<PAGE>13
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
Set forth below are selected consolidated financial and other data of the
Company. This financial data is derived in part from, and should be read in
conjunction with, the Company's Consolidated Financial Statements and Related
Notes.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial Condition Data:
Total assets................................... $2,881,221 $2,760,095 $1,595,844 $ 993,370 $ 914,483
Federal funds sold............................. -- 17,775 26,000 6,000 20,000
Debt and equity securities,net(1):
Available for sale.......................... 257,485 297,611 238,890 19,706 21,659
Held to maturity............................ -- -- -- 205,201 307,700
Mortgage-backed and mortgage-related
securities, net(1):
Available for sale.......................... 707,446 866,844 604,304 27,398 1,394
Held to maturity............................ 57,161 -- -- 185,122 80,284
Loans receivable, net(2)....................... 1,573,808 1,313,527 644,469 496,258 419,270
Goodwill....................................... 43,324 43,382 -- -- --
Deposits....................................... 1,789,876 1,619,470 950,808 885,818 819,216
Borrowings..................................... 773,690 757,832 306,000 -- --
Stockholders' equity........................... 306,410 370,211 328,595 100,865 89,901
Selected Operating Data:
Interest income................................ $ 194,537 $ 132,574 $ 86,754 $ 65,781 $ 59,063
Interest expense............................... 98,269 62,231 37,512 27,707 26,254
----------------------------------------------------------
Net interest income before provision
for possible loan losses.................. 96,268 70,343 49,242 38,074 32,809
Provision for possible loan losses............. 1,200 2,550 2,200 1,080 1,600
----------------------------------------------------------
Net interest income after provision
for possible loan losses.................. 95,068 67,793 47,042 36,994 31,209
Non-interest income............................ 7,176 11,389 3,601 2,861 2,827
Non-interest expense(3)........................ 52,303 36,360 44,046 19,667 18,503
----------------------------------------------------------
Income before income taxes..................... 49,941 42,822 6,597 20,188 15,533
Provision for income taxes..................... 13,672 16,178 2,071 9,463 6,803
----------------------------------------------------------
Net income..................................... $ 36,269 $ 26,644 $ 4,526 $ 10,725 $ 8,730
==========================================================
Basic earnings (loss) per share (4)............ $ 1.36 $ 1.07 $ (0.16) N/A N/A
==========================================================
Diluted earnings (loss) per share(4)........... $ 1.35 $ 1.07 $ (0.16) N/A N/A
==========================================================
</TABLE>
(footnotes on next page)
<PAGE>14
<TABLE>
<CAPTION>
At or For the Year Ended
----------------------------------------------------------
June 30
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial Ratios
and Other Data(5):
Performance Ratios(6):
Return on average assets................... 1.27% 1.36% 1.26% 1.13% 0.99%
Return on average stockholders' equity..... 10.94 8.30 8.36 11.25 10.25
Average stockholders' equity to
average assets........................... 11.64 16.35 15.05 10.07 9.70
Stockholders' equity to total assets
at end of period......................... 10.63 13.41 20.59 10.15 9.83
Net interest rate spread(7)................ 2.99 2.88 3.29 3.64 3.48
Net interest margin(8)..................... 3.57 3.73 4.10 4.22 3.96
Average interest-earning assets
to average interest-bearing liabilities.. 116.00 125.73 126.04 118.94 114.99
Total non-interest expense to
average assets(9)........................ 1.72 1.79 1.93 1.99 2.07
Net interest income to operating
expenses................................. 184.06 193.46 201.09 193.59 177.32
Efficiency ratio(10)................ 44.77 46.25 45.75 46.08 51.04
Asset Quality Ratios:
Non-performing loans as a percent
of loans, net............................ 0.30% 0.45% 0.85% 0.78% 0.91%
Non-performing assets as a percent
of total assets.......................... 0.18 0.25 0.37 0.46 0.48
Allowance for loan losses as a percent
of loans receivable, net................. 0.93 1.05 1.12 1.10 1.14
Allowance for loan losses as a percent
of total non-performing loans............ 311.46 237.07 131.50 141.09 125.55
Regulatory Capital Ratios and Other Data:
Leverage capital........................... 7.71% 10.96% 12.81% 9.54% 9.65%
Total risk-based capital................... 14.77 19.84 24.81 18.91 19.20
Tier I capital............................. 13.85 18.90 23.87 17.98 18.33
Number of full service customer
facilities......................... 24 24 13 13 13
</TABLE>
(1) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities," as of July 1, 1994, and reclassified securities having
a market value of $26 million from its held to maturity portfolio to its
available for sale portfolio in November 1995, pursuant to a Financial
Accounting Standards Board ("FASB") interpretation of SFAS No. 115. In
February 1998, the Company transferred its entire securities held to
maturity portfolio to its securities available for sale portfolio as part
of a balance sheet restructuring initiative implemented at that time,
primarily in connection with a reassessment by the Company of its
asset/liability management strategy.
(2) Loans receivable, net, consist of gross loans receivable, plus unamortized
premiums, less unamortized discounts, plus deferred loan costs, less
deferred loan fees and the allowance for loan losses. The allowance for
loan losses at June 30, 2000, 1999, 1998, 1997, and 1996 was $14.7 million,
$13.9 million, $7.3 million, $5.5 million and $4.8 million, respectively.
(3) Includes the one-time non-recurring charge of $19.6 million ($11.2 million,
net of tax) for funding of the Richmond County Savings Foundation at time
of Conversion.
(4) Proforma earnings per share for fiscal 1998, calculated as if the Bank had
converted to stock form as of July 1, 1997, was $0.19.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios and fiscal 2000, 1999
and 1998, which is based on daily average balances, all ratios are based
upon average balances during the indicated period. Averages for the periods
ended fiscal 1997 and 1996 utilize average month-end balances.
(6) All performance ratios for the year ended June 30, 1998, exclude the
one-time non-recurring charge of $19.6 million ($11.2 million net of tax)
for the funding of the Foundation at time of conversion.
(7) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(8) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(9) Total non-interest expense excludes the effect of amortization of goodwill.
The 1997 ratio excludes the one-time special assessment of $493,000 to
recapitalize the Savings Association Insurance Fund (the "SAIF"). Including
the effects of the amortization of goodwill and funding of the RCS
Foundation, total non-interest expense to average assets for the year ended
June 30, 1998 would be 3.52%.
(10) The efficiency ratio represents the ratio of non-interest expense,
excluding the effect of amortization of goodwill and the SAIF special
assessment, divided by the sum of net interest income and non-interest
income. Including the effects of the amortization of goodwill and the
contribution to the RCS Foundation, the efficiency ratio for the year ended
June 30, 1998 would be 83.35%.
<PAGE>15
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
Richmond County Financial Corp. (the "Company") was incorporated in September
1997, and is the holding company for Richmond County Savings Bank and its
subsidiaries (the "Bank"). On July 31, 1997, the Board of Trustees of the Bank
unanimously adopted a Plan of Conversion, whereby the Bank would convert from a
New York State chartered mutual bank to a New York State chartered stock
institution with the concurrent formation of the Company (the "Conversion").
The Conversion was completed on February 18, 1998, with the issuance by the
Company of 24,466,250 shares of common stock, at a price of $10.00 per share, in
an initial public offering. The Company received gross proceeds from the
Conversion of $244.7 million, before the reduction from gross proceeds of $9.8
million for estimated conversion related expenses. The Company used $117.4
million, or 50% of the net proceeds, to purchase all of the outstanding stock of
the Bank.
Concurrent with the completion of the Conversion, an additional 1,957,300 shares
of authorized but unissued shares of common stock were contributed by the
Company to the Richmond County Savings Foundation (the "Foundation"), a private
foundation dedicated to charitable purposes within the communities the Bank
serves. The Company recorded a one-time charge of $19.6 million, the full amount
of the contribution made to the Foundation, and a corresponding deferred tax
benefit of $8.4 million, in the third quarter ended March 31,1998. The
contribution to the Foundation is expected to be fully tax deductible, subject
to an annual limitation based upon the Company's annual taxable income.
Additionally, in connection with the Conversion, the Bank implemented the
Employee Stock Ownership Plan ("ESOP"), a tax-qualified plan designed to invest
primarily in the Company's common stock. Subsequent to the Conversion, the ESOP
purchased, through a $34.6 million loan from the Company, 8%, or 2,113,884
shares of common stock in the open market.
The Company's results of operations depend primarily on its net interest income,
which is the difference between interest income on interest-earning assets,
which principally consist of loans, mortgage-backed and mortgage-related
securities and investment securities and interest expense on interest-bearing
liabilities, which principally consist of deposits and borrowings. Net interest
income is determined by an institution's interest rate spread (i.e., the
difference between yields earned on its interest-earning assets and the rates
paid on its interest-bearing liabilities) and the relative amount of
interest-earning assets to interest-bearing liabilities. Results of operations
are also affected by the Company's provision for possible loan losses, the level
of its non-interest income, including service fees and related income. The
Company's non-interest expense principally consists of compensation and
benefits, occupancy and equipment expense, advertising expense, federal deposit
insurance premiums and other expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates, governmental policies and actions by
regulatory authorities.
The Company had no operations prior to February 18, 1998, and, accordingly, the
results of operations prior to that date reflect only those of the Bank.
Acquisitions
South Jersey Financial Corporation, Inc.
On March 15, 2000, the Company and South Jersey Financial Corporation, Inc.
("South Jersey") entered into a definitive agreement pursuant to which South
Jersey, the holding company of South Jersey Savings and Loan Association, a
community savings association with three full-service banking offices in the New
Jersey counties of Gloucester and Camden, merged with the Company. Under the
terms of the agreement, South Jersey shareholders will receive $20 per share in
cash for each outstanding share of common stock of South Jersey. The total
transaction value is approximately $68.0 million. The excess of cost over the
fair value of net assets acquired ("goodwill") in the transaction is estimated
at $20 million, which will be amortized on a straight line basis over 20 years.
As of June 30, 2000 (unaudited), the total assets of South Jersey were $322.5
million, deposits were $238.1 million and total stockholders' equity was $53.8
million. The acquisition was completed at the close of business on July 31,
2000.
Bayonne Bancshares, Inc.
At the close of business on March 22, 1999, the Company completed its
acquisition of Bayonne Bancshares, Inc. ("Bayonne"), the holding company of
First Savings Bank of New Jersey, SLA, a New Jersey State chartered savings and
loan association with four full service banking offices in Bayonne, New Jersey
in a transaction which was accounted for as a purchase. The cost of the
acquisition was approximately $118.5 million for which the Company issued 1.05
shares of its common stock for each outstanding share of Bayonne common stock
for a total of 8,668,615
<PAGE>16
common shares, of which 3,938,731 shares were issued from its treasury shares.
Options to purchase 683,577 shares of Bayonne common stock were also converted
into options to purchase 717,755 shares of the Company's common stock. The
goodwill in the transaction was $31.4 million, which is being amortized on a
straight line basis over 15 years.
Ironbound Bankcorp, NJ
At the close of business on March 5, 1999, the Company completed its acquisition
of Ironbound Bankcorp, NJ ("Ironbound"), the holding company of Ironbound Bank,
a New Jersey chartered commercial bank with three full service commercial
banking offices in the New Jersey counties of Union and Essex , in a transaction
which was accounted for as a purchase. The cost of the acquisition was
approximately $27.7 million. The Company issued 1.463 shares of its common stock
for each outstanding share of Ironbound common stock for a total of 1,458,842
common shares. The goodwill attributable to the transaction was $14.9 million,
which is being amortized on a straight line basis over 15 years.
Management Strategy
The Bank's operating strategy emphasizes customer service and convenience, and
the Bank attributes the loyalty of its customer base to its commitment to
maintaining customer satisfaction, as well as its proactive involvement in the
communities that it serves. The Bank attempts to set itself apart from its
larger competitors by providing the type of personalized service not generally
available from larger banks, while offering a greater variety of products and
services than is typically available from smaller, local depository
institutions.
The Bank's historical operating strategy has concentrated on maintaining
profitability and asset quality by primarily investing in one- to four-family
mortgage loans and in U.S. Government and agency debt securities, as well as
debt and equity securities of corporate issuers. In the past few years, the Bank
has pursued a strategy, in conjunction with its traditional thrift lending and
securities investment strategy, of focusing on small and medium-sized retail
businesses as both lending and deposit customers by emphasizing the origination
of commercial real estate, construction and commercial loans, as well as
increasing the marketing of its business checking accounts and other
business-related services. In this regard, the Bank hired additional lending
personnel who have commercial real estate and commercial lending experience in
the Bank's primary market area. The Bank has placed increased emphasis on the
origination of multifamily loans and in April 1998, the Bank established a
multifamily lending department, staffed by personnel experienced in the
multifamily lending business. In addition, the Bank is increasing the merchant
services it provides, such as merchant credit card processing, letters of
credit, sweep accounts and increased night depository services. The Bank intends
to continue this strategy, maintaining its traditional focus of investing in
residential mortgage loans and soliciting deposits from individuals in its
primary market area, while strengthening the Bank's position as a provider of
loans and financial services to the local business community.
The Bank's current operating strategy consists primarily of: (1) investing
primarily in one- to four-family, multifamily and to a lesser extent, commercial
real estate, construction and development, commercial and other loans and in
investment-grade securities; (2) attempting to increase its position as a lender
to businesses operating in its primary market area, as well as other areas
within the New York metropolitan area, by offering its commercial loan and
deposit products to small and medium-sized businesses; (3) increasing the yield
and estimated average life of its securities investments by emphasizing the
purchase of government agency and privately issued mortgage-backed and
mortgage-related securities with estimated average lives of three to seven years
and de-emphasizing its investment in U.S. Treasury obligations and corporate and
other debt securities; (4) maintaining a low cost of funds by attracting and
retaining core deposits by providing enhanced customer service; (5) attempting
to attract new deposit customers by competitively pricing certificate of deposit
products and offering a greater variety of durations of such certificates; (6)
developing wholesale borrowing sources, such as FHLB advances, repurchase
agreements and brokered certificates of deposit, as additional means of funding
asset growth; and (7) managing its interest rate risk by originating or
purchasing adjustable-rate loans and from time to time, selling fixed-rate loans
with maturities of more than 15 years. The Bank has recently begun to place a
greater level of emphasis on the utilization of borrowed funds to fund asset
growth. In this regard, at June 30, 2000, the Bank had total borrowings of
$773.7 million, of which $758.7 million were in the form of FHLB advances and
$15.0 million were in the form of repurchase agreements. The Bank had borrowings
of $757.8 million at June 30, 1999. The Bank may continue to increase such
emphasis, which may result in an increase in the Bank's average cost of funds.
<PAGE>17
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends on the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
Average Balance Sheet. The following table sets forth certain information
relating to the Company for the years ended June 30, 2000, 1999 and 1998. The
average yields and costs are derived by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown and reflect annualized yields and costs.
Average balances are derived from daily average balances. The yields and costs
include fees, which are considered adjustments to yields.
<TABLE>
<CAPTION>
For the Year Ended June 30,
-------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets(1):
Debt and equity securities........ $ 336,243 $ 24,999 7.43% $ 276,097 $ 24,999 7.43% $ 230,067 $ 14,645 6.37%
Mortgage-backed and mortgage-
related securities, net......... 849,343 55,572 6.54 629,703 55,572 6.54 350,398 23,622 6.74
Real estate loans, net(2)(3)...... 1,479,996 111,641 7.54 923,750 111,641 7.54 522,996 41,562 7.96
Commercial loans, net(2).......... 13,971 1,366 9.78 16,919 1,366 9.78 7,030 717 10.20
Consumer and student loans........ 4,354 447 10.27 9,152 447 10.27 22,770 2,096 9.21
Other interest-earning assets..... 10,486 512 4.88 29,000 512 4.88 69,577 4,112 5.91
-------------------- -------------------- --------------------
Total interest-earning
assets..................... 2,694,393 194,537 7.22 1,884,621 194,537 7.22 1,201,978 86,754 7.22
---------------- ---------------- ----------------
Non-interest-earning assets.......... 152,726 78,088 48,284
----------- ----------- -----------
Total assets.................. $2,847,119 $1,962,709 $1,250,262
=========== =========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Money market savings accounts..... $ 48,766 $ 1,587 3.25% $ 42,973 $ 1,384 3.22% $ 39,075 $ 1,353 3.46%
Savings accounts.................. 747,253 19,614 2.62 510,476 12,636 2.48 445,057 12,146 2.73
N.O.W. accounts................... 73,671 1,091 1.48 35,004 596 1.70 19,089 446 2.34
Certificates of deposit........... 632,258 32,418 5.13 412,166 21,315 5.17 314,106 32,418 5.38
-------------------- -------------------- --------------------
Total deposits................ 1,501,948 54,710 3.64 1,000,619 35,931 3.59 817,327 30,839 3.77
-------- -------- --------
Borrowed funds.................... 819,198 43,559 5.32 498,311 26,300 5.59 103,424 5,778 5.59
Non-depository stock
subscriptions................... -- -- -- -- -- -- 32,914 895 2.72
-------------------- -------------------- --------------------
Total interest-bearing
liabilities................ 2,321,146 98,269 4.23 1,498,930 62,231 4.15 953,665 37,512 3.93
---------------- ---------------- -----------------
Non-interest-bearing liabilities.. 194,542 142,801 108,412
----------- ----------- -----------
Total liabilities............. 2,515,688 1,641,731 1,062,077
Stockholders'equity.............. 331,431 320,978 188,185
----------- ----------- -----------
Total liabilities and
stockholders' equity....... $2,847,119 $1,962,709 $1,250,262
=========== =========== ===========
Net interest income/interest
rate spread(4)................. $ 96,268 2.99% $ 70,343 2.88% $ 49,242 3.29%
================ ================ ================
Net interest margin(5)........... 3.57% 3.73% 4.10%
======= ======= =======
Ratio of interest-earning
assets to interest-
bearing liabilities............ 116.08% 125.73% 126.04%
======= ======= =======
</TABLE>
(1)Includes related assets available for sale and unamortized discounts
and premiums.
(2)Amount is net of deferred loan costs and fees, deferred mortgage interest,
unamortized discounts net and includes loans held for sale and
non-performing loans.
(3)Real estate loans, net includes one- to four-family, multifamily, commercial
real estate, construction and development and home equity loans.
(4)Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5)Net interest margin represents net interest income divided by average
interest-earning assets.
<PAGE>18
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (1) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (2) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (3) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 2000 June 30, 1999
Compared to Compared to
Year Ended Year Ended
June 30, 1999 June 30, 1998
---------------------------- ------------------------------
---------------------------- ------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
---------------------------- ------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Debt and equity securities......... $ 4,148 $ 1,811 $ 5,959 $ 2,930 $ 1,465 $ 4,395
Mortgage-backed securities and
mortgage-related securities, net.. 13,922 1,736 15,658 18,829 (2,537) 16,292
Real estate loans, net............. 41,751 554 42,305 31,968 (4,194) 27,774
Commercial loans, net.............. (343) (259) (602) 1,009 242 1,251
Consumer and student loans......... (486) 6 (480) (1,254) 85 (1,169)
Other interest-earning assets...... (887) 10 (877) (2,398) (325) (2,723)
------------------------------------------------------------
Total interest-earning assets.... 58,105 3,858 61,963 51,084 (5,264) 45,820
------------------------------------------------------------
Interest-bearing liabilities:
Money market savings accounts...... 187 16 203 135 (104) 31
Savings accounts................... 5,861 1,117 6,978 1,785 (1,295) 490
N.O.W. accounts.................... 658 (163) 495 372 (222) 150
Certificates of deposit............ 11,382 (279) 11,103 5,274 (853) 4,421
Borrowings......................... 16,936 323 17,259 27,839 (7,317) 20,522
Non-depository stock
subscriptions..................... -- -- -- (895) -- (895)
------------------------------------------------------------
Total interest-bearing
liabilities..................... 35,024 1,014 36,038 34,510 (9,791) 24,719
-----------------------------------------------------------
Net change in net interest income.... $23,081 $ 2,844 $25,925 $16,574 $ 4,527 $21,101
============================================================
</TABLE>
Changes in Financial Condition
Total assets increased by $121.1 million, or 4.4%, to $2.9 billion at June 30,
2000 from June 30, 1999. The increase in overall assets was primarily due to an
increase in net loans of $260.3 million, or 19.8%, offset in part by a decrease
in mortgage-backed and mortgage-related securities and investment securities.
Mortgage-backed and mortgage-related securities decreased by $102.2 million, or
11.8%, from $866.8 million at June 30, 1999 to $764.6 million at June 30, 2000.
Investment securities at June 30, 2000 totaled $257.5 million, a decrease of
$40.1 million, or 13.5%, compared to $297.6 million at June 30, 1999. The
overall increase in the level of assets was primarily the result of significant
deposit inflows, as well as an increase in borrowed funds.
The Bank continues to experience increased loan growth. For fiscal 2000, gross
loans receivable increased by $259.2 million, or 19.5%, to $1.6 billion,
compared to $1.3 billion at June 30, 1999. The substantial increase in net loans
was due primarily to originations of $589.6 million generated during fiscal year
ended June 30, 2000, offset by the sale of $87.7 million of one- to four-family
mortgage loans, $1.6 million in student loan sales, securitization of $93.6
million of originated one-to four-family fixed rate mortgage loans and net
amortization and prepayments of $147.0 million. During the fourth quarter of
fiscal 2000, the Bank securitized $93.6 million of originated fixed rate one- to
four-family mortgage loans in exchange for a like amount of FNMA pass-through
securities, recorded these securities in the Bank's securities portfolio and
retained the related servicing rights. Loan originations for fiscal 2000 were
primarily comprised of multifamily and one- to four-family mortgage loans.
Multifamily mortgage loan originations for fiscal 2000 totaled $277.4 million,
bringing the total multifamily loan portfolio to $549.2 million, or 34.9% of net
loans at June 30, 2000. Total one- to four-family loan production for fiscal
2000 was $243.0 million.
<PAGE>19
Total liabilities at June 30, 2000 were $2.6 billion, an increase of $184.9
million, or 7.7%, from $2.4 billion at June 30, 1999. Total deposits increased
by $170.4 million, or 10.5%, to $1.8 billion at June 30, 2000. The Bank's core
deposits increased by $75.6 million, or 7.4%, at June 30, 2000 to $1.1 billion,
resulting in a core deposit to total deposit ratio of approximately 61.3%. The
increase in the Bank's core deposits were attributable to a $38.9 million
increase in total demand deposits, or 23.0%, and a $36.7 million increase in
savings, N.O.W. and money market accounts. The Bank also experienced an increase
of $94.8 million, or 15.8%, in certificates of deposit from $598.5 million at
June 30, 1999 to $693.3 million at June 30, 2000.
Additionally, the Bank continues to place a level of emphasis on the utilization
of borrowed funds to fund asset growth. In this regard, at June 30, 2000 and
June 30, 1999, the Bank had total borrowings of $773.7 million and $757.8
million, respectively. 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 decreased by $63.8 million to $306.4 million at June
30, 2000 from $370.2 million at June 30, 1999. The overall decrease was
primarily due to the repurchase of 3.6 million shares of the Company's common
stock, year to date cash dividends paid of $13.8 million and a $26.7 million
decrease in the fair value on securities available-for-sale, net of tax. These
decreases were offset by the earnings reported for fiscal 2000 of $36.3 million
and the amortization of $5.5 million for the unallocated and unearned shares of
common stock held by the Company's stock-related benefit plans.
Non-Performing Assets
Non-performing loans totaled $4.7 million, or 0.30% of total loans at June 30,
2000, as compared to $5.9 million, or 0.45% of total loans, at June 30, 1999. At
June 30, 2000, the Bank's real estate owned consisted of foreclosed assets
totaling $509,000, which at such date was comprised of three one- to four-family
properties and one commercial property.
At June 30, 2000, the Bank had $2.6 million of assets designated as
"Substandard," consisting of 22 loans, no assets classified as "Doubtful," and
$13,000 of assets classified as "Loss" consisting of seven consumer loans. At
June 30, 2000 the Bank had $2.1 million of assets designated "Special Mention,"
consisting of 27 loans, which were designated "Special Mention" due to past loan
delinquencies.
Non-accrual loans totaled $4.7 million as of June 30, 2000, which included 45
one- to four-family loans, with an aggregate balance of $3.9 million, and three
non-residential loans totaling $0.7 million and eight other loans totaling
$60,000.
For the twelve-month period ended June 30, 2000, the Company's loan loss
provision was $1.2 million as compared to $2.6 million for the prior year's
period. The Company's allowance for loan losses totaled $14.7 million at June
30, 2000 and $13.9 million at June 30, 1999, which represents a ratio of
allowance for loan losses to non-performing loans of 311.5% and 237.1%,
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 June 30, 2000 is adequate and sufficient reserves
are presently maintained to cover potential losses. For the fiscal year ended
June 30, 2000, the Company experienced net charge-offs of $386,200.
Comparison of Operating Results For the Years Ended June 30, 2000 and June
30, 1999
General. The Company reported net income for the fiscal year ended June 30, 2000
of $36.3 million, or diluted earnings per share of $1.35, an increase of $9.6
million as compared to the $26.6 million reported for the same period last year.
Core earnings for the fiscal year ended June 30, 2000 increased 41.5% to a
record $35.7 million, or core diluted earnings per share of $1.33, also an
increase of 41.5%, as compared with $0.94 core diluted earnings per share, or
$23.2 million reported for the same period last year. Core earnings for fiscal
2000, excludes net losses of $6.7 million on sales of securities ($4.4 million
net of income-tax benefits) and a $4.4 million income tax benefit related to the
Foundation. The income-tax benefit is due to a valuation adjustment reflecting
the fair market value of stock contributed to the Foundation at its inception.
Core earnings for fiscal 1999, excludes net gains on sales of securities and
loans of $3.6 million and a $2.0 million curtailment gain on the freezing of the
Bank's defined benefit pension plan.
<PAGE>20
Interest Income. The Company reported total interest income of $194.5 million
for the twelve-month period ended June 30, 2000, representing an increase of
$62.0 million, or 46.7%, as compared to the same period in 1999. The increase in
interest income was attributable primarily to the growth in average
interest-earning assets of $810.0 million and a 19 basis point increase in the
average yield on interest-earning assets. The overall increase in the level of
interest-earning assets was primarily the result of an increase in borrowed
funds to fund growth in the mortgage loan and securities portfolios, assets
acquired from Bayonne and Ironbound, as well as deposit inflows.
Interest income on loans increased $41.2 million, or 57.1%, to $113.5 million
for the twelve-month period ended June 30, 2000, as compared to the $72.2
million reported for the comparable period in 1999. This increase was the result
of growth in the average balance of loans outstanding of $548.5 million, due
primarily to increased originations of multifamily and one- to four-family real
estate loans and loans acquired through the recently completed acquisitions. The
average yield on the overall loan portfolio remained relatively unchanged at
7.57% and 7.60% for the twelve-month period ended June 30, 2000 and 1999,
respectively.
Interest income on debt and equity securities increased $6.0 million, or 31.3%,
from $19.0 million for the twelve-month period ended June 30, 1999, to $25.0
million for the same period in 2000. This increase is mainly attributable to the
growth in the average balance of debt and equity securities, primarily
investments in financial bonds and FHLB stock, as well as a 53 basis point
increase in the average yield on the debt and equity portfolio.
Interest income on mortgage-backed and mortgage-related securities increased
$15.7 million, or 39.2%, from $39.9 million reported for the twelve-month period
ended June 30, 1999, to $55.6 million for the same period in 2000. This increase
was due primarily to an increase in the average balance of mortgage-backed and
mortgage-related securities of $219.6 million as a result of the investment of
borrowed funds and mortgage-backed and mortgage-related securities acquired
through the recently completed acquisitions and a 20 basis point increase in the
average yield on the mortgage-backed and mortgage-related securities portfolio.
Interest Expense. Interest expense increased $36.0 million, or 57.9%, from $62.2
million for the twelve-month period ended June 30, 1999, to $98.3 million for
the twelve-month period ended June 30, 2000. The average cost of the Bank's
interest-bearing liabilities increased by 8 basis points to 4.23% for the
twelve-month period ended June 30, 2000. Interest expense on deposits increased
$18.8 million, or 52.3%, from $35.9 million for the twelve-month period ended
June 30, 1999, to $54.7 million for the twelve-month period ended June 30, 2000.
The increase reflects a $501.3 million increase in the average balance of
interest-bearing deposits, primarily attributable to a $220.1 million increase
in the average balance of certificates of deposit and a $236.8 million increase
in the average balance of savings deposit accounts. This increase can be
primarily attributable to the opening of two full-service banking facilities and
one public accommodation office on Staten Island, the opening of an Ironbound
Bank divisional full-service banking facility in Union, New Jersey and deposits
acquired through the recently completed acquisitions. In addition, the Bank's
strategy over the past several years has been to attract more certificates of
deposit through the offering of additional certificate of deposit products and
related marketing of commercial deposit accounts.
Interest expense on borrowed funds for the twelve-month period ended June 30,
2000 was $43.6 million, an increase of $17.3 million as compared to the $26.3
million reported in the same period in 1999. The increase in interest expense on
borrowed funds was attributable to the growth in the average balance of borrowed
funds of $320.9 million, offset in part by a 27 basis point decrease in the
average cost on borrowed funds. 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. As of June
30, 2000, the Bank had $773.7 million of borrowings outstanding, an increase of
$15.9 million, or 2.1%, as compared to the $757.8 million of borrowings
outstanding as of June 30, 1999. 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 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.
Provision for Loan Losses. The Bank's provision for loan losses for the
twelve-month periods ended June 30, 2000 and 1999 was $1.2 million and $2.6
million, respectively. The provision for the twelve-month period ended June 30,
2000 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, the introduction of new lending products by the Bank and the
seasoning of such new products, as well as the level of its non-performing
loans. Management believes, based upon information currently available, that its
allowance for loan losses is adequate to cover future loan losses. To the extent
the Bank increases its investment in multifamily loans, commercial real estate,
commercial and other loans, which entail higher risk than one- to four-family
loans, the Bank may decide to increase its allowance for loan losses through
additional loan loss provisions, which may adversely affect net income. In
addition, if general economic conditions and real estate values within the
Bank's primary lending areas 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.
<PAGE>21
Non-Interest Income. Exclusive of net gains and losses from the sales of
securities and loans, and a non-recurring $2.0 million curtailment gain on the
freezing of the Bank's pension plan in fiscal 1999, total non-interest income
for the twelve-month period ended June 30, 2000 was $13.1 million, as compared
to the $5.8 million reported for the same period in 1999. The increased level of
non-interest income is primarily due to an overall increase in deposit fee
income, fee income generated from the Bayonne and Ironbound acquisitions, ATM
fee income and advisory fee income from the Company's investment in Peter B.
Cannell & Co. Inc. Additionally, the Bank purchased a Bank Owned Life Insurance
Policy ("BOLI"), which accounted for approximately $3.0 million of other income.
Non-Interest Expense. Non-interest expense totaled $52.3 million for the
twelve-month period ended June 30, 2000, an increase of $15.9 million, or 43.8%,
as compared to the $36.4 million reported for the same period of the prior year.
The increased level of non-interest expense was mainly attributable to increased
compensation and employee benefit expenses, goodwill amortization and other
expenses associated with the Bayonne and Ironbound acquisitions. Additionally,
the Bank recognized increases in non-interest expenses as a result of the Bank's
opening of a public accommodation office and the opening of two new full-service
branches in Staten Island and a full service branch in Union, New Jersey.
Income Taxes. The Company's effective consolidated tax rate for the fiscal year
period ended June 30, 2000, was 27.4% as compared to 37.8% reported for the
comparable period in 1999. The fiscal year ended June 30, 2000 effective tax
rate includes the effect of a $4.4 million income tax benefit due to a valuation
adjustment reflecting the fair market value of stock contributed to the
Foundation at its inception. Excluding the effect of the aforementioned income
tax benefit, the Company's effective tax rate was 36.2%. 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 Years Ended June 30, 1999 and June
30, 1998
General. The Company reported net income for the fiscal year ended June 30, 1999
of $26.6 million, or diluted earnings per share of $1.07, an increase of $22.1
million as compared to the $4.5 million reported in fiscal 1998. Core earnings
for the fiscal year ended June 30, 1999 increased 58.7% to a record $23.3
million, or core diluted earnings per share of $0.94, as compared to $14.7
million reported for the comparable prior fiscal year period. Core earnings for
fiscal 1999 excludes net gains on sales of securities and loans of $3.6 million
and a $2.0 million curtailment gain on the freezing of the Bank's defined
benefit pension plan. Core earnings for fiscal 1998 excludes the impact of a
non-recurring contribution relating to the funding of the Foundation of $19.6
million ($11.2 million after tax) and net gains on sales of securities and loans
of $163,000 for the fiscal year ended June 30, 1998. Net loss per share since
the conversion to a public company on February 18, 1998 to June 30, 1998 was
$0.16.
The Foundation was established and funded as part of the Conversion to a New
York State chartered stock savings bank. At the close of the Conversion, the
Company funded the Foundation with a contribution of 1,957,300 shares of common
stock resulting in a one-time, non-recurring charge of $19.6 million ($11.2
million after tax). The Foundation is dedicated to charitable purposes in the
communities served by Richmond County Savings Bank.
Interest Income. The Company reported total interest income of $132.6 million
for the fiscal year ended June 30, 1999, representing an increase of $45.8
million, or 52.8%, as compared to the same period in 1998. The increase in
interest income was attributable primarily to the growth in average
interest-earning assets of $682.6 million, offset in part by a 19 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 an increase
in borrowed funds to fund growth in the mortgage loan and securities portfolios,
utilizing the net conversion proceeds, assets acquired from Bayonne Bancshares
and Ironbound Bank and significant deposit inflows experienced throughout fiscal
1999.
Interest income on loans increased $27.9 million, or 62.8%, to $72.2 million for
the fiscal year ended June 30, 1999, as compared to the $44.4 million reported
for the comparable period in 1998. This increase was the result of growth in the
average balance of real estate loans outstanding, due primarily to increased
originations of multifamily and one- to four-family real estate loans and loans
acquired through the recently completed acquisitions, offset in part by a
decrease in the average yield on the overall loan portfolio to 7.60% for the
fiscal year ended June 30, 1999, as compared to 8.04% for the same period in
fiscal 1998.
Interest income on debt and equity securities increased $4.4 million, or 30.0%,
from $14.6 million for the fiscal year ended June 30, 1998, to $19.0 million for
the same period in fiscal 1999. This increase is mainly attributable to the
growth in the average balance of debt and equity securities, primarily
investments in financial bonds and FHLB Stock, as well as a 53 basis point
increase in the average yield on the debt and equity portfolio.
<PAGE>22
Interest income on mortgage-backed and mortgage-related securities increased
$16.3 million, or 69.0%, from $23.6 million for the fiscal year ended June 30,
1998, to $39.9 million for the fiscal year ended June 30, 1999. This increase
was due primarily to an increase in the average balance of mortgage-backed and
mortgage-related securities of $279.3 million, resulting from the investment of
net conversion proceeds, the investment of borrowed funds and mortgage-backed
and mortgage related securities acquired through the recently completed
acquisitions. The increase was offset in part by a decrease in the average yield
on the mortgage-backed and mortgage-related securities portfolio to 6.34% for
the fiscal year ended June 30, 1999, as compared to 6.74% for the same period in
fiscal 1998.
Interest Expense. Interest expense increased $24.7 million, or 65.9%, from $37.5
million for the fiscal year ended June 30, 1998, to $62.2 million for the fiscal
year ended June 30, 1999. Interest expense on deposits increased $4.2 million,
or 13.2%, from $31.7 million for the fiscal year ended June 30, 1998, to $35.9
million for the fiscal year ended June 30, 1999. The increase reflects a $150.4
million increase in the average balance of interest-bearing deposits, primarily
attributable to a $98.1 million increase in the average balance of certificates
of deposit and a $32.5 million increase in the average balance of savings
deposit accounts. This increase can mainly be attributable to the opening of two
full-service banking facilities and one public accommodation office on Staten
Island and deposits acquired through the recently completed acquisitions. In
addition, the Bank's strategy over the past several years has been to attract
more certificates of deposit through additional certificate of deposit products
and related marketing of commercial deposit accounts. Furthermore, in fiscal
1998, the Bank realized a one time $895,000 expense relating to interest paid on
non-depository stock subscription funds received in connection with the
Conversion.
Interest expense on borrowed funds for the fiscal year ended June 30, 1999 was
$26.3 million, an increase of $20.5 million as compared to the $5.8 million
reported in fiscal 1998. The Bank continues to place a greater level of emphasis
on the utilization of borrowed funds to fund asset growth and to leverage the
Bank's capital position to improve returns on equity. For the fiscal year ended
June 30, 1999, the Bank had $757.8 million of borrowings outstanding, an
increase of $451.8 million, or 147.7%, as compared to the $306.0 million of
borrowings outstanding as of June 30, 1998. The Bank may continue to increase
such emphasis on borrowed funds, which may result in an increase in the Bank's
overall cost of funds. The Bank's current strategy is to invest such borrowed
funds primarily in mortgage-backed and mortgage-related securities. This
strategy is intended to incrementally increase net interest income, although it
may have the effect of incrementally decreasing net interest rate spread.
Consequently, the average cost of the Bank's interest-bearing liabilities
increased from 3.93% for the fiscal year ended June 30, 1998, to 4.15% for the
fiscal year ended June 30, 1999.
Provision for Loan Losses. The Bank's provision for loan losses was $2.6 million
for the fiscal year ended June 30, 1999, as compared to $2.2 million reported in
fiscal 1998. The provision for fiscal 1999 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, the introduction of
new lending products by the Bank and the seasoning of such new products, as well
as the level of its non-performing loans. Management believes, based upon
information currently available, that its allowance for loan losses is adequate
to cover future loan losses. To the extent the Bank increases its investment in
multifamily loans, commercial real estate, commercial and other loans, which
entail higher risk than one- to four-family loans, the Bank may decide to
increase its allowance for loan losses through additional loan loss provisions,
which may adversely affect net income. In addition, if general economic
conditions and real estate values within the Bank's primary lending area
decline, the level of non-performing loans may increase, resulting in larger
provisions for loan losses which, in turn, would also adversely affect net
income.
Non-Interest Income. Exclusive of net gains and losses from the sales of
securities and loans and a $2.0 million curtailment gain on the freezing of the
Bank's pension plan, total non-interest income for the fiscal year ended June
30, 1999 was $5.8 million, as compared to the $3.4 million reported for the same
period in fiscal 1998. The increased level of non-interest income is primarily
due to fee income generated from the Bayonne Bancshares and Ironbound Bank
acquisitions and an overall increase in deposit fee income, ATM fee income and
fee income generated from the sale of annuities and mutual funds. Additionally,
in the fourth quarter of fiscal 1999 the Bank purchased a Bank Owned Life
Insurance Policy ("BOLI"), which accounted for approximately $253,000 of other
income. Net gains on the sale of securities and loans for fiscal 1999 was $3.6
million, which were primarily due to net gains of $3.1 million from the sale of
equity and investment securities, and $444,000 of net gains realized from the
sale of the Bank's student loan portfolio.
Non-Interest Expense. Non-interest expense totaled $36.4 million for the fiscal
year ended June 30, 1999, an increase of $11.9 million, as compared to the $24.5
million, excluding the charitable contribution, reported for the fiscal year
ended June 30, 1998. The increased level of non-interest expense was mainly
attributable to increased compensation
<PAGE>23
expense, goodwill amortization and other expenses associated with the Bayonne
Bancshares and Ironbound Bank acquisitions, as well as increases in compensation
and employee benefits, including senior management additions, compensation costs
associated with the establishment of the Bank's new Multifamily Lending
Department, the addition of the ESOP and the MRP. 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 opening of two new full-service
branches in Staten Island and the expected opening of a full-service branch in
Union, New Jersey in fiscal 2000.
Income Taxes. The Company's effective consolidated tax rate for the fiscal year
ended June 30, 1999, was 37.8% as compared to 31.4% reported for the comparable
period in 1998. The fiscal year ended June 30, 1998 rate includes the effect of
funding the Foundation. Excluding the effect of the Foundation, the Company's
effective tax rate was 40.5%. 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. For the fiscal
year periods ended June 30, 2000 and 1999, the Bank's loan originations totaled
$589.6 million and $550.4 million, respectively. Purchases of mortgage-backed,
mortgage-related and investment securities totaled $88.4 million and $480.7
million for the fiscal year periods ended June 30, 2000 and 1999, 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, borrowed funds from the FHLB and
repurchase agreements, and the net proceeds received from the Conversion. As of
June 30, 2000, the Bank experienced a net increase in total deposits of $170.4
million, or 10.5%, from $1.6 billion at June 30, 1999. Deposit flows are
affected by the level of interest rates, the interest rates and products offered
by local competitors and the Bank and other factors.
The Bank closely monitors its liquidity position on a daily basis. Excess
short-term liquidity is invested in overnight federal funds sold. In the event
the Bank should require funds beyond its ability to generate them internally,
additional sources of funds are available through repurchase agreements and
advances from the FHLB. The Bank has recently begun to place a greater level of
emphasis on the utilization of borrowed funds to fund asset growth. In this
regard, at June 30, 2000, the Bank had total borrowings of $773.7 million, of
which $758.7 million were in the form of advances from the FHLB and
approximately $15.0 million were in the form of repurchase agreements. 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 $164.5 million at June 30, 2000, were comprised of
$41.3 million in one- to four-family loan commitments, $15.7 million in
multifamily loan commitments, $1.2 million in commercial real estate loan
commitments, $68.1million in construction loan commitments, $14.6 million in
commercial loan commitments, $19.4 million in home equity loan commitments and
$4.2 million in other loan commitments. 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
June 30, 2000, totaled $547.6 million. Based upon past experience and the Bank's
current pricing strategy, management believes that a significant portion of such
deposits will remain with the Bank.
At June 30, 2000, the Bank exceeded all of its regulatory capital requirements
with a leverage capital level of $221.5 million, or 7.7% of adjusted assets,
which is above the required level of $114.2 million, or 4.0% of adjusted assets
and risk-based capital of $236.2 million, or 14.8% of adjusted assets, which is
above the required level of $127.9 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 June 30,
2000, cash and due from banks and federal funds sold totaled $47.7 million, or
1.7% of total assets.
<PAGE>24
Asset and Liability Management and the Management of Interest Rate Risk
General
The principal objective of the Company's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company's
Board of Directors reviews the Company's interest rate risk position at least
quarterly. The Company's Asset/Liability Committee is comprised of the Company's
senior management, under the direction of the Board of Directors, with senior
management responsible for reviewing, with the Board of Directors, its
activities and strategies, the effect of those strategies on the Company's net
interest margin, the market value of the portfolio and the effect that changes
in the interest rates will have on the Company's portfolio and the Company's
exposure limits.
Discussion of Market Risk
As a financial institution, the Company's primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact
both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. All significant
interest rate risk management procedures are performed at the Company level.
Based upon the Company's nature of operations, the Company is not subject to
foreign currency exchange or commodity price risk. The Company's real estate
loan portfolio, concentrated primarily within the New York metropolitan area and
increasingly in New Jersey and the Philadelphia metropolitan area is subject to
risks associated with these local economies. The Company does not own any
trading assets.
In recent years, the Company has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of fixed-rate
mortgage loans having terms to maturity of not more than fifteen years,
adjustable-rate loans and consumer loans consisting primarily of home equity
loans and lines of credit; (2) selling from time to time, fixed-rate mortgage
loans with terms of more than fifteen years without recourse and on a servicing
retained basis; and (3) investing in fixed rate mortgage-backed and
mortgage-related securities with estimated average lives of three to seven
years. In pursuing the above, the Company considered the relative stability of
its core deposits. The actual duration of mortgage loans and mortgage-backed
securities can be significantly impacted by changes in mortgage prepayment and
market interest rates. Mortgage prepayment rates will vary due to a number of
factors, including the regional economy in the area where the underlying
mortgages were originated, seasonal factors, demographic variables and the
assumability of the underlying mortgages. However, the largest determinants of
prepayment rates are prevailing interest rates and related mortgage refinancing
opportunities, as was the case over the last fiscal year. Management monitors
interest rate sensitivity so that adjustments in the asset and liability mix,
when deemed appropriate, can be made on a timely basis. The Company currently
does not participate in hedging programs, interest rate swaps or other
activities involving the use of off-balance sheet derivative financial
instruments.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At June 30, 2000, the Company's one-year gap position was
negative 17.1%. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. 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.
<PAGE>25
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 2000, which are anticipated
by the Company, based upon certain assumptions, to reprice or mature in each of
the future time periods shown (the "GAP Table"). Except as stated below, the
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
June 30, 2000, on the basis of contractual maturities, anticipated prepayments,
and scheduled rate adjustments within a three month period and subsequent
selected time intervals. For loans on residential properties, adjustable-rate
loans, and fixed-rate loans, prepayment rates were assumed to range from 5% to
24% annually. Mortgage-backed and mortgage-related securities were assumed to
prepay at rates based on their respective previous three month prepayment
experience. Savings and N.O.W. accounts were assumed to decay at 10%, 5%, 5%,
40%, 20%, and 20%, and money market savings accounts were assumed to decay at
25%, 15%, 10%, 50%, 0% and 0%, for the periods of three months or less, three to
six months, six to twelve months, one to three years, three to five years and
more than five years, respectively. These assumptions are generally based on the
FDIC's deposit decay guidelines and the Bank's historical experience. Prepayment
and deposit decay rates can have a significant impact on the Company's estimated
gap. While the Company believes such assumptions to be reasonable, there can be
no assurance that assumed prepayment rates and decay rates will approximate
actual future loan prepayment and deposit withdrawal activity.
<TABLE>
<CAPTION>
At June 30, 2000
----------------------------------------------------------------------------------
3 More than More than More than More than
Months 3 Months to 6 Months to 1 Year to 3 Years to More than
or Less 6 Months 1 Year 3 Years 5 Years 5 Years Total
----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Debt and equity securities(2)............ $ 85,419 $ 473 $ 11,647 $ 25,442 $ 4,418 $ 130,086 $ 257,485
Mortgage-backed and
mortgage-related securities(2).......... 22,976 23,082 61,744 148,343 122,312 386,150 764,607
Real estate loans,net(3)(4).............. 68,532 63,118 122,629 411,179 348,611 546,910 1,560,979
Other loans(4)........................... 1,574 1,406 2,396 6,125 3,616 6,300 21,417
Other interest-earning assets............ 46,711 -- -- -- -- -- 46,711
FHLB stock............................... -- -- -- -- -- 38,873 38,873
----------------------------------------------------------------------------------
Total interest-earning assets........... $ 225,212 $ 88,079 $ 198,416 $ 591,089 $ 478,957 $1,108,319 $2,690,072
==================================================================================
Interest-bearing liabilities:
Money market savings accounts............ $ 10,382 $ 6,229 $ 4,153 $ 20,764 $ -- $ -- $ 41,528
N.O.W. accounts.......................... 7,336 3,668 3,668 29,342 14,671 14,671 73,356
Savings accounts......................... 75,902 37,951 37,951 303,609 151,805 151,805 759,023
Certificates of deposit.................. 134,347 139,440 276,682 122,892 14,457 5,458 693,276
Borrowings............................... 103,500 15,000 147,000 383,190 125,000 -- 773,690
----------------------------------------------------------------------------------
Total interest-bearing liabilities...... $ 331,467 $ 202,288 $ 469,454 $ 859,797 $ 305,933 $ 171,934 $2,340,873
----------------------------------------------------------------------------------
Interest sensitivity gap(5)................. $(106,225) $(114,209) $(271,038) $(268,708) $ 173,024 $ 936,385
=======================================================================
Cumulative interest sensitivity gap......... $(106,255) $(202,464) $(491,502) $(760,210) $(587,186) $ 349,199
=======================================================================
Cumulative interest sensitivity gap
as a percentage of total assets........... (3.69)% (7.65)% (17.06)% (26.39)% (20.38)% 12.12%
Cumulative interest sensitivity gap
as a percentage of total interest-
earning assets........................... (3.97)% (8.24)% (18.36)% (28.26)% (21.83)% 12.98%
Cumulative net interest-earning
assets as a percentage of cumulative
interest-bearing liabilities............. (32.06)% (108.99)% (104.70)% (88.42)% (191.93)% 203.10%
</TABLE>
(1)Interest-earning assets are included in the period in which the balances are
expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2)Debt and equity and mortgage-backed and mortgage-related securities are shown
at carrying value. Equity securities include callable preferred stock, the
maturities of which have been assumed to be the date on which they are
initially callable.
(3)For purposes of the gap analysis, real estate loans, commercial loans, and
consumer/installment loans are shown excluding adjustments for allowance for
loan losses and unearned fees of $14.7 million and $1.4 million,
respectively.
(4)For purposes of the gap analysis, non-performing loans are not included.
(5)Interest sensitivity gap represents the difference between net
interest-earning assets and interest-bearing liabilities.
<PAGE>26
Certain shortcomings are inherent in the method of analysis presented in
the GAP Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features, which restrict changes in interest rates both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.
Net Portfolio Value. The Company's interest rate sensitivity is also
monitored by management through the use of a model, which generates estimates of
the change in the Company's net portfolio value ("NPV") over a range of interest
rate scenarios. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts. The NPV ratio, under any interest
rate scenario, is defined as the NPV in that scenario divided by the market
value of assets in the same scenario. The model assumes estimated loan
prepayment rates, reinvestment rates and deposit decay rates similar to the
assumptions utilized for the GAP Table. The following NPV Table sets forth the
Company's NPV as of June 30, 2000.
<TABLE>
<CAPTION>
Change in
Interest Rates
In Basis Points NPV as % of Portfolio
(Rate Shock) Net Portfolio Value Value of Assets
-------------------------------------------------------------------------------------------------------
% %
Amount $ Change Change NPV Ratio Change(1)
----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
200................................... $317,334 $(95,571) (23.1)% 11.76% (17.88)%
100................................... 368,354 (44,551) (10.8) 13.19 (7.89)
Static................................ 412,905 -- -- 14.32 --
(100).................................. 475,936 63,031 15.3 15.97 11.52
(200).................................. 459,574 46,669 11.3 15.09 5.38
</TABLE>
(1) Based on the portfolio value of the Company's assets assuming no
change in interest rates.
As is the case with the GAP Table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV Table presented assumes that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Also, the model does not take into account the
Company's business or strategic plans. Accordingly, although the NPV Table
provides an indication of the Company's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Company's net interest income and may differ from actual results.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes presented herein, have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollar amounts without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
<PAGE>27
The Year 2000 Project
Over the past several quarters, the Company reported, on a regular basis,
potential concerns relating to the "Year 2000 Problem," which centered upon the
possible inability of computer systems to recognize the change into the year
2000. The Company did not experience any significant interruptions in any
computer operations related to the Year 2000 Problem. The Company's loan and
deposit data processing functions were not affected by the change into the year
2000. Additionally, the Company did not encounter any significant delays in loan
payments from our borrowers due to difficulties they may have encountered as a
result of the Year 2000 Problem. The Company estimates that the total costs
incurred related to the Year 2000 Problem, from inception to date, did not
exceed $300,000, and the Company does not anticipate any additional costs to be
incurred related to this matter.
Recent Legislation
Recent legislation designed to modernize the regulation of the financial
services industry expands the ability of bank holding companies to affiliate
with other types of financial services companies such as insurance companies and
investment banking companies. However, the legislation provides that companies
that acquire control of a single savings association after May 4, 1999 (or that
filed an application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed formerly allowed for a unitary savings
and loan holding company. Rather, these companies will have authority to engage
in the activities permitted "a financial holding company" under the new
legislation, including insurance and securities-related activities, and the
activities currently permitted for multiple savings and loan holding companies,
but generally not in commercial activities. The authority for unrestricted
activities is grandfathered for unitary savings and loan holding companies, such
as the Company, that existed prior to May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
Company.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this Annual Report includes certain
forward-looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices.
Impact of New Accounting Standards
For discussion regarding the impact of new accounting standards, refer to Note 1
of Notes to Consolidated Financial Statements.
<PAGE>28
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30,
2000 1999
------------------------
(In thousands, except
per share amounts)
<S> <C> <C>
ASSETS
Cash and due from banks................................. $ 47,684 $ 55,773
Federal funds sold...................................... -- 17,775
Securities held to maturity:
Mortgage-backed and mortgage-related securities
(estimated market value of $54,068).................. 57,161 -
Securities available for sale:
Investment securities.............................. 257,485 297,611
Mortgage-backed and mortgage-related securities.... 707,446 866,844
Loans receivable:
Real estate loans.................................. 1,567,080 1,301,118
Other loans........................................ 21,426 26,294
Less allowance for loan losses..................... (14,698) (13,885)
------------------------
Total loans receivable, net............................. 1,573,808 1,313,527
Federal Home Loan Bank stock............................ 38,873 38,388
Banking premises and equipment, net..................... 26,115 27,353
Accrued interest receivable............................. 18,170 15,568
Other real estate owned................................. 509 997
Goodwill................................................ 43,324 43,382
Other assets............................................ 110,646 82,877
------------------------
Total assets...................................... $2,881,221 $2,760,095
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits......................................... $ 207,894 $ 169,007
Savings, N.O.W. & Money market accounts................. 873,907 842,465
Certificates of deposit................................. 693,276 598,470
Escrow accounts......................................... 14,799 9,528
------------------------
Total deposits.................................... 1,789,876 1,619,470
Securities sold under agreements to repurchase.......... 15,000 94,000
Borrowings.............................................. 758,690 663,832
Accrued expenses & other liabilities.................... 11,245 12,582
------------------------
Total liabilities................................. 2,574,811 2,389,884
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued................................. -- --
Common stock, $.01 par value, 75,000,000 shares
authorized; 32,737,134 shares issued;
28,065,972 and 31,662,839 shares outstanding,
at of June 30, 2000 and June 30, 1999, respectively... 327 327
Additional paid-in-capital.............................. 329,718 330,122
Retained earnings-substantially restricted.............. 145,231 122,784
Unallocated common stock held by ESOP.................. (30,249) (31,978)
Unearned compensation MRP stock (13,147) (16,885)
Treasury stock, at cost, 4,671,162 and 1,074,295
shares at June 30, 2000 and
June 30, 1999, respectively........................... (82,541) (17,967)
Accumulated other comprehensive income:
Net unrealized loss on securities, net of tax......... (42,929) (16,192)
------------------------
Total stockholders' equity.................... 306,410 370,211
------------------------
Total liabilities and stockholders' equity.............. $2,881,221 $2,760,095
========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>29
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------
2000 1999 1998
--------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Interest income
Loans.............................................. $113,454 $ 72,231 $ 44,375
Debt and equity securities......................... 24,999 19,040 14,645
Mortgage-backed and mortgage-related securities.... 55,572 39,914 23,622
Federal funds sold................................. 369 1,277 3,822
Other.............................................. 143 112 290
--------------------------------------
Total interest income........................... 194,537 132,574 86,754
--------------------------------------
Interest expense
Deposits........................................... 54,710 35,931 31,734
Securities sold under repurchase agreements........ 1,692 686 1,059
Borrowed funds..................................... 41,867 25,614 4,719
--------------------------------------
Total interest expense.......................... 98,269 62,231 37,512
--------------------------------------
Net interest income............................. 96,268 70,343 49,242
Provision for loan losses............................ 1,200 2,550 2,200
--------------------------------------
Net interest income after
provision for loan losses..................... 95,068 67,793 47,042
--------------------------------------
Non-interest income
Fee income......................................... 10,007 5,511 3,397
Net (losses)gains on sales of securities and loans. (5,973) 3,576 163
Curtailment gain on pension plan................... -- 2,021 --
Other.............................................. 3,142 281 41
--------------------------------------
Total non-interest income....................... 7,176 11,389 3,601
--------------------------------------
Non-interest expenses
Salaries and employee benefits..................... 27,891 20,988 12,929
Occupancy costs.................................... 6,110 3,867 3,181
Computer service fees.............................. 5,550 3,598 2,743
Advertising........................................ 1,893 1,803 1,135
FDIC insurance premiums............................ 439 175 154
Contribution to RCS Foundation..................... -- -- 19,558
Other.............................................. 7,099 4,785 4,033
--------------------------------------
Total general and administrative................ 48,982 35,216 43,733
Amortization of goodwill and other intangibles..... 3,321 1,144 313
--------------------------------------
Total non-interest expense...................... 52,303 36,360 44,046
--------------------------------------
Income before income taxes........................... 49,941 42,822 6,597
Provision for income taxes........................... 13,672 16,178 2,071
--------------------------------------
Net income...................................... $ 36,269 $ 26,644 $ 4,526
======================================
Earnings (loss) per share:
(since Conversion for fiscal 1998)
Basic......................................... $ 1.36 $ 1.07 $ (0.16)
Diluted....................................... $ 1.35 $ 1.07 $ (0.16)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>30
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Retained Accumulated
Additional Earnings Other
Common Paid-in Substantially Comprehensive
Stock Capital Restricted Income
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $ -- $ -- $100,555 $ 310
Comprehensive income:
Net income............................................ -- -- 4,526 --
Other comprehensive income, net of tax:
Net unrealized gain on certain securities,
net of tax.......................................... -- -- -- 3,660
Comprehensive income..................................
Cash dividends paid on common stock................... -- -- (1,321) --
Issuance of 24,466,250 shares of common
stock in the initial public offering............... 245 234,644 -- --
Issuance of 1,957,300 shares of common
stock to the Foundation............................. 19 19,553 -- --
Open market purchase of common stock by the ESOP...... -- -- -- --
Allocation of ESOP stock.............................. -- 110 -- --
--------------------------------------------------
Balance at June 30, 1998................................ $ 264 $254,307 $103,760 $ 3,970
--------------------------------------------------
Comprehensive income:
Net income............................................ -- -- 26,644 --
Other comprehensive income, net of tax:
Net unrealized loss on certain securities,
net of tax.......................................... -- -- -- (20,162)
Comprehensive income..................................
Cash dividends paid on common stock................... -- -- (7,620) --
Issuance of stock for Ironbound Bankcorp, NJ
acquisition (1,458,842 shares)...................... 14 25,851 -- --
Issuance of stock for Bayonne Bancshares, Inc.
acquisition (8,668,615 shares)...................... 49 62,059 -- --
Common stock repurchased (4,604,213 shares)........... -- --
Treasury stock issued for options exercised
(55,817 shares)..................................... -- -- -- --
Open market purchases of Bayonne Bancshares,Inc.
common stock (464,625 shares)....................... -- -- -- --
Open market purchases of unearned MRP stock........... -- -- -- --
Reissuance of treasury stock...................... -- (12,045) -- --
Allocation of ESOP and MRP stock...................... -- (50) -- --
--------------------------------------------------
Balance at June 30, 1999................................ $ 327 $330,122 $122,784 $(16,192)
--------------------------------------------------
Comprehensive income:
Net income............................................ -- -- 36,269 --
Other comprehensive income, net of tax:
Net unrealized loss on certain securities,
net of tax.......................................... -- -- -- (26,737)
Comprehensive income....................................
Adjustments............................................. -- 255 -- --
Cash dividends paid on common stock..................... -- -- (13,822) --
Common stock repurchased (3,646,484 shares)............. -- -- -- --
Treasury stock issued for options exercised
(49,617 shares)....................................... -- (366) -- --
Allocation of ESOP and MRP stock........................ -- (293) -- --
--------------------------------------------------
Balance at June 30, 2000................................ $ 327 $329,718 $145,231 $(42,929)
==================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>30 continued
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Unallocated Unearned
Common Common
Stock Held Stock Held Treasury
by ESOP by MRP Stock Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $ -- $ -- $ -- $100,865
Comprehensive income:
Net income............................................ -- -- -- 4,526
Other comprehensive income, net of tax:
Net unrealized gain on certain securities,
net of tax.......................................... -- -- -- 3,660
----------
Comprehensive income.................................. 8,186
----------
Cash dividends paid on common stock................... -- -- -- (1,321)
Issuance of 24,466,250 shares of common
stock in the initial public offering............... -- -- -- 234,889
Issuance of 1,957,300 shares of common
stock to the Foundation............................. -- -- -- 19,572
Open market purchase of common stock by the ESOP...... (34,571) -- -- (34,571)
Allocation of ESOP stock.............................. 865 -- -- 975
-----------------------------------------------------
Balance at June 30, 1998................................ $(33,706) $ -- $ -- $328,595
-----------------------------------------------------
Comprehensive income:
Net income............................................ -- -- -- 26,644
Other comprehensive income, net of tax:
Net unrealized loss on certain securities,
net of tax.......................................... -- -- -- (20,162)
----------
Comprehensive income.................................. 6,482
----------
Cash dividends paid on common stock................... -- -- -- (7,620)
Issuance of stock for Ironbound Bankcorp, NJ
acquisition (1,458,842 shares)...................... -- -- -- 25,865
Issuance of stock for Bayonne Bancshares, Inc.
acquisition (8,668,615 shares)...................... -- (2,820) 63,103 122,391
Common stock repurchased (4,604,213 shares)........... -- -- (75,529) (75,529)
Treasury stock issued for options exercised
(55,817 shares)..................................... -- -- 915 915
Open market purchases of Bayonne Bancshares,Inc.
common stock (464,625 shares)....................... -- -- (6,456) (6,456)
Open market purchases of unearned MRP stock........... -- (16,118) -- (16,118)
Reissuance of treasury stock...................... -- -- -- (12,045)
Allocation of ESOP and MRP stock...................... 1,728 2,053 -- 3,731
------------------------------------------------
Balance at June 30, 1999................................ $(31,978) $(16,885) $(17,967) $370,211
-------------------------------------------------
Comprehensive income:
Net income............................................ -- -- -- 36,269
Other comprehensive income, net of tax:
Net unrealized loss on certain securities,
net of tax.......................................... -- -- -- (26,737)
----------
Comprehensive income.................................... $ 9,532
----------
Adjustments............................................. -- -- -- 255
Cash dividends paid on common stock..................... -- -- -- (13,822)
Common stock repurchased (3,646,484 shares)............. -- -- (65,431) (65,431)
Treasury stock issued for options exercised
(49,617 shares)....................................... -- -- 857 491
Allocation of ESOP and MRP stock........................ 1,729 3,738 -- 5,174
-----------------------------------------------------
Balance at June 30, 2000................................ $(30,249) $(13,147) $(82,541) $306,410
=====================================================
</TABLE>
<TABLE>
<CAPTION>
(1) Disclosure of reclassification amount,
net of tax for the fiscal years ended June 30,: 2000 1999 1998
----------------------------------------
<S> <C> <C> <C>
Net unrealized (depreciation) appreciation
arising during the year..................................... $(32,752) $(16,331) $ 6,179
Less: Reclassification adjustment for net
(losses) gains included in net income........................ (6,015) 3,831 2,519
----------------------------------------
Net unrealized (loss) gain
on certain securities........................................ $(26,737) $(20,162) $ 3,660
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>31
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended June 30,
-------------------------------------
2000 1999 1998
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.............................................. $ 36,269 $ 26,644 $ 4,526
Adjustments to reconcile net income to net
cash provided by operating activities:
Contribution of the Company's common stock
to the RCS Foundation............................. -- -- 19,553
ESOP and MRP expense................................. 5,174 3,731 975
Depreciation......................................... 2,236 1,314 848
Amortization of goodwill............................. 3,008 831 --
Amortization of deposit premium...................... 313 313 313
Amortization of deferred fees, net .................. (790) (311) (446)
Amortization of investment premiums,
net accretion of discount......................... (473) 2,576 482
Provision for loan losses............................ 1,200 2,550 2,200
Amortization of loan premiums, net
accretion of discount.............................. (57) (344) (158)
Net realized losses (gains) on sales of
securities and loans............................... 5,991 (3,514) (30)
Net realized (gains) on sales of other
real estate owned.................................. (25) (55) (133)
Increase in accrued interest receivable.............. (2,602) (1,182) (1,559)
(Decrease) increase in accrued expenses
and other liabilities.............................. (1,082) (12,150) 3,754
Increase in other assets............................. (19,051) (48,532) (5,350)
-------------------------------------
Net cash provided by/(used in)
operating activities............................. 30,111 (28,129) 24,975
Cash Flows from Investing Activities:
Increase in loans receivable, net................... (443,758) (435,520) (114,373)
Loan purchases...................................... -- (1,500) (38,616)
Proceeds from sales of loans........................ 89,360 16,705 --
Investment securities held to maturity:
Maturities and redemptions.......................... -- -- 55,972
Investment securities available for sale:
Sales and redemption................................ 67,787 107,141 108,936
Purchases........................................... (49,156) (96,028) (173,260)
Mortgage-backed and mortgage-related securities
held to maturity:
Maturities and redemptions.......................... -- -- 29,237
Principal collected................................. 402 -- 31,987
Mortgage-backed and mortgage-related securities
available for sale:
Sales and redemptions............................... 94,521 63,931 69,074
Principal collected................................. 117,255 264,460 86,073
Purchases........................................... (39,273) (384,631) (608,059)
Purchases of Federal Home Loan Bank of
New York stock........................................ (485) (11,990) (15,550)
Net additions to banking premises and
equipment............................................. (998) (5,088) (1,884)
Proceeds from sales of other real estate owned.......... 868 350 823
Cash and cash equivalents acquired from
Ironbound Bankcorp, NJ acquisition.................... -- 40,226 --
Cash and cash equivalents acquired from
Bayonne Bancshares, Inc. acquisition................. -- 124,055 --
-------------------------------------
Net cash used in investing activities............... (163,477) (317,889) (569,640)
</TABLE>
(continued on next page)
<PAGE>32
<TABLE>
<CAPTION>
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows - Continued
Years ended June 30,
-------------------------------------
2000 1999 1998
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net increase in deposits.............................. $ 165,135 $ 133,076 $ 64,369
Increase in escrow accounts........................... 5,271 7,620 621
Increase in borrowed funds............................ 15,858 320,000 306,000
Net proceeds of common stock issuance................. -- -- 234,908
Loan to ESOP for open market purchase
of common stock..................................... -- -- (34,571)
Purchase of MRP stock................................. -- (16,118) --
Purchase of treasury shares........................... (65,431) (75,529) --
Net proceeds from issuance of common
stock upon exercise of stock options................ 491 253 --
Cash dividends paid on common stock................... (13,822) (7,620) (1,321)
-------------------------------------
Net cash provided by financing activities....... 107,502 361,682 570,006
Net(decrease)increase in cash and
cash equivalents.................................... (25,864) 15,664 25,341
Cash and cash equivalents at beginning
of the year......................................... 73,548 57,884 32,543
-------------------------------------
Cash and cash equivalents at end of the year.......... $ 47,684 $ 73,548 $ 57,884
=====================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest on deposits and borrowed funds............ $ 98,269 $ 59,914 $ 35,609
Income taxes....................................... 22,776 16,254 6,949
Non-cash investing activities:
Transfer of loans to other real estate owned, net..... $ 355 $ 482 $ 350
Securitization of mortgage loans to mortgage-
backed securities held to maturity................. 57,563 -- --
Securitization of mortgage loans to mortgage-
backed securities available for sale............... 35,864 77,159 --
Transfer of securities from held to maturity
to available for sale.............................. -- -- 273,127
Net unrealized (losses) gains on
available for sale investments..................... (32,752) (16,331) 6,179
</TABLE>
Supplemental Information to the Consolidated Statements of Cash Flows
Relating to Acquisitions:
Non-cash investing and financing transactions relating to the Ironbound
Bankcorp, NJ and Bayonne Bancshares, Inc. for the year ended June 30, 1999 not
reflected in the Consolidated Statements of Cash Flows are listed below:
<TABLE>
<CAPTION>
Ironbound Bayonne
Bankcorp,NJ Bancshares,Inc
--------------------------
(In thousands)
<S> <C> <C>
Fair value of assets acquired, excluding cash and
cash equivalents acquired........................................... $ 74,096 $ 528,372
Liabilities assumed................................................. (103,745) (570,344)
Excess of cost over fair value of net assets acquired............... 15,288 28,925
Stock consideration................................................. (25,865) (111,008)
--------------------------
Cash and cash equivalents acquired $ (40,226) $(124,055)
==========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>33
RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies and Related Matters
Richmond County Financial Corp. (the "Company") was organized under Delaware law
as the savings and loan holding company for Richmond County Savings Bank and its
subsidiaries (the "Bank") in connection with the Bank's conversion from a New
York State chartered mutual savings bank to a New York State chartered stock
savings bank on February 18, 1998 (the "Conversion"). See note 2 for a further
discussion of the Conversion.
The Company's business consists primarily of the business activities of the
Bank. The Bank, together with its two divisional banks, First Savings Bank of
New Jersey and Ironbound Bank, operates 15 banking offices on Staten Island, one
banking office in Brooklyn, eight banking offices in the counties of Essex,
Hudson, and Union, New Jersey, and a multifamily loan processing center in
Jericho, Long Island. The Bank's activities include attracting deposits from the
general public and originating secured residential, multifamily and commercial
real estate loans. The Bank also provides other financial services to customers
primarily within this region. The Bank's primary revenues are derived from these
banking activities and its portfolios of investment and mortgage-backed and
mortgage-related securities. The Bank is subject to competition from other
financial institutions. Deposits at the Bank are insured up to applicable limits
by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation
(the "FDIC"). The Bank is subject to regulation by the FDIC and the New York
State Banking Department.
The following is a description of the significant accounting policies followed
by the Company and its wholly-owned subsidiary. The policies conform to
generally accepted accounting principles and to general practice within the
banking industry:
(a) Principles of Consolidation and Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP) and include the accounts of the
Company and its wholly-owned subsidiary. All significant inter-company balances
and transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from the estimates.
(c) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company defines cash and cash
equivalents as cash and due from banks (including restricted cash), federal
funds sold and time deposits with original maturities of three months or less.
(d) Securities Held to Maturity
Investment securities and mortgage-backed and mortgage-related securities, for
which the Company has the positive intent and ability to hold to maturity, are
stated at cost, adjusted for amortization of premiums and discounts, which are
recognized as adjustments to interest income over the life of the security, so
as to provide a level yield.
(e) Securities Available for Sale
Investment securities and mortgage-backed and mortgage-related securities, not
classified as trading nor as held to maturity, are classified as available for
sale and are carried at fair value. Unrealized gains or losses on securities
available for sale are included in accumulated other comprehensive income, as a
separate component of stockholders' equity, net of applicable income taxes.
Gains and losses on the disposition of securities available for sale are
recognized using the specific identification method.
(f) Loans Receivable
Loans receivable are stated at unpaid principal balances, less unearned
discounts and net deferred origination and commitment fees. Loan origination and
commitment fees and certain direct costs incurred in connection with loan
originations are deferred and amortized to income over the life of the related
loans as an adjustment to yield. Loans held for sale are stated at the lower of
cost or market value.
The Company does not accrue interest on loans that are more than ninety days
delinquent as to principal or interest unless, in the opinion of management,
collection is probable. Any accrued but unpaid interest previously recorded on
these loans is reversed against current period interest income.
<PAGE>34
(g) Allowance for Loan Losses
The allowance for loan losses is based on management's periodic review and
evaluation of the loan portfolio and the potential for loss in light of the
current composition of the loan portfolio, current economic conditions, and
other relevant factors.
Assessing the adequacy of the allowance for loan losses is inherently subjective
as it requires making material estimates, including the amount and timing of
future cash flows expected to be received on impaired loans, which may be
susceptible to significant change. In the opinion of management, the allowance,
when taken as a whole, is adequate to absorb estimated loan losses inherent in
the Company's entire portfolio.
(h) Banking Premises and Equipment
Banking premises and equipment are recorded at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives (3 to 20
years) on a straight-line basis. Leasehold improvements are amortized over the
lives of the respective leases or the service lives of the improvements,
whichever is shorter.
Expenditures for improvements and major renewals are capitalized, while the cost
of ordinary maintenance, repairs and minor improvements is charged to
operations.
(i) Other Real Estate Owned
Other real estate owned, consisting of properties acquired through foreclosure,
is carried at the lower of carrying amount or fair value less cost to sell.
(j) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over the fair value of net assets acquired in the
acquisitions of Bayonne Bancshares, Inc. and Ironbound Bankcorp, NJ, is
amortized using the straight line method over fifteen years. The excess of cost
over fair value of net assets acquired ("goodwill") is evaluated periodically by
the Company for impairment in response to changes in circumstances or events.
(k) Income Taxes
The Company uses the liability method to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured at currently enacted income tax rates applicable to the period in which
they are expected to be realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
(l) Treasury Stock
Repurchases of common stock are recorded as treasury stock at cost.
(m) Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted EPS is calculated
using the same method as basic EPS, but reflects potential dilution of common
stock equivalents. Shares of common stock held by the ESOP that have not been
allocated to participants' accounts or are not committed to be released for
allocation and non-vested 1998 Management Recognition Plan (the "MRP") shares
are not considered to be outstanding for the calculation of basic EPS, however,
a portion of such shares are considered in the calculation of diluted EPS as
common stock equivalents of basic EPS. Basic and diluted weighted-average common
shares outstanding were 26,682,604 and 26,891,673 shares, for the fiscal year
ended June 30, 2000. Basic and diluted weighted-average common shares
outstanding were 24,807,859 shares, for the fiscal year ended June 30, 1999 For
fiscal year ended June 30, 1998, basic EPS is calculated by dividing net loss
since Conversion by the weighted average number of common shares outstanding.
There were no dilutive stock equivalents for the fiscal year ended June 30,
1998. Since the Conversion on February 18, 1998, basic and diluted weighted
average common shares outstanding was 24,328,143 shares. For fiscal year ended
June 30, 1998, net loss since Conversion was $4.0 million.
(n) Employee Benefits
The Company follows the provisions of the American Institute of Certified Public
Accountants ("AICPA") Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans" ("SOP 93-6"). In accordance with SOP 93-6,
compensation expense is recorded at an amount equal to the shares committed by
the Employee Stock Ownership Plan ("ESOP") multiplied by the average fair value
of the Company's common stock during the reporting period. The difference
between the fair value of shares for the period and the cost of the shares
committed by the ESOP is recorded as an adjustment to additional paid in
capital.
<PAGE>35
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" established a fair value-based method of accounting
for stock-based compensation arrangements with employees, rather than the
intrinsic value-based method that is contained in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
SFAS No. 123 does not require an entity to adopt the new fair value-based
method for purposes of preparing its basic financial statements. The Company
has chosen to continue to use the APB No. 25 method; however, SFAS No. 123
requires the presentation of pro forma net income and EPS information in the
notes to the financial statements as if the fair value-based method had been
adopted. See Note 10 for the presentation of this pro forma information.
(o) Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in the second
quarter of fiscal 1999. All comparative financial statements provided for
earlier periods have been restated to reflect application of the provisions.
Comprehensive income includes net income and all other changes in equity during
a period except those resulting from investments by owners and distribution to
owners. Other comprehensive income includes revenues, expenses, gains and losses
that, under generally accepted accounting principles, are included in
comprehensive income but excluded from net income. Comprehensive income and
accumulated other comprehensive income are reported net of related income taxes.
Accumulated other comprehensive income consists solely of unrealized gains and
losses on available for sale securities.
(p) Segment Reporting
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires public
companies to report certain financial information about significant
revenue-producing segments of the business for which such information is
available and utilized by the chief operating decision maker. Specific
information to be reported for individual operating segments includes a measure
of profit and loss, certain revenue and expense items, and total assets. As a
community-oriented financial institution, substantially all of the Company's
operations involve the delivery of loan and deposit products to customers.
Management makes operating decisions and assesses performance based on an
ongoing review of these community banking operations, which constitute the
Company's only operating segment for financial reporting purposes under SFAS No.
131.
(q) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under SFAS No. 133, entities
are required to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value (i.e. gains
or losses) of a derivative instrument depends on whether it has been designated
and qualifies as part of a hedging relationship and, if so, on the reason for
holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair values, cash
flows or foreign currencies.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Investments and Hedging Activities Deferral of the Effective Date of SFAS NO.
133," which amended the effective date of SFAS No. 133.
SFAS No. 133 is now effective for fiscal quarters of fiscal years beginning
after June 15, 2000 and does not require restatement of prior periods. Currently
the Company does not have any derivative instruments nor has it entered into any
hedging transactions, therefore, SFAS No. 133 will not have a material impact on
the Company's consolidated financial statements.
(r) Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
<PAGE>36
2. Conversion to Stock Form of Ownership
On July 31, 1997, the Board of Trustees of the Bank unanimously adopted a Plan
of Conversion whereby the Bank would convert from a New York State chartered
mutual bank to a New York State chartered stock institution with the concurrent
formation of a holding company, Richmond County Financial Corp. (the
"Conversion").
The Conversion was completed on February 18, 1998, with the issuance by the
Company of 24,466,250 shares of common stock, at a price of $10.00 per share, in
an initial public offering. The Company received gross proceeds from the
Conversion of $244.7 million, before the reduction from gross proceeds of $9.8
million for estimated conversion related expenses. The Company used $117.4
million, or 50% of the net proceeds, to purchase all of the outstanding stock of
the Bank.
Concurrent with the completion of the Conversion, an additional 1,957,300 shares
of authorized but unissued shares of common stock were contributed by the
Company to the Richmond County Savings Foundation (the "Foundation"), a private
foundation dedicated to charitable purposes within the Bank's communities that
it serves. The Company recorded a one-time charge of $19.6 million, the full
amount of the contribution made to the Foundation and a corresponding deferred
tax benefit of $8.4 million in fiscal 1998. The contribution to the Foundation
will be fully tax deductible, subject to an annual limitation based upon the
Company's annual taxable income.
In connection with the Conversion, the Bank implemented the ESOP. Subsequent to
the Conversion, the ESOP purchased, through a $34.6 million loan from the
Company, 8%, or 2,113,884 shares of the Company's common stock in the open
market.
The Bank established, in accordance with the requirements of the Office of
Thrift Supervision (the "OTS"), a liquidation account for $102.8 million, equal
to its retained earnings as of the date of the latest consolidated statement of
financial condition appearing in the final prospectus. The liquidation account
is maintained for the benefit of eligible pre-Conversion account holders who
continue to maintain their account at the Bank after the date of Conversion. The
liquidation account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled, under New York State Law, to receive a
distribution from the liquidation account in an amount equal to their current
adjusted account balances for all such depositors then holding qualifying
deposits in the Bank.
In addition, the Company may not declare or pay cash dividends on or repurchase
any of its shares of common stock if the effect thereof would cause
stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
3. Acquisitions
Bayonne Bancshares, Inc.
At the close of business on March 22, 1999, the Company completed its
acquisition of Bayonne Bancshares, Inc. ("Bayonne"), the holding company of
First Savings Bank of New Jersey, SLA, a New Jersey State chartered savings and
loan association with four full service banking offices located in Bayonne, New
Jersey in a transaction which was accounted for as a purchase. The cost of the
acquisition was approximately $118.5 million of which the Company issued 1.05
shares of its common stock for each outstanding share of Bayonne common stock
for a total of 8,668,615 common shares of which 3,938,731 shares were issued
from its treasury shares. Options to purchase 683,577 shares of Bayonne common
stock were also converted into options to purchase 717,755 shares of the
Company's common stock. The goodwill attributable to the transaction was $31.4
million which is being amortized on a straight line basis over 15 years.
Ironbound Bankcorp, NJ
At the close of business on March 5, 1999, the Company completed its acquisition
of Ironbound Bankcorp, NJ ("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 in a
transaction which was accounted for as a purchase. The cost of the acquisition
was approximately $27.7 million. The Company issued 1.463 shares of its common
stock for each outstanding share of Ironbound common stock for a total of
1,458,842 common shares. The goodwill attributable to the transaction was $14.9
million which is being amortized on a straight line basis over 15 years.
<PAGE>37
4. Securities Available for Sale and Securities Held to Maturity
The amortized cost of investment securities and mortgage-backed and
mortgage-related securities and their related estimated fair values at June 30,
2000 and 1999, are summarized as follows:
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------------------------
AVAILABLE FOR SALE Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agencies.......................... $ 34,406 $ -- $ 4,791 $ 29,615
Corporate and other debt obligations.................. 211,900 138 24,351 187,687
------------------------------------------------
$ 246,306 $ 138 $ 29,142 $ 217,302
================================================
Marketable equity securities:
Preferred............................................. $ 29,629 $ -- $ 1,516 $ 28,113
Common................................................ 13,908 36 1,874 12,070
------------------------------------------------
$ 43,537 $ 36 $ 3,390 $ 40,183
================================================
Mortgage-backed and mortgage-related securities:
Federal Home Loan Mortgage Corporation
Pass-Through Certificates........................... $ 124,736 $ 38 $ 5,933 $ 118,841
Government National Mortgage Association
Pass-Through Certificates........................... 140,365 14 4,990 135,389
Private Issuer Pass-Through Certificates.............. 83,095 -- 4,228 78,867
Federal National Mortgage Association
Pass-Through Certificates........................... 70,121 -- 2,627 67,494
Federal National Mortgage Association
Real Estate Mortgage
Investment Conduits................................ 63,977 -- 4,148 59,829
Private Issuer Real Estate Mortgage...................
Investment Conduits................................ 260,081 -- 13,055 247,026
------------------------------------------------
$ 742,375 $ 52 $ 34,981 $ 707,446
================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------------------------
HELD TO MATURITY Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Mortgage-backed and mortgage-related securities:
Federal National Mortgage Association
Pass-Through Certificates........................... $ 57,161 $ -- $ 3,093 $ 54,068
------------------------------------------------
$ 57,161 $ -- $ 3,093 $ 54,068
================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------------
AVAILABLE FOR SALE Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agencies.......................... $ 41,864 $ 2 $ 2,254 $ 39,612
Corporate and other debt obligations.................. 217,765 494 6,715 211,544
------------------------------------------------
$ 259,629 $ 496 $ 8,969 $ 251,156
================================================
Marketable equity securities:
Preferred............................................. $ 29,687 $ 433 $ 23 $ 30,097
Common................................................ 16,218 1,236 1,096 16,358
------------------------------------------------
$ 45,905 $ 1,669 $ 1,119 $ 46,455
================================================
Mortgage-backed and mortgage-related securities:
Federal Home Loan Mortgage Corporation
Pass-Through Certificates........................... $ 166,129 $ 83 $ 4,740 $ 161,472
Government National Mortgage Association
Pass-Through Certificates........................... 162,446 80 3,279 159,247
Private Issuer Pass-Through Certificates.............. 92,664 -- 2,930 89,734
Federal National Mortgage Association
Pass-Through Certificates........................... 98,465 5 1,415 97,055
Federal National Mortgage Association
Real Estate Mortgage
Investment Conduits................................ 55,849 -- 927 54,922
Private Issuer Real Estate Mortgage...................
Investment Conduits................................ 311,274 3 6,863 304,414
------------------------------------------------
$ 886,827 $ 171 $ 20,154 $ 866,844
================================================
</TABLE>
At June 30, 1999, the Company had no securities Held to Maturity
<PAGE>38
The amortized cost and estimated fair values of mortgage-backed and
mortgage-related securities held to maturity by contractual maturity at June
30, 2000 are as follows:
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------------------------------------------------------------------------------------
Mortgage-backed
and mortgage-related
Investment Securities Securities
-------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
-------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Year ended June 30:
2001............................................... $ -- $ -- $ 3,074 $ 3,031
2002-2005.......................................... 11,777 11,433 10,976 10,771
2006-2010.......................................... 13,984 13,088 1,902 1,857
2011 and thereafter................................ 220,545 192,781 726,424 691,787
------------------------------------------------
$ 246,306 $ 217,302 $ 742,376 $ 707,446
================================================
</TABLE>
The amortized cost and estimated fair values of mortgage-backed and
mortgage-related securities held to maturity by contractual maturity at June 30,
2000 are as follows:
<TABLE>
<CAPTION>
June 30, 2000
------------------------------------------------------------------------------------------------------------
Mortgage-backed
and mortgage-related
Securities
----------------------
(In thousands)
<S> <C> <C>
Year ended June 30:
2001......................................................................... $ -- $ --
2002-2005.................................................................... -- --
2006-2010.................................................................... -- --
2011 and thereafter.......................................................... 57,161 54,068
----------------------
$ 57,161 $ 54,068
======================
</TABLE>
Sales and redemptions of investment and mortgage-backed and mortgage-related
securities from the available for sale portfolio during the years ended June
30, are summarized as follows:
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------
(In thousands)
<S> <C> <C> <C>
Proceeds from sales and redemptions..................... $ 162,308 $ 171,072 $ 178,010
Gross gains............................................. 1,883 3,424 317
Gross losses............................................ 7,892 352 287
</TABLE>
<PAGE>39
5. Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------
2000 1999
------------------------
(In thousands)
<S> <C> <C>
One- to four-family mortgage loans...................... $ 810,853 $ 834,528
Multifamily mortgage loans.............................. 549,151 290,066
Commercial real estate mortgage loans................... 108,532 107,280
Construction and development loans,
principally residential................................ 65,603 51,044
Home equity loans....................................... 31,497 18,575
------------------------
1,565,636 1,301,493
Less unearned discounts/plus premiums, net.............. 1,444 (375)
------------------------
Total real estate mortgage loans........................ 1,567,080 1,301,118
Consumer and student loans.............................. 5,458 11,817
Commercial loans........................................ 16,020 14,557
------------------------
21,478 26,374
Less net deferred origination and commitment fees....... (52) (80)
------------------------
Total other loans....................................... 21,426 26,294
Less allowance for loan losses.......................... (14,698) (13,885)
------------------------
Total loans receivable, net............................. $1,573,808 $1,313,527
========================
</TABLE>
Included in real estate mortgage loans are $69.1 million and $86.0 million of
mortgages serviced by third parties as of June 30, 2000 and 1999, respectively.
The Bank sells real estate mortgage loans to the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and
the State of New York Mortgage Association ("SONYMA"). These loans are then
serviced by the Bank under agreements which specify a servicing fee based on a
percentage of the outstanding principal balances. At June 30, 2000, 1999 and
1998, the total loans serviced for the above totaled $210.6 million, $115.8
million, and $45.3 million, respectively, and are not included in the
consolidated financial statements.
Loans on non-accrual status totaled $4.7 million, $5.9 million and $5.5 million
at June 30, 2000, 1999, and 1998, respectively. If interest on the non-accrual
loans had been accrued, such income would have been $0.4 million, $0.5 million
and $0.5 million, respectively.
A summary of the changes in the allowance for loan losses for the years ended
June 30, 2000, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year............................ $ 13,885 $ 7,276 $ 5,470
Allowance of acquired institutions.................... -- 4,357 --
Provision charged to operations....................... 1,200 2,550 2,200
Charge offs, net of recoveries........................ (387) (298) (394)
-----------------------------------
Balance at end of year.................................. $ 14,698 $ 13,885 $ 7,276
===================================
</TABLE>
<PAGE>40
6. Banking Premises and Equipment
Banking premises and equipment at June 30, 2000 and 1999 consist of the
following:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------
2000 1999
----------------------
(In thousands)
<S> <C> <C>
Land.................................................... $ 6,023 $ 5,561
Banking houses and improvements......................... 12,246 13,199
Leasehold improvements.................................. 6,994 7,139
Furniture, fixtures and equipment....................... 7,352 8,129
----------------------
32,615 34,028
Less accumulated depreciation and amortization.......... (6,500) (6,675)
----------------------
$ 26,115 $ 27,353
======================
</TABLE>
7. Deposits
At June 30, 2000 and 1999, deposits consist of the following:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------------------------------------------------------------------------------------------------------
Average Average
Amount Rate Amount Rate
------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Certificates of deposit................................. $ 693,276 5.48% $ 598,470 5.01%
Savings................................................. 759,023 2.86 716,634 2.38
Money market demand accounts............................ 41,528 3.17 49,911 3.13
Non-interest bearing demand deposits.................... 207,894 -- 169,007 --
N.O.W. accounts......................................... 73,356 1.47 75,920 1.48
------------------------------------------------
$1,775,077 $1,609,942
========== ==========
</TABLE>
Contractual maturities of certificates of deposit accounts at June 30, 2000 and
1999 are as follows:
<TABLE>
<CAPTION>
June 30, 2000
-----------------------------------------------------------------------------------------------
Certificates
of $100,000 All Other Total
or More Certificates Certificates
-----------------------------------
(In thousands)
<S> <C> <C> <C>
Year ending June 30:
2001.................................................. $ 72,556 $ 477,913 $ 550,469
2002.................................................. 15,207 93,023 108,230
2003.................................................. 1,375 13,224 14,599
2004.................................................. 2,527 7,446 9,973
2005 and thereafter................................... -- 10,005 10,005
-----------------------------------
$ 91,665 $ 601,611 $ 693,276
===================================
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Year ending June 30:
2000.................................................. $ 60,360 $ 392,655 $ 453,015
2001.................................................. 10,173 84,236 94,409
2002.................................................. 3,362 17,640 21,002
2003.................................................. 5,502 18,497 23,999
2004 and thereafter................................... 905 5,140 6,045
-----------------------------------
$ 80,302 $ 518,168 $ 598,470
===================================
</TABLE>
<PAGE>41
8. Borrowings
Borrowings totaled $773.7 million and $757.8 million at June 30, 2000 and 1999,
respectively, and consist of the following:
Federal Home Loan Bank of New York Advances
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average
Amount Interest Amount Interest
---------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Contractual Maturity
2000*................................................. $ 8,500 7.23% $ -- --%
2001.................................................. -- -- 25,000 5.57
2003.................................................. -- -- 35,000 5.03
2004.................................................. 22,000 5.32 22,000 5.32
2005.................................................. 20,000 5.50 30,000 5.45
2006.................................................. 65,000 4.77 65,000 4.77
2008.................................................. 455,000 5.23 475,000 5.22
2009.................................................. 126,600 5.33 11,832 4.45
2010.................................................. 61,590 5.77 -- --
------------------------------------------------
$ 758,690 5.28% $ 663,832 5.18%
========= =========
</TABLE>
* FHLBNY overnight line of credit advance. Rate is based on the Federal Funds
rate at time of takedown plus 10.0 basis points. Principal and interest is due
on the next succeeding business day. The Company has an available overnight line
of credit with the FHLBNY for a maximum of $75.0 million at June 30, 2000.
The advances received were all fixed rate under the FHLB of New York ("FHLBNY")
convertible advance program, which grants the FHLBNY the option to call the
advance after an initial lock-out period of 1, 2, 3 or 5 years and quarterly
thereafter, until maturity. The convertible advances are collateralized by
mortgage-backed securities with a carrying value of approximately $690.7 million
and $677.5 million, pledges of FHLBNY stock of $38.9 million and $38.4 million
at June 30, 2000 and 1999, respectively, and a blanket assignment of the
Company's unpledged, qualifying mortgage loans.
Repurchase Agreements
The contractual maturities of the outstanding repurchase agreements at June 30,
2000 and 1999, respectively, were as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average
Amount InterestRate Amount Interest Rate
--------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Contractual Maturity
August 1999.......................................... $ -- --% $ 42,300 4.99%
September 1999.......................................... -- -- 36,700 5.12
December 2002*......................................... 15,000 5.90 15,000 5.90
--------------------------------------------------
$ 15,000 5.90% $ 94,000 5.19%
==================================================
</TABLE>
* Callable commencing December 2000 and quarterly thereafter, until maturity.
The above are collateralized by mortgage-backed securities with a carrying value
of approximately $16.8 million and $97.8 million at June 30, 2000 and 1999,
respectively.
<PAGE>42
9. Income Taxes
Significant components of the Bank's deferred tax assets and liabilities as of
June 30, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------
2000 1999
----------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................. $ 5,920 $ 5,245
Deferred loan fees.................................... 570 339
Book over tax amortization............................ 350 289
Non-accrual interest income........................... 332 295
Postretirement benefits............................... 1,730 1,519
Securities available for sale......................... 27,051 12,754
Richmond County Savings Foundation.................... 8,096 4,810
1998 Stock Based Incentive Plans...................... 751 776
----------------------
Gross deferred tax assets........................... 44,800 26,027
Deferred tax liabilities:
Tax bad debt reserves................................. 502 646
Tax over book depreciation............................ 462 393
Prepaid pension expense............................... 1,047 1,010
Conversion and acquisition costs...................... 501 --
----------------------
Gross deferred tax liabilities...................... 2,512 2,049
----------------------
Net deferred tax assets............................. $ 42,288 $ 23,978
======================
</TABLE>
In view of the Bank's current and projected future earnings trend, management
believes that it is more likely than not that it will be able to utilize the
entire net deferred tax assets. Accordingly, no valuation allowance was recorded
for the years ended June 30, 2000 and 1999.
Significant components of the provision (benefit) for income taxes attributable
to continuing operations for the years ended June 30, 2000, 1999 and 1998, are
as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal............................................... $ 14,070 $ 13,329 $ 7,583
State and local....................................... 1,686 2,570 2,773
-----------------------------------
15,756 15,899 10,356
Deferred:
Federal............................................... (1,761) 220 (5,997)
State and local....................................... (323) 59 (2,288)
-----------------------------------
(2,084) 279 (8,285)
----------- ---------- ---------
$ 13,672 $ 16,178 $ 2,071
===================================
</TABLE>
The table below presents a reconciliation between the reported tax provision and
the tax provision computed by applying the statutory federal income tax rate
(35% for the years ended June 30, 2000, 1999 and 1998) to income before
provision for income taxes:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------
(In thousands)
<S> <C> <C> <C>
Federal income tax provision at statutory rates......... $ 17,479 $ 14,988 $ 2,309
Increase in tax resulting from:
State and local income taxes, net
of federal income tax effect........................ 886 1,709 315
Valuation adjustment reflecting the fair value
of stock contributed to the
Foundation at inception........................... (4,400) -- --
Other................................................. (293) (519) (553)
-----------------------------------
$ 13,672 $ 16,178 $ 2,071
===================================
</TABLE>
<PAGE>43
For federal income tax purposes, prior to 1996, if certain definitional tests
and other conditions were met, the Bank was allowed a special bad debt deduction
in determining its taxable income. The deduction was based on either specified
experience formulas or a percentage of taxable income. Federal tax legislation
enacted during 1996, repealed the special bad debt deduction provisions. As a
result, a large thrift institution, such as the Bank, is required to use the
specific charge-off method in computing its federal bad debt deduction for tax
years beginning after December 31, 1995. However, New York State enacted
legislation which, among other things, would permit a large thrift institution,
such as the Bank, to continue to use the bad debt reserve method for both New
York State and New York City tax purposes.
The 1996 federal tax legislation also provided that a large thrift institution,
such as the Bank, is required to recapture the excess of its tax bad debt
reserves at December 31, 1995, over the balance of such reserves as of December
31, 1987, (the "base year"), whether the additions were made under the
percentage of the taxable income method or the experience method. The Bank is
required to recapture its excess bad debt reserves, for which deferred taxes
have been recognized, over a six-year period on a straight-line basis beginning
in calendar year 1998. The base year reserve will remain subject to recapture in
the case of certain excess distributions to and redemptions of shareholders or
if the Bank ceases to be a bank. The New York State legislation provides that
the recapture of excess bad debt reserves is not required for either New York
State or New York City tax purposes.
At June 30, 2000, the base year bad debt reserve for federal income tax purposes
was approximately $9.6 million, for which deferred taxes are not required to be
recognized. Bad debt reserves maintained for New York State and New York City
tax purposes as of June 30, 2000, for which deferred taxes are not required to
be recognized, amounted to approximately $54 million. Accordingly, deferred tax
liabilities of approximately $10.0 million have not been recognized as of June
30, 2000.
10. Employee Benefit Plans
Defined Benefit Plan
The following table sets forth the change in benefit obligations, the change in
plan assets, the funded status of the plan, and amounts recognized in the
accompanying consolidated financial statements at June 30,
<TABLE>
<CAPTION>
2000 1999
----------------------
(In thousands)
<S> <C> <C>
Change in Benefit Obligation:
Benefit Obligation at Beginning of Year............... $ 10,991 $ 10,232
Service Cost.......................................... -- 525
Interest Cost......................................... 567 677
Curtailment........................................... -- (3,182)
Benefits Paid......................................... (529) (417)
Actuarial Loss........................................ 479 3,156
Acquisition........................................... 725 --
----------------------
Benefit Obligation at End of Year..................... $ 12,233 $ 10,991
======================
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year........ $ 13,334 $ 12,955
Actual Return on Plan Assets.......................... 2,790 796
Benefits Paid......................................... (529) (417)
Acquisition........................................... 675 --
----------------------
Fair Value of Plan Assets at End of Year.............. $ 16,270 $ 13,334
======================
Reconciliation of Funded Status:
Funded Status......................................... $ 4,037 $ 2,342
Unrecognized Actuarial Loss (Gain).................... (1,256) 4
Unrecognized Transition Asset......................... - (4)
----------------------
Prepaid Benefit Cost.................................. $ 2,781 $ 2,342
======================
</TABLE>
<PAGE>44
Defined Benefit Plan
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-Average Assumptions as of June 30,
Discount Rate......................................... 5.50% 5.25% 6.75%
Expected Return on Plan Assets........................ 8.00% 8.00% 8.00%
Rate of Compensation Increase......................... -- 5.00% 4.50%
Components of Net Periodic Benefit Cost:
Service Cost.......................................... $ -- $ 525 $ 477
Interest Cost......................................... 567 677 671
Expected Return on Plan Assets........................ (1,051) (1,021) (854)
Amortization of Prior Service Cost.................... -- (2) (2)
Amortization of Transition Asset...................... (4) (36) (36)
Unrecognized Actuarial (Gain)......................... -- (102) (55)
Additional (Gain) Recognized Due to Curtailment....... -- (2,021) --
Acquisition 50 -- --
-----------------------------------
Net Periodic Benefit (Credit) Cost.................... (438) (1,980) 201
===================================
</TABLE>
Based on an evaluation of the pension plan in fiscal 1999, the Bank concluded
that future benefit accruals under the plan would cease, or "freeze" on March
31, 1999. In connection with the freezing of the plan and the plan's measurement
date of April 1, 1999, the Bank recognized a curtailment gain of approximately
$2.0 million as of June 30, 1999.
Defined Contribution Plan
The Bank also provides a 401(k) Savings Plan open to salaried employees meeting
certain eligibility requirements. Participants contribute 2% to 9% of pre-tax
compensation. The Bank makes matching contributions in an amount equal to 50% of
an employee's contributions, up to 6%. Cash contributions to the 401(k) Plan by
the Bank was $300,496, $215,996 and $157,975 for the years ended June 30, 2000,
1999 and 1998, respectively.
Employee Stock Ownership Plan
In connection with the Conversion, the Bank implemented an ESOP, a tax-qualified
plan designed to invest primarily in the Company's common stock. The ESOP
provides eligible employees with the opportunity to receive a Bank-funded
retirement benefit based primarily on the value of the common stock. All
eligible employees of the Bank and its affiliates, including the Company, as of
the effective date of the Conversion, may participate in the ESOP. Subsequent to
the Conversion, all eligible employees of the Bank and its affiliates, including
the Company, may participate in the ESOP upon the age of 21 and the completion
of one year of service. Subsequent to the Conversion, the ESOP purchased,
through a $34.6 million loan from the Company, 8%, or 2,113,884 shares of common
stock in the open market. The term of the ESOP loan is 20 years and will be
primarily repaid with contributions from the Bank to the ESOP. As of June 30,
2000, the loan from the Company had an outstanding balance of $32.3 million and
an interest rate of 8.50%.
Under the terms of the ESOP, the Bank makes contributions to the ESOP sufficient
to cover all payments of principal and interest as they become due. Shares
purchased with the loan proceeds are held in a suspense account by the trustee
of the Plan for future allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account are
allocated among participants on the basis of compensation as described in the
Plan. The number of shares released to participants will be determined based
upon the percentage of principal and interest payments made during the calendar
year divided by the total remaining principal and interest payments including
the current year's payment. Participants will vest in the shares allocated to
their respective accounts over a period not to exceed six years. Any forfeited
shares are allocated to the then remaining participants in the same proportions
as contributions. There were 105,694 shares allocated in calendar 1999 and 1998,
respectively. For the six month period ended June 30, 2000, 52,847 shares were
committed to be released and 1,849,649 shares remain unallocated. The Company
recognizes compensation expense attributable to its ESOP over the year, based
upon the estimated number of ESOP shares to be allocated each December 31st. The
amount of compensation expense recorded is equal to the estimate of shares to be
allocated by the ESOP multiplied by the average fair value of the underlying
shares during the period. For the fiscal year ended June 30, 2000, 1999 and
1998, compensation expense attributable to the ESOP was $1.9 million, $1.8
million and 975,000 respectively.
<PAGE>45
The trustee for the ESOP must vote all allocated shares held in the ESOP trust
in accordance with the instructions of the participants. Unallocated shares held
by the ESOP trust are voted by the trustee in a manner calculated to most
accurately reflect the results of the allocated ESOP shares voted, subject to
the requirements of the Employee Retirement Income Security Act of 1974, as
amended (ERISA).
Stock-Based Incentive Plans
At the annual shareholders' meeting on September 29, 1998 the shareholders
approved the Richmond County Financial Corp. 1998 Stock-Based Incentive Plan and
at the special meeting of shareholders on February 25, 1999 the shareholders
approved the ratification of certain amendments to the Richmond County Financial
Corp. 1998 Stock-Based Incentive Plan (collectively, "Incentive Plan"). The
Incentive Plan authorizes the granting of options to purchase the Company's
common stock, option-related awards and awards of the Company's common stock
(collectively, "Awards"). Subject to certain adjustments to prevent dilution of
Awards to participants, the maximum number of shares reserved for Awards
denominated in common stock under the Incentive Plan is 3,699,297 shares. The
maximum number of shares reserved for purchase pursuant to the exercise of
options and option-related Awards which may be granted under the Incentive Plan
is 2,642,355 shares, and will primarily vest over a five year period and which
must be exercised no more than ten years from the date of grant. The maximum
number of the shares reserved for the award of shares of the Company's common
stock is 1,056,942 shares, and will primarily vest over a five year period. All
officers, other employees and outside directors of the Company and its
affiliates, including the Bank and its subsidiaries, are eligible to receive
Awards under the Incentive Plan. The Incentive Plan is administered by a
committee of non-employee directors of the Company (the "Committee"). Authorized
but unissued shares, or shares previously issued and reacquired by the Company,
may be used to satisfy the Awards under the Incentive Plan. Each option may
become fully exercisable and each award may become fully vested upon the
occurrence of a change in control of the Company, or upon death, disability or
retirement of the optionee.
The Company contributed $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 1,054,274 shares were awarded at a
price of $14.25 per share to outside directors, officers and employees of the
Bank. For the year ended June 30, 2000 and 1999, compensation expenses
attributable to stock awards under the Incentive Plan was approximately $3.4
million and $2.0 million, respectively. The Incentive Plan was not in effect for
fiscal 1998.
Options granted under this 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. There was no compensation expense attributable to
these options as the Company used the intrinsic value based method of accounting
as the exercise price equaled the common stock price at the grant date. All
options expire no later that ten years following the date of grant.
Bayonne maintained the 1995 and 1998 Stock-Based Compensation Plans, which
consisted of options to purchase Bayonne common stock and stock awards of
Bayonne's common stock ("Restricted Stock"), for its officers, directors and
other key employees. Generally, these plans granted options to individuals at a
price equivalent to the fair market value of the stock at the date of grant.
Options awarded under the plans generally vested over a five-year period from
the date of grant and expired ten years from the grant date. The awards of
Restricted Stock purchased by Bayonne are held in trusts by the plan for the
benefit of participants pending the vesting of such shares. Awards of Restricted
Stock granted under the plans generally vest over a five-year period. As a
result of the merger, participants under the 1995 Stock-Based Compensation Plan
became fully vested at the merger date. Under the 1998 Stock-based Compensation
Plan, participants continue to vest in stock options and stock awards over the
vesting periods in accordance with the terms of the plan. As of June 30, 2000,
$2.5 million of Restricted Stock awarded under the plan is reflected as deferred
compensation in stockholders' equity. Compensation expense recognized under the
plan was $250,000 and $63,000 for the years ended June 30, 2000 and 1999,
respectively.
Option transactions for the year ended June 30, 2000 and 1999 are shown below:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year................ 2,953,488 $ 14.13 -- $ --
Granted................................................. 114,936 17.34 3,016,305 13.94
Exercised............................................... (28,400) 14.25 (55,817) 4.22
Forfeited............................................... (3,600) 14.25 (7,000) 14.25
--------- ---------
Options outstanding, end of year........................ 3,036,424 14.25 2,953,488 14.13
========= =========
Options exercisable, end of year........................ 750,525 183,563
Weighted average fair value of options granted.......... $ 2.98 $3.51
</TABLE>
<PAGE>46
In accordance with SFAS No. 123, the Company used the Black-Scholes option
pricing model with the following weighted average assumptions to value the
options granted as of June 30, 2000 and 1999 as follows:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Dividend yield.......................................... 5.19% 3.09%
Expected volatility..................................... 27.80% 27.50%
Risk-free interest rate................................. 6.50% 4.75%
Expected option lives................................... 6 years 6 years
</TABLE>
On a pro forma basis, had compensation expense for the Company's stock-based
compensation plan been determined based on the fair value at the grant date for
awards made under the plan, consistent with SFAS No. 123, the Company's net
income and earnings per share for the years ended June 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------
(In thousands, except
per share amounts)
<S> <C> <C>
Net income:
As reported........................................... $ 36,269 $ 26,644
Pro forma............................................. 34,838 25,487
Basic earnings per share:
As reported........................................... $ 1.36 $ 1.07
Pro forma............................................. 1.31 1.03
Diluted earnings per share:
As reported........................................... $ 1.35 $ 1.07
Pro forma............................................. 1.30 1.03
</TABLE>
The effects of applying SFAS No. 123, for either recognizing or disclosing
compensation cost under such pronouncement, may not be representative of the
effect on reported net income for future periods.
Postretirement Benefit Plan
The Bank provides postretirement medical and life insurance benefits for
eligible retired employees. The Bank uses actuarial-basis accrual accounting for
all employer provided postretirement benefits other than pensions.
Based on an evaluation of the Postretirement Plan in fiscal 1999, the Bank
amended the Plan to reflect the termination of postretirement medical and life
insurance benefits for active employees with less than five years of service as
of April 1, 1999.
The following table sets forth the change in postretirement benefit obligation
and amounts recognized in the Bank's consolidated statements of financial
condition at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
-----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Change in Accumulated Postretirement Benefit Obligation ("APBO")
Accumulated postretirement benefit obligation at beginning of year... $ 4,423 $ 3,293
Service cost......................................................... 114 194
Interest cost........................................................ 296 280
Acquisitions......................................................... -- 213
Premiums paid, net................................................... (154) (127)
Amendments........................................................... -- (188)
Curtailment gain..................................................... -- (86)
Actuarial (gain)/loss................................................ (441) 844
----------------------
Accumulated postretirement benefit obligation at end of year......... $ 4,238 $ 4,423
======================
Reconciliation of Funded Status:
Accumulated postretirement benefit obligation
Funded status........................................................ $ (4,238) $ (4,423)
Unrecognized prior service cost...................................... (186) (217)
Unrecognized net loss................................................ 113 555
----------------------
(Accrued) postretirement benefit cost............................... $ (4,311) $ (4,085)
======================
</TABLE>
<PAGE>47
The Bank's postretirement benefits expense for the years ended June 30, 2000,
1999 and 1998, consisted of the following:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Interest cost........................................... $ 296 $ 280 $ 240
Service cost............................................ 114 194 158
Amortization............................................ (30) (12) (9)
-----------------------------------
$ 380 $ 462 $ 389
===================================
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 10.5% for the initial
year and is assumed to decrease 1% annually to 6% in 2003. The health care cost
trend rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one percentage
point in each year would increase the APBO at June 30, 2000 by $561,000 (13.2%).
The increase in the aggregate of the service and interest cost components of the
net periodic postretirement benefit cost for 2000 would be $58,000 (14.5%).
Likewise, decreasing the assumed health care cost trend rates by one percentage
point in each year would decrease the APBO at June 30, 2000 by $456,000 (10.8%).
The decrease in the aggregate of the service and interest cost components of the
net periodic postretirement benefit cost for 2000 would be $46,000 (13.2%). The
weighted-average discount rate used in computing the APBO was 7.5% at June 30,
2000 and 7.0% at June 30, 1999.
11. Commitments and Contingencies
Lease Commitments
The Bank conducts a portion of its banking operations in leased facilities under
non-cancelable operating leases expiring at various periods through 2005 and
thereafter. These leases contain renewal options and certain of the leases
provide for increases based upon various escalation clauses. Rent expense was
$1,203,500, $570,700 and $460,300 for the fiscal years ended June 30, 2000, 1999
and 1998, respectively.
The future minimum lease payments under such operating leases are as follows:
<TABLE>
<CAPTION>
Amount
-------------------------------------------------------------------------
(In thousands)
<S> <C>
Years ended June 30:
2001.................................................. $ 1,025
2002.................................................. 943
2003.................................................. 914
2004.................................................. 893
2005 and thereafter................................... 6,023
---------
$ 9,798
=========
</TABLE>
Litigation
The Bank is a defendant in legal actions arising in the ordinary course of
business. Management believes that these actions are without merit or that the
ultimate liability, if any, resulting from such actions will not materially
affect the Bank's consolidated financial position.
Loan Commitments
There were outstanding commitments to make loans at June 30, 2000 and 1999, of
$164.5 million and $134.4 million, respectively. Loan commitments have credit
risk essentially the same as that involved in extending loans to customers and
are subject to the Bank's normal credit policy. These commitments are not
reflected in the accompanying consolidated statements of financial condition.
Management expects that all loan originations will be funded from existing
liquidity and normal monthly cash flow.
12. Regulatory Requirements
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital
<PAGE>48
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
total and Tier I capital to risk-weighted assets, and Tier I capital to average
assets (all as defined in the regulations). Management believes, as of June 30,
2000, that the Bank meets all capital adequacy requirements to which it is
subject.
Based on its regulatory capital ratios at June 30, 2000, the Bank is categorized
as "well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. The Bank's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
Minimum To Be
Well Capitalized
Under Prompt
Minimum forCapital Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------------------------------------------------------------
Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000:
Total Capital (to RiskWeighted Assets)............... $ 236,202 14.77% $ 127,899 8.00% $ 160,813 10.00%
Tier I Capital (to Risk Weighted Assets).............. 221,504 13.85 63,949 4.00 96,488 6.00
Tier I Capital (to Average Assets).................... 221,504 7.71 114,211 4.00 142,763 5.00
As of June 30, 1999:
Total Capital (to Risk Weighted Assets).............. $ 299,650 19.84% $ 126,272 8.00% $ 157,841 10.00%
Tier I Capital (to Risk Weighted Assets).............. 285,363 18.90 63,136 4.00 94,704 6.00
Tier I Capital (to Average Assets).................... 285,363 10.96 122,614 4.00 153,267 5.00
</TABLE>
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. Quoted market prices, when available, are used as the measure of fair
value. In cases where quoted market prices are not available, fair values are
based on present value estimates or other valuation techniques. These derived
fair values are significantly affected by assumptions used, the timing of future
cash flows, and the discount rate.
Because assumptions are inherently subjective in nature, the estimated fair
values cannot be substantiated by comparison to independent market quotes, and,
in many cases, the estimated fair values would not necessarily be realized in an
immediate sale or settlement of the instrument. The disclosure requirements of
SFAS No. 107 exclude certain financial instruments and all nonfinancial
instruments. Accordingly, the aggregate fair value amounts presented do not
represent management's estimation of the underlying value of the Company.
The carrying values and estimated fair values of the Company's material
financial instruments as of June 30, 2000 and 1999, are summarized as follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
-------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks................................. $ 47,684 $ 47,684 $ 55,773 $ 55,773
Federal funds sold...................................... -- -- 17,775 17,775
Securities available for sale:
Investment securities................................. 257,485 257,485 297,611 297,611
Mortgage-backed and mortgage-related securities....... 707,446 707,446 866,844 866,844
Securities held to maturity:
Mortgage-backed and mortgage-related securities....... 57,161 54,068 -- --
Real estate mortgage loans receivable................. 1,567,080 1,526,712 1,301,118 1,275,616
Other loans receivable.................................. 21,426 21,417 26,294 26,236
Financial liabilities:
Deposits.............................................. 1,789,876 1,791,513 1,619,470 1,622,941
Borrowings............................................ 773,690 751,378 757,832 737,986
</TABLE>
<PAGE>49
The following methods and assumptions were used by the Company in estimating the
fair values of financial instruments:
Cash and Due from Banks and Federal Funds Sold: Carrying amounts approximate
fair value, since these instruments are either payable on demand or have
short-term maturities.
Securities Available for Sale and Held to Maturity: The estimated fair values
are based on independent dealer quotations and quoted market prices.
Real Estate Mortgage Loans and Other Loans Receivable: The estimated fair values
of real estate mortgage loans and other loans receivable are based on discounted
cash flow calculations that apply interest rates currently being offered by the
Bank for loans with similar remaining maturities to a schedule of aggregated
expected monthly maturities.
Deposits: The estimated fair values of deposits are based on discounted cash
flow calculations that apply interest rates currently being offered by the Bank
for deposits with similar remaining maturities to a schedule of aggregated
expected monthly maturities.
Borrowings: The estimated fair value of borrowed funds is based on the
discounted value of contractual cash flows using interest rates currently in
effect for borrowings with similar maturities and collateral requirements.
14. Parent-Only Financial Information
The earnings of the Bank are recognized by Richmond County Financial Corp. (the
Holding Company) using the equity method of accounting. Accordingly,
undistributed earnings of the Bank are recorded as increases in the Holding
Company's investment in the Bank.
The Condensed Statements of Financial Condition as of June 30, 2000 and 1999,
are summarized as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------
2000 1999
----------------------
(In thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents............................. $ 4,081 $ 5,645
Securities available for sale:
Investment securities................................. 4,150 7,887
Investment in subsidiary................................ 162,116 284,180
ESOP loan receivable.................................... 32,349 33,120
Other assets............................................ 19,123 9,689
----------------------
Total assets....................................... $ 221,819 $ 340,521
======================
Liabilities and stockholders' equity:
Liabilities........................................... $ 7,296 $ 7,138
Total stockholders' equity......................... 214,523 333,383
----------------------
Total liabilities and stockholders' equity......... $ 221,819 $ 340,521
======================
</TABLE>
The Condensed Statements of Operations for the years ended June 30, 2000, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------
(In thousands)
<S> <C> <C> <C>
Investment income....................................... $ 183 $ 2,053 $ 886
Other interest income................................... 39 596 745
Interest income - ESOP loan receivable.................. 2,799 2,841 1,064
Non-interest income..................................... 715 -- --
Gain on sale of investments............................. 76 620 14
Cash dividends from Bank................................ 73,946 19,000 --
---------------------------------
77,758 25,110 2,709
Interest expense - borrowing from subsidiary............ (204) -- --
Charitable donation..................................... -- -- (19,553)
Other expenses.......................................... (4,083) (2,580) (221)
---------------------------------
Income before income taxes and equity in
undistributed earnings of subsidiary.................. 73,471 22,530 (17,065)
Income tax benefit (expense)............................ 4,424 (1,288) 7,763
---------------------------------
Income before equity in undistributed
earnings of subsidiary................................ 77,895 21,242 (9,302)
Equity in undistributed earnings of subsidiary.......... (41,626) 5,402 13,828
---------------------------------
Net income.............................................. 36,269 26,644 $ 4,526
=================================
</TABLE>
<PAGE>50
The Condensed Statements of Cash Flows for the years ended June 30, 2000, 1999
and 1998, are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------
2000 1999 1998
-----------------------------------
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net income.............................................. $ 36,269 $ 26,644 $ 4,526
Adjustments to reconcile net income to net
cash(used in)/provided by operating activities:
Equity in the undistributed earnings of
subsidiary....................................... (32,320) (24,402) (13,828)
Charitable contribution of common stock............. -- -- 19,553
MRP expense......................................... 3,738 1,991 --
Net realized (gain) on sale of securities
available-for-sale............................... (74) (620) (14)
Amortization of premium/(discount), on
available-for-sale investments, net.............. -- 46 18
Increase in accrued interest receivable............. 16 (32) --
Decrease (increase) in receivable from
subsidiary....................................... 321 (321) --
Increase in other assets............................ (9,985) (1,264) (8,072)
Increase in liabilities............................. 159 6,228 138
----------------------------------
Net cash(used in)/provided by operating
activities..................................... (1,876) 8,270 2,321
Cash flows from investing activities:
Investment securities available for sale:
Sales and redemptions............................... 4,201 17,583 688
Purchases........................................... -- (10,351) (15,909)
Mortgage-backed and mortgage-related securities
available for sale:
Sales and redemptions............................... -- 34,726 --
Principal collected................................. -- 4,252 1,563
Purchases........................................... -- -- (40,451)
Decrease (increase) in bank subsidiary................. 74,661 18,944 (117,444)
Net decrease (increase) in ESOP loan receivable........ 771 1,111 (34,231)
----------------------------------
Net cash provided by/(used in) investing
activities..................................... 79,633 66,265 (205,784)
Financing activities:
Net proceeds of common stock issuance.................. -- -- 234,908
Purchase of MRP shares................................. -- (16,118) --
Purchase of treasury shares............................ (65,431) (75,529) --
Proceeds from options exercised........................ 893 253 --
Cash dividends paid on common stock.................... (14,783) (7,620) (1,321)
----------------------------------
Net cash (used in)/provided by financing
activities..................................... (79,321) (99,014) 233,587
Net (decrease) increase in cash and cash
equivalents........................................ (1,564) (24,479) 30,124
Cash and cash equivalents at beginning of year......... 5,645 30,124 --
----------------------------------
Cash and cash equivalents at end of year............... $ 4,081 $ 5,645 $ 30,124
==================================
</TABLE>
<PAGE>51
15. Selected Quarterly Financial Date (unaudited)
The following table provides a summary of operations by quarter for the years
ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Fiscal 2000 Quarter Ended
-----------------------------------------------------------------------------------------------------
June 30, March 31, December31, September30,
-----------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income.................................. $ 50,209 $ 49,136 $ 48,477 $ 46,715
Interest expense................................. 25,591 25,336 24,215 23,127
-----------------------------------------------
Net interest income before
provision for possible loan losses............. 24,618 23,800 24,262 23,588
Provision for possible loan losses............... 300 300 300 300
-----------------------------------------------
Net interest income after provision
for possible loan losses..................... 24,318 23,500 23,962 23,288
Non-interest income:
Fee income and other........................... 3,348 3,135 3,452 3,214
Net (losses)/gains on sale of
securities and loans......................... (6,707) 24 7 703
-----------------------------------------------
Total non-interest income...................... (3,359) 3,159 3,459 3,917
Non-interest expense:
General and administrative expenses............ 12,458 12,104 12,383 12,037
Amortization of goodwill and
other intangibles........................... 865 821 818 817
-----------------------------------------------
Total non-interest expense................ 13,323 12,925 13,201 12,854
-----------------------------------------------
Income before provision for income
taxes.......................................... 7,636 13,734 14,220 14,351
(Benefit)/Provision for income taxes............. (1,687) 4,925 5,192 5,242
-----------------------------------------------
Net income....................................... $ 9,323 $ 8,809 $ 9,028 $ 9,109
===============================================
Basic and diluted earnings per share........... $ 0.37 $ 0.34 $ 0.33 $ 0.32
===============================================
Dividends declared per common share.............. $ 0.16 $ 0.14 $ 0.13 $ 0.12
Stock price per common share:
High........................................... $ 19.88 $ 18.50 $ 19.25 $ 20.00
Low............................................ $ 16.25 $ 16.13 $ 16.88 $ 18.19
Close.......................................... $ 19.13 $ 16.13 $ 18.06 $ 18.81
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999 Quarter Ended
-----------------------------------------------------------------------------------------------------
June 30, March 31, December31, September30,
-----------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income.................................. $ 44,782 $ 30,988 $ 29,142 $ 27,662
Interest expense................................. 21,578 14,423 13,631 12,599
-----------------------------------------------
Net interest income before
provision for possible loan losses............. 23,204 16,565 15,511 15,063
Provision for possible loan losses............... 600 600 600 750
-----------------------------------------------
Net interest income after provision
for possible loan losses..................... 22,604 15,965 14,911 14,313
Non-interest income:
Fee income and other........................... 2,327 1,432 1,098 935
Curtailment gain on pension plan............... 2,021 -- -- --
Net (losses)/gains on sale of
loans and securities......................... 972 81 1,614 909
-----------------------------------------------
Total non-interest income...................... 5,320 1,513 2,712 1,844
Non-interest expense:
General and administrative expenses............ 11,329 8,612 7,721 7,554
Amortization of goodwill and
other intangibles........................... 792 195 79 78
-----------------------------------------------
Total non-interest expense................ 12,121 8,807 7,800 7,632
-----------------------------------------------
Income before provision for income
taxes.......................................... 15,803 8,671 9,823 8,525
(Benefit)/Provision for income taxes............. 5,913 3,291 3,803 3,171
-----------------------------------------------
Net income....................................... $ 9,890 $ 5,380 $ 6,020 $ 5,354
===============================================
Basic and diluted earnings per share........... $ 0.34 $ 0.24 $ 0.27 $ 0.22
===============================================
Dividends declared per common share.............. $ 0.11 $ 0.09 $ 0.08 $ 0.07
Stock price per common share:
High........................................... $ 19.31 $ 16.31 $ 17.13 $ 18.69
Low............................................ $ 14.50 $ 14.81 $ 11.31 $ 11.88
Close.......................................... $ 19.25 $ 14.81 $ 16.06 $ 15.00
</TABLE>
<PAGE>52
Report of Independent Auditors
The Board of Directors
Richmond County Financial Corp.
We have audited the accompanying consolidated statements of financial condition
of Richmond County Financial Corp. (the "Company") as of June 30, 2000 and 1999,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended June 30,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at June 30, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2000 in conformity with accounting principles generally accepted in the
United States.
August 11, 2000
New York, New York
