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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 Commission File No. 0-23271
RICHMOND COUNTY FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
Delaware 06-1498455
(State of Incorporation) (I.R.S. Employer Identification Number)
1214 Castleton Avenue
Staten Island, New York 10310
(Address of principal executive offices) (Zip Code)
718-448-2800
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
As of November 6, 1998, there were 26,423,550 shares of the common stock
outstanding.
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FORM 10-Q
RICHMOND COUNTY FINANCIAL CORP.
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
at September 30, 1998 and June 30, 1998 ................................... 3
Consolidated Statements of Operations
for the three months ended September 30, 1998 and 1997 .................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended September 30, 1998 ............................. 5
Consolidated Statements of Cash Flows
for the three months ended September 30, 1998 and 1997 .................... 6
Notes to Unaudited Consolidated Financial Statements ...................... 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .......................... 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ....... 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ................................................. 18
ITEM 2. Changes in Securities and Use of Proceeds ......................... 18
ITEM 3. Defaults Upon Senior Securities ................................... 18
ITEM 4. Submission of Matters to a Vote of Security Holders ............... 18
ITEM 5. Other Information ................................................. 18
ITEM 6. Exhibits and Reports on Form 8-K .................................. 19
Exhibit Index ............................................................. 20
Signature Page ............................................................ 21
================================================================================
Statements contained in this Form 10-Q which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected. Such risks and uncertainties include potential changes in
interest rates, competitive factors in the financial services industry, general
economic conditions, the effect of new legislation and other risks detailed in
documents filed by the Company with the Securities and Exchange Commission from
time to time.
================================================================================
2
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RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
-------------- -------------
(Unaudited)
Assets:
<S> <C> <C>
Cash and due from banks $ 22,764 $ 31,884
Federal funds sold 4,200 26,000
Securities available for sale:
Investment securities 237,956 238,890
Mortgage-backed and mortgage-related securities 593,714 604,304
Loans receivable:
Real estate loans 765,799 623,293
Other loans 16,679 28,452
Less allowance for loan losses (7,920) (7,276)
------------- ------------
Total loans receivable, net 774,558 644,469
Federal Home Loan Bank stock 20,375 15,550
Banking premises and equipment, net 13,530 13,094
Accrued interest receivable 11,514 9,827
Other real estate owned 340 322
Net deferred tax assets 10,735 8,708
Other assets 2,929 2,796
------------- ------------
Total assets $ 1,692,615 $ 1,595,844
============= ============
Liabilities and Stockholders' Equity:
Demand deposits $ 112,566 $ 121,646
Savings, N.O.W & Money market accounts 501,060 503,814
Certificates of deposit 339,880 325,348
------------ ------------
Total deposits 953,506 950,808
Borrowings from the Federal Home Loan Bank 400,000 306,000
Accrued expenses & other liabilities 9,283 10,441
------------ ------------
Total liabilities 1,362,789 1,267,249
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 at
September 30, 1998 and June 30, 1998 264 264
Additional paid-in-capital 254,288 254,307
Retained earnings-substantially restricted 107,529 103,760
Unallocated common stock held by
Employee Stock Ownership Plan ("ESOP") (33,274) (33,706)
Accumulated other comprehensive income:
Net unrealized gain on securities available for sale, net of tax 1,019 3,970
------------ ------------
Total stockholders' equity 329,826 328,595
------------ ------------
Total liabilities and stockholders' equity $ 1,692,615 $ 1,595,844
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
For The
Three Months Ended
September 30,
----------------------------
(Unaudited)
1998 1997
---------- ------------
<S> <C> <C>
Interest income:
Loans $ 13,728 $ 10,319
Debt and equity securities 4,329 3,472
Mortgage-backed and mortgage-related securities 9,254 3,821
Federal funds sold and interest-earning bank balances 351 142
-------- --------
Total interest income 27,662 17,754
-------- --------
Interest expense:
Deposits 7,970 7,519
Borrowed funds 4,629 77
-------- --------
Total interest expense 12,599 7,596
-------- --------
Net interest income 15,063 10,158
Provision for loan losses 750 450
-------- --------
Net interest income after provision for loan losses 14,313 9,708
-------- --------
Non-interest income:
Fee income 933 818
Net gain (loss) on sale of securities and loans 909 (5)
Other 2 4
-------- --------
Total non-interest income 1,844 817
-------- --------
Non-interest expense:
Salaries and employee benefits 4,185 2,459
Occupancy costs 910 791
Computer service fees 806 669
Advertising 447 153
Amortization of deposit premium 78 79
FDIC insurance premiums 39 38
Other 1,167 766
-------- --------
Total non-interest expense 7,632 4,955
-------- --------
Income before income taxes 8,525 5,570
Provision for income taxes 3,171 2,717
-------- --------
Net Income $ 5,354 $ 2,853
======== ========
Earnings per share:
Basic $ 0.22 N/A
Diluted $ 0.22 N/A
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Unallocated
Retained Accumulated Common
Additional Earnings- Other Stock
Common Paid-in- Substantially Comprehensive Held by
Stock Capital Restricted Income ESOP Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ 264 $ 254,307 $ 103,760 $ 3,970 $ (33,706) $ 328,595
Comprehensive income:
Net income -- -- 5,354 -- -- 5,354
Net unrealized loss on certain
securities, net of tax -- -- -- (2,951) -- (2,951)
---------
Comprehensive income 2,403
---------
Allocation from shares purchased with
loan to ESOP -- (19) -- -- 432 413
Cash dividends paid on common stock -- -- (1,585) -- -- (1,585)
--------- --------- --------- --------- --------- ---------
Balance at September 30, 1998 $ 264 $ 254,288 $ 107,529 $ 1,019 $ (33,274) $ 329,826
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For The
Three Months Ended
September 30,
---------------------------
(Unaudited)
1998 1997
----------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 3,248 $ 2,830
Cash flows from investing activities:
Increase in loans receivable, net (144,155) (19,649)
Loans sold 13,715 --
Investment securities held to maturity:
Maturities and redemptions -- 17,632
Investment securities available for sale:
Sales and redemptions 15,169 --
Purchases (20,310) (20,431)
Mortgage-backed and mortgage-related securities held to maturity:
Maturities -- 28,147
Principal collected -- 9,251
Mortgage-backed and mortgage-related securities available for sale:
Principal collected 57,049 1,233
Purchases (45,281) (49,673)
Purchases of Federal Home Loan Bank of New York stock (4,825) --
Net addition to banking premises and equipment (715) (276)
Proceeds from sales of other real estate owned 72 5
--------- ---------
Net cash used in investing activities (129,281) (33,761)
Cash flows from financing activities:
Net increase in deposits 2,698 1,246
Increase in securities sold under repurchase agreements -- 25,639
Increase in borrowings from the Federal Home Loan Bank 94,000 --
Cash dividends paid on common stock (1,585) --
--------- ---------
Net cash provided by financing activities 95,113 26,885
--------- ---------
Net (decrease) in cash and cash equivalents (30,920) (4,046)
Cash and cash equivalents at beginning of period 57,884 32,543
--------- ---------
Cash and cash equivalents at end of period $ 26,964 $ 28,497
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowed funds $ 12,414 $ 7,593
Income taxes 3,545 1,584
Non-cash investing activities:
Additions to other real estate owned, net $ 90 $ 129
Net (decrease) increase in unrealized gain on available for sale investments (4,967) 1,011
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements include the
accounts of Richmond County Financial Corp. (the "Company"), its direct
wholly-owned subsidiary, Richmond County Savings Bank (the "Bank"), and the
subsidiaries of the Bank.
The unaudited consolidated financial statements included herein reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods presented. The
results of operations for the three months ended September 30, 1998 are not
necessarily indicative of the results of operations that may be expected for the
entire fiscal year. Certain information and note disclosures normally included
in the financial statements, prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
1998 Annual Report on Form 10-K.
2. Earnings Per Share
------------------
Earnings per common share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding. For the three months ended
September 30, 1998, the weighted average number of shares of common stock
outstanding was 24,362,800. For the three months ended September 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 ESOP.
3. 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
7
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tax benefit of $8.4 million, in the third quarter ended March 31, 1998. The
contribution to the Foundation will be fully tax deductible, subject to an
annual limitation based upon the Company's annual taxable income.
4. Employee Stock Ownership Plan
-----------------------------
In connection with the Conversion, the Bank implemented the Employee Stock
Ownership Plan (the "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, are eligible to
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. 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 three months ended September 30, 1998,
compensation expense attributable to the ESOP was $413,000.
5. Recent Developments
-------------------
On October 14, 1998, the Company announced that the Company and Bayonne
Bancshares, Inc. ("Bayonne") had amended and restated their Agreement and Plan
of Merger, dated as of July 19, 1998. On October 14, 1998, Richmond County and
Bayonne formally amended the original agreement entered into by the parties on
July 19, 1998 to eliminate certain provisions relating to pooling-of-interests
accounting as a condition to the consummation of the Bayonne Merger, to
terminate the Bayonne ESOP at the consummation of the Bayonne Merger and to
condition the consummation of the Bayonne Merger to be accounted for as a
purchase accounting transaction.
On July 17, 1998, the Company announced that the Company and Ironbound Bankcorp,
NJ had entered into an Agreement and Plan of Merger, dated as of July 17, 1998.
Both mergers should be completed by the end of the first quarter of calendar
1999.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Richmond County Financial Corp. is a savings and loan holding company regulated
by the Office of Thrift Supervision. The primary operating subsidiary of
Richmond County Financial Corp. is Richmond County Savings Bank, a New York
State chartered stock savings bank. While the following discussion of financial
condition and results of operations includes the collective results of Richmond
County Financial Corp. and the Bank, this discussion reflects principally the
Bank's activities as the Company currently does not engage in any significant
business activities other than the management of the Bank and the investment of
net proceeds from the Bank's mutual to stock conversion, which occurred on
February 18, 1998.
Financial Condition
Total assets increased by $96.8 million, or 6.1%, from $1.6 billion at June 30,
1998 to $1.7 billion at September 30, 1998. The increase in overall assets was
primarily due to an increase in loans of $130.7 million, or 20.1%, offset in
part by a decrease in federal funds sold of $21.8 million. The overall increase
in the level of assets was primarily the result of an increase in borrowed funds
to fund growth in the mortgage loan portfolio.
Mortgage-backed and mortgage-related securities decreased by $10.6 million, or
1.8%, from $604.3 million at June 30, 1998 to $593.7 million at September 30,
1998. Investment securities at September 30, 1998 totaled $238.0 million, a
decrease of $934,000, or 0.4%, compared to $238.9 million at June 30, 1998.
The Bank continues to experience increased loan growth and for the quarter ended
September 30, 1998, gross loans receivable increased by $130.7 million, or
20.1%, to $782.5 million, compared to $651.7 million at June 30, 1998. The
substantial increase in net loans was due primarily to originations of $167.4
million generated in the first quarter of fiscal 1999, offset by scheduled
amortization and prepayments of $23.0 million and the sale of $12.3 million of
student loans. Loan originations during the first quarter of fiscal 1999 were
primarily comprised of multifamily and one-to-four family mortgage loans.
Multifamily mortgage loan originations for the first quarter of fiscal 1999
totaled $76.3 million, bringing the total multifamily loan portfolio to $126.6
million, or 16.2% of gross loans at quarter end. Total one-to-four family loan
production during the first quarter of fiscal 1999 was $76.0 million.
Total liabilities at September 30, 1998 were $1.4 billion, an increase of $95.5
million, or 7.5%, from $1.3 billion at June 30, 1998. Total deposits increased
by $2.7 million, or 0.3%, from $950.8 million at June 30, 1998 to $953.5 million
at September 30, 1998. The Bank's "core" deposits decreased by $11.8 million, or
1.9%, at September 30, 1998 to $613.6 million, from $625.5 million at June 30,
1998. The decrease in the Bank's "core" deposits was primarily attributable to a
$9.1 million decline in total demand deposits. The Bank experienced an increase
of $14.5 million, or 4.5%, in certificates of deposit from $325.3 million at
June 30, 1998 to $339.9 million at September 30, 1998. The increase in
certificates of deposit was primarily attributable to increased 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 September
30, 1998, the Bank had total borrowings of
9
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$400.0 million, all of which were in the form of advances from the FHLB. The
Bank had $306.0 million in borrowings at June 30, 1998. 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 loans and mortgage-backed and mortgage-related securities
with similar estimated maturities. 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 $1.2 million to $329.8 million at
September 30, 1998 from $328.6 million at June 30, 1998.
Non-performing Assets
Non-performing loans totaled $3.8 million, or 0.5% of total loans at September
30, 1998, as compared to $5.5 million, or 0.9% of total loans, at June 30, 1998.
At September 30, 1998, the Bank's real estate owned net, consisted of foreclosed
assets totaling $340,000, which at such date was comprised of two one-to-four
family properties and one vacant commercial lot.
At September 30, 1998, the Bank had $1.8 million of assets designated as
"Substandard", consisting of seven loans, no assets classified as "Doubtful",
and six consumer loans classified as "Loss", respectively. At September 30,
1998, the Bank had $2.0 million of assets designated as "Special Mention",
consisting of seventeen loans due to past loan delinquencies.
Non-accrual loans totaled $3.8 million as of September 30, 1998, which included
nineteen one-to-four family loans, with an aggregate balance of $2.3 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.
For the three months ended September 30, 1998, the Company's loan loss provision
was $750,000 as compared to $450,000 for the prior year's period. The Company's
allowance for loan losses totaled $7.9 million at September 30, 1998 and $7.3
million at June 30, 1998, which represents a ratio of allowance for loan losses
to non-performing loans and to total loans of 208.6% and 131.5%, respectively.
The Company continues to increase its overall loan loss reserves due to the
increase in lending of all loan products. Management believes the allowance for
loan losses at September 30, 1998 is adequate and sufficient reserves are
presently maintained to cover potential losses. For the quarter ended September
30, 1998, the Company experienced net charge-offs of $106,000.
Comparison of Operating Results For the Three Months Ended September 30, 1998
and 1997
General. The Company reported net income of $5.4 million, or $0.22 per share,
for the quarter ended September 30, 1998, an increase of $2.5 million, or 87.7%,
from the, $2.9 million reported for the same period last year. Core earnings for
the quarter ended, September 30, 1998 increased 68.1% to $4.8 million, or $0.20
per share, compared to $2.9 million reported in the first quarter ended
September 30, 1997. Core earnings excludes net gains on sales of securities and
loans for the quarter ended September 30, 1998 of $909,000. Per share amounts
are not applicable to the 1997 results, due to the Company's recent conversion
to a public company.
Interest Income. The Company reported total interest income of $27.7 million for
the quarter ended September 30, 1998, representing an increase of $9.9 million,
or 55.8%, as compared to the same
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period in 1997. The increase in interest income was primarily attributable to
the growth in average interest-earning assets of $596.0 million, offset in part,
by a 27 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 on loans increased $3.4 million, or 33.0%, to $13.7 million for
the three month period ended September 30, 1998, as compared to the $10.3
million reported for the comparable period in 1997. This increase was the result
of growth in the average balance of real estate loans outstanding primarily due
to increased originations of multifamily and one-to-four family real estate
loans. The average yield on the overall loan portfolio decreased 33 basis points
from 8.02% for the three month period ended September 30, 1997, to 7.69% for the
same period in 1998.
Interest income on debt and equity securities increased $857,000, or 24.7%, from
$3.5 million for the three month period ended September 30, 1997, to $4.3
million for the same period in 1998.
Interest income on mortgage-backed and mortgage-related securities increased
$5.4 million, or 142.2%, from $3.8 million for the three month period ended
September 30, 1997, to $9.3 million for the three month period ended September
30, 1998. This increase was primarily due to an increase in the average balance
of mortgage-backed and mortgage-related securities of $349.4 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 to its securities investment
strategy, whereby it has decreased its emphasis on debt securities by investing
funds from the maturity and sale of debt securities into mortgage-backed and
mortgage-related securities. The yield on the mortgage-backed and
mortgage-related securities decreased by 58 basis points, due primarily to the
lower rate environment for new purchases with a longer weighted average life and
the repricing of adjustable rate securities purchased in prior periods.
Interest Expense. Interest expense increased $5.0 million, or 65.9%, from $7.6
million for the three month period ended September 30, 1997, to $12.6 million
for the three month period ended September 30, 1998. Interest expense on
deposits increased $451,000, or 6.0%, from $7.5 million for the three month
period ended September 30, 1997, to $8.0 million for the three month period
ended September 30, 1998. The increase reflects a $37.7 million increase in the
average balance of interest-bearing deposits, primarily attributable to a $28.8
million increase in the average balance of certificates of deposit and a $8.9
million increase in the average balance of savings deposit accounts. This
increase can mainly be attributable to the Bank's strategy of attracting more
certificates of deposit through additional certificate of deposit products and
the related marketing of commercial deposit accounts.
Interest expense on borrowed funds was $4.6 million for the quarter ended
September 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 quarters ended
September 30, 1998 and 1997 the Bank had $400.0 million and $25.6 million in
borrowings outstanding, respectively. 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 loan and mortgage-backed and mortgage-related
securities with similar estimated maturities. This strategy is intended to
incrementally increase net interest income, although it may have the effect of
incrementally
11
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decreasing net interest rate spread. Consequently, the average cost of the
Bank's interest-bearing liabilities increased from 3.75% for the three month
period ended September 30, 1997, to 4.27% for the three month period ended
September 30, 1998.
Provision for Loan Losses. The Bank's provision for loan losses was $750,000 for
the three month period ended September 30, 1998, compared to $450,000 for the
three month period ended September 30, 1997. The first quarter fiscal 1999
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.
Management believes, based upon information currently available, that its
allowance for loan losses is adequate to cover potential 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. Exclusive of net gains and losses from the sales of
securities and loans, total non-interest income for the first quarter of fiscal
1999 was $935,000, as compared to the $822,000 reported for the same period in
fiscal 1998. The increased level of non-interest income is primarily due to an
overall increase in deposit fee income. Net gains on the sale of securities and
loans for the first quarter of fiscal 1999 was $909,000, as compared to net
losses on the sale of securities and loans of $5,000 for the same period in
fiscal 1998. Net gains reported in the first quarter of fiscal 1999 were due to
net gains of $513,000 from the sale of equity securities and $396,000 of net
gains realized from the sale of the Bank's student loan portfolio.
Non-Interest Expense. Non-interest expense for the first quarter of fiscal 1999
increased $2.7 million, or 54.0%, as compared to $5.0 million reported for the
same period in fiscal 1998. The increase in non-interest expense was primarily
due to increases in compensation and employee benefits, including senior
management additions, compensation costs associated with the establishment of
the Bank's new Multifamily Lending Department and the addition of the ESOP. 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 associated with the Conversion. In addition, the Bank expects non-interest
expense to increase in future periods as a result of the Bank's opening of a
public accommodation office and the anticipation of opening two new full-service
branches in fiscal 1999.
Income Taxes. The Company's effective consolidated tax rate for the three month
period ended September 30, 1998 was 37.2% as compared to 48.8% reported for the
comparable period last year. The reduction of the Company's effective tax rate
is primarily due to the Bank establishing a Real Estate Investment Trust (REIT)
in the third quarter of fiscal 1998.
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
12
<PAGE>
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 three month period
ended September 30, 1998 and 1997, the Bank's loan originations totaled $167.4
million and $48.0 million, respectively. Purchases of mortgage-backed,
mortgage-related and investment securities totaled $65.6 million and $70.1
million for the three month period ended September 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 September 30,
1998, the Bank experienced a net increase in total deposits of $2.7 million, or
0.3%, as compared to the $950.8 million at June 30, 1998. 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 September 30, 1998, the Bank had total borrowings of $400.0 million,
all of which were in the form of long-term 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 $155.0 million at September 30, 1998, were comprised of
$63.5 million in one-to-four family loan commitments, $3.9 million in commercial
real estate loan commitments, $42.1 million in construction loan commitments,
$5.9 million in commercial loan commitments, $11.1 million in home equity loan
commitments and $28.5 million in multifamily loan commitments. In addition,
management estimates that an increased level of loan commitments will arise as a
result of the most 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 which are scheduled to mature in less
than one year from September 30, 1998, totaled $243.3 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 September 30, 1998, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $190.1 million, or 12.4% of
adjusted assets, which is above the required level of $61.4 million, or 4.0% of
adjusted assets, and risk-based capital of $198.0 million, or 22.5% of adjusted
assets, which is above the required level of $70.4 million, or 8.0% of adjusted
assets.
The Company's most liquid assets are cash, due from banks and federal funds
sold. The levels of these assets are dependent on the Bank's operating,
financing, lending and investing activities during any given period. At
September 30, 1998, cash, due from banks and federal funds sold totaled $27.0
million, or 1.6% of total assets.
13
<PAGE>
Year 2000 Compliance
The "Year 2000" Problem, as it is generally referred to, concerns the inability
of certain computer hardware and software systems and associated applications to
correctly recognize and process dates beyond December 31, 1999. Many computer
programs were developed using only six digits to define the date field in their
programs. Computer programs used by the Company, its suppliers or outside
service providers that have date-sensitive software may recognize "00" as the
year 1900, rather than the year 2000. Due to the nature of financial
information, calculations that rely on the integrity of the date field for the
correct processing of information could be significantly misstated, if
corrective action is not timely taken.
State of Readiness
The Company has implemented a detailed Year 2000 Plan, according to the
guidelines of the FFIEC, to evaluate the Year 2000 compliance of its computer
systems and the equipment which supports the operation of the Company. The
Company initiated formal communications with all of its service providers,
vendors, major fund providers, major borrowers and companies with which it has
material investments, to determine the extent to which it may be vulnerable to
the inability of those parties to remediate their own Year 2000 issues.
Like many financial institutions, the Company relies upon computers for the
daily conduct of its business and for data processing generally. The Company
utilizes a combination of in house and service bureau applications, with the
bulk of customers account processing being handled by a leading national vendor
of data processing services for financial institutions. The Company has received
assurances that this service provider has completed its internal remediation of
programs, and has substantially completed its remediation of issues related to
interdependencies with other parties. However, these assurances are not
guarantees and may not be enforceable. The vendor has provided the Company with
a Year 2000 compliant version of its system. The Company will participate with
the service provider, in the testing of both direct and indirect services
commencing in November 1998, and continuing through the first quarter of 1999.
The Company does not anticipate that there will be any significant or material
condition which will impact this service provider's ability to deliver accurate
data processing services before, during and after the transition to the new
millennium. While no formal contingency plans exist at this time, the Company is
in the process of developing a contingency plan. Further, results of system
tests conducted by the Company and by other users of this service provider will
be carefully monitored to ensure that all issues have been identified and
successfully remediated.
The balance of the Company's internal processing is supported by PC based
systems, using industry standard software to run non-mission critical
applications. Any software program or application which was not supported by the
vendor, or which required an update to achieve Year 2000 capability, has been
identified for replacement or upgrade. Equipment which contains embedded chips
or microprocessors has also been tested and scheduled for upgrade or replacement
where necessary. All such system enhancements are expected to be completed by
first quarter of 1999. The cost to remediate these systems is immaterial, and is
being expensed in the period in which it occurs. The majority of the related
expense is expected to be incurred in the Company's fiscal year ended June 30,
1999 operating results.
The Company believes it has developed an effective plan to address the Year 2000
problem
14
<PAGE>
based on the available information and that the steps taken to date, its
Year 2000 transition will not have a material effect on its business, operations
or financial results. However, the Company has no control over the progress of
third parties in addressing their own Year 2000 issues. If the necessary changes
are not effected or are not completed in a timely manner, or if unanticipated
problems arise, there may be a material impact on the Company's financial
condition and results of operations.
Cost to Address the Company's Year 2000 Issues
The Company's cost to achieve Year 2000 compliance are not expected to have a
material financial impact on the Company. The Company intends to fund such costs
from its current operations. However, as stated above, there can be no assurance
that all such costs have been identified, or that there may not be some
unforeseen cost which may have a material adverse effect on the Company's
financial condition and results of operations. The Company anticipates that its
1998 expense relative to he Year 2000 issue will be approximately $100,000 and
1999 expense will be approximately $120,000.
Risk of Year 2000 Issues
To date, the Company has not identified any system which presents a material
risk of failing to be Year 2000 compliant in a timely manner, or for which a
suitable alternative cannot be implemented. However, as the Company progresses
with its Year 2000 transition, systems or equipment may be identified which
present a material risk of business interruption. Such disruption may include
the inability to process customer accounting transactions, including deposits,
withdrawals, loan payments and disbursements; the inability to reconcile and
record daily activity; the inability to process loan applications or the track
delinquencies; the inability to generate checks or to clear funds. In addition,
if any of the Company's major borrowers should fail to achieve Year 2000
compliance, and should they experience a disruption of their own businesses,
their ability to meet their obligations to the Company may be seriously
impaired.
To the extent that the risks posed by the Year 2000 problem are pervasive in
data processing and telecommunication services worldwide, or the extent that
disruption of a power utility prevents the Company from gaining access to its
systems, the Company cannot predict with certainty that it will remain
materially unaffected by issues related to the Year 2000 problem, which are
beyond the Company's control.
Contingency Plans
The Company is in the process of developing a contingency plan. The plan will
identify components of mission critical applications which are judged, at some
point prior to December 31, 1999, to be at risk of failure to achieve complete
renovation, validation and implementation. The Contingency Plan will ensure that
the company has sufficiently planned for unanticipated system failures at
critical production dates before, on and after January 1, 2000.
The plan would be invoked if unanticipated Year 2000 problems occur in
production, similar to Disaster Recovery Plans. Essentially, it requires that
resources are planned for deployment to ensure that such an interruption does
not threaten the viability of the Company. The Company will modify its current
Disaster Recovery Plan to specifically address the special circumstances of a
disruption due to a Year 2000 related component failure.
15
<PAGE>
The discussion above contains certain forward-looking statements. Actual results
may differ materially from the Company's expectations due to the nature and
uncertainty of circumstances surrounding the Year 2000 problem. The Company may
fail to identify systems that are not Year 2000 compliant, or the Company or
other parties may fail to meet the dates and goals set above. If so, the extent
and nature of efforts to then address those contingencies, to repair or replace
the affected systems, the Company's ability to obtain qualified personnel,
consultants or other resources and the success of those efforts cannot be stated
with any degree to certainty.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management and the Management of Interest Rate Risk
The principal objective of the Bank'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 Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. The Bank 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 September 30, 1998,
mortgage-backed and mortgage-related securities and investment securities
totaled 71.4% and 28.6% of total securities, respectively. The weighted average
life of the Company's securities portfolio decreased to 7.2 years at September
30, 1998 from 7.5 years at June 30, 1998. This strategy has been accomplished
primarily by investing funds from the maturity and sale 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 decrease in the weighted average life of
such portfolio, which could decrease the Bank'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.
At September 30, 1998, the Bank's estimated one-year "gap" position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was a positive $156.1 million, representing a one-year interest
sensitivity gap as a percentage of total assets of 9.2%. Accordingly, during a
period of rising interest rates, the Bank, 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.
17
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On September 29, 1998, the Company held its annual meeting of stockholders for
the purpose of the election of Directors to three year terms, for the approval
of the Richmond County Financial Corp. 1998 Stock-Based Incentive Plan and for
the ratification of Ernst & Young LLP as the Company's independent auditors.
Number of Number of
Votes Votes
For Withheld
----------------- --------------
1. Election of Directors
James L. Kelley 21,795,677 289,429
T. Ronald Quinlan, Jr. 21,752,832 332,274
Anthony E. Burke 21,717,599 307,507
The Directors whose terms continued and the years their terms expire are as
follows:
William C. Frederick, M.D. (1999); Maurice K. Shaw (1999); Godfrey H. Carstens,
Jr. (2000); Robert S. Farrell (2000); Michael F. Manzulli (2000).
Number of Number of Number of
Votes Votes Votes
For Withheld Abstaining
--------------- ------------- --------------
2. Approval of the Richmond
County Financial Corp.
1998 Stock-Based
Incentive Plan 14,613,963 1,843,916 209,946
Number of Number of Number of
Votes Votes Votes
For Withheld Abstaining
--------------- ------------- --------------
3. Ratification of Ernst &
Young LLP as the Company's
independent auditors 21,838,771 123,791 122,544
ITEM 5. OTHER INFORMATION
- --------------------------
Not applicable
18
<PAGE>
ITEM 6. 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.**
2.4 Amended and Restated Agreement and Plan of Merger, amended and restated as
of October 14, 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.
27.0 Financial Data Schedule.
(b) Report on Form 8-K
------------------
The Company filed a Report on Form 8-K with the SEC on July 27, 1998
relating to the execution of a Merger Agreement by and between the Company
and Bayonne Bancshares, Inc. as well as the execution of a Merger Agreement
by and between the Company and Ironbound Bankcorp, NJ. In addition, the
Company filed a Report on Form 8-K with the SEC on October 16, 1998
relating to the amendment to the Merger Agreement by and between the
Company and Bayonne Bancshares, Inc.
* 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.
*** Incorporated by reference from the Form 8-K (File No. 0-23271), filed with
the SEC on October 16, 1998.
19
<PAGE>
Exhibit Index
-------------
Page
11.0 Statement re: Computation of Per Share Earnings.................. 22
27.0 Financial Data Schedule
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RICHMOND COUNTY FINANCIAL CORP.
(Registrant)
Date: November 13, 1998 By: /s/ Michael F. Manzulli
------------------------------------
Michael F. Manzulli
Chairman of the Board and
Chief Executive Officer
Date: November 13, 1998 By: /s/ Thomas R. Cangemi
------------------------------------
Thomas R. Cangemi
Senior Vice President, Chief
Financial Officer and Secretary
21
<PAGE>
EXHIBIT 11
RICHMOND COUNTY FINANCIAL CORP.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In Thousands, Except Share and Per Share Amounts)
For The
Three Months Ended
September 30, 1998
---------------------
Net income $ 5,354
===========
Weighted average common shares outstanding 24,362,800
Common stock equivalents due to dilutive effect of stock options --
-----------
Total weighted average common shares and equivalents 24,362,800
===========
Basic earnings per common and common share equivalents $ 0.22
===========
Total weighted average common shares and equivalents outstanding 24,362,800
Additional dilutive shares using ending period market value
versus average market value for the period when utilizing
the treasury stock method regarding stock options --
-----------
Total shares for diluted earnings per share 24,362,800
===========
Diluted earnings per common share equivalents $ 0.22
===========
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RICHMOND
COUNTY FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,762
<INT-BEARING-DEPOSITS> 4,002
<FED-FUNDS-SOLD> 4,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 831,670
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 782,478
<ALLOWANCE> 7,920
<TOTAL-ASSETS> 1,692,615
<DEPOSITS> 953,506
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,283
<LONG-TERM> 400,000
0
0
<COMMON> 264
<OTHER-SE> 329,562
<TOTAL-LIABILITIES-AND-EQUITY> 1,692,615
<INTEREST-LOAN> 13,728
<INTEREST-INVEST> 13,269
<INTEREST-OTHER> 665
<INTEREST-TOTAL> 27,662
<INTEREST-DEPOSIT> 7,970
<INTEREST-EXPENSE> 12,599
<INTEREST-INCOME-NET> 15,063
<LOAN-LOSSES> 750
<SECURITIES-GAINS> 513
<EXPENSE-OTHER> 7,632
<INCOME-PRETAX> 8,525
<INCOME-PRE-EXTRAORDINARY> 8,525
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,354
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
<YIELD-ACTUAL> 7.08
<LOANS-NON> 3,797
<LOANS-PAST> 0
<LOANS-TROUBLED> 85
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,276
<CHARGE-OFFS> 119
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 7,920
<ALLOWANCE-DOMESTIC> 4,448
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,472
</TABLE>
