10-Q 1 richmond10q.txt 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 Commission File No. 0-23271 RICHMOND COUNTY FINANCIAL CORP. (Exact name of Registrant as specified in its charter) Delaware 06-1498455 (State of Incorporation) (I.R.S. Employer Identification Number) 1214 Castleton Avenue Staten Island, New York 10310 (Address of principal executive offices) (Zip Code) 718-448-2800 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- As of May 4, 2001, there were 26,159,057 shares of the common stock outstanding. 2 FORM 10-Q RICHMOND COUNTY FINANCIAL CORP. INDEX Page ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition at March 31, 2001 and June 30, 2000....................................... 3 Consolidated Statements of Operations for the three and nine months ended March 31, 2001 and 2000............... 4 Consolidated Statements of Changes in Stockholders' Equity for the nine months ended March 31, 2001 and 2000......................... 5 Consolidated Statements of Cash Flows for the nine months ended March 31, 2001 and 2000......................... 6 Notes to Unaudited Consolidated Financial Statements...................... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 9 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....... 18 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings................................................ 19 ITEM 2. Changes in Securities and Use of Proceeds......................... 19 ITEM 3. Defaults Upon Senior Securities................................... 19 ITEM 4. Submission of Matters to a Vote of Security Holders............... 19 ITEM 5. Other Information................................................. 19 ITEM 6. Exhibits and Reports on Form 8-K.................................. 19 Exhibit Index............................................................. 20 Signature Page............................................................ 21 ================================================================================ Statements contained in this Form 10-Q which are not historical facts are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Such risks and uncertainties include potential changes in interest rates, competitive factors in the financial services industry, general economic conditions, the effect of new legislation and other risks detailed in documents filed by the Company with the Securities and Exchange Commission from time to time. ================================================================================ 2 3

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6 7 RICHMOND COUNTY FINANCIAL CORP. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION --------------------- The accompanying unaudited consolidated financial statements include the accounts of Richmond County Financial Corp. (the "Company"), its direct wholly-owned subsidiary, Richmond County Savings Bank (the "Bank"), and the subsidiaries of the Bank. The unaudited consolidated financial statements included herein reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and nine month periods ended March 31, 2001 are not necessarily indicative of the results of operations that may be expected for the entire fiscal year. Certain information and note disclosures normally included in the financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 2000 Annual Report and Form 10-K. 2. EARNINGS PER SHARE ------------------ Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is calculated using the same method as basic EPS, but reflects potential dilution of common stock equivalents. Shares of common stock held by the ESOP that have not been allocated to participants' accounts or are not committed to be released for allocation and non-vested 1998 Management Recognition Plan (the "MRP") shares are not considered to be outstanding for the calculation of basic EPS, however, a portion of such shares are considered in the calculation of diluted EPS as common stock equivalents of basic EPS. Basic and diluted weighted-average common shares outstanding were 23,843,517 and 24,815,482 shares, for the third quarter of fiscal 2001, respectively. For the nine months ended March 31, 2001, basic and diluted weighted-average common shares were 24,106,621 and 24,854,318 shares, respectively. 3. CONVERSION TO STOCK FORM OF OWNERSHIP ------------------------------------- On July 31, 1997, the Board of Trustees of the Bank unanimously adopted a Plan of Conversion whereby the Bank would convert from a New York State chartered mutual bank to a New York State chartered stock institution with the concurrent formation of a holding company, Richmond County Financial Corp. (the "Conversion"). The Conversion was completed on February 18, 1998, with the issuance by the Company of 24,466,250 shares of common stock, at a price of $10.00 per share, in an initial public offering. The Company received gross proceeds from the Conversion of $244.7 million, before the reduction from gross proceeds of $9.8 million for estimated conversion related expenses. The Company used $117.4 million, or 50% of the net proceeds, to purchase all of the outstanding stock of the Bank. 7 8 Concurrent with the completion of the Conversion, an additional 1,957,300 shares of authorized but unissued shares of common stock were contributed by the Company to the Richmond County Savings Foundation (the "Foundation"), a private foundation dedicated to charitable purposes within the Bank's communities that it serves. The Company recorded a one-time charge of $19.6 million, the full amount of the contribution made to the Foundation and a corresponding deferred tax benefit of $8.4 million, in the third quarter ended March 31, 1998. The contribution to the Foundation will be fully tax deductible, subject to an annual limitation based upon the Company's annual taxable income. 4. RECENT DEVELOPMENTS ------------------- On March 27, 2001, New York Community Bancorp, Inc. and the Company announced the signing of a definitive agreement under which the two companies will combine in a merger-of-equals. The transaction, which will be tax-free to the Company's shareholders, is expected to close in the third quarter of calendar 2001 pending shareholder and regulatory approval. Under the terms of the agreement, which has been unanimously approved by the Boards of Directors of both companies, the Company will merge into New York Community Bancorp. Shareholders will receive 1.02 shares of New York Community Bancorp common stock in exchange for each share of the Company's common stock. On the announcement date, the transaction was valued at approximately $802 million. On a pro-forma basis, as of December 31, 2000, the combined companies had total assets of $8.8 billion; deposits of $5.7 billion and total stockholders' equity of $1.1 billion. On February 27, 2001, the Company announced that it has reached a definitive agreement with Summit Bancorp ("Summit") and FleetBoston Financial Corp. ("Fleet"), to acquire five Summit branch offices located in Atlantic County, New Jersey. The acquisition of these branches will occur in conjunction with the government-mandated divestiture of deposits and loans following Summit's merger with Fleet. Under the terms of the agreement, Richmond will assume approximately $200 million in deposits and acquire $40 million in small business and consumer loans. Richmond will operate the Summit commercial banking offices through its South Jersey Bank division. In a separate transaction, Richmond has entered into a definitive agreement with Fleet to acquire Fleet's branch offices located on Staten Island, New York. Under the terms of this agreement, Richmond will assume approximately $100 million in deposits, of which 70% are core deposits (demand, money market and savings) and acquire $21 million in small business and consumer loans. 5. SUBSEQUENT EVENT ---------------- On April 18, 2001, the Company announced that its Board of Directors had authorized a quarterly cash dividend for the fiscal quarter ended March 31, 2001 in the amount of $0.18 per common share. The dividend will be payable on May 23, 2001, to shareholders of record on May 7, 2001. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Richmond County Financial Corp. is a savings and loan holding company regulated by the Office of Thrift Supervision. The primary operating subsidiary of Richmond County Financial Corp. is Richmond County Savings Bank (the "Bank"), a New York State chartered stock savings bank. While the following discussion of financial condition and results of operations includes the collective results of Richmond County Financial Corp. and the Bank (collectively the "Company"), this discussion reflects the Bank's activities as the Company currently does not engage in any significant business activities other than the management of the Bank and the investment of net proceeds from the Bank's mutual to stock conversion, which occurred on February 18, 1998 (the "Conversion"). SOUTH JERSEY FINANCIAL CORPORATION, INC. At the close of business on July 31, 2000, the Company completed its acquisition of South Jersey Financial Corporation, Inc. ("South Jersey"), the holding company of South Jersey Savings and Loan Association, a community savings association which operates three full service banking offices in the New Jersey counties of Gloucester and Camden in a transaction which was accounted for as a purchase. The cost of the acquisition was approximately $68.0 million for which South Jersey shareholders received $20 per share in cash for each outstanding share of common stock of South Jersey. The excess of cost over the fair value of net assets acquired ("goodwill") in the transaction was $28.0 million, which is being amortized on a straight-line basis over 20 years. BAYONNE BANCSHARES, INC. At the close of business on March 22, 1999, the Company completed its acquisition of Bayonne Bancshares, Inc. ("Bayonne"), the holding company of First Savings Bank of New Jersey, SLA, a New Jersey State chartered savings and loan association with four full service banking offices located in Bayonne, New Jersey in a transaction which was accounted for as a purchase. The cost of the acquisition was approximately $118.5 million for which the Company issued 1.05 shares of its common stock for each outstanding share of Bayonne common stock for a total of 8,668,615 common shares, of which 3,938,731 shares were issued from its treasury shares. Options to purchase 683,577 shares of Bayonne common stock were also converted into options to purchase 717,755 shares of the Company's common stock. The goodwill attributable to the transaction was $28.8 million, which is being amortized on a straight line basis over 15 years. IRONBOUND BANKCORP, NJ. At the close of business on March 5, 1999, the Company completed its acquisition of Ironbound Bankcorp, NJ ("Ironbound"), the holding company of Ironbound Bank, a New Jersey chartered commercial bank with three full service commercial banking offices located in the New Jersey counties of Union and Essex, in a transaction which was accounted for as a purchase. The cost of the acquisition was approximately $27.7 million. The Company issued 1.463 shares of its common stock for each outstanding share of Ironbound common stock for a total of 1,458,842 common shares. The goodwill attributable to the transaction was $15.3 million, which is being amortized on a straight line basis over 15 years. 9 10 FINANCIAL CONDITION Total assets increased by $474.8 million, or 16.5%, to $3.4 billion at March 31, 2001 from June 30, 2000. The increase in overall assets was primarily due to the completion of the South Jersey acquisition with and into the Bank and a significant increase in deposit inflows. As of the acquisition date, South Jersey had total assets of approximately $314.7 million, total deposits of $240.9 million and total equity of $47.7 million. The Bank continues to experience increased loan growth, and for the nine month period ended March 31, 2001, gross loans receivable increased by $135.6 million, or 8.5% on a non-annualized basis, to $1.7 billion, compared to $1.6 billion at June 30, 2000. The increase in gross loans was due primarily to originations of $409.3 million generated during the nine month period ended March 31, 2001 and $142.3 million of loans acquired through the acquisition of South Jersey, offset by the sale of $3.1 million of one- to four-family mortgage loans, securitizations of $272.8 million of one- to four-family mortgage loans and net amortization and prepayments of $140.1 million. As part of the Company's plan to diversify its loan portfolio and reduce its dependency on residential one- to four-family mortgage loans, during the first quarter of fiscal 2001 and in conjunction with the South Jersey acquisition, the Bank securitized $61.7 million of one- to four-family mortgage loans acquired from the South Jersey acquisition in exchange for a like amount of FHLMC pass-through securities, and recorded these securities in the Bank's securities portfolio. Additionally, in the third quarter of fiscal 2001, the Bank securitized an additional $211.1 million of one- to four-family mortgage loans in exchange for a like amount of FNMA pass-through securities, recorded these securities in the Bank's securities portfolio and subsequently sold approximately $69.4 million of the related securities. Loan originations for the nine month period ended March 31, 2001 were primarily comprised of multifamily and one- to four-family mortgage loans. Multifamily mortgage loan originations during the nine month period ended March 31, 2001 totaled $191.4 million, bringing the total multifamily loan portfolio to $703.0 million, or 41.2% of net loans at March 31, 2001. Total one- to four-family loan production for the nine month period ended March 31, 2001 was $166.2 million. Mortgage-backed and mortgage-related securities increased by $253.0 million, or 33.1%, from $764.6 million at June 30, 2000 to $1.0 billion at March 31, 2001. The increase in mortgage-backed and mortgage-related securities were primarily the result of the aforementioned securitizations of $272.8 million of one- to four-family mortgage loans into FHLMC and FNMA pass-through securities, as well as $70.0 million of mortgage-backed and mortgage-related securities acquired from the South Jersey acquisition, offset in part by the sale of $428.6 million of mortgage-backed and mortgage-related securities and net amortization and prepayments of $81.4 million. Investment securities at March 31, 2001 totaled $270.5 million, an increase of $13.0 million, or 5.1%, compared to $257.5 million at June 30, 2000. Total liabilities at March 31, 2001 were $3.0 billion, an increase of $451.7 million, or 17.5%, from $2.6 billion at June 30, 2000. Total deposits increased by $399.8 million, or 22.3%, to $2.2 billion at March 31, 2001. Excluding the South Jersey acquisition, total deposits increased by $158.9 million, or 8.9%, to $1.9 billion at March 31, 2001. The Bank's core deposits increased $193.8 million, or 17.7%, at March 31, 2001 to $1.3 billion, resulting in a core deposit to total deposit ratio of approximately 58.9%. The increase in the Bank's core deposits was primarily 10 11 attributable to a $31.9 million increase in demand deposits and a $162.0 million increase in savings, N.O.W. and Money market accounts. The Bank also experienced an increase of $206.0 million, or 29.7%, in certificates of deposit from $693.3 million at June 30, 2000 to $899.3 million at March 31, 2001. The increase in overall deposits was primarily the result of $240.9 million of deposits acquired through the South Jersey acquisition and an increase in certificates of deposit which was primarily attributable to increased marketing of such deposit products. Additionally, the Bank continues to place a level of emphasis on the utilization of borrowed funds to fund asset growth. In this regard, at March 31, 2001 and June 30, 2000, the Bank had total borrowings of $814.7 million and $773.7 million, respectively. In connection with the South Jersey acquisition, the Company acquired $27.6 million of borrowed funds. The Bank may continue to increase such emphasis, which may result in an increase in the Bank's overall cost of funds. The Bank's current strategy is to invest such borrowed funds primarily in mortgage loans and mortgage-backed and mortgage-related securities with similar estimated maturities. This strategy is intended to incrementally increase net interest income, although it may have the effect of incrementally decreasing net interest rate spread. Total stockholders' equity increased by $23.1 million to $329.5 million at March 31, 2001 from $306.4 million at June 30, 2000. The overall increase was primarily due to earnings reported for the nine month period ended March 31, 2001 of $28.8 million, a $35.3 million increase in the fair value on securities available for sale, net of tax and the amortization of $3.9 million for the unallocated and unearned shares of common stock held by the Company's stock-related benefit plans. These increases were offset, in part by the repurchase of 1.5 million shares of the Company's common stock and year to date cash dividends paid of $12.8 million. NON-PERFORMING ASSETS Non-performing loans totaled $10.7 million, or 0.6% of total loans, net at March 31, 2001, as compared to $4.7 million, or 0.3% of total loans, at June 30, 2000. At March 31, 2001, the Bank's real estate owned consisted of foreclosed assets totaling $16,000, which at such date was comprised of a one- to four-family property. At March 31, 2001, the Bank had $3.9 million of assets designated as "Substandard," consisting of 27 loans, no assets classified as "Doubtful," and four consumer loans classified as "Loss," respectively. Non-accrual loans totaled $10.7 million as of March 31, 2001, which included 48 one- to four-family loans, with an aggregate balance of $4.5 million, seven non-residential loans totaling $1.5 million, seven construction loans totaling $3.2 million and 10 commercial loans totaling $1.5 million. For the nine month periods ended March 31, 2001 and 2000, the Company's loan loss provision remained unchanged at $900,000. The Company's allowance for loan losses totaled $19.1 million at March 31, 2001 and $14.7 million at June 30, 2000, which represents a ratio of allowance for loan losses to non-performing loans of 178.4% and 311.5%, respectively. The Company continues to increase its overall loan loss reserves due to the increase in lending of all loan products. Management believes the allowance for loan losses at March 31, 2001 is adequate and sufficient reserves are presently maintained to cover potential losses. For the nine month period ended March 31, 2001, the Company experienced net charge-offs of $86,706. 11 12 COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 GENERAL. The Company reported net income for the third quarter ended March 31, 2001 of $9.9 million, or diluted earnings per share of $0.40, an increase of 17.7% as compared to the $8.8 million, or diluted earnings per share of $0.34, reported for the same period last year. INTEREST INCOME. The Company reported total interest income of $57.9 million for the third quarter ended March 31, 2001, representing an increase of $8.8 million, or 17.9%, as compared to the same period in 2000. The increase in interest income was attributable primarily to the growth in average interest-earning assets of $338.2 million and a 35 basis point increase in the average yield on interest-earning assets. The overall increase in the level of interest-earning assets was primarily the result of an increase in assets acquired from South Jersey, as well as deposit inflows. Interest income on loans increased $5.6 million, or 19.1%, to $35.1 million for the third quarter ended March 31, 2001, as compared to the $29.5 million reported for the comparable period in 2000. This increase was the result of growth in the average balance of loans outstanding of $207.2 million, due primarily to increased originations of multifamily and one- to four-family real estate loans and loans acquired through the recently completed acquisition, and an increase in the average yield on the overall loan portfolio to 7.88% for the third quarter ended March 31, 2001, as compared to 7.49% for the same period in 2000. Interest income on debt and equity securities increased $650,000, or 10.7%, from $6.1 million for the third quarter ended March 31, 2000, to $6.7 million for the same period in 2001. This increase is mainly attributable to the growth in the average balance of debt and equity securities, primarily investments in financial bonds and FHLB stock, as well as a 49 basis point increase in the average yield on the debt and equity portfolios. Interest income on mortgage-backed and mortgage-related securities increased $2.3 million, or 16.9%, from $13.5 million reported for the third quarter ended March 31, 2000, to $15.8 million for the same period in 2001. This increase was due primarily to an increase in the average yield on the mortgage-backed and mortgage-related securities portfolio to 6.81% for the third quarter ended March 31, 2001, as compared to 6.54% for the same period in 2000. INTEREST EXPENSE. Interest expense increased $5.4 million, or 21.3%, from $25.3 million for the third quarter ended March 31, 2000, to $30.7 million for the third quarter ended March 31, 2001. The average cost of the Bank's interest-bearing liabilities increased from 4.3% for the third quarter ended March 31, 2000, to 4.5% for the third quarter ended March 31, 2001. Interest expense on deposits increased $5.8 million, or 41.6%, from $13.9 million for the third quarter ended March 31, 2000, to $19.8 million for the third quarter ended March 31, 2001. The increase reflects a $392.2 million increase in the average balance of interest-bearing deposits, primarily attributable to a $242.0 million increase in the average balance of certificates of deposit and a $150.1 million increase in the average balance of money market, savings and N.O.W. deposit accounts. This increase is primarily attributable to deposits acquired through the completed South Jersey acquisition. In addition, the Bank's strategy over the past several years has been to attract more certificates of deposit through the offering of additional certificate of deposit products and related marketing of commercial deposit accounts. 12 13 Interest expense on borrowed funds for the third quarter ended March 31, 2001 was $11.0 million, a decrease of $403,000 as compared to the $11.4 million reported in the same period in 2000. The decrease in interest expense on borrowed funds is attributable to a decrease in the average balance of borrowed funds of $10.0 million as well as a 13 basis point decrease in the average cost on borrowed funds. The Bank continues to place a greater level of emphasis on the utilization of borrowed funds to fund asset growth and to leverage the Bank's capital position to improve returns on equity. As of March 31, 2001, the Bank had $814.7 million of borrowings outstanding, an increase of $41.0 million, or 5.3%, as compared to the $773.7 million of borrowings outstanding as of June 30, 2000. The Bank may continue to increase such emphasis on borrowed funds, which may result in an increase in the Bank's overall cost of funds. The Bank's current strategy is to invest such borrowed funds primarily in mortgage-backed and mortgage-related securities. This strategy is intended to incrementally increase net interest income, although it may have the effect of incrementally decreasing net interest rate spread. PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses for the three month periods ended March 31, 2001 and 2000 were $300,000. The provision for the third quarter ended March 31, 2001 was based on management's evaluation of its loan portfolio and real estate market conditions. In particular, management considered the continued growth in the portfolio, the introduction of new lending products by the Bank and the seasoning of such new products, as well as the level of its non-performing loans. Management believes, based upon information currently available, that its allowance for loan losses is adequate to cover future loan losses. To the extent the Bank increases its investment in multifamily loans, commercial real estate, commercial and other loans, which entail higher risk than one- to four-family loans, the Bank may decide to increase its allowance for loan losses through additional loan loss provisions, which may adversely affect net income. In addition, if general economic conditions and real estate values within the Bank's primary lending area decline, the level of non-performing loans may increase, resulting in larger provisions for loan losses which, in turn, would also adversely affect net income. NON-INTEREST INCOME. Exclusive of net gains and losses from the sales of securities and loans, total non-interest income for the third quarter ended March 31, 2001 was $3.6 million, as compared to the $3.1 million reported for the same period in 2000. The increased level of non-interest income is primarily due to an overall increase in deposit fee income, fee income generated from the South Jersey acquisition, and advisory fee income from our investment in Peter B. Cannell & Co. Inc. NON-INTEREST EXPENSE. Non-interest expense totaled $15.2 million for the third quarter ended March 31, 2001, an increase of $2.3 million, or 17.6%, as compared to the $12.9 million reported for the same period of the prior year. The increased level of non-interest expense was mainly attributable to increased compensation and employee benefit expenses, goodwill amortization and other expenses associated with the South Jersey acquisition. INCOME TAXES. The Company's effective consolidated tax rate for the third quarter ended March 31, 2001, was 35.7% as compared to 35.9% reported for the comparable period in 2000. The reduction of the Company's effective tax rate is primarily due to the Bank's utilization of various tax-planning strategies. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000 GENERAL. The Company reported net income for the nine month period ended March 31, 2001 of $28.8 million, or core diluted earnings per share of $1.16, an increase of 19.6% as compared with $0.97 core earnings per share reported for the same period last year. Core earnings for the nine 13 14 month periods ended March 31, 2001 and 2000 excludes net gains on sales of securities and loans of $67,000 and $734,000, respectively. INTEREST INCOME. The Company reported total interest income of $168.4 million for the nine month period ended March 31, 2001, representing an increase of $24.0 million, or 16.7%, as compared to the same period in 2000. The increase in interest income was attributable primarily to the growth in average interest-earning assets of $303.0 million and a 34 basis point increase in the average yield on interest-earning assets. The overall increase in the level of interest-earning assets was primarily the result of an increase in assets acquired from South Jersey, as well as deposit inflows. Interest income on loans increased $20.1 million, or 24.0%, to $103.6 million for the nine month period ended March 31, 2001, as compared to the $83.6 million reported for the comparable period in 2000. This increase was the result of growth in the average balance of loans outstanding of $394.0 million, due primarily to increased originations of multifamily and one- to four-family real estate loans and loans acquired through the recently completed acquisition, as well as an increase in the average yield on the overall loan portfolio to 7.82% for the nine month period ended March 31, 2001, as compared to 7.56% for the same period in fiscal 2000. Interest income on debt and equity securities increased $1.6 million, or 8.5%, from $18.6 million for the nine month period ended March 31, 2000, to $20.2 million for the same period in 2001. This increase is mainly attributable to a 66 basis point increase in the average yield on the debt and equity portfolio. Interest income on mortgage-backed and mortgage-related securities increased $2.0 million, or 4.8%, from $41.8 million reported for the nine month period ended March 31, 2000, to $43.8 million for the same period in 2001. This increase was due primarily to an increase in the average yield on the mortgage-backed and mortgage-related securities portfolio to 6.79% for the nine month period ended March 31, 2001, as compared to 6.50% for the same period in 2000. INTEREST EXPENSE. Interest expense increased $16.7 million, or 23.0%, from $72.7 million for the nine month period ended March 31, 2000, to $89.4 million for the nine month period ended March 31, 2001. The average cost of the Bank's interest-bearing liabilities increased from 4.21% for the nine month period ended March 31, 2000, to 4.49% for the nine month period ended March 31, 2001. Interest expense on deposits increased $16.9 million, or 42.3%, from $39.9 million for the nine month period ended March 31, 2000, to $56.7 million for the nine month period ended March 31, 2001. The increase reflects a $354.9 million increase in the average balance of interest-bearing deposits, primarily attributable to a $226.4 million increase in the average balance of certificates of deposit and a $128.5 million increase in the average balance of money market, savings and N.O.W. deposit accounts. This increase can be primarily attributable to deposits acquired through the recently completed South Jersey acquisition. In addition, the Bank's strategy over the past several years has been to attract more certificates of deposit through the offering of additional certificate of deposit products and related marketing of commercial deposit accounts. Interest expense on borrowed funds for the nine month period ended March 31, 2001 was $32.6 million, a decrease of $174,000 as compared to the $32.8 million reported in the same period in 2000. The decrease in interest expense on borrowed funds was primarily attributable to a decrease in the average balance of borrowed funds of $6.2 million, offset in part, by an increase in average cost of one basis point from the nine month period ended March 31, 2000. The Bank continues to place a greater level of emphasis on the utilization of borrowed funds to fund asset growth and to leverage the Bank's capital position to improve returns on equity. As of March 31, 14 15 2001, the Bank had $814.7 million of borrowings outstanding, an increase of $41.0 million, or 5.3%, as compared to the $773.7 million of borrowings outstanding as of June 30, 2000. The Bank may continue to increase such emphasis on borrowed funds, which may result in an increase in the Bank's overall cost of funds. The Bank's current strategy is to invest such borrowed funds primarily in mortgage-backed and mortgage-related securities. This strategy is intended to incrementally increase net interest income, although it may have the effect of incrementally decreasing net interest rate spread. PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses for the nine month periods ended March 31, 2001 and 2000 were $900,000. The provision for the nine month period ended March 31, 2001 was based on management's evaluation of its loan portfolio and real estate market conditions. In particular, management considered the continued growth in the portfolio, the introduction of new lending products by the Bank and the seasoning of such new products, as well as the level of its non-performing loans. Management believes, based upon information currently available, that its allowance for loan losses is adequate to cover future loan losses. To the extent the Bank increases its investment in multifamily loans, commercial real estate, commercial and other loans, which entail higher risk than one- to four-family loans, the Bank may decide to increase its allowance for loan losses through additional loan loss provisions, which may adversely affect net income. In addition, if general economic conditions and real estate values within the Bank's primary lending area decline, the level of non-performing loans may increase, resulting in larger provisions for loan losses which, in turn, would also adversely affect net income. NON-INTEREST INCOME. Exclusive of net gains and losses from the sales of securities and loans, total non-interest income for the nine month period ended March 31, 2001 was $11.1 million, as compared to the $9.8 million reported for the same period in 2000. The increased level of non-interest income is primarily due to an overall increase in deposit fee income, loan prepayment fees, fee income generated from the South Jersey acquisition, and advisory fee income from our investment in Peter B. Cannell & Co. Inc. Net gains reported for the nine month period ended March 31, 2000, were primarily due to net gains of $734,000 from the sale of equity and investment securities. NON-INTEREST EXPENSE. Non-interest expense totaled $44.3 million for the nine month period ended March 31, 2001, an increase of $5.3 million, or 13.7%, as compared to the $39.0 million reported for the same period of the prior year. The increased level of non-interest expense was mainly attributable to increased compensation and employee benefit expenses, goodwill amortization and other expenses associated with the South Jersey acquisition. INCOME TAXES. The Company's effective consolidated tax rate for the nine month period ended March 31, 2001, was 35.8% as compared to 36.3% reported for the comparable period in 2000. The reduction of the Company's effective tax rate is primarily due to the Bank's utilization of various tax-planning strategies. LIQUIDITY AND CAPITAL RESOURCES The Bank's primary sources of funds are deposits, proceeds from the principal and interest payments on loans, mortgage-backed and mortgage-related and investment securities, and to a significantly lesser extent, proceeds from the sale of fixed-rate mortgage loans to the secondary market. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, mortgage prepayments and mortgage loan sales are greatly influenced by general interest rates, economic conditions and competition. 15 16 The primary investing activities of the Bank are the origination of residential one- to four-family, multifamily and, to a lesser extent, commercial real estate, construction and development and other loans and the purchase of mortgage-backed and mortgage-related and investment securities. During the nine month periods ended March 31, 2001 and 2000, the Bank's loan originations totaled $409.3 million and $472.6 million, respectively. Purchases of mortgage-backed, mortgage-related and investment securities totaled $431.5 million and $83.6 million for the nine month periods ended March 31, 2001 and 2000, respectively. These activities were funded primarily by deposit growth and principal repayments and prepayments on loans, mortgage-backed and mortgage-related securities and investment securities and advances from the FHLB. As of March 31, 2001, the Bank experienced a net increase in total deposits of $399.8 million to $2.2 billion, or 22.3%, as compared to the $1.8 billion at June 30, 2000. Deposit flows are affected by the level of interest rates, products offered by local competitors and other factors. The Bank closely monitors its liquidity position on a daily basis. Excess short-term liquidity is invested in overnight federal funds sold. In the event the Bank should require funds beyond its ability to generate them internally, additional sources of funds are available through repurchase agreements and advances from the FHLB. The Bank has placed a greater level of emphasis on the utilization of borrowed funds to fund asset growth. In this regard, at March 31, 2001, the Bank had total borrowings of $814.7 million. The Bank may continue to increase such emphasis, which may result in an increase in the Bank's average cost of funds. Loan commitments totaled $202.9 million at March 31, 2001, and were comprised of $84.6 million in one- to four-family loan commitments, $14.7 million in commercial real estate loan commitments, $52.9 million in construction loan commitments, $14.9 million in commercial loan commitments, $26.1 million in home equity loan commitments, $4.5 million in multifamily loan commitments and $5.2 million in other loan commitments. In addition, management estimates that an increased level of loan commitments may arise as a result of the Multifamily Lending Division. Management of the Bank anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit, which are scheduled to mature in less than one year from March 31, 2001, totaled $693.1 million. Based upon past experience and the Bank's current pricing strategy, management believes that a significant portion of such deposits will remain with the Bank. At March 31, 2001, the Bank exceeded all of its regulatory capital requirements with a leveraged capital level of $231.6 million, or 6.8% of adjusted assets, which is above the required level of $136.6 million, or 4.0% of adjusted assets, and risk-based capital of $250.7 million, or 14.1% of adjusted assets, which exceeds the required level of $142.7 million, or 8.0% of adjusted assets. The Company's most liquid assets are cash, due from banks and federal funds sold. The levels of these assets are dependent on the Bank's operating, financing, lending and investing activities during any given period. At March 31, 2001, cash, due from banks and federal funds sold totaled $86.2 million, or 2.6% of total assets. FORWARD-LOOKING STATEMENT This Report on Form 10-Q contains certain forward-looking statements within the meaning of the federal securities laws. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, 16 17 strategies and expectations of the Company, are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's other filings with the SEC. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of the Report. Except as required by applicable law or regulation, the Company undertakes no obligation to update forward-looking statements to reflect events that occur after the date on which such statements have been made. 17 18 ITEM 3. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK ASSET AND LIABILITY MANAGEMENT AND THE MANAGEMENT OF INTEREST RATE RISK Quantitative and qualitative disclosure about market risk is presented at June 30, 2000 in Item 7a. to the Company's Form 10-K, filed with the SEC on September 28, 2000. There have been no material changes in the Company's market risk at March 31, 2001 as compared to June 30, 2000. The following is an update of the discussion provided therein. GENERAL. The Company's largest component of market risk continues to be interest rate risk. Substantially all of this risk continues to reside at the Bank level. The Bank still is not subject to foreign currency exchange or commodity price risk. At March 31, 2001, neither the Company nor the Bank owned any trading assets, nor did they participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments. GAP ANALYSIS. At March 31, 2001, the Company's estimated one-year "gap" position, the difference between the amount of interest-earning assets maturing or repricing within one year and interest-bearing liabilities maturing or repricing within one year, was a negative $686.4 million, representing a one-year interest sensitivity gap as a percentage of total assets of (20.5%). Accordingly, during a period of rising interest rates, the Company, having a positive gap position, would be in a better position to invest in higher yielding assets which, consequently, may result in the yield on its assets increasing at a pace more closely matching the increase in the cost of its interest-bearing liabilities than if it had a negative gap. During a period of falling interest rates, an institution with a positive gap would tend to have its assets repricing at a faster rate than one with a negative gap which, consequently, may tend to restrain the growth of its net interest income or result in a decrease in interest income. INTEREST RATE RISK COMPLIANCE. The Company continues to monitor the impact of interest rate volatility upon net interest income and net portfolio value in the same manner as at June 30, 2000. There have been no changes in the Board of Directors' approved limits of acceptable variance in net interest income and net portfolio value at March 31, 2001, compared to June 30, 2000, and the projected changes continue to fall within the Board of Directors' approved limits at all levels of potential interest rate volatility. 18 19 PART II - OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS --------------------------------- The Company is not involved in any pending legal proceedings other than the routine legal proceedings occurring in the ordinary cause of business. Such routine legal proceeding 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 ----------------------------------------- Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES ------------------------------- Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- Not applicable. ITEM 5. OTHER INFORMATION ----------------- Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) EXHIBITS -------- 2.1 Agreement and Plan of Merger, dated as of March 27, 2001, by and between New York Community Bancorp. Inc. and Richmond County Financial Corp.* 3.1 Certificate of Incorporation of Richmond County Financial Corp.** 3.2 Bylaws of Richmond County Financial Corp.* 10.1 Stock Option Agreement, dated as of March 27, 2001, by and between New York Community Bancorp. Inc., as issuer, and Richmond County Financial Corp., as grantee* 11.0 Statement re: Computation of Per Share Earnings. * Incorporated by reference from the Form 8-K filed on March 28, 2001. ** Incorporated by reference from the Form S-1 (Registration No. 333-37009), as amended, filed on October 2, 1997. (b) REPORTS ON FORM 8-K ------------------- 1. Form 8-K filed on March 9, 2001 reporting definitive agreements with Summit Bancorp and FleetBoston Financial Corp. to acquire branch offices of each institution. 2. Form 8-K filed on March 28, 2001 regarding the merger with New York Community Bancorp. Inc. 19 20 Exhibit Index ------------- Exhibit No. ----------- 11.0 Statement re: Computation of Per Share Earnings 20 21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RICHMOND COUNTY FINANCIAL CORP. (Registrant) Date: May 11, 2001 By: /s/ Michael F. Manzulli -------------------------------- Michael F. Manzulli Chairman of the Board and Chief Executive Officer Date: May 11, 2001 By: /s/ Thomas R. Cangemi -------------------------------- Thomas R. Cangemi Executive Vice President, Chief Financial Officer and Treasurer 21

RICHMOND COUNTY FINANCIAL CORP 10-Q