<PAGE>
Richmond County Financial Corp.
1214 Castleton Avenue
Staten Island, New York 10310
Tel: (718) 448-2800
RICHMOND COUNTY FINANCIAL CORP.
A BRIDGE TO
COMMUNITY BANKING
1998 ANNUAL REPORT
Corporate Profile
Richmond County Financial Corp., publicly traded on the NASDAQ National
Market under the symbol "RCBK", is the holding company for Richmond County
Savings Bank, a New York state chartered stock savings bank founded in 1886.
Headquartered in Staten Island, New York, the Bank operates 12 full service
banking offices on Staten Island, one full service banking office in Brooklyn
and a multifamily loan processing center in Jericho, Long Island.
On February 18, 1998, Richmond County Financial Corp. acquired Richmond
County Savings Bank as part of the bank's conversion from the mutual to stock
form of ownership.
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Corporate Information
Board of Directors
Michael F. Manzulli
Chairman of the Board
Anthony E. Burke
Godfrey H. Carstens, Jr.
Robert S. Farrell
William C. Frederick, M.D.
James L. Kelley
T. Ronald Quinlan, Jr.
Maurice K. Shaw
Directors Emeriti
Kenneth DeForest
Fred C. Lahr
Nelson K. Mintz
Independent Auditors
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
General Counsel
Lahr, Dillon, Manzulli,
Kelley & Penett
33 Decker Avenue
Staten Island, New York 10302
Securities Counsel
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, NW
Washington, DC 20016
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Executive Management
Executive Officers of
Richmond County Financial Corp.
and Richmond County Savings Bank
Michael F. Manzulli
Chairman and Chief Executive Officer
Anthony E. Burke
President and Chief Operating Officer
Thomas R. Cangemi
Senior Vice President and
Chief Financial Officer
Richmond County Savings Bank
John J. McKenna
Executive Vice President
Senior Vice Presidents
Stephen G. C. Campbell-Auditing
Peter J. Esposito-Residential
& Construction Lending
Charles F. Hermann, III-Special Services
Robert J. O'Rourke-Commercial Lending
Andrew M. Sisock-Financial Operations
Nelson C. Sundback-Information Systems
Terrence S. Walsh-Multifamily Lending
Vice Presidents
Frank J. Akalski-Investments
Salvatore Annarumma-
Information Systems
Charles W. Baker-
Multifamily Underwriting
Leonard J. Bosso-Business Services
John F. Cook-Multifamily Underwriting
Donna J. DiGirolamo-Multifamily
Loan Administration
Dorothy Episcopia-Human Resources
Louis L. Hallisey-Multifamily Underwriting
Everett M. Hannah-Compliance
Sean Howland-Multifamily Underwriting
Joseph Masi-Marketing
Ann Rapaglia-Branch Administration
Frank Segreto-Commercial Lending
Teddy T. Taylor-Business Services
Ralph Walther-Strategic Planning
Other Senior Officers
John J. Amodio-Director of
Commercial Services
Margaret Bell-Auditing
Philip A. DeLuca-Director of
Residential Lending
Rosemary Colca-Secretary of the Bank
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Shareholder Information
Corporate Offices
Richmond County Financial Corp.
1214 Castleton Avenue
Staten Island, New York 10310
Tel: (718) 448-2800
Stock Listing
Richmond County Financial Corp. is traded on the NASDAQ National Market under
the symbol RCBK. Newspaper stock listings: RchmndCntyFnl or RichCty.
Annual Meeting
The annual meeting of shareholders will be held on Tuesday, September 29, 1998,
at 10:00 a.m., at the Columbian Lyceum, 386 Clove Road, Staten Island, New York
10310.
Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Tel: (908) 497-2300
Investor Relations
Copies of the Company's earnings releases and financial publications, including
the annual report on Form 10-K (without exhibits) filed with the Securities and
Exchange Commission, are available without charge by contacting:
Carolynn Orisino
1214 Castleton Avenue Staten Island,
New York 10310
Tel: (718) 815-7048
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Highlights
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(Dollars in thousands, except per share data)
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1998 1997 1996
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Selected Financial Condition at Year End:
Total assets $ 1,595,844 $993,370 $914,483
Cash and cash equivalents 57,884 32,543 49,272
Debt and equity securities, net:
Available for sale 238,890 19,706 21,659
Held to maturity -- 205,201 307,700
Mortgage-backed and mortgage-related securities, net:
Available for sale 604,304 27,398 1,394
Held to maturity -- 185,122 80,284
Loans receivable, net 644,469 496,258 419,270
Deposits 950,808 885,818 819,216
Borrowings 306,000 -- --
Stockholders' equity 328,595 100,865 89,901
Selected Operating Data for the Year Ended:
Net interest income $ 49,242 $38,074 $32,809
Provision for possible loan losses 2,200 1,080 1,600
Non-interest income 3,601 2,861 2,827
Non-interest expense 44,046 19,667 18,503
Net income 4,526 10,725 8,730
Selected Financial Ratios, Excluding RCS Foundation Charge:
Return on average assets 1.26% 1.13% 0.99%
Return on average stockholders' equity 8.36 11.25 10.25
Average stockholders' equity to average assets 15.05 10.07 9.70
Stockholders' equity to total assets at end of period 20.59 10.15 9.83
Net interest rate spread 3.29 3.64 3.48
Net interest margin 4.10 4.22 3.96
Total non-interest expense to average assets 1.93 1.99 2.07
Efficiency ratio 45.75 46.08 51.04
Book value per share $ 12.44 N/A N/A
Asset Quality Ratios at Year End:
Non-performing loans as a percent of loans, net 0.85% 0.78% 0.91%
Non-performing assets to total assets 0.37 0.46 0.48
Allowance for loan losses to loans receivable, net 1.12 1.10 1.14
Allowance for loan losses to non-performing loans 131.50 141.09 125.55
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g r o w t h
Dear Shareholder,
Richmond County Financial Corp., the holding company for Richmond County
Savings Bank, is pleased to present its first annual report as a public company.
On February 18, 1998, we became a public company as the conversion from a mutual
to a stock form of ownership was successfully completed. The subscription
offering was fully subscribed by our depositors. We issued 24,466,250 shares of
common stock to the public at $10.00 a share, raising net proceeds of
approximately $234.9 million.
In addition, as part of our commitment to the community, the Richmond
County Savings Foundation was established. Its mission is to support charitable
causes designed to further community development, expand home ownership
opportunities, provide access to affordable housing and to support community
organizations that contribute to the quality of life in the communities in which
the bank serves. The Company funded the Foundation with a contribution of
1,957,300 shares of common stock.
Our success this past year was the result of focused planning, solid
commitment and aggressive action. During October 1997, in anticipation of our
public offering, the Company strengthened its management staff with the addition
of Anthony E. Burke as President-Chief Operating Officer and Thomas R. Cangemi
as Senior Vice President-Chief Financial Officer. Both have substantial
experience with the operations of publicly held financial institutions. Their
combined experience and expertise have served our organization well during the
conversion process, with recent acquisition strategy, and will prove an
invaluable asset as we continue to position the organization for future growth.
Shortly after the close of our fiscal year on June 30, 1998, we announced
back-to-back acquisitions of Ironbound Bankcorp, NJ ("Ironbound"), the holding
company of Ironbound Bank and Bayonne Bancshares, Inc. ("Bayonne"), the holding
company of First Savings Bank of New Jersey. These transactions demonstrate our
commitment to enhancing long-term shareholder value and our vision of growing
our operations and of entering the New Jersey market. Ironbound is a commercial
bank with three full service commercial banking offices, with two additional
commercial banking offices expected to open in calendar year 1999. Bayonne is a
traditional thrift with four full service banking offices. As of June 30, 1998,
total assets of Ironbound were $113.7 million, deposits were $107.8 million and
stockholders' equity was $11.3 million. Total assets of Bayonne were
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$700.3 million, deposits were $421.7 million and stockholders' equity stood at
$96.0 million. Combined, the total transaction value is estimated to be
approximately $200.0 million and both transactions are expected to be completed
in the first quarter of calendar 1999. You will be hearing more about these
transactions, as the Bayonne transaction will require our shareholders'
approval. On a pro-forma combined basis, as of June 30, 1998, total assets of
the Company, Ironbound and Bayonne would have been $2.4 billion.
These acquisitions follow an equally important transaction completed in
April of 1998, wherein we established our Multifamily Lending Group and staffed
the division with highly experienced personnel from a major New York banking
institution. This highly successful team with a proven track record brings to us
a significant origination capability and a new product to our expanding
community customer base.
Fiscal Year Financial Results
Our financial results for fiscal 1998 also reflect our progress as a public
company. Net income for the fiscal year ended June 30, 1998 was $4.5 million.
Adjusting for the non-recurring contribution to the Richmond County Savings
Foundation, net income was $15.7 million, or 46.7% higher than the $10.7 million
reported for the same period last year.
As of June 30, 1998, total assets were $1.6 billion, deposits were $950.8
million and total stockholders' equity was $328.6 million. These increases were
primarily due to net proceeds received in the conversion, $306.0 million of
advances received from the Federal Home Loan Bank and a net increase of $65.0
million in deposits. The increase in stockholders' equity to $328.6 million was
primarily due to the net conversion proceeds, offset in part by the funding of
the Bank's Employee Stock Ownership Plan (ESOP). Subsequent to the conversion,
the ESOP purchased 2,113,884 shares of the Company's stock at a cost of $34.6
million.
From a performance perspective, excluding the one-time non-recurring charge
to fund the Foundation, the Company performed well. It had a 1.26% return on
average assets for the year and a 1.42% return on average assets for the fourth
quarter. The Company's return on average equity was 8.36% for the year and 6.75%
for the quarter ending June 30, 1998. These returns on equity reflect an equity
to total assets ratio of 20.59%. We fully understand, as any other recently
converted institution, that we will need to wisely deploy our new capital and
will be committed to improving our return on equity through a combination of
prudent capital management and growth strategies.
Our performance was certainly enhanced by the inflow of the conversion
proceeds, but also reflects our historically low operating expenses and strong
asset quality. Our efficiency ratio improved slightly to 45.75% from 46.08%. Our
ratio of non-interest expense to average earning assets was 1.93%. Our
percentage of non-performing loans to total loans increased slightly to 0.85%
from 0.78% and declined as a percent of total assets to 0.37% from 0.46%. Our
allowance for loan losses as a percent of total loans stood at 1.12% at
year-end. It is our goal to closely monitor these performance and asset quality
measurements throughout the next fiscal year.
Our loan originations and purchases increased to $231.9 million, or 68%
over last year. This loan growth in fiscal 1998 came from all of our major
lending products and we expect continued strong loan growth in fiscal 1999,
especially as we begin to see the benefits of multifamily loan originations.
<PAGE>
Even with the success of our conversion with over 25% of our depositors
participating in the offering, many of whom used their deposits to buy stock, we
were able to generate a 7.3% growth in our deposits, driven by a $28.7 million
increase in non-interest bearing demand deposits.
New Millennium...What the Future Holds
We will be tireless in our pursuit of opportunities to enhance shareholder
value, continuously exploring alternative channels to more efficiently deliver
our services to more of the marketplace. Delivering more service to more people
more efficiently will strengthen our franchise and create additional value.
New branch locations will expand our presence on Staten Island. New Dorp,
long a hub of retail and commercial activity, will be the new home for our
Commercial Services Center. Staffed by our Business Services experts, we plan to
introduce our personal brand of Business Banking to an entirely new market.
Additionally, we are locating a Public Accommodation Office in the newest
shopping center on the Island, "Expressway Plaza," where over 30,000 cars are
expected to visit the center weekly. Finally, we will open a branch office in
the Sunnyside section of Staten Island, and similar to the New Dorp Branch, it
will have a decidedly commercial banking focus.
With all our new initiatives, we have also made sure our infrastructure and
need for qualified people are addressed. We have added professionals to our
lending, business services, mortgage operations, information systems and finance
departments and will continue to seek out outstanding individuals to share in
our growth and success. We are pursuing state-of-the-art mortgage and commercial
lending systems, customer warehousing and database systems.
We would be remiss in not reporting on our commitment to the Year 2000
issues. Our Board of Directors and management, along with our technological
providers and outside vendors, have been involved in a significant effort to
ensure our operating systems are Year 2000 compliant well before the turn of the
century.
Management Style
Because each of us has a background as a professional advisor to financial
institutions and has operated in professional partnerships, the concept of
creating a "partnership" has been an overriding principle and philosophy. Prior
to joining the Bank and the Company, we have devoted virtually all of our
working lives to a partnership, in one case a substantial law practice and the
other a "Big 5" public accounting firm. During those years, we knew that client
service was the force in a successful endeavor, and that stakeholders in any
enterprise include management, the Board, the shareholders, the employees and,
in our industry, the regulators. In addition, we acknowledge that the benefits
of a partnership could be achieved by focusing on the strengths of our partners.
We are expecting that with the future adoption of our stock based incentive
plan, and equity awards under that plan, our management and employees will
become partners with our shareholders and have a common equity interest.
Already, our concept of partnering with our significant vendors is taking hold,
and we believe that our attempts at partnering with our borrowing clients,
especially those in commercial businesses, are being well-received.
Being a good partner also implies that we can be good listeners. Our
short-term goals are revised continually based upon feedback from our
shareholders and the marketplace. In summary, we are excited about the future of
this company and we have become significant investors in that belief.
Conclusion
As we look to the future, we eagerly anticipate the challenges and
opportunities which lie ahead, while our vision of building "A Bridge to
Community Banking" begins to take shape. We will continue to seek opportunities
which will enhance shareholder value via prudent growth through in-market
expansion, operating efficiencies and customer satisfaction. With the commitment
of the Board of Directors, the dedication of our officers and the enthusiasm of
our employees, the Company will successfully build "A Bridge to Community
Banking," a bridge which will span the millennium and beyond. Thank you for your
continued support.
Sincerely,
Michael F. Manzulli
Chairman & CEO
Anthony E. Burke
President & COO
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s t a b i l i t y
WE HAVE NEVER WAVERED FROM OUR FOUNDING PRINCIPLES OF PROVIDING PERSONAL SERVICE
TO THE COMMUNITY, OFFERING ATTRACTIVE DEPOSIT RATES TO ENCOURAGE SAVINGS, AND
MAKING AFFORDABLE MORTGAGES AVAILABLE TO PROMOTE HOME OWNERSHIP FOR OUR
NEIGHBORS.
TODAY, AS A MARKET-DRIVEN INSTITUTION, WE HAVE INTRODUCED PRODUCTS AND SERVICES
WHICH MEET THE NEEDS OF OUR FAST-GROWING COMMUNITY. BUSINESS SERVICES, SBA
LENDING, FIRST TIME HOMEBUYERS PROGRAMS AND AN EXPANDING ATM NETWORK ARE JUST A
FEW EXAMPLES OF HOW WE'VE ENHANCED OUR PRODUCT OFFERINGS TO SATISFY THE DEMANDS
OF THE MARKET.
WITH THE COMMITMENT OF THE BOARD OF DIRECTORS, THE DEDICATION OF OUR OFFICERS
AND THE ENTHUSIASM OF OUR EMPLOYEES, RICHMOND COUNTY FINANCIAL CORP. WILL
SUCCESSFULLY BUILD "A BRIDGE TO COMMUNITY BANKING."
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c o m m i t m e n t
A Year of Change and Growth
It is hard to imagine the pace of change and growth that the Bank has
undertaken and experienced this past year. This could not have been possible
without careful planning and execution of a vision that has been nurtured and
honed over the past five years. With the conversion process and the proceeds
acting as the catalyst, the actions undertaken reflect a deep commitment to
community banking and enhancing shareholder value.
Here are a few of the year's many highlights and a profile of our Company:
Retail Banking
Always the backbone of the franchise, the banking offices were faced with
large challenges and opportunities this past year. Through all of the changes
brought on by the conversion process, our officers and employees never lost
sight of our customers' needs. This attention and service is reflected in our
branches' ability to increase our deposits by 7.3%. This growth was led by the
31% expansion in non-interest demand deposits to $121.6 million. Our core
deposits now represent 65.8% of our total deposits. Our hallmark "Free Checking"
account has tremendous appeal to a broad segment of the market and provides an
effective edge against the competition. During the year, we introduced formal
sales training, measurement and incentive programs in an effort to increase
overall productivity of the branches. As a result of this program, the Bank's
new customer cross-sell ratio has increased from 1.41 to 2.10.
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Residential Mortgage Lending
This Division has long been the major contributor to our portfolio of loans
by making one-to-four family residential and construction loans almost
exclusively in our primary market areas. At the end of last year, these products
totaled 82.1% of our loan portfolio. As we have diversified our lending
products, this percentage has decreased to 77.0% of our portfolio as of June 30,
1998, while the loan balance has increased to $501.7 million from a balance of
$412.9 million last year. Our originations this past year of $140.7 million set
a record for the Bank. While we were proud of this accomplishment, our
short-term goal is to substantially increase these levels of originations by
making the needed investments in technology and people. Similar to the retail
banking area, we will be introducing an incentive program to motivate our
people. Our plan to substantially increase these originations comes after a
thorough review of our marketplace and a realization that there are substantial
growth opportunities for our residential loan products, on Staten Island,
Brooklyn and New Jersey.
Commercial Banking
Over the past several years, there has been a focused effort to develop a
de-novo commercial bank within the overall bank structure. This effort was begun
after determining that the Staten Island market was being underserved by the
major commercial banks while having no independent commercial banks of its own
at the time.
Commercial banking talent was employed and a concerted effort initiated to
service small to medium size businesses, colleges and universities and
professional practices. Our vision became a reality over the past two years and
on June 30, 1998, commercial loans stood at $62.2 million, up from $47.4 million
in the prior year, reflecting originations of $32.6 million vs. $8.1 million in
the prior year. In addition, by June 30, 1998, non-interest bearing business
checking balances totaled approximately $45.0 million, with over 2,000 business
relationships already in place. We expect these balances to continue to grow in
fiscal 1999 and believe that we can enhance our commercial banking expertise
significantly, with the planned acquisition of Ironbound Bank.
Multifamily Lending
In order to greatly expand and diversify our lending capabilities, the
Multifamily Lending Group (the ML Group) was hired, bringing ten new officers to
the bank who believe in our vision and strategic plan. This group formerly led
successful operations at Bayside Federal Savings Bank and Home Federal Savings
Bank, both banks that were subsequently acquired. A major portion of fiscal year
1999 loan growth is anticipated to be comprised of multifamily loans throughout
the five boroughs of New York City, Westchester, New Jersey, Pennsylvania and
Delaware. We believe that these loans are relatively low risk assets that can
offer us attractive yields. We also believe that our planned entry into the
cities of Bayonne and Newark will add significant market opportunities to the ML
Group and plans to capitalize on these opportunities are already in motion.
<PAGE>
Richmond County Savings Foundation
It is a rare opportunity when a commercial enterprise can give back to the
community that created its growth and success. One entity that should be
reaching to accomplish this end is a community bank. In our conversion process
the Foundation was formed.
The Foundation has seen the value of its stock contribution of 1,957,300
shares grow from $19.6 million to almost $36.6 million as of June 30, 1998. The
Board of the Foundation has adopted a sound and responsible business strategy
and is in the process of studying the initial requests for funding.
Pending Mergers
Our planned mergers with Bayonne Bancshares and Ironbound Bankcorp
represent our entry into the New Jersey market.
Bayonne has four full service offices with an estimated 40% deposit market
share in the city of Bayonne. This "in-market" merger is a natural extension for
us, with Bayonne's branches closer to our main headquarters than many of our
existing branches on Staten Island.
The Ironbound merger will bring commercial banking relationships and will
accelerate our efforts to become more active in commercial lending. The merger
is consistent with our goal of becoming a full service community bank.
h i s t o r y
o f
s e r v i c e
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THE MISSION OF RICHMOND COUNTY SAVINGS FOUNDATION IS TO SUPPORT CHARITABLE
CAUSES DESIGNED TO FURTHER COMMUNITY DEVELOPMENT, EXPAND HOME OWNERSHIP
OPPORTUNITIES, PROVIDE ACCESS TO AFFORDABLE HOUSING AND TO SUPPORT COMMUNITY
ORGANIZATIONS THAT CONTRIBUTE TO THE QUALITY OF LIFE IN THE COMMUNITIES WHICH
THE BANK SERVES.
THE BACK-TO-BACK ACQUISITIONS OF IRONBOUND BANKCORP AND BAYONNE
BANCSHARES, INC. DEMONSTRATE OUR COMMITMENT TO ENHANCING LONG-TERM SHAREHOLDER
VALUE AND OUR VISION OF GROWING OUR OPERATIONS AND ENTERING THE NEW JERSEY
MARKET. ON A PRO-FORMA COMBINED BASIS, AS OF JUNE 30, 1998, TOTAL ASSETS OF THE
COMPANY, IRONBOUND AND BAYONNE WOULD HAVE BEEN $2.4 BILLION.
<PAGE>
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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 June 30, 1998
Commission file number 0-23271
RICHMOND COUNTY FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
06-1498455
(I.R.S. Employer
Identification No.)
1214 Castleton Avenue, Staten Island, New York 10310
(Address of principal executive offices)
Registrant's Telephone number, including area code: (718) 448-2800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 filer pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the shares of registrant's common stock held by
non-affiliates of the Registrant was $418,791,456 as of August 7, 1998. Solely
for the purpose of this computation, it has been assumed that executive officers
and directors of the Registrant are "affiliates".
There were issued and outstanding 26,423,550 common shares of the Registrant's
Common as of August 7, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The information required under Part III of this Form 10-K is incorporated by
reference from the Registrant's definitive Proxy Statement relating to its 1998
Annual Meeting of Stockholders.
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INDEX
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PART I
Item 1 Business ..................................................................................... 1
Item 2 Properties ................................................................................... 34
Item 3 Legal Proceedings ............................................................................ 36
Item 4 Submission of Matters to a Vote of Security Holders .......................................... 36
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters ......................... 36
Item 6 Earnings Summary and Selected Financial Data and
Condensed Quarterly Statements of Operations ................................................. 37
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................... 40
Item 7a Quantitative and Qualitative Disclosures About Market Risk.................................... 50
Item 8 Financial Statements.......................................................................... 54
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................................... 77
PART III
Item 10 Directors and Executive Officers of the Registrant ........................................... 77
Item 11 Executive Compensation........................................................................ 77
Item 12 Security Ownership of Certain Beneficial Owners and Management ............................... 77
Item 13 Certain Relationships and Related Transactions ............................................... 77
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .............................. 78
SIGNATURES................................................................................................... 79
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<PAGE>
PART I
Item 1. Business
General
Richmond County Financial Corp. (the "Company" or "Registrant") was incorporated
under Delaware law in September 1997. On February 18, 1998, the Company acquired
Richmond County Savings Bank and subsidiaries (the "Bank"), Staten Island, New
York, as part of the Bank's conversion from the mutual to stock form of
organization (the "Conversion"). On February 18, 1998, the Company issued an
aggregate of 26,423,550 shares of its common stock, par value $0.01 per share,
of which 24,466,250 shares were issued in a subscription offering and 1,957,300
shares were issued to the Richmond County 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 $234.9 million of net conversion proceeds, of which $117.4
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 June 30, 1998, the Company had consolidated
total assets of $1.6 billion, deposits of $950.8 million and stockholders'
equity of $328.6 million. Currently, the Company's activities consist solely of
managing the Bank and investing the portion of net conversion proceeds retained
by the Company. The following discussions address the operations of the Bank and
its subsidiaries.
The Bank is a community-oriented savings bank, which was originally chartered in
the State of New York in 1886. The Bank's principal businesses consist of the
acceptance of retail deposits from the general public in the areas surrounding
its branch offices and the investment of those deposits, together with funds
generated from operations and borrowings, primarily in one-to-four family
residential and multifamily mortgage loans and, to a lesser extent, commercial
real estate, construction and development, commercial, home equity, consumer and
student loans and in mortgage-backed and mortgage-related securities and various
debt and equity securities. The Bank's revenues are derived principally from the
interest on its mortgage, commercial and consumer loans and securities. 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.
As a New York State chartered savings bank, the Bank's deposits are insured up
to the applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is regulated by the Superintendent of Banks of the State of New York,
(the "Superintendent") the New York Banking Board ("NYBB") and the New York
State Banking Department ("NYSBD").
The Company's executive offices are located at the administrative offices of the
Bank, 1214 Castleton Avenue, Staten Island, New York 10310. Its telephone number
is (718) 448-2800.
Planned Acquisitions and Recent Developments
On July 20, 1998, the Company and Bayonne Bancshares, Inc. ("Bayonne") entered
into a definitive agreement pursuant to which Bayonne, the holding company of
First Savings Bank of New Jersey, SLA, a New Jersey chartered savings and loan
association, with four full service banking offices located in Bayonne, New
Jersey, will merge with and into the Company. Under the terms of the agreement,
the Company will issue 1.05 shares of its common stock for each outstanding
share of common stock of Bayonne. The total transaction value is estimated to be
$173.0 million. As of June 30, 1998 (unaudited), total assets of Bayonne were
$700.3 million, deposits were $421.7 million and total stockholders' equity was
$96.0 million. The merger is subject to the approval of the shareholders of each
company, as well as certain regulatory approvals. The merger is expected to be
completed in the first quarter of calendar year 1999, and is intended to be a
tax-free merger accounted for as a pooling of interests.
On July 17, 1998, the Company and Ironbound Bankcorp, NJ ("Ironbound") entered
into a definitive agreement pursuant to which Ironbound, the holding company of
Ironbound Bank, a New Jersey chartered commercial bank, with three full service
commercial banking offices located in the New Jersey counties of Union and
Essex, will merge with and into the Company. Under the terms of the agreement,
the Company will issue 1.45 shares of its common stock for each outstanding
common share of Ironbound. The total transaction value is estimated to be $26.5
million. As of June 30, 1998 (unaudited), total assets of Ironbound were $113.7
million, deposits were $107.8 million and total stockholders' equity was $11.3
million. The merger is subject to the approval of Ironbound shareholders, as
well as certain regulatory approvals. The
1
<PAGE>
merger is expected to be completed in the first quarter of calendar year 1999,
and is intended to be a tax-free merger accounted for as a pooling of interests.
On April 3, 1998, the Company announced that the Bank has entered the
multifamily lending business servicing the metropolitan area and surrounding
counties of the five boroughs of New York City, New Jersey, Pennsylvania and
Delaware from its back office operations based in Jericho, Long Island, New
York.
In October 1997, the Company hired a President and Chief Operating Officer and a
Senior Vice President, Chief Financial Officer and Secretary, both of whom were
not previously employed by the Bank, but who have significant experience in the
financial services industry.
Market Area
The Bank is a community-oriented financial institution offering a variety of
financial services to meet the needs of the communities it serves. The Bank
currently operates twelve full-service banking offices in the Borough of Staten
Island, and one full service banking office in the Borough of Brooklyn.
Additionally, the Bank intends to open a public accommodation office in 1998 and
two new full-service branches located on Staten Island in fiscal 1999.
The Bank's primary deposit gathering area is currently concentrated around the
areas where its full service banking offices are located in Staten Island and
Brooklyn, which the Bank generally considers to be its primary market area. The
Bank's primary lending area has also historically been concentrated in Staten
Island and, to a lesser extent, in the area around its office in Brooklyn. As of
June 1997, based on a survey by a nationally-recognized bank consulting firm,
the Bank had 14.2% of total deposits in Staten Island, and for 1996, the Bank
had a lending market share of approximately 7.2% in Staten Island, placing the
Bank among the leaders in both loans originated and deposits in Staten Island.
The Bank and Company may, in the future, consider expanding the market area
served by the Bank and Company to other areas in the New York City metropolitan
area, including New Jersey, and Pennsylvania. As indicated previously, the
Company announced the planned mergers of Bayonne and Ironbound in July 1998.
Upon completion of the proposed mergers, which is anticipated to be completed in
the first quarter of calendar 1999, the Company's primary market area would
expand into northern New Jersey.
The economy of 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, Staten Island has historically
benefited from steady residential growth and an expanding base of service
businesses. During the late 1980s and early 1990s, however, due in part to the
effects of a prolonged period of weakness in the national economy, the decline
in the regional economy, layoffs in the financial services industry and
corporate relocations, the New York City metropolitan area experienced reduced
levels of employment. These conditions, in conjunction with a surplus of
available commercial and residential property, resulted in an overall decline in
the underlying values of properties located in the area during the late 1980s
and early 1990s. Staten Island, due to its location and its relatively large
population of government employees, was somewhat insulated from the economic
decline of the late 1980s and early 1990s. Since 1993, the prices and values of
real estate have stabilized and, in certain areas, the prices and values of real
estate have increased. In the past several years, the New York City metropolitan
area has benefited from the resurgence and growth in employment and
profitability experienced by national securities and investment banking firms,
many of which are domiciled in the Borough of Manhattan, as well as the growth
and profitability of other financial services companies, such as money center
banks. However, there can be no assurances that conditions in the local economy,
national economy or real estate market in general will not deteriorate in the
future.
Competition
The Bank faces significant competition, both in making loans and in attracting
deposits. The New York City metropolitan area has a high density of financial
institutions, many of which are branches of significantly larger institutions
that have greater financial resources than the Bank, and all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from savings banks, commercial banks, savings and loan
associations, mortgage banking companies, credit unions, insurance companies and
other financial service companies. Its most direct competition for deposits has
historically come from savings and loan associations, savings banks, commercial
banks and credit unions. The Bank faces additional competition for deposits from
non-depository competitors, such as the mutual fund industry, securities and
brokerage firms and insurance companies. There are approximately eleven
depository institutions with operations in the Borough of Staten Island.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions.
2
<PAGE>
Lending Activities
Loan Portfolio Composition. The types of loans that the Bank may originate are
subject to federal and state law and regulations. Interest rates charged by the
Bank on loans are affected principally by the demand for such loans, the supply
of money available for lending purposes and the rates offered by its
competitors. These factors are, in turn, affected by general and economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters.
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 portfolios at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ---------------- ----------------- ------------------ -----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
--------- -------- --------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family .............. $ 470,385 $ 72.2% $ 394,588 78.4% $ 325,139 76.3% $ 303,734 76.2% $ 273,063 75.5%
Multifamily ..................... 50,491 7.8 2,705 0.5 1,238 0.3 811 0.2 920 0.3
Commercial real estate .......... 55,416 8.5 40,713 8.1 39,892 9.3 40,037 10.1 39,220 10.8
Construction and development ... 31,297 4.8 18,343 3.7 12,812 3.0 10,487 2.6 6,677 1.9
Home equity ..................... 15,379 2.4 16,729 3.3 18,054 4.2 16,518 4.1 16,775 4.6
Commercial ...................... 6,783 1.0 6,662 1.3 6,300 1.5 5,039 1.3 5,426 1.5
Consumer and student ............ 21,770 3.3 23,589 4.7 22,932 5.4 21,795 5.5 19,663 5.4
--------- ------ --------- ----- --------- ----- --------- ----- --------- -----
Gross loans................ 651,521 100.0% 503,329 100.0% 426,367 100.0% 398,421 100.0% 361,744 100.0%
====== ===== ===== ===== =====
Less:
Unamortized discounts, net....... (631) (788) (947) (1,105) (1,263)
Deferred loan (costs) fees....... 855 (813) (1,354) (1,632) (1,525)
Allowance for loan losses........ (7,276) (5,470) (4,796) (3,275) (3,106)
--------- --------- --------- --------- ---------
Total loans, net........... 644,469 496,258 419,270 392,409 355,850
Less:
Loans held for sale, net:
One-to-four family ............ -- -- 1,155 -- --
--------- --------- --------- --------- ---------
Loans receivable held for
investment, net ............... $ 644,469 $ 496,258 $ 418,115 $392,409 $ 355,850
========= ========= ========= ======== =========
</TABLE>
Loan Originations. The Bank originates both adjustable-rate and fixed-rate
one-to-four family mortgage loans, multifamily loans, commercial real estate
loans, construction and development loans, home equity loans, commercial loans
and consumer loans and student loans. The Bank's one-to-four family mortgage
lending activities are conducted primarily through the utilization of mortgage
brokers and by the Bank's loan personnel, generally operating in the Bank's loan
center. Although the Bank has authorized the use of approximately 70 mortgage
brokers in connection with one-to-four family loan originations, the Bank
primarily utilizes the services of 17 mortgage brokers operating primarily on
Staten Island and in Brooklyn. During the years ended June 30, 1998 and 1997,
the Bank originated $74.3 million and $73.9 million, respectively, of
one-to-four family loans through mortgage brokers and $44.1 million and $26.6
million, respectively, of such loans through Bank personnel. Recently, the Bank
began offering, through brokers, its fully processed loan program, which is a
zero point loan that is originated and processed by the broker. The Bank pays
mortgage brokers a processing fee for a fully processed loan. All loans are
underwritten by the Bank pursuant to the Bank's loan underwriting policies and
procedures.
3
<PAGE>
Recently, the Bank has placed increased emphasis on the origination of
commercial real estate, construction and development and commercial loans as
part of its efforts to broaden the services it provides to the Staten Island
business community. In this regard, the Bank has recently hired commercial
lending personnel with experience in the Bank's primary market area and may add
additional personnel as needed. In addition, the Bank has increased its
marketing efforts with respect to commercial real estate, construction and
development and commercial lending by making its existing business customers
aware of the expanded products and services available to businesses. The Bank's
ability to originate loans is dependent upon customer demand, demand for
fixed-rate or adjustable-rate loans and expected future levels of interest
rates.
In addition, the Bank has placed increased emphasis on the origination of
multifamily loans and, in April 1998, established a multifamily lending
department staffed by personnel experienced in the multifamily lending business.
Generally, all loans are originated for investment with certain exceptions for
longer-term fixed-rate one-to-four family mortgage loans. From time to time, the
Bank will retain fixed-rate mortgage loans with terms over fifteen years,
depending on the asset quality and the interest rate risk position of the Bank.
The one-to-four family loan products currently originated for sale by the Bank
include a variety of mortgage loans that conform to underwriting standards
specified by FNMA and FHLMC ("conforming loans"). Loans that do not conform to
FNMA or FHLMC standards due to loan amounts ("jumbo loans") are originated for
the Bank's portfolio. With the exception of customary provisions relating to
breaches of representations and warranties, sales of loans are made without
recourse to the Bank in the event of default by the borrower. The Bank generally
retains the servicing rights on the mortgage loans sold to FHLMC.
At June 30, 1998, the Bank was servicing its own portfolio of $651.5 million of
loans receivable and $45.3 million of loans for others, primarily consisting of
conforming fixed-rate loans sold by the Bank. 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 the years ended June 30, 1998 and June 30, 1997, the Bank originated
$118.4 million and $100.5 million of fixed-rate and adjustable-rate one-to-four
family loans, respectively, of which $118.4 million and $98.5 million,
respectively, were retained by the Bank. The fixed-rate loans retained by the
Bank consisted primarily of loans with terms of 15 to 30 years. At June 30,
1998, the Bank had no mortgage loans held for sale. The Bank has, in the past,
purchased participations in loans, primarily one-to-four family mortgage loans,
and had $0.9 million of participations in loans at June 30, 1998.
The following table sets forth the Bank's loan originations, purchases, sales
and principal repayments for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended June 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans:
Balance outstanding at beginning of period .............. $503,329 $426,367 $398,421
-------- -------- --------
Loans originated:
One-to-four family ............................. 118,384 100,487 53,957
Multifamily .................................... 9,393 1,616 540
Commercial real estate ......................... 22,537 4,454 6,408
Construction and development ................... 22,280 13,444 9,080
Home equity .................................... 3,567 5,824 6,049
Commercial ..................................... 10,083 3,636 11,280
Consumer and student ........................... 7,024 7,790 7,011
-------- -------- --------
Total loans originated .............. 193,268 137,251 94,325
Loans purchased ...................................... 38,616 910 --
-------- -------- --------
Total loans originated and purchased. 231,884 138,161 94,325
-------- -------- --------
Less:
Principal repayments ................................. 83,120 58,485 55,799
Sales of loans ....................................... -- 2,004 9,972
Transfers to real estate owned ....................... 532 673 608
Principal charged off ................................ 40 37 --
-------- -------- --------
Total loans ................................... 651,521 503,329 426,367
Less:
Loans held for sale, net ............................. -- -- 1,155
-------- -------- --------
Loans receivable held for investment at end of period. $651,521 $503,329 $425,212
======== ======== ========
</TABLE>
4
<PAGE>
Loan Maturity. The following table shows the contractual maturity of the Bank's
loan portfolio at June 30, 1998. The table does not include prepayments or
scheduled principal amortization. Prepayments and scheduled principal
amortization on mortgage loans totaled $83.1 million, $58.5 million, and $55.8
million for the years ended June 30, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------------------------------------------------------------------
Real Estate Loans
-------------------------------------------------------------
One-to- Construction Consumer Total
Four Multi- Commercial and Home and Loans
Family Family Real Estate Development Equity Commercial Student Receivable
-------- -------- ----------- ----------- ------- ---------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year.......... $ 5,577 $ 26 $ 209 $ 22,027 $ - $ 4,431 $ 873 $ 33,143
-------- -------- ----------- ----------- ------- -------- ------- ----------
After one year:
More than one year to
three years....... 1,433 20 308 9,270 - 2,352 5,344 18,727
More than three years to
five years......... 4,734 - 1,062 - 39 - 1,900 7,735
More than five years to
10 years........... 30,221 12,312 18,646 - 2,233 - 6,787 70,199
More than 10 years to
20 years........... 86,153 38,133 31,858 - 10,376 - 6,777 173,297
More than 20 years...... 342,267 - 3,333 - 2,731 - 89 348,420
-------- -------- ----------- ----------- ------- -------- ------- ----------
Total due after June
30, 1999........... 464,808 50,465 55,207 9,270 15,379 2,352 20,897 618,378
-------- -------- ----------- ----------- ------- -------- ------- ----------
Total amount due........ $470,385 $ 50,491 $ 55,416 $ 31,297 $15,379 $ 6,783 $21,770 651,521
======== ======== =========== =========== ======= ======== ======= ==========
Less:
Unamortized discounts, net............................................................................................ (631)
Deferred loan costs, net............................................................................................. 855
Allowance for possible loan losses................................................................................... (7,276)
--------
Loans receivable held for investment, net $ 644,469
==========
</TABLE>
The following table sets forth at June 30, 1998, the dollar amount of gross
loans receivable contractually due after June 30, 1999, and whether such loans
have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After June 30, 1999
------------------------------------------
Fixed Adjustable Total
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One-to-four family....................... $ 176,819 $ 287,989 $ 464,808
Multifamily.............................. 7,325 43,140 50,465
Commercial real estate................... 8,128 47,079 55,207
Construction and development............. - 9,270 9,270
Home equity.............................. 5,818 9,561 15,379
------------- ------------- -------------
Total real estate loans................ 198,090 397,039 595,129
Commercial loans............................ - 2,352 2,352
Consumer and student loans.................. 6,792 14,105 20,897
------------- ------------- -------------
Total loans receivable................. $ 204,882 $ 413,496 $ 618,378
============= ============= =============
</TABLE>
One-to-four family Loans. The Bank currently offers both fixed-rate and
adjustable-rate mortgage loans secured by one-to-four family residences located
in the Bank's primary market area, primarily with maturities of up to thirty
years. One-to-four family mortgage loan originations are obtained through the
use of mortgage brokers, the Bank's loan center, existing or past customers,
advertising, and referrals from real estate brokers and attorneys.
5
<PAGE>
At June 30, 1998, the Bank's one-to-four family loans totaled $470.4 million, or
72.2%, of gross loans. Of the one-to-four family loans outstanding at that date,
38.8% were fixed-rate mortgage loans and 61.2% were adjustable-rate mortgage
loans. The Bank generally offers fixed-rate mortgage loans with terms of fifteen
and thirty years. The Bank, from time to time may sell fixed-rate residential
mortgage loans it originates with terms in excess of fifteen years, except for
non-conforming loans, to FHLMC, and retains the servicing on all loans sold,
although the Bank may retain fixed-rate mortgage loans with terms exceeding
fifteen years, depending on the asset quality and the interest rate risk
position of the Bank. The Bank generally retains for its portfolio shorter-term,
fixed-rate loans with maturities of fifteen years or less and all
adjustable-rate one-to-four family loans.
The Bank currently offers a number of adjustable-rate mortgage loans with terms
of up to thirty years and interest rates which adjust annually from the outset
of the loan or which adjust annually after a one, three, five or seven year
initial fixed period. Forty-year terms are available on certain adjustable-rate
loans. The interest rates for the Bank's adjustable-rate mortgage loans are
indexed to the one or three year U.S. Treasury Securities Index. Interest rate
adjustments on loans are limited to a 2% periodic adjustment cap (2.5% on
five-year adjustable-rate loans) 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 a fixed-rate loan with interest rates based upon the then-current market
rates plus a varying margin.
The volume and type of adjustable-rate mortgage loans originated by the Bank
have been affected by such market factors as the level of 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, are intended, in part, to 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 are
expected to reduce the risks associated with adjustable-rate loans but also may
limit the interest rate sensitivity thereof.
One-to-four family residential mortgage loans are generally underwritten
according to FNMA or FHLMC guidelines. The Bank currently originates one-to-four
family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan and up to
97% of the appraised value or selling price if private mortgage insurance is
obtained. Mortgage loans originated by the Bank 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 homebuyers, the
Bank participates in residential mortgage programs and products sponsored by the
State of New York Mortgage Association ("SONYMA"). The SONYMA mortgage programs
provide low and moderate-income households with fixed-rate loans, which have
market rates generally below prevailing fixed-rate mortgages and which allow
below market down payments. At June 30, 1998, $9.4 million, or 1.4% of total
loans, were sponsored by SONYMA.
Multifamily Lending. During fiscal 1998, the Bank increased its origination of
multifamily loans through the establishment of a separate department staffed by
personnel experienced in the multifamily lending business. During fiscal 1998,
the Bank originated $9.4 million and purchased $38.6 million of multifamily
loans, as compared to originations of $1.6 million and $540,000 in fiscal years
1997 and 1996, respectively. As a result, the Bank had approximately $50.5
million, or 7.7% of the total loan portfolio invested in multifamily loans. The
largest multifamily loan in the Bank's portfolio at June 30, 1998, was a $13.4
million loan secured by six individual multifamily apartment dwellings in the
Borough of The Bronx.
Multifamily loans generally involve large principal amounts and a greater degree
of risk than one-to-four family residential mortgage loans. Because payments on
loans secured by multifamily properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Bank seeks to minimize these risks by originating such loans
within market areas where it has knowledge and experience.
In reaching its decision on whether to make a multifamily 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. Multifamily loans originated by the Bank require a
debt service coverage ratio of at least 120% and a loan to value ratio of no
more than 75% of the lower of the appraised value or sales price of the
underlying property. Generally,
6
<PAGE>
these loans are 5 year adjustable-rate loans with a term of 15 years
and an amortization schedule not exceeding 30 years. The Bank's multifamily
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 the U.S. Treasury obligations, adjusted to a
constant maturity of five years, plus a margin of 1.75% to 2.50%.
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 and that are generally located in
the Bank's primary market area. All mixed-use properties are classified as
commercial real estate. At June 30, 1998, the Bank's commercial real estate loan
portfolio totaled approximately $55.4 million, or 8.5%, of total loans. 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 price of the property, subject to the Bank's current regulatory
loans-to-one-borrower limit. These loans generally may be made with terms up to
twenty years and are generally offered at interest rates that adjust every one,
three or five years, utilizing the corresponding U.S. Treasury Securities Index
as a base. The Bank also offers fixed-rate commercial real estate loans with
ten-year terms. In reaching its decision on whether to make a commercial real
estate loan, the Bank considers the net operating income of the property and the
borrower's expertise, credit history and profitability. In addition, the Bank
considers the business activities and present and past uses of the properties in
evaluating potential environmental issues and, where such consideration
indicates a need, a more detailed investigation by a qualified environmental
expert is conducted. The Bank has generally required that the properties
securing commercial real estate loans have a debt service coverage ratio (the
ratio of earnings before debt service to debt service) of at least 120%.
Exceptions to this ratio are considered on an individual basis and must be
approved by the appropriate lending authority. Generally, all commercial real
estate loans made to corporations, partnerships and other business entities
require personal guarantees by the principals. The largest commercial real
estate loan in the Bank's portfolio at June 30, 1998, was a $3.4 million loan
secured by a shopping center located on Staten Island.
Loans secured by commercial real estate properties generally involve larger
principal amounts and a greater degree of risk than one-to-four family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on successful operation or management of
the properties, or business operated on such properties, repayment of such loans
may be affected by adverse conditions in the real estate market or the economy.
The Bank seeks to minimize these risks through its underwriting standards, which
require such loans to be qualified on the basis of the property's income and
debt service coverage ratio. As part of the operating strategy, the Bank intends
to continue to emphasize its commercial real estate lending activities in its
primary market area depending on the demand for such loans and commercial real
estate market conditions.
Construction and Development Lending. The Bank originates construction and
development loans for the development of commercial and residential property
located in its primary market area, and may originate construction and
development loans outside its primary market area to existing customers. At June
30, 1998, the Bank had $31.3 million of construction loans, most of which
related to the construction of one-to-four family properties, of which $20.3
million of these loans were outstanding at that date. The Bank originates loans
for the acquisition of commercial and residential property located in its
primary market area usually if such acquisition loan is part of an overall
development loan. Construction loans are offered primarily to experienced local
developers operating in the Bank's primary market area and, to a lesser extent,
to individuals for the construction of their residences. The majority of the
Bank's construction loans are originated primarily to finance the construction
of one-to-four family, owner-occupied residential real estate, and commercial
real estate properties located in the Bank's primary market area. Construction
loans are generally offered with terms of up to two years. Construction loans
may be made in amounts up to 70% of the estimated cost of construction, or up to
80% in the case of loans to individuals for the construction of their
residences. With respect to commercial construction loans, the Bank generally
requires borrowers, with whom the Bank does not have experience, 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 periodically in
increments as construction progresses and as inspections by the Bank's lending
officers warrant.
The Bank originates land loans to local developers for the purpose of holding or
developing the land for sale. At June 30, 1998, the Bank had $8.3 million of
land loans. Such loans are secured by a lien on the property, and limited to 65%
of the appraised value of the secured property on raw land or up to 75% on
developed building lots, and have terms of up to two years, with floating
interest rates based on the prime rate (which is the prime rate as published in
The Wall Street Journal). The principal of the loan is reduced as lots are sold
and released. The Bank's land loans are generally secured by property in its
primary market area; however, the Bank may originate land loans outside its
primary market area to existing
7
<PAGE>
customers. In addition, the Bank generally originates such loans to developers
with whom it has established relationships and obtains personal guarantees.
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. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development 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. The largest
construction loan in the Bank's portfolio at June 30, 1998, was a $2.7 million
loan for the construction of multiple single-family residences located in the
Borough of Staten Island.
Home Equity Lending. The Bank offers fixed-rate, fixed-term home equity loans
and lines of credit and adjustable-rate home equity loans in its primary market
area. At June 30, 1998, the Bank's home equity loans and lines of credit totaled
$15.4 million, or 2.4%, of the Bank's gross loans. Fixed-rate, fixed-term home
equity loans and lines of credit are offered in amounts up to 75% (80% if the
Bank holds the first mortgage) of the appraised value of the property (including
the first mortgage). Fixed-rate, fixed-term home equity loans and lines of
credit are offered with terms of up to ten years, with interest-only payments
during the first five years and repayment of principal and interest during the
final five years. Adjustable-rate home equity loans are offered in amounts up to
75% (80% if the Bank holds the first mortgage) of the appraised value of the
property (including the first mortgage) with terms of up to twenty years.
Adjustable-rate loans are indexed to the prime rate (which is the prime rate as
published in The Wall Street Journal).
Commercial Lending. The Bank also originates commercial loans to small and
medium sized businesses operating in the Bank's primary market area. At June 30,
1998, the Bank had $6.8 million of commercial loans, which amounted to 1.0% of
the Bank's total loans receivable. Although such loans are sometimes secured by
equipment, leases, inventory and accounts receivable, in the case of the Bank,
the majority of its commercial loans are secured by real estate. Term loans are
generally offered with adjustable rates of interest and terms of up to five
years. Secured commercial loans will be made in an amount up to 85% of the value
of the property securing the loan. All term loans fully amortize during the term
of such loan. Business lines of credit have terms of up to five years, if
secured, and up to two years, if unsecured. Secured lines of credit will
generally be made in amounts up to 85% of the value of the property securing the
line. Interest rates on business lines of credit adjust on a daily basis and are
indexed to the prime rate.
The Bank also issues both secured and unsecured letters of credit to business
customers of the Bank. Secured letters of credit will be issued in amounts up to
100% of the value of the collateral securing the letter of credit. Acceptable
collateral includes an assigned deposit account with the Bank, real estate or
marketable securities. Letters of credit have a maximum term of two years. At
June 30, 1998, there was $552,000 letters of credit outstanding.
In making commercial loans, the Bank considers primarily the financial resources
of the borrower, the borrower's ability to repay the loan out of net operating
income, the Bank's lending history with the borrower and the value of any
collateral. Generally, if the borrower is a corporation, partnership or other
business entity, personal guarantees by the principals are required. However,
personal guarantees may not be required on such loans, depending on the
creditworthiness of the borrower and other mitigating circumstances. The Bank's
largest commercial loan at June 30, 1998, was $0.7 million. At such date, the
Bank had $4.3 million of unadvanced commercial lines of credit.
Unlike mortgage loans, which generally are made on the basis of the borrower's
ability to make repayment from his or her employment or other income and secured
by real property whose value tends to be more easily ascertainable, commercial
loans are of higher risk and typically are made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business. As a
result, the availability of funds for the repayment of commercial loans may be
substantially dependent upon the success of the business itself. Further, any
collateral securing such loans may depreciate over time, may be difficult to
appraise or may fluctuate in value based on the success of the business.
Consumer and Student Lending. The Bank's portfolio of consumer and student loans
consists primarily of student loans, unsecured personal loans and overdraft
lines of credit. As of June 30, 1998, consumer and student loans amounted to
$21.8 million, or 3.3% of the Bank's total loan portfolio, of which $15.4
million were student loans. The Bank offers student loans through the Federal
Family Education Loan Program, a federal program governed by the New York State
Higher Education Services Corporation ("NYSHESC"). The Bank offers both
subsidized and unsubsidized Federal Stafford Loans
8
<PAGE>
and Federal Parent Loans. NYSHESC is responsible for the final approval of these
loans and guarantees all student loans made by the Bank. The terms and rates of
the loans are set by NYSHESC. The Bank is permitted to charge an origination
fee, currently 3.0% of the loan amount, which is subject to change by the
NYSHESC.
Consumer loans may entail a greater degree of credit risk than do residential
mortgage loans, particularly in the case of consumer loans that are unsecured.
Consumer loan collections are dependent upon the borrower's continuing financial
stability and are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. Finally, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans in the event of a default.
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 Officer Loan Committee, which is comprised of members of
senior management, including the Chairman and Chief Executive Officer and the
President and Chief Operating Officer of the Bank, whom are also Directors of
the Bank. The Officer Loan Committee has the authority to approve all loans
greater than $250,000, but less than $500,000, with the exception of multifamily
loans. The Officer Loan Committee approves all multifamily loans greater than
$1.5 million but less than $2.0 million. The Board has also established a
Director Loan Committee, comprised of five members of the Board of Directors,
whom are not employees of the Bank, to review and approve all loans in amounts
greater than the Officer Loan Committee approval limits up to $3.0 million. The
Directors Loan Committee discusses and approves all loans and lines of credit in
amounts greater than management has authority to approve, within the Committee's
designated authority as established from time to time by the Board of Directors.
Loans, in amounts that exceed the Directors Loan Committee's authority are
approved or denied by the Board of Directors. In addition, the Board has
established lending authorities for individual officers as to its various types
of loan products.
The Board of Directors has authorized the following persons to approve loans up
to the amounts indicated: multifamily loans can be approved by two members of
the Multifamily Lending Division, requiring the Multifamily Division Head and
one Vice President of the Multifamily Division up to $1.5 million; residential
mortgage loans and construction loans of up to $250,000 and home equity loans of
up to $250,000 can be approved by the Senior Real Estate Officer, together with
one other loan officer; commercial mortgages of up to $250,000, secured
commercial loans up to $200,000 and unsecured commercial loans and lines of
credit up to $100,000 can be approved by the Senior Commercial Loan Officer,
together with one other loan officer. Additionally, individual loans to one
borrower may not exceed $3.0 million and aggregate loans to one borrower may not
exceed $3.0 million for all loans, with the exception of multifamily loans in
which the aggregate loan limit is $12 million, without Board approval. Total
aggregate loans are also subject to the Bank's regulatory loans-to-one-borrower
limit, which at June 30, 1998, was $19.7 million.
With respect to all loans originated by 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 annually approves 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.
Delinquent Loans, Real Estate Owned and Classified Assets
Management and the Board of Directors perform a monthly review of all delinquent
loans. The Bank's procedures with respect to delinquencies vary, depending upon
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 thirtieth day of delinquency and that a late charge be
assessed after fifteen days. 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. Mortgage loans, which
are more than 45 days delinquent, are referred to the Bank's attorneys for
collection. If the loan becomes 75 days delinquent, the Bank's attorneys are
instructed to commence foreclosure proceedings.
It was the Bank's policy to discontinue accruing interest on all commercial real
estate, construction and commercial loans which were past due 90 days, on all
consumer loans which were past due 120 days, and on all one-to-four family
residential
9
<PAGE>
mortgage loans which were past due 180 days, or, when in the opinion of
management, such suspension was warranted. Effective July 1, 1997, the Bank
revised this policy such that it does not accrue interest on any loans,
including one-to-four family loans secured by real estate, which are more than
90 days delinquent unless, in the opinion of management, collection is probable.
Property acquired by the Bank as a result of foreclosure on a mortgage loan is
classified as "real estate owned" and is recorded at the lower of the unpaid
principal balance or fair value, less costs to sell at the date of acquisition
and thereafter. For loans in excess of $25,000, fair value must be substantiated
by an appraisal of the property and, thereafter, appraisal of the property on an
as-needed basis. At June 30, 1998, the Bank had $5.9 million of nonperforming
assets (defined as non-accruing loans and REO).
At June 30, 1998, the Bank's real estate owned, net, consisting of foreclosed
assets, totaled $322,000, which was comprised of two one-to-four family
properties and one mixed use commercial property. Bank personnel generally
conduct periodic external inspections on all properties securing loans in
foreclosure and generally conduct external appraisals on all properties prior to
taking ownership of the property. Based upon such inspections and appraisals,
the Bank will charge off any loan principal it deems appropriate at such time.
Bank personnel conduct monthly reviews of foreclosed real estate and
periodically adjust valuation allowance for possible declines in the value of
real estate owned. The Bank had no allowance for possible losses on real estate
owned at June 30, 1998. The Bank is currently offering for sale all real estate
owned as a result of foreclosure through brokers and through its own personnel.
The Bank's policies generally permit the financing of the sale of its foreclosed
real estate on substantially the same terms applicable to its other real estate
mortgage loans.
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 a sufficient degree of risk to warrant classification in one of
the aforementioned categories, but possess weaknesses, are required to be
designated "Special Mention."
When an insured institution classifies one or more assets, or portions thereof,
as Substandard or Doubtful, it is required to establish a general valuation
allowance for possible loan losses in an amount deemed prudent by management,
unless the loss of principal appears to be remote. General valuation allowances
represent loss allowances, which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies one or more assets or portions thereof, as Loss, it is
required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified or to charge off such amount.
A savings institution's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the FDIC and
NYSBD, which can order the establishment of additional general or specific loss
allowances. The FDIC, in conjunction with the other federal banking agencies,
recently adopted an interagency policy statement on the allowance for loan and
lease losses. The policy statement provides guidance for financial institutions
on both the responsibilities of management for the assessment and establishment
of adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Bank believes that it has established an adequate allowance for
possible loan losses, there can be no assurance that regulators, in reviewing
the Bank's loan portfolio, will not request the Bank to materially increase at
that time, its allowance for possible loan losses, thereby negatively affecting
the Bank's financial condition and earnings at that time. Although management
believes that adequate specific and general loan loss allowances have been
established, actual losses are dependent upon future events and, as such,
further additions to the level of specific and general loan loss allowances may
become necessary.
10
<PAGE>
All residential real estate loans with loan balances in excess of $500,000 are
reviewed annually. Commercial real estate and construction loans with a balance
in excess of $500,000 are also reviewed annually. Additionally, loans with
balances of $1.0 million or more will be reviewed semi-annually, if conditions
warrant. Loan reviews are performed by the Loan Reviewer, a person not directly
involved in the lending or loan administration process. Each loan reviewed is
submitted to the Loan Review Committee, composed of the Loan Reviewer, Senior
Real Estate and Commercial Loan Officer, the Foreclosure Officer and certain
members of the Board of Directors. Meetings are held on a quarterly or on an
as-needed basis. Upon review, the Committee will classify the loan and comment
as to any corrective action needed. The Senior Real Estate Loan Officer will
report to the Board of Directors the findings of the Loan Review Committee on an
on-going basis. A report, summarizing the results of loan reviews, is submitted
to the Board on a quarterly basis, or as meetings occur.
At June 30, 1998, the Bank had $2.5 million of assets designated as Substandard,
consisting of nine loans; $38,000, consisting of 14 consumer loans classified as
Doubtful; and $5,000, consisting of four consumer loans classified as Loss. At
June 30, 1998, the Bank had $3.0 million of assets designated as Special
Mention, consisting of 23 loans which were designated Special Mention, due to
past loan delinquencies.
The following tables set forth delinquencies in the Bank's loan portfolio as of
the dates indicated:
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------------------
60-89 Days 90 Days or More
----------------------- ------------------------
Number Principal Number Principal
----------- ----------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family................................ 4 $ 481 24 $3,162
Multifamily....................................... - - - -
Commercial real estate............................ - - 5 1,619
Construction and development...................... 4 612 2 606
Home equity....................................... 1 33 1 144
Commercial loans.................................. 3 134 - -
Consumer and student loans........................ 88 273 1 3
----------- ----------- ---------- ------------
Total........................................ 100 $1,533 33 $5,534
=========== =========== ========== ============
Delinquent loans to total loans(1)................ 0.24% 0.85%
=========== ============
<CAPTION>
At June 30, 1997
----------------------------------------------------
60-89 Days 90 Days or More
----------------------- ------------------------
Number Principal Number Principal
----------- ----------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family................................ 3 $ 338 20 $2,306
Multifamily....................................... - - - -
Commercial real estate............................ 1 1,102 6 876
Construction and development...................... 1 100 3 341
Home equity....................................... - - 1 30
Commercial loans.................................. 1 18 - -
Consumer and student loans........................ 67 213 89 324
----------- ----------- ---------- ------------
Total........................................ 73 $1,771 119 $3,877
=========== =========== ========== ============
Delinquent loans to total loans(1)................ 0.35% 0.77%
=========== ============
<CAPTION>
At June 30, 1996
----------------------------------------------------
60-89 Days 90 Days or More
----------------------- ------------------------
Number Principal Number Principal
----------- ----------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family................................ 7 $ 901 16 $1,837
Multifamily....................................... - - - -
Commercial real estate............................ - - 4 939
Construction and development...................... 1 385 7 687
Home equity....................................... - - 4 94
Commercial loans.................................. 1 118 - -
Consumer and student loans........................ 25 71 77 263
----------- ----------- ---------- ------------
Total........................................ 34 $1,475 108 $3,820
=========== =========== ========== ============
Delinquent loans to total loans(1)................ 0.35% 0.91%
=========== ============
</TABLE>
(1) Total loans includes loans receivable held-for-investment, plus deferred
loan costs, deferred mortgage interest and unamortized discounts, net.
11
<PAGE>
Non-Performing Assets. The following table sets forth information regarding the
Bank's non-performing assets.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- --------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One-to-four family ................................... $3,306 $1,676 $1,695 $1,590 $1,862
Multifamily .......................................... -- -- -- -- --
Commercial real estate ............................... 1,619 876 939 593 1,747
Construction and development ......................... 606 120 120 108 215
Commercial ........................................... -- -- -- -- --
Consumer and student ................................. 3 -- -- -- 52
------ ------ ------ ------ ------
Total non-accrual loans .......................... 5,534 2,672 2,754 2,291 3,876
Loans contractually past due 90 days or more and
still accruing interest(1) ............................. -- 1,205 1,066 704 1,513
------ ------ ------ ------ ------
Total non-performing loans .............. 5,534 3,877 3,820 2,995 5,389
Real estate owned .......................................... 322 662 612 335 441
------ ------ ------ ------ ------
Total non-performing assets ............. $5,856 $4,539 $4,432 $3,330 $5,830
====== ====== ====== ====== ======
Allowance for possible loan losses
as a percent of loans(2) ................................ 1.12% 1.10% 1.14% 0.83% 0.87%
Allowance for possible loan losses as a percent of
total non-performing loans(3) ........................... 131.50 141.09 125.55 109.35 57.64
Non-performing loans as a percent of loans(2)(3) ........... 0.85 0.78 0.91 0.76 1.51
Non-performing assets as a percent of total
assets(3) .............................................. 0.37 0.46 0.48 0.39 0.71
</TABLE>
(1) Includes consumer and student loans.
(2) Loans include loans receivable held for investment, net, excluding the
allowance for possible loan losses.
(3) It was the Bank's policy to generally cease accruing interest on all
commercial real estate, construction and commercial loans 90 days or more
past due, on all consumer loans which were 120 days or more past due, and
on all one-to-four family residential mortgage loans which were 180 days or
more past due. Effective July 1, 1997, the Bank revised this policy such
that it does not accrue interest on any loans, including one-to-four family
loans secured by real estate, which are more than ninety days delinquent as
to principal and interest unless, in the opinion of management, collection
is probable.
Non-accrual loans totaled $5.5 million as of June 30, 1998, which included 25
one-to-four family loans, with an aggregate balance of $3.3 million and 7
commercial real estate loans and construction loans with an aggregate balance of
$2.2 million, of which one loan is a $1.1 million commercial mortgage on a
mixed-use property in Staten Island, New York. Non-accrual loans do not include
student loans delinquent 90 days or more, as the Bank does not classify such
loans as non-accrual because delinquent principal and interest on student loans
is guaranteed by the U.S.
government.
Allowance for Loan Losses
The allowance for possible loan losses is maintained through provisions for
possible loan losses based on management's on-going evaluation of the risks
inherent in its loan portfolio in consideration of the trends in its loan
portfolio, the national and regional economies and the real estate market in the
Bank's primary lending area. The allowance for possible loan losses is
maintained at an amount management considers adequate to cover estimated losses
in its loan portfolio that are deemed probable and estimable, based on
information currently known to management. The Bank's loan loss allowance
determinations also incorporate factors and analyses which consider the
potential principal loss associated with the loan, costs of acquiring the
property securing the loan through foreclosure or deed in lieu thereof, the
periods of time involved with the acquisition and sale of such property, costs
and expenses associated with maintaining and holding the property until sale,
and the costs associated with the Bank's inability to utilize funds for other
income producing activities during the estimated holding period of the property.
12
<PAGE>
As of June 30, 1998, the Bank's allowance for possible loan losses was $7.3
million, or 1.1% of total loans, and 131.5% of non-performing loans as compared
to $5.5 million, or 1.1% of total loans, and 141.1% of non-performing loans, as
of June 30, 1997. The Bank had total non-performing loans of $5.5 million and
$3.9 million at June 30, 1998 and June 30, 1997, respectively, and
non-performing loans to total loans of 0.9% and 0.8%, respectively. The Bank
will continue to monitor and modify its allowance for possible loan losses as
conditions dictate. The Board of Directors reviews the adequacy of the allowance
for possible loan losses quarterly. While management believes that, based on
information currently available, the Bank's allowance for possible loan losses
is sufficient to cover losses inherent in its loan portfolio at this time, no
assurances 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 multifamily, 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 different from those of management.
The following table sets forth activity in the Bank's allowance for loan losses
for the periods set forth in the table.
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period...................... $5,470 $4,796 $3,275 $3,106 $2,735
------------ ------------ ------------ ------------ ------------
Provision for loan losses........................... 2,200 1,080 1,600 600 859
Charge-offs:
Real estate loans............................... 110 174 166 384 565
Commercial real estate.......................... 142 15 - 6 118
Consumer and student loans...................... 281 286 186 150 133
------------ ------------ ------------ ------------ ------------
Total charge-offs......................... 533 475 352 540 816
Recoveries:
Real estate loans............................... - 45 97 48 241
Commercial real estate.......................... 88 - 122 - -
Consumer and student loans...................... 51 24 54 61 87
------------ ------------ ------------ ------------ ------------
Total recoveries.......................... 139 69 273 109 328
Net charge-offs..................................... 394 406 79 431 488
============ ============ ============ ============ ============
Balance at end of period............................ $7,276 $5,470 $4,796 $3,275 $3,106
============ ============ ============ ============ ============
</TABLE>
13
<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 in each of the
categories listed at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
1998 1997
--------------------------------- ----------------------------------
Percent Percent of Percent Percent of
of Loans in 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>
Real estate(1)... $3,581 49 % 96 % $2,619 48 % 94 %
Commercial....... 156 2 1 355 6 1
Consumer and 325 5 3 321 6 5
Student......
Unallocated ..... 3,214 44 - 2,175 40 -
========= ======= ====== ========= ======= =======
Total allowance
for possible
loan losses.. $7,276 100 % 100 % $5,470 100 % 100 %
========= ======= ====== ========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------- -------------------------------- --------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Percent of Each Percent of Each Percent of Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------- ---------- ------------ ---------- ----------- --------- ------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate(1)... $2,173 45 % 93 % $2,084 64 % 93 % $1,892 61 % 93 %
Commercial....... 380 8 3 472 14 1 427 14 2
Consumer and 315 7 4 295 9 6 255 8 5
Student......
Unallocated ..... 1,928 40 - 424 13 - 532 17 -
------- ---------- ------------ ---------- ----------- --------- ------- ---------- ---------
Total allowance
for possible
loan losses.. $4,796 100 % 100 % $3,275 100 % 100 % $3,106 100 % 100 %
======= ========= ============ ========== ========== ========= ======== ========== =========
</TABLE>
(1) Real estate includes one-to-four family, multifamily, commercial real
estate, construction and development, and home equity loans.
14
<PAGE>
Securities Investment Activities
The investment policy of the Company and the Bank, which is approved by the
Board of Directors, is designed primarily to manage the interest rate
sensitivity of its overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement the
Bank's lending activities and to provide and maintain liquidity. In establishing
its investment strategies, the company considers its business and growth
position, the economic environment, its interest rate sensitivity position, the
types of securities to be held and other factors.
While the Board of Directors has final authority and responsibility for the
securities investment portfolio, the Bank has established a Management
Investment Committee comprised of six senior officers, including the Investment
Officer, to supervise the Bank's securities investment program. The Management
Investment Committee meets at least quarterly and evaluates all investment
activities for safety and soundness, adherence to the Bank's investment policy
and assurance that authority levels are maintained. The Bank's policies provide
that all investment transactions must be authorized by two senior executive
officers and reported to the Board of Directors on a monthly basis and reviewed
by the Asset/Liability Committee on an ongoing basis.
The Company's current securities investment policy permits investments in
various types of liquid assets, including obligations of the U.S. Treasury and
federal agencies, investment grade corporate obligations, various types of
mortgage-backed and mortgage-related securities, including collateralized
mortgage obligations ("CMOs"), corporate equities, commercial paper and insured
certificates of deposit.
The Company currently does not participate in hedging programs, interest rate
swaps, or other activities involving use of off-balance sheet derivative
financial instruments. Similarly, the Company does not invest in
mortgage-related securities, deemed to be "high risk" by the federal banking
regulators.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
special report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," which allowed institutions
to affect a one-time reclassification of its securities from held to maturity to
available for sale without requiring that all securities held to maturity be
reclassified. As a result, in November 1995, the Bank reclassified $26.0 million
of securities from held to maturity to available for sale. In February 1998, the
Company transferred its entire securities held to maturity portfolio to its
securities available for sale portfolio as part of a balance sheet restructuring
initiative implemented at that time, primarily in connection with a reassessment
by the Company of its asset/liability management strategy. As a result, the
Company did not maintain a portfolio of securities held to maturity, nor a
trading portfolio of securities at June 30, 1998. In connection with the balance
sheet restructuring initiative, approximately $54.7 million of securities
available for sale were sold and a net loss of $144,000 was realized. Management
believes that the flexibility of the available for sale portfolio will assist
the Company in evaluating market opportunities while managing the Bank's
exposure to interest rate risk and asset sensitivity.
As of June 30, 1998, the Company's securities portfolio totaled $843.2 million,
or 52.8% of total assets, with a weighted average life of 7.5 years and was
classified as available for sale.
Mortgage-Backed and Mortgage-related Securities. The Bank purchases
mortgage-backed and mortgage-related securities in order to: (i) generate
positive interest rate spreads with minimal administrative expense; (ii) lower
its credit risk as a result of the guarantees provided by GNMA, FHLMC and FNMA;
(iii) utilize these securities as collateral for borrowings; and (iv) maintain
sufficient liquidity levels for the Bank. The Bank has primarily invested in
mortgage-backed and mortgage-related securities issued or sponsored by GNMA,
FHLMC and FNMA and private issuers.
The Bank also invests in CMOs issued or sponsored by FNMA and FHLMC, as well as
private issuers. At June 30, 1998, mortgage-backed and mortgage-related
securities totaled $604.3 million, or 37.9% of total assets, with a weighted
average yield of 6.78%. The increase in such securities reflects management's
recent revisions to its investment strategy, placing greater emphasis on
mortgage-backed and mortgage-related securities, the investment of conversion
proceeds and the investment of borrowings from the FHLB. At June 30, 1998, the
Company's CMO portfolio totaled $227.2 million, or 14.2% of total assets,
consisting of $188.1 million of CMOs issued by private issuers and $39.1 million
issued by the government sponsored agency FNMA. The Company policy limits its
privately issued CMOs to non-high risk securities rated "AAA" by two rating
agencies, with an average life of seven years or less and limits the amount of
such investment to 40% of total assets. For government sponsored CMOs, the
policy limits such investments to non-high risk
15
<PAGE>
securities that have an average life of 10 years or less. The credit rating of
the specific CMOs owned are monitored on a regular basis. The current investment
policy 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 such date, the Company's CMO portfolio had an estimated average
life of 1.5 years and a weighted average yield of 6.88%.
Debt Securities. The Company's investment in debt securities generally consists
of investments in U.S. government obligations, debt securities issued by
government sponsored agencies such as FNMA, FHLB and FHLMC and debt issues of
creditworthy financial companies. During fiscal year 1998, the Company either
sold or allowed to mature its U.S. government obligations, government sponsored
agency debt, corporate and public utility bonds in conjunction with its
asset/liability management strategy.
U.S. Government and Agency Obligations. At June 30, 1998, the Company's U.S.
government securities portfolio totaled $8.9 million, with a weighted average
maturity of 2.5 months. The agency security portfolio totaled $24.7 million and
consists of callable agency zero-coupon medium term notes and callable
debentures. The Company's current investment practice is to de-emphasize its
investments in such instruments.
Corporate, Public Utility and Financial Bonds. The corporate bond portfolio of
the Company consists of short and medium term fixed-rate investment grade issues
totaling $5.2 million, with a weighted average coupon and weighted average
maturity of 7.00% and 11 months, respectively, at June 30, 1998.
The public utility bond portfolio at June 30, 1998, totaled $14.4 million,
consisting of bonds issued by electric and gas utilities and telephone
companies. The weighted average maturity and weighted average coupon was 1.9
years and 6.60%, respectively.
All of the corporate bond and public utility bond issues held are rated "A" or
higher and classified as available for sale. Consistent with the Company's
current securities investment strategy, the Company intends to de-emphasize its
investment in corporate and public utility bonds.
At June 30, 1998, the financial bond portfolio totaled $115.9 million,
consisting of $77.1 million fixed-rate and $38.8 million floating-rate issues.
Such issues are long term and generally issued by investment grade U.S. banks
and savings and loan holding companies. All of the Company's financial bonds are
callable by the respective issuers pursuant to the terms of the bonds, generally
after an initial ten year holding period. The floating-rate bonds reset
quarterly, based on the Three Month LIBOR (London Interbank Offer Rate) Index
plus margins ranging from 0.50% to 0.75%. The current policy of the Company
limits the purchases of corporate, public utility and financial bonds to a
maturity of 30 years or less, a total investment of 10% of total assets, with a
1% limitation for any single issuer.
Equity Securities. At June 30, 1998, the Company's equity securities portfolio
totaled $56.3 million, all of which was classified as available for sale. Such
portfolio consisted of investments of $800,000 in mutual funds, $28.5 million of
investments in preferred stock, primarily of financial institutions, and $27.0
million of investments in common stock. The Company's policy limit for its
common and preferred stock investments is 5% and 7.5%, respectively, of its
total assets. Current policy permits the purchase of preferred stock rated
investment grade. The substantial majority of the preferred stock holdings are
redeemable by issuers after five years.
16
<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 percentages at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------
1998 1997 1996
----------------------- -------------------- ---------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- ----------- --------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
Corporate bonds....................... $ 5,213 0.62% $ 68,483 15.66% $110,714 26.94%
U.S. Government obligations........... 8,989 1.07 52,757 12.06 120,045 29.21
Agency securities..................... 24,675 2.93 39,457 9.02 49,472 12.03
Public utilities...................... 14,385 1.70 36,489 8.34 39,257 9.55
Municipal bonds....................... 1,182 0.14 1,149 0.26 1,188 0.28
Other debt obligations................ 2,249 0.27 6,866 1.57 6,976 1.70
Asset backed notes.................... 9,988 1.18 - - - -
Financial bonds....................... 115,863 13.74 - - - -
---------- -------- ---------- -------- ---------- --------
Total debt securities............... 182,544 21.65 205,201 46.91 327,652 79.71
---------- -------- ---------- -------- ---------- --------
Equity securities:
Preferred stock....................... 28,448 3.37 14,158 3.24 24 0.01
Common stock.......................... 27,056 3.21 3,814 0.87 156 0.04
Mutual funds.......................... 842 0.10 1,734 0.40 1,527 0.37
--------- -------- --------- -------- --------- -------
Total equity securities............. 56,346 6.68 19,706 4.51 1,707 0.42
--------- -------- --------- -------- --------- -------
Mortgage-backed and mortgage-related
securities:
FHLMC pass-through.................... 97,362 11.55 82,237 18.80 80,284 19.53
GNMA pass-through..................... 185,023 21.94 11,824 2.70 1,394 0.34
FNMA pass-through..................... 76,451 9.07 - - - -
Private issuer pass-through........... 18,208 2.16 3,276 0.75 - -
Agency CMOs........................... 39,125 4.64 36,934 8.44 - -
Private issuer CMOs................... 188,135 22.31 78,249 17.89 - -
--------- -------- --------- -------- --------- -------
Total mortgage-backed and mortgage-
related securities.............. 604,304 71.67 212,520 48.58 81,678 19.87
--------- -------- --------- -------- --------- -------
Total securities.................... $843,194 100.00% $437,427 100.00% $411,037 100.00%
========= ======== ========= ======== ========= =======
Debt and equity securities available for
sale......................................... $238,890 28.33% $ 19,706 4.51% $ 21,659 5.27%
Debt and equity securities held to maturity.. - - 205,201 46.91 307,700 74.86
---------- -------- ---------- -------- ---------- --------
Total debt and equity securities.... 238,890 28.33 224,907 51.42 329,359 80.13
---------- -------- ---------- -------- ---------- --------
Mortgage-backed and mortgage-related
securities available for sale........... 604,304 71.67 27,398 6.26 1,394 0.34
Mortgage-backed and mortgage-related
securities held to maturity............. - - 185,122 42.32 80,284 19.53
========== ======== ========== ========= ========== ========
Total mortgage-backed and mortgage-
related securities.............. 604,304 71.67 212,520 48.58 81,678 19.87
---------- -------- ---------- -------- ---------- --------
Total securities.................... $843,194 100.00% $437,427 100.00% $411,037 100.00%
========== ======== ========== ========= ========== ========
</TABLE>
17
<PAGE>
The following table sets forth the Company's securities activities for the
periods indicated:
<TABLE>
<CAPTION>
For the Year
Ended June 30,
-----------------------------------------
1998 1997 1996
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Beginning balance ................................................... $437,427 $411,037 $382,573
------------ ------------ ------------
Add:
Debt and equity securities purchased held to maturity................ - 17,611 150,256
Debt and equity securities purchased available for sale.............. 173,260 17,678 1,064
Mortgage-backed and mortgage-related securities
purchased held to maturity.................................. - 133,668 15,197
Mortgage-backed and mortgage-related securities
purchased available for sale................................ 608,059 26,478 -
Change in net unrealized gain on
available for sale securities.............................. 6,179 450 11
Less:
Maturities and redemptions debt and equity securities
held to maturity............................................ 55,972 127,005 107,658
Sales and redemptions of debt and equity securities
available for sale.......................................... 108,936 11,938 10
Maturities and redemptions of mortgage-backed and
mortgage-related securities held to maturity................ 29,237 3,609 -
Principal repayments on mortgage-backed and
mortgage-related securities held to maturity................ 31,987 25,315 21,305
Maturities and redemptions of mortgage-backed and
mortgage-related securities available for sale.............. 69,074 - 5,940
Principal repayments on mortgage-backed and
mortgage-related securities available for sale.............. 86,073 479 410
Realized losses (gains on sales of mortgage-backed and
mortgage-related securities................................. 287 - (19)
Realized (gains) losses on debt and equity securities................ (317) 110 (9)
Amortization of investment premiums, net accretion
of discount................................................. 482 1,039 2,769
------------ ------------ ------------
Ending balance....................................................... $843,194 $437,427 $411,037
============ ============ ============
</TABLE>
18
<PAGE>
The following table sets forth certain information regarding the amortized cost
and market values of the Company's debt and equity and mortgage-backed and
mortgage-related securities, at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
----------- ----------- ----------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities held to maturity:
U.S. Government obligations............. $ - $ - $ 52,757 $ 52,815 $100,093 $ 99,897
Agency securities....................... - - 39,457 39,522 49,472 49,076
Municipal bonds......................... - - 1,149 1,198 1,188 1,212
Corporate bonds......................... - - 104,972 104,930 149,970 149,431
Other debt obligations.................. - - 6,866 6,897 6,977 6,993
----------- ----------- ----------- --------- --------- ----------
Total debt securities held to
maturity......................... - - 205,201 205,362 307,700 306,609
----------- ----------- ----------- --------- --------- ----------
Debt securities available for sale:
U.S. Government obligations............. 8,960 8,989 - - 19,967 19,952
Agency securities....................... 24,484 24,675 - - - -
Municipal bonds......................... 1,119 1,182 - - - -
Corporate bonds......................... 19,425 19,598 - - - -
Other debt obligations.................. 2,218 2,249 - - - -
Asset backed notes...................... 9,954 9,988 - - - -
Financial bonds......................... 114,153 115,863 - - - -
----------- ----------- ----------- --------- --------- ----------
Total debt securities available for
sale.............................. 180,313 182,544 - - 19,967 19,952
----------- ----------- ----------- --------- --------- ----------
Equity securities available for sale:
Mutual funds............................ 605 842 1,629 1,734 1,521 1,527
Preferred stock......................... 27,146 28,448 14,027 14,158 27 24
Common stock............................ 24,786 27,056 3,578 3,814 109 156
----------- ----------- ----------- --------- --------- ----------
Total equity securities available
for sale.......................... 52,537 56,346 19,234 19,706 1,657 1,707
----------- ----------- ----------- --------- --------- ----------
Mortgage-backed and mortgage-related
securities:
Held to maturity:
FHLMC pass-through...................... - - 82,237 83,584 80,284 80,631
Private issuer pass-through............. - - 3,276 3,281 - -
Agency CMOs............................. - - 32,248 32,336 - -
Private issuer CMOs..................... - - 67,361 67,392 - -
----------- ----------- ----------- --------- --------- ----------
Total mortgage-backed and
mortgage-related securities held
to maturity....................... - - 185,122 186,593 80,284 80,631
----------- ----------- ----------- --------- --------- ----------
Available for sale:
FHLMC pass-through...................... 96,970 97,362 11,710 11,824 1,292 1,394
GNMA pass-through....................... 185,098 185,023 - - - -
FNMA pass-through.................. 76,616 76,451 - - - -
Private issuer pass-through............. 18,143 18,208 - - - -
Agency CMOs............................. 39,165 39,125 4,693 4,686 - -
Private issuer CMOs..................... 187,587 188,135 10,881 10,888 - -
----------- ----------- ----------- --------- --------- ----------
Total mortgage-backed and
mortgage-related securities
available for sale................ 603,579 604,304 27,284 27,398 1,292 1,394
Net unrealized gains on
available for sale securities........... 6,765 - 586 - 137 -
----------- ----------- ----------- --------- --------- ----------
Total securities........................... $843,194 $843,194 $437,427 $439,059 $411,037 $410,293
=========== =========== =========== ========= ========== ==========
</TABLE>
19
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's securities
portfolio as of June 30, 1998.
<TABLE>
<CAPTION>
At June 30, 1998
---------------------------------------------------------------------------------------------
More than One More than Five
One Year or Year to Five Years to Ten More than Ten
Less Years Years Years Total
----------------- ----------------- ----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
Debt securities:
Municipal bonds ...... $ - -% $ 104 6.20% $ 508 6.47% $ 570 5.76% $ 1,182 6.10%
U.S. Government
obligations.......... 8,989 6.50 - - - - - - 8,989 6.50
Agency securities..... - - 16,195 7.00 - - 8,480 7.39 24,675 7.14
Public utilities...... 2,797 6.39 11,286 6.88 - - 302 7.31 14,385 6.80
Industrial bonds...... 2,998 7.01 2,215 6.87 - - - - 5,213 6.95
Other debt
obligations.......... - - 2,249 6.90 - - - - 2,249 6.90
Asset backed notes.... - - - - 9,988 7.00 - - 9,988 7.00
Financial bonds....... - - - - - - 115,863 7.63 115,863 7.63
-------- -------- -------- -------- --------
Total debt securities
available for sale...... 14,784 6.58 32,049 6.94 10,496 6.97 125,215 7.60 182,544 7.37
-------- -------- -------- -------- --------
Mortgage-backed and
mortgage-related
securities:
FHLMC pass-through.... - - 10,013 6.87 8,597 6.13 78,751 6.95 97,361 6.87
GNMA pass-through..... - - - - 295 7.09 184,728 6.79 185,023 6.79
FNMA pass-through..... - - - - 45,423 6.15 31,028 6.72 76,451 6.38
Private issuer
pass-through........ - - - - 2,793 6.63 15,416 6.63 18,209 6.63
Agency CMOs........... - - - - - - 39,125 6.74 39,125 6.74
Private issuer CMOs... - - - - - - 188,135 6.91 188,135 6.91
-------- -------- -------- -------- --------
Total mortgage-backed
and mortgage-related
securities available
for sale................ - - 10,013 6.87 57,108 6.18 537,183 6.85 604,304 6.78
-------- -------- -------- -------- --------
Equity securities:
Mutual Funds.......... - - - - - - 842 0.52 842 0.52
Preferred stock....... - - 4,511 5.09 9,973 6.08 13,964 6.22 28,448 5.99
Common stock.......... - - - - - - 27,056 1.56 27,056 1.56
-------- -------- -------- -------- --------
Total equity securities.. - - 4,511 5.09 9,973 6.08 41,862 3.12 56,346 3.84
-------- -------- -------- -------- --------
Total securities
available for sale..... 14,784 46,573 77,577 704,260 843,194
======== ======== ======== ======== ========
Total securities......... $ 14,784 6.58 $ 46,573 6.74 $ 77,577 6.27 $704,260 6.81 $843,194 6.75
======== ======== ======== ======== ========
</TABLE>
Sources of Funds
General. Deposits, repayments and prepayments of loans and securities, proceeds
from sales of loans and securities, 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 FHLB advances and reverse-repurchase agreements, to
fund its operations.
Deposits. The Bank offers a variety of deposit accounts with a range of interest
rates and terms. The Bank's deposit accounts consist of savings, retail
checking/NOW accounts, commercial checking accounts, money market accounts, club
accounts and certificates of deposit accounts. The Bank offers jumbo certificate
of deposit accounts and Individual Retirement Accounts ("IRAs") and other
qualified plan accounts. While jumbo certificate accounts 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.
At June 30, 1998, the Bank's deposits totaled $950.8 million, of which 87.2%
were interest-bearing deposits. For year ended June 30, 1998, the average
balance of core deposits totaled $609.4 million, or 66.0% of total average
deposits. At June 30, 1998, the Bank had a total of $325.3 million in
certificates of deposit, of which $234.6 million had maturities of less than one
year. For the year ended June 30, 1997, the average balance of core deposits
represented approximately 67.3% of total deposits and certificate accounts
represented 32.7%, as compared to core deposits representing 66.0% of total
deposits and certificate accounts representing 34.0% of deposits for year ended
June 30, 1998. Although the Bank has a significant portion of its deposits in
savings accounts, management monitors activity on the Bank's savings accounts
and,
20
<PAGE>
based on historical experience and the Bank's current pricing strategy,
believes it will continue to retain a large portion of such accounts. The Bank
is not limited with respect to the rates it may offer on deposit products.
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 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 affect the Bank's ability to attract and retain deposits. The Bank
uses traditional means of advertising its deposit products, including television
and print media, and generally does not solicit deposits from outside its market
area. While the Bank has historically not accepted brokered deposits, the Bank
is currently in the process of establishing relationships with deposit brokers
and may, in the future, utilize brokered deposits as a funding source, depending
on market conditions.
The following table presents the deposit activity of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
For the Year Ended June 30,
------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net deposits.......................................... $ 34,168 $ 38,896 $ 27,612
Interest credited on deposit accounts................. 30,822 27,707 26,254
======== ======== ========
Total increase in deposit accounts.................... $ 64,990 $ 66,603 $ 53,866
======== ======== ========
</TABLE>
At June 30, 1998, the Bank had outstanding $35.6 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.................................. $ 9,323 4.89%
Over three through six months......................... 6,653 5.41
Over six through 12 months............................ 7,815 5.44
Over 12 months........................................ 11,777 5.95
---------
Total................................................. $ 35,568 5.47
=========
</TABLE>
21
<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. Averages for the periods ended June 30,
1997 and 1996 presented utilize average month-end balances. The period ended
June 30, 1998, utilized daily average balances.
<TABLE>
<CAPTION>
For the Year Ended June 30,
-----------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------- -------- -------- ------- -------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market accounts $ 39,075 4.23% 3.46% $ 37,552 4.48% 3.4% $28,430 3.62% 3.47%
Savings accounts..... 445,057 48.19 2.73 432,162 51.61 2.74 430,500 54.78 2.75
NOW accounts......... 19,089 2.07 2.34 15,652 1.87 2.36 14,602 1.86 2.42
Non-interest-bearing
accounts........... 106,189 11.50 - 78,483 9.37 - 65,670 8.35 -
-------- -------- -------- -------- -------- --------
Total............ 609,410 65.99 2.29 563,849 67.33 2.40 539,202 68.61 2.44
-------- -------- -------- -------- -------- --------
Certificates of
deposit:
Less than six months. 21,096 2.28 4.42 30,437 3.64 4.38 30,360 3.86 4.55
Over six through
12 months.......... 57,081 6.18 5.09 46,188 5.52 4.90 39,924 5.08 4.91
Over 12
through
24 months......... 152,047 16.47 5.59 121,109 14.46 5.33 105,340 13.41 5.49
Over 24 months....... 51,293 5.55 5.81 52,787 6.30 5.75 54,496 6.93 5.66
Certificates over
$100,000........... 32,589 3.53 5.46 23,025 2.75 5.32 16,577 2.11 5.39
-------- -------- -------- -------- -------- --------
Total certificates of
deposit............... 314,106 34.01 5.44 273,546 32.67 5.23 246,697 31.39 5.31
-------- -------- -------- -------- -------- --------
Total average
deposits........... $923,516 100.00% 3.36 $837,395 100.00% 3.33 $785,899 100.00% 3.33
======== ======== ======== ======== ======== ========
</TABLE>
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 June 30, 1998 At June 30,
-------------------------------------------------------------------------- -------------------------------
Less than One to Two to Three to Four to Five years
One Year Two years Three years Four years Five years or more 1998 1997 1996
------------ --------- ----------- ---------- ---------- ---------- -------------------------------
(In thousands)
-------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of
deposit:
0 to 4.00%........ $ 4,870 $ - $ 1 $ - $ - $ - $ 4,871 $ 3,369 $ 2,972
4.01 to 5.00%..... 36,812 5,690 - - 10 - 42,512 75,534 155,120
5.01 to 6.00%..... 192,518 40,150 22,436 5,595 5,328 714 266,741 205,325 63,573
6.01 to 7.00%..... 447 1,753 307 3,808 635 - 6,950 9,553 28,167
7.01 to 8.00%..... - - 563 3,711 - - 4,274 4,285 4,095
=========== ======= ======= ======= ====== ===== ======== ======== ========
Total............ $234,647 $47,593 $23,307 $13,114 $5,973 $ 714 $325,348 $298,066 $253,927
=========== ======= ======= ======= ====== ===== ======== ======== ========
</TABLE>
22
<PAGE>
Borrowed Funds. The Bank continues to place a greater level of emphasis on the
utilization of borrowed funds as an alternative to retail deposits to fund asset
growth. In this regard, at June 30, 1998, the Bank had total borrowings of
$306.0 million, all of which were in the form of advances from the FHLB. These
advances are collateralized primarily by the Bank's mortgage-backed securities.
The Bank had no borrowings at June 30, 1997.
The Bank may continue to increase the emphasis on borrowed funds, which may
result in an increase in the Bank's overall cost of funds. The Bank's current
strategy is to invest such borrowed funds primarily in mortgage-backed and
mortgage-related securities. This strategy is intended to incrementally increase
net interest income, although it may have the effect of incrementally decreasing
net interest rate spread. The maximum amount that the FHLB will advance to
member institutions fluctuates from time-to-time, in accordance with the
policies of the OTS and the FHLB.
Other Activities
In addition to its traditional lending and deposit products, the Bank also
offers certain merchant banking services. These include providing credit card
deposit accounts to local merchants. The Bank receives a processing fee from the
customer for each credit card transaction processed. The Bank also receives
monthly income from terminal and printer sales and rentals. For the years ended
June 30, 1998 and 1997, $68,000 and $65,000, or 2.0% and 2.2%, respectively, of
total fee income was attributable to credit card processing fees. In addition,
the Bank has endorsed and promotes a credit card through a national affinity
credit card bank. Under the program, the affinity credit card bank receives and
underwrites all credit card applications. The Bank receives royalty payments
based on new accounts and renewal accounts, as well as a portion of finance
charges assessed. For the years ended June 30, 1998 and 1997, the Bank received
$47,000 and $42,000, or 1.4% and 1.4%, respectively, of total fee income through
the affinity credit card program.
Subsidiary Activities
RCSB Corp. RCSB Corp. ("RCSB"), a wholly-owned subsidiary of the Bank
incorporated in the State of New York in 1976, was formed to purchase three
branch buildings from the Bank, which are leased back to the Bank. This is
currently the only business activity conducted by RCSB. The assets of RCSB
totaled $805,000 at June 30, 1998.
Richmond Enterprises, Inc. Richmond Enterprises, Inc., a wholly-owned subsidiary
of the Bank incorporated in the State of New York in 1983, previously was a
partner in a joint-venture real estate development project with a local
developer. The development was completed in 1986, and Richmond Enterprises, Inc.
has been inactive since that date. Its total assets as of June 30, 1998, were
$2,900.
Richmond County Capital Corp. Richmond County Capital Corp. ("RCCC") is a
wholly-owned subsidiary of the Bank, incorporated in the State of New York on
February 27, 1998, for the purpose of establishing a Real Estate Investment
Trust ("REIT"). On that date, the Bank transferred one-to-four family
residential mortgage loans, commercial real estate loans and mortgage-backed
securities totaling $266 million, net, which included certain other associated
assets and liabilities to RCCC. In return, the Bank received shares of common
stock and will receive preferred stock of RCCC. The assets of RCCC totaled $275
million at June 30, 1998.
RCBK Mortgage Corp. RCBK Mortgage Corp., a wholly-owned subsidiary of the Bank,
was incorporated in New York State on July 9, 1998, and is licensed to conduct
business in the state of New Jersey.
Personnel
As of June 30, 1998, the Bank had 294 full-time employees and 114 part-time
employees. The employees are not represented by a collective bargaining
agreement and the Bank considers its relationship with its employees to be good.
23
<PAGE>
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file certain
reports and otherwise comply with the rules and regulations of the OTS under the
Home Owner's Loan Act.
The Bank is a New York State chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the Bank
Insurance Fund ("BIF"). The Bank is subject to extensive regulation by the
Superintendent, the NYBB, 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 the Securities and Exchange
Commission ("SEC") under the federal securities laws. Certain of the regulatory
requirements applicable to the Bank and to the Holding 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 upon 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
NYBB, as limited by FDIC regulations. Under these laws and regulations, savings
banks, including the Bank, may invest in real estate mortgages, consumer and
commercial loans, certain types of debt securities, including certain corporate
debt securities and obligations of federal, state and local governments and
agencies, certain types of corporate equity securities and certain other assets.
Under the statutory authority for investing in equity securities, a savings bank
may directly invest up to 7.5% of its assets in certain corporate stock and may
also invest up to 7.5% of its assets in certain mutual fund securities.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain tests of
financial performance. A savings bank's lending powers are not subject to
percentage of asset limitations, although there are limits applicable to single
borrowers. A savings bank may also, pursuant to the "leeway" authority, make
investments, not otherwise authorized, under the New York State Banking Law.
This authority permits investments not otherwise authorized of up to 1% of the
savings bank's assets in any single investment, subject to certain restrictions
and to an aggregate limit for all such investments of up to 5% of assets.
Additionally, in lieu of investing in such securities in accordance with, and
reliance upon, the specific investment authority set forth in the New York State
Banking Law, savings banks are authorized to elect to invest under a "prudent
person" standard in a wider range of debt and equity securities as compared to
the types of investments permissible under such specific investment authority.
However, in the event a savings bank elects to utilize the "prudent person"
standard, it will be unable to avail itself of the other provisions of the New
York State Banking Law and regulations which set forth specific investment
authority. A New York State chartered stock savings bank may also exercise trust
powers upon approval of the NYBB.
New York State chartered savings banks may also invest in subsidiaries under
their service corporation investment power. A savings bank may use this power to
invest in corporations that engage in various activities authorized for savings
banks, plus any additional activities which may be authorized by the NYBB.
Investment by a savings bank in the stock, capital notes and debentures of its
service corporations is limited to 3% of the bank's assets, and such
investments, together with the bank's loans to its service corporations, may not
exceed 10% of the savings bank's assets.
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The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New York State Banking Law is limited by FDIC
regulations and other federal law and regulations. In particular, the applicable
provisions of New York State Banking Law and regulations governing the
investment authority and activities of an FDIC insured state-chartered savings
bank have been effectively limited by the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") of 1991 and the FDIC regulations issued pursuant
thereto.
With certain limited exceptions, a New York State chartered savings bank may not
make loans or extend unsecured credit for commercial, corporate or business
purposes (including lease financing) to a single borrower, the aggregate amount
of which would be in excess of 15% of the bank's net worth. The Bank currently
complies with all applicable loans-to-one-borrower limitations.
Under New York State Banking Law, a New York State chartered stock savings bank
may declare and pay dividends out of its net profits, unless there is an
impairment of capital, but approval of the Superintendent is required if the
total of all dividends declared in a calendar year would exceed the total of its
net profits for that year combined with its retained net profits of the
preceding two years, subject to certain adjustments.
Under the New York State Banking Law, the Superintendent may issue an order to a
New York State chartered banking institution to appear and explain an apparent
violation of law, to discontinue unauthorized or unsafe practices and to keep
prescribed books and accounts. Upon a finding by the NYBB that any director,
trustee or officer of any banking organization has violated any law, or has
continued unauthorized or unsafe practices in conducting the business of the
banking organization, after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office by the NYBB 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 NYBB against the Bank or any
of its Directors or Officers. The Superintendent also may take possession of a
banking organization under specified statutory criteria.
FDIC Regulations
Capital Requirements. The FDIC has adopted risk-based capital guidelines to
which the Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. The Bank is required
to maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. The ratio of such regulatory capital to regulatory
risk-weighted assets is referred to as the Bank's "risk-based capital ratio."
Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet items to four risk-weighted categories, ranging from 0% to
100%, with higher levels of capital being required for the categories perceived
as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first tier
("Tier I") includes common equity, retained earnings, certain non-cumulative
perpetual preferred stock (excluding auction rate issues), and minority
interests in equity accounts of consolidated subsidiaries, less goodwill and
other intangible assets (except mortgage servicing rights and purchased credit
card relationships subject to certain limitations) and deferred tax assets.
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 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
regulations). These regulations provide for a minimum Tier I leverage ratio of
3% for banks that meet certain specified criteria, including that they have the
highest examination rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%,
plus an additional cushion of at least 100 to 200 basis points. The federal
banking agencies, including the FDIC, have proposed a uniform minimum Tier 1
leverage ratio of 4% for all but the highest rated banks. The FDIC may, however,
set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
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The following is a summary of the Bank's regulatory capital at June
30, 1998:
GAAP Capital to Total Assets.................................. 13.36%
Total Capital to Risk-Weighted Assets......................... 24.81%
Tier I Leverage Ratio......................................... 12.81%
In August 1995, the FDIC, along with the other federal banking agencies, adopted
a regulation providing that the agencies will take account of the exposure of a
bank's capital and economic value to changes in interest rate risk in assessing
a bank's capital adequacy. According to the agencies, applicable considerations
include the quality of the bank's interest rate risk management process, the
overall financial condition of the bank and the level of other risks at the bank
for which capital is needed. Institutions with significant interest rate risk
may be required to hold additional capital. The agencies also have issued a
joint policy statement providing guidance on interest rate risk management,
including a discussion of the critical factors affecting the agencies'
evaluation of interest rate risk in connection with capital adequacy. The
agencies have determined not to proceed with a previously issued proposal to
develop a supervisory framework for measuring interest rate risk and an explicit
capital component for interest rate risk.
Standards for Safety and Soundness. Federal law requires each federal banking
agency to prescribe for depository institutions under its jurisdiction standards
relating to, among other things, internal controls; information systems and
audit systems; loan documentation; credit underwriting; interest rate risk
exposure; asset growth; compensation; fees and benefits; and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings and compensation; fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the Federal Deposit
Insurance Act, as amended, ("FDIC Act"). The final regulation establishes
deadlines for the submission and review of such safety and soundness compliance
plans.
Real Estate Lending Standards. The FDIC and the other federal banking agencies
have adopted regulations that prescribe standards for extensions of credit that
(i) are secured by real estate or (ii) are made for the purpose of financing the
construction or improvements on real estate. The FDIC regulations require each
institution to establish and maintain written internal real estate lending
standards that are consistent with safe and sound banking practices and
appropriate to the size of the institution and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying FDIC guidelines, which include loan-to-value limitations for the
different types of real estate loans. Institutions are also permitted to make a
limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standard are justified.
Dividend Limitations. The FDIC has authority to use its enforcement powers to
prohibit a savings bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe or unsound practice. Federal law prohibits
the payment of dividends by a bank that will result in the bank failing to meet
applicable capital requirements on a pro forma basis. Additionally, the Bank, as
a subsidiary of a savings and loan holding company, will be required to provide
the OTS with 30 days prior written notice before declaring any dividend. The
Conversion also restricts the Bank's ability to pay a dividend, if payment of
the dividend would impair the liquidation account established in connection with
the Conversion.
Investment Activities
Since the enactment of FDICIA, all state-chartered financial institutions,
including savings banks and their subsidiaries, have generally been limited to
activities as principal and equity investments of the type and in the amount
authorized for national banks, notwithstanding state law. FDICIA and the FDIC
regulations, thereunder, permit certain exceptions to these limitations. For
example, certain state chartered banks, such as the Bank, may, with FDIC
approval, continue to exercise
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state authority to invest in common or preferred stocks listed on a national
securities exchange or the Nasdaq National Market and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. Such banks may also continue to sell savings bank life insurance. In
addition, the FDIC is authorized to permit such institutions to engage in state
authorized activities or investments that do not meet this standard (other than
non-subsidiary equity investments) for institutions that meet all applicable
capital requirements, if it is determined, that such activities or investments
do not pose a significant risk to the BIF. The FDIC has recently proposed
revisions to its regulations governing the procedures for institutions seeking
approval to engage in such activities or investments. These proposed revisions
would, among other things, streamline certain application procedures for healthy
banks and impose certain quantitative and qualitative restrictions on a bank's
dealings with its subsidiaries engaged in activities not permitted for national
bank subsidiaries. All non-subsidiary equity investments, unless otherwise
authorized or approved by the FDIC, must have been divested by December 19,
1996, pursuant to a FDIC-approved divestiture plan unless such investments were
grandfathered by the FDIC. The Bank received grandfathering authority from the
FDIC in February, 1993, to invest in listed stocks and/or registered shares
subject to the maximum permissible investment of 100% of Tier 1 capital, as
specified by the FDIC's regulations, or the maximum amount permitted by New York
State Banking Law, whichever is less. Such grandfathering authority is subject
to termination upon the FDIC's determination that such investments pose a safety
and soundness risk to the Bank, or in the event the Bank converts its charter or
undergoes a change in control. As of June 30, 1998, the Bank had $50.8 million
of securities which were subject to such grandfathering authority.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action
legislation. Among other things, the regulations define the relevant capital
measures for the five capital categories. An institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and is not subject to a regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of
4% or greater, and generally a leverage ratio of 4% or greater. An institution
is deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a
leverage ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less
than 3%. An institution is deemed to be "critically undercapitalized" if it has
a ratio of tangible equity (as defined in the regulations) to total assets that
is equal to or less than 2%.
"Undercapitalized" banks are subject to growth, capital distribution (including
dividend) and other limitations and are required to submit a capital restoration
plan. A bank's compliance with such plan is required to be guaranteed by any
company that controls the undercapitalized institutions in an amount equal to
the lesser of 5.0% of the bank's total assets when deemed undercapitalized or
the amount necessary to achieve the status of adequately capitalized. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
are subject to one or more of a number of additional restrictions, including but
not limited to an order by the FDIC to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cease receipt of
deposits from correspondent banks or dismiss directors or officers, and
restrictions on interest rates paid on deposits, compensation of executive
officers and capital distributions by the parent holding company. "Critically
undercapitalized" institutions also may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any material transaction outside the ordinary course of business. In
addition, "critically undercapitalized" institutions are subject to appointment
of a receiver or conservator. Generally, subject to a narrow exception, the
appointment of a receiver or conservator is required for a "critically
undercapitalized" institution within 270 days after it obtains such status.
Transactions with Affiliates
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is
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under common control with the savings bank, other than a nonbanking subsidiary
of the bank. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies, which are controlled by such parent
holding company, are affiliates of the savings bank. The Federal Reserve Board
has proposed regulations that would treat as an affiliate, any subsidiary of a
savings bank that engages in activities not permissible for the parent savings
bank to engage in directly. Generally, Section 23A limits the extent to which
the savings bank or its subsidiaries may engage in "covered transactions" with
any one affiliate to an amount equal to 10% of such savings bank's capital stock
and surplus, and contains an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. The
term, "covered transaction", includes the making of loans or other extensions of
credit to an affiliate; the purchase of assets from an affiliate; the purchase
of, or an investment in, the securities of an affiliate; the acceptance of
securities of an affiliate as collateral for a loan or extension of credit to
any person; or issuance of a guarantee, acceptance, or letter of credit on
behalf of an affiliate. Section 23A also establishes specific collateral
requirements for loans or extensions of credit to, or guarantees of, 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 nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank with
respect to loans to directors, executive officers, and principal stockholders.
Under Section 22(h), loans to directors, executive officers and stockholders who
control, directly or indirectly, 10% or more of voting securities of a savings
bank, and certain related interests of any of the foregoing, may not exceed,
together with all other outstanding loans to such persons and affiliated
entities, the savings bank's total capital and surplus. Section 22(h) also
prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers, and shareholders who control 10% or
more of voting securities of a stock savings bank, and their respective related
interests, unless such loan is approved in advance by a majority of the board of
directors of the savings bank. Any "interested" director may not participate in
the voting. The loan amount (which includes all other outstanding loans to such
person) as to which such prior board of director approval is required, is the
greater of $25,000, or 5% of capital and surplus, or any loans over $500,000.
Further, pursuant to Section 22(h), loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions to other persons, except for extensions of credit
made pursuant to a benefit or compensation program that is widely available to
the institution's employees and does not give preference to insiders over other
employees. Section 22(g) of the Federal Reserve Act places additional
limitations on loans to executive officers.
Enforcement
The FDIC has extensive enforcement authority over insured savings banks,
including the Bank. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease and desist orders and to
remove directors and officers. In general, these enforcement actions may be
initiated in response to violations of laws and regulations and to unsafe or
unsound practices.
The FDIC has authority, under federal law, to appoint a conservator or receiver
for an insured savings bank under certain circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state savings bank if that savings bank was "critically undercapitalized", on
average, during the calendar quarter beginning 270 days after the date on which
the savings bank became "critically undercapitalized." For this purpose,
"critically undercapitalized" means having a ratio of tangible equity to total
assets that is equal to or less than 2%. See "- Prompt Corrective Regulatory
Action." The FDIC may also appoint a conservator or receiver for a state savings
bank on the basis of the institution's financial condition or upon the
occurrence of certain events, including: (i) insolvency (whereby the assets of
the savings bank are less than its liabilities to depositors and others); (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business; (iv) likelihood that the savings bank will be unable to
meet the demands of its depositors or to pay its obligations in the normal
course of business; and (v) insufficient capital, or the incurring or likely
incurring of losses that will deplete substantially all of the institution's
capital with no reasonable prospect of replenishment of capital without federal
assistance.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns
an institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending seven months before the
assessment period, consisting of (1) well capitalized, (2) adequately
capitalized or (3) undercapitalized, and one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based
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on a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and additional information which the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Assessment rates for
BIF and SAIF deposits currently range from 0 basis points to 27 basis points,
and the FDIC has determined to retain such range of assessment rates for the
first half of 1998. The FDIC is authorized to raise the assessment rates in
certain circumstances, including to maintain or achieve the designated reserve
ratio of 1.25%, which requirement the BIF and the SAIF currently meet. The FDIC
has exercised its authority to raise rates 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. In addition, recent legislation
requires BIF-insured institutions, such as the Bank, to assist in the payment of
Financing Corporation bonds.
Under the FDIC Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
Division. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $47.8 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $47.8
million, the reserve requirement is $1.43 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $47.8 million. The first $4.7 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Community Reinvestment Act
Federal Regulation. Under the Community Reinvestment Act, as amended ("CRA"), as
implemented by FDIC regulations, a savings bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the FDIC, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The FIRREA amended the CRA to require, effective July 1, 1990,
public disclosure of an institution's CRA rating and requires the FDIC to
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system, which replaced the five-tiered numerical
rating system. The Bank's latest CRA rating received from the FDIC was
"Satisfactory".
New York State Regulation. The Bank is also subject to provisions of the New
York State Banking Law, which impose continuing and affirmative obligations upon
banking institutions organized in New York State to serve the credit needs of
its local community ("NYCRA"), which are substantially similar to those imposed
by the CRA. Pursuant to the NYCRA, a bank must file copies of all federal CRA
reports with the NYSBD. The NYCRA also requires the Superintendent to consider a
bank's NYCRA rating when reviewing a bank's application to engage in certain
transactions, including mergers, asset purchases and the establishment of branch
offices or automated teller machines, and provides that such assessment may
serve as a basis for the denial of any such application. The NYSBD has adopted,
effective December 3, 1997, new regulations to implement the NYCRA. The NYSBD
replaced its process-focused regulations with performance-focused regulations
that are intended to parallel current CRA regulations of federal banking
agencies and to promote consistency in CRA evaluations by considering more
objective criteria. The new regulations require a biennial assessment of a
bank's
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compliance with the NYCRA, utilizing a four-tiered rating system, and
require the NYSBD to make available to the public such rating and a written
summary of the results. The Bank's latest NYCRA rating received from the NYSBD
was "Satisfactory".
Federal Home Loan Bank System
On October 24, 1997, the Bank became a member of the FHLB System, which consists
of 12 regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. The Bank, as a member of the FHLB, is required to acquire
and hold shares of capital stock in the FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. FHLB advances must be secured
by specified types of collateral and all long-term advances may only be obtained
for the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirements
could reduce the amount of dividends that the FHLBs pay to their members and
could also result in the FHLBs imposing a higher rate of interest on advances to
their members. If dividends were reduced, the Bank's net interest income will
likely also be reduced. Further, there can be no assurance that the impact of
recent or future legislation on the FHLBs will not also cause a decrease in the
value of the FHLB stock that will be held by the Bank.
Holding Company Regulation
Federal law allows a state savings bank that qualifies as a "qualified thrift
lender" ("QTL"), discussed below, to elect to be treated as a savings
association for purposes of the savings and loan holding company provisions of
the Home Owners' Loan Act, as amended ("HOLA"). Such election would result in
its holding company being regulated as a savings and loan holding company by the
OTS, rather than as a bank holding company by the Federal Reserve Board. The
Bank made such election and received approval from the OTS to become a savings
and loan holding company. The Company is regulated as a non-diversified unitary
savings and loan holding company, within the meaning of the HOLA. As such, the
Company registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings institution.
Additionally, the Bank 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
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, as
amended ("BHC Act"), subject to the prior approval of the OTS, and to other
activities authorized by OTS regulations. Multiple savings and loan holding
companies are prohibited from acquiring or retaining, with certain exceptions,
more than 5% of a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by the HOLA. Recently proposed
legislation in Congress would treat all savings and loan holding companies as
bank holding companies and would limit the activities of such companies to those
permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution or holding company thereof or from
acquiring such an institution or company by merger, consolidation or purchase of
its assets, without prior written approval of the OTS. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target
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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 to elect and continue to be regulated as a savings and loan holding
company by the OTS (rather than as a bank holding company by the Federal Reserve
Board), the Bank must continue to qualify as a QTL. In order to qualify as a
QTL, the Bank must maintain compliance with a Qualified Thrift Lender Test ("QTL
Test"). Under the QTL Test, a savings institution is required to maintain at
least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed and related securities) in at least 9 months
out of each 12 month period. A holding company of a savings institution that
fails the QTL test must either convert to a bank holding company and thereby
become subject to the regulation and supervision of the Federal Reserve Board or
operate under certain restrictions. As of June 30, 1998, the Bank maintained in
excess of 66.7% of its portfolio assets in qualified thrift investments. The
Bank also met the QTL test in each of the prior 12 months. Recent legislation
amendments have broadened the scope of "qualified thrift investments" that go
toward meeting the QTL test to fully include credit card loans, student loans
and small business loans. A savings association may also satisfy the QTL test by
qualifying as a "domestic building and loan association" as defined in the
Internal Revenue Code of 1986 (the "Code").
New York State Holding Company Regulation. In addition to the federal holding
company regulations, a bank holding company organized or doing business in New
York State may be also subject to regulation under the New York State Banking
Law. The term "bank holding company," for the purposes of the New York State
Banking Law, is defined generally to include any person, company or trust that
directly or indirectly either controls the election of a majority of the
directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions, including commercial banks and state
savings banks and savings and loan associations organized in stock form. In
general, a holding company controlling, directly or indirectly, only one banking
institution will not be deemed to be a bank holding company for the purposes of
the New York State Banking Law. Under New York State Banking Law, the prior
approval of the NYSBD is required before: (1) any action is taken that causes
any company to become a bank holding company; (2) any action is taken that
causes any banking institution to become or to be merged or consolidated with a
subsidiary of a bank holding company; (3) any bank holding company acquires
direct or indirect ownership or control of more than 5% of the voting stock of a
banking institution; (4) any bank holding company or subsidiary thereof acquires
all or substantially all of the assets of a banking institution; or (5) any
action is taken that causes any bank holding company to merge or consolidate
with another bank holding company. Additionally, certain restrictions apply to
New York State bank holding companies regarding the acquisition of banking
institutions which have been chartered five years or less and are located in
smaller communities. Officers, directors and employees of New York State bank
holding companies are subject to limitations regarding their affiliation with
securities underwriting or brokerage firms and other bank holding companies and
limitations regarding loans obtained from its subsidiaries. Although the Company
is not 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 New York banking institution or bank holding company
would cause it to become such.
Interstate Banking and Branching
The Company, as a savings and loan holding company, is limited under HOLA with
respect to its acquisition of a savings association located in a state other
than New York. In general, a savings and loan holding company may not acquire an
additional savings association subsidiary that is located in a state other than
the home state of its first savings association subsidiary, unless such an
interstate acquisition is permitted by the statutes of such other state. Many
states permit such interstate acquisitions if the statutes of the home state of
the acquiring savings and loan holding company satisfy various reciprocity
conditions. New York is one of a number of states that permit, subject to the
reciprocity conditions of the New York Banking Law, out-of-state bank and
savings and loan holding companies to acquire New York savings associations.
In contrast, bank holding companies are generally authorized to acquire banking
subsidiaries in more than one state, irrespective of any state law restrictions
on such acquisitions. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Interstate Banking Act"), which was enacted on
September 29, 1994, permits approval under the BHC Act of the acquisition of a
bank located outside of the holding company's home state, regardless of whether
the acquisition is permitted under the law of the state of the acquired bank.
The Federal Reserve Board may not approve an acquisition under
31
<PAGE>
the BHC Act that would result in the acquiring holding company controlling more
than 10% of the deposits in the United States or more than 30% of the deposits
in any particular state.
In the past, branching across state lines was not generally available to a state
bank, such as the Bank. Out-of-state branches of savings banks are authorized
under the New York Banking Law, but similar authority does not exist generally
under the laws of most other states. The Interstate Banking Act permitted,
beginning June 1, 1997, the responsible federal banking agencies to approve
merger transactions between banks located in different states, regardless of
whether the merger would be prohibited under the law of the two states. The
Interstate Banking Act also permitted a state to "opt in" to the provisions of
the Interstate Banking Act prior to June 1, 1997, and permitted a state to "opt
out" of the provisions of the Interstate Banking Act by adopting appropriate
legislation before that date. Accordingly, the Interstate Banking Act, beginning
June 1, 1997, permitted a bank, such as the Bank, to acquire branches in a state
other than New York unless the other state had opted out of the Interstate
Banking Act. The Interstate Banking Act also authorizes de novo branching into
-- ----
another state if the host state enacts a law expressly permitting out of state
banks to establish such branches within its borders.
The Interstate Banking Act may facilitate the further consolidation of the
banking industry. The effect of the Interstate Banking Act on the Bank, if any,
is likely to occur as banking institutions, state legislators, and bank
regulators respond to the new federal regulatory structure. The states will have
to establish appropriate corporate law, tax and regulatory structures to adjust
to the growth of new interstate banks.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under section 12(g) of the
Securities 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
does not cover the resale of such shares. Shares of the Common Stock purchased
by persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company will be subject to
the resale restrictions of Rule 144 under the Securities Act. If the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank will report their income on a consolidated
basis, using a calendar year and the accrual method of accounting, and will be
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Bank's treatment of its reserve for
bad debts discussed below. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Bank or the Company. The Bank had been audited by
the IRS for the years ended December 31, 1993, 1994 and 1995.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the "1996
Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Code relating to a savings institution's use of bad debt
reserves for federal income tax purposes and requires such institutions to
recapture (i.e. take into income) certain portions of their accumulated bad debt
reserves. The effect of the 1996 Act on the Bank is discussed below. Prior to
the enactment of the 1996 Act, the Bank was permitted to establish tax reserves
for bad debts and to make annual additions thereto, which additions, within
specified formula limits, were deducted in arriving at the Bank's taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, could be computed
using an amount based on a six-year moving average of the Bank's actual loss
experience (the "Experience Method"), or a percentage equal to 8% of the Bank's
taxable income (the "PTI Method"), computed without regard to this deduction and
32
<PAGE>
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve. The Bank's deduction with respect to
non-qualifying loans was required to be computed under the Experience Method.
The 1996 Act. Under the 1996 Act, for its current and future taxable years, the
Bank is not permitted to make additions to its tax bad debt reserves. In
addition, the Bank is required to recapture (i.e. take into income) over a six
year period, the excess of the balance of its tax bad debt reserves as of
December 31, 1995, over the balance of such reserves as of December 31, 1987. As
of December 31, 1995, $2.5 million of the Bank's bad debt reserve was subject to
recapture for which deferred taxes have been provided.
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. The term "Non-dividend
distributions" is defined as 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 cause this pre-1988 reserve to be included in the Bank's
income.
The amount of additional taxable income created from a non-dividend distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. See "Regulation and Supervision" for limits on the
payment of dividends by the Bank. The Bank does not intend to pay dividends that
would result in a recapture of any portion of its tax bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum
taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net
operating loss carryforwards. The adjustment to AMTI, based on book income, will
be an amount equal to 75% of the amount by which a corporation's adjusted
current earnings exceeds its AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses). Certain payments of AMTI may
be used as credits against regular tax liabilities in future years. For tax
years prior to the 1996 tax year, the excess of the bad debt reserve deduction
using the percentage of taxable income method over the deduction that would have
been allowable under the Experience Method is treated as a preference item for
purposes of computing the AMTI. In addition, for taxable years beginning after
December 31, 1986 and before January 1, 1996, an environmental tax of .12% of
the excess of AMTI (with certain modifications) over $2 million, is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax
("AMT") is paid. The Bank has not been subject to the AMT and no such amounts
have been accrued for carryover.
Dividends Received Deduction and Other Matters. The Company may exclude from its
income, 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
excluded.
State and Local Taxation
New York State and New York City Taxation. The Bank is subject to the New York
State Franchise Tax on Banking Corporations in an annual amount equal to the
greater of (i) 9% of the Bank's "entire net income" allocable to New York State
during the taxable year, or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greatest of (a) .01% of the average
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 is also subject
to New York City Corporation Tax, which is imposed using SMTI or alternative
taxable income method. For purposes of computing its entire net income, the Bank
is permitted a deduction for an addition to the reserve for losses on qualifying
real property loans. For New York State and City purposes, the applicable
percentage to calculate bad debt deduction under the percentage of taxable
income method is 32%. The New York State and New York City tax laws were
recently amended to prevent the recapture of tax bad debt reserves that would
otherwise occur as a result of the enactment
33
<PAGE>
of the 1996 Act for both New York State and City tax purposes. However, the New
York bad debt reserve is subject to recapture for "non-dividend distributions"
in a manner similar to the recapture of the federal bad debt reserves for such
distributions. Also, the New York bad debt reserve is subject to recapture in
the event that the Bank fails to satisfy certain definitional tests relating to
its assets and the nature of its business. The Bank's deduction with respect to
non-qualifying loans must be computed under the Experience Method which is based
on the Bank's actual charge-offs.
A Temporary Metropolitan Transportation Business Tax Surcharge on banking
corporations doing business in the metropolitan district has been applied since
1982. Through December 31, 1997, the Bank did all of its business within this
District and is subject to this surcharge. For the tax year ended December 31,
1997, the surcharge rate is 17% of the New York State Franchise Tax liability.
Delaware State Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
Item 2. Properties
Properties
The Bank currently conducts its business through thirteen full-service banking
offices. The following table sets forth the Bank's offices as of June 30, 1998.
The table does not include one full-service branch office facility the Bank is
considering establishing in fiscal 1999.
<TABLE>
<CAPTION>
Original Net Book Value
Year of Property or
Leased Leased Date of Leasehold
or or Lease Improvements at
Location Owned Acquired Expiration June 30, 1998
- --------------------------------------------- ----------- --------------- ------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Administrative/Home Office:
West New Brighton Office (1):
1214 Castleton Avenue
Staten Island, NY 10310.................... Owned 1916 - $1,736
Branch Offices:
Port Richmond Office:
282 Port Richmond Avenue
Staten Island, NY 10302..................... Owned 1951 - 106
Great Kills Office:
3879 Amboy Road
Staten Island, NY 10308..................... Owned 1975 - 1,505
Annadale Office:
820 Annadale Road
Staten Island, NY 10312..................... Owned 1967 - 311
Bull's Head Office:
1460 Richmond Avenue
Staten Island, NY 10314..................... Owned 1971 - 281
Dongan Hills Office:
1833 Hylan Boulevard
Staten Island, NY 10305..................... Owned 1974 - 1,504
New Springville Office:
2555 Richmond Avenue
Staten Island, NY 10134..................... Leased 1976 2005 331
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Original Net Book Value
Year of Property or
Leased Leased Date of Leasehold
or or Lease Improvements at
Location Owned Acquired Expiration June 30, 1998
- --------------------------------------------- ----------- --------------- ------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Woodrow Plaza Office:
645-100 Rossville Avenue
Staten Island, NY 10309..................... Leased 1983 2013 $ 276
Tottenville Office:
179 Main Street
Staten Island, NY 10307..................... Owned 1988 - 381
Westerleigh Office:
832 Jewett Avenue
Staten Island, NY 10314..................... Owned 1992 - 567
Eltingville Office (2):
4523 Amboy Road
Staten Island, NY 10312..................... Owned 1992 - 2,113
Grasmere Office:
1100 Hylan Boulevard
Staten Island, NY 10305..................... Leased 1992 2005 241
Brooklyn Office:
132 Avenue U
Brooklyn, NY 11223.......................... Leased 1977 1997(3) 485(4)
New Dorp Office:
2595 Hylan Boulevard
Staten Island, NY 10306..................... Leased 1998 2013 304
Jericho Office:
100 Jericho Quadrangle, Suite 334
Jericho, NY 11753........................... Leased 1998 2005 -
Public Accommodation Offices:
Brooklyn Public Accommodation Office:
81 Avenue U
Brooklyn, NY 11223.......................... Leased 1980 1999 -
Staten Island Public Accommodation Office:
1445 Richmond Avenue
Staten Island, NY 10314.................... Leased 1998 2013 -
</TABLE>
(1) Certain portions of the Bank's administrative operations are located at
properties not included in the table.
(2) Eltingville office includes the Bank's lending center.
(3) The Bank has the option to extend the lease on the Brooklyn office for two
five-year periods.
(4) Together with Brooklyn Public Accommodation Office.
35
<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, which, in the
aggregate, involve amounts which are believed by management to be immaterial to
the financial condition and results of operations of the Company.
The Company is the defendant in a number of complaints by subscribers of the
Company's common stock in the Conversion who claim that they did not receive all
of the common stock to which they were entitled in connection with the
Conversion. Management believes that these cases are without merit or that the
potential liability from these actions is not material to the financial
condition and results of operation of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Richmond County Financial Corp. became a public company on February 18, 1998.
Richmond County Financial Corp. Common Stock is traded on The Nasdaq National
Market under the symbol "RCBK".
The initial public offering price was $10.00 per share. For the period from
February 18, 1998, to March 31, 1998, and the quarterly period from April 1,
1998 to June 30, 1998, the high for Company's Common Stock was $19.63 and $19.75
and the low was $15.68 and $17.75, respectively. As of June 30, 1998, the
Company had 26,423,550 shares outstanding and approximately 19,300 shareholders
of record, not including persons or entities holding stock in nominee or street
name through brokers or banks. The Board of Directors of the Company has the
authority to declare dividends on the Common Stock, subject to statutory or
regulatory requirements. For the third quarter ended March 31, 1998, and the
fourth quarter ended June 30, 1998, the Company declared dividends on its common
stock of $.05 and $.06 per share, respectively.
36
<PAGE>
Item 6. Earnings Summary and Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
Set forth below are selected consolidated financial and other data of the
Company. These financial data are derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Company and
Notes, thereto presented under Item 8. to this Form 10-K.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial Condition Data:
Total assets....................................... $1,595,844 $ 993,370 $ 914,483 $ 851,751 $ 825,663
Federal funds sold................................. 26,000 6,000 20,000 18,000 17,500
Debt and equity securities, net(1):
Available for sale............................. 238,890 19,706 21,659 607 -
Held to maturity............................... - 205,201 307,700 287,879 328,779
Mortgage-backed and mortgage
related securities, net(1):
Available for sale............................. 604,304 27,398 1,394 1,683 -
Held to maturity............................... - 185,122 80,284 92,404 74,961
Loans receivable, net(2)........................... 644,469 496,258 419,270 392,409 355,850
Federal Home Loan Bank of New York stock........... 15,550 - - - -
Intangible assets.................................. 1,209 1,527 1,802 2,115 2,428
Deposits........................................... 950,808 885,818 819,216 766,231 750,216
Borrowings......................................... 306,000 - - - -
Stockholders' equity............................... 328,595 100,865 89,901 81,166 73,550
Selected Operating Data:
Interest income.................................... $ 86,754 $ 65,781 $ 59,063 $ 54,321 $ 51,608
Interest expense................................... 37,512 27,707 26,254 22,456 20,207
-------------------------------------------------------------------
Net interest income
before provision for possible loan losses... 49,242 38,074 32,809 31,865 31,401
Provision for possible loan losses................. 2,200 1,080 1,600 600 859
-------------------------------------------------------------------
Net interest income after provision
for possible loan losses..................... 47,042 36,994 31,209 31,265 30,542
-------------------------------------------------------------------
Non-interest income................................ 3,601 2,861 2,827 2,659 2,961
Non-interest expense(3)............................ 44,046 19,667 18,503 18,139 17,287
-------------------------------------------------------------------
Income before income taxes and cumulative effect
of changes in accounting principles....... 6,597 20,188 15,533 15,785 16,216
Provision for income taxes......................... 2,071 9,463 6,803 6,919 7,305
-------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles.................. 4,526 10,725 8,730 8,866 8,911
-------------------------------------------------------------------
Cumulative effect of changes
in accounting principles(4)............... - - - (1,316) 1,232
===================================================================
Net income......................................... $ 4,526 $ 10,725 $ 8,730 $ 7,550 $ 10,143
===================================================================
Basic and diluted loss per share
since Conversion(5)............................ $ (0.16) N/A N/A N/A N/A
===================================================================
</TABLE>
(footnotes on next page)
37
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended
-----------------------------------------------------------
June 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial Ratios and Other Data(6):
Performance Ratios(7):
Return on average assets............................... 1.26% 1.13% 0.99% 0.91% 1.27%
Return on average stockholders' equity................. 8.36 11.25 10.25 9.80 14.97
Average stockholders' equity to average assets......... 15.05 10.07 9.70 9.29 8.50
Stockholders' equity to total assets
at end of period.................................... 20.59 10.15 9.83 9.53 8.91
Net interest rate spread(8)............................ 3.29 3.64 3.48 3.66 3.85
Net interest margin(9)................................. 4.10 4.22 3.96 4.06 4.16
Average interest-earning assets
to average interest-bearing liabilities............. 126.04 118.94 114.99 113.96 111.64
Total non-interest expense to average assets(10)....... 1.93 1.99 2.07 2.15 2.13
Net interest income to operating expenses.............. 201.09 193.59 177.32 175.67 181.65
Efficiency ratio(11)................................... 45.75 46.08 51.04 51.63 49.40
Asset Quality Ratios:
Non-performing loans as a percent of loans, net........ 0.85% 0.78% 0.91% 0.76% 1.51%
Non-performing assets as a percent of total assets..... 0.37 0.46 0.48 0.39 0.71
Allowance for loan losses
as a percent of loans receivable, net................ 1.12 1.10 1.14 0.83 0.87
Allowance for loan losses as a percent of
total non-performing loans........................... 131.50 141.09 125.55 109.35 57.64
Regulatory Capital Ratios and Other Data:
Leverage capital....................................... 12.81% 9.54% 9.65% 9.25% 8.60%
Total risk-based capital............................... 24.81 18.91 19.20 18.33 16.23
Tier I capital......................................... 23.87 17.98 18.33 17.92 15.71
Number of full service customer facilities........... 13 13 13 13 13
</TABLE>
(1) The Bank adopted Statement of Financial Accounting Standards ("SFAS")
No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities," as of July 1, 1994, and reclassified securities having
a market value of $26 million from its held to maturity portfolio to its
available for sale portfolio in November 1995, pursuant to a Financial
Accounting Standards Board ("FASB") interpretation of SFAS No. 115. In
February 1998, the Company transferred its entire securities held to
maturity portfolio to its securities available for sale portfolio as part
of a balance sheet restructuring initiative implemented at that time,
primarily in connection with a reassessment by the Company of its
asset/liability management strategy.
(2) Loans receivable, net, consist of gross loans receivable, less unamortized
discounts, plus deferred loan costs, less deferred loan fees and the
allowance for loan losses. The allowance for loan losses at June 30, 1998,
1997, 1996, 1995, and 1994 was $7.3 million, $5.5 million, $4.8 million,
$3.3 million and $3.1 million, respectively. Loans receivable, net, at
June 30, 1996, includes $1.2 million of loans held for sale.
(3) Includes the one-time non-recurring charge of $19.6 million ($11.2 million,
net of tax) for funding of the RCS Foundation at time of Conversion.
(4) Cumulative effect of changes in accounting principles reflects a charge,
net of tax, of $1.3 million for fiscal 1995, resulting from the adoption of
SFAS No. 106 ("SFAS No. 106"), "Employer's Accounting For Post-Retirement
Benefits Other than Pensions," and a credit to earnings of $1.2 million for
fiscal 1994, resulting from the adoption of SFAS No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes."
(5) Proforma earnings per share for fiscal 1998, calculated as if the Bank had
converted to stock form as of July 1, 1997, was $0.19.
(6) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios and fiscal 1998, which
is based on daily average balances, all ratios are based upon average
balances during the indicated period. Averages for the periods ended fiscal
1997, 1996, 1995 and 1994, utilize average month-end balances.
(7) All performance ratios for the year ended June 30, 1998, exclude the
one-time non-recurring charge of $19.6 million ($11.2 million net of tax)
for the funding of RCS Foundation at time of conversion.
(8) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(9) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(10) Total non-interest expense excludes the effect of amortization of goodwill.
The 1997 ratio excludes the one-time special assessment of $493,000 to
recapitalize the Savings Association Insurance Fund (the "SAIF"). Including
the effects of the amortization of goodwill and funding of the RCS
Foundation, total non-interest expense to average assets for the year ended
June 30, 1998 would be 3.52%.
(11) The efficiency ratio represents the ratio of non-interest expense,
excluding the effect of amortization of goodwill and the SAIF special
assessment, divided by the sum of net interest income and non-interest
income. Including the effects of the amortization of goodwill and the
contribution to the RCS Foundation, the efficiency ratio for the year
ended June 30, 1998 would be 83.35%.
38
<PAGE>
Selected Quarterly Financial Data
The following table provides a summary of operations by quarter for the years
ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Fiscal 1998 Quarter Ended
------------------------------------------------------------
(In Thousands, Except Per Share Data)
June 30, March 31, December 31, September 30,
------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
Interest income....................................... $ 26,114 $ 23,975 $ 18,911 $ 17,754
Interest expense...................................... 11,389 10,173 8,354 7,596
------------- ------------ -------------- ---------------
Net interest income before
provision for possible loan losses................ 14,725 13,802 10,557 10,158
Provision for possible loan losses.................... 700 600 450 450
------------- ------------ -------------- ---------------
Net interest income after provision
for possible loan losses....................... 14,025 13,202 10,107 9,708
Non-interest income:
Fee income........................................ 801 990 825 822
Net gains (losses) on sale of loans and
securities........................................ 143 (53) 78 (5)
------------- ------------ -------------- ---------------
Total non-interest income......................... 944 937 903 817
Non-interest expense:
General and administrative expenses............... 6,945 6,880 5,474 4,876
Amortization of deposit premium................... 78 78 78 79
Charitable contribution to the RCS Foundation..... - 19,558 - -
------------- ------------ -------------- ---------------
Total non-interest expense..................... 7,023 26,516 5,552 4,955
------------- ------------ -------------- ---------------
Income before provision for income taxes............. 7,946 (12,377) 5,458 5,570
Provision for income taxes............................ 2,473 (5,766) 2,647 2,717
============ ============== ============= =============
Net income............................................ $ 5,473 $ (6,611) $ 2,811 $ 2,853
============ ============== ============= =============
Basic and diluted earnings per share since
conversion........................................ $ 0.23 $ (0.39) N/A N/A
============ ============== ============= =============
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1997 Quarter Ended
-----------------------------------------------------------
(In Thousands, Except Per Share Data)
June 30, March 31, December 31, September 30,
------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Interest income....................................... $ 17,306 $ 16,576 $ 16,140 $ 15,759
Interest expense...................................... 7,266 6,916 6,828 6,697
------------- ------------ -------------- ----------------
Net interest income before
provision for possible loan losses................ 10,040 9,660 9,312 9,062
Provision for possible loan losses 270 270 270 270
------------- ------------ -------------- ----------------
Net interest income after provision
for possible loan losses....................... 9,770 9,390 9,042 8,792
Non-interest income:
Fee income........................................ 781 825 634 728
Net (losses) gains on sale of loans and
securities........................................ (45) 7 50 (119)
------------- ------------ -------------- ---------------
Total non-interest income......................... 736 832 684 609
Non-interest expense:
General and administrative expenses............... 4,722 4,978 4,967 4,687
Amortization of deposit premium................... 78 78 78 79
Charitable contribution to the RCS Foundation..... - - - -
------------- ------------ -------------- ---------------
Total non-interest expense..................... 4,800 5,056 5,045 4,766
------------- ------------ -------------- ---------------
Income before provision for income taxes.............. 5,706 5,166 4,681 4,635
Provision for income taxes............................ 2,685 2,400 2,200 2,178
============= ============ ============== ===============
Net income............................................ $ 3,021 $ 2,766 $ 2,481 $ 2,457
============= ============ ============== ===============
Basic and diluted earnings per share since
conversion........................................ N/A N/A N/A N/A
============= ============ ============== ===============
</TABLE>
39
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Richmond County Financial Corp. (the "Company") was incorporated in September
1997, and is the holding company for Richmond County Savings Bank and its
subsidiaries (the "Bank"). On July 31, 1997, the Board of Trustees of the Bank
unanimously adopted a Plan of Conversion, whereby the Bank would convert from a
New York State chartered mutual bank to a New York State chartered stock
institution with the concurrent formation of the Company (the "Conversion").
The Conversion was completed on February 18, 1998, with the issuance by the
Company of 24,466,250 shares of common stock, at a price of $10.00 per share, in
an initial public offering. The Company received gross proceeds from the
Conversion of $244.7 million, before the reduction from gross proceeds of $9.8
million for estimated conversion related expenses. The Company used $117.4
million, or 50% of the net proceeds, to purchase all of the outstanding stock of
the Bank.
Concurrent with the completion of the Conversion, an additional 1,957,300 shares
of authorized but unissued shares of common stock were contributed by the
Company to the Richmond County Savings Foundation (the "Foundation"), a private
foundation dedicated to charitable purposes within the communities the Bank
serves. The Company recorded a one-time charge of $19.6 million, the full amount
of the contribution made to the Foundation, and a corresponding deferred tax
benefit of $8.4 million, in the third quarter ended March 31,1998. The
contribution to the Foundation is expected to be fully tax deductible, subject
to an annual limitation based upon the Company's annual taxable income.
Additionally, in connection with the Conversion, the Bank implemented the
Employee Stock Ownership Plan ("ESOP"), a tax-qualified plan designed to invest
primarily in the Company's common stock. Subsequent to the Conversion, the ESOP
purchased, through a $34.6 million loan from the Company, 8%, or 2,113,884
shares of common stock in the open market.
The Company's results of operations depend primarily on its net interest income,
which is the difference between interest income on interest-earning assets,
which principally consist of loans, mortgage-backed and mortgage-related
securities and investment securities, and interest expense on interest-bearing
liabilities, which principally consist of deposits and borrowings. Net interest
income is determined by an institution's interest rate spread (i.e., the
difference between yields earned on its interest-earning assets and the rates
paid on its interest-bearing liabilities) and the relative amount of
interest-earning assets to interest-bearing liabilities. Results of operations
are also affected by the Company's provision for possible loan losses, the level
of its non-interest income, including service fees and related income. The
Company's non-interest expense principally consists of compensation and
benefits, occupancy and equipment expense, advertising 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, governmental policies and actions by
regulatory authorities.
The Company had no operations prior to February 18, 1998, and, accordingly, the
results of operations prior to that date reflect only those of the Bank.
Acquisitions
On July 20, 1998, the Company and Bayonne Bancshares, Inc. ("Bayonne") entered
into a definitive agreement pursuant to which Bayonne, the holding company of
First Savings Bank of New Jersey, SLA, a New Jersey chartered savings and loan
association, with four full service banking offices located in Bayonne, New
Jersey, will merge with and into the Company. Under the terms of the agreement,
the Company will issue 1.05 shares of its common stock for each outstanding
share of common stock of Bayonne. The total transaction value is estimated to be
$173.0 million. As of June 30, 1998 (unaudited), total assets of Bayonne were
$700.3 million, deposits were $421.7 million and total stockholders' equity was
$96.0 million. The merger is subject to the approval of the shareholders of each
company, as well as certain regulatory approvals. The merger is expected to be
completed in the first quarter of calendar year 1999, and is intended to be a
tax-free merger accounted for as a pooling of interests.
40
<PAGE>
On July 17, 1998, the Company and Ironbound Bankcorp, NJ ("Ironbound") entered
into a definitive agreement pursuant to which Ironbound, the holding company of
Ironbound Bank, a New Jersey chartered commercial bank, with three full service
commercial banking offices located in the New Jersey counties of Union and
Essex, will merge with and into the Company. Under the terms of the agreement,
the Company will issue 1.45 shares of its common stock for each outstanding
common share of Ironbound. The total transaction value is estimated to be $26.5
million. As of June 30, 1998 (unaudited), total assets of Ironbound were $113.7
million, deposits were $107.8 million and total stockholders' equity was $11.3
million. The merger is subject to the approval of Ironbound shareholders, as
well as certain regulatory approvals. The merger is expected to be completed in
the first quarter of calendar year 1999, and is intended to be a tax-free merger
accounted for as a pooling of interests.
Management Strategy
The Bank's operating strategy emphasizes customer service and convenience, and
the Bank attributes the loyalty of its customer base to its commitment to
maintaining customer satisfaction, as well as its proactive involvement in the
communities that it serves. The Bank attempts to set itself apart from its
larger competitors by providing the type of personalized service not generally
available from larger banks, while offering a greater variety of products and
services than is typically available from smaller, local depository
institutions.
The Bank's historical operating strategy has concentrated on maintaining
profitability and asset quality by primarily investing in one-to-four family
mortgage loans and in U.S. Government and agency debt securities, as well as
debt and equity securities of corporate issuers. In the past few years, the Bank
has pursued a strategy, in conjunction with its traditional thrift lending and
securities investment strategy, of focusing on small and medium-sized retail
businesses as both lending and deposit customers by emphasizing the origination
of commercial real estate, construction and commercial loans, as well as
increasing the marketing of its business checking accounts and other
business-related services. In this regard, the Bank hired additional lending
personnel who have commercial real estate and commercial lending experience in
the Bank's primary market area. The Bank has placed increased emphasis on the
origination of multifamily loans and in April 1998, the Bank established a
multifamily lending department, staffed by personnel experienced in the
multifamily lending business. In addition, the Bank is increasing the merchant
services it provides, such as merchant credit card processing, letters of
credit, sweep accounts and increased night depository services. The Bank intends
to continue this strategy, maintaining its traditional focus of investing in
residential mortgage loans and soliciting deposits from individuals in its
primary market area, while strengthening the Bank's position as a provider of
loans and financial services to the local business community.
The Bank's current operating strategy consists primarily of: (i) investing
primarily in one-to-four family, multifamily and to a lesser extent, commercial
real estate, construction and development, commercial and other loans and in
investment-grade securities; (ii) attempting to increase its position as a
lender to businesses operating in its primary market area, as well as other
areas within the New York City metropolitan area, by offering its commercial
loan and deposit products to small and medium-sized businesses; (iii) increasing
the yield and estimated average life of its securities investments by
emphasizing the purchase of government agency and privately issued
mortgage-backed and mortgage-related securities with estimated average lives of
three to seven years and de-emphasizing its investment in U.S. Treasury
obligations and corporate and other debt securities; (iv) maintaining a low cost
of funds by attracting and retaining core deposits by providing enhanced
customer service; (v) attempting to attract new deposit customers by
competitively pricing certificate of deposit products and offering a greater
variety of durations of such certificates; (vi) developing wholesale borrowing
sources, such as FHLB advances, repurchase agreements and brokered certificates
of deposit, as additional means of funding asset growth; and (vii) managing its
interest rate risk by originating or purchasing adjustable-rate loans and from
time to time, selling fixed-rate loans with maturities of more than 15 years.
The Bank has recently begun to place a greater level of emphasis on the
utilization of borrowed funds to fund asset growth. In this regard, at June 30,
1998, the Bank had total borrowings of $306.0 million, all of which were in the
form of FHLB advances. The Bank may continue to increase such emphasis, which
may result in an increase in the Bank's average cost of funds.
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
on the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rates earned or paid on them.
41
<PAGE>
Average Balance Sheet. The following table sets forth certain information
relating to the Company for the years ended June 30, 1998, 1997 and 1996. The
average yields and costs are derived by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown and reflect annualized yields and costs.
Average balances are derived from average monthly balances, with the exception
of fiscal 1998, which is based on daily average balances. The yields and costs
include fees, which are considered adjustments to yields.
<TABLE>
<CAPTION>
For the Year Ended June 30,
--------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
--------- -------- ------- -------- -------- ------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets(1):
Debt and equity securities............ $ 230,067 $14,645 6.37% $271,721 $16,754 6.17% $304,133 $17,873 5.88%
Mortgage-backed and mortgage-
related securities, net............ 350,398 23,622 6.74 142,330 9,588 6.74 84,270 5,402 6.41
Real estate loans, net(2)(3).......... 522,136 41,562 7.96 441,221 35,165 7.97 377,565 30,902 8.18
Commercial loans, net(2).............. 7,030 717 10.20 6,490 617 9.51 6,007 620 10.32
Consumer and student loans............ 22,770 2,096 9.21 23,388 2,286 9.77 22,566 2,285 10.13
Other interest-earning assets......... 69,577 4,112 5.91 17,505 1,371 7.83 33,667 1,981 5.88
---------- ------- --------- ------- -------- -------
Total interest-earning assets...... 1,201,978 86,754 7.22 902,655 65,781 7.29 828,208 59,063 7.13
------- ------ ------- ------ ------- ------
Non-interest-earning assets............. 48,284 43,845 50,080
---------- ---------- --------
Total assets....................... $1,250,262 $946,500 $878,288
========== ========== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Money market savings accounts......... $ 39,075 $1,353 3.46% $ 37,552 $1,308 3.48% $28,430 $ 987 3.47%
Savings accounts...................... 445,057 12,146 2.73 432,162 11,823 2.74 430,500 11,841 2.75
NOW accounts.......................... 19,089 446 2.34 15,652 370 2.36 14,602 354 2.42
Certificates of deposit............... 314,106 16,894 5.38 273,546 14,206 5.19 246,697 13,072 5.30
---------- ------- --------- ------- -------- -------
Total deposits.................... 817,327 30,839 3.77 758,912 27,707 3.65 720,229 26,254 3.65
------- ------- -------
Borrowed funds........................ 103,424 5,778 5.59 - - - - - -
Non-depository stock
subscriptions.................... 32,914 895 2.72 - - - - - -
---------- ------- --------- ------- -------- -------
Total interest-bearing
liabilities................. 953,665 37,512 3.93 758,912 27,707 3.65 720,229 26,254 3.65
------- ------ ------- ------ ------- ------
Non-interest-bearing
liabilities...................... 108,412 92,254 72,872
---------- --------- --------
Total liabilities............. 1,062,077 851,166 793,101
Stockholders' equity.............. 188,185 95,334 85,187
---------- --------- --------
Total liabilities and
stockholders' equity....... $1,250,262 $946,500 $878,288
========== ========= ========
Net interest income/
interest rate spread(4)......... $49,242 3.29% $38,074 3.64% $32,809 3.48%
======= ====== ======= ====== ======= ======
Net interest margin(5)........... 4.10% 4.22% 3.96%
====== ====== ======
Ratio of interest-earning
assets to interest-bearing
liabilities..................... 126.04% 118.94% 114.99%
====== ====== ======
</TABLE>
(1) Includes related assets available for sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan cost and fees, deferred mortgage interest,
unamortized discounts net and includes loans held for sale and
non-performing loans.
(3) Real estate loans, net includes one-to-four family, multifamily, commercial
real estate, construction and development and home equity loans.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
42
<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 Year Ended
June 30, 1998 June 30, 1997
Compared to Compared to
Year Ended Year Ended
June 30, 1997 June 30, 1996
------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
-------------------------------- ---------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Debt and equity securities........... $ (2,568) $ 459 $(2,109) $ (1,905) $ 786 $(1,119)
Mortgage-backed securities and
mortgaged-related securities, net. 14,016 18 14,034 3,722 4,186 464
Real estate loans, net............... 6,449 (52) 6,397 5,210 (947) 4,263
Commercial loans, net............... 51 49 100 50 (53) (3)
Consumer and student loans.......... (60) (130) (190) 83 (82) 1
Other interest-earning assets....... 4,078 (1,337) 2,741 (951) 341 (610)
-------- ------- ------- -------- ----- -------
Total interest-earning assets..... 21,966 (993) 20,973 6,209 509 6,718
-------- ------- ------- -------- ----- -------
Interest-bearing liabilities:
Money market savings accounts........ 53 (8) 45 317 4 321
Savings accounts..................... 353 (30) 323 46 (64) (18)
NOW accounts........................ 81 (5) 76 25 (9) 16
Certificates of deposit.............. 2,106 582 2,688 1,423 (289) 1,134
Borrowings........................... 5,778 - 5,778 - - -
Non-depository stock subscriptions.. 895 - 895 - - -
-------- ------- ------- -------- ----- -------
Total interest-bearing
liabilities....................... 9,266 539 9,805 1,811 (358) 1,453
-------- ------- ------- -------- ----- -------
Net change in net interest income........ $ 12,700 $(1,532) $11,168 $ 4,398 $ 867 $ 5,265
======== ======= ======= ======== ===== =======
</TABLE>
Changes in Financial Condition
Total assets increased by $602.5 million, or 60.6%, from $993.4 million at June
30, 1997, to $1.6 billion at June 30, 1998. The increase in overall assets was
primarily due to an increase of $405.8 million in investment and mortgage-backed
and mortgage-related securities, an increase in net loans of $148.2 million, or
29.9%, and an increase in federal funds sold of $20.0 million. These increases
were primarily due to $234.9 million of net proceeds received in the Conversion,
$306.0 million of advances received from the FHLB and a net increase in overall
deposits of $65.0 million.
As part of its efforts to manage the Bank's asset/liability strategy in an
environment experiencing above normal prepayment risk and market sensitivity to
potential changes in market interest rates, in the third quarter of fiscal 1998,
the Company designated substantially all of its investment securities and its
mortgage-backed and mortgage-related securities as available for sale. The Bank
transferred $149.2 million of investment securities and $123.9 million of
mortgage-backed and mortgage-related securities from the held to maturity
category to the available for sale category. Subsequent to the transfer,
approximately $38.0 million of investment securities available for sale and
$16.7 million of mortgage-backed and mortgage-related securities available for
sale were sold and a net loss of $144,000 was realized. Management believes that
the flexibility of the available for sale portfolio will assist the Company in
evaluating market opportunities while managing the Bank's exposure to interest
rate risk and asset sensitivity.
Mortgage-backed and mortgage-related securities increased by $391.8 million, or
184.4%, from $212.5 million at June 30, 1997, to $604.3 million at June 30,
1998. Investment securities at June 30, 1998, totaled $238.9 million, an
increase of $14.0 million, or 6.2%, compared to $224.9 million at June 30, 1997.
43
<PAGE>
Net loans receivable increased $148.2 million, or 29.9%, to $644.5 million at
June 30, 1998, compared to $496.3 million at June 30, 1997. This increase was
due primarily to originations of $193.3 million and whole loan purchases of
$38.6 million, offset by scheduled amortization and prepayments of $83.1
million.
Total liabilities at June 30, 1998, were $1.3 billion, an increase of $374.7
million, or 42.0%, from $892.5 million at June 30, 1997. Total deposits
increased by $65.0 million, or 7.3%, from $885.8 million at June 30, 1997, to
$950.8 million at June 30, 1998. The Bank's "core" deposits increased by $37.7
million, or 6.4%, at June 30, 1998, to $625.5 million, from $587.8 million at
June 30, 1997. The increase in the Bank's "core" deposits was primarily
attributable a $28.7 million increase in demand deposits. The Bank also
experienced an increase of $27.3 million, or 9.2%, in certificates of deposit
from $298.1 million at June 30, 1997, to $325.3 million at June 30, 1998. The
increase in certificates of deposit was primarily attributable to additional
certificate of deposit products and related marketing of such deposit products.
Additionally, the Bank continues to place a greater level of emphasis on the
utilization of borrowed funds to fund asset growth. In this regard, at June 30,
1998, the Bank had total borrowings of $306.0 million, all of which were in the
form of advances from the FHLB. The Bank had no borrowings at June 30, 1997. The
Bank may continue to increase such emphasis, which may result in an increase in
the Bank's overall cost of funds. The Bank's current strategy is to invest such
borrowed funds primarily in mortgage-backed and mortgage-related securities.
This strategy is intended to incrementally increase net interest income,
although it may have the effect of incrementally decreasing net interest rate
spread.
Total stockholders' equity increased by $227.7 million to $328.6 million at June
30, 1998, from $100.9 million at June 30, 1997. The increase was primarily
attributable to net conversion proceeds received of $234.9 million, offset in
part by the funding of the Bank's ESOP. Subsequent to the Conversion, the ESOP
purchased 2,113,884 shares of the Company's stock with loan proceeds of $34.6
million received from the Company.
Non-performing Assets
Non-performing loans totaled $5.5 million, or 0.9% of total loans at June 30,
1998, as compared to $3.9 million, or 0.8% of total loans, at June 30, 1997. At
June 30, 1998, the Bank's real estate owned net, consisted of foreclosed assets
totaling $322,000 which at such date was comprised of two one-to-four family
properties and one mixed use commercial property.
At June 30, 1998, the Bank had $2.5 million of assets designated as Substandard,
consisting of nine loans; $38,000, consisting of 14 consumer loans classified as
Doubtful; and $5,000, consisting of four consumer loans classified as Loss. At
June 30, 1998, the Bank had $3.0 million of assets designated as Special
Mention, consisting of 23 loans which were designated Special Mention, due to
past loan delinquencies.
Non-accrual loans totaled $5.5 million as of June 30, 1998, which included 25
one-to-four family loans, with an aggregate balance of $33 million. One
non-accrual loan is a $1.1 million commercial mortgage on a mixed-use property
in Staten Island, New York. The loan is secured by the property, which was last
appraised in December 1996, for $1.4 million.
Prior to July 1, 1997, it was the Bank's policy to generally cease accruing
interest on all commercial real estate, construction and commercial loans 90
days or more past due, on all consumer loans 120 days or more past due, and on
all one-to-four family residential mortgage loans 180 days or more past due.
Effective July 1, 1997, the Bank revised this policy such that it does not
accrue interest on any loans, including one-to-four family loans secured by real
estate, which are more than 90 days delinquent as to principal and interest
unless, in the opinion of management, collection is probable.
Allowance for Loan Losses
For the year ended June 30, 1998, the Company's loan loss provision was $2.2
million as compared to $1.1 for the prior year's period. The Company's allowance
for loan losses totaled $7.3 million at June 30, 1998, and $5.5 million at June
30, 1997, which represents a ratio of allowance for loan losses to
non-performing loans and to total loans of 131.5% and 1.1%, respectively, and
141.1% and 1.1%, respectively. The Company continues to increase its overall
loan loss reserves after analyzing non-performing loans, as well as the need to
increase its general valuation allowances due to the increase in lending of all
loan products. Management believes the allowance for loan losses at June 30,
1998, is adequate and sufficient reserves are presently maintained to cover
potential losses. For the years ended June 30, 1998 and 1997, the Company
experienced net charge-offs of $394,000 and $406,000, respectively.
44
<PAGE>
Comparison of Operating Results For the Years Ended June 30, 1998 and June 30,
1997
General. The Company reported net income of $4.5 million for the fiscal year
ended June 30, 1998, as compared to the $10.7 million reported in fiscal 1997.
Pro-forma earnings per share for the fiscal year ended June 30, 1998, calculated
as if the Bank had converted to stock form as of July 1, 1997, was $0.19.
Historical loss per share for the fiscal year ended June 30, 1998 since the
Conversion, was $0.16. Per share amounts are not applicable to the 1997 results,
due to the fact that the Bank was a mutual institution prior to the Conversion.
The results of operations for the fiscal year ended June 30, 1998, reflect a
non-recurring contribution relating to the funding of the Richmond County
Savings Foundation (the "Foundation"). Excluding the effect of this
contribution, net income was $15.7 million for the fiscal year ended June 30,
1998, an increase of $5.0 million, or 46.7% from the $10.7 million reported for
the fiscal year ended June 30, 1997. At the close of the Conversion, the Company
funded the Foundation with a contribution of 1,957,300 shares of common stock,
resulting in a one-time, non-recurring charge of $19.6 million ($11.2 million
after tax). The Foundation is dedicated to charitable purposes in the
communities served by the Bank.
Interest Income. The Company reported total interest income of $86.8 million for
the fiscal year ended June 30, 1998, representing an increase of $21.0 million,
or 31.9%, as compared to the same period in 1997. The increase in interest
income was attributable primarily to the growth in average interest-earning
assets of $299.3 million, offset in part by a 7 basis point decrease in the
average yield on interest-earning assets. The overall increase in the level of
interest-earning assets was primarily the result of utilizing the net conversion
proceeds and an increase in borrowed funds to fund growth in the mortgage loan
and securities portfolios. Interest income was also positively affected by
non-depository stock subscriptions received as a result of the Conversion, which
were invested primarily in overnight funds prior to its completion. The
substantial liquidity position was maintained due to the offering of Company's
common stock and the return of approximately $236.9 million in non-depository
stock subscription funds.
Interest income on loans increased $6.3 million, or 16.6%, to $44.4 million for
the fiscal year ended June 30, 1998, as compared to the $38.1 million reported
for the comparable period in 1997. This increase was the result of growth in the
average balance of real estate loans outstanding, due primarily to increased
originations of one-to-four family, commercial real estate loans and the
purchase of $38.6 million of multifamily loans. The average yield on the overall
loan portfolio remained relatively constant at 8.04% for the fiscal year ended
June 30, 1998, as compared to 8.08% for the same period in fiscal 1997.
Interest income on debt and equity securities decreased $2.1 million, or 12.6%,
from $16.8 million for the fiscal year ended June 30, 1997, to $14.6 million for
the same period in fiscal 1998. This decrease is attributable primarily to
management's recent restructuring of its securities portfolio, resulting in a
$41.7 million decrease in the average balance of such securities, offset in part
by a 20 basis point increase in the average yield.
Interest income on mortgage-backed and mortgage-related securities increased
$14.0 million, or 146.4%, from $9.6 million for the fiscal year ended June 30,
1997, to $23.6 million for the fiscal year ended June 30, 1998. This increase
was due primarily to an increase in the average balance of mortgage-backed and
mortgage-related securities of $208.1 million, resulting from the restructuring
of the securities portfolio, the investment of net conversion proceeds and the
investment of borrowed funds. The increase in such securities reflects
management's recent revision of its securities investment strategy, whereby it
has decreased its emphasis on debt securities by investing funds from the
maturity and sale of debt securities, as well as proceeds from the Conversion
and borrowed funds into mortgage-backed and mortgage-related securities. The
yield on the mortgage-backed and mortgage-related securities remained constant
at 6.74% for the fiscal years ended June 30, 1998 and 1997.
Interest Expense. Interest expense increased $9.8 million, or 35.4%, from $27.7
million for the fiscal year ended June 30, 1997, to $37.5 million for the fiscal
year ended June 30, 1998. Interest expense on deposits increased $4.0 million,
or 14.5%, from $27.7 million for the fiscal year ended June 30, 1997, to $31.7
million for the fiscal year ended June 30, 1998. The increase reflects a $91.3
million increase in the average balance of interest-bearing deposits, primarily
attributable to a $40.6 million increase in the average balance of certificates
of deposit and a $12.9 million increase in the average balance of savings
deposit accounts. This increase is attributable to the Bank's strategy of
attracting more certificates of deposit through additional certificate of
deposit products and related marketing of commercial deposit accounts.
Additionally, the
45
<PAGE>
Bank realized a one time $895,000 expense relating to interest paid on
non-depository stock subscription funds received in connection with the
Conversion.
Interest expense on borrowed funds was $5.8 million for the fiscal year ended
June 30, 1998. The Bank continues to place a greater level of emphasis on the
utilization of borrowed funds to fund asset growth and to leverage the Bank's
capital position to improve returns on equity. For the fiscal year ended June
30, 1997, the Bank had no borrowings outstanding. The Bank may continue to
increase such emphasis on borrowed funds, which may result in an increase in the
Bank's overall cost of funds. The Bank's current strategy is to invest such
borrowed funds primarily in mortgage-backed and mortgage-related securities.
This strategy is intended to incrementally increase net interest income,
although it may have the effect of incrementally decreasing net interest rate
spread. Consequently, the average cost of the Bank's interest-bearing
liabilities increased from 3.65% for the fiscal year ended June 30, 1997, to
3.93% for the fiscal year ended June 30, 1998.
Provision for Loan Losses. The Bank's provision for loan losses was $2.2 million
for the fiscal year ended June 30, 1998, as compared to $1.1 million reported in
fiscal 1997. The provision for fiscal 1998 was based on management's evaluation
of its loan portfolio and real estate market conditions. In particular,
management considered the continued growth in the portfolio, as well as the
increase in its non-performing loans. Management believes, based upon
information currently available, that its allowance for loan losses is adequate
to cover future loan losses. To the extent the Bank increases its investment in
multifamily loans, commercial real estate, commercial and other loans, which
entail higher risk than one-to-four family loans, the Bank may decide to
increase its allowance for loan losses through additional loan loss provisions,
which may adversely affect net income. In addition, if general economic
conditions and real estate values within the Bank's primary lending area
decline, the level of non-performing loans may increase, resulting in larger
provisions for loan losses which, in turn, would also adversely affect net
income.
Non-Interest Income. Non-interest income is comprised primarily of fee income
and gains and losses from the sale of securities and loans. Exclusive of net
securities gains and losses, non-interest income for the fiscal year ended June
30, 1998, increased $470,000, or 15.8%, to $3.4 million. The increased level of
non-interest income is due primarily to an overall increase in deposit fee
income. Net gain on sales of securities and loans for the fiscal year ended June
30, 1998, was $163,000, as compared to net losses on the sale of securities and
loans of $107,000 in fiscal 1997.
Non-Interest Expense. Non-interest expense, excluding the contribution to the
Foundation, totaled $24.5 million for the fiscal year ended June 30, 1998, an
increase of $4.8 million, or 24.5%, as compared to $19.7 million reported for
the same period in fiscal 1997. The increased level of non-interest expense was
attributable primarily to increases in compensation and employee benefits,
including senior management additions, compensation costs associated with the
establishment of the Bank's new Multifamily Lending Division, the addition of
the ESOP and increased professional fees. The Bank incurred additional
professional fees associated with the formation of Richmond County Capital
Corporation, a subsidiary of the Bank formed for the purpose of establishing a
REIT. The Bank expects that compensation and employee benefits expense may
continue to increase, primarily as a result of the adoption of various employee
benefit plans, compensation adjustments adopted in connection with the
Conversion and the establishment of the Bank's new Multifamily Lending Division.
In addition, the Bank expects non-interest expense to increase in future periods
as a result of the Bank's intention to open a public accommodation office and
the opening of two new full-service branches in fiscal 1999.
Income taxes. The Company's effective consolidated tax rate for the fiscal year
ended June 30, 1998, was 31.4% as compared to 46.9% reported for the comparable
period in 1997. The fiscal year ended June 30, 1998 rate includes the effect of
funding the Foundation. Excluding the effect of the Foundation, the Company's
effective tax rate was 40.5%.
Comparison of Operating Results For the Years Ended June 30, 1997 and June 30,
1996.
General. Net income for fiscal 1997 increased by $2.0 million, or 22.9%, from
$8.7 million for fiscal 1996 to $10.7 million for fiscal 1997. The increase was
due primarily to an increase in net interest income which resulted from an
increase in the average balance of interest-earning assets and a higher weighted
average yield on its securities portfolio, offset, in part, by increases in
non-interest expenses, including the one-time SAIF special assessment and
increased compensation and advertising costs.
Interest Income. Interest income amounted to $65.8 million for fiscal 1997,
representing an increase of $6.7 million from fiscal 1996. The increase was the
result of a $74.4 million increase in average interest-earning assets and a 16
basis point increase in the yield on interest-earning assets. The increase in
average interest-earning assets was due primarily to an
46
<PAGE>
increase in one-to-four family loans due to the introduction of the Bank's use
of mortgage brokers and increased marketing efforts. The increase in the average
interest rate on interest-earning assets, which increased from 7.13% to 7.29%,
was due primarily to the reallocation of interest-earning assets from
lower-yielding U.S. Government securities to higher-yielding mortgage-backed and
mortgage-related securities. This was partially offset by a 24 basis point
decline in the yield on real estate loans, net, due primarily to the repricing
of adjustable-rate loans in a lower interest rate environment. Interest income
on mortgage-backed and mortgage-related securities increased $4.2 million, or
77.5%, from $5.4 million for fiscal 1996 to $9.6 million for fiscal 1997. This
increase was due primarily to an increase in the average balance of
mortgage-backed and mortgage-related securities of $58.1 million, which resulted
from the restructuring of the securities portfolio and the investment of excess
funds not utilized for loan demand in mortgage-backed and mortgage-related
securities. The yield on the mortgage-backed and mortgage-related securities
portfolio increased by 33 basis points due to the higher rate environment for
new purchases and the repricing of adjustable-rate securities purchased in prior
periods. Interest income on debt and equity securities decreased $1.1 million,
or 6.3%, due to management's restructuring of its securities portfolio resulting
in a $32.4 million decrease in the average balance of such securities offset, in
part, by the increased yield on such securities.
Interest income on loans increased $4.3 million, from $33.8 million for fiscal
1996, to $38.1 million for fiscal 1997. The increase in interest income on loans
was a result of growth in the average balance of one-to-four family loans
outstanding, partially offset by a 24 basis point decrease in the average yield
on loans, which occurred due to a repricing of adjustable rate loans in a lower
interest rate environment. The increase in the average balance of loans was due
primarily to an increase in residential one-to-four family loans, resulting
primarily from the investment of funds resulting from the growth in deposits.
Interest Expense. Interest expense increased $1.5 million, or 5.5%, from $26.3
million for fiscal 1996 to $27.7 million for fiscal 1997. This increase reflects
a $38.7 million increase in the average balance of interest-bearing liabilities.
The increase in average interest-bearing liabilities was primarily attributable
to an increase in the average balance of certificates of deposits and money
market savings accounts, which increased as a result of the Bank's strategy of
attracting more certificates of deposits through additional certificate of
deposit products, competitive pricing of such products, and related marketing of
commercial deposit accounts. The average cost of the Bank's interest-bearing
liabilities remained relatively stable at 3.65% for fiscal 1997 and for fiscal
1996.
Provision for Loan Losses. The Bank's provision for loan losses was $1.1 million
for fiscal 1997, as compared to $1.6 million for fiscal 1996. The 1997 provision
was based on management's evaluation of its loan portfolio and real estate
market conditions. In particular, management considered the continued growth in
the portfolio, as well as the decrease in its non-performing loans. The Bank's
non-performing loans as a percentage of total loans improved from 0.91% at June
30, 1996, to 0.78% at June 30, 1997. At June 30, 1997, the Bank's allowance for
loan losses as a percentage of total non-performing loans was 141.1%, as
compared to 125.6% at June 30, 1996. At June 30, 1997, the Bank's allowance for
loan losses as a percentage of loans receivable, net, was 1.10%, as compared to
1.14% at June 30, 1996. To the extent the Bank increases its investment in
commercial real estate, commercial and other loans, which entail higher risk
than one-to-four family loans, the Bank may determine to increase its allowance
for loan losses through additional loan loss provisions, which may adversely
affect net income.
Non-Interest Income. Non-interest income is composed of fee income and profits
from the sale of securities and loans. Total non-interest income for fiscal 1997
increased $34,000, or 1.2%, to $2.9 million. Fee income increased $245,000, or
9.0%, from $2.7 million for fiscal 1996 to $3.0 million for fiscal 1997, due to
an increase in the Bank's deposit accounts. Net gains/losses on sales of
securities and loans changed from a net gain of $42,000 for fiscal 1996, to a
net loss of $107,000 for fiscal 1997, primarily as a result of the Bank's sale
of lower-yielding U.S. Treasury and corporate obligations.
Non-Interest Expense. Non-interest expense increased by $1.2 million, or 6.3%,
from $18.5 million for fiscal 1996, to $19.7 million for fiscal 1997, primarily
due to the one-time SAIF special assessment and an increase in compensation and
employee benefits. Compensation and employee benefits increased by $589,000, or
6.4%, from $9.3 million for fiscal 1996, to $9.9 million for fiscal 1997,
primarily as a result of the retention of new personnel in various areas of the
Bank's operations and normal salary increases. Deposit insurance premiums
increased $373,000, or 148.6%, from $251,000 for fiscal 1996, to $624,000 for
fiscal 1997, due to the increase in average deposits from $720.2 million for
fiscal 1996, to $758.9 million for fiscal 1997. In addition, the Bank paid a
one-time special assessment to the SAIF of $493,000 in October 1996, based on
the amount of SAIF-insured deposits the Bank maintains. Advertising and
promotion expense increased $183,000, or 28.9%, from $634,000 for fiscal 1996,
to $817,000 for fiscal 1997, primarily as a result of the Bank's special
47
<PAGE>
anniversary promotion throughout October 1996 and additional marketing of the
Bank's loan and deposit products. The Bank expects that compensation and
employee benefits expense may increase after the Conversion, primarily as a
result of the adoption of various employee benefit plans and compensation
adjustments contemplated in connection with the Conversion. In addition, the
Bank expects non-interest expense to increase in future periods as a result of
the Bank's intention to open a public accommodation office during 1998. The Bank
is also considering opening two new full-service branches in 1998, although no
assurances can be made in this regard. If the Bank were to open two new
branches, non-interest expenses would be expected to increase further in future
periods.
Income Taxes. Total income tax expense was $9.5 million for fiscal 1997, as
compared to $6.8 million for fiscal 1996. The increase was due primarily to an
increase in pre-tax income for 1997. The effective tax rate was 46.9% for fiscal
1997, as compared to 43.8% for fiscal 1996.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, proceeds from the principal
and interest payments on loans, mortgage-backed and mortgage-related and
investment securities, and to a significantly lesser extent, proceeds from the
sale of fixed-rate mortgage loans to the secondary market. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit outflows, mortgage prepayments and mortgage loan sales are greatly
influenced by general interest rates, economic conditions and competition.
The primary investing activities of the Bank are the origination of residential
one-to-four family, multifamily and, to a lesser extent, commercial real estate,
construction and development, and other loans and the purchase of
mortgage-backed and mortgage-related and investment securities. During the
fiscal years ended June 30, 1998 and 1997, the Bank's loan originations totaled
$193.3 million and $137.3 million, respectively. Purchases of mortgage-backed,
mortgage-related and investment securities totaled $781.3 million and $195.4
million for the fiscal years ended June 30,1998 and 1997, respectively. These
activities were funded primarily by deposit growth and principal repayments and
prepayments on loans, mortgage-backed and mortgage-related securities and
investment securities, and advances from the FHLB and the net proceeds received
from the Conversion. As of June 30, 1998, the Bank experienced a net increase in
total deposits of $65.0 million, or 7.3%, to $950.8 million as compared to the
$885.8 million at June 30, 1997. Deposit flows are affected by the level of
interest rates, the interest rates and products offered by local competitors and
the Bank and other factors.
The Bank closely monitors its liquidity position on a daily basis. Excess
short-term liquidity is invested in overnight federal funds sold. In the event
the Bank should require funds beyond its ability to generate them internally,
additional sources of funds are available through repurchase agreements and
advances from the FHLB. The Bank has recently begun to place a greater level of
emphasis on the utilization of borrowed funds to fund asset growth. In this
regard, at June 30, 1998, the Bank had total borrowings of $306.0 million, all
of which were in the form of advances from the FHLB. The Bank may continue to
increase such emphasis, which may result in an increase in the Bank's average
cost of funds.
Loan commitments totaled $150.8 million at June 30, 1998, and were comprised of
$19.1 million in multifamily loan commitments, $66.1 million in one-to-four
family loan commitments, $6.9 million in commercial real estate loan
commitments, $39.6 million in construction loan commitments, $5.8 million in
commercial loan commitments, $10.1 million in home equity loan commitments and
$3.2 million in consumer loan commitments. In addition, management estimates
that an increased level of loan commitments will arise as a result of the recent
formation of the Bank's Multifamily Lending Division, established in the fourth
quarter of fiscal 1998. Management of the Bank anticipates that it will have
sufficient funds available to meet its current loan commitments. Certificates of
deposit that are scheduled to mature in less than one year from June 30, 1998,
totaled $234.6 million. Based upon past experience and the Bank's current
pricing strategy, management believes that a significant portion of such
deposits will remain with the Bank.
At June 30, 1998, the Bank exceeded all of its regulatory capital requirements
with a leverage capital level of $185.0 million, or 12.81% of adjusted assets,
which is above the required level of $31.0 million, or 4.0% of adjusted assets
and risk-based capital of $192.3 million, or 24.8% of adjusted assets, which is
above the required level of $62.0 million, or 8.0%.
The Company's most liquid assets are cash, due from banks and federal funds
sold. The levels of these assets are dependent on the Company's operating,
financing, lending and investing activities during any given period. At June 30,
1998, cash and due from banks (unrestricted) and federal funds sold totaled
$57.9 million, or 3.6% of total assets.
48
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements and notes presented herein, have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollar amounts 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 Bank's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
The Year 2000 Issue
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the year 2000. The Company
primarily utilizes a third party vendor and such vendor's proprietary software
to process transactions and maintain its electronic data. The third party data
processing vendor is modifying, upgrading or replacing its computer software
applications and systems as necessary to permit correct recording of year dates
for 2000 and later years. The vendor has engaged a consultant to review its year
2000 issues and has implemented a year 2000 compliance program. It has also
initiated a compliance testing program to ensure that all changes are adequately
tested. Management will be participating in the testing of systems during
calendar 1998 and management is also developing appropriate contingency plans to
deal with problems as they may arise.
The Company does not expect that the cost of its year 2000 compliance program
will be material to its financial condition or results of operations and
believes that it will be able to satisfy such compliance program by the end of
calendar 1998 without any material disruption in its operations. Although the
Company has requested status information from its major suppliers and software
vendors, in the event that any significant vendor does not timely achieve year
2000 compliance, the Company's business or operations could be adversely
affected.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this Annual Report on Form 10-K 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.
49
<PAGE>
ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk
Asset and Liability Management and the Management of Interest Rate Risk
General
The principal objective of the Company's interest rate risk management is 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's 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 at least
quarterly. The Company's Asset/Liability Committee is comprised of the Company's
senior management, under the direction of the Board of Directors, with senior
management responsible for reviewing, with the Board of Directors, its
activities and strategies, the effect of those strategies on the Company's net
interest margin, the market value of the portfolio and the effect that changes
in the interest rates will have on the Company's portfolio and the Company's
exposure limits.
Discussion of Market Risk
As a financial institution, the Company's primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact
both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. All significant
interest rate risk management procedures are performed at the Company level.
Based upon the Company's nature of operations, the Company is not subject to
foreign currency exchange or commodity price risk. The Company's real estate
loan portfolio, concentrated primarily within the New York metropolitan area, is
subject to risks associated with the local economy. The Company does not own any
trading assets.
In prior years, the Company has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of fixed-rate
mortgage loans having terms to maturity of not more than fifteen years,
adjustable-rate loans and consumer loans consisting primarily of home equity
loans and lines of credit; (2) selling fixed-rate mortgage loans with terms of
more than fifteen years without recourse and on a servicing retained basis; and
(3) investing in short term and, to a lesser extent, adjustable rate securities
which may generally bear lower yields as compared to longer term investments,
but which better position the Company for increases in market interest rates.
The Company currently does not participate in hedging programs, interest rate
swaps or other activities involving the use of off-balance sheet derivative
financial instruments.
Over the past year, the Company has begun to emphasize investment in
mortgage-backed and mortgage-related securities with estimated average lives of
three to seven years and to de-emphasize investment in U.S. Treasury securities,
corporate and other debt securities. As a result, at June 30, 1998,
mortgage-backed and mortgage-related securities and investment securities
totaled 71.7% and 28.3% of total securities, respectively, as compared to 48.6%
and 51.4%, respectively, at June 30, 1997. The weighted average life of the
Company's securities portfolio increased to 7.5 years at June 30, 1998 from 3.3
years at June 30, 1997. This strategy has been accomplished primarily by
investing funds from the maturities and sales of U.S. Treasury obligations and
other debt securities into mortgage-backed and mortgage-related securities,
primarily government agency pass-throughs and privately issued Collateralized
Mortgage Obligations ("CMOs"). This strategy has, in part, resulted in the
increase in the average yield of the Company's securities portfolio. It has also
resulted in an increase in the weighted average life of such portfolio, which
could increase the Company's exposure to interest rate risk in a period of
rising interest rates. In pursuing this strategy, the Company considered the
relative stability of its core deposits.
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 a bank'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. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At June 30,
1998, the Company's one-year gap position, the difference between the amount of
interest-earning assets maturing or repricing within one year and interest-
bearing liabilities maturing or repricing within one year,
50
<PAGE>
was $127.3 million, representing a one-year interest sensitivity gap as a
percentage of total assets of 8.0%. Accordingly, during a period of rising
interest rates, the Company, having a positive gap position, would be in a
better position to invest in higher yielding assets which, consequently, may
result in the yield on its assets increasing at a pace more closely matching the
increase in the cost of its interest-bearing liabilities than if it had a
negative gap. During a period of falling interest rates, an institution with a
positive gap would tend to have its assets repricing at a faster rate than one
with a negative gap which, consequently, may tend to restrain the growth of its
net interest income or result in a decrease in interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1998, which are anticipated
by the Company, based upon certain assumptions, to reprice or mature in each of
the future time periods shown (the "GAP Table"). Except as stated below, the
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
June 30, 1998, on the basis of contractual maturities, anticipated prepayments,
and scheduled rate adjustments within a three month period and subsequent
selected time intervals. For loans on residential properties, adjustable-rate
loans, and fixed-rate loans, prepayment rates were assumed to range from 6% to
18% annually. Mortgage-backed and mortgage-related securities were assumed to
prepay at rates between 8% and 30% annually. Savings and NOW accounts were
assumed to decay at 10%, 5%, 5%, 40%, 20%, 20% and 0%, and money market savings
accounts were assumed to decay at 25%, 15%, 10%, 50%, 0%, 0% and 0%, for the
periods of three months or less, three to six months, six to 12 months, one to
three years, three to five years, five to ten years and more than ten years,
respectively. These assumptions are generally based on the FDIC's deposit decay
guidelines and the Bank's historical experience. 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.
51
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------------------------------------------------------
More than More than More than More than More than
3 3 Months 6 Months 1 Year 3 Years 5 Years
Months to to to to to More than
or Less 6 Months 1 Year 3 Years 5 Years 10 Years 10 Years Total
---------- ---------- ---------- ---------- ---------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Debt and equity securities(2).......... $58,624 $ 7,841 $24,875 $ 21,646 $ 20,074 $ 36,507 $ 69,323 $ 238,890
Mortgage-backed and mortgage-related
securities(2)....................... 56,371 55,600 82,935 154,220 57,943 143,484 53,751 604,304
Real estate loans, net(3)(4)........... 52,495 43,604 85,766 170,682 99,934 106,236 59,087 617,804
Commercial loans(3).................... 1,450 1,110 2,213 2,010 - - - 6,783
Consumer and student loans(4).......... 2,887 2,283 4,526 4,271 2,431 2,672 2,554 21,624
Other interest-earning assets.......... 32,424 - - - - - - 32,424
FHLB stock............................. - - - - - - 15,550 15,550
---------- ---------- ---------- ---------- ---------- ---------- --------- ----------
Total interest-earning assets....... $204,251 $110,438 $200,315 $352,829 $180,382 $288,899 $200,265 $1,537,379
========== ========== ========== ========== ========== ========== ========= ==========
Interest-bearing liabilities:
Money market savings accounts.......... $ 9,685 $ 5,811 $ 3,874 $ 19,371 $ - $ - $ - $ 38,741
NOW accounts........................... 1,973 987 987 7,893 3,946 3,946 - 19,732
Savings accounts....................... 44,343 22,172 22,172 177,373 88,687 88,687 - 443,434
Certificates of deposit................ 69,936 71,269 93,453 70,891 19,099 700 - 325,348
Borrowings............................. 6,000 - 35,000 115,000 150,000 - - 306,000
---------- ---------- ---------- ---------- ---------- ---------- --------- ----------
Total interest-bearing
liabilities......................... $131,937 $100,239 $155,486 $ 390,528 $261,732 $ 93,333 $ - 1,133,255
========== ========== ========== ========== ========== ========== ========= ==========
Interest sensitivity gap(5)............ $ 72,314 $ 10,199 $ 44,829 $(37,699) $(81,350) $195,566 $ 200,265
========== ========== ========== ========== ========== ========== =========
Cumulative interest
sensitivity gap........................ $ 72,314 $ 82,513 $127,342 $ 89,643 $ 8,293 $203,859 $ 404,124
========== ========== ========== ========== ========== ========== =========
Cumulative interest sensitivity gap
as a percentage of total
assets.............................. 4.53% 5.17% 7.98% 5.62% 0.52% 12.77% 25.32%
Cumulative interest sensitivity gap
as a percentage of total
interest-earning assets............. 4.70% 5.37% 8.28% 5.83% 0.54% 13.26% 26.29%
Cumulative net interest-earning
assets as a percentage of cumulative
interest-bearing liabilities........ 154.81% 135.54% 132.85% 111.52% 100.80% 117.99% 135.66%
</TABLE>
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Debt and equity and mortgage-backed and mortgage-related securities are
shown at carrying value. Equity securities primarily consist of callable
preferred stock, the maturities of which have been assumed to be the date
on which they are initially callable.
(3) For purposes of the gap analysis, real estate loans, commercial loans, and
consumer/installment loans are shown excluding adjustments for allowance
for loan losses and unearned fees of $7.3 million and ($224,000),
respectively.
(4) For purposes of the gap analysis, non-performing loans are not included.
(5) Interest sensitivity gap represents the difference between net
interest-earning assets and interest-bearing liabilities.
Certain shortcomings are inherent in the method of analysis presented in the GAP
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 loans, have
features, which restrict changes in interest rates both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.
Net Portfolio Value. The Bank's interest rate sensitivity is also monitored by
management through the use of a Net Portfolio Value Mode, which generates
estimates of the change in the Bank's net portfolio value ("NPV") over a range
of interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities, and off-balance sheet contracts. The
52
<PAGE>
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. The model
assumes estimated loan prepayment rates, reinvestment rates and deposit decay
rates similar to the assumptions utilized for the GAP Table. The Sensitivity
Measure is the decline in the NPV ratio, in basis points, caused by a 2%
increase or decrease in rates, whichever produces a larger decline. The higher
an institution's Sensitivity Ratio, the greater its exposure to interest rate
risk is considered to be. The following NPV Table sets forth the Bank's NPV as
of June 30, 1998.
<TABLE>
<CAPTION>
Change in
Interest Rates
In Basis Points NPV as % of Portfolio
(Rate Shock) Net Portfolio Value Value of Assets
-------------------------------------------- ---------------------------
% %
Amount $ Change Change NPV Ratio Change
- -------------------------- -------- ---------- -------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400.............. $121,684 $(108,906) (47.2)% 9.37% (37.91)%
300.............. 157,681 (72,909) (31.6) 11.56 (23.39)
200.............. 188,537 (42,053) (18.2) 13.83 (8.35)
100.............. 214,271 (16,319) (7.1) 14.46 (4.17)
Static........... 230,590 - - 15.09 -
(100)............. 214,003 (16,587) (7.2) 13.76 (8.81)
(200)............. 187,209 (43,381) (18.8) 11.90 (21.14)
(300)............. 171,255 (59,335) (25.7) 10.75 (28.76)
(400)............. 160,861 (69,729) (30.2) 9.96 (33.99)
</TABLE>
As of June 30, 1998, the Bank's NPV was $230.6 million, or 15.09% of the market
value of assets. Following a 200 basis point increase in interest rates, the
Bank's "post shock" NPV was $188.5 million, or 13.83% of the market value of
assets. The change in the NPV ratio or the Bank's Sensitivity Measure was
negative 1.26%.
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV 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 Table presented assumes that the
composition of the Bank'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. Also, the model does not take into account the
Bank's business or strategic plans. Accordingly, although the NPV Table provides
an indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and may differ from actual results.
<PAGE>
Item 8. Financial Statements
Report of Independent Auditors
The Board of Directors
Richmond County Financial Corp.
We have audited the accompanying consolidated statements of financial condition
of Richmond County Financial Corp. (the "Company") as of June 30, 1998 and 1997,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial position of the
Company at June 30, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
Ernst & Young LLP
August 6, 1998
New York, New York
54
<PAGE>
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 31,884 $ 26,543
Federal funds sold 26,000 6,000
Securities held to maturity:
Investment securities - 205,201
Mortgage-backed and mortgage-related securities - 185,122
Securities available for sale:
Investment securities 238,890 19,706
Mortgage-backed and mortgage-related securities 604,304 27,398
Loans receivable:
Real estate mortgage loans 623,293 471,601
Other loans 28,452 30,127
Less allowance for loan losses (7,276) (5,470)
----------- -----------
Total loans receivable, net 644,469 496,258
Federal Home Loan Bank of New York stock 15,550 -
Banking premises and equipment, net 13,094 12,058
Accrued interest receivable 9,827 8,268
Other real estate owned 322 662
Net deferred tax assets 8,708 2,942
Other assets 2,796 3,212
----------- -----------
Total assets $ 1,595,844 $ 993,370
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits $ 121,646 $ 92,959
Savings, N.O.W. & Money market accounts 501,906 493,506
Certificates of deposit 325,348 298,066
Escrow accounts 1,908 1,287
----------- -----------
Total deposits 950,808 885,818
Borrowings from the Federal Home Loan Bank 306,000 -
Accrued expenses and other liabilities 10,441 6,687
----------- -----------
Total liabilities 1,267,249 892,505
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued - -
Common stock, $.01 par value, 75,000,000 shares authorized;
26,423,550 shares issued and outstanding 264 -
Additional paid-in-capital 254,307 -
Retained earnings-substantially restricted 103,760 100,555
Unallocated common stock held by ESOP (33,706) -
Net unrealized gain on securities available for sale, net of tax 3,970 310
----------- -----------
Total stockholders' equity 328,595 100,865
Total liabilities and stockholders' equity $ 1,595,844 $ 993,370
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE>
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------
1998 1997 1996
--------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Interest income
Loans $ 44,375 $ 38,068 $ 33,807
Debt & equity securities 14,645 16,754 17,873
Mortgage-backed and mortgage-related securities 23,622 9,588 5,402
Federal funds sold 3,822 961 1,570
Other 290 410 411
-------- -------- --------
Total interest income 86,754 65,781 59,063
-------- -------- --------
Interest expense
Deposits 31,734 27,707 26,254
Securities sold under repurchase agreements 1,059 - -
Borrowed funds 4,719 - -
-------- -------- --------
Total interest expense 37,512 27,707 26,254
-------- -------- --------
Net interest income 49,242 38,074 32,809
Provision for loan losses 2,200 1,080 1,600
-------- -------- --------
Net interest income after
provision for loan losses 47,042 36,994 31,209
-------- -------- --------
Non-interest income
Fee income 3,397 2,962 2,717
Net gain (loss) on sales of
securities and loans 163 (107) 42
Other 41 6 68
-------- -------- --------
Total non-interest income 3,601 2,861 2,827
-------- -------- --------
Non-interest expenses
Salaries and employee benefits 12,929 9,850 9,261
Occupancy costs 3,181 3,063 3,029
Computer service fees 2,743 2,511 2,440
Advertising 1,135 817 634
Amortization of deposit premium 313 313 313
FDIC insurance premiums 154 624 251
Contribution to RCS Foundation 19,558 - -
Other 4,033 2,489 2,575
-------- -------- --------
Total non-interest expenses 44,046 19,667 18,503
-------- -------- --------
Income before income taxes 6,597 20,188 15,533
Provision for income taxes 2,071 9,463 6,803
-------- -------- --------
Net income $ 4,526 $ 10,725 $ 8,730
======== ======== ========
Loss per share since conversion
Basic $ (0.16) N/A N/A
Diluted $ (0.16) N/A N/A
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------------
1998 1997 1996
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Common stock (par value)
Issuance of 24,466,250 shares of $.01 par value
common stock $ 245 $ - $ -
Issuance of 1,957,300 shares of $.01 par value
common stock to the RCS Foundation 19 - -
--------- --------- ---------
Balance at end of period 264 - -
--------- --------- ---------
Additional paid-in-capital
Issuance of 24,466,250 shares common stock in initial
public offering at $10.00 per share, net of conversion - -
related expenses 234,644
Issuance of 1,957,300 shares common
at $10.00 per share to the RCS Foundation 19,553 - -
Excess of ESOP compensation cost measured using
fair value of stock over related cost 110 - -
--------- --------- ---------
Balance at end of period 254,307 - -
--------- --------- ---------
Retained earnings-substantially restricted
Balance at beginning of period 100,555 89,830 81,100
Net income 4,526 10,725 8,730
Cash dividends paid on common stock ($.05 per share) (1,321) - -
--------- --------- ---------
Balance at end of period 103,760 100,555 89,830
--------- --------- ---------
Unallocated common stock held by ESOP
Open market purchases of the Company's common stock
by ESOP trustee (34,571) - -
Allocation from shares purchased 865 - -
--------- --------- ---------
Balance at end of period (33,706) - -
--------- --------- ---------
Unrealized gain on securities available for sale, net of tax
Balance at beginning of period 310 71 67
Change in unrealized gain on
securities available for sale, net of tax 3,660 239 4
--------- --------- ---------
Balance at end of period 3,970 310 71
--------- --------- ---------
Total stockholders' equity $ 328,595 $ 100,865 $ 89,901
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended June 30,
-------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 4,526 $ 10,725 $ 8,730
Adjustments to reconcile net income to net cash provided by
operating activities:
Contribution of the Company's common stock
to the RCS Foundation 19,553 - -
Employee Stock Ownership Plan expense 975 - -
Depreciation of bank premises and equipment 848 928 750
Amortization of deposit premium 313 313 313
Amortization of deferred fees, net (446) (479) (580)
Amortization of investment premiums,
net accretion of discount 482 1,039 2,769
Provision for loan losses 2,200 1,080 1,600
Earned discounts on loans purchased (158) (158) (158)
Net realized (gains) losses on sales of securities and loans (30) 103 (100)
Net realized (gains) losses on sales of other real estate
owned (133) 4 58
Decrease (increase) in receivable from broker - 7,531 (7,531)
(Increase) decrease in net deferred tax assets (5,766) 36 (450)
(Increase) decrease in accrued interest receivable (1,559) 944 (575)
Increase in accrued expenses and other liabilities 3,754 1,321 1,013
Decrease (increase) in other assets 416 (782) 8,387
-------------- -------------- --------------
Net cash provided by operating activities 24,975 22,605 14,226
Cash Flows from Investing Activities:
Increase in loans receivable, net (114,373) (79,002) (38,316)
Loan purchases (38,616) (910) -
Proceeds from sales of loans - 2,004 9,972
Investment securities held to maturity:
Maturities and redemptions 55,972 127,005 107,658
Purchases - (17,611) (150,256)
Investment securities available for sale:
Sales and redemptions 108,936 11,938 10
Purchases (173,260) (17,678) (1,064)
Mortgage-backed and mortgage-related securities held to maturity:
Maturities and redemptions 29,237 3,609 -
Principal collected 31,987 25,315 21,305
Purchases - (133,668) (15,197)
Mortgage-backed and mortgage-related securities available for sale:
Sales and redemptions 69,074 - 5,940
Principal collected 86,073 479 410
Purchases (608,059) (26,478) -
Purchases of Federal Home Loan Bank of New York stock (15,550) - -
Net additions to banking premises and equipment (1,884) (1,418) (1,897)
Proceeds from sales of other real estate owned 823 479 396
-------------- -------------- --------------
Net cash used in investing activities (569,640) (105,936) (61,039)
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net increase in deposits 64,369 66,603 53,866
Increase (decrease) in escrow accounts 621 (1) (881)
Increase in borrowings funds 306,000 - -
Net proceeds of common stock issuance 234,908 - -
Loan to ESOP for open market purchase of common stock (34,571) - -
Cash dividends paid on common stock (1,321) - -
--------------- -------------- --------------
Net cash provided by financing activities 570,006 66,602 52,985
Net increase (decrease) in cash and cash equivalents 25,341 (16,729) 6,172
Cash and cash equivalents at beginning of the year 32,543 49,272 43,100
--------------- -------------- --------------
Cash and cash equivalents at end of the year $ 57,884 $ 32,543 $ 49,272
=============== ============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds $ 35,609 $ 27,707 $ 26,254
Income taxes 6,949 8,733 7,080
Non-cash investing activities:
Additions to other real estate owned, net $ 350 $ 673 $ 608
Transfer of securities from held to maturity to
available for sale 273,127 - -
Net increase in unrealized gains on available for sale
investments 6,179 449 9
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies and Related Matters
Richmond County Financial Corp. (the "Company") was organized under Delaware law
as the savings and loan holding company for Richmond County Savings Bank and its
subsidiaries (the "Bank") in connection with the Bank's conversion form a New
York State chartered mutual savings bank to a New York State chartered stock
savings bank on February 18, 1998 (the "Conversion"). See note 2 for a further
discussion of the Conversion.
The Company's business consists primarily of the business activities of the
Bank. The Bank operates twelve branches in the borough of Staten Island and one
branch in the borough of Brooklyn, in the City of New York. The Bank's
activities include attracting deposits from the general public and originating
secured residential, multifamily and commercial real estate loans. The Bank also
provides other financial services to customers primarily within this region. The
Bank's primary revenues are derived from these banking activities and its
portfolios of investment and mortgage-backed and mortgage-related securities.
The Bank is subject to competition from other financial institutions. Deposits
at the Bank are insured up to applicable limits by the Bank Insurance Fund (BIF)
of the Federal Deposit Insurance Corporation (FDIC). The Bank is subject to
regulation by the Federal Deposit Insurance Corporation and the New York State
Banking Department.
The following is a description of the significant accounting policies followed
by the Company and its wholly-owned subsidiary. The policies conform to
generally accepted accounting principles and to general practice within the
banking industry:
(a) Principles of Consolidation and Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP) and include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from the estimates.
(c) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company defines cash and cash
equivalents as cash and due from banks (including restricted cash), federal
funds sold and time deposits with original maturities of three months or less.
(d) Securities Held to Maturity
Investment securities and mortgage-backed and mortgage-related securities, for
which the Company has the positive intent and ability to hold to maturity, are
stated at cost, adjusted for amortization of premiums and discounts, which are
recognized as adjustments to interest income over the life of the security, so
as to provide a level yield.
(e) Securities Available for Sale
Investment securities and mortgage-backed and mortgage-related securities, not
classified as trading nor as held to maturity, are classified as available for
sale and are carried at fair value. Unrealized gains or losses on securities
available for sale are included as a separate component of stockholders' equity,
net of applicable income taxes. Gains and losses on the disposition of
securities available for sale are recognized using the specific identification
method.
(f) Loans Receivable
Loans receivable are stated at unpaid principal balances, less unearned
discounts and net deferred origination and commitment fees. Loan origination and
commitment fees and certain direct costs incurred in connection with loan
originations are deferred and amortized to income over the life of the related
loans as an adjustment to yield. Loans held for sale are stated at the lower of
cost or market value.
60
<PAGE>
The Company does not accrue interest on loans that are more than ninety days
delinquent as to principal or interest unless, in the opinion of management,
collection is probable, with the exception of single-family-home loans secured
by real estate, where accrual is discontinued after six months. Any accrued but
unpaid interest previously recorded on these loans is reversed against current
period interest income. Effective July 1, 1997, the Bank revised this policy
such that it does not accrue interest on any loans, including single-family
loans secured by real estate, which are more than ninety days delinquent as to
principal or interest unless, in the opinion of management, collection is
probable. The effect of this change in policy was immaterial.
(g) Allowance for Loan Losses
The allowance for loan losses is based on management's periodic review and
evaluation of the loan portfolio and the potential for loss in light of the
current composition of the loan portfolio, current and prospective economic
conditions, and other relevant factors.
Assessing the adequacy of the allowance for loan losses is inherently subjective
as it requires making material estimates, including the amount and timing of
future cash flows expected to be received on impaired loans, which may be
susceptible to significant change. In the opinion of management, the allowance,
when taken as a whole, is adequate to absorb estimated loan losses inherent in
the Company's entire portfolio.
(h) Banking Premises and Equipment
Banking premises and equipment are recorded at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives (3 to 20
years) on a straight-line basis. Leasehold improvements are amortized over the
lives of the respective leases or the service lives of the improvements,
whichever is shorter.
Expenditures for improvements and major renewals are capitalized, while the cost
of ordinary maintenance, repairs and minor improvements is charged to
operations.
(i) Other Real Estate Owned
Other real estate owned, consisting of properties acquired through foreclosure,
is carried at the lower of carrying amount or fair value less cost to sell.
(j) Income Taxes
The Company uses the liability method to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured at currently enacted income tax rates applicable to the period in which
they are expected to be realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
(k) Earnings Per Share
Basic earnings per share is calculated by dividing net income since Conversion
by the weighted average number of common shares outstanding. Diluted earnings
per common share is calculated using the same method as basic earning per common
share, but reflects potential dilution of common stock equivalents. There were
no dilutive common stock equivalents for the fiscal year ended June 30, 1998.
For the fiscal year ended June 30, 1998, the weighted average number of shares
of common stock outstanding was 24,328,143. For the fiscal year ended June 30,
1998, such shares have been reduced, in accordance with the provisions of the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 93-6, "Employers' Accounting for Employee Stock Option Plans", by the
weighted average number of unallocated shares of common stock held by the Bank's
Employees' Stock Ownership Plan (the "ESOP"). Net loss since Conversion was $4.0
million.
(l) Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires that an enterprise (a)
61
<PAGE>
classify items of other comprehensive income by their nature in a financial
statement, and (b) display the accumulated balance of other comprehensive income
separately from net worth and additional paid-in capital in the equity section
of a statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. Adoption of this
statement is not expected to have a material effect on the Company's
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 requires disclosures for each
segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader geographic
regions as permitted under current standards. SFAS No. 131 is effective for
fiscal year beginning after December 15, 1997, with earlier application
permitted.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under SFAS No. 133, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e. gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposures to changes in fair values, cash flows or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of the other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss is reported in earnings
immediately. Accounting for foreign currency hedges is similar to the accounting
for fair value and cash flow hedges. If the derivative instrument is not
designated as a hedge, the gain or loss is recognized in earnings in the period
of change.
SFAS No. 133 is effective for the financial statements issued for periods
beginning after June 15, 1999. The Company is currently evaluating the effects
of SFAS No. 133.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
2. Conversion to Stock Form of Ownership
On July 31, 1997, the Board of Trustees of the Bank unanimously adopted a Plan
of Conversion whereby the Bank would convert from a New York State chartered
mutual bank to a New York State chartered stock institution with the concurrent
formation of a holding company, Richmond County Financial Corp. (the
"Conversion").
The Conversion was completed on February 18, 1998, with the issuance by the
Company of 24,466,250 shares of common stock, at a price of $10.00 per share, in
an initial public offering. The Company received gross proceeds from the
Conversion of $244.7 million, before the reduction from gross proceeds of $9.8
million for estimated conversion related expenses. The Company used $117.4
million, or 50% of the net proceeds, to purchase all of the outstanding stock of
the Bank.
Concurrent with the completion of the Conversion, an additional 1,957,300 shares
of authorized but unissued shares of common stock were contributed by the
Company to the Richmond County Savings Foundation (the "Foundation"), a private
foundation dedicated to charitable purposes within the Bank's communities that
it serves. The Company recorded a one-time charge of $19.6 million, the full
amount of the contribution made to the Foundation and a corresponding deferred
tax benefit of $8.4 million fiscal 1998. The contribution to the Foundation will
be fully tax deductible, subject to an annual limitation based upon the
Company's annual taxable income.
62
<PAGE>
In connection with the Conversion, the Bank implemented the ESOP. Subsequent to
the Conversion, the ESOP purchased, through a $34.6 million loan from the
Company, 8%, or 2,113,884 shares of the Company's common stock in the open
market.
The Bank established, in accordance with the requirements of the OTS, a
liquidation account for $102.8 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 account
at the Bank after the date of Conversion. The liquidation account will be
reduced annually to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible account holder will be entitled,
under New York State Law, to receive a distribution from the liquidation account
in an amount equal to their current adjusted account balances for all such
depositors then holding qualifying deposits in the Bank.
In addition, the Company may not declare or pay cash dividends on or repurchase
any of its shares of common stock if the effect thereof would cause
stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
3. Securities Held to Maturity and Securities Available for Sale
As part of its efforts to manage the Company's asset/liability strategy in an
environment experiencing above normal repayment risk and market sensitivity to
potential changes in market interest rates, in February 1998, as part of a
balance sheet restructuring initiative, the Bank transferred its entire held to
maturity portfolio to its securities available for sale portfolio. As a result,
at June 30, 1998, the Company had no securities in held to maturity.
The amortized cost of investment securities and mortgage-backed and
mortgage-related securities and their related estimated fair values at June 30,
1998 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------------------------------
AVAILABLE FOR SALE Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- ------------- -------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agencies $ 33,444 $ 226 $ (6) $ 33,664
Corporate and other debt obligations 146,869 2,069 (59) 148,880
------------- ------------- -------------- -------------
$ 180,313 $ 2,295 $ (65) $ 182,544
============= ============= ============== =============
Marketable equity securities:
Preferred $ 27,146 $ 1,303 $ (1) $ 28,448
Common 24,786 2,861 (591) 27,056
Mutual Funds 605 237 - 842
------------- ------------- -------------- -------------
$ 52,537 $ 4,401 $ (592) $ 56,346
============= ============= ============== =============
Mortgage-backed and mortgage-related securities:
Federal Home Loan Mortgage Corporation
Pass-Through Certificates $ 96,970 $ 547 $ (155) $ 97,362
Government National Mortgage Association
Pass-Through Certificates 185,098 307 (382) 185,023
Private Issuer Pass-Through Certificates 18,143 65 - 18,208
Federal National Mortgage Association
Pass-Through Certificates 76,616 82 (247) 76,451
Federal National Mortgage Association
Real Estate Mortgage Investment Conduits 39,165 14 (54) 39,125
Private Issuer Real Estate Mortgage
Investment Conduits 187,587 584 (36) 188,135
------------- ------------- -------------- -------------
$ 603,579 $ 1,599 $ (874) $ 604,304
============= ============= ============== =============
</TABLE>
63
<PAGE>
3. Securities Held to Maturity and Securities Available for Sale (continued)
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------------
AVAILABLE FOR SALE Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- ------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Marketable equity securities:
Preferred $ 14,027 $ 132 $ (1) $ 14,158
Common 3,578 305 (69) 3,814
Mutual Funds 1,629 105 - 1,734
------------- ------------- -------------- --------------
$ 19,234 $ 542 $ (70) $ 19,706
============= ============= ============== ==============
Mortgage-backed and mortgage-related securities:
Government National Mortgage Association
Pass-Through Certificates $ 11,710 $ 151 $ (37) $ 11,824
Federal Home Loan Mortgage Corporation Real Estate
Mortgage Investment Conduits 4,693 - (7) 4,686
Private Issuer Real Estate Mortgage Investment
Conduits 10,881 19 (12) 10,888
------------- ------------- -------------- --------------
$ 27,284 $ 170 $ (56) $ 27,398
============= ============= ============== ==============
<CAPTION>
June 30, 1997
------------------------------------------------------------
HELD TO MATURITY Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- ------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agencies $ 92,215 $ 394 $ (272) 92,337
Corporate and other debt obligations 112,986 443 (404) 113,025
------------- ------------- -------------- --------------
$ 205,201 $ 837 $ (676) $ 205,362
============= ============= ============== ==============
Mortgage-backed and mortgage-related securities:
Federal Home Loan Mortgage Corporation
Pass-Through Certificates $ 82,237 $ 1,534 $ (187) $ 83,584
Private Issuer Pass-Through Certificates 3,276 5 - 3,281
Federal Home Loan Mortgage Corporation
Real Estate Mortgage Investment Conduits 32,248 130 (42) 32,336
Private Issuer Real Estate Mortgage
Investment Conduits 67,361 179 (148) 67,392
------------- ------------- -------------- --------------
$ 185,122 $ 1,848 $ (377) $ 186,593
============= ============= ============== ==============
</TABLE>
64
<PAGE>
3. Securities Held to Maturity and Securities Available for Sale (continued)
The amortized cost and estimated fair values of investment and mortgage-backed
and mortgage-related securities available for sale by contractual maturity at
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------------------------------------------------------
Mortgage-backed and mortgage-related
Investment Securities Securities
-------------------------------------- ---------------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------------ ------------------ ----------------- --------------------
(In thousands)
<S> <C> <C> <C> <C>
Year ended June 30:
1999 $ 14,742 $ 14,784 $ - $ -
2000-2003 31,659 32,049 9,932 10,013
2004-2009 10,424 10,496 57,197 57,108
2010 and thereafter 176,025 181,561 536,450 537,183
------------------- ----------------- ------------------ -------------------
$ 232,850 $ 238,890 $ 603,579 $ 604,304
=================== ================= ================== ===================
</TABLE>
Sales and redemptions of investment securities from the available for sale
portfolio during the year ended June 30, are summarized as follows:
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------------------
1998 1997 1996
------------------ ------------------- -------------------
(In thousands)
<S> <C> <C> <C>
Proceeds from sales and redemptions $ 178,010 $ 11,938 $ 5,950
Gross gains 317 40 19
Gross losses 287 24 -
</TABLE>
4. Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------------------
1998 1997
------------------ -----------------
(In thousands)
<S> <C> <C>
One-to-four family mortgage loans $ 470,385 $ 394,588
Multifamily mortgage loans 50,491 2,705
Commercial real estate mortgage loans 55,416 40,713
Construction and development loans, principally residential 31,297 18,343
Home equity loans 15,379 16,729
------------------ -----------------
622,968 473,078
Plus (less) unearned discounts 325 (1,477)
------------------ -----------------
Total real estate mortgage loans 623,293 471,601
Consumer and student loans 21,770 23,589
Commercial loans 6,783 6,662
------------------ -----------------
28,553 30,251
Less net deferred origination and
commitment fees (101) (124)
------------------ -----------------
Total other loans 28,452 30,127
Less allowance for loan losses (7,276) (5,470)
------------------ -----------------
Total loans receivable, net $ 644,469 $ 496,258
================== =================
</TABLE>
65
<PAGE>
4. Loans Receivable (continued)
Included in real estate mortgage loans are $20.8 million and $1.3 million of
mortgages serviced by third parties as of June 30, 1998 and 1997, respectively.
The Bank sells real estate mortgage loans to the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and
the State of New York Mortgage Association ("SONYMA"). These loans are then
serviced by the Bank under agreements which specify a servicing fee based on a
percentage of the outstanding principal balances. At June 30, 1998, 1997 and
1996, the total loans serviced for the above totaled $45.3 million, $50.1
million, and $49.5 million, respectively, and are not included in the
consolidated financial statements.
Loans on nonaccrual status totaled $5.5 million, $2.7 million and $2.8 million
at June 30, 1998, 1997, and 1996, respectively. If interest on the nonaccrual
loans had been accrued, such income would have been $0.5 million, $0.3 million
and $0.2 million, respectively.
A summary of the changes in the allowance for loan losses for the years ended
June 30, 1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------------
1998 1997 1996
-------------- --------------- --------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $5,470 $4,796 $3,275
Provision charged to operations 2,200 1,080 1,600
Charge offs, net of recoveries (394) (406) (79)
-------------- --------------- --------------
Balance at end of year $7,276 $5,470 $4,796
============== =============== ==============
</TABLE>
5. Banking Premises and Equipment
Banking premises and equipment at June 30, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
June 30,
-----------------------------------
1998 1997
---------------- --------------
(In thousands)
<S> <C> <C>
Land $ 2,850 $ 2,850
Banking houses and improvements 7,059 6,742
Leasehold improvements 3,117 2,847
Furniture, fixtures and equipment 5,132 3,835
Automobiles 40 40
---------------- --------------
18,198 16,314
Less accumulated depreciation and amortization (5,104) (4,256)
---------------- --------------
$ 13,094 $ 12,058
================ ==============
</TABLE>
66
<PAGE>
6. Deposits
At June 30, 1998 and 1997, deposits consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
----------------------------- ---------------------------
Average Average
Amount Rate Amount Rate
----------------------------- -------------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Certificates of deposit $ 325,348 5.38% $ 298,066 5.37%
Savings 443,433 2.74 437,694 2.78
Money market demand accounts 38,741 3.47 37,782 3.45
Non-interest bearing demand deposits 121,646 - 92,959 -
NOW accounts 19,732 2.26 18,030 2.26
-------------- --------------
$ 948,900 $ 884,531
============== ==============
</TABLE>
Contractual maturities of certificates of deposit accounts at June 30, 1998 are
as follows:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------------
Certificates
of $100,000 or All Other Total
More Certificates Certificates
----------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
Year ending June 30:
1999 $ 23,791 $ 210,856 $ 234,647
2000 5,474 42,119 47,593
2001 2,861 20,446 23,307
2002 3,442 9,672 13,114
2003 and thereafter - 6,687 6,687
----------------- ---------------- ----------------
$ 35,568 $ 289,780 $ 325,348
================= ================ ================
<CAPTION>
June 30, 1997
----------------------------------------------------------
Certificates
of $100,000 All Other Total
or More Certificates Certificates
--------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C>
Year ending June 30:
1998 $ 17,551 $ 191,526 $ 209,077
1999 5,837 53,741 59,578
2000 200 6,529 6,729
2001 792 4,237 5,029
2002 and thereafter 3,061 14,592 17,653
--------------- ---------------- ----------------
$ 27,441 $ 270,625 $ 298,066
=============== ================ ================
</TABLE>
67
<PAGE>
7. Borrowings
Advances received from the FHLB of New York ("FHLBNY") as of June 30, 1998,
consist of the following:
June 30, 1998
----------------------------------------------------------------------------
Weighted
Maturity Date Call Date Average Rate 1998
-----------------------------------------------------------------------------
(In Thousands)
1998* 6.13% $ 6,000
2003 1999 5.03 35,000
2008 2000 5.06 20,000
2008 2001 5.22 95,000
2008 2003 5.48 150,000
----------------- ----------------
5.33% $ 306,000
================= ================
The advances received were under the FHLBNY's convertible advance program, which
grants the FHLBNY the option to call the advance after an initial lock-out
period of 1, 2, 3 or 5 years and quarterly thereafter, until maturity. The
convertible advances are collateralized by mortgage-backed securities with a
carrying value of approximately $338.6 million. The Bank had no borrowings at
June 30, 1997.
* FHLBNY overnight line of credit advance. Rate is based on the Federal Funds
rate at time of takedown plus 12.5 basis points. Principal and interest is due
on the next succeeding business day.
8. Income Taxes
Significant components of the Bank's deferred tax assets and liabilities as of
June 30, 1998 and 1997, are as follows:
June 30,
----------------------------------
1998 1997
--------------- ----------------
(In thousands)
Deferred tax assets:
Allowance for loan losses $ 3,152 $ 2,576
Deferred loan fees 20 338
Book over tax amortization 287 262
Non-accrual interest income 471 370
Postretirement benefits 1,621 1,660
Richmond County Savings Foundation 7,420 -
--------------- ----------------
Gross deferred tax assets 12,971 5,206
Deferred tax liabilities:
Tax bad debt reserves 754 1,159
Tax over book depreciation 399 426
Prepaid pension expense 315 402
Discount accretion - 1
Securities available for sale 2,795 276
--------------- ----------------
Gross deferred tax liabilities 4,263 2,264
-------------- ----------------
Net deferred tax assets $ 8,708 $ 2,942
============== ================
In view of the Bank's current and projected future earnings trend, management
believes that it is more likely than not that the entire net deferred tax assets
will be utilized. Accordingly, no valuation allowance was deemed necessary for
the net deferred tax assets for the years ended June 30, 1998 and 1997.
68
<PAGE>
8. Income Taxes (continued)
Significant components of the provision (benefit) for income taxes attributable
to continuing operations for the years ended June 30, 1998, 1997 and 1996, are
as follows:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $7,583 $6,278 $4,526
State and local 2,773 3,361 2,732
--------------- --------------- ---------------
10,356 9,639 7,258
Deferred:
Federal (5,997) (106) (275)
State and local (2,288) (70) (180)
--------------- --------------- ---------------
(8,285) (176) (455)
--------------- --------------- ---------------
$2,071 $9,463 $6,803
=============== =============== ===============
</TABLE>
The table below presents a reconciliation between the reported tax provision and
the tax provision computed by applying the statutory federal income tax rate
(35% for the years ended June 30, 1998, 1997 and 1996) to income before
provision for income taxes:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Federal income tax provision at statutory rates $2,309 $7,066 $5,437
Increase (reduction) in tax resulting from:
State and local income taxes, net
of federal income tax effect 315 2,139 1,659
Other (553) 258 (293)
--------------- --------------- ---------------
$2,071 $9,463 $6,803
=============== =============== ===============
</TABLE>
For federal income tax purposes, prior to 1996, if certain definitional tests
and other conditions were met, the Bank was allowed a special bad debt deduction
in determining its taxable income. The deduction was based on either specified
experience formulas or a percentage of taxable income. Federal tax legislation
enacted during 1996, repealed the special bad debt deduction provisions. As a
result, a large thrift institution, such as the Bank, is required to use the
specific charge-off method in computing its federal bad debt deduction for tax
years beginning after December 31, 1995. However, New York State enacted
legislation which, among other things, would permit a large thrift institution,
such as the Bank, to continue to use the bad debt reserve method for both New
York State and New York City tax purposes.
The 1996 federal tax legislation also provided that a large thrift institution,
such as the Bank, is required to recapture the excess of its tax bad debt
reserves at December 31, 1995, over the balance of such reserves as of December
31, 1987, (the "base year"), whether the additions were made under the
percentage of the taxable income method or the experience method. The Bank will
be required to recapture its excess bad debt reserves, for which deferred taxes
have been recognized, over a six-year period on a straight-line basis beginning
in calendar year 1998. The base year reserve will remain subject to recapture in
the case of certain excess distributions to and redemptions of shareholders or
if the Bank ceases to be a bank. The New York State legislation provides that
the recapture of excess bad debt reserves is not required for either New York
State or New York City tax purposes.
At June 30, 1998, the base year bad debt reserve for federal income tax purposes
was approximately $9.6 million, for which deferred taxes are not required to be
recognized. Bad debt reserves maintained for New York State and New York City
tax purposes as of June 30, 1998, for which deferred taxes are not required to
be recognized, amounted to approximately $40 million. Accordingly, deferred tax
liabilities of approximately $8.0 million have not been recognized as of June
30, 1998.
69
<PAGE>
9. Employee Benefit Plans
Defined Benefit Plan
The Bank, through its participation in the RSI Retirement Trust, contributes to
a pension plan covering substantially all of its full-time employees. The
pension plan benefit formula is based upon years of service and average
compensation over the final years of service. The Bank's policy is to make
quarterly contributions to the plan equal to the amount necessary to satisfy the
funding requirements of ERISA. Plan assets are principally invested in pooled
investment funds in the RSI Retirement Trust, which is a registered investment
company.
The following table sets forth the funded status of the Bank's defined benefit
plan for the years ended June 30, 1998 and 1997, in accordance with Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions":
<TABLE>
<CAPTION>
1998 1997
------------------------------------
(In thousands)
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 8,466 $ 6,640
Nonvested benefits 141 266
----------------- ---------------
Accumulated benefit obligation $ 8,607 $ 6,906
================= ===============
Plan assets at fair value $ 12,955 $ 10,852
Projected benefit obligation (10,232) (8,569)
----------------- ---------------
Plan assets in excess of projected benefit obligation 2,723 2,283
Unrecognized (gain) (2,298) (1,619)
Unrecognized transition (asset) (40) (76)
Unrecognized past service liability (23) (25)
----------------- ---------------
Prepaid pension asset included in other assets $ 362 $ 563
================= ===============
</TABLE>
The expected long-term rate of return on plan assets for plan years 1998 and
1997, was 8.00%. The rate of increase in future compensation levels was 6.00%
and 5.50% for plan years 1998 and 1997, respectively. The weighted-average
discount rate was 8.00% and 7.75% for plan years 1998 and 1997, respectively.
Pension expense for the years ended June 30, 1998, 1997 and 1996, includes the
following components:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 478 $ 427 $ 453
Interest cost 671 606 614
Actual return on plan assets (854) (770) (773)
Net amortization and deferrals (94) (48) (38)
----------------- ---------------- ---------------
Net pension expense $ 201 $ 215 $ 256
================= ================ ===============
</TABLE>
Defined Contribution Plan
The Bank also provides a 401(k) Savings Plan open to salaried employees meeting
certain eligibility requirements. Participants contribute 2% to 9% of pre-tax
compensation. The Bank makes matching contributions in an amount equal to 50% of
an employee's contributions, up to 6%. Participants may invest in any or all of
six investment funds, which are managed by the 401(k) Plan's trustee, RSI
Retirement Trust.
70
<PAGE>
9. Employee Benefit Plans (continued)
Employee Stock Ownership Plan
In connection with the Conversion, the Bank implemented an ESOP, a tax-qualified
plan designed to invest primarily in the Company's common stock. The ESOP will
provide eligible employees with the opportunity to receive a Bank-funded
retirement benefit based primarily on the value of the common stock. All
eligible employees of the Bank and its affiliates, including the Company, as of
the effective date of the Conversion, may participate in the ESOP. Subsequent to
the Conversion, all eligible employees of the Bank and its affiliates, including
the Company, may participate in the ESOP upon the age of 21 and the completion
of one year of service. Subsequent to the Conversion, the ESOP purchased,
through a $34.6 million loan from the Company, 8%, or 2,113,884 shares of common
stock in the open market. The term of the ESOP loan will be 20 years and will be
primarily repaid with contributions from the Bank to the ESOP. As of June 30,
1998, the loan from the Company had an outstanding balance of $34.2 million and
an interest rate of 8.50%.
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. Shares
purchased with the loan proceeds are held in a suspense account by the trustee
of the Plan for future allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account are
allocated among participants on the basis of compensation as described in the
Plan. The number of shares released to participants will be determined based
upon the percentage of principal and interest payments made during the calendar
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 6 years. Any forfeited
shares are allocated to the then remaining participants in the same proportions
as contributions. For the year ended June 30, 1998, 52,848 shares were committed
to be released and 2,061,036 shares remain unallocated. No shares had been
specifically allocated as of June 30, 1998. The Company recognizes compensation
expense attributable to its ESOP over the year, based upon the estimated number
of ESOP shares to be allocated each December 31st. The amount of compensation
expense recorded is equal to the estimate of shares to be allocated by the ESOP
multiplied by the average fair value of the underlying shares during the period.
For the fiscal year ended June 30, 1998, compensation expense attributable to
the ESOP was $975,000.
The trustee for the ESOP must vote all allocated shares held in the ESOP trust
in accordance with the instructions of the participants. Unallocated shares held
by the ESOP trust are voted by the trustee in a manner calculated to most
accurately reflect the results of the allocated ESOP shares voted, subject to
the requirements of the Employee Retirement Income Security Act of 1974, as
amended (ERISA).
Postretirement Benefit Plan
The Bank provides postretirement medical and life insurance benefits for
eligible retired employees.
Effective July 1, 1994, the Bank adopted SFAS No. 106, "Employer's Accounting
for Postretirement Benefits Other Than Pensions." The Bank uses actuarial-basis
accrual accounting for all employer provided postretirement benefits other than
pensions. This requires the recognition of a transition obligation for the
difference between the accumulated postretirement benefit obligation and the
liability currently recognized on the statement of financial condition. Upon
adoption of SFAS No. 106, the Bank immediately recognized its entire net
transition obligation by recording a charge of $2.5 million ($1.3 million on an
after-tax basis) as the cumulative effect of this change in accounting
principle.
71
<PAGE>
9. Employee Benefit Plans (continued)
The following table sets forth the funded status and amounts recognized in the
Bank's consolidated statements of financial condition at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (1,163) $ (1,025)
Fully eligible active plan participants (309) (300)
Other active plan participants (1,821) (1,471)
Unrecognized net actuarial gain (200) (498)
Unrecognized prior service cost (85) -
----------------- ----------------
Accrued postretirement benefit cost included in accrued and other
liabilities $ (3,578) $ (3,294)
================= ================
</TABLE>
The Bank's postretirement benefits expense for the years ended June 30, 1998,
1997 and 1996, consisted of the following:
1998 1997 1996
------------------ ------------------ ----------------
(In thousands)
Interest cost $ 240 $ 201 $ 190
Service cost 158 120 120
Amortization (9) (20) (16)
------------------ ------------------ ----------------
$ 389 $ 301 $ 294
================== ================== ================
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 10.5% for the initial
year and is assumed to decrease gradually to 6% in 2003, with 1.0% annual
decreases thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation at June 30, 1998 by $414,000
(12.6%). The increase in the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1998, would be
$56,000 (14.3%).
The weighted-average discount rate at June 30, 1998 and 1997, was 8.0%. The rate
of increase in future compensation levels at June 30, 1998 and 1997, was 5.5%.
10. Commitments and Contingencies
Lease Commitments
The Bank conducts a portion of its banking operations in leased facilities under
noncancellable operating leases expiring at various periods through 2003 and
thereafter. These leases contain renewal options and certain of the leases
provide for increases based upon various escalation clauses. Rent expense was
$460,300, $353,600 and $339,700 for the fiscal year ended June 30, 1998, 1997
and 1996, respectively.
The future minimum lease payments under such operating leases are as follows:
Amount
------------------
(In thousands)
Years ended June 30:
1999 $ 1,997
2000 877
2001 877
2003 764
2003 and thereafter 6,997
------------------
$ 11,512
==================
72
<PAGE>
10. Commitments and Contingencies (continued)
Litigation
The Bank is a defendant in legal actions arising in the ordinary course of
business. Management believes that these actions are without merit or that the
ultimate liability, if any, resulting from such actions will not materially
affect the Bank's consolidated financial position.
Loan Commitments
There were outstanding commitments to make loans at June 30, 1998 and 1997, of
$150.8 million and $47.5 million, respectively. Loan commitments have credit
risk essentially the same as that involved in extending loans to customers and
are subject to the Bank's normal credit policy. These commitments are not
reflected in the accompanying consolidated statements of financial condition.
Management expects that all loan originations will be funded from existing
liquidity and normal monthly cash flow.
11. Regulatory Requirements
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
total and Tier I capital to risk-weighted assets, and Tier I capital to average
assets (all as defined in the regulations). Management believes, as of June 30,
1998, that the Bank meets all capital adequacy requirements to which it is
subject.
Based on its regulatory capital ratios at June 30, 1998, the Bank is categorized
as "well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. The Bank's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
Minimum To Be Well
Minimum for Capital Capitalized Under Prompt
Actual Adequacy Purposes Corrective
Action Provisions
------------------------ ------------------------- --------------------------
Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
------------- ---------- ------------- ----------- -------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total Capital (to Risk Weighted Assets) $192,271 24.81 % $62,004 8.00% $77,505 10.00%
Tier I Capital (to Risk Weighted Assets) 184,995 23.87 31,002 4.00 46,503 6.00
Tier I Capital (to Average Assets) 184,995 12.81 31,002 4.00 38,753 5.00
As of June 30, 1997:
Total Capital (to Risk Weighted Assets) 98,704 18.91 41,764 8.00 52,205 10.00
Tier I Capital (to Risk Weighted Assets) 93,857 17.98 20,882 4.00 31,323 6.00
Tier I Capital (to Average Assets) 93,857 9.54 20,882 4.00 26,103 5.00
</TABLE>
73
<PAGE>
12. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. Quoted market prices, when available, are used as the measure of fair
value. In cases where quoted market prices are not available, fair values are
based on present value estimates or other valuation techniques. These derived
fair values are significantly affected by assumptions used, the timing of future
cash flows, and the discount rate.
Because assumptions are inherently subjective in nature, the estimated fair
values cannot be substantiated by comparison to independent market quotes, and,
in many cases, the estimated fair values would not necessarily be realized in an
immediate sale or settlement of the instrument. The disclosure requirements of
SFAS No. 107 exclude certain financial instruments and all nonfinancial
instruments. Accordingly, the aggregate fair value amounts presented do not
represent management's estimation of the underlying value of the Company.
The carrying values and estimated fair values of the Company's material
financial instruments as of June 30, 1998 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- --------- ------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 31,884 $ 31,884 $ 26,543 $ 26,543
Federal funds sold 26,000 26,000 6,000 6,000
Securities held to maturity:
Investment securities - - 205,201 205,362
Mortgage-backed and mortgage-related securities - - 185,122 186,593
Securities available for sale:
Investment securities 238,890 238,890 19,706 19,706
Mortgage-backed and mortgage-related securities 604,304 604,304 27,398 27,398
Real estate mortgage loans receivable 623,293 623,056 471,601 472,868
Other loans receivable 28,452 28,526 30,127 30,089
Financial liabilities:
Deposits 950,808 939,162 885,818 839,578
Borrowings 306,000 305,558 - -
</TABLE>
The following methods and assumptions were used by the Company in estimating the
fair values of financial instruments:
Cash and Due from Banks and Federal Funds Sold: Carrying amounts approximate
fair value, since these instruments are either payable on demand or have
short-term maturities.
Securities Held to Maturity and Securities Available for Sale: The estimated
fair values of securities held to maturity and securities available for sale are
based on independent dealer quotations and quoted market prices.
Real Estate Mortgage Loans and Other Loans Receivable: The estimated fair values
of real estate mortgage loans and other loans receivable are based on discounted
cash flow calculations that apply interest rates currently being offered by the
Bank for loans with similar remaining maturities to a schedule of aggregated
expected monthly maturities.
Deposits: The estimated fair values of deposits are based on discounted cash
flow calculations that apply interest rates currently being offered by the Bank
for deposits with similar remaining maturities to a schedule of aggregated
expected monthly maturities.
Borrowings: 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.
74
<PAGE>
13. Subsequent Events
Pending Acquisitions
On July 20, 1998, the Company and Bayonne Bancshares, Inc. ("Bayonne") entered
into a definitive agreement pursuant to which Bayonne, the holding company of
First Savings Bank of New Jersey, SLA, a New Jersey chartered savings and loan
association, with four full service banking offices located in Bayonne, New
Jersey, will merge with and into the Company. Under the terms of the agreement,
the Company will issue 1.05 shares of its common stock for each outstanding
share of common stock of Bayonne. The total transaction value is estimated to be
$173.0 million. As of June 30, 1998 (unaudited), total assets of Bayonne were
$700.3 million, deposits were $421.7 million and total stockholders' equity was
$96.0 million. The merger is subject to the approval of the shareholders of each
company, as well as certain regulatory approvals. The merger is expected to be
completed in the first quarter of calendar year 1999, and is intended to be a
tax-free merger accounted for as a pooling of interests.
On July 17, 1998, the Company and Ironbound Bankcorp, NJ ("Ironbound") entered
into a definitive agreement pursuant to which Ironbound, the holding company of
Ironbound Bank, a New Jersey chartered commercial bank, with three full service
commercial banking offices located in the New Jersey counties of Union and
Essex, will merge with and into the Company. Under the terms of the agreement,
the Company will issue 1.45 shares of its common stock for each outstanding
common share of Ironbound. The total transaction value is estimated to be $26.5
million. As of June 30, 1998 (unaudited), total assets of Ironbound were $113.7
million, deposits were $107.8 million and total stockholders' equity was $11.3
million. The merger is subject to the approval of Ironbound shareholders, as
well as certain regulatory approvals. The merger is expected to be completed in
the first quarter of calendar year 1999, and is intended to be a tax-free merger
accounted for as a pooling of interests.
14. Parent-Only Financial Information
The earnings of the Bank are recognized by Richmond County Financial Corp. (the
Holding Company) using the equity method of accounting. Accordingly,
undistributed earnings of the Bank are recorded as increases in the Holding
Company's investment in the Bank. The following are the condensed financial
statements of the Holding Company as of, and for the year ended, June 30, 1998
(although the Holding Company did not commence operations until the Conversion
on February 18, 1998, the full year results have been presented).
The Condensed Statement of Financial Condition as of June 30, 1998 is as
follows, in thousands:
Assets:
Cash and cash equivalents $ 30,124
Securities available for sale:
Investment securities 15,233
Mortgage-backed and mortgage-related securities 38,885
Investment in subsidiary 202,188
ESOP loan receivable 34,231
Other assets 8,072
--------------
Total assets $ 328,733
==============
Liabilities and stockholders' equity:
Liabilities $ 138
Total Stockholders' equity 328,595
--------------
Total liabilities and Stockholders' equity $ 328,733
==============
75
<PAGE>
14. Parent-Only Financial Information (continued)
The Condensed Statement of Operations for the year ended June 30, 1998, is as
follows, in thousands:
<TABLE>
<S> <C>
Investment income $ 886
Other interest income 745
Interest income - ESOP loan receivable 1,064
Gain or sale of investments 14
---------------
2,709
Contribution to the RCS Foundation (19,553)
Other expenses (221)
---------------
Loss before income taxes and equity
in undistributed earnings of subsidiary (17,065)
Income tax benefit 7,763
---------------
Loss before equity in undistributed
earnings of subsidiary (9,302)
Equity in undistributed earnings of subsidiary 13,828
---------------
Net income $ 4,526
===============
</TABLE>
The Condensed Statement of Cash Flows for the year ended June 30, 1998, is as
follows, in thousands:
<TABLE>
<S> <C>
Operating activities:
Net income $ 4,526
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in the undistributed earnings of subsidiary (13,828)
Charitable contribution of common stock
19,553
Increase in other assets (8,072)
Amortization of premium, net of discount accretion 18
Gain on sale of equity investments (14)
Increase in liabilities 138
---------------
Net cash provided by operating activities 2,321
Investing activities:
Purchases of equity investments available for sale (6,358)
Purchases of callable preferred stock available for sale (9,551)
Purchases of mortgage-backed and mortgage-related securities
available for sale (40,451)
Proceeds from sales of equity investments 688
Prepayments of mortgage-backed and mortgage-related securities
available for sale 1,563
Investment in subsidiary (117,444)
Funding of ESOP loan receivable, net of payments (34,231)
---------------
Net cash used in investing activities (205,784)
Financing activities:
Net proceeds of common stock issuance 234,908
Cash dividends paid on common stock (1,321)
---------------
Net cash provided by financing activities 233,587
Net increase in cash and cash equivalents 30,124
---------------
Cash and cash equivalents at beginning of year -
Cash and cash equivalents at end of year $ 30,124
===============
</TABLE>
76
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Company
Information regarding the directors and executive Officers of the Company
appears on pages 4 through 5 of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on September 29, 1998, under the caption
"Information with Respect to the Nominees, Continuing Directors, and Named
Executive Officers of the Company" and is incorporated herein by this reference.
Item 11. Executive Compensation
Information regarding executive compensation appears on page 10 of the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on September
29, 1998, under the caption "Executive Compensation" and is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners appears on
pages 3 through 4 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held September 29, 1998, under the caption "Security
Ownership of Certain Beneficial Owners" and is incorporated herein by this
reference.
Information regarding security ownership of management appears on pages 4
through 5 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held September 29, 1998, under the caption "Information with
Respect to the Nominees, Continuing Directors and Named Executive Officers of
the Company" and is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions appears on
page 13 of the Company's Proxy Statement for the Annual Meeting of Stockholders
to be held on September 29, 1998 under the caption "Transactions With Certain
Related Persons" and is incorporated by this reference.
77
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements:
See "Part II - Item 8. Financial Statements"
EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------
(a) Exhibits
--------
2.1 Plan of Conversion (including the Restated Organization Certificate and
Stock Bylaws of Richmond County Savings Bank).*
2.2 Agreement and Plan of Merger, dated as of July 17, 1998, by and between
Richmond County Financial Corp. and Ironbound Bankcorp, NJ.**
2.3 Agreement and Plan of Merger, dated as of July 19, 1998, by and between
Richmond County Financial Corp. and Bayonne Bancshares, Inc.**
3.1 Certificate of Incorporation of Richmond County Financial Corp.*
3.2 Bylaws of Richmond County Financial Corp.*
10.1 Form of Richmond County Savings Bank Employee Stock Ownership Plan and
Trust.*
10.2 Form of ESOP Loan Commitment Letter and ESOP Loan Documents.*
10.3 Form of Proposed Employment Agreement between Richmond County Savings
Bank and certain executive officers.*
10.4 Form of Proposed Employment Agreement between Richmond County Financial
Corp. and certain executive officers.*
10.5 Form of Proposed Change in Control Agreement between Richmond County
Savings Bank and certain executive officers.*
10.6 Form of Proposed Richmond County Savings Bank Employee Severance
Compensation Plan.*
10.7 Form of Proposed Management Supplemental Executive Retirement Plan.*
10.8 Stock Option Agreement, dated July 17, 1998, by and between Ironbound
Bankcorp, NJ and Richmond County Financial Corp.**
10.9 Stock Option Agreement, dated July 19, 1998, by and between Bayonne
Bancshares, Inc. and Richmond County Financial Corp.**
11.0 Statement re: Computation of Per Share Earnings.
21.0 Subsidiaries Information included in Part I.
23.0 Consent of Independent Auditors.
27.0 Financial Data Schedule (EDGAR version only).
(b) Report on Form 8-K
------------------
The Company filed a report on Form 8-K with the SEC (File No. 0-23271) on
April 21, 1998, which report announced that the Company declared a
quarterly cash dividend of $0.05 per common share.
* Incorporated by reference from the Form S-1 (Registration No. 333-37009),
as amended, filed on October 2, 1997.
** Incorporated by reference from the Form 8-K(File No. 0-23271), filed with
the SEC on July 27, 1998.
78
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RICHMOND COUNTY FINANCIAL CORP.
-------------------------------
(Registrant)
/s/ Michael F. Manzulli
-------------------------
Michael F. Manzulli
Chairman of the Board and
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
Company and in the capacities indicated on August 14, 1998.
NAME TITLE
-------------- ----------
/s/ Michael F. Manzulli Chairman of the Board, Chief
- --------------------------------------- Executive Officer and Director
Michael F. Manzulli
/s/ Anthony E. Burke President, Chief Operating
- --------------------------------------- Officer and Director
Anthony E. Burke
/s/ Thomas R. Cangemi Senior Vice President,
-------------------------------------- Chief Financial Officer,
Thomas R. Cangemi Treasurer and Secretary
/s/ Godfrey H. Carstens, Jr. Director
--------------------------------------
Godfrey H. Carstens, Jr.
/s/ Robert S. Farrell Director
- ---------------------------------------
Robert S. Farrell
/s/ William C. Frederick, M.D. Director
--------------------------------------
William C. Frederick, M.D.
/s/ James L. Kelley Director
--------------------------------------
James L. Kelley
/s/ T. Ronald Quinlan, Jr. Director
- ---------------------------------------
T. Ronald Quinlan, Jr.
/s/ Maurice K. Shaw Director
- ---------------------------------------
Maurice K. Shaw
79
<PAGE>
================================================================================
EXHIBIT 11
RICHMOND COUNTY FINANCIAL CORP.
EARNINGS PER SHARE RECONCILIATION
The following table is the reconciliation of basic and diluted EPS as required
under SFAS 128 at June 30, 1998.
<TABLE>
<CAPTION>
Loss Shares Per Share
(Numerator) (Denominator) Amounts
------------------------------------------------------------------
(In Thousands, Except Share and Per Share Amounts)
<S> <C> <C> <C>
Net loss $ (3,988)
==================
Basic EPS:
Loss available to common stockholders $ (3,988) 24,328,143 $ ( 0.16)
Effect of dilutive securities:
Options - - -
------------------ ----------------- ----------------
Diluted EPS:
Loss available to common stockholders $ (3,988) 24,328,143 $ (0.16)
================== ================= ================
</TABLE>
80
<PAGE>
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-49233) pertaining to the Richmond County Savings Bank 401(k) Savings
Plan in RSI Retirement Trust (the "Plan") of our report dated August 6, 1998,
with respect to the consolidated financial statements of Richmond County
Financial Corp., included in the Form 10-K for the year ended June 30, 1998.
New York, New York
August 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRATED FROM FORM 10-K AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 31,884
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 26,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 843,194
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 651,745
<ALLOWANCE> 7,276
<TOTAL-ASSETS> 1,595,844
<DEPOSITS> 950,808
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,441
<LONG-TERM> 0
0
0
<COMMON> 264
<OTHER-SE> 328,331
<TOTAL-LIABILITIES-AND-EQUITY> 1,595,844
<INTEREST-LOAN> 44,375
<INTEREST-INVEST> 42,089
<INTEREST-OTHER> 290
<INTEREST-TOTAL> 86,754
<INTEREST-DEPOSIT> 31,374
<INTEREST-EXPENSE> 37,512
<INTEREST-INCOME-NET> 49,242
<LOAN-LOSSES> 2,200
<SECURITIES-GAINS> 163
<EXPENSE-OTHER> 44,046
<INCOME-PRETAX> 6,597
<INCOME-PRE-EXTRAORDINARY> 4,526
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,526
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
<YIELD-ACTUAL> 7.22
<LOANS-NON> 5,534
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,470
<CHARGE-OFFS> 533
<RECOVERIES> 139
<ALLOWANCE-CLOSE> 7,276
<ALLOWANCE-DOMESTIC> 7,276
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,276
</TABLE>
