UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________ to __________
Commission File Number 1-13503
Staten Island Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3958850
- ------------------------------------ -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15 Beach Street
Staten Island, New York 10304
- --------------------------------------- ------------------------
(Address of principal executive office) (Zip Code)
(718) 556-6518
-----------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. The Registrant had
60,377,107 shares of Common Stock outstanding as of August 6 , 2002.
Table of Contents PAGE
- ----------------- ----
Part 1 Financial Information
Item 1 Financial Statements
Unaudited Statements of Condition
(As of June 30, 2002 and December 31, 2001) 1
Unaudited Statements of Income
(For three and six months ended June 30, 2002 and
three and six months ended June 30, 2001) 2
Unaudited Statement of Changes in Stockholders' Equity
(For six months ended June 30, 2002) 3
Unaudited Statements of Cash Flows
(For the six months ended June 30, 2002 and 2001) 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 3 Quantitative and Qualitative Disclosures About Market Risk 30
Part II Other Information
Item 1 Legal Proceedings 32
Item 2 Changes in Securities and Use of Proceeds 32
Item 3 Defaults Upon Senior Securities 32
Item 4 Submission of Matters to a Vote of Security Holders 32
Item 5 Other Information 32
Item 6 Exhibits and Reports on Form 8-K 32
Signatures 32
STATEN ISLAND BANCORP, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
June 30, 2002
(unaudited) December 31, 2001
--------------------------------------------
(000's omitted)
ASSETS
ASSETS:
Cash and due from banks .................................... $ 102,190 $ 116,846
Federal funds sold ......................................... 64,000 38,000
Securities available for sale .............................. 1,573,612 1,528,639
Loans, net of allowance for loan losses of $22,925 in 2002
and $20,041 in 2001 ........................................ 3,299,227 2,806,619
Loans held for sale ........................................ 1,079,906 1,187,373
Accrued interest receivable ................................ 30,454 28,601
Bank premises and equipment, net ........................... 43,348 38,939
Intangible assets, net ..................................... 58,080 58,871
Other assets ............................................... 194,493 189,558
----------- -----------
Total assets ............................................... $ 6,445,310 $ 5,993,446
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Due Depositors-
Savings .................................................... $ 1,001,060 $ 868,028
Certificates of deposit .................................... 1,111,285 1,083,900
Money market ............................................... 520,752 350,558
NOW accounts ............................................... 133,018 115,349
Demand deposits ............................................ 507,891 483,493
----------- -----------
Total deposits ............................................. 3,274,006 2,901,328
Borrowed funds ............................................. 2,551,604 2,451,762
Advances from borrowers for taxes and insurance ............ 21,378 17,495
Accrued interest and other liabilities ..................... 40,986 70,665
----------- -----------
Total liabilities .......................................... 5,887,974 5,441,250
----------- -----------
STOCKHOLDERS' EQUITY: (1)
Common stock, par value $.01 per share, 100,000,000
shares authorized, 90,260,624 issued and 60,908,166
outstanding at June 30, 2002 and 90,260,624 issued and
62,487,286 outstanding at December 31, 2001 ................ 903 903
Additional paid-in-capital ................................. 546,779 543,123
Retained earnings .......................................... 369,478 340,270
Unallocated common stock held by ESOP ...................... (28,842) (30,215)
Unearned common stock held by RRP .......................... (14,176) (14,333)
Treasury stock (29,352,458 shares at June 30, 2002
and 27,773,338 at December 31, 2001), at cost .............. (326,891) (289,469)
----------- -----------
547,251 550,279
Accumulated other comprehensive income, net of taxes ....... 10,085 1,917
----------- -----------
Total stockholders' equity ........................... 557,336 552,196
----------- -----------
Total liabilities and stockholders' equity ........... $ 6,445,310 $ 5,993,446
=========== ===========
See accompanying notes to consolidated financial statements
1
STATEN ISLAND BANCORP, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------------------------------
(000's omitted, except per share and share data)
unaudited
Interest Income:
Loans ................................................. $ 75,755 $ 64,382 $ 145,638 $ 123,831
Securities, available for sale ........................ 24,016 28,068 47,841 58,918
Federal funds sold .................................... 189 254 698 633
------------ ------------ ------------ ------------
Total interest income .............................. 99,960 92,704 194,177 183,382
------------ ------------ ------------ ------------
Interest Expense:
Savings and escrow .................................... 4,918 4,516 9,401 8,877
Certificates of deposits .............................. 9,811 14,206 20,157 28,136
Money market and NOW accounts ......................... 3,985 2,381 7,342 4,128
Borrowed funds ........................................ 28,379 33,021 56,519 67,822
------------ ------------ ------------ ------------
Total interest expense ............................. 47,093 54,124 93,419 108,963
------------ ------------ ------------ ------------
Net interest income ................................ 52,867 38,580 100,758 74,419
Provision for Loan Losses ............................. 4,990 600 6,490 1,200
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 47,877 37,980 94,268 73,219
Other Income (Loss):
Service and fee income ................................ 8,528 4,701 13,580 9,591
Net gains on loan sales ............................... 35,793 16,846 70,648 26,401
Loan fees ............................................. 5,063 4,107 11,843 6,194
Securities transactions ............................... (6,818) 9 (7,151) 3
------------ ------------ ------------ ------------
42,566 25,663 88,920 42,189
Other Expenses:
Personnel ............................................. 21,336 15,716 40,644 28,463
Commissions ........................................... 21,105 9,835 41,744 14,733
Occupancy and equipment ............................... 3,814 3,068 7,435 6,256
Amortization of intangible assets ..................... 153 1,431 298 2,818
Data processing ....................................... 1,667 1,451 3,373 2,990
Marketing ............................................. 1,382 788 2,492 1,461
Professional fees ..................................... 3,059 838 5,719 1,446
Other ................................................. 9,374 5,618 17,772 10,138
------------ ------------ ------------ ------------
Total other expenses ............................... 61,890 38,745 119,477 68,305
------------ ------------ ------------ ------------
Income before provision for income taxes ........... 28,553 24,898 63,711 47,103
Provision for Income Taxes ............................ 10,973 9,735 24,148 17,944
------------ ------------ ------------ ------------
Net Income ............................................ $ 17,580 $ 15,163 $ 39,563 $ 29,159
============ ============ ============ ============
Earnings Per Share:(1)
Basic ................................................. $ 0.31 $ 0.25 $ 0.70 $ 0.47
Fully Diluted ......................................... $ 0.31 $ 0.25 $ 0.69 $ 0.47
Dividends Declared .................................... $ 0.12 $ 0.08 $ 0.23 $ 0.16
Weighted Average: Fully Diluted (1)
Common Shares ......................................... 90,260,624 90,260,624 90,260,624 90,260,624
Less: Unallocated ESOP/RRP Shares ..................... 5,296,410 5,747,418 5,342,947 5,802,181
Less: Treasury Shares ................................. 27,593,635 23,253,739 27,336,649 22,497,490
------------ ------------ ------------ ------------
57,370,579 61,259,467 57,581,028 61,960,953
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
(1) Prior period amounts have been adjusted to reflect the 2-for-1 stock split
on November 19, 2001.
2
STATEN ISLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Unallocated Accumulated
Additional Common Unearned Other
Common Paid-In Stock RRP Treasury Comprehensive Retained Comprehensive
Stock Capital Held by ESOP Shares Stock Income Income Income Total
---------------------------------------------------------------------------------------------------
(000's omitted)
unaudited
Balance January 1, 2002 $ 903 $ 543,123 $ (30,215) $ (14,333) $ (289,469) $ -- $ 340,270 $ 1,917 $ 552,196
Change in unrealized
appreciation (depreciation)
on securities, net of tax 8,168 8,168 8,168
Allocation of 228,904 ESOP shares 3,093 1,373 4,466
Vesting of 17,200 RRP shares 4 157 161
Exercise of 752,548 stock options 559 7,970 2,669 11,198
Treasury stock (2,331,668) at cost (45,392) (45,392)
Net Income 39,563 39,563 39,563
--------
$ 47,731
Dividends paid (13,024) (13,024)
---------------------------------------------------------------------------------------------------
Balance June 30, 2002 $ 903 $ 546,779 $ (28,842) $ (14,176) $ (326,891) $ 369,478 $ 10,085 $ 557,336
===================================================================================================
See accompanying notes to consolidated financial statements.
3
STATEN ISLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
---- ----
(000's omitted)
unaudited
Cash Flows From Operating Activities:
Net Income ..................................................................... $ 39,563 $ 29,159
Adjustments to reconcile net income to net cash
provided by operating activities----
Depreciation and amortization of intangible assets ............................. 2,669 4,794
Amortization of bond and mortgage premiums ..................................... (214) 279
Provision for possible loan losses ............................................. 6,490 1,200
Origination of loans held for sale ............................................. (2,412,141) (1,463,863)
Purchase of loans held for sale ................................................ (234,242) (247,136)
Proceeds from sale of loans held for sale ...................................... 2,551,171 832,114
Loss on sale of available for sale securities .................................. (699) (3)
Loss on writedown of available for sale securities ............................. 7,850 0
Other noncash expense (income) ................................................. (3,456) (4,503)
Expense charge related to allocated and earned portions of employee benefit plan 6,019 4,898
Increase in net deferred loan fees and costs ................................... (5,411) (695)
Increase in accrued interest receivable ........................................ (1,853) (1,330)
Increase in other assets ....................................................... (23,682) (17,006)
(Decrease) increase in accrued interest and other liabilities .................. (10,882) 375
Decrease in deferred income taxes .............................................. 1,094 1,986
----------- -----------
Net cash used in operating activities .......................................... (77,724) (859,731)
----------- -----------
Cash Flows From Investing Activities:
Maturities of available for sale securities .................................... 352,213 211,448
Sales of available for sale securities ......................................... 50,473 148,118
Purchases of available for sale securities ..................................... (433,024) (163,287)
Principal collected on loans ................................................... 694,543 765,206
Loans made to customers ........................................................ (994,073) (420,978)
Capital expenditures ........................................................... (7,580) (1,560)
----------- -----------
Net cash (used in) provided by investing activities ............................ (337,448) 538,947
----------- -----------
Cash Flows From Financing Activities:
Net increase in deposit accounts ............................................... 372,678 224,910
Net increase in advances from borrowers for taxes and insurance ................ 3,883 5,269
Borrowings ..................................................................... 99,842 176,278
Cash dividends paid ............................................................ (13,024) (10,181)
Purchase of treasury stock ..................................................... (45,392) (42,501)
Exercise of stock options ...................................................... 8,529 --
----------- -----------
Net cash provided by financing activities ...................................... 426,516 353,775
----------- -----------
Net increase in cash and cash equivalents ...................................... 11,344 32,991
Cash and cash equivalents, beginning of year ................................... $ 154,846 $ 104,103
----------- -----------
Cash and cash equivalents, end of period ....................................... $ 166,190 $ 137,094
=========== ===========
Supplemental Disclosures Of Cash Flow Information:
Cash paid for-
Interest ....................................................................... $ 92,492 $ 113,419
Income taxes ................................................................... $ 36,248 $ 13,964
See accompanying note to consoliated financial statements
4
STATEN ISLAND BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Item 1. Financial Information
Summary of Significant Accounting Policies
The accounting and reporting policies of Staten Island Bancorp, Inc.
(the "Company") and subsidiaries conform to generally accepted accounting
principles and to general practice within the banking industry.
Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, SI Bank & Trust
(the "Bank"), and the Bank's subsidiaries. The Bank's wholly owned subsidiaries
are SIB Mortgage Corp. (the "Mortgage Company"), SIB Investment Corporation
("SIBIC"), Staten Island Funding Corporation ("SIFC") and SIB Financial Services
Corporation ("SIBFSC"). All significant intercompany transactions and balances
are eliminated in consolidation.
The unaudited consolidated financial statements included herein reflect
all normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. The results of operations for the three-month and six-month period
ended June 30, 2002 are not necessarily indicative of the results to be expected
for the year ending December 31, 2002. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported assets,
liabilities, revenues and expenses as of the dates of the financial statements.
Actual results could differ significantly from those estimates.
Business
Staten Island Bancorp, Inc. is the holding company for SI Bank & Trust.
The Bank, which is a traditional full service community oriented bank, operates
seventeen full service branches on Staten Island, two full service branches in
Brooklyn, six full service branches in Ocean County, New Jersey, two full
service branches in Monmouth County, New Jersey, three full service branches in
Union County, New Jersey and three full service branches in Middlesex County,
New Jersey. The Bank also has a lending center and a Trust Department on Staten
Island, New York. Commercial lending offices are also located in Bay Ridge,
Brooklyn, New York and the Howell, New Jersey branch.
The Mortgage Company does business as Ivy Mortgage and is headquartered
in Branchburg, New Jersey. The Mortgage Company originates loans in 42 states
and sells them to investors generating fee income for the Bank. The Bank, in its
efforts to manage interest rate risk and maintain yields, retains for its own
portfolio certain loans originated by the Mortgage Company.
The Bank's deposits are insured by the Bank Insurance Fund ("BIF") to
the maximum extent permitted by law. The Bank is subject to examination and
regulation by the Office of Thrift Supervision ("OTS") which is the Bank's
chartering authority and primary regulator. The Bank is also regulated by the
5
Federal Deposit Insurance Corporation ("FDIC"), the administrator of the BIF.
The Bank is also subject to certain reserve requirements established by the
Board of Governors of the Federal Reserve System ("FRB") and is a member of the
Federal Home Loan Bank ("FHLB") of New York, which is one of the 12 regional
banks comprising the FHLB system.
Organization and Form of Ownership
The Bank was originally founded as a New York State chartered savings
bank in 1864. In August 1997, the Bank converted to a federally chartered mutual
savings bank and is now regulated by the OTS. On April 16, 1997, the Board of
Directors of the Bank adopted a Plan of Conversion to convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank with
the concurrent formation of a holding company (the "Conversion"). The Company
completed its initial public offering and Conversion on December 22, 1997 and
issued 45,130,312 shares of common stock, $.01 par value per share.
The Company, on November 19, 2001, paid a stock dividend of one share
for each share of stock held (two-for-one stock split) to shareholders of record
on November 5, 2001. At June 30, 2002 the number of shares issued was 90,260,624
and the number of shares outstanding was 60,908,166. All share amounts and
earnings per share amounts have been adjusted for the stock split.
The Bank has the following wholly owned subsidiaries:
The Mortgage Company was incorporated in the State of New Jersey in
1998. The Mortgage Company currently originates loans in 42 states and, as of
June 30, 2002, had assets totaling $1.3 billion of which $1.1 billion were loans
held for sale.
SIFC is a wholly owned subsidiary of SIBIC, incorporated in the State
of Maryland in 1998 for the purpose of establishing a real estate investment
trust ("REIT"). The assets of SIFC totaled $674.4 million at June 30, 2002.
SIBIC was incorporated in the State of New Jersey in 1998 for the
purpose of managing certain investments of the Bank. The Bank transferred the
common stock and a majority of the preferred stock of SIFC to SIBIC. The
consolidated assets of SIBIC at June 30, 2002 were $935.6 million.
SIBFSC was incorporated in the State of New York in January 2000.
SIBFSC was formed as a licensed life insurance agency to sell the products of
the SBLI USA Mutual Life Insurance Co. In the second quarter of 2002, this
subsidiary began to offer certain non-deposit investment products such as mutual
funds and annuities along with additional insurance products using a third party
vendor. The assets of SIBFSC were $661,000 as of June 30, 2002.
6
Earnings Per Share
Earnings per share are computed by dividing net income by the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding, adjusted for the 5.2 million unallocated shares held by the ESOP
and RRP plans in accordance with the Statement of Position 93-6. The following
table is a reconciliation of the earnings per share calculation for the three
months and six months ended June 30, 2002 and 2001.
Earnings Per Share Reconciliation
Weighted
Average Shares Per Share
Net Income Outstanding Amount
---------- ----------- ------
(Dollars and shares in thousands,
except per share amounts)
Three Months ended June 30, 2002
-----------------------------------------------
Basic EPS
Net income $17,580 56,192 $ 0.31
Effect of Dilutive Securities
Incremental shares from assumed
exercise of outstanding options $ -- 1,179 $ --
------- ------ --------
Diluted EPS $17,580 57,371 $ 0.31
======= ====== ========
Three Months ended June 30, 2001
Basic EPS
Net income $15,163 60,883 $ 0.25
Effect of Dilutive Securities
Incremental shares from assumed
exercise of outstanding options $ -- 376 $ --
------- ------ --------
Diluted EPS $15,163 $61,259 $ 0.25
======= ======= ========
Six Months ended June 30, 2002
Basic EPS
Net income $39,563 56,464 $ 0.70
Effect of Dilutive Securities
Incremental shares from assumed
exercise of outstanding options $ -- 1,117 $ (0.01)
------- ------ --------
Diluted EPS $39,563 $57,581 $ 0.69
======= ======= ========
Six Months ended June 30, 2001
Basic EPS
Net income $29,159 61,729 $ 0.47
Effect of Dilutive Securities
Incremental shares from assumed
exercise of outstanding options $ -- 232 $ --
------- ------- --------
Diluted EPS $29,159 $61,961 $ 0.47
======= ======= ========
7
Derivative Financial Instruments:
Interest rate derivatives, such as interest rate swaps and eurodollar
futures, are not currently employed by the Company for managing its interest
rate risk. The Company, however, does currently utilize derivative instruments,
such as forward delivery commitments, to manage exposure to interest rate risk
associated with mortgage loan commitments and mortgage loans held for sale.
Prior to the closing of a loan, the Company generally extends an interest rate
lock commitment to the borrower. As a result, the Company is exposed to
subsequent changes in the level of market interest rates, and the spread over
Treasuries required by investors. An increase in market interest rates or a
widening of spreads will reduce the prices paid by investors and the resultant
gain on sale. To mitigate this risk, at the time the Company extends the
interest rate lock commitment to the borrower, the Company enters into mandatory
or best effort commitments to deliver mortgage whole loans to various investors,
or to issue Fannie Mae and/or Freddie Mac securities (forward delivery
commitments.) These commitments effectively establish the price the Company will
receive for the related mortgage loan thereby minimizing the risk of subsequent
changes in interest rates. At June 30, 2002, the Company had mandatory forward
delivery commitments outstanding amounting to $1.2 billion. Such commitments are
comprised of the following: $102.0 million in allocated single whole loan sales,
$80.0 million of allocated Fannie Mae/Freddie Mac securities, $701.0 million of
allocated bulk whole loan sales, and $295.0 million of unallocated forward
security sales. The unallocated forward security sales had market depreciation
of $1.3 million at June 30, 2002 resulting in a mark to market loss in the
second quarter of 2002.
Since its release in 1998, the guidance in SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities" has raised questions about
whether loan commitments should be accounted for as derivatives. It had been the
position of the Company that they should not. On March 13, 2002, the Financial
Accounting Standards Board (FASB) cleared Statement 133 Implementation Issue C13
("Statement 133"), which offers clear guidance on the question, "In what
circumstances must a loan commitment be included in the scope of Statement No.
133 and accounted for as a derivative instrument?" After clearance of Statement
133 by FASB, the Company identified certain commitments that should be accounted
for as derivative instruments in accordance with Statement 133.
The effective date of the implementation guidance in Issue C13 is the
first day of the fiscal quarter beginning after April 10, 2002, and accounting
for the effects of initially complying with the implementation guidance in Issue
C13 is to be reported as a change of accounting principle. Accordingly, the
effective date for the Company is July 1, 2002. The effect of the initial
implementation of Statement 133 is that the Company shall record a pre-tax gain
of $6.5 million resulting from the mark to market of certain loan commitments as
of July 1, 2002.
Accounting For Goodwill
- -----------------------
In accordance with SFAS No. 142, the Company is no longer required to
amortize goodwill resulting from acquisitions effective January 1, 2002. The
Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets", ("SFAS 142") effective January 1, 2002 and had
goodwill of $55.3 million, which included core deposit intangibles of $2.4
million as of January 1, 2002. An annual impairment test of the goodwill is
required to determine if there is the need to writedown the goodwill. Prior to
adoption of SFAS 142 the quarterly goodwill amortization expense totaled
approximately $1.5 million.
8
The proforma results if SFAS 142 had been adopted in the prior periods.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(000'omitted)
unaudited
Net Income
- ----------
Reported net income $ 17,580 $ 15,163 $ 39,563 $ 29,159
Add back goodwill
amortization, net of tax -- 628 -- 1,268
---------- ---------- ---------- ----------
Adjusted net income $ 17,580 $ 15,791 $ 39,563 $ 30,427
========== ========== ========== ==========
Basic earnings per share
- ------------------------
Reported basic earnings per share $ 0.31 $ 0.25 $ 0.70 $ 0.47
Goodwill amortization, net of tax -- .01 -- .02
---------- ---------- ---------- ----------
Adjusted basic earning per share $ 0.31 $ 0.26 $ 0.70 $ 0.49
========== ========== ========== ==========
Diluted earnings per share
- --------------------------
Reported diluted earnings per share $ 0.31 $ 0.25 $ 0.69 $ 0.47
Goodwill amortization, net of tax . -- .01 -- .02
---------- ---------- ---------- ----------
Adjusted diluted earnings per share $ 0.31 $ 0.26 $ 0.69 $ 0.49
========== ========== ========== ==========
The carrying amount of goodwill and other intangible assets (in 000's) at June
30, 2002 and December 31, 2001 is as follows:
As of June 30, 2002 As of December 31, 2001
Net Net
Original Accumulated Carrying Original Accumulated Carrying
Amount Amortization Value Amount Amortization Value
------ ------------ ----- ------ ------------ -----
Goodwill $64,591 $11,499 $53,092 $64,322 $11,443 $52,879
Core deposit intangible 2,895 741 2,154 2,895 500 2,395
------- ------- ------- ------- ------- -------
Total $67,486 $12,240 $55,246 $67,217 $11,943 $55,274
======= ======= ======= ======= ======= =======
Estimated future amortization expense (in 000's) related to the core
deposit intangibles is as follows:
For the year ending
2002 483
2003 483
2004 483
2005 483
2006 463
Segment Reporting
The Company manages its operations in a manner to focus on two
strategic goals: fulfilling its role as a banking institution for both
individuals and businesses and as a national provider of single-family
residential mortgage loan products. Accordingly, the Company aligns its various
business objectives in
9
support of these goals and manages the Company through two segments:
Community Banking and Mortgage Banking.
Community Banking
The Company's Community Banking segment provides traditional banking
services to commercial and retail customers through the Bank. The services
include deposit accounts and related services, residential and commercial real
estate lending, consumer lending, commercial lending, loan servicing, trust
services and life insurance products. Products and services offered by this
business segment are delivered through a multi-channel distribution network,
including on-line banking. The Community Banking segment is the primary
warehouse lender for the Mortgage Banking segment and purchases loans from the
Mortgage Banking segment to be held in its portfolio.
During the first six months of 2002, the Community Banking segment
opened four branches in the State of New Jersey continuing its goal to expand
its branch network. In the second quarter of 2002 the Bank began to offer
certain non-deposit investment products to generate fee income.
Mortgage Banking
The Company's Mortgage Banking segment activities, which are conducted
through the Mortgage Company include primarily the origination of residential
real estate loans either for the sale into the secondary market or, to a lesser
extent, for retention in the Bank's portfolio. The loans are originated through
a network of branches in 42 states. Loans not retained for the Bank's portfolio
are sold to investors, including certain government sponsored agencies.
Applications for loans are accepted through various channels by the Mortgage
Banking segment as indicated on the Table 1 below. The Mortgage Company's goal
is to increase Alt-A loan production since this product produces higher margins.
Loan sales activity by product is provided on Table 2 for both the three and
six-month periods. This table includes loans sold to the Bank.
The segment operating revenue and operating earnings in the table below
incorporate certain intersegment transactions that the Company views as
appropriate for purposes of reflecting the contribution of certain segments,
which are eliminated in preparation of the Company's consolidated financial
statements in accordance with generally accepted accounting principles.
10
Segment Reporting Table
For Three and Six Months Ended June 30, 2002 and 2001
Quarter to Date
June 30, 2002
(000's omitted)
-------------------------------------------------------------------
unaudited
-------------------------------------------------------------------
Elimination of
Community Intersegment
Mortgage Banking Banking Items(1) Total
-------------------------------- ---------------------------------
Interest income: ..................................... $ 22,960 $ 104,859 $ (13,397) $ 114,422
--------- --------- --------- ---------
Interest expense: .................................... 14,270 60,682 (13,397) 61,555
--------- --------- --------- ---------
Net interest income: ................................. 8,690 44,177 -- 52,867
Provision for loan losses ............................ 3,890 1,100 4,990
Other income (loss):
Service and fee income ............................. -- 8,528 8,528
Net gains on loan sales ............................ 39,152 (571) (2,788) 35,793
Loan fees .......................................... 5,297 (235) 5,062
Securities transactions ............................ -- (6,817) (6,817)
--------- --------- --------- ---------
Total other income (loss): ........................... 44,449 905 (2,788) 42,566
Other expenses ....................................... 42,114 19,776 61,890
--------- --------- --------- ---------
Income before provision for income taxes ............. 7,135 24,206 (2,788) 28,553
Provision for income taxes ........................... 2,961 9,044 (1,032) 10,973
Income before cumulative effect of accounting change 4,174 15,162 (1,756) 17,580
Cumulative effect of change in accounting for income
taxes .............................................. -- -- -- --
--------- --------- --------- ---------
Net income ......................................... $ 4,174 $ 15,162 $ (1,756) $ 17,580
========= ========= ========= =========
Quarter to Date
June 30, 2001
(000's omitted)
-------------------------------------------------------------------
unaudited
-------------------------------------------------------------------
Elimination of
Community Intersegment
Mortgage Banking Banking Items(1) Total
-------------------------------- ---------------------------------
Interest income: .................................... $ 15,229 $ 86,389 $ (8,914) $ 92,704
--------- --------- --------- ---------
Interest expense: ................................... 8,914 54,124 (8,914) 54,124
Net interest income: ................................ 6,315 32,265 -- 38,580
--------- --------- --------- ---------
Provision for loan losses ........................... 85 515 600
Other income (loss):
Service and fee income ............................ -- 4,700 4,700
Net gains on loan sales ........................... 17,572 (611) (115) 16,846
--------- --------- --------- ---------
Loan fees ......................................... 3,863 245 4,108
Securities transactions ........................... -- 9 9
--------- --------- --------- ---------
Total other income (loss): .......................... 21,435 4,343 (115) 25,663
Other expenses ...................................... 20,711 18,034 38,745
--------- --------- --------- ---------
Income before provision for income taxes............. 6,954 18,059 (115) 24,898
Provision for income taxes .......................... 3,050 6,728 (43) 9,735
--------- --------- --------- ---------
Net income .......................................... $ 3,904 $ 11,331 $ (72) $ 15,163
======== ======== ======== ========
11
Year to Date
June 30, 2002
(000's omitted)
-------------------------------------------------------------------
unaudited
-------------------------------------------------------------------
Elimination of
Community Intersegment
Mortgage Banking Banking Items(1) Total
-------------------------------- ---------------------------------
Interest income: .................................... $ 45,274 $ 176,760 $ (27,858) $ 194,176
--------- --------- --------- ---------
Interest expense: ................................... 29,371 91,906 (27,858) 93,419
--------- --------- --------- ---------
Net interest income: ................................ 15,903 84,854 -- 100,757
Provision for loan losses ........................... 4,590 1,900 6,490
Other income (loss):
Service and fee income ............................ -- 13,581 13,581
Net gains on loan sales ........................... 78,758 (445) (7,665) 70,648
Loan fees ......................................... 11,313 530 11,843
Securities transactions ........................... -- (7,151) (7,151)
--------- --------- --------- ---------
Total other income (loss): .......................... 90,071 6,515 (7,665) 88,921
Other expenses ...................................... 81,023 38,454 119,477
Income before provision for income taxes ............ 20,361 51,015 (7,665) 63,711
--------- --------- --------- ---------
Provision for income taxes .......................... 8,450 18,534 (2,836) 24,148
--------- --------- --------- ---------
Income before cumulative effect of accounting change 11,911 32,481 (4,829) 39,563
Cumulative effect of change in accounting for income
taxes ............................................. -- -- -- --
--------- --------- --------- ---------
Net income ......................................... $ 11,911 $ 32,481 $ (4,829) $ 39,563
========= ========= ========= =========
Year to Date
June 30, 2001
-------------------------------------------------------------------
(000's omitted)
unaudited
-------------------------------------------------------------------
Elimination of
Community Intersegment
Mortgage Banking Banking Items(1) Total
-------------------------------- ---------------------------------
Interest income: .................................... $ 23,634 $ 173,349 $ (13,601) $ 183,382
--------- --------- --------- ---------
Interest expense: ................................... 14,784 107,780 (13,601) 108,963
--------- --------- --------- ---------
Net interest income: ................................ 8,850 65,569 -- 74,419
Provision for loan losses ........................... 335 865 1,200
Other income (loss):
Service and fee income ............................ -- 9,591 9,591
Net gains on loan sales ........................... 27,526 (935) (191) 26,400
Loan fees ......................................... 5,822 373 6,195
Securities transactions ........................... -- 3 3
--------- --------- --------- ---------
Total other income (loss): .......................... 33,348 9,032 (191) 42,189
Other expenses ...................................... 32,457 35,849 68,306
--------- --------- --------- ---------
Income before provision for income taxes............. 9,406 37,887 (191) 47,102
Provision for income taxes .......................... 3,908 14,106 (71) 17,943
--------- --------- --------- ---------
Net income .......................................... $ 5,498 $ 23,781 $ (120) $ 29,159
========= ========= ========= =========
(1) The intersegment eliminations consist of interest income on the Community
Banking Segment results and interest expense on the Mortgage Banking
results due to the Community Banking Segment providing the warehouse line
of credit to the Mortgage Banking Segment. The intersegment elimination
also includes $2.9 million and $115,000 in premiums paid by the Community
Banking Segment to the
12
Mortgage Banking Segment for the purchase of loans during the second
quarter of 2002 and 2001, respectively. The premiums paid for the purchase
of loans by the Community Banking Segment from the Mortgage Banking Segment
for the first six months of 2002 and 2001 were $7.7 million and $191,000,
respectively.
13
Securities - Available for Sale. The following table sets forth certain
information regarding amortized cost and estimated fair values of debt, equity,
mortgage-backed and mortgage related securities of the Company at June 30, 2002
and December 31, 2001.
June 30, 2002 (unaudited) December 31, 2001
----------------------------- -----------------------------
Bonds - Available For Sale Amortized Fair Amortized Fair
- -------------------------- Cost Value Cost Value
---------- ---------- ---------- -----------
(000's omitted) (000's omitted)
U.S. Treasuries ........................................ $ 1,015 $ 1,037 $ 1,035 $ 1,082
Govt. Sponsored Agencies ............................... 49,708 51,745 55,476 56,470
Industrial and Finance ................................. 194,772 180,621 199,470 178,077
Foreign ................................................ 250 250 250 250
---------- ---------- ---------- ----------
Total Debt Securities .................................. 245,745 233,653 256,231 235,879
---------- ---------- ---------- ----------
G.N.M.A. - M.B.S ....................................... 8,607 8,994 10,347 10,642
F.H.L.M.C. - M.B.S ..................................... 375,091 383,988 295,432 299,975
F.N.M.A. - M.B.S ....................................... 438,920 449,917 326,927 331,991
Agency C.M.O.'s ........................................ 109,801 112,225 128,564 130,116
Privately Issued C.M.O.'s .............................. 206,906 210,180 337,272 343,201
---------- ---------- ---------- ----------
Total Mortgage-Backed and Mortgage Related Securities .. 1,139,325 1,165,304 1,098,542 1,115,925
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Total Bonds - Available For Sale ....................... 1,385,070 1,398,957 1,354,773 1,351,804
---------- ---------- ---------- ----------
Equity Securities Amortized Fair Amortized Fair
- ----------------- Cost Value Cost Value
---------- ---------- ---------- -----------
Preferred Stock ........................ 8,382 8,031 20,352 19,842
Common Stock ........................... 21,355 25,376 16,279 19,744
FHLB Common Stock ...................... 109,600 109,600 102,900 102,900
IIMF Capital Appreciation Fund ......... 31,246 31,648 31,229 34,349
---------- ---------- ---------- ----------
Total Equity Securities ................ 170,583 174,655 170,760 176,835
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Total Investments ...................... $1,555,653 $1,573,612 $1,525,533 $1,528,639
========== ========== ========== ==========
14
Loan Portfolio Composition. The following table sets forth the composition of
the Bank's held for investment loans at the dates indicated.
June 30, 2002
(unaudited) December 31, 2001
----------- -----------------
(000's omitted)
Mortgage loans: (1)
Single-family residential ...................... $ 2,532,942 $ 2,062,336
Multi-family residential ....................... 54,259 48,783
Commercial real estate ......................... 391,438 335,821
Construction and land .......................... 205,310 245,515
Home equity .................................... 17,413 12,815
----------- -----------
Total mortgage loans ......................... 3,201,362 2,705,270
Other loans:
Student loans .................................. 115 288
Passbook loans ................................. 8,662 7,477
Commercial business loans ...................... 44,666 42,962
Other consumer loans ........................... 53,525 60,292
----------- -----------
Total other loans ............................ 106,968 111,019
----------- -----------
Total loans receivable ....................... 3,308,330 2,816,289
Less:
Premium (discount) on loans purchased .......... 4,533 5,135
Allowance for loan losses ...................... (22,925) (20,041)
Deferred loan costs ............................ 9,289 5,236
----------- -----------
Loans receivable, net .......................... $ 3,299,227 $ 2,806,619
=========== ===========
(1) Mortgage loans held for sale at June 30, 2002 and December 31, 2001, of $1.1
billion and $1.2 billion, respectively, are not included in this table.
15
Delinquent Loans: The following table sets forth information concerning
delinquent loans at June 30, 2002, in dollar amounts and as a percentage of each
category of the Bank's loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.
June 30, 2002 (unaudited)
------------------------ ---------------------- ----------------------
30-59 Days 60-89 Days 90 Days or More
------------------------ ---------------------- ----------------------
Percent of Loan Percent of Loan Percent of Loan
Amount Category Amount Category Amount Category
------- --------------- ------ --------------- ------ ---------------
(000's omitted)
Mortgage loans:
Single-family residential ............... $15,371 0.43% $ 5,873 0.16% $ 5,942 0.17%
Multi-family residential ................ 196 0.36% -- 0.00% -- 0.00%
Commercial real estate .................. 3,318 0.85% 402 0.10% -- 0.00%
Construction and land ................... 1,215 0.59% 68 0.03% 282 0.14%
Home equity ............................. 236 1.36% 90 0.52% 29 0.17%
------- ---- ------- ---- ------- ----
Total mortgage loans ................. 20,336 0.48% 6,433 0.15% 6,253 0.15%
Other loans:
Commercial business loans ............... 1,298 2.91% 338 0.76% 27 0.06%
Other loans ............................. 1,802 2.89% 523 0.84% 922 1.48%
------- ---- ------- ---- ------- ----
Total other loans ...................... 3,100 2.90% 861 0.80% 949 0.89%
---- ---- ----
Total delinquent loans ................. $23,436 0.54% $ 7,294 0.17% $ 7,202 0.16%
======= ==== ======= ==== ======= ====
16
Delinquent Loans: The following table sets forth information concerning
delinquent loans at the dates indicated. The amounts presented represent the
total outstanding principal balances of the related held in portfolio and held
for sale loans, rather than the actual payment amounts which are past due.
June 30, 2002
(unaudited) December 31, 2001
------------- -----------------
90 Days or More (000's Omitted)
- ---------------
Mortgage loans:
Single-family residential...... $5,942 $5,432
Multi-family residential ...... -- --
Commercial real estate ........ -- --
Construction and land ......... 282 509
Home equity ................... 29 30
------ ------
Total mortgage loans ........ 6,253 5,971
Other loans:
Commercial business loans ..... 27 774
Other loans ................... 922 468
------ ------
Total other loans ........... 949 1,242
Total ....................... $7,202 $7,213
====== ======
June 30, 2002
(unaudited) December 31, 2001
------------- -----------------
60-89 Days
- ----------
Mortgage loans:
Single-family residential...... $ 5,873 $ 5,945
Multi-family residential ...... -- 162
Commercial real estate ........ 402 1,510
Construction and land ......... 68 5,339
Home equity ................... 90 258
------- -------
Total mortgage loans ....... 6,433 13,214
Other loans:
Commercial business loans ..... 338 42
Other loans ................... 523 586
------- -------
Total other loans .......... 861 628
Total ...................... $ 7,294 $13,842
======= =======
June 30, 2002
(unaudited) December 31, 2001
------------- -----------------
30-59 Days
- ----------
Mortgage loans:
Single-family residential...... $15,371 $15,634
Multi-family residential ...... 196 567
Commercial real estate ........ 3,318 3,848
Construction and land ......... 1,215 9,113
Home equity ................... 236 62
------- -------
Total mortgage loans ....... 20,336 29,224
Other loans:
Commercial business loans ..... 1,298 1,257
Other loans ................... 1,802 2,645
------- -------
Total other loans .......... 3,100 3,902
------- -------
Total ...................... $23,436 $33,126
======= =======
17
Loans Past Due 90 Days or More and Still Accruing And Non-Accruing Assets. The
following table sets forth information with respect to non-accruing loans, other
real estate owned, repossessed assets, loans past due 90 days or more and still
accruing, and non-accruing securities.
June 30, 2002
(unaudited) December 31, 2001
------------- -----------------
(000's omitted)
Non-Accruing Loan Assets
Mortgage loans:
Single-family residential ............................. $ 7,909 $ 7,663
Multi-family residential .............................. 256 --
Commercial real estate ................................ 3,431 4,086
Construction and land ................................. 4,792 2,117
Home equity ........................................... -- 38
Other loans:
Commercial business loans ............................. 64 558
Other consumer loans .................................. 192 631
------- -------
Total non-accrual loans .............................. 16,644 15,093
Other real estate owned and repossessed assets, net ..... 8,592 1,227
------- -------
Total non-accruing loan assets ..................... 25,236 16,320
Loans past due 90 days or more and still accruing ...... 7,202 7,213
Non-accruing loan assets and loans past due 90 days
------- -------
or more and still accruing ............................ $32,438 $23,533
======= =======
Non-accruing loan assets to total *HFI & **HFS loans ... 0.58% 0.41%
Non-accruing loan assets to total assets ............... 0.39% 0.27%
Non-accruing loans to total *HFI & **HFS loans ......... 0.38% 0.38%
Non-accruing loans to total assets ..................... 0.26% 0.25%
Non-Accruing Security Assets
------- -------
Non-accruing available for sale securities ............ $ 2,150 $ --
======= =======
Non-accruing securities to total securities ............ 0.14% 0.00%
Non-accruing loans and securities assets to total assets 0.42% 0.27%
* Held for Investment
** Held for Sale
18
Allowance for Loan Losses. The following table sets forth the activity in the
Bank's allowance for loan losses during the periods indicated.
Six Months Ended Year Ended
June 30, (unaudited) December 31,
---------------------------- ------------
2002 2001 2001
------- ------- ------------
(000's omitted)
Allowance at beginning of period ............... $20,041 $14,638 $14,638
Provisions ..................................... 6,490 1,200 8,757
Charge-offs:
Mortgage loans:
Construction, land and land development ..... -- -- --
Single-family residential ................... 2,968 67 1,854
Multi-family residential .................... -- -- --
Commercial real estate ...................... -- -- --
Other loans .................................... 1,131 1,456 2,411
------- ------- -------
Total charge-offs ........................... 4,099 1,523 4,265
Recoveries:
Mortgage loans:
Construction, land and land development ..... 15 -- --
Single-family residential ................... 1 129 131
Multi-family residential .................... -- -- --
Commercial real estate ...................... -- -- --
Other loans .................................... 477 351 780
------- ------- -------
Total recoveries ............................ 493 480 911
------- ------- -------
Allowance at end of period ..................... $22,925 $14,795 $20,041
======= ======= =======
Allowance for possible loan losses
to total non-accruing loans at
end of period .................................. 137.74% 134.64% 132.78%
Allowance for possible loan losses
to total loans at end of period ................ 0.52% 0.42% 0.50%
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of management
as well as assumptions made by and information currently available to
management. In addition, in portions of this document and the Company's Annual
Report to Stockholders, the words "anticipate," "believe," "estimate," "expect,"
"intend," "should" and similar expressions, or the negative thereof, as they
relate to the Company or the Company's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future looking events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
Changes in Financial Condition
The Company recorded total assets of $6.4 billion at June 30, 2002
compared to total assets of $6.0 billion at December 31, 2001. The growth in
assets of $451.9 million or 7.5% was primarily due to an increase of $492.6
million in loans, net and an increase of $45.0 million in securities available
for sale. These increases were partially offset by a $107.5 million decline in
loans held for sale. The increase in loans, net was due to loan originations of
$610.9 million by the Bank in the first six months of 2002 and the retention of
$383.1 million in loans originated by the Mortgage Company for the Bank's
portfolio. The originations by the Bank are primarily residential loans and, to
a lesser extent, loans secured by commercial real estate. This level of
originations continues to reflect the Bank's business development efforts to
originate both residential and commercial loans in its primary market area and
the continued growth of its broker business. The Mortgage Company originations
retained for the Bank's portfolio are primarily higher yielding adjustable rate
loans. The increase in securities available for sale was due to management's
plan to invest excess cash flows in the securities portfolio. Loans held for
sale decreased due to loan sales of $2.9 billion by the Mortgage Company
compared to originations of $2.8 billion by the Mortgage Company for the first
six months of 2002. The level of loans sold reflects the Mortgage Company's
increased efficiencies in the area of shipping loans. In the current rate
environment, the mortgage banking refinance index and purchase index are at all
time highs and it is anticipated that originations by the Mortgage Company will
reach $1.8 billion in the third quarter of 2002.
Deposits increased $372.7 million or 12.8% during the first six months
of 2002 and totaled $3.3 billion at June 30, 2002. This increase was primarily
due to a $170.2 million increase in money market accounts and a $133.0 million
increase in savings accounts. This increase in money market accounts is
primarily due to the "Bank Edge" account which is a higher yielding money market
account which also requires the opening of a non-interest bearing DDA account
and is promoted primarily in the Bank's Brooklyn and New Jersey markets. The
growth in savings accounts was due to the current interest rate environment and
the current uncertainty of the stock market making this product attractive to
depositors. Core deposits, which consist of savings, money market, NOW and DDA
accounts, represented 66.1% of total deposits at June 30, 2002. The Company
believes that it can maintain this level of core deposits primarily due to the
quality customer service offered by the Bank and the current rate environment.
During the first six months of 2002 the Bank opened four branches in
the State of New Jersey increasing its branch network to 34 locations. The four
new branches had total deposits of
20
$34.9 million at June 30, 2002. The Bank plans to continue this strategy of
opening de-novo branches to increase deposits and expand its market area when
acceptable locations can be found.
The Company's borrowings at June 30, 2002 were $2.6 billion compared to
$2.5 billion at December 31, 2001. Borrowings as a percentage of assets at June
30, 2002 were 39.6% compared to 40.9% at December 31, 2001. Borrowings at June
30, 2002 consisted of Federal Home Loan Bank advances of $1.9 billion,
repurchase agreements of $567.5 million between the Mortgage Company and two
individual financial institutions of $129.1 million. The Mortgage Company's
obligations under these repurchase agreements are fully guaranteed by the Bank.
The growth in borrowings is primarily due to the level of originations at the
Mortgage Company.
Stockholders' equity amounted to $557.3 million at June 30, 2002 and
$552.2 million at December 31, 2001 or 8.6% and 9.2% of total assets at such
dates, respectively. The increase of $5.1 million was due to net income of $39.6
million, an allocation of Employee Stock Ownership Plan ("ESOP") shares and
Recognition and Retention Plan ("RRP") shares resulting in an increase of $4.6
million, the exercise of 752,548 stock options resulting in an increase of $11.2
million and an $8.2 million increase in the unrealized appreciation on
securities available for sale, net of taxes. These increases were partially
offset by the purchase of 2.3 million shares of the Company's common stock at a
cost of $45.4 million and aggregate cash dividend payments of $13.0 million. The
tangible book value per share of the Company's common stock was $8.20 at June
30, 2002 compared to $7.89 at December 31, 2001.
Results of Operations
The Company reported net income of $17.6 million or $0.31 per fully
diluted share for the three months ended June 30, 2002 compared to net income of
$15.2 million or $0.25 per fully diluted share for the comparable time period
last year. Core earnings for the second quarter of 2002 were $21.8 million or
$0.38 per fully diluted share compared to $15.2 million or $0.25 per fully
diluted share for the second quarter of 2001. Core earnings represent the
Company's earnings excluding securities gains or losses, net of taxes. Cash
earnings for the quarter ended June 30, 2002 were $19.6 million or $0.35 per
fully diluted share compared to $18.1 million or $0.30 per fully diluted share
for the second quarter of 2001. Cash earnings represent the Company's net income
increased by adding back non-cash expenses, net of applicable taxes related to
the ESOP and RRP plans, and the amortization of goodwill.
For the six-month period ended June 30, 2002, the Company reported net
income of $39.6 million or $0.69 per fully diluted share compared to $29.2
million or $0.47 per fully diluted share for the comparable time period in the
prior year. Core earnings for the six month period ended June 30, 2002 were
$44.0 million or $0.76 per fully diluted share compared to $29.2 million or
$0.47 per fully diluted share for the first half of 2001. Cash earnings were
$43.6 million or $0.76 per fully diluted share for the six-month period ended
June 30, 2002 compared to $35.0 million or $0.57 per fully diluted share for the
same time period one year ago.
The return on average equity and average assets for the three months
ended June 30, 2002 were 12.63% and 1.11%, respectively, compared to 10.73% and
1.09%, respectively, for the comparable time period in the prior year.
The return on average equity and average assets for the six-month
period ended June 30, 2002 was 14.33% and 1.28%, respectively, compared to
10.24% and 1.08%, respectively, for the six-month period ended June 30, 2001.
The increase in net income for the quarter ended June 30, 2002 compared
to the same quarter one year ago was due to an increase of $16.9 million in
other income and a $14.3 million
21
increase in net interest income. These
increases were partially offset by a $23.1 million increase in total other
expenses, a $4.4 million increase in the provision for loan losses and a $1.2
million increase in the provision for income taxes.
The increase in net income for the six-month period ended June 30, 2002
compared to the six-month period ended June 30, 2001 was due to an increase of
$46.7 million in other income and a $26.3 million increase in net interest
income. These increases were partially offset by a $51.2 million increase in
total other expenses, a $6.2 million increase in the provision for income taxes
and a $5.3 million increase in the provision for loan losses.
22
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID (unaudited)
Three Months Ended June 30,
------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost
--------- ---------- -------- ---------- -------- -----
Interest-earning assets: (000's omitted)
Loans receivable (1):
Real estate loans ................................. $4,100,486 $ 73,529 7.19% $3,262,392 $ 61,625 7.58%
Other loans ....................................... 105,857 2,226 8.43% 118,119 2,757 9.36%
--------- ---------- --------- ------
Total loans .................................... 4,206,343 75,755 7.22% 3,380,511 64,382 7.64%
Securities ........................................ 1,647,438 24,016 5.85% 1,759,556 28,068 6.40%
Other interest-earning assets (2) ................. 52,307 189 1.45% 32,666 254 3.11%
--------- ---------- --------- ------
Total interest-earning assets ..................... 5,906,088 99,960 6.79% 5,172,733 92,704 7.19%
---------- ------
Noninterest-earning assets ........................ 449,594 402,759
---------- ----------
Total assets ...................................... $6,355,682 $5,575,492
========== ==========
Interest-bearing liabilities:
Deposits:
NOW and money market deposits ..................... $ 621,252 3,985 2.57% $ 291,161 2,381 3.28%
Savings and escrow accounts ....................... 996,026 4,918 1.98% 808,755 4,516 2.24%
Certificates of deposit ........................... 1,101,234 9,811 3.57% 1,020,103 14,206 5.59%
--------- ---------- --------- ------
Total deposits ................................. 2,718,512 18,714 2.76% 2,120,019 21,103 3.99%
Total Other Borrowings ............................ 2,526,681 28,379 4.51% 2,392,163 33,021 5.54%
--------- ---------- --------- ------
Total interest-bearing liabilities ................ 5,245,193 47,093 3.60% 4,512,182 54,124 4.81%
Noninterest-bearing liabilities (3) ............... 552,338 496,514
---------- ----------
Total liabilities ................................. 5,797,531 5,008,696
Stockholders' equity .............................. 558,151 566,796
---------- ----------
Total liabilities and stockholders' equity 6,355,682 $5,575,492
========= ==========
Net interest-earning assets ....................... $ 660,895 $ 660,551
========= ---------- ========== --------
Net interest income/interest rate spread .......... $ 52,867 3.19% $ 38,580 2.38%
========== ====== ======== ======
Net interest margin ............................... 3.59% 2.99%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities ........ 112.60% 114.64
====== ======%
Six Months Ended June 30,
------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost
--------- ---------- -------- ---------- -------- -----
Interest-earning assets: (000's omitted)
Loans receivable (1):
Real estate loans ................................. $3,979,497 $ 141,182 7.15% $3,123,188 $118,244 7.63%
Other loans ....................................... 105,996 4,456 8.48% 118,519 5,587 9.51%
--------- ---------- --------- ------
Total loans .................................... 4,085,493 145,638 7.19% 3,241,707 123,831 7.70%
Securities ........................................ 1,616,029 47,841 5.97% 1,818,560 58,918 6.53%
Other interest-earning assets (2) ................. 91,644 698 1.54% 33,324 633 3.83%
--------- ---------- --------- ------
Total interest-earning assets ..................... 5,793,166 194,177 6.76% 5,093,591 183,382 7.26%
---------- ------
Noninterest-earning assets ........................ 439,232 368,392
---------- ----------
Total assets ...................................... $6,232,398 $5,461,983
========== ==========
Interest-bearing liabilities:
Deposits:
NOW and money market deposits ..................... $ 571,125 7,342 2.59% $ 266,727 4,128 3.12%
Savings and escrow accounts ....................... 956,216 9,401 1.98% 796,880 8,877 2.25%
Certificates of deposit ........................... 1,090,578 20,157 3.73% 1,000,032 28,136 5.67%
--------- ---------- --------- ------
Total deposits ................................. 2,617,919 36,900 2.84% 2,063,639 41,141 4.02%
Total Other Borrowings ............................ 2,501,454 56,519 4.56% 2,344,761 67,822 5.83%
--------- ---------- --------- ------
Total interest-bearing liabilities ................ 5,119,373 93,419 3.68% 4,408,400 108,963 4.98%
---------- ------
Noninterest-bearing liabilities (3) ............... 556,346 479,607
Total liabilities ................................. 5,675,719 4,888,007
Stockholders' equity .............................. 556,679 573,976
---------- ----------
Total liabilities and stockholders' equity 6,232,398 $5,461,983
========= ==========
Net interest-earning assets ....................... $ 673,793 $ 685,191
========= ---------- ========== --------
Net interest income/interest rate spread .......... $ 100,758 3.08% $ 74,419 2.28%
========== ====== ======== ======
Net interest margin ............................... 3.51% 2.95%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities ........ 113.16% 115.54%
====== ======
- ------------------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Includes money market accounts and Federal Funds sold.
(3) Consists primarily of demand deposit accounts.
23
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (change in rate multiplied by change in volume).
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------- -------------------------------------------
2002 compared to 2001 2002 compared to 2001
------------------------------------------- -------------------------------------------
Increase (decrease) due to Increase (decrease) due to
------------------------------ Total ------------------------------ Total
Rate/ Net Increase Rate/ Net Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
-------- -------- -------- -------- -------- -------- -------- --------
(000's omitted)
unaudited
Interest-earning assets:
Loans receivable:
Real estate loans .................... $ (3,124) $ 15,831 $ (803) $ 11,904 $ (7,442) $ 32,420 $ (2,040) $ 22,938
Other loans .......................... (274) (286) 29 (531) (605) (590) 64 (1,131)
-------- -------- -------- -------- -------- -------- -------- --------
Total loans receivable ............... (3,398) 15,545 (774) 11,373 (8,047) 31,830 (1,976) 21,807
Securities ............................ (2,418) (1,788) 154 (4,052) (5,081) (6,562) 566 (11,077)
Other interest-earning assets ......... (135) 152 (82) (65) (379) 1,107 (663) 65
Total net change in income on interest-
-------- -------- -------- -------- -------- -------- -------- --------
earning assets ....................... (5,951) 13,909 (702) 7,256 (13,507) 26,375 (2,073) 10,795
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
NOW and money market deposits ........ (513) 2,699 (582) 1,604 (699) 4,711 (798) 3,214
Savings and escrow accounts .......... (523) 1,046 (121) 402 (1,043) 1,775 (208) 524
Certificates of deposit .............. (5,118) 1,130 (407) (4,395) (9,652) 2,547 (874) (7,979)
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits ...................... (6,154) 4,875 (1,110) (2,389) (11,394) 9,033 (1,880) (4,241)
Other Borrowings ...................... (6,152) 1,856 (346) (4,642) (14,843) 4,532 (992) (11,303)
Total net change in expense on
-------- -------- -------- -------- -------- -------- -------- --------
interest-bearing liabilities ......... (12,306) 6,731 (1,456) (7,031) (26,237) 13,565 (2,872) (15,544)
-------- -------- -------- -------- -------- -------- -------- --------
Net change in net interest income ..... $ 6,355 $ 7,178 $ 754 $ 14,287 $ 12,730 $ 12,810 $ 799 $ 26,339
======== ======== ======== ======== ======== ======== ======== ========
24
Interest Income
The Company's interest income for the three months ended June 30, 2002
was $100.0 million compared to $92.7 million for the three months ended June 30,
2001. The $7.3 million increase was due to an $11.4 million increase in interest
income, from loans, partially offset by a $4.1 million decrease in interest
income from securities. The increase in interest income from loans was due to an
$825.8 million increase in the average balance of the loan portfolio partially
offset by a decline in the average yield on the loan portfolio from 7.64% for
the second quarter of 2001 to 7.22% for the second quarter of 2002. The increase
in the average balance of the loan portfolio was due to increased loan
originations by the Bank, the retention of higher yielding loans originated by
the Mortgage Company for the Bank's portfolio and the increase in loans held for
sale by the Mortgage Company. The decrease in the average yield on the loan
portfolio was due to the generally lower interest rate environment over the past
twelve months resulting in increased prepayments and satisfactions, the downward
repricing of adjustable rate loans and the origination of loans at lower
interest rates. The decrease in interest income from securities was due to a
$112.1 million decline in the average balance of the securities portfolio and a
55 basis point decline in the average yield on the securities portfolio to 5.85%
for the second quarter of 2002 compared to 6.40% for the second quarter of 2001.
The decrease in the average balance of the securities portfolio was due to the
use of cash flows generated by the securities portfolio to fund higher yielding
loan originations at both the Bank and the Mortgage Company. The decline in the
average yield on the securities portfolio was primarily due to the lower rate
environment and the accelerated paydown of higher yielding mortgage-backed
securities in this interest rate environment.
Total interest income for the six-month period ended June 30, 2002 was
$194.2 million compared to $183.4 million for the first six months of 2001. The
increase of $10.8 million was due to a $21.8 million increase in interest income
from loans partially offset by an $11.1 million decrease in interest income from
securities. The increase in interest income from loans was due to an $843.8
million increase in the average balance of loans partially offset by a 51 basis
point decline in the average yield on loans to 7.19% for the six months ended
June 30, 2002. The increase in the average balance of loans was primarily due to
the growth of originations at the Mortgage Company resulting in an increase in
loans held for sale and an increase in the amount of loans originated by the
Mortgage Company and retained for the Bank's portfolio. The decline in the
average yield on loans is due to substantially the same reasons as previously
stated for the quarter.
Interest Expense
The Company's total interest expense was $47.1 million for the second
quarter of 2002 compared to $54.1 million for the second quarter of 2001. The
decrease of $7.0 million was due to a $4.4 million decrease in interest expense
on certificates of deposit and a $4.6 million decrease in interest expense on
borrowed funds. These decreases were partially offset by a $1.6 million increase
in interest expense on money market and NOW accounts. The decrease in interest
expense on certificates of deposit was due to a 201 basis point decrease in the
average cost of certificates of deposit to 3.57% for the second quarter of 2002
primarily due to the lower interest rates over the past twelve months. The
decline in interest expense on borrowed funds was due to a 103 basis point
decline in the average cost of borrowings to 4.51% for the second quarter of
2002. The decline in the average cost of borrowings was due to the lower rate
environment resulting in new borrowings at lower rates compared to the
borrowings coming due. The decline in interest expense on borrowings, due to the
decline in the average cost, was partially offset by a $134.5 million increase
in the average balance of borrowings. The increase in the average balance of
borrowings was due to the Bank's funding requirements, particularly with respect
to higher yielding loan originations. The increase in interest expense for money
market and NOW accounts was due to a $330.1 million increase in the average
balance of money market and NOW accounts in the second quarter of 2002 compared
to the first quarter of 2001. This increase was partially offset by a 71 basis
point decline in the average cost to 2.57% for the
25
second quarter of 2002. The increase in the average balance of money market and
NOW accounts was due to the promotion of a premium money market account which
required the opening of a DDA account to develop banking relationships and, to a
lesser extent, the opening of four new branches in the first half of 2002.
For the first six months of 2002 the Company's interest expense was
$93.4 million compared to $109.0 million for the same time period in the prior
year. The decrease of $15.5 million was due to an $8.0 million decrease in
interest expense on certificates of deposit and an $11.3 million decrease in
interest expense on borrowed funds. These decreases were partially offset by a
$3.2 million increase in interest expense on money market and NOW accounts. The
decrease in interest expense on certificates of deposit was due to the average
cost for the first six months of 2002 declining to 3.73% from 5.67% for the
first six months of 2001. The decline in the average cost was due to the lower
interest rate environment over the past twelve months. The decline in interest
expense on borrowed funds was due to a 128 basis point decline in the average
cost from 5.83% for the first six months of 2001 to 4.56% for the first six
months of 2002. In this period of lower interest rates, the Company has extended
the maturities of certain borrowings to limit its interest rate risk exposure in
a rising rate environment.
The increase in interest expense on money market and NOW accounts was
due to a $304.4 million increase in the average balance of money market and NOW
accounts partially offset by a 53 basis point decline in the average cost to
2.59% for the first six months of 2002. The increase in the average balance and
decline in the average cost are due to substantially the same reasons as
previously stated for the quarter.
Net Interest Income
Net interest income for the second quarter of 2002 was $52.9 million,
an increase of $14.3 million or 37.0% over the second quarter of 2001. The
increase was due to a $7.3 million increase in interest income and a $7.0
million decrease in interest expense. The increase in interest income was due to
a $733.4 million increase in the average balance of interest-earning assets
partially offset by a 40 basis point decrease in the average yield from 7.19% to
6.79% for the second quarter of 2002. The decrease in interest expense was due
to a 121 basis point decrease in the average cost to 3.60% partially offset by
an increase of $733.0 million in the average balance of interest -bearing
liabilities.
The Company's net interest rate spread and net interest rate margin for
the three-month period ended June 30, 2002 was 3.19% and 3.59%, respectively,
compared to 2.38% and 2.99%, respectively, for the three-month period ended June
30, 2001.
For the six-month period ended June 30, 2002 net interest income was
$100.8 million compared to $74.4 million for the six-month period ended June 30,
2001. The increase of $26.3 million or 35.4% was due to a $10.8 million increase
in interest income and a $15.5 million decrease in interest expense. The
increase in interest income was due to a $699.6 million increase in the average
balance of interest-earning assets partially offset by a 50 basis point decline
in the average yield on interest-earning assets to 6.76%. The decrease in
interest expense was due to a decrease in the average cost of interest-bearing
liabilities for the first half of 2002 to 3.68% from 4.98% for the first half of
2001, partially offset by a $711.0 million increase in the average balance of
interest-bearing liabilities.
The improvement in the Company's net interest rate spread and margin
continues to be driven by the favorable interest rate environment which results
in lower funding costs. The growth of the Company's earning assets has also led
to improvements in the interest rate spread and margin. The Company will
continue to retain higher yielding loans originated by the Mortgage Company to
maintain asset yields and closely monitor its repricing of interest-bearing
liabilities and, when the opportunity exists, extend the maturities of
certificates of deposit and borrowings.
26
Provision for Loan Losses
The provision for loan losses for the second quarter of 2002 was $5.0
million compared to $600,000 for the second quarter of 2001. The increase in the
loan loss provision was due to the increase in net chargeoffs, current economic
conditions and increased origination volumes at both the Bank and Mortgage
Company. Net chargeoffs for the second quarter of 2002 were $3.2 million
compared to $506,000 for the second quarter of 2001. The increase in net
chargeoffs was primarily due to $1.4 million in chargeoffs on loans transferred
to Other Real Estate Owned ("OREO") at net realizable value and a $1.6 million
chargeoff relating to the sale of $5.3 million of loans by the Mortgage Company
that did not meet secondary market standards.
For the six months ended June 30, 2002 the provision for loan losses
was $6.5 million compared to $1.2 million for the six months ended June 30,
2001. The increase in the provision was primarily due to the same reasons as
previously discussed for the quarter and, to a lesser extent, the $1.6 million
growth in non-accrual loans and the $7.3 million growth in OREO since December
31, 2001.
Total non-accruing loans and OREO increased by an aggregate of $8.9
million during the six-month period ended June 30, 2002 resulting in total
non-accruing loans and OREO of $25.2 million at June 30, 2002 compared to $16.3
million at December 31, 2001. The increase is primarily due to the movement of
two loans with a total book balance of $7.4 million into OREO status during the
first half of the year and two loans with a book balance of $4.4 million moving
into non-accrual status during the same time period.
In July 2002, the Company entered into an agreement for the sale of a
previously reported non-accrual loan with a book balance of $2.5 million and the
Company also entered into an agreement for the sale of one of the previously
mentioned OREO properties with a book balance of $4.7 million. The Company
anticipates that both of these transactions will settle prior to September 30,
2002 with no material loss. Management continues to aggressively pursue the
recovery of the second OREO property previously mentioned which has a book
balance of $2.8 million and the second non-accrual loan which has a book balance
of $1.8 million.
The allowance for loan losses was $22.9 million or 137.7% of
non-accruing loans at June 30, 2002 compared to $20.0 million or 132.8% of
non-accruing loans at December 31, 2001. The activity in the allowance for loan
losses consisted of chargeoffs of $4.1 million, recoveries of $493,000 and
provisions of $6.5 million for the first six months of 2002. While no assurance
can be given that future chargeoffs or additional provisions over the current
level will not be necessary, management believes, based on its review and the
level of non-accruing loans and delinquencies, that the current allowance for
loan losses is adequate.
Total Other Income
Other income, exclusive of net securities gains and losses, was $49.4
million for the second quarter of 2002 compared to $25.7 million for the second
quarter of 2001. The increase of $23.7 million was primarily due to a $3.8
million increase in service and fee income and an $18.9 million increase in net
gains on loan sales. The increase in service and fee income was due to the
receipt of a one-time $3.0 million liquidating dividend from the investment in
the Company's former data processing provider and higher banking fees,
reflecting increased transactions due to the expansion of the Bank's retail
branching network and deposit growth. The increase in net gains on loan sales
was due to increased volume and an increase in the average gross margins,
partially offset by a $1.3 million mark to market adjustment on unallocated
forward security sales. The increase in the volumes of shipped loans to $1.6
billion for the second quarter of June 2002 was due to the record level of
originations and increased efficiencies in packaging and shipping loans. The
increase in the average gross margin from 2.27% for the second quarter of 2001
to 2.56% for the second quarter of 2002 was primarily due to the increase in the
higher margin Alt-A product. In the second quarter of 2002 Alt-A production
represented 34.8% of total sales compared to 17.5% of total sales in the second
quarter of 2001. The mark to market
27
adjustment on $295.0 million of unallocated forward security sales was due to
the movement in interest rates.
Other income, exclusive of net securities gains and losses, was $96.1
million for the first six months of 2002 compared to $42.2 million for the first
six months of 2001. The increase of $53.9 million was due to a $4.0 million
increase in service and fee income, a $44.2 million increase in net gains on
loan sales and a $5.6 million increase in loan fees. The increase in service and
fee income was due to substantially the same reasons as previously discussed for
the quarter. The increase in net gains on loan sales was due to increased
volumes of loan originations and the average gross margin remaining stable at
2.60% for the first six months of 2002 and 2.56% for the first six months of
2001. The increased volumes were due to the current interest rate environment
and the continued expansion of the Mortgage Company. The margin remained stable
due to the growth in the wholesale and correspondent business channel
originations which resulted in lower margins being offset by the growth in Alt-A
production which resulted in higher margins. The increase in loan fees was due
to increased volumes at both the Bank and Mortgage Company.
The Company recorded a net security loss of $6.8 million for the second
quarter of 2002 compared to a net gain of $9,000 for the second quarter of 2001.
For the six months ended June 30, 2002 net security losses were $7.2 million
compared to a net security gain of $3,000 for the first six months of 2001. The
reason for the net security losses in the first six months of 2002 was a $7.9
million impairment charge on two asset-backed securities. The Company recorded a
$500,000 impairment charge in the first quarter of 2002 and a $7.4 million
impairment charge in the second quarter of 2002. During the second quarter, due
to further significant deterioration in the collateral value supporting these
securities and the resultant negative impact on anticipated cash flows, the
Company recorded a $7.4 million impairment charge in accordance with generally
accepted accounting principles reducing the aggregate carrying value of these
two securities to $2.1 million at June 30, 2002. The Company owns three
additional collateralized bond obligations with a book value of $14.0 million
and a market value of $6.6 million at June 30, 2002.
The Mortgage Company sells various types of loans in the secondary market.
The following table summarizes loans sold and gross margins realized by type of
loan.
Quarter ended June 30, Year to Date June 30,
2002 2002
Type Volume Gain Gross Margin Volume Gain Gross Margin
Agency $ 655,014 $ 12,873 1.97% $1,358,529 $ 29,027 2.14%
Government 284,851 7,119 2.50% 634,597 15,724 2.48%
Jumbo 82,821 1,312 1.58% 213,656 3,357 1.57%
ALT-A 553,160 18,426 3.33% 846,217 30,730 3.63%
Sub Prime 17,140 673 3.93% 27,706 1,170 4.22%
---------------------------- ----------------------------
Total $1,592,986 $ 40,403 2.54% $3,080,705 $ 80,008 2.60%
============================ ============================
Quarter ended June 30, Year to Date June 30,
2001 2001
Type Volume Gain Gross Margin Volume Gain Gross Margin
Agency $ 454,129 $ 8,360 1.84% $ 608,167 $ 12,803 2.11%
Government 101,624 2,428 2.39% 160,069 4,639 2.90%
Jumbo 72,328 823 1.14% 100,764 1,339 1.33%
ALT-A 135,758 5,673 4.18% 193,670 8,340 4.31%
Sub Prime 10,280 287 2.79% 13,609 406 2.98%
---------------------------- ----------------------------
Total $ 774,119 $ 17,571 2.27% $1,076,279 $ 27,527 2.56%
============================ ============================
28
The Mortgage Company originates loans through various channels.
The following table summarizes application volumes by channel.
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
Channel Volume Volume Volume Volume
Consumer Direct $ 365,278 $ 102,905 $ 599,840 $ 149,545
Retail 807,173 673,065 1,589,190 1,349,971
Wholesale 1,637,634 606,279 2,865,037 1,071,194
Bulk Purchase 26,726 -- 26,726 --
----------
Total $2,836,811 $1,382,249 $5,080,793 $2,570,710
========== ========== ========== ==========
Total Other Expenses
Total other expenses for the second quarter of 2002 were $61.9 million
compared to $38.7 million for the second quarter of 2001. The increase of $23.1
million was primarily due to an increase of $5.6 million in personnel costs, an
$11.3 million increase in commission expense, a $2.2 million increase in
professional fees and a $3.8 million increase in other expenses. The increase in
personnel expense was due to a $4.2 million increase at the Mortgage Company
resulting from expansion and growth, a $558,000 increase in non-cash expense for
the ESOP reflecting the Company's higher stock price compared to last year and
an $800,000 increase in personal expenses related to branch expansion,
incentives, and normal merit pay increases at the Bank. The increase in
commission reflects the growth of the Mortgage Company. The increase in
professional fees is primarily due to the hiring of contract workers at the
mortgage-banking subsidiary in response to the increased origination volumes.
The increase in other expenses primarily reflects the growth and expansion of
the Mortgage Company over the past year to properly handle the increased volumes
and expansion.
Total other expenses for the first half of 2002 were $119.5 million
compared to $68.3 million for the comparable time period last year. The increase
of $51.2 million was due to a $12.1 million increase in personnel expenses, a
$27.0 million increase in commissions, a $4.3 million increase in professional
fees and a $7.6 million increase in other expenses. These increases were
partially offset by a $2.5 million decrease in the amortization expense related
to goodwill due to the change in generally accepted accounting principles. The
increase in personnel expense was primarily due to an $8.9 million increase due
to growth at the Mortgage Company, a $1.2 million increase in the non-cash
expense related to the ESOP, a $1.9 million increase at the Bank due to
expansion, incentives, normal merit pay increase and medical insurance costs at
the Bank. The increase in commission expense was due to the increased level of
originations at the Mortgage Company compared to the same time period in the
prior year. The increase in professional fees was due to the use of contract
workers at the Mortgage Company in response to the increased volumes for the
first half of the year. The increase in other expenses was due to the growth and
expansion at the Mortgage Company.
Provision for Income Taxes
The provision for income taxes for the second quarter of 2002 was $11.0
million compared to $9.7 million for the same period in 2001. This resulted in
an effective tax rate of 38.4% for the second quarter of 2002 and 39.1% for the
second quarter of 2001. The provision for income taxes for the first half of
2002 was $24.1 million compared to $17.9 million for the same time period in the
prior year. This resulted in an effective tax rate of 37.9% for the 2002 period
and 38.1% for the 2001 period. The primary reason for the increase in the
provision for income taxes for both the three and six months periods ending June
30, 2002 compared to the same time frames in the prior year was the increase in
income before taxes partially offset by a decline in the effective tax rate.
29
Liquidity and Commitments
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, amortization, prepayments and maturities
of outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-backed
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Company invests excess funds in federal funds sold
and other short-term interest-earning assets which provide liquidity to meet
lending requirements.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds. The Company uses its sources of funds primarily to meet
its ongoing commitments, to pay maturing certificates of deposit and savings
withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed
and mortgage-related securities and investment securities. At June 30, 2002, the
total approved loan origination commitments outstanding amounted to $587.0
million and the Mortgage Company had commitments of $587.1 million to sell loans
to third party investors. At the same date, the unadvanced portion of
construction loans totaled $38.2 million. Certificates of deposit scheduled to
mature in one year or less at June 30, 2002 totaled $804.7 million. Investment
securities scheduled to mature in one year or less at June 30, 2002 totaled $1.0
million and amortization from investments and loans is projected at $1.5 billion
over the next 12 months. Based on historical experience, the Bank's current
pricing strategy and the Bank's strong core deposit base, management believes
that a significant portion of maturing deposits will remain with the Bank. The
Bank anticipates that it will continue to have sufficient funds, together with
loan sales and security sales, to meet its current commitments. In the event the
funds required exceed the funds generated by the Bank, additional sources of
funds such as reverse repurchase agreements, FHLB advances, overnight lines of
credit and brokered CD's are available to the Bank.
Capital
At June 30, 2002, the Bank had regulatory capital that was well in
excess of all regulatory requirements set by the OTS. The current requirements
and the Bank's actual levels are detailed below (dollars in thousands):
Required Capital Actual Capital Excess Capital
---------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
Tangible capital $ 95,060 1.50% $416,213 6.57% $321,153 5.07%
Core capital $253,580 4.00% $418,367 6.60% $164,787 2.60%
Risk-based capital $274,692 8.00% $436,397 12.71% $161,705 4.71%
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk continues to be market interest rate
volatility due to the potential impact on net interest income and the market
value of all interest-earning assets and interest-bearing liabilities resulting
from changes in interest rates. The Company monitors its interest rate risk on a
quarterly basis, and due to the current interest rate environment, the Company's
net interest rate spreads and margins have improved. The operation of the
Company does not subject it to foreign exchange or commodity price risk and the
Company does not own any trading assets. The real estate loan portfolio of the
Company is concentrated primarily within the New York metropolitan area making
it subject to the risks associated with the local economy. Since December 31,
2001 OREO properties have increased primarily due to two credit relationships
being placed in OREO status during the first quarter of
30
2002. Management anticipates that this will not have a material effect on future
earnings. For a complete discussion of the Company's asset and liability
management market risk and interest rate sensitivity, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's 2001 Annual Report to Stockholders.
31
Part II Other Information
Item 1 Legal Proceedings
Not applicable
Item 2 Changes in Securities and Use of Proceeds
Not applicable
Item 3 Defaults Upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Certification of Chief Executive Officer
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18U.S.C. 1350)
The undersigned executive officer of Staten Island Bancorp, Inc. (the
"Registrant") hereby certifies that the Registrant's (Form 10-Q for the three
months and six months ended June 30, 2002) fully complies with the requirements
of Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained therein fairly presents, in all material respects, the financial
condition and results of operations of the Registrant.
/s/ Harry P. Doherty
------------------------------------
Name: Harry P. Doherty
Title: President and Chief Executive Officer
Date: August 14, 2002
99.2 Certification of Chief Financial Officer
CERTIFICATIONS OF CHIEF FINANCIAL OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18U.S.C. 1350)
The undersigned executive officer of Staten Island Bancorp, Inc. (the
"Registrant") hereby certifies that the Registrant's (Form 10-Q for the three
months and six months ended June 30, 2002) fully complies with the requirements
of Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained therein fairly presents, in all material respects, the financial
condition and results of operations of the Registrant.
/s/ Edward Klingele
-------------------------------------
Name: Edward Klingele
Title: Sr. Vice President and Chief
Financial Officer
Date: August 14, 2002
b. Reports on Form 8-K
On July 15th, 2002, Staten Island Bancorp filed a current report on form
8-K that included the press release regarding the $7.4 million writedown of
two asset backed securities due to permanent impairment of these
securities.
On July 22, 2002, Staten Island Bancorp filed current report on Form 8-K
that included the press release announcing the intention of the Company to
repurchase up to 3,040,000 shares of the Company's Common stock.
32