UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2001 Commission File Number 0-22278
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NEW YORK COMMUNITY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1377322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
615 Merrick Avenue, Westbury, New York 11590
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(Address of principal executive offices)(Zip code)
(Registrant's telephone number, including area code) 516: 683-4100
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not considered herein,
and will not be contained to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of the Form 10-K or any amendment to this Form 10-K. |X|
As of March 26, 2002, the aggregate market value of the shares of common stock
outstanding of the registrant was $2.556 billion, excluding 7,422,899 shares
held by all directors and executive officers of the registrant. This figure is
based on the closing price by The Nasdaq Stock Market(R) for a share of the
registrant's common stock on March 26, 2002, which was $26.98 as reported in The
Wall Street Journal on March 27, 2002. The number of shares of the registrant's
common stock outstanding as of March 26, 2002 was 102,175,430 shares.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 15, 2002 and the 2001 Annual Report to
Shareholders are incorporated herein by reference - Parts I, II, and III.
CROSS REFERENCE INDEX
PART I
Page
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Item 1. Business 1
Description of Business 1
Statistical Data: 19
Mortgage and Other Lending Activities 20
Loan Maturity and Repricing 21
Summary of the Allowance for Loan Losses 22
Composition of the Loan Portfolio 23
Portfolio of Securities, Money Market Investments, and Mortgage-backed Securities 24
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 25
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data
New York Community Bancorp, Inc. and Subsidiaries: 26
Independent Auditors' Report 26
Consolidated Statements of Condition 26
Consolidated Statements of Income and Comprehensive Income 26
Consolidated Statements of Changes in Stockholders' Equity 26
Consolidated Statements of Cash Flows 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26
Signatures 28
PART I
ITEM 1. BUSINESS
New York Community Bancorp, Inc. (the "Company"), formerly known as Queens
County Bancorp, Inc., was incorporated in the State of Delaware on July 20, 1993
as the holding company for New York Community Bank (the "Bank"), formerly known
as Queens County Savings Bank, the first savings bank chartered by the State of
New York in the Borough of Queens, on April 14, 1859. The Company acquired all
of the stock of the Bank upon its conversion from a New York State-chartered
mutual savings bank to a New York State-chartered stock form savings bank on
November 23, 1993.
On November 21, 2000, the Company changed its name from Queens County
Bancorp, Inc. to New York Community Bancorp, Inc., in anticipation of its
acquisition of Haven Bancorp, Inc. ("Haven"), parent company of CFS Bank. On
November 30, 2000, Haven was merged with and into the Company, and on January
31, 2001, CFS Bank merged with and into New York Community Bank.
On July 31, 2001, the Company completed a merger-of-equals with Richmond
County Financial Corp. ("Richmond County"), parent company of Richmond County
Savings Bank. At the same time, Richmond County Savings Bank merged with and
into the Bank.
The Bank currently serves its customers through 119 banking offices
spanning Company all five boroughs of New York City, Long Island, Westchester
and Rockland counties, New Jersey, and Connecticut. Reflecting the opening of
three new branches in the first quarter of 2002 and the anticipated divestiture
of 14 in-store branches in Connecticut, northern New Jersey, and Rockland County
in the second quarter, the Company's franchise will consist of 108 locations,
including 53 traditional branches, 54 in-store branches, and a customer
convenience center. The Bank operates its branches through six community
divisions: Queens County Savings Bank, Richmond County Savings Bank, CFS Bank,
First Savings Bank of New Jersey, Ironbound Bank, and South Jersey Bank.
In addition to operating the largest supermarket banking franchise in the
metro New York region, the Bank is the second largest producer of multi-family
mortgage loans in the City of New York.
General
The Company recorded total assets of $9.2 billion at December 31, 2001,
including total loans of $5.4 billion, and total deposits of $5.5 billion,
including core deposits of $3.0 billion. Reflected in the year-end amounts were
assets and liabilities acquired in the Richmond County merger on July 31, 2001.
At the date of merger, Richmond County had $3.7 billion assets, including net
loans of $1.9 billion; and total deposits of $2.5 billion, including core
deposits of $1.4 billion. The merger also added 34 banking offices to the
Company's branch network, including 17 in Staten Island, one in Brooklyn, and 16
in New Jersey, the neighboring state.
Included in the balance of loans acquired in the merger was a $784.0
million portfolio of multi-family mortgage loans. Reflecting the multi-family
mortgage loans acquired, and $791.3 million in twelve-month originations, the
multi-family mortgage loan portfolio totaled $3.3 billion at year-end 2001.
In addition to multi-family mortgage loans, the Company's primary assets
consist of commercial real estate and construction loans, together with a
portfolio of securities available for sale primarily consisting of
mortgage-backed securities. Although the Company has had a policy of originating
one-to-four family mortgage loans on a conduit basis since December 1, 2000, the
outstanding balance of such loans was $1.3 billion at December 31, 2001. The
balance reflects loans acquired in the Richmond County merger and to, a lesser
extent, seasoned one-to-four family mortgage loans from the Company's
pre-transaction loan portfolio. Reflecting the Company's preference for
multi-family mortgage lending, $610.6 million of one-to-four family mortgage
loans acquired in the Haven and Richmond County transactions were sold over the
course of 2001.
Despite the significant portfolio growth stemming from its transactions,
the Company's record of asset quality was essentially sustained. At December 31,
2001, the ratio of non-performing assets to total assets was 0.19%, consistent
with the year-earlier measure, while the ratio of non-performing loans to loans,
net, rose a modest eight basis points year-over-year to 0.33%. Reflecting a
$22.4 million addition to the allowance for loan losses pursuant to the merger,
the allowance
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for loan losses totaled $40.5 million, representing 231.46% of non-performing
loans at December 31, 2001.
The Company's primary funding sources are deposits and borrowings. To
supplement the funding provided by its deposits, the Company increased its
borrowings in the second half of 2001. At December 31, 2001, borrowings totaled
$2.5 billion, including Federal Home Loan Bank ("FHLB") advances of $1.8
billion, reverse repurchase agreements of $596.7 million, and trust preferred
securities of $121.3 million that were issued by the Company in the final month
of the year.
Additional funding stems from the amortization and prepayments of loans
and mortgage-backed securities, maturities of investment and mortgage-backed
securities, and the sale of securities and loans.
The Company's revenues primarily stem from the interest earned on mortgage
and other loans and securities investments, together with fee income derived
from operations and the sale of third-party financial products and services. In
addition to providing a full-service menu of banking and lending products, the
Company offers a range of third-party investment products, including annuities,
insurance, and mutual funds.
In addition to maintaining a high level of asset quality and a strong
capital position, the Company has enhanced share value through the
implementation of various capital management strategies. In addition to
3-for-2 stock splits in March and September, the Company increased its quarterly
cash dividend 20% in each of the second and fourth quarters, and allocated
$121.0 million toward the repurchase of 6,254,437 shares. Reflecting share
repurchases, the stock splits, and the shares issued in the merger, the number
of shares outstanding at December 31, 2001 was 101,845,276. Reflecting share
repurchases in the first quarter of 2002, the number of outstanding shares at
March 26, 2002 was 102,175,430.
Market Area and Competition
The Company enjoys a significant presence in the metro New York region and
New Jersey, and ranks as the fifth largest thrift depository in the City of New
York. In Queens and Staten Island, where the Company has, respectively, 25 and
23 locations, the Bank ranks as the second largest thrift depository, with a 7%
and 23% market share. The remainder of the franchise consists of 29 branches on
Long Island, 19 in New Jersey, eight more in New York City, and four in
Westchester County, New York.
The majority of the Company's loans are secured by multi-family buildings
in the five boroughs of New York City with Manhattan and Queens accounting for
29.2% and 24.8%, respectively. Reflecting the addition of multi-family loans
through the Richmond County merger, approximately 15% of the portfolio is now
secured by buildings in New Jersey and in the vicinity of Philadelphia,
Pennsylvania.
The Bank faces significant competition both in making loans and in
attracting deposits. Its market area has a high density of financial
institutions, many of which have greater financial resources than the Bank, and
all of which are competitors of the Bank to varying degrees. The Bank's
competition for loans comes principally from commercial banks, savings banks,
credit unions, savings and loan associations, mortgage banking companies, and
insurance companies. Additionally, the Bank faces competition from
non-traditional financial service companies and, on a nationwide basis, from
companies that solicit loans and deposits over the Internet.
Competition is likely to increase as a result of recent regulatory actions
and legislative changes, most notably the enactment of the Gramm-Leach-Bliley
Act of 1999. These changes have eased and likely will continue to ease
restrictions on interstate banking and the entrance into the financial services
market by non-traditional and non-depository financial services providers,
including insurance companies and securities brokerage and underwriting firms.
The Bank has recently faced increased competition for the origination of
multi-family loans, which comprised 60.23% of the Bank's loan portfolio at
year-end 2001. Management anticipates that competition for multi-family loans
will continue to increase in the future. Thus, no assurances can be made that
the Bank will be able to maintain its current level of lending activity.
Lending Activities
Loan and Mortgage-backed Securities Portfolio Composition. The Company's
loan portfolio consists primarily of multi-family mortgage loans on rental and
cooperative apartment buildings and, to a lesser extent, of one-to-four family,
commercial real estate, construction, and other loans. At December 31, 2001,
loans outstanding totaled $5.4 billion, of which $3.3 billion, or 60.23%, were
multi-family mortgage loans. Included in the latter amount were $783.8 million
in loans acquired through the Richmond County merger and $791.3 million in loans
produced during the year.
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One-to-four family mortgage loans totaled $1.3 billion at December 31,
2001, representing 24.40% of total loans outstanding. The year-end balance
reflects the sale of $526.9 million and $83.7 million of one-to-four family
mortgage loans acquired in the Haven and Richmond County transactions,
respectively.
The remainder of the mortgage loan portfolio at year-end 2001 consisted of
$561.9 million in commercial real estate loans and $152.4 million in
construction loans. In addition, the Company had other loans totaling $116.9
million, including $87.3 million in home equity loans generally secured by
second liens on real property and $29.6 million in other consumer loans.
At December 31, 2001, 77.15% of outstanding mortgage loans had been made
at adjustable rates of interest and 22.85% had been made at fixed rates.
The types of loans originated by the Bank are subject to Federal and State
laws and regulations. Interest rates charged by the Bank on loans are affected
principally by the demand for such loans, the supply of money available for
lending purposes, and the rates offered by its competitors. These factors are,
in turn, affected by general economic conditions, the monetary policy of the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"),
legislative tax policies, and governmental budgetary matters.
The Bank has invested in a variety of mortgage-backed securities, some of
which are directly or indirectly insured or guaranteed by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Government National Mortgage Association
("GNMA"), or the Federal National Mortgage Association ("FNMA"). At December 31,
2001, mortgage- backed securities totaled $2.2 billion, or 23.61% of total
assets, of which $2.1 billion were classified as available for sale and $50.9
million were classified as held to maturity. The market value of such securities
was approximately $2.2 billion at December 31, 2001.
Loan Originations, Purchases, Sales, and Servicing. The Bank originates
both adjustable rate mortgage ("ARM") loans and fixed-rate loans, the amounts of
which are dependent upon customer demand and market rates of interest.
Generally, the Bank does not purchase whole mortgage loans or loan
participations. One-to-four family mortgage loans are originated on a conduit
basis and sold without recourse.
For the years ending December 31, 2001 and 2000, sales of ARM loans and
fixed-rate loans totaled $610.6 million and $107.4 million, respectively. As of
December 31, 2001, the Bank was servicing $1.7 billion in loans for others. The
Bank is generally paid a fee up to 0.25% for servicing loans sold.
Multi-Family Lending. The Bank originates multi-family loans (defined as
loans on properties with five or more units), which are secured by rental or
cooperative apartment buildings primarily located in the greater metropolitan
New York area. At December 31, 2001, the Bank's portfolio of multi-family
mortgage loans totaled $3.3 billion, representing 60.23% of the total loan
portfolio. Of this total, $3.1 billion, or 95.37%, were secured by rental
apartment buildings and $150.8 million, or 4.63%, were secured by underlying
mortgages on cooperative apartment buildings.
Multi-family loans are generally originated for terms of 10 years at a
fixed rate of interest in years one through five and a rate that adjusts
annually with the prime rate of interest, as reported in The New York Times, in
each of years six through ten. The minimum rate is equivalent to that of the
initial five year term. Prepayment penalties range from five points to two over
the first five years of the loan. At year-end 2001, 86.0% of the Bank's
multi-family mortgage loans were adjustable rate credits, including $359.4
million that are due to adjust in 2002. Properties securing multi-family
mortgage loans are appraised by independent appraisers approved by the Bank.
In originating such loans, the Bank bases its underwriting decisions
primarily on the cash flow generated by the property in relation to the debt
service. The Bank also considers the financial resources of the borrower, the
borrower's experience in owning or managing similar property, the market value
of the property, and the Bank's lending experience with the borrower. The Bank
generally requires minimum debt service ratios of 120% on multi-family
properties. In addition, the Bank requires a security interest in the personal
property at the premises and an assignment of rents.
The Bank's largest concentration of loans to one borrower at December 31,
2001 consisted of 19 loans secured by 19 multi-family properties located in the
Bank's primary market area. These loans were made to several borrowers who are
3
deemed to be related for regulatory purposes. As of December 31, 2001, the
outstanding balance of these loans totaled $85.5 million and, as of such date,
all such loans were performing in accordance with their terms. The Bank's
concentration of such loans did not exceed its "loans-to-one-borrower"
limitation.
Loans secured by multi-family properties tend to be larger and are
generally believed to involve a greater degree of risk than one-to-four family
residential mortgage loans. Payments on loans secured by multi-family buildings
are generally dependent on the income produced by such properties, which, in
turn, is dependent on the successful operation or management of the properties;
accordingly, repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the local economy. The Bank
seeks to minimize these risks through its underwriting policies, which restrict
new originations of such loans to the Bank's primary lending area and require
such loans to be qualified on the basis of the property's net income and debt
service ratio. Since 1987, one loan on a multi-family property located outside
of the primary lending area was foreclosed upon and subsequently sold. The
portfolio has otherwise been fully performing for 15 years.
One-to-Four Family Mortgage Lending. At December 31, 2001, $1.3 billion,
or 24.40%, of the Bank's loan portfolio, consisted of one-to-four family
mortgage loans. On December 1, 2000, the Bank adopted a policy of originating
such loans on a conduit basis in order to minimize its credit and interest rate
risk. Since then, applications have been taken and processed by a third party
and the loans sold to said party, service-released. Under this program, the Bank
sold one-to-four family mortgage loans totaling $67.0 million and $1.7 million
in 2001 and 2000, respectively. In the years ended December 31, 2001 and 2000,
the Bank originated $137.0 million and $2.5 million, respectively, of
one-to-four family loans.
The Bank had non-performing loans of $17.5 million at December 31, 2001,
consisting of loans secured by one-to-four family homes. Foreclosed real estate;
which is included in "other assets" in the Consolidated Statements of Condition,
consisted of 5 properties with a total carrying value of approximately $249,000
as of December 31, 2001.
During the year ended 2001, the Bank sold $610.6 million in one-to-four
family mortgage loans that were primarily acquired in the Haven transaction. Of
the $875.1 million in one-to-four family mortgage loans acquired in the Richmond
County merger, $83.7 million were immediately sold. During the year ended 2000,
the Bank sold one-to-four family mortgage loans totaling $105.7 million that it
had acquired in the Haven transaction, while retaining the servicing rights.
During 1999, the Bank sold a $211.6 million interest in multi-family
mortgage loans from its portfolio to the Federal Home Loan Bank of New York
("FHLB-NY"), while retaining the servicing rights.
In 2002, the balance of one-to-four family mortgage loans is expected to
decline through repayments and securitization.
Commercial Real Estate Lending. The Bank offers commercial real estate
loans that are typically secured by office buildings, retail stores, medical
offices, warehouses, and other non-residential buildings. At December 31, 2001,
the Bank had loans secured by commercial real estate of $561.9 million,
comprising 10.4% of the Bank's total loan portfolio. Commercial real estate
loans may be originated in amounts of up to 65% of the appraised value of the
mortgaged property. Such loans are typically made for terms of ten years with
interest rates charged in the same manner as the Company's multi-family loans.
To originate commercial real estate loans, the Bank requires one or more of the
following: personal guarantees of the principals, a security interest in the
personal property, and an assignment of rents and/or leases. Properties securing
the loan are appraised by independent appraisers approved by the Bank.
Loans secured by commercial real estate properties, like multi-family
loans, are generally larger and involve a greater degree of risk than
one-to-four family residential mortgage loans. Because payments on loans secured
by commercial real estate properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy, to a
greater extent than other types of loans. The Bank seeks to minimize these risks
through its lending policies and underwriting standards, which restrict new
originations of such loans to the Bank's primary lending area and qualify such
loans on the basis of the property's net income and debt service ratio.
Construction Lending. While the Bank originated construction loans prior
to the Richmond County merger, its focus on this type of lending has expanded
since the merger took place. The Bank primarily originates construction loans to
a select group of experienced builders with whom it has had a successful lending
relationship in the past. Building loans are primarily made for the construction
of owner-occupied one-to-four family homes under contract and, to a far lesser
extent,
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for the acquisition and development of commercial real estate properties. The
Bank's policies provide that construction loans may be made in amounts of up to
70% of the appraised value of the project. The Bank generally requires personal
guarantees and a permanent loan commitment. Construction loans are made for
terms of up to two years and feature a daily floating prime-based rate of
interest, with a floor of the original rate. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. As of December
31, 2001, the Bank had $152.4 million, or 2.82% of its total loan portfolio,
invested in construction loans.
Other Lending. Other loans outstanding at December 31, 2001 totaled $116.9
million, representing 2.15% of the Bank's total loan portfolio. Home equity
loans which include closed-end loans and open-end lines of credit, represented
the largest component. Home equity loans outstanding at December 31, 2001
totaled $87.3 million, against total available credit lines of $11.2 million. In
order to reduce credit and interest rate risk, the Bank no longer originates
home equity and other loans for portfolio.
Loan Approval Authority and Underwriting. The Board of Directors
establishes lending authority for individual officers for its various loan
products. For multi-family and commercial real estate loans, the Mortgage and
Real Estate Committee must approve all loans. A loan in excess of $5.0 million
must be approved by the Board of Directors; during the year ended December 31,
2001, the Bank originated 31 loans in excess of $5.0 million, with the highest
amount being $36.5 million.
Non-performing Loans and Foreclosed Assets. The Bank had $17.5 million in
loans 90 days or more delinquent at December 31, 2001. Based on current market
values, management does not currently expect to incur significant losses on its
non-performing mortgage loans.
Management reviews non-performing loans on a regular basis and reports
monthly to both the Mortgage and Real Estate Committee and the Board of
Directors regarding delinquent loans. The Bank hires outside counsel experienced
in foreclosure and bankruptcy to institute foreclosure and other proceedings on
the Bank's delinquent loans.
With respect to one-to-four family mortgage loans, the Bank's collection
procedures include sending a past due notice when the regular monthly payment is
17 days past due. In the event that payment is not received following
notification, another notice is sent after the loan becomes 30 days delinquent.
If payment is not received after the second notice is sent, personal contact
with the borrower is attempted through additional letters and telephone calls.
If a loan becomes 90 days delinquent, the Bank issues a demand note and sends an
inspector to the property. When contact is made with the borrower at any time
prior to foreclosure, the Bank attempts to obtain full payment or to work out a
repayment schedule with the borrower to avoid foreclosure. If a satisfactory
repayment schedule is not worked out with the borrower, foreclosure actions are
generally initiated prior to the loan becoming 120 days past due.
With respect to multi-family and commercial real estate loans, any loans
that become 20 days delinquent are reported to the Executive Vice President,
Mortgages. The Bank then attempts to contact such borrowers by telephone. Before
a loan becomes 30 days past due, the Bank conducts a physical inspection of the
property. Once contact is made with the borrower, the Bank attempts to obtain
full payment or to work out a repayment schedule. If the Bank determines that
successful repayment is unlikely, the Bank initiates foreclosure proceedings,
typically before the loan becomes 60 days delinquent.
The Bank's policies provide that management report monthly to the Mortgage
and Real Estate Committee and the Board of Directors regarding classified
assets. The Bank reviews the problem loans in its portfolio on a monthly basis
to determine whether any loans require classification in accordance with
applicable regulatory guidelines, and believes its classification policies are
consistent with regulatory policies. All classified assets of the Bank are
included in mortgage loans in foreclosure, loans 90 days or more delinquent, or
foreclosed real estate.
When loans are designated as "in foreclosure," the accrual of interest and
amortization of origination fees continues up to net realizable value, less the
transaction cost of disposition. During the years ended December 31, 2001, 2000,
and 1999, the amounts of additional interest income that would have been
recorded on mortgage loans in foreclosure, had they been current, totaled
approximately $651,000, $435,000 and $641,000, respectively. These amounts were
not included in the Bank's interest income for the respective periods.
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The following table sets forth information regarding all mortgage loans in
foreclosure, loans that are 90 days or more delinquent, and foreclosed real
estate at the dates indicated. At December 31, 2001, the Bank had no
restructured loans within the meaning of Statement of Financial Accounting
Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructurings," as amended by SFAS No. 114.
At December 31,
2001 2000 1999 1998 1997
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(dollars in thousands)
Mortgage loans in foreclosure $10,604 $ 6,011 $ 2,886 $ 5,530 $ 6,121
Loans 90 days or more delinquent
and still accruing interest 6,894 3,081 222 663 1,571
------- ------- ------- ------- -------
Total non-performing loans 17,498 9,092 3,108 6,193 7,692
------- ------- ------- ------- -------
Foreclosed real estate 249 12 66 419 1,030
------- ------- ------- ------- -------
Total non-performing assets $17,747 $ 9,104 $ 3,174 $ 6,612 $ 8,722
======= ======= ======= ======= =======
Total non-performing loans to
loans, net 0.33% 0.25% 0.19% 0.42% 0.55%
Total non-performing assets to
total assets 0.19 0.19 0.17 0.38 0.54
Management monitors non-performing loans and, when deemed appropriate,
writes down such loans to their current appraised values, less transaction
costs. There can be no assurances that further write-downs will not occur with
respect to such loans.
At December 31, 2001, foreclosed real estate consisted of five residential
properties with an aggregate carrying value of approximately $249,000. The Bank
generally conducts appraisals on all properties securing mortgage loans in
foreclosure and foreclosed real estate as deemed appropriate and, if necessary,
charges off any declines in value at such times. Based upon management's
estimates as to the timing of, and expected proceeds from, the disposition of
these loans, no material loss is currently expected to be incurred.
It is the Bank's general policy to dispose of properties acquired through
foreclosure or by deed in lieu thereof as quickly and as prudently as possible,
in consideration of market conditions and the condition of such property.
Foreclosed real estate is titled in the name of the Bank's wholly-owned
subsidiary, Main Omni Realty Corp., which manages the property while it is
offered for sale.
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan
losses charged to operations and reduced by reversals or by net charge-offs.
Management establishes the allowance for loan losses through a process that
begins with estimates of probable loss inherent in the portfolio, based on
various statistical analyses. These analyses consider historical and projected
default rates and loss severities; internal risk ratings; geographic, industry,
and other environmental factors; and model imprecision. In establishing the
allowance for loan losses, management also considers the Company's current
business strategy and credit process, including compliance with stringent
guidelines it has established with regard to credit limitations, credit
approvals, loan underwriting criteria, and loan workout procedures.
The allowance for loan losses is composed of five separate categories
corresponding to the various loan classifications listed in Statistical Data-D,
"Composition of the Loan Portfolio." The policy of the Bank is to segment the
allowance to correspond to the various types of loans in the loan portfolio.
These loan categories are assessed with specific emphasis on the underlying
collateral, which corresponds to the respective levels of quantified and
inherent risk. The initial assessment takes into consideration non-performing
loans and the valuation of the collateral supporting each loan. Non-performing
loans are risk-weighted based upon an aging schedule that typically depicts
either (1) delinquency, a situation in which repayment obligations are at least
90 days in arrears, which is risk weighted at 500 basis points at December 31,
2001, or (2) serious delinquency, a situation in which legal foreclosure action
has been initiated, which is risk weighted at 1,200 basis points at December 31,
2001. Based upon this analysis, a quantified risk factor is assigned to each
type of non-performing loan. This results in an allocation to the overall
allowance for the corresponding type and severity of each non-performing loan
category.
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Performing loans are also reviewed by collateral type, with similar risk
factors being assigned. These risk factors take into consideration, among other
matters, the borrower's ability to pay and the Bank's past loan loss experience
with each loan type. The performing loan categories are also assigned quantified
risk factors, which result in allocations to the allowance that correspond to
the individual types of loans in the portfolio. The performing one-to-four
family loan category had an overall risk weighting increase from 19 basis points
as of December 31, 2000 to 46 basis points as of December 31, 2001. The
multi-family category also had a risk weighting increase from 40 basis points to
66 basis points from December 31, 2000 to 2001, respectively.
The remaining categories, comprising approximately 15% of the entire loan
portfolio, had the following risk weighted assessments: construction loans,
which had outstanding balances ranging from $59.5 million to $152.4 million from
December 31, 2000 to December 31, 2001, respectively, had an overall increase in
risk weighting from 150 basis points to 229 basis points; outstanding balances
on commercial real estate loans ranged from $324.1 million to $561.9 million and
experienced a decrease from 175 basis points to 145 basis points over the
measurement dates; outstanding balances of other loans increased from $39.7
million to $116.9 million and also experienced a decrease in risk weighting from
200 basis points to 121 basis points over the measurement dates.
Outstanding loan commitments of $344.4 million as of December 31, 2001
were assigned a risk weighting of 20 basis points. Loan commitments of $180.1
million as of December 31, 2000 did not have a risk weighting assigned.
In order to determine its overall adequacy, the allowance for loan losses
is reviewed quarterly by both management (through its Classification of Assets
Committee), and the Board of Directors' designated committee (the Mortgage and
Real Estate Committee).
Various factors are considered in determining the appropriate level of the
allowance for loan losses. These factors include, but are not limited to:
1) End-of-period levels and observable trends in non-performing loans;
2) Charge-offs experienced over prior periods, including an analysis of
the underlying factors leading to the delinquencies and subsequent
charge-offs (if any);
3) Analysis of the portfolio in the aggregate as well as on an
individual loan basis, which analysis considers:
i. payment history;
ii. underwriting analysis based upon current financial
information; and
iii. current inspections of the loan collateral by qualified
in-house property appraisers/inspectors.
4) Bi-weekly meetings of executive management with the Mortgage and
Real Estate Committee (which committee includes 5 outside directors,
each possessing over 30 years of complementary real estate
experience) during which observable trends in the local economy and
their effect on the real estate market are discussed;
5) Discussions with and periodic review by the various governmental
regulators (e.g., Federal Deposit Insurance Corporation, the New
York State Banking Department); and
6) Full Board assessment of all of the above when making a business
judgment regarding the impact of anticipated changes on the future
level of the allowance for loan losses.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary, based on changes in economic
and local market conditions beyond management's control. In addition, various
regulatory agencies periodically review the Bank's loan loss allowance as an
integral part of the examination process. Accordingly, the Bank may be required
to take certain charge-offs and/or recognize additions to the allowance based on
the judgment of regulators with regard to information provided to them during
their examinations. Based upon all relevant and presently available information,
management believes that the current allowance for loan losses is adequate.
At December 31, 2001, the total allowance was $40.5 million, which
amounted to 231.46% of non-performing loans and 228.21% of non-performing
assets. The increase of $22.4 million from $18.1 million at December 31, 2000
7
stemmed from the Richmond County merger. For the years ended December 31, 2001
and 2000, the Bank had no net charge-offs against this allowance.
The Bank will continue to monitor and modify the level of its allowance
for loan losses in order to maintain such allowance at a level which management
considers adequate. See Statistical Data-A, B, C and D for components of the
Bank's mortgage loan portfolio, maturity, and repricing, and for a summary of
the allowance for loan losses.
Mortgage-backed Securities
Most of the Bank's mortgage-backed securities are directly or indirectly
insured or guaranteed by the FNMA, FHLMC, or GNMA. At December 31, 2001,
mortgage-backed securities totaled $2.2 billion, representing 23.49% of total
assets. Of the $2.2 billion in total mortgage-backed securities, $50.9 million
were classified by the Bank as held to maturity and $2.1 billion were classified
as available for sale. Because a majority of the Bank's mortgage-backed
securities are either adjustable rate or are FHLMC five-year term securities,
the Bank anticipates that all of its mortgage-backed securities will prepay or
reprice within three years. At December 31, 2001, the mortgage-backed securities
portfolio had a weighted average interest rate of 6.27% and a market value of
approximately $2.2 billion. See Statistical Data-E for components of the
mortgage-backed securities portfolio.
Investment Activities
General. The investment policy of the Bank, which is established by the
Board of Directors and implemented by the Mortgage and Real Estate Committee and
the Investment Committee, together with certain executive officers of the Bank,
is primarily designed to provide and maintain liquidity, to generate a favorable
return on investments without incurring undue interest rate and credit risk, and
to complement the Bank's lending activities. The Bank's current securities
investment policy permits investments in various types of liquid assets,
including U.S. Treasury securities, obligations of various Federal agencies, and
bankers' acceptances of other Board-approved financial institutions, investment
grade corporate securities, commercial paper, certificates of deposit, and
Federal funds. The Bank currently does not participate in hedging programs or
interest rate swaps and does not invest in non-investment grade bonds or
high-risk mortgage derivatives. See Statistical Data-E, "Securities, Money
Market Investments, and Mortgage-backed Securities."
Sources of Funds
General. The Company's primary funding sources are deposits and
borrowings. To supplement the funding provided by its deposits, the Company
increased its borrowings in the second half of 2001. At December 31, 2001,
borrowings totaled $2.5 billion, including Federal Home Loan Bank ("FHLB")
advances of $1.8 billion, reverse repurchase agreements of $596.7 million, and
trust preferred securities of $121.3 million that were issued by the Company in
the final month of the year.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits principally consist of
certificates of deposit ("CDs") and savings accounts, together with NOW and
money market accounts and demand deposits. The flow of deposits is influenced
significantly by the restructuring of the banking industry, changes in money
market and prevailing interest rates, and competition with other financial
institutions. The Bank's deposits are typically obtained from customers residing
or working in the communities in which its offices are located. The Bank relies
primarily on its long-standing relationships with its customers to retain these
deposits. At December 31, 2001, $408.4 million, or 7.49% of the Bank's deposit
balance, consisted of CDs with a balance of $100,000 or more.
Federal Home Loan Bank of New York Advances ("FHLB-NY"). The Bank is a
member of the FHLB-NY, and had a $3.7 billion line of credit at December 31,
2001. FHLB borrowings totaled $1.8 billion at December 31, 2001. A $10.0 million
line of credit with a correspondent financial institution is also available to
the Bank.
Reverse Repurchase Agreements. The Company has repurchase agreements of
$529.7 million and $0 outstanding at December 31, 2001 and 2000, respectively.
Trust Preferred Securities. Haven Capital Trust I, Haven Capital Trust II,
Queens Capital Trust I, Queens Statutory Trust I, NYCB Capital Trust I, New York
Community Statutory Trust I, and New York Community Statutory Trust II are
Delaware business trusts of which all the common stock are owned by the Company.
The Trusts were formed
8
for the purpose of issuing Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures
("Trust Preferred Securities").
The following Trust Preferred Securities were outstanding at December
31, 2001:
Amount Date of Stated Optional
Security Title Issuer Outstanding Original Issue Maturity Redemption Date
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
10.46% Capital Securities Haven Capital Trust I $ 18,174 February 12, 1997 February 1, 2027 February 1, 2007
10.25% Capital Securities Haven Capital Trust II 23,333 May 26, 1999 September 30, 2029 June 30, 2009
11.045% Capital Securities Queens Capital Trust I 10,000 July 26, 2000 July 19, 2030 July 19, 2010
10.60% Capital Securities Queens Statutory Trust I 15,000 September 7, 2000 September 7, 2030 September 7, 2010
6.007% Floating Rate
Capital Securities NYCB Capital Trust I 36,000 November 28, 2001 December 8, 2031 December 8, 2006
5.60% Floating Rate New York Community
Capital Securities Statutory Trust I 35,032 December 18, 2001 December 18, 2031 December 18, 2006
5.58% Floating Rate New York Community
Capital Securities Statutory Trust II 50,250 December 18, 2001 December 28, 2031 December 28, 2006
--------
$187,789
========
Subsidiary Activities
Under its New York State Leeway Authority, the Bank has formed or acquired
through merger 14 active subsidiary corporations, 10 of which are direct
subsidiaries of the Bank and four of which are subsidiaries of Bank-owned
entities. The following subsidiaries are organized in New York: CFS Investments,
Inc., which sells non-deposit investment products; Queens County Capital
Management, Inc., which sold life insurance and annuity products during 2001 and
currently is inactive; Richmond County Capital Corp., a real estate investment
trust (hereinafter "REIT") that holds commercial and residential mortgages; RCBK
Mortgage Corp., which holds multi-family mortgage loans; Main Omni Realty Corp.,
which owns foreclosed and investment properties; RCSB Corporation, which owns a
branch building; and Richmond Enterprises Inc., the holding company for Peter B.
Cannell & Co., Inc.
The following subsidiaries are organized in Delaware: Peter B. Cannell &
Co., Inc., which advises high net worth individuals and institutions on the
management of their assets; Richmond Investment Corp., the holding company for
Ironbound Investment Corp.; Columbia Preferred Capital Corp., a REIT that holds
residential and commercial mortgages; and Queens Realty Trust, Inc., a REIT that
holds residential and commercial mortgages.
The following subsidiaries are organized in New Jersey: CFS Investments
New Jersey, Inc., an investment Company which is also the holding company for
Columbia Preferred Capital Corp.; Ironbound Investment Corp., which owns real
estate mortgages and bank branches and is the holding company for Richmond
County Capital Corp.; and Pacific Urban Renewal Corp., which owns a branch
building.
In addition, the Bank maintains four currently inactive corporations,
which are MFO Holding Corp., a New York corporation; Columbia Resources Corp., a
New York corporation; Columbia Funding Corporation, a New York corporation; and
Bayonne Service Corp, a New Jersey corporation. The Bank is also affiliated with
Columbia Travel Services, Inc., an inactive corporation organized in New York.
The Company owns seven special business trusts formed for the purpose of
issuing capital and common securities and investing the proceeds thereof in the
junior subordinated debentures issued by the Company. The following subsidiaries
are organized in the state of Delaware: Haven Capital Trust I, Haven Capital
Trust II, Queens Capital Trust I, NYCB Capital Trust I, and New York Community
Statutory Trust II. The following subsidiaries are organized in the state of
9
Connecticut: Queens Statutory Trust I and New York Community Statutory Trust II.
(See "Note 11 - Borrowings" in the Company's 2001 Annual Report to Shareholders
which portion is incorporated herein by reference.)
Personnel
At December 31, 2001, the number of full-time equivalent employees was
1,521. The Bank's employees are not represented by a collective bargaining unit,
and the Bank considers its relationship with its employees to be good.
FEDERAL, STATE, AND LOCAL TAXATION
Federal Taxation
General. The Company, the Bank and their subsidiaries (excluding certain
subsidiaries which are qualified as a Real Estate Investment Trust, which files
separately) report their income on a consolidated basis using a calendar year on
the accrual method of accounting, and are subject to Federal income taxation in
the same manner as other corporations with some exceptions, including,
particularly, the Bank's addition to its reserve for bad debts, as discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the
"1996 Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Internal Revenue Code of 1986 (the "Code") relating to a
savings institution's use of bad debt reserves for Federal income tax purposes
and requires such institutions to recapture (i.e. take into income) certain
portions of their accumulated bad debt reserves. The effect of the 1996 Act on
the Bank is discussed below. Prior to the enactment of the 1996 Act, the Bank
was permitted to establish tax reserves for bad debts and to make annual
additions thereto, which additions, within specified formula limits, were
deducted in arriving at the Bank's taxable income. The Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, could be computed using an amount based on a
six-year moving average of the Bank's actual loss experience (the "Experience
Method"), or a percentage equal to 8% of the Bank's taxable income (the "PTI
Method"), computed without regard to this deduction and with additional
modifications, and reduced by the amount of any permitted addition to the
non-qualifying reserve.
The 1996 Act. Under the 1996 Act, for its current and future taxable
years, the Bank is not permitted to make additions to its tax bad debt reserves.
In addition, the Bank is required to recapture (i.e. take into income) over a
six-year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987. The
amount subject to recapture is approximately $7.4 million.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to shareholders that are considered to result in distributions
from the excess bad debt reserve, i.e., that portion, if any, of the balance of
the reserve for qualifying real property loans attributable to certain
deductions under the percentage of taxable income method, or the supplemental
reserve for losses on loans ("Excess Distribution"), then an amount based on the
distribution will be included in the Bank's taxable income.
Non-dividend distributions include distributions in excess of the Bank's
current and accumulated earnings and profits, distributions in redemption of
stock, and distributions in partial or complete liquidation. However, dividends
paid out of the Bank's current or accumulated earnings and profits, as
calculated for Federal income tax purposes, will not be considered to result in
a distribution from the Bank's bad debt reserves. Thus, any dividends to the
Company that would reduce amounts appropriated to the Bank's bad debt reserves
and deducted for Federal income tax purposes would create a tax liability for
the Bank.
The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, the additional taxable
income would be an amount equal to approximately one and one-half times the
amount of the Excess Distribution, assuming a 35% corporate income tax rate
(exclusive of state taxes). See "Regulation and Supervision" for limits on the
payment of dividends by the Bank. The Bank does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on Alternative
Minimum Taxable Income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset
by net operating loss carryovers. The adjustment to AMTI based on
10
adjusted current earnings is an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986 and before January
1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain
modifications) over $2.0 million was imposed on corporations, including the
Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank does
not expect to be subject to the AMT. The Bank was subject to an environmental
tax liability for the year ended December 31, 1995, which was not material.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
unless the Company and the Bank own more than 20% of the stock of the
corporation distributing a dividend, in which case 80% of any dividends
received may be deducted.
State and Local Taxation
The Company, the Bank and certain of their subsidiaries are subject to the
New York State Franchise Tax on Banking Corporations in an annual amount equal
to the greater of (i) 8.5% (falling to 8% and 7.5% in years ending in December
2002 and 2003, respectively), "entire net income" allocable to New York State
during the taxable year, or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greatest of (a) 0.01% of the value of
taxable assets allocable to New York State with certain modifications, (b) 3% of
"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 (including the fact that prior to 2001, net operating losses could
not be carried back or carried forward) and alternative entire net income is
equal to entire net income without certain deductions. The Bank is also subject
to a similarly calculated New York City tax of 9% on income allocated to New
York City and similar alternative taxes.
A temporary Metropolitan Transportation Business Tax Surcharge on banking
corporations doing business in the metropolitan district has been applied since
1982. The Bank does most of its business within this District (except for the
branch offices in Connecticut and New Jersey), and is subject to this surcharge
rate of 17% of the New York State tax liability.
Delaware State Taxation. As a Delaware business corporation, the Company
is required to file annual returns and pay annual fees and an annual franchise
tax to the State of Delaware. These taxes and fees were not material in 2001.
New Jersey State Taxation. The Bank and other subsidiaries of the Company
doing business in New Jersey report income on a separate company basis, as New
Jersey does not permit combined return filing. New Jersey imposes a Savings
Institution Tax of 3% of the net income derived from New Jersey sources. Other
subsidiaries are subject to tax on their entire net income allocated to the
state, at a rate of 7.5% if income is less than $100,000, or at 9% if income is
over $100,000. The total New Jersey state tax liability of subsidiaries subject
to New Jersey income taxes is not material.
REGULATION AND SUPERVISION
General
The Bank is a New York State-chartered stock form savings bank and its
deposit accounts are insured under the Bank Insurance Fund ("BIF"), and through
its acquisition of CFS Bank, some deposits are insured by the Savings
Association Insurance Fund ("SAIF"). The Bank is subject to extensive regulation
and supervision by the New York State Banking Department ("Banking Department"),
as its chartering agency, and by the FDIC, as its deposit insurer. The Bank must
file reports with the Banking Department and the FDIC concerning its activities
and financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other depository institutions. There are periodic examinations by the Banking
Department and the FDIC to assess the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings bank can engage and is intended
primarily for the protection of the 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 allowances for regulatory purposes. Any
change in such regulation, whether by the Banking Department, the FDIC, or
through legislation, could have a material adverse impact on the Company and the
11
Bank and their operations, and the Company's shareholders. The Company is
required to file certain reports, and otherwise comply with the rules and
regulations of the Federal Reserve Board and the Banking Department and of the
Securities and Exchange Commission ("SEC") under federal securities laws.
Certain of the regulatory requirements applicable to the Bank and to the company
are referred to below or elsewhere herein.
New York Law
The Bank derives its lending, investment, and other authority primarily
from the applicable provisions of Banking Law and the regulations of the Banking
Department, as limited by FDIC regulations. See "Restrictions on Certain
Activities." Under these laws and regulations, savings banks, including the
Bank, may invest in real estate mortgages, consumer and commercial loans,
certain 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. Under the
statutory authority for investing in equity securities, a savings bank may
directly invest up to 7.5% of its assets in certain corporate stock, and may
also invest up to 7.5% of its assets in certain mutual fund securities.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the issued and outstanding stock of such corporation or 1% of the savings
bank's assets, except as set forth below. Such equity securities must meet
certain earnings ratios and other tests of financial performance. A savings
bank's lending powers are not subject to percentage of asset limitations,
although there are limits applicable to single borrowers. A savings bank may
also, pursuant to the "leeway" power, make investments not otherwise permitted
under the New York State Banking Law. This power permits investments in
otherwise impermissible investments of up to 1% of assets in any single
investment, subject to certain restrictions and to an aggregate limit for all
such investments of up to 5% of assets. Additionally, savings banks are
authorized to elect to invest under a "prudent person" standard in a wide range
of debt and equity securities in lieu of investing in such securities in
accordance with and reliance upon the specific investment authority set forth in
the New York State Banking Law. Although the "prudent person" standard may
expand a savings bank's authority, in the event a savings bank elects to utilize
the "prudent person" standard, it will be unable to avail itself of the other
provisions of the New York State Banking Law and regulations which set forth
specific investment authority. A savings bank may also exercise trust powers
upon approval of the Banking Department.
New York savings banks may also invest in subsidiaries under a service
corporation power. A savings bank may use this power to invest in corporations
that engage in various activities authorized for savings banks, plus any
additional activities, which may be authorized by the Banking Department.
Investment by a savings bank in the stock, capital notes, and debentures of its
service corporation is limited to 3% of the savings bank's assets, and such
investments, together with the savings bank's loans to its service corporations,
may not exceed 10% of the savings bank's assets.
The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New York State Banking Law is limited by FDIC
regulations and other federal laws and regulations. In particular, the
applicable provision of New York State Banking Law and regulations governing the
investment authority and activities of an FDIC-insured state-chartered savings
bank have been effectively limited by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued pursuant
thereto.
With certain limited exceptions, a New York State chartered savings bank
may not make loans or extend credit for commercial, corporate, or business
purposes (including lease financing) to a single borrower, the aggregate amount
of which would be in excess of 15% of the bank's net worth. The Bank currently
complies with all applicable loans-to-borrower limitations.
Under New York State Banking Law, a New York State chartered stock form
savings bank may declare and pay dividends out of its net profits, unless there
is an impairment of capital, but approval of the Superintendent is required if
the total of all dividends declared in a calendar year would exceed the total of
its net profits for that year combined with its retained net profits of the
preceding two years, subject to certain adjustments.
Under New York State Banking Law, the Superintendent of Banks 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 Banking Department
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, such director, trustee, or officer
may be removed from office after notice and an opportunity to be heard.
12
FDIC Regulations
Capital Requirements. The FDIC has adopted risk-based capital guidelines
to which the Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. The Bank is required
to maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. The ratio of such regulatory capital to regulatory
risk-weighted assets is referred to as the Bank's "risk-based capital ratio."
Risk-based capital ratios are determined by allocating assets and specified
off-balance-sheet items to four risk-weighted categories ranging from 0% to
100%, with higher levels of capital being required for the categories perceived
as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan lease losses, subject to certain limitations, less required
deductions. Savings banks are required to maintain a total risk-based capital
ratio of 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage capital ratio (Tier I capital to adjusted average assets as
specified in the regulations). These regulations provide for a minimum Tier I
leverage capital ratio of 3% for banks that meet certain specified criteria,
including that they have the highest examination rating and are not experiencing
or anticipating significant growth. All other banks are required to maintain a
Tier I leverage capital ratio of at least 4%. The FDIC may, however, set higher
leverage and risk-based capital requirements on individual institutions when
particular circumstances warrant. Savings banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
capital positions, well above the minimum levels.
As of December 31, 2001, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain a minimum Tier I Leverage Capital ratio of 5%, Total Capital ratio of
10%, and Tier I Capital ratio of 6%.
The following is a summary of the Bank's regulatory capital at December
31, 2001:
Tier I Leverage Capital to Average Assets 6.09%
Total Capital to Risk-Weighted Assets 10.97%
Tier I Capital to Risk-Weighted Assets 10.12%
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate risk
in assessing a bank's capital adequacy. 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
recently have 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 agencies have determined not to proceed with a previously issued
proposal to develop a supervisory framework for measuring interest rate risk and
an explicit capital component for interest rate risk.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for depository institutions under its jurisdiction
standards relating to, among other things, internal controls; information
systems and audit systems; loan documentation; credit underwriting; interest
risk exposure; asset growth; compensation; fees and benefits; and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings and compensation; fees; and
benefits. If the
13
appropriate federal banking agency determines that an institution fails to meet
any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the federal Deposit Insurance Act, as amended,
("FDI Act"). The final regulation establishes deadlines for the submission and
review of such safety and soundness compliance plans.
Real Estate Lending Standards. The FDIC and the other federal banking
agencies have adopted regulations that prescribe standards for extensions of
credit that (i) are secured by real estate or (ii) are made for the purpose of
financing the construction or improvements on real estate. The FDIC regulations
require each savings bank to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the bank and the nature and scope of its real estate
lending activities. The standards also must be consistent with accompanying FDIC
Guidelines, which include loan-to-value limitations for the different types of
real estate loans. Savings banks are also permitted to make a limited amount of
loans that do not conform to the proposed loan-to-value limitations so long as
such exceptions are reviewed and justified appropriately. The Guidelines also
list a number of lending situations in which exceptions to the loan-to-value
standard are justified.
Dividend Limitations. The FDIC has authority to use its enforcement powers
to prohibit a savings bank from paying dividends if, in its opinion, the payment
of dividends would constitute an unsafe or unsound practice. Federal law
prohibits the payment of dividends by a bank that will result in the bank
failing to meet applicable capital requirements on a pro forma basis. The Bank
is also subject to dividend declaration restrictions imposed by New York law.
Investment Activities
Since the enactment of FDICIA, all state-chartered financial institutions,
including savings banks and their subsidiaries, have generally been limited to
activities as principal and equity investments of the type and in the amount
authorized for national banks, notwithstanding state law, FDICIA and the FDIC
regulations permit certain exceptions to these limitations. For example, certain
state chartered banks, such as the Bank, may, with FDIC approval, continue to
exercise state authority to invest in common or preferred stocks listed on a
national securities exchange or the National Market System of Nasdaq(R) and in
the shares of an investment company registered under the Investment Company Act
of 1940, as amended. Such banks may also continue to sell Savings Bank Life
Insurance. In addition, the FDIC is authorized to permit such institutions to
engage in state authorized activities or investments not permitted for national
banks (other than non-subsidiary equity investments) for institutions that meet
all applicable capital requirements if it is determined that such activities or
investments do not pose a significant risk to the BIF. The Gramm-Leach-Bliley
Act of 1999 and FDIC regulations impose certain quantitative and qualitative
restrictions on such activities and a bank's dealings with a subsidiary that
engages in specified activities. All non-subsidiary equity investments, unless
otherwise authorized or approved by the FDIC, must have been divested by
December 19, 1996, pursuant to an FDIC-approved divestiture plan unless such
investments were grandfathered by the FDIC. The Bank received grandfathering
authority from the FDIC in February 1993 to invest in listed stock and/or
registered shares subject to the maximum permissible investments of 100% of Tier
I capital, as specified by the FDIC's regulations, or the maximum amount
permitted by New York State Banking Law, whichever is less. Such grandfathering
authority is subject to termination upon the FDIC's determination that such
investments pose a safety and soundness risk to the Bank or in the event the
Bank converts its charter or undergoes a change in control. As of December 31,
2001, the Bank had $83.0 million of such investments.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action
legislation. Among other things, the regulations define the relevant capital
measure for the five capital categories. An institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and is not subject to a regulatory order, agreement, or directive to
meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of
4% or greater, and generally a leverage ratio of 4% or greater. An institution
is deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a
leverage capital ratio of less than 4%. An institution is deemed to be
"significantly undercapitalized" if
14
it has a total risk-based capital ratio of less than 6%, a Tier I risk-based
capital ratio of less than 3%, or a leverage ratio of less than 3%. An
institution is deemed to be "critically undercapitalized" if it has a ratio of
tangible equity (as defined in the regulations) to total assets that is equal to
or less than 2%.
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institution in an
amount equal to the lesser of 5.0% of the bank's total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately
capitalized. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks are subject to one or more of a number of additional
restrictions, including but not limited to an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks or dismiss
directors or officers, and restrictions on interest rates paid on deposits,
compensation of executive officers, and capital distributions by the parent
holding company. "Critically undercapitalized" institutions also may not,
beginning 60 days after becoming "critically undercapitalized," make any payment
of principal or interest on certain subordinated debt or extend credit for a
highly leveraged transaction or enter into any material transaction outside the
ordinary course of business. In addition, "critically undercapitalized"
institutions are subject to appointment of a receiver or conservator. Generally,
subject to a narrow exception, the appointment of a receiver is required for a
"critically undercapitalized" institution within 270 days after it obtains such
status.
Transactions with Affiliates
Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. Generally, a bank's subsidiaries are not treated as affiliates
unless they are engaged in activities as principal that are not permissible for
national banks. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies, which are controlled, by such
parent holding company are affiliates of the savings bank. Generally, Section
23A limits the extent to which the savings bank or its subsidiaries may engage
in "covered transactions" with any one affiliate to an amount equal to 10% of
such savings bank's capital stock and surplus, and contains an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus. The term "covered transaction" includes the making of
loans or other extensions of credit to an affiliate; the purchase of assets from
an affiliate, the purchase of, or an investment in, the securities of an
affiliate; the acceptance of securities of an affiliate as collateral for a loan
or extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
non-affiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
shareholders. Under Section 22(h), loans to directors, executive officers, and
shareholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
Federal-banking agency to directors, executive officers, and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers, and principal shareholders must be made on terms
substantially the same as offered in comparable transactions to other persons.
Recent legislation created an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to executive officers over other
employees. Section 22(g) of the Federal Reserve Act places additional
limitations on loans to executive officers.
Enforcement
The FDIC has extensive enforcement authority over insured savings banks,
including the Bank. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease and desist orders, and
to
15
remove directors and officers. In general, these enforcement actions may be
initiated in response to violations of laws and regulations and to unsafe or
unsound practices.
The FDIC has authority under federal law to appoint a conservator or
receiver for an insured savings bank under certain circumstances. The FDIC is
required, with certain exceptions, to appoint a receiver or conservator for an
insured state savings bank if that savings bank was "critically
undercapitalized" on average during the calendar quarter beginning 270 days
after the date on which the savings bank became "critically undercapitalized."
For this purpose, "critically undercapitalized" means having a ratio of tangible
equity to total assets of less than 2%. See "Prompt Corrective Regulatory
Action." The FDIC may also appoint a conservator or receiver for a state savings
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 savings 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 savings 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.
Insurance of Deposit Accounts
The Bank is a member of the Bank Insurance Fund ("BIF") and, through its
acquisition of CFS Bank, also holds some deposits that are considered to be
insured by the Savings Association Insurance Fund ("SAIF").
The FDIC has adopted a risk-based 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 seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized, or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on the supervisory evaluation provided to the
FDIC by the institution's primary federal regulator, and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for both BIF and SAIF deposits are determined
semiannually by the FDIC and currently range from 0 basis points to 27 basis
points.
The FDIC is authorized to raise the assessment rates in certain
circumstances, including maintaining or achieving the designated reserve ratio
of 1.25%, which requirement the BIF and SAIF currently meet. The FDIC has
indicated that it may be necessary to raise BIF premiums during 2002.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Funds
Act"), was signed into law. Among other things, the law spreads the obligations
for payment of the financing Corporation ("FICO") bonds across all SAIF and BIF
members. Prior to January 1, 2000, BIF members were assessed for FICO payments
at approximately 20% of SAIF members. Full pro rata sharing the FICO payments
between BIF and SAIF members began on January 1, 2000.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition, or violation
that might lead to the termination of deposit insurance.
Community Reinvestment Act
Federal Regulation. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings bank has 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.
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with CRA. CRA requires the FDIC, in connection with its
examination of a savings bank; to assess the 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. CRA requires public
disclosure of an institution's CRA rating and further requires the FDIC to
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. The Bank's latest CRA rating, received
from the FDIC in September 1999, was "satisfactory."
16
New York Regulation. The Bank is also subject to provisions of the New
York Banking Law which impose continuing and affirmative obligations upon
banking institutions organized in New York to serve the credit needs of its
local community ("NYCRA"), which are substantially similar to those imposed by
the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA report and
copies of all Federal CRA reports with the Banking Department. The NYCRA
requires the Banking Department to make an annual written assessment of a bank's
compliance with the NYCRA, utilizing a four-tiered rating system, and make such
assessment available to the public. The NYCRA also requires the 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 ATMs, and provides that such assessment may
serve as a basis for the denial of any such application. The Bank's latest NYCRA
rating, received from the Banking Department in June 2000, was a "1", the
highest rating.
Federal Reserve System
Under Federal Reserve Board ("FRB") regulations, the Bank is required to
maintain non-interest-earning reserves against its transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $41.3 million or less (subject to adjustment by the Federal Reserve
Board), the reserve requirement is 3%; for accounts greater than $41.3 million,
the reserve requirement is $1.239 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14% against that portion of total
transaction accounts in excess of $41.3 million). The first $5.7 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interesting-bearing account at a Federal
Reserve Bank, or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB-NY, is required to acquire and
hold shares of capital stock in that FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB-NY, whichever is greater. The Bank was in compliance
with this requirement, with an investment in FHLB-NY stock of $114.8 million at
December 31, 2001. FHLB advances must be secured by specified types of
collateral and may be obtained primarily for the purpose of providing funds for
residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the fiscal
years ended December 31, 2001, and 2000, dividends from the FHLB-NY to the Bank,
amounted to $4.6 million and $4.1 million, respectively. If dividends were
reduced, or interest on future FHLB advances increased, the Bank's net interest
income might also be reduced.
Interstate Branching
Federal law allows the FDIC, and New York banking law allows the New York
superintendent of banks, to approve an application by a state bank to acquire
interstate branches by merger, unless, in the case of the FDIC, the state of the
target institution has opted out of interstate branching. New York state banking
law authorizes savings banks to open and occupy de novo branches outside the
state of New York, and the FDIC is authorized to approve a state bank's
establishment of a de novo interstate branch if the intended host state has
opted into interstate de novo branching. In addition to its branches in New
York, the Bank currently maintains branches in New Jersey and Connecticut.
Holding Company Regulations
Federal Regulation. The Company is currently subject to examination,
regulation, and periodic reporting under the Bank Holding Company Act of 1956,
as amended ("BHMA"), as administered by the FRB.
17
The Company 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 would be required for the Company 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. In addition to the approval of the FRB, 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 Banking Department.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting securities of
any company engaged in non-banking activities. One of the principal exceptions
to this prohibition is for activities found by the FRB to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities that the FRB has determined by regulation to be
so closely related to banking 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 Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that
meets specified conditions, including being "well capitalized" and "well
managed," to opt to become a "financial holding company" and thereby engage in a
broader array of financial activities than previously permitted. Such activities
can include insurance underwriting and investment banking.
The FRB has adopted capital adequacy guidelines for bank holding companies
(on a consolidated basis) substantially similar to those of the FDIC for the
Bank. See "Capital Maintenance." At December 31, 2001, the Company's
consolidated total and Tier I capital exceeded these requirements.
Bank holding companies are generally 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, is 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. The FRB has adopted an exception
to this approval requirement for well-capitalized bank holding companies that
meet certain other conditions.
The FRB has issued a policy statement regarding the payment of dividends
by bank holding companies. In general, the FRB's policies provide that dividends
should be paid only out of current earnings and only if the prospective rate of
earnings retention by the bank holding company appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
The FRB's policies also require that a bank holding company serve as a source of
financial strength to its subsidiary banks by standing ready to use available
resources to provide adequate capital funds to those banks during periods of
financial stress or adversity and by maintaining the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks where necessary. These regulatory policies could affect the
ability of the Company to pay dividends or otherwise engage in capital
distributions.
The status of the Company as a registered bank holding company under the
BHCA does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
Under the FDI Act, 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. This law would have potential
applicability if the Company ever held as a separate subsidiary a depository
institution in addition to the Bank.
The Company and the Bank will be affected by the monetary and fiscal
policies of various agencies of the United States Government, including the
Federal Reserve System. In view of changing conditions in the national economy
and in the money markets, it is impossible for management to accurately predict
future changes in monetary policy or the effect of such changes on the business
or financial condition of the Company or the Bank.
18
Acquisition of the Holding Company
Federal Restrictions. Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the FRB if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's shares of Common Stock outstanding, unless the FRB has found that the
acquisition will not result in a change in control of the Company. Under the
CIBCA, the FRB has 60 days within which to act on such notices, taking into
consideration certain factors, including the financial and managerial resources
of the acquirer, the convenience and needs of the communities served by the
Company and the Bank, and the anti-trust 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 Company within the meaning of the BHCA. Control
generally is defined to mean the ownership or power to vote 25% or more of any
class of voting securities of the Company or the ability to control in any
manner the election of a majority of the Company's directors. An existing bank
holding company would be required to obtain the FRB's prior approval under the
BHCA before acquiring more than 5% of the Company's voting stock. See "Holding
Company Regulation." Approval of the Banking Department may also be required for
acquisition of the Company.
New York Change in Control Restrictions. In addition to the CIBCA and the
BHCA, the New York State 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 which is organized
in New York.
Federal Securities Law
The Company's common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the information and proxy solicitation requirements, insider trading
restrictions, and other requirements under the Exchange Act.
Registration of the shares of the common Stock that were issued in the
Bank's conversion from mutual to stock form under the Securities Act of 1933, as
amended (the "Securities Act"), does not cover the resale of such shares. Shares
of the common stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed in any three-month period the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
STATISTICAL DATA
The detailed statistical data that follows is being presented in
accordance with Guide 3, prescribed by the Securities and Exchange Commission.
This data should be read in conjunction with the consolidated financial
statements and related notes, and the discussion included in the Management's
Discussion and Analysis of Financial Condition and Results of Operations, that
are indexed on the Form 10-K Cross Reference Index.
19
A. Mortgage and Other Lending Activities
The following table sets forth the Bank's loan originations and
mortgage-backed securities, including purchases, sales, and principal
repayments, for the periods indicated:
For the
Years Ended December 31,
------------------------
(dollars in thousands) 2001 2000 1999
---------- ---------- ----------
Mortgage loans (gross):
At beginning of period $3,596,273 $1,601,798 $1,487,256
Mortgage loans originated:
Multi-family 791,250 541,734 603,347
One-to-four family 137,002 6,205 26,338
Commercial real estate 130,677 58,899 42,708
Construction 91,155 9,133 4,433
---------- ---------- ----------
Total mortgage loans originated 1,150,084 615,971 676,826
Mortgage loans acquired from Richmond County Financial
Corp. and Haven Bancorp, Inc., respectively 1,917,575 1,749,180 --
Principal repayments 765,578 185,539 348,036
Mortgage loans sold 610,581 185,137 213,597
Mortgage loans transferred to foreclosed real estate -- -- 651
---------- ---------- ----------
At end of period 5,287,773 3,596,273 1,601,798
Other loans (gross):
At beginning of period 39,748 8,742 9,750
Other loans originated and/or acquired from Richmond
County Financial Corp. and Haven Bancorp, Inc., 254,278 36,655 2,039
respectively
Principal repayments 177,148 5,649 3,047
---------- ---------- ----------
At end of period 116,878 39,748 8,742
---------- ---------- ----------
Total loans $5,404,651 $3,636,021 $1,610,540
========== ========== ==========
Mortgage-backed securities held to maturity:
At beginning of period $ 1,923 $ 2,094 $ 19,680
Purchase of mortgage-backed securities, net 48,942 -- --
Principal repayments -- 171 17,586
---------- ---------- ----------
At end of period $ 50,865 $ 1,923 $ 2,094
========== ========== ==========
20
B. Loan Maturity and Repricing
The following table shows the maturity or period to repricing of the
Bank's loan portfolio at December 31, 2001. Loans that have adjustable rates are
shown as being due in the period during which the interest rates are next
subject to change. The table does not include prepayments or scheduled principal
amortization. Prepayments and scheduled principal amortization on mortgage loans
totaled $765.6 million for the twelve months ended December 31, 2001.
Mortgage and Other Loans
at December 31, 2001
1-4 Multi- Commercial Home Total
(dollars in thousands) Family Family Real Estate Construction Equity Other Loans
---------- ---------- ----------- ------------ ------- ------- ----------
Amount due:
Within one year $ 220,028 $ 418,584 $119,905 $141,258 $52,588 $22,084 $ 974,447
After one year:
One to three years 228,167 832,543 164,250 11,109 7,310 3,827 1,247,206
Three to five years 199,742 1,604,698 170,119 -- 5,673 1,480 1,981,712
Five to ten years 349,066 359,700 92,911 -- 11,684 1,834 815,195
Ten years and over 321,292 39,642 14,759 -- 10,019 379 386,091
---------- ---------- -------- -------- ------- ------- ----------
Total due or repricing
after one year 1,098,267 2,836,583 442,039 11,109 34,686 7,520 4,430,204
---------- ---------- -------- -------- ------- ------- ----------
Total amounts due or
repricing, gross $1,318,295 $3,255,167 $561,944 $152,367 $87,274 $29,604 $5,404,651
========== ========== ======== ======== ======= ======= ==========
The following table sets forth, at December 31, 2001, the dollar amount of
all loans due after December 31, 2002, and indicates whether such loans have
fixed or adjustable rates of interest.
Due after December 31, 2002
--------------------------------------------
(dollars in thousands) Fixed Adjustable Total
---------- ---------- ----------
Mortgage loans:
Multi-family $ 401,354 $2,435,229 $2,836,583
One-to-four family 502,470 595,797 1,098,267
Commercial real estate 116,897 325,142 442,039
Construction -- 11,109 11,109
Home equity 20,193 14,493 34,686
---------- ---------- ----------
Total mortgage loans $1,040,914 $3,381,770 $4,422,684
Other loans 6,288 1,232 7,520
---------- ---------- ----------
Total loans $1,047,202 $3,383,002 $4,430,204
========== ========== ==========
21
C. Summary of the Allowance for Loan Losses
The allowance for loan losses was allocated as follows at December 31,
2001 2000 1999 1998 1997
----------------- ----------------- ------------------ ------------------ -----------------
Percent Percent Percent Percent Percent
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
(dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Mortgage loans:
Multi-family $21,361 52.74% $ 7,783 43.08% $ 4,927 70.08% $ 6,686 70.89% $ 6,521 69.14%
One-to-four family 6,084 15.02 2,923 16.18 663 9.42 1,341 14.22 1,592 16.88
Construction 3,489 8.62 892 4.94 64 0.91 28 0.30 23 0.24
Commercial real estate 8,150 20.12 5,671 31.40 1,202 17.10 1,181 12.52 1,080 11.45
Other loans 1,416 3.50 795 4.40 175 2.49 195 2.07 215 2.29
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total loans $40,500 100.00% $18,064 100.00% $ 7,031 100.00% $ 9,431 100.00% $ 9,431 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
The preceding allocation is based upon an estimate at a given point in
time, based on various factors including, but not limited to, local economic
conditions. A different allocation methodology may be deemed to be more
appropriate in the future.
22
D. Composition of the Loan Portfolio
The following table sets forth the composition of the Bank's portfolio of
mortgage and other loans in dollar amounts and in percentages at December 31,
2001 2000 1999
----------------------- ------------------------ -----------------------
Percent Percent Percent
of of of
(dollars in thousands) Amount Total Amount Total Amount Total
------------- ----- ------------- ----- ------------- ----
Mortgage loans:
Multi-family $ 3,255,167 60.23% $ 1,945,656 53.51% $ 1,348,351 83.72%
One-to-four family 1,318,295 24.40 1,267,080 34.85 152,644 9.48
Commercial real estate 561,944 10.40 324,068 8.91 96,008 5.96
Construction 152,367 2.82 59,469 1.64 4,793 0.30
------------- ----- ------------- ----- ------------- ----
Total mortgage loans 5,287,773 97.85 3,596,273 98.91 1,601,796 99.46
------------- ----- ------------- ----- ------------- ----
Other loans:
Cooperative apartment -- -- 3,726 0.10 4,856 0.30
Home equity 87,274 1.61 12,240 0.34 1,347 0.08
Student 660 0.01 683 0.02 8 0.00
Passbook savings 1,777 0.03 779 0.02 331 0.02
Other 27,167 0.50 22,320 0.61 2,200 0.14
------------- ----- ------------- ----- ------------- ----
Total other loans 116,878 2.15 39,748 1.09 8,742 0.54
------------- ----- ------------- ----- ------------- ----
Total loans 5,404,651 100.00% 3,636,021 100.00% 1,610,538 100.00%
------------- ====== ------------- ====== ------------- ======
Unearned premiums (discounts) 91 (18) (24)
Less: Net deferred loan
origination fees 3,055 1,553 2,404
Allowance for loan losses 40,500 18,064 7,031
------------- ------------- -------------
Loans, net $ 5,361,187 $ 3,616,386 $ 1,601,079
============= ============= =============
1998 1997
------------------------ ------------------------
Percent Percent
of of
(dollars in thousands) Amount Total Amount Total
------------- ----- ------------- -----
Mortgage loans:
Multi-family $ 1,239,094 82.77% $ 1,107,343 78.78%
One-to-four family 178,770 11.94 224,287 15.96
Commercial real estate 67,494 4.51 61,740 4.39
Construction 1,898 0.13 1,538 0.10
------------- ----- ------------- -----
Total mortgage loans 1,487,256 99.35 1,394,908 99.23
------------- ----- ------------- -----
Other loans:
Cooperative apartment 4,802 0.32 5,041 0.36
Home equity 1,793 0.12 2,386 0.17
Student 8 0.00 8 0.00
Passbook savings 321 0.02 312 0.02
Other 2,826 0.19 3,048 0.22
------------- ----- ------------- -----
Total other loans 9,750 0.65 10,795 0.77
------------- ----- ------------- -----
Total loans 1,497,006 100.00% 1,405,703 100.00%
------------- ====== ------------- ======
Unearned premiums (discounts) (22) (19)
Less: Net deferred loan
origination fees 1,034 1,281
Allowance for loan losses 9,431 9,431
------------- -------------
Loans, net $ 1,486,519 $ 1,394,972
============= =============
23
E. Portfolio of Securities, Money Market Investments, and Mortgage-backed
Securities
The following table sets forth certain information regarding the carrying
and market values of the Bank's securities, money market investments, and
mortgage-backed securities portfolio at the dates indicated:
At December 31,
2001 2000 1999
-------------------------- ---------------------- ----------------------
Carrying Market Carrying Market Carrying Market
(dollars in thousands) Value Value Value Value Value Value
---------- ---------- -------- -------- -------- --------
Securities:
U.S. Government and agency
obligations $ 25,113 $ 24,883 $184,994 $184,161 $140,325 $135,797
Equity securities 208,875 210,523 95,286 95,492 55,690 55,762
Corporate bonds 51,257 51,047 61,140 61,140 -- --
Capital trust notes 165,615 170,529 25,191 23,892 -- --
---------- ---------- -------- -------- -------- --------
Total securities $ 450,860 $ 456,982 $366,611 $364,685 $196,015 $191,599
========== ========== ======== ======== ======== ========
Money market investments:
Federal funds sold $ 10,166 $ 10,166 $124,622 $124,622 $ 6,000 $ 6,000
---------- ---------- -------- -------- -------- --------
Total money market investments $ 10,166 $ 10,166 $124,622 $124,622 $ 6,000 $ 6,000
======== ========
Mortgage-backed securities:
GNMA $ 143,179 $ 143,842 $ 1,059 $ 1,067 $ 1,429 $ 1,429
FHLMC 47,528 47,946 6,886 6,942 2,094 2,135
FNMA Certificates 129,123 129,843 80,286 80,286 -- --
CMOs and REMICs 1,841,727 1,850,935 73,341 73,341 -- --
---------- ---------- -------- -------- -------- --------
Total mortgage-backed securities $2,161,557 $2,172,566 $161,572 $161,636 $ 3,523 $ 3,564
========== ========== ======== ======== ======== ========
24
ITEM 2. PROPERTIES
The executive and administrative offices of the Company and its
subsidiaries are located at 615 Merrick Avenue, Westbury, New York. Haven
Bancorp had purchased the office building and land in December 1997 under a
lease agreement and Payment-in-Lieu-of-Tax ("PILOT") agreement with the Town of
Hempstead Industrial Development Agency ("IDA"), which has been assumed by the
Company. Under the IDA and PILOT agreements, the Company assigned the building
and land to the IDA, is subleasing it for $1.00 per year for a 10-year period,
and will repurchase the building for $1.00 upon expiration of the lease term in
exchange for IDA financial assistance.
At December 31, 2001, the Company's bank subsidiaries owned 30 of their
branch offices and leased 93 of their branch offices and other bank business
facilities under various lease and license agreements expiring at various times
through 2025 (see "Note 13 - Commitments and Contingencies, Lease and License
Commitments" in the Company's 2001 Annual Report to Shareholders, which portion
is incorporated herein by reference). In the second quarter of 2002, the Company
anticipates the divestiture of 14 in-store branches in Connecticut, New Jersey
and Rockland County, New York, all of which were leased at December 31, 2001.
ITEM 3. LEGAL PROCEEDINGS
The Bank is involved in various legal actions arising in the ordinary
course of its business. All such actions, in the aggregate, involve amounts,
that are believed by management to be immaterial to the financial condition and
results of operations of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on The Nasdaq National Market(R) and
quoted under the symbol "NYCB".
Information regarding the Company's common stock and its price during
fiscal year 2001 appears on page 36 of the 2001 Annual Report to Shareholders
under the caption "Market Price of Common Stock and Dividends Paid per Common
Share," and is incorporated herein by this reference.
As of March 29, 2002 the Company had approximately 8,400 shareholders of
record, not including the number of persons or entities holding stock in nominee
or street name through various brokers and banks.
ITEM 6. SELECTED FINANCIAL DATA
Information regarding selected financial data appears on page 10 of the
2001 Annual Report to Shareholders under the caption "Financial Summary," and is
incorporated therein by this reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 13 through 35 of the 2001
Annual Report to Shareholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and is incorporated
herein by this reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about
market risk appears on pages 20 through 23 of the 2001 Annual Report to
Shareholders under the caption "Asset and Liability Management and the
Management of Interest Rate Risk," and is incorporated herein by this reference.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information regarding the consolidated financial statements and the
Independent Auditors' Report appears on pages 37 through 63 of the 2001 Annual
Report to Shareholders, and is incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors and executive officers of the
Registrant appears on pages 5 through 8 of the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on May 15, 2002, under the caption
"Information with Respect to Nominees, Continuing Directors, and Executive
Officers," and is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears on pages 10 through
19 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held May 15, 2002, and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
appears on pages 3 and 4 of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held May 15, 2002, under the caption "Security Ownership
of Certain Beneficial Owners," and is incorporated herein by this reference.
Information regarding security ownership of management appears on pages 5
through 8 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held May 15, 2002, under the caption "Information with
Respect to the Nominees, Continuing Directors, and Executive Officers," and is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears on page 19 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 15, 2002 under the caption "Transactions with
Certain Related Persons," and is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are included in the
Company's Annual Report to Shareholders for the year ended December 31, 2001 and
are incorporated herein by this reference:
- Consolidated Statements of Condition at December 31, 2001 and 2000;
- Consolidated Statements of Income and Comprehensive Income for each
of the years in the three-year period ended December 31, 2001;
- Consolidated Statements of Changes in Stockholders' Equity for each
of the years in the three-year period ended December 31, 2001;
- Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2001;
- Notes to the Consolidated Financial Statements;
- Management's Responsibility for Financial Reporting;
- Independent Auditors' Report
26
The remaining information appearing in the 2001 Annual Report to
Shareholders is not deemed to be filed as a part of this report, except as
expressly provided herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or because the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 2001
None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
-------
3.1 Certificate of Incorporation of Queens County Bancorp, Inc.
(1)
3.2 Bylaws of New York Community Bancorp, Inc. (attached hereto)
10.1 Form of Employment Agreement between Queens County Savings
Bank and Certain Officers (1)
10.2 Form of Employment Agreement between Queens County Bancorp,
Inc. and Certain Officers (1)
10.3 Form of Change in Control Agreements among the Company, the
Bank, and Certain Officers (1)
10.4 Form of Queens County Savings Bank Recognition and Retention
Plan for Outside Directors (1)
10.5 Form of Queens County Savings Bank Recognition and Retention
Plan for Officers (1)
10.6 Form of Queens County Bancorp, Inc. 1993 Incentive Stock
Option Plan (2)
10.7 Form of Queens County Bancorp, Inc. 1993 Incentive Stock
Option Plan for Outside Directors (2)
10.8 Form of Queens County Savings Bank Employee Severance
Compensation Plan (1)
10.9 Form of Queens County Savings Bank Outside Directors'
Consultation and Retirement Plan (1)
10.10 Form of Queens County Bancorp, Inc. Employee Stock Ownership
Plan and Trust (1)
10.11 ESOP Loan Documents (1)
10.12 Incentive Savings Plan of Queens County Savings Bank (3)
10.13 Retirement Plan of Queens County Savings Bank (1)
10.14 Supplemental Benefit Plan of Queens County Savings Bank (4)
10.15 Excess Retirement Benefits Plan of Queens County Savings Bank
(1)
10.16 Queens County Savings Bank Directors' Deferred Fee Stock Unit
Plan (1)
10.17 Queens County Bancorp, Inc. 1997 Stock Option Plan (5)
10.18 Richmond County Financial Corp. 1998 Stock Option Plan (6)
10.19 Richmond County Savings Bank Retirement Plan (6)
11.0 Statement Re: Computation of Per Share Earnings
(attached hereto)
13.0 2001 Annual Report to Shareholders
21.0 Subsidiaries information incorporated herein by reference to
Part I, "Subsidiaries"
23.0 Consent of KPMG LLP, dated April 1, 2002 (attached hereto)
99.0 Proxy Statement for the Annual Meeting of Shareholders to be
held on May 15, 2002
(1) Incorporated by reference to Exhibits filed with the Registration
Statement on Form S-1, Registration No. 33-66852.
(2) Incorporated herein by reference into this document from the Exhibits to
Form S-8, Registration Statement filed on October 27, 1994, Registration
No. 33-85684.
(3) Incorporated herein by reference into this document from the Exhibits to
Form S-8, Registration Statement filed on October 27, 1994, Registration
No. 33-85682.
(4) Incorporated by reference to Exhibits filed with the 1995 Proxy Statement
for the Annual Meeting of Shareholders held on April 19, 1995.
(5) Incorporated by reference to Exhibit filed with the 1997 Proxy Statement
for the Annual Meeting of Shareholders held on April 16, 1997.
(6) Incorporated herein by reference into this document from the Exhibits to
Form S-8, Registration Statement filed on July 31, 2001, Registration No.
333-66366.
27
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
New York Community Bancorp, Inc.
--------------------------------
(Registrant)
/s/ Joseph R. Ficalora 4/1/02
-------------------------------------
Joseph R. Ficalora
President and Chief Executive Officer
(Principal Executive Officer)
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 dates indicated:
/s/ Michael F. Manzulli 4/1/02 /s/ Joseph R. Ficalora 4/1/02
--------------------------- ----------------------------------------
Michael F. Manzulli Joseph R. Ficalora
Chairman President and Chief Executive Officer
(Principal Executive Officer)
/s/ Robert Wann 4/1/02 /s/ Donald M. Blake 4/1/02
--------------------------- ----------------------------------------
Robert Wann Donald M. Blake
Executive Vice President Director
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Anthony E. Burke 4/1/02 /s/ Dominick Ciampa 4/1/02
--------------------------- ----------------------------------------
Anthony E. Burke Dominick Ciampa
Director Director
/s/ Robert S. Farrell 4/1/02 /s/ Dr. William C. Frederick 4/1/02
--------------------------- ----------------------------------------
Robert S. Farrell Dr. William C. Frederick
Director Director
/s/ Max L. Kupferberg 4/1/02 /s/ Howard C. Miller 4/1/02
--------------------------- ----------------------------------------
Max L. Kupferberg Howard C. Miller
Director Director
28