<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, 1999
0-28886
Commission File Number
ROSLYN BANCORP, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 11-3333218
-------------------- ---------------------
(State or Other (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
1400 Old Northern Boulevard, Roslyn, New York 11576
--------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(516) 621-6000
--------------------------------------------------------
(Registrant's telephone number, including area code)
None
--------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act
Common Stock, $.01 par value
--------------------------------------------------------
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 14, 2000 the aggregate market value of the voting stock held by non-
affiliates of the registrant was $1,069,159,437. This figure is based on the
closing price on the NASDAQ National Market for a share of the registrant's
common stock on March 14, 2000 which was $15.5625 as reported in the Wall Street
Journal on March 15, 2000.
The Registrant had 68,701,008 shares of Common Stock outstanding as of March 14,
2000.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1999 are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
2
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INDEX
Page
No.
------
PART I
Item 1. Business.................................................. 4
Item 2. Properties................................................ 49
Item 3. Legal Proceedings......................................... 54
Item 4. Submission of Matters to a Vote of Security Holders....... 54
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters....................................... 54
Item 6. Selected Financial Data................................... 54
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 54
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 54
Item 8. Financial Statements and Supplementary Data............... 54
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........... 55
Item 11. Executive Compensation.................................... 55
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 55
Item 13. Certain Relationships and Related Transactions............ 55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 55
SIGNATURES............................................................ 58
3
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PART I
Item 1. Business.
- -----------------
General
Roslyn Bancorp, Inc. and subsidiaries (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, 1999,
the Company had consolidated total assets of $7.73 billion, deposits of $4.05
billion and stockholders' equity of $637.7 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 Bank is a community-oriented
stock savings bank which was originally chartered by the State of New York in
1875. The following discussion addresses the operations of the Bank and its
subsidiaries.
After the close of business on February 16, 1999, T R Financial Corp., a
Delaware company, merged with and into the Company and T R Financial Corp.'s
subsidiary, Roosevelt Savings Bank, a New York State chartered stock savings
bank, merged with and into the Bank (the Merger). All subsidiaries of Roosevelt
Savings Bank became subsidiaries of the Bank. The acquisition was accounted for
as a pooling-of-interests, and accordingly, all historical financial information
for the Company has been restated to include T R Financial Corp.'s historical
information for the earliest period presented. Previously reported balances of
T R Financial Corp. have been reclassified to conform to the Company's
presentation and restated to give effect to the Merger. When necessary, certain
reclassifications have been made to prior period amounts to conform to the
current period presentation.
Pursuant to the merger agreement, each share of T R Financial Corp. common
stock was converted into the Company's common stock at a fixed exchange ratio of
2.05. As a result, 17,347,768 shares of T R Financial Corp. common stock were
exchanged for 35,528,785 shares of Roslyn common stock and a total of 1,746,880
T R Financial Stock Options were converted into options to purchase a maximum of
3,581,103 shares of the Company's common stock at an exercise price ranging from
$2.20 to $17.32 depending on the exercise price of the underlying T R Financial
stock option. Additionally under the agreement, five former officers and
directors of T R Financial Corp. have joined the Boards of Directors of the
Company and the Bank.
4
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In connection with the aforementioned acquisition of T R Financial Corp.,
the Company incurred $89.2 million of merger related costs. The nature of the
merger-related charges for the year ended December 31, 1999 is detailed below
(in thousands).
Merger-related charges:
Transactions costs $ 16,917
Severance and other compensation costs 39,927
T R Financial Corp. ESOP termination 24,626
Other costs to combine operations 7,777
---------
$ 89,247
=========
At December 31, 1999, $16.0 million of such costs, primarily relating to
the T R Financial Corp. ESOP, remains outstanding.
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,
Roslyn National Mortgage Corp. (RNMC)(formerly Residential First, Inc. (RFI)).
The Bank's principal business consists of accepting retail deposits from
the general public in the areas surrounding its branch offices and investing
those deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans, commercial real
estate loans, mortgage-backed and mortgage related securities, and various debt
and equity securities. The Bank also invests in multi-family, construction and
development, home equity, second mortgage, consumer and student loans. It is
the Bank's strategy to generally sell, on a servicing retained basis, a portion
of longer-term fixed-rate and adjustable-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 investment
certain adjustable-rate one- to four-family loans and fixed-rate one- to four-
family mortgage loans with terms up to 15 years plus loans originated by RNMC
which have interest rates of 8% or more. The Bank's revenues are derived
principally from the interest income generated by 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, RNMC, 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 RNMC's mortgage origination offices located in New York, New Jersey,
Alabama, Tennessee, Delaware, Pennsylvania, Virginia and Maryland. In addition,
RNMC has established wholesale relationships with mortgage brokers along the
eastern United States. Also, RNMC maintains correspondent relationships with
other lenders from whom RNMC will purchase loans. Currently, all of the Bank's
origination of one- to four-family loans is conducted through RNMC, which
originates loans on behalf of the Bank as well as for various other investors
and financial institutions.
In addition to RNMC, 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 (b) operate as a real estate
investment trust (REIT); or (c) offer annuity, mutual fund and insurance
products. The Bank previously
5
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offered savings bank life insurance through its Savings Bank Life Insurance
(SBLI) department prior to its dissolution on December 31, 1999. The Company, in
addition to the Bank, maintains various subsidiaries incorporated in New York
and Vermont to either (a) operate as a joint venture partner in a mortgage-
banking company; or (b) offer mortgage-related insurance products.
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. As of
December 31, 1999, the Bank operated 25 full-service banking offices in Kings,
Queens, Nassau and Suffolk Counties in New York. The Bank's primary deposit
gathering area is currently concentrated around the areas where its full service
banking offices are located in Kings, Queens, 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 the New York City
metropolitan area. However, with the establishment of RNMC in August 1995, the
Bank's primary lending area with regards to one- to four-family loans was
broadened to include the areas surrounding RNMC'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 Queens, 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 1980's and early 1990's, 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. After a prolonged period of decline, which was marked by
layoffs in the financial services and defense industries and corporate
relocations and downsizings, the economy in the greater New York metropolitan
area has performed well during the last several years. The residential real
estate market in the New York City metropolitan area has been favorably impacted
by the increased demand for housing, low unemployment levels and, for most of
1999, a relatively stable interest rate environment.
The Bank faces significant competition in its primary market area both in
attracting deposits and in originating loans. The New York City metropolitan
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.
Lending Activities
Loan Portfolio Composition. The types of loans that the Bank may originate
or purchase 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 areaIncluded first mortgage loans secured by one-
to four-family residences is approximately $178.2 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,
---------------------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- ---------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------- ------- ------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $2,964,835 76.14 % $ 2,809,995 76.09 % $ 2,313,417 75.66 %
Multi-family 89,161 2.29 84,575 2.29 71,525 2.34
Commercial real estate 489,504 12.57 484,260 13.11 462,087 15.11
Construction and development 107,781 2.77 101,545 2.75 70,818 2.32
Home equity and
second mortgage 139,191 3.57 114,915 3.11 59,274 1.94
Consumer (1) 21,947 0.56 16,219 0.44 11,496 0.38
Student 1,788 0.05 1,734 0.05 3,027 0.10
Automobile lease, net 79,804 2.05 79,786 2.16 65,887 2.15
------------ ------ ------------- ------ ------------ ------
Gross loans 3,894,011 100.00 % 3,693,029 100.00 % 3,057,531 100.00 %
====== ====== ======
Less:
Unamortized discounts,
deferred loan (costs)/
fees and deferred
mortgage interest, net (17,303) (12,645) 1,032
Allowance for loan losses 40,155 40,207 38,946
------------ ----------- -----------
Total loans, net 3,871,159 3,665,467 3,017,553
Less:
Loans held-for-sale, net: 61,064 79,991 13,987
One- to four-family 1,788 1,734 3,027
Student ------------ ----------- -----------
Loan receivable held for $ 3,808,307 $ 3,583,742 $ 3,000,539
investment, net ============ =========== ===========
<CAPTION>
At December 31,
---------------------------------------------------------
1996 1995
----------------------- ------------------------
Percent Percent
of of
Amount Total Amount Total
------ ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One-to four-family $ 1,615,377 71.83 % $ 1,303,831 71.09 %
Multi-family 70,900 3.15 60,098 3.28
Commercial real estate 378,978 16.85 340,924 18.59
Construction and development 49,805 2.22 46,808 2.55
Home equity and
second mortgage 33,992 1.51 20,924 1.14
Consumer (1) 8,953 0.40 10,162 0.56
Student 4,225 0.19 4,988 0.27
Automobile lease, net 86,527 3.85 46,285 2.52
------------ ------ ----------- ======
Gross loans 2,248,757 100.00 % 1,834,020 100.00 %
====== ======
Less:
Unamortized discounts,
deferred loan (costs)/
fees and deferred
mortgage interest, net 6,231 4,679
Allowance for loan losses 37,690 36,617
----------- -----------
Total loans, net 2,204,836 1,792,724
Less:
Loans held-for-sale, net:
One- to four-family 12,558 15,278
Student 4,225 4,902
Loan receivable held for ------------ -----------
investment, net $ 2,188,053 $ 1,772,544
============ ============
</TABLE>
- ---------------------
(1) Consumer loans originated consist of private banking, personal secured,
personal unsecured, modernization, business, automobile and passbook loans.
Private banking was originated beginning during the year ended December 31,
1997. The amounts shown prior to December 31, 1997 do not include the
aforementioned loan product.
7
<PAGE>
Loan Originations. The Bank's mortgage banking subsidiary, RNMC,
originates loans through its 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 early 1999, all one- to four-family loan origination activity has
been conducted through RNMC. RNMC's commissioned loan officers operate in the
Bank's full-service banking offices as well as through RNMC's mortgage
origination offices.
All loans originated by the Bank, or by RNMC 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. The Bank places 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. During 1998 and
1999, the Bank emphasized the sale of one- to four-family loans to the secondary
market. The Bank's and RNMC'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.
During 1999, the Bank did not purchase any residential whole loans from
unaffiliated originators. The Bank discontinued its loan purchase program during
early 1998 since the Bank's mortgage company's loan production reached an
appropriate level to meet the Bank's portfolio needs. It is not anticipated
that the Company will resume this program in the near future.
Loan Sales, Servicing and Mortgage Banking Activities. Prior to the
establishment of RNMC, the Bank's loan sale, purchase and servicing activities
were primarily conducted directly by the Bank. During 1999, all of the Bank's
mortgage banking operations were conducted through RNMC with the exception of
the servicing of one- to four-family loans originated by the Bank prior to the
establishment of RNMC, which are being serviced directly by a third party
provider (Cenlar) on behalf of the Bank. RNMC was formed in conjunction with
the Bank's August 1995 acquisition of certain assets and liabilities, including
the loan servicing portfolio, of Residential Mortgage Banking, Inc. (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.
RNMC's activities are directed by its executive officers and overseen by the
Bank.
RNMC originates one- to four-family loans through commissioned loan
personnel and through referrals from real estate brokers, builders, developers
and other sources. RNMC also utilizes a network of approved mortgage brokers
and loan correspondents to originate mortgage loans. As a mortgage banking
company, RNMC 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. RNMC 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
RNMC by such agencies. RNMC 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. RNMC's one- to four-family loan production is not dedicated to the
Bank as RNMC 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 RNMC's other investors for the purchase of
one- to four-family loans and mortgage-backed securities on the basis of rates
and terms. Based upon an ongoing best execution analysis, RNMC sells loans on a
servicing retained or a servicing released basis. The Bank may revise its policy
as to the types of loans it will originate for investment through RNMC based
upon an analysis of the current and anticipated
8
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market interest rates and other market conditions. It is currently the strategy
of the Bank to retain for its portfolio investment certain adjustable-rate one-
to four-family loans and fixed-rate one- to four-family mortgage loans with
terms of up to 15 years plus loans originated by RNMC which have interest rates
of 8% or more. For the year ended December 31, 1999, RNMC originated $1.39
billion of loans and mortgage-backed securities of which $841.9 million were
purchased by the Bank for its loan and mortgage-backed securities portfolio.
RNMC 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 RNMC is provided by
the Bank through a $190.0 million revolving line of credit. The borrowings on
the line of credit are immediately paid down by RNMC upon the sale of loans. At
December 31, 1999, $147.1 million of this revolving line of credit was
outstanding. From time to time, RNMC will pledge mortgage loans 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. At December 31, 1999 there were no outstanding borrowings
under this line of credit.
RNMC'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 RNMC issues loan commitments and the time such loans, or
the securities into which the loans are converted, are sold, RNMC is exposed to
movements in the market price due to changes in market interest rates. RNMC
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, RNMC
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 RNMC 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 RNMC to losses. If RNMC is not
able to deliver the mortgage loans or mortgage-backed securities during the
appropriate delivery period called for by the forward sale commitment, RNMC may
be required to pay a non-delivery fee, repurchase the delivery commitments at
current market prices or purchase whole loans at a premium for delivery. While
the aforementioned activity is managed continually, there can be no assurance
that RNMC will be successful in its efforts to eliminate the risk of interest
rate fluctuation between the time of the loans origination or purchase
commitments are issued and the ultimate sale of the loans.
Currently, the Bank services all of its construction and development,
multi-family, home equity, second mortgage, consumer and student loans, and a
portion of its commercial real estate loans. The remaining portion of
commercial real estate loans and all one- to four-family loans are serviced by a
third party service provider on behalf of the Bank. The same third party
service provider services all loans RNMC originates on behalf of the Bank as
well as for all conforming loans sold to other investors. All newly originated
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, 1999, RNMC's loan servicing portfolio totaled $1.31 billion,
primarily consisting of conforming fixed-rate loans. Excluding RNMC, the Bank's
loan servicing portfolio totaled $97.3 million as of December 31, 1999 and
primarily consisted of one- to four-family,
9
<PAGE>
commercial real estate and construction and development loans. 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. During 1999, RNMC utilized a third party subservicer,
to service all loans. Cenlar receives an annual flat fee per loan and a portion
of the ancillary fee income collected. RNMC and the Bank recognizes servicing
fee income in excess of servicing fees paid to Cenlar, a portion of the
ancillary fee income and retains the use of the escrow balances. During the year
ended December 31, 1999, the Bank, through RNMC, sold without recourse,
approximately $815.9 million of whole loans with loan servicing retained.
10
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The following table shows the maturity of the Bank's loan portfolio at
December 31, 1999. 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
$750.2 million, for the year ended December 31, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------------------------------------------
Real Estate Loans
---------------------------------------------------------------------
Home
One- to Commercial Construction Equity and
Four- Multi- Real and Second
Family Family Estate Development Mortgage
----------- -------- ------------ -------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 1,467 $ 2,096 $ 11,898 $ 47,026 $ 402
--------- -------- --------- --------- ---------
After one year:
More than one year to three years 12,196 294 22,951 58,550 5,172
More than three years to five
years 85,580 398 50,142 1,638 8,896
More than five years to 10 years 425,429 65,001 285,399 567 61,580
More than 10 years to 20 years 893,583 18,179 113,996 - 6,959
More than 20 years 1,546,580 3,193 5,118 - 56,182
---------- -------- ---------- --------- ---------
Total due after December 31, 2000 2,963,368 87,065 477,606 60,755 138,789
---------- -------- ---------- --------- ---------
Total amount due $2,964,835 $ 89,161 $ 489,504 $ 107,781 $ 139,191
========== ======== ========== ========= =========
Less:
Unamortized discounts,
deferred loan (costs)/ fees
and deferred mortgage
interest, net
Allowance for loan losses
Total loans, net
Less:
Loans held-for-sale, net:
One- to four-family
Student
Loan receivable held for
investment, net
<CAPTION>
At December 31, 1999
-------------------------------------------------------
Automobile Total Loans
Consumer Student Leases Receivable
----------- -------- ------------ --------------
(In thousands)
<S> <C> <C> <C> <C>
Amounts due:
Within one year $ 1,145 $ 1,788 $ 3,735 $ 69,557
---------- --------- --------- ----------
After one year:
More than one year to three years 3,907 - 75,098 178,168
More than three years to five
years 2,814 - 971 150,439
More than five years to 10 years 1,080 - - 839,056
More than 10 years to 20 years 31 - - 1,032,748
More than 20 years 12,970 - - 1,624,043
---------- --------- --------- ----------
Total due after December 31, 2000 20,802 - 76,069 3,824,454
---------- --------- --------- ----------
Total amount due $ 21,947 $ 1,788 $ 79,804 $ 3,894,011
========== ========= =========
Less:
Unamortized discounts,
deferred loan (costs)/ fees
and deferred mortgage
interest, net (17,303)
Allowance for loan losses 40,155
-----------
Total loans, net 3,871,159
Less:
Loans held-for-sale, net:
One- to four-family 61,064
Student 1,788
-----------
Loan receivable held for
investment, net $ 3,808,307
===========
</TABLE>
11
<PAGE>
The following table sets forth at December 31, 1999, the dollar amount of
gross loans receivable contractually due after December 31, 2000, and whether
such loans have fixed or adjustable interest rates:
<TABLE>
<CAPTION>
Due After December 31, 2000
---------------------------------------------------
Fixed Adjustable Total
-------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family $ 1,781,958 $ 1,181,410 $ 2,963,368
Multi-family 59,399 27,666 87,065
Commercial real estate 236,079 241,527 477,606
Construction and development 1,135 59,620 60,755
Home equity and second mortgage 39,031 99,758 138,789
-------------- ------------- -------------
Total real estate loans 2,117,602 1,609,981 3,727,583
Consumer and student loans and automobile
leases, net (1) 81,306 15,565 96,871
-------------- ------------- -------------
$ 2,198,908 $ 1,625,546 $ 3,824,454
============== ============= =============
</TABLE>
______________
(1) Includes private banking, personal secured, personal unsecured,
modernization, business, automobile and passbook loans.
One- to Four-Family Loans. The Bank, through RNMC, currently offers both
fixed-rate and adjustable-rate mortgage loans secured by one- to four-family
residences with maturities up to 40 years located in the Bank's primary market
area, as well as in the New York, New Jersey, Alabama, Delaware, Tennessee,
Pennsylvania, Virginia and Maryland areas in which RNMC operates mortgage
origination offices. One- to four-family mortgage loan originations are
generally obtained from RNMC's loan representatives operating in the Bank's
branch offices and RNMC's mortgage origination offices, and through their
contacts with the local real estate industry and through direct consumer
advertising. In addition, RNMC has established wholesale relationships with
mortgage brokers along the eastern United States. 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, 1999, the Bank's one- to four-family loans totaled $2.96
billion, or 76.14% of gross loans. Of the one- to four-family loans outstanding
at that date, 59.5% were fixed-rate loans and 40.5% were adjustable-rate
mortgage loans. The Bank, through RNMC, offers fixed-rate mortgage loans with
terms of 10, 15, 20 and 30 years. The Bank, through RNMC, currently offers a
number of adjustable-rate mortgage loans with terms of up to 40 years and
interest rates which adjust annually from the outset of the loan or which adjust
annually after a three, five, 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
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rates based upon the then-current market rates plus a varying margin.
The volume and type of adjustable-rate mortgage loans originated by RNMC 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, 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 RNMC, generally
originates one- to four-family residential mortgage loans in amounts up to $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. In addition, RNMC also originates loans for sale to
third party investors in accordance with their respective underwriting
guidelines. The Bank generally 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,
RNMC 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.
Multi-Family Lending. The Bank originates fixed- and adjustable-rate
multi-family mortgage loans generally secured by 40 to four hundred unit
apartment buildings located in the Bank's primary market area. At December 31,
1999, the Bank's multi-family loan portfolio was $89.2 million, or 2.29% 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. Additional 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 10 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 $15 million per project and an aggregate of $40 million in loans
outstanding 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
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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, 1999, was $15 million per
project and an aggregate of $40 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, 1999 the Bank's commercial real estate loan portfolio totaled
approximately $489.5 million, or 12.57%, 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, 1999, the Bank had $99.7 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.
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
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<PAGE>
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. Standard fixed rate, fixed term home equity loans are
offered in amounts of up to 80% of the appraised value of the property
(including the first mortgage) with a maximum loan amount of $100,000. Standard
adjustable rate home equity lines-of-credit are offered in either, (a) amounts
up to 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) on lines greater
than $100,000, to a maximum line of $250,000.
The Bank also offers home equity loans and lines-of-credit for individuals
whose loan-to-value ratios or expense ratios exceed that used for the standard
product. The alternative loan-to-value product offers loans or lines-of-credit
up to 90% of the property value (including the first mortgage) to a maximum of
$100,000. The alternative income product offers loans or line-of-credit up to a
maximum of 65% of the property value (including the first mortgage) up to a
maximum of $100,000. The alternative loan products carry an interest rate
greater than that offered on the standard products.
Consumer and Student Lending. The Bank's portfolio of consumer and student
loans primarily consists of private banking, secured and unsecured personal
loans, automobile and home improvement loans. Private banking entails offering
a wide array of deposit and loan products that are customized to meet the needs
of a specific client base, principally composed of entrepreneurs, professionals
and senior corporate executives. Private banking can be either fixed or
adjustable rate, secured or unsecured and typically have a maturity of one year
or less, or are payable on demand. Unsecured personal loans are offered with a
maximum term of five years and maximum amount of $15,000. Secured personal
loans are collateralized with deposits from any federally insured financial
institution. Secured personal loans have a maximum term of five years and a
maximum amount of $50,000. Home improvement loans are offered to homeowners for
the purpose of modernization and maintenance of owner-occupied properties for
terms up to five years and to a maximum loan amount of $20,000. At December 31,
1999, there were $79.8 million automobile leases outstanding, or 2.05%, of gross
loans. The Bank has originated, or purchased leases originated by an unrelated
third party, which were secured by automobiles. As of July 30, 1999, the Bank
terminated its agreement with the third party provider and no longer originates
or purchases leases. The Bank offers both subsidized and unsubsidized student
loans through a forward purchasing and servicing agreement with the Student Loan
Marketing Association (Sallie Mae). The Bank also offers automobile loans up to
five years and $50,000 for a new automobile and four years for a used
automobile, depending on the vehicle year, and limited to a maximum amount of
$25,000. Cash cushion (checking overdraft protection) is offered up to $5,000.
The Bank also offers Master Card(R)(TM) and Visa(R)(TM) credit cards through an
affinity relationship with MBMA American, who assumes underwriting
responsibility and credit risk.
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
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following persons to approve loans up to the amounts indicated: (a) commercial
real estate loans of up to $1.0 million can be approved by the Chairman,
President or Senior Commercial Lending Officer plus one additional officer in
the Lending Division; (b) 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, lines of credit, personal loans, and home improvement loans are
approved by a Consumer Loan Officer up to a defined maximum amount established
by the Board of Directors. Loan amounts greater than the defined maximum amount
must be countersigned by the Senior Consumer Lending Officer. Residential loan
approval authority limits have been established by RNMC's management and
approved by its Board of Directors. These limits require approval by senior
personnel for loans that carry greater risks based upon underwriting criteria.
With respect to all loans originated by RNMC 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 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, that a delinquency notice be mailed no later than the sixteenth day of
delinquency and a late charge assessed after 15 days. The Bank's subservicer,
Cenlar, 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, 1999, there was no Bank owned real estate that was held
directly by the Bank and its subsidiaries which were formed for the purpose of
holding and maintaining certain REO. See "Subsidiary Activities." 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 uncollectible at such
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<PAGE>
time. Bank personnel conduct monthly reviews of its foreclosed real estate and
periodically adjust its valuation allowance for declines in the value of REO.
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 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 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, either of which can order the establishment of additional
general or specific loss allowances. The FDIC, in conjunction with the other
federal banking agencies, has adopted an 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 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 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.
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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, 1999, the Bank had $31.2 million of loans designated as
Substandard, consisting of 21 commercial real estate and 183 one- to four-family
loans, and no loans classified as Doubtful or Loss. At December 31, 1999, the
Bank had $14.3 million of assets designated as Special Mention, consisting of 28
commercial real estate and one- to four-family loans, which were designated due
to past loan delinquencies.
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Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans and REO:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1):
One- to four-family $ 16,354 $ 15,662 $ 9,029 $ 9,846 $ 11,798
Commercial real estate 2,434 2,775 9,564 10,256 16,884
Construction and development - - - 602 150
Home equity 79 120 116 50 78
Consumer (2) 96 96 221 106 86
-------- -------- -------- -------- --------
Total non-accrual loans 18,963 18,653 18,930 20,860 28,996
Loans contractually past due 90 days or
more, other than non-accruing - 3,421 1,295 509 1,879
-------- -------- -------- -------- --------
Total non-performing loans 18,963 22,074 20,225 21,369 30,875
Real estate owned, net (3) - 1,176 1,197 4,962 12,594
-------- -------- -------- -------- --------
Total non-performing assets $ 18,963 $ 23,250 $ 21,422 $ 26,331 $ 43,469
======== ======== ======== ======== ========
Allowance for loan losses as a percent of
total loans (4) 1.04% 1.11% 1.28% 1.69% 2.02%
Allowance for loan losses as a percent of
total non-performing loans (4)(5) 211.75% 182.15% 192.56% 176.38% 118.60%
Non-performing loans as a percent of total
loans (4)(5) 0.49% 0.61% 0.67% 0.96% 1.71%
Non-performing assets as a percent of total
assets (6)(7) 0.25% 0.30% 0.29% 0.38% 0.97%
</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, business, automobile and passbook loans. Private banking
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 product.
(3) REO balances are shown net of related loss allowances.
(4) Loans include loans receivable held for investment, net, excluding the
allowance for loan losses which at December 31, 1999, 1998, 1997, 1996 and
1995 was $40.2 million, $40.2 million, $38.9 million, $37.7 million and
$36.6 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.
The principal balance of non-accrual loans approximated $19.0 million,
$18.7 million and $18.9 million at December 31, 1999, 1998 and 1997,
respectively. Interest income that would have been recorded if the loans had
been performing in accordance with their original terms aggregated approximately
$2.5 million, $1.5 million and $1.8 million during the years ended December 31,
1999, 1998 and 1997. Actual interest income recorded on loans previously on non-
accrual was $410,000, $1.6 million and $757,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
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The principal balance of restructured loans that have not complied with the
terms of their restructuring agreement for a satisfactory period of time
was $1.2 million, $909,000 and $280,000 at December 31, 1999, 1998 and 1997,
respectively. Interest income that would have been recorded if the loans had
been performing in accordance with their original terms aggregated approximately
$107,000, $76,000 and $30,000 during the years ended December 31, 1999, 1998 and
1997, respectively. Interest income recorded for restructured loans amounted to
$671,000, $433,000 and $235,000 for the years ended December 31, 1999, 1998 and
1997, respectively. Additionally, restructured loans totaling $7.6 million, $4.1
million and $1.4 million 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, 1999, 1998 and 1997, respectively.
Allowance for Loan Losses
The Company's formalized process for assessing the adequacy of the
allowance for loan losses, and the resultant need, if any, for periodic
provisions to the allowance charged to income, entails both individual loan
analyses and loan pool analyses. The individual loan analyses are periodically
performed on individually significant loans or when otherwise deemed necessary,
and primarily encompasses multi-family, commercial real estate and construction
and development loans. The result of these individual analyses is the allocation
of the overall allowance to specific allowances for individual loans, both loans
considered impaired and non-impaired.
The loan pool analyses are performed on the balance of the portfolio,
primarily the one- to-four family residential and consumer loans. The pools
consist of aggregations of homogeneous loans having similar credit risk
characteristics. Examples of pools defined by the Company for this purpose are
Company-originated, fixed-rate residential loans; Company-originated,
adjustable-rate residential loans; purchased, fixed-rate residential loans;
outside-serviced residential loans; residential second mortgage loans;
participation in conventional first mortgages; residential construction loans;
commercial construction loans, etc. For each such defined pool, there is a set
of sub-pools based upon delinquency status: current, 30-59 days, 60-89 days,
90-119 days and 120+ days (the latter three sub-pools are considered to be
"classified" by the Company). For each sub-pool, the Company has developed a
range of allowance necessary to adequately provide for probable losses inherent
in that pool of loans. These ranges are based upon a number of factors
including the risk characteristics of the pool, actual loss and migration
experience, expected loss and migration experience considering current economic
conditions, industry norms, and the relative seasoning of the pool. The ranges
of allowance developed by the Company are applied to the outstanding principal
balance of the loans in each sub-pool; as a result, further specific and general
allocations of the overall allowance are made (the allocations for the
classified sub-pools are considered specific and the allocations for the non-
classified sub-pools are considered general).
The Company's overall allowance also contains an unallocated amount which
is supplemental to the results of the aforementioned process and takes into
consideration known and expected trends that are likely to affect the
creditworthiness of the loan portfolio as a whole, national and local economic
conditions, unemployment conditions in the local lending area and the timeliness
of court foreclosure proceedings in the Company's local and other lending areas.
During the period from 1997 to 1999, the Company's loan portfolio has
remained relatively stable. During that time period, the Bank has seen a slight
decrease in the amount of non-performing loans. At December 31, 1999, 1998 and
1997, 76.14%, 76.09% and 75.66%, respectively, of the gross
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loan portfolio was in one-to four-family loans, which are considered low risk
loans. Non-performing loans at those dates were $19.0 million, $22.1 million and
$20.2 million, respectively, however, the composition of those loans has changed
since 1997, and is currently primarily comprised of one- to four-family loans in
1999.
The allowance for loan losses has remained relatively consistent over the
aforementioned periods as the composition of the loan portfolio has remained
stable and the general economic and other factors have improved over that
period. The allowance as a percent of total loans was 1.04%, 1.11% and 1.28%,
as of December 31, 1999, 1998 and 1997, respectively. The allowance for loan
losses totaled $40.2 million, $40.2 million and $38.9 million at December 31,
1999, 1998 and 1997, respectively.
The quantitative information cited in the previous paragraphs indicates a
trend over this time horizon of (a) an increase in absolute dollars in the
relatively less risky one- to four-family residential first mortgage loans;
(b) an increase in absolute dollars, and a slight decrease in relative dollars,
in the relatively riskier loans (multi-family, commercial real estate,
construction and development, and home equity and second mortgage loans), and;
(c) a decrease in absolute dollars in non-performing loans. The application of
the Company's formalized process for assessing the adequacy of the allowance for
loan losses to the loan portfolio undergoing the changes cited during this time
horizon has resulted in a relatively flat absolute dollar level of the allowance
for loan losses and a slight decrease in the ratio of the allowance for loan
losses to total loans. Management continues to believe the Company's reported
allowance for loan losses is both appropriate in the circumstances and adequate
to provide for estimated probable losses inherent in the loan portfolio.
As of December 31, 1999, the Bank's allowance for loan losses was $40.2
million, or 1.04% of total loans and 211.75% of non-performing loans, as
compared to $40.2 million, or 1.11% of total loans and 182.15% of non-performing
loans, as of December 31, 1998. The Bank had total non-performing loans of
$19.0 million and $22.1 million at December 31, 1999 and 1998, respectively, and
non-performing loans to total loans of 0.49% and 0.61%, respectively. The Bank
will continue to monitor and modify its allowance for loan losses as conditions
dictate. Management believes that, based on information currently available, the
Bank's allowance for loan losses is sufficient to cover losses inherent in its
loan portfolio. At this time, no assurance can be given that the Bank's level
of allowance for loan losses will be sufficient to cover future loan losses
incurred by the Bank or that future adjustments to the allowance for loan losses
will not be necessary if economic and other conditions differ substantially from
the economic and other conditions used by management to determine the current
level of the allowance for loan losses. 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 loan
losses. Such agencies may require the Bank to make additional provisions for
estimated 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 loan
losses for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 40,207 $ 38,946 $ 37,690 $ 36,617 $ 37,172
-------- -------- -------- -------- --------
Provision for loan losses - 1,500 1,400 3,400 3,650
Charge-offs:
Real estate loans:
One- to four-family 25 187 189 410 811
Commercial real estate - 387 327 1,646 4,480
Construction and development - - - 519 111
Consumer, student loans and other 170 128 167 90 127
-------- -------- -------- -------- --------
Total charge-offs 195 702 683 2,665 5,529
-------- -------- -------- -------- --------
Recoveries:
Real estate loans:
One- to four-family 96 55 202 5 438
Commercial real estate 5 330 272 197 822
Construction and development - - - 94 1
Consumer, student loans and other 42 78 65 42 63
-------- -------- -------- -------- --------
Total recoveries 143 463 539 338 1,324
-------- -------- -------- -------- --------
Net charge-offs (52) (239) (144) (2,327) (4,205)
-------- -------- -------- -------- --------
Balance at end of year $ 40,155 $ 40,207 $ 38,946 $ 37,690 $ 36,617
======== ======== ======== ======== ========
Ratio of net charge-offs
during the year to average loans
outstanding during the year .001% 0.01% 0.01% 0.12% 0.26%
</TABLE>
22
<PAGE>
The following tables set forth the Bank's percent of allowance for 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,
--------------------------------------------------------------------------------
1999 1998
------------------------------------------- -----------------------------------
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 $ 16,144 40.20% 76.14% $ 17,823 44.34% 76.09%
Multi-family 1,444 3.60 2.29 1,662 4.13 2.29
Commercial real estate 7,054 17.57 12.57 11,223 27.91 13.11
Construction and development 6,875 17.12 2.77 5,984 14.88 2.75
Home equity/second mortgage 486 1.21 3.57 794 1.97 3.11
Consumer and student 1,168 2.91 2.66 804 2.00 2.65
Unallocated 6,984 17.39 - 1,917 4.77 -
-------- ------ ------ --------- ------ ------
Total allowance for loan losses $ 40,155 100.00% 100.00% $ 40,207 100.00% 100.00%
======== ====== ====== ========= ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------
1997 1996
------------------------------------------ ------------------------------------------
Percent of Percent of Percent of Percent of
Allowance Loans in Allowance Loans in
To Total Each Category To Total Each Category
Amount Allowance to Total Loans Amount Allowance to Total Loans
------- ------------ --------------- ------- ----------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $16,501 42.37% 75.66% $ 9,749 25.86% 71.83%
Multi-family 1,945 5.00 2.34 3,119 8.27 3.15
Commercial real estate 12,339 31.68 15.11 13,908 36.90 16.85
Construction and development 3,770 9.68 2.32 4,726 12.54 2.22
Home equity/second mortgage 375 0.96 1.94 157 0.42 1.51
Consumer and student 523 1.34 2.63 471 1.26 4.44
Unallocated 3,493 8.97 - 5,560 14.75 -
--------- ------ ------ ------ ------ ------
Total allowance for loan losses $ 38,946 100.0% 100.00% $37,690 100.00% 100.00%
========= ====== ====== ======= ====== ======
<CAPTION>
At December 31,
------------------------------------------
1995
------------------------------------------
Percent of Percent of
Allowance Loans in
To Total Each Category
Amount Allowance to Total Loans
------- ------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C>
One- to four-family $ 5,678 15.51% 71.09%
Multi-family 3,036 8.29 3.28
Commercial real estate 16,396 44.78 18.59
Construction and development 3,872 10.57 2.55
Home equity/second mortgage 162 0.44 1.14
Consumer and student 461 1.26 3.35
Unallocated 7,012 19.15 -
--------- ------ ------
Total allowance for loan losses $ 36,617 100.00% 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 five 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 the investment policy and its
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.
At December 31, 1999, 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, preferred stock and trust
preferreds 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, 1999, the Company had $3.53 billion in securities,
consisting primarily of U.S. Government and agency obligations, mortgage-backed
and mortgage related securities, municipal and corporate obligations, trust
preferreds, and preferred and common stocks, as compared with $3.87 billion at
December 31, 1998. Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" 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
24
<PAGE>
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 Bank or the Holding Company maintain trading
portfolios. As of December 31, 1999, $3.53 billion of the Company's securities
portfolio, or 45.7% of total assets, was classified as available-for-sale, with
an average life of the portfolio of 7.74 years. During 1999, in connection with
the merger with T R Financial, the Company transferred all held-to-maturity
securities to available-for-sale. For the year ended December 31, 1999, the
Company 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: (a) generate
positive interest rate spreads with minimal administrative expense; (b) lower
its credit risk as a result of the guarantees provided by FHLMC, FNMA, and GNMA;
(c) 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, FHLMC, as
well as private issuers. At December 31, 1999, mortgage-backed and mortgage
related securities totaled $2.80 billion, or 36.3% of total assets, and 37.5% of
total interest-earning assets, of which all was classified as available-for-
sale. At December 31, 1999, 8.5% of the mortgage-backed and mortgage related
securities were adjustable-rate and 91.5% were fixed-rate. The mortgage-backed
and mortgage related securities portfolio had coupon rates ranging from 5.4% to
12.5% and had a weighted average yield of 6.58% at December 31, 1999.
At December 31, 1999, the Bank's CMO portfolio totaled $1.59 billion, or
20.6% of total assets and 21.2% of total interest-earning assets, consisting
of $513.9 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 $1.08
billion issued by government sponsored agencies such as GNMA, 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,
1999, $1.59 billion, or 100%, of which was classified as available-for-sale. At
such date, the Bank's CMO portfolio had an average estimated life of 6.98 years
and a weighted average yield of 6.63%.
Debt Securities. At December 31, 1999 the Bank's debt securities portfolio
total $340.7 million, or 4.4%, of total assets. 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, 1999, the Bank's
U.S. Government securities portfolio totaled $67.9 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, 1999, the Bank's agency securities portfolio
totaled $267.9 million, all of which was classified as available-for-sale and
consisted of callable debentures. 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 30 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.
Industrial, Financial Corporation and Other. 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 10 years and 30 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 has continued to de-emphasized
investments in corporate debt obligations during 1999. At December 31, 1999, the
Bank had no corporate bond holdings.
Municipal Bonds. At December 31, 1999, the Bank's municipal bond portfolio
totaled $4.8 million, all of which was classified as available-for-sale. Such
securities 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" by at least one national rating agency. At December 31,
1999, the average life of the portfolio was approximately 3.71 years and the
portfolio had a weighted average coupon rate of 5.61%. 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, 1999, the Bank's equity securities
portfolio totaled $201.3 million, all of which was classified as available-for-
sale. The Company, on an unconsolidated basis, also has an equity securities
portfolio totaling $187.2 million, all of which was classified as available-for-
sale at December 31, 1999. The Company's equity securities portfolio consisted
of trust preferreds, common and preferred stock. 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, 1999, the Company did not have any preferred stock eligible for
redemption within one year. 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.
Included in the Bank's equity securities at December 31, 1999 was a $16.8
million investment in two common stock mutual funds. The Bank's policy limit
for its common and preferred stock investments is 5% and 7.5%, respectively, of
its total assets and allows for the purchase of common and preferred stock with
a 1% limitation on the purchase of any single issuer. At December 31, 1999, the
Bank's policies permit the purchase of preferred stock rated "Baa" or better by
at least one national rating agency, with a 1% limitation on the purchase of
preferred stock of any single issuer.
The Company's investment policy was modified in 1998 to include capital
notes/trust preferreds issued primarily by financial institutions. These
securities represent secondary capital and rank subordinate and junior in right
of payment to all indebtedness of the issuing company. These higher yielding
securities generally are non-rated, or rated below investment grade. In order
to offset the higher degree of risk, management will focus primarily on, but not
limited to, securities issued by New York metropolitan area institutions. At
December 31, 1999, the Company had $169.0 million of trust preferreds.
26
<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,
---------------------------------------------------------------------------
1999 1998 1997
------------------- -------------------- -----------------------
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 $ 67,880 1.92% $ 191,669 4.95% $ 279,939 6.62%
U.S. Government agency securities 267,942 7.59 154,986 4.01 206,322 4.87
Public utility bonds - - 800 0.02 901 0.02
State, county and municipal bonds 4,833 0.14 5,551 0.14 8,248 0.19
Industrial, financial corporation and other - - 23,737 0.61 36,323 0.86
---------- ------ ---------- ------ ---------- ------
Total debt securities 340,655 9.65 376,743 9.73 531,733 12.56
---------- ------ ---------- ------ ---------- ------
Equity securities:
Preferred and common stock and other 219,506 6.21 300,857 7.78 298,968 7.06
Trust preferreds 169,040 4.79 144,727 3.75 - -
---------- ------ ---------- ------ ---------- ------
Total equity securities 388,546 11.00 445,584 11.53 298,968 7.06
---------- ------ ---------- ------ ---------- ------
Mortgage-backed and mortgage related
securities:
FHLMC 173,581 4.92 69,315 1.79 343,623 8.12
GNMA 797,202 22.58 1,606,893 41.54 1,624,207 38.37
FNMA 235,817 6.68 70,642 1.83 92,689 2.19
CMOs 1,594,684 45.17 1,299,249 33.58 1,341,611 31.70
---------- ------ ---------- ------ ---------- ------
Total mortgage-backed and mortgage
related securities 2,801,284 79.35 3,046,099 78.74 3,402,130 80.38
---------- ------ ---------- ------ ---------- ------
Total securities $3,530,485 100.00% $3,868,426 100.00% $4,232,831 100.00%
========== ====== ========== ====== ========== ======
Debt and equity securities
available-for-sale $3,530,485 100.00% $3,868,426 100.00% $4,232,831 100.00%
========== ====== ========== ====== ========== ======
$ 729,201 20.65% $ 795,362 20.56% $ 786,679 18.58%
Debt securities held-to-maturity - - 26,965 0.70 44,022 1.04
---------- ------ ---------- ------- ---------- ------
Total debt and equity securities 729,201 20.65 822,327 21.26 830,701 19.62
---------- ------ ---------- ------- ---------- ------
Mortgage-backed and mortgage related
securities available-for-sale 2,801,284 79.35 1,795,833 46.42 2,024,729 47.84
Mortgage-backed and mortgage related
securities held-to-maturity - - 1,250,266 32.32 1,377,401 32.54
---------- ------ ---------- ------- ---------- ------
Total mortgage-backed and mortgage
related securities 2,801,284 79.35 3,046,099 78.74 3,402,130 80.38
---------- ------ ---------- ------- ---------- ------
Total securities $3,530,485 100.00% $3,868,426 100.00% $4,232,831 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
27
<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,
------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------- -----------------------
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:
Held-to-maturity:
U. S. Government agency
securities $ - $ - $ - $ - $ 6,000 $ 5,997
Public utility bonds - - 800 796 901 872
State, county and municipal
bonds - - 5,551 5,809 8,248 8,544
Industrial, financial
corporation and other - - 20,614 20,543 28,873 28,796
----------- ----------- ----------- ----------- ----------- -----------
Total debt securities
held-to-maturity - - 26,965 27,148 44,022 44,209
Available-for-sale:
U. S. Government obligations 67,192 67,880 187,250 191,669 275,847 279,939
U. S. Government agency
securities 287,642 267,942 154,353 154,986 200,154 200,322
State, county and municipal
bonds 4,762 4,833 - - - -
Industrial, financial
corporation and other - - 3,003 3,123 7,397 7,450
----------- ----------- ----------- ----------- ----------- -----------
Total debt securities
available-for-sale 359,596 340,655 344,606 349,778 483,398 487,711
Equity securities
available-for-sale:
Preferred and common stock
and other 244,395 219,506 283,743 300,857 262,422 298,968
Trust preferreds 194,604 169,040 147,131 144,727 - -
----------- ----------- ----------- ----------- ----------- -----------
Total equity securities
available-for-sale 438,999 388,546 430,874 445,584 262,422 298,968
----------- ----------- ----------- ----------- ----------- -----------
Total debt and equity
securities 798,595 729,201 802,445 822,510 789,842 830,888
----------- ----------- ----------- ----------- ----------- -----------
Mortgage-backed and mortgage
related securities:
Held-to-maturity:
FHLMC - - 65,864 68,245 85,969 89,137
GNMA - - 1,045,918 1,060,676 1,002,553 1,025,316
FNMA - - 67,500 68,082 85,777 86,058
CMOs - - 70,984 71,458 203,102 203,486
----------- ----------- ----------- ----------- ----------- -----------
Total mortgage-backed and
mortgage related
securities
held-to-maturity - - 1,250,266 1,268,461 1,377,401 1,403,997
----------- ----------- ----------- ----------- ----------- -----------
Available-for-sale:
FHLMC 171,591 173,581 3,431 3,451 254,702 257,654
GNMA 813,335 797,202 554,533 560,975 611,431 621,654
FNMA 240,151 235,817 3,135 3,142 6,758 6,912
CMOs 1,696,202 1,594,684 1,228,644 1,228,265 1,127,327 1,138,509
----------- ----------- ----------- ----------- ----------- -----------
Total mortgage-backed and
mortgage related
securities
available-for-sale 2,921,279 2,801,284 1,789,743 1,795,833 2,000,218 2,024,729
----------- ----------- ----------- ----------- ----------- -----------
Total mortgage-backed
and mortgage related
securities 2,921,279 2,801,284 3,040,009 3,064,294 3,377,619 3,428,726
----------- ----------- ----------- ----------- ----------- -----------
Net unrealized (loss) gain on
securities available-for-sale (189,389) - 25,972 - 65,370 -
----------- ----------- ----------- ----------- ----------- -----------
Total securities amortized
cost/estimated fair value $ 3,530,485 $ 3,530,485 $ 3,868,426 $ 3,886,804 $ 4,232,831 $ 4,259,614
============ ============ ============ ============ ============ ============
</TABLE>
28
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, 1999:
<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>
Available-for-sale
securities:
Mortgage-backed and
mortgage related
securities:
GNMA $ - - % $ 98 10.44 % $ 3,657 10.42 %
FNMA - - - - - -
FHLMC - - - - - -
CMOs - - 2,085 8.01 58,336 6.74
---------- --------- ----------
Total
mortgage-backed
and mortgage related
securities - - 2,183 8.12 61,993 6.96
---------- --------- ----------
Debt securities:
U. S. Government
obligations 26,016 6.21 41,864 7.43 - -
U. S. Government
agency securities - - - - 24,125 7.33
State, county and
municipal bonds 1,287 5.33 2,354 5.80 36 5.50
---------- --------- ----------
Total debt
securities 27,303 6.17 44,218 7.34 24,161 7.33
---------- --------- ----------
Equity securities (1):
Preferred and common
stock and other - - - - - -
Trust preferreds - - - - - -
---------- --------- ----------
Total equity
securities - - - - - -
---------- --------- ----------
Total
available-for-sale
securities $ 27,303 6.17 $ 46,401 7.38 $ 86,154 7.06
=========== =========== ==========
<CAPTION>
----------------------------------------------------------
More than Ten Years Total
---------------------- ----------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale
securities:
Mortgage-backed and
mortgage related
securities:
GNMA $ 793,447 6.87% $ 797,202 6.91%
FNMA 235,817 7.36 235,817 7.36
FHLMC 173,581 7.71 173,581 7.71
CMOs 1,534,263 6.60 1,594,684 6.60
---------- -----------
Total
mortgage-backed
and mortgage related
securities 2,737,108 6.81 2,801,284 6.82
---------- -----------
Debt securities:
U. S. Government
obligations - - 67,880 6.96
U. S. Government
agency securities 243,817 7.56 267,942 7.55
State, county and
municipal bonds 1,156 5.51 4,833 5.60
----------- -----------
Total debt
securities 244,973 7.56 340,655 7.40
---------- -----------
Equity securities (1):
Preferred and common
stock and other 219,506 5.36 219,506 5.36
Trust preferreds 169,040 8.56 169,040 8.56
----------- -----------
Total equity securities 388,546 6.76 388,546 6.75
----------- -----------
Total available-for-sale
securities $ 3,370,627 6.85 $ 3,530,485 6.87
=========== ===========
</TABLE>
(1) As equity securities have no maturities, they are classified in the more
than ten year category.
29
<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 and FHLB
borrowings to fund its operations.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. At December 31, 1999, the Bank's deposit accounts
consisted 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 account service with direct deposit features, new money
market and certificates of deposit products, as well as a low-cost checking
account service for low-income customers.
At December 31, 1999, the Bank's deposits totaled $4.05 billion. For the
year ended December 31, 1999, the average balance of core deposits (savings,
Super NOW and NOW, money market and non-interest-bearing checking accounts)
totaled $1.45 billion, or 34.3%, of total average deposits. At December 31,
1999, the Bank had a total of $2.61 billion in certificates of deposit, of which
$1.88 billion had maturities of one year or less. For the year ended December
31, 1999, the average balance of certificate of deposit accounts represented
65.7% 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 competitive
pricing of its deposit products, customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the 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 5% to 25% of interest paid on these accounts
during the year. For each of the years ended December 31, 1999, 1998 and the
Bank paid a special interest payment of 5%, 15% and 25%, respectively of
interest paid on savings and NOW accounts, which totaled $336,000, $970,000 and
$2.3 million, respectively. Prior to 1999, such payments were not made to T R
Financial Corp. accounts. The Bank has made no decision as to the amount of
such special interest payment or whether such special interest payments will
continue after 1999. 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. Dependent on market conditions, the Bank
will periodically use such brokered deposits
30
<PAGE>
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, 1999, the Bank had $94.6
million in brokered deposits, or 2.3% of total deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1999 1998 1997
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Net withdrawals from deposit accounts $ (339,458) $ (92,640) $ (327,232)
Interest credited on deposit accounts 166,088 167,024 172,782
------------- ------------- -------------
Total (decrease) increase in deposit accounts $ (173,370) $ 74,384 $ (154,450)
============= ============= =============
</TABLE>
At December 31, 1999, the Bank had outstanding $490.9 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 $ 117,538 4.86%
Over three through six months 58,801 5.23
Over six through 12 months 152,191 5.64
Over 12 months 162,353 6.04
---------
Total $ 490,883 5.54
=========
</TABLE>
31
<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,
-------------------------------------------------------------------------------------------
1999 1998
---------------------------------------- -------------------------------------------
Percent Percent
of Total of Total
Average Average Weighted Average Average Weighted
Balance Deposits Average Rate Balance Deposits Average Rate
---------- ---------- ------------ ---------- --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Money market accounts $ 171,720 4.05% 3.82% $ 82,114 1.95% 3.09%
Savings accounts (1)(2) 992,385 23.43 2.20 1,071,426 25.46 2.66
Super NOW and NOW accounts (3) 150,247 3.55 2.14 159,950 3.80 2.86
Non-interest-bearing accounts 140,181 3.31 - 103,635 2.46 -
----------- ------- ----------- ------
Total 1,454,533 34.34 2.17 1,417,125 33.67 2.51
----------- ------- ----------- ------
Total certificates of
deposit 2,781,650 65.66 5.10 2,791,556 66.33 5.57
----------- ------- ----------- ------
Total average
deposits $ 4,236,183 100.00% 4.09% $ 4,208,681 100.00% 4.54%
=========== ======= =========== =======
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1997
----------------------------------------
Percent
of Total
Average Average Weighted
Balance Deposits Average Rate
---------- ---------- ------------
<S> <C> <C> <C>
Money market accounts $ 70,733 1.69% 2.57%
Savings accounts (1) (2) 1,080,232 25.74 2.98
Super NOW and NOW accounts (3) 148,145 3.53 3.27
Non-interest-bearing accounts 95,876 2.28 -
----------- ------
Total 1,394,986 33.24 2.79
----------- ------
Total certificates of
deposit 2,801,963 66.76 5.69
----------- ------
Total average
deposits $ 4,196,949 100.00% 4.73%
=========== ======
</TABLE>
(1) Includes special interest payments made by the Bank on such accounts for the
years ended December 31, 1999, 1998 and 1997, which resulted in an increased
cost of such accounts of 4 basis points, 18 basis points, and 48 basis
points, respectively. Prior to 1999, such payments were not made to T R
Financial Corp. accounts.
(2) Savings accounts include mortgagors' escrow deposits.
(3) Includes special interest payments made by the Bank on the NOW accounts for
the years ended December 31, 1999, 1998 and 1997, which resulted in an
increased cost of such accounts of 2 basis points, 8 basis points and 18
basis points, respectively. Prior to 1999, such payments were not made to
T R Financial Corp. accounts.
32
<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, 1999
---------------------------------------------------------------
Greater Greater Greater Greater
One Than Than Than Than
Year One to Two Two to Three to Four to
or Less Years Three Years Four Years Five Years
---------- ---------- ----------- ---------- ----------
(In thousands)
Certificates
deposit:
<S> <C> <C> <C> <C> <C>
0 to 3.00% $ 90 $ 103 $ 25 $ 42 $ -
3.01 to 4.00% 457 - - - -
4.01 to 5.00% 901,424 27,292 590 1,131 1,440
5.01 to 6.00% 931,546 308,837 91,641 31,669 33,629
6.01 to 7.00% 28,662 105,185 55,361 10,323 19,786
7.01 to 8.00% 5,695 10,351 6,054 7 153
Over 8.01% 11,258 1,685 32 5 -
---------- -------- -------- -------- ----------
Total $1,879,132 $453,453 $153,703 $ 43,177 $ 55,008
========== ======== ======== ======== ==========
<CAPTION>
At December 31,
----------- -------------------------------------------
Greater
Than
Five Years 1999 1998 1997
----------- ------------- ------------- -----------
(In thousands)
Certificates
of deposit:
<S> <C> <C> <C> <C>
0 to 3.00% $ - $ 260 $ - $ -
3.01 to 4.00% - 457 - -
4.01 to 5.00% 159 932,036 929,894 145,156
5.01 to 6.00% 14,621 1,411,943 1,455,362 1,864,441
6.01 to 7.00% 5,516 224,833 408,584 689,151
7.01 to 8.00% 640 22,900 23,999 26,498
Over 8.01% 45 13,025 17,739 19,742
-------- ----------- ----------- -----------
Total $ 20,981 $ 2,605,454 $ 2,835,578 $ 2,744,988
======== =========== =========== ===========
</TABLE>
33
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, 1999, the Bank had $2.45 billion of reverse-
repurchase agreements outstanding. 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. At December 31, 1999, the Bank's policies limit the Bank's use of
reverse-repurchase agreements to maturities of overnight to five years. The
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. At December
31, 1999, the Bank held $195.0 million of reverse-repurchase agreements with
maturities in excess of five years. These agreements were acquired as part of
the Merger, under the investment policy of Roosevelt Savings Bank. The Bank
averaged approximately $2.31 billion in reverse-repurchase agreements during the
year ended December 31, 1999. At December 31, 1999, none of RNMC'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 Bank maintains a $100.0 million overnight line of credit with the
Federal Home Loan Bank (FHLB). Included in other borrowed funds at December 31,
1999 is $100.0 million of borrowings drawn under this line at an interest rate
of 4.60%. At December 31, 1998, such borrowings under this line of credit were
$5.0 million at an interest rate of 5.13%. In addition, the Bank may access
funds through a $100.0 million one month facility from the FHLB of which $85.0
million at an interest rate of 4.100% was outstanding and included in other
borrowed funds at December 31, 1999. Additionally, included in other borrowings
at December 31, 1999 were FHLB advances of $75.0 million, which have fixed
interest rates between 5.52% and 5.73%, for five years and which rate may
become convertible by the FHLB in 2002, and quarterly thereafter. FHLB advances
and FHLB overnight line of credit borrowings are secured under an assignment
arrangement of eligible collateral, primarily mortgage loans, in an amount equal
to 110% of outstanding advances.
Subsequent to the Merger, the Company restructured $427.1 million of
reverse-repurchase agreement and $118.1 million of FHLB borrowings. These
borrowed funds had maturities between less than one year and four years and a
weighted average rate of 5.98%. The borrowings were then replaced with new
funds with a weighted average rate of 4.98% and maturities between less than
one year and four years. As a result, for the year ended December 31, 1999, the
Company incurred a prepayment penalty of $7.2 million ($4.2 million, net of
tax). The prepayment penalty is reflected as an extraordinary item in the
Company's consolidated statements of income.
34
<PAGE>
The following table sets forth certain information regarding borrowed funds
for the dates indicated:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Other borrowings:
Average balance outstanding $ 247,084 $ 529,665 $ 503,416
Maximum amount outstanding at any month
end during the year 411,178 629,105 581,845
Balance outstanding at end of year 395,196 433,528 492,910
Weighted average interest rate during the year 4.16% 5.78% 5.80%
Weighted average interest rate at end of year 5.19 5.72 5.91
Reverse-repurchase agreements:
Average balance outstanding $ 2,305,473 $ 2,100,206 $ 1,030,796
Maximum amount outstanding at any month end
during the year 2,594,268 2,341,847 1,802,861
Balance outstanding at end of year 2,449,345 2,094,319 1,772,119
Weighted average interest rate during the year 5.70% 5.81% 5.90%
Weighted average interest rate at end of year 5.67 5.63 5.90
Total borrowed funds:
Average balance outstanding $ 2,552,557 $ 2,629,871 $ 1,534,212
Maximum amount outstanding at any month end
during the year 2,844,541 2,868,475 2,295,866
Balance outstanding at end of year 2,844,541 2,527,847 2,265,029
Weighted average interest rate during the year 5.55% 5.81% 5.87%
Weighted average interest rate at end of year 5.59 5.65 5.90
</TABLE>
Savings Bank Life Insurance
Effective December 31, 1999, the Savings Bank Mutual Life Insurance
Company, Inc. was restructured and resulted in the cessation of the Bank's
Savings Bank Life Insurance (SBLI) department. The individuals employed by the
SBLI department were re-deployed by the Bank.
Previously, the Bank, through its SBLI department, engaged in group life
insurance coverage per individual under SBLI's Financial Institution Group Life
Insurance policy. The SBLI department's activities were segregated from the
Bank and, while they did not directly affect the Bank's earnings, management
believed that offering SBLI was beneficial to the Bank's relationship with its
depositors and the general public. The SBLI department paid its own expenses
and reimbursed the Bank for expenses incurred on its behalf.
Subsidiary Activities
Roslyn National Mortgage Corp. RNMC 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. RNMC was formed in connection
with the Bank's acquisition of certain assets and liabilities of Residential
Mortgage Banking, Inc. (RMBI). RNMC currently operates in New York, New Jersey,
Alabama, Tennessee, Delaware, Pennsylvania, Virginia, Maryland and Tennessee.
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 RNMC as goodwill and is being amortized on a straight line basis
over a 10 year period. RNMC is operated under the direction of its executive
officers who are overseen by RNMC's Board of Directors, which consists of
certain members of the Board of Directors of the
35
<PAGE>
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 investing in
mortgage related assets as a real estate investment trust. 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, through reduced taxes, 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 and
collects commissions for previously-issued life insurance policies. RSB Agency,
Inc. is currently active in the sale of annuities, mutual fund and insurance
products for which it receives commissions from third parties.
Roosevelt Asset Funding Corp. Roosevelt Asset Funding Corp. (RAFC), is a
real estate investment trust which was incorporated in the State of Delaware on
April 28, 1997 for the purpose of investment and reinvestment of its assets in
real property, interests in real property, mortgage loans secured by real
property, interests in mortgage loans secured by real property, leasehold
interests in real property and mortgage-backed securities, including
collateralized mortgage obligations.
Other Subsidiaries. The Bank has 16 other wholly owned subsidiaries.
Anaconda Enterprises, Inc., Blizzard Realty Corp., 1400 Corp., BSR Inc., BSR
1400 Corp., Roosevelt Abstract Corp., Roosevelt Land Corp. and 155 East 33rd
Street Corp. are periodically used to hold REO. 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.,
Bellingham Corp., Roosevelt Service Corporation, Rokings Holding Corporation,
VBF Holding Corporation, Oyster Bay Holding Corporation and Rosouth Holding
Corporation currently are inactive subsidiaries.
RBI Holdings, Inc. RBI Holdings, Inc. (RBI) a wholly owned subsidiary of
the Holding Company was established on March 17, 1999. RBI is a 50% joint
venture partner in a mortgage banking company, Emeritus Mortgage, which is
engaged in the generation of loan commissions from the sale of loans,
principally to third parties. The Emeritus Mortgage may, from time to time, sell
loans to RNMC at market. The mortgage banking company does not close loans in
its own name and relies on the funding of the purchasing institution.
RNMC Re, Inc. RNMC Re, Inc. (RRI), a wholly owned subsidiary of the
Holding Company was established in December 1999. RRI was organized as a
captive re-issuance company in the state of Vermont. RRI originates mortgage
impairment policies, which are then delivered to a third party insurance
carrier. The subsidiary will retain a portion of the risks associated with such
policies for a percentage of the premiums paid. The individual loans covered by
these policies were originated by a subsidiary of the Bank, RMNC.
Personnel
As of December 31, 1999, the Bank had 744 full-time employees and 186 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank and RNMC considers its relationship with its employees to be
good.
36
<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.
The Bank is a New York State chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the FDIC as a member of 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 is also
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.
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.
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 and any waivers granted.
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
37
<PAGE>
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.
Assessments. Savings banks are required to pay assessments to the NYSBD to
fund operations. Assessments paid by the Bank for the fiscal year ended
December 31, 1999 totaled $116,000.
FDIC Regulations
Capital Requirements. The FDIC has adopted risk-based capital guidelines
to which the Bank is subject. Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier (Tier I) includes 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 regulations prescribe a minimum Tier I leverage ratio
(Tier I capital to adjusted total assets as specified in the regulations) 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 at
least 4%. The FDIC may, however, set higher leverage and risk-based capital
requirements on individual institutions when particular circumstances warrant.
The following is a summary of the Bank's regulatory capital at December 31,
1999:
GAAP Capital to Total Assets 6.06 %
Total Capital to Risk-Weighted Assets 16.42 %
Tier I Leverage Ratio 6.93 %
The FDIC, along with the other federal banking agencies, has 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. The agencies 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.
Standards for Safety and Soundness. The federal banking agencies have
adopted final regulations and Interagency Guidelines Establishing Standards for
Safety and Soundness (Guidelines) to implement 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. 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 standard.
38
<PAGE>
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,
is 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 State law.
Investments and Activities
The activities of all state-chartered financial institutions, including
savings banks and their subsidiaries, have generally been limited by federal law
to those activities of the type and in the amount authorized for national banks,
notwithstanding state law. Applicable 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) if the 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
I capital, as specified by the FDIC's regulations, or the maximum amount
permitted by New York State Banking Law, whichever is less. Such grandfathering
authority is subject to termination upon the FDIC's determination that such
investments pose a safety and soundness risk to the Bank or in the event the
Bank converts its charter or undergoes a change in control. As of December 31,
1999, the Bank had $211.4 million of securities which were subject to such
grandfathering authority. The Gramm-Leach-Bliley Act of 1999 authorizes state
banks that meet certain conditions to invest in "financial subsidiaries" that
engage in activities permitted for financial subsidiaries of national banks to
conduct, including investment banking.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements, the severity of which depends upon the degree
of under capitalization.
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
39
<PAGE>
"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
Transactions between depository institutions and their affiliates are
governed by federal law. An affiliate of a savings bank is any company or
entity that controls, is controlled by, or is under common control with the
savings bank, other than a subsidiary. Generally, the extent to which the
savings bank or its subsidiaries may engage in "covered transactions" with any
one affiliate is limited to an amount equal to 10% of such savings bank's
capital stock and surplus. There is an aggregate limit on all such transactions
with all affiliates to an amount equal to 20% of such capital stock and surplus.
The term "covered transaction" includes the making of loans or other extensions
of credit to an affiliate; the purchase of assets from an affiliate, the
purchase of, or an investment in, the securities of an affiliate; the acceptance
of securities of an affiliate as collateral for a loan or extension of credit to
any person; or issuance of a guarantee, acceptance, or letter of credit on
behalf of an affiliate. Federal law 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.
Federal law also restricts a savings bank with respect to loans to
directors, executive officers, and principal stockholders. 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.
Loans above certain amounts to directors, executive officers, and stockholders
who control more than 10% of a stock savings bank, and their respective related
interests, must be approved in advance by a majority of the board of directors
of the savings bank. Loans to directors, executive officers and principal
stockholders 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. Federal law 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.
40
<PAGE>
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 (i) well capitalized, (ii)
adequately capitalized or (iii) 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 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 spread the obligations for payment of the Financing
Corporation (FICO) bonds across all SAIF and BIF members. This assessment is in
addition to any FDIC insurance assessment. For 1999, BIF members paid
approximately 1.3 basis points toward the FICO payment while SAIF members paid
approximately 6.5 basis points. Full pro rata sharing of FICO payments between
SAIF and BIF members commenced January 1, 2000. The Bank's insurance premiums
were $648,000 during fiscal 1999.
Under the FDI Act, insurance of an institution's 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 2000, the Federal
Reserve Board regulations required that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $44.3 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%, plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $44.3 million. The first $5.0 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.
Holding Company Regulation
The Company is regulated as a non-diversified unitary savings and loan
holding company within the meaning of the federal law. 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. 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 is 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 is not
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
Home Owners' Loan Act (HOLA) limits
41
<PAGE>
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, 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 multiple savings and loan holding
companies. Recent legislation designed to modernize the regulation of the
financial services industry expands the ability of bank holding companies to
affiliate with other types of financial services companies such as insurance
companies and investment banking companies. However, the legislation provides
that companies that acquire control of a single savings association after May 4,
1999 (or that filed an application for that purpose after that date) are not
entitled to the unrestricted activities formerly allowed for a unitary savings
and loan holding company. Rather, these companies will have authority to engage
in the activities permitted "a financial holding company" under the new
legislation, including insurance and securities-related activities, and the
activities currently permitted for multiple savings and loan holding companies,
but generally not in non financial activities. The authority for unrestricted
activities is grandfathered for unitary savings and loan holding companies, such
as the Company, that existed prior to May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that was to acquire the
Company.
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 qualified thrift lender.
In order to qualify as a qualified thrift lender, the Bank must maintain
compliance with a Qualified Thrift Lender Test. Under the Qualified Thrift
Lender Test, a savings institution is required to qualify as a "domestic
building loan association" within the meaning of the Internal Revenue Code or
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 nine months out of each 12 month period. A holding company of
an institution that fails the 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. For the year ended
December 31, 1999, the Bank maintained in excess of 94.45% 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, 1999.
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 purposes of the New York
State Banking Law, is defined generally to include any person, company or trust
that directly or indirectly owns, controls or holds with power to vote 10% or
more of the voting stock of each
42
<PAGE>
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 is not deemed to be a bank holding company for the purposes of the
New York State Banking Law. The prior approval of the NYSBD is required before
any action is taken that causes any company to become a bank holding company;
any bank holding company acquires direct or indirect ownership or control of
more than 5% of the voting stock of a banking institution; or acquires a banking
institution by merger or purchase of assets. 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.
Federal Securities Laws
The Company's common stock is registered with the SEC under Section 12(g)
of the Securities 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.
Year 2000 Compliance
As of March 1, 2000, the Company has experienced no disruptions or problems
regarding the year 2000 (Y2K) rollover. As part of the Company's Year 2000
plan, on January 1, 2000, the Company tested and sampled internal systems,
including its primary third-party data processor, telecommunications systems,
automated teller machines and related third party vendors supporting these
machines, various third party software applications and the company's ability to
interface with its correspondent banks, such as the Chase Manhattan Bank and the
Federal Reserve Bank. All testing completed on January 1, 2000 indicated all
systems were operating as normal. Through March 1, 2000, all of the Company's
internal hardware and software continue to operate as normal, and to date, to
the Company's knowledge, all vendors utilized by the Company in its daily
operations are operating normally and have not indicated any Y2K related
problems.
The Company will continue to monitor and oversee all internal operations
and be in contact with its vendors regarding Y2K related issues. Based on the
successful transition through the January, 2000 rollover period and the
previously conducted testing, the Company does not anticipate any significant
Y2K problems to arise. None of the Company's major commercial borrowers
reported any Y2K related problems.
The Company's expenditures for the Y2K effort total approximately $374,000
through December 31, 1999, including $314,000 for the fiscal 1999.
43
<PAGE>
Recent Legislation
Recent legislation designed to modernize the regulation of the financial
services industry expands the ability of bank holding companies to affiliate
with other types of financial services companies such as insurance companies and
investment banking companies. However, the legislation provides that companies
that acquire control of a single savings association after May 4, 1999 (or that
filed an application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the
activities permitted "a financial holding company" under the new legislation,
including insurance and securities-related activities, and the activities
currently permitted for multiple savings and loan holding companies, but
generally not in commercial activities. The authority for unrestricted
activities is grandfathered for unitary savings and loan holding companies, such
as the Company, that existed prior to May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
Company.
44
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company, the Bank and their subsidiaries (excluding Roslyn
Capital Corporation) 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 was last audited by the
Internal Revenue Service for the year ended December 31, 1991 which resulted in
no change to taxable income.
Bad Debt Reserves. Prior to the enactment of The Small Business Job
Protection Act of 1996 (the 1996 Act) on August 20, 1996, for Federal income tax
purposes, thrift institutions which met certain definitional tests primarily
relating to their assets (the 60% Test) and the nature of their business, were
permitted to establish tax reserves for bad debts and to make annual additions
thereto, which additions could, within certain specified limitations, be
deducted in arriving at taxable income. The Bank's deduction for bad debts with
respect to non-qualifying loans could be computed using an amount based on a six
year moving average of the Bank's actual loss experience (the Experience
Method). The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interest in real property, could be computed
using the Experience Method or a percentage equal to 8% of the Bank's taxable
income (the PTI Method), computed with certain modifications and without regard
to this deduction and reduced by the amount of the permitted deduction for bad
debts on non-qualifying loans. Additions to the tax bad debt reserve under the
PTI method were subject to an overall limitation. The allowable deduction under
the PTI Method was limited to the excess of 12% of withdrawable accounts of
depositors at the end of the year over the sum of the Bank's surplus, undivided
profits and reserves at the beginning of the year. 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 tax, as compared to the maximum corporate
Federal income tax rate of 35%.
The 1996 Act. Under the 1996 Act, for tax years beginning after December
31, 1995, the PTI Method was repealed. Additionally, "large banks" (i.e., one
with assets having an adjusted basis of more than $500 million), which includes
the Bank, are no longer permitted to make additions to its tax bad debt reserve,
can only deduct bad debts as they occur and is required to recapture (i.e.,
include in its taxable 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 (or a lesser amount if the Bank's loan
portfolio decreased since December 31, 1987). For tax years beginning in 1996
and 1997, the recapture requirement is suspended if the principal amount of
residential mortgages originated by the Bank during the year was not less than
the average of the principal amount of loans made during the six preceding
taxable years. 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.
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.
45
<PAGE>
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to that
income, is equal to the amount of the distribution. Thus, 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. In addition to the regular income tax,
the Code imposes a alternative minimum tax (AMT) in an amount equal to 20% of
alternative minimum taxable income (AMTI) to the extent the AMT exceeds the
regular tax. AMTI regular taxable income as modified by certain adjustments and
tax preference items. AMTI includes an amount equal to 75% of the excess of
adjusted current earnings over AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses). Only 90% of AMTI
can be offset by net operating loss carry forwards. The AMT is available as a
credit against future regular income tax. The AMT credit can be carried forward
indefinitely. The Bank does not expect to be subject to the AMT.
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. A 70% dividends received deduction generally
applies with respect to dividends received from corporations that are not
members such affiliated group, except that an 80% dividends received deduction
applies if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend.
State and Local Taxation
New York State Taxation. The Bank is subject to the New York State
Franchise Tax on Banking Corporations in an annual amount equal to the greater
of (a) 9% of the Bank's "entire net income" allocable to New York State during
the taxable year, or (b) the applicable AMT. The AMT 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 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. The Bank, the
Company and their subsidiaries (excluding Roslyn Capital Corporation, Roosevelt
Asset Funding Corp. and RNMC Re, Inc.) file a combined return.
The New York State tax law was amended in 1999 to reduce the tax rate on
allocated entire net income. For tax years beginning after June 30, 2000 and
before July 1, 2001, the tax rate is 8.5%; for tax years beginning after June
30, 2001 and before July 1, 2002, the tax rate is 8%; and tax years beginning
after June 30, 2002, the tax rate is 7.5%.
The Company, the Bank and their subsidiaries do business within the
Metropolitan Transportation Business Tax District (the District) which is
comprised of the counties of New York, Bronx, Kings, Queens, Richmond, Dutchess,
Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester. A tax surcharge is
imposed on banking corporations doing business within the District and has been
applied since 1982. This district tax rate is 17%.
The District tax surcharge is scheduled to expire for tax years ending on
or after December 31, 2001. In prior years, the District tax surcharge has been
extended before its expiration date.
The reduction in the tax rate on allocated entire net income enacted in
1999 will not be reflected in the computation of the District tax surcharge.
The surcharge is to be computed as if the tax rate reductions had not occurred.
46
<PAGE>
The Bank was last audited by the State of New York for the three-year
period ended December 31, 1995, which resulted in adjustments which were
immaterial to the Bank's financial statements.
Bad Debt Reserves: For purposes of computing its New York State entire net
income, the Bank is permitted a deduction for an addition to the reserve for
losses on qualifying real property loans. The allowable deduction is the same as
for federal income tax purposes, prior to the 1996 Act, except that the
percentage allowable under the PTI Method was 32% instead of 8%. The New York
State tax law was amended in August 1996 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
tax bad debt reserves for such distributions. Also, the New York tax bad debt
reserve is subject to recapture in the event that the Bank fails to meet the 60%
Test, which it presently satisfies. Although there can be no assurance that the
Bank will satisfy the 60% Test in the future, management believes that this
level of qualifying assets can be maintained by the Bank. Each year the Bank
reviews the most favorable method to calculate the deduction attributable to an
addition to the tax bad debt reserve.
City of New York Taxation: The Bank, the Company and its subsidiaries
(excluding Roslyn Capital Corporation, Roosevelt Asset Funding Corporation and
RNMC Re, Inc.) are also subject to a New York City banking corporation tax of 9%
on income allocated to New York City calculated in a manner similar to New York
State. Income is allocated to New York City based upon three factors: receipts,
wages and deposits.
In March 1997, the New York City tax law was amended, similar to New York
State, to prevent the recapture of the tax bad debt reserve that would have
otherwise occurred as a result of the enactment of the 1996 Act.
Delaware Taxation: The Company, as a Delaware holding company not earning
income in Delaware, is exempted from the corporate income tax. However, the
Company is required to file an annual report with and pay an annual franchise
tax based on authorized shares to the State of Delaware.
Roslyn National Mortgage Corporation: RNMC is subject to tax in the
various states in which it operates. RNMC is also subject to tax in New York
City.
RNMC Re, Inc.: RNMC Re, Inc. is subject to tax on its premium income in
Vermont.
47
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT AND THE BANK
The name, age, position, term of office as officer and period during which
he or she has served as an officer is provided below for each executive officer
of the Registrant and the Bank. All executive officers of the Registrant are
also executive officers of the Bank.
Joseph L. Mancino, Vice Chairman of the Board, President and Chief
Executive Officer and a Director of the Registrant, Chairman of the Board and
Chief Executive Officer of the Bank, joined the Bank in 1960, and has been
Chairman of the Board and Chief Executive Officer of the Bank since 1993 and of
the Registrant in 1997. Mr. Mancino was President of the Bank from 1993 until
February 2000. In connection with the Registrant's acquisition of T R
Financial Corp. in 1999, Mr. Mancino became Vice Chairman of the Registrant.
Mr. Mancino is 62 years of age.
John M. Tsimbinos, Chairman of the Board of the Registrant and Vice
Chairman of the Board of the Bank, joined the Bank in 1999 in connection with
the Registrant's acquisition of T R Financial Corp. Mr. Tsimbinos is 62 years
of age.
John R. Bransfield, Jr., Vice Chairman of the Registrant commencing in
February 2000, President and Chief Operating Officer of the Bank commencing in
February 2000, joined the Bank in 1993 as a Senior Vice President and Senior
Lending Officer, became a Director in 1998, and became Senior Executive Vice
President and Chief Operating Officer in 1999. Mr. Bransfield is 58 years of
age.
Nancy C. MacKenzie, Executive Vice President and Chief Information Officer
of the Bank, joined the Bank in 1976, became Chief Information Officer in 1995,
and became Executive Vice President and Chief Information Officer in 1999.
Ms. MacKenzie is 46 years of age.
Daniel L. Murphy, Executive Vice President and Retail Banking Officer of
the Bank, joined the Bank in 1978, and became Executive Vice President and
Retail Banking Officer in 1999. Mr. Murphy is 40 years of age.
Michael P. Puorro, Treasurer and Chief Financial Officer of the Registrant
and Executive Vice President and Chief Financial Officer of the Bank, joined the
Bank in 1992 and became Executive Vice President and Chief Financial Officer in
1999. Mr. Puorro is 40 years of age.
John L. Klag, Executive Vice President and Investment Officer of the Bank,
joined the Bank in 1993 and became Executive Vice President and Investment
Officer in 1999. Mr. Klag is 42 years of age.
R. Patrick Quinn, Corporate Secretary of the Registrant, joined the Bank in
1999 as Corporate Secretary. Mr. Quinn is 38 years of age.
Kevin T. Dunne, Senior Vice President and Senior Consumer Lending Officer
of the Bank, joined the Bank in 1974 and became Senior Vice President and Senior
Consumer Lending Officer in 1999. Mr. Dunne is 44 years of age.
Ralph E. Caccipuoti, Senior Vice President and Retail Operations Officer of
the Bank, joined the Bank in 1975 and became Senior Vice President and Retail
Operations Officer in 1999. Mr. Caccipuoti is 44 years of age.
Mary Ellen McKinley, Senior Vice President and Human Resources Officer of
the Bank, joined the Bank in 1994 and became Senior Vice President and Human
Resources Officer in 2000. Ms. McKinley is 54 years of age.
John F. Coffey, Senior Vice President and Senior Commercial Lending Officer
of the Bank, joined the Bank in 1996, and became Senior Vice President and
Commercial Lending Officer in 1999. Mr. Coffey is 53 years of age.
48
<PAGE>
William A. Walter, Senior Vice President and Assistant Chief Financial
Officer of the Bank, joined the Bank in 1996, and became Senior Vice President
and Assistant Chief Financial Officer in 1999. Mr. Walter is 35 years of age.
Walter G. Mullins, Senior Vice President and Marketing Officer of the Bank,
joined the Bank in 1999 in connection with the Registrant's acquisition of T R
Financial Corp. Mr. Mullins is 54 years of age.
Gerard L. Treglia, Senior Vice President and Retail Systems Officer of the
Bank joined the Bank in 1999 in connection with the Registrant's acquisition of
T R Financial Corp. Mr. Treglia is 50 years of age.
49
<PAGE>
Item 2. Properties.
- -------------------
The Bank currently conducts its business through 25 full service banking
offices. In addition, RNMC, 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 RNMC's
offices as of December 31, 1999:
<TABLE>
<CAPTION>
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
- -------------------------------- ------------ ------------- -----------------
<S> <C> <C> <C>
Administrative/Main Office:
Roslyn Office Owned 1932 Not Applicable
1400 Old Northern Boulevard
Roslyn, NY 11576
Administrative Offices:
Garden City Office Owned 1976 Not Applicable
1122 Franklin Avenue
Garden City, New 11530
Jericho Office Leased 1999 2014
One Jericho Plaza
Jericho, NY 11753
Branch Offices:
Bayshore Leased 1999 2009
130-145 East Main Street
Bayshore, NY 11706
Bayside (1) Owned 1969 Not Applicable
224-04 Union Turnpike
Bayside, NY 11364
Bellmore Owned 1972 Not Applicable
2641 Merrick Road
Bellmore, NY 11710
2790 Sunrise Highway (1) Leased 1980 2010
Bellmore, NY 11710
Bellerose (1) Owned 1975 Not Applicable
247-53 Jamaica Avenue
Bellerose, NY 11426
Brooklyn (1) Owned 1920 Not Applicable
1024 Gates Avenue
Brooklyn, NY 11221
2925 Avenue U (1) Owned 1955 Not Applicable
Brooklyn, NY 11229
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
- -------------------------------- ------------ ------------- -----------------
<S> <C> <C> <C>
Dix Hills (1) Leased 1995 2002
699 Old Country Road
Dix Hills, NY 11746
East Northport Owned 1992 Not Applicable
580 Larkfield Road
East Northport, NY 11731
Farmingdale Owned 1968 Not Applicable
14 Conklin Street
Farmingdale, NY 11735
Garden City (1) Owned 1976 Not Applicable
1122 Franklin Avenue
Garden City, NY 11530
108-110 Seventh Street (1) Leased 1995 2025
Garden City, NY 11530
Hewlett (1) Owned 1996 Not Applicable
1280 Broadway
Hewlett, NY 11557
Howard Beach (1) (2) Owned 1965 Not Applicable
156-02 Cross Bay Boulevard
Howard Beach, NY 11414
Lawrence Leased 1996 2003
333 Central Avenue
Lawrence, NY 11559
Little Neck (1) Leased 1971 2017
254-09 Horace Harding Expressway
Little Neck, NY 11362
Massapequa (3) Leased 1996 2004
6199 Sunrise Highway /Owned
Massapequa, NY 11758
Massapequa Park (1) Owned 1961 Not Applicable
4848 Merrick Road
Massapequa Park, NY 11762
New Hyde Park (1) Owned 1975 Not Applicable
1114 Jericho Turnpike
New Hyde Park, NY 11040
North Babylon (1) Owned 1991 Not Applicable
1501 Deer Park Avenue
North Babylon, NY 11703
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
- -------------------------------- ------------ ------------- -----------------
<S> <C> <C> <C>
Oceanside Owned 1998 Not Applicable
3140 Long Beach Road
Oceanside, NY 11572
Smithtown Leased 1998 2008
719 Smithtown Bypass
Smithtown, NY 11787
West Hempstead Owned 1965 Not Applicable
50 Hempstead Turnpike
West Hempstead, NY 11552
Woodbury (4) Leased 1976 2009
8081 Jericho Turnpike
Woodbury, NY 11797
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
- -------------------------------- ------------ ------------- -----------------
<S> <C> <C> <C>
RNMC Origination Offices:
Melville - Main Office Leased 1999 2010
48 South Service Road
Melville, NY 11747
Birmingham Leased 1999 2000
1 Perimeter Park South
Suite 100N
Birmingham, AL 35243
Brentwood Leased 1999 2004
5115 Maryland Way
Brentwood, TN 37027
Cherry Hill Leased 1998 Month-to-month
Executive Quarters
1930 E. Marlton Pike
Suite Q26
Cherry Hill, NJ 08003
Columbia Leased 1999 2004
6996 Columbia Gateway Drive
Suite 102
Columbia, MD 21045
Parsippany Leased 1998 2003
400 Lanidex Plaza
Suite 4203
Parsippany, NJ 07054
Patchogue Leased 1998 Month-to-month
57 E. Main Street
Patchogue, NY 11772
Richboro Leased 1998 2000
130 Almshouse Road
Suite 200A
Richboro, PA 18954
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Original
Leased Year
or Leased or Date of Lease
Location Owned Acquired Expiration
- -------------------------------- ------------ ------------- -----------------
<S> <C> <C> <C>
Vienna Leased 1999 2004
1604 Springhill Road
Suite 110
Vienna, VA 22182
Whitestone Leased 1998 2003
17-20 Whitestone
Expressway
Suite 400
Whitestone, NY 11357
Wilmington Leased 1998 2002
5301 Limestone Road
Suite 104
Wilmington, DE 19808
</TABLE>
- ------------------------------
(1) The Bank acquired these former offices of Roosevelt Savings Bank on
February 16, 1999.
(2) Includes a leased accommodation facility adjacent to the branch office.
The lease on such facility expires December 2011.
(3) The Bank owns the building but leases the minority 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.
(4) 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.
54
<PAGE>
Item 3. Legal Proceedings.
- ---------------------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operation.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
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 1999 Annual Report under the caption
"Market Price of Common Stock" and is incorporated herein by this reference. The
following schedule summarizes the dividend payment ratio (dividends declared/net
income per share) for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- -------------------- ------------------ ----------------------
<S> <C> <C>
190.74% 58.91% 51.12%
</TABLE>
Item 6. Selected Financial Data.
- ---------------------------------
Information regarding selected financial data appears on page 1 of the
1999 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 12 through 26 of the 1999
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 1999 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 27 through 66 of the 1999 Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
None.
55
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
- ---------------------------------------------------------
Information regarding the Directors and executive officers of the Company
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 24, 2000 under the caption
"Information with Respect to the Nominees, Continuing Directors, and Certain
Executive Officers of the Company," and to pages 47 and 48 herein. Pursuant to
General Instruction G(3) to the Form 10-K, the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 24, 2000 will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K.
Item 11. Executive Compensation.
- --------------------------------
Information regarding executive compensation is incorporated herein by
reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 24, 2000 under the caption "Executive
Compensation", not including the report of the personnel committee and the stock
performance graph. Pursuant to General Instruction G(3) to the Form 10-K, the
Company's Proxy Statement for the Annual Meeting of the Stockholders to be held
on May 24, 2000 will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The company knows of no single person or group that is the beneficial owner
of more than 5% of the Company's common stock.
Information regarding security ownership of management is incorporated
herein by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 24, 2000 under the caption "Information with
Respect to the Nominees, Continuing Directors and Named Executive Officers of
the Company." Pursuant to General Instructions G(3) to the Form 10-K, the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 24, 2000 will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
Information regarding certain relationships and related transactions is
incorporated herein by reference to the company's Proxy Statement for the Annual
Meeting of Stockholders to be held on May 24, 2000 under the caption
"Transactions With Certain Related Persons." Pursuant to General Instruction
G(3) to the Form 10-K, the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 24, 2000 will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- --------------------------------------------------------------------------
1. Financial Statements
The following consolidated financial statements are included in the
Company's Annual Report for the fiscal year ended December 31, 1999 and
are incorporated herein by reference:
- Consolidated Statements of Financial Condition as of December 31, 1999
and 1998
56
<PAGE>
- Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997
- Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
- Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
- Notes to Consolidated Financial Statements
- Independent Auditors' Report
- Selected Quarterly Financial Data (Unaudited) for the Years Ended
December 31, 1999 and 1998
The remaining information appearing in the Annual Report 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 1999
None.
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
- ------
2.1 Agreement and Plan of Merger, dated as of May 25, 1998, by and between
Roslyn Bancorp, Inc. and T R Financial Corp./1/
2.2 First Amendment, dated as of January 23, 1999, to the Agreement and Plan
of Merger, dated as of May 25, 1998, by and between Roslyn Bancorp, Inc.
And T R Financial Corp./2/
3.1 Certificate of Incorporation of Roslyn Bancorp, Inc./3/
3.2 Certificate of Amendment to Certificate of Incorporation of Roslyn
Bancorp, Inc./4/
3.3 Second Amended and Restated Bylaws of Roslyn Bancorp, Inc./5/
4.0 Form of Stock Certificate of Roslyn Bancorp, Inc./3/
10.1 Employment Agreement between Roslyn Bancorp, Inc. and Joseph L.
Mancino/6/
10.2 Employment Agreement between Roslyn Savings Bank and Joseph L. Mancino/6/
10.3 Employment Agreement between Roslyn Bancorp, Inc. and John R. Bransfield,
Jr./6/
10.4 Employment Agreement between Roslyn Savings Bank and John R. Bransfield,
Jr./6/
10.5 Employment Agreement between Roslyn Bancorp, Inc. and Michael P.
Puorro/6/
10.6 Employment Agreement between Roslyn Savings Bank and Michael P.
Puorro/6/
10.7 Employment Agreement between Roslyn Savings Bank and John L. Klag/6/
10.8 Employment Agreement between Roslyn Savings Bank and Nancy MacKenzie/6/
10.9 Employment Agreement between Roslyn Savings Bank and Daniel L.
Murphy/6/
10.10 Employment Agreement between Roslyn Bancorp, Inc. and R. Patrick
Quinn/6/
10.11 Employment Agreement between Roslyn Savings Bank and R. Patrick
Quinn/6/
10.12 Employment Agreement between Roslyn Bancorp, Inc. and John M.
Tsimbinos/6/
10.13 The Roslyn Savings Bank Management Supplemental Retirement Plan/4/
10.14 Roslyn Bancorp, Inc. 1997 Stock-Based Incentive Plan/5/
10.15 Employment Agreement between Roslyn Savings Bank and John M.
Tsimbinos/4/
57
<PAGE>
10.16 Supplemental Executive Retirement Plan of Roosevelt Savings Bank, as
amended and restated as of March 16, 1993./7/
10.17 First Amendment to the Supplemental Executive Retirement Plan of
Roosevelt Savings Bank, as amended and restated./8/
10.18 T R Financial Corp. 1993 Incentive Stock Option Plan, amended and
restated as of January 23, 1997./9/
11.0 Statement re: Computation of per Share Earnings (incorporated by
reference to Note 17 to Notes to Consolidated Statements - Part IV, Item
14).
13.0 1999 Annual Report
21.0 Subsidiary information is incorporated by reference to "Part I -
Subsidiary Activities"
23.0 Consent of KPMG LLP
27.0 Financial Data Schedule (EDGAR version only)
1. Incorporated by reference into this document from the Registration
Statement on Form S-4, and any amendments thereto, Registration No. 333-
67369, filed with the Securities and Exchange Commission on November 16,
1998.
2. Incorporated by reference into this document from the Form 8-K, and any
amendments thereto, Commission File No. 0-28886, filed with the Securities
and Exchange Commission on February 18, 1999.
3. Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1, and any amendments thereto,
Registration Statement No. 333-10471, filed with the Securities and
Exchange Commission on August 20, 1996.
4. Incorporated by reference into this document from the Exhibits to the
Company's quarterly report on Form 10-Q, Commission File No. 0-28886, filed
with the Securities and Exchange Commission on August 13, 1999.
5. Incorporated by reference into this document from the Exhibits to the
Company's quarterly report on Form 10-Q, Commission File No. 0-28886, filed
with the Securities and Exchange Commission on November 12, 1999.
6. Incorporated by reference into this document from the Exhibits filed with
the Form 10-K and any amendments thereto, Commission File No. 0-28886,
filed with the Securities and Exchange Commission on March 31, 1999.
7. 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.
8. Incorporated by reference into this document from the Exhibits to T R
Financial Corp.'s Annual Report on Form 10-K for fiscal year 1993,
Commission File No. 0-21386, filed with the Securities and Exchange
Commission on March 30, 1994.
9. Incorporated by reference into this document from the Exhibits to T R
Financial Corp.'s Annual Report on Form 10-K for fiscal year 1995,
Commission File No. 0-21386,. Filed with the Securities and Exchange
Commission on March 27, 1996 and as amended as of March 29, 1996.
10. Incorporated by reference to the Exhibits to T R Financial Corp.'s
definitive Proxy Statement for its 1997 Annual Meeting of stockholders,
Commission File No. 0-21386, filed with the Securities and Exchange
Commission on March 19, 1997.
58
<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 30, 2000
------------------------------------------ --------------
Joseph L. Mancino, Vice 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:
NAME TITLE DATE
- ---- ----- -----
/s/ Joseph L. Mancino Vice Chairman of the Board, March 30, 2000
- --------------------- President,& Chief Executive Officer --------------
Joseph L. Mancino
/s/ John M. Tsimbinos Chairman of the Board March 30, 2000
- --------------------- --------------
John M. Tsimbinos
/s/ John R. Bransfield Vice Chairman of the Board March 30, 2000
- ---------------------- --------------
John R. Bransfield
/s/ Michael P. Puorro Treasurer & Chief Financial Officer March 30, 2000
- --------------------- --------------
Michael P. Puorro
/s/ A. Gordon Nutt Director March 30, 2000
- ------------------- --------------
A. Gordon Nutt
/s/ Thomas J. Calabrese, Jr. Director March 30, 2000
- ---------------------------- --------------
Thomas J. Calabrese, Jr.
/s/ Maureen E. Clancy Director March 30, 2000
- --------------------- --------------
Maureen E. Clancy
/s/ Thomas A. Doherty Director March 30, 2000
- --------------------- --------------
Thomas A. Doherty
/s/ Robert G. Freese Director March 30, 2000
- -------------------- --------------
Robert G. Freese
/s/ Leonard Genovese Director March 30, 2000
- -------------------- --------------
Leonard Genovese
59
<PAGE>
SIGNATURES (Continued)
NAME TITLE DATE
- ---- ----- -----
/s/ Dr. Edwin W. Martin, Jr. Director March 30, 2000
- ---------------------------- --------------
Dr. Edwin W. Martin, Jr.
/s/ Victor C. McCuaig Director March 30, 2000
- --------------------- --------------
Victor C. McCuaig
/s/ James E. Swiggett Director March 30, 2000
- --------------------- --------------
James E. Swiggett
/s/ Spiros J. Voutsinas Director March 30, 2000
- ----------------------- --------------
Spiros J. Voutsinas
/s/ Richard C. Webel Director March 30, 2000
- -------------------- --------------
Richard C. Webel
60
<PAGE>
EXHIBIT 13.0
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. On February 16, 1999, T R Financial Corp. was
merged with and into the Company. The merger was accounted for as a pooling-of-
interests. The financial results presented have been restated to include T R
Financial Corp. See Note 2 to "Notes to Consolidated Financial Statements."
<TABLE>
<CAPTION>
At December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $7,725,183 $7,799,719 $7,429,374 $6,877,580 $4,502,893
Money market investments 30,800 38,079 75 1,114,240 10,000
Debt securities, net (1):
Held-to-maturity - 26,965 44,022 55,562 100,722
Available-for-sale 340,655 349,778 487,711 633,819 554,360
Equity securities (1):
Available-for-sale 388,546 445,584 298,968 190,523 129,125
Mortgage-backed and mortgage related
securities, net (1):
Held-to-maturity - 1,250,266 1,377,401 1,231,932 1,104,044
Available-for-sale 2,801,284 1,795,833 2,024,729 1,263,812 640,327
Loans held-for-sale, net 62,852 81,725 17,014 16,783 20,180
Loans receivable held for investment, net (2) 3,808,307 3,583,742 3,000,539 2,188,053 1,772,544
Deposits 4,045,612 4,218,982 4,144,598 4,299,048 3,367,286
Roslyn Bancorp, Inc. non-depository
stock subscriptions - - - 1,356,911 -
Borrowed funds 2,844,541 2,527,847 2,265,029 639,664 596,210
Stockholders' equity (3) 637,659 853,366 854,545 453,387 426,097
For the Years Ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Selected Operating Data:
Interest income $ 527,766 $ 546,744 $ 480,376 $ 358,877 $ 304,427
Interest expense 315,194 343,804 289,679 215,533 183,169
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for
loan losses 212,572 202,940 190,697 143,344 121,258
Provision for loan losses - 1,500 1,400 3,400 3,650
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 212,572 201,440 189,297 139,944 117,608
Non-interest income (4) 26,888 35,696 21,353 19,665 16,238
Non-interest expense (4) (5) 171,941 90,191 103,219 76,847 68,883
- ------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and
extraordinary item 67,519 146,945 107,431 82,762 64,963
Provision for income taxes 43,657 51,402 39,313 31,613 25,320
- ------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 23,862 95,543 68,118 51,149 39,643
Extraordinary item, net of tax - prepayment penalty
on debt extinguishment (4,236) - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 19,626 $ 95,543 $ 68,118 $ 51,149 $ 39,643
==============================================================================================================================
Basic earnings per share $ 0.27 $ 1.32 $ 0.92 N/A N/A
==============================================================================================================================
Diluted earnings per share $ 0.27 $ 1.29 $ 0.89 N/A N/A
==============================================================================================================================
</TABLE>
(Continued on next page)
1
<PAGE>
Selected Consolidated Financial and Other Data of the Company
(Continued)
<TABLE>
<CAPTION>
At December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data (6):
Performance Ratios Excluding Merger Related Items and
Special Charges (7) (8):
Return on average assets 1.39% 1.22% 1.12% 1.01% 0.92%
Return on average stockholders' equity 13.89 11.20 9.13 (15) 12.17 9.70
Average stockholders' equity to average assets 9.97 10.90 12.31 8.31 9.51
Stockholders' equity to total assets 8.25 10.94 11.50 6.59 9.46
Net interest rate spread (9) 2.27 2.07 2.27 2.50 2.43
Net interest margin (10) 2.82 2.66 2.92 2.92 2.91
Average interest-earning assets to average
interest-bearing liabilities 113.23 113.18 114.77 109.54 111.08
Operating expenses to average assets (4) 0.99 1.15 1.34 1.51 1.60
Net interest income to operating expenses (4) 278.61 226.19 211.79 187.68 176.72
Efficiency ratio (4) (11) 32.46 40.79 44.17 48.55 51.90
Dividend payout ratio 190.74 58.91 51.12 - -
Cash Basis Performance Ratios Excluding Merger
Related Items and Special Charges (7) (8) (12):
Return on average assets 1.50% 1.43% 1.45% 1.10% 1.01%
Return on average stockholders' equity 15.07 13.15 11.76 (16) 13.21 10.65
Operating expenses to average assets (4) 0.88 0.94 1.10 1.43 1.51
Net interest income to operating expenses (4) 313.82 276.01 257.43 197.85 186.58
Efficiency ratio (4) (11) 28.82 33.43 36.34 46.05 49.16
Asset Quality Ratios and Data:
Total non-performing loans (13) $18,963 $22,074 $20,225 $21,369 $30,875
Real estate owned, net - 1,176 1,197 4,962 12,594
Total non-performing assets (14) 18,963 23,250 21,422 26,331 43,469
Non-performing loans as a percent of loans (13) 0.49% 0.61% 0.67% 0.96% 1.71%
Non-performing assets as a percent of total assets (14) 0.25 0.30 0.29 0.38 0.97
Allowance for loan losses as a percent of loans (2) 1.04 1.11 1.28 1.69 2.02
Allowance for loan losses as a percent
of total non-performing loans (2) (13) 211.75 182.15 192.56 176.38 118.60
Other Data:
Number of full service customer facilities 25 25 23 23 21
Number of mortgage origination offices 11 14 11 8 6
</TABLE>
(footnotes on next page)
2
<PAGE>
(1) Includes securities having a fair value of $949.3 million that were
transferred from held-to-maturity to available-for-sale in 1995, pursuant
to a Financial Accounting Standards Board (FASB) interpretation of the
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Also in 1995,
securities having an amortized cost of $105.5 million were transferred
from available-for-sale to held-to-maturity. In 1999, securities having an
amortized cost of $1.27 billion were transferred from held-to-maturity to
available-for-sale.
(2) All loans receivable held for investment are presented net of the
allowance for loan losses which, at December 31, 1999, 1998, 1997, 1996,
and 1995 were $40.2 million, $40.2 million, $38.9 million, $37.7 million
and $36.6 million, respectively.
(3) The amounts prior to December 31, 1997 represent retained earnings of The
Roslyn Savings Bank and stockholders' equity of T R Financial Corp.
(4) Certain reclassifications were made to the 1998, 1997, 1996 and 1995
amounts to conform to the 1999 presentation.
(5) 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 the Bank's mortgage banking subsidiary. Included in 1999 is
$89.2 million of merger related costs and a $5.9 million restructuring
charge.
(6) Asset quality ratios are end of year ratios, with the exception of all
ratios that are based on average 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) Excludes, net of tax, merger related costs associated with acquisition of
T R Financial Corp., a restructuring charge in connection with an early
retirement program for Roslyn Savings Bank employees, and extraordinary
charges related to financial liability repositioning.
(9) 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 5% to 25% of the interest paid on savings and NOW
accounts. Prior to 1999, such payment was not made to T R Financial
accounts.
(10) 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 5%
to 25% of the interest paid on savings and NOW accounts. Prior to 1999,
such payment was not made to T R Financial accounts.
(11) 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, adjusted by securities gains or losses, net real
estate operations activity and servicing impairment provisions.
(12) Excluding non-cash charges related to the establishment of The Roslyn
Savings Foundation, goodwill amortization and amortization relating to
certain employee stock benefit plans.
(13) 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.
(14) Non-performing assets consist of non-performing loans and real estate
owned, net.
(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 9.30%.
(16) The ratio shown assumes that the conversion was completed on January 1,
1997. The actual cash basis return on average stockholders' equity based
on the January 10, 1997 conversion date was 11.98%.
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 communities. 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 (the 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.
After the close of business on February 16, 1999, T R Financial Corp., a
Delaware company, merged with and into the Company and T R Financial Corp.'s
subsidiary, Roosevelt Savings Bank, a New York State chartered stock savings
bank, merged with and into the Bank (the Merger). All subsidiaries of Roosevelt
Savings Bank became subsidiaries of the Bank. The acquisition was accounted for
as a pooling-of-interests, and accordingly, all historical financial information
for the Company has been restated to include T R Financial Corp.'s historical
information for the earliest period presented. Previously reported balances of
T R Financial Corp. have been reclassified to conform to the Company's
presentation and restated to give effect to the Merger. When necessary, certain
reclassifications have been made to prior period amounts to conform to the
current period presentation.
Pursuant to the merger agreement, each share of T R Financial Corp. common stock
was converted into the Company's stock at a fixed exchange ratio of 2.05 shares
of Roslyn Bancorp, Inc. common stock for each share of T R Financial Corp. held.
As a result, 17,347,768 shares of T R Financial Corp. common stock were
exchanged for 35,528,785 shares of the Company's common stock and a total of
1,746,880 T R Financial stock options were converted into options to purchase a
maximum of 3,581,103 shares of the Company's common stock at exercise prices
ranging from $2.20 to $17.32 depending on the exercise price of the underlying
T R Financial stock option. Additionally under the agreement, five former
officers and directors of T R Financial Corp. joined the Boards of Directors of
the Company and the Bank.
The Company conducts business primarily through its ownership of the Bank and
its subsidiaries. The Bank operates its 25 full service banking locations in
Kings, Queens, Nassau and Suffolk Counties in New York and 11 mortgage
origination offices of Roslyn National Mortgage Corp. (RNMC), a wholly-owned
subsidiary of the Bank, in New York, New Jersey, Delaware, Pennsylvania,
Virginia, Maryland, Tennessee and Alabama. On August 1, 1995, the Bank acquired
through RNMC (formerly Residential First, Inc. (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 the New York and New Jersey counties
4
<PAGE>
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.
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 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.
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 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 is 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. See Note 14 of "Notes to Consolidated Financial Statements" for
information regarding Awards made 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 established 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, were fully accrued at December 31, 1997 by the
Company and totaled $4.7 million. The expense is included in non-interest
expense in the Company's consolidated statement of income for the year ended
December 31, 1997. In the settlement agreement, the Company denied 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
The Bank's operating strategy continues to focus on the origination of mortgage
loans and the efficient use of personnel and technological resources. The Bank
has reduced its previous emphasis on investing in mortgage-backed and mortgage
related securities, in favor of investing in better yielding one- to four-family
loans during 1999. The increase in the portfolio also relates to the Bank's
continued emphasis on mortgage banking activities as a source for generating
one- to four-family loans for its portfolio and for sale into the secondary
market. The Company's current operating strategy consists primarily of:
(i) building its loan portfolio by retaining a higher percentage 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 and the origination of consumer
loans; (ii) investing funds not utilized for loan originations and purchases in
5
<PAGE>
shorter-term debt securities and mortgage-backed and mortgage related securities
and preferred stock of corporate issuers; (iii) increasing fee income and
building the loan servicing portfolio through its mortgage banking operations
which sells, generally on a servicing retained basis, a portion of longer-term
fixed-rate and adjustable-rate one- to four-family mortgage loans originated;
(iv) attracting and retaining core deposit accounts by offering competitive
deposit products and opening new branches; and (v) maintaining a lower expense
ratio by efficiently utilizing personnel, branch facilities and alternative
delivery channels (telephone banking, internet, and ATMs) 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 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 of investments and loans and the effect that changes in interest
rates will have on the Company's portfolio and exposure limits.
Currently, the Company has utilized the following strategies to manage interest
rate risk: (i) increasing low-cost core deposits through expanded product
offerings and its branch network while reducing the portfolio of high-cost time
deposits; (ii) investing in short-term fixed-rate and adjustable-rate mortgage
loans which may generally bear lower yields as compared to longer-term
investments, but reduces the Company's exposure to increases in market interest
rates; and (iii) utilization of borrowings to fund and sustain asset growth
while maintaining market spreads. 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 deposits that mature in one
year or less, which, at December 31, 1999, totaled $1.88 billion, or 27.9%, 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, 1999, the Company's one-year gap position was negative 22.72%. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. 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. Accordingly,
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
6
<PAGE>
tend to positively affect the growth of its net interest income. The Company's
December 31, 1999 cumulative one-year gap position reflects the classification
of available-for-sale securities within repricing periods based on their
contractual maturities adjusted for estimated prepayments, if any. If those
securities at December 31, 1999 were classified within the one-year maturity or
repricing category, net interest-earning assets would have exceeded interest-
bearing liabilities maturing or repricing within the same period by $984.9
million, representing a positive cumulative one-year gap position of 12.69%. The
available-for-sale securities may or may not be sold, subject to management's
discretion. 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.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which are
anticipated by the 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 Gap Table
sets forth an approximation of the projected repricing of assets and liabilities
at December 31, 1999, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a one year period and
subsequent annual time intervals. Prepayment assumptions ranging from 6.00% to
18.00% 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 11.00% and 20.00% annually. Savings accounts
were assumed to decay at 21.00%, 5.00%, 5.00%, 5.00%, 5.00% and 59.00%, 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.
In addition to the foregoing, callable features of certain assets and
liabilities may cause actual experience to vary from that indicated. Included
in the Gap Table are $345.5 million of callable securities at their estimated
fair value, classified according to their maturity dates, which are within the
over five years maturity category. Of such securities, $198.4 million are
callable with in one year and the remaining are callable over five years. Also
included in the Gap Table are $836.3 million of callable borrowings, classified
according to their maturity dates, which are primarily due within three years.
Of such borrowings, $576.3 million are callable within one year.
The Company's negative gap position primarily reflects the effect of the
callable borrowings acquired from T R Financial Corp. as part of the Merger.
These borrowings are included in the "Up to One Year" category of the Gap Table
below. The majority of these borrowings were "called" during the fourth quarter
of 1999 and were rolled-over into other short-term borrowings with maturities
less than one year. Management's decision to utilize short-term borrowings as
the calls occurred was based upon the interest rate environment experienced
during the fourth quarter of 1999.
7
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------------------------------------------------------------------------
One Two Three Four Over
Up to to Two to Three to Four to Five Five
One Year Years Years Years Years Years
------------- ------------ ------------- --------------- ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets (1):
Federal funds sold $ 30,800 $ - $ - $ - $ - $ -
Debt and equity
securities, net (2) 27,303 41,997 1,888 333 - 685,709
Mortgage-backed and
mortgage related
securities, net (2) 791,455 585,855 400,819 277,091 193,963 552,101
Real estate loans,
net (3) (4) 919,469 345,614 399,430 337,297 328,386 1,458,712
Consumer loans, net (4) 44,922 31,296 26,720 505 - -
------------ ------------ ------------ ------------- ---------- ------------
Total interest-earning
Assets 1,813,949 1,004,762 828,857 615,226 522,349 2,696,522
------------ ------------ ------------ ------------- ---------- ------------
Interest-bearing Liabilities:
Money market accounts 45,752 11,438 11,438 11,438 11,438 137,256
Savings accounts 192,227 45,768 45,768 45,768 45,768 540,070
Super NOW and NOW
Accounts 28,927 7,232 7,232 7,232 7,232 86,779
Certificates of deposit 1,879,132 453,453 153,703 43,177 55,008 20,981
Borrowed funds 1,422,782 553,481 452,800 95,000 100,000 220,478
------------ ------------ ------------ ------------- ---------- ------------
Total interest-bearing
Liabilities 3,568,820 1,071,372 670,941 202,615 219,446 1,005,564
------------ ------------ ------------ ------------- ---------- ------------
Interest sensitivity
gap (5) $(1,754,871) $ (66,610) $ 157,916 $ 412,611 $ 302,903 $1,690,958
============ ============ ============ ============= ========== ============
Cumulative interest
sensitivity gap $(1,754,871) $(1,821,481) $(1,663,565) $(1,250,954) $(948,051) $ 742,907
============ ============ ============ ============= ========== ============
Cumulative interest
sensitivity gap as a
percentage of
total assets (22.72)% (23.58)% (21.53)% (16.19)% (12.27)% 9.62%
Cumulative net interest-
earning assets as a
percentage of cumulative
interest-bearing liabilities 50.83% 60.75% 68.68% 77.31% 83.46% 111.02%
<CAPTION>
At December 31, 1999
--------------------
Total
--------------
<S> <C>
Interest-earning Assets (1):
Federal funds sold $ 30,800
Debt and equity
securities, net (2) 757,230
Mortgage-backed and
mortgage related
securities, net (2) 2,801,284
Real estate loans,
net (3) (4) 3,788,908
Consumer loans, net (4) 103,443
-----------
Total interest-earning
Assets 7,481,665
-----------
Interest-bearing Liabilities:
Money market accounts 228,760
Savings accounts 915,369
Super NOW and NOW
Accounts 144,634
Certificates of deposit 2,605,454
Borrowed funds 2,844,541
-----------
Total interest-bearing
Liabilities 6,738,758
-----------
Interest sensitivity
gap (5) $ 742,907
===========
</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, equity, mortgage-backed and mortgage related securities, net are shown
at their respective carrying values. Included in debt and equity
securities, net is $28.0 million of Federal Home Loan Bank (FHLB) stock
included in the "Over Five Years" category.
(3) For the purpose of the gap analysis, the allowance for loan losses and non-
accrual loans have been excluded.
(4) Loans held-for-sale, net 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
preceding 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 Gap 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 and
money market which, subject to certain regulatory exceptions, 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 assumptions 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, 1999, as calculated by the Company.
<TABLE>
<CAPTION>
Change in
Interest Rates NPV as Percentage of Portfolio
in Basis Net Portfolio Value Value of Assets
Points ------------------------------------------------------------- ------------------------------------
(Rate Shock) Amount $ Change % Change NPV Ratio % Change (1)
- --------------- ----------------- ----------------- ---------------- -------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
200 $177,073 $(413,677) (70.03)% 2.62% (68.55)%
100 370,050 (220,700) (37.36) 5.36 (35.66)
Static 590,750 - - 8.34 -
(100) 704,570 113,820 19.27 9.80 17.61
(200) 762,005 171,255 28.99 10.40 24.83
</TABLE>
(1) Based on the portfolio value of the Company's assets assuming no change in
interest rates.
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
9
<PAGE>
point in time, such measurements are not intended to and do not provide a
precise forecast of the effect of changes in market interest rates on the
Company's net interest income and will differ from actual results.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the 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,
------------------------------------------
1999
------------------------------------------
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 $ 33,522 $ 1,647 4.91%
Debt and equity securities, net (2) 759,118 51,577 6.79
Mortgage-backed and
mortgage related securities, net (2) 3,034,138 199,553 6.58
Real estate loans, net (3) 3,593,731 266,818 7.42
Consumer loans, net 107,350 8,171 7.61
---------- ----------
Total interest-earning assets 7,527,859 527,766 7.01
----------
Non-interest-earning assets 157,523
----------
Total assets $7,685,382
==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Money market accounts $ 171,720 6,567 3.82
Savings accounts (4) (5) 992,385 21,791 2.20
Super NOW and NOW accounts (5) 150,247 3,208 2.14
Certificates of deposit 2,781,650 141,882 5.10
---------- ----------
Total deposits 4,096,002 173,448 4.23
Borrowed funds 2,552,557 141,746 5.55
Non-depository stock subscriptions - - -
---------- ----------
Total interest-bearing liabilities 6,648,559 315,194 4.74
----------
Non-interest-bearing liabilities 270,456
----------
Total liabilities 6,919,015
Stockholders' equity 766,367
----------
Total liabilities and stockholders'
equity $7,685,382
==========
Net interest income/interest rate spread (6) $ 212,572 2.27%
========== ==========
Net interest margin (7) 2.82%
==========
Ratio of interest-earning assets to
interest-bearing liabilities 113.23%
==========
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1998
--------------------------------------
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 $ 32,536 $ 1,733 5.33%
Debt and equity securities, net (2) 902,213 56,611 6.27
Mortgage-backed and
mortgage related securities, net (2) 3,257,403 225,029 6.91
Real estate loans, net (3) 3,352,938 257,535 7.68
Consumer loans, net 77,455 5,836 7.53
----------- ----------
Total interest-earning assets $ 7,622,545 546,744 7.17
----------
Non-interest-earning assets 203,803
-----------
Total assets $ 7,826,348
===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Money market accounts $ 82,114 2,537 3.09
Savings accounts (4) (5) 1,071,426 28,498 2.66
Super NOW and NOW accounts (5) 159,950 4,568 2.86
Certificates of deposit 2,791,556 155,466 5.57
----------- ----------
Total deposits 4,105,046 191,069 4.65
Borrowed funds 2,629,871 152,735 5.81
Non-depository stock subscriptions - - -
----------- ----------
Total interest-bearing liabilities 6,734,917 343,804 5.10
----------
Non-interest-bearing liabilities 238,012
-----------
Total liabilities 6,972,929
Stockholders' equity 853,419
-----------
Total liabilities and stockholders'
equity $ 7,826,348
===========
Net interest income/interest rate spread (6) $ 202,940 2.07%
========== ========
Net interest margin (7) 2.66%
========
Ratio of interest-earning assets to
interest-bearing liabilities 113.18%
========
<CAPTION>
For the Years Ended December 31,
---------------------------------------
1997
--------------------------------------
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 $ 91,593 $ 5,072 5.54%
Debt and equity securities, net (2) 916,565 58,679 6.40
Mortgage-backed and
mortgage related securities, net (2) 2,939,853 214,374 7.29
Real estate loans, net (3) 2,494,898 195,918 7.85
Consumer loans, net 85,582 6,333 7.40
----------- ----------
Total interest-earning assets 6,528,491 480,376 7.36
----------
Non-interest-earning assets 186,580
-----------
Total assets $ 6,715,071
===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Money market accounts $ 70,733 1,816 2.57
Savings accounts (4) (5) 1,080,232 32,227 2.98
Super NOW and NOW accounts (5) 148,145 4,846 3.27
Certificates of deposit 2,801,963 159,447 5.69
----------- ----------
Total deposits 4,101,073 198,336 4.84
Borrowed funds 1,534,212 90,002 5.87
Non-depository stock subscriptions 52,903 1,341 2.53
----------- ----------
Total interest-bearing liabilities 5,688,188 289,679 5.09
----------
Non-interest-bearing liabilities 200,106
-----------
Total liabilities 5,888,294
Stockholders' equity 826,777
-----------
Total liabilities and stockholders'
equity $ 6,715,071
===========
Net interest income/interest rate spread (6) $ 190,697 2.27%
========== ==========
Net interest margin (7) 2.92%
==========
Ratio of interest-earning assets to
interest-bearing liabilities 114.77%
==========
</TABLE>
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Includes at amortized cost, securities available-for-sale, securities held-
to-maturity net, and in the case of debt and equity securities, net, FHLB
stock. Excludes net unrealized depreciation/appreciation in available-
for-sale securities.
(3) Amount is net of deferred loan fees, deferred mortgage interest, unamortized
discounts, and allowance for loan losses and includes loans held-for-sale,
net and non-performing loans.
(4) Savings accounts include mortgagors' escrow deposits.
(5) The average cost of savings and Super NOW and NOW accounts reflect the
payment of a special interest payment of approximately 5%, 15% and 25% for
the years ended December 31, 1999, 1998 and 1997, respectively, of interest
paid on savings and NOW accounts. Such payments resulted in additional cost
on savings accounts of 4 basis points, 18 basis points and 48 basis points
for the years ended December 31, 1999, 1998 and 1997, respectively, and
additional cost on NOW accounts of 2 basis points, 8 basis points and 18
basis points for the years ended December 31, 1999, 1998 and 1997,
respectively. Prior to 1999, such payments were not made to T R Financial
accounts.
(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, 1999 Year Ended December 31, 1998
Compared to Compared to
Year Ended December 31, 1998 Year Ended December 31, 1997
------------------------------------------ ----------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------------ ----------------------------------------
Volume Rate Net Volume Rate Net
------------ ----------- ---------- ------------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Federal funds sold, repurchase
agreements and short-term deposits $ 56 $ (142) $ (86) $ (3,154) $ (185) $ (3,339)
Debt and equity securities, net (10,535) 5,501 (5,034) (900) (1,168) (2,068)
Mortgage-backed and mortgage
related securities, net (14,988) (10,488) (25,476) 20,593 (9,938) 10,655
Real estate loans, net 17,342 (8,059) 9,283 65,758 (4,141) 61,617
Consumer loans, net 2,238 97 2,335 (610) 113 (497)
------------ ----------- --------- ----------- ----------- --------
Total interest-earning assets (5,887) (13,091) (18,978) 81,687 (15,319) 66,368
------------ ----------- --------- ----------- ----------- --------
Interest-bearing liabilities:
Money market accounts 3,309 721 4,030 319 402 721
Savings accounts (2) (1,993) (4,714) (6,707) (263) (3,466) (3,729)
Super NOW and NOW accounts (272) (1,088) (1,360) 485 (763) (278)
Certificates of deposit (594) (12,990) (13,584) (596) (3,385) (3,981)
Non-depository stock subscriptions - - - (1,341) - (1,341)
Borrowed funds (4,411) (6,578) (10,989) 63,644 (911) 62,733
------------ ----------- --------- ----------- ----------- --------
Total interest-bearing liabilities (3,961) (24,649) (28,610) 62,248 (8,123) 54,125
------------ ----------- --------- ----------- ----------- --------
Net change in net interest income $ (1,926) $ 11,558 $ 9,632 $ 19,439 $ (7,196) $ 12,243
============ =========== ========= =========== =========== ========
</TABLE>
(1) Includes assets available-for-sale.
(2) Includes mortgagors' escrow deposits.
12
<PAGE>
Comparison of Financial Condition For the Years Ended December 31, 1999 and
December 31, 1998
General
Total assets at December 31, 1999 were $7.73 billion, a decrease of $74.5
million, or 0.96%, from $7.80 billion at December 31, 1998. The decrease in
total assets is primarily due to decreases in debt, equity, mortgage-backed and
mortgage related securities offset by an increase in the loans held for
investment portfolio.
Mortgage-backed and mortgage related securities available-for-sale, net
increased by $1.00 billion, or 56.0%, from $1.80 billion at December 31, 1998 to
$2.80 billion at December 31, 1999. Debt and equity securities available-for-
sale, net at December 31, 1999 totaled $729.2 million, a decrease of $66.2
million, or 8.3%, compared to $795.4 million at December 31, 1998. Total
securities held-to-maturity, net decreased $1.28 billion, or 100.0%, to zero at
December 31, 1999 from $1.28 billion at December 31, 1998. Changes in the
securities portfolios reflect the effect of the portfolio restructure that
occurred subsequent to the February 16, 1999 merger between T R Financial Corp.
and Roslyn Bancorp, Inc. Additionally contributing to the changes were
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, 1999,
the securities available-for-sale portfolio had a net unrealized loss of $189.4
million as compared to a net unrealized gain of $26.0 million at December 31,
1998.
Loans held for investment, net at December 31, 1999 were $3.81 billion, an
increase of $224.6 million, or 6.3%, from $3.58 billion at December 31, 1998,
primarily due to the origination of $1.70 billion in commercial real estate,
multi-family, construction and development, home equity and one- to four-family
residential real estate loans.
Total liabilities at December 31, 1999 were $7.09 billion, an increase of $141.2
million, or 2.0%, from $6.95 billion at December 31, 1998. The overall increase
in total liabilities was principally due to a $316.7 million, or 12.5%, increase
in borrowed funds from $2.53 billion at December 31, 1998 to $2.84 billion at
December 31, 1999. Management has consistently applied its leveraging strategy
to utilize borrowings, primarily in the form of reverse-repurchase agreements
and Federal Home Loan Bank borrowings, to fund and sustain asset growth. The
increase in borrowed funds was partially offset by a decrease in total deposits.
Total deposits decreased $173.4 million, or 4.1%, from $4.22 billion at December
31, 1998 to $4.05 billion at December 31, 1999. The decrease in total deposits
resulted from management's continuing strategy of increasing core deposits and
decreasing its portfolio of high-cost time deposits. Certificates of deposit
decreased $230.1 million, or 8.1%, from $2.84 billion at December 31, 1998 to
$2.61 billion at December 31, 1999. Core deposits increased $56.8 million, or
4.1%, from $1.38 billion at December 31, 1998 to $1.44 billion at December 31,
1999.
Total stockholders' equity decreased $215.7 million, or 25.3%, to $637.7 million
at December 31, 1999 from $853.4 million at December 31, 1998. The decrease was
primarily due to dividends paid of $37.2 million for the year ended December 31,
1999, a $123.3 million decrease in net unrealized gain on securities available-
for-sale, net of tax, and was partially offset by income of $19.6 million for
the year ended December 31, 1999. The net income for the year ended December
31, 1999, was lowered due to the inclusion of the merger related costs
associated with the acquisition of T R Financial Corp. of $79.2 million, net of
tax, and the restructuring charge in connection with the early retirement
program for employees totaling $3.4 million, net of tax. Partially offsetting
the decreases were the amortization of unallocated and unearned shares of common
stock held by the Company's stock-related benefit plans of $22.0 million for the
year ended December 31, 1999, and the impact of stock option exercises.
13
<PAGE>
Comparison of Operating Results For the Years Ended December 31, 1999 and
December 31, 1998
General
The Company reported net income of $19.6 million for the year ended December 31,
1999, or basic and diluted earning per share of $0.27, as compared to net income
of $95.5 million, or basic and diluted earnings per share of $1.32 and $1.29,
respectively, for the year ended December 31, 1998. The year ended December 31,
1999 includes $79.2 million, net of tax, of merger related costs associated with
the acquisition and $3.4 million, net of tax, of restructuring charges relating
to the January 1999 early retirement program. Additionally, an extraordinary
item of $4.2 million, net of tax, was incurred during the year ended December
31, 1999, related to prepayment penalties incurred in recasting the Company's
borrowed fund position. The Company incurred these penalties in order to take
advantage of favorable market conditions, while increasing spreads and reducing
its exposure to interest rate risk, and thus restructure its securities and
borrowed funds position.
Interest Income
Interest income decreased to $527.8 million for the year ended December 31,
1999, a decrease of $18.9 million, or 3.5%, from $546.7 million for the prior
year. The decrease was attributable to a decrease in average interest-earning
assets to $7.53 billion for the year ended December 31, 1999, from $7.62 billion
for the prior year. The decrease in average interest-earning assets was
primarily attributable to a decrease of $223.3 million in the average balance of
mortgage-backed and mortgage related securities, net and a $143.1 million
decline in the average balance of debt and equity securities, net. These
increases were partially offset by a $240.8 million increase in average real
estate loans, net.
Interest income on mortgage-backed and mortgage related securities decreased
$25.4 million, or 11.3%, to $199.6 million for the year ended December 31, 1999,
from $225.0 million for the same period in 1998. The decrease was a result of a
$223.3 million reduction in the average balance of mortgage-backed and mortgage
related securities from $3.26 billion for the year ended December 31, 1998 to
$3.03 billion for the year ended December 31, 1999, due to management's strategy
of repositioning the balance sheet to assist in the Company's financial
liability restructuring. The decrease was also due to a 33 basis point decline
in the average yield on mortgage-backed and mortgage related securities from
6.91% for the year ended December 31, 1998 to 6.58% for the same period in 1999.
Interest income on debt and equity securities, net, decreased $5.0 million, or
8.9%, to $51.6 million for the year ended December 31, 1999 from $56.6 million
for the same period in 1998. The decrease was the result of a decline in the
average balance of debt and equity securities, net, offset by a 52 basis point
increase in the average yield on debt and equity securities, net, from 6.27% for
the year ended December 31, 1998 to 6.79% for the same period in 1999.
Interest income on real estate loans increased $9.3 million, or 3.6%, to $266.8
million for the year ended December 31, 1999, from $257.5 million for the same
period in 1998. The increase was a result of the growth in the average balance
of loans outstanding, primarily due to management's continued emphasis on the
origination of one- to four-family loans. The increase in interest income on
real estate loans for the year ended December 31, 1999, as compared to the same
period in 1998, was offset by a 26 basis point decrease in the average yield on
real estate loans, net, from 7.68% for the year ended December 31, 1998 to 7.42%
for the same period in 1999. The decline in the yield was principally due to
the concentration of lower yielding one- to four-family real estate and home
equity loans within the loan portfolio mix.
Interest income on consumer loans, which includes student loans, increased $2.4
million, or 40.0%, to $8.2 million for the year ended December 31, 1999, from
$5.8 million for the same period in 1998. The increase was a result of the
growth in the average balance of consumer and student loans outstanding and the
increase of 8 basis points in the average yield on consumer and student loans
from 7.53% for the year ended December 31, 1998 to 7.61% for the same period in
1999.
14
<PAGE>
Interest Expense
Interest expense for the year ended December 31, 1999, was $315.2 million,
compared to $343.8 million for the year ended December 31, 1998, a decrease of
$28.6 million, or 8.3%. The decrease was related to a $86.4 million, or 1.3%,
decrease in the average balance of interest-bearing liabilities from $6.73
billion in 1998 to $6.65 billion in 1999. This decrease reflects a $77.3
million decrease in the average balance of borrowed funds and a $9.0 million
decrease in the average balance of total interest-bearing deposits for the year
ended December 31, 1999 as compared to the prior year.
The decrease in interest-bearing deposits is primarily due to a decrease in
savings and Super NOW and NOW accounts, offset by an increase in the average
balance of higher yielding money market accounts. The increase in money market
accounts was achieved by introducing new deposit products and the growth in
deposits from recent de-novo branches. The effect of the lower average deposit
balance was coupled with a 42 basis point decrease in the average cost of
deposits from 4.65% for the year ended December 31, 1998, to 4.23% for the
corresponding 1999 period, resulted in a decrease of $17.6 million in interest
expense on deposits for the year ended December 31, 1999 as compared to the same
period in 1998.
The average balance of borrowed funds decreased $77.3 million, from $2.63
billion for the year ended December 31, 1998 to $2.55 billion for the year ended
December 31, 1999. This decrease, combined with a 26 basis point decrease in
the average cost of borrowings, resulted in a $11.0 million decrease in interest
expense on borrowed funds, from $152.7 million for the year ended December 31,
1998 to $141.7 million for the year ended December 31, 1999. The decrease in
borrowings is part of the Company's wholesale leveraging strategy.
Net Interest Income
Net interest income before provision for loan losses was $212.6 million for the
year ended December 31, 1999, an increase of $9.7 million, or 4.7%, from $202.9
million for the year ended December 31, 1998. The increase in net interest
income was attributable to increases in the net interest rate spread and margin
of 20 and 16 basis points, respectively, for the year ended December 31, 1999 as
compared to the year ended December 31, 1998. The increase in net interest
income was accomplished despite a decrease in average interest-earning assets of
$94.7 million for the year ended December 31, 1999 as compared to the
corresponding 1998 period. The interest rate spread and margin for the year
ended December 31, 1999 was 2.27% and 2.82%, respectively, and 2.07% and 2.66%,
respectively, for the same period in 1998. The increase in these ratios is
primarily reflective of the Company's balance sheet repositioning and a decline
in deposit costs as certificates renewed at lower rates during most of 1999,
coupled with an overall increase in lower cost core accounts.
Provision for Loan Losses
The Company had no provision for loan losses for the year ended December 31,
1999 as compared to $1.5 million for the year ended December 31, 1998. The lack
of a provision for loan losses for the year ended December 31, 1999, reflects
management's qualitative and quantitative assessment of the loan portfolio, net
charge-offs and collection of delinquent loans. At December 31, 1999 and 1998
the allowance for loan losses amounted to $40.2 million, and the ratio of such
allowance to total non-performing loans was 211.75% and 182.15%, respectively.
Included in non-performing loans at December 31, 1999 were $10.5 million of
Federal Housing Administration (FHA) and Veterans Administration (VA) government
guaranteed loans, which are backed by the FHA and VA, respectively. Excluding
these loans, non-performing assets totaled $8.5 million at December 31, 1999,
resulting in a non-performing loan coverage ratio of 473.9%. Management assesses
the level and adequacy of the allowance for loan losses based on an evaluation
of known and inherent risks in the loan portfolio and upon continuing analysis
of the factors underlying the quality of the loan portfolio.
15
<PAGE>
The Company's formalized process for assessing the adequacy of the allowance for
loan losses, and the resultant need, if any, for periodic provisions to the
allowance charged to income, entails both individual loan analyses and loan pool
analyses. The individual loan analyses are periodically performed on
individually significant loans, or when otherwise deemed necessary, and
primarily encompasses multi-family, commercial real estate and construction and
development loans. The result of these individual analyses is the allocation of
the overall allowance to specific allowances for individual loans, for both
loans considered impaired and non-impaired.
The loan pool analyses are performed on the balance of the portfolio, primarily
the one- to four-family residential and consumer loans. The pools consist of
aggregations of homogeneous loans having similar credit risk characteristics.
Examples of pools defined by the Company for this purpose are Company-
originated, fixed-rate residential loans; Company-originated, adjustable-rate
residential loans; purchased, fixed-rate residential loans; outside-serviced
residential loans; residential second mortgage loans; participations in
conventional first mortgages; residential construction loans; commercial
construction loans, etc. For each such defined pool, there is a set of sub-
pools based upon delinquency status: current, 30-59 days, 60-89 days, 90-119
days and 120+ days (the latter two sub-pools are considered to be "classified"
by the Company). For each sub-pool, the Company has developed a range of
allowance necessary to adequately provide for probable losses inherent in that
pool of loans. These ranges are based upon a number of factors including the
risk characteristics of the pool, actual loss and migration experience, expected
loss and migration experience considering current economic conditions, industry
norms and the relative seasoning of the pool. The ranges of allowance developed
by the Company are applied to the outstanding principal balance of the loans in
each sub-pool; as a result, further specific and general allocations of the
overall allowance are made (the allocations for the classified sub-pools are
considered specific and the allocations for the non-classified sub-pools are
considered general).
The Company's overall allowance also contains an unallocated amount which is
supplemental to the results of the aforementioned process and takes into
consideration known and expected trends that are likely to affect the
creditworthiness of the loan portfolio as a whole such as, national and local
economic conditions, unemployment conditions in the local lending area and the
timeliness of court foreclosures proceedings in the Company's local and other
lending areas.
Between December 31, 1999 and 1998, the loan portfolio, net of unearned income,
increased by $205.6 million to $3.91 billion from $3.71 billion. At those
dates, one- to four-family residential first mortgage loans were $2.96 billion
and $2.81 billion, respectively, or 75.8% and 75.8%, respectively, of loans, net
of unearned income. The relatively riskier multi-family, commercial real
estate, construction and development, and home equity and second mortgage loans
aggregated $825.6 million and $785.3 million, respectively, at those dates, or
21.1% and 21.2%, respectively, of loans, net of unearned income. Consumer and
student loans and automobile leases, net amounted to $103.5 million and $97.7
million, or 2.6% and 2.6%, of loans, net of unearned income at December 31, 1999
and December 31, 1998, respectively. Non-performing loans at December 31, 1999
and 1998 were $19.0 million and $22.1 million, respectively, of which $2.4
million and $2.8 million, respectively, were commercial real estate loans. The
allowance for loan losses as a percent of loans was 1.04% and 1.11% at December
31, 1999 and 1998, respectively.
The quantitative information cited in the above paragraph indicates a continuing
trend over the last several years: (1) an increase in absolute dollars in the
relatively less risky one- to four-family residential first mortgage loans; (2)
an increase in absolute dollars, and a slight decrease in relative dollars, in
the relatively riskier loans (as previously defined); and (3) a decrease in
absolute dollars in non-performing loans. The application of the Company's
formalized process for assessing the adequacy of the allowance for loan losses
to the loan portfolio, undergoing the changes cited during the last several
years, has resulted in a relatively flat absolute dollar level of the allowance
for loan losses. Management continues to believe the reported allowance for
loan losses is both appropriate in the Company's current operating environment
and adequate to provide for probable losses inherent in the loan portfolio.
16
<PAGE>
Non-interest Income
Non-interest income decreased $8.8 million, or 24.7%, to $26.9 million for the
year ended December 31, 1999 as compared to $35.7 million for the prior year.
The decrease was primarily the result of a $15.4 million decrease in net gains
on sales of securities and a $846,000 decrease in fees and service charges.
These decreases were partially offset by a $6.9 million increase in mortgage
banking operations for the year ended December 31, 1999 as compared to the 1998
comparable period. The decrease in net gains on securities was due to
management's investment strategy of periodically recognizing profits from its
available-for-sale securities portfolio during favorable market conditions. The
increase in mortgage banking operations income, which includes gains from the
sale of loans, was primarily due to an increased level of loan production,
favorable market conditions in the secondary market and the recently enacted
loan securitization program. Included in other non-interest income for the year
ended December 31, 1999 is a $1.6 million gain from the sale of an excess
operating facility, a previously consolidated branch building, and an excess
parcel of Bank property. These gains further allowed management to continue its
ability to restructure its mortgage-backed securities portfolio without
compromising net income.
Non-interest Expense
Non-interest expense totaled $171.9 million for the year ended December 31,
1999, as compared to $90.2 million for the year ended December 31, 1998, an
increase of $81.7 million, or 90.6%. The increase in non-interest expense was
primarily attributable to merger related costs associated with the acquisition
of T R Financial Corp. totaling $89.2 million and a restructuring charge in
connection with an early retirement program for employees totaling $5.9 million
during the first quarter of 1999. The aforementioned merger related costs were
comprised of $16.9 million of transaction costs, $39.9 million of severance and
other compensation costs, $24.6 million of ESOP amortization costs and $7.8
million of costs associated with combining operations.
General and administrative expenses totaled $76.3 million for the year ended
December 31, 1999, as compared to $89.7 million for the comparable period in
1998, a decrease of $13.4 million, or 15.0%. The decrease primarily reflects
cost savings achieved in connection with the acquisition of T R Financial Corp.,
principally relating to reductions in compensation and certain employee benefit
plan expenses and the elimination of other redundant charges. The decrease in
general and administrative expenses also reflects a decrease in advertising and
promotion expense for the year ended December 31, 1999 of $695,000 due to the
consolidation of advertising campaigns between the former T R Financial Corp.
and Roslyn Bancorp, Inc. Partially offsetting these decreases is an increase of
$659,000 in deposit insurance premiums and an increase of $2.8 million in other
non-interest expenses.
Income Taxes
Total income tax expense decreased $7.7 million, or 15.1% from $51.4 million
recorded during the year ended December 31, 1998 to $43.7 million during the
year ended December 31, 1999. As a percentage of income before provision for
income taxes, the provision for income taxes increased from 34.98% in 1998 to
64.66% in 1999. The effective tax rate for the year ended December 31, 1999 has
been negatively impacted by the merger related costs, which were deemed to be
non-taxable.
17
<PAGE>
Comparison of Operating Results For the Years Ended December 31, 1998 and
December 31, 1997
General
The Company reported net income of $95.5 million for the year ended December 31,
1998, or basic and diluted earnings per share of $1.32 and $1.29, respectively,
as compared to net income of $68.1 million for the year ended December 31, 1997,
or basic and diluted earnings per share of $0.92 and $0.89, respectively. 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 the Bank's mortgage banking subsidiary. The Company's net income,
excluding such charges, would have been $78.1 million, or $1.06 per basic share
and $1.02 per diluted share, for the year ended December 31, 1997.
Interest Income
Interest income increased to $546.7 million for the year ended December 31,
1998, an increase of $66.3 million, or 13.8%, from $480.4 million for the prior
year. The increase was attributable to the growth in average interest-earning
assets to $7.62 billion for the year ended December 31, 1998, from $6.53 billion
for the prior year. The increase in average interest-earning assets was
principally attributable to growth of $317.6 million in average mortgage-backed
and mortgage related securities, net and $858.0 million growth in average real
estate loans, net. Interest income on mortgage-backed and mortgage related
securities increased $10.6 million, from $214.4 million for the year ended
December 31, 1997 to $225.0 million for the same period in 1998, primarily due
to an increase of 10.8% in the average balance of these securities.
Interest income on real estate loans increased $61.6 million, or 31.5%, to
$257.5 million for the year ended December 31, 1998, from $195.9 million for the
same period in 1997. 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 residential real estate loans. The increase was partially offset by
a 17 basis point decrease in the average yield on real estate loans, net from
7.85% for the year ended December 31, 1997 to 7.68% at December 31, 1998,
principally due to an increased concentration in relatively lower yielding one-
to four-family residential real estate loans within the loan portfolio mix.
Interest Expense
Interest expense for the year ended December 31, 1998, was $343.8 million,
compared to $289.7 million for the year ended December 31, 1997, an increase of
$54.1 million, or 18.7%. The increase is related to a $1.04 billion, or 18.4%,
increase in the average balance of interest-bearing liabilities from $5.69
billion in 1997 to $6.73 billion in 1998. This increase primarily reflects a
$1.10 billion increase in the average balance of borrowed funds. As a result of
this increase, interest expense on borrowed funds increased $62.7 million, from
$90.0 million for the year ended December 31, 1997 to $152.7 million for the
year ended December 31, 1998. Borrowed funds, principally reverse-repurchase
agreements, have been reinvested in 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.
Partially off-setting the increase in interest expense on borrowed funds was a
$7.2 million decrease in interest expense on interest-bearing deposits from
$198.3 million for the year ended December 31, 1997 to $191.1 million for the
1998 comparable period. This decrease reflects the change in the deposit mix
from higher yielding certificates of deposits to lower costing money market,
Super NOW and NOW accounts. Additionally, there was a $52.9 million decrease in
the average balance of non-depository stock subscriptions during the 1998
period.
18
<PAGE>
Net Interest Income
Net interest income before provision for loan losses increased $12.2 million, or
6.4%, to $202.9 million for the year ended December 31, 1998, from $190.7
million for the same period in 1997. This increase is the result, in part, of a
$1.09 billion increase in the average balance of interest-earning assets to
$7.62 billion, offset by a $1.05 billion increase in the average balance of
interest-bearing liabilities to $6.73 billion for the year ended December 31,
1998, as compared to the comparable prior year period. As a result of these
increases in average balances and a related decrease in the yield associated
with the earning assets, the net interest rate spread and margin for the year
ended December 31, 1998 decreased to 2.07% and 2.66%, respectively from 2.27%
and 2.92%, respectively, for the same period in 1997.
Provision For Loan Losses
The provision for loan losses totaled $1.5 million for the year ended December
31, 1998, as compared to $1.4 million for the year ended December 31, 1997. The
provision for loan losses for the year ended December 31, 1998 reflects
management's qualitative assessment of the loan portfolio, net charge-offs and
collection of delinquent loans. The increase resulted from management's
assessment of the loan portfolio, the level of the Company's allowance for loan
losses and its assessment of the local economy and market conditions. At
December 31, 1998 and 1997, the allowance for loan losses amounted to $40.2
million and $38.9 million, respectively, and the ratio of such allowance to non-
performing loans was 182.15% and 192.56%, respectively.
Non-interest Income
Non-interest income increased $14.3 million, or 67.2%, to $35.7 million for the
year ended December 31, 1998, as compared to $21.4 million for the prior year.
The increase was primarily the result of an increase of $9.8 million in gains on
securities and an increase of $4.6 million in mortgage banking operations
income, partially offset by a $498,000 decrease in fees and service charges.
The increase in gains on securities is reflective of management's investment
strategy of periodically recognizing profits from its available-for-sale
securities portfolio during favorable market conditions. The increase in
mortgage banking operations includes an increase in net gains on sales of loans,
which was primarily attributable to increased level of loan production and
favorable market conditions in the secondary market.
Non-interest Expense
Non-interest expense totaled $90.2 million for the year ended December 31, 1998,
as compared to $103.2 million for the year ended December 31, 1997, a decrease
of $13.0 million, or 12.6%. Non-interest expense for the 1998 period
principally decreased due to a decrease in the one-time $12.7 million pre-tax
charge associated with funding the Foundation, and $4.7 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 the
Bank's mortgage banking subsidiary, included in the 1997 period.
General and administrative expense totaled $89.7 million for the year ended
December 31, 1998, as compared to $85.4 million for the comparable period in
1997, an increase of $4.3 million, or 5.1%. The increase was primarily
attributable to an increase in compensation and employee benefits, from $53.1
million for the year ended December 31, 1997 to $61.9 million for the year ended
December 31, 1998. The increase in the 1998 compensation and employee benefits
expense was due, in part, to higher costs associated with the Company's stock-
related incentive plans. Additionally, the increase in general and
administrative expenses was due to an increase in occupancy and equipment costs,
due to retail and mortgage origination office expansion. These increases were
offset by decreases in advertising and promotion, other non-interest expenses
and deposit insurance premiums which totaled $4.6 million. The decrease in
other non-interest expenses was due to lower professional fees and generally
lower levels of operating expenses.
19
<PAGE>
Income Taxes
Total income tax expense increased $12.1 million, from $39.3 million recorded
during the year ended December 31, 1997 to $51.4 million during the year ended
December 31, 1998. The effective income tax rates were 34.98% for the 1998 year
as compared to 36.59% for the 1997 year (see Note 13 of "Notes to Consolidated
Financial Statements").
The Company's contribution of common stock to the Foundation in 1997 was 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 1997 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.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, reverse-repurchase
agreements, FHLB borrowings, and proceeds from the principal and interest
payments on loans and mortgage-backed securities. While maturities and
scheduled amortization of loans and investments are predictable sources of
funds, deposit flows, prepayment of mortgage loans and mortgage-backed
securities are greatly influenced by general interest rates, economic conditions
and competition.
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, mortgage related, debt and equity securities. During the years ended
December 31, 1999 and 1998, the Bank originated and purchased mortgage loans in
the amount of $1.77 billion and $1.93 billion, respectively. Purchases of
mortgage-backed, mortgage related, debt and equity securities available-for-sale
totaled $2.08 billion and $2.13 billion during the years ended December 31, 1999
and 1998, respectively. These activities were funded primarily by principal
repayments on loans and mortgage-backed and mortgage related securities and by
the Company's deposit and borrowed funds position during the years ended
December 31, 1999 and 1998. Loan sales provided additional liquidity to the
Company, totaling $817.8 million and $688.1 million for the years ended December
31, 1999 and 1998, 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 and FHLB borrowings. At December 31, 1999, the
Company had $2.45 billion in reverse-repurchase agreements outstanding, as
compared to $2.09 billion at December 31, 1998. 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, 1999, the Company had outstanding loan commitments to advance
approximately $438.1 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, 1999 totaled $1.88 billion. 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.
20
<PAGE>
The Company's most liquid assets are cash and cash equivalents, short-term
securities and securities available-for-sale. The levels of these assets are
dependent on the Company's operating, financing, lending, and investment
activities during any given period. At December 31, 1999 and 1998, the Company
had $78.8 million and $94.2 million, respectively, in cash and cash equivalents.
The Company had no short-term repurchase agreements outstanding at December 31,
1999 and 1998.
Tangible stockholders' equity (stockholders' equity less the excess of cost over
fair value of net assets acquired (goodwill), totaled $634.4 million at December
31, 1999, as compared to $850.9 million at December 31, 1998. This decrease
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, partially offset by
an increase in 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
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, 1999, cash
earnings, excluding merger related items and special charges totaled $115.5
million, or $9.1 million more than reported earnings, excluding merger related
items and special charges, representing a cash return on average stockholders'
equity of 15.07%. 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 0.88% and
28.82%, respectively, for the year ended December 31, 1999, from 0.94% and
33.43%, respectively, for the year ended December 31, 1998.
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.
21
<PAGE>
Year 2000 Compliance
As of March 1, 2000, the Company has experienced no disruptions or problems
regarding the Year 2000 (Y2K) rollover. As part of the Company's Y2K plan, on
January 1, 2000, the Company tested and sampled internal systems, including its
primary third-party data processor, telecommunications systems, automated teller
machines and related third party vendors supporting these machines, various
third party software applications and the Company's ability to interface with
its corespondent banks, such as the Chase Manhattan Bank and the Federal Reserve
Bank. All testing completed on January 1, 2000, indicated all systems were
operating as normal. Through March 1, 2000, all of the Company's internal
hardware and software continue to operate as normal, and to date, to the
Company's knowledge, all vendors utilized by the Company in its daily operations
are operating normally and have not indicated any Y2K related problems.
The Company will continue to monitor and oversee all internal operations and be
in contact with its vendors regarding Y2K related issues. Based on the
successful transition through the January, 2000 rollover period and the
previously conducted testing, the Company does not anticipate any significant
Y2K problems to arise. In addition, none of the Company's major commercial
borrowers reported any Y2K problems.
The Company's expenditures for the Y2K effort total approximately $374,000
through December 31, 1999, including $314,000 for fiscal 1999.
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 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."
Recent Legislation
Recent legislation designed to modernize the regulation of the financial
services industry expands the ability of bank holding companies to affiliate
with other types of financial services companies such as insurance companies and
investment banking companies. However, the legislation provides that companies
that acquire control of a single savings association after May 4, 1999 (or that
filed an application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as the
Company, that existed prior to May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
Company.
22
<PAGE>
ROSLYN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents:
Cash and cash items $ 8,937 $ 8,403
Due from banks 39,112 47,706
Money market investments 30,800 38,079
----------------- -----------------
78,849 94,188
Debt and equity securities, net:
Held-to-maturity (estimated fair value of $27,148 in 1998) - 26,965
Available-for-sale 729,201 795,362
Mortgage-backed and mortgage related securities, net:
Held-to-maturity (estimated fair value of $1,268,461 in 1998) - 1,250,266
Available-for-sale 2,801,284 1,795,833
----------------- -----------------
3,530,485 3,868,426
Federal Home Loan Bank of New York stock, at cost 28,029 40,029
Loans held-for-sale, net 62,852 81,725
Loans receivable held for investment, net:
Real estate loans, net 3,746,711 3,527,944
Consumer loans, net 101,751 96,005
----------------- -----------------
3,848,462 3,623,949
Less allowance for loan losses (40,155) (40,207)
----------------- -----------------
3,808,307 3,583,742
Banking house and equipment, net 30,790 32,170
Accrued interest receivable 42,763 47,103
Mortgage servicing rights, net 17,953 13,779
Excess of cost over fair value of net assets acquired, net 3,215 2,449
Real estate owned, net - 1,176
Deferred tax asset, net 97,156 5,308
Other assets 24,784 29,624
----------------- -----------------
Total assets $ 7,725,183 $ 7,799,719
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Savings accounts $ 915,369 $ 971,138
Certificates of deposit 2,605,454 2,835,578
Money market accounts 228,760 120,930
Demand deposit accounts 296,029 291,336
----------------- -----------------
Total deposits 4,045,612 4,218,982
Official checks outstanding 25,758 22,472
Borrowed funds:
Reverse-repurchase agreements 2,449,345 2,094,319
Other borrowings 395,196 433,528
Accrued interest and dividends 28,924 28,808
Mortgagors' escrow and security deposits 59,465 72,044
Accrued taxes payable 15,905 34,012
Accrued expenses and other liabilities 67,319 42,188
----------------- -----------------
Total liabilities 7,087,524 6,946,353
----------------- -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none issued - -
Common stock, $0.01 par value, 200,000,000 shares authorized; 79,212,903
and 89,196,513 shares issued; 71,551,008 and 76,186,346 shares outstanding
at December 31, 1999 and 1998, respectively 792 892
Additional paid-in-capital 492,311 529,012
Retained earnings - substantially restricted 478,891 512,184
Accumulated other comprehensive (loss)/income:
Net unrealized (loss)/gain on securities available-for-sale, net of tax (109,557) 13,745
Unallocated common stock held by Employee Stock Ownership Plan Employee
Stock Ownership Plan (ESOP) (48,425) (53,831)
Unearned common stock held by Stock-Based Incentive Plan Stock-Based
Incentive Plan (SBIP) (20,894) (30,818)
Common stock held by Supplemental Executive Retirement Plan and Trust
(SERP), at cost (347,895 and 273,575 shares at December 31, 1999
and 1998, respectively) (4,191) (2,158)
Treasury stock, at cost (7,314,000 and 12,736,592 shares at December 31,
1999 and 1998, respectively) (151,268) (115,660)
----------------- -----------------
Total stockholders' equity 637,659 853,366
----------------- -----------------
Total liabilities and stockholders' equity $ 7,725,183 $ 7,799,719
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Federal funds sold and short-term deposits $ 1,647 $ 1,733 $ 5,072
Debt and equity securities 51,577 56,611 58,679
Mortgage-backed and mortgage related securities 199,553 225,029 214,374
Real estate loans 266,818 257,535 195,918
Consumer loans 8,171 5,836 6,333
--------- --------- ---------
Total interest income 527,766 546,744 480,376
--------- --------- ---------
Interest expense:
Deposits 173,448 191,069 199,677
Borrowed funds 141,746 152,735 90,002
--------- --------- ---------
Total interest expense 315,194 343,804 289,679
--------- --------- ---------
Net interest income before provision for loan losses 212,572 202,940 190,697
Provision for loan losses - 1,500 1,400
--------- --------- ---------
Net interest income after provision for loan losses 212,572 201,440 189,297
--------- --------- ---------
Non-interest income:
Fees and service charges 6,458 7,304 7,802
Mortgage banking operations 15,668 8,752 4,112
Net gains on securities 2,738 18,105 8,310
Other non-interest income 2,024 1,535 1,129
--------- --------- ---------
Total non-interest income 26,888 35,696 21,353
--------- --------- ---------
Non-interest expense:
General and administrative expenses:
Compensation and employee benefits 44,869 61,910 53,146
Occupancy and equipment 10,151 9,254 9,050
Deposit insurance premiums 648 (11) 578
Advertising and promotion 3,408 4,103 4,841
Other non-interest expenses 17,222 14,464 17,744
--------- --------- ---------
Total general and administrative expenses 76,298 89,720 85,359
Amortization of excess of cost over fair value of net
assets acquired 493 471 469
Merger related costs 89,247 - -
Restructuring charge 5,903 - -
Settlement of asserted claims - - 4,680
Charitable contribution to The Roslyn Savings Foundation - - 12,711
--------- --------- ---------
Total non-interest expense 171,941 90,191 103,219
--------- --------- ---------
Income before provision for income taxes and extraordinary item 67,519 146,945 107,431
Provision for income taxes 43,657 51,402 39,313
--------- --------- ---------
Income before extraordinary item 23,862 95,543 68,118
Extraordinary item, net of tax - prepayment penalty on debt extinguishment (4,236) - -
--------- --------- ---------
Net income $ 19,626 $ 95,543 $ 68,118
========= ========= =========
Basic earnings per share:
Income before extraordinary item $ 0.33 $ 1.32 $ 0.92
Extraordinary item, net of tax (0.06) - -
--------- --------- ---------
Net income per share $ 0.27 $ 1.32 $ 0.92
========= ========= =========
Diluted earnings per share:
Income before extraordinary item $ 0.33 $ 1.29 $ 0.89
Extraordinary item, net of tax (0.06) - -
--------- --------- ---------
Net income per share $ 0.27 $ 1.29 $ 0.89
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Retained Accumulated
Additional earnings- other
Common paid-in- substantially comprehensive
stock capital restricted income (loss)
-------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 227 $ 104,880 $ 392,870 $ 12,694
Comprehensive income:
Net income - - 68,118 -
Other comprehensive income, net of tax:
Net unrealized gain on certain securities,
net of reclassification adjustment (1) (2) - - - 25,254
Comprehensive income
Adjustments to stockholders' equity to effect the merger
with T R Financial Corp. (3) (11,087) - (1,808)
Issuance of 42,371,359 shares of common stock in the
initial public offering 423 410,227 - -
Issuance of 1,271,100 shares of common stock to The
Roslyn Savings Foundation 13 12,699 - -
Common stock acquired, at cost - 504 - -
Exercise of stock options and related tax benefit - - (399) -
Allocation from shares purchased with 1996 contribution - - - -
Allocation of ESOP stock and related tax benefit - 6,063 - -
Amortization of SBIP stock awards - - (186) -
Cash dividends declared on common stock - - (16,218) -
Sale of shares held in SBIP trust to treasury stock - - - -
-------- ------------ --------------- ---------------
Balance at December 31, 1997 660 523,286 444,185 36,140
-------- ------------ --------------- ---------------
Comprehensive income:
Net income - - 95,543 -
Other comprehensive loss, net of tax:
Net unrealized loss on certain securities, net of
reclassification adjustment (1) (2) - - - (21,862)
Comprehensive income
Adjustments to stockholders' equity to effect the merger
with T R Financial Corp. 232 (5,079 ) - (533)
Common stock acquired, at cost - 933 - -
Exercise of stock options and related tax benefit - 44 (307) -
Allocation of ESOP stock and related tax benefit - 9,724 - -
Amortization of SBIP stock awards - 104 (67) -
Cash dividends declared on common stock - - (27,170) -
-------- ------------ --------------- ---------------
Balance at December 31, 1998 892 529,012 512,184 13,745
-------- ------------ --------------- ---------------
<CAPTION>
Unearned Common
Unallocated common stock held Treasury
common stock stock held by SERP, at stock,
held by ESOP by SBIP cost at cost
------------------ --------------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ (5,650) $ (346) $ (721) $ (50,567)
Comprehensive income:
Net income - - - -
Other comprehensive income, net of tax:
Net unrealized gain on certain securities,
net of reclassification adjustment (1) (2) - - - -
Comprehensive income
Adjustments to stockholders' equity to effect the merger
with T R Financial Corp. - - - (1,863)
Issuance of 42,371,359 shares of common stock in the
initial public offering - - - -
Issuance of 1,271,100 shares of common stock to The
Roslyn Savings Foundation - - - -
Common stock acquired, at cost (54,805) (41,374) (504) (3,174)
Exercise of stock options and related tax benefit - - - 1,333
Allocation from shares purchased with 1996 contribution 1,000 - - -
Allocation of ESOP stock and related tax benefit 2,839 - - -
Amortization of SBIP stock awards - 3,966 - -
Cash dividends declared on common stock - - - -
Sale of shares held in SBIP trust to treasury stock - 140 - -
----------------- -------------- ----------- ----------
Balance at December 31, 1997 (56,616) (37,614) (1,225) (54,271)
----------------- -------------- ----------- ----------
Comprehensive income:
Net income - - - -
Other comprehensive loss, net of tax:
Net unrealized loss on certain securities, net of
reclassification adjustment (1) (2) - - - -
Comprehensive income
Adjustments to stockholders' equity to effect the merger
with T R Financial Corp. - - - 642
Common stock acquired, at cost - - (933) (63,406)
Exercise of stock options and related tax benefit - - - 1,375
Allocation of ESOP stock and related tax benefit 2,785 - - -
Amortization of SBIP stock awards - 6,796 - -
Cash dividends declared on common stock - - - -
----------------- -------------- ----------- ----------
Balance at December 31, 1998 (53,831) (30,818) (2,158) (115,660)
----------------- -------------- ----------- ----------
<CAPTION>
Total
----------
<S> <C>
Balance at December 31, 1996 $ 453,387
Comprehensive income:
Net income 68,118
Other comprehensive income, net of tax:
Net unrealized gain on certain securities,
net of reclassification adjustment (1) (2) 25,254
----------
Comprehensive income 93,372
----------
Adjustments to stockholders' equity to effect the merger
with T R Financial Corp. (14,761)
Issuance of 42,371,359 shares of common stock in the
initial public offering 410,650
Issuance of 1,271,100 shares of common stock to The
Roslyn Savings Foundation 12,712
Common stock acquired, at cost (99,353)
Exercise of stock options and related tax benefit 934
Allocation from shares purchased with 1996 contribution 1,000
Allocation of ESOP stock and related tax benefit 8,902
Amortization of SBIP stock awards 3,780
Cash dividends declared on common stock (16,218)
Sale of shares held in SBIP trust to treasury stock 140
----------
Balance at December 31, 1997 854,545
----------
Comprehensive income: 95,543
Net income
Other comprehensive loss, net of tax:
Net unrealized loss on certain securities, net of
reclassification adjustment (1) (2) (21,862)
----------
Comprehensive income 73,681
----------
Adjustments to stockholders' equity to effect the merger
with T R Financial Corp. (4,738)
Common stock acquired, at cost (63,406)
Exercise of stock options and related tax benefit 1,112
Allocation of ESOP stock and related tax benefit 12,509
Amortization of SBIP stock awards 6,833
Cash dividends declared on common stock (27,170)
----------
Balance at December 31, 1998 853,366
----------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997 (con't)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Retained Accumulated
Additional earnings- other Unallocated
Common paid-in- substantially comprehensive common stock
stock capital restricted income held by ESOP
------ ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Comprehensive loss:
Net income 19,626
Other comprehensive loss, net of tax:
Net unrealized loss on certain securities,
net of reclassification adjustment (1) (2) (124,794)
Comprehensive loss
Adjustments to stockholders' equity to effect the
merger with T R Financial Corp. (100) (47,768) -- 1,492 3,613
Common stock acquired for options exercised
Exercise of stock options and related tax benefit -- 62 (15,012)
Allocation of ESOP stock and related tax benefit -- 11,001 -- 1,793
Amortization of SBIP stock awards -- 4 (666) -- --
Cash dividends declared on common stock -- (37,241) -- --
Common stock acquired, at cost
----- --------- --------- ---------- ---------
Balance at December 31, 1999 $ 792 $ 492,311 $ 478,891 $ (109,557) $ (48,425)
===== ========= ========= ========== =========
<CAPTION>
Unearned Common
common stock held Treasury
stock held by SERP, at stock
by SBIP cost at cost Total
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Comprehensive loss:
Net income 19,626
Other comprehensive loss, net of tax:
Net unrealized loss on certain securities,
net of reclassification adjustment (1) (2) (124,794)
---------
Comprehensive loss (105,168)
---------
Adjustments to stockholders' equity to effect the
merger with T R Financial Corp. 52 2,158 56,268 15,715
Common stock acquired for options exercised -- -- (27,207) (27,207)
Exercise of stock options and related tax benefit -- -- 27,207 12,257
Allocation of ESOP stock and related tax benefit 12,794
Amortization of SBIP stock awards 9,872 -- -- 9,210
Cash dividends declared on common stock (37,241)
Common stock acquired, at cost (4,191) (91,876) (96,067)
-------- ------- --------- ---------
Balance at December 31, 1999 $(20,894) $(4,191) $(151,268) $ 637,659
======== ======= ========= =========
<CAPTION>
(1) Disclosure of reclassification amount, net of tax, for the years ended: 1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Net unrealized (depreciation) appreciation arising during the year $ (123,209) $ (11,332) $ 30,055
Less: Reclassification adjustment for net gains included in net income 1,585 10,530 4,801
---------- --------- --------
Net unrealized (loss) gain on certain securities $ (124,794) $ (21,862) $ 25,254
========== ========= ========
</TABLE>
(2) The tax benefit (expense) relating to the net unrealized (loss) gain on
certain securities, net of reclassification adjustment for the years ended
December 31, 1999, 1998 and 1997 was $90.7 million, $15.7 million and $(18.5)
million, respectively.
See accompanying notes to consolidated financial statements.
26
<PAGE>
ROSLYN BANCORP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 19,626 $ 95,543 $ 68,118
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 loan losses - 1,500 1,400
(Recovery of) provision for other real estate owned losses (300) (830) 4
Originated mortgage servicing rights, net of amortization and valuation
adjustment (4,174) (4,480) (604)
Amortization of excess of cost over fair value of net assets acquired 493 471 469
Depreciation and amortization 3,452 3,793 3,614
Amortization of premiums in excess of (less than) accretion of discounts 5,277 (5,478) (2,321)
ESOP and SBIP expense, net 21,457 16,118 11,283
Originations and purchases of loans held-for-sale, net of sales and
securitizations 35,861 (56,631) 2,674
Gains on sales of loans (17,309) (4,680) (2,647)
Net gains on securities (2,738) (18,105) (8,303)
Net gains on sales of real estate owned (2) (337) (542)
Merger related costs and restructuring charges 41,000 - -
Income taxes deferred and tax benefits attributable to stock plans 6,473 15,594 (6,113)
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable 4,340 (1,540) (5,381)
Decrease (increase) in other assets 7,238 (17,678) 7,878
Increase (decrease) in official checks outstanding 3,286 (6,716) 4,937
Increase in accrued interest and dividends 116 5,347 9,714
(Decrease) increase in accrued taxes payable (18,107) 8,914 12,913
(Decrease) increase in accrued expenses and other liabilities (17,324) (1,290) 2,705
Net (decrease) increase in unearned income (3,948) (1,640) 6,754
Increase in other, net 547 641 452
------------ ------------ ------------
Net cash provided by operating activities 85,264 28,516 119,715
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from calls and repayments of debt and mortgage-backed and mortgage
related securities held-to-maturity and redemption of FHLB capital stock 21,125 578,794 242,638
Proceeds from sales and repayments of debt, equity, mortgage-backed and
mortgage related securities available-for-sale 2,197,502 2,356,754 1,134,973
Purchases of securities held-to-maturity and FHLB capital stock (9,125) (465,461) (389,277)
Purchases of debt, equity, mortgage-backed and mortgage related securities
available-for sale (2,077,462) (2,131,541) (1,806,796)
Loan originations and purchases in excess of principal repayments (220,596) (670,283) (832,785)
Proceeds from sales of loans held for investment - 82,096 10,002
Purchases of banking house and equipment, net (2,072) (5,289) (3,734)
Proceeds from sales of other real estate owned 1,762 2,397 5,848
Excess of cost over fair value of net assets acquired (1,259) (15) -
------------ ------------ ------------
Net cash used in investing activities (90,125) (252,548) (1,639,131)
------------ ------------ ------------
Cash flows from financing activities:
Increase (decrease) in demand deposit, money market and savings
accounts 56,754 (16,206) (156,583)
(Decrease) increase in certificates of deposit (230,124) 90,590 2,133
Increase in borrowed funds 316,694 262,818 1,625,365
(Decrease) increase in mortgagors' escrow and security deposits (12,579) 29,809 4,494
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)
Net cash (used in) proceeds from exercise of stock options (19,756) 1,112 934
Cash dividends paid on common stock (37,241) (27,170) (16,218)
Costs to repurchase common stock (91,876) (63,406) (3,034)
Proceeds from re-issuance of treasury stock 7,650 - -
Decrease in non-depository stock subscriptions - - (1,356,911)
------------ ------------ ------------
Net cash (used in) provided by financing activities (10,478) 277,547 415,651
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (15,339) 53,515 (1,103,765)
Cash and cash equivalents at beginning of year 94,188 40,673 1,144,438
------------ ------------ ------------
Cash and cash equivalents at end of year $ 78,849 $ 94,188 $ 40,673
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 315,078 $ 265,001 $ 193,301
============ ============ ============
Income taxes $ 56,078 $ 12,740 $ 29,633
============ ============ ============
Non-cash investing activities:
Additions to real estate owned, net $ 141 $ 1,209 $ 1,568
============ ============ ============
Transfer of securities from held-to-maturity to available-
for-sale, at amortized cost $ 1,269,280 $ - $ -
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
ROSLYN BANCORP, INC.
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(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 3 for a further discussion of the
conversion. The following is a summary of significant accounting policies
of Roslyn Bancorp, Inc. and it's wholly-owned subsidiaries (collectively,
the Company).
After the close of business on February 16, 1999, T R Financial Corp., a
Delaware company, merged with and into the Company and T R Financial
Corp.'s subsidiary, Roosevelt Savings Bank, a New York State chartered
stock savings bank, merged with and into the Bank (the Merger). All
subsidiaries of Roosevelt Savings Bank became subsidiaries of the Bank.
The acquisition was accounted for as a pooling-of-interests, and
accordingly, all historical financial information for the Company has been
restated to include T R Financial Corp.'s historical information for the
earliest period presented. Previously reported balances of T R Financial
Corp. have been reclassified to conform to the Company's presentation and
restated to give effect to the Merger. See Note 2 for further discussion
of the Merger.
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. 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 subsidiaries. All significant inter-
company 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 new assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated financial
statements and disclosure of contingent assets and liabilities 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
loan losses.
28
<PAGE>
Management believes that the allowance for loan losses is adequate. In
connection with the determination of the allowance for 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 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.
(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
accumulated other comprehensive income, 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 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.
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.
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 has been demonstrated.
29
<PAGE>
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," and the amendment thereof, 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 No. 114 are limited to loans modified in a
troubled debt restructuring (TDR) and commercial and multi-family first
mortgage loans. SFAS No. 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 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.
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. This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial component
approach that focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. 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 the
lower of allocated cost or fair value. The Company estimates the fair
value of its MSRs internally, based on a proprietary valuation model. The
value of MSRs is based upon the Company's stratification of the mortgage
servicing portfolio, considering the predominant risk characteristics of
the underlying loans, including estimates of the cost of servicing per
loan, discount rate, float rate, inflation rate, ancillary income per loan,
prepayment speeds and default rates. Each strata is then discounted to
reflect the present value of the expected future cash flows utilizing
current market assumptions. Impairment, if any, is recognized through a
valuation allowance.
Income from mortgage banking operations is comprised of the gains or losses
generated from the sale of mortgage loans into the secondary market,
including all fees and mortgage servicing rights related thereto, and
servicing fee income and the amortization of servicing rights relating to
servicing loans for others.
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.
30
<PAGE>
(e) Allowance for Loan Losses
-------------------------
The allowance for 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 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 loan losses are charged to operations. Loans, including
impaired loans, are charged-off against the allowance for 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.
When a loan is sold, the remaining net unamortized fee is taken into
income.
(g) Banking House and Equipment
---------------------------
Land is carried at cost and banking houses are carried at cost, less an
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, 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 current period 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.
31
<PAGE>
(j) Summary of Retirement Benefits
------------------------------
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 (ERISA). 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," 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 stockholders' equity.
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 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
------------------
Pursuant to SFAS No. 128, "Earnings Per Share," 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 (see Note 17).
(m) Treasury Stock
--------------
Common stock shares repurchased are recorded as treasury stock at cost.
32
<PAGE>
(n) Comprehensive Income
--------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and displaying of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company adopted the provisions of SFAS No. 130
during the quarter ended March 31, 1998 to give effect to this
pronouncement. Under existing accounting standards, other comprehensive
income is separately classified into foreign currency items, minimum
pension liability adjustments and unrealized gains and losses on available-
for-sale securities. Only the last of these items, however, is currently
applicable to the Company. Comprehensive income is reported by the Company
in the Consolidated Statements of Changes in Stockholders' Equity.
(o) Operating Segments
------------------
The FASB also issued in June 1997, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which established
standards for the way public business enterprises are to report information
about operating segments in interim reporting. This statement also
established standards for related disclosures about products, services,
geographic areas and major customers. SFAS No. 131 is effective for annual
reporting periods beginning after December 15, 1997 and requires interim
periods to be presented in the second year of application. In adopting
SFAS No. 131, the Company determined that, using the definitions contained
in the statement, all of its activities constitute only one reportable
operating segment.
(p) New Accounting Pronouncements
-----------------------------
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133-an amendment of FASB Statement No. 133." This statement
delays the effective date for one year of SFAS No. 133, to fiscal years
beginning after June 15, 2000. SFAS No.'s 133 and 137 apply to quarterly
and annual financial statements. The Company does not believe that there
will be a material impact on its financial condition or results of
operations upon the adoption of SFAS No. 133.
(2) Acquisition of T R Financial Corp.
----------------------------------
On February 16, 1999, a merger between T R Financial Corp., a Delaware
company, and the Company was completed with the Company as the surviving
corporation. The transaction was treated as a tax-free reorganization and
accounted for using the pooling-of-interests method of accounting. As part
of the Merger, T R Financial Corp.'s wholly-owned subsidiary, Roosevelt
Savings Bank, a New York State chartered stock savings bank, was merged
into the Bank.
Pursuant to the merger agreement, each share of T R Financial Corp. common
stock was converted into shares of the Company's common stock at a fixed
exchange ratio of 2.05 shares of Roslyn Bancorp, Inc. common stock for each
share of T R Financial Corp. common stock held. As a result, 17,347,768
shares of T R Financial Corp. common stock were exchanged for 35,528,785
shares of the Company's common stock, and a total of 1,746,880 T R
Financial Corp. stock options were converted into options to purchase a
maximum of 3,581,103 shares of the Company's common stock at exercise
prices ranging from $2.20 to $17.32 depending on the exercise price of the
underlying T R Financial Corp. stock option. Additionally, under the
agreement, five former directors of T R Financial Corp. joined the Boards
of Directors of the Company and the Bank.
Merger related costs associated with the acquisition of T R Financial Corp.
was comprised of $16.9 million of transaction costs, $39.9 million of
severance and other compensation costs, $24.6 million of ESOP amortization
costs and $6.5 million of costs associated with combining operations. At
December 31, 1999 $16.0 million of such costs, primarily relating to the T
R Financial Corp. ESOP, remains in other liabilities on the accompanying
consolidated statements of financial condition.
33
<PAGE>
(3) 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 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
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. As of December 31, 1999, the balance in the
liquidation account was approximately $50.2 million, which includes the
eligible account holder's interest from T R Financial Corp.'s IPO on June
29, 1993. 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 (including T R Financial Corp.'s conversion on
June 29, 1993), 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 was equal to
3.0% of the total amount of its 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
34
<PAGE>
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.
(4) Debt and Equity Securities
--------------------------
Investments in debt and equity securities, net at December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available-for-sale: Cost Gain Loss Value
------------ ------------- -------------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
United States Government - direct and guaranteed $ 67,192 $ 688 $ - $ 67,880
United States Government agencies 287,642 55 (19,755) 267,942
State, county and municipal 4,762 71 - 4,833
------------ ------------- ------------- ------------
Total debt securities available-for-sale 359,596 814 (19,755) 340,655
------------ ------------- ------------- ------------
Equity securities:
Preferred and common stock 227,854 8,685 (33,786) 202,753
Trust preferreds 194,604 - (25,564) 169,040
Other 16,541 1,070 (858) 16,753
------------ ------------- ------------- ------------
Total equity securities available-for-sale 438,999 9,755 (60,208) 388,546
------------ ------------- ------------- ------------
Total debt and equity securities available-for-sale $ 798,595 $ 10,569 $ (79,963) $ 729,201
============ ============= ============= ============
<CAPTION>
At December 31, 1998
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ------------- -------------- ------------
Held-to-maturity: (In thousands)
<S> <C> <C> <C> <C>
Debt securities:
Public utility $ 800 $ 1 $ (5) $ 796
State, county and municipal 5,551 262 (4) 5,809
Industrial, financial corporation and other 20,614 11 (82) 20,543
------------ ------------- ------------- ------------
Total debt securities held-to-maturity $ 26,965 $ 274 $ (91) $ 27,148
============ ============= ============= ============
Available-for-sale:
Debt securities:
United States Government - direct and guaranteed $ 187,250 $ 4,429 $ (10) $ 191,669
United States Government agencies 154,353 666 (33) 154,986
Industrial, financial corporation and other 3,003 120 - 3,123
------------ ------------- ------------- ------------
Total debt securities available-for-sale 344,606 5,215 (43) 349,778
------------ ------------- ------------- ------------
Equity securities:
Preferred and common stock 268,860 27,931 (12,112) 284,679
Trust preferreds 147,131 868 (3,272) 144,727
Other 14,883 1,350 (55) 16,178
------------ ------------- ------------- ------------
Total equity securities available-for-sale 430,874 30,149 (15,439) 445,584
------------ ------------- ------------- ------------
Total debt and equity securities available-for sale $ 775,480 $ 35,364 $ (15,482) $ 795,362
============ ============= ============= ============
</TABLE>
35
<PAGE>
Sales of investments in debt and equity securities are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1999 1998 1997
----------------- --------------- -------------------
(In thousands)
<S> <C> <C> <C>
Proceeds from sales:
Equity securities $ 71,091 $ 232,574 $ 107,264
Debt securities 213,693 366,480 414,000
Gross gains:
Equity securities 15,036 15,688 7,593
Debt securities 839 2,039 624
Gross losses:
Equity securities 1,534 312 48
Debt securities 351 41 101
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, 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.
Interest income on debt and equity securities also includes the amortized
premiums relating to the Company's investments in certain callable preferred
stocks in the amounts of approximately $23,000, $559,000 and $1.2 million for
the years ended December 31, 1999, 1998 and 1997, respectively.
The maturities of the investments in debt securities at December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
At December 31, 1999
----------------------------------------------
Available-for-Sale
----------------------------------------------
Amortized Estimated
Cost Fair Value
------------------- --------------------
(In thousands)
<S> <C> <C>
Within 1 year $ 27,270 $ 27,303
After 1 year through 5 years 43,510 44,218
After 5 years through 10
years 25,035 24,161
Over 10 years 263,781 244,973
------------------- --------------------
$ 359,596 $ 340,655
=================== ====================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------------------------------------
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 $ 67,536 $ 68,052 $ 20,618 $ 20,637
After 1 year through 5 years 138,277 142,208 4,774 4,842
After 5 years through 10 years 1,003 1,097 385 384
Over 10 years 137,790 138,421 1,188 1,285
---------------- ----------------- ----------------- --------------------
$ 344,606 $ 349,778 $ 26,965 $ 27,148
================ ================= ================= ====================
</TABLE>
(5) Mortgage-Backed and Mortgage Related Securities
-----------------------------------------------
Mortgage-backed and mortgage related securities, net at December 31, 1999 and
1998 are summarized as follows:
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------------- ---------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
GNMA pass-through securities, net $ 638,855 $ 1,227 $ (18,877) $ 621,205
FNMA pass-through securities, net 177,003 7 (4,341) 172,669
FHLMC pass-through securities, net 171,591 2,271 (281) 173,581
GNMA adjustable-rate mortgage
pass-through securities, net 174,480 1,517 - 175,997
FNMA adjustable-rate mortgage
pass- through securities, net 63,148 - - 63,148
Whole loan private collateralized
mortgage obligations, net 536,320 15 (22,395) 513,940
Agency collateralized mortgage
obligations, net 1,159,882 57 (79,195) 1,080,744
---------------- ---------------- ---------------- ----------------
Total mortgage-backed and
mortgage related securities
available-for-sale, net $ 2,921,279 $ 5,094 $ (125,089) $ 2,801,284
================ ================ ================ ================
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------------- ---------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Held-to-maturity:
GNMA pass-through securities, net $ 1,045,918 $ 15,542 $ (784) $ 1,060,676
FNMA pass-through securities, net 67,500 644 (62) 68,082
FHLMC pass-through securities, net 65,864 2,381 - 68,245
Whole loan private collateralized
mortgage obligations, net 68,071 430 (85) 68,416
Agency collateralized mortgage
obligations, net 2,913 129 - 3,042
---------------- ---------------- ---------------- ----------------
Total mortgage-backed and mortgage
related securities held-to-maturity,
net $ 1,250,266 $ 19,126 $ (931) $ 1,268,461
================ ================ ================ ================
Available-for-sale:
GNMA pass-through securities, net $ 202,288 $ 2,253 $ (216) $ 204,325
FNMA pass-through securities, net 3,135 11 (4) 3,142
FHLMC pass-through securities, net 3,431 20 - 3,451
GNMA adjustable-rate mortgage
pass-through securities, net 352,245 4,405 - 356,650
Whole loan private collateralized
mortgage obligations, net 674,727 1,508 (576) 675,659
Agency collateralized mortgage
obligations, net 553,917 850 (2,161) 552,606
---------------- ---------------- ---------------- ----------------
Total mortgage-backed and mortgage
related securities
available-for-sale, net $ 1,789,743 $ 9,047 $ (2,957) $ 1,795,833
================ ================ ================ ================
</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,
---------------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
(In thousands)
<S> <C> <C> <C>
Proceeds from sales $ 479,198 $ 645,370 $ 317,349
Gross gains 936 731 956
Gross losses 12,188 - 714
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, sales of mortgage-
backed and mortgage related securities were from the "available-for-sale"
portfolio.
38
<PAGE>
The contractual maturities of the investments in mortgage-backed and mortgage
related securities, net at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------------
Available-for-Sale
---------------------------------------
Amortized Estimated
Cost Fair Value
----------------- ----------------
(In thousands)
<S> <C> <C>
Within 1 year $ - $ -
After 1 year through 5 years 2,160 2,183
After 5 years through 10 years 62,607 61,993
Over 10 years 2,856,512 2,737,108
----------------- ----------------
$ 2,921,279 $ 2,801,284
================= ================
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------------------------------------
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 $ 674 $ 674 $ 3,012 $ 3,022
After 1 year through 5 years 2,945 3,001 2,550 2,540
After 5 years through 10 years 13,750 13,948 8,894 9,007
Over 10 years 1,772,374 1,778,210 1,235,810 1,253,892
----------------- ----------------- ----------------- ----------------
$ 1,789,743 $ 1,795,833 $ 1,250,266 $ 1,268,461
================= ================= ================= =================
</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.
(6) Loans Held-for-Sale, Net and Loans Receivable Held for Investment, Net
----------------------------------------------------------------------
Loans held-for-sale, net at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
One- to four-family loans, net $ 61,064 $ 79,991
Student loans 1,788 1,734
----------------- -----------------
Total loans held-for-sale, net $ 62,852 $ 81,725
================= =================
</TABLE>
The Company originates most fixed rate and adjustable-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,
1999, 1998 and 1997, the Company recorded aggregate net gains of $49,000,
$90,000 and $65,000, respectively, on sales of student loans.
39
<PAGE>
Loans receivable held for investment, net at December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
(In thousands)
<S> <C> <C>
Real estate loans:
One- to four-family $ 2,903,771 $ 2,730,004
Multi-family 89,161 84,575
Home equity and second mortgage 139,191 114,915
Commercial real estate 489,504 484,260
Construction and development 107,781 101,545
--------------------- ---------------------
Total real estate loans 3,729,408 3,515,299
Less:
Net unamortized discount and deferred income (3,496) (4,601)
Net deferred loan origination costs 20,799 17,246
--------------------- ---------------------
Total real estate loans, net 3,746,711 3,527,944
Consumer loans, net:
Consumer 21,947 16,219
Automobile leases, net 79,804 79,786
--------------------- ---------------------
Total consumer loans, net 101,751 96,005
Less allowance for loan losses (40,155) (40,207)
--------------------- ---------------------
Loans receivable held for investment, net $ 3,808,307 $ 3,583,742
===================== =====================
</TABLE>
The principal balance of non-accrual loans was $19.0 million, $18.7 million and
$18.9 million at December 31, 1999, 1998 and 1997, respectively. Interest income
that would have been recorded if the loans had been performing in accordance
with their original terms aggregated approximately $2.5 million, $1.5 million
and $1.8 million during the years ended December 31, 1999, 1998 and 1997,
respectively.
The principal balance of restructured loans that have not complied with the
terms of their restructuring agreement for a satisfactory period of time was
$1.2 million, $909,000 and $280,000 at December 31, 1999, 1998 and 1997,
respectively. Interest income that would have been recorded if the loans had
been performing in accordance with their original terms aggregated approximately
$107,000, $76,000 and $30,000 during the years ended December 31, 1999, 1998 and
1997, respectively. Interest income recorded for restructured loans amounted to
$671,000, $433,000 and $235,000 for the years ended December 31, 1999, 1998 and
1997, respectively. Additionally, restructured loans totaling $7.6 million, $4.1
million and $1.4 million 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, 1999, 1998 and 1997, respectively.
Loans in arrears three months or more were as follows at:
Amount Percent of Loans
------ ----------------
(Dollars in thousands)
December 31, 1999 $ 18,963 0.49%
======== ====
December 31, 1998 $ 20,649 0.57%
======== ====
December 31, 1997 $ 18,264 0.60%
======== ====
The Company has entered into various agreements to service loans for others. At
December 31, 1999 and 1998, 15,209 loans and 9,645 loans, respectively, with a
total balance of $1.31 billion and $1.14 billion, respectively, were being
serviced for others. The Company has not retained a participation in these
loans.
40
<PAGE>
The right to service loans for others is generally obtained by either the sale
of loans with servicing retained, the open market purchase of MSRs or the
creation of MSRs pursuant to SFAS No. 125 (collectively referred to as mortgage
servicing rights).
During the years ended December 31, 1999, 1998 and 1997, the Company sold
without recourse approximately $815.9 million, $351.9 million and $144.7
million, respectively, of whole loans with servicing retained. Service fee
income of $4.3 million, $3.4 million and $3.0 million is included, net, in
mortgage banking operations in the accompanying consolidated statements of
income for the years ended December 31, 1999, 1998 and 1997, respectively.
In connection with the 1995 acquisition of certain assets and liabilities of
Residential Mortgage Banking, Inc. (RMBI) (see Note 10), 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 $6.7
million, $6.8 million and $2.4 million during the years ended December 31, 1999,
1998 and 1997, respectively.
Fees earned for servicing loans are reported as income when the related mortgage
loan payments are collected. MSRs are amortized as a reduction to service fee
income on the interest method over the estimated remaining life of the
underlying mortgage loans. For the years ended December 31, 1999 and 1998, the
valuation allowance for impairment totaled $117,000 and for the year ended
December 31, 1997 such allowance was $13,000.
MSR activity for the years ended December 31, 1999, 1998 and 1997 is summarized
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 13,896 $ 9,312 $ 8,695
Originated mortgage servicing rights 6,681 6,751 2,444
Less:
Amortization (2,507) (2,167) (1,827)
----------------- ----------------- -----------------
18,070 13,896 9,312
Valuation allowance for impairment (117) (117) (13)
----------------- ----------------- -----------------
Balance at end of year $ 17,953 $ 13,779 $ 9,299
================= ================= =================
</TABLE>
(7) Allowance for Loan Losses
-------------------------
Impaired loans and related allowances for loan losses have been identified and
calculated in accordance with the provisions of SFAS No. 114. The total
allowance for loan losses has been determined in accordance with the provisions
of SFAS No. 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 No.
114.
The Company's recorded investment in impaired loans at December 31, 1999 and
1998 was $4.5 million and $4.9 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, 1999, 1998 and
1997 was $4.5 million, $5.3 million and $13.8 million, respectively. Interest
income recognized on impaired loans, which was not materially different from
cash-basis interest income, amounted to $36,000, $325,000 and $653,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
41
<PAGE>
The following is a summary of the activity in the allowance for loan losses
account:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 40,207 $ 38,946 $ 37,690
Provisions for loan losses - 1,500 1,400
Charge-offs (195) (702) (683)
Recoveries 143 463 539
----------------- ----------------- -----------------
Balance at end of year $ 40,155 $ 40,207 $ 38,946
================= ================= =================
</TABLE>
(8) 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, 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
(In thousands)
<S> <C> <C>
Land $ 2,727 $ 3,327
Banking house 29,712 30,434
Furniture, fixtures and equipment 17,814 17,543
--------------------- ---------------------
50,253 51,304
Accumulated depreciation and amortization (19,463) (19,134)
--------------------- ---------------------
$ 30,790 $ 32,170
===================== =====================
</TABLE>
Depreciation and amortization of banking house and equipment of approximately
$3.5 million, $3.8 million and $3.6 million was included in occupancy and
equipment expense for the years ended December 31, 1999, 1998 and 1997,
respectively.
(9) Accrued Interest Receivable
---------------------------
Accrued interest receivable at December 31, 1999 and 1998 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
(In thousands)
<S> <C> <C>
Loans $ 19,027 $ 22,542
Mortgage-backed and mortgage related securities 16,612 17,946
Debt and equity securities 7,124 6,615
--------------------- ---------------------
$ 42,763 $ 47,103
===================== =====================
</TABLE>
(10) Excess of Cost Over Fair Value of Net Assets Acquired, Net
----------------------------------------------------------
The Bank acquired in 1995, through a wholly-owned subsidiary now known as Roslyn
National Mortgage Corp. (RNMC), 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.
42
<PAGE>
This amount was recorded as goodwill and is being amortized over ten 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 RNMC. The unamortized balance
of goodwill relating to the RMBI acquisition was $2.0 million and $2.3 million
as of December 31, 1999 and 1998, respectively.
In November 1999, the Company purchased certain assets and assumed the deposit
liabilities of a bank branch, located in Brooklyn, New York. 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
$1.3 million and is being amortized on a straight-line basis over ten years. The
unamortized balance of the goodwill as of December 31, 1999 was $1.2 million.
(11) Deposits
--------
Savings and time deposit account balances (excluding demand deposit accounts)
are summarized as follows:
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
----------------------------------------- ---------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
------------------ ---------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of account:
Savings accounts 2.02% $ 915,369 2.38% $ 971,138
Certificates of deposit 5.31 2,605,454 5.36 2,835,578
Money market accounts 4.08 228,760 3.51 120,930
------------- -------------
$ 3,749,583 $ 3,927,646
============= =============
</TABLE>
43
<PAGE>
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------------------------------
Weighted
Average
Rate Amount Percent
---------------- --------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
1 year or less 5.12% $ 1,879,132 72.12%
Greater than 1 year through 2 years 5.82 453,453 17.40
Greater than 2 years through 3 years 6.03 153,703 5.90
Greater than 3 years through 4 years 5.78 43,177 1.66
Greater than 4 years through 5 years 5.85 55,008 2.11
Over 5 years 5.96 20,981 0.81
--------------- ----------------
$ 2,605,454 100.00%
=============== ================
<CAPTION>
At December 31, 1998
----------------------------------------------------------
Weighted
Average
Rate Amount Percent
---------------- --------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
1 year or less 5.22% $ 2,244,502 79.16%
Greater than 1 year through 2 years 5.70 337,459 11.90
Greater than 2 years through 3 years 6.23 115,793 4.08
Greater than 3 years through 4 years 6.25 62,427 2.20
Greater than 4 years through 5 years 5.77 39,164 1.38
Over 5 years 6.36 36,233 1.28
--------------- ----------------
$ 2,835,578 100.00%
=============== ================
</TABLE>
Certificates of deposit in excess of $100,000 were approximately $490.9 million
and $408.6 million at December 31, 1999 and 1998, respectively. Additionally,
included in certificates of deposit at December 31, 1999 and 1998 were brokered
deposits totaling $94.6 million and $129.7 million, respectively.
Demand deposits are summarized as follows:
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
--------------------------------- ---------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
-------------- -------- -------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of account:
Personal - $151,395 - $130,573
Super NOW and NOW 1.94% 144,634 2.40% 160,763
-------- --------
$296,029 $291,336
======== ========
</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 19). At December 31, 1999 and 1998, the
Company was assessed at the FDIC's lowest assessment level, as a well
capitalized institution. For the years ended December 31, 1999 and 1998, the
Company paid $648,000 and was refunded $11,000, respectively, in FDIC insurance
premiums.
44
<PAGE>
Interest expense on deposit balances for the years ended December 31, 1999,
1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- -----------------
(In thousands)
<S> <C> <C> <C>
Savings accounts $ 21,791 $ 28,498 $ 33,568
Money market accounts 6,567 2,537 1,816
Super NOW and NOW 3,208 4,568 4,846
Certificates of deposit 141,882 155,466 159,447
-------------- -------------- -----------------
$ 173,448 $ 191,069 $ 199,677
============== ============== =================
</TABLE>
Included in interest expense on savings accounts for the year ended December
31, 1997 is $1.3 million of interest expense on non-depository stock
subscriptions.
(12) Borrowed Funds
--------------
Borrowed funds at December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ----------------------------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
--------------- ---------------- ---------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Reverse-repurchase agreements $ 2,449,345 5.66% $ 2,094,319 5.63%
Other borrowed funds 395,196 5.19 433,528 5.72
--------------- ----------------
$ 2,844,541 $ 2,527,847
=============== ================
</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 statements of
financial condition. 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, 1999 and 1998, all outstanding reverse-repurchase agreements had
original contractual maturities ranging from ten days to ten 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:
45
<PAGE>
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
-------------------------------------------------------------
1999 1998 1997
--------------- --------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
Book value of collateral (including
accrued interest):
U.S. Treasury notes $ 55,725 $ 51,946 $ 101,001
Government agency notes 202,800 102,710 15,559
Mortgage-backed securities:
Available-for-sale 2,355,193 984,669 1,009,928
Held-to-maturity - 1,059,125 751,174
Estimated fair value of collateral
(including accrued interest):
U.S. Treasury notes 56,216 52,609 100,067
Government agency notes 186,679 102,957 15,600
Mortgage-backed securities:
Available-for-sale 2,251,720 983,197 1,022,230
Held-to-maturity - 1,027,703 757,977
Average balance of outstanding
agreements during the year $ 2,305,473 $ 2,100,206 $ 1,030,796
============== ============== ================
Maximum balance of outstanding agree-
ments at any month end during the year $ 2,594,268 $ 2,341,847 $ 1,802,861
============== ============== ================
Average interest rate for the year 5.70% 5.81% 5.90%
============== ============== ================
</TABLE>
The contractual maturities of the outstanding reverse-repurchase agreements at
December 31, 1999 were as follows:
Balance
----------------
(In thousands)
2000 $ 1,069,664
2001 548,881
2002 445,800
2003 90,000
2004 100,000
2005 25,000
2006 --
2007 25,000
2008 145,000
---------------
$ 2,449,345
===============
Included in the 2000 maturity category above is $50.0 million, $31.5 million,
$50.0 million, $70.0 million, $49.6 million and $50.0 million of reverse-
repurchase agreements with contractual maturities of 10 days, 20 days, 28 days,
59 days, 74 days and 86 days, respectively, which are collateralized by
available-for-sale mortgage-backed securities and U.S. Treasury notes with a
book value (including accrued interest) of $58.1 million, $30.4 million, $83.9
million, $51.6 million, $52.6 million and $58.3 million, respectively, and an
estimated fair value (including accrued interest) of $53.3 million, $30.8
million, $80.2 million, $48.4 million, $51.0 million and $52.0 million,
respectively. All remaining reverse-repurchase agreements have contractual
maturities in excess of 90 days, which are collateralized by U.S. Treasury
notes, government agency notes and mortgage-backed securities available-for-sale
with book values (including accrued interest) of $25.4 million, $202.8 million
and $2.05 billion, respectively, and estimated fair values (including accrued
interest) of $25.4 million, $186.7 million and $1.97 billion, respectively.
46
<PAGE>
At December 31, 1998, the Company had $150,000 of outstanding secured notes
payable to FNMA under a warehouse line of credit. The line of credit was secured
by $150,000 of mortgage loans held-for-sale as of December 31, 1998. The
outstanding notes had an interest rate of 6.05%, at December 31, 1998. The note
was repaid as the related mortgage loans were sold or collected. At December 31,
1999, the Company had no outstanding balances under this agreement.
The Bank maintains a $100.0 million overnight line of credit with the Federal
Home Loan Bank (FHLB). Included in other borrowed funds at December 31, 1999 is
$100.0 million of borrowings drawn under this line at an interest rate of 4.60%.
At December 31, 1998, such borrowings under this line of credit were $5.0
million at an interest rate of 5.13%. In addition, the Bank may access funds
through a $100.0 million one month facility from the FHLB of which $85.0 million
at an interest rate of 4.10% was outstanding and included in other borrowed
funds at December 31, 1999. Additionally, included in other borrowings at
December 31, 1999 were FHLB advances of $75.0 million, which have fixed interest
rates between 5.52% and 5.73%, for five years and which rate may become
convertible by the FHLB in 2002, and quarterly thereafter. FHLB advances and
FHLB overnight line of credit borrowings are secured under an assignment
arrangement of eligible collateral, primarily mortgage loans, in an amount equal
to 110% of outstanding advances.
Subsequent to the Merger, the Company restructured $427.1 million of reverse-
repurchase agreements and $118.1 million of FHLB borrowings. These borrowed
funds had maturities between less than one year and four years and a weighted
average rate of 5.98%. The borrowings were then replaced with new funds with a
weighted average rate of 4.98% and maturities between less than one year and
four years. As a result, for the year ended December 31, 1999, the Company
incurred a prepayment penalty of $7.2 million ($4.2 million, net of tax). The
prepayment penalty is reflected as an extraordinary item in the Company's
consolidated statements of income.
Interest expense on borrowings for the years ended December 31, 1999, 1998 and
1997 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C>
Reverse-repurchase agreements $ 131,467 $ 122,094 $ 60,829
Other borrowed funds 10,279 30,641 29,173
----------------- ----------------- -----------------
$ 141,746 $ 152,735 $ 90,002
================= ================= =================
</TABLE>
(13) Income Taxes
------------
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,
---------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Expected income tax expense at statutory Federal tax rate $ 23,632 $ 51,431 $ 37,601
State and local taxes, net of Federal income tax benefit 3,302 4,112 3,185
Merger related costs 22,893 - -
Dividend received deduction (3,278) (4,156) (3,142)
ESOP expense - 2,288 1,577
Change in valuation allowance (1,600) - -
Other, net (1,292) (2,273) 92
-------- -------- --------
$ 43,657 $ 51,402 $ 39,313
======== ======== ========
</TABLE>
47
<PAGE>
Provisions for income taxes are comprised of the following amounts:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 32,402 $ 35,106 $ 40,154
State and local 4,027 3,775 6,697
-------- -------- --------
36,429 38,881 46,851
-------- -------- --------
Deferred:
Federal 6,172 10,156 (5,754)
State and local 1,056 2,365 (1,784)
-------- -------- --------
7,228 12,521 (7,538)
-------- -------- --------
$ 43,657 $ 51,402 $ 39,313
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999
and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan loss $ 19,756 $ 16,230
Post-retirement benefits 6,884 5,664
Non-qualified deferred compensation 4,664 4,315
Qualified retirement plans 5,970 2,239
Charitable contributions - 623
Amortization of intangibles 1,288 354
Depreciation of fixed assets 1,588 (250)
Mark to market adjustment 863 745
Merger related expenses 780 -
Net unrealized loss on available-for-sale securities 79,832 -
Other 944 1,789
----------------- -----------------
Total gross deferred tax assets 122,569 31,709
Less: Valuation allowance - (1,600)
----------------- -----------------
Total net deferred tax assets 122,569 30,109
----------------- -----------------
Deferred tax liabilities:
Net unrealized gain on available-for-sale securities - (10,819)
Originated mortgage servicing rights (6,893) (3,678)
Real Estate Investment Trust dividends (6,127) (1,136)
Net deferred origination costs (12,241) (9,082)
Other (152) (86)
----------------- -----------------
Total gross deferred tax liabilities (25,413) (24,801)
----------------- -----------------
Net deferred tax assets $ 97,156 $ 5,308
================= =================
</TABLE>
At December 31, 1998, the Company had a $1.6 million valuation allowance against
its deferred tax assets for state and local taxes. At December 31, 1999,
management believed 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.
48
<PAGE>
The Company's stockholders' equity includes approximately $18.9 million and
$19.6 million at December 31, 1999 and 1998, respectively, 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 (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 "Experience Method",
or the percentage equal to 8% of the Bank's taxable income "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 and the New York City Bank
Corporation Tax, however, for purposes of these taxes, the effective allowable
percentage under the PTI Method was 32% rather than 8%.
Under the Small Business Job Protection Act of 1996 (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. However, such
recapture requirements are suspended for each of the two successive taxable
years beginning January 1, 1996 in which the Bank originates a minimum amount of
certain residential loans based upon the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding January 1,
1996. At December 31, 1995 the balance of the Bank's federal bad debt reserves
were approximately $19.9 million which exceeded the balance of such amount at
December 31, 1987 by approximately $2.1 million. The New York State tax law has
been amended during 1996 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. Similar amendments to the New
York City tax law were made in March 1997.
(14) Employee Benefit Plans
----------------------
Pension Plan - The Bank's noncontributory pension plan with the RSI Retirement
Trust covers substantially all full-time employees. In February 1998, the FASB
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS No. 132, which is effective for fiscal years
beginning after December 15, 1997, standardizes the disclosure requirements for
pensions and other post-retirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures no longer deemed useful. The disclosures which follow have been
prepared in accordance with SFAS No. 132. As required by SFAS No. 132,
disclosures for prior years have been restated. The following table depicts the
components of the net pension expense for the years ended December 31, 1999,
1998 and 1997:
49
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------ -------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 2,025 $ 1,797 $ 1,384
Interest cost 2,683 2,405 2,153
Actual return on assets (3,548) (3,281) (5,066)
Amortization of unrecognized transition asset - - (122)
Amortization of unrecognized loss 128 - -
Amortization of unrecognized past service liability (7) (8) (8)
Curtailment credit (1,477) - -
Settlement credit (19) - -
Special termination benefits charge 1,639 - -
Deferred investment gain - - 2,428
------------------- ----------------- ------------------
$ 1,424 $ 913 $ 769
=================== ================= ==================
</TABLE>
The assumptions used by the Company relating to the plan for the years ended
December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------------------- -----------------------
Roslyn T R Roslyn T R
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Assumed rate of return on assets 9.50% 8.50% 9.00% 8.00% 9.00%
========== ========= ========= ========= =========
Assumed rate of compensation increase 4.50% 4.50% 4.50% 5.00% 5.00%
========== ========= ========= ========= =========
Assumed discount rate 7.75% 6.50% 6.50% 7.25% 7.25%
========== ========= ========= ========= =========
</TABLE>
The following table provides details of the changes in the actuarial present
value of the benefit obligation and fair value of plan assets for the above plan
for each of the years shown and a reconciliation, at the end of each year shown,
of the funded status of the plan with the net amount recognized in the
consolidated statement of financial condition.
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
Change in benefit obligation during the year:
Benefit obligation at beginning of the year $ 39,796 $ 33,958
Service cost 2,025 1,797
Interest cost 2,683 2,405
Actuarial (gain) loss (1,421) 3,089
Annuity payments (1,804) (1,424)
Settlements (2,884) (29)
Curtailment (1,457) -
----------------- -----------------
Benefit obligation at end of year 36,938 39,796
----------------- -----------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In thousands)
<S> <C> <C>
Change in fair value of plan assets during the year:
Fair value of plan assets at beginning of the year 36,407 37,664
Actual return on plan assets 6,212 (389)
Employer contributions 1,331 585
Annuity payments (1,804) (1,424)
Settlements (2,884) (29)
----------------- -----------------
Fair value of plan assets at the end of the year 39,262 36,407
----------------- -----------------
Funded status at the end of the year 2,324 (3,389)
Unrecognized actuarial (gain) loss (319) 5,513
Contribution 413 92
Unrecognized past service liability (9) (37)
----------------- -----------------
Net prepaid pension expense at the end of the year $ 2,409 $ 2,179
================= =================
</TABLE>
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,
1999 and 1998 was $567,000 and $626,000, respectively. Included in the employee
benefit expense for the years ended December 31, 1999, 1998 and 1997 was
$43,000, $42,000 and $47,000, respectively, related to this obligation.
Pursuant to the Merger, the Company assumed a non-qualified SERP for certain
former executives of T R Financial Corp. The actuarial present value of the
accumulated benefit obligation at December 31, 1999 and 1998 was $1.7 million
and $1.4 million, respectively. At December 31, 1999 and 1998, the SERP
maintains $1.7 million and $1.3 million, respectively, of trust held assets.
Trust held assets at December 31, 1999 and 1998 include $4.2 million and $2.2
million, respectively, of the Company's common stock, at cost. This represents
347,895 and 273,575 shares of common stock at December 31, 1999 and 1998,
respectively, the cost of which is reflected as contra-equity and additional
paid-in-capital in the accompanying consolidated statements of financial
condition. Included in the employee benefit expense for the years ended December
31, 1999, 1998 and 1997 was $2.4 million, $1.4 million and $988,000,
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, 1999 and 1998 was $1.7
million and $1.3 million, respectively. Included in employee benefit expense for
the years ended December 31, 1999, 1998 and 1997 was $169,000, $280,000 and
$166,000, 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 were no longer eligible for the 401(k) matching
contribution. The Bank made cash contributions of $98,000, $478,000 and $394,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
Pursuant to the Merger, on October 1, 1999, The Roosevelt Savings Bank Salary
Reduction Plan in RSI Retirement Trust (Roosevelt 401(k) Plan) merged with The
Roslyn Savings Bank 401(k) Plan in RSI Retirement Trust. Effective October 1,
1999, contribution amounts and percentages under the Roosevelt 401(k) Plan were
terminated and/or modified to conform with the Company's.
51
<PAGE>
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 are eligible to
participate in the ESOP. The ESOP utilized funds borrowed from the Company
totaling $53.8 million, and a $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 years ended December 31, 1999, 1998 and 1997, the Bank made
contributions of $3.0 million, $3.8 million and $4.3 million, respectively, to
the ESOP. The ESOP utilized the contributions, along with the dividends received
on the unallocated ESOP shares, which totaled $1.6 million, $1.2 million and
$617,000, to repay $578,000, $470,000 and $454,000 of principal and $4.1
million, $4.5 million and $4.4 million of interest on the loan in 1999, 1998 and
1997, respectively. At December 31, 1999 and 1998, the loan had an outstanding
balance of $52.3 million and $52.9 million, respectively, and an interest rate
of 8.50% and 7.75%, respectively.
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 is 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 to exceed five years. Any forfeited shares
are allocated to the then remaining participants in the same proportion as
contributions. As of December 31, 1999, 1998 and 1997 406,474 shares, 292,218
shares and 177,961, respectively, shares, respectively, have been allocated to
participants and 3,084,922 shares, 3,199,179 shares and 3,313,436 shares
remained unallocated, respectively. Included in the shares allocated to
participants during the years ended December 31, 1999, 1998 and 1997, were
approximately 26,000 shares, 21,000 shares and 20,000 shares, respectively,
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, 1999, 1998, and 1997, the
Company recognized $1.9 million, $2.2 million and $2.0 million, respectively, as
compensation expense.
Pursuant to the Merger, T R Financial Corp.'s ESOP was terminated. T R Financial
Corp.'s ESOP loan of approximately $4.5 million was paid off on March 30, 1999,
through the sale of approximately 244,000 shares of the Company's common stock
at $17.57 per share and $189,000 of dividends on unallocated shares. The
remaining 1,401,658 shares held by the T R Financial Corp. ESOP trustee were
released for allocation to the former T R Financial Corp. employees. A non-cash
charge to equity of $24.6 million was recorded by the Company, which represents
the allocation of the shares to the former employees of T R Financial Corp. at
the sale price associated with the sold shares. T R Financial Corp. recognized
expense relating to the T R Financial Corp. ESOP on the basis of the shares
allocated to participant accounts multiplied by the average fair value of the T
R Financial Corp. common stock during the period. Accordingly, compensation and
employee benefits in the accompanying consolidated statements of income for the
years ended December 31, 1998 and 1997 include $7.5 million and $5.6 million,
respectively, of expense relating to the benefits provided under the T R
Financial Corp. ESOP.
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 ERISA.
52
<PAGE>
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, 1999 and 1998 was $749,000 and $1.6 million, respectively. The Company
recorded an expense of $234,000 and $148,000 relating to the MSERP for the years
ended December 31, 1999 and 1998, respectively. No expense related to the MSERP
was recorded 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 is 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 may
become fully exercisable and each award may become fully vested 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 Plan's
initial effective grant date and 1,512,507 shares were awarded at a price of
$22.50 per share to outside directors, officers and certain employees of the
Bank. During the year ended December 31, 1999, the Company granted additional
stock awards of 49,000 shares, with prices ranging from $17.31 to $20.69 per
share, and 31,692 shares were forfeited. During the year ended December 31,
1999, plan participants vested in 406,259 shares. The total outstanding unvested
stock awards amounted to 861,915 shares at December 31, 1999. Upon the
achievement of certain defined performance targets, 85,069 of the aforementioned
shares will vest. For the years ended December 31, 1999, 1998 and 1997,
compensation expense attributable to stock awards under the Incentive Plan was
approximately $6.5 million, $6.4 million and $3.6 million, respectively.
Pursuant to the Merger, T R Financial Corp.'s Recognition and Retention Plan
(RRP) was terminated. The remaining 23,739 unallocated T R Financial Corp.
shares were retired as of the merger date. Included in the compensation and
employee benefits expense for the years ended December 31, 1998 and 1997 was
$51,000 and $103,000, respectively, attributable to the RRP.
The T R Financial Corp. 1993 Incentive Stock Option Plan (ISO) initially
reserved 2,184,998 shares of T R Financial Corp. common stock for officers and
employees and outside directors of Roosevelt Savings Bank. The ISO was
subsequently amended and additional 2,576,550 shares of T R Financial common
stock were reserved for issuance. The 1,746,880 T R Financial Corp. stock
options outstanding as of the date of the Merger were converted into 3,581,103
options to purchase the Company's common stock at exercise prices ranging from
$2.20 to $17.32.
53
<PAGE>
Options granted under both the Incentive Plan and ISO 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 exercise price equaled the common stock price at the
grant date. All options expire no later than ten years following the date of
grant. Option transactions for the years ended December 31, 1999 and 1998 are
shown below:
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Exercise Price
----------------- -------------------
<S> <C> <C>
Options outstanding at December 31, 1997 7,371,863 $ 13.35
Granted 1,031,952 18.14
Exercised (437,898) 2.59
Forfeited (191,163) 22.33
-----------------
Options outstanding at December 31, 1998 7,774,754 14.37
Granted 103,000 18.35
Exercised (1,451,499) 4.08
Forfeited (206,432) 22.38
-----------------
Options outstanding at December 31, 1999 6,219,823 16.57
=================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------------------------------------------------
Weighted Weighted
Range of Average Exercise Number of Average Options
Exercise Prices Price Shares Life Exercisable
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 2.20 - 2.20 $ 2.20 1,381,521 3.49 1,381,521
8.23 - 8.41 8.25 354,440 5.79 354,440
14.39 - 15.25 14.41 367,621 8.09 359,621
17.32 - 18.13 17.70 145,280 8.95 49,280
19.94 - 22.00 21.83 327,000 8.28 60,000
22.50 - 22.50 22.50 3,605,461 7.67 1,440,384
22.63 - 22.63 22.63 23,500 8.42 4,700
27.88 - 27.88 27.88 15,000 8.32 3,000
--------- ---------
6,219,823 6.71 3,652,946
========= =========
In accordance with FAS No. 123, the Company used the Black-Scholes option pricing model with the following weighted average
assumptions to value the options granted as follows:
<CAPTION>
1999 1998 1997
------- ------------------------ ------------------------
Roslyn T R Roslyn T R
------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Dividend yield 2.50% 2.10% 2.10% 1.74% 2.90%
======= ======= ======= ======= =======
Expected volatility 28.89% 22.50% 29.10% 22.50% 21.60%
======= ======= ======= ======= =======
Risk-free interest rate 6.13% 4.54% 4.54% 5.61% 6.45%
======= ======= ======= ======= =======
Expected option lives 2.67yrs. 3.60yrs. 0.97yrs. 4.00yrs. 7.56yrs.
======= ======= ======= ======= =======
</TABLE>
54
<PAGE>
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 No. 123, the Company's net
income and earnings per share for the years ended December 31, 1999, 1998 and
1997 would have been reduced as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income:
As reported $ 19,626 $ 95,543 $ 68,118
Pro forma 15,430 89,110 66,259
Basic earnings per share:
As reported $ 0.27 $ 1.32 $ 0.92
Pro forma 0.21 1.23 0.90
Diluted earnings per share:
As reported $ 0.27 $ 1.29 $ 0.89
Pro forma 0.21 1.20 0.87
</TABLE>
The per share weighted average fair value of stock options granted during the
years ended December 31, 1999, 1998 and 1997, was $5.93, $8.41 and $6.47,
respectively.
The effects of applying SFAS No. 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.
(15) Post-retirement 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 disclosures which follow have
been prepared in accordance with SFAS No. 132. As required by SFAS No. 132,
disclosures for prior years have been restated. 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, 1999, 1998
and 1997 is comprised of the following components:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ---------------- ------------------
(In thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 369 $ 326 $ 300
Interest cost on accumulated post-retirement
benefit obligation 885 868 802
Amortization of unrecognized loss 11 59 81
Amortization of unrecognized past service liability (115) (160) (319)
-------------- ---------------- ------------------
$ 1,150 $ 1,093 $ 864
============== ================ ==================
</TABLE>
The assumptions used by the Company relating to the plan for the years
ended December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------- --------------------------
Roslyn T R Roslyn T R Roslyn T R
---------- -------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assumed ultimate medical trend 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
========== ======== =========== ========= ========== ==========
Assumed current medical trend 6.50% 6.50% 6.50% 7.00% 7.00% 9.00%
========== ======== =========== ========= ========== ==========
Assumed salary scale for life insurance 4.50% 5.50% 4.50% 4.00% 5.00% 4.00%
========== ======== =========== ========= ========== ==========
Assumed discount rate 7.75% 8.00% 6.50% 6.75% 7.25% 7.00%
========== ======== =========== ========= ========== ==========
</TABLE>
55
<PAGE>
For measurement purposes, the annual rate of increase in the per capita cost of
covered benefits (health care cost trend rates) will have a significant effect
on the estimate of the accumulated post-retirement benefit obligation and the
aggregate service and interest cost components of the net periodic post-
retirement benefit cost. Increasing the annual health care trend rates by 1.0%
in each year would increase both the accumulated post-retirement benefit
obligation by $701,000 and the aggregated related service and interest cost by
$153,000 at December 31, 1999. A 1.0% decrease in the assumed health care trend
rates would decrease both the accumulated post-retirement benefit obligation by
$635,000 and the aggregate related service and interest cost by $130,000 at
December 31, 1999.
The following table provides details of the changes in the benefit obligation
and fair value of plan assets for the above plans for each of the years shown
and a reconciliation, at the end of each year shown, of the funded status of the
plans with the net amount recognized in the consolidated statement of financial
condition:
<TABLE>
<CAPTION>
1999 1998
---------------- ------------------
(In thousands)
<S> <C> <C>
Change in benefit obligation during the year:
Benefit obligation at beginning of the year $ 13,799 $ 12,818
Service cost 369 326
Interest cost 885 868
Actuarial (gain) loss (5,504) 29
Premiums/claims paid (429) (548)
Termination benefits - 306
Curtailment (1,086) -
---------------- ------------------
Benefit obligation at end of year 8,034 13,799
---------------- ------------------
Change in fair value of plan assets during the year:
Fair value of plan assets at beginning of the year - -
Employer contributions 429 548
Premiums/claims paid (429) (548)
---------------- ------------------
Fair value of plan assets at the end of the year - -
---------------- ------------------
Funded status at the end of the year (8,034) (13,799)
Unrecognized actuarial (gain) loss (5,203) 1,398
Unrecognized past service liability (94) (661)
---------------- ------------------
Accrued post-retirement benefit cost at the end of the year $ (13,331) $ (13,062)
================ ==================
</TABLE>
(16) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
The Company, under SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," is required to disclose the fair value of its on- and off-balance
sheet financial instruments. A financial instrument is defined in SFAS No. 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 No. 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.
56
<PAGE>
The following table represents the carrying amounts and fair values of the
Company's financial instruments:
<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------------------------
Carrying Estimated
Amount Fair Value
----------------------- -----------------------
(In thousands)
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 78,849 $ 78,849
Debt and equity securities, net:
Available-for-sale 729,201 729,201
Mortgage-backed and mortgage related securities, net:
Available-for-sale 2,801,284 2,801,284
Federal Home Loan Bank of New York stock 28,029 28,029
Loans held-for-sale, net 62,852 62,852
Loans receivable held for investment, net 3,808,307 3,794,404
Accrued interest receivable 42,763 42,763
Mortgage servicing rights, net 17,953 22,450
Financial liabilities:
Deposit liabilities:
Certificates of deposit 2,605,454 2,600,985
Deposits, excluding certificates of deposit 1,440,158 1,440,158
Borrowed funds 2,844,541 2,804,272
Accrued interest and dividends 28,924 28,924
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------
Carrying Estimated
Amount Fair Value
----------------------- -----------------------
(In thousands)
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 94,188 $ 94,188
Debt and equity securities, net:
Held-to-maturity 26,965 27,148
Available-for-sale 795,362 795,362
Mortgage-backed and mortgage related securities, net:
Held-to-maturity 1,250,266 1,268,461
Available-for-sale 1,795,833 1,795,833
Federal Home Loan Bank of New York stock 40,029 40,029
Loans held-for-sale, net 81,725 82,322
Loans receivable held for investment, net 3,583,742 3,629,830
Accrued interest receivable 47,103 47,103
Mortgage servicing rights, net 13,779 13,797
Financial liabilities:
Deposit liabilities:
Certificates of deposit 2,835,578 2,855,367
Deposits, excluding certificates of deposit 1,383,404 1,383,404
Borrowed funds 2,527,847 2,566,440
Accrued interest and dividends 28,808 28,808
</TABLE>
57
<PAGE>
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 since it is currently due.
Mortgage servicing rights, net - Mortgage servicing rights are valued based
- ------------------------------
upon the Company's stratification of the mortgage servicing portfolio. Based
upon the Company's stratification of the mortgage servicing portfolio,
considering the predominant risk characteristics of the underlying loans,
including estimates of the cost of servicing per loan, discount rate, float
rate, inflation rate, ancillary income per loan, prepayment speeds and default
rates. Each strata is then discounted to reflect the present value of the
expected future cash flows utilizing current market assumptions. Impairment, if
any, is recognized through a valuation allowance.
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 are estimated by
computing the present value of contractual future cash flows for each
certificate. The present value rate utilized is 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.
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 interest and dividends on deposits - The fair values of the accrued
- ------------------------------------------
interest and dividends on deposit balances are estimated to be their book value
since they are currently payable.
Limitations - SFAS No. 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
58
<PAGE>
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. The fair value of commitments
did not result in an unrealized gain or loss at December 31, 1999 and 1998.
(17) Earnings Per Share Reconciliation
---------------------------------
The following table is the reconciliation of basic and diluted EPS as required
under SFAS No. 128 for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
------------------ ------------------ ------------------
(In thousands, except share and per share amounts)
<S> <C> <C> <C>
Net income $ 19,626
==================
Basic EPS:
Income available to common stockholders $ 19,626 72,052,030 $ 0.27
Effect of dilutive securities:
Options - 859,951 -
------------------ ------------------ ------------------
Diluted EPS:
Income available to common stockholders $ 19,626 72,911,981 $ 0.27
================== ================== ==================
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
------------------- ------------------- -------------------
(In thousands, except share and per share amounts)
<S> <C> <C> <C>
Net income $ 95,543
===================
Basic EPS:
Income available to common stockholders $ 95,543 72,601,103 $ 1.32
Effect of dilutive securities:
Options - 1,641,180 (0.03)
------------------- ------------------- -------------------
Diluted EPS:
Income available to common stockholders $ 95,543 74,242,283 $ 1.29
=================== =================== ===================
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amounts
------------------- ------------------- -------------------
(In thousands, except share and per share amounts)
<S> <C> <C> <C>
Net income $ 68,118
===================
Basic EPS:
Income available to common stockholders $ 68,118 73,866,416 $ 0.92
Effect of dilutive securities:
Options - 2,649,500 (0.03)
------------------- ------------------- -------------------
Diluted EPS:
Income available to common stockholders $ 68,118 76,515,916 $ 0.89
=================== =================== ===================
</TABLE>
(18) 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.
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.
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 its mortgage banking subsidiary. Under terms of the
settlement agreement, the Company established a $3.0 million fund to provide
compensation to certain borrowers who allegedly paid an overage fee for their
mortgage loans obtained from its mortgage banking subsidiary. 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 $4.7 million.
At December 31, 1999 and 1998 there were outstanding loan commitments by the
Company to advance approximately $438.1 million and $422.9 million,
respectively, for mortgage loans, primarily all of which were fixed rate
commercial and residential real estate loans.
At December 31, 1999 and 1998, the Company had no available lines of credit with
banks or any other institutions, except as noted in Note 12.
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 $73.3 million and $112.3 million at December 31, 1999 and 1998,
respectively.
60
<PAGE>
The Company's future minimum rental payments required under non-cancelable
operating leases for office space and equipment as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Years Ending December 31, Amounts
----------------------------- -----------------
(In thousands)
<S> <C>
2000 $ 4,162
2001 4,032
2002 3,888
2003 3,672
2004 3,225
Thereafter 26,902
-----------------
$ 45,881
=================
</TABLE>
Total rent expense for the years ended December 31, 1999, 1998 and 1997 was $2.5
million, $1.2 million and $949,000, respectively.
(19) Regulatory Capital
------------------
The Bank is 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, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1999, 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.
61
<PAGE>
The actual capital amounts and ratios are presented in the following table for
the years ended:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1999 1998
---------------------- ----------------------
Percent Percent of
Amount Of Assets Amount Assets
--------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GAAP capital (to total assets) $ 457,950 6.06% $ 701,240 9.10%
========= =========== ========= ===========
Leverage capital (to adjusted average assets):
Actual level $ 533,941 6.93% $ 678,359 8.61%
========= =========== ========= ===========
Capital adequacy requirement $ 231,185 3.00% $ 236,367 3.00%
========= =========== ========= ===========
Requirement to be well capitalized under
PCA provisions $ 385,308 5.00% $ 393,945 5.00%
========= =========== ========= ===========
Tier I capital (to risk-weighted assets):
Actual level $ 533,941 15.27% $ 678,359 20.38%
========= =========== ========= ===========
Capital adequacy requirement $ 139,866 4.00% $ 133,143 4.00%
========= =========== ========= ===========
Requirement to be well capitalized under
PCA provisions $ 209,800 6.00% $ 199,715 6.00%
========= =========== ========= ===========
Total capital (to risk-weighted assets):
Actual level $ 574,096 16.42% $ 716,303 21.52%
========= =========== ========= ===========
Capital adequacy requirement $ 279,733 8.00% $ 266,286 8.00%
========= =========== ========= ===========
Requirement to be well capitalized under
PCA provision $ 349,666 10.00% $ 322,858 10.00%
========= =========== ========= ===========
</TABLE>
(20) Parent-Only Financial Information
---------------------------------
The earnings of the subsidiaries (primarily the Bank) are recognized by Roslyn
Bancorp, Inc. (the Holding Company) using the equity method of accounting.
Accordingly, undistributed earnings of the subsidiaries are recorded as
increases in the Holding Company's investment in subsidiaries. The following are
the condensed financial statements of the Holding Company as of December 31,
1999 and 1998, and for the years ended December 31, 1999, 1998 and 1997
(although the Holding Company did not commence operations until the Conversion
on January 10, 1997, the full year results have been presented):
62
<PAGE>
Condensed Statements of Financial Condition
- -------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
(In thousands)
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ 355 $ 2,862
Securities available-for-sale, net:
United States Government obligations - 2,020
Mortgage-backed and mortgage related securities, net 409 4,371
Equity securities 187,232 333,387
--------------- ----------------
Total securities available-for-sale 187,641 339,778
--------------- ----------------
Investment in subsidiaries 458,249 701,240
ESOP loan receivable 52,303 52,882
Receivable from subsidiary - 33,409
Deferred tax asset, net 22,124 6,913
Accrued interest receivable 3,279 2,251
Income taxes receivable 1,487 -
Other assets 4,453 2,547
--------------- ----------------
Total assets $ 729,891 $ 1,141,882
=============== ================
Liabilities and Stockholders' Equity
- ------------------------------------
Accrued interest payable $ 387 $ 3,763
Payable to subsidiary 50,501 251,456
Accrued taxes payable - 33,045
Other liabilities 41,344 252
Total stockholders' equity 637,659 853,366
--------------- ----------------
Total liabilities and stockholders' equity $ 729,891 $ 1,141,882
=============== ================
</TABLE>
Condensed Statements of Income
- ------------------------------
The condensed statements of income for the years ended December 31, 1999, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Dividends received from subsidiary $ 213,288 $ 27,916 $ 16,856
Interest income - securities 22,816 17,922 5,451
Interest income - ESOP loan receivable 4,204 4,535 4,439
Net gain on sale of securities 756 3,136 -
Other income - 29 3
---------- --------- ---------
241,064 53,538 26,749
---------- --------- ---------
Interest expense - borrowings from subsidiary (21,407) (15,230) -
Charitable donation - - (12,711)
Other operating expenses (964) (1,309) (1,358)
Merger related costs (39,637) - -
---------- --------- ---------
Income before income taxes and equity in (overdistributed)
undistributed earnings of subsidiaries 179,056 36,999 12,680
Income tax benefit (expense) 607 (1,388) 2,859
---------- --------- ---------
Income before equity in (overdistributed) undistributed
earnings of subsidiaries 179,663 35,611 15,539
Equity in (overdistributed) undistributed earnings of
subsidiaries (160,037) 59,932 52,579
---------- --------- ---------
Net income $ 19,626 $ 95,543 $ 68,118
========== ========= =========
</TABLE>
63
<PAGE>
Condensed Statements of Cash Flows
- ----------------------------------
The condensed statements of cash flows for the years ended December 31, 1999,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net income $ 19,626 $ 95,543 $ 68,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in overdistributed (undistributed) earnings of
subsidiaries 160,037 (59,932) (52,579)
Amortization of premiums and discounts, net 276 (704) 333
Charitable contribution of common stock - - 12,711
Decrease (increase) in receivable from subsidiaries 29 (3,425) (27,135)
Deferred taxes 8,360 3,177 (709)
(Increase) decrease in other assets (3,393) (2,391) 43
(Increase) decrease in accrued interest receivable (1,028) (2,201) 24
Net gains on sale of securities (756) (3,136) -
(Decrease) increase in accrued interest payable (3,376) 3,763 -
(Decrease) increase in accrued taxes payable (24,092) 17,949 15,035
Increase (decrease) in other liabilities 36,917 (139) (3,241)
---------- ---------- ----------
Net cash provided by operating activities 192,600 48,504 12,600
---------- ---------- ----------
Investing activities:
Purchases of securities (37,663) (367,821) (155,442)
Proceeds from sales and repayments of securities
available-for-sale 184,464 156,954 9,064
Investment in subsidiary (309) - (205,807)
Funding of ESOP loan receivable - - (53,806)
Principal payment on ESOP loan receivable 579 470 454
---------- ---------- ----------
Net cash provided by (used in) investing activities 147,071 (210,397) (405,537)
---------- ---------- ----------
Financing activities:
Purchase of treasury stock (91,876) (63,406) (3,589)
Net proceeds of common stock issuance - - 410,650
(Decrease) increase in payable to subsidiary (200,955) 251,456 -
Net cash (used in) proceeds from exercise of stock options (19,756) 1,112 934
Proceeds from re-issuance of treasury stock 7,650 - -
Cash dividends paid on common stock (37,241) (27,170) (16,218)
---------- ---------- ----------
Net cash (used in) provided by financing activities (342,178) 161,992 391,777
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (2,507) 99 (1,160)
Cash and cash equivalents at beginning of year 2,862 2,763 3,923
---------- ---------- ----------
Cash and cash equivalents at end of year $ 355 $ 2,862 $ 2,763
========== ========== ==========
</TABLE>
64
<PAGE>
Selected Quarterly Financial Data (Unaudited)
The following table is a summary of operations by quarter for the years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
12/31/99 9/30/99 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
--------- --------- --------- --------- ---------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 136,640 $ 133,414 $ 128,130 $ 129,582 $ 136,818 $ 139,430 $ 137,045 $ 133,451
Interest expense 81,438 79,238 76,526 77,992 85,572 89,637 86,878 81,717
--------- --------- --------- --------- ---------- --------- --------- ---------
Net interest income before
provision for loan losses 55,202 54,176 51,604 51,590 51,246 49,793 50,167 51,734
Provision for loan losses - - - - - 400 550 550
--------- --------- --------- --------- ---------- --------- --------- ---------
Net interest income after
provision for loan losses 55,202 54,176 51,604 51,590 51,246 49,393 49,617 51,184
--------- --------- --------- --------- ---------- --------- --------- ---------
Non-interest income:
Fees and service charges 1,815 1,703 1,590 1,350 1,731 2,055 1,611 1,907
Mortgage banking
operations 3,306 5,635 3,510 3,217 2,183 3,114 1,776 1,679
Net (loss)/gain on securities (703) 42 1,214 2,185 4,170 5,225 4,441 4,269
Other non-interest income 743 (29) 902 408 401 263 273 598
--------- --------- --------- --------- ---------- --------- --------- ---------
Total non-interest income 5,161 7,351 7,216 7,160 8,485 10,657 8,101 8,453
--------- --------- --------- --------- ---------- --------- --------- ---------
Non-interest expense:
General and administrative
expenses 19,300 19,153 18,994 18,851 22,864 21,683 21,925 23,248
Amortization of excess of
cost over fair value of
net assets acquired 139 118 118 118 118 118 118 117
Merger related costs - - 1,260 87,987 - - - -
Restructuring charge - - - 5,903 - - - -
--------- --------- --------- --------- ---------- --------- --------- ---------
Total non-interest expense 19,439 19,271 20,372 112,859 22,982 21,801 22,043 23,365
--------- --------- --------- --------- ---------- --------- --------- ---------
Income/(loss) before provision
for income taxes and
extraordinary item 40,924 42,256 38,448 (54,109) 36,749 38,249 35,675 36,272
Provision for income taxes 14,465 14,665 12,870 1,657 12,225 13,356 12,608 13,213
--------- --------- --------- --------- ---------- --------- --------- ---------
Income/(loss) before
extraordinary item 26,459 27,591 25,578 (55,766) 24,524 24,893 23,067 23,059
Extraordinary item, net of tax-
prepayment penalty on debt
extinguishment - - (1,320) (2,916) - - - -
--------- --------- --------- --------- ---------- --------- --------- ---------
Net income/(loss) $ 26,459 $ 27,591 $ 24,258 $ (58,682) $ 24,524 $ 24,893 $ 23,067 $ 23,059
========= ========= ========= ========= ========== ========= ========= =========
Basic earnings/(loss) per share:
Income/(loss) before
extraordinary item $ 0.38 $ 0.38 $ 0.35 $ (0.78) $ 0.34 $ 0.34 $ 0.32 $ 0.31
Extraordinary item, net of tax - - (0.02) (0.04) - - - -
--------- --------- --------- --------- ---------- --------- --------- ---------
Net income/(loss) per share $ 0.38 $ 0.38 $ 0.33 $ (0.82) $ 0.34 $ 0.34 $ 0.32 $ 0.31
========= ========= ========= ========= ========== ========= ========= =========
Diluted earnings/(loss) per
share:
Income/(loss) before
extraordinary item $ 0.38 $ 0.37 $ 0.34 $ (0.78) $ 0.33 $ 0.34 $ 0.31 $ 0.31
Extraordinary item, net of tax - - (0.02) (0.04) - - - -
--------- --------- --------- --------- ---------- --------- --------- ---------
Net income/(loss) per share $ 0.38 $ 0.37 $ 0.32 $ (0.82) $ 0.33 $ 0.34 $ 0.31 $ 0.31
========= ========= ========= ========= ========== ========= ========= =========
</TABLE>
65
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Roslyn Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of Roslyn Bancorp, Inc. and subsidiaries (the Company) as of
December 31, 1999 and 1998, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the
years in the three-year period ended
December 31, 1999. These 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 Roslyn
Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Melville, New York
January 25, 2000
66
<PAGE>
Market Price of Common Stock
Roslyn Bancorp, Inc. common stock is traded on the Nasdaq National Market under
the symbol "RSLN." The following table shows the reported high, low and closing
sales price of the Company's common stock during the periods indicated in 1999
and 1998.
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------- ----------------------------------------------
High Low Closing High Low Closing
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ 22.0625 $ 16.2500 $ 16.8750 $ 24.5000 $ 20.1562 $ 23.5000
2nd Quarter 19.0625 16.6250 17.1875 30.5000 20.8750 22.3125
3rd Quarter 18.0000 16.1250 17.8750 22.6250 13.7500 16.1250
4th Quarter 20.0000 16.9688 18.5000 21.5000 13.3125 21.5000
</TABLE>
As of March 14, 2000, the Company had approximately 8,765 shareholders of
record, not including the number of persons or entities holding stock in nominee
or street name through various brokers and banks. There were 71,551,008 shares
of common stock outstanding at December 31, 1999.
The following schedule summarizes the cash dividends paid per common share for
1999 and 1998:
<TABLE>
<CAPTION>
Record Dividend Dividend Paid
Date Payment Date Per Share
--------------------- ----------------------- ------------------------
<S> <C> <C>
March 2, 1998 March 12, 1998 $0.080
June 2, 1998 June 12, 1998 0.085
September 1, 1998 September 14, 1998 0.100
December 2, 1998 December 14, 1998 0.110
March 2, 1999 March 12, 1999 0.115
June 2, 1999 June 12, 1999 0.125
September 1, 1999 September 13, 1999 0.135
December 3, 1999 December 10, 1999 0.140
</TABLE>
67
<PAGE>
EXHIBIT 23.0
Independent Auditors' Consent
To the Board of Directors
Roslyn Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statements (Nos.
333-41365, 333-72471, and 333-56259) on Form S-8 and (No. 333-67359) on Form S-4
of Roslyn Bancorp, Inc. of our report dated January 25, 2000, relating to the
consolidated statements of financial condition of Roslyn Bancorp, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1999, which report is
incorporated by reference in the December 31, 1999 Annual Report on Form 10-K of
Roslyn Bancorp, Inc.
/s/ KPMG LLP
Melville, New York
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Form 10-K and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
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0
0
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</TABLE>
