| INDEPENDENCE COMMUNITY BANK CORP ITEM 1A Risk Factors In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating the Company and its business because such factors may have a significant effect on its operating results and financial condition |
| As a result of the risk factors set forth below and the information presented elsewhere in this Annual Report on Form 10-K, actual results could differ materially from those included in any forward-looking statements |
| If we Fail to Complete the Merger or the Closing of the Merger is Significantly Delayed, it may have an Adverse Impact on our Business As discussed above under “Item 1 |
| — Business” on October 24, 2005, the Company entered into a merger agreement with Sovereign Bancorp, Inc |
| The proposed merger is subject to the satisfaction of various closing conditions, including the approval from the Office of Thrift Supervision, and other conditions described in the Merger Agreement |
| We cannot assure you that these conditions will be satisfied or that the proposed merger will be successfully completed or completed without significant delay |
| In the event that the proposed merger is not completed or if the completion of the merger is significantly delayed: (i) Management’s attention from our day-to-day business may be diverted; (ii) we may lose key employees; (iii) our relationships with clients may be disrupted as a result of uncertainties with regard to our business and prospects; (iv) we may be involved in litigation or other adversarial proceedings relating to the merger or to Banco Santander’s proposed investment in Sovereign; and (v) the market price of shares of our common stock may decline to the extent that the current market price of those shares reflects an assumption by investors that the proposed merger will be completed |
| Any such events could adversely affect our stock price and harm our business and operating results |
| Our Loan Portfolio Includes Commercial Real Estate, Commercial Business and Multi-Family Residential Loans Which Have a Generally Higher Risk of Loss Than Single-Family Residential Loans Over the past several years the Company has increased its investment in commercial real estate loans, commercial business loans and multi-family residential loans, both in terms of dollar amounts and as a percentage of our loan portfolio |
| Such loans generally have a higher inherent risk of loss than single-family residential mortgage or cooperative apartment loans because repayment of the loans or lines often depends on the successful operation of a business or the underlying property |
| Accordingly, repayment of these loans is subject to adverse conditions in the real estate market and the local economy |
| In addition, our commercial real estate and multi-family residential loans have significantly larger average loan balances compared to our single-family residential mortgage and cooperative apartment loans |
| Our commercial real estate and commercial business loans aggregated dlra4dtta66 billion or 37dtta9prca of the total loan portfolio at December 31, 2005 |
| We continue to originate multi-family residential loans consistent with our historical involvement in such lending |
| Such loans totaled dlra4dtta74 billion or 38dtta6prca of the total loan portfolio at December 31, 2005 |
| In addition, we originate and sell multi-family residential loans to Fannie Mae under a special program |
| Under the terms of the sales program, we retain a portion of the associated credit risk |
| At December 31, 2005, our maximum potential loss exposure with respect to the dlra6dtta27 billion in loans sold under this program was dlra186dtta7 million |
| Loan Origination Levels Could be Adversely Affected if Mortgage Broker Relationship Ceases In recent years, mortgage brokers have been the source of substantially all of the multi-family residential and commercial real estate loans originated by the Company |
| The loans originated by the Company resulting from referrals by Meridian Capital account for a significant portion of the Company’s total loan originations, including the majority of the loans originated for sale |
| The ability of the Company to continue to originate multi-family residential and commercial real estate loans at the levels experienced in recent years may be a function of, among other things, maintaining the 44 _________________________________________________________________ [114]Table of Contents level of referrals from Meridian Capital to the Company or increasing the number of referrals from other mortgage broker relationships |
| Although the Company lends throughout the New York City metropolitan area, the substantial majority of its real estate loans are secured primarily by properties located in the boroughs of Brooklyn, Queens and Manhattan, Nassau County, Long Island, and the counties in northern and central New Jersey |
| Furthermore, at December 31, 2005, approximately 77prca of our loan portfolio consists of commercial real estate, commercial business and multi-family residential loans |
| Such loans may be more sensitive to adverse changes in the local economy than single-family residential loans |
| The Company’s results of operation may be adversely affected by changes in prevailing economic conditions, particularly in the metropolitan New York area, including (i) decreases in real estate values; (ii) changes in interest rates which may cause a decrease in interest rate spreads; (iii) adverse employment conditions; (iv) the monetary and fiscal policies of the Federal government; (v) and other significant external events |
| These factors could adversely affect the Company’s results of operations and consequently its financial condition because borrowers may not be able to repay their loans, the value of collateral securing the Company’s loans to borrowers may decline and the quality of the loan portfolio may deteriorate |
| This could result in an increase in delinquencies and non-performing assets or require the Company to charge-off a percentage of its loans and/or increase the Company’s provisions for loan losses, which would reduce the Company’s earnings |
| Competition With Other Financial Institutions Could Adversely Affect our Growth and Profitability The Company faces intense competition both in making loans and in attracting deposits |
| The Company competes primarily on the basis of its depository rates, the terms of the loans it originates and the quality of the Company’s financial and depository services |
| The New York City metropolitan area has a significant concentration of financial institutions, many of which are branches of significantly larger institutions which have greater financial resources |
| Over the past 10 years, consolidation of the banking industry in the New York City metropolitan area has continued resulting in the Company having to face larger and increasingly efficient competitors |
| This competition has made it more difficult for the Company to make new loans as competitors have recently been offering loans with lower fixed rates and loans on more attractive terms than the Company has been willing to offer |
| In addition, the Company has at times offered higher deposit rates in its market area which also decreases net interest margin |
| The Company’s profitability depends upon its continued ability to successfully compete in its market area and lowering interest rates on loans and increasing rates paid on deposits in response to competitive pressure could decrease the Company’s net interest margin |
| The Company expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry |
| Technological advances, for example, have lowered barriers to market entry, enabled banks to expand their geographic reach by providing services over the Internet and enabled non-depository institutions to offer products and services that traditionally have been provided by banks |
| Recent changes in federal banking law permit affiliation under certain circumstances among banks, securities firms and insurance companies, which also may change the competitive environment in which the Company conducts business |
| Rising Interest Rates Could Reduce our Net Income The Company’s ability to earn a profit depends primarily on its net interest income, which is the difference between the interest income on interest-earning assets, such as loans and investments, and interest expense on our interest-bearing liabilities, such as deposits and borrowings |
| The majority of the Company’s interest- earning assets generally bear fixed interest rates for a contractual period of time |
| However, the Company’s interest-bearing liabilities that fund the interest-earning assets generally have shorter 45 _________________________________________________________________ [115]Table of Contents contractual maturities or no stated maturities, such as core deposits |
| This imbalance can create significant earnings volatility, because market interest rates change over time |
| In addition, short-term and long-term interest rates do not necessarily change at the same time or at the same rate |
| During 2005, the FOMC of the Federal Reserve Board raised the federal funds rate (the rate at which banks borrow funds from one another) eight times, in 25 basis point increments to 4dtta25prca during 2005 (and further raised it an additional 25 basis points to 4dtta50prca in January 2006) |
| While these short-term market rates (which are used as a guide to price the Bank’s deposits) have increased, longer term market interest rates (which are used as a guide to price the Bank’s longer term loans) have not |
| This flattening of the market yield curve has had a negative impact on net interest margin, and if the increase in short-term interest rates continues to outpace the increase in long-term rates, the Company would experience further compression on its net interest margin which would have a negative effect on the Company’s earnings |
| Changes in interest rates also affect the value of the Company’s interest-earning assets, and in particular the securities available-for-sale portfolio |
| Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates |
| Unrealized gains and losses on securities available-for-sale are reported as a separate component of stockholders’ equity, net of tax |
| Decreases in the fair value of securities available-for-sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity |
| Our Allowance for Loan Losses may be Inadequate, which Could Adversely Affect our Earnings The Company’s allowance for loan losses may not be sufficient to cover actual loan losses and if the Company is required to increase its allowance, earnings may be reduced in the period in which the allowance is increased |
| The Company has identified the evaluation of the allowance for loan losses as a critical accounting estimate where amounts are sensitive to material variation due to the large degree of judgment in (i) assigning individual loans to specific risk levels (pass, special mention, substandard, doubtful and loss); (ii) valuing the underlying collateral securing the loans; (iii) determining the appropriate reserve factor to be applied to specific risk levels for criticized and classified loans (special mention, substandard, doubtful and loss); and (iv) determining reserve factors to be applied to pass loans based upon loan type |
| To the extent that loans change risk levels, collateral values change or reserve factors change, the Company may need to adjust its provision for loan losses which would impact earnings |
| Management believes the allowance for loan losses at December 31, 2005 was at a level to cover the known and inherent losses in the portfolio that were both probable and reasonable to estimate |
| In the future, management may adjust the level of its allowance for loan losses as economic and other conditions dictate |
| In addition, the FDIC and the Department as an integral part of their examination process periodically review the Company’s allowance for possible loan losses |
| Such agencies may require the Company to adjust the allowance based upon their judgment |
| Our Ability to Pay Dividends is Restricted Although the Holding Company has been paying regular quarterly dividends since 1998, its ability to pay dividends to stockholders depends to a large extent upon the dividends the Holding Company receives from the Bank |
| Dividends paid by the Bank are subject to restrictions under various federal and state banking laws |
| In addition, the Bank must maintain certain capital levels, which may restrict the ability of the Bank to pay dividends to the Holding Company |
| The Bank’s regulators have the authority to prohibit the Bank or the Company from engaging in unsafe or unsound practices in conducting its business |
| As a consequence, bank regulators could deem the payment of dividends by the Bank to be an unsafe or unsound practice, depending on the Bank’s financial condition or otherwise, and prohibit such payments |
| If the Bank were unable to pay dividends to the Holding Company, the Board of Directors might cease paying or reduce the rate or frequency at which the Company pays dividends to stockholders |
| Our Stock Value May Suffer from Anti-Takeover Provisions That May Impede Potential Takeovers Other than the Pending Merger with Sovereign Provisions in our corporate documents and in Delaware corporate law, as well as certain federal regulations and certain contractual restrictions in our merger agreement with Sovereign, may make it 46 _________________________________________________________________ [116]Table of Contents difficult and expensive to pursue a tender offer, change in control or takeover attempt that the board of directors opposes |
| As a result, stockholders may not have an opportunity to participate in such a transaction, and the trading price of our stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers |
| Anti-takeover provisions include: (i) limitation on the acquisition of more than 10prca of the issued and outstanding shares of common stock; (ii) limitations on voting rights; (iii) the election of members of the board of directors to staggered three-year terms; (iv) the absence of cumulative voting by stockholders in the election of directors; (v) provisions governing nominations of directors by stockholders; (vi) provisions governing the submission of stockholder proposals; (vii) provisions prohibiting the calling of special meetings of stockholders except by the board of directors; (viii) our ability to issue preferred stock and additional shares of common stock without stockholder approval; (ix) super-majority voting provisions for the approval of certain business combinations; and (x) super-majority voting provisions to amend our corporate documents |
| These provisions also will make it more difficult for an outsider to remove the current board of directors or management and may discourage potential proxy contests and other potential takeover attempts other than the pending merger with Sovereign |
| We are Subject to Extensive Governmental Regulation Which May Affect our Operations The Company and the Bank are subject to extensive federal and state governmental supervision and regulation, which are intended primarily for the protection of depositors |
| The Company and the Bank are also subject to various laws and regulations which impose restrictions and requirements on our operations |
| Laws, regulations and policies adopted by federal or state authorities could significantly affect the Company’s business operations |
| The Company and Bank are also subject to periodic examination by federal and state banking regulators who may impose, among other things, restrictions on operations, which restrictions could substantially affect the implementation of our business plan |
| In addition, the Company and Bank are subject to changes in federal and state laws, as well as changes in regulations, governmental policies and accounting principles |
| The effects of any such potential changes cannot be predicted but could adversely affect our business and operations in the future |
| Changes in the Value of Goodwill Could Reduce our Earnings The Company is required, by generally accepted accounting principles, to test goodwill for impairment at least annually |
| Testing for impairment of goodwill involves the identification of reporting units and the estimation of fair values |
| The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used |
| As of December 31, 2005, if the dlra1dtta19 billion of goodwill reflected as an asset of the Company was deemed fully impaired and the Company was required to charge-off all of its goodwill, the pro forma reduction to stockholders’ equity would be approximately dlra14dtta40 per share |