<PAGE>
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, 1997
0-28886
Commission File Number
ROSLYN BANCORP, INC.
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(Exact name of registrant as specified in its charter.)
Delaware 11-3333218
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1400 Old Northern Boulevard, Roslyn, New York 11576
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(Address of Principal Executive Offices) (Zip Code)
(516) 621-6000
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(Registrant's telephone number, including area code)
None
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Securities registered pursuant to Section 12(b) of the Act
Common Stock, $.01 par value
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Securities registered pursuant to Section 12(g) of the Act
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 is not contained 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 this Form 10-K or any
amendment to this Form 10-K.
As of March 13, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $879,835,803. This figure is based on the
closing price on the NASDAQ National Market for a share of the registrant's
common stock on March 13, 1998, which was $21.3125 as reported in the Wall
Street Journal on March 16, 1998.
The Registrant had 43,027,459 shares of Common Stock outstanding as of March 13,
1998.
1
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1997 are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
2
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INDEX
<TABLE>
<CAPTION>
PART I PAGE
NO.
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<S> <C>
Item 1. Business.............................................................................. 4
Item 2. Properties............................................................................ 50
Item 3. Legal Proceedings..................................................................... 53
Item 4. Submission of Matters to a Vote of Security Holders................................... 53
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters................ 53
Item 6. Selected Financial Data............................................................... 53
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 53
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................ 53
Item 8. Financial Statements and Supplementary Data........................................... 53
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 54
PART III
Item 10. Directors and Executive Officers of the Company....................................... 54
Item 11. Executive Compensation................................................................ 54
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 54
Item 13. Certain Relationships and Related Transactions........................................ 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 54
SIGNATURES.......................................................................................... 57
</TABLE>
3
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PART I
ITEM 1. BUSINESS.
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GENERAL
Roslyn Bancorp, Inc. (also referred to as the Company or Registrant) was
incorporated under Delaware law on July 26, 1996. On January 10, 1997, the
Registrant acquired The Roslyn Savings Bank and subsidiaries (the Bank), Roslyn,
New York, as part of the Bank's conversion from the mutual to stock form of
organization (the Conversion). On January 10, 1997, Roslyn Bancorp, Inc. issued
an aggregate of 43,642,459 shares of its common stock, par value $0.01 per share
(Common Stock), of which 42,371,359 shares were issued in a subscription
offering and 1,271,100 shares were issued to The Roslyn Savings Foundation (the
Foundation), a charitable foundation established by the Bank. Prior to such
date, the Company had no assets, liabilities or operations. In connection with
the Conversion, the Company raised $410.7 million of net conversion proceeds, of
which $205.3 million was utilized for the acquisition of 100% of the outstanding
stock of the Bank. The Company is a savings and loan holding company and is
subject to regulation by the Office of Thrift Supervision (OTS) and the
Securities and Exchange Commission (SEC). At December 31, 1997, the Company had
consolidated total assets of $3.60 billion, deposits of $1.94 billion and
stockholders' equity of $628.3 million. Currently, the Company's activities
consist solely of managing the Bank and investing the portion of net conversion
proceeds retained by the Company. The following discussion addresses the
operations of the Bank and its subsidiaries.
The Bank is a community-oriented stock savings bank which was originally
chartered by the State of New York in 1875. In August 1995, the Bank completed
its acquisition of certain assets and liabilities of Residential Mortgage
Banking, Inc. (RMBI), including its loan servicing portfolio, through its
wholly-owned mortgage banking subsidiary, Residential First, Inc. (RFI). The
Bank's principal business consists of the acceptance of retail deposits from the
general public in the areas surrounding its branch offices and the investment of
those deposits, together with funds generated from operations and borrowings,
primarily in mortgage-backed and mortgage related securities, and various debt
and equity securities, one- to four-family residential mortgage loans and
commercial real estate loans. The Bank also invests in multi-family,
construction and development, home equity, second mortgage, consumer and student
loans. It is the Bank's policy to generally sell, on a servicing retained
basis, most longer-term fixed-rate one- to four-family loans as a method of
managing its interest rate risk and increasing its loan servicing fee income.
However, the Bank currently retains for its portfolio one- to four-family fixed-
rate loans of up to 15 years plus loans in excess of 15 years which have
interest rates of 8% or greater. The Bank's revenues are derived principally
from the interest income derived on its investment securities, mortgage,
consumer and commercial loans and from gains on loan sales and loan servicing
fees. The Bank's primary sources of funds are deposits, borrowings, principal
and interest payments on loans and securities, and proceeds from the sale of
loans and securities.
The Bank's mortgage banking subsidiary, RFI, conducts mortgage banking
activities consisting of the origination, sale and servicing of one- to four-
family loans secured by properties in the Bank's primary lending area as well as
through RFI's mortgage origination offices located in the New York Counties of
Nassau, Suffolk, Queens, Staten Island, Syracuse, Albany and Rochester, the New
Jersey Counties of Morris and Monmouth and the Connecticut Counties of Fairfield
and Hartford. Currently, all of the Bank's origination of one- to four-family
loans is conducted through RFI, which originates loans on behalf of the Bank as
well as various other investors and financial institutions.
In addition to RFI, the Bank maintains various subsidiaries, which were
incorporated in New York to either (a) maintain ownership of specific real
estate properties the Bank has taken ownership over as a result of foreclosure
or in connection with its lending activities or (b) operate as a real estate
investment trust (REIT). The Bank also offers savings bank life insurance
through its Savings Bank Life Insurance (SBLI) department.
4
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As a New York State chartered savings bank, the Bank's deposits are insured
up to the applicable limits by the Federal Deposit Insurance Corporation (FDIC).
The Bank is regulated by the Superintendent of Banks of the State of New York,
the New York Banking Board and the New York State Banking Department (NYSBD).
The Company's executive offices are located at 1400 Old Northern Boulevard,
Roslyn, New York 11576. The telephone number is (516) 621-6000.
MARKET AREA AND COMPETITION
The Bank is a community-oriented financial institution offering a variety
of financial services to meet the needs of the communities it serves. The Bank
currently operates eight full service banking offices in Nassau and Suffolk
Counties. The Bank's primary deposit gathering area is currently concentrated
around the areas where its full service banking offices are located in Nassau
and Suffolk Counties, which the Bank generally considers to be its primary
market area. The Bank's primary lending area has also historically been
concentrated in Nassau and Suffolk Counties. However, with the establishment of
RFI in August 1995, the Bank's primary lending area with regards to one- to
four-family loans was broadened to include the area surrounding RFI's mortgage
origination offices.
The New York City metropolitan area has historically benefited from having
a large number of corporate headquarters and a diversity of financial service
entities. Additionally, the Counties of Nassau and Suffolk have historically
benefited from a large developed suburban market, well educated employment base
and a diversity of industrial, service and high technology businesses. During
the late 1980s and early 1990s, however, due in part to the effects of a
prolonged period of weakness in the national economy, the decline in the
regional economy, layoffs in the financial services industry and corporate
relocations, the New York City metropolitan area experienced reduced levels of
employment. In addition, the Counties of Nassau and Suffolk experienced reduced
employment as a result of restructuring and downsizing in the high technology
defense related industries. These conditions, in conjunction with a surplus of
available commercial and residential property, resulted in an overall decline in
the underlying values of properties located in the area during the late 1980s
and early 1990s. Since 1993, the prices and values of real estate have
stabilized and, in certain areas, the prices and values of real estate have
increased.
The Bank faces significant competition in its primary market area both in
attracting deposits and in originating loans. The Long Island, New York area is
a highly competitive market. The Bank faces direct competition from a
significant number of financial institutions operating in its market area, many
with a state-wide or regional presence, and, in some cases, a national presence.
This competition arises from commercial banks, savings banks, mortgage banking
companies, mortgage brokers, credit unions and other providers of financial
services, many of which are significantly larger than the Bank and, therefore,
have greater financial and marketing resources than those of the Bank.
5
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LENDING ACTIVITIES
Loan Portfolio Composition. The types of loans that the Bank may originate
are subject to federal and state laws and regulations. The interest rates
charged by the Bank on loans are affected principally by the demand for such
loans, the supply of money available for lending purposes and the rates offered
by its competitors. These factors are, in turn, affected by general and
economic conditions, monetary policies of the federal government, including the
Federal Reserve Board, legislative tax policies and governmental budgetary
matters.
The Bank's loan portfolio consists primarily of first mortgage loans
secured by one- to four-family residences and commercial real estate properties
located in its primary lending area. At December 31, 1997, the Bank's gross
loan portfolio totaled $1.00 billion, of which $634.0 million were one- to four-
family residential mortgage loans, or 63.28% of total gross loans, and $248.6
million were commercial real estate loans, or 24.82% of total gross loans. At
such date, the remainder of the loan portfolio consisted of $44.0 million of
multi-family loans, or 4.39% of total gross loans; $52.3 million of construction
and development loans, or 5.22% of total gross loans; $17.0 million of home
equity and second mortgage loans, or 1.69% of total gross loans; $4.7 million of
consumer loans, primarily consisting of private banking, passbook, modernization
and personal secured and unsecured loans, or 0.47% of total gross loans; and
$1.3 million of student loans, or 0.13% of total gross loans. Included in first
mortgage loans secured by one- to four-family residences is approximately $309.8
million of purchased loans.
6
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The following table sets forth the composition of the Bank's loan
portfolio, including loans held-for-sale, in dollar amounts and in percentages
of the respective gross loan portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ------------------- ------------------- ----------------- ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ -------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family....... $633,957 63.28% $263,373 49.83% $197,357 48.41% $153,203 41.52% $134,248 45.16%
Multi-family.............. 44,006 4.39 46,576 8.81 36,353 8.92 18,617 5.05 21,642 7.28
Commercial real estate.... 248,607 24.82 168,797 31.94 124,976 30.65 114,317 30.98 101,806 34.24
Construction and
development.............. 52,269 5.22 37,459 7.09 41,611 10.21 56,163 15.22 12,983 4.37
Home equity and second
mortgage................. 16,974 1.69 9,506 1.80 3,672 0.90 4,346 1.18 5,255 1.77
Consumer (1)................. 4,686 0.47 1,241 0.23 1,760 0.43 1,680 0.46 1,995 0.67
Student...................... 1,296 0.13 1,576 0.30 1,959 0.48 20,626 5.59 19,345 6.51
--------- ------ -------- ------ -------- -------- -------- ------ -------- ------
Gross loans............. 1,001,795 100.00% 528,528 100.00% 407,688 100.00% 368,952 100.00% 297,274 100.00%
====== ====== ======== ====== ======
Less:
Unamortized discounts,
net...................... 5,974 701 763 978 -
Deferred loan fees........ 1,522 917 666 611 -
Deferred mortgage
interest................. 696 566 493 145 -
Allowance for possible
loan losses.............. 24,029 23,320 23,350 25,127 24,502
--------- -------- -------- -------- --------
Total loans, net........ 969,574 503,024 382,416 342,091 272,772
Less:
Loans held-for-sale, net:
One- to four-family..... 13,987 12,558 15,278 - 8,105
Student................. 1,296 1,576 1,873 - -
--------- -------- -------- -------- --------
Loan receivable held for
investment, net....... $954,291 $488,890 $365,265 $342,091 $264,667
========= ======== ======== ======== ========
</TABLE>
_______________________
(1) Consumer loans originated consist of private banking, personal secured,
personal unsecured, modernization and passbook loans. Private banking,
personal secured and personal unsecured loans were originated beginning
during the year ended December 31, 1997. The amounts shown prior to
December 31, 1997 do not include the aforementioned loan products.
7
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Loan Originations. Prior to the establishment of its mortgage banking
subsidiary, RFI, in August 1995, all of the Bank's loan origination activity was
conducted directly by the Bank's loan personnel at its branch offices and
through referrals from local real estate agents, attorneys and builders. While
the Bank continues to directly originate all commercial real estate, multi-
family, construction and development, home equity, second mortgage, consumer and
student loans, since the establishment of RFI in August 1995, all one- to four-
family loan origination activity has been conducted through RFI and RFI's
commissioned loan officers operating in the Bank's full-service banking offices
as well as in RFI's mortgage origination offices.
All loans originated by the Bank, or by RFI on behalf of the Bank, are
underwritten pursuant to the Bank's loan underwriting policies and procedures.
The Bank originates both adjustable-rate and fixed-rate one- to four-family
loans, multi-family loans, commercial real estate loans, home equity and second
mortgage loans, construction and development loans, consumer loans and student
loans. Since 1993, the Bank has placed increased emphasis on the origination
and retention of one- to four-family loans and commercial real estate loans to
selected real estate developers operating within the Bank's primary market area.
In 1995, the Bank began to phase out its direct student loan originations
(except for its direct lending program with the Student Loan Marketing
Association (SLMA)) in response to the federal government's initiation of the
Federal Family Education Loan Program, which is a direct student lending
program. The Bank's and RFI's ability to originate loans is dependent upon the
relative customer demand for the type of loan and demand for fixed-rate or
adjustable-rate loans, which is affected by the current and expected future
levels of interest rates.
Loan Sales, Servicing and Mortgage Banking Activities. Prior to the
establishment of RFI, the Bank's loan sale, purchase and servicing activities
were primarily conducted directly by the Bank. Since August 1995, all of the
Bank's mortgage banking operations have been conducted through RFI with the
exception of the servicing of one- to four-family loans originated by the Bank
prior to the establishment of RFI, which continue to be serviced directly by the
Bank. RFI was formed in conjunction with the Bank's August 1995 acquisition of
certain assets and liabilities, including the loan servicing portfolio, of RMBI,
a mortgage banking firm then operating in the New York Counties of Nassau,
Suffolk, Queens and Albany and the New Jersey Counties of Morris and Monmouth.
RFI's activities are directed by its executive officers, with such activities
being overseen by the Bank.
RFI originates one- to four-family loans through commissioned loan
personnel and through referrals from real estate brokers, builders, developers
and other sources. RFI also utilizes a network of approved mortgage brokers and
loan correspondents to originate mortgage loans. As a mortgage banking company,
RFI originates one- to four-family loans for sale to the Bank, as well as a
variety of other investors, including financial institutions and securities
brokerage firms. RFI also originates loans for sale directly to the Federal
National Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC) based upon loan terms and underwriting criteria provided to
RFI by such agencies. RFI delivers loan products to investors in the form of
whole loans and in the form of mortgage-backed securities issued by FNMA and
FHLMC, which it receives in exchange for the sale of whole loans to such
agencies. RFI's one- to four-family loan production is not dedicated to the
Bank as RFI offers a variety of competing loan products to customers pursuant to
loan programs that are pre-approved by other potential loan investors.
Accordingly, the Bank competes with RFI's other investors for the purchase of
one- to four-family loans on the basis of rates and terms. With the exception
of all Federal Housing Authority (FHA)/Veterans Administration (VA) loans and
non-conforming loans, all loans sold by RFI are sold on a servicing retained
basis. The Bank may revise its policy as to the types of loans it will
originate for investment through RFI based upon an analysis of the current and
anticipated market interest rates and other market conditions. It is currently
the policy of the Bank to retain for its portfolio investment all adjustable-
rate one- to four-family loans and fixed-rate one- to four-family mortgage loans
with terms of up to fifteen years plus loans in excess of fifteen years which
8
<PAGE>
have interest rates of 8% or more originated by RFI. For the year ended
December 31, 1997, RFI originated $320.2 million of loans of which $103.0
million were purchased by the Bank for its loan portfolio. RFI currently does
not offer commercial real estate, multi-family, construction and development,
home equity, second mortgage or consumer loans.
The primary funding source for the loans originated by RFI is provided by
the Bank through a $30.0 million revolving line of credit. The borrowings on
the line of credit are immediately paid down by RFI upon the sale of loans. At
December 31, 1997, $1.3 million of RFI's mortgage loans were pledged to secure
notes payable to FNMA under a warehouse line of credit known as the FNMA "As
Soon As Pooled Plus Program." The notes are repaid as the related mortgage
loans are sold or collected.
RFI's mortgage banking revenues generally consist of loan origination fees,
interest income earned on mortgages during the period they are held-for-sale,
less the interest expense incurred to finance the mortgages, gains (or losses)
from the sale of mortgage loans, loan servicing fees and gains (or losses) from
the sale of any loan servicing.
Between the time RFI issues loan commitments and the time such loans, or
the securities into which the loans are converted, are sold, RFI is exposed to
movements in the market price due to changes in market interest rates. RFI
attempts to manage this risk by utilizing forward cash sales to FNMA, FHLMC and
other approved investors or agencies and forward sales of mortgage-backed
securities to securities brokers and dealers, other financial institutions and
private investors (such forward sales of loans or mortgage-backed securities are
collectively referred to as "forward sale commitments"). Generally, RFI
attempts to cover between 75% and 105% of the principal amount of the loans that
it has committed to fund at specified interest rates with forward sale
commitments. However, the type, amount and delivery date of forward sale
commitments RFI will enter into is based upon anticipated movements in market
interest rates, bond market conditions and management's estimates as to closing
volumes and the length of the origination or purchase commitments. Differences
between the volume and timing of actual loan originations and purchases and
management's estimates can expose the Bank and RFI to losses. If RFI is not
able to deliver the mortgage loans or mortgage-backed securities during the
appropriate delivery period called for by the forward sale commitment, RFI may
be required to pay a non-delivery fee, repurchase the delivery commitments at
current market prices or purchase whole loans at premium for delivery. While
the aforementioned activity is managed continually, there can be no assurance
that RFI will be successful in its efforts to eliminate the risk of interest
rate fluctuation between the time origination or purchase commitments are
issued and the ultimate sale of the loans.
Currently, the Bank services all of its commercial real estate,
construction and development, multi-family, home equity, second mortgage,
consumer and student loans and all one- to four-family loans originated for its
portfolio prior to its establishment of RFI on August 1, 1995. RFI services all
loans it originates on behalf of the Bank as well as for all conforming loans
sold to other investors. All FHA and VA loans are sold, on a servicing-released
basis, as are other selected loans sold to private institutional investors. In
addition, in connection with the Bank's acquisition of certain liabilities and
assets from RMBI, the Bank acquired the servicing rights of $623.0 million of
loans sold by RMBI. At December 31, 1997, RFI's loan servicing portfolio
totaled $1.01 billion, primarily consisting of conforming fixed-rate loans.
Excluding RFI, the Bank's loan servicing portfolio totaled $495.1 million as of
December 31, 1997 and primarily consisted of one- to four-family, commercial
real estate and construction and development loans originated by the Bank prior
to its acquisition of certain assets and liabilities from RMBI. Loan servicing
includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults, making certain
insurance and tax payments on behalf of the borrowers and generally
administering the loans. As of June 1997, RFI utilizes a third party
subservicer, Dovenmuehle Mortgage Inc. (Dovenmuehle) to service all loans.
Dovenmuehle receives
9
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an annual flat fee per loan and any ancillary fee income and RFI recognizes
servicing fee income in excess of servicing fees paid to Dovenmuehle and retains
the use of the escrow balances. During the year ended December 31, 1997, the
Bank, through RFI, sold without recourse, approximately $134.9 million of whole
loans with loan servicing retained.
10
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The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated and includes RFI's loan
originations on behalf of the Bank commencing August 1, 1995.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross loans (1):
Balance outstanding at beginning of year..................... $528,528 $407,688 $368,952
---------- -------- --------
Loans originated:
One- to four-family...................................... 320,465 299,292 153,206
Multi-family............................................. 7,000 14,000 19,310
Commercial real estate................................... 83,775 59,555 17,310
Construction and development............................. 75,271 42,540 31,598
Home equity and second mortgage.......................... 12,078 8,943 50
Consumer and student (2)................................. 9,846 3,958 4,845
---------- -------- --------
Total loans originated................................ 508,435 428,288 226,319
Loans purchased............................................ 303,363 12,734 22,059
---------- -------- --------
Total loans originated and purchased.................. 811,798 441,022 248,378
---------- -------- --------
Less:
Principal repayments....................................... 126,127 95,069 66,084
Sales of loans............................................. 212,231 221,989 134,084
Transfers to real estate owned............................. 82 997 6,964
Principal charged-off...................................... 91 2,127 2,510
---------- -------- --------
Total loans.............................................. 1,001,795 528,528 407,688
Less: Loans held-for-sale, net............................... 15,283 14,134 17,151
---------- -------- --------
Loans receivable held for investment at end
of year.................................................... $986,512 $514,394 $390,537
========== ======== ========
</TABLE>
(1) Gross loans includes loans receivable held for investment and loans held-
for-sale.
(2) Consumer loans originated consist of private banking, personal secured,
personal unsecured, modernization and passbook loans. Private banking,
personal secured and personal unsecured loans were originated beginning
during the year ended December 31, 1997. The amounts shown prior to
December 31, 1997 do not include the aforementioned loan products.
11
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The following table shows the maturity of the Bank's loan portfolio at
December 31, 1997. Loans held-for-sale are included in the within one year
maturity category. The table does not include prepayments or scheduled
principal amortization. Prepayments and scheduled principal amortization on
loans totaled $126.1 million, $95.1 million and $66.1 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------------------------------------------------
REAL ESTATE LOANS
----------------------------------------------------------
HOME
ONE- TO COMMERCIAL CONSTRUCTION EQUITY AND TOTAL
FOUR- MULTI- REAL AND SECOND LOANS
FAMILY FAMILY ESTATE DEVELOPMENT MORTGAGE CONSUMER STUDENT RECEIVABLE
--------- -------- --------- ----------- -------- -------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year............................. $ 14,252 $ 241 $ 10,482 $ 15,355 $ 532 $ 400 $ 1,296 $ 42,558
-------- -------- -------- --------- ------- ------ ------- ----------
After one year:
More than one year to three years......... 945 443 14,739 33,260 1,814 717 - 51,918
More than three years to five years....... 3,968 300 11,632 3,654 2,880 730 - 23,164
More than five years to 10 years.......... 17,187 39,260 194,084 - 2,391 554 - 253,476
More than 10 years to 20 years............ 229,159 3,762 16,149 - 540 1 - 249,611
More than 20 years........................ 368,446 - 1,521 - 8,817 2,284 - 381,068
-------- -------- -------- --------- ------- ------ ------- ----------
Total due after December 31, 1998......... 619,705 43,765 238,125 36,914 16,442 4,286 - 959,237
-------- -------- -------- --------- ------- ------ ------- ----------
Total amount due.......................... $633,957 $ 44,006 $248,607 $ 52,269 $16,974 $4,686 $ 1,296 1,001,795
======== ======== ======== ========= ======= ====== ======= ----------
Less:
Unamortized discounts, net.............. 5,974
Deferred loan fees, net................. 1,522
Deferred mortgage interest.............. 696
Allowance for possible loan losses...... 24,029
----------
Total loans, net.......................... 969,574
Less: Loans held-for-sale, net........... 15,283
----------
Loans receivable held for investment, net. $ 954,291
==========
</TABLE>
12
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The following table sets forth at December 31, 1997, the dollar amount of
gross loans receivable contractually due after December 31, 1998, and whether
such loans have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1998
---------------------------------------------------------
FIXED ADJUSTABLE TOTAL
--------------- ------------------ ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family $460,447 $159,258 $619,705
Multi-family 24,481 19,284 43,765
Commercial real estate 70,909 167,216 238,125
Construction and development - 36,914 36,914
Home equity and second mortgage 5,492 10,950 16,442
-------- -------- --------
Total real estate loans 561,329 393,622 954,951
Consumer and student loans (1) 1,752 2,534 4,286
-------- -------- --------
$563,081 $396,156 $959,237
======== ======== ========
</TABLE>
______________
(1) Includes private banking, personal secured, personal unsecured,
modernization and passbook loans.
One- to Four-Family Loans. The Bank, through RFI, currently offers both
fixed-rate and adjustable-rate mortgage loans secured by one- to four-family
residences with maturities up to thirty years located in the Bank's primary
market area, as well as in the New York, New Jersey and Connecticut areas in
which RFI operates mortgage origination offices. One- to four-family mortgage
loan originations are generally obtained from RFI's loan representatives
operating in the Bank's branch offices and RFI's mortgage origination offices,
and through their contacts with the local real estate industry and through
direct consumer advertising. Additionally, from time to time the Bank may
purchase residential one- to four-family loans in the secondary market. All
loans purchased in the secondary market are quality control reviewed for
adherence to the Bank's underwriting standards.
At December 31, 1997, the Bank's one- to four-family loans totaled $634.0
million, or 63.28% of gross loans. Of the one- to four-family loans outstanding
at that date, 74.68% were fixed-rate loans and 25.32% were adjustable-rate
mortgage loans. The Bank, through RFI, offers fixed-rate mortgage loans with
terms of ten, fifteen, twenty and thirty years. The Bank, through RFI,
currently offers a number of adjustable-rate mortgage loans with terms of up to
30 years and interest rates which adjust annually from the outset of the loan or
which adjust annually after a three, seven or ten year initial fixed-rate
period. The interest rates for the majority of the Bank's adjustable-rate
mortgage loans are indexed to the one year and five year Constant Maturity
Treasury (CMT) Index. Interest rate adjustments on such loans are limited to a
2% annual adjustment cap and a maximum adjustment of 6% over the life of the
loan. Certain of the Bank's adjustable-rate mortgage loans can be converted to
fixed-rate loans with interest rates based upon
13
<PAGE>
the then-current market rates plus a varying margin.
The volume and type of adjustable-rate mortgage loans originated by RFI on
behalf of the Bank have been affected by such market factors as interest rates,
competition, consumer preferences and the availability of funds. The
origination of adjustable-rate residential mortgage loans, as opposed to fixed-
rate residential mortgage loans, helps reduce the Bank's exposure to increases
in interest rates. However, adjustable-rate loans generally pose credit risks
not inherent in fixed-rate loans, primarily because as interest rates rise, the
underlying payments of the borrower rise, and thereby increasing the potential
for default. Periodic and lifetime caps on interest rate increases help to
reduce the risks associated with adjustable-rate loans but also limit the
interest rate sensitivity thereof.
One- to four-family residential mortgage loans are generally underwritten
according to FNMA and FHLMC guidelines. The Bank, through RFI, generally
originates one- to four-family residential mortgage loans in amounts up to 90%
of the lower of the appraised value or the selling price of the property
securing the loan up to a maximum amount of $600,000 for loans originated for
sale and up to a maximum amount of $1 million for loans to be sold to private
investors, subject to certain exceptions to these guidelines which must be
approved by either the Chief Executive Officer or Senior Lending Officer and
reviewed by the Board of Directors. The Bank currently requires private
mortgage insurance to be obtained for loans in excess of an 80% loan to value
ratio. Mortgage loans originated by the Bank generally include due-on-sale
clauses which provide the Bank with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of the
property without the Bank's consent. Due-on-sale clauses are an important means
of adjusting the yields on the Bank's fixed-rate mortgage loan portfolio and the
Bank has generally exercised its rights under these clauses.
In an effort to provide financing for low and moderate income home buyers,
RFI participates in residential mortgage programs and products sponsored by the
State of New York Mortgage Agency (SONYMA) and the New Jersey Mortgage Housing
Finance Agency (NJMHFA). The SONYMA and NJMHFA mortgage programs provide low
and moderate income households with fixed-rate loans which are generally below
prevailing fixed-rate mortgages and which allow below market down payments.
Such loans generally are sold by RFI without retention of the servicing rights.
Multi-Family Lending. The Bank originates fixed-rate and adjustable-rate
multi-family mortgage loans generally secured by forty to four hundred unit
apartment buildings located in the Bank's primary market area. At December 31,
1997, the Bank's multi-family loan portfolio was $44.0 million, or 4.39% of
total gross loans. In reaching its decision on whether to make a multi-family
loan, the Bank considers the qualifications and financial condition of the
borrower, including credit history, profitability and expertise, as well as the
value and condition of the underlying property. Additionally, factors considered
by the Bank include: the net operating income of the mortgaged premises before
debt service and depreciation; the debt coverage ratio (the ratio of net
earnings to debt service); and the ratio of loan amount to appraised value.
Pursuant to the Bank's underwriting policies, a multi-family mortgage loan may
be made in an amount up to 75% of the lower of the appraised value or sales
price of the underlying property with amortization periods of up to 30 years.
The Bank's adjustable-rate multi-family loans are originated with rates that are
generally fixed for the first five years with a single adjustment on the fifth
anniversary of the loan based upon the average monthly yield on U.S. Treasury
obligations, adjusted to a constant maturity of five years, plus a margin of
1.50% to 2.50%. Ten year fixed-rates based on similar spreads are also
available. The Bank offers multi-family loans with terms of up to ten years. The
Bank's current policies limit the amount of multi-family loans the Bank may have
to 25% of the aggregate loan portfolio. The Bank's current policies limit such
loans to $10 million per project and an aggregate of $30 million in loans
outstanding
14
<PAGE>
per borrower, although the Bank will make exceptions to this policy provided
full Board approval for the loan is obtained. In addition, the Bank generally
requires a debt service coverage ratio of a minimum of 120%. The Bank also
requires an appraisal on the property conducted by an independent appraiser and
title insurance. Additionally, the Bank requires a market occupancy rate of at
least 90% prior to lending for multi-unit apartment buildings.
When evaluating the qualifications of the borrower for a multi-family loan,
the Bank considers the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar property and the Bank's
lending experience with the borrower. The Bank's underwriting policies require
that the borrower be able to demonstrate management skills and the ability to
maintain the property from current rental income. The Bank's policy requires
borrowers to present evidence of the ability to repay the mortgage and a history
of making mortgage payments on a timely basis. In making its assessment of the
creditworthiness of the borrower, the Bank generally reviews the financial
statements and credit history of the borrower, as well as other related
documentation.
Commercial Real Estate Lending. The Bank originates commercial real estate
loans that are generally secured by properties used for business purposes or a
combination of residential and retail purposes which are located in the Bank's
primary market area. The Bank's underwriting procedures provide that commercial
real estate loans generally may be made in amounts up to 75% of the lower of the
appraised value or sales value of the property, subject to the Bank's current
loans-to-one-borrower limit, which at December 31, 1997, was $10 million per
project and an aggregate of $30 million in loans outstanding per borrower. The
Bank will make exceptions to this policy provided full board approval for the
loan is obtained. These loans may be made with terms up to 20 years and are
generally offered at interest rates which adjust in accordance with the CMT
Index. The Bank's underwriting standards and procedures are similar to those
applicable to its multi-family loans, whereby the Bank considers the net
operating income of the property and the borrower's expertise, credit history
and profitability. The Bank has generally required that the properties securing
commercial real estate loans have debt service coverage ratios of at least 125%.
At December 31, 1997 the Bank's commercial real estate loan portfolio totaled
approximately $248.6 million, or 24.82% of gross loans.
Construction and Development Lending. The Bank originates loans for the
development of commercial and residential property located in its primary market
area. The Bank will originate loans for the acquisition of commercial and
residential property located in its primary market area only if such acquisition
loan is part of an overall development loan. Construction and development loans
are offered primarily to experienced local developers operating in the Bank's
primary market area. The majority of the Bank's construction loans are
originated primarily to finance the construction of one- to four-family, owner-
occupied residential, multi-family and commercial real estate properties located
in the Bank's primary market area. Such loans are offered for the construction
of properties that are pre-sold or for which permanent financing has been
secured. At December 31, 1997, the Bank had $96.3 million of construction loan
commitments for the construction of one- to four-family properties.
Construction loans are generally offered with terms up to three years for
residential property and up to two years for multi-family and commercial
property. Construction loans may be made in amounts up to 90% of the estimated
cost of construction. With respect to construction loans, the Bank's policy is
to require borrowers to secure permanent financing commitments from generally
recognized lenders for an amount equal to or greater than the amount of the
loan. In some cases, the Bank may itself provide permanent financing. Loan
proceeds are disbursed generally on a monthly basis in increments as
construction progresses and as inspections by the Bank's supervising engineer
warrant.
15
<PAGE>
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate and therefore, the personal guarantee of the borrower
during the construction stage is required. Risk of loss on a construction loan
is dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction compared to the estimated cost (including
interest) of construction and other assumptions, including the estimated time to
sell residential properties. If the estimate of value proves to be inaccurate,
the Bank may be confronted with a project, when completed, having a value which
is insufficient to assure full repayment.
Home Equity and Second Mortgage Lending. The Bank offers fixed-rate,
fixed-term home equity loans and adjustable-rate home equity lines of credit in
its primary market area. Fixed-rate, fixed-term home equity loans are offered
in amounts up to 80% of the appraised value of the property (including the first
mortgage) with a maximum loan amount of $50,000. Fixed-rate, fixed-term home
equity loans are offered with terms up to fifteen years and home equity lines of
credit are offered for terms up to thirty years, with interest-only payments
during the first ten years and repayment of principal and interest during the
final twenty years. Adjustable-rate home equity lines of credit are offered in
either amounts up to a) 80% of the appraised value of the property (including
the first mortgage) with a maximum line amount of $100,000 or b) amounts up to
70% of the appraised value of the property (including the first mortgage) with a
credit line greater than $100,000 to a maximum line amount of $250,000.
Consumer and Student Lending. The Bank's portfolio of consumer and
student loans primarily consists of private banking, personal secured,
personal unsecured, modernization loans, loans secured by deposit accounts and
student loans. Private banking entails offering a wide array of deposit and
loan products which are customized to meet the needs of a specific client base,
which are composed of entrepreneurs, professionals and senior corporate
executives. Private banking loan terms can be either fixed or adjustable-rate,
secured or unsecured and with maturity terms of one year or less or on demand,
depending upon the borrower. The personal loan program began in May 1997.
Secured loans can be collateralized with deposits at any Federally Insured
Financial Institution with terms up to five years with a maximum amount of
$50,000. Unsecured loans are also offered with terms up to five years, however,
the maximum amount is $15,000. As of December 31, 1997, consumer and student
loans amounted to $6.0 million, or 0.60% of the Bank's gross loan portfolio, of
which $1.3 million were student loans. The Bank has phased out its direct
student loan origination program, except for its participation in a direct
lending program with SLMA. The Bank offers both subsidized and unsubsidized
student loans through a forward purchase and servicing agreement with SLMA. This
agreement was prompted by the initiation of the federal government's direct
student loan program. The Bank also has phased out its home improvement loans by
expanding its home equity loan program.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and loan approval limits of the Bank. The Board of
Directors has established an Executive Committee, comprised of rotating members
of the Board of Directors, to review and approve loans in amounts greater than
management's approval limits. The Board of Directors has authorized the
following persons to approve loans up to the amounts indicated: commercial real
estate loans of up to $1.0 million can be approved by the President or Senior
Lending Officer plus one additional officer in the Lending Division; all
commercial real estate loans, multi-family loans, construction loans and loan
participations in excess of $1.0 million require the approval of the Executive
Committee of the Board of Directors; when these loans exceed $5.0 million, they
require the approval of the Board of Directors. Home equity loans and lines of
credit are approved by two officers within the lending division, with one of
those officers being a senior officer of the Bank. All residential loans of up
to $300,000 are approved within RFI by the underwriter; loans in excess of this
amount require the countersignature of a senior officer of RFI.
With respect to all loans originated by RFI on behalf of the Bank, upon
receipt of a completed loan application from a prospective borrower, a credit
report is ordered and certain other information is verified by an independent
credit agency. If necessary, additional financial information may be required.
An appraisal of real estate intended to secure a proposed loan generally is
required to be performed by appraisers approved by the Bank. For proposed
mortgage loans, the Board of Directors annually
16
<PAGE>
approves the independent appraisers used by the Bank and approves the Bank's
appraisal policy. The Bank's policy is to obtain title and hazard insurance on
all mortgage loans and the Bank may require borrowers to make payments to a
mortgage escrow account for the payment of property taxes. Any exceptions to the
Bank's underwriting policies must be noted on an underwriting standards
checklist and approved by the Executive Committee for loans of up to $5.0
million and by the Board of Directors for loans of $5.0 million or more. The
Bank subjects all loan commitments for non-residential mortgage loans to an
environmental site assessment.
DELINQUENT LOANS, REAL ESTATE OWNED AND CLASSIFIED ASSETS
Management and the Board of Directors perform a monthly review of all
delinquent loans. The procedures taken by the Bank with respect to
delinquencies vary depending on the nature of the loan and period of
delinquency. The Bank generally requires that delinquent mortgage loans be
reviewed and that a delinquency notice be mailed no later than the 16th day of
delinquency and a late charge assessed after 15 days. The Bank's subservicer,
Dovenmuehle, follows similar delinquency procedures. The Bank's policies
provide that telephone contact will be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to foreclosure, the Bank will attempt to obtain full
payment or work out a repayment schedule with the borrower to avoid foreclosure.
It is the Bank's general policy to discontinue accruing interest on all loans
which are past due 90 days or when in the opinion of management such suspension
is warranted. Property acquired by the Bank as a result of foreclosure on a
mortgage loan is classified as real estate owned (REO) and is recorded at the
lower of the unpaid principal balance or fair value less estimated costs to sell
at the date of acquisition and thereafter. Upon foreclosure, it is the Bank's
policy to generally require an appraisal of the property and, thereafter,
appraise the property on an as-needed basis.
At December 31, 1997, the Bank's real estate owned, net, consisted of
foreclosed assets totaling $157,000 and was held directly by the Bank and its
subsidiaries which were formed for the purpose of holding and maintaining
certain real estate owned. See "Subsidiary Activities." At such date, real
estate owned was comprised of four (4) one- to four-family properties with an
aggregate carrying value of $267,000, and three (3) commercial real estate
properties with an aggregate carrying value of $1.0 million. Bank personnel or
an independent inspector generally conducts periodic external inspections on all
properties securing loans in foreclosure and generally conducts external
appraisals on all properties prior to taking ownership of the property. Based
upon such inspections and appraisals, the Bank will charge- off any loan
principal it deems appropriate at such time. Bank personnel conduct monthly
reviews of its foreclosed real estate and periodically adjust its valuation
allowance for possible declines in the value of real estate owned. The Bank's
allowance for possible losses on real estate owned at December 31, 1997 totaled
$1.1 million, or 87.8% of the aggregate gross value of real estate owned. The
Bank is currently offering for sale all real estate owned as a result of
foreclosure through brokers and through its own personnel.
The Bank's policies permit the financing of the sale of its foreclosed real
estate on substantially the same terms applicable to its other real estate
mortgage loans with the exception that the Bank may loan up to 80% of the lesser
of the appraised value or sales price of the foreclosed property.
Federal regulations and the Bank's Classification of Assets Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank currently classifies
problem and potential problem assets as "Substandard," "Doubtful" or "Loss"
assets. An asset is considered Substandard if it is inadequately protected by
the current net worth and
17
<PAGE>
paying capacity of the obligor or of the collateral pledged, if any. Substandard
assets include those characterized by the distinct possibility that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as Doubtful have all of the weaknesses inherent in those
classified Substandard with the added characteristic that the weaknesses present
make collection or liquidation in full, on the basis of currently existing
facts, conditions and values, highly questionable and improbable. Assets
classified as Loss are those considered uncollectible and of such little value
that their continuance as assets without the establishment of a specific loss
reserve is not warranted. Assets which do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories, but possess weaknesses are designated as "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for possible loan losses in an amount deemed prudent by
management unless the loss of principal appears to be remote. General valuation
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies one or more assets, or portions thereof, as Loss,
it is required either to establish a specific allowance for losses equal to 100%
of the amount of the assets so classified or to charge-off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
FDIC and NYSBD, which can order the establishment of additional general or
specific loss allowances. The FDIC, in conjunction with the other federal
banking agencies, recently adopted an inter-agency policy statement on the
allowance for loan and lease losses. The policy statement provides guidance for
financial institutions on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management has
established acceptable allowance evaluation processes that meet the objectives
set forth in the policy statement. While the Bank believes that it has
established an adequate allowance for possible loan losses, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to materially increase its allowance for possible loan losses,
thereby negatively affecting the Bank's financial condition and earnings at that
time. Although management believes that adequate specific and general loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of specific and general loan loss
allowances may become necessary.
The Bank's senior management reviews and classifies the Bank's loans on a
monthly basis and reports the results of its reviews to the Board of Directors.
At December 31, 1997, the Bank had $7.3 million of loans designated as
Substandard, consisting of 47 commercial real estate and one- to four-family
loans, and no loans classified as Doubtful or Loss. At December 31, 1997, the
Bank had $12.4 million of assets designated as Special Mention, consisting of 31
commercial real estate and one- to four-family loans, which were designated
Special Mention due to past loan delinquencies.
18
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio as of
the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
---------------------------------------------------- ------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------------ ----------------------- ------------------- ---------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- ---------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family............... 8 $1,045 23 $2,437 6 $ 475 21 $1,853
Multi-family...................... - - - - - - - -
Commercial real estate............ 3 448 4 2,060 - - 8 4,004
Construction and development...... - - - - - - 1 602
Home equity and second mortgage... - - 1 3 - - - -
Consumer (1)...................... - - 1 19 1 5 1 8
Student loans..................... - - - - - - - -
-------- --------- ------- --------- ------- -------- -------- ---------
Total............................. 11 $1,493 29 $4,519 7 $ 480 31 $6,467
======== ========= ======= ========= ======= ======== ======== =========
Delinquent loans to total
loans (2).................... 0.15% 0.46% 0.09% 1.26%
========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
-----------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------- --------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family............................. 4 $ 297 23 $ 1,915
Multi-family.................................... - - - -
Commercial real estate.......................... - - 15 6,536
Construction and development.................... - - 1 150
Home equity and second mortgage................. - - 1 123
Consumer (1).................................... - - - -
Student loans................................... - - 11 42
-------- ------- ------- --------
Total........................................... 4 $ 297 51 $ 8,766
======== ======= ======= ========
Delinquent loans to total loans (2)............. 0.08% 2.26%
======= ========
</TABLE>
___________________
(1) Consumer loans consist of private banking, personal secured, personal
unsecured, modernization and passbook loans. Private banking, personal
secured and personal unsecured loans were originated beginning during the
year ended December 31, 1997. The amounts shown prior to December 31, 1997
do not include the aforementioned loan products.
(2) Total loans includes loans receivable held for investment, less deferred
loan fees, deferred mortgage interest and unamortized discounts, net.
19
<PAGE>
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans and REO.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans(1):
One- to four-family....................... $ 3,676 $ 2,764 $ 2,965 $ 4,708 $ 6,041
Multi-family.............................. - - - 263 1,037
Commercial real estate.................... 2,723 5,374 8,650 16,519 17,350
Construction and development.............. - 602 150 2,900 3,226
Home equity............................... 62 - - - -
Consumer (2)............................... 19 - - - -
------- ------- ------- ------- -------
Total non-accrual loans............ 6,480 8,740 11,765 24,390 27,654
Loans contractually past due 90 days or more,
other than non-accruing......................... - - 408 665 3,689
------- ------- ------- ------- -------
Total non-performing loans........... 6,480 8,740 12,173 25,055 31,343
Real estate owned, net (3)......................... 157 1,698 6,047 3,359 2,613
------- ------- ------- ------- -------
Total non-performing assets.......... $ 6,637 $10,438 $18,220 $28,414 $33,956
======= ======= ======= ======= =======
Allowance for possible loan losses as a percent
of total loans (4).............................. 2.46% 4.55% 6.01% 6.84% 8.47%
Allowance for possible loan losses as a percent
of total non-performing loans (4) (5)........... 370.82% 266.82% 191.82% 100.28% 78.17%
Non-performing loans as a percent
of loans (4) (5)............................... 0.66% 1.71% 3.13% 6.82% 10.84%
Non-performing assets as a percent of total
assets (6) (7)................................. 0.18% 0.29% 1.14% 1.98% 2.53%
</TABLE>
(1) Includes restructured loans which are less than 90 days past due but which
have not yet complied with the terms of their restructuring agreement for
a satisfactory period of time.
(2) Includes private banking, personal secured, personal unsecured,
modernization and passbook loans. Private banking, personal secured and
personal unsecured loans were originated beginning during the year ended
December 31, 1997. The amounts shown prior to December 31, 1997 do not
include the aforementioned loan products.
(3) REO balances are shown net of related loss allowances.
(4) Loans include loans receivable held for investment, net, excluding the
allowance for possible loan losses which at December 31, 1997, 1996, 1995,
1994 and 1993 was $24.0 million, $23.3 million, $23.4 million, $25.1 million
and $24.5 million, respectively.
(5) Non-performing loans consist of non-accruing loans and all loans 90 days or
more past due and other loans which have been identified by the Bank as
presenting uncertainty with respect to the collectibility of interest or
principal.
(6) Non-performing assets consist of non-performing loans and REO.
(7) Total assets at December 31, 1996 includes $1.36 billion of proceeds held in
escrow by the Bank on behalf of depositors and other individuals who
submitted funds in anticipation of the Bank's conversion to stock form and
the concurrent issuance of Roslyn Bancorp, Inc. Common Stock.
20
<PAGE>
Non-accrual loans totaled $6.5 million as of December 31, 1997, and
included 39 one- to four-family loans, with an aggregate balance of $3.7
million, 9 commercial real estate loans with an aggregate balance of $2.7
million, 2 home equity loans, with an aggregate balance of $62,000 and 1
consumer loan with an aggregate balance of $19,000. Non-accrual loans do not
include student loans delinquent 90 days or more as the Bank does not classify
such loans as non-accrual because delinquent principal and interest on
guaranteed student loans is guaranteed by the U.S. Government.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained through provisions for
possible loan losses based on management's on-going evaluation of the risks
inherent in its loan portfolio in consideration of the trends in its loan
portfolio, the national and regional economies and the real estate market in the
Bank's primary lending area. The allowance for possible loan losses is
maintained at an amount management considers adequate to cover estimated losses
in its loan portfolio which are deemed probable and estimable based on
information currently known to management. The Bank's loan loss allowance
determinations also incorporate factors and analyses which consider the
potential principal loss associated with the loan, costs of acquiring the
property securing the loan through foreclosure or deed in lieu thereof, the
periods of time involved with the acquisition and sale of such property, costs
and expenses associated with maintaining and holding the property until sale and
the costs associated with the Bank's inability to utilize funds for other income
producing activities during the estimated holding period of the property.
As of December 31, 1997, the Bank's allowance for possible loan losses was
$24.0 million, or 2.46% of total loans and 370.82% of non-performing loans as
compared to $23.3 million, or 4.55% of total loans and 266.82% of non-performing
loans as of December 31, 1996. The Bank had total non-performing loans of $6.5
million and $8.7 million at December 31, 1997 and 1996, respectively, and non-
performing loans to total loans of 0.66% and 1.71%, respectively. The Bank will
continue to monitor and modify its allowance for possible loan losses as
conditions dictate. While management believes that, based on information
currently available, the Bank's allowance for possible loan losses is sufficient
to cover losses inherent in its loan portfolio at this time, no assurance can be
given that the Bank's level of allowance for possible loan losses will be
sufficient to cover future possible loan losses incurred by the Bank or that
future adjustments to the allowance for possible loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for possible loan losses. Management may in the future
increase its level of loan loss allowance as a percentage of total loans and
non-performing loans in the event it increases the level of multi-family,
commercial real estate, construction and development or other lending as a
percentage of its total loan portfolio. In addition, the FDIC and NYSBD as an
integral part of their examination process periodically review the Bank's
allowance for possible loan losses. Such agencies may require the Bank to make
additional provisions for estimated possible loan losses based upon judgments
that may differ from those of management.
21
<PAGE>
The following table sets forth activity in the Bank's allowance for
possible loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year........................ $23,320 $23,350 $25,127 $24,502 $23,187
------- ------- ------- ------- -------
Provision for possible loan losses.................. 600 2,000 600 600 6,860
Charge-offs:
Real estate loans:
One- to four-family............................ - 19 14 - 304
Commercial real estate......................... 83 1,589 2,385 59 3,977
Construction and development................... - 519 111 112 1,264
Consumer and student loans....................... 8 - - - -
------- ------- ------- ------- -------
Total charge-offs........................ 91 2,127 2,510 171 5,545
------- ------- ------- ------- -------
Recoveries:
Real estate loans:
One- to four-family............................ - 3 40 107 -
Commercial real estate......................... 200 94 92 89 -
Construction and development................... - - 1 - -
------- ------- ------- ------- -------
Total recoveries......................... 200 97 133 196 -
------- ------- ------- ------- -------
Net recoveries (charge-offs)........................ 109 (2,030) (2,377) 25 (5,545)
------- ------- ------- ------- -------
Balance at end of year.............................. $24,029 $23,320 $23,350 $25,127 $24,502
======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
The following tables set forth the Bank's percent of allowance for possible
loan losses to total allowance and the percent of loans to total loans
(including loans held-for-sale) in each of the categories listed at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996
---------------------------------------- ----------------------------------
PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
--------- ------------ ---------------- -------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family................................. $ 6,970 29.01% 63.28% $ 2,580 11.06% 49.83%
Multi-family........................................ 1,770 7.37 4.39 2,960 12.69 8.81
Commercial real estate.............................. 8,003 33.30 24.82 7,474 32.05 31.94
Construction and development........................ 3,553 14.79 5.22 4,664 20.00 7.09
Home equity/second mortgage......................... 137 0.57 1.69 47 0.20 1.80
Consumer and student................................ 103 0.43 0.60 35 0.15 0.53
Unallocated......................................... 3,493 14.53 - 5,560 23.85 -
------- ------- ------ ------- ------ ------
Total allowance for possible
loan losses............................... $24,029 100.00% 100.00% $23,320 100.00% 100.00%
======= ======= ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------ -----------------------------
PERCENT OF PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ --------- ----------- ------ ---------- ----------- ------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family................... $ 2,176 9.32% 48.41% $2,677 10.65% 41.52% $2,801 11.43% 45.16%
Multi-family.......................... 3,036 13.00 8.92 2,824 11.24 5.05 2,938 11.99 7.28
Commercial real estate................ 7,185 30.77 30.65 7,523 29.94 30.98 9,525 38.87 34.24
Construction and development.......... 3,872 16.58 10.21 4,426 17.61 15.22 2,533 10.34 4.37
Home equity/second mortgage........... 35 0.15 0.90 31 0.13 1.18 32 0.13 1.77
Consumer and student.................. 34 0.15 0.91 35 0.14 6.05 38 0.16 7.18
Unallocated........................... 7,012 30.03 - 7,611 30.29 - 6,635 27.08 -
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance for possible
loan losses................. $23,350 100.00% 100.00% $25,127 100.00% 100.00% $24,502 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======
</TABLE>
23
<PAGE>
ENVIRONMENTAL ISSUES
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for costs
of cleaning up hazardous materials found on property securing their loans. In
addition, the existence of hazardous materials may make it unattractive for a
lender to foreclose on such properties. Although environmental risks are
usually associated with loans secured by commercial real estate, risks also may
be substantial for loans secured by residential real estate if environmental
contamination makes security property unsuitable for use. This could also have
a negative effect on nearby property values. The Bank attempts to control its
risk by requiring that a phase one environmental assessment be completed as part
of its underwriting review for all non-residential mortgage applications. In
addition, the Bank's policy is to maintain ownership of specific real estate
properties acquired by the Bank as a result of foreclosure in separately
incorporated subsidiaries.
SECURITIES INVESTMENT ACTIVITIES
The Board of Directors sets the securities investment policy of the Bank.
This policy dictates that investment decisions will be made based on the safety
of the investment, liquidity requirements of the Bank and potential return on
the investments. In pursuing these objectives, the Bank considers the ability
of an investment to provide earnings consistent with factors of quality,
maturity, marketability and risk diversification. The Board of Directors has
established an Investment Committee comprised of three Directors and the
Investment Officer to supervise the Bank's securities investment program. The
Bank's Investment Committee meets periodically and evaluates all investment
activities for safety and soundness, evaluates investment policy and objectives
for the next period and submits a report to the Board of Directors. The Bank's
Investment Officer is responsible for making securities investment portfolio
decisions in accordance with the Bank's policies. While the Investment Officer
has the authority to conduct trades within specific guidelines established by
the Bank's investment policy, all transactions are periodically reviewed by the
Investment Committee and reported to the Board of Directors on a monthly basis.
The Bank's current policies generally limit securities investments to U.S.
Government and agency securities, municipal bonds, corporate debt obligations
and corporate equities. In addition, the Bank's policies permit investments in
mortgage-backed and mortgage related securities, including securities issued and
guaranteed by FNMA, FHLMC, Government National Mortgage Association (GNMA) and
privately-issued Collateralized Mortgage Obligations (CMOs). The Bank's current
securities investment strategy is to de-emphasize its investment in U.S.
Government obligations, corporate debt and municipal bonds and to emphasize the
purchase of mortgage-backed and mortgage related securities and preferred stock
issued by corporate issuers in order to increase its overall investment
securities yield while remaining in short- and medium-term investments for
purposes of interest rate risk management.
At December 31, 1997, the Company had $2.55 billion in securities,
consisting primarily of U.S. Government and agency obligations, mortgage-backed
and mortgage related securities, municipal and corporate obligations, and
preferred and common stocks, as compared with $1.92 billion at December 31,
1996. Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS No. 115), requires the
Company to designate its securities as held-to-maturity, available-for-sale or
trading depending on the Company's intent regarding its investments. Upon the
purchase of an investment security, the Bank and the Holding Company (Roslyn
Bancorp, Inc. on an unconsolidated basis) will make a determination as to the
classification of the security. However, the Bank and the Holding Company
currently do not purchase securities with the intention of trading such
securities, nor does the
24
<PAGE>
Bank or the Holding Company maintain trading portfolios. As of December 31,
1997, $2.35 billion of the Company's securities portfolio, or 65.3% of total
assets, was classified as available-for-sale, with an average life of the
portfolio of 2.25 years. At such date, $202.1 million of the Company's
securities portfolio, or 5.6% of total assets, was classified as held-to-
maturity, with a market value of $202.5 million and an average life of the
portfolio of 1.24 years. Since December 1995, the Company has designated all
newly-purchased securities as available-for-sale.
Mortgage-Backed and Mortgage Related Securities. The Bank purchases
mortgage-backed and mortgage related securities in order to: (i) generate
positive interest rate spreads with minimal administrative expense; (ii) lower
its credit risk as a result of the guarantees provided by FHLMC, FNMA, and GNMA;
(iii) utilize these securities as collateral for borrowings; and (iv) increase
the liquidity of the Bank. The Bank has primarily invested in mortgage-backed
and mortgage related securities issued or sponsored by private issuers, GNMA and
FHLMC. The Bank also invests in CMOs issued or sponsored by FNMA and FHLMC as
well as private issuers. At December 31, 1997, mortgage-backed and mortgage
related securities totaled $2.06 billion, or 57.1% of total assets and 58.1% of
total interest-earning assets, of which $1.86 billion was classified as
available-for-sale and $200.2 million was classified as held-to-maturity. At
December 31, 1997, 21.8% of the mortgage-backed and mortgage related securities
were adjustable-rate and 78.2% were fixed-rate. The mortgage-backed and
mortgage related securities portfolio had coupon rates ranging from 5.0% to
12.5% and had a weighted average yield of 7.24% at December 31, 1997. The
estimated fair value of the Bank's mortgage-backed and mortgage related
securities available-for-sale at December 31, 1997, was $1.86 billion.
At December 31, 1997, the Bank's CMO portfolio totaled $1.34 billion, or
37.2% of total assets and 37.8% of total interest-earning assets, consisting of
$845.5 million of CMOs issued by private issuers such as GE Capital Mortgage
Services, Inc., Prudential Home Mortgage Securities, Inc., Residential Funding
Mortgage Securities, Inc. and Citicorp Mortgage Securities, Inc., and $493.2
million issued by government sponsored agencies such as FNMA and FHLMC. It is
the policy of the Bank to limit its privately issued CMOs to non-high risk
securities rated "AAA" by two rating agencies with an average life of seven
years or less. The Bank also limits the amount of such investments to $25
million per transaction, 10% of the issuer's outstanding CMOs and 35% of the
Bank's assets. For government sponsored CMOs, the Bank's policy limits such
investments to non-high risk securities that have an average life of ten years
or less. The Bank also limits the amount of such investments to $50 million per
transaction. The Bank monitors the credit rating of its CMOs on a regular
basis. The current securities investment policy of the Bank prohibits the
purchase of higher risk CMOs, which are defined as those securities exhibiting
significantly greater volatility of estimated average life and price relative to
interest rates than do standard 30-year fixed-rate securities. At December 31,
1997, $1.14 billion of the Bank's CMO portfolio was classified as available-for-
sale and $200.2 million was classified as held-to-maturity, with a market value
of $200.4 million. At such date, the Bank's CMO portfolio had an average
estimated life of 2.01 years and a weighted average yield of 7.24%.
Debt Securities. The Bank's investment in debt securities generally
consists of investments in U.S. Treasury securities and debt securities issued
by government sponsored agencies such as FNMA, GNMA and FHLMC. To a lesser
extent, the Bank invests in debt securities and commercial paper issued by
industrial and financial companies and obligations of municipalities and public
utilities.
U.S. Government and Agency Obligations. At December 31, 1997, the Bank's
U.S. Government securities portfolio totaled $78.0 million, all of which was
classified as available-for-sale. Such portfolio primarily consists of short-
to medium-term (maturities of one to five years) securities. The Bank's
25
<PAGE>
current investment practice, however, is to de-emphasize its investments in such
instruments. At December 31, 1997, the Bank's agency securities portfolio
totaled $125.5 million, all of which was classified as available-for-sale and
consisted of agency structured notes and callable debentures. The agency
structured notes generally provide for predetermined interest rate adjustments
("step-ups") primarily consisting of annual interest rate increases of 13 to 25
basis points. While such step-up structured notes generally do not involve
credit risk, such securities involve interest rate risk in the event market
interest rates increase at a rate faster than the structured rate adjustment,
which, in turn, may adversely affect the market value of such investment. The
Bank's callable agency debentures generally are callable at par after one year
and in six month intervals thereafter. The current policy of the Bank limits the
purchase of agency debt obligations to a maturity of thirty years or less and
limits such purchases to $50 million per transaction, although purchases of
structured notes are limited to $20 million per transaction and 10% of the
Bank's assets.
Corporate Bonds. The Bank's corporate bond portfolio, which at December
31, 1997 totaled $5.4 million, all of which was classified as available-for-
sale, was composed primarily of short- and medium-term, floating-rate investment
grade issues of Lehman Brothers Holdings, Sears Roebuck and CHI Corp. At
December 31, 1997, the portfolio had an average life of approximately 0.83 years
and a weighted average coupon rate of 7.42%. The Bank's policy limits
investments in corporate bonds with maturities of ten years or less to bonds
rated "A" or better by at least one nationally recognized rating agency and to a
total investment of 25% of the Bank's assets, with a 1% limitation of a single
issuer. The Bank's policy limits investments in corporate bonds with maturities
between ten years and thirty years to bonds rated "A" or better by at least one
nationally recognized rating agency and a total investment of no more than 33%
of the Bank's current total corporate investments. Consistent with the Bank's
current securities investment strategy, the Bank intends to de-emphasize
investments in corporate debt obligations.
Municipal Bonds. The Bank's municipal bond portfolio, which at December
31, 1997 totaled $1.9 million, had an estimated fair market value of $2.0
million. All of such securities were classified as held-to-maturity and were
comprised of general obligation bonds (i.e., obligations backed by the general
credit of the issuer). All of the Bank's municipal bonds are currently rated
"AAA." At December 31, 1997, the average life of the portfolio was approximately
1.66 years and the portfolio had a weighted average coupon rate of 7.40%.
Interest earned on municipal bonds is exempt from federal, state and local
income taxes. The Bank's current policy is to de-emphasize its investment in
municipal bonds.
Equity Securities. At December 31, 1997, the Bank's equity securities
portfolio totaled $131.9 million, all of which was classified as available-for-
sale. The Company on an unconsolidated basis also has an equity securities
portfolio totaling $153.5 million, all of which was classified as available-for-
sale at December 31, 1997. The Company's equity securities portfolio consisted
of preferred stock issued by corporate issuers such as Ford Motor Co., and other
nationally recognized companies. The majority of the Company's preferred stock
portfolio is redeemable by the issuers pursuant to the terms of the preferred
stock, generally after a three to five year holding period. As of December 31,
1997, the Company had $32.3 million of preferred stock eligible for redemption
on or before December 31, 1998. The Company benefits from its investment in
common and preferred stocks due to a tax deduction the Company receives with
regards to dividends paid by corporate issuers on equity securities held by
other corporate entities such as the Company.
Included in the Bank's equity securities at December 31, 1997 was a $10.6
million investment in two common stock mutual funds. The Bank's policy limit
for its common and preferred stock investments is 7.5% of its total assets and
allows only for the purchase of common stock with a 1%
26
<PAGE>
limitation on the purchase of any single issuer and a total investment of 5% of
the Bank's total assets. The Bank's current policies permit the purchase of
preferred stock rated "Baa" or better, with a 1% limitation on the purchase of
preferred stock of any single issuer.
27
<PAGE>
The following table sets forth the composition of the Company's debt and
equity and mortgage-backed and mortgage related securities portfolios in dollar
amounts and in percentages at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- ------------ --------- ------------ -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government obligations..................... $ 77,975 3.05% $ 179,259 9.31% $ 204,626 17.92%
Agency securities............................... 125,481 4.92 124,377 6.46 34,744 3.04
Municipal bonds................................. 1,930 .08 1,930 .10 1,930 .17
Corporate obligations........................... 5,385 .21 14,398 .75 18,384 1.61
Other debt obligations (1)...................... - - - - 2,799 .25
---------- ------ ---------- ------ ---------- ------
Total debt securities.................... 210,771 8.26 319,964 16.62 262,483 22.99
---------- ------ ---------- ------ ---------- ------
Equity securities:
Preferred and common stock and other............ 285,352 11.18 168,862 8.78 118,778 10.40
---------- ------ ---------- ------ ---------- ------
Total equity securities.................. 285,352 11.18 168,862 8.78 118,778 10.40
---------- ------ ---------- ------ ---------- ------
Mortgage-backed and mortgage related securities:
FHLMC........................................... 253,153 9.91 220,264 11.44 116,267 10.18
GNMA............................................ 464,971 18.21 292,936 15.22 113,616 9.95
FNMA............................................ - - 6,263 .32 27,299 2.39
CMOs............................................ 1,338,702 52.44 916,580 47.62 503,516 44.09
---------- ------ ---------- ------ ---------- ------
Total mortgage-backed and mortgage
related securities...................... 2,056,826 80.56 1,436,043 74.60 760,698 66.61
---------- ------ ---------- ------ ---------- ------
Total securities............. $2,552,949 100.00% $1,924,869 100.00% $1,141,959 100.00%
========== ====== ========== ====== ========== ======
Debt and equity securities available-for-sale... $ 494,193 19.36% $ 486,896 25.30% $ 379,331 33.22%
Debt securities held-to-maturity................ 1,930 .08 1,930 .10 1,930 .17
---------- ------ ---------- ------ ---------- ------
Total debt and equity securities......... 496,123 19.44 488,826 25.40 381,261 33.39
---------- ------ ---------- ------ ---------- ------
Mortgage-backed and mortgage related
securities available-for-sale............ 1,856,633 72.72 1,159,411 60.23 413,485 36.20
Mortgage-backed and mortgage related
securities held-to-maturity.............. 200,193 7.84 276,632 14.37 347,213 30.41
---------- ------ ---------- ------ ---------- ------
Total mortgage-backed and mortgage
related securities...................... 2,056,826 80.56 1,436,043 74.60 760,698 66.61
---------- ------ ---------- ------ ---------- ------
Total securities......................... $2,552,949 100.00% $1,924,869 100.00% $1,141,959 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
__________________
(1) Includes public utilities.
28
<PAGE>
The following table sets forth the Company's securities activities for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
-------------- ------------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BEGINNING BALANCE.................................................. $1,924,869 $1,141,959 $1,018,043
---------- ---------- ----------
Debt securities purchased - held-to-maturity....................... - - 176,308
Debt securities purchased - available-for-sale..................... 123,329 201,226 2,002
Equity securities purchased - available-for-sale................... 155,220 80,012 32,957
Mortgage-backed and mortgage related securities
purchased - held-to-maturity...................................... - - 240,702
Mortgage-backed and mortgage related securities
purchased - available-for-sale.................................... 1,250,235 925,159 190,564
LESS:
Sale of debt securities - available-for-sale....................... 79,864 - 112,077
Sale of debt securities - held-to-maturity......................... - - 60,022
Sale of equity securities - available-for-sale..................... 17,855 35,758 11,077
Sale of mortgage-backed and mortgage
related securities available-for-sale............................. 37,794 89,400 48,463
Principal repayments on mortgage-backed
and mortgage related securities................................... 353,430 164,630 91,987
Maturities of debt securities...................................... 451,693 137,453 218,757
Realized gains (losses) on sales of mortgage-backed
and mortgage related securities................................... 784 (873) 904
Realized and unrealized gains (losses) on
debt and equity securities........................................ 1,973 69 (418)
Amortization of premium on callable preferred
stock............................................................. (805) (705) (1,297)
Accretion of discount/amortization of
(premium) on other securities..................................... 5,343 1,242 (962)
Change in net unrealized gain
on available-for-sale securities.................................. 32,637 4,021 25,539
---------- ---------- ----------
ENDING BALANCE..................................................... $2,552,949 $1,924,869 $1,141,959
========== ========== ==========
</TABLE>
29
<PAGE>
The following table sets forth certain information regarding the amortized
cost and estimated fair value of the Company's debt and equity and mortgage-
backed and mortgage related securities at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------- ---------- ----------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Debt and equity securities:
Debt securities held-to-maturity:
Municipal bonds.......................... $ 1,930 $ 2,026 $ 1,930 $ 2,067 $ 1,930 $ 2,151
---------- ---------- ----------- ---------- ----------- ----------
Debt securities available-for-sale:
U.S. Government obligations.............. 75,499 77,975 175,440 179,259 195,701 204,626
Agency securities........................ 125,097 125,481 124,709 124,377 34,764 34,744
Corporate obligations.................... 5,365 5,385 14,207 14,398 17,838 18,384
Other debt obligations (1)............... - - - - 2,742 2,799
---------- ---------- ----------- ---------- ----------- ----------
Total debt securities available-
for-sale............................... 205,961 208,841 314,356 318,034 251,045 260,553
---------- ---------- ----------- ---------- ----------- ----------
Equity securities available-for-sale:
Preferred and common stock
and other........................ 253,584 285,352 155,772 168,862 112,155 118,778
---------- ---------- ----------- ---------- ----------- ----------
Total debt and equity securities......... 461,475 496,219 472,058 488,963 365,130 381,482
---------- ---------- ----------- ---------- ----------- ----------
Mortgage-backed and mortgage related
securities:
Held-to-maturity:
CMOs.................................. 200,193 200,445 276,632 276,046 347,213 348,799
---------- ---------- ----------- ---------- ----------- ----------
Available-for-sale:
FHLMC.................................. 250,206 253,153 220,800 220,264 116,100 116,267
GNMA................................... 456,328 464,971 287,538 292,936 109,966 113,616
FNMA................................... - - 6,443 6,263 27,689 27,299
CMOs................................... 1,127,327 1,138,509 636,615 639,948 155,100 156,303
---------- ---------- ----------- ---------- ----------- ----------
Total mortgage-backed and
mortgage related securities
available-for-sale.............. 1,833,861 1,856,633 1,151,396 1,159,411 408,855 413,485
---------- ---------- ----------- ---------- ----------- ----------
Total mortgage-backed and mortgage
related securities........................ 2,034,054 2,057,078 1,428,028 1,435,457 756,068 762,284
---------- ---------- ----------- ---------- ----------- ----------
Net unrealized gain on securities
available-for-sale........................ 57,420 - 24,783 - 20,761 -
---------- ---------- ----------- ---------- ----------- ----------
Total securities carrying value/
estimated fair value...................... $2,552,949 $2,553,297 $ 1,924,869 $1,924,420 $ 1,141,959 $1,143,766
========== ========== =========== ========== =========== ==========
</TABLE>
_______________________________
(1) These securities include public utilities.
30
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
securities portfolio as of December 31, 1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
------------------------ ---------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
------------ ---------- ---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Municipal bonds............................ $ 735 6.34% $ 1,195 8.04% $ - -%
Mortgage-backed and mortgage
related securities........................ - - 6,744 5.85 2,992 5.50
------- ------- -------
Total held-to-maturity................... 735 6.34 7,939 6.18 2,992 5.50
------- ------- -------
Available-for-sale:
Mortgage-backed and mortgage
related securities:
FHLMC..................................... - - - - - -
GNMA...................................... - - 1,242 8.65 1,511 9.44
CMOs...................................... 62,960 6.67 - - 17,004 7.66
------- ------- -------
Total mortgage-backed and
mortgage related securities............... 62,960 6.67 1,242 8.65 18,515 7.80
------- ------- -------
Debt Securities:
U.S. Government obligations............... 30,353 6.92 47,622 7.40 - -
Agency securities......................... - - 15,463 6.60 10,000 7.45
Corporate obligations..................... 4,741 6.64 - - 644 6.50
------- ------- -------
Total debt securities..................... 35,094 6.88 63,085 7.19 10,644 7.39
------- ------- -------
Equity Securities (1):
Preferred and common stock
and other................................. - - - - - -
------- ------- -------
Total equity securities................... - - - - - -
------- ------- -------
Total available-for-sale.................. 98,054 6.75 64,327 7.22 29,159 7.65
------- ------- -------
Total securities............................... $98,789 $72,266 $32,151
======= ======= =======
<CAPTION>
-----------------------------------------------------------
MORE THAN TEN YEARS TOTAL
--------------------------- -----------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Municipal bonds............................ $ - -% $ 1,930 7.39%
Mortgage-backed and mortgage related....... 190,457 6.97 200,193 6.91
---------- ----------
Total held-to-maturity................... 190,457 6.97 202,123 6.91
---------- ----------
Available-for-sale:
Mortgage-backed and mortgage
related securities:
FHLMC..................................... 253,153 7.57 253,153 7.57
GNMA...................................... 462,218 7.09 464,971 7.10
CMOs...................................... 1,058,545 7.33 1,138,509 7.30
---------- ----------
Total mortgage-backed and mortgage
related securities..................... 1,773,916 7.30 1,856,633 7.28
---------- ----------
Debt Securities:
U.S. Government obligations............... - - 77,975 7.21
Agency securities......................... 100,018 8.03 125,481 7.80
Corporate obligations..................... - - 5,385 6.62
---------- ----------
Total debt securities................... 100,018 8.03 208,841 7.56
---------- ----------
Equity Securities (1):
Preferred and common stock
and other............................... 285,352 5.69 285,352 5.69
---------- ----------
Total equity securities................. 285,352 5.69 285,352 5.69
---------- ----------
Total available-for-sale................ 2,159,286 7.14 2,350,826 7.13
---------- ----------
Total securities............................... $2,349,743 $2,552,949
========== ==========
</TABLE>
(1) As equity securities have no maturities, they are classified in the more
than ten year category.
31
<PAGE>
SOURCES OF FUNDS
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, and proceeds from maturing
securities and cash flows from operations are the primary sources of the Bank's
funds for use in lending, investing and for other general purposes. The Bank
also utilizes borrowed funds, primarily reverse-repurchase agreements, to fund
its operations.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings
(including school savings and club accounts), Super NOW and NOW accounts,
checking accounts, money market accounts and certificates of deposit. The Bank
offers certificates of deposit with balances in excess of $100,000 at
preferential rates (jumbo certificates) and also offers Individual Retirement
Accounts (IRAs) and other qualified plan accounts. To enhance the deposit
products it offers and increase its market share, the Bank added commercial
checking accounts for small to moderately-sized commercial businesses, a payroll
accounts service with direct deposit features, as well as a low-cost checking
account service for low-income customers. Additionally, during 1997 the Bank
introduced the Quantum Savings account, free checking and several new
certificates of deposit products. The Quantum Savings account offers higher
interest rates than the traditional savings accounts.
At December 31, 1997, the Bank's deposits totaled $1.94 billion. For the
year ended December 31, 1997, the average balance of core deposits (savings,
Super NOW and NOW, money market and non-interest-bearing checking accounts,
excluding non-depository stock subscriptions) totaled $608.3 million, or 33.39%
of total average deposits. At December 31, 1997, the Bank had a total of $1.30
billion in certificates of deposit, of which $892.4 million had maturities of
one year or less. For the year ended December 31, 1997, the average balance of
certificate of deposit accounts represented 66.61% of total average deposits.
Although the Bank has a significant portion of its deposits in shorter term
certificates of deposit, management monitors activity on the Bank's certificate
of deposit accounts and, based on historical experience and the Bank's current
pricing strategy, believes it will retain a large portion of such accounts upon
maturity.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its branch offices are located. The Bank relies primarily on the
competitive pricing of its deposit products, customer service and its long-
standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits. In addition, the Bank has historically paid a special interest
payment on savings and NOW accounts, ranging from 10% to 25% of interest paid
on these accounts during the year. For each of the years ended December 31,
1997 and 1996, the Bank paid a special interest payment of 25% of interest paid
on savings and NOW accounts, which totaled $2.3 million and $3.0 million,
respectively. The Bank has made no decision as to the amount of such special
interest payment or whether such special interest payments will continue after
1997. The Bank uses traditional means of advertising its deposit products,
including radio and print media and generally does not solicit deposits from
outside its market area. While certificate accounts in excess of $100,000 are
accepted by the Bank, and may be subject to preferential rates, the Bank does
not actively solicit such deposits as such deposits are more difficult to retain
than core deposits. Although the Bank has historically not used brokers to
obtain deposits, the Bank has authorized the utilization of brokers to obtain
deposits to fund its activities and has entered into several relationships with
a nationally recognized retail brokerage firm to accept deposits sold by such
brokerage firm.
32
<PAGE>
Dependent on market conditions, the Bank will periodically use such brokered
deposits primarily to fund asset growth and manage interest rate risk. The
Bank's policies limit the amount of brokered deposits which the Bank may have at
any time to 25% of total retail deposits. At December 31, 1997, the Bank had
$149.8 million in brokered deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals)................................ $(99,293) $560,178 $ 52,272
Interest credited on deposit accounts..................... 86,003 66,412 57,192
-------- -------- --------
Total (decrease) increase in deposit accounts............. $(13,290) $626,590 $109,464
======== ======== ========
</TABLE>
At December 31, 1997, the Bank had outstanding $191.8 million in
certificate of deposit accounts in amounts of $100,000 or more, maturing as
follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
----------------------------------------- ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less..................... $ 64,621 5.46%
Over three through six months............ 32,452 5.75
Over six through 12 months............... 55,564 5.87
Over 12 months........................... 39,195 6.39
--------
Total.................................... $191,832 5.82
========
</TABLE>
33
<PAGE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Average balances for the periods
presented utilize average daily balances.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996
------------------------------- --------------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
---------- -------- -------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts.............................. $ 52,916 2.90% 2.70% $ 64,046 4.18% 2.89%
Savings accounts (1)............................... 445,716 24.47 3.04 480,171 31.37 3.08
Super NOW and NOW accounts (2)..................... 78,974 4.34 3.60 45,990 3.00 2.96
Non-interest-bearing accounts...................... 30,644 1.68 - 29,248 1.91 -
---------- ------ ---------- ------
Total........................................... 608,250 33.39 2.93 619,455 40.46 2.91
---------- ------ ---------- ------
Certificates of deposit:
Less than six months............................ 147,011 8.07 5.13 180,355 11.78 5.03
Over six through 12 months...................... 367,371 20.17 5.56 306,839 20.05 5.42
Over 12 through 24 months....................... 236,161 12.96 6.00 107,997 7.06 5.94
Over 24 months.................................. 219,665 12.06 6.36 169,017 11.04 6.43
Certificates over $100,000...................... 243,270 13.35 5.70 147,008 9.61 5.65
---------- ------ ---------- ------
Total certificates of deposit................. 1,213,478 66.61 5.77 911,216 59.54 5.63
---------- ------ ---------- ------
Total average deposits................... $1,821,728 100.00% 4.82 $1,530,671 100.00% 4.53
========== ====== ========== ======
<CAPTION>
---------------------------------
1995
---------------------------------
PERCENT
OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE
---------- -------- ----------
<S> <C> <C> <C>
Money market accounts.............................. $ 69,237 5.41% 2.90%
Savings accounts (1)............................... 473,682 36.99 3.21
Super NOW and NOW accounts (2)..................... 33,135 2.59 2.53
Non-interest-bearing accounts...................... 26,901 2.10 -
---------- ------
Total........................................... 602,955 47.09 2.99
---------- ------
Certificates of deposit:
Less than six months............................ 119,414 9.33 5.28
Over six through 12 months...................... 238,283 18.60 5.76
Over 12 through 24 months....................... 74,302 5.80 5.62
Over 24 months.................................. 147,580 11.53 6.51
Certificates over $100,000...................... 97,931 7.65 5.90
---------- ------
Total certificates of deposit................. 677,510 52.91 5.84
---------- ------
Total average deposits................... $1,280,465 100.00% 4.50
========== ======
</TABLE>
(1) Includes special interest payment made by the Bank on such accounts for the
years ended December 31, 1997, 1996 and 1995, which resulted in an
increased cost of such accounts of 48 basis points, 59 basis points, and 61
basis points, respectively.
(2) Includes special interest payment made by the Bank on the NOW accounts for
the years ended December 31, 1997, 1996 and 1995, which resulted in an
increased cost of such accounts of 18 basis points, 35 basis points and 49
basis points, respectively.
34
<PAGE>
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1997 AT DECEMBER 31,
------------------------------------------------------------------------ -------------------------------
GREATER GREATER GREATER GREATER
THAN THAN THAN THAN
ONE ONE TO TWO TO THREE TO FOUR TO GREATER
YEAR TWO THREE FOUR FIVE THAN
OR LESS YEARS YEARS YEARS YEARS FIVE YEARS 1997 1996 1995
--------- ------------- ----------- ---------- --------- ----------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit:
0 to 3.00%................ $ - $ - $ - $ - $ - $ - $ - $ 223 $ 3,720
3.01 to 4.00%............. - - - - - - - 61 18,094
4.01 to 5.00%............. 24,071 143 - - - - 24,214 10,000 464,858
5.01 to 6.00%............. 753,814 86,716 6,034 5,125 2,395 1,450 855,534 819,414 225,343
6.01 to 7.00%............. 113,117 126,040 51,787 53,734 40,544 20,075 405,297 278,741 12,762
7.01 to 8.00%............. - 32 3,692 1,374 174 749 6,021 6,677 14,704
Over 8.01%................ 1,389 2,506 6,952 1,323 27 9 12,206 12,937 10,294
-------- -------- ------- ------- ------- ------- ---------- ---------- --------
Total..................... $892,391 $215,437 $68,465 $61,556 $43,140 $22,283 $1,303,272 $1,128,053 $749,775
======== ======== ======= ======= ======= ======= ========== ========== ========
</TABLE>
35
<PAGE>
Borrowed Funds. The Bank's primary source of borrowings consists of reverse-
repurchase agreements entered into with nationally recognized securities
brokerage firms. At December 31, 1997, the Bank had $965.1 million of reverse-
repurchase agreements outstanding, whereas there were no reverse-repurchase
agreements outstanding at December 31, 1996. Reverse-repurchase agreements are
contracts for the sale of securities owned or borrowed by the Bank with an
agreement to repurchase those securities at an agreed upon price and date.
Historically, the Bank has entered into reverse-repurchase agreements as a
method of providing the Bank with cost effective funding in periods where its
needs for funds exceeded the amount of funds provided by its deposit gathering
activities. Currently, the Bank utilizes such reverse-repurchase agreements in
periods when the Bank can generate securities investments with yields in excess
of its cost of such borrowing. The Bank's policies limit the Bank's use of
reverse-repurchase agreements to maturities of overnight to five years, with
collateral consisting of U.S. Treasury obligations, U.S. agency obligations or
mortgage-backed securities. Securities brokers utilized by the Bank in these
agreements must have a minimum of $100 million of "net" excess capital with a
Public Securities Association Master repurchase agreement on file. The Bank
averaged approximately $629.2 million pursuant to such reverse-repurchase
agreements during the year ended December 31, 1997. At December 31, 1997, $1.3
million of RFI's mortgage loans were pledged to secure notes payable to FNMA
under a warehouse line of credit known as the FNMA "As Soon As Pooled Plus
Program." These notes are repaid as the related mortgage loans are sold or
collected.
The following table sets forth certain information regarding borrowed funds
for the dates indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995
------------------ ------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FNMA warehouse line of credit:
Average balance outstanding.................................. $ 1,128 $ 2,248 $ 2,053
Maximum amount outstanding at any month
end during the year....................................... 3,945 3,239 5,734
Balance outstanding at end of year........................... 1,332 1,829 1,647
Weighted average interest rate during the year............... 6.56% 6.62% 6.04%
Weighted average interest rate at end of year................ 6.70% 6.87% 6.84%
Reverse-repurchase agreements:
Average balance outstanding.................................. $629,224 $100,159 $22,292
Maximum amount outstanding at any month
end during the year....................................... 995,861 212,296 40,850
Balance outstanding at end of year........................... 965,119 - -
Weighted average interest rate during the year............... 5.90% 5.58% 6.42%
Weighted average interest rate at end of year................ 6.05% - -
Total borrowed funds:
Average balance outstanding.................................. $630,352 $102,407 $24,345
Maximum amount outstanding at any month end
during the year........................................... 997,288 215,310 46,584
Balance outstanding at end of year........................... 966,451 1,829 1,647
Weighted average interest rate during the year............... 5.91% 5.66% 6.38%
Weighted average interest rate at end of year................ 6.05% 6.87% 6.84%
</TABLE>
36
<PAGE>
SAVINGS BANK LIFE INSURANCE
The Bank, through its SBLI department, engages in group life insurance
coverage per individual under SBLI's Financial Institution Group Life Insurance
policy. The SBLI department's activities are segregated from the Bank and,
while they do not directly affect the Bank's earnings, management believes that
offering SBLI is beneficial to the Bank's relationship with its depositors and
the general public. The SBLI department pays its own expenses and reimburses
the Bank for expenses incurred on its behalf.
SUBSIDIARY ACTIVITIES
Residential First, Inc. RFI is the Bank's wholly-owned mortgage banking
subsidiary which was established in August 1995 for the origination, sale and
servicing of one- to four-family loans. RFI was formed in connection with the
Bank's acquisition of certain assets and liabilities of Residential Mortgage
Banking, Inc. It is a mortgage banking entity currently operating in the New
York Counties of Nassau, Suffolk, Queens, Staten Island, Albany, Syracuse and
Rochester, the New Jersey Counties of Morris and Monmouth and the Connecticut
Counties of Fairfield and Hartford. The consideration paid for the assets and
liabilities of RMBI, including a $623.0 million loan servicing portfolio,
exceeded the estimated fair market value of the net assets acquired by
approximately $3.5 million, which was recorded by RFI as goodwill and is being
amortized on a straight line basis over a ten year period. RFI is operated
under the direction of its executive officers who are overseen by RFI's Board of
Directors, which consists of certain members of the Board of Directors of the
Company.
Roslyn Capital Corp. Roslyn Capital Corp. (RCC) is a subsidiary of the
Bank, organized by the Bank on April 1, 1997 for the purpose of engaging in a
REIT. On that date, the Bank transferred one- to four-family residential
mortgage loans, commercial real estate loans and mortgage-backed securities
totaling $707.0 million, net, which included certain associated assets and
liabilities, to RCC. In return, the Bank received shares of common and
preferred stock of RCC. The subsidiary will promote greater retained earnings
for the Bank and thereby serve to strengthen the Bank's capital position from an
operational standpoint.
RSB Agency, Inc. RSB Agency, Inc., a wholly-owned subsidiary of the Bank
incorporated in 1983, previously engaged in the sale of life insurance. RSB
Agency, Inc. is currently inactive, except for its collection of commissions for
previously-issued life insurance policies.
Other Subsidiaries. The Bank has five other wholly-owned subsidiaries.
Blizzard Realty Corp., 1400 Corp. and BSR 1400 Corp. are periodically used to
hold real estate owned. In addition, BSR 1400 Corp. holds Bank facilities and
leases thereon. Residential Mortgage Banking, Inc. was established to preserve
the name thereof for future use. Old Northern Co. Ltd. currently is an inactive
subsidiary.
PERSONNEL
As of December 31, 1997, the Bank had 367 full-time employees and 81 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank and RFI considers its relationship with its employees to be
good.
37
<PAGE>
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of,
the OTS under the Home Owner's Loan Act.
The Bank is a New York State chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the Bank
Insurance Fund (BIF). The Bank is subject to extensive regulation by the NYSBD,
as its chartering agency, and by the FDIC, as the deposit insurer. The Bank
must file reports with the NYSBD and the FDIC concerning its activities and
financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as establishing branches and mergers
with, or acquisitions of, other depository institutions. There are periodic
examinations by the NYSBD and the FDIC to assess the Bank's compliance with
various regulatory requirements and financial condition. This regulation and
supervision establishes a 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 reserves
for regulatory purposes. Any change in such regulation, whether by the NYSBD,
the FDIC or through legislation, could have a material adverse impact on the
Company and the Bank and their operations and stockholders. The Company will
also be required to file certain reports with and otherwise comply with the
rules and regulations of the OTS, the NYSBD and of the SEC under the federal
securities laws. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description
of statutory provisions and regulations applicable to savings banks and their
holding companies set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effect on the Bank and
the Company.
NEW YORK STATE LAW
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the NYSBD, as limited by FDIC regulations. 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
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 outstanding stock of such corporation or 1% of the
savings bank's assets, except as set forth below. Such equity securities must
meet certain 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" authority, make investments not otherwise permitted under the New York
State Banking Law. This authority permits investments in otherwise
impermissible investments of up to 1% of the savings bank's 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, 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, savings banks are
authorized to elect to invest under a "prudent person" standard in a wider range
of debt and equity securities as compared to the types of investments
permissible under such specific investment authority. However, in the event a
savings bank elects to utilize the "prudent person" standard, it will be
38
<PAGE>
unable to avail itself of the other provisions of the New York State Banking Law
and regulations which set forth specific investment authority. A New York State
chartered stock savings bank may also exercise trust powers upon approval of the
NYSBD.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment 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 corporations is limited to 3% of the bank's
assets, and such investments, together with the 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 law and regulations. In particular, the
applicable provisions 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-one-borrower limitations.
Under New York State Banking Law, a New York State chartered stock 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 the New York State Banking Law, the Superintendent may issue an order
to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the NYSBD 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 by the NYSBD after notice and an opportunity to be heard. The Bank
does not know of any past or current practice, condition or violation that might
lead to any proceeding by the Superintendent or the NYSBD against the Bank or
any of its Directors or officers. The Superintendent also may take possession
of a banking organization under specified statutory criteria.
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.
39
<PAGE>
These guidelines divide a savings bank's capital into two tiers. The first
tier (Tier I) includes stockholders' equity 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 and lease losses, subject to
certain limitations, less required deductions. Savings banks are required to
maintain a total risk-based capital ratio of at least 8%, of which at least 4%
must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage 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
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. 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.
The following is a summary of the Bank's regulatory capital at December 31,
1997:
<TABLE>
<S> <C>
GAAP Capital to Total Assets 11.31%
Total Capital to Risk-Weighted Assets 27.60%
Tier I Leverage Ratio 12.32%
</TABLE>
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 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
rate 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 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
40
<PAGE>
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 association to establish and maintain written internal real
estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards also must be
consistent with accompanying FDIC guidelines, which include loan-to-value
limitations for the different types of real estate loans. Associations are also
permitted to make a limited amount of loans that do not conform to the proposed
loan-to-value limitations so long as such exceptions are reviewed and justified
appropriately. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value 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.
Additionally, the Bank, as a subsidiary of a savings and loan holding company,
will be required to provide the OTS with 30 days prior written notice before
declaring any dividend. The Plan of Conversion also restricts the Bank's
payment of dividends in the event the dividend would impair the liquidation
account established in connection with the Conversion. The Bank is also subject
to dividend declaration restrictions imposed by New York law.
INVESTMENTS AND ACTIVITIES
Since the enactment of the FDICIA, the activities of all state-chartered
financial institutions, including savings banks and their subsidiaries, have
generally been limited to those activities of the type and in the amount
authorized for national banks, notwithstanding state law. FDICIA and the FDIC
regulations thereunder 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 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 that
do not meet this standard (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.
All non-subsidiary equity investments, unless otherwise authorized or approved
by the FDIC, must have been divested by December 19, 1996, pursuant to a 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 stocks and/or registered shares subject to the maximum
permissible investment of 100% of Tier 1 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, 1997, the Bank had $285.4 million of securities
which were subject to such grandfathering authority.
41
<PAGE>
PROMPT CORRECTIVE REGULARY 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
measures 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 ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if 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 institutions. 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 or conservator 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. 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
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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-affiliated parties.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, more than 10% 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 more than
10% 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 insiders 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
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
capital to total assets of less than 2%. 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 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 a supervisory
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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 currently range from 0 basis
points to 27 basis points. The FDIC is authorized to raise the assessment rates
in certain circumstances. The FDIC has exercised this authority several times in
the past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Bank. On
September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 (the Funds Act) which, among other things, imposed a special one-
time assessment on Savings Association Insurance Fund member institutions to
recapitalize SAIF. The Funds Act also spreads the obligations for payment of the
Financing Corporation (FICO) bonds across all SAIF and BIF members. As of
January 1, 1997, BIF deposits will be assessed a FICO payment of 1.3 basis
points, while SAIF deposits will pay an estimated 6.4 basis points on the FICO
bonds. Full pro rata sharing of the FICO payments between BIF and SAIF members
will occur on the earlier of January 1, 2000 or the date BIF and SAIF are
merged. The Funds Act specifies that BIF and SAIF will be merged on January 1,
1999 provided no savings associations remain at that time.
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 in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
Division. The management of the Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily Super NOW, NOW and regular checking accounts). For 1997, the Federal
Reserve Board regulations generally requires that reserves be maintained against
aggregate transaction accounts as follows: for that portion of transaction
accounts aggregating $49.3 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts greater than
$49.3 million, the reserve requirement is $1.48 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 $49.3 million. The first $4.4
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. The required reserves must be
maintained in the form of either vault cash, a non-interest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the Bank's interest-
earning assets. Federal Home Loan Bank (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.
COMMUNITY REINVESTMENT ACT
Federal Regulation. Under the Community Reinvestment Act, as amended,
(CRA), as implemented by FDIC regulations, a savings bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's
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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. The
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)
amended the CRA to require, effective July 1, 1990, public disclosure of an
institution's CRA rating and require the FDIC to provide a written evaluation of
an institution's CRA performance utilizing a four-tiered descriptive rating
system which replaced the five-tiered numerical rating system. The Bank has
recently received a CRA rating from the FDIC as a result of its most recent exam
and has executed a memorandum of understanding with the FDIC ("MOU") which
requires the Bank to revise its existing compliance program. The Bank is in the
process of taking the action required by the MOU and has appealed such rating. A
regulatory CRA rating of a "needs to improve" or below may have an adverse
impact on the ability of a financial institution to obtain any necessary
regulatory approval of an acquisition of another financial institution or the
establishment of a branch office or may result in the delays of any such
approval.
New York State Regulation. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State 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 NYSBD 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 automated teller machines, 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 NYSBD was "satisfactory."
HOLDING COMPANY REGULATION
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" (QTL), discussed below, to exercise an election to be treated as
a savings association subsidiary of a savings and loan holding company under the
Home Owners' Loan Act, as amended, (HOLA). Such election would result in its
holding company being regulated as a savings and loan holding company by the OTS
rather than as a bank holding company by the Federal Reserve Board. The Bank
and Company have exercised this option. Accordingly, the Company is regulated
as a non-diversified unitary savings and loan holding company within the meaning
of the HOLA. As such, the Company has registered with the OTS and will be
subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings institution. Additionally, the
Bank will be required to notify the OTS at least 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage. Upon any non-supervisory acquisition by the Company of
another savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, as
amended (BHC Act), subject to the prior approval of the OTS, and to other
activities authorized by OTS regulation. Multiple savings and loan holding
companies are prohibited from acquiring or retaining, with certain exceptions,
more than 5% of a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by the HOLA. Recently
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proposed legislation would treat all savings and loan holding companies as bank
holding companies and would, subject to a narrow grandfather clause, limit the
activities of such companies to those permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof, or
from acquiring such an institution or company by merger, consolidation or
purchase of its assets, without prior written approval of the OTS. In
evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
In order for the Company to continue to be regulated as a savings and loan
holding company by the OTS (rather than as a bank holding company by the Federal
Reserve Board), the Bank must continue to qualify as a QTL. In order to qualify
as a QTL, the Bank must maintain compliance with a Qualified Thrift Lender Test
(QTL Test). Under the QTL Test, a savings institution is required to maintain
at least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed and mortgage related securities) in at least 9
months out of each 12 month period. A holding company of a savings institution
that fails the QTL test must either convert to a bank holding company and
thereby become subject to the regulation and supervision of the Federal Reserve
Board or operate under certain restrictions. On average, for the year ended
December 31, 1997, the Bank maintained in excess of 86% of its portfolio assets
in qualified thrift investments. The Bank met all of the requirements relating
to the QTL Test for the year ended December 31, 1997.
New York State Holding Company Regulation. In addition to the federal
holding company regulations, a bank holding company organized or doing business
in New York State may be also subject to regulation under the New York State
Banking Law. The term "bank holding company," for the purposes of the New York
State Banking Law, is defined generally to include any person, company or trust
that directly or indirectly either controls the election of a majority of the
directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions, including commercial banks and state
savings banks and savings and loan associations organized in stock form. In
general, a holding company controlling, directly or indirectly, only one banking
institution will not be deemed to be a bank holding company for the purposes of
the New York State Banking Law. Under New York State Banking Law, the prior
approval of the NYSBD is required before: (1) any action is taken that causes
any company to become a bank holding company; (2) any action is taken that
causes any banking institution to become or to be merged or consolidated with a
subsidiary of a bank holding company; (3) any bank holding company acquires
direct or indirect ownership or control of more than 5% of the voting stock of a
banking institution; (4) any bank holding company or subsidiary thereof acquires
all or substantially all of the assets of a banking institution; or (5) any
action is taken that causes any bank holding company to merge or consolidate
with another bank holding company. Additionally, certain restrictions apply to
New York State bank holding
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companies regarding the acquisition of banking institutions which have been
chartered five years or less and are located in smaller communities. Officers,
directors and employees of New York State bank holding companies are subject to
limitations regarding their affiliation with securities underwriting or
brokerage firms and other bank holding companies and limitations regarding loans
obtained from its subsidiaries. Although the Company is not currently a bank
holding company for purposes of New York State law, any future acquisition of
ownership, control, or the power to vote 10% or more of the voting stock of
another banking institution or bank holding company would cause it to become
such.
INTERSTATE BANKING AND BRANCHING
The Company, as a savings and loan holding company, is limited under HOLA
with respect to its acquisition of a savings association located in a state
other than New York. In general, a savings and loan holding company may not
acquire an additional savings association subsidiary that is located in a state
other than the home state of its first savings association subsidiary unless
such an interstate acquisition is permitted by the statutes of such other state.
Many states permit such interstate acquisitions if the statutes of the home
state of the acquiring savings and loan holding company satisfy various
reciprocity conditions. New York is one of a number of states that permit,
subject to the reciprocity conditions of the New York Banking Law, out-of-state
bank and savings and loan holding companies to acquire New York savings
associations.
In contrast, bank holding companies are generally authorized to acquire
banking subsidiaries in more than one state irrespective of any state law
restrictions on such acquisitions. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (Interstate Banking Act), which was enacted on
September 29, 1994, permits approval under the BHC Act of the acquisition of a
bank located outside of the holding company's home state regardless of whether
the acquisition is permitted under the law of the state of the acquired bank.
The Federal Reserve Board may not approve an acquisition under the BHC Act that
would result in the acquiring holding company controlling more than 10% of the
deposits in the United States or more than 30% of the deposits in any particular
state.
In the past, branching across state lines was not generally available to a
state bank such as the Bank. Out-of-state branches of savings banks are
authorized under the New York Banking Law, but similar authority does not exist
generally under the laws of most other states. The Interstate Banking Act
permits, beginning June 1, 1997, the responsible federal banking agencies to
approve merger transactions between banks located in different states,
regardless of whether the merger would be prohibited under the law of the two
states. The Interstate Banking Act also permits a state to "opt in" to the
provisions of the Interstate Banking Act prior to June 1, 1997, and permits a
state to "opt out" of the provisions of the Interstate Banking Act by adopting
appropriate legislation before that date. Accordingly, the Interstate Banking
Act will, beginning on June 1, 1997, permits a bank, such as the Bank, to
acquire branches in a state other than New York unless the other state has opted
out of the Interstate Banking Act. The Interstate Banking Act also authorizes de
--
novo branching into another state if the host state enacts a law expressly
- ----
permitting out of state banks to establish such branches within its borders.
The Interstate Banking Act may facilitate the further consolidation of the
banking industry. The effect of the Interstate Banking Act on the Bank, if any,
is likely to occur as banking institutions, state legislators, and bank
regulators respond to the new federal regulatory structure. The states will
have to establish appropriate corporate law, tax and regulatory structures to
adjust to the growth of new interstate banks.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the SEC under Section 12(g)
of the Securities
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Exchange Act of 1934, as amended (the Exchange Act). The Company is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
The registration under the Securities Act of 1933, as amended (the
Securities Act) of shares of the Common Stock that were issued in the Bank's
conversion from mutual to stock form 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.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a
consolidated basis, using a calendar year and the accrual method of accounting
and will be subject to Federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Bank's treatment
of its reserve for bad debts 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. The Bank
had been audited by the IRS for the year ended December 31, 1991 resulting in no
change to taxable income. The Bank was also audited by the State of New York
for the three-year period ended December 31, 1995, resulting in adjustments
which were immaterial to the Bank's financial statements. RFI has not been
audited by the IRS, the State of New York or New York City to date.
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. Use of the PTI Method had the effect of reducing the
marginal rate of federal tax on the Bank's income to 32.2%, exclusive of any
minimum or environmental tax, as compared to the maximum corporate federal
income tax rate of 35%. The Bank's deduction with respect to non-qualifying
loans was required to be computed under the Experience Method. As of December
31, 1997 the overall 12% of deposits limitation has restricted the Bank's
deduction for additions to its bad debt reserve. Each year the Bank reviewed the
most favorable way to calculate the deduction attributable to an addition to the
tax bad debt reserves.
The 1996 Act. Under the 1996 Act, for its current and future taxable
years, the Bank is not
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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. As of December 31, 1995,
the Bank's tax bad debt reserve was equal to the balance of such reserve as of
December 31, 1987. As such, the Bank will not incur an additional tax liability.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. Non-dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be included in income for federal income tax purposes, assuming
a 35% federal corporate income tax rate. 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 tax bad debt
reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income (AMTI) at a rate of 20%. The excess of the bad debt
reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the Experience Method is treated
as a preference item for purposes of computing the AMTI. Only 90% of AMTI can
be offset by net operating loss carryforwards. The adjustment to AMTI based on
book income will be an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment 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 .12% of the excess of AMTI (with certain
modifications) over $2 million, is imposed on corporations, including the Bank,
whether or not an Alternative Minimum Tax (AMT) is paid. Under the President's
legislative proposals, the environmental tax would be extended for tax years
beginning before 2007. The Bank does not expect to be subject to the AMT but is
subject to the environmental tax liability.
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,
except that if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
excluded.
STATE AND LOCAL TAXATION
New York State and New York City Taxation. The Bank is subject to the New
York State Franchise Tax on Banking Corporations in an annual amount equal to
the greater of (i) 9% of the Bank's "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) .01% of the value
of the taxable assets allocable to New York State with certain modifications,
(b) 3% of the Bank's "alternative
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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
that net operating losses cannot be carried back or carried forward) and
alternative entire net income is equal to entire net income without certain
adjustments. While the Bank is not directly subject to any New York City tax,
RFI will be subject to a New York City tax of 9% on income allocated to New York
City. For purposes of computing its entire net income, the Bank is permitted a
deduction for an addition to the reserve for losses on qualifying real property
loans. For New York State purposes, the applicable percentage to calculate bad
debt deduction under the percentage of taxable income method is 32%. However,
the Bank cannot fully utilize this deduction because its New York reserve for
qualifying real property loans is at the 6% of the qualifying real property loan
limit. The New York State tax law was recently amended to prevent the recapture
of tax bad debt reserves that would otherwise occur as a result of the enactment
of the 1996 Act. However, the New York bad debt reserve is subject to recapture
for "non-dividend distributions" in a manner similar to the recapture of the
federal bad debt reserves for such distributions. Also, the New York bad debt
reserve is subject to recapture in the event that the Bank fails to satisfy
certain definitional tests relating to its assets and the nature of its
business. The Bank's deduction with respect to non-qualifying loans must be
computed under the experience method which is based on the Bank's actual charge-
offs.
A Temporary Metropolitan Transportation Business Tax Surcharge on banking
corporations doing business in the metropolitan district has been applied since
1982. The Bank does all of its business within this District and is subject to
this surcharge. For the tax year ended December 31, 1997, the surcharge rate is
17%.
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
ITEM 2. PROPERTIES.
- -------------------
The Bank currently conducts its business through eight full service banking
offices. In addition, RFI, the Bank's mortgage banking subsidiary, conducts its
business through the Bank's banking offices as well as eleven mortgage
origination offices. The following table sets forth the Bank's and RFI's offices
as of December 31, 1997.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
LEASED YEAR LEASEHOLD
OR LEASED OR DATE OF LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1997
- ---------------------------------- ---------- --------------- ----------------- ----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE/MAIN OFFICE: Owned 1932 Not Applicable $4,140
Roslyn Office:
1400 Old Northern Blvd.
Roslyn, NY 11576
BRANCH OFFICES: Owned 1965 Not Applicable $ 918
West Hempstead Office:
50 Hempstead Turnpike
West Hempstead, NY 11552
Farmingdale Office: Owned 1968 Not Applicable $ 705
14 Conklin Street
Farmingdale, NY 11735
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
LEASED YEAR LEASEHOLD
OR LEASED OR DATE OF LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1997
- ----------------------------------- --------- ------------- ------------------ -------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Bellmore Office: Owned 1972 Not Applicable $ 753
2641 Merrick Road
Bellmore, NY 11710
Woodbury Office (1): Leased 1976 2009 $ 778
8081 Jericho Turnpike
Woodbury, NY 11797
East Northport Office: Owned 1992 Not Applicable $1,838
580 Larkfield Road
East Northport, NY 11731
Lawrence Office: Leased 1996 2003 $ 350
333 Central Avenue
Lawrence, NY 11559
Massapequa Office (2): Leased 1996 2004 $1,387
6199 Sunrise Highway
Massapequa, NY 11758
ADMINISTRATIVE OFFICE: Owned 1996 Not Applicable $2,380
Port Washington Office:
2 Seaview Blvd.
Port Washington, NY 11050
RFI MORTGAGE ORIGINATION OFFICES: Leased 1986 2002 $ 8
Hauppauge Office:
350 Motor Parkway
Hauppauge, NY 11788
East Meadow Office: Leased 1992 Month-to-Month -
325 Merrick Avenue
East Meadow, NY 11554
Syracuse Office (3): Leased 1997 2000 -
251 Salina Meadows Parkway
Suite 250
Syracuse, NY 13212
Bayside Office: Leased 1993 1998 -
218-15 Northern Blvd.
Bayside, NY 11361
Shrewsbury Office: Leased 1993 1998 -
1 Revmont Dr. No., Rt. 35
Shrewsbury, NJ 07702
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
LEASED YEAR LEASEHOLD
OR LEASED OR DATE OF LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1997
- -------------------------------------- ---------- --------------- ------------------ ------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Parsippany Office: Leased 1995 1998 -
140 Littleton Road
Parsippany, NJ 07054
Fairfield Office: Leased 1996 2001 -
55 Walls Drive
Suite 205
Fairfield, CT 06430
West Hartford Office: Leased 1996 2000 -
15 North Main Street
West Hartford, CT 06107
Rochester Office (4): Leased 1997 1998 -
100 Linden Oaks
Suite 202
Rochester, NY 14625
Staten Island Office: Leased 1997 1999 -
260 Christopher Lane
Suite 103
Staten Island, NY 10314
Woodhaven Office: Leased 1997 1998 -
95-04 Jamaica Avenue
Woodhaven, NY 11421
Albany Office (5): Leased 1992 1998 -
427 New Karner Road
Albany, NY 12205
</TABLE>
______________________________
(1) The Bank owns the building but leases the majority portion of the land. The
Bank has the option to renew the lease upon expiration for two (2)
additional consecutive terms of thirty-three (33) years each.
(2) The Bank owns the building but leases the majority portion of the land. The
Bank has the option to renew the lease upon expiration for two (2)
additional consecutive terms of twenty (20) years each.
(3) Vacant as of September 1997.
(4) Closed as of January 1998.
(5) Closed as of February 1998.
52
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
On February 17, 1998, the Company announced a settlement with the NYSBD
regarding certain practices relating to origination and loan fees (overage fees)
paid by certain borrowers of RFI. Under the terms of the settlement agreement,
the Company will establish a $3.0 million fund to provide compensation to
certain borrowers who allegedly paid an "overage fee" for their RFI mortgage
loans. Any money remaining in the fund will go to further the Company's
community development initiatives. The charge for the settlement, and the costs
related thereto, was fully accrued at December 31, 1997 by the Company and
totaled $4.6 million. The expense is included in other general and
administrative expenses in the Company's statement of income for the year ended
December 31, 1997. In the settlement agreement, the company denies that RFI had
engaged in any unfair overage practices. The Company agreed to accept the
conditions of the settlement because it believed that the cost of contesting the
allegations in the courts would have been in excess of the settlement amount.
See "Business-Regulation and Supervision--Community Reinvestment Act" for a
further discussion of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
No matter was submitted during the fourth quarter of the fiscal year ended
December 31, 1997 to a vote of security holders of the Company, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- --------------------------------------------------------------------------------
Information regarding the market for the Company's common equity and
related stockholder matters appears in the 1997 Annual Report to Shareholders
under the caption "Market Price of Common Stock" and is incorporated herein by
this reference.
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
Information regarding selected financial data appears on page 1 of the 1997
Annual Report under the caption "Selected Consolidated Financial and Other Data
of the Company" and is incorporated herein by this reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- --------------
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 3 through 16 of the 1997
Annual Report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Management of
Interest Rate Risk and Gap Analysis" in the 1997 Annual Report is incorporated
herein by this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
Information regarding the financial statements and the Independent
Auditors' Report appears on pages 17 through 48 of the 1997 Annual Report and is
incorporated herein by this reference.
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
- -----------------------------------------------------------
Information regarding the directors and executive officers of the Company,
appears on pages 5 through 7 of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on April 28, 1998 under the caption
"Information with Respect to the Nominees, Continuing Directors, and Certain
Executive Officers of the Company" and is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
Information regarding executive compensation appears on page 9 of the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
April 28, 1998 under the caption "Executive Compensation" 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 page 3 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 28, 1998 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 7 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 28, 1998 under the caption "Information with
Respect to the Nominees, Continuing Directors and Named Executive Officers of
the Company" and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
Information regarding certain relationships and related transactions
appears on page 22 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 28, 1998 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 Stockholders for the fiscal year ended December
31, 1997 and are incorporated by this reference:
. Consolidated Statements of Financial Condition at December 31, 1997
and 1996
. Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995
54
<PAGE>
. Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
. Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
. Notes to Consolidated Financial Statements
. Independent Auditors' Report
. Selected Quarterly Financial Data (Unaudited) for the Years Ended
December 31, 1997 and 1996
The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(A) 2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1997
The Company filed an 8-K on November 25, 1997 to report a declared
quarterly dividend. This dividend represented an increase of 17% from the
dividend paid the previous quarter.
(C) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K
Exhibit
Number
- ------
3.1 Certificate of Incorporation of Roslyn Bancorp, Inc. (1)
3.2 By-Laws of Roslyn Bancorp, Inc. (1)
10.1 Form of Employment Agreement between the Bank and Joseph L. Mancino and
Form of Employment Agreement between the Company and Joseph L. Mancino (1)
10.2 Form of Employment Agreement between the Bank and John R. Bransfield, Jr.
and Form of Employment Agreement between the Company and John R.
Bransfield, Jr. (1)
10.3 Form of Employment Agreement between the Bank and Michael P. Puorro and
Form of Employment Agreement between the Company and Michael P. Puorro (1)
10.4 Form of Employment Agreement between the Bank and John L. Klag and Form of
Employment Agreement between the Company and John L. Klag (1)
10.5 Form of Employment Agreement between the Bank and Arthur W. Toohig and Form
of Employment Agreement between the Company and Arthur W. Toohig (1)
10.6 The Roslyn Savings Bank Employee Severance Compensation Plan (1)
10.7 Management's Supplemental Executive Retirement Plan (1)
10.8 Employee Stock Ownership Plan and Trust (1)
10.9 Roslyn Bancorp, Inc. 1997 Stock-Based Incentive Plan (2)
11.0 Statement Re: Computation of Per Share Earnings
13.0 1997 Annual Report to Stockholders
21.0 Subsidiaries Information Incorporated Herein By Reference to Part 1 -
Subsidiaries
23.0 Consent of Independent Auditors
27.0 Financial Data Schedule
_______________
55
<PAGE>
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1 and any amendments thereto,
Registration No. 333-10471 filed with the Securities and Exchange
Commission on August 20, 1996.
(2) Incorporated by reference into this document from the Appendix to the Proxy
Statement for the Annual Meeting of Shareholders held on July 22, 1997,
filed with the Securities and Exchange Commission on June 6, 1997.
56
<PAGE>
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.
ROSLYN BANCORP, INC.
-------------------------------
(Registrant)
/s/ Joseph L. Mancino March 31, 1998
-------------------------------------- --------------
Joseph L. Mancino
Chairman of the Board,
President & Chief 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:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Joseph L. Mancino Chairman of the Board, President, March 31, 1998
- ------------------------------- --------------
Joseph L. Mancino & Chief Executive Officer
/s/ Michael P. Puorro Treasurer
- -------------------------------
Michael P. Puorro & Chief Financial Officer March 31, 1998
--------------
/s/ Floyd N. York Director March 31, 1998
- ------------------------------- --------------
Floyd N. York
/s/ Victor C. McCuaig Director March 31, 1998
- ------------------------------- --------------
Victor C. McCuaig
/s/ John P. Nicholson Director March 31, 1998
- ------------------------------- --------------
John P. Nicholson
/s/ James E. Swiggett Director March 31, 1998
- ------------------------------- --------------
James E. Swiggett
/s/ Robert G. Freese Director March 31, 1998
- ------------------------------- --------------
Robert G. Freese
/s/ Thomas J. Calabrese, Jr. Director March 31, 1998
- ------------------------------- --------------
Thomas J. Calabrese, Jr.
/s/ Dr. Edwin W. Martin, Jr. Director March 31, 1998
- ------------------------------- --------------
Dr. Edwin W. Martin, Jr.
/s/ Richard C. Webel Director March 31, 1998
- ------------------------------- --------------
Richard C. Webel
</TABLE>
57
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<PAGE>
EXHIBIT 11
ROSLYN BANCORP, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Net income........................................................................ $ 33,390
===========
Weighted average common shares outstanding........................................ 40,159,931
Common stock equivalents due to dilutive effect of stock options.................. -
-----------
Total weighted average common shares and equivalents outstanding.................. 40,159,931
===========
Basic earnings per common and common share equivalents............................ $ 0.83
===========
Total weighted average common shares and equivalents outstanding.................. 40,159,931
Additional dilutive shares using ending period market value versus average
market value for the period when utilizing the treasury stock method regarding
stock options................................................................... -
-----------
Total shares for fully dilutive earnings per share................................ 40,159,931
===========
Diluted earnings per common and common share equivalents.......................... $ 0.83
===========
</TABLE>
<PAGE>
EXHIBIT 13
ANNUAL REPORT
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
SELECTED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Total assets $3,601,079 $3,617,953 $1,598,270 $1,438,337 $1,344,390
Money market investments - 1,114,240 10,000 25,000 25,000
Debt securities (1):
Held-to-maturity/held-for-investment 1,930 1,930 1,930 466,204 530,802
Available-for-sale 208,841 318,034 260,553 - -
Equity securities (1):
Held-for-investment - - - - 66,298
Available-for-sale 285,352 168,862 118,778 89,787 -
Mortgage-backed and mortgage related
securities, net (1):
Held-to-maturity/held-for-investment 200,193 276,632 347,213 411,341 399,417
Available-for-sale 1,856,633 1,159,411 413,485 50,711 -
Loans held-for-sale, net 15,283 14,134 17,151 - 8,105
Loans receivable held for
investment, net (2) 954,291 488,890 365,265 342,091 264,667
Deposits 1,942,245 1,955,535 1,328,945 1,219,481 1,141,528
Roslyn Bancorp, Inc. non-depository
stock subscriptions - 1,356,911 - - -
Borrowed funds 966,451 1,829 1,647 - -
Stockholders' equity (3) 628,335 249,349 226,413 193,066 176,380
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Interest income $224,964 $140,473 $109,737 $93,282 $94,819
Interest expense 126,414 78,759 59,298 40,353 39,698
- ------------------------------------------------------------------------------------------------------------------
Net interest income before provision for
possible loan losses 98,550 61,714 50,439 52,929 55,121
Provision for possible loan losses 600 2,000 600 600 6,860
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 97,950 59,714 49,839 52,329 48,261
Non-interest income 12,075 8,409 6,297 3,127 6,714
Non-interest expense (4) 60,562 38,051 28,908 26,016 26,229
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of changes in accounting principles 49,463 30,072 27,228 29,440 28,746
Provision for income taxes 16,073 9,438 8,510 10,018 10,586
- ------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 33,390 20,634 18,718 19,422 18,160
Cumulative effect of changes in accounting
principles (5) - - - - 5,983
==================================================================================================================
Net income $33,390 $20,634 $18,718 $19,422 $24,143
==================================================================================================================
Basic and diluted earnings per share $ 0.83 N/A N/A N/A N/A
==================================================================================================================
(Continued)
</TABLE>
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
(Continued)
<TABLE>
<CAPTION>
At or For the Years Ended December 31, 1997 1996 1995 1994 1993 (17)
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
SELECTED FINANCIAL RATIOS AND OTHER DATA (6):
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS (7):
Return on average assets 1.29% 1.03% 1.21% 1.39% 1.35%
Return on average stockholders' equity 6.57 (15) 8.97 8.82 10.27 10.85
Average stockholders' equity to average assets 19.22 11.45 13.69 13.56 12.48
Stockholders' equity to total assets at end of year 17.45 6.89 14.17 13.42 13.12
Net interest rate spread (8) 2.20 2.69 2.71 3.45 3.81
Net interest margin (9) 3.20 3.19 3.37 3.93 4.26
Average interest-earning assets to average
interest-bearing liabilities 124.39 112.29 116.55 116.11 114.72
Operating expenses to average assets 1.49 1.84 1.89 1.87 1.83
Net interest income to operating expenses 208.75 168.42 174.80 205.55 227.10
Efficiency ratio (10) 43.77 51.66 51.30 45.98 41.47
CASH BASIS PERFORMANCE RATIOS (11):
Return on average assets 1.65% 1.05% 1.22% 1.40% 1.36%
Return on average stockholders' equity 8.42 (16) 9.17 8.94 10.33 10.91
Operating expenses to average assets 1.32 1.84 1.89 1.87 1.83
Net interest income to operating expense 237.00 168.42 174.80 205.55 227.10
Efficiency ratio 38.55 51.66 51.30 45.98 41.47
REGULATORY CAPITAL RATIOS:
Leverage capital 12.32% 8.70% 13.19% 13.57% 13.07%
Total risk-based capital 27.60 19.75 29.79 27.01 30.95
ASSET QUALITY RATIOS AND DATA:
Total non-performing loans (12) $6,480 $8,740 $12,173 $25,055 $31,343
Real estate owned, net 157 1,698 6,047 3,359 2,613
Total non-performing assets (13) 6,637 10,438 18,220 28,414 33,956
Non-performing loans as a percent of loans (12) (14) 0.66% 1.71% 3.13% 6.82% 10.84%
Non-performing assets as a percent of total assets (13) 0.18 0.29 1.14 1.98 2.53
Allowance for possible loan losses as a percent
of loans (2) (14) 2.46 4.55 6.01 6.84 8.47
Allowance for possible loan losses as a percent
of total non-performing loans (2) (12) 370.82 266.82 191.82 100.28 78.17
OTHER DATA:
Number of full service customer facilities 8 8 6 6 6
Number of mortgage origination offices 11 8 6 - -
(footnotes on next page)
</TABLE>
2
<PAGE>
(1) The Bank adopted Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities," as
of January 1, 1994, and reclassified securities having a market value of
$658.3 million from its held-to-maturity portfolio to its available-for-
sale portfolio in November 1995 pursuant to a Financial Accounting
Standards Board (FASB) interpretation of SFAS No. 115. Prior to the
adoption of SFAS No. 115, securities were carried at amortized cost, as
adjusted for amortization of premiums and accretion of discounts over the
remaining terms of the securities from the dates of purchase.
(2) All loans receivable held for investment are presented net of the Bank's
allowance for possible loan losses which at December 31, 1997, 1996, 1995,
1994 and 1993 were $24.0 million, $23.3 million, $23.4 million, $25.1
million and $24.5 million, respectively.
(3) The amounts prior to December 31, 1997 represent retained earnings only.
(4) Included in 1997 is a $12.7 million charitable contribution to The Roslyn
Savings Foundation and a $4.6 million pre-tax charge for a settlement
agreement, including professional fees related thereto, with the New York
State Banking Department regarding certain loan and origination fee
practices by RFI, the Bank's mortgage banking subsidiary.
(5) Reflects the net cumulative effect of the Bank's adoption of SFAS No. 106,
"Employer's Accounting for Post-retirement Benefits Other than Pensions"
and SFAS No. 109, "Accounting for Income Taxes."
(6) Asset Quality and Regulatory Capital Ratios are end of year ratios. With
the exception of end of year ratios, all ratios are based on average
monthly balances during the indicated year.
(7) All performance ratios for the year ended December 31, 1997 exclude the
$7.4 million after-tax effect of the shares contributed to The Roslyn
Savings Foundation concurrent with the conversion.
(8) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities and includes the effect of the
Bank's payment of a special interest payment which has generally ranged
from 10% to 25% of the interest paid on savings and NOW accounts.
(9) The net interest margin represents net interest income as a percent of
average interest-earning assets and includes the effect of the Bank's
payment of a special interest payment which has generally ranged from 10%
to 25% of the interest paid on savings and NOW accounts.
(10) The efficiency ratio represents the ratio of operating expenses, excluding
the amortization of goodwill, divided by the sum of net interest income and
non-interest income.
(11) Excluding non-cash charges related to the establishment of The Roslyn
Savings Foundation, goodwill amortization and amortization relating to
certain employee stock benefit plans.
(12) Non-performing loans consist of all non-accrual loans and all other loans
90 days or more past due. It is the Bank's policy to generally cease
accruing interest on all loans 90 days or more past due.
(13) Non-performing assets consist of non-performing loans and real estate
owned, net.
(14) Loans include loans receivable held for investment, net, excluding the
allowance for possible loan losses.
(15) The ratio shown assumes that the conversion was completed on January 1,
1997. The actual return on average stockholders' equity based on the
January 10, 1997 conversion date was 6.70%.
(16) The ratio shown assumes that the conversion was completed on January 1,
1997. The actual return on average stockholders' equity based on the
January 10, 1997 conversion date was 8.59%.
(17) Does not include the net effect of accounting changes due to the
implementation of SFAS Nos. 106 and 109.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS
- ----------
GENERAL
Roslyn Bancorp, Inc. (the Company) was incorporated on July 26, 1996, and is the
holding company for The Roslyn Savings Bank and its subsidiaries (the Bank). On
May 29, 1996, the then Board of Trustees of the Bank adopted a Plan of
Conversion, which was subsequently amended on July 30, 1996 and September 30,
1996, to convert the Bank from a New York State chartered mutual savings bank to
a New York State chartered stock savings bank with the concurrent formation of a
holding company (the Conversion). The Conversion was completed on January 10,
1997, with the issuance by the Company of 42,371,359 shares of its common stock
in a public offering which resulted in $410.7 million of net proceeds, of which
$205.3 million was utilized to acquire all of the outstanding stock of the Bank.
Concurrent with the close of the stock offering, an additional 1,271,100 shares
of authorized but unissued shares of common stock were donated by the Company to
The Roslyn Savings Foundation (the Foundation), a private foundation dedicated
to charitable purposes within the Bank's local community. The Company recognized
a one-time charge of $12.7 million, the full amount of the contribution made to
the Foundation, in the first quarter of 1997. The contribution to the
Foundation is fully tax deductible, subject to an annual limitation based upon
the Company's annual taxable income.
Additionally, in connection with the Conversion, the Bank established an
Employee Stock Ownership Plan (ESOP). The ESOP purchased, primarily through a
$53.8 million loan from the Company and an initial $1.0 million contribution
from the Bank, approximately 8% of the outstanding shares of common stock, or
3,491,397 shares, on the open market.
The Company conducts business primarily through its ownership of the Bank and
its subsidiaries. The Bank operates its eight full service banking locations in
Nassau and Suffolk Counties on Long Island and eleven mortgage origination
offices of Residential First, Inc. (RFI), a wholly-owned subsidiary of the Bank,
in New York, New Jersey and Connecticut. On August 1, 1995, the Bank acquired
through RFI, certain assets and liabilities, including the loan origination
business and the loan servicing portfolio, of Residential Mortgage Banking,
Inc., a mortgage banking company which primarily operated in New York and New
Jersey counties in and surrounding the New York City metropolitan area and in
Albany, New York. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the information contained in this section regarding
periods subsequent to July 31, 1995 reflects the consolidated operations of the
Bank and its subsidiaries, inclusive of its mortgage banking subsidiary.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan and
security portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
Company's provision for possible loan losses, real estate operations expense,
security and loan sale activities and loan servicing activities. The Company's
non-interest expense principally consists of compensation and benefits,
occupancy and equipment expense, federal deposit insurance premiums and other
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
The Company had no operations prior to January 10, 1997 and, accordingly, the
results of operations prior to that date reflect only those of the Bank.
At the annual shareholder meeting on July 22, 1997, the shareholders approved
The Roslyn Bancorp, Inc. 1997 Stock-Based Incentive Plan (Incentive Plan or
SBIP). The Incentive Plan authorizes the granting of options to purchase
common stock, option-related awards and awards of common stock (collectively,
Awards). Subject to
4
<PAGE>
certain adjustments to prevent dilution of Awards to participants, the maximum
number of shares reserved for Awards denominated in common stock under the
Incentive Plan is 6,108,444 shares. The maximum number of shares reserved for
purchase pursuant to the exercise of options and option-related Awards which may
be granted under the Incentive Plan is 4,364,246 shares, and will primarily vest
over a five year period and which must be exercised no more than ten years from
the date of grant. The maximum number of the shares reserved for the award of
shares of common stock is 1,744,198 shares, and will primarily vest over a five
year period. All officers, other employees and outside directors of the Company
and its affiliates, including the Bank and its subsidiaries, are eligible to
receive Awards under the Incentive Plan. The Incentive Plan will be administered
by a committee of non-employee directors of the Company. Authorized but unissued
shares, or shares previously issued and reacquired by the Company, may be used
to satisfy the Awards under the Incentive Plan.
On February 17, 1998, the Company announced a settlement with the New York State
Banking Department (NYSBD) regarding certain practices relating to origination
and loan fees (overage fees) paid by certain borrowers of RFI. Under the terms
of the settlement agreement, the Company will establish a $3.0 million fund to
provide compensation to certain borrowers who allegedly paid an "overage fee"
for their RFI mortgage loans. Any money remaining in the fund will go to further
the Company's community development initiatives. The charge for the settlement,
and the costs related thereto, was fully accrued at December 31, 1997 by the
Company and totaled $4.6 million. The expense is included in other general and
administrative expenses in the Company's statement of income for the year ended
December 31, 1997. In the settlement agreement, the Company denies that RFI had
engaged in any unfair overage practices. The Company agreed to accept the
conditions of the settlement because it believed that the cost of contesting the
allegations in the courts would have been in excess of the settlement amount.
MANAGEMENT STRATEGY
In recent years, the Bank's operating strategy concentrated on maintaining
profitability by primarily investing in mortgage loans and mortgage-backed and
mortgage related securities. Since 1993, the Bank has decreased its emphasis on
investments in U.S. Government securities and increased its emphasis on building
its mortgage-backed and mortgage related securities and loan portfolios. The
increase in the loan portfolio relates to the restructuring of the lending
department, hiring experienced commercial real estate loan personnel and
revising its underwriting policies and procedures. More recently, the Bank has
increased its emphasis on mortgage banking activities and developed a resource
for developing its one- to four-family loan portfolio. The Company's current
operating strategy consists primarily of: (i) building its loan portfolio by
retaining a portion of one- to four-family loans originated and placing emphasis
on the origination of high quality commercial real estate loans to selected real
estate developers operating in the Bank's primary market area; (ii) investing
funds not utilized for loan originations and purchases in shorter-term debt
securities and mortgage-backed and mortgage related securities and preferred
stock of corporate issuers; (iii) increasing fee income and building its loan
servicing portfolio through its mortgage banking operations whereby it sells,
generally on a servicing retained basis, most longer-term fixed-rate one- to
four-family mortgage loans originated as a means of increasing servicing fee
income; (iv) attracting and retaining deposit accounts by paying competitive
rates on its deposit products and opening new branches; and (v) maintaining a
lower expense ratio by efficiently utilizing personnel and branch facilities to
service its customers.
MANAGEMENT OF INTEREST RATE RISK
The principal objectives of the Company's interest rate risk management are to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company's
Board of Directors
5
<PAGE>
reviews the Company's interest rate risk position on a monthly basis. The
Company's Board of Directors has established an Asset/Liability Committee
comprised of the Company's senior management under the direction of the Board of
Directors. Senior management is responsible for reviewing with the Board of
Directors its activities and strategies, the effect of those strategies on the
Company's net interest margin, the market value of the portfolio and the effect
that changes in interest rates will have on the Company's portfolio and the
Company's exposure limits.
In recent years, the Company has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of fixed-rate
mortgage loans having terms to maturity of not more than fifteen years,
adjustable-rate loans and consumer loans consisting primarily of home equity
loans and second mortgage loans; (2) selling substantially all 30-year fixed-
rate mortgage loans to the secondary market without recourse and on a servicing
retained basis (except for such loans with interest rates of 8% or greater,
which the Bank retains in its loan portfolio); and (3) investing in shorter-term
and, to a lesser extent, adjustable-rate securities which may generally bear
lower yields as compared to longer-term investments, but which better position
the Company for increases in market interest rates. In recent years, the Company
has attempted to shorten the maturities of its interest-earning assets by
increasing its investment in shorter-term investments to better match the
maturities of its deposit accounts, in particular its certificates of deposit
that mature in one year or less, which, at December 31, 1997, totaled $892.4
million, or 31.0% of total interest-bearing liabilities. These strategies may
adversely impact net interest income due to lower initial yields on these
investments in comparison to longer-term fixed-rate investments and whole loans.
However, management believes that reducing its exposure to interest rate
fluctuations will enhance long-term profitability.
GAP ANALYSIS
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. At December 31, 1997, the Company's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was negative 7.19%. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position would be in a worse position to invest in higher yielding
assets which, consequently, may result in the cost of its interest-bearing
liabilities increasing at a rate faster than its yield on interest-earning
assets than if it had a positive gap. During a period of falling interest rates,
an institution with a negative gap would tend to have its interest-bearing
liabilities repricing downward at a faster rate than its interest-earning assets
as compared to an institution with a positive gap which, consequently, may tend
to positively affect the growth of its net interest income. Given the Company's
existing liquidity position and its ability to sell securities from its
available-for-sale portfolio, management of the Company believes that its
negative gap position will have no material adverse effect on its liquidity
position. If interest rates decrease, there will be a corresponding effect on
the Company's interest rate margin and corresponding operating results.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the Gap Table). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
December 31, 1997, on the basis of contractual
6
<PAGE>
maturities, anticipated prepayments, and scheduled rate adjustments within a one
year period and subsequent annual time intervals. Prepayment assumptions ranging
from 7.50% to 29.76% per year were applied to the real estate loan portfolio,
dependent upon the loan type and coupon. Mortgage-backed and mortgage related
securities were assumed to prepay at rates between 6.84% and 44.64% annually.
Savings accounts were assumed to decay at 21.06%, 5.00%, 5.00%, 5.00%, 5.00% and
58.95%, Super NOW and NOW accounts and money market accounts were assumed to
decay at 20.00%, 5.00%, 5.00%, 5.00%, 5.00% and 60.00%, for the periods of up to
one year, one to two years, two to three years, three to four years, four to
five years, and over five years, respectively. Prepayment and deposit decay
rates can have a significant impact on the Company's estimated gap. While the
Company believes such assumptions to be reasonable, there can be no assurance
that assumed prepayment rates and decay rates will approximate actual future
loan prepayment and deposit withdrawal activity.
7
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------------------------------------------------------------------
ONE TWO THREE FOUR OVER
UP TO TO TWO TO THREE TO FOUR TO FIVE FIVE
ONE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
------------ ----------- ----------- ---------- ---------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS (1):
Debt and equity
securities (2) $ 153,213 $ 32,458 $ 3,838 $ 43,508 $ 8,261 $254,845 $ 496,123
Mortgage-backed and
mortgage related
securities (2) 976,182 352,111 238,377 149,823 97,973 242,360 2,056,826
Real estate loans,
net (3) (4) 198,666 115,988 67,283 228,591 51,351 319,281 981,160
Consumer and student
loans (4) 4,309 334 308 282 86 644 5,963
--------- --------- --------- -------- -------- -------- ----------
Total interest-earning
assets 1,332,370 500,891 309,806 422,204 157,671 817,130 3,540,072
--------- --------- --------- -------- -------- -------- ----------
INTEREST-BEARING LIABILITIES:
Money market accounts 9,869 2,467 2,467 2,467 2,467 29,607 49,344
Savings accounts 98,792 23,426 23,426 23,426 23,426 276,432 468,928
Super NOW and NOW
accounts 17,344 4,336 4,336 4,336 4,336 52,033 86,721
Certificates of deposit 892,391 215,437 68,465 61,556 43,140 22,283 1,303,272
Borrowed funds 573,012 258,439 105,000 30,000 - - 966,451
---------- --------- --------- -------- -------- -------- ----------
Total interest-bearing
liabilities 1,591,408 504,105 203,694 121,785 73,369 380,355 2,874,716
---------- --------- --------- -------- -------- -------- ----------
Interest sensitivity
gap (5) $ (259,038) $ (3,214) $ 106,112 $300,419 $ 84,302 $436,775 $ 665,356
========== ========= ========= ======== ======== ======== ==========
Cumulative interest
sensitivity gap $ (259,038) $(262,252) $(156,140) $144,279 $228,581 $665,356
========== ========= ========= ======== ======== ========
Cumulative interest
sensitivity
gap as a percentage
of total assets (7.19)% (7.28)% (4.34)% 4.01% 6.35% 18.48%
Cumulative net interest-
earning assets as a
percentage
of cumulative
interest-bearing
liabilities 83.72% 87.49% 93.21% 105.96% 109.16% 123.15%
</TABLE>
(1) Interest-earning assets are included in the period in which the balances are
expected to be re-deployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Debt and equity and mortgage-backed and mortgage related securities are
shown at their respective carrying values. Equity securities includes
callable preferred stock, the maturities of which have been assumed to be
the date on which they are initially callable.
(3) For the purpose of the gap analysis, the allowance for possible loan losses
and non-performing loans have been excluded.
(4) Loans held-for-sale are included in the "Up to One Year" category.
(5) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
8
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage (ARM)
loans, have features which limit adjustments to interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels may deviate significantly
from those assumed in calculating the table. Finally, the ability of borrowers
to service their ARM loans may decrease in the event of an interest rate
increase. The table reflects the estimates of management as to periods to
repricing at particular points in time. Among the factors considered, management
monitors both current trends and its historical repricing experience with
respect to particular or similar products. For example, the Bank has a number of
deposit accounts, including passbook savings, Super NOW and NOW accounts and
money market accounts which, subject to certain regulatory exceptions not
relevant here, may be withdrawn at any time. The Bank, based upon its historical
experience, assumes that while all customers in these account categories could
withdraw their funds on any given day, they will not do so, even if market
interest rates were to change. As a result, different assumptions may be used at
different points in time.
The Company's interest rate sensitivity is also monitored by management through
the use of a model which internally generates estimates of the change in net
portfolio value (NPV) over a range of interest rate change scenarios. NPV is the
present value of expected cash flows from assets, liabilities, and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. For purposes of the NPV table, prepayment speeds similar to those used
in the Gap Table were used, reinvestment rates were those in effect for similar
products currently being offered and rates on core deposits were modified to
reflect recent trends. The following table sets forth the Company's NPV as of
December 31, 1997, as calculated by the Company.
<TABLE>
<CAPTION>
CHANGE IN NPV AS % OF PORTFOLIO
INTEREST RATES NET PORTFOLIO VALUE VALUE OF ASSETS
IN BASIS POINTS ---------------------------------------------------------- --------------------------------------
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE
- --------------------- ----------------- ------------------- ------------------ ----------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
200 $660,703 $(130,646) (16.51)% 19.45% 6.34%
100 731,712 (59,637) (7.54) 20.78 2.93
Static 791,349 - - 21.82 -
(100) 799,116 7,767 0.98 21.71 (1.49)
(200) 787,353 (3,996) (0.50) 21.11 (2.82)
</TABLE>
As in the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Company's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Company's net interest income and will differ from actual
results.
9
<PAGE>
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the volume of interest-earning assets and interest-bearing liabilities and
the interest rates earned or paid on them.
The following table sets forth certain information regarding the Company's
consolidated statements of financial condition and its consolidated statements
of income for the years indicated, and reflects the average yield on interest-
earning assets and average cost of interest-bearing liabilities for the years
indicated. Such yields and costs are derived by dividing income or expense, by
the average balance of interest-earning assets or interest-bearing liabilities,
respectively. Average balances are derived from daily balances and include non-
performing loans. The yields and costs include fees which are considered
adjustments to yields.
10
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------- -------- ---------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets (1):
Federal funds sold, repurchase
agreements and short-term deposits $ 75,718 $ 4,190 5.53% $ 151,160 $ 7,960 5.27%
Debt and equity securities 510,842 33,153 6.49 453,051 31,087 6.86
Mortgage-backed and mortgage
related securities, net 1,772,744 126,148 7.12 901,575 62,432 6.92
Real estate loans, net (2) 714,294 61,091 8.55 424,356 38,644 9.11
Consumer and student loans 4,229 382 9.03 4,244 350 8.25
---------- -------- ---------- --------
Total interest-earning assets 3,077,827 224,964 7.31 1,934,386 140,473 7.26
-------- --------
Non-interest-earnings assets 83,605 75,372
---------- ----------
Total assets $3,161,432 $2,009,758
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market accounts $ 52,916 1,427 2.70 $ 64,046 1,854 2.89
Savings accounts (3) (4) 445,716 13,545 3.04 480,171 14,812 3.08
Super NOW and NOW accounts (4) (5) 78,974 2,841 3.60 45,990 1,361 2.96
Certificates of deposit 1,213,478 69,982 5.77 911,216 51,305 5.63
---------- ------- ---------- -------
Total deposits 1,791,084 87,795 4.90 1,501,423 69,332 4.62
Borrowed funds 630,352 37,278 5.91 102,408 5,794 5.66
Non-depository stock subscriptions 52,903 1,341 2.53 118,884 3,633 3.06
---------- ------- ---------- -------
Total interest-bearing liabilities 2,474,339 126,414 5.11 1,722,715 78,759 4.57
------- -------
Non-interest-bearing liabilities 79,319 56,906
---------- ----------
Total liabilities 2,553,658 1,779,621
Stockholders' equity 607,774 230,137
---------- ----------
Total liabilities and
stockholders' equity $3,161,432 $2,009,758
========== ==========
Net interest income/interest rate
spread (6) $98,550 2.20% $61,714 2.69%
======= ======= ======= =======
Net interest margin (7) 3.20% 3.19%
======= =======
Ratio of interest-earning assets to
interest-bearing liabilities 124.39% 112.29%
======= =======
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995
--------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST
---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets (1):
Federal funds sold, repurchase
agreements and short-term deposits $ 30,568 $ 1,819 5.95%
Debt and equity securities 560,663 36,594 6.53
Mortgage-backed and mortgage
related securities, net 545,642 37,086 6.80
Real estate loans, net (2) 350,802 33,341 9.50
Consumer and student loans 9,816 897 9.14
---------- --------
Total interest-earning assets 1,497,491 109,737 7.33
--------
Non-interest-earnings assets 53,237
----------
Total assets $1,550,728
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market accounts $ 69,237 2,007 2.90
Savings accounts (3) (4) 480,572 15,317 3.19
Super NOW and NOW accounts (4) (5) 33,135 837 2.53
Certificates of deposit 677,510 39,583 5.84
---------- -------
Total deposits 1,260,454 57,744 4.58
Borrowed funds 24,345 1,554 6.38
Non-depository stock subscriptions - - -
---------- -------
Total interest-bearing liabilities 1,284,799 59,298 4.62
-------
Non-interest-bearing liabilities 53,610
----------
Total liabilities 1,338,409
Stockholders' equity 212,319
----------
Total liabilities and
stockholders' equity $1,550,728
==========
Net interest income/interest rate
spread (6) $50,439 2.71%
======= =======
Net interest margin (7) 3.37%
Ratio of interest-earning assets to =======
interest-bearing liabilities 116.55%
=======
</TABLE>
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan fees, deferred mortgage interest, unamortized
discounts, net and allowance for possible loan losses and includes loans
held-for-sale, net and non-performing loans.
(3) Savings accounts include mortgagors' escrow deposits.
(4) The average cost of savings and Super NOW and NOW accounts for the years
above reflect the payment of a special interest payment of approximately 25%
of interest paid on savings and NOW accounts. Such payments resulted in
additional cost on savings accounts of 48 basis points, 59 basis points and
61 basis points for the years ended December 31, 1997, 1996 and 1995,
respectively, and additional cost on NOW accounts of 18 basis points, 35
basis points and 49 basis points for the years ended December 31, 1997, 1996
and 1995, respectively.
(5) The Super NOW account product was originated during the year ended December
31, 1997. The amounts shown for the years ended December 31, 1996 and 1995
include NOW accounts only.
(6) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(7) Net interest margin represents net interest income divided by average
interest-earning assets.
11
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------------ -------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
----------------------- ------------------------
VOLUME RATE NET VOLUME RATE NET
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
INTEREST-EARNING ASSETS (1):
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold, repurchase agreements
and short-term deposits $ (4,146) $ 376 $ (3,770) $ 6,372 $ (231) $ 6,141
Debt and equity securities 3,808 (1,742) 2,066 (7,288) 1,781 (5,507)
Mortgage-backed and mortgage related
securities, net 61,866 1,850 63,716 24,678 668 25,346
Real estate loans, net 24,954 (2,507) 22,447 6,723 (1,420) 5,303
Consumer and student loans (1) 33 32 (467) (80) (547)
----------- ---------- ----------- ----------- ----------- -----------
Total interest-earning assets 86,481 (1,990) 84,491 30,018 718 30,736
----------- ---------- ----------- ----------- ----------- -----------
INTEREST-BEARING LIABILITIES:
Money market accounts (310) (117) (427) (146) (7) (153)
Savings accounts (2) (1,073) (194) (1,267) (12) (493) (505)
Super NOW and NOW accounts 1,137 343 1,480 365 159 524
Certificates of deposit 17,374 1,303 18,677 13,192 (1,470) 11,722
Non-depository stock subscriptions (2,292) - (2,292) 3,633 - 3,633
Borrowed funds 31,217 267 31,484 4,434 (194) 4,240
----------- ---------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 46,053 1,602 47,655 21,466 (2,005) 19,461
----------- ---------- ----------- ----------- ----------- -----------
Net change in net interest income $ 40,428 $ (3,592) $ 36,836 $ 8,552 $ 2,723 $ 11,275
=========== ========== =========== =========== =========== ===========
</TABLE>
(1) Includes assets available-for-sale.
(2) Includes mortgagors' escrow deposits.
12
<PAGE>
COMPARISON OF FINANCIAL CONDITION FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL
Total assets at December 31, 1997 were $3.60 billion, a decrease of $16.9
million from $3.62 billion at December 31, 1996. Although total assets at
December 31, 1997 and 1996 remained relatively consistent, the components
thereof dramatically changed, primarily due to the January 10, 1997 conversion
of the Bank to a stock institution whereby the Company retained net proceeds of
$410.7 million and returned $1.08 billion of non-depository stock subscriptions
to subscribers. The return of non-depository stock subscriptions held at
December 31, 1996 was offset by current year increases in the investment and
loan portfolios funded primarily by the net conversion proceeds, along with the
Company's leveraging strategy.
Exclusive of the effect of the $1.08 billion of non-depository stock
subscriptions returned to subscribers, total assets increased $1.06 billion, or
41.81%, primarily due to a $704.5 million increase in securities available-for-
sale and a $462.6 million increase in real estate loans held for investment,
net. Mortgage-backed and mortgage related securities available-for-sale
increased by $697.2 million, or 60.1%, from $1.16 billion at December 31, 1996
to $1.86 billion at December 31, 1997. Debt and equity securities available-for-
sale at December 31, 1997 totaled $494.2 million, an increase of $7.3 million,
or 1.5%, compared to $486.9 million at December 31, 1996. Securities held-to-
maturity, net decreased $76.5 million, or 27.4%, to $202.1 million at December
31, 1997 from $278.6 million at December 31, 1996. These changes in the
securities portfolios reflect the effects of securities purchases, securities
repayments and maturities, and in the case of the available-for-sale securities
portfolio, the effects of securities sales and changes in the estimated fair
values of the securities. At December 31, 1997, the securities available-for-
sale portfolio had net unrealized gains of $57.4 million as compared to $24.8
million at December 31, 1996.
Real estate loans held for investment, net at December 31, 1997 were $973.6
million, an increase of $462.6 million, or 90.5%, from $511.0 million at
December 31, 1996, primarily due to the origination of $479.5 million in
commercial real estate, construction and development and one- to four-family
residential real estate loans and from the purchase of $303.4 million of one- to
four-family residential real estate loans.
Real estate owned, net at December 31, 1997 was $157,000, a decrease of $1.5
million, or 90.8%, from $1.7 million at December 31, 1996. The decrease was
primarily attributable to the sale of several real estate owned properties
during the year end December 31, 1997.
Funding for the Company's asset growth was generated through a combination of
borrowings, cash flows and recent deposit growth. Since December 31, 1996,
total deposits decreased by $13.3 million, or 0.7%, to $1.94 billion at December
31, 1997. However, after giving effect to the $145.3 million of deposits that
were transferred to stockholders' equity as part of the Conversion, deposits
have increased by $132.0 million, or 7.3%. At December 31, 1997 total deposits
increased $66.3 million, or 3.5% from the previous quarter ended September 30,
1997.
Borrowed funds at December 31, 1997 were $966.5 million, as compared to $1.8
million at December 31, 1996. The $964.7 million increase was principally due
to management's decision to adopt a leveraging strategy utilizing borrowings,
primarily in the form of reverse-repurchase agreements, to fund asset growth
and, to a lesser extent, fund first quarter deposit outflows.
Total stockholders' equity increased $379.0 million to $628.3 million at
December 31, 1997 from $249.3 million at December 31, 1996. The increase is
primarily due to the transfer of $410.7 million of net conversion proceeds from
the initial public offering that was completed on January 10, 1997, earnings for
the year ended December 31, 1997 totaling $33.4 million and the increase in net
unrealized gain on securities available-for-sale, net of taxes of $18.7 million.
The increase in net unrealized gain on securities available-for-sale from
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December 31, 1996 to December 31, 1997 resulted primarily from the appreciation
in equity securities coupled with the larger aggregate principal balance of the
investment portfolio. This increase in total stockholders' equity was partially
offset by the unallocated and unearned shares of common stock held by the ESOP
and SBIP of $52.0 million and $37.5 million, respectively, and the $7.2 million
of dividends paid to shareholders. Additionally, concurrent with the close of
the stock offering, the Company donated 1,271,100 shares of common stock to the
Foundation which increased stockholders' equity by $12.7 million.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL
The Company reported net income of $33.4 million for the year ended December 31,
1997, or $0.83 per share, as compared to net income of $20.6 million for the
year ended December 31, 1996. Net income for the year ended December 31, 1997
includes a $7.4 million after-tax non-recurring charge relating to the funding
of the Foundation and a $2.7 million after-tax charge for a settlement
agreement, including professional fees related thereto, with the NYSBD regarding
certain loan and origination fee practices by RFI, the Bank's mortgage banking
subsidiary. The Company's net income excluding such charges would have been
$43.4 million, or $1.08 per share, for the year ended December 31, 1997,
representing a $22.8 million, or 110.4%, increase in net income from the prior
year.
INTEREST INCOME
Interest income increased to $225.0 million for the year ended December 31,
1997, an increase of $84.5 million, or 60.1%, from $140.5 million for the prior
year. The increase was attributable to the growth in average interest-earning
assets to $3.08 billion for the year ended December 31, 1997, from $1.93 billion
for the prior year. The increase in average interest-earning assets was
principally attributable to growth of $871.2 million in average mortgage-backed
and mortgage related securities, $289.9 million growth in average real estate
loans, net and $57.8 million growth in average debt and equity securities.
These increases were principally the result of the deployment of the conversion
proceeds and the Company's leveraging strategy. Additionally, the growth was
attributable to a $289.7 million increase in average interest-bearing deposits
over the comparable 1996 period. Interest income on mortgage-backed and
mortgage related securities increased $63.7 million, from $62.4 million for the
year ended December 31, 1996 to $126.1 million for the same period in 1997
principally due to an increase of 96.6% in the average balance of these
securities. Additionally contributing to the increase was an increase in the
average yield on these securities of 20 basis points from 6.92% for the year
ended December 31, 1996 to 7.12% for the year ended December 31, 1997. The
yield increases were due to increases in maturity terms for new purchases and
the upward repricing of securities purchased in prior periods.
Interest income on real estate loans increased $22.5 million, or 58.1%, to $61.1
million for the year ended December 31, 1997, from $38.6 million for the same
period in 1996. The increase was a result of the growth in the average balance
of loans outstanding primarily due to increased originations of one- to four-
family, construction and development, and commercial real estate loans and the
purchase of $303.4 million of one- to four-family residential real estate loans.
Further contributing to the increase in interest income for the year ended
December 31, 1997 compared to the same period in 1996 was a 25.9% decrease in
non-performing loans, from $8.7 million at December 31, 1996 to $6.5 million at
December 31, 1997. The increase was partially offset by a 56 basis point
decrease in the average yield on real estate loans, net from 9.11% for the year
ended December 31, 1996 to 8.55% for the current year, principally due to an
increased concentration of relatively lower yielding one- to four-family
residential real estate loans within the loan portfolio mix.
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INTEREST EXPENSE
Interest expense for the year ended December 31, 1997, was $126.4 million,
compared to $78.8 million for the year ended December 31, 1996, an increase of
$47.6 million, or 60.5%. The increase is related to a $751.6 million, or 43.6%,
increase in the average balance of interest-bearing liabilities from $1.72
billion in 1996 to $2.47 billion in 1997. This increase reflects a $289.7
million increase in the average balance of interest-bearing deposits and a 28
basis point increase in the average rate paid on total interest-bearing deposits
for the year ended December 31, 1997 compared to the prior year due to an
increase in the average balance of relatively higher costing certificates of
deposit. The average balance of certificates of deposit increased due to
management's strategy of funding asset growth by offering competitive rates, and
through the acquisition of $150.0 million of brokered deposits of which $50.0
million was purchased during the year ended December 31, 1997 and $100.0 million
was purchased during the year ended December 31, 1996. As of December 31, 1997,
$149.8 million of brokered deposits remain outstanding. The effect of the higher
average deposit balance primarily resulted in an increase in interest expense on
certificates of deposit of $18.7 million, or 36.4%, from $51.3 million for the
year ended December 31, 1996 to $70.0 million for the year ended December 31,
1997.
Interest expense on borrowed funds increased $31.5 million, from $5.8 million
for the year ended December 31, 1996 to $37.3 million for the year ended
December 31, 1997, primarily due to an increase of $528.0 million in the average
balance of borrowed funds, from $102.4 million for the 1996 period to $630.4
million for the comparable period in 1997. Borrowed funds, principally reverse-
repurchase agreements, have been reinvested in investment securities, real
estate loans and residential whole loans as part of a strategy to leverage the
Company's capital position and improve its return on equity.
NET INTEREST INCOME
Net interest income before provision for possible loan losses was $98.6 million
for the year ended December 31, 1997, an increase of $36.9 million, or 59.7%,
from $61.7 million for the year ended December 31, 1996. The increase in net
interest income before provision for possible loan losses was attributable to
the growth in average interest-earning assets to $3.08 billion for the year
ended December 31, 1997 from $1.93 billion for the year ended December 31, 1996.
The growth in interest-earning assets was principally the result of the
deployment of the January 10, 1997 conversion proceeds, deposit growth and the
Company's leveraging strategy which was utilized to increase both the investment
securities and real estate loan portfolios. Interest-bearing liabilities
increased $751.6 million, or 43.6%, to $2.47 billion for the 1997 period from
$1.72 billion for the 1996 period. The substantial growth in average interest-
earning assets enabled the Company to significantly increase net interest income
and offset the negative impact of the flattening of the yield curve and the
inherent margin compression from leveraging. For the year ended December 31,
1997, the Company's net interest margin of 3.20% remained consistent with the
comparable 1996 period of 3.19%, despite a 49 basis point decline in the net
interest spread to 2.20% from 2.69% in 1996. The decline in the net interest
spread was primarily a result of a 56 basis point decrease in real estate loan
yields, a 28 basis point increase in total deposit costs and the Company's
increased leverage position.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses totaled $600,000 for the year ended
December 31, 1997 as compared to $2.0 million for the year ended December 31,
1996. The provision for possible loan losses for the year ended December 31,
1997 reflects management's qualitative assessment of the loan portfolio, net
charge-offs and collection of delinquent loans. The decrease resulted from
management's assessment of the loan portfolio, the level of the Company's
allowance for possible loan losses and its assessment of the local economy and
market conditions. At December 31, 1997 and 1996, the allowance for possible
loan losses amounted to $24.0 million and $23.3 million, respectively, and the
ratio of such allowance to non-performing loans was 370.82% at December 31, 1997
as compared to 266.82% at December 31, 1996. Management assesses the adequacy
of the
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allowance for possible loan losses based on evaluating known and inherent risks
in the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. While management believes that,
based on information currently available, the allowance for possible loan losses
is sufficient to cover losses inherent in its loan portfolio at this time, no
assurance can be given that the level of allowance for possible loan losses will
be sufficient to cover future possible loan losses incurred by the Company or
that future adjustments to the allowance for possible loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for possible loan losses. Management may in the future increase
its level of allowance for possible loan losses as a percentage of total loans
and non-performing loans in the event it increases the level of commercial real
estate, multi-family, construction and development or consumer lending as a
percentage of its total loan portfolio. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowance for possible loan losses. Such agencies may require the Company to
provide additions to the allowance for possible loans losses based upon
judgments different from management.
NON-INTEREST INCOME
Non-interest income increased $3.7 million, or 43.6%, to $12.1 million for the
year ended December 31, 1997 as compared to $8.4 million for the prior year.
The increase was primarily the result of an increase of $1.4 million in loan
servicing and fee income and a $3.6 million increase in gains on securities,
partially offset by a $1.4 million decrease in net gains on loan sales. The
increases are reflective of management's investment strategy of periodically
recognizing profits from its available-for-sale securities portfolio during
favorable market conditions and from the increase in the loan servicing
portfolio and related loan fees. These increases were partially offset by the
decrease in net gains on sales of loans which was primarily attributable to
unfavorable market conditions in the secondary market during the first nine
months of 1997.
NON-INTEREST EXPENSE
Non-interest expense totaled $60.6 million for the year ended December 31, 1997
as compared to $38.1 million for the year ended December 31, 1996, an increase
of $22.5 million, or 59.2%. Non-interest expense for the 1997 period
principally increased due to an increase in general and administrative expense,
and the one-time $12.7 million pre-tax charge associated with funding the
Foundation, offset in part by a $417,000 decrease in losses on real estate
operations.
General and administrative expense totaled $47.2 million for the year ended
December 31, 1997, as compared to $37.0 million for the comparable period in
1996, an increase of $10.2 million, or 27.6%. The increase was primarily
attributable to an increase in compensation and employee benefits, from $20.7
million for the year ended December 31, 1996 to $26.8 million for the year ended
December 31, 1997. Increases in the current year's compensation and employee
benefits expense due to the Company's stock-related benefit plans were offset in
part by actuarial cost reductions relating to the retirement plan and a one-time
return of reserves from a former health insurance trust. The Company does not
anticipate these cost savings to re-occur in 1998. Additionally, general and
administrative expenses increased due to $4.6 million of pre-tax charges for a
settlement agreement including professional fees related thereto with the NYSBD
regarding certain loan and origination fee practices by RFI, the Bank's mortgage
banking subsidiary (see Note 19 of Notes to Consolidated Financial Statements).
To a lesser extent, the increase was also related to the establishment of
additional branch and mortgage origination offices.
INCOME TAXES
Total income tax expense increased $6.7 million, from $9.4 million recorded
during the year ended December 31, 1996 to $16.1 million during the year ended
December 31, 1997. The effective income tax rates were 32.49% for
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<PAGE>
the 1997 year as compared to 31.38% for the 1996 year (see Note 12 of Notes to
Consolidated Financial Statements).
The Company's contribution of common stock to the Foundation is tax deductible,
subject to a limitation based on 10% of the Company's annual taxable income.
The Company, however, is able to carry forward any unused portion of the
deduction for five years following the year in which the contribution was made.
Based on the Company's estimate of annual taxable income for the current year
and for the next successive five years (the carry forward period), the Company
recognized a tax benefit of $5.3 million on the $12.7 million charitable
donation.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL
Net income for the year ended December 31, 1996 was $20.6 million, an increase
of $1.9 million, or 10.2%, from $18.7 million for the year ended December 31,
1995. Net income for the years ended December 31, 1996 and 1995 represents a
return on average assets of 1.03% and 1.21%, respectively, and return on average
equity of 8.97% and 8.82%, respectively. The increase in net income was due
primarily to an $11.3 million increase in net interest income which, for the
most part, resulted from an increase in the average balance of interest-earning
assets. The growth in interest-earning assets was primarily due to the
significant increase in the Bank's money market investments, mortgage-backed
securities and real estate loan portfolios. These increases resulted from the
core operating activities of the Bank and the temporary receipt during the
latter part of the year of stock subscription escrow funds received in
connection with the offering of Roslyn Bancorp, Inc. common stock. The
increases were partially offset by a $1.4 million increase in the provision for
possible loan losses and a $9.1 million increase in non-interest expense
primarily due to compensation and employee benefit costs associated with a full
year's operation of RFI and staffing and other costs associated with operating
the Bank's two new branch offices in 1996.
INTEREST INCOME
Interest income amounted to $140.5 million for the year ended December 31, 1996,
representing an increase of $30.7 million, or 28.0%, from the same period in
1995. The increase was the result of a $436.9 million increase in average
interest-earning assets. The growth in interest-earning assets was due to
significant increases in the Bank's money market investments, mortgage-backed
and mortgage related securities and real estate loan portfolios. These increases
resulted from both the core operating activities of the Bank, the temporary
receipt during the latter part of the year of stock subscription escrow funds
received in connection with the offering of Roslyn Bancorp, Inc. common stock
and the post-conversion return of escrow funds related to unsatisfied common
stock subscription orders. Although average interest-earning assets increased,
the average yield on interest-earning assets decreased by 7 basis points. The
decrease is due to the Bank's short-term liquidity position during the last
quarter of 1996. Short-term liquidity was required to be maintained at year end
1996 due to the then pending offering of Roslyn Bancorp, Inc. common stock.
Interest income on mortgage-backed and mortgage related securities increased
$25.3 million, or 68.3%, from $37.1 million for the year ended December 31, 1995
to $62.4 million for the same period in 1996, primarily due to an increase of
$355.9 million, or 65.2%, in the average balance of these securities and an
increase in the average yield on these securities of 12 basis points from 6.80%
for 1995 to 6.92% for 1996. These yield increases were due to the increased
interest rate environment for new purchases and the upward repricing of
securities purchased in prior periods.
Interest income on real estate loans increased $5.3 million, or 15.9%, for the
year ended December 31, 1996 to $38.6 million as compared to the same period in
1995. The increase was a result of growth in the average balance of loans
outstanding primarily due to increased origination of one- to four-family and
commercial real estate loans. Further contributing to the increase in interest
income for the period was a 28.2% decrease in
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non-performing loans, from $12.2 million at December 31, 1995 to $8.7 million at
December 31, 1996. The increase was partially offset by a 39 basis point
decrease in the average yield on real estate loans from 9.50% for 1995 to 9.11%
for 1996. Interest income on consumer and student loans decreased $547,000 from
$897,000 for the year ended December 31, 1995 to $350,000 for the same period in
1996, principally due to the sale in April 1995 of $21.5 million of student
loans to the Student Loan Marketing Association.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1996 was $78.8 million as
compared to $59.3 million for the year ended December 31, 1995, an increase of
$19.5 million, or 32.8%. This increase reflects a $241.0 million increase in
the average balance of interest-bearing deposits in the 1996 period compared to
the 1995 period, a 4 basis point increase in the average rate paid on such
liabilities over the same period due to a substantial increase in the average
balance of certificates of deposit and a one-time $3.6 million expense relating
to interest on stock subscription escrow funds received in connection with the
offering of Roslyn Bancorp, Inc. common stock. The increase in average
interest-bearing deposits was primarily attributable to an increase in the
average balance of certificates of deposit to $911.2 million for the year ended
December 31, 1996 from $677.5 million for the year ended December 31, 1995.
Certificates of deposit increased during this period due to management's
strategy of funding its asset growth by offering competitive rates, the
acquisition of $100.0 million of brokered deposits and, to a lesser extent, the
November 1996 opening of the Bank's two new branch offices. The effect of the
higher average balance primarily resulted in an increase of $11.7 million in
interest expense on certificates of deposit in 1996 as compared to 1995.
Interest expense on savings and money market accounts decreased $658,000 to
$16.7 million for the year ended December 31, 1996 from the same period a year
earlier.
Interest expense on borrowed funds increased $4.2 million, or 272.8%, to $5.8
million for the year ended December 31, 1996 as compared to $1.6 million in
1995. The increase was primarily attributable to a $78.1 million increase in
the average balance of borrowed funds to $102.4 million which was offset by a 72
basis point reduction in the average rate paid on borrowed funds to 5.66% for
the year ended December 31, 1996 as compared to the comparable period for 1995.
The increase in borrowed funds in 1996 reflects management's decision to
increase its utilization of reverse-repurchase agreements to fund the purchase
of investment securities during periods when such agreements are cost effective
as a source of funds. During the first three quarters of 1996, the Bank funded
the purchase of a significant portion of the increase in its debt and equity and
mortgage-backed and mortgage related securities available-for-sale portfolio by
entering into various reverse-repurchase agreements with nationally recognized
securities brokerage firms.
PROVISION FOR POSSIBLE LOAN LOSSES
The Bank's provision for possible loan losses increased by $1.4 million, or
233.3%, from $600,000 for the year ended December 31, 1995, to $2.0 million for
the year ended December 31, 1996. The increase in the provision was due
primarily to management's assessment of charge-off activity, particularly
commercial real estate and construction and development loan charge-offs
relating to six loans which totaled $2.1 million during the year ended December
31, 1996. The events leading to such charge-offs associated with such loans
were generally attributable to events occurring in 1996 which resulted in the
Bank reevaluating such loans or obtaining updated appraisals on the properties
securing such loans. The increased provision also reflects management's
assessment of its continuation of the origination of commercial real estate and
construction and development loans, which amounted to 39.0% and 40.9% of gross
loans at December 31, 1996 and 1995, respectively. Such loans generally bear a
greater degree of risk as compared to one- to four-family loans. At December
31, 1996, the Bank's allowance for possible loan losses as a percentage of total
non-performing loans was 266.82%, compared to 191.82% at December 31, 1995, due
to the increase in the provision and a decrease in non-performing loans from
$12.2 million at December 31, 1995 to $8.7 million at December 31, 1996. At
December 31, 1996, the Bank's allowance for possible loan losses as a percentage
of loans, net, excluding loans held-for-sale was 4.55%.
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NON-INTEREST INCOME
Non-interest income is composed of fee income for bank services and profits from
the sale of assets. Non-interest income totaled $8.4 million for the year ended
December 31, 1996 as compared to $6.3 million for the prior year, primarily
reflecting a $2.0 million increase in net gains on sales of loans and a $1.3
million increase in loan servicing and fee income. The increases are reflective
of the Bank's establishment of RFI in August 1995. During 1996, the Bank,
through RFI, increased the level of originations and sales of residential one-to
four-family loans and the outstanding balance of loans serviced for others. One-
to four-family originations increased $146.1 million for the year ended December
31, 1996 to $299.3 million from $153.2 million for the same period in 1995. For
the same period, loan sales were $222.0 million and $134.1 million,
respectively. At December 31, 1996 the Bank was servicing $795.0 million of
loans for others compared to $704.8 million at December 31, 1995, resulting in
loan servicing and fee income of $5.0 million for the year ended December 31,
1996 as compared to $3.7 million for the same period in 1995. Non-interest
income was also affected by net losses on securities totaling $804,000 during
1996 as compared to net gains of $486,000 in 1995.
NON-INTEREST EXPENSE
Non-interest expense increased by $9.2 million, or 31.6%, from $28.9 million for
the year ended December 31, 1995 to $38.1 million for the year ended December
31, 1996, primarily due to increases in general and administrative expenses.
General and administrative expenses totaled $37.0 million for the year ended
December 31, 1996 as compared to $29.4 million for the year ended December 31,
1995. The $7.6 million increase in general and administrative expenses is
primarily attributable to an increase in compensation and employee benefit
expenses related to a full year of operations of RFI coupled with staffing and
other costs associated with the November 1996 opening of the Bank's two new
branch offices. Other significant changes in the Bank's operating expenses
included a $1.4 million decrease in deposit insurance premiums paid to the
Federal Deposit Insurance Corporation (FDIC) resulting from the FDIC's decision
to lower the insurance premiums paid by the Bank Insurance Fund (BIF) insured
institutions to the legal minimum effective January 1, 1996. Other non-interest
expenses increased $2.3 million to $9.4 million for the year ended December 31,
1996 compared to $7.1 million for the year ended December 31, 1995 primarily due
to an increase in professional fees of $318,000, and other non-interest expenses
associated with RFI of $1.0 million primarily related to mortgage recording
taxes and certain general and administration expenses. Non-interest expense was
also affected by net losses on real estate operations, net totaling $589,000 as
compared to net gains of $714,000 in 1995. In addition, non-interest expenses
increased as a result of the renovation of a new administrative office and the
opening of two new branch offices in late 1996.
INCOME TAXES
Total income tax expense increased $928,000, or 10.9%, from $8.5 million for the
year ended December 31, 1995 to $9.4 million for the same period in 1996. The
effective tax rate was 31.38% for the year ended December 31, 1996 as compared
to 31.25% for the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, proceeds from the principal
and interest payments on loans, mortgage-backed and mortgage related and debt
and equity securities, and to a lesser extent, proceeds from the sale of
residential mortgage loans in the secondary market. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit outflows, mortgage prepayments and mortgage loan sales are greatly
influenced by general interest rates, economic conditions and competition.
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The primary investing activities of the Company are the origination of both one-
to four-family and commercial real estate loans and the purchase of mortgage-
backed and mortgage related and debt and equity securities. During the years
ended December 31, 1997 and 1996, the Bank originated and purchased mortgage
loans in the amount of $802.0 million and $437.1 million, respectively.
Purchases of mortgage-backed and mortgage related and debt and equity securities
totaled $1.5 billion and $1.2 billion during the years ended December 31, 1997
and 1996, respectively. These activities were funded primarily by principal
repayments on loans and mortgage-backed and mortgage related securities and by
the Company's increased borrowed funds position during the year ended December
31, 1997. Loan sales provided additional liquidity to the Company, totaling
$212.2 million and $222.0 million for the years ended December 31, 1997 and
1996, respectively.
The Company closely monitors its liquidity position on a daily basis. Excess
short-term liquidity is invested in overnight federal funds sold. In the event
that the Bank should require funds beyond its ability to generate them
internally, additional sources of funds are available through the use of
reverse-repurchase agreements. At December 31, 1997, the Company had $965.1
million in reverse-repurchase agreements outstanding, whereas, at December 31,
1996 there were no reverse-repurchase agreements outstanding. The aforementioned
is primarily attributable to management's decision to utilize borrowings,
primarily in the form of reverse-repurchase agreements, to fund a significant
portion of its asset growth.
At December 31, 1997 the Company had outstanding loan commitments to advance
approximately $231.5 million for mortgage loans, primarily all of which were
fixed-rate commercial and residential real estate loans. Management of the
Company anticipates that it will have sufficient funds available to meet its
current loan commitments. Certificates of deposit that are scheduled to mature
in one year or less from December 31, 1997 totaled $892.4 million. Based upon
prior experience and the Company's current pricing strategy, management believes
that a significant portion of such deposits will remain with the Company.
The Company's most liquid assets are cash and cash equivalents, short-term
securities, securities available-for-sale and securities held-to-maturity due
within one year. The levels of these assets are dependent on the Company's
operating, financing, lending, and investment activities during any given
period. At December 31, 1997, the Bank had $22.4 million in cash and cash
equivalents and no short-term repurchase agreements outstanding whereas, at
December 31, 1996 the Bank had $624.6 million in cash and cash equivalents and
$501.7 million in short-term repurchase agreements outstanding. The decrease in
cash and cash equivalents and short-term repurchase agreements was primarily due
to the Bank's temporarily high liquidity position at December 31, 1996 due to
the receipt of stock subscriptions held in escrow relating to the Conversion.
Tangible stockholders' equity (stockholders' equity less the excess of cost over
fair value of net assets acquired (goodwill)) totaled $625.4 million at December
31, 1997 as compared to $246.0 million at December 31, 1996. This increase
reflects the change in the Company's stockholders' equity noted in the
Comparison of Financial Condition section of Management's Discussion and
Analysis of Financial Condition and Results of Operations, plus the reduction in
the balance of goodwill. Tangible equity is a critical measure of a company's
ability to repurchase stock, pay dividends and support greater asset and
franchise growth. The Company is subject to various capital requirements which
affect its classification for safety and soundness purposes, as well as for
deposit insurance purposes. These requirements utilize tangible equity as a
base component, not equity, as defined by generally accepted accounting
principles (GAAP). Although reported earnings and return on equity are
traditional measures of a company's performance, management believes that the
growth in tangible equity, or "cash earnings" is also a significant measure of a
company's performance. Cash earnings represent the amount by which tangible
equity changes each period due to operating results. Cash earnings include
reported earnings plus the non-cash charges related to the establishment of the
Foundation, amortization for the allocation of ESOP and SBIP stock as well as
the amortization of goodwill. These items have either been previously charged
to equity, as in the case of ESOP and SBIP charges through contra-equity
accounts, or do not affect tangible equity, such as the market appreciation of
allocated ESOP shares, for which the operating charge is offset by a credit to
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additional paid-in-capital, and goodwill amortization for which the related
intangible asset has already been deducted in the calculation of tangible
equity.
Management believes that cash earnings and cash returns on average stockholders'
equity reflects the Company's ability to generate tangible capital that can be
leveraged for future growth. For the year ended December 31, 1997, cash
earnings totaled $52.2 million, or $18.8 million more than reported earnings,
representing a cash return on average stockholders' equity of 8.42%. Management
also believes that since cash earnings represent the Company's tangible capital
growth, various other performance measures should also be analyzed utilizing
cash earnings. Additionally, the cash operating expense to average assets and
cash efficiency ratios decreased to 1.32% and 38.55%, respectively, for the year
ended December 31, 1997 from 1.84% and 51.66% for the year ended December 31,
1996.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
GAAP, which requires the measurement of financial position and operating results
in terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
COMPUTER ISSUES FOR THE YEAR 2000
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the year 2000. The Company
primarily utilizes a third party vendor and such vendor's proprietary software
to process its electronic data. The third party data processing vendor is
modifying, upgrading or replacing its computer software applications and systems
as necessary to permit correct recording of year dates for 2000 and later years.
The vendor has engaged a consultant to review its year 2000 issues and has
implemented a year 2000 compliance program. It has also initiated a compliance
testing program to ensure that all changes are adequately tested.
RFI utilizes a combination of purchased and contract based software, as well as
the services of a third party vendor. RFI is also in the process of assessing
the impact of these products and services on its internal processes, and has
identified compliant alternatives where necessary.
The Company does not expect that the cost of its year 2000 compliance program
will be material to its financial condition or results of operations and
believes that it will be able to satisfy such compliance program by the end of
1998 without any material disruption in its operations. Although the Company
has requested status information from its major suppliers and software vendors,
in the event that any significant vendor does not timely achieve year 2000
compliance, the Company's business or operations could be adversely affected.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this Annual Report includes certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies
21
<PAGE>
of the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices.
IMPACT OF NEW ACCOUNTING STANDARDS
For discussion regarding the impact of new accounting standards, refer to Note 1
of Notes to Consolidated Financial Statements.
22
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---------- ----------
<S> <C> <C>
Cash and cash equivalents:
Cash and cash items $ 2,516 $ 2,284
Due from banks 19,850 9,786
Money market investments - 1,114,240
---------- ----------
22,366 1,126,310
Debt and equity securities, net:
Held-to-maturity (estimated fair value of $2,026
and $2,067, respectively) 1,930 1,930
Available-for-sale 494,193 486,896
Mortgage-backed and mortgage related securities, net:
Held-to-maturity (estimated fair value of $200,445
and $276,046, respectively) 200,193 276,632
Available-for-sale 1,856,633 1,159,411
---------- ----------
2,552,949 1,924,869
Loans held-for-sale, net 15,283 14,134
Loans receivable held for investment, net:
Real estate loans, net 973,634 510,969
Consumer 4,686 1,241
---------- ----------
978,320 512,210
Less allowance for possible loan losses (24,029) (23,320)
---------- ----------
954,291 488,890
Banking house and equipment, net 17,033 17,235
Accrued interest receivable 21,237 18,665
Mortgage servicing rights, net 9,155 8,695
Excess of cost over fair value of net assets acquired 2,906 3,375
Real estate owned, net 157 1,698
Deferred tax asset, net - 5,022
Other assets 5,702 9,060
---------- ----------
Total assets $3,601,079 $3,617,953
========== ==========
</TABLE>
(Continued)
23
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Financial Condition, Continued
December 31, 1997 and 1996
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1997 1996
------------------------------------ ---------- ----------
<S> <C> <C>
Liabilities:
Deposits:
Savings accounts $ 468,928 $ 646,650
Certificates of deposit 1,303,272 1,128,053
Money market accounts 49,344 75,157
Demand deposit accounts 120,701 105,675
---------- ----------
Total deposits 1,942,245 1,955,535
---------- ----------
Official checks outstanding 1,199 -
Borrowed funds:
Reverse-repurchase agreements 965,119 -
Other borrowings 1,332 1,829
Accrued dividends and interest on deposits 10,375 6,636
Mortgagors' escrow and security deposits 20,222 17,725
Accrued taxes payable 9,478 12,185
Deferred tax liability, net 1,742 -
Non-depository stock subscriptions - 1,356,911
Accrued expenses and other liabilities 21,032 17,783
---------- ----------
Total liabilities 2,972,744 3,368,604
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; none issued - -
Common stock, $.01 par value, 100,000,000 shares authorized;
43,642,459 shares issued and outstanding at December 31, 1997 436 -
Additional paid-in-capital 423,411 -
Retained earnings - substantially restricted 261,120 235,154
Unallocated common stock held by Employee Stock Ownership Plan (ESOP) (52,012) -
Unearned common stock held by Stock-Based Incentive Plan (SBIP) (37,511) -
Net unrealized gain on securities available-for-sale, net of tax 32,891 14,195
---------- ----------
Total stockholders' equity 628,335 249,349
---------- ----------
Total liabilities and stockholders' equity $3,601,079 $3,617,953
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31, 1997, 1996 and 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Federal funds sold and short-term deposits $ 4,190 $ 7,960 $ 1,819
Debt and equity securities 33,153 31,087 36,594
Mortgage-backed and mortgage related securities 126,148 62,432 37,086
Real estate loans 61,091 38,644 33,341
Consumer and student loans 382 350 897
-------- -------- --------
Total interest income 224,964 140,473 109,737
-------- -------- --------
Interest expense:
Deposits 89,136 72,965 57,744
Borrowed funds 37,278 5,794 1,554
-------- -------- --------
Total interest expense 126,414 78,759 59,298
-------- -------- --------
Net interest income before provision for possible loan losses 98,550 61,714 50,439
Provision for possible loan losses 600 2,000 600
-------- -------- --------
Net interest income after provision for possible loan losses 97,950 59,714 49,839
-------- -------- --------
Non-interest income:
Loan servicing and fee income 6,430 5,002 3,729
Net gains on sales of loans 2,489 3,858 1,827
Net gains (losses) on securities 2,757 (804) 486
Other non-interest income 399 353 255
-------- -------- --------
Total non-interest income 12,075 8,409 6,297
-------- -------- --------
Non-interest expense:
General and administrative expenses:
Compensation and employee benefits 26,806 20,703 15,815
Occupancy and equipment 3,789 4,378 3,288
Deposit insurance premiums 274 2 1,430
Advertising and promotion 2,363 2,508 1,708
Other non-interest expenses 13,978 9,402 7,115
-------- -------- --------
Total general and administrative expenses 47,210 36,993 29,356
Real estate operations, net 172 589 (714)
Amortization of excess of cost over fair value
of net assets acquired 469 469 266
Charitable contribution to The Roslyn
Savings Foundation 12,711 - -
-------- -------- --------
Total non-interest expense 60,562 38,051 28,908
-------- -------- --------
Income before income taxes 49,463 30,072 27,228
Provision for income taxes 16,073 9,438 8,510
-------- -------- --------
Net income $ 33,390 $ 20,634 $ 18,718
======== ======== ========
Basic and diluted earnings per share $0.83 N/A N/A
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995
(In thousands, except share amounts)
<TABLE>
<CAPTION>
NET
UNREALIZED
UNALLOCATED GAIN (LOSS)
RETAINED COMMON UNEARNED ON SECURITIES
ADDITIONAL EARNINGS- STOCK COMMON AVAILABLE-
COMMON PAID-IN- SUBSTANTIALLY HELD BY STOCK FOR-SALE, NET
STOCK CAPITAL RESTRICTED ESOP HELD BY SBIP OF TAX TOTAL
------ ---------- ------------- ----------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ - $ - $ 195,802 $ - $ - $ (2,736) $ 193,066
Net income - - 18,718 - - - 18,718
Net unrealized gain on securities
transferred from held-to-maturity to
available-for-sale, net of tax - - - - - 5,484 5,484
Change in net unrealized loss on
securities available-for-sale,
net of tax - - - - - 9,145 9,145
------ ---------- ------------- ----------- ------------ ------------- ---------
BALANCE AT DECEMBER 31, 1995 - - 214,520 - - 11,893 226,413
------ ---------- ------------- ----------- ------------ ------------- ---------
Net income - - 20,634 - - - 20,634
Change in net unrealized gain on
securities available-for-sale,
net of tax - - - - - 2,302 2,302
------ ---------- ------------- ----------- ------------ ------------- ---------
BALANCE AT DECEMBER 31, 1996 - - 235,154 - - 14,195 249,349
------ ---------- ------------- ----------- ------------ ------------- ---------
Net income - - 33,390 - - - 33,390
Issuance of 42,371,359 shares of $0.01
par value common stock in the initial
public offering at $10.00 per share 423 410,227 - - - - 410,650
Issuance of 1,271,100 shares of $0.01
par value common stock to The Roslyn
Savings Foundation at $10.00 per share 13 12,699 - - - - 12,712
Open market purchases of common stock - - - (54,805) (41,374) - (96,179)
Allocation from shares purchased with
1996 contribution - - - 1,000 - - 1,000
Allocation from shares purchased with
loan to ESOP - 485 - 1,793 - - 2,278
Amortization of SBIP stock awards - - (186) - 3,863 - 3,677
Change in net unrealized gain on
securities available-for-sale, net of
tax - - - - - 18,696 18,696
Cash dividends declared on common stock - - (7,238) - - - (7,238)
------ ---------- ------------- ----------- ------------ ------------- ---------
BALANCE AT DECEMBER 31, 1997 $ 436 $ 423,411 $ 261,120 $ (52,012) $ (37,511) $ 32,891 $ 628,335
====== ========== ============= =========== ============ ============= =========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $33,390 $20,634 $ 18,718
Adjustments to reconcile net income to net cash
provided by operating activities:
Charitable contribution of Roslyn Bancorp, Inc.
common stock to The Roslyn Savings Foundation 12,711 - -
Provision for possible loan losses 600 2,000 600
Provision for possible losses on real estate owned - 350 -
Originated mortgage servicing rights, net of amortization (460) (398) (246)
Amortization of excess of cost over fair value of net
assets acquired 469 469 266
Depreciation and amortization 1,533 1,904 1,327
Accretion of discounts, net of amortization of premiums (5,343) (1,242) 962
Amortization of premium on callable preferred stock 805 705 1,297
Employee Stock Ownership Plan expense 2,035 1,000 -
Stock-Based Incentive Plan expense 3,594 - -
Proceeds from sales of loans held-for-sale, net of originations
and purchases 1,664 6,122 6,307
Gains on sales of loans (2,489) (3,858) (1,827)
Net (gains) losses on securities (2,757) 804 (486)
Net gains on sales of real estate owned (155) (121) (1,113)
(Increase) decrease in deferred income taxes (7,178) 627 578
Changes in assets and liabilities (net of effects from the
purchase of assets and liabilities of RMBI):
(Increase) decrease in accrued interest receivable (2,572) (7,102) 2,452
Decrease (increase) in other assets 3,358 (5,978) (167)
Increase in official checks outstanding 1,199 - -
Increase in accrued dividends and interest on deposits 3,739 5,635 512
(Decrease) increase in accrued taxes payable (2,707) 3,918 (796)
Increase in accrued expenses and other liabilities 3,603 842 6,165
Net increase in unearned income 5,925 227 187
Other, net 323 - (241)
------- ------- --------
Net cash provided by operating activities 51,287 26,538 34,495
------- ------- --------
Cash flows from investing activities:
Purchase of assets and liabilities of RMBI - - (12,220)
Proceeds from sales and redemptions of debt and equity securities
held-to-maturity - - 278,779
Proceeds from sales and repayments of mortgage-backed
and mortgage related securities held-to-maturity 76,895 71,368 91,987
</TABLE>
(Continued)
27
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Cash Flows, Continued
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Cash flows from investing activities (continued):
Purchases of mortgage-backed and mortgage related
securities held-to-maturity - - (240,702)
Purchases of debt and equity securities held-to-maturity - - (176,308)
Proceeds from sales and repayments of debt, equity,
mortgage-backed and mortgage related securities
available-for-sale 863,732 355,873 171,617
Purchases of debt, equity, mortgage-backed and
mortgage related securities available-for-sale (1,528,784) (1,206,397) (225,523)
Loan originations and purchases, net of principal repayments (472,649) (126,096) (80,698)
Proceeds from sales of loans - - 28,008
Purchases of banking house and equipment, net (1,331) (6,716) (1,708)
Proceeds from sales of real estate owned 1,755 5,139 5,580
----------- ----------- ---------
Net cash used in investing activities (1,060,382) (906,829) (161,188)
----------- ----------- ---------
Cash flows from financing activities:
(Decrease) increase in demand deposit, money market,
and savings accounts (188,509) 248,312 (122,874)
Increase in certificates of deposit 175,219 378,278 232,338
Increase in borrowed funds 964,622 182 1,647
Increase in mortgagors' escrow and security deposits 2,497 1,647 9,594
Net proceeds of common stock issuance 410,650 - -
Loan to ESOP for open market purchase of common stock (53,805) - -
Open market purchase of common stock for SBIP (41,374) - -
Cash dividends paid on common stock (7,238) - -
(Decrease) increase in non-depository stock subscriptions (1,356,911) 1,356,911 -
----------- ----------- ---------
Net cash (used) provided by financing activities (94,849) 1,985,330 120,705
----------- ----------- ---------
Net (decrease) increase in cash and cash equivalents (1,103,944) 1,105,039 (5,988)
Cash and cash equivalents at beginning of year 1,126,310 21,271 27,259
----------- ----------- ---------
Cash and cash equivalents at end of year $ 22,366 $ 1,126,310 $ 21,271
=========== =========== =========
(Continued)
</TABLE>
28
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Cash Flows, Continued
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
(Continued)
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds $122,675 $73,124 $ 58,786
======== ======== =========
Income taxes $ 25,431 $ 4,848 $ 8,888
======== ======== =========
Non-cash investing activities:
Additions to real estate owned, net $ 82 $ 997 $ 6,964
======== ======== =========
Transfer of securities from held-to-maturity to
available-for-sale $ - $ - $648,705
======== ======== =========
Fair value of assets acquired from RMBI:
Loans held-for-sale $ 22,571
Mortgage servicing rights 8,051
Excess of cost over fair value of net assets acquired 3,469
Other assets 628
---------
34,719
---------
Liabilities assumed from RMBI:
Borrowed funds 22,061
Other 438
---------
22,499
---------
Cash paid in acquisition $ 12,220
=========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
ROSLYN BANCORP, INC.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies and Related Matters
--------------------------------------------------------------
Roslyn Bancorp, Inc. was organized under Delaware law as the savings and loan
holding company for The Roslyn Savings Bank and its subsidiaries (the Bank) in
connection with the Bank's conversion from a New York State chartered mutual
savings bank to a New York State chartered stock savings bank on January 10,
1997. See Note 2 for a further discussion of the conversion. The following is a
summary of significant accounting policies of Roslyn Bancorp, Inc. and its
wholly-owned subsidiary (collectively, the Company).
The Company's business consists primarily of the business activities of the
Bank, which activities include attracting deposits from the general public and
originating residential property loans (one- to four-family home mortgage,
cooperative apartment and multi-family property loans). The Bank also makes
commercial real estate loans and consumer loans. The Bank is subject to
competition from other financial institutions. Deposits at the Bank are insured
up to applicable limits by the Bank Insurance Fund (BIF) of the Federal Deposit
Insurance Corporation (FDIC). The Bank is subject to comprehensive regulation,
examination and supervision by the New York State Banking Department (NYSBD) and
the FDIC.
(a) Principles of Consolidation and Basis of Financial Statement Presentation
-------------------------------------------------------------------------
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP) and include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany balances
and transactions have been eliminated in consolidation. When necessary, certain
reclassifications have been made to prior year amounts to conform to the current
year presentation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated financial statements and results
of operations for the periods then ended. Actual results could differ from
those estimates. Material estimates that are particularly susceptible to change
in the near term relate to the determination of the allowance for possible loan
losses.
Management believes that the allowance for possible loan losses is adequate. In
connection with the determination of the allowance for possible loan losses,
management obtains independent appraisals for significant properties. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on unanticipated changes in
economic conditions, particularly in the New York Metropolitan area. In
addition, the NYSBD and the FDIC, as an integral part of their examination
process, periodically review the Bank's allowance for possible loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.
(b) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and money market investments, which are generally
sold for one to three day periods. Money market investments consist of federal
funds sold and, at December 31, 1996, repurchase agreements of $501.7 million.
30
<PAGE>
(c) Debt, Equity, Mortgage-Backed and Mortgage Related Securities
-------------------------------------------------------------
In accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
is required to report debt, readily-marketable equity, mortgage-backed and
mortgage related securities in one of the following categories: (i) "held-to-
maturity" (management has a positive intent and ability to hold to maturity)
which are to be reported at amortized cost adjusted, in the case of debt
securities, for the amortization of premiums and accretion of discounts; (ii)
"trading" (held for current resale) which are to be reported at fair value, with
unrealized gains and losses included in earnings; and (iii) "available-for-sale"
(all other debt, equity, mortgage-backed and mortgage related securities) which
are to be reported at fair value, with unrealized gains and losses reported net
of tax as a separate component of stockholders' equity. The Company determines
the appropriate classification of each security, as either "trading," "held-to-
maturity" or "available-for-sale," at the time of purchase.
Premiums and discounts on debt, mortgage-backed and mortgage related securities
are amortized to expense and accreted to income over the estimated life of the
respective security using the interest method. Premiums paid on certain
callable preferred stock are amortized against income over the period to the
call date. Gains and losses on the sales of securities are recognized on
realization.
(d) Loans Held-for-Sale and Loans Receivable
----------------------------------------
Loans receivable are stated at unpaid principal balances, including negative
escrow, less unearned discounts, deferred mortgage interest and net deferred
loan origination fees.
Purchased loans are recorded at cost. Related premiums or discounts on mortgage
and other loans purchased are amortized to expense or accreted to income using
the interest method over the estimated life of the loans.
Loans held-for-sale are carried at the aggregate lower of cost or market value
as determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate loan basis.
The Company places loans, including impaired loans, on non-accrual status when
they become past due 90 days. All interest previously accrued and not collected
is reversed against interest income, and income is subsequently recognized only
to the extent cash is received until, in management's judgment, a return to
accrual status is warranted. Loans are generally returned to accrual status
when principal and interest payments are current, full collectibility of
principal and interest is reasonably assured and a consistent record of
performance, generally six months, has been demonstrated.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," and the amendment there of, SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," the Company
considers a loan impaired when, based upon current information and events, it is
probable that it will be unable to collect all amounts due, both principal and
interest, according to the contractual terms of the loan agreement. Loans
individually reviewed for impairment by the Company within the scope of SFAS 114
are limited to loans modified in a troubled debt restructuring (TDR) and
commercial and multi-family first mortgage loans. SFAS 114 generally does not
apply to those smaller-balance homogeneous loans that are collectively evaluated
for impairment, which for the Company, include one-to four-family first
mortgage loans, student loans and consumer loans, other than those modified in a
TDR. The measurement value of the Company's impaired loans is based on the fair
value of the underlying collateral. The Company identifies and measures impaired
loans in conjunction with its review of the adequacy of its allowance for
possible loan losses. Specific factors utilized in the identification of
impaired loans include, but are not limited to, delinquency status, loan-to-
value ratio, the condition of the underlying collateral, credit history and debt
coverage.
31
<PAGE>
Cash receipts on non-accrual loans, including impaired loans, are generally
applied to principal and interest in accordance with the contractual terms of
the loan. If full payment of principal is not expected, the Company will either
defer the recognition of interest until the loan performs according to its
original terms or apply all of the principal and interest payments received as a
reduction of the carrying value of the loan.
The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," effective January 1, 1997
(see Note 1(m)). This statement provides accounting and reporting standards for
transfers and servicing of a financial assets and extinguishments of liabilities
based on consistent application of a financial components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. This statement supersedes SFAS No. 76,
"Extinguishment of Debt," SFAS No. 77, "Reporting by Transferors for Transfers
of Receivables with Recourse," and SFAS No. 122, "Accounting for Mortgage
Servicing Rights," and amends SFAS 115 and SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities." The statement requires that a mortgage banking
enterprise recognize as separate assets the rights to service mortgage loans for
others, however acquired. For mortgage servicing rights (MSRs) that are created
through the origination of mortgage loans, and where the loans are subsequently
sold or securitized with servicing rights retained, the statement requires that
the total cost of the mortgage loans should be allocated to the mortgage
servicing rights and the loans based on their relative fair values. The
statement also requires the assessment of capitalized mortgage servicing rights
for impairment to be based on the current fair value of those rights and
recognized through a valuation allowance.
Fees earned for servicing loans are reported as income when the related mortgage
loan payments are collected. MSRs are amortized as a reduction to loan
servicing fee income using the interest method over the estimated remaining life
of the underlying mortgage loans. MSRs are carried at fair value and impairment,
if any, is recognized through a valuation allowance.
A substantial portion of the Company's loans are secured by real estate in the
New York Metropolitan area. Accordingly, the ultimate collectibility of such a
loan portfolio is susceptible to changes in market conditions in the New York
Metropolitan area.
(e) Allowance for Possible Loan Losses
----------------------------------
The allowance for possible loan losses is based on a periodic analysis of the
loan portfolio and reflects an amount which, in management's judgment, is
adequate to provide for possible loan losses in the existing portfolio. In
evaluating the portfolio, management takes into consideration numerous factors
such as the Company's loan growth, prior loss experience, present and potential
risks of the loan portfolio and current economic conditions. Provisions for
possible loan losses are charged to operations. Loans, including impaired
loans, are charged-off against the allowance for possible loan losses when the
collectibility of loan principal is unlikely. Recoveries of loans previously
charged-off are credited to the allowance.
(f) Commitment and Loan Origination Fees
------------------------------------
The Company defers certain loan origination and commitment fees net of certain
origination costs and amortizes them as an adjustment of the loan's yield over
the term of the related loan using the interest method.
(g) Banking House and Equipment
---------------------------
Land is carried at cost and banking houses are carried at cost, less allowance
for depreciation computed on the straight-line method over a twenty-five to
fifty year period. Leasehold improvements are stated at cost, less accumulated
amortization. Amortization is computed on the straight-line method over the
terms of the respective lease or the life of the improvement, whichever is
shorter. Furniture, fixtures and equipment are stated at cost,
32
<PAGE>
less accumulated depreciation. Depreciation is computed on the straight-line
method on the estimated service lives over a three to ten year period.
(h) Real Estate Owned
-----------------
Real estate acquired through foreclosure or deed-in-lieu of foreclosure are
reported at the lower of cost or fair value at the acquisition date, and
subsequently at the lower of its new cost or fair value less estimated selling
costs. Cost represents the unpaid loan balance at the acquisition date plus
expenses, when appropriate, incurred to bring the property to a salable
condition. The Company maintains an allowance for subsequent declines in a
property's carrying value. Certain costs relating to holding the properties,
and gains or losses resulting from the disposition of properties are recognized
in the current period's operations.
(i) Income Taxes
------------
Under the asset and liability method of SFAS No. 109, "Accounting for Income
Taxes," deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance must
be established. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(j) Summary of Retirement Benefits Accounting
-----------------------------------------
The Company's retirement plan is non-contributory and covers substantially all
eligible employees. The plan conforms to the provisions of the Employee
Retirement Income Security Act of 1974, as amended. The Company's policy is to
accrue for all pension costs and to fund the maximum amount allowable for tax
purposes. Actuarial gains and losses that arise from changes in assumptions
concerning future events used in estimating pension costs are amortized over a
period that reflects the long-range nature of pension expense. The Company
accounts for post-retirement benefits pursuant to SFAS No. 106, "Employers'
Accounting for Post-Retirement Benefits Other Than Pensions," whereby the cost
of providing those benefits to an employee, and the employee's beneficiaries and
covered dependents, are accrued during the years that the employee renders the
necessary service.
(k) Stock-Based Compensation
------------------------
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company adheres to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), in accounting for its stock-based
compensation plans and discloses in the footnotes to the financial statements
pro-forma net income and earnings per share (EPS) information as if the fair
value based method had been adopted.
Deferred compensation for the Stock-Based Incentive Plan (SBIP) awards is
recorded as a reduction of stockholders' equity and is calculated as the cost of
the shares purchased by the Company and contributed to the plan. Compensation
expense is recognized over the vesting period of actual stock awards based upon
the fair value of the shares at the award date. The excess of the cost of the
shares over the fair value at the award date is treated as an adjustment of
retained earnings.
Compensation expense for the Employee Stock Ownership Plan (ESOP) is recorded at
an amount equal to the shares allocated by the ESOP multiplied by the average
fair market value of the shares during the year. The Company recognizes
compensation expense ratably over the year for the ESOP shares to be allocated
each
33
<PAGE>
December 31st, based upon the Company's current estimate of the number of shares
expected to be allocated by the ESOP during each calendar year. The difference
between the average fair market value and the cost of the shares allocated by
the ESOP is recorded as an adjustment to additional paid-in-capital.
(l) Earnings Per Share
------------------
The Company adopted SFAS No. 128, "Earnings Per Share," effective December 15,
1997. This statement establishes standards for computing and presenting EPS for
entities with publicly held common stock or potential common stock. The
statement simplifies the computations of EPS that were previously found in APB
Opinion No. 15, "Earnings Per Share," and replaces primary EPS with basic EPS
and fully diluted EPS with diluted EPS. Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. This statement requires a
reconciliation of the numerator and denominator of the two EPS calculations and
the restatement of all prior period EPS data presented after adoption. See Note
16 for reconciliation of basic and diluted EPS. The Company has not presented
EPS for the periods prior to 1997 as shares of common stock had not yet been
issued.
(m) Recently Issued Accounting Pronouncements
-----------------------------------------
In December 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125." The FASB was made aware that the volume and variety of certain
transactions and the related changes to information systems and accounting
processes that are necessary to comply with the requirements of SFAS 125 would
make it extremely difficult, if not impossible, for some affected enterprises to
apply the transfer and collateral provisions of SFAS 125 to those transactions
as soon as January 1, 1997. As a result, SFAS 127 defers for one year the
effective date (a) of paragraph 15 of SFAS 125 and (b) for repurchase agreement,
dollar-roll, securities lending and similar transactions, of paragraphs 9-12 and
237(b) of SFAS 125. The adoption of the deferred provisions of SFAS 125, as
amended by SFAS 127, is not expected to have a material effect in the Company's
results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS 130 is effective for fiscal years beginning after December 15, 1997 and
requires reclassification of financial statements for earlier periods provided
for comparative purposes. The statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. The statement requires that all items that are
required to be recognized as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as net income plus all
other comprehensive income which includes all changes in equity during a period
except those resulting from investments by owners and distributions to owners.
This statement will be effective for the Company's fiscal 1998 periods.
Management is still assessing the impact of SFAS 130 on its financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. In the initial year
of application, comparative information for earlier years is to be restated.
The statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. The Company
is still assessing the impact of SFAS 131 on its financial statements.
(2) Conversion to Stock Form of Ownership
-------------------------------------
On May 29, 1996, the then Board of Trustees of the Bank adopted a Plan of
Conversion, which was subsequently amended on July 30, 1996 and September 30,
1996, to convert the Bank from a state chartered mutual savings
34
<PAGE>
bank to a state chartered capital stock savings bank with the concurrent
formation of a holding company, Roslyn Bancorp, Inc., subject to approval by
regulatory authorities and depositors of the Bank.
On January 10, 1997, the Bank completed the conversion and the Company completed
the issuance and sale of 42,371,359 shares of its common stock (the Conversion),
at a price of $10.00 per share, through an initial public offering (IPO), with
the Bank's eligible depositors receiving all of the shares. The Company also
contributed 1,271,100 shares of its common stock, from authorized but unissued
shares, to The Roslyn Savings Foundation (the Foundation) immediately following
the Conversion. The Company received gross proceeds from the Conversion of
$423.7 million, before the reduction from gross proceeds of $13.1 million for
estimated IPO related expenses. On the date of the Conversion, $145.3 million of
deposits and $278.4 million of non-depository stock subscriptions funds were
transferred to stockholders' equity, and $1.08 billion of non-depository stock
subscriptions funds were subsequently returned to subscribers; also subsequent
to the Conversion, the ESOP purchased, through a $53.8 million loan from the
Company and the initial $1.0 million contribution from the Bank, 3,491,397
shares of common stock on the open market.
The Bank established a liquidation account, as of the date of Conversion, in the
amount of $222.2 million, equal to its retained earnings as of the date of the
latest consolidated statement of financial condition appearing in the final
prospectus. The liquidation account is maintained for the benefit of eligible
pre-Conversion account holders who continue to maintain their accounts at the
Bank after the date of Conversion. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In
the event of a complete liquidation, each eligible account holder will be
entitled, under New York State Law, to receive a distribution from the
liquidation account in an amount equal to their current adjusted account
balances for all such depositors then holding qualifying deposits in the Bank.
Subsequent to the Conversion, the Bank may not declare or pay cash dividends on
or repurchase any of its shares of common stock if the effect thereof would
cause stockholder's equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements or would reduce the Bank's capital level below
the then aggregate balance required for the liquidation account. The Company,
unlike the Bank, is not subject to the same restrictions regarding the
declaration or payment of dividends to its' shareholders, although the source of
the Company's dividends may depend upon the Bank's ability to pay dividends. The
Company is subject to the requirements of Delaware law, which generally limit
dividends to an amount equal to the excess of its net assets over its stated
capital or, if there is no such excess, to its net profits for the current
and/or immediately preceding fiscal year.
The Company established the Foundation in connection with the Conversion. The
amount of shares the Company contributed to the Foundation equaled 3.0% of the
total amount of common stock issued in the Conversion. The Foundation was
formed as a complement to the Bank's existing community activities and is
dedicated to community activities and the promotion of charitable causes.
The Foundation has received approval from the Internal Revenue Service to be
recognized as a tax-exempt organization and is classified as a private
foundation. The contribution of common stock to the Foundation by the Company
will be tax deductible, subject to an annual limitation based on 10% of the
Company's annual taxable income. The Company, however, will be able to carry
forward any unused portion of the deduction for a five year period following the
contribution. The Company recognized a $12.7 million expense for the full
amount of the contribution to the Foundation, offset in part by the $5.3 million
corresponding tax benefit, during the first quarter of 1997.
35
<PAGE>
(3) Debt and Equity Securities
--------------------------
Investments in debt and equity securities, net at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Held-to-maturity:
Debt securities:
State, county and municipal $ 1,930 $ 96 $ - $ 2,026
======== ======= ===== ========
Available-for-sale:
Debt securities:
United States Government - direct
and guaranteed $ 75,499 $ 2,476 $ - $ 77,975
United States Government agencies 125,097 384 - 125,481
Other 5,365 20 - 5,385
-------- ------- ----- --------
Total debt securities available-for-sale 205,961 2,880 - 208,841
-------- ------- ----- --------
Equity securities:
Preferred and common stock 243,864 30,560 (171) 274,253
Other 9,720 1,409 (30) 11,099
-------- ------- ----- --------
Total equity securities available-for-sale 253,584 31,969 (201) 285,352
-------- ------- ----- --------
Total debt and equity securities available-for-sale $459,545 $34,849 $(201) $494,193
======== ======= ===== ========
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Held-to-maturity:
Debt securities:
State, county and municipal $ 1,930 $ 137 $ - $ 2,067
======== ======= ===== ========
Available-for-sale:
Debt securities:
United States Government - direct
and guaranteed $175,440 $ 3,819 $ - $179,259
United States Government agencies 124,709 161 (493) 124,377
Other 14,207 198 (7) 14,398
-------- ------- ----- --------
Total debt securities available-for-sale 314,356 4,178 (500) 318,034
-------- ------- ----- --------
Equity securities:
Preferred and common stock 155,284 13,100 (20) 168,364
Other 488 10 - 498
-------- ------- ----- --------
Total equity securities available-for-sale 155,772 13,110 (20) 168,862
-------- ------- ----- --------
Total debt and equity securities available-for-sale $470,128 $17,288 $(520) $486,896
======== ======= ===== ========
</TABLE>
37
<PAGE>
Sales of investments in debt and equity securities are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
(In thousands)
Proceeds from sales:
Equity securities $ 58,312 $35,758 $ 11,077
Debt securities 233,759 - 172,099
Gross gains:
Equity securities 1,752 92 189
Debt securities 264 - 159
Gross losses:
Equity securities 43 23 74
Debt securities - - 231
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, sales of investments in
debt securities were from both the "held-to-maturity" and "available-for-sale"
portfolios and the sales of investments in equity securities were from the
"available-for-sale" portfolio. Investments in debt securities referred to as
being "sold" from the "held-to-maturity" portfolio were either called or sold
within 90 days of the maturity date.
Other securities losses of $461,000 were recorded during the year ended December
31, 1995, principally related to the Company's investment in Nationar, a failed
bank service institution. Additionally, charged against interest income on debt
and equity securities are the amortized premiums relating to the Company's
investments in certain callable preferred stocks in the amounts of $1.2 million,
$705,000 and $1.2 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
The maturities of the investments in debt securities at December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
At December 31, 1997
---------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
------------------------------- ---------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 34,781 $ 35,094 $ 735 $ 751
After 1 year through 5 years 60,893 63,085 1,195 1,275
After 5 years through 10 years 10,640 10,644 - -
Over 10 years 99,647 100,018 - -
-------- -------- ------ ------
$205,961 $208,841 $1,930 $2,026
======== ======== ====== ======
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
At December, 31 1996
----------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
------------------------------ -------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------- --------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 57,886 $ 58,317 $ - $ -
After 1 year through 5 years 245,214 248,605 1,930 2,067
After 5 years through 10 years 11,256 11,112 - -
Over 10 years - - - -
-------- -------- ------ ------
$314,356 $318,034 $1,930 $2,067
======== ======== ====== ======
</TABLE>
Included in available-for-sale debt securities at December 31, 1997 and 1996 are
callable step-up notes which were issued by U.S. Government agencies. The
amortized cost, which approximates fair value, of these notes aggregated $35.0
million and $63.4 million at December 31, 1997 and 1996, respectively. These
notes represent general U.S. Government agency obligations that provide for
annual fixed rate step-ups of interest and are callable at par after one year
and in six month intervals thereafter. The weighted average rate of the notes
was 6.86% and 6.55% at December 31, 1997 and 1996, respectively.
(4) Mortgage-Backed and Mortgage Related Securities
-----------------------------------------------
Mortgage-backed and mortgage related securities at December 31, 1997 and 1996
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------- -------------- ---------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Held-to-maturity:
Whole loan private collateralized
mortgage obligations, net $ 200,193 $ 990 $(738) $ 200,445
========== ======= ===== ==========
Available-for-sale:
GNMA pass-through securities, net $ 14,291 $ 1,420 $ - $ 15,711
FHLMC pass-through securities, net 250,206 2,947 - 253,153
GNMA adjustable rate mortgage
pass-through securities, net 442,037 7,223 - 449,260
Whole loan private collateralized
mortgage obligations, net 640,467 5,019 (170) 645,316
Agency collateralized mortgage obligations, net 486,860 6,452 (119) 493,193
---------- ------- ----- ----------
Mortgage-backed and mortgage related
securities available-for-sale, net $1,833,861 $23,061 $(289) $1,856,633
========== ======= ===== ==========
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Held-to-maturity:
Whole loan private collateralized
mortgage obligations, net $ 276,632 $ - $ (586) $ 276,046
========== ========== ========== ==========
Available-for-sale:
GNMA pass-through securities, net $ 18,737 $ 1,767 $ - $ 20,504
FNMA pass-through securities, net 6,443 - (180) 6,263
FHLMC pass-through securities, net 220,800 536 (1,072) 220,264
GNMA adjustable rate mortgage
pass-through securities, net 268,801 3,631 - 272,432
Whole loan private collateralized
mortgage obligations, net 276,500 2,136 (603) 278,033
Agency collateralized mortgage obligations, net 360,115 2,678 (878) 361,915
---------- ---------- ---------- ----------
Mortgage-backed and mortgage related
securities available-for-sale, net $1,151,396 $ 10,748 $ (2,733) $1,159,411
========== ========== ========== ==========
</TABLE>
Included in the Company's available-for-sale and held-to-maturity securities
portfolios are mortgage-backed and mortgage related securities which, except for
collateralized mortgage obligations (CMOs), represent participating interests in
pools of first mortgage loans.
Sales of investments in mortgage-backed and mortgage related securities are
summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
Proceeds from sales $ 295,123 $ 89,400 $ 48,463
Gross gains 853 50 904
Gross losses 69 923 -
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, sales of mortgage-
backed and mortgage related securities were from the "available-for-sale"
portfolio.
40
<PAGE>
The contractual maturities of the investments in mortgage-backed and mortgage
related securities, net at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
At December 31, 1997
---------------------------------------------------------------
Available-for-Sale Held-to-Maturity
---------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Within 1 year $ 62,089 $ 62,960 $ - $ -
After 1 year through 5 years 1,207 1,242 6,744 6,709
After 5 years through 10 years 18,051 18,515 2,992 2,999
Over 10 years 1,752,514 1,773,916 190,457 190,737
---------- ---------- ---------- ----------
$1,833,861 $1,856,633 $ 200,193 $ 200,445
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------------------------------------------
Available-for-Sale Held-to-Maturity
---------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Within 1 year $ 30,010 $ 29,989 $ - $ -
After 1 year through 5 years 1,065 1,104 8,964 8,864
After 5 years through 10 years 25,645 25,984 8,996 8,937
Over 10 years 1,094,676 1,102,334 258,672 258,245
---------- ---------- ---------- ----------
$1,151,396 $1,159,411 $ 276,632 $ 276,046
========== ========== ========== ==========
</TABLE>
Expected maturities differ from contractual obligations since borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. Generally, the aging of mortgage-backed and mortgage related
securities is based on their weighted average maturities.
(5) Loans Held-for-Sale, Net and Loans Receivable Held for Investment, Net
----------------------------------------------------------------------
Loans held-for-sale, net at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
One- to four-family loans, net $13,987 $12,558
Student loans 1,296 1,576
------- -------
Total loans held-for-sale, net $15,283 $14,134
======= =======
</TABLE>
The Company originates most fixed rate loans for immediate sale to the Federal
National Mortgage Association (FNMA) or other investors. Generally, the sale of
such loans is arranged at the time the loan application is received through
investor commitments.
In addition, student loans are sold to the Student Loan Marketing Association
generally during the grace period of the loan, before principal repayment
begins. During the years ended December 31, 1997, 1996 and 1995, the
41
<PAGE>
Company sold approximately $2.8 million, $3.7 million and $21.5 million,
respectively, of student loans, recording aggregate net gains of $30,000,
$38,000 and $496,000, respectively.
Loans receivable held for investment, net at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Real estate loans, net:
One- to four-family $619,970 $250,815
Multi-family 44,006 46,576
Home equity and second mortgage 16,974 9,506
Commercial real estate 248,607 168,797
Construction and development 52,269 37,459
-------- --------
Total real estate loans 981,826 513,153
Less:
Net unamortized discount and deferred income (6,670) (1,267)
Net deferred loan origination fees (1,522) (917)
-------- --------
Total real estate loans, net 973,634 510,969
Other loans:
Consumer 4,686 1,241
Less allowance for possible loan losses (24,029) (23,320)
-------- --------
Loans receivable held for investment, net $954,291 $488,890
======== ========
</TABLE>
The principal balance of non-accrual loans approximated $6.2 million, $7.1
million and $9.2 million at December 31, 1997, 1996 and 1995, respectively.
Interest income that would have been recorded if the loans had been performing
in accordance with their original terms aggregated approximately $630,000,
$720,000 and $1.2 million during the years ended December 31, 1997, 1996 and
1995, respectively. No interest income has been recorded relating to non-
accrual loans during the years ended December 31, 1997, 1996 and 1995.
The principal balance of restructured loans that have not complied with the
terms of their restructuring agreement for a satisfactory period of time
(normally six months) was $280,000, $1.6 million and $2.6 million at December
31, 1997, 1996 and 1995, respectively. Interest income that would have been
recorded if the loans had been performing in accordance with their original
terms aggregated approximately $30,000, $172,000 and $266,000 during the years
ended December 31, 1997, 1996 and 1995, respectively. Interest income recorded
for restructured loans amounted to $235,000, $118,000 and $38,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Additionally,
restructured loans totaling $1.4 million, $2.3 million and $750,000 have
complied with the terms of the restructuring agreement for a satisfactory period
and were returned to the performing loan portfolio during the years ended
December 31, 1997, 1996 and 1995, respectively.
42
<PAGE>
Loans in arrears three months or more were as follows at:
<TABLE>
<CAPTION>
Amount % of loans
------- -----------
(Dollar in thousands)
<S> <C> <C>
December 31, 1997 $4,519 0.46%
====== ====
December 31, 1996 $6,467 1.26%
====== ====
December 31, 1995 $8,766 2.26%
====== ====
</TABLE>
The Company has entered into various agreements to service loans for others. At
December 31, 1997 and 1996, 7,444 loans and 6,803 loans, respectively, with a
total balance of $866.3 million and $795.0 million, respectively, were being
serviced for others. The Company has not retained a participation in these
loans.
The right to service loans for others is generally obtained by either the sale
of loans with servicing retained, the open market purchase of mortgage servicing
rights or the creation of mortgage servicing rights pursuant to SFAS 125
(collectively referred to as mortgage servicing rights).
During the years ended December 31, 1997, 1996 and 1995, the Company sold
without recourse approximately $134.9 million, $152.0 million and $70.4 million,
respectively, of whole loans with servicing retained. Service fee income of
$2.5 million, $2.2 million and $888,000 is included in loan servicing and fee
income, net in the accompanying consolidated statements of income for the years
ended December 31, 1997, 1996 and 1995, respectively.
In connection with the 1995 acquisition of certain assets and liabilities of
Residential Mortgage Banking, Inc. (RMBI) (see Note 9), the Company recorded
MSRs with a fair value of $8.1 million. No servicing rights were purchased prior
thereto. In addition, the Company capitalized MSRs in the amount of $2.3
million, $1.8 million and $690,000, respectively, during the years ended
December 31, 1997, 1996 and 1995.
Fees earned for servicing loans are reported as income when the related mortgage
loan payments are collected. Mortgage servicing rights are amortized as a
reduction to loan servicing and fee income on the interest method over the
estimated remaining life of the underlying mortgage loans. MSRs are carried at
fair value and impairment, if any, is recognized through a valuation allowance.
For the years ended December 31, 1997, 1996 and 1995, no impairment existed in
the MSRs and, as a result, there was no valuation allowance required. See Note
15 for risk characteristics and assumptions used to estimate fair value.
MSR activity for the years ended December 31, 1997, 1996 and 1995 is summarized
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 8,695 $ 8,297 $ -
Acquired in acquisition - - 8,051
Originated mortgage servicing rights 2,289 1,821 690
Less:
Amortization (1,829) (1,423) (444)
------- ------- ------
Balance at end of year $ 9,155 $ 8,695 $8,297
======= ======= ======
</TABLE>
43
<PAGE>
(6) Allowance for Possible Loan Losses
----------------------------------
Impaired loans and related allowances for possible loan losses have been
identified and calculated in accordance with the provisions of SFAS 114. The
total allowance for possible loan losses has been determined in accordance with
the provisions of SFAS 5. As such, the Company has provided amounts for
anticipated losses that exceed the immediately identified losses associated with
loans that have been deemed impaired. Provisions have been made and established
accordingly, based upon experience and expectations, for losses associated with
the general population of loans, specific industry and loan types, including
residential and consumer loans which are not generally subject to the provisions
of SFAS 114.
The Company's recorded investment in impaired loans at December 31, 1997 and
1996 was $2.8 million and $4.4 million, respectively. The Company did not
maintain a related allowance for these loans. The Company's average recorded
investment in impaired loans for the years ended December 31, 1997, 1996 and
1995 was $5.3 million, $5.0 million and $5.1 million, respectively. Interest
income recognized on impaired loans, which was not materially different from
cash-basis interest income, amounted to $568,000, $206,000 and $378,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The following is a summary of the activity in the allowance for possible loan
losses account:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $23,320 $23,350 $25,127
Provisions for loan losses 600 2,000 600
Charge-offs (91) (2,127) (2,510)
Recoveries 200 97 133
------- ------- -------
Balance at end of year $24,029 $23,320 $23,350
======= ======= =======
</TABLE>
(7) Banking House and Equipment
---------------------------
A summary of banking house and equipment at cost, net of accumulated
depreciation and amortization, and land at cost at December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Land $ 3,008 $ 3,008
Banking house 13,545 13,332
Furniture, fixtures and equipment 6,402 5,294
------- -------
22,955 21,634
Accumulated depreciation and amortization (5,922) (4,399)
------- -------
$17,033 $17,235
======= =======
</TABLE>
Depreciation and amortization of banking house and equipment of approximately
$1.5 million, $1.9 million and $1.3 million was included in occupancy and
equipment expense for the years ended December 31, 1997, 1996 and 1995,
respectively.
44
<PAGE>
(8) Accrued Interest Receivable
---------------------------
Accrued interest receivable at December 31, 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Loans $ 6,777 $ 3,682
Mortgage-backed and mortgage related securities 11,867 8,395
Debt and equity securities 2,593 5,362
Money market investments - 1,226
------- -------
$21,237 $18,665
======= =======
</TABLE>
(9) Excess of Cost Over Fair Value of Net Assets Acquired
-----------------------------------------------------
The Bank acquired in 1995, through a wholly-owned subsidiary now known as
Residential First, Inc. (RFI), certain assets and liabilities, including the
loan origination business and the $623.0 million loan servicing portfolio (the
acquisition), of RMBI, a mortgage banking firm which operated in New York and
New Jersey.
The acquisition was funded by the Bank, and was accounted for under the purchase
method of accounting. Accordingly, the purchase price was allocated to the
assets and liabilities acquired based on their estimated fair values as of
August 1, 1995, including $8.1 million relating to the value of the loan
servicing portfolio acquired. The consideration paid exceeded the estimated
fair value of the net assets acquired (goodwill) by $3.5 million. This amount
was recorded as goodwill and is being amortized over 10 years. The Company will
assess the recoverability of this intangible asset by determining whether the
amortization of the goodwill over its remaining life can be recovered through
future operating cash flows of RFI. The unamortized balance of goodwill relating
to the RMBI acquisition was $2.6 million and $3.0 million as of December 31,
1997 and 1996, respectively.
Previously, the Company purchased certain assets and assumed the deposit
liabilities of a bank branch. The acquisition was accounted for under the
purchase method of accounting and, accordingly, all of the acquired assets and
assumed liabilities were adjusted to and recorded at their fair market value.
The goodwill generated from the acquisition amounted to $855,000 and is being
amortized on a straight-line basis over seven years. The unamortized balance of
the goodwill as of December 31, 1997 and 1996 was $275,000 and $397,000,
respectively.
(10) Deposits
--------
Savings and time deposit account balances (excluding demand deposit accounts)
are summarized as follows:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
------------------------------- ------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
------------ ---------- ------------ ----------
(Dollars in thousands)
Type of account:
<S> <C> <C> <C> <C>
Savings accounts 2.93% $ 468,928 2.58% $ 646,650
Certificates of deposit 5.88 1,303,272 5.73 1,128,053
Money market accounts 2.63 49,344 2.97 75,157
---------- ----------
$1,821,544 $1,849,860
========== ==========
</TABLE>
45
<PAGE>
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
At December 31, 1997
-----------------------------------------------------------
Weighted
Average Rate Amount Percent
---------------- --------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
1 year or less 5.62% $ 892,391 68.47%
Greater than 1 year through 2 years 6.14 215,437 16.53
Greater than 2 years through 3 years 6.54 68,465 5.26
Greater than 3 years through 4 years 6.37 61,556 4.72
Greater than 4 years through 5 years 6.33 43,140 3.31
Over 5 years 6.58 22,283 1.71
---------- ------
$1,303,272 100.00%
========== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
-----------------------------------------------------------
Weighted
Average Rate Amount Percent
---------------- --------------- ----------------
<S> <C> <C> <C>
(Dollars in thousands)
1 year or less 5.45% $ 774,110 68.62%
Greater than 1 year through 2 years 5.97 144,936 12.85
Greater than 2 years through 3 years 6.46 96,177 8.52
Greater than 3 years through 4 years 6.85 38,299 3.40
Greater than 4 years through 5 years 6.52 61,043 5.41
Over 5 years 6.48 13,488 1.20
---------- ------
$1,128,053 100.00%
========== ======
</TABLE>
Certificates of deposit in excess of $100,000 were approximately $191.8 million
and $163.1 million at December 31, 1997 and 1996, respectively. Additionally,
included in certificates of deposit at December 31, 1997 and 1996 were brokered
deposits totaling $149.8 million and $100.0 million, respectively.
Demand deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------------- ---------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
--------- --------- --------- ---------
Type of account: (Dollars in thousands)
<S> <C> <C> <C> <C>
Personal - $ 33,980 - $ 29,516
Super NOW and NOW 3.54% 86,721 3.09% 76,159
-------- --------
$120,701 $105,675
======== ========
</TABLE>
The FDIC insures deposits of account holders up to $100,000 per insured
depositor. To provide for this insurance, the Company must pay a risk-based
annual assessment which considers the financial soundness of the institution and
capitalization level (see Note 18). At December 31, 1997 and 1996, the Company
was assessed at
46
<PAGE>
the FDIC's lowest assessment level, as a well capitalized institution. For the
years ended December 31, 1997 and 1996, the Company paid $274,000 and $2,000,
respectively, in FDIC insurance premiums, the statutory minimum.
Interest expense on deposit balances for the years ended December 31, 1997, 1996
and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Savings accounts $14,886 $18,445 $15,317
Money market accounts 1,427 1,854 2,007
Super NOW and NOW 2,841 1,361 837
Certificates of deposit 69,982 51,305 39,583
------- ------- -------
$89,136 $72,965 $57,744
======= ======= =======
</TABLE>
Included in interest expense on savings accounts for the years ended December
31, 1997 and 1996 is $1.3 million and $3.6 million, respectively, of interest
expense on non-depository stock subscriptions.
(11) Borrowed Funds
--------------
Borrowed funds at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Reverse-repurchase agreements $965,119 6.05% $ - -%
FNMA warehouse line of credit 1,332 6.70 1,829 6.87
-------- ------
$966,451 $1,829
======== ======
</TABLE>
From time to time, the Company enters into sales of securities under agreements
to repurchase (reverse-repurchase agreements). Fixed-coupon reverse-repurchase
agreements are treated as financing transactions and the obligations to
repurchase are reflected as a liability in the consolidated financial
statements. The dollar amount of securities underlying the agreements remains
in the asset account. The securities underlying the agreements are delivered to
the dealer with whom each transaction is executed. The dealers, who may sell,
loan or otherwise dispose of such securities to other parties in the normal
course of their business, agree to resell to the Company the same securities at
the maturities of the agreements. The Company retains the right of substitution
of collateral throughout the terms of the agreements.
At December 31, 1997, all outstanding reverse-repurchase agreements had original
contractual maturities ranging from 7 days to 5 years. The securities underlying
the reverse-repurchase agreements were secured by available-for-sale U.S.
Treasury notes, Government agency notes and mortgage-backed securities, except
as noted below. The following is a summary of information relating to these
reverse-repurchase agreements:
47
<PAGE>
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
--------------------------------------------------
1997 1996 1995
------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C>
Book value of collateral (including accrued interest):
U.S. Treasury notes $ 5,030 $ - $ -
Government agency notes 15,559 - -
Mortgage-backed securities:
Available-for-sale 984,644 - -
Held-to-maturity 15,584 - -
Estimated fair value of collateral
(including accrued interest):
U.S. Treasury notes 5,111 - -
Government agency notes 15,600 - -
Mortgage-backed securities:
Available-for-sale 995,999 - -
Held-to-maturity 15,669 - -
Average balance of outstanding agreements
during the year $ 629,224 $ 100,159 $ 22,292
============ ============ ===========
Maximum balance of outstanding agreements
at any month end during the year $995,861 $212,296 $40,850
============ ============ ===========
Average interest rate for the year 5.90% 5.58% 6.42%
============ ============ ===========
</TABLE>
The contractual maturities of the outstanding reverse-repurchase agreements were
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Balance
---------
(In thousands)
<S> <C>
1998 $ 501,680
1999 137,139
2000 175,000
2001 30,000
2002 121,300
---------
$ 965,119
=========
</TABLE>
Included in the 1998 maturity category above is $82.5 million and $48.6 million
of reverse-repurchase agreements with contractual maturities of 7 days and 35
days, respectively, which are collateralized by available-for-sale mortgage-
backed securities with a book value (including accrued interest) of $84.5
million and $50.3 million, respectively, and an estimated fair value (including
accrued interest) of $86.5 million and $50.3 million, respectively.
At December 31, 1997 and 1996, the Company had $1.3 million and $1.8 million,
respectively, of outstanding secured notes payable to FNMA under a warehouse
line of credit. The line of credit is secured by $1.3 million and $1.8 million
of mortgage loans held-for-sale as of December 31, 1997 and 1996, respectively.
The outstanding notes had an interest rate of 6.70% and 6.87%, at December 31,
1997 and 1996, respectively. The notes are repaid as the related mortgage loans
are sold or collected.
48
<PAGE>
Interest expense on borrowings for the years ended December 31, 1997, 1996 and
1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Reverse-repurchase agreements $ 37,133 $ 5,586 $ 1,431
FNMA warehouse line of credit 145 208 123
-------- ------- -------
$ 37,278 $ 5,794 $ 1,554
======== ======= =======
</TABLE>
(12) Income Taxes
------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Mortgages and other loans receivable, primarily due
to allowance for loan losses and deferred loan fees $ 10,209 $ 9,497
Real estate owned, primarily due to allowance for losses 526 958
Post-retirement benefits 1,467 1,363
Non-accrual loan interest 1,142 927
Employee bonus and fringe benefits 2,774 2,161
ESOP and SBIP 1,998 -
Charitable contributions 2,989 -
Loss carryforward 380 -
Correspondent reserve 522 490
Callable preferred stock 832 644
Amortization of purchased mortgage servicing rights 551 271
Mark to market on mortgage loans held-for-sale 179 351
Other 649 263
-------- --------
Total gross deferred tax assets 24,218 16,925
-------- --------
Deferred tax liabilities:
Net unrealized gain on available-for-sale securities (24,530) (10,588)
Originated mortgage servicing rights (1,430) (1,244)
Other - (71)
-------- --------
Total gross deferred tax liabilities (25,960) (11,903)
-------- --------
Net deferred tax (liability) asset $ (1,742) $ 5,022
======== ========
</TABLE>
Management believes that it is more likely than not that the consolidated
results of future operations of the Company will generate sufficient taxable
income to realize the deferred tax assets of the Company. Therefore, a
valuation allowance against the gross deferred tax assets is not considered
necessary.
49
<PAGE>
Provisions for income taxes are comprised of the following amounts:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
--------- ------- --------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 19,168 $ 6,053 $ 5,771
State and local 4,083 2,758 2,161
-------- ------- -------
23,251 8,811 7,932
-------- ------- -------
Deferred:
Federal (5,486) 458 406
State and local (1,692) 169 172
-------- ------- -------
(7,178) 627 578
-------- ------- -------
$ 16,073 $ 9,438 $ 8,510
======== ======= =======
</TABLE>
Total provision for income taxes differed from the amounts computed by applying
the U.S. Federal income tax rate of 35% to income before income tax expense as a
result of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
Expected income tax expense at statutory Federal tax rate $ 17,312 $ 10,525 $ 9,530
State and local taxes, net of Federal income tax benefit 1,554 2,049 1,743
Dividend received deduction (2,956) (2,513) (1,992)
Tax exempt income - - (70)
ESOP 168 - -
Reversal of prior year taxes (100) (675) (750)
Other, net 95 52 49
-------- -------- -------
$ 16,073 $ 9,438 $ 8,510
======== ======== =======
</TABLE>
The Company's stockholders' equity includes approximately $10.3 million at
December 31, 1997 and 1996 which has been segregated for Federal income tax
purposes as a bad debt reserve. The use of this amount for purposes other than
to absorb losses on loans may result in taxable income for Federal income taxes
at the then current tax rate. Under section 593 of the Internal Revenue Code
(the Code), thrift institutions such as the Bank, which met certain definitional
tests, primarily relating to their assets and the nature of their business, were
permitted to establish a tax reserve for bad debts and to make annual additions
thereto, which additions were, within specified limitations, deducted in
arriving at their taxable income. The Bank's deduction with respect to
"qualifying loans," which are generally loans secured by certain interests in
real property, was, prior to January 1, 1996, computed using an amount based on
the Bank's actual loss experience (the Experience Method), or the 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 additions to the non-qualifying reserve. Similar
deductions for additions to the Bank's bad debt reserve were permitted under the
New York State Bank Franchise Tax, however, for purposes of these taxes, the
effective allowable percentage under the PTI Method was 32% rather than 8%.
50
<PAGE>
Under the Small Business Job Protection Act of 1996 (the 1996 Act), which was
enacted in August 1996, section 593 of the Code was amended and the Bank, as a
"large bank" (one with assets having an adjusted basis of more than $500
million), is no longer permitted to make additions to its tax bad debt reserve,
is permitted to deduct bad debts only as they occur and is required to recapture
(that is, take into taxable income) over a multi-year period, beginning with the
Bank's taxable year beginning on January 1, 1996, the excess of the balance of
its bad debt reserves (other than the supplemental reserve) as of December 31,
1995 over the balance of such reserves as of December 31, 1987. At December 31,
1995 the balance of the Bank's federal bad debt reserves equaled the balance of
such amount at December 31, 1987. The New York State tax law has been amended
to prevent a similar recapture of the Bank's bad debt reserve, and to permit the
continued future use of the bad debt reserve methods, for purposes of
determining the Bank's New York State tax liability, in either case, so long as
the Bank continues to satisfy the New York State definitional test related to
its assets and nature of business, which are similar to the former federal
income tax test described above.
(13) Employee Benefit Plans
----------------------
Pension Plan - The Bank's noncontributory pension plan with The RSI Retirement
Trust covers substantially all full-time employees. The following table depicts
the components of the net pension expense for the years ended December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Service cost $ 589 $ 463 $ 384
Interest cost 875 845 822
Actual return on assets (2,939) (1,667) (2,044)
Amortization of unrecognized transition asset (50) (115) (115)
Amortization of unrecognized loss - 11 -
Amortization of unrecognized past service liability 5 5 5
Deferred investment gain 1,942 790 1,233
------- ------- -------
$ 422 $ 332 $ 285
======= ======= =======
</TABLE>
The following table sets forth the Bank's defined benefit plan's funded status
at September 30, 1997 and 1996 (the latest valuation dates) as determined by the
plan's actuary:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $10,523 and $9,351 in 1997 and 1996, respectively $ 10,898 $ 9,887
======== ========
Projected benefit obligation for services rendered $(14,948) $(11,801)
Market value of plan assets 15,617 13,389
-------- --------
Plan assets greater than projected benefit obligation 669 1,588
Amount contributed during fourth quarter 25 -
Unrecognized net transition asset being amortized
over 10.40 years - (49)
Unrecognized net gain (49) (577)
Unrecognized past service liability 25 30
-------- --------
Prepaid pension expense $ 670 $ 992
======== ========
Assumed rate of return on assets 8.00% $ 8.00%
======== ========
Assumed rate of compensation increase 5.00% 5.50%
======== ========
Assumed discount rate 7.25% 7.75%
======== ========
</TABLE>
51
<PAGE>
The projected benefit obligation represents the obligation to plan members for
services already rendered and then increases that obligation for future
compensation levels.
Supplemental Plan - The former chief executive officer is covered by a
supplemental executive retirement plan with The RSI Retirement Trust. The
actuarial present value of the accumulated benefit obligation at December 31,
1997 and 1996 was $627,000 and $637,000, respectively. Included in the employee
benefit expense for the years ended December 31, 1997, 1996 and 1995 was
$47,000, $45,000 and $55,000, respectively, related to this obligation.
Benefit Restoration Plan - The Benefit Restoration Plan provides benefits for
any highly compensated employee whose benefits are restricted under the Bank's
defined benefit and defined contribution plans. The actuarial present value of
the accumulated benefit obligation at December 31, 1997 and 1996 was $800,000
and $483,000, respectively. Included in employee benefit expense for the years
ended December 31, 1997, 1996 and 1995 was $166,000, $160,000 and $168,000,
respectively, related to this obligation.
401(k) Plan - The Bank has a defined contribution and thrift savings plan under
Section 401(k) of the Internal Revenue Code. All regular, full-time employees
are eligible for voluntary participation after one or more years of continuous
service. The plan is effectuated through a trust established by the Bank. The
Bank makes matching contributions of 6% of the participant's eligible
compensation in the form of cash. Commencing on January 10, 1997, eligible
participants in the ESOP are no longer eligible for the 401(k) matching
contribution. The Bank made cash contributions of $51,000, $322,000 and
$255,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Employee Stock Ownership Plan - In connection with the Conversion, the Bank
established an ESOP. The ESOP is a tax qualified retirement plan designed to
invest primarily in the Company's common stock. All full-time employees of the
Bank who have completed one year of service with the Bank will be eligible to
participate in the ESOP. The ESOP utilized funds borrowed from the Company
totaling $53.8 million, and the initial $1.0 million contribution from the Bank
made in 1996, to purchase approximately 8%, or 3,491,397 shares of the Company's
common stock issued in the Conversion. The loan to the ESOP will be primarily
repaid with contributions from the Bank to the ESOP over a period not to exceed
30 years. Under the terms of the ESOP, the Bank makes contributions to the ESOP
sufficient to cover all payments of principal and interest as they become due.
For the year ended December 31, 1997, the Bank made contributions of $4.3
million to the ESOP. The ESOP utilized the contributions, along with the
dividends received on the unallocated ESOP shares, which totaled $617,000, to
repay $454,000 of principal and $4.4 million of interest on the loan. At
December 31, 1997, the loan had an outstanding balance of $53.4 million and an
interest rate of 8.25%.
Shares purchased with the loan proceeds are held in a suspense account by the
trustee of the plan for future allocation among participants as the loan is
repaid. Contributions to the ESOP and shares released from the suspense account
are allocated among participants on the basis of compensation as described in
the plan. The number of shares released to participants will be determined
based upon the percentage of principal and interest payments made during the
year divided by the total remaining principal and interest payments including
the current year's payment. Participants will vest in the shares allocated to
their respective accounts over a period not
52
<PAGE>
to exceed 5 years. Any forfeited shares are allocated to the then remaining
participants in the same proportion as contributions. At December 31, 1997,
approximately 177,961 shares have been allocated to participants and 3,313,436
shares remain unallocated. Included in the shares allocated to participants
during the year ended December 31, 1997, 20,117 shares were allocated utilizing
the matching contribution formula under the 401(k) plan. The Company recognizes
compensation expense attributable to the ESOP ratably over the year based upon
the estimated number of ESOP shares to be allocated each December 31st. For the
years ended December 31, 1997 and 1996, the Company recognized $2.0 million and
$1.0 million, respectively, as compensation expense.
The trustee for the ESOP must vote all allocated shares held in the ESOP trust
in accordance with the instructions of the participants. Unallocated shares
held by the ESOP trust are voted by the trustee in a manner calculated to most
accurately reflect the results of the allocated ESOP shares voted, subject to
the requirements of the Employee Retirement Income Security Act of 1974, as
amended (ERISA).
Management Supplemental Executive Retirement Plan - The Management Supplemental
Executive Retirement Plan (MSERP) provides benefits to certain officers and
highly compensated employees whose benefits are limited under the ESOP
allocation procedure if they retire prior to the complete repayment of the ESOP
loan. Benefits under the MSERP vest in 20% annual increments over a five year
period commencing as of the date of a participant's participation in the MSERP.
The actuarial present value of the accumulated benefit obligation at
December 31, 1997 was $685,000. The Company has not recorded any expense
relating to the MSERP for the year ended December 31, 1997.
Stock-Based Incentive Plan - At the annual shareholder meeting on July 22, 1997
the shareholders approved The Roslyn Bancorp, Inc. 1997 Stock-Based Incentive
Plan (Incentive Plan). The Incentive Plan authorizes the granting of options to
purchase the Company's common stock, option-related awards and awards of the
Company's common stock (collectively, Awards). Subject to certain adjustments
to prevent dilution of Awards to participants, the maximum number of shares
reserved for Awards denominated in common stock under the Incentive Plan is
6,108,444 shares. The maximum number of shares reserved for purchase pursuant
to the exercise of options and option-related Awards which may be granted under
the Incentive Plan is 4,364,246 shares, and will primarily vest over a five year
period and which must be exercised no more than ten years from the date of
grant. The maximum number of the shares reserved for the award of shares of the
Company's common stock is 1,744,198 shares, and will primarily vest over a five
year period. All officers, other employees and outside directors of the Company
and its affiliates, including the Bank and its subsidiaries, are eligible to
receive Awards under the Incentive Plan. The Incentive Plan will be
administered by a committee of non-employee directors of the Company (the
Committee). Authorized but unissued shares, or shares previously issued and
reacquired by the Company, may be used to satisfy the Awards under the Incentive
Plan. Each option and award may become 100% exercisable/granted upon the
occurrence of a change in control of the Company, or upon death, disability or
retirement of the optionee.
The Company contributed $41.4 million, during the third quarter of 1997, to the
Incentive Plan to enable the Incentive Plan to purchase 1,744,198 shares of the
Company's common stock to be awarded. This contribution represents deferred
compensation which is initially recorded as a reduction to stockholders' equity
and ratably charged to compensation expense over the vesting period of the
awards. The Committee established September 2, 1997 as the Incentive Plans
effective grant date and 1,512,507 shares, reserved as noted above, were awarded
to outside directors, officers and employees of the Bank. Upon the achievement
of certain defined performance targets, 148,900 of the aforementioned shares
will vest. For the year ended December 31, 1997, compensation expense
attributable to stock awards under the Incentive Plan was approximately $3.6
million.
Options granted under this plan are either non-statutory stock options or
incentive stock options. Each option entitles the holder to purchase one share
of the Company's common stock at an exercise price equal to the fair market
value on the date of grant. There was no compensation expense attributable to
these options as the Company used the intrinsic value based method of accounting
as the $22.50 exercise price equaled the common
53
<PAGE>
stock price at the grant date. All options expire no later than ten years
following the date of grant. Option transactions for the year ended December 31,
1997 are shown below:
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Exercise Price
---------- --------------
<S> <C> <C>
Options outstanding at December 31, 1996 - $ -
Granted 3,883,388 22.50
Forfeited (3,882) 22.50
Exercised - -
--------- ------
Options outstanding at December 31, 1997 3,879,506 $ 22.50
========= ======
</TABLE>
The exercise price on all options granted for the year ended December 31, 1997
and outstanding at December 31, 1997 is $22.50. The weighted average remaining
contractual life for options outstanding at December 31, 1997 is 9.67 years.
None of the granted options are exercisable at December 31, 1997.
In accordance with SFAS 123, the Company used the Black-Scholes option pricing
model with the following weighted average assumptions to value the options
granted as follows:
<TABLE>
<CAPTION>
At December 31, 1997
--------------------
<S> <C>
Dividend yield 1.74%
Expected volatility 22.50%
Risk-free interest rate 5.61%
Expected option lives 4 years
</TABLE>
On a pro forma basis, had compensation expense for the Company's stock-based
compensation plan been determined based on the fair value at the grant date for
awards made under the plan, consistent with SFAS 123, the Company's net income
and earnings per share for the year ended December 31, 1997 would have been
reduced as follows:
<TABLE>
<CAPTION>
1997
----------------
(In thousands, except per share data)
<S> <C>
Net income:
As reported $33,390
Pro forma 31,906
Basic earnings per share:
As reported $ 0.83
Pro forma 0.79
Diluted earnings per share:
As reported $ 0.83
Pro forma 0.79
</TABLE>
The effects of applying SFAS 123, for either recognizing or disclosing
compensation cost under such pronouncement, may not be representative of the
effect on reported net income for future periods.
54
<PAGE>
(14) Post-employment Health Care and Life Insurance Benefits
-------------------------------------------------------
The Bank currently provides health care and life insurance benefits for retirees
and their eligible dependents. The coverage provided depends upon the date they
retired.
The cost of the Bank's post-retirement health care and life insurance benefits
is recognized in the consolidated financial statements during the employee's
active working career.
The status of the plan, which is unfunded, at December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In thousands)
<S> <C> <C>
Accumulated post-retirement benefit obligation $3,485 $3,693
Unrecognized net gain 601 205
Unrecognized past service liability (539) (589)
------ ------
Accrued post-retirement benefit cost recognized in the
consolidated statements of financial condition $3,547 $3,309
====== ======
</TABLE>
Net periodic post-retirement benefit cost included in compensation and employee
benefits in the accompanying consolidated statements of income for the years
ended December 31, 1997, 1996 and 1995 is comprised of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 106 $ 86 $ 40
Interest cost on accumulated post-retirement
benefit obligation, net of amortization 248 321 228
----- ----- -----
$ 354 $ 407 $ 268
===== ===== =====
</TABLE>
For measurement purposes, an 8.0% annual rate of increase in the per capita cost
of covered benefits (health care cost trend rate) was assumed for 1997; with the
rate assumed to gradually decrease to 5.0% by the year 2006 and remain at that
level thereafter. This rate assumption has a significant effect on the estimate
of the accumulated post-retirement benefit obligation and aggregate service and
interest cost components of net periodic post-retirement benefit cost. A 1%
point increase in the health care cost trend rate would increase the accumulated
post-retirement benefit obligation by 2.5% as of December 31, 1997 while the
aggregate of the service and interest cost components of net periodic post-
retirement benefit cost for the year ended December 31, 1997 would increase
2.4%. The discount rate used in determining the accumulated post-retirement
benefit obligation was 7.25% and 7.75%, respectively, at December 31, 1997 and
1996.
(15) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
the Company to disclose the fair value of its on- and off-balance sheet
financial instruments. A financial instrument is defined in SFAS 107 as cash,
evidence of an ownership interest in an entity or a contract that creates a
contractual obligation or right to deliver or receive cash or another financial
instrument from a second entity on potentially favorable or unfavorable terms.
SFAS 107 defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale.
55
<PAGE>
The following table represents the carrying amounts and fair values of the
Company's financial instruments:
<TABLE>
<CAPTION>
At December 31, 1997
-----------------------------------
Carrying Estimated
Amount Fair Value
----------------- ---------------
(In thousands)
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 22,366 $ 22,366
Debt and equity securities, net:
Held-to-maturity 1,930 2,026
Available-for-sale 494,193 494,193
Mortgage-backed and mortgage related securities, net:
Held-to-maturity 200,193 200,445
Available-for-sale 1,856,633 1,856,633
Loans held-for-sale, net 15,283 15,498
Loans receivable held for investment, net 954,291 984,117
Accrued interest receivable 21,237 21,237
Mortgage servicing rights, net 9,155 12,641
Financial liabilities:
Deposit liabilities:
Certificates of deposit 1,303,272 1,312,899
Deposits, excluding certificates of deposit 638,973 638,973
Borrowed funds 966,451 966,029
Accrued dividends and interest on deposits 10,375 10,375
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996
----------------------------------------------
Carrying Estimated
Amount Fair Value
------------------- ---------------------
(In thousands)
<S> <C> <C>
Financial assets:
Cash and cash equivalents $1,126,310 $1,126,310
Debt and equity securities, net:
Held-to-maturity 1,930 2,067
Available-for-sale 486,896 486,896
Mortgage-backed and mortgage related securities, net:
Held-to-maturity 276,632 276,046
Available-for-sale 1,159,411 1,159,411
Loans held-for-sale, net 14,134 14,203
Loans receivable held for investment, net 488,890 491,139
Accrued interest receivable 18,665 18,665
Mortgage servicing rights, net 8,695 10,583
Financial liabilities:
Deposit liabilities:
Certificates of deposit 1,128,053 1,132,452
Deposits, excluding certificates of deposit 827,482 827,482
Non-depository stock subscriptions 1,356,911 1,356,911
Borrowed funds 1,829 1,829
Accrued dividends and interest on deposits 6,636 6,636
</TABLE>
The carrying amounts in the table are included in the consolidated statements of
condition under the indicated captions. The following summarizes the major
methods and assumptions used in estimating the fair values of the financial
instruments:
Cash and cash equivalents - The carrying amounts for cash and cash equivalents
- -------------------------
approximate fair value as they mature in 30 days or less and do not present
unanticipated credit concerns.
Securities - The fair values of securities are estimated based on bid quotations
- ----------
received from security dealers or from prices obtained from firms specializing
in providing security pricing services.
Loans held-for-sale, net - Fair value is estimated based on current prices
- ------------------------
established in the secondary market or, for those loans committed to be sold,
based upon the price established in the commitment.
Loans receivable held for investment, net - Fair values are estimated for
- -----------------------------------------
portfolios of loans with similar financial characteristics. Loans are segregated
by type, such as commercial real estate and residential mortgage. Each loan
category is further segmented into fixed and adjustable rate interest terms and
by performing and non-performing categories. For performing residential mortgage
loans, fair values are estimated by discounting contractual cash flows through
the estimated maturity using discount rates and prepayment estimates based on
secondary market sources adjusted to reflect differences in servicing and credit
costs. The estimated fair value of remaining performing loans is calculated by
discounting scheduled cash flows using estimated market discount rates that
reflect the credit and interest rate risks inherent in the loan. Fair values for
non-performing real estate loans are based on recent appraisals.
Accrued interest receivable - The fair value of the accrued interest receivable
- ---------------------------
is estimated to be the book value.
57
<PAGE>
Mortgage servicing rights, net - Mortgage servicing rights are valued based upon
- ------------------------------
the Company's stratification of the mortgage servicing portfolio.
Stratification is based upon the predominate risk characteristics of the
underlying loans, including, but not limited to, interest rate, loan type and
the frequency of value of interest rate adjustments in the case of adjustable
rate mortgage loans. Each strata is then discounted to reflect the present
value of the future cash flows utilizing current market assumptions regarding
discount rates, prepayment speeds, delinquency rates, and other factors.
Deposit liabilities - All deposits, except certificates of deposit, are subject
- -------------------
to rate changes at any time, and therefore are considered to be carried at
estimated fair value. The fair value of certificates of deposit is estimated
by computing the present value of contractual future cash flows for each
certificate. The present value rate utilized was the rate offered by the
Company at each date presented on certificates with an initial maturity equal to
the remaining term to maturity of the existing certificates.
Non-depository stock subscriptions - Non-depository stock subscriptions were
- ----------------------------------
subject to rate change at any time, and therefore were considered to be carried
at estimated fair value.
Borrowed funds - The estimated fair value of borrowed funds is based on the
- --------------
discounted value of contractual cash flows using interest rates currently in
effect for borrowings with similar maturities and collateral requirements.
Accrued dividends and interest on deposits - The fair values of the accrued
- ------------------------------------------
dividends and interest on deposit balances are estimated to be their book
value.
Limitations - SFAS 107 requires disclosures of the estimated fair value of
- -----------
financial instruments. Fair value estimates are made at a specific point in
time, based on relevant market information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering a one-time sale of the Company's entire holdings of a particular
financial instrument nor the resultant tax ramifications or transaction costs.
Since no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company conducts a mortgage servicing
activity that contributes fee income annually. The mortgage servicing activity
is not considered a financial instrument, and as such its value has not been
incorporated into the fair value estimates. Other significant assets of the
Company that are not considered financial assets include banking house and
equipment and deferred tax assets. In addition, the tax ramifications related
to the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered.
Commitments - The fair value of commitments is estimated using the fees
- -----------
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments and commitments to sell loans
at specified prices, fair value also considers the difference between current
levels of interest rates and the committed rates.
58
<PAGE>
(16) Earnings Per Share Reconciliation
---------------------------------
The following table is the reconciliation of basic and diluted EPS as required
under SFAS 128 at December 31, 1997:
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amounts
----------- ------------- ---------
(In thousands, except share and per share amounts)
<S> <C> <C> <C>
Net income $33,390
=======
Basic EPS:
Income available to common stockholders $33,390 40,159,931 $0.83
Effect of dilutive securities:
Options - - -
------- ---------- -----
Diluted EPS:
Income available to common stockholders $33,390 40,159,931 $0.83
======= ========== =====
</TABLE>
Options to purchase 3,879,506 shares of the Company's common stock at $22.50 per
share were outstanding at December 31, 1997 but were not included in the
computation of diluted EPS because the assumed exercise would be anti-dilutive.
(17) Commitments and Contingencies
-----------------------------
In the normal course of the Company's business, there are outstanding various
commitments and contingent liabilities that have not been reflected in the
consolidated statements of financial condition. In the opinion of management,
the financial position of the Company will not be affected materially as a
result of such commitments and contingent liabilities (see Note 19).
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consultation with legal
counsel, the financial position, results of operations and liquidity of the
Company will not be affected materially by the outcome of such legal
proceedings.
At December 31, 1997 and 1996, respectively, there were outstanding loan
commitments by the Company to advance approximately $231.5 million and $226.9
million for mortgage loans, primarily all of which were fixed rate commercial
and residential real estate loans.
At December 31, 1997 and 1996, the Company had no available lines of credit with
banks or any other institutions, except as noted in Note 11.
In the normal course of its mortgage banking activities, the Company enters into
both optional and mandatory commitments to sell packages of mortgage loans that
it originates. The Company commits to sell the loans at specified prices in a
future period, generally ranging from 30 to 120 days from the date of
commitment, directly to FNMA and other agencies or via pass-through certificates
guaranteed by these agencies. Market risk is associated with these financial
instruments which results from movements in interest rates and is reflected by
gains or losses on the sale of the mortgage loan packages determined by the
difference between the price of the packaged loans and the price guaranteed in
the commitment.
The Company has unfilled mandatory delivery commitments with investors totaling
approximately $23.5 million and $26.8 million at December 31, 1997 and 1996,
respectively. The Company also had optional delivery
59
<PAGE>
commitments of approximately $2.0 million at December 1996. No optional delivery
commitments were outstanding at December 31, 1997.
The Company's future minimum rental payments required under non-cancelable
operating leases for office space and equipment as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Years Ending December 31, Amounts
-------------------------- --------------
(In thousands)
<S> <C>
1998 $ 451
1999 353
2000 304
2001 284
2002 146
Thereafter 278
------
$1,816
======
</TABLE>
Total rent expense for the years ended December 31, 1997, 1996 and 1995 was
$512,000, $492,000 and $155,000, respectively.
(18) Regulatory Capital
------------------
The Company and Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the institutions' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action
(PCA), the institution must meet specific capital guidelines that involve
quantitative measures of the institution's assets, liabilities, and certain off-
balance sheet items as calculated under regulatory accounting practices. The
institution's capital amount and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the institution to maintain minimum amounts and ratios (set forth in the
table) of total and Tier I (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, at December 31, 1997, that the
Company and Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1997, the most recent notification from the FDIC categorized
the Bank as "well capitalized" under the regulatory framework for PCA. To be
categorized as "well capitalized" the Bank must maintain minimum total risk-
based, Tier I risk-based and Tier I leverage ratios of 10%, 6% and 5%,
respectively. There are no conditions or events since that notification that
management believes have changed the Bank's category.
60
<PAGE>
The actual capital amounts and ratios are presented in the following table for
the years ended:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------
Bank Company
--------------------- --------------------
Percent Percent
Amount of Assets Amount of Assets
-------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GAAP capital (to total assets) $407,372 11.31% $628,335 17.45%
======== ===== ======== =====
Leverage capital
(to adjusted average assets):
Actual level $375,901 12.32% $592,538 18.87%
======== ===== ======== =====
Capital adequacy requirement $ 91,558 3.00% $ 94,192 3.00%
======== ===== ======== =====
Requirement to be well capitalized
under PCA provisions $152,596 5.00% N/A N/A
======== ===== ======== =====
Tier I capital (to risk-weighted assets):
Actual level $375,901 26.34% $592,538 37.55%
======== ===== ======== =====
Capital adequacy requirement $ 57,078 4.00% $ 63,121 4.00%
======== ===== ======== =====
Requirement to be well
capitalized under PCA provisions $ 85,617 6.00% N/A N/A
======== ===== ======== =====
Total capital (to risk-weighted assets):
Actual level $393,814 27.60% $612,317 38.80%
======== ===== ======== =====
Capital adequacy requirement $114,157 8.00% $126,243 8.00%
======== ===== ======== =====
Requirement to be well
capitalized under PCA provisions $142,696 10.00% N/A N/A
======== ===== ======== =====
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------
Bank
----------------------
Percent
Amount of Assets
-------- ---------
(Dollars in thousands)
<S> <C> <C>
GAAP capital (to total assets) $249,349 6.89%
======== =====
Leverage capital (to adjusted average assets):
Actual Level $233,294 8.70%
======== =====
Capital adequacy requirement $ 80,458 3.00%
======== =====
Requirement to be well capitalized under PCA provisions $134,097 5.00%
======== =====
Tier I capital (to risk-weighted assets):
Actual level $233,294 18.50%
======== =====
Capital adequacy requirement $ 50,453 4.00%
======== =====
Requirement to be well capitalized under PCA provisions $ 75,680 6.00%
======== =====
Total capital (to risk-weighted assets):
Actual level $249,154 19.75%
======== =====
Capital adequacy requirement $100,907 8.00%
======== =====
Requirement to be well capitalized under PCA provisions $126,134 10.00%
======== =====
</TABLE>
(19) Subsequent Events
-----------------
On January 13, 1998, the Board of Directors announced the Company's initial
stock repurchase plan. The plan authorizes the repurchase of 5%, or
approximately 2.2 million shares of the outstanding shares, of the Company's
common stock. The repurchases will occur over the course of 1998 at management's
discretion.
On February 17, 1998, the Company announced a settlement with the NYSBD
regarding certain practices relating to origination and loan fees (overage fees)
paid by certain borrowers of RFI. Under terms of the settlement agreement, the
Company will establish a $3.0 million fund to provide compensation to certain
borrowers who allegedly paid an overage fee for their RFI mortgage loans. Any
money remaining in the fund will go to further the Company's community
development initiatives. The charge for the settlement, and the costs related
thereto, was fully accrued at December 31, 1997 by the Company and totaled $4.6
million. The expense is included in other general and administrative expenses in
the Company's statement of income for the year ended December 31, 1997.
(20) Parent-Only Financial Information
---------------------------------
The earnings of the Bank are recognized by Roslyn Bancorp, Inc. (the Holding
Company) using the equity method of accounting. Accordingly, undistributed
earnings of the Bank are recorded as increases in the Holding Company's
investment in the Bank. The following are the condensed financial statements of
the Holding Company as of and for the year ended December 31, 1997 (although the
Holding Company
62
<PAGE>
did not commence operations until the Conversion on January 10, 1997, the full
year results have been presented).
Condensed Statement of Financial Condition
- ------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
------------------
Assets (In thousands)
- ------
<S> <C>
Cash and cash equivalents $ 220
Investment in equity securities, net:
Available-for-sale 153,492
Investment in subsidiary 407,372
ESOP loan receivable 53,352
Receivable from subsidiary 28,237
Other assets 709
--------
Total assets $643,382
========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities $ 15,047
Total stockholders' equity 628,335
--------
Total liabilities and stockholders' equity $643,382
========
</TABLE>
63
<PAGE>
Condensed Statement of Income
- -----------------------------
The condensed statement of income for the year ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
1997
--------------
(In thousands)
<S> <C>
Dividends received from subsidiary $ 7,856
Interest income - securities 4,175
Interest income - ESOP loan receivable 4,439
--------------
16,470
Charitable donation (12,711)
Other operating expenses (228)
--------------
Income before income taxes and equity
in undistributed earnings of subsidiary 3,531
Income tax benefit 2,922
--------------
Income before equity in undistributed earnings
of subsidiary 6,453
Equity in undistributed earnings of subsidiary 26,937
--------------
Net income $ 33,390
==============
</TABLE>
64
<PAGE>
Condensed Statement of Cash Flows
- ---------------------------------
The condensed statement of cash flows for the year ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
1997
-------------
(In thousands)
<S> <C>
Operating activities
Net income $ 33,390
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in the undistributed earnings of subsidiary (26,937)
Charitable contribution of common stock 12,711
Increase in receivable from subsidiary (28,237)
Increase in other assets (709)
Amortization of premium on callable
preferred stock 303
Increase in liabilities 11,690
---------
Net cash provided by operating activities 2,211
---------
Investing activities:
Purchases of equity securities (152,445)
Proceeds from calls of equity securities
available-for-sale 6,201
Investment in subsidiary (205,807)
Funding of ESOP loan receivable, net of payments (53,352)
---------
Net cash used in investing activities (405,403)
---------
Financing activities:
Net proceeds of common stock issuance 410,650
Cash dividends paid on common stock (7,238)
---------
Net cash provided by financing activities 403,412
---------
Net increase in cash and cash equivalents 220
Cash and cash equivalents at beginning of year -
---------
Cash and cash equivalents at end of year $ 220
=========
</TABLE>
65
<PAGE>
Selected Quarterly Financial Data (Unaudited)
The following table is a summary of operations by quarter for the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
For the Quarter Ended
-----------------------------------------------------------------------------------
(In thousands, except per share data)
12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
--------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............................ $ 62,378 $ 59,333 $ 53,203 $ 50,050 $ 45,272 $ 34,173 $ 31,221 $ 29,807
Interest expense........................... 37,795 34,336 28,868 25,415 26,359 19,535 17,113 15,752
--------- -------- -------- -------- --------- -------- -------- --------
Net interest income before provision for
possible loan losses..................... 24,583 24,997 24,335 24,635 18,913 14,638 14,108 14,055
Provision for possible loan losses......... 150 150 150 150 1,300 300 300 100
--------- -------- -------- -------- --------- -------- -------- --------
Net interest income after provision for
possible loan losses..................... 24,433 24,847 24,185 24,485 17,613 14,338 13,808 13,955
--------- -------- -------- -------- --------- -------- -------- --------
Non-interest income:
Loan servicing and fee income............ 1,625 1,547 1,532 1,726 1,086 1,210 1,525 1,181
Net gains on sales of loans.............. 700 592 524 673 819 1,071 1,258 710
Net gains (losses) on securities......... 1,491 923 (6) 349 (901) 42 20 35
Other non-interest income................ 232 36 89 42 57 19 37 240
--------- -------- -------- -------- --------- -------- -------- --------
Total non-interest income............. 4,048 3,098 2,139 2,790 1,061 2,342 2,840 2,166
--------- -------- -------- -------- --------- -------- -------- --------
Non-interest expense:
General and administrative
expenses............................... 14,235 11,161 10,307 11,507 11,817 8,957 7,982 8,237
Real estate operations, net.............. 118 17 93 (56) 25 233 256 75
Amortization of excess of cost over
fair value of net assets acquired...... 117 117 117 118 117 117 117 118
Charitable contribution to The Roslyn
Savings Foundation..................... - - - 12,711 - - - -
--------- -------- -------- -------- --------- -------- -------- --------
Total non-interest expense............ 14,470 11,295 10,517 24,280 11,959 9,307 8,355 8,430
--------- -------- -------- -------- --------- -------- -------- --------
Income before provision for
income taxes............................. 14,011 16,650 15,807 2,995 6,715 7,373 8,293 7,691
Provision for income taxes................. 4,586 5,616 5,340 531 1,671 2,702 2,818 2,247
--------- -------- -------- -------- --------- -------- -------- --------
Net income................................. $ 9,425 $ 11,034 $ 10,467 $ 2,464 $ 5,044 $ 4,671 $ 5,475 $ 5,444
========= ======== ======== ======== ========= ======== ======== ========
Basic and diluted earnings per share....... $ 0.24 $ 0.28 $ 0.26 $ 0.06 N/A N/A N/A N/A
========= ======== ======== ======== ========= ======== ======== ========
</TABLE>
66
<PAGE>
Independent Auditors' Report
The Board of Directors
Roslyn Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Roslyn Bancorp, Inc. and subsidiary (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Jericho, New York
January 28, 1998
67
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
<PAGE>
EXHIBIT 23
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Consent
-----------------------------
The Stockholders and the
Board of Directors of Roslyn Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statement No.
333-41365 on Form S-8 of Roslyn Bancorp, Inc. of our report dated January 28,
1998, relating to the consolidated statements of financial condition of Roslyn
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
which report is incorporated by reference to the December 31, 1997 Annual Report
on Form 10-K of Roslyn Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Jericho, New York
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,366
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,350,826
<INVESTMENTS-CARRYING> 202,123
<INVESTMENTS-MARKET> 202,471
<LOANS> 993,603
<ALLOWANCE> 24,029
<TOTAL-ASSETS> 3,601,079
<DEPOSITS> 1,942,245
<SHORT-TERM> 230,427
<LIABILITIES-OTHER> 64,048
<LONG-TERM> 736,024
0
0
<COMMON> 436
<OTHER-SE> 627,899
<TOTAL-LIABILITIES-AND-EQUITY> 628,335
<INTEREST-LOAN> 61,473
<INTEREST-INVEST> 159,301
<INTEREST-OTHER> 4,190
<INTEREST-TOTAL> 224,964
<INTEREST-DEPOSIT> 89,136
<INTEREST-EXPENSE> 126,414
<INTEREST-INCOME-NET> 98,550
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 2,757
<EXPENSE-OTHER> 60,562
<INCOME-PRETAX> 49,463
<INCOME-PRE-EXTRAORDINARY> 49,463
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,390
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 7.31
<LOANS-NON> 6,480
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 859
<ALLOWANCE-OPEN> 23,320
<CHARGE-OFFS> 91
<RECOVERIES> 200
<ALLOWANCE-CLOSE> 24,029
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 24,029
</TABLE>
