________ * The figures on the first line for 1999 are for the fiscal year ended December 31, 1999. The figures on the second line are for the seven-month period ended December 31, 1998. The figures on the third line are for the fiscal year ending May 31, 1998. (1) For the periods shown, neither the Company nor Warwick Savings had any long-term incentive plan ("LTIP") in existence. (2) Salary includes the amount of each individual's salary deferrals under the 401(k) Plan. (3) For the periods shown, there were no: (a) perquisites with an aggregate value for any named individual in excess of the lesser of $50,000 or 10% of the total of the individual's salary and bonus for the year; (b) payments of above-market preferential earnings on deferred compensation; (c) payments of earnings with respect to long-term incentive plans prior to settlement or maturation; or (d) preferential discounts on stock. (4) Pursuant to the RRP, Messrs. Dempsey, Gentile, Budich and Haggerty were awarded 52,855, 36,998, 15,855 and 15,855 shares of stock, respectively, as of June 24, 1998, which vest at a rate of 20% per year over a five-year period beginning on June 24, 1999, with 100% vesting in cases of officer's death, disability or retirement or a change in control of the Company. The dollar amounts shown in the table for the seven-month period ended December 31, 1998 are based on the closing price of the Common Stock on June 24, 1998, which was $17.375, as reported on the National Market System of the Nasdaq Stock Market ("Nasdaq National Market"). As of December 31, 1999, the number of shares held under the RRP by Messrs. Dempsey, Gentile, Budich and Haggerty was 42,284, 29,598, 12,684 and 12,684, respectively. The aggregate fair market value of these shares at December 31, 1999 for Messrs. Dempsey, Gentile, Budich and Haggerty was $459,839, $321,878, $137,939 and $137,939, respectively, based on the closing price of $10.875 per share as reported on the Nasdaq National Market on that date. Dividends which are declared and paid are distributed at the same time as the related shares. During the fiscal year ended May 31, 1998, neither the Company nor Warwick Savings maintained any restricted stock plans. (footnotes continued on next page) 14 (5) Pursuant to the Option Plan, Messrs. Dempsey, Gentile, Budich and Haggerty were awarded 100,000, 65,000, 35,000 and 35,000 options, respectively, as of June 24, 1998, which are exercisable at a rate of 20% per year over a five-year period beginning on June 24, 1999, with 100% vesting in cases of death, disability or retirement or a change in control of the Company. As of December 31, 1999, 20,000 of Mr. Dempsey's options were exercisable, 13,000 of Mr. Gentile's options were exercisable, 7,000 of Mr. Budich's options were exercisable and 7,000 of Mr. Haggerty's options were exercisable. There were no options granted in 1999. (6) Includes the matching contributions made by Warwick Savings under the 401(k) Plan, which for the fiscal year ended December 31, 1999 totaled $4,760 for Mr. Dempsey, $4,800 for Mr. Gentile, $1,737 for Mr. Budich and $4,256 for Mr. Haggerty. Also includes the value of allocations under the ESOP, which for the fiscal year ended December 31, 1999 totaled $15,240 for Mr. Dempsey, $15,200 for Mr. Gentile, $14,375 for Mr. Budich and $17,837 for Mr. Haggerty. Also includes Warwick Savings' contributions to the trust established for the BRP (excluding amounts contributed with respect to supplemental retirement benefits thereunder) with respect to supplemental 401(k) Plan benefits and supplemental ESOP benefits, which for the fiscal year ended December 31, 1999 totaled $17,457 for Mr. Dempsey and $4,959 for Mr. Gentile. The dollar amounts with respect to allocations under the ESOP and contributions under the BRP with respect to supplemental ESOP benefits are based on $10.875 per share, the closing price of the Common Stock as reported on the Nasdaq National Market on December 31, 1999. See " -- 401(k) Plan," " -- Employee Stock Ownership Plan and Trust" and " -- Benefit Restoration Plan." Also includes the dollar value of the premiums paid by Warwick Savings for the benefit of the executive officer, which for the fiscal year ended December 31, 1999 totaled $720 for each of Mr. Dempsey and Mr. Gentile and $634 for each of Mr. Budich and Mr. Haggerty. EMPLOYMENT AGREEMENTS. The Company has entered into Employment Agreements with each of Mr. Dempsey, Mr. Gentile, Mr. Budich and Mrs. Sobotor-Littell ("Senior Executives"). The Employment Agreements provide for three-year terms, with automatic daily extensions such that the remaining terms of the Employment Agreements shall be three years unless written notice of non-renewal is given by the Company or the Senior Executive, and, in any event, will terminate on the last day of the month following the Senior Executive's 68th birthday. The Employment Agreements provide that the Senior Executive's base salary will be reviewed annually. It is anticipated that this review will be performed by the Company's Compensation Committee and approved by the non-employee members of the Board of Directors, and the Senior Executive's base salary may be increased on the basis of such officer's job performance and the overall performance of the Company. The Employment Agreements also provide for, among other things, entitlement to participation in stock, retirement and welfare benefit plans and reimbursement for ordinary and necessary business expenses. Senior Executives would also be entitled to reimbursement of certain costs incurred in interpreting or enforcing the Employment Agreements. The Employment Agreements provide for termination by the Company at any time for "cause" as defined in the Employment Agreements. In the event that (i) the Company terminates a Senior Executive's employment for reasons other than for cause, (ii) a Senior Executive resigns from the Company for certain reasons specified in the Employment Agreements or (iii) a "change of control" as defined in the Employment Agreements occurs, the Senior Executive (or, in the event of the Senior Executive's death, such Senior Executive's estate) would be entitled to a lump sum cash payment in an amount generally equal to (a) the Senior Executive's earned but unpaid salary, (b) the present value of the amount the Senior Executive would have earned in salary had he or she continued working through the unexpired term of the Employment Agreement and (c) the present value of the additional contributions or benefits that such Senior Executive would have earned under the specified employee benefit plans or programs of Warwick Savings or the Company during the remaining term of the Employment Agreement and payments that would have been made under any incentive compensation plan during the remaining term of the Employment Agreement. The Employment Agreements also provide for the cashout of any stock options, appreciation rights or restricted stock as if the Senior Executive was fully vested. Warwick Savings and the Company would also continue the Senior Executive's life, health and any disability insurance or other benefit plan coverage for the remaining term of the Employment Agreement. Reasons specified as grounds for resignation for purposes of the Employment Agreements include: failure to elect or re-elect the Senior Executive to such officer's position; failure to vest in the Senior Executive the functions, duties or authority associated with such position; if the Senior Executive is a member of the Board of Directors of Warwick Savings or Company, failure to re-nominate or re- elect such Senior Executive to such Board; any material breach of contract by Warwick Savings or the Company that is not cured within 30 days after written notice thereof; or a change in the Senior Executive's principal place 15 of employment to a location in excess of 50 miles from Warwick Savings' principal office in Warwick, New York. In general, for purposes of the Employment Agreements and the plans maintained by the Company or Warwick Savings, a "change of control" will generally be deemed to occur when a person or group of persons acting in concert acquires beneficial ownership of 25% or more of any class of equity security of the Company or Warwick Savings, upon shareholder approval of certain mergers or consolidations of the Company or Warwick Savings, upon liquidation or sale of substantially all the assets of the Company or Warwick Savings or upon a contested election of directors which results in a change in the majority of the Board of Directors. Cash and benefits paid to a Senior Executive under the Employment Agreement, together with payments under other benefit plans, following a change of control of Warwick Savings or the Company may constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended ("Code"), resulting in the imposition of a 20% excise tax on the recipient and the denial of the deduction for such excess amounts to the Company and Warwick Savings. In the event that any amounts paid to a Senior Executive following a change of control would constitute excess parachute payments, the Employment Agreements provide that such Senior Executives will be indemnified for any excise taxes imposed due to such excess parachute payments, and any additional excise, income and employment taxes imposed as a result of such tax indemnification. The Company and Towne Center Bank also entered into an Employment Agreement with Mr. Haggerty in October 1999, the terms of which are substantially the same as the Employment Agreements described above, except that Mr. Haggerty's Employment Agreement is for a term of two years, with automatic daily extensions only in the event a "change of control" as defined in the Employment Agreement occurs. Upon a change of control, the term of the Employment Agreement shall be automatically extended to have a two-year term, which term is extended one additional day each day unless written notice of non-renewal is given by any party, in which case the term of the Employment Agreement shall expire two years from the date such notice is given. EMPLOYEE RETENTION AGREEMENTS. Warwick Savings has entered into Retention Agreements with each of Ms. Lyons, Ms. Rudy and Mr. Arthur S. Anderson ("Contract Employees"). The purpose of the Retention Agreements is to secure the Contract Employees' continued availability and attention to Warwick Savings' affairs, relieved of distractions arising from the possibility of a corporate change of control. The Retention Agreements do not impose an immediate obligation on Warwick Savings to continue the Contract Employees' employment, but provide for a period of assured employment ("Assurance Period") in the event of a "change of control" as defined in the Retention Agreements, which definition is similar to the definition of change of control contained in the Employment Agreements. The Retention Agreements provide for one-year terms, with automatic daily extensions such that the remaining term shall be one year unless written notice of non-renewal is given by Warwick Savings or the Contract Employee, and, in any event, will end on the last day of the month following the Contract Employee's 68th birthday. The Retention Agreements provide for an initial Assurance Period of one year commencing on the date of a change of control during the term of the Retention Agreement. In general, the applicable Assurance Periods will be automatically extended on a daily basis under the Retention Agreements until written notice of non-extension is given by Warwick Savings or the Contract Employee, in which case the Assurance Period would end on the first anniversary of the date such notice is given. If a Contract Employee is discharged without "cause," as defined in the Retention Agreements, during the Assurance Period, or prior to the commencement of the Assurance Period but within 3 months of, and in connection with, a change of control, or the Contract Employee voluntarily resigns during the Assurance Period for certain specified reasons, the Contract Employee (or, in the event of the Contract Employee's death, such Contract Employee's estate) would be entitled to a lump sum cash payment in an amount generally equal to (a) the Contract Employee's earned but unpaid salary, (b) the present value of the amount the Contract Employee would have earned in salary had he or she continued working during the remaining term of the Assurance Period and (c) the present value of the additional contributions or benefits that such that Contract Employee would have earned under the specified employee benefit plans or programs of Warwick Savings or Company during the remaining term of the Assurance Period. Reasons specified as grounds for resignation for purposes of the Retention Agreements include: failure to elect or re-elect the Contract Employee to such officer's position; failure to vest 16 in the Contract Employee the functions, duties or authority associated with such position; if the Contract Employee is a member of the Board of Directors of Warwick Savings or Company, failure to re-nominate or re-elect such Contract Employee to such Board; certain reduction in salary or material reduction in benefits; any material breach of contract by Warwick Savings or the Company that is not cured within 30 days after written notice thereof; or a change in the Contract Employee's principal place of employment to a location in excess of 50 miles from Warwick Savings' principal office in Warwick, New York. The Retention Agreements also provide for the cashout of stock options, appreciation rights or restricted stock as if the Contract Employee was fully vested. Each Contract Employee's life, health and any disability coverage would also be continued during the Assurance Period. The total amount of termination benefits payable to each Contract Employee under the Retention Agreements is limited to three times the Contract Employee's average total compensation for the prior five calendar years. Payments to the Contract Employees under their respective Retention Agreements will be guaranteed by the Company to the extent that the required payments are not made by Warwick Savings. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Company established, and Warwick Savings adopted, for the benefit of eligible employees, an ESOP and related trust, which became effective upon completion of the Conversion of Warwick Savings. Substantially all employees of Warwick Savings or the Company who have completed 1,000 hours of service during a consecutive twelve-month period will be eligible to become participants in the ESOP. Generally, shares held in the ESOP trust are allocated among the accounts of participants who are employees of Warwick Savings or the Company on the last day of the plan year on the basis of the participants' total taxable compensation (excluding amounts attributable to the vesting of RRP awards and the exercise of stock options) for the year of allocation. Benefits generally become vested at the rate of 20% per year beginning on a participant's third year of service, with 100% vesting after seven years of service (including past service). Participants also become immediately vested upon termination of employment due to death, retirement at age 65 or older, permanent disability or upon the occurrence of a change of control. The ESOP generally provides that, upon certain changes of control as described in the ESOP, unallocated shares in the ESOP will be sold to repay any outstanding loan and all remaining unallocated shares or proceeds thereof will be allocated among participants who were employed immediately preceding the change of control in proportion to compensation for that part of the year prior to the change of control. A participant who terminates employment prior to the end of a plan year for reasons other than death, retirement or disability will not receive an allocation under the ESOP for that plan year. Forfeitures will be used to reduce the Company's contributions to the ESOP. Vested benefits may be paid in a single sum or installment payments and are payable upon death, retirement at age 65 or older, disability or separation from service. The ESOP is administered by Warwick Savings as the Plan Administrator and by a committee established pursuant to the ESOP ("ESOP Committee"). HSBC Bank USA has been appointed as the trustee for the ESOP. The ESOP Committee may instruct the trustee regarding investment of funds contributed to the ESOP. The ESOP trustee, subject to its fiduciary duty, must vote all allocated shares held in the ESOP in accordance with the instructions of the participating employees. Under the ESOP, unallocated shares generally will be voted in a manner calculated to most accurately reflect the instructions received from participants regarding the allocated stock as long as such vote is in accordance with the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). STOCK OPTION PLAN. The Option Plan was adopted by the Board of Directors of the Company and subsequently approved by the Company's shareholders on June 24, 1998. In February 1999, the Board of Directors adopted amendments to the Option Plan, which were subsequently approved by the Company's shareholders on April 20, 1999. Subject to the terms of the Option Plan, employees, directors and officers of the Company, Warwick Savings and its affiliates are eligible to participate in the Option Plan. The Option Plan is not 17 subject to ERISA and is not a tax-qualified plan under the Code. The Company reserved 660,654 shares of Common Stock for issuance upon the exercise of stock options ("Options") granted under the Option Plan. The Board of Directors and the members of the Compensation Committee who are Disinterested Directors ("Option Committee") administer the Option Plan. The Option Committee determines, subject to the terms of the Option Plan and Rule 16b-3 promulgated under the Exchange Act, the officers and employees to whom Options will be granted, the number of shares subject to each Option and the terms of such Options (including provisions regarding exercisability and acceleration of exercisability) and the procedures by which the Options may be exercised. Options granted under the Option Plan may be either "incentive stock options," which qualify for favorable federal income tax treatment, or non-qualified stock options, which do not so qualify. Options granted under the Option Plan will generally vest at a rate of 20% per year beginning on the first anniversary of the grant date and generally remain exercisable until the tenth anniversary of the grant date, subject to earlier expiration upon termination of employment, as defined in the Option Plan. In the case of termination due to death, disability or retirement of the Option holder, or upon a change in control of the Company, all options granted become immediately exercisable. Subject to certain specific limitations and restrictions set forth in the Option Plan and such limitations as may be imposed from time to time by the Board of Directors, the Option Committee has the authority to interpret the Option Plan, to prescribe, amend and rescind rules and regulations, if any, relating to the Option Plan and to make all determinations necessary or advisable for the administration of the Option Plan. The following table provides certain information with respect to the number of shares of Common Stock represented by unexercised options held by the CEO and the Named Executive Officers as of December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES DURING 1999 AND 1999 YEAR-END OPTION/SAR VALUES ------------------------------------------- NUMBER OF SHARES VALUE SECURITIES UNDERLYING VALUE OF UNEXERCISED ACQUIRED REALIZED UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS ON ON AT YEAR-END 1999 AT YEAR-END 1999 EXERCISE EXERCISE (#) ($)(1) NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - - --------------------- ---------- ---------- ------------ -------------- ----------- -------------- Timothy A. Dempsey -- -- 20,000 80,000 0 0 Ronald J. Gentile -- -- 13,000 52,000 0 0 Arthur W. Budich -- -- 7,000 28,000 0 0 Laurence D. Haggerty -- -- 7,000 28,000 0 0
______________________ (1) As of December 31, 1999, none of the outstanding options held by the Named Executive Officers were in-the-money based upon the difference between $10.875, the closing price of the Common Stock as reported on the Nasdaq National Market on December 31, 1999, and the $17.00 exercise price of the options. RECOGNITION AND RETENTION PLAN. The RRP was adopted by the Board of Directors of the Company and subsequently approved by the Company's shareholders on June 24, 1998. In February 1999, the Board of Directors adopted amendments to the RRP, which were subsequently approved by the Company's shareholders on April 20, 1999. The RRP provides for stock awards ("Awards") to eligible officers, employees, outside 18 directors and directors emeritus of the Company, Warwick Savings and its affiliates. The RRP is not subject to ERISA and is not a tax-qualified plan under the Code. The Board of Directors and the members of the Compensation Committee who are Disinterested Directors ("RRP Committee") administer the RRP. The Board of Directors or the RRP Committee will determine at the time of grant the number of shares of Common Stock subject to an Award and the vesting schedule applicable to the Award and may, in its discretion, establish other terms and conditions applicable to the Award. Stock subject to an Award is held in trust pursuant to the RRP until the Award vests, at which time the shares of Common Stock attributable to the portion of the Award that have vested are distributed to the Award holder. An individual to whom an Award is granted is entitled to exercise voting rights and receive dividends with respect to stock subject to Awards granted to him whether or not vested. Dividends will be distributed at the same time as the related shares. Generally, shares granted to outside directors or directors emeriti will vest and become distributable at a rate of 20% per year, over a five-year period, subject to 100% vesting in the case of death, disability or retirement of the director or a change in control of the Company. The shares granted to eligible officers and employees will vest according to a schedule established by the RRP committee, but in no event at a rate of more than 20% per year, subject to 100% vesting in the case of death, disability or retirement of the officer or employee or a change in control of the Company. Subject to certain specific limitations and restrictions set forth in the RRP, and such limitations as may be imposed from time to time by the Board of Directors, the RRP Committee has authority to interpret the RRP, to prescribe, amend and rescind rules and regulations, if any, relating to the RRP and to make all determinations necessary or advisable for the administration of the RRP. PERFORMANCE COMPENSATION PLAN. In March 1999, the Board of Directors of the Company adopted a Performance Compensation Plan to provide certain key officers of the Company and its affiliates with an incentive to achieve business objectives, to attract and retain individuals of outstanding competence and to provide a means of compensating such individuals for their contributions to the Company. The Performance Compensation Plan provides for cash payments to eligible employees based upon the annual performance of the Company during 1999 in comparison to pre-established target goals. The Performance Compensation Plan was adopted for 1999 only, with the expectation that subsequent plans would be developed for plan years 2000 and beyond. In January 2000, the Board of Directors established target goals for 2000. 401(K) PLAN. Warwick Savings maintains The Warwick Savings Bank 401(k) Savings Plan ("401(k) Plan"), a tax-qualified profit-sharing plan under Sections 401(a) and 401(k) of the Code. Employees who satisfy prescribed eligibility requirements may make pre-tax salary deferrals under section 401(k) of the Code. Salary deferrals are made by election, subject to the limits prescribed by the 401(k) Plan and a limit imposed under the Code (which is $10,500 for 2000). Warwick Savings makes matching contributions equal to a percentage of salary contributions determined annually by Warwick Savings, up to 3% of salary. Employees are fully vested in their salary deferrals and become incrementally vested in Warwick Savings' contribution after one year and fully vested in Warwick Savings' contributions after five years. Warwick Savings amended the 401(k) Plan in connection with the Conversion of Warwick Savings to provide that Warwick Savings' matching contributions will be invested in an investment fund consisting primarily of Common Stock of the Company. In addition, participating employees may elect to invest all or a portion of their remaining account balances in such investment fund or the other investment funds provided under the 401(k) Plan. Common Stock held by the 401(k) Plan may be newly issued or treasury shares acquired from the Company or outstanding shares purchased in the open market or in privately negotiated transactions. All Common Stock held by the 401(k) Plan is held by an independent trustee and allocated to the accounts of individual participants. Participants control the exercise of voting and tender rights relating to the Common Stock held in their accounts. 19 PENSION PLAN. Warwick Savings maintains The Warwick Savings Bank Defined Benefit Pension Plan ("Pension Plan"), a non-contributory, tax-qualified defined benefit pension plan, for eligible employees. All employees, except (i) those paid on an hourly basis or contract basis, (ii) leased employees or (iii) employees regularly employed by outside employers for maintenance of properties, are eligible to participate in the Pension Plan upon the later of (i) the end of the twelve-month period in which he or she completes 1,000 hours of service or (ii) the date he or she attains age 21. The Pension Plan provides an annual benefit for each participant, including the executive officers named in the Summary Compensation Table above, equal to 2% of the participant's average annual compensation, multiplied by the participant's years of credited service, up to a maximum of 30 years. Average annual compensation is the average of a participant's compensation (excluding amounts attributable to the vesting of RRP awards and the exercise of stock options) over the three years of employment out of the participant's last 10-year period of employment during which the participant's compensation is the highest. A participant is fully vested in his or her pension benefit after five years of service. The Pension Plan is funded by Warwick Savings on an actuarial basis, and all assets are held in trust by the Pension Plan trustee. BENEFIT RESTORATION PLAN. In connection with the Conversion, Warwick Savings adopted the Benefit Restoration Plan of The Warwick Savings Bank ("BRP") to provide eligible employees with the benefits that would be due to such employees under the Pension Plan, the 401(k) Plan and the ESOP if such benefits were not limited under the Code. The BRP is also intended to make up allocations lost by participants of the ESOP who retire prior to the complete repayment of the ESOP loan. BRP benefits to be provided with respect to the Pension Plan are reflected in the pension table and BRP benefits to be provided with respect to the ESOP and the 401(k) Plan are reflected in the Summary Compensation Table. PENSION PLAN TABLE. The following table sets forth the estimated annual benefits payable under the Pension Plan upon a participant's normal retirement at age 65, expressed in the form of a single life annuity, and any related amounts payable under the BRP, for the average annual compensation and years of credited service specified. PENSION PLAN TABLE(1) YEARS OF CREDITED SERVICE AT RETIREMENT AVERAGE ANNUAL --------------------------------------------------------------- COMPENSATION 15 20 25 30 35(2) - - -------------------------------------------------------------------------------- $125,000 $37,500 $ 50,000 $ 62,500 $ 75,000 $ 75,000 150,000 45,000 60,000 75,000 90,000 90,000 175,000(3) 52,500 70,000 87,500 105,000 105,000 200,000(3) 60,000 80,000 100,000 120,000 120,000 225,000(3) 67,500 90,000 112,500 135,000(4) 135,000(4) 250,000(3) 75,000 100,000 125,000 150,000(4) 150,000(4) 300,000(3) 90,000 120,000 150,000(4) 180,000(4) 180,000(4) ________________ (1) The annual benefits shown in the table above assume the participant would receive his or her retirement benefits under the Pension Plan and the BRP in the form of a straight life annuity at normal retirement age. (2) Normal retirement benefits are limited to 60% of average annual compensation. (3) For the Pension Plan year ending September 30, 1999, the annual compensation for calculating benefits under the Pension Plan may not exceed $160,000 (as adjusted for subsequent years pursuant to Code provisions). The limitation is $160,000 for the plan year beginning October 1, 1999 and will be adjusted to reflect cost of living increases after 1999 in accordance with Section 401(a)(17) of the Code. The table reflects amounts payable in conjunction with the BRP. (footnotes continued on next page) 20 (4) These are hypothetical benefits based upon the Pension Plan's normal retirement benefit formula. The maximum annual benefit permitted under Section 415 of the Code in 1999 is $130,000 or, if higher, a member's current accrued benefit as of December 31, 1982 (but not more than $136,425). The $130,000 ceiling will be adjusted to reflect cost of living increases after 1999 in accordance with Section 415 of the Code. The BRP will provide the difference between the amounts appearing in this table and the maximum amount allowed by the Code. The following table sets forth the years of credited service and the average annual compensation (as defined above), determined as of December 31, 1999, for each of the individuals named in the Summary Compensation Table. YEARS OF CREDITED SERVICE ------------------------- AVERAGE ANNUAL YEARS MONTHS COMPENSATION ----- ------ -------------- Mr. Dempsey.............. 26 6 $ 228,394 Mr. Gentile.............. 9 7 $ 149,810 Mr. Budich............... 13 11 $ 98,866 Mr. Haggerty............. 8 7 $ 108,236 TRANSACTIONS WITH CERTAIN RELATED PERSONS From time to time Warwick Savings makes loans or extends credit to its executive officers and to certain persons related to its executive officers and directors, to the extent consistent with applicable laws and regulations. All such loans are made by Warwick Savings in the ordinary course of business and on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and do not and will not involve more than the normal risk of collectibility or present other unfavorable features. The outstanding principal balance of such loans to executive officers and to persons related to executive officers and directors totaled approximately $306,005 as of December 31, 1999. In addition, Warwick Savings has committed a line of credit of $2.5 million to Warwick Valley Telephone Company, of which $900,000 was outstanding at December 31, 1999. Mr. Nielsen and Mr. Knipp are directors, and Mr. Knipp is the former Chief Executive Officer, of Warwick Valley Telephone Company. Mr. Krahulik is a partner in the law firm of Bonacic, Blustein & Krahulik, LLP, which Warwick Savings retains to provide certain legal services. During the fiscal year ended December 31, 1999, Warwick Savings paid $161,052 for legal services provided during such period (which includes fees paid to the firm Beattie & Krahulik during 1999 prior to its merger into the law firm of Bonacic, Blustein & Krahulik, LLP in August 1999). In addition, the firm received fees in the amount of approximately $491,290 from third parties pursuant to its representation of Warwick Savings in loan closings and other legal matters for the fiscal year ended December 31, 1999. Towne Center Mortgage and Bonacic, Blustein & Krahulik, LLP, are co-tenants on the lease for Towne Center Mortgage's office in West Milford, New Jersey. Mr. McDermott is a managing partner in J.D. Blake Company, which leases office space to the Company. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Under the securities laws of the United States, the Company's directors and executive officers, and any person holding more than ten percent of the Company's Common Stock, are required to file initial reports of ownership of the Company's Common Stock and reports of changes in that ownership with the SEC. Specific due dates for these reports have been established, and the Company is required to disclose in this Proxy Statement any failure to file by these dates during the fiscal year ended December 31, 1999. All of such filing requirements of the Company's directors and executive officers (other than R. Michael Kennedy and Robert N. Smith, who each filed one late report of changes in his ownership of the Company's Common Stock, and John J. McDermott III, who filed a late initial report of ownership of the Company's Common Stock) were satisfied during the fiscal year 21 ended December 31, 1999, based upon their written representations and copies of the reports that they have filed with the SEC. PROPOSAL TWO RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS The Board of Directors has appointed the firm of Arthur Andersen LLP to act as independent auditors for the Company for the fiscal year ending December 31, 2000, subject to ratification of such appointment by the Company's shareholders. Representatives of Arthur Andersen LLP are expected to be present at the Annual Meeting. The representatives will have an opportunity to make a statement if they desire to do so and will be available to respond to questions. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT AUDITORS FOR THE COMPANY ADDITIONAL INFORMATION NOTICE OF BUSINESS TO BE CONDUCTED AT ANNUAL MEETING The By-Laws of the Company provide an advance notice procedure for a shareholder to properly bring business before an Annual Meeting or to nominate any person for election to the Board of Directors. The shareholder must be a shareholder of record and have given timely notice thereof in writing to the Corporate Secretary of the Company. To be timely, a shareholder's notice must be delivered to or received by the Corporate Secretary not later than the following dates: (i) with respect to an annual meeting of shareholders, 60 days in advance of the anniversary of the previous year's annual meeting if the current year's meeting is to be held within 30 days prior to, on the anniversary date of, or after the anniversary of the previous year's annual meeting; and (ii) with respect to an annual meeting of shareholders held at a time other than within the time periods set forth in the immediately preceding clause (i), or with respect to a special meeting of shareholders for the election of directors, the close of business on the 10th day following the date on which notice of such meeting is first given to shareholders. Notice shall be deemed to first be given to shareholders when disclosure of such date of the meeting of shareholders is first made in a press release reported to the Dow Jones News Services, Associated Press or comparable national news service, or in a document publicly filed by the Company with the SEC pursuant to Section 13, 14 or 15(d) of the Exchange Act. A shareholder's notice to the Corporate Secretary shall set forth such information as required by the By-Laws of the Company. Nothing in this paragraph shall be deemed to require the Company to include in its proxy statement and proxy card relating to an annual meeting any shareholder proposal or nomination which does not meet all of the requirements for inclusion established by the SEC in effect at the time such proposal or nomination is received. See "-- Date For Submission of Shareholder Proposals." DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS Pursuant to the proxy soliciting regulations of the SEC, any shareholder proposal intended for inclusion in the Company's proxy statement and proxy card relating to the Company's 2001 Annual Meeting of Shareholders must be received by the Company on or before November 18, 2000. Nothing in this paragraph shall be deemed to require the Company to include in its proxy statement and proxy card for such meeting any shareholder proposal 22 which does not meet the requirements of the SEC in effect at the time. Any such proposal will be subject to 17 C.F.R.ss.240.14a-8 of the rules and regulations promulgated by the SEC under the Exchange Act. OTHER MATTERS As of the date of this Proxy Statement, the Board of Directors of the Company does not know of any other matters to be brought before the shareholders at the Annual Meeting. If, however, any other matters not now known are properly brought before the meeting, the persons named in the accompanying Proxy Card will vote the shares represented by all properly executed proxies on such matters in such manner as shall be determined by a majority of the Board of Directors. FINANCIAL STATEMENTS A copy of the Company's Annual Report for the fiscal year ended December 31, 1999, containing consolidated statements of financial condition as of December 31, 1999 and December 31, 1998 and related consolidated statements of income, changes in shareholders' equity and cash flows for the fiscal years ended December 31, 1999, 1998 and 1997, prepared in conformity with generally accepted accounting principles, accompanies this Proxy Statement. The consolidated financial statements have been audited by Arthur Andersen LLP whose report thereon appears in the Annual Report. The Annual Report serves as Warwick Savings' and Towne Center Bank's Annual Disclosure Statement for purposes of the regulations of the Federal Deposit Insurance Corporation. Upon request, shareholders will be furnished, free of charge, an additional copy of the Annual Report. The Company is required to file a transition report on Form 10-K for the fiscal year ended December 31, 1999 with the SEC. Shareholders may obtain, free of charge, a copy of such transition report (excluding exhibits) by writing to Karen J. Hall, Assistant Vice President, The Warwick Savings Bank, 591 Route 17M, Monroe, New York 19050. A copy of the Form 10-K is also available on the SEC's Electronic Data Gathering Analysis and Retrieval ("EDGAR") System at the SEC's website, www.sec.gov. By Order of the Board of Directors, [Facsimile signature] Nancy L. Sobotor-Littell Corporate Secretary Warwick, New York March 17, 2000 TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. EX-27 8 FDS -- WARWICK COMMUNITY BANCORP, INC.
9 This schedule contains summary financial information extracted from the consolidated condensed statement of financial condition and the consolidated condensed statement of income and is qualified in its entirety by reference to such financial statements. 0001046209 WARWICK COMMUNITY BANCORP, INC. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 21,600 609 7,665 0 185,072 1,418 1,410 351,262 1,941 597,714 283,072 37,375 9,019 201,675 0 0 63,044 3,528 597,714 22,508 13,017 37 35,562 7,849 16,951 18,611 500 523 16,708 5,209 5,209 0 0 3,143 0.57 0.57 7.40 1,214 822 0 359 1,727 372 86 1,941 1,941 0 0
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