<PAGE>
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 December 31, 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 February 10, 1999, there were 23,888,273 shares of the common stock
outstanding.
<PAGE>
FORM 10-Q
RICHMOND COUNTY FINANCIAL CORP.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
at December 31, 1998 and June 30, 1998................................... 3
Consolidated Statements of Operations
for the three and six months ended December 31, 1998 and 1997............ 4
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended December 31, 1998............................... 5
Consolidated Statements of Cash Flows
for the six months ended December 31, 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......................... 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...... 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 23
ITEM 2. Changes in Securities and Use of Proceeds........................ 23
ITEM 3. Defaults Upon Senior Securities.................................. 23
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 23
ITEM 5. Other Information................................................ 23
ITEM 6. Exhibits and Reports on Form 8-K................................. 23
Exhibit Index............................................................ 25
Signature Page........................................................... 26
================================================================================
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
risk 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>
December 31, June 30,
1998 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,479 $ 31,884
Federal funds sold 48,150 26,000
Securities available for sale:
Investment securities 209,510 238,890
Mortgage-backed and mortgage-related securities 538,654 604,304
Loans receivable:
Real estate loans 864,357 623,293
Other loans 15,670 28,452
Less allowance for loan losses (8,486) (7,276)
--------------- --------------
Total loans receivable, net 871,541 644,469
Federal Home Loan Bank stock 23,095 15,550
Banking premises and equipment, net 14,404 13,094
Accrued interest receivable 10,193 9,827
Other real estate owned 284 322
Net deferred tax assets 11,130 8,708
Other assets 3,893 2,796
--------------- --------------
TOTAL ASSETS $1,756,333 $1,595,844
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 131,446 $ 121,646
Savings, N.O.W & Money market accounts 512,666 503,814
Certificates of deposit 348,849 325,348
--------------- --------------
Total deposits 992,961 950,808
Borrowings from the Federal Home Loan Bank 450,000 306,000
Accrued expenses & other liabilities 10,409 10,441
--------------- --------------
Total liabilities 1,453,370 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; 25,492,550 and 26,423,550 shares outstanding, respectively 264 264
Additional paid-in-capital 254,259 254,307
Retained earnings-substantially restricted 112,078 103,760
Unallocated common stock held by
Employee Stock Ownership Plan ("ESOP") (32,842) (33,706)
Unearned compensation MRP-1998 (15,581) -
Treasury stock, at cost (931,000 shares at December 31, 1998) (15,709) -
Accumulated other comprehensive income:
Net unrealized gain on securities available for sale, net of tax 494 3,970
--------------- --------------
Total stockholders' equity 302,963 328,595
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,756,333 $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 FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ----------------------------
(Unaudited) (Unaudited)
1998 1997 1998 1997
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 16,033 $ 10,788 $ 29,761 $ 21,107
Debt and equity securities 4,206 3,420 8,535 6,892
Mortgage-backed and mortgage-related securities 8,825 4,519 18,079 8,340
Federal funds sold and interest-earning bank balances 78 184 429 326
------------- -------------- ------------ ------------
Total interest income 29,142 18,911 56,804 36,665
------------- -------------- ------------ ------------
INTEREST EXPENSE:
Deposits 7,902 7,641 15,872 15,160
Borrowed funds 5,729 713 10,358 790
------------- -------------- ------------ ------------
Total interest expense 13,631 8,354 26,230 15,950
------------- -------------- ------------ ------------
Net interest income 15,511 10,557 30,574 20,715
Provision for loan losses 600 450 1,350 900
------------- -------------- ------------ ------------
Net interest income after provision for loan losses 14,911 10,107 29,224 19,815
------------- -------------- ------------ ------------
NON-INTEREST INCOME:
Fee income 1,090 826 2,023 1,644
Net gain on sale of securities and loans 1,614 78 2,523 73
Other 8 (1) 10 3
------------- -------------- ------------ ------------
Total non-interest income 2,712 903 4,556 1,720
------------- -------------- ------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,786 2,873 8,971 5,332
Occupancy costs 721 662 1,631 1,453
Computer service fees 834 713 1,640 1,382
Advertising 394 439 841 592
Amortization of deposit premium 79 78 157 157
FDIC insurance premiums 38 39 77 77
Other 948 848 2,115 1,614
------------- -------------- ------------ ------------
Total non-interest expense 7,800 5,652 15,432 10,607
------------- -------------- ------------ ------------
Income before income taxes 9,823 5,358 18,348 10,928
Provision for income taxes 3,803 2,547 6,974 5,264
------------- -------------- ------------ ------------
NET INCOME $ 6,020 $ 2,811 $ 11,374 $ 5,664
============= ============== ============ ============
EARNINGS PER SHARE:
Basic $ 0.26 N/A $ 0.48 N/A
Diluted $ 0.26 N/A $ 0.48 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, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
UNALLOCATED
RETAINED ACCUMULATED COMMON
ADDITIONAL EARNINGS- OTHER STOCK UNALLOCATED TREASURY
COMMON PAID-IN- SUBSTANTIALLY COMPREHENSIVE HELD BY MRP STOCK,
STOCK CAPITAL RESTRICTED INCOME ESOP SHARES AT COST TOTAL
------ ---------- ------------- ------------- ----------- ----------- -------- --------
<S> <C> <C> <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 - - 11,374 - - - - 11,374
Other comprehensive income,
net of tax - - - - - - - -
Net unrealized loss on
certain securities, net of tax - - - (3,476) - - - (3,476)
--------
Comprehensive income 7,898
--------
Purchase of MRP shares - - - - - (16,118) - (16,118)
Allocation from shares purchased
with loan to ESOP - (48) - - 864 - - 816
Common stock repurchased
(931,000 shares) - - - - - - (15,709) (15,709)
Amortization of MRP shares - - - - - 537 - 537
Cash dividends paid on
common stock - - (3,056) - - - - (3,056)
------ ---------- ------------- ------------- ----------- ----------- -------- --------
BALANCE AT DECEMBER 31, 1998 $ 264 $254,259 $ 112,078 $ 494 $ (32,842) $ (15,581) $(15,709) $302,963
====== ========== ============= ============= =========== =========== ======== ========
</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
Six Months Ended
December 31,
----------------------------
(Unaudited)
1998 1997
----------- -----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 11,524 $ 3,905
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in loans receivable, net (241,615) (31,209)
Loans purchased (1,500) (12,880)
Loans sold 15,300 -
Investment securities held to maturity:
Maturities and redemptions - 49,377
Investment securities available for sale:
Sales and redemptions 54,270 1,195
Purchases (28,865) (35,496)
Mortgage-backed and mortgage-related securities held to maturity:
Maturities - 33,370
Principal collected - 22,337
Mortgage-backed and mortgage-related securities available for sale:
Calls and redemptions 21,656 2,797
Principal collected 132,600 5,877
Purchases (89,599) (130,532)
Purchases of Federal Home Loan Bank of New York stock (7,545) (1,276)
Net addition to banking premises and equipment (1,885) (623)
Proceed from sales of other real estate owned 134 101
----------- -----------
Net cash used in investing activities (147,049) (96,962)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 42,153 26,508
Increase in securities sold under repurchase agreements - 55,700
Increase in borrowings from the Federal Home Loan Bank 144,000 14,000
Cash dividends paid on common stock (3,056) -
Purchase of MRP - 1998 shares (16,118) -
Purchase of treasury shares (15,709) -
------------ -----------
Net cash provided by financing activities 151,270 96,208
----------- -----------
Net increase in cash and cash equivalents 15,745 3,151
Cash and cash equivalents at beginning of period 57,884 32,543
----------- -----------
Cash and cash equivalents at end of period $ 73,629 $ 35,694
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits and borrowed funds $ 25,716 $ 15,460
Income taxes 7,420 4,294
NON-CASH INVESTING ACTIVITIES:
Additions to other real estate owned, net 90 $ 365
Net (decrease) increase in unrealized gains on available for sale investments (5,893) 1,737
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
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 and six months ended December 31, 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
------------------
Basic earnings per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted earnings
per common share is calculated using the same method as basic earnings per
common share, but reflects the potential dilution of common stock equivalents.
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", ESOP shares that have not been allocated to
participants' accounts or are not committed to be released for allocation, are
not considered outstanding for the earnings per share calculations. Basic and
diluted weighted average common shares outstanding were 23,426,288 and
23,120,009 shares, respectively, for the second quarter of fiscal 1999. For the
six months ended December 31, 1998, basic and diluted weighted average common
shares outstanding were 23,888,753 and 23,620,501 shares, respectively.
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.
7
<PAGE>
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, 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 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 Company's 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.
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
estimated number of shares to be allocated by the ESOP multiplied by the average
fair value of the underlying shares during the period. For the three and six
months ended December 31, 1998, compensation expense attributable to the ESOP
was $402,900 and $815,600, respectively.
5. STOCK-BASED INCENTIVE PLANS
---------------------------
At the annual meeting of the shareholders held on September 29, 1998, the
shareholders approved the 1998 Stock-Based Incentive Plan ("Incentive Plan")
authorizing the granting of options to purchase common stock of the Company
("Options") and awards of shares of common stock ("Stock Awards") and certain
related rights (collectively referred to as "Awards"). Subject to certain
adjustments to prevent dilution of Awards to participants, the maximum number of
shares reserved for Awards under the Incentive Plan is 3,699,297 shares,
consisting of 2,642,355 shares reserved for Options, which will primarily vest
over a five year period and which must be exercised no more than ten years from
the date of grant and 1,056,942 shares reserved for Stock Awards, which will
primarily vest over a five year period. All employees and outside Directors of
the Company and its affiliates, including the Bank, are eligible to receive
Awards under the Incentive Plan. The Incentive Plan is administered by a
committee (the "Committee") consisting of members of the Company who are not
employees of the Company or its affiliates.
The Company contributed $16.1 million, during the second quarter of fiscal 1999,
to the Incentive Plan to enable the Incentive Plan to purchase 1,056,942 shares
of the Company's common stock to be awarded. This contribution represents
deferred compensation which is initially recorded as a reduction to
stockholders' equity and ratably charged to compensation expense over the
vesting period of the awards. The Committee established October 20, 1998 as the
Incentive Plan's effective grant date and 1,053,554 shares were awarded to
outside directors and employees of the
8
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Company, at the fair value of $14.25 per share on the date of grant. For the six
month period ended December 31, 1998, compensation expense attributable to the
Incentive Plan was approximately $537,000.
Options granted under the Incentive Plan are either non-statutory stock options
or incentive stock options. Each Option entitles the holder to purchase one
share of the Company's common stock at an exercise price equal to the fair
market value on the date of grant. On October 20, 1998, the Committee issued
options of 2,602,385 shares, at the fair value of $14.25 per share on the date
of grant. The granting of these options did not affect the Company's
consolidated results of operations for the six months ended December 31, 1998 or
the Company's consolidated statement of financial condition at December 31,
1998.
6. COMPREHENSIVE INCOME
--------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display
of 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) 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
condition. The Company adopted SFAS No. 130 in the first quarter of fiscal 1999.
All comparative financial statements provided for earlier periods have been
restated to reflect application of the provisions. As the requirements of SFAS
No. 130 are solely disclosure related, its implementation had no affect on the
Company's consolidated financial condition or results of operations.
7. RECENT DEVELOPMENTS
-------------------
On January 20, 1999, the Company announced that its Board of Directors declared
a quarterly cash dividend of eight cents ($0.08) per common share. The dividend
is payable on February 25, 1999 to shareholders of record as of February 10,
1999.
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 Bayonne common stock. On October 14, 1998, the Company and Bayonne
formally amended the original agreement entered into by the parties to eliminate
certain provisions relating to pooling-of-interest accounting as a condition to
the completion of the merger so that the merger could be accounted for as a
purchase accounting transaction. The merger is subject to the approval of the
shareholders of each company as well as certain regulatory approvals. Meetings
for each company's shareholders to approve and adopt the merger agreement will
be held on February 25, 1999. The merger is expected to be completed in the
first quarter of calendar year 1999.
9
<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
share of Ironbound common stock. The merger is subject to the approval of
Ironbound shareholders as well as certain regulatory approvals. A meeting of
Ironbound's shareholders to approve and adopt the merger agreement will be held
on February 25, 1999. The merger is expected to be completed in the first
quarter of calendar year 1999.
The combined mergers will create a financial institution with approximately $2.5
billion in total assets and approximately $1.5 billion in deposits.
8. SUBSEQUENT EVENT
----------------
On February 1, 1999, the Company announced that it has completed its previously
announced initial stock repurchase plan. The Company repurchased 1,321,177
shares of its common stock, par value $.01 per share, in open market
transactions at an aggregate cost of approximately $22.1 million.
The Company also announced that it has received approval from the Superintendent
of the New York State Banking Department to repurchase an additional 1,255,119
shares, or 5% of the Company's outstanding common stock prior to February 18,
1999, the first anniversary of Richmond County Savings Bank's conversion to
stock form. The repurchase will be made in unsolicited purchases pursuant to the
federal securities laws relating to activities by issuers having a distribution,
subject to the availability of stock, acceptable pricing of the stock and such
timing limitations as may be applicable.
10
<PAGE>
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 (the "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 (collectively the "Company"), 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 (the "Conversion").
FINANCIAL CONDITION
Total assets increased by $160.5 million, or 10.1%, from $1.6 billion at June
30, 1998 to $1.8 billion at December 31, 1998. The increase in overall assets
was primarily due to an overall increase in net loans of $227.1 million, or
35.2%, and an increase in federal funds sold of $22.2 million, offset in part by
a decrease of $87.5 million in investment and mortgage-backed and mortgage-
related securities. These increases were primarily due to an increase of $144.0
million in advances received from the Federal Home Loan Bank ("FHLB") and a net
increase in overall deposits of $42.2 million.
Mortgage-backed and mortgage-related securities decreased by $65.7 million, or
10.9%, from $604.3 million at June 30, 1998 to $538.7 million at December 31,
1998. Investment securities at December 31, 1998 totaled $232.6 million, a
decrease of $21.8 million, or 8.6%, compared to $254.4 million at June 30, 1998.
The Bank continues to experience increased loan growth, and for the six months
ended December 31, 1998, gross loans receivable increased by $228.3 million, or
35.0% on an non-annualized basis, to $880.0 million, compared to $651.7 million
at June 30, 1998. The substantial increase in gross loans was due primarily to
originations of $287.8 million generated during the first half of fiscal 1999,
offset by scheduled amortization and prepayments of $47.0 million and the sale
of $15.3 million of student loans. Loan originations during the first half of
fiscal 1999 were primarily comprised of multifamily and one-to-four family
mortgage loans. Multifamily mortgage loan originations for the first half of
fiscal 1999 totaled $126.7 million, bringing the total multifamily loan
portfolio to $177.0 million, or 20.1% of gross loans at December 31, 1998. Total
one-to-four family loan production during the first half of fiscal 1999 was
$129.3 million.
Total liabilities at December 31, 1998 were $1.5 billion, an increase of $186.1
million, or 14.7%, from $1.3 billion at June 30, 1998. Total deposits increased
by $42.2 million, or 4.4%, from $950.8 million at June 30, 1998 to $993.0
million at December 31, 1998. The Bank's "core" deposits increased by $18.7
million, or 3.0%, at December 31, 1998 to $644.1 million, from $625.5 million at
June 30, 1998. The increase in the Bank's "core" deposits was primarily
attributable a $9.8 million increase in demand deposits. The Bank also
experienced an increase of $23.5 million, or 7.2%, in certificates of deposit
from $325.3 million at June 30, 1998 to $348.8 million at
11
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December 31, 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 December
31, 1998, the Bank had total borrowings of $450.0 million, all of which were in
the form of advances from the FHLB. The Bank had borrowings of $306.0 million
at June 30, 1998. The Bank may increase its levels of 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.
Total stockholders' equity decreased by $25.6 million to $303.0 million at
December 31, 1998 from $328.6 million at June 30, 1998. The decrease was
primarily due to the $16.1 million reduction as a result of the issuance of
grants under the recently adopted Management Recognition and Retention Plans
("MRP"), the repurchase of 931,000 shares of the Company's common stock, at an
aggregate cost of $15.7 million, cash dividends paid of $3.1 million for the six
months ended December 31, 1998 and a $3.5 million decrease in net unrealized
gain on securities available-for-sale, net of tax. These decreases were
partially offset by the first half of fiscal 1999 earnings of $11.4 million and
the amortization of unallocated and unearned shares of common stock held by the
Company's stock-related benefit plans.
NON-PERFORMING ASSETS
Non-performing loans totaled $3.1 million, or 0.4% of total loans at December
31, 1998, as compared to $5.5 million, or 0.9% of total loans, at June 30, 1998.
At December 31, 1998, the Bank's real estate owned net, consisted of foreclosed
assets totaling $284,000, which at such date was comprised of 1 one- to four-
family property and one vacant commercial lot.
At December 31, 1998, the Bank had $1.8 million of assets designated as
"Substandard", consisting of 8 loans, no assets classified as "Doubtful", and no
assets classified as "Loss", respectively. At December 31, 1998, the Bank had
$1.3 million of assets designated "Special Mention", consisting of 16 loans,
which were designated "Special Mention" due to past loan delinquencies.
Non-accrual loans totaled $3.1 million as of December 31, 1998, which primarily
included 16 one- to four-family loans, with an aggregate balance of $1.6 million
and three non-residential loans totaling $1.5 million of which one 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 six months ended December 31, 1998, the Company's loan loss provision
was $1.4 million as compared to $900,000 for the prior year's period. The
Company's allowance for loan losses totaled $8.5 million at December 31, 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 273.7% and 1.0%,
respectively, and 134.6% 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 December 31, 1998 is adequate and sufficient reserves are
presently maintained to cover potential losses. For the quarter and six months
ended December 31, 1998, the Company experienced net charge-offs of $35,000 and
$140,000, respectively.
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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND
1997
General. The Company reported net income of $6.0 million, or diluted earnings
per share of $0.26 for the second quarter ended December 31, 1998, an increase
of $3.2 million, or 114.2% from the $2.8 million reported for the same period
last year. Core earnings for the quarter ended December 31, 1998 increased
83.5% to a record $5.1 million, or core diluted earnings per share of $0.22,
compared to $2.8 million reported in the second quarter of fiscal 1998. Core
earnings excludes net gains on sales of securities and loans of $1.6 million for
the quarter ended December 31, 1998. 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 $29.1 million
for the quarter ended December 31, 1998, representing an increase of $10.2
million, or 54.1%, as compared to the same period in 1997. The increase in
interest income was primarily attributable to the growth in average interest-
earning assets of $635.9 million, offset in part, by a 40 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 $5.2 million, or 48.6%, to $16.0 million for
the three month period ended December 31, 1998, as compared to the $10.8 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, one- to four-family real estate loans and
commercial real estate loans. The average yield on the overall loan portfolio
decreased 50 basis points from 8.1% for the three months ended December 31,
1997, to 7.6% for the same period in 1998.
Interest income on debt and equity securities increased $786,000, or 23.0%, from
$3.4 million for the three months ended December 31, 1997, to $4.2 million for
the same period in 1998.
Interest income on mortgage-backed and mortgage-related securities increased
$4.3 million, or 95.3%, from $4.5 million for the three month period ended
December 31, 1997, to $8.8 million for the three month period ended December 31,
1998. This increase was primarily due to an increase in the average balance of
mortgage-backed and mortgage-related securities of $301.8 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 77 basis points, due primarily to the lower rate
environment for new purchases and the repricing of adjustable rate securities
purchased in prior periods.
Interest Expense. Interest expense increased $5.3 million, or 63.2%, from $8.4
million for the three month period ended December 31, 1997, to $13.6 million for
the three month period ended December 31, 1998. Interest expense on deposits
increased $261,000, or 3.4%, from $7.6 million for the three month period ended
December 31, 1997, to $7.9 million for the three month period ended December 31,
1998. The increase is a result of a $52.4 million increase in the average
balance of interest-bearing deposits, primarily attributable to a $32.4 million
increase in the average
13
<PAGE>
balance of certificates of deposit and a $16.9 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 $5.7 million and $713,000 for the quarter
ended December 31, 1998 and 1997, respectively. 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.
The Bank may increase its levels of 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 3.92% for the three month period ended December 31,
1997, to 4.23% for the three month period ended December 31, 1998.
Provision for Loan Losses. The Bank's provision for loan losses was $600,000
for the three month period ended December 31, 1998, compared to $450,000 for the
three month period ended December 31, 1997. The second 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 overall level of 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, non-interest income for the three month period ended
December 31, 1998, increased $273,000, or 33.1%, to $1.1 million from $825,000
for the same period in 1997. The increased level of non-interest income is
primarily due to an overall increase in deposit fee income. In particular,
during the second quarter of fiscal 1999, the Bank instituted a charge to non-
Bank customers (i.e. foreign customers), for the use of the Bank's ATM
facilities. Net gains reported for the three month period ended December 31,
1998 were primarily due to net gains of $1.6 million from the sale of equity and
investment securities, and $46,000 of net gains realized from the sale of the
Bank's student loan portfolio.
Non-Interest Expense. Non-interest expense for the second quarter of fiscal
1999 increased $2.1 million, or 38.0%, as compared to $5.7 million reported for
the same period of 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 Employee Stock Ownership Plan and the Management Recognition and
Retention Plan. 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.
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<PAGE>
Income taxes. The Company's effective consolidated tax rate for the three month
period ended December 31, 1998 was 38.7% as compared to 47.5% reported for the
comparable period last year. The reduction of the Company's effective tax rate
is primarily due to the Bank's utilization of various tax planning strategies.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND
1997
General. The Company reported net income of $11.4 million, or diluted earnings
per share of $0.48 for the six month period ended December 31, 1998, an increase
of $5.7 million, or 100.8% as compared to the $5.7 million reported for the same
period last year. Core earnings for the six months ended December 31, 1998
increased 77.2% to a record $10.0 million, or core diluted earnings per share of
$0.42, as compared to $5.6 million reported in the comparable six month period
in the prior year. Core earnings excludes net gains on sales of securities and
loans of $2.5 million for six months ended December 31, 1998. 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 $56.8 million
for the six months ended December 31, 1998, representing an increase of $20.1
million, or 54.9%, as compared to the same period in 1997. The increase in
interest income was primarily attributable to the growth in average interest-
earning assets of $615.9 million, offset in part by a 36 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 $8.7 million, or 41.0%, to $29.8 million for
the six months ended December 31, 1998, as compared to the $21.1 million
reported for the comparable period in 1997. This increase was the result of
growth in the average balance of real estate loans outstanding, primarily due to
increased originations of multifamily loans, one-to-four family and commercial
real estate loans. The average yield on the overall loan portfolio decreased to
7.62% from 8.04% for the six months ended December 31, 1998 and 1997,
respectively.
Interest income on debt and equity securities increased $1.6 million, or 23.8%,
from $6.9 million for the six months ended December 31, 1997 to $8.5 million for
the same period in 1998.
Interest income on mortgage-backed and mortgage-related securities increased
$9.7 million, or 116.8%, from $8.3 million for the six month period ended
December 31, 1997, to $18.1 million for the six month period ended December 31,
1998. This increase was primarily due to an increase in the average balance of
mortgage-backed and mortgage-related securities of $325.6 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 68 basis points due to the lower rate
environment for new purchases and the repricing of adjustable rate securities
purchased in prior periods.
Interest Expense. Interest expense increased $10.3 million, or 64.5%, from
$16.0 million for the six month period ended December 31, 1997, to $26.2 million
for the six month period ended December 31, 1998. Interest expense on deposits
increased $712,000, or 4.7%, from $15.2 million
15
<PAGE>
for the six month period ended December 31, 1997, to $15.9 million for the six
month period ended December 31, 1998. The increase is a result of a $45.0
million increase in the average balance of interest-bearing deposits, primarily
attributable to a $30.6 million increase in the average balance of certificates
of deposit and a $12.2 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 related marketing of commercial deposit
accounts.
Interest expense on borrowed funds was $10.4 million and $790,000 for the six
month period ended December 31, 1998 and 1997, respectively. 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. The Bank may increase its utilization of 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 3.84% for the six month
period ended December 31, 1997 to 4.25% for the six month period ended December
31, 1998.
Provision for Loan Losses. The Bank's provision for loan losses was $1.4
million for the six month period ended December 31, 1998, as compared to
$900,000 for the six month period ended December 31, 1997. The provision for
the six month period ended December 31, 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 overall level of 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. Exclusive of net gains and losses from the sales of
securities and loans, non-interest income for the six month period ended
December 31, 1998, increased $386,000, or 23.4%, to $2.0 million from $1.6
million for the same period in 1997. The increased level of non-interest income
is primarily due to an overall increase in deposit fee income. In particular,
during the second quarter of fiscal 1999, the Bank instituted a charge to non-
Bank customers (i.e. foreign customers), for the use of the Bank's ATM
facilities. Net gains reported for the six month period ended December 31, 1998
were primarily due to net gains of $2.1 million from the sale of equity and
investment securities, and $442,000 of net gains realized from the sale of the
Bank's student loan portfolio.
Non-Interest Expense. Non-interest expense totaled $15.4 million for the six
months ended December 31, 1998, an increase of $4.8 million, or 45.5%, as
compared to $10.6 million reported for the same periods in fiscal 1997. 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 Employee Stock Ownership Plan and the
Management
16
<PAGE>
Recognition and Retention Plan. 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 six month
period ended December 31, 1998, was 38.0% as compared to 48.2% reported for the
comparable period in 1997. The reduction of the Company's effective tax rate is
primarily due to the Bank's utilization of various tax planning strategies.
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 primarily
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 and six month periods ended December 31, 1998 and 1997, the Bank's loan
originations totaled $118.9 million, $286.3 million, $32.5 million and $71.2
million, respectively. Purchases of mortgage-backed, mortgage-related and
investment securities totaled $55.6 million, $126.0 million, $97.2 million, and
$167.3 million for the three and six month periods ended December 31, 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 December 31, 1998, the Bank
experienced a net increase in total deposits of $42.2 million, or 4.4%, 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 December 31, 1998, the Bank had total borrowings of $450.0 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 $127.9 million at December 31, 1998, were comprised of
$46.5 million in one- to four-family loan commitments, $14.7 million in
multifamily loan commitments, $6.8 million in commercial real estate loan
commitments, $38.5 million in construction loan commitments, $10.0 million in
commercial loan commitments and $11.4 million in home equity 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
17
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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
December 31, 1998, totaled $240.2 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 December 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $198.1 million, or 11.9% of
adjusted assets, which is above the required level of $66.4 million, or 4.0% of
adjusted assets and risk-based capital of $206.6 million, or 12.4% of adjusted
assets, which is above the required level of $132.7 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 Bank's operating,
financing, lending and investing activities during any given period. At
December 31, 1998, cash and due from banks and federal funds sold totaled $73.6
million, or 4.2% of total assets.
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. The
Company has received formal communication from 100% of the service providers,
vendors, major fund providers, major borrowers and companies contracted to
provide Year 2000 compliance assurances.
The Company's vendor relationships cover a wide range of services which may or
may not be subject to a contractual agreement. Where a contractual relationship
exists between the Company and a provider of services, and the Company is
exposed to potential liability due to a failure on the part of the vendor to
provide the service, whether due to Year 2000 or some other issue, the vendor
would necessarily be subject to a breach of contract suit. In order to minimize
the risk of material loss or disruption of the Company's business due to an
issue involving date sensitive processing, the Company has required all of these
vendors to provide written assurances that they are proactively addressing Year
2000 issues within their operations. The Company has received written
assurances from all of the 19 vendors it has contacted for Year 2000 compliance.
A violation of such written assurances may constitute a breach of contract by
such vendor, thereby allowing the Company to institute legal proceedings against
such vendor. The Company can give no assurance as to either the circumstances
under which it would institute
18
<PAGE>
such legal proceedings or the probable degree of success of such action. The
Company is participating in testing all products and services from these
vendors. Testing will be completed by April 15, 1999.
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 has been participating with the service provider, in the testing of both
direct and indirect services which commenced in November 1998, and will continue
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. 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 and based on available information and 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's 1998 expense
relative to the Year 2000 issue was approximately $100,000 and anticipates that
in 1999 the expense will be approximately $120,000.
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<PAGE>
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 to 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 mitigate credit risk the Company has contacted all of its unsecured
commercial borrowers to survey their Year 2000 readiness in order to anticipate
any potential exposure. The Company also surveys all new commercial borrowers
for Year 2000 readiness. The Company has not contacted its largest dollar
deposit customers to determine their readiness for Year 2000 because such
customers comprise a small percentage of the Company's deposit base.
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 has a contingency plan in operation as of November 1998 which it
will update as necessary. The plan identifies 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 contingency plan was completed
in November 1998. The Company's internal contingency committee meets monthly to
monitor the plan and to monitor current testing of service providers. Any
changes to be made to the contingency plan will be finalized upon completion of
testing on April 15, 1999. The Company expects to complete its Year 2000
testing of all mission critical systems prior to any date of potential
disruption.
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.
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
20
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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.
21
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ITEM 3. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented at June
30, 1998 in Item 7a. to the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on August 27, 1998. There have been no
material changes in the Company's market risk at December 31, 1998 as compared
to June 30, 1998. The following is an update of the discussion provided
therein:
General. The Company's largest component of market risk continues to be
interest rate risk. Substantially all of this risk continues to reside at the
Bank level. The Bank still is not subject to foreign currency exchange or
commodity price risk. At December 31, 1998, neither the Company nor the Bank
owned any trading assets, nor did they participate in hedging programs, interest
rate swaps or other activities involving the use of off-balance sheet derivative
financial instruments.
Gap Analysis. At December 31, 1998, the Company'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 $92.1 million, representing a one-year
interest sensitivity gap as a percentage of total assets of 5.2%. 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.
Interest Rate Risk Compliance. The Company continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at June 30, 1998. There have been no changes in the Board of
Directors approved limits of acceptable variance in net interest income and net
portfolio value at December 31, 1998, compared to June 30, 1998, and the
projected changes continue to fall within the Board of Directors approved limits
at all levels of potential interest rate volatility.
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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
- ------ ---------------------------------------------------
None
ITEM 5. OTHER INFORMATION
- ------ -----------------
Not applicable
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.**
23
<PAGE>
10.10 Form of Proposed Amended and Restated Richmond County Financial Corp.
1998 Stock Based Incentive Plan.****
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 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.
**** Incorporated by reference from document filed pursuant to Rule 424(b)(3)
(Registration No. 333-66749), filed with the SEC on February 1, 1999.
24
<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: February 16, 1999 By: /s/ Michael F. Manzulli
--------------------------
Michael F. Manzulli
Chairman of the Board and
Chief Executive Officer
Date: February 16, 1999 By: /s/ Thomas R. Cangemi
--------------------------
Thomas R. Cangemi
Senior Vice President, Chief
Financial Officer and Secretary
<PAGE>
Exhibit Index
-------------
Page
----
11.0 Statement re: Computation of Per Share Earnings......... 27
27.0 Financial Data Schedule ................................. 28
25
<PAGE>
EXHIBIT 11
RICHMOND COUNTY FINANCIAL CORP.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
For the For The
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- -------------------------
1998 1997(1) 1998 1997(1)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net Income $ 6,020 $ 2,811 $ 11,374 $ 5,664
============ ============ ============ ===========
Weighted average common shares outstanding 23,426,228 - 23,888,753 -
Common stock equivalents due to dilutive effect
of stock options - - - -
------------ ------------ ------------ -----------
Total weighted average common shares and equivalents 23,426,228 - 23,888,753 -
============ ============ ============ ===========
Basic earnings per common and common share equivalents $ 0.26 N/A $ 0.48 N/A
============ ============ ============ ===========
Total weighted average common shares and equivalents outstanding 23,426,228 - 23,888,753 -
Additional dilutive shares using ending period market value versus
average market value for the period when utilizing the treasury
stock method regarding stock options (306,219) - (268,252) -
------------ ------------ ------------ -----------
Total shares for dilutive earnings per share 23,120,009 - 23,620,501 -
============ ============ ============ ===========
Diluted earnings per common share equivalents $ 0.26 N/A $ 0.48 N/A
============ ============ ============ ===========
</TABLE>
(1) Per share amounts are not applicable to the 1997 results, due to the
Company's recent conversion to a public company.
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 21,665
<INT-BEARING-DEPOSITS> 3,814
<FED-FUNDS-SOLD> 48,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 748,164
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 880,027
<ALLOWANCE> 8,486
<TOTAL-ASSETS> 1,756,333
<DEPOSITS> 992,961
<SHORT-TERM> 35,000
<LIABILITIES-OTHER> 10,409
<LONG-TERM> 0
0
0
<COMMON> 264
<OTHER-SE> 302,699
<TOTAL-LIABILITIES-AND-EQUITY> 1,756,333
<INTEREST-LOAN> 29,761
<INTEREST-INVEST> 26,614
<INTEREST-OTHER> 429
<INTEREST-TOTAL> 56,804
<INTEREST-DEPOSIT> 15,872
<INTEREST-EXPENSE> 26,230
<INTEREST-INCOME-NET> 30,574
<LOAN-LOSSES> 1,350
<SECURITIES-GAINS> 2,074
<EXPENSE-OTHER> 15,432
<INCOME-PRETAX> 18,348
<INCOME-PRE-EXTRAORDINARY> 18,348
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,374
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
<YIELD-ACTUAL> 7.06
<LOANS-NON> 3,100
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,276
<CHARGE-OFFS> 163
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 8,486
<ALLOWANCE-DOMESTIC> 8,486
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,594
</TABLE>
