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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 0-28886
ROSLYN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3333218
-------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Jericho Plaza, Jericho, New York 11753-8905
-----------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(516) 942 - 6000
-----------------------------------------------------------------------------
(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.
Classes of Common Stock Number of Shares Outstanding, July 23, 2002
----------------------- -------------------------------------------
$.01 Par Value 83,684,198
-------------- ----------
FORM 10-Q
ROSLYN BANCORP, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at
June 30, 2002 and December 31, 2001 1
Consolidated Statements of Income for the three and six months ended
June 30, 2002 and 2001 2
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 2002 3
Consolidated Statements of Cash Flows
for the six months ended June 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 27
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings 28
ITEM 2. Changes in Securities and Use of Proceeds 28
ITEM 3. Defaults Upon Senior Securities 28
ITEM 4. Submission of Matters to a Vote of Security Holders 28
ITEM 5. Other Information 29
ITEM 6. Exhibits and Reports on Form 8-K 29
Signatures Page 30
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This report, as well as other written communications made from time to time by
Roslyn Bancorp, Inc. and its subsidiaries (the Company) (including, without
limitation, the Company's 2001 Annual Report to Stockholders), and oral
communications made from time to time by authorized officers of the Company, may
contain statements relating to the future results of the Company (including
certain projections and business trends) that are considered "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995
(the PSLRA). Such forward-looking statements may be identified by the use of
such words as "believe," "expect," "anticipate," "should," "planned,"
"estimated," "intend" and "potential." Examples of forward-looking statements
include, but are not limited to, possible or assumed estimates with respect to
the financial condition, expected or anticipated revenue, and results of
operations and business of the Company, including with respect to earnings
growth (on both an accounting principles generally accepted in the United States
(GAAP) and cash basis); revenue growth in retail banking, lending and other
areas; origination volume in the Company's consumer, commercial and other
lending businesses; asset quality and levels of non-performing assets; results
of operations from real estate joint ventures; current and future capital
management programs; non-interest income levels, including fees from services
and product sales; tangible capital generation; market share; expense levels;
and other business operations and strategies. For these statements, the Company
claims the protection of the safe harbor for forward-looking statements
contained in the PSLRA.
The Company cautions you that a number of important factors could cause actual
results to differ materially from those currently anticipated in any
forward-looking statement. Such factors include, but are not limited to:
prevailing economic conditions; changes in interest rates, loan demand, real
estate values and competition, which can materially affect, among other things,
retail banking revenues, revenues from sales of non-deposit investment products,
origination levels in the Company's mortgage lending businesses and real estate
joint venture activities; the level of defaults, losses and prepayments on loans
made by the Company, whether held in portfolio or sold in the secondary markets;
changes in accounting principles, policies, and guidelines; changes in any
applicable law, rule, regulation or practice with respect to tax or other legal
issues; risks and uncertainties related to acquisitions and related integration
and restructuring activities; and other economic, competitive, governmental,
regulatory and technological factors affecting the Company's operations,
pricing, products and services. The forward-looking statements are made as of
the date of this report, and the Company assumes no obligation to update the
forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
ROSLYN BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands, except share amounts)
June 30, 2002 December 31, 2001
----------------- -----------------
ASSETS
------
Cash and cash equivalents:
Cash and cash items $ 10,031 $ 10,815
Due from banks 72,745 64,810
Money market investments 4,600 27,200
----------------- ----------------
Total cash and cash equivalents 87,376 102,825
Debt and equity securities available-for-sale, net (securities pledged of
$167,585 and $114,426 at June 30, 2002 and December 31, 2001, respectively) 1,259,196 1,004,728
Mortgage-backed and mortgage related securities available-for-sale, net
(securities pledged of $2,344,967 and $1,754,733 at June 30, 2002 and
December 31, 2001, respectively) 4,769,282 3,560,854
----------------- ----------------
Total securities available-for-sale, net 6,028,478 4,565,582
Federal Home Loan Bank of New York stock, at cost 94,890 109,870
Loans held-for-sale 4,455 9,364
Loans receivable held for investment, net:
Real estate loans, net 3,111,725 3,412,148
Consumer and other loans, net 289,253 285,012
----------------- ----------------
Total loans receivable held for investment, net 3,400,978 3,697,160
Allowance for loan losses (42,019) (40,634)
----------------- ----------------
Total loans receivable held for investment, net of allowance for loan losses 3,358,959 3,656,526
Banking house and equipment, net 35,084 32,589
Accrued interest receivable 60,204 50,550
Deferred tax asset, net 19,318 40,213
Intangible assets 923 986
Other assets 196,998 168,275
----------------- ----------------
Total assets $ 9,886,685 $ 8,736,780
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Savings accounts $ 995,092 $ 920,507
Certificates of deposit 3,147,417 2,756,737
Money market accounts 508,597 371,007
Interest-bearing demand deposit accounts 285,381 256,145
Demand deposit accounts 209,565 182,371
----------------- ----------------
Total deposits 5,146,052 4,486,767
Official checks outstanding 30,896 40,349
Borrowed funds:
Reverse-repurchase agreements 2,278,531 1,757,489
Senior notes 75,000 75,000
Other borrowings 1,612,804 1,687,806
----------------- ----------------
Total borrowed funds 3,966,335 3,520,295
Accrued interest and dividends 30,334 27,475
Mortgagors' escrow and security deposits 26,806 30,615
Accrued taxes payable 12,198 21,837
Accrued expenses and other liabilities 39,735 40,474
----------------- ----------------
Total liabilities 9,252,356 8,167,812
----------------- ----------------
Guaranteed preferred beneficial interest in junior subordinated debentures 63,000 -
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none issued - -
Common stock, $0.01 par value, 200,000,000 shares authorized; 118,811,472
shares issued; 83,684,198 and 87,116,397 shares outstanding at June 30,
2002 and December 31, 2001, respectively 1,188 1,188
Additional paid-in-capital 508,329 507,413
Retained earnings - partially restricted 631,319 592,865
Accumulated other comprehensive income (loss):
Net unrealized gain (loss) on securities available-for-sale, net of tax 2,854 (26,573)
Unallocated common stock held by Employee Stock Ownership Plan (ESOP) (43,941) (44,838)
Unearned common stock held by Stock-Based Incentive Plan (SBIP) (5,180) (9,132)
Common stock held by Supplemental Executive Retirement Plan and Trust (SERP),
at cost (626,142 and 553,080 shares at June 30, 2002 and December 31, 2001,
respectively) (6,230) (4,535)
Treasury stock, at cost (35,127,274 and 31,695,075 shares at June 30, 2002
and December 31, 2001, respectively) (517,010) (447,420)
----------------- ----------------
Total stockholders' equity 571,329 568,968
----------------- ----------------
Total liabilities and stockholders' equity $ 9,886,685 $ 8,736,780
================= ================
See accompanying notes to consolidated financial statements.
1
ROSLYN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Interest income:
Federal funds sold and short-term deposits $ 342 $ 459 $ 797 $ 858
Debt and equity securities 23,669 20,662 46,952 42,040
Mortgage-backed and mortgage related securities 68,389 47,221 123,768 87,592
Real estate loans 54,917 69,654 112,461 141,101
Consumer and other loans 4,196 5,628 8,467 11,498
--------- --------- --------- ---------
Total interest income 151,513 143,624 292,445 283,089
--------- --------- --------- ---------
Interest expense:
Deposits 32,797 45,998 63,979 92,351
Borrowed funds 48,713 43,749 93,964 85,675
--------- --------- --------- ---------
Total interest expense 81,510 89,747 157,943 178,026
--------- --------- --------- ---------
Net interest income before provision for loan losses 70,003 53,877 134,502 105,063
Provision for loan losses 750 100 1,500 100
--------- --------- --------- ---------
Net interest income after provision for loan losses 69,253 53,777 133,002 104,963
--------- --------- --------- ---------
Non-interest income:
Fees and service charges 4,497 3,453 8,264 5,552
Net gains on securities 15 1,687 65 1,687
Income from bank owned life insurance 1,883 1,916 3,854 3,768
Joint venture income 5,234 - 10,197 -
Other non-interest income 414 497 595 1,013
--------- --------- --------- ---------
Total non-interest income 12,043 7,553 22,975 12,020
--------- --------- --------- ---------
Non-interest expense:
General and administrative expenses:
Compensation and employee benefits 13,927 11,384 27,779 21,413
Occupancy and equipment 3,193 2,843 6,362 5,702
Deposit insurance premiums 209 209 421 413
Advertising and promotion 744 755 1,741 2,007
Other non-interest expenses 5,111 4,035 10,082 7,709
--------- --------- --------- ---------
Total general and administrative expenses 23,184 19,226 46,385 37,244
Amortization of intangible assets 32 32 63 63
Real estate operations, net (9) (28) (83) (19)
Capital securities costs 943 - 1,067 -
--------- --------- --------- ---------
Total non-interest expense 24,150 19,230 47,432 37,288
--------- --------- --------- ---------
Income before provision for income taxes and
extraordinary item 57,146 42,100 108,545 79,695
Provision for income taxes 20,405 12,696 38,220 24,964
--------- --------- --------- ---------
Income before extraordinary item 36,741 29,404 70,325 54,731
Extraordinary item, net of tax - prepayment penalty on
debt extinguishments - (2,419) - (2,419)
--------- --------- --------- ---------
Net income $ 36,741 $ 26,985 $ 70,325 $ 52,312
========= ========= ========= =========
Basic earnings per share (1):
Income before extraordinary item $ 0.46 $ 0.34 $ 0.88 $ 0.63
Extraordinary item, net of tax - (0.03) - (0.03)
--------- --------- --------- ---------
Net income per share $ 0.46 $ 0.31 $ 0.88 $ 0.60
========= ========= ========= =========
Diluted earnings per share (1):
Income before extraordinary item $ 0.45 $ 0.34 $ 0.86 $ 0.62
Extraordinary item, net of tax - (0.03) - (0.03)
--------- --------- --------- ---------
Net income per share $ 0.45 $ 0.31 $ 0.86 $ 0.59
========= ========= ========= =========
(1) Prior period amounts have been adjusted to reflect the 3-for-2 stock split
on August 22, 2001.
See accompanying notes to consolidated financial statements.
2
ROSLYN BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
Unallocated
Retained Accumulated common
Additional earnings- other stock
Common paid-in- partially comprehensive held by
stock capital restricted (loss) income ESOP
------- ---------- ---------- ------------- -----------
Balance at December 31, 2001 $ 1,188 $ 507,413 $ 592,865 $ (26,573) $ (44,838)
Comprehensive income:
Net income 70,325
Other comprehensive income, net of tax:
Net unrealized gain on securities,
net of reclassification adjustment (1)(2) 29,427
Total comprehensive income
Exercise of stock options and related tax benefit (11,491)
Allocation of ESOP stock 916 897
Amortization of SBIP stock awards 54
Cash dividends declared on common stock (20,434)
Common stock acquired, at cost
------- --------- ---------- ---------- ----------
Balance at June 30, 2002 $ 1,188 $ 508,329 $ 631,319 $ 2,854 $ (43,941)
======= ========= ========== ========== ==========
Unearned
common Common Stock
stock held by Treasury Total
held by SERP, at stock, stockholders'
SBIP cost at cost equity
-------- ------------ --------- -------------
Balance at December 31, 2001 $ (9,132) $ (4,535) $(447,420) $ 568,968
Comprehensive income:
Net income 70,325
Other comprehensive income, net of tax:
Net unrealized gain on securities,
net of reclassification adjustment (1)(2) 29,427
---------
Total comprehensive income 99,752
---------
Exercise of stock options and related tax benefit (11,491)
Allocation of ESOP stock 1,813
Amortization of SBIP stock awards 3,952 4,006
Cash dividends declared on common stock (20,434)
Common stock acquired, at cost (1,695) (69,590) (71,285)
-------- -------- --------- ---------
Balance at June 30, 2002 $ (5,180) $ (6,230) $(517,010) $ 571,329
======== ======== ========= =========
(1) Disclosure of reclassification amount, net of tax, for the six months ended June 30, 2002:
Net unrealized appreciation arising during the period, net of tax $ 29,465
Less: Reclassification adjustment for net gains included in net income, net of tax 38
----------
Net unrealized gain on securities, net of tax $ 29,427
==========
(2) The net deferred tax expense relating to the net unrealized appreciation arising during the
six months ended June 30, 2002 was $19.8 million.
Disclosure of total comprehensive income for the six months ended June 30, 2001:
Net income for the six months ended June 30, 2001 $ 52,312
Other comprehensive income, net of tax:
Net unrealized gains on securities, net of reclassification adjustment 11,391
----------
Total comprehensive income for the six months ended June 30, 2001 $ 63,703
==========
See accompanying notes to consolidated financial statements.
3
ROSLYN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended
June 30,
---------------------------------------
2002 2001
------------------ --------------
Cash flows from operating activities:
Net income $ 70,325 $ 52,312
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,500 100
Amortization of intangible assets 63 63
Depreciation and amortization 1,915 1,592
Accretion of discounts greater than amortization of premiums (17,947) (12,652)
ESOP and SBIP expense, net 5,819 4,327
Originations of loans held-for-sale, net of sales 5,267 (492)
Net gains on sales of loans (358) (222)
Net gains on securities (65) (1,687)
Net gains on sales of real estate owned (85) (40)
Net gains on sales of fixed assets (6) (35)
Income from bank owned life insurance (3,854) (3,768)
Income taxes deferred and tax benefits attributable to stock plans 7,304 1,049
Changes in assets and liabilities:
Increase in accrued interest receivable (9,654) (1,636)
Decrease in other assets 566 85
(Decrease) increase in official checks outstanding (9,453) 6,367
Increase in accrued interest and dividends 2,859 856
Decrease in accrued taxes payable (9,639) (6,602)
Decrease in accrued expenses and other liabilities (739) (8,439)
Net decrease (increase) in deferred costs and fees 632 (250)
Increase in other, net - 24
------------------ --------------
Net cash provided by operating activities 44,450 30,952
------------------ --------------
Cash flows from investing activities:
Net redemption (purchase) of Federal Home Loan Bank stock 14,980 (31,825)
Proceeds from sales and repayments of securities available-for-sale 1,827,652 1,399,613
Purchases of securities available-for-sale (3,222,214) (2,063,113)
Loan originations and purchases, net of repayments 294,761 171,858
Investment in real estate joint venture (24,440) -
Purchases of banking house and equipment, net (4,404) (2,641)
Proceeds from sales of real estate owned 429 435
------------------ --------------
Net cash used in investing activities (1,113,236) (525,673)
------------------ --------------
Cash flows from financing activities:
Increase in demand deposit, money market and savings accounts 268,605 106,104
Increase in certificates of deposit 390,680 116,187
(Decrease) increase in short-term reverse-repurchase agreements and other
borrowings (118,958) 8,670
Increase in long-term reverse-repurchase agreements and other borrowings 564,998 359,117
Net proceeds from issuance of guaranteed preferred beneficial interest in
junior subordinated debentures 62,335 -
Decrease in mortgagors' escrow and security deposits (3,809) (105)
Net cash used in exercise of stock options (18,795) (2,843)
Cash dividends paid on common stock (20,434) (19,627)
Cost to repurchase treasury stock (69,590) (20,417)
Cost to repurchase SERP stock (1,695)
------------------ --------------
Net cash provided by financing activities 1,053,337 547,086
------------------ --------------
Net (decrease) increase in cash and cash equivalents (15,449) 52,365
Cash and cash equivalents at beginning of period 102,825 82,949
------------------ --------------
Cash and cash equivalents at end of period $ 87,376 $ 135,314
================== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 155,084 $ 177,170
================== ==============
Income taxes $ 40,424 $ 22,046
================== ==============
Non-cash investing activities:
Additions to real estate owned $ 674 $ 391
================== ==============
See accompanying notes to consolidated financial statements.
4
ROSLYN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Roslyn Bancorp, Inc. (on a stand alone basis, the Holding Company) and its
wholly-owned subsidiaries (collectively, the Company). Roslyn Bancorp, Inc. is
the holding company for The Roslyn Savings Bank and its subsidiaries
(collectively, the Bank).
When necessary, certain reclassifications have been made to prior period amounts
to conform to the current period presentation.
The consolidated financial statements included herein reflect all normal
recurring adjustments which, in the opinion of management, are necessary to
present a fair statement of the results for the interim periods presented. Such
adjustments are the only adjustments made to the consolidated financial
statements contained herein. The results of operations for the three and six
months ended June 30, 2002 are not necessarily indicative of the results of
operations that may be expected for the entire year. Certain information and
note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC).
The consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's 2001 Annual Report on Form 10-K.
2. NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The Statement updates, clarifies and simplifies existing
accounting pronouncements. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," which required all gains and losses
from extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Accounting Principles Board Opinion (APB) No. 30, "Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," will now be used to classify those gains and
losses. SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements," amended SFAS No. 4, and is no longer necessary because SFAS No. 4
has been rescinded. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with the FASB's goal
of requiring similar accounting treatment for transactions that have similar
economic effects. SFAS No. 145 also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in some
instances, they may change accounting practice. The provisions of SFAS No. 145
are effective for fiscal years beginning after May 15, 2002. Early application
of SFAS No. 145 is encouraged. There will be no material impact on the Company's
consolidated statements of financial condition or consolidated statements of
income upon adoption of SFAS No. 145.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which replaced SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 144 established a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale.
SFAS No. 144 also resolved significant implementation issues related to SFAS No.
121. The provisions of SFAS No. 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001. There was no impact
on the Company's consolidated statements of financial condition or consolidated
statements of income upon adoption of SFAS No. 144 on January 1, 2002.
5
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually in accordance with the provision of SFAS No. 142. SFAS No. 142
also requires that other intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values. Amortizing intangible assets must also be reviewed for
impairment. SFAS No. 142 is applicable to fiscal years beginning after December
15, 2001 and is required to be applied at the beginning of the entities fiscal
year. As a result of the adoption of SFAS No. 142 on January 1, 2002, other
amortizing intangible assets (consisting of deposit intangibles) is presented in
the accompanying consolidated statements of financial condition and consolidated
statements of income as "Intangible Assets." There was no impact on the
Company's consolidated statements of financial condition or consolidated
statements of income upon adoption of SFAS No. 142.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement replaced SFAS No. 125. SFAS No. 140 became effective for transfers
occurring after March 31, 2001 and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000,
which disclosures have been incorporated into the Company's consolidated
financial statements. The implementation of the remaining provisions on January
1, 2002 had no impact on the Company's financial condition or results of
operations.
3. RECENT DEVELOPMENTS
On May 21, 2002, the Company announced that the Company's Board of Directors
declared a quarterly dividend of $0.13 per common share. The dividend was paid
on June 11, 2002 to shareholders of record as of May 30, 2002.
4. DEBT, EQUITY, MORTGAGE-BACKED AND MORTGAGE RELATED SECURITIES, NET
The following table sets forth certain information regarding amortized cost and
estimated fair values of debt, equity, mortgage-backed and mortgage related
securities, net, at June 30, 2002 and December 31, 2001:
June 30, 2002 December 31, 2001
----------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ------------ ----------- -----------
(In thousands)
Available-for-sale:
Debt securities:
United States Government - direct and
guaranteed, net $ - $ - $ 1,000 $ 1,020
United States Government agencies, net 563,107 565,468 355,255 349,725
State, county and municipal 4,474 5,023 4,470 4,950
Other 1,000 961 - -
----------- ------------ ----------- -----------
Total debt securities, net 568,581 571,452 360,725 355,695
----------- ------------ ----------- -----------
Equity securities:
Preferred and common stock 129,686 114,759 135,998 120,153
Trust preferreds, net 568,442 559,267 533,823 514,813
Other 14,549 13,718 14,556 14,067
----------- ------------ ----------- -----------
Total equity securities, net 712,677 687,744 684,377 649,033
----------- ------------ ----------- -----------
Total debt and equity securities, net 1,281,258 1,259,196 1,045,102 1,004,728
----------- ------------ ----------- -----------
Mortgage-backed and mortgage related securities:
GNMA pass-through securities, net 281,851 292,277 368,449 376,295
FNMA pass-through securities, net 45,285 47,313 57,274 58,948
FHLMC pass-through securities, net 84,299 89,437 353,911 359,212
GNMA adjustable-rate mortgage pass-through
securities, net 97,657 99,413 126,703 128,180
Whole loan private collateralized mortgage
obligations, net 828,456 840,213 1,065,924 1,067,003
Agency collateralized mortgage obligations, net 3,404,897 3,400,629 1,593,767 1,571,216
----------- ------------ ----------- -----------
Total mortgage-backed and mortgage related
securities, net 4,742,445 4,769,282 3,566,028 3,560,854
----------- ------------ ----------- -----------
Total securities available-for-sale, net $ 6,023,703 $ 6,028,478 $ 4,611,130 $ 4,565,582
=========== ============ =========== ===========
6
5. LOANS RECEIVABLE, NET
Loans receivable, net, at June 30, 2002 and December 31, 2001 consist of the
following:
June 30, 2002 December 31, 2001
------------- -----------------
(In thousands)
Loans held-for-sale:
One- to four-family loans $ 4,326 $ 8,590
Student loans 129 774
------------- -----------------
Total loans held-for-sale $ 4,455 $ 9,364
============= =================
Loans receivable held for investment, net:
Real estate loans:
One- to four-family $ 1,800,924 $ 2,281,477
Multi-family 223,633 173,780
Commercial 671,836 629,663
Construction and development 402,458 312,630
------------- -----------------
Total real estate loans 3,098,851 3,397,550
Net unamortized discount and deferred income (853) (1,081)
Net deferred loan origination costs 13,727 15,679
------------- -----------------
Total real estate loans, net 3,111,725 3,412,148
Consumer and other loans, net:
Consumer and other 77,118 67,587
Home equity and second mortgage 190,104 175,192
Automobile leases 20,133 40,481
------------- -----------------
Total consumer and other loans 287,355 283,260
Net deferred loan origination costs 1,898 1,752
------------- -----------------
Total consumer and other loans, net 289,253 285,012
------------- -----------------
Allowance for loan losses (42,019) (40,634)
------------- -----------------
Total loans receivable held for investment, net $ 3,358,959 $ 3,656,526
============= =================
7
6. ASSET QUALITY
The following table sets forth information regarding non-accrual loans and real
estate owned, net, at the dates indicated. It is the Company's policy generally
to discontinue accruing interest on all loans that are more than 90 days past
due, or when in the opinion of management such suspension is otherwise
warranted. When a loan is placed on non-accrual status, the Company ceases the
accrual of interest owed, and previously accrued interest outstanding is charged
against interest income. Loans are generally returned to accrual status when the
loan delinquency status is less than 90 days past due and the Company has
reasonable assurance that the loan will be fully collectible.
At June 30, 2002 At December 31, 2001
------------------- --------------------
(In thousands)
Non-accrual loans:
One- to four-family $ 6,402 $ 6,353
Commercial real estate 33,737 33,128
Home equity 224 111
Consumer and other 76 49
------------------ --------------------
Total non-accrual loans 40,439 39,641
Loans contractually past due 90 days or more and still accruing (1) 4,079 5,865
------------------ --------------------
Total non-performing loans 44,518 45,506
Real estate owned 808 478
------------------ --------------------
Total non-performing assets $ 45,326 $ 45,984
================== ====================
Allowance for loan losses as a percent of loans (2) 1.24% 1.10%
Allowance for loan losses as a percent of total
non-performing loans 94.39% 89.29%
Total non-performing loans as a percent of loans (2) 1.31% 1.23%
Total non-performing assets as a percent of total assets 0.46% 0.53%
(1) Amounts shown are comprised of U.S. Government guaranteed one- to
four-family loans.
(2) Loans consist of loans receivable held for investment, net, excluding the
allowance for loan losses.
Management assesses the level and adequacy of the allowance for loan losses
based on an evaluation of known and inherent risks in the loan portfolio and
upon continuing analysis of the factors underlying the quality of the loan
portfolio.
Non-accrual loans at June 30, 2002 include two large commercial credits added to
non-accrual status during the fourth quarter 2001. The Bank has continued to
aggressively pursue the recovery of these credits. The first commercial credit
consists of loans totaling $13.3 million secured by four commercial properties
in the New York Metropolitan area. As a preferred alternative to pursuing
foreclosure, the Bank, the borrowers' other creditors and the chapter 11
debtors, reached agreement in principle on a plan that provides for the prompt
sale of all of the properties securing the Bank's loans and full repayment of
all sums owed to the Bank under its notes, with consideration in excess of that
amount being paid to the subordinated secured creditors. Although no assurances
can be given, based on the current collateral values determined by independent
appraisers combined with the initial bids received by the selling broker,
management anticipates a full recovery, by the Spring of 2003, of all principle
and interest due under the loans, as well as all attorneys' fees and other costs
related to the collection of the debt.
The second credit is a $19.0 million loan secured by two assisted living
facilities in the New York Metropolitan area. A court-appointed receiver has
operated the facilities since the commencement of the borrowers' bankruptcy
filing in November 2001 and has improved the facilities' cash flows and
profitability since that time. Concurrently, the facilities
8
are actively being marketed for sale. Despite the facilities' high value as
determined by independent appraisers, the market for assisted living facilities
has softened in recent months.
Additionally, based upon the Bank's and the receiver's analyses of offers
received to date, the operation of the properties and assessments of the market
for similar facilities, among other things, the Bank believes that its recovery
against the loan balance in the event the note (or the properties) is sold on an
accelerated basis would likely require a discount. Although it is probable that
the amount of any required discount would be lower if the receiver is permitted
more time to prepare the property for sale, the Bank believes that it is more
prudent to pursue a prompt resolution in order to avoid potential risks of
future uncertainties and to restore the loan proceeds to productive use. In the
event that a discount is required, no additional provision for loan loss
relating to this commercial credit currently is expected.
9
7. INTANGIBLE ASSETS
The following table sets forth information regarding intangible assets at June
30, 2002 and December 31, 2001:
At June 30, 2002 At December 31, 2001
------------------------ ------------------------
(In thousands)
Deposit intangibles:
Gross carrying amount $ 1,259 $ 1,259
Accumulated amortization (336) (273)
------------------------ ------------------------
Carrying amount, net $ 923 $ 986
======================== ========================
The following table sets forth the anticipated amortization expense, as of June
30, 2002, for the periods indicated:
Deposit intangibles: Amount
------------------
Estimated amortization expense for the years ended: (In thousands)
December 31, 2003 $ 126
December 31, 2004 126
December 31, 2005 126
December 31, 2006 126
December 31, 2007 126
The weighted average amortization period for the deposit intangibles is 10
years. The Company incurred amortization expense of $63,000 for the six months
ended June 30, 2002 related to deposit intangibles.
8. GUARANTEED PREFERRED BENEFICAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES
On March 20, 2002, Roslyn Preferred Trust I (RPT I), a Delaware statutory
business trust and a wholly-owned subsidiary of the Company, issued $63.0
million aggregate liquidation amount of floating rate guaranteed preferred
beneficial interest in Junior Subordinated Debentures (the Capital Securities)
due April 1, 2032, at a distribution rate equal to the 6-month LIBOR plus 360
basis points, resetting on a semi-annual basis. The maximum distribution rate on
the Capital Securities is 12.0% through April 1, 2007, with no maximum
thereafter. The Company may redeem the Capital Securities, in whole or in part,
at any time on or after April 1, 2007. At June 30, 2002, the distribution rate
was 5.88%. Distributions on the Capital Securities are payable semi-annually on
April 1 and October 1 of each year beginning October 1, 2002 and are reported in
the accompanying consolidated statements of income as a component of
non-interest expense under the caption "Capital securities costs."
The Holding Company made an initial capital contribution of $1.9 million to RPT
I in exchange for all of its common securities. RPT I was formed for the
exclusive purpose of issuing the Capital Securities and using the proceeds to
acquire $64.9 million in Junior Subordinated Debentures due April 1, 2032 issued
by the Holding Company. The Company has fully and unconditionally guaranteed the
Capital Securities along with all obligations of RPT I related thereto.
The proceeds from the issuance of the Capital Securities were used for general
corporate purposes including the repurchase of the Company's common stock and
the repayment of borrowed funds. The costs associated with the Capital
Securities issuance, totaling $842,000, have been capitalized.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Roslyn Bancorp, Inc. is a savings and loan holding company regulated by the
Office of Thrift Supervision. The primary operating subsidiary of Roslyn
Bancorp, Inc. is The Roslyn Savings Bank, a New York State chartered stock
savings bank, and its subsidiaries (collectively, the Bank). While the following
discussion of financial condition and results of operations includes the
collective results of Roslyn Bancorp, Inc. (on a stand alone basis, the Holding
Company) and its subsidiaries (collectively, the Company), this discussion
principally reflects the Bank's activities.
Critical Accounting Policies
The Company identified the accounting policies below as critical to the
Company's operations and understanding of the Company's results of operations.
Certain accounting policies are considered to be important to the portrayal of
the Company's financial condition, since they require management to make complex
or subjective judgments, some of which may relate to matters that are inherently
uncertain. The inherent sensitivity of the Company's consolidated financial
statements to critical accounting policies and, the use of judgments, estimates
and assumptions could result in material differences in the Company's results of
operations or financial condition.
Allowance for Loan Losses - The Company has determined that the methodology used
in determining the level of its allowance for loan losses is critical in the
presentation and understanding of the Company's consolidated financial
statements. The allowance for loan losses represents management's estimate of
probable losses inherent in the loan portfolio. This evaluation process is
subject to numerous estimates and judgments. The frequency of default, risk
ratings, and the loss recovery rates, among other things, are considered in
making this evaluation, as are the size and diversity of individual large
credits. Changes in these estimates could have a direct impact on the provision
for loan losses and could result in a change in the allowance. While management
uses available information to determine losses on loans, future additions to the
allowance may be necessary based on, among other things, unanticipated changes
in economic conditions, particularly in the New York Metropolitan area.
The allowance for loan losses has been determined in accordance with the
provisions of Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies." In evaluating the portfolio, management takes into consideration
numerous factors such as the Company's loan growth, prior loss experience,
present and potential risks of the loan portfolio, risk ratings assigned by
lending personnel, ratings assigned by the independent loan review function, the
present financial condition of borrowers, current economic conditions and other
portfolio risk characteristics. The Company's formalized process for assessing
the adequacy of the allowance for loan losses and the resultant need, if any,
for periodic provisions to the allowance charged to income, entails both
individual loan analyses and loan pool analyses. The individual loan analyses
are periodically performed on individually significant loans or when otherwise
deemed necessary, and primarily encompass multi-family, commercial real estate
and construction and development loans. The result of these analyses is the
allocation of the overall allowance to specific allowances for individual loans
considered impaired and non-impaired.
The loan pool analyses are performed on the balance of the Company's loan
portfolio, primarily consisting of one- to four-family residential and consumer
loans. The pools consist of aggregations of homogeneous loans having similar
credit risk characteristics. Examples of pools defined by the Company for this
purpose are Company-originated, fixed-rate residential loans;
Company-originated, adjustable-rate residential loans; purchased fixed-rate
residential loans; outside-serviced residential loans; residential second
mortgage loans; participations in conventional first mortgage loans; residential
construction loans; commercial construction loans, etc. For each such defined
pool there is a set of sub-pools based upon delinquency status, including:
current, 30-59 days, 60-89 days, 90-119 days and 120+ days (the latter two
sub-pools are considered to be "classified" by the Company). For each sub-pool,
the Company has developed a range of allowances necessary to adequately provide
for probable losses inherent in that pool of loans. These ranges are based upon
a number of factors, including the risk characteristics of the pool, actual loss
and migration experience, expected loss and migration experience considering
current economic conditions, industry norms and the relative
11
seasoning of the pool. The ranges of allowance developed by the Company are
applied to the outstanding principal balance of the loans in each sub-pool; as a
result, further specific and general allocations of the overall allowance are
made (the allocations for the classified sub-pools are considered specific and
the allocations for the non-classified sub-pools are considered general).
The Company's overall allowance also contains an unallocated amount which is
supplemental to the results of the aforementioned process and takes into
consideration known and expected trends that are likely to affect the
creditworthiness of the loan portfolio as a whole, such as national and local
economic conditions, unemployment conditions in the local lending area and the
timeliness of court foreclosure proceedings in the Company's lending areas.
Management continues to believe that the Company's allowance for loan losses at
June 30, 2002 is both appropriate in the circumstances and adequate to provide
for estimated probable losses inherent in the loan portfolio.
Employee Benefit Plans - The Company provides a range of benefits to its
employees and retired employees, including pensions and post-retirement health
care and life insurance benefits. The Company records annual amounts relating to
these plans based on calculations specified by accounting principles generally
accepted in the United States of America (GAAP), which include various actuarial
assumptions, such as discount rates, assumed rates of return, assumed rate of
compensation increases, turnover rates and health care cost trend rates. The
Company reviews its actuarial assumptions on an annual basis and makes
modifications to the assumptions based on current rates and trends when it is
deemed appropriate to do so. As required by GAAP, the effect of the
modifications is generally recorded or amortized over future periods. The
Company believes that the assumptions utilized in recording its obligations
under its plans are reasonable based upon the advice of its actuaries.
Investment in Debt and Equity Securities - Certain of our fixed income
securities classified as available-for-sale are not publicly traded, and quoted
market prices are not available from brokers or investment bankers on these
securities. The change in the fair value of these available-for-sale securities
is recorded in other comprehensive income as an unrealized gain or loss. The
Company calculates the fair value of these securities based upon assumptions
established through the use of pricing models and discounted cash flows of
similar outstanding securities.
Income Taxes - The Company has established reserves for possible payments to
various taxing authorities with respect to the admissibility and timing of tax
deductions. Management has made certain assumptions and judgments concerning the
eventual outcome of these items. The Company continually reviews those
assumptions and judgments to reflect any changes that may have arisen concerning
these items.
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
Total Assets
Total assets at June 30, 2002 were $9.89 billion, an increase of $1.15 billion,
or 13.2%, from $8.74 billion at December 31, 2001. This increase primarily was
due to increases in the mortgage-backed and mortgage related securities
portfolio and the debt and equity securities portfolio, partially offset by a
decrease in total loans receivable held for investment, net. Mortgage-backed and
mortgage related securities increased $1.21 billion, or 33.9%, from $3.56
billion at December 31, 2001 to $4.77 billion at June 30, 2002. Debt and equity
securities, net, increased $254.5 million, or 25.3%, to $1.26 billion at June
30, 2002, as compared to $1.00 billion at December 31, 2001. These increases in
the securities portfolios were primarily due to management's strategy of
deploying proceeds from increased deposits, borrowings and principal repayments
on loans and securities into mortgage-backed and mortgage related securities and
debt and equity securities. Total loans receivable held for investment, net,
decreased $296.2 million, or 8.0%, to $3.40 billion at June 30, 2002, as
compared to $3.70 billion at December 31, 2001. The decrease in total loans
receivable held for investment, net, is primarily due to principal repayments,
which were partially offset by loan originations for the six months ended June
30, 2002.
Total Liabilities
Total liabilities at June 30, 2002 were $9.25 billion, an increase of $1.08
billion, or 13.3%, from $8.17 billion at
12
December 31, 2001. The increase in total liabilities principally was due to an
increase in total deposits and borrowed funds. Total deposits increased $659.3
million, or 14.7%, from $4.49 billion at December 31, 2001 to $5.15 billion at
June 30, 2002. The increase in total deposits reflects the Bank's continued
emphasis on attracting core deposits through new product offerings and the
addition of de novo branches. Core deposits increased $268.6 million, or 15.5%,
from $1.73 billion at December 31, 2001 to $2.00 billion at June 30, 2002.
Additionally, certificates of deposit increased $390.7 million, or 14.2%, from
$2.76 billion at December 31, 2001 to $3.15 billion at June 30, 2002. The
increase in certificates of deposits partially reflects the acquisition of $75.1
million of brokered deposits during the first quarter of 2002. Borrowed funds
increased $446.0 million, or 12.7%, from $3.52 billion at December 31, 2001 to
$3.97 billion at June 30, 2002. The Company utilizes borrowings, primarily in
the form of reverse-repurchase agreements and Federal Home Loan Bank (FHLB)
borrowings, to fund and sustain asset growth.
Capital Securities
On March 20, 2002, Roslyn Preferred Trust I (RPT I), a Delaware statutory
business trust and a wholly-owned subsidiary of the Company, issued $63.0
million aggregate liquidation amount of floating rate guaranteed preferred
beneficial interest in Junior Subordinated Debentures (the Capital Securities)
due April 1, 2032, at a distribution rate equal to the 6-month LIBOR plus 360
basis points, resetting on a semi-annual basis. The maximum distribution rate on
the Capital Securities is 12.0% through April 1, 2007, with no maximum
thereafter. The Company may redeem the Capital Securities, in whole or in part,
at any time on or after April 1, 2007. At June 30, 2002, the distribution rate
was 5.88%. See Note 8 to Notes to Consolidated Financial Statements included
herein.
Stockholders' Equity
Stockholders' equity increased $2.3 million, or 0.4%, to $571.3 million at June
30, 2002 from $569.0 million at December 31, 2001. The increase was due to net
income for the six months ended June 30, 2002 of $70.3 million, the amortization
of unallocated and unearned shares of common stock held by the Company's
stock-related benefit plans of $5.8 million and an increase of $29.4 million in
the net unrealized gains on securities available-for-sale from December 31,
2001. Items that offset these increases were dividends paid of $20.4 million,
the $11.5 million effect of stock options exercised for the six months ended
June 30, 2002 and the purchase of $71.3 million of treasury and SERP stock for
the six months ended June 30, 2002.
13
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the volume of average interest-earning assets and average interest-bearing
liabilities and the interest rates earned or paid on them.
The following table sets forth certain information regarding the Company's
consolidated average statements of financial condition and the Company's average
yields on interest-earning assets and average costs of interest-bearing
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense, annualized, by the average balance of
interest-earning assets or interest-bearing liabilities, respectively. Average
balances are derived from average daily balances and include non-performing
loans. The yields and costs include fees that are considered adjustments to
yields and costs.
For the Three Months Ended June 30,
--------------------------------------------------------------------------------
2002 2001
--------------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ----------- ---------- --------- ---------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Federal funds sold and short-term deposits $ 82,498 $ 342 1.66% $ 42,990 $ 459 4.27%
Debt and equity securities, net 1,342,045 23,669 7.05 1,023,252 20,662 8.08
Mortgage-backed and mortgage
related securities, net 4,488,374 68,389 6.09 2,879,049 47,221 6.56
Real estate loans, net 3,119,466 54,917 7.04 3,678,588 69,654 7.57
Consumer and other loans, net 306,487 4,196 5.48 295,923 5,628 7.61
----------- --------- ----------- ---------
Total interest-earning assets 9,338,870 151,513 6.49 7,919,802 143,624 7.25
--------- ---------
Non-interest-earning assets (1) 348,476 241,698
----------- -----------
Total assets $ 9,687,346 $ 8,161,500
=========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Money market accounts $ 488,570 2,329 1.91 $ 281,538 2,514 3.57
Savings accounts 1,008,785 2,741 1.09 880,664 3,874 1.76
Super NOW and NOW accounts 279,515 459 0.66 210,711 803 1.52
Certificates of deposit 3,042,486 27,268 3.58 2,768,135 38,807 5.61
----------- --------- ----------- ---------
Total interest-bearing deposits 4,819,356 32,797 2.72 4,141,048 45,998 4.44
Borrowed funds 3,952,349 48,713 4.93 3,157,087 43,749 5.54
----------- --------- ----------- ---------
Total interest-bearing liabilities 8,771,705 81,510 3.72 7,298,135 89,747 4.92
--------- ---------
Non-interest-bearing liabilities 351,041 255,007
----------- -----------
Total liabilities 9,122,746 7,553,142
Stockholders' equity 564,600 608,358
----------- -----------
Total liabilities and stockholders' equity $ 9,687,346 $ 8,161,500
=========== ===========
Net interest income/interest rate spread (2) $ 70,003 2.77% $ 53,877 2.33%
========= ======== ========= ========
Net interest margin (2) 3.00% 2.72%
======== ========
Ratio of interest-earning assets to
interest-bearing liabilities 106.47% 108.52%
======== ========
_______________________
1)Included in non-interest-earning assets for the three months ended June
30, 2002 and 2001 is Bank Owned Life Insurance (BOLI) with an average
balance of $115.1 million and $107.3 million, respectively, and
associated income of $1.9 million for each period.
2)On a tax equivalent basis, inclusive of reclassifying the BOLI asset,
the net interest rate spread and the net interest margin for the three
months ended June 30, 2002 and 2001 would be 2.93% and 3.20%, and 2.55%
and 3.00%, respectively.
14
For the Six Months Ended June 30,
--------------------------------------------------------------------------------------
2002 2001
----------------------------------------- ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------ ------------ ---------- ----------- ----------- ---------
(Dollars in thousands)
Assets:
Interest-earning assets:
Federal funds sold and short-term deposits $ 95,490 $ 797 1.67% $ 35,694 $ 858 4.81%
Debt and equity securities, net 1,295,794 46,952 7.25 1,033,912 42,040 8.13
Mortgage-backed and mortgage
related securities, net 4,110,412 123,768 6.02 2,620,895 87,592 6.68
Real estate loans, net 3,198,643 112,461 7.03 3,727,727 141,101 7.57
Consumer and other loans, net 307,074 8,467 5.51 290,782 11,498 7.91
---------- ---------- ---------- ---------
Total interest-earning assets 9,007,413 292,445 6.49 7,709,010 283,089 7.34
---------- ---------
Non-interest-earning assets (1) 330,400 239,187
---------- ----------
Total assets $9,337,813 $7,948,197
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Money market accounts $ 446,851 4,244 1.90 $ 272,302 5,228 3.84
Savings accounts 990,967 5,424 1.09 876,425 7,750 1.77
Super NOW and NOW accounts 269,621 886 0.66 204,198 1,624 1.59
Certificates of deposit 2,950,668 53,425 3.62 2,727,065 77,749 5.70
---------- ---------- ---------- ---------
Total interest-bearing deposits 4,658,107 63,979 2.75 4,079,990 92,351 4.53
Borrowed funds 3,786,242 93,964 4.96 3,010,316 85,675 5.69
---------- ---------- ---------- ---------
Total interest-bearing liabilities 8,444,349 157,943 3.74 7,090,306 178,026 5.02
---------- ---------
Non-interest-bearing liabilities 329,887 252,595
---------- ----------
Total liabilities 8,774,236 7,342,901
Stockholders' equity 563,577 605,296
---------- ----------
Total liabilities and stockholders' equity $9,337,813 $7,948,197
========== ==========
Net interest income/interest rate spread (2) $ 134,502 2.75% $ 105,063 2.32%
========== ======== ========= =======
Net interest margin (2) 2.99% 2.73%
======== =======
Ratio of interest-earning assets to
interest-bearing liabilities 106.67% 108.73%
======== =======
___________________________
1)Included in non-interest-earning assets for the six months ended June 30,
2002 and 2001 is BOLI with an average balance of $114.1 million and $106.3
million, respectively, and associated income of $3.9 million and $3.8
million, respectively.
2)On a tax equivalent basis, inclusive of reclassifying the BOLI asset, the
net interest rate spread and the net interest margin for the six months ended
June 30, 2002 and 2001 would be 2.94% and 3.21%, and 2.55% and 3.01%,
respectively.
15
Comparison of Operating Results for the Three Months Ended June 30, 2002 and
2001
Overview
The Company reported net income of $36.7 million, or basic earnings per share of
$0.46 and diluted earnings per share of $0.45, for the quarter ended June 30,
2002, compared to $27.0 million, or basic and diluted earnings per share of
$0.31, for the comparable prior year period. Earnings per share data has been
adjusted to reflect the 3-for-2 stock split distributed in the form of a stock
dividend on August 22, 2001.
Interest Income
Interest income for the quarter ended June 30, 2002 increased $7.9 million, or
5.5%, to $151.5 million from $143.6 million for the quarter ended June 30, 2001.
This increase was primarily the result of an increase in average
interest-earning assets of $1.42 billion, or 17.9%, to $9.34 billion for the
quarter ended June 30, 2002 from $7.92 billion in the comparable quarter of
2001. This increase in average balance was partially offset by a decrease in the
average yield on total interest-earning assets from 7.25% for the quarter ended
June 30, 2001 to 6.49% for the 2002 comparable quarter. The increase in average
interest-earning assets from the June 30, 2001 period was attributable to a
$1.61 billion increase in the average balance of mortgage-backed and mortgage
related securities, net, an increase in the average balance of debt and equity
securities, net, of $318.8 million and an increase in the average balance of
consumer and other loans, net, of $10.6 million. Partially offsetting these
increases was a decrease in the average balance of real estate loans, net, of
$559.1 million from the June 30, 2001 period.
Interest income on mortgage-backed and mortgage related securities, net,
increased $21.2 million, or 44.8%, to $68.4 million for the three months ended
June 30, 2002 from $47.2 million for the same period in 2001. The increase was
principally the result of an increase of $1.61 billion, or 55.9%, in the average
balance of mortgage-backed and mortgage related securities, net, from $2.88
billion for the three months ended June 30, 2001 to $4.49 billion for the three
months ended June 30, 2002. This increase in average balance primarily was due
to management's strategy of investing the proceeds received primarily from
increased borrowings and deposit liabilities into mortgage-backed and mortgage
related securities. The increase in the average balance was offset by a decrease
in the average yield on mortgage-backed and mortgage related securities, net, of
47 basis points from 6.56% for the three months ended June 30, 2001 to 6.09% for
the three months ended June 30, 2002.
Interest income on debt and equity securities, net, increased $3.0 million, or
14.6%, to $23.7 million for the three months ended June 30, 2002 from $20.7
million for the same period in 2001. The increase was the result, in part, of an
increase in the average balance of debt and equity securities, net, of $318.8
million, or 31.2%, from $1.02 billion for the three months ended June 30, 2001
to $1.34 billion for the three months ended June 30, 2002. The increase in
average balance of debt and equity securities, net, was offset by a decrease in
the average yield on such securities of 103 basis points from 8.08% for the
three months ended June 30, 2001 to 7.05% for the three months ended June 30,
2002.
Interest income on consumer and other loans, net, decreased $1.4 million, or
25.4%, to $4.2 million for the three months ended June 30, 2002 from $5.6
million for the same period in 2001. This decrease was due to a 213 basis point
decrease in the average yield on consumer and other loans, net, from 7.61% for
the three months ended June 30, 2001 to 5.48% for the same period in 2002,
partially offset by a $10.6 million, or 3.6%, increase in the average balance of
consumer and other loans, net, outstanding from $295.9 million for the three
months ended June 30, 2001 to $306.5 million for the three months ended June 30,
2002. The decrease in average yield was principally due to downward re-pricing
of consumer loan products during the declining interest rate environment
experienced during 2001. Interest rates have remained static at these low levels
for the first half of 2002.
Interest income on real estate loans, net, decreased $14.8 million, or 21.2%, to
$54.9 million for the three months ended June 30, 2002 from $69.7 million for
the same period in 2001. The decrease was the result of a $559.1 million, or
15.2%, decrease in the average balance of real estate loans, net, outstanding
from $3.68 billion for the quarter ended June 30, 2001 to $3.12 billion for the
quarter ended June 30, 2002. The decrease in average balance was due to a net
16
decrease in the average balance of one-to four-family loans of $935.4 million,
partially offset by a $376.3 million net increase in the average balance of
multi-family, construction and commercial real estate loans. The decrease in the
average balance of real estate loans, net, was also the result of a 53 basis
point decrease in the average yield on real estate loans from 7.57% for the
three months ended June 30, 2001 to 7.04% for the three months ended June 30,
2002. The decrease in the average yield was principally due to the low interest
rate environment experienced during 2002, which has resulted in increased
principal repayments on one- to-four family loans as consumers refinanced their
loans at lower rates, primarily with third parties.
Interest Expense
Interest expense for the three months ended June 30, 2002 was $81.5 million,
compared to $89.7 million for the three months ended June 30, 2001, a decrease
of $8.2 million, or 9.2%. The decrease in interest expense was the result of a
120 basis point decrease in the average cost of interest-bearing liabilities for
the quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001.
The decrease in average cost was partially offset by a $1.47 billion, or 20.2%,
increase in the average balance of interest-bearing liabilities from $7.30
billion for the quarter ended June 30, 2001 to $8.77 billion for the quarter
ended June 30, 2002. The increase in average interest-bearing liabilities
reflects a $678.3 million increase in the average balance of interest-bearing
deposits and a $795.3 million increase in the average balance of borrowed funds
as compared to the prior year quarter.
Interest expense on interest-bearing deposits for the three months ended June
30, 2002 decreased $13.2 million, or 28.7%, to $32.8 million from $46.0 million
for the corresponding 2001 period. This decrease was primarily due to a 172
basis point decrease in the average rate paid on interest-bearing deposits from
4.44% for the three months ended June 30, 2001 to 2.72% for the corresponding
period in 2002. Partially offsetting the decrease in the average rate paid was
an increase in the average balance of interest-bearing deposit accounts of
$678.3 million for the three months ended June 30, 2002 from the corresponding
period in 2001. The increase in the average balance of interest-bearing deposits
was a result of increases in average balances of money market accounts of $207.0
million, Super NOW and NOW accounts of $68.8 million, savings accounts of $128.1
million and certificates of deposits of $274.4 million for the three months
ended June 30, 2002 from the corresponding period in 2001. The increase in the
average balance of money market, savings, Super NOW and NOW accounts and
certificates of deposits principally was achieved by introducing new deposit
products and through additional deposits generated from the Company's de novo
branching strategy.
Interest expense on borrowed funds for the three months ended June 30, 2002
increased $5.0 million, or 11.3%, to $48.7 million from $43.7 million for the
corresponding 2001 period. The increase was primarily due to an increase in the
average balance of borrowed funds of $795.3 million, or 25.2%, from $3.16
billion for the three months ended June 30, 2001 to $3.95 billion for the three
months ended June 30, 2002. Offsetting the increase in average balance was a 61
basis point decrease in the average cost of borrowed funds from 5.54% for the
three months ended June 30, 2001 to 4.93% for the corresponding period in 2002.
Net Interest Income
Net interest income before provision for loan losses was $70.0 million for the
three months ended June 30, 2002, as compared to $53.9 million for the three
months ended June 30, 2001, an increase of $16.1 million, or 29.9%. The increase
in net interest income reflects the impact of the expanded interest rate spread
and margin experienced for the three months ended June 30, 2002 as compared to
the prior year quarter. The net interest rate spread and margin for the three
months ended June 30, 2002 was 2.77% and 3.00%, respectively, as compared to
2.33% and 2.72%, respectively, for the three months ended June 30, 2001.
17
Provision for Loan Losses
The Company had a provision for loan losses for the three months ended June 30,
2002 of $750,000 as compared to $100,000 for the three months ended June 30,
2001. The provision for loan losses for the three months ended June 30, 2002 and
2001 reflects management's qualitative and quantitative assessment of the loan
portfolio, changes in the composition of the loan portfolio, net charge-offs and
prospects for collection of delinquent loans. At June 30, 2002 and December 31,
2001 the allowance for loan losses amounted to $42.0 million and $40.6 million,
respectively. The ratio of such allowance to total non-performing loans was
94.39% at June 30, 2002, as compared to 89.29 % at December 31, 2001.
Non-performing loans were $44.5 million and $45.5 million at June 30, 2002 and
December 31, 2001, respectively. During the three months ended June 30, 2002 the
Company had net charge-offs of $13,000, or 0.00% of average loans. For the three
months ended June 30, 2001 net charge-offs were $413,000, or 0.01% of average
loans.
The allowance for loan losses as a percentage of total non-performing loans was
negatively impacted by the fourth quarter of 2001 placement of two
non-performing commercial credit relationships, totaling $32.3 million at June
30, 2002 and December 31, 2001, on non-accrual status. See Note 6 to Notes to
Consolidated Financial Statements for further discussion of the two
non-performing commercial credit relationships.
Non-Interest Income
Non-interest income increased $4.4 million, or 59.4%, from $7.6 million for the
quarter ended June 30, 2001 to $12.0 million for the quarter ended June 30,
2002. The increase reflects an increase in fees and service charges of $1.0
million, or 30.2%, from $3.5 million the quarter ended June 30, 2001 to $4.5
million for the quarter ended June 30, 2002. The increase in fees and service
charges reflects the continued success of the Bank's high performance checking
campaign, as well as increased fee income associated with the sale of
alternative investment products. Also contributing significantly to the increase
in non-interest income was $5.2 million in income related to the delivery of 78
units in the Company's joint venture for the development of a residential
community in Oyster Bay, New York. Partially offsetting these increases was a
decrease of $116,000, or 4.8%, in other non-interest income from $2.4 million
for the quarter ended June 30, 2001 to $2.3 million for the quarter ended June
30, 2002.
Non-Interest Expense
Non-interest expense increased $5.0 million, or 25.6%, to $24.2 million for the
quarter ended June 30, 2002, as compared to $19.2 million for the same period in
2001. The increase in non-interest expense was attributable to an increase in
general and administrative expenses, primarily relating to increases in
compensation and benefits expenses and other non-interest expenses.
Additionally, non-interest expense increased due to the incurrence of $943,000
of expense for the quarter ended June 30, 2002 relating to $63.0 million of
Capital Securities issued in March of 2002.
General and administrative expenses for the quarter ended June 30, 2002
increased $4.0 million, or 20.6%, to $23.2 million from $19.2 million for the
quarter ended June 30, 2001. The increase in general and administrative expenses
was primarily due to the increase in compensation and employee benefit costs of
$2.5 million, a $350,000 increase in occupancy and equipment expense and an
increase in other non-interest expenses of $1.1 million.
The increase in compensation and employee benefit expense was due to an increase
in employee stock and performance-based benefit plan expenses, commission
expenses paid on sales of alternative investment products during the 2002
quarter and staffing additions related to de novo branch activities. The
increase in occupancy and equipment expense primarily relates to the operation
of the de novo branches opened in the fourth quarter of 2001 and first quarter
2002. The increase in other non-interest expenses was primarily due to increases
in data processing fees and other operating expenses principally relating to the
increase in the number of deposit accounts.
18
Income Taxes
The provision for income taxes increased $7.7 million, from $12.7 million
recorded during the quarter ended June 30, 2001 to $20.4 million recorded during
the quarter ended June 30, 2002. The increase was attributable to the increase
in income before provision for income taxes and extraordinary item of $15.0
million in the current year quarter as compared to the same prior year quarter.
Additionally, the Company recorded a $1.4 million tax benefit during the quarter
ended June 30, 2001 primarily related to T R Financial Corp.
Comparison of Operating Results for the Six Months Ended June 30, 2002 and 2001
Overview
The Company reported net income of $70.3 million, or basic earnings per share of
$0.88 and diluted earnings per share of $0.86, for the six months ended June 30,
2002, compared to $52.3 million, or basic and diluted earnings per share of
$0.60 and $0.59, respectively, for the comparable prior year period. Earnings
per share data has been adjusted to reflect the 3-for-2 stock split distributed
in the form of a stock dividend on August 22, 2001.
Interest Income
Interest income for the six months ended June 30, 2002 increased $9.3 million,
or 3.3%, to $292.4 million from $283.1 million for the six months ended June 30,
2001. This increase was primarily the result of an increase in average
interest-earning assets of $1.30 billion, or 16.8%, to $9.01 billion for the six
months ended June 30, 2002 from $7.71 billion in the comparable six months of
2001. This increase in average balance was partially offset by an 85 basis point
decrease in the average yield on total interest-earning assets from 7.34% for
the six months ended June 30, 2001 to 6.49% for the 2002 comparable six months.
The increase in average interest-earning assets from the June 30, 2001 period
was attributable to a $1.49 billion increase in the average balance of
mortgage-backed and mortgage related securities, net, an increase in the average
balance of debt and equity securities, net, of $261.9 million and an increase in
the average balance of consumer and other loans, net, of $16.3 million.
Partially offsetting these increases was a decrease in the average balance of
real estate loans, net, of $529.1 million from the June 30, 2001 period.
Interest income on mortgage-backed and mortgage related securities, net,
increased $36.2 million, or 41.3%, to $123.8 million for the six months ended
June 30, 2002 from $87.6 million for the same period in 2001. The increase was
principally the result of an increase of $1.49 billion, or 56.8%, in the average
balance of mortgage-backed and mortgage related securities, net, from $2.62
billion for the six months ended June 30, 2001 to $4.11 billion for the six
months ended June 30, 2002. This increase in average balance primarily was due
to management's strategy of investing the proceeds received primarily from
increased borrowings and deposit liabilities into mortgage-backed and mortgage
related securities. The increase in the average balance was offset by a decrease
in the average yield on mortgage-backed and mortgage related securities, net, of
66 basis points from 6.68% for the six months ended June 30, 2001 to 6.02% for
the six months ended June 30, 2002.
Interest income on debt and equity securities, net, increased $5.0 million, or
11.7%, to $47.0 million for the six months ended June 30, 2002 from $42.0
million for the same period in 2001. The increase was the result, in part, of an
increase in the average balance of debt and equity securities, net, of $261.9
million, or 25.3%, from $1.03 billion for the six months ended June 30, 2001 to
$1.30 billion for the six months ended June 30, 2002. The increase in average
balance of debt and equity securities, net, was offset by a decrease in the
average yield on such securities of 88 basis points from 8.13% for the six
months ended June 30, 2001 to 7.25% for the six months ended June 30, 2002.
Interest income on consumer and other loans, net, decreased $3.0 million, or
26.4%, to $8.5 million for the six months ended June 30, 2002 from $11.5 million
for the same period in 2001. This decrease was due to a 240 basis point decrease
in the average yield on consumer and other loans, net, from 7.91% for the six
months ended June 30, 2001 to 5.51% for the same period in 2002, partially
offset by a $16.3 million, or 5.6%, increase in the average balance of consumer
and other loans, net, outstanding from $290.8 million for the six months ended
June 30, 2001 to $307.1
19
million for the six months ended June 30, 2002. The decrease in average yield
was principally due to downward re-pricing of consumer loan products during the
declining interest rate environment experienced during 2001.
Interest income on real estate loans, net, decreased $28.6 million, or 20.3%, to
$112.5 million for the six months ended June 30, 2002 from $141.1 million for
the same period in 2001. The decrease was the result of a $529.1 million, or
14.2%, decrease in the average balance of real estate loans, net, outstanding
from $3.73 billion for the six months ended June 30, 2001 to $3.20 billion for
the six months ended June 30, 2002. The decrease in the average balance was also
the result of a 54 basis point decrease in the average yield on real estate
loans from 7.57% for the six months ended June 30, 2001 to 7.03% for the six
months ended June 30, 2002. The decrease in the average yield was principally
due to the low interest rate environment experienced during 2002, which has
resulted in increased principal repayments on one- to-four family loans as
consumers refinanced their loans at lower rates, primarily with third parties.
Interest Expense
Interest expense for the six months ended June 30, 2002 was $157.9 million,
compared to $178.0 million for the six months ended June 30, 2001, a decrease of
$20.1 million, or 11.3%. The decrease in interest expense was the result of a
128 basis point decrease in the average cost of interest-bearing liabilities
from 5.02% for the six months ended June 30, 2001 as compared to 3.74% for the
six months ended June 30, 2002. The decrease in average cost was offset by a
$1.35 billion, or 19.1%, increase in the average balance of interest-bearing
liabilities from $7.09 billion for the six months ended June 30, 2001 to $8.44
billion for the six months ended June 30, 2002. The increase in average
interest-bearing liabilities reflects a $578.1 million increase in the average
balance of interest-bearing deposits and a $775.9 million increase in the
average balance of borrowed funds as compared to the prior year six months.
Interest expense on interest-bearing deposits for the six months ended June 30,
2002 decreased $28.4 million, or 30.7%, to $64.0 million from $92.4 million for
the corresponding 2001 period. This decrease was primarily due to a 178 basis
point decrease in the average rate paid on interest-bearing deposits from 4.53%
for the six months ended June 30, 2001 to 2.75% for the corresponding period in
2002. Offsetting the decrease in the average rate paid was an increase in the
average balance of interest-bearing deposit accounts of $578.1 million, or
14.2%, for the six months ended June 30, 2002 from the corresponding period in
2001. The increase in the average balance of interest-bearing deposits was a
result of increases in average balances of money market accounts of $174.5
million, savings accounts of $114.5 million, Super NOW and NOW accounts of $65.4
million and certificates of deposits of $223.6 million for the six months ended
June 30, 2002 from the corresponding period in 2001. The increase in the average
balance of money market, savings, Super NOW and NOW accounts and certificates of
deposits principally was achieved by introducing new deposit products and
through additional deposits generated from the Company's de novo branching
strategy.
Interest expense on borrowed funds for the six months ended June 30, 2002
increased $8.3 million, or 9.7%, to $94.0 million from $85.7 million for the
corresponding 2001 period. The increase was primarily due to an increase in the
average balance of borrowed funds of $775.9 million, or 25.8%, from $3.01
billion for the six months ended June 30, 2001 to $3.79 billion for the six
months ended June 30, 2002. Offsetting the increase in average balance was an 73
basis point decrease in the average cost of borrowed funds from 5.69% for the
six months ended June 30, 2001 to 4.96% for the corresponding period in 2002.
Net Interest Income
Net interest income before provision for loan losses was $134.5 million for the
six months ended June 30, 2002, as compared to $105.1 million for the six months
ended June 30, 2001, an increase of $29.4 million, or 28.0%. The increase in net
interest income reflects the impact of the expanded interest rate spread and
margin experienced for the six months ended June 30, 2002 as compared to the
prior year six months. The net interest rate spread and margin for the six
months ended June 30, 2002 was 2.75% and 2.99%, respectively, as compared to
2.32% and 2.73%, respectively, for the six months ended June 30, 2001.
20
Provision for Loan Losses
The Company had a provision for loan losses for the six months ended June 30,
2002 of $1.5 million as compared to $100,000 for the six months ended June 30,
2001. The provision for loan losses for the six months ended June 30, 2002 and
2001 reflects management's qualitative and quantitative assessment of the loan
portfolio, changes in the composition of the loan portfolio, net charge-offs and
prospects for collection of delinquent loans. During the six months ended June
30, 2002 the Company had net charge-offs of $115,000, or 0.00% of average loans.
For the six months ended June 30, 2001 net charge-offs were $465,000, or 0.01%
of average loans.
Non-Interest Income
Non-interest income increased $11.0 million, or 91.1%, from $12.0 million for
the six months ended June 30, 2001 to $23.0 million for the six months ended
June 30, 2002. The increase reflects an increase in fees and service charges of
$2.7 million, or 48.8%, from $5.6 million the six months ended June 30, 2001 to
$8.3 million for the six months ended June 30, 2002. The increase in fees and
service charges reflects the continued success of the Bank's high performance
checking campaign, as well as increased fee income associated with the sale of
alternative investment products. Also contributing significantly to the increase
in non-interest income was $10.2 million in income related to the delivery of
152 units in the Company's joint venture for the development of a residential
community in Oyster Bay, New York. Partially offsetting these increases was a
decrease of $1.6 million, or 96.1%, in net gains on securities from $1.7 million
for the six months ended June 30, 2001 to $65,000 for the six months ended June
30, 2002. Also partially offsetting these increases was a decrease of $332,000,
or 6.9%, in other non-interest income from $4.8 million for the six months ended
June 30, 2001 to $4.4 million for the corresponding 2002 period.
Non-Interest Expense
Non-interest expense increased $10.1 million, or 27.2%, to $47.4 million for the
six months ended June 30, 2002, as compared to $37.3 million for the same period
in 2001. The increase in non-interest expense was attributable to an increase in
general and administrative expenses, primarily relating to increases in
compensation and benefits expenses and other non-interest expenses.
Additionally, non-interest expense increased due to the incurrence of $1.1
million of expense for the six months ended June 30, 2002 relating to $63.0
million of Capital Securities issued in March of 2002.
General and administrative expenses for the six months ended June 30, 2002
increased $9.2 million, or 24.5%, to $46.4 million from $37.2 million for the
six months ended June 30, 2001. The increase in general and administrative
expenses was primarily due to the increase in compensation and employee benefit
costs of $6.4 million, a $660,000 increase in occupancy and equipment expense
and an increase in other non-interest expenses of $2.4 million. These increases
were partially offset by a decrease in advertising and promotion expense of
$266,000.
The increase in compensation and employee benefit expense was due to an increase
in employee stock and performance-based benefit plan expenses, commission
expenses paid on sales of alternative investment products and staffing additions
related to de novo branch activities. The increase in occupancy and equipment
expense primarily relates to the operation of the de novo branches opened in the
fourth quarter of 2001 and first quarter 2002. The increase in other
non-interest expenses was primarily due to an increase in professional fees,
data processing fees and other operating expenses.
Income Taxes
The provision for income taxes increased $13.2 million, from $25.0 million
recorded during the six months ended June 30, 2001 to $38.2 million recorded
during the six months ended June 30, 2002. The increase was attributable to the
increase in income before provision for income taxes and extraordinary item of
$28.9 million in the current year six months as compared to the same prior year
six months. Additionally, the Company recorded a $1.4 million tax benefit during
the six months ended June 30, 2001 primarily related to T R Financial Corp.
21
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings and proceeds
from the principal and interest payments on loans and securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and prepayments of mortgage loans and
mortgage-backed securities are greatly influenced by general interest rates,
economic conditions and competition and, therefore, are less predictable.
Another source of funding for the Holding Company is dividend payments from the
Bank. Dividends paid by the Bank have primarily been used to fund common stock
repurchases, pay dividends on the Company's common stock and repay borrowings.
The Bank's ability to pay dividends to the Holding Company is generally limited
by New York State banking law and regulations and the regulations of the Federal
Deposit Insurance Corporation and the Office of Thrift Supervision. For the six
months ended June 30, 2002, the Bank paid $7.2 million of dividends to the
Holding Company.
The Company has debt ratings from three recognized credit rating firms. These
ratings allow the Company to access the wholesale debt markets thereby providing
the Company with additional means for meeting its funding requirements.
As of June 30, 2002, the Company had issued $75.0 million in unsecured senior
notes at a rate of 7.50% and a maturity date of December 1, 2008. The Company
used the net proceeds from the senior notes for general corporate purposes,
including the repurchase of outstanding common stock and repayment or reduction
of indebtedness. The costs associated with the issuance of the senior notes have
been capitalized and are being amortized generally over the life of the
borrowing. In addition, the Company has the ability to issue an additional
$125.0 million in debt and other types of securities, with rates and terms to be
determined, pursuant to the Company's $200.0 million shelf registration filed
with the SEC during 2001.
On March 20, 2002, the Company, through its wholly-owned subsidiary RPT I,
issued $63.0 million in floating rate Capital Securities. Such securities bear
interest at 6-month LIBOR plus 360 basis points and are due April 1, 2032. The
proceeds from the issuance of the Capital Securities were used for general
corporate purposes, including, among other things, the repurchase of the
Company's common stock and the repayment of borrowed funds. The costs associated
with the Capital Securities issuance have been capitalized.
The primary investing activities of the Company are the origination of mortgage
and construction loans and the purchase of mortgage-backed, mortgage related,
debt and equity securities. During the six months ended June 30, 2002, the Bank
originated $284.7 million of construction, multi-family and commercial real
estate loans, as compared to $197.0 million in the comparable 2001 period. This
increase reflects management's decision to de-emphasize its reliance on one- to
four-family lending and capitalize on its higher margin lending operations.
Originations of one- to four-family mortgage loans for the six months ended June
30, 2002 and 2001 were $59.1 million and $30.4 million, respectively. Also
during the six months ended June 30, 2002 the Bank purchased securities
available-for-sale totaling $3.22 billion as compared to $2.06 billion during
the six months ended June 30, 2001. In addition to the aforementioned investing
activities, the Company, during the six months ended June 30, 2002, disbursed
$24.4 million of a $25.0 million total investment in a real estate joint venture
for the development of a 177 unit residential community located in Mount Sinai,
Suffolk County, New York.
The Bank utilizes a private label program for the origination of one- to
four-family loans through its existing branch network under a mortgage
origination assistance agreement with a third party mortgage originator. Under
this program, the Bank utilizes the third party's mortgage loan origination
platforms (including, among others, telephone and internet platforms) to
originate loans, based on defined underwriting criteria and in accordance with
Federal National Mortgage Association (FNMA) guidelines, that close in the
Bank's name and utilize the Bank's licensing. The Bank will fund such loans
directly, and, under a separate loan and servicing rights purchase and sale
agreement with the same third party, has the option to retain the loans in its
portfolio, sell the loans to third party investors or deliver the loans back to
the same third party at agreed upon pricing.
The Company closely monitors its liquidity position on a daily basis. Excess
short-term liquidity is invested in overnight federal funds sold and/or in
short-term repurchase agreements. In the event that the Company should require
22
funds beyond its ability to generate them internally, additional sources of
funds are available through the use of reverse-repurchase agreements, FHLB
advances and other borrowing facilities. At June 30, 2002 the Company had $3.97
billion in borrowed funds outstanding, as compared to $3.52 billion at December
31, 2001.
At June 30, 2002, the Company had outstanding loan commitments to advance $450.2
million of loans, which primarily consisted of commercial real estate and
construction loans. Management of the Company anticipates that it will have
sufficient funds available to meet its current loan commitments. Also, in the
normal course of business, the Company enters into commitments to purchase
securities. As of June 30, 2002, the Company had no commitments outstanding to
purchase debt or mortgage-backed securities.
Certificates of deposit that are scheduled to mature in one year or less at June
30, 2002 totaled $2.17 billion. Based upon prior experience and the Company's
current pricing strategy, management believes that a significant portion of such
deposits will remain with the Company.
The Company's most liquid assets are cash and cash equivalents, short-term
securities and securities available-for-sale. The levels of these assets are
dependent on the Company's operating, financing, lending and investment
activities during any given period. At June 30, 2002 and December 31, 2001, the
Company had $87.4 million and $102.8 million, respectively, in cash and cash
equivalents. Additionally, the Company had no short-term repurchase agreements
outstanding at June 30, 2002 or December 31, 2001.
Interest Rate Sensitivity Analysis - Management of Interest Rate Risk
The principal objectives of the Company's interest rate risk management are to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company's
Board of Directors reviews the Company's interest rate risk position on a
monthly basis. Additionally, an Asset/Liability Committee comprised of the
Bank's senior management reviews the Company's interest rate risk position on a
weekly basis. Senior management is also responsible for reviewing, with the
Board of Directors, its activities and strategies, the effect of those
strategies on the Company's net interest margin, the market value of the
Company's portfolio of investments and loans and the effect that changes in
interest rates will have on the Company's portfolio and exposure limits.
The Company has utilized the following strategies, among other things, to manage
interest rate risk: (i) increasing low-cost core deposits through an expanded
branch network and product offerings; (ii) focusing on higher margin business
lines by expanding construction, commercial real estate, multi-family and
consumer lending; and (iii) effectively utilizing borrowed funds and deposits to
support asset growth while maintaining market spreads. Management believes that
reducing its exposure to interest rate fluctuations will enhance long-term
profitability.
Interest Rate Sensitivity Analysis - Gap Analysis
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's, "interest rate sensitivity gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or re-price within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or re-pricing within a specific time period and
the amount of interest-bearing liabilities maturing or re-pricing within that
same time period. At June 30, 2002, the Company's one-year gap position was
positive 21.04%. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered
23
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, an institution with a positive gap position would be in a better position
to invest in higher yielding assets, which, consequently, may result in the
yield of its interest-earning assets increasing at a rate faster than its cost
of interest-bearing liabilities, as opposed to if the institution had a negative
gap. Accordingly, during a period of falling interest rates, an institution with
a positive gap would tend to have its interest-earning assets re-pricing
downward at a faster rate than its interest-bearing liabilities as compared to
an institution with a negative gap which, consequently, may tend to negatively
affect the growth of its net interest income. The Company's June 30, 2002
cumulative one-year gap position reflects the classification of
available-for-sale securities within re-pricing periods based on their
contractual maturities adjusted for estimated callable features and prepayments,
if any. If available-for-sale securities at June 30, 2002 were classified within
the one-year maturity or re-pricing category, net interest-earning assets would
have exceeded interest-bearing liabilities maturing or re-pricing within the
same period by $4.64 billion, representing a positive cumulative one-year gap
position of 46.97%. Available-for-sale securities may or may not be sold,
subject to management's discretion. Given the Company's existing liquidity
position and its ability to sell securities from its available-for-sale
portfolio, management of the Company believes that its current gap position will
have no material adverse effect on its liquidity position.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 2002, that are anticipated
by the Company, based upon certain assumptions, to re-price or mature in each of
the future time periods shown (the Gap Table). Except as stated, the amount of
assets and liabilities shown which re-price or mature during a particular period
was determined in accordance with the earlier of the term to re-price or the
contractual maturity of the asset or liability. The Gap Table sets forth an
approximation of the projected re-pricing of assets and liabilities at June 30,
2002 on the basis of contractual maturities, anticipated prepayments, callable
features and scheduled rate adjustments within a one-year period and subsequent
annual time intervals. Prepayment assumptions ranging from 6% to 40% per year
were applied to the real estate loan portfolio, dependent upon the loan type and
coupon. Mortgage-backed and mortgage related securities were assumed to prepay
at rates between 32% and 60% annually, dependent upon the security type, call
features and pass-through rate. Money market accounts were assumed to decay at
7% per annum, savings accounts were assumed to decay at 4% per annum and Super
NOW and NOW accounts were assumed to decay at 3% per annum. Prepayment and
deposit decay rates (estimated deposit withdrawal activity) can have a
significant impact on the Company's estimated gap. While the Company believes
such assumptions are reasonable, there can be no assurance that assumed
prepayment or decay rates will approximate actual future real estate loan and
mortgage-backed and mortgage related securities prepayments and deposit
withdrawal activity.
In addition to the foregoing, callable features of certain assets and
liabilities may cause actual experience to vary from that indicated. Included in
the Gap Table are $771.8 million of callable securities at their estimated fair
value and classified primarily based upon their respective call features and/or
interest rates. Of such securities, $565.4 million have been classified, using
callable features, in the "Up to One Year" category, $100.4 million have been
classified, according to their contractual maturity date, in the "Four to Five
Years" category and $106.0 million have been classified, according to their
contractual maturity date, in the "Over Five Years" category. Also included in
the Gap Table are $2.34 billion of callable borrowings, classified according to
their maturity date, except for $750.0 million of such borrowings which have
been classified according to their first call date, of which $550.0 million have
been classified in the "One to Two Years" category and $200.0 million have been
classified in the "Two to Three Years" category. If all callable borrowings at
June 30, 2002 were classified according to their first call date, the Company's
one-year gap position would have been positive 6.52%.
The Company's positive gap position at June 30, 2002 and December 31, 2001 of
21.04% and 15.33%, respectively, primarily reflects the effect of prepayment
activity during 2001 and the first half of 2002 in the mortgage-backed
securities and real estate loan portfolios, increased investment in shorter-term
multi-family/construction loans, as well as management's decision to extend the
maturities of the Company's borrowings. The decision to extend the maturities of
the Company's borrowings was primarily based upon management's expectations
regarding the current and future interest rate environments.
24
At June 30, 2002
-------------------------------------------------------------------------------------------------
One Two Three Four Over
Up to to Two to Three To Four to Five Five
One Year Years Years Years Years Years Total
---------- ----------- ---------- ---------- ----------- ------------ ----------
(Dollars in thousands)
Interest-earning assets (1):
Federal funds sold $ 4,600 $ - $ - $ - $ - $ - $ 4,600
Debt and equity
securities, net (2) 909,793 37,502 9,283 2,228 1,093 394,187 1,354,086
Mortgage-backed and
mortgage related
securities, net (2) 2,649,281 1,070,288 522,892 258,605 129,502 138,714 4,769,282
Real estate loans,
net (3) (4) 1,300,754 591,901 385,747 240,279 305,246 247,906 3,071,833
Consumer and other loans,
net (3) (4) 231,166 8,047 8,101 7,121 5,607 29,040 289,082
---------- ---------- ---------- ---------- ---------- ----------- ----------
Total interest-earning
assets 5,095,594 1,707,738 926,033 508,233 441,448 809,847 9,488,883
---------- ---------- ---------- ---------- ---------- ----------- ----------
Interest-bearing liabilities:
Money market accounts 38,136 29,027 23,043 19,048 16,328 383,015 508,597
Savings accounts 35,557 34,149 32,802 31,515 30,286 830,783 995,092
Super NOW and NOW accounts 8,561 8,305 8,055 7,814 7,579 245,067 285,381
Certificates of deposit 2,169,784 449,532 184,873 62,890 244,822 35,516 3,147,417
Borrowed funds 700,857 705,000 625,000 600,000 - 1,335,478 3,966,335
Capital securities 63,000 - - - - - 63,000
---------- ---------- ---------- ---------- ---------- ----------- ----------
Total interest-bearing
liabilities 3,015,895 1,226,013 873,773 721,267 299,015 2,829,859 8,965,822
---------- ---------- ---------- ---------- ---------- ----------- ----------
Interest sensitivity
gap (5) $2,079,699 $ 481,725 $ 52,250 $ (213,034) $ 142,433 $(2,020,012) $ 523,061
========== ========== ========== ========== ========== =========== ==========
Cumulative interest
sensitivity gap $2,079,699 $2,561,424 $2,613,674 $2,400,640 $2,543,073 $ 523,061
========== ========== ========== ========== ========== ===========
Cumulative interest
sensitivity gap as a
percentage of total assets 21.04% 25.91% 26.44% 24.28% 25.72% 5.29%
Cumulative net interest-
earning assets as a
percentage of cumulative
interest- bearing liabilities 168.96% 160.38% 151.09% 141.13% 141.45% 105.83%
(1) Interest-earning assets are included in the period in which the balances
are expected to be re-deployed and/or re-priced as a result of anticipated
prepayments and call dates, scheduled rate adjustments and contractual
maturities.
(2) Debt, equity and mortgage-backed and mortgage related securities, net, are
shown at their respective carrying values. Included in debt and equity
securities, net, is $94.9 million of Federal Home Loan Bank stock.
(3) For the purpose of the gap analysis, the allowance for loan losses and
non-accrual loans have been excluded.
(4) Loans held-for-sale are included in the "Up to One Year" category.
(5) The interest sensitivity gap represents the difference between
interest-earning assets and interest-bearing liabilities.
25
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to re-pricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage (ARM)
loans, have features which limit adjustments to interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels may deviate significantly
from those assumed in calculating the table. Finally, the ability of borrowers
to service their ARM loans may decrease in the event of an interest rate
increase. The table reflects management's estimates as to periods to re-pricing
at particular points in time. Among the factors considered, management monitors
both current trends and its historical re-pricing experience with respect to
particular or similar products. For example, the Bank has a number of deposit
accounts, including passbook savings, Super NOW and NOW accounts and money
market accounts, which, subject to certain regulatory exceptions, may be
withdrawn at any time. The Bank, based upon its historical experience, assumes
that while all customers in these account categories could withdraw their funds
on any given day, not all will do so even if market interest rates were to
change. As a result, different assumptions may be used at different points in
time.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For a description of the Company's quantitative and qualitative disclosures
about market risk, see the information set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Interest Rate Sensitivity Analysis - Management of Interest Rate
Risk" and "- Interest Rate Sensitivity Analysis - Gap Analysis."
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 21, 2002, the Company held its annual meeting of stockholders for
the purpose of the election of four Directors to three-year terms of office each
and the ratification of the Board of Directors' appointment of KPMG LLP as the
Company's independent auditors for the fiscal year ending December 31, 2002. The
number of votes cast at the meeting as to each matter acted upon was as follows:
Number of Votes
Number of Votes For Withheld
------------------- ---------------
1. Election of Directors:
John R. Bransfield, Jr. 66,218,110 516,114
Thomas A. Doherty 66,200,902 533,322
Maureen E. Clancy 66,109,480 624,744
Victor C. McCuaig 66,055,113 679,111
The Directors whose terms continued and the years their terms expire are as
follows:
Continuing Directors: Year Term Expires
-----------------
Thomas J. Calabrese, Jr. 2003
Spiros J. Voutsinas 2003
Leonard Genovese 2003
Dr. Edwin W. Martin, Jr. 2003
Richard C. Webel 2003
Joseph L. Mancino 2004
John M. Tsimbinos 2004
James E. Swiggett 2004
Number of Number of
Number of Votes Votes
Votes For Against Abstaining
-------------- ---------------- -----------------
2. Ratification of appointment of KPMG LLP as independent
auditors of the Company for the fiscal year ending December
31, 2002 65,269,366 1,315,154 149,704
28
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Roslyn Bancorp, Inc. (1)
3.2 Certificate of Amendment to Certificate of Incorporation of Roslyn
Bancorp, Inc. (2)
3.3 Third Amended and Restated Bylaws of Roslyn Bancorp, Inc. (3)
4.1 Shareholder Protection Rights Agreement, dated as of September 26,
2000, between Roslyn Bancorp, Inc. and Registrar and Transfer
Company, as Rights Agent (4)
4.2 Form of Senior Indenture (5)
4.3 Form of Subordinated Indenture (5)
11.0 Statement Re: Computation of Per Share Earnings
99.1 Certification of Chief Executive Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to Section 906
of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
1. Incorporated by reference into this document from Exhibits filed with the
Registration Statement on Form S-1, and any amendments thereto,
Registration Statement No. 333-10471, filed with the Securities and
Exchange Commission on August 20, 1996.
2. Incorporated by reference into this document from the Exhibits to the
Company's quarterly report on Form 10-Q, Commission File No. 0-28886, filed
with the Securities and Exchange Commission on August 13, 1999.
3. Incorporated by reference into this document from Exhibits to the Company's
quarterly report on Form 10-Q, Commission file No. 0-28886, filed with the
Securities and Exchange Commission on August 10, 2000.
4. Incorporated by reference into this document from Exhibits to the Company's
Form 8-A, Commission File No. 0-28886, filed with the Securities and
Exchange Commission on September 29, 2000.
5. Incorporated by reference into this document from Exhibits to the Company's
Form S-3, Commission File No. 333-67282, filed with the Securities and
Exchange Commission on August 10, 2001.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROSLYN BANCORP, INC.
(Registrant)
Date: July 31, 2002 By: /s/ Joseph L. Mancino
-----------------------------------------
Joseph L. Mancino
Vice Chairman of the Board, President and
Chief Executive Officer
Date: July 31, 2002 By: /s/ Michael P. Puorro
-----------------------------------------
Michael P. Puorro
Treasurer and Chief Financial Officer
30