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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
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/A
RICHMOND COUNTY FINANCIAL CORP.
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .......................... 9
Signature Page ............................................................ 21
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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
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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
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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
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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.
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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 contacted 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 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 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. 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
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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 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.
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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.
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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: January 27, 1999 By: /s/ Michael F. Manzulli
------------------------------------
Michael F. Manzulli
Chairman of the Board and
Chief Executive Officer
Date: January 27, 1999 By: /s/ Thomas R. Cangemi
------------------------------------
Thomas R. Cangemi
Senior Vice President, Chief
Financial Officer and Secretary
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