10-Q 1 e10-q.txt NORTH FORK BANCORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED: JUNE 30, 2000 NORTH FORK BANCORPORATION, INC. (Exact name of Company as specified in its charter) DELAWARE 36-3154608 -------- ---------- (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 275 BROADHOLLOW ROAD, MELVILLE, NEW YORK 11747 ---------------------------------------- ----- (Address of principal executive offices) (Zip Code)
(631) 844-1004 -------------- (Company's telephone number, including area code) Indicate by check mark whether the Company (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 Company 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.
CLASS OF COMMON STOCK NUMBER OF SHARES OUTSTANDING 8/10/2000 --------------------- -------------------------------------- $.01 PAR VALUE 173,972,192
1 2 INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) North Fork Bancorporation, Inc. and Subsidiaries. 4) Consolidated Balance Sheets. 5) Consolidated Statements of Income. 6) Consolidated Statements of Cash Flows. 7) Consolidated Statements of Changes in Stockholders' Equity. 8) Consolidated Statements of Comprehensive Income. 9) Notes to Consolidated Financial Statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is contained throughout Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated by reference. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS LITIGATION INVOLVING DIME BANCORP, INC. The Company is a party to six separate lawsuits in connection with its pending offer to acquire all of the outstanding common stock of Dime Bancorp, Inc. ("Dime"). A complete description of this litigation is contained in: (1) the section captioned "The Offer - Litigation" on pages 46 through 52 of Amendment No. 3 to the Company's Registration Statement on Form S-4, Registration No. 333-32492, filed with the Securities and Exchange Commission (the, "Commission") on May 15, 2000 (the "Exchange Offer S-4") and is included as Exhibit 99.1 to this Quarterly Report on Form 10-Q, and incorporated herein by reference in response to Item 1 of Part II of Form 10-Q; (2) Item 5. Other Events, numbers 1-4 of the Current Report on Form 8-K, dated May 15, 2000 and filed with the Commission on May 22, 2000 and is included in Exhibit 99.2 to this Quarterly Report on Form 10-Q, and incorporated herein by reference in response to Item 1 of Part II of Form 10-Q; and (3) Item 5. Other Events of he Current Report on Form 8-K, dated July 14, 2000 and filed with the Commission on July 19, 2000 and is included as Exhibit 99.3 to this Quarterly Report on Form 10-Q, and incorporated herein by reference in response to Item 1 of Part II of Form 10-Q. ITEM 2. CHANGES IN SECURITIES 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 The following exhibits are submitted herewith:
(a) Exhibit # Description (11) Statement Re: Computation of Per Share Earnings. (27) Financial Data Schedule (99.1) Description of certain litigation involving the Company (incorporated by reference to the section entitled "The Offer-Litigation " on pages 46-52 of Amendment No. 3 to the Company's Registration Statement filed on Form S-4 (registration no. 333-32492) filed with the Securities and Exchange Commission (the "Commission") on May 15, 2000). (99.2) Description of certain litigation involving the Company (incorporated by reference to Item 5. Other Events, numbers 1-4 of the Current Report on Form 8-K, dated May 15, 2000 and filed with the Commission on May 22, 2000). (99.3) Description of certain litigation involving the Company (incorporated by reference to Item 5. Other Events of the Current Report on Form 8-K, dated July 14, 2000 and filed with the Commission on July 19, 2000).
2 3 INDEX (CONTINUED) PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) (b) Current Reports on Form 8-K 1) Current Report on Form 8-K/A dated April 14, 2000 (amending the Current Report on Form 8-K filed with the Commission on March 3, 2000). 2) Current Report on Form 8-K dated April 18, 2000 (containing the audited supplemental consolidated balance sheets of the Company as of December 31, 1999 and 1998, and the related audited supplemental consolidated statements of income, cash flows, changes in stockholders' equity, and comprehensive income for each of the years in the three-year period ended December 31, 1999. The financial statements give retroactive effect to the merger of the Company and JSB Financial, Inc. on February 29, 2000). 3) Current Report on Form 8-K dated April 24, 2000 (reporting the Company's earnings results for the quarter ended March 31, 2000). 4) Current Report on Form 8-K dated May 15, 2000 (containing certain updated information to Amendment No. 3 to the Company's Registration Statement filed on Form S-4 with the Securities and Exchange Commission relating to the offer (the "offer') by North Fork to exchange 0.9302 shares of North Fork common stock and $2.00 in cash for each outstanding share of common stock of Dime Bancorp, Inc. ("Dime")). 5) Current Report on Form 8-K dated May 26, 2000 (announcing that the Company was extending the expiration date of the offer until 12:00 midnight, New York City time, on June 30, 2000). 6) Current Report on Form 8-K dated June 27, 2000 (announcing that the Company was extending the expiration date of the offer until 12:00 midnight, New York City time, on July 31, 2000). 7) Current Report on Form 8-K dated June 30, 2000 (announcing that the Company began sending a letter to stockholders of Dime, in connection with the Company's solicitation of proxies from Dime stockholders to withhold authority for each of Dime's five nominees for election to the Board of Directors of Dime at the 2000 Annual Meeting of Stockholders of Dime Bancorp, Inc.). 3 4 CONSOLIDATED BALANCE SHEETS (UNAUDITED)
------------------------------------------------ JUNE 30, DECEMBER 31, JUNE 30, (in thousands, except per share amounts) 2000 1999 1999 ------------------------------------------------ ASSETS: Cash and Due from Banks ................................................ $ 248,269 $ 317,434 $ 169,640 Money Market Investments ............................................... 72,807 85,767 241,872 Securities: Available-for-Sale .................................................. 3,449,273 3,682,210 3,612,810 Held-to-Maturity .................................................... 1,219,444 1,351,504 1,562,017 ------------------------------------------------ Total Securities ................................................. 4,668,717 5,033,714 5,174,827 ------------------------------------------------ Loans .................................................................. 9,100,542 7,913,328 7,272,019 Less: Unearned Income ................................................ 16,760 15,640 18,277 Allowance for Loan Losses .................................. 88,010 74,525 75,333 ------------------------------------------------ Net Loans ............................................ 8,995,772 7,823,163 7,178,409 ------------------------------------------------ Intangible Assets ...................................................... 352,549 79,151 82,109 Premises and Equipment ................................................. 100,517 92,652 93,026 Accrued Income Receivable .............................................. 91,208 78,651 77,099 Other Assets ........................................................... 152,909 165,624 125,324 ------------------------------------------------ Total Assets ...................................................... $ 14,682,748 $ 13,676,156 $ 13,142,306 ================================================ LIABILITIES AND STOCKHOLDERS' EQUITY: Demand Deposits ........................................................ $ 1,846,973 $ 1,558,044 $ 1,503,254 Savings, NOW, and Money Market Deposits ................................ 4,123,281 3,598,481 3,514,651 Other Time Deposits .................................................... 2,373,567 1,965,827 2,023,971 Certificates of Deposit, $100,000 & Over .............................. 577,599 519,211 600,254 ------------------------------------------------ Total Deposits .................................................... 8,921,420 7,641,563 7,642,130 ------------------------------------------------ Federal Funds Purchased and Securities Sold Under Agreements to Repurchase ............................................ 2,800,282 2,665,200 3,014,796 Other Borrowings ....................................................... 1,144,710 1,894,000 885,000 Accrued Expenses and Other Liabilities ................................. 229,507 276,981 221,886 ------------------------------------------------ Total Liabilities ................................................ $ 13,095,919 $ 12,477,744 $ 11,763,812 ------------------------------------------------ Capital Securities ..................................................... $ 244,326 $ 199,314 $ 199,301 STOCKHOLDERS' EQUITY: Preferred Stock, par value $1.00; authorized 10,000,000 shares, unissued -- -- -- Common stock, par value $0.01; authorized 500,000,000 shares; issued 174,041,526 shares at June 30, 2000 ......................... 1,740 1,931 1,931 Additional Paid in Capital ............................................. 352,503 560,979 560,741 Retained Earnings ...................................................... 1,059,843 1,026,546 954,593 Accumulated Other Comprehensive Income - Unrealized (Losses)/Gains on Securities Available-for-Sale, net of taxes ..................... (41,435) (37,818) 1,715 Deferred Compensation .................................................. (26,585) (28,007) (22,771) Treasury Stock at Cost; 186,420 at June 30, 2000 ...................... (3,563) (524,533) (317,016) ------------------------------------------------ Total Stockholders' Equity ....................................... 1,342,503 999,098 1,179,193 ------------------------------------------------ Total Liabilities and Stockholders' Equity ....................... $ 14,682,748 $ 13,676,156 $ 13,142,306 ================================================
See Accompanying Notes to Consolidated Financial Statements 4 5 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, (in thousands, except per share amounts) 2000 1999 2000 1999 ---------------------------------------------------- INTEREST INCOME: Loans ................................................ $ 181,922 $ 146,641 $ 350,846 $ 290,926 Mortgage-Backed Securities ........................... 71,662 69,069 142,460 133,272 Other Securities ..................................... 13,306 7,863 23,014 17,004 U.S. Treasury and Government Agency Securities ....... 2,684 3,858 5,125 6,917 State and Municipal Obligations ...................... 929 791 1,848 1,600 Money Market Investments ............................. 639 1,785 2,017 2,829 ---------------------------------------------------- Total Interest Income ................................ 271,142 230,007 525,310 452,548 ---------------------------------------------------- INTEREST EXPENSE: Savings, NOW, and Money Market Deposits .............. 19,909 16,431 38,818 32,995 Other Time Deposits .................................. 30,023 23,765 56,477 48,199 Certificates of Deposit, $100,000 and Over ........... 7,690 8,491 14,877 16,682 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase .......................... 38,726 43,640 72,307 85,818 Other Borrowings ..................................... 21,828 5,972 50,535 7,782 ---------------------------------------------------- Total Interest Expense ............................ 118,176 98,299 233,014 191,476 ---------------------------------------------------- Net Interest Income ............................... 152,966 131,708 292,296 261,072 Provision for Loan Losses ............................ 2,250 1,255 11,250 2,512 ---------------------------------------------------- Net Interest Income after Provision for Loan Losses 150,716 130,453 281,046 258,560 ---------------------------------------------------- NON-INTEREST INCOME: Fees and Service Charges on Deposit Accounts ......... 9,601 7,058 18,056 13,756 Investment Management, Commissions and Trust Fees .... 4,623 4,203 9,356 8,572 Mortgage Banking Operations .......................... 942 957 1,797 1,898 Other Operating Income ............................... 5,584 3,384 10,808 6,654 Gain on Sale of Branch Facilities .................... 10,392 -- 10,392 -- Net Securities Gains/(Losses) ........................ 11,148 7,017 (8,600) 9,720 Gain on Sale of Loans ................................ -- -- 2,303 -- ---------------------------------------------------- Total Non-Interest Income ....................... 42,290 22,619 44,112 40,600 ---------------------------------------------------- NON-INTEREST EXPENSE: Compensation and Employee Benefits ................... 27,730 25,344 56,337 50,671 Occupancy and Equipment, net ......................... 8,864 8,424 17,784 16,769 Capital Securities Costs ............................. 5,140 4,211 9,774 8,422 Amortization of Intangible Assets .................... 5,671 2,084 8,989 4,159 Other Operating Expenses ............................. 10,964 11,077 22,532 21,779 Dime Related Expenses ................................ 2,300 -- 8,300 -- Merger Related Restructure Charge .................... -- -- 50,499 -- ---------------------------------------------------- Total Non-Interest Expense ....................... 60,669 51,140 174,215 101,800 ---------------------------------------------------- Income Before Income Taxes ........................... 132,337 101,932 150,943 197,360 Provision for Income Taxes ........................... 46,318 36,679 63,012 71,060 ---------------------------------------------------- Net Income ...................................... $ 86,019 $ 65,253 $ 87,931 $ 126,300 ==================================================== PER SHARE: Earnings Per Share - Basic ........................... $ 0.50 $ 0.39 $ 0.53 $ 0.76 Earnings Per Share - Diluted ......................... $ 0.50 $ 0.39 $ 0.52 $ 0.75 Cash Dividends ....................................... $ 0.18 $ 0.15 $ 0.36 $ 0.30 Weighted Average Shares Outstanding - Basic .......... 171,672 166,169 166,994 166,804 Weighted Average Shares Outstanding - Diluted ........ 172,847 167,594 168,144 168,311
See Accompanying Notes to Consolidated Financial Statements 5 6 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) 2000 1999 ---------------------------- FOR THE SIX MONTHS ENDED JUNE 30, CASH FLOWS FROM OPERATING ACTIVITIES: Net Income .................................................................... $ 87,931 $ 126,300 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Provision for Loan Losses ..................................................... 11,250 2,512 Depreciation and Amortization ................................................. 7,273 7,000 Amortization of Intangible Assets ............................................. 8,989 4,159 Amortization of Securities Premiums ........................................... 2,790 6,330 Accretion of Discounts and Net Deferred Loan Fees ............................. (10,518) (4,738) Net Securities Losses/(Gains) ................................................. 8,600 (9,720) Other, net .................................................................... 16,333 (14,981) ---------------------------- Net Cash Provided by Operating Activities ................................. 132,648 116,862 ---------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Securities Held-to-Maturity ...................................... (10,083) (290,706) Maturities, Redemptions, Calls and Principal Repayments on Securities Held-to-Maturity ............................................... 141,509 507,210 Purchases of Securities Available-for-Sale .................................... (358,857) (1,406,623) Proceeds from Sales of Securities Available-for-Sale .......................... 1,585,216 69,621 Maturities and Principal Repayments on Securities Available-for-Sale .......... 228,264 717,972 Loans Originated, Net of Principal Repayments and Charge-offs ................. (467,574) (437,124) Proceeds from the Sale of Loans ............................................... 252,321 71,535 Transfers to Other Real Estate, net of sales .................................. 207 3,205 Purchases of Premises and Equipment, net ...................................... (119) (8,270) Purchase Acquisition, net of Cash Acquired .................................... 36,858 -- ---------------------------- Net Cash Provided by/(Used in) Investing Activities ....................... 1,407,742 (773,180) ---------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (Decrease)/Increase in Customer Deposits Liabilities ...................... (221,722) 48,456 Net (Decrease)/Increase in Borrowings ......................................... (1,338,212) 894,700 Net Decrease in Long Term Debt ................................................ -- (35,000) Purchase of Treasury Stock .................................................... (10,216) (68,924) Common Stock Sold for Cash .................................................... 2,030 3,686 Cash Dividends Paid ........................................................... (54,395) (68,442) ---------------------------- Net Cash (Used in)/Provided by Financing Activities ....................... (1,622,515) 774,476 ---------------------------- Net Decrease in Cash and Cash Equivalents ................................. (82,125) 118,158 Cash and Cash Equivalents at Beginning of the Period .......................... 403,201 293,354 ---------------------------- Cash and Cash Equivalents at End of the Period ................................ $ 321,076 $ 411,512 ============================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Period for: Interest Expense .......................................................... 242,036 190,027 ============================ Income Taxes .............................................................. 1,412 75,957 ============================ During the Year the Company Purchased Various Securities which Settled in the Subsequent Period .......................................... 35,206 2,537 ---------------------------- In February 2000, the Company acquired all of the outstanding common stock of Reliance Bancorp, Inc. Each share of Reliance's common stock was exchanged for 2.0 shares of the Company's common stock. Non-cash activity related to the Reliance acquisition not reflected above for the period ended February 18, 2000 are as follows: Fair Value of Assets Acquired ............................................... $ 2,344,276 Intangible Assets ........................................................... 282,387 Common Stock Issued ......................................................... 332,947 ----------- Liabilities Assumed ......................................................... $ 2,293,716 ===========
See Accompanying Notes to Consolidated Financial Statements 6 7 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
------------------------------------------------ Additional Unrealized Common Paid in Retained Securities (in thousands, except per share amounts) Stock Capital Earnings Gains/(Losses) ------------------------------------------------ BALANCE, DECEMBER 31, 1998 ................................ $ 1,929 $ 556,773 $ 879,441 $ 50,208 Net Income ................................................ -- -- 126,300 -- Cash Dividends ($.30 per share) .......................... -- -- (41,763) -- Cash Dividends-Acquired Company ........................... -- -- (8,462) -- Issuance of Stock (101,969 shares) ........................ 1 2,273 -- -- Purchase of Treasury Stock (3,385,900 shares) ............. -- -- -- -- Loss on Reissuance of Treasury-Acquired Company ........... -- -- (751) -- Restricted Stock Activity, net ............................ -- 20 -- -- Stock Based Compensation Activity, net .................... 1 1,675 -- -- Amortization of Unrealized Loss on Securities Transferred from Available-for-Sale to Held-to-Maturity -- -- (172) 172 Adjustment to Unrealized Gains/(Losses) on Securities Available-for-Sale, net of taxes .................... -- -- -- (48,665) ----------------------------------------------- BALANCE, JUNE 30, 1999 .................................... $ 1,931 $ 560,741 $ 954,593 $ 1,715 =============================================== BALANCE, DECEMBER 31, 1999 ................................ $ 1,931 $ 560,979 $1,026,546 ($ 37,818) Net Income ................................................ -- -- 87,931 -- Cash Dividends ($.36 per share) ........................... -- -- (62,569) -- Cash Dividends-Acquired Company ........................... -- -- (4,718) -- Issuance of Stock-Reliance Acquisition (17,120,638 shares) -- (38,989) -- -- Fair Value of Options-Reliance Acquisition ................ -- 14,075 -- -- Issuance of Stock (124,924 shares) ........................ 1 1,975 -- -- JSB Common Stock Retired (19,687,149 shares) .............. (197) (184,872) 13,540 -- Purchases of Treasury Stock (636,300 shares) .............. -- -- -- -- Restricted Stock Activity, net ............................ -- (20) -- -- Stock Based Compensation Activity, net .................... 5 (645) (887) -- Adjustment to Unrealized Gains/(Losses) on Securities Available-for-Sale, net of taxes .................... -- -- -- (3,617) ----------------------------------------------- BALANCE, JUNE 30, 2000 .................................... $ 1,740 $ 352,503 $1,059,843 ($ 41,435) ===============================================
-------------------------------------- Deferred Treasury (in thousands, except per share amounts) Compensation Stock Total -------------------------------------- BALANCE, DECEMBER 31, 1998 ................................ ($24,365) ($250,260) $1,213,726 Net Income ................................................ -- -- 126,300 Cash Dividends ($.30 per share) .......................... -- -- (41,763) Cash Dividends-Acquired Company ........................... -- -- (8,462) Issuance of Stock (101,969 shares) ........................ -- -- 2,274 Purchase of Treasury Stock (3,385,900 shares) ............. -- (68,924) (68,924) Loss on Reissuance of Treasury-Acquired Company ........... -- -- (751) Restricted Stock Activity, net ............................ 1,594 (279) 1,335 Stock Based Compensation Activity, net .................... -- 2,447 4,123 Amortization of Unrealized Loss on Securities Transferred from Available-for-Sale to Held-to-Maturity -- -- -- Adjustment to Unrealized Gains/(Losses) on Securities Available-for-Sale, net of taxes .................... -- -- (48,665) -------------------------------------- BALANCE, JUNE 30, 1999 .................................... ($22,771) ($317,016) $1,179,193 ====================================== BALANCE, DECEMBER 31, 1999 ................................ ($28,007) ($524,533) $ 999,098 Net Income ................................................ -- -- 87,931 Cash Dividends ($.36 per share) ........................... -- -- (62,569) Cash Dividends-Acquired Company ........................... -- -- (4,718) Issuance of Stock-Reliance Acquisition (17,120,638 shares) -- 357,861 318,872 Fair Value of Options-Reliance Acquisition ................ -- -- 14,075 Issuance of Stock (124,924 shares) ........................ -- 54 2,030 JSB Common Stock Retired (19,687,149 shares) .............. -- 171,529 -- Purchases of Treasury Stock (636,300 shares) .............. -- (10,216) (10,216) Restricted Stock Activity, net ............................ 1,422 (228) 1,174 Stock Based Compensation Activity, net .................... -- 1,970 443 Adjustment to Unrealized Gains/(Losses) on Securities Available-for-Sale, net of taxes .................... -- -- (3,617) -------------------------------------- BALANCE, JUNE 30, 2000 .................................... ($26,585) ($ 3,563) $1,342,503 ======================================
See Accompanying Notes to Consolidated Financial Statements 7 8 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, (in thousands) 2000 1999 2000 1999 ------------------------------------------------------ Net Income ....................................... $ 86,019 $ 65,253 $ 87,931 $ 126,300 ------------------------------------------------------ Other Comprehensive Income, net of Income Taxes: Unrealized Losses on Securities Available-for-Sale (1,268) (33,065) (9,207) (42,272) Less: Reclassification of Realized (Gains)/Losses Included in Net Income ................ (7,246) (4,491) 5,590 (6,221) ------------------------------------------------------ Other Comprehensive Loss ......................... (8,514) (37,556) (3,617) (48,493) ------------------------------------------------------ Comprehensive Income ............................. $ 77,505 $ 27,697 $ 84,314 $ 77,807 ======================================================
See Accompanying Notes to Consolidated Financial Statements 8 9 NORTH FORK BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 AND 1999 FORWARD LOOKING STATEMENTS Certain statements under this caption, which involve risk and uncertainties constitute "forward looking statements under the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs, assumptions, and expectations of management of the Company. Words such as "expects", "believes", "should", "plans", "will", "estimates", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future financial condition, performance or operations and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. Therefore, actual outcomes or results may differ materially from what is indicated or forecasted in such forward-looking statements. Factors that may cause or contribute to such differences include, among others, the following possibilities: (1) changes in economic or market conditions; (2) significantly increased competition among financial service companies; (3) changes in the interest rate environment, which may reduce interest margins; and (4) accounting, tax, legislative or regulatory changes may adversely affect the business in which the Company is engaged. BASIS OF PRESENTATION North Fork Bancorporation, Inc. (the "Company") is a $14.7 billion multi-bank holding company headquartered in Melville, New York. The Company's primary bank subsidiary, North Fork Bank ("North Fork"), operates through 154 full-service retail-banking facilities located in the New York metropolitan area, one of the most densely populated and wealthiest markets in the nation. North Fork focuses on providing superior customer service to both personal and commercial clients by offering the convenience of telephone banking as well as an array of financial products and brokerage/investment management services through its non-bank subsidiaries, Compass Investment Services Corp. ("Compass") and Amivest Corporation ("Amivest"). The Company's other bank subsidiary, Superior Savings of New England NA ("Superior"), a nationally chartered bank located in the Connecticut county of New Haven, operates from one location, where it currently conducts a telebanking operation focused on gathering deposits throughout the New England region. In July 2000, Superior's charter was changed from a Connecticut state chartered savings bank to a nationally chartered bank. On February 18, 2000, Reliance Bancorp, Inc. ("Reliance"), the parent company of Reliance Federal Savings Bank, was merged with and into the Company. The transaction has been accounted for in accordance with the purchase method of accounting and, accordingly, the Company's consolidated results of operations reflect Reliance activity subsequent to the acquisition date. On February 29, 2000, JSB Financial, Inc. ("JSB"), the parent company of Jamaica Savings Bank ("Jamaica"), was merged with and into the Company. The merger has been accounted for in accordance with the pooling-of-interests method of accounting and, accordingly, the Company's consolidated financial statements include the accounts of JSB for all periods reported. The accounting and reporting policies of the Company are in conformity with generally accepted accounting principles and prevailing practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Such estimates are subject to change in the future as additional information becomes available or previously existing circumstances are modified. Actual results could differ from those estimates. Certain reclassifications have been made to prior year amounts to conform to current year presentations. Results of operations for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results of operations which may be expected for the full year 2000 or any other interim periods. These statements should be read in conjunction with the Company's 1999 Annual Report on Form 10-K, which is incorporated herein by reference. 9 10 RECENT ACCOUNTING DEVELOPMENTS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign currency denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Under SFAS 133, an entity that elects to apply hedge accounting is required to establish, at the inception of the hedge, the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" delaying SFAS 133's effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. Management is currently evaluating the effect SFAS 133 will have on its financial statements. At June 30, 2000, the Company was a party to five interest rate swap contracts with an aggregate notional value of $400 million. 10 11 MANAGEMENT'S DISCUSSION AND ANALYSIS BUSINESS COMBINATIONS JSB Financial, Inc. On February 29, 2000, JSB Financial, Inc., the parent company of Jamaica Savings Bank, was merged with and into the Company in a transaction accounted for in accordance with the pooling-of-interests method of accounting. On March 10, 2000, Jamaica Savings Bank was merged with and into North Fork. Pursuant to the merger agreement, the Company issued 3.0 shares of common stock for each share of JSB's common stock outstanding. Accordingly, the Company issued 28,312,851 of its common shares, simultaneously retired 19,687,149 shares, as adjusted, of JSB's common stock held in treasury and reserved 2,410,500 common shares for JSB's outstanding stock options at the merger date. JSB had $1.7 billion in total assets, $1.3 billion in loans, $1.1 billion in deposit liabilities, and $376.4 million in stockholders' equity at the merger date. Jamaica operated from 13 retail-banking facilities in the New York City boroughs of Manhattan and Queens and in Nassau and Suffolk Counties, New York. The Company's previously reported components of consolidated income and the amounts reflected in the accompanying consolidated statements of income for the three and six month periods ended June 30, 1999 are as follows: THREE MONTHS SIX MONTHS ENDED ENDED ------------------------- JUNE 30, JUNE 30, (in thousands) 1999 1999 ------------------------- NET INTEREST INCOME As Previously Reported $113,398 $223,489 JSB Financial, Inc. .. 18,310 37,583 ------------------------ Combined ............. $131,708 $261,072 NET INCOME As Previously Reported $ 58,360 $111,928 JSB Financial, Inc. .. 6,893 14,372 ------------------------ Combined ............. $ 65,253 $126,300 ======================== The following table sets forth a summary of the components reflected in the Merger Related Restructure Charge recognized during the first quarter of 2000:
(in thousands) Merger Expenses .................................... $ 6,534 Restructure Charge: Merger Related Compensation and Severance Costs 36,419 Facility and System Costs ..................... 5,163 Other Merger Related Costs .................... 2,383 ------- Total Pre-Tax Merger and Related Restructure Charge $50,499 =======
Merger expenses consist primarily of investment banking fees, legal fees, other professional fees, and expenses associated with shareholder and customer notifications. The restructure charge component represents merger related compensation and severance costs, which consist primarily of employee severance, compensation arrangements, transitional staffing and related employee benefits expenses. Facility and system costs consist primarily of lease termination charges and equipment write-offs resulting from the consolidation of overlapping branch locations and duplicate headquarters and operational facilities. Also reflected are the costs associated with the cancellation of certain data and item processing contracts and the deconversion of JSB's computer systems. Other merger related costs arise primarily from the application of the Company's accounting practices to the accounts of the merged business and, to a lesser extent, other expenses associated with the integration of operations. Additionally, the Company recorded a $6.6 million tax charge, net of federal benefit, relating to the recapture of Jamaica's bad debt reserve for state and local tax purposes. At June 30, 2000, $3.9 million of the merger related restructure charge was reflected in accrued expenses and other liabilities in the consolidated balance sheet. It is anticipated that the amount of this charge will be substantially paid in 2000, with the exception of certain obligations under long-term lease arrangements. 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) BUSINESS COMBINATIONS (CONTINUED) Reliance Bancorp, Inc. On February 18, 2000, Reliance was merged with and into the Company in a transaction accounted for using the purchase method of accounting. In accordance with the purchase method of accounting, the accompanying consolidated statements of income include the results of operations for Reliance subsequent to the acquisition date. The consolidated balance sheet reflects the assets and liabilities of Reliance at their estimated fair values. Pursuant to the merger agreement, the Company issued 2.0 shares of its common stock for each share of Reliance's common stock outstanding. The Company reissued from its treasury 17,120,638 common shares in exchange for outstanding Reliance shares and reserved for issuance 1,369,348 common shares for Reliance's outstanding stock options at the date of acquisition. The excess of the Company's cost over the fair value of net assets acquired was approximately $282.4 million and is being amortized on a straight-line basis over 20 years. Reliance had $2.4 billion in total assets, $1.0 billion in loans, $1.5 billion in deposit liabilities, and $175 million in stockholders' equity at the merger date. Reliance Federal Savings Bank operated from 29 retail-banking facilities throughout Suffolk and Nassau Counties, New York, as well as the New York City borough of Queens. PROPOSED BUSINESS COMBINATION Dime Bancorp Inc. On March 5, 2000, the Company announced its intention to commence an offer (the "Offer") to exchange .9302 shares of the Company's common stock and $2.00 in cash for each outstanding share of common stock of Dime Bancorp, Inc., a Delaware corporation ("Dime"), the parent company of Dime Savings Bank of New York, FSB. The Company intends promptly after the completion of the Offer to seek to merge Dime with the Company or a wholly owned subsidiary. As a result of the merger, each share of Dime common stock which has not been exchanged or accepted for exchange in the Offer would be converted into the same number of shares of the Company's common stock and the same amount of cash as is paid in the Offer, subject to appraisal rights. The purpose of the Offer is for the Company to acquire control of, and, thereafter, the entire common equity interest in Dime. The Offer is subject to certain conditions including the receipt of all regulatory approvals and the execution of a definitive merger agreement between the Company and Dime. The foregoing description of the Company's proposed acquisition of Dime is qualified in its entirety by reference to Amendment No. 3 to the Company's Registration Statement on Form S-4 (registration no. 333-32492), filed with the Securities and Exchange Commission on May 15, 2000 ("Amendment No. 3"), and any amendments thereto. In connection with the Offer, the Company entered into a stock purchase agreement with FleetBoston Financial Corporation ("FleetBoston"). Pursuant to this agreement, FleetBoston agreed to purchase (i) 250,000 shares of the Company's 7.5% Series B Non-Cumulative Convertible Preferred Stock, par value $1.00 per share and with a liquidation preference of $1,000.00 per share, at a conversion price of $18.69 per share of the Company's common stock and (ii) Common Stock Purchase Rights to acquire 7,500,000 shares of the Company's common stock at an exercise price of $17.88 for an aggregate purchase price of $250 million. FleetBoston's investment would be made in connection with, and at the time of the completion of the Offer. A complete description of the Company's arrangement with FleetBoston is more fully described and is qualified in its entirety by reference to Amendment No. 3. OVERVIEW The following table sets forth selected financial highlights for the Company in the three and six month periods ended June 30, 2000 and 1999. The 2000 second quarter results reflect the Company's first full quarter of operations subsequent to its acquisitions of JSB and Reliance. The succeeding discussion and analysis describes the changes in components of operating results giving rise to net income. 12 13 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) OVERVIEW (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, (in thousands, except ratios & per share amounts) 2000 1999 2000 1999 ------------------------------------------------------ EARNINGS: Net Income .................................. $ 86,019 $ 65,253 $ 87,931 $ 126,300 ------------------------------------------------------ PER SHARE: Earnings Per Share - Basic .................. $ 0.50 $ 0.39 $ 0.53 $ 0.76 Earnings Per Share - Diluted ................ $ 0.50 $ 0.39 $ 0.52 $ 0.75 Cash Dividends .............................. $ 0.18 $ 0.15 $ 0.36 $ 0.30 Book Value .................................. $ 7.72 $ 7.08 $ 7.72 $ 7.08 Average Equivalent Shares - Basic ........... 171,672 166,169 166,994 166,804 Average Equivalent Shares - Diluted ......... 172,847 167,594 168,144 168,311 ------------------------------------------------------ SELECTED RATIOS: Return on Average Total Assets (1) .......... 2.35% 2.01% 1.23% 2.00% Return on Average Stockholders' Equity (1) .. 25.10% 21.82% 13.81% 21.43% Core Efficiency Ratio ....................... 32.96% 34.62% 34.05% 34.64% Net Interest Margin ......................... 4.52% 4.31% 4.39% 4.39%
(1) Return on average total assets and average stockholders' equity, excluding merger related expenses and other special items, was 2.01% and 21.45% for the three months ended June 30, 2000, respectively, and 1.93% and 21.68% for the six months ended June 30, 2000, respectively. The Company reported net income for the quarter ended June 30, 2000 of $86 million, or diluted earnings per share of $.50. Net income and diluted earnings per share during the quarter were impacted by gains recognized from the sale of certain branch facilities and equity securities, partially offset by additional expenses incurred in the Company's attempt to acquire Dime. Earnings and diluted earnings per share, exclusive of these items ("Core Earnings"), was $73.5 million, or $.43, as compared to earnings, exclusive of securities gains, of $60.8 million, or diluted earnings per share of $.36, for the quarter ended June 30, 1999. Net Income for the first six months of 2000 was $87.9 million, or diluted earnings per share of $.52. Net Income and diluted earnings per share during this period were impacted by the recognition of the merger related and restructuring charge and other special items, which aggregated $61.5 million, or $50.1 million, after taxes. Earnings, exclusive of these items, was $138.1 million, or adjusted diluted earnings per share of $.82, for the six months ended June 30, 2000, as compared with earnings, exclusive of securities gains, of $120.1 million, or diluted earnings per share of $.71, for the comparable prior year period. The following tables set forth the reconciliation from net income, as reported, to Core Earnings for the three and six months ended June 30, 2000 and 1999, respectively.
THREE MONTHS ENDED THREE MONTHS ENDED --------------------------------------------------- JUNE 30, 2000 JUNE 30, 1999 --------------------------------------------------- Net Income, as reported ............. $ 86,019 $ 65,253 Items Excluded from Core Earnings: Gain on Sale of Branch Facilities (10,392) -- Net Securities (Gains)/Losses ... (11,148) (7,017) Dime Related Expenses ........... 2,300 -- -------- -------- (19,240) (7,017) Related Tax Effect .............. 6,734 2,526 -------- -------- (12,506) (4,491) -------- -------- Core Earnings ........... $ 73,513 $ 60,762 ======== ======== Core Earnings per Share - Basic ..... $ 0.43 $ 0.37 Core Earnings per Share - Diluted ... $ 0.43 $ 0.36
13 14 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) OVERVIEW (CONTINUED)
SIX MONTHS ENDED SIX MONTHS ENDED ----------------------------------------------- JUNE 30, 2000 JUNE 30, 1999 ----------------------------------------------- Net Income, as reported .................................. $ 87,931 $ 126,300 Items Excluded from Core Earnings: Gain on Sale of Branch Facilities .................... (10,392) -- Net Securities (Gains)/Losses ........................ 8,600 (9,720) Dime Related Expenses ................................ 8,300 -- Special Provision for Loan Losses .................... 6,750 -- Gain on Loan Sales ................................... (2,303) -- Merger Related Restructure Charge .................... 50,499 -- --------- --------- 61,454 (9,720) Related Tax Effect ................................... (17,927) 3,499 --------- --------- 43,527 (6,221) Jamaica Tax Bad Debt Recapture, Net of Federal Benefit 6,600 -- --------- --------- Core Earnings ................................ $ 138,058 $ 120,079 ========= ========= Core Earnings per Share - Basic .......................... $ 0.83 $ 0.72 Core Earnings per Share - Diluted ........................ $ 0.82 $ 0.71
NET INTEREST INCOME Net interest income, which represents the difference between interest earned on interest earning assets and interest incurred on interest bearing liabilities, is the Company's primary source of earnings. Net interest income is affected by the level and composition of assets, liabilities, and equity, as well as changes in market interest rates. Net interest income for the quarter ended June 30, 2000 increased $21.3 million, or 16.1%, to $153.0 million, when compared to $131.7 million for the 1999 second quarter. This growth was achieved through an increase in the level of interest earning assets (principally loans) and a 21 basis point increase in the net interest margin. Interest income for the quarter ended June 30, 2000 increased $41.1 million, or 17.9%, to $271.1 million, when compared to $230.0 million for the 1999 second quarter. The growth in interest income was due to a 44 basis point improvement in the yield on average interest earning assets to 7.93% and an increase in the level of average interest earning assets of $1.5 billion, or 12.1%, to $13.9 billion. The growth in average interest earning assets was due in large measure to the acquisition of Reliance, which added approximately $2.3 billion in interest earning assets. Absolute growth levels were partially offset by management's decision during the first quarter of 2000 to sell approximately $1.1 billion in securities classified as available-for-sale, reducing the Company's exposure to further rises in interest rates. The proceeds were used to reduce the level of higher costing short-term borrowings. During the second quarter of 2000, average loans increased $1.8 billion, or 25.5%, to $9.0 billion, when compared to second quarter 1999 levels. Approximately $1.0 billion represented loans acquired from Reliance. Internal loan origination's accounted for the remainder of the increase, with each component of the loan portfolio contributing to the growth. However, the net interest margin and interest income were negatively impacted by a modest 7 basis point decline in yield on average loans to 8.15% during the 2000 second quarter. Average loans represent 64.5% of average interest earning assets, as compared to 57.7% in the comparable prior year period. Loans represented 102% of total deposits at June 30, 2000. Average securities declined modestly to $4.9 billion in the second quarter of 2000, when compared to $5.1 billion in the 1999 second quarter, while the yield on average securities improved 102 basis points to 7.53%. Factors contributing to the decline in average securities and the improvement in yield were as follows: (a) approximately $1.2 billion in securities were acquired in the Reliance purchase transaction, with a book yield of 7.85%, (b) the aforementioned sale of $1.1 billion in the lower yielding available-for-sale securities; and (c) the reinvestment of cash flow on the securities portfolio at higher rates due to market conditions. For the quarter ended June 30, 2000, interest expense increased $19.9 million, or 20.2%, over the comparable prior year period to $118.2 million. This was attributable to a $1.2 billion, or 12.2%, increase in average interest bearing liabilities to $11.2 billion and an increase of 29 basis points in the Company's average cost of funds to 4.24% for the second quarter of 2000, as compared to 3.95% for the comparable prior year period. Average total borrowings increased $302.9 million, or 8.2%, to $4.0 billion during the second quarter of 2000, when compared to $3.7 billion during the comparable prior year period. The average cost of funds on total borrowings increased 71 basis points to 6.13% from 5.42%, reflecting market interest rates during the respective periods. In the current interest rate environment, management has kept the average duration of its other borrowings short-term. 14 15 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) NET INTEREST INCOME (CONTINUED) Average time and savings deposits, which continue to represent a stable funding source, increased $919.9 million to $7.2 billion, reflecting an average cost of funds of 3.20% during the second quarter of 2000, from $6.3 billion, with an average cost of funds of 3.09%. This increase was due primarily to the acquisition of Reliance. The increase was partially offset by a modest decline in deposit balances at the former Reliance and Jamaica branches, as both product and rate structures previously offered were conformed to those offered at North Fork. Average demand deposits increased $390.3 million, or 28.5%, to $1.8 billion during the 2000 second quarter, as compared to $1.4 billion in the 1999 second quarter. The growth in demand deposits has been achieved as a result of the emphasis on developing long-term deposit relationships with borrowers, the use of incentive compensation plans, and the successful conversion of previously acquired savings bank locations into full-service commercial banking locations. At June 30, 2000, demand deposits represented 20.7% of total deposits, as compared to 19.7% at June 30, 1999. The use of derivative instruments, principally interest rate swaps, decreased interest expense by approximately $1.4 million during the second quarter of 2000. These derivative financial instruments were immaterial to the overall cost of funds and net interest margin during these respective period ends. The following table sets forth a summary analysis of the relative impact on net interest income of changes in the average volume of interest earning assets and interest bearing liabilities and changes in average rates on such assets and liabilities. Because of the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes to volume or rate. For presentation purposes, changes which are not solely due to volume changes or rate changes have been allocated to these categories based on the respective percentage changes in average volume and average rates as they compare to each other.
THREE MONTHS ENDED SIX MONTHS ENDED 2000 VS. 1999 2000 VS. 1999 ---------------------------------------------------------------------------------- CHANGE IN CHANGE IN AVERAGE AVERAGE NET INTEREST AVERAGE AVERAGE NET INTEREST (in thousands) VOLUME RATE INCOME VOLUME RATE INCOME ---------------------------------------------------------------------------------- INTEREST INCOME FROM EARNING ASSETS: Securities ................................ $ (3,176) $ 12,401 $ 9,225 $ (1,029) $ 18,496 $ 17,467 Loans, net of unearned income ............. 36,591 (1,323) 35,268 66,780 (6,891) 59,889 Money Market Investments .................. (2,337) 657 (1,680) (1,414) 418 (996) ------------------------------------------------------------------------------- Total Interest Income .................. 31,078 11,735 42,813 64,337 12,023 76,360 ------------------------------------------------------------------------------- INTEREST EXPENSE ON LIABILITIES: Savings, NOW, and Money Market Deposits ... 2,695 783 3,478 3,977 1,846 5,823 Time Deposits ............................. 4,092 1,365 5,457 5,465 1,008 6,473 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase .......... (9,151) 4,237 (4,914) (20,065) 6,554 (13,511) Other Borrowings .......................... 14,260 1,596 15,856 41,503 1,250 42,753 ------------------------------------------------------------------------------- Total Interest Expense ................. 11,896 7,981 19,877 30,880 10,658 41,538 ------------------------------------------------------------------------------- Net Change in Net Interest Income ......... $ 19,182 $ 3,754 $ 22,936 $ 33,457 $ 1,365 $ 34,822 ===============================================================================
(1) The above table is presented on a tax equivalent basis. (2) Non-accrual loans are included in average loans, net of unearned income. 15 16 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) NET INTEREST INCOME (CONTINUED) The following tables present an analysis of net interest income by each major category of interest earning assets and interest bearing liabilities for the three and six month periods ended June 30, 2000 and 1999, respectively.
FOR THE THREE MONTHS ENDED JUNE 30, 2000 1999 ----------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE (dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE ----------------------------------------------------------------------------------- INTEREST EARNING ASSETS: Securities ................................. $ 4,900,775 $ 91,789 7.53% $ 5,088,793 $ 82,564 6.51% Loans, net of unearned income (1) .......... 8,989,125 182,153 8.15% 7,164,798 146,885 8.22% Money Market Investments ................... 38,569 767 8.00% 166,588 2,447 5.89% --------------------------- ---------------------------- Total Interest Earning Assets ............ 13,928,469 274,709 7.93% 12,420,179 231,896 7.49% --------------------------- ---------------------------- NON INTEREST EARNING ASSETS: Cash and Due from Banks .................... 243,139 174,861 Other Assets (2) ........................... 566,799 410,751 ------------ ------------ Total Assets ............................. $ 14,738,407 $ 13,005,791 ============ ============ INTEREST BEARING LIABILITIES: Savings, NOW, and Money Market Deposits .... $ 4,204,952 $ 19,909 1.90% $ 3,622,644 $ 16,431 1.82% Time Deposits .............................. 3,031,302 37,713 5.00% 2,693,697 32,256 4.80% --------------------------- ---------------------------- Total Savings and Time Deposits .......... 7,236,254 57,622 3.20% 6,316,341 48,687 3.09% Federal Funds Purchased and Securities Sold Under Agreements to Repurchase ........... 2,580,818 38,726 6.04% 3,206,472 43,640 5.46% Other Borrowings ........................... 1,393,806 21,828 6.30% 465,275 5,972 5.15% --------------------------- ---------------------------- Total Borrowings ......................... 3,974,624 60,554 6.13% 3,671,747 49,612 5.42% --------------------------- ---------------------------- Total Interest Bearing Liabilities ..... 11,210,878 118,176 4.24% 9,988,088 98,299 3.95% --------------------------- ---------------------------- Rate Spread ................................ 3.69% 3.54% NON-INTEREST BEARING LIABILITIES Demand Deposits ............................ 1,773,792 1,383,538 Other Liabilities .......................... 178,066 203,239 ------------ ------------ Total Liabilities ........................ 13,162,736 11,574,865 Capital Securities ......................... 244,324 199,299 Stockholders' Equity ....................... 1,331,347 1,231,627 ------------ ------------ Total Liabilities and Stockholders' Equity $ 14,738,407 $ 13,005,791 ============ ============ Net Interest Income & Net Interest Margin .. 156,533 4.52% 133,597 4.31% Less: Tax Equivalent Adjustment ............ (3,567) (1,889) ------------ ------------ Net Interest Income ................... $ 152,966 $ 131,708 ============ ============
(1) Non-accrual loans are included in average loans, net of unearned income. (2) Unrealized gains/(losses) on available-for-sale securities are recorded in other assets. (3) Interest income on a tax equivalent basis includes the additional amount of income that would have been earned if the Company's investment in tax exempt money market investments and securities, state and municipal obligations, non-taxable loans, equity securities, and U.S. Treasuries had been made in securities and loans subject to Federal, State, and Local income taxes yielding the same after tax income. The tax equivalent amount for $1.00 of those aforementioned categories was $1.75, $1.58, $1.55, $1.43, and $1.03 for the three months ended June 30, 2000; $N/A, $1.58, $1.56, $1.43, and $1.03 for the three months ended June 30, 1999, respectively. 16 17 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) NET INTEREST INCOME (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 1999 ------------------------------------------------------------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE (dollars in thousands ) BALANCE INTEREST RATE BALANCE INTEREST RATE ------------------------------------------------------------------------------------ INTEREST EARNING ASSETS: Securities $ 4,914,881 $ 178,321 7.30% $ 4,946,985 $ 160,854 6.56% Loans, net of unearned income (1) 8,703,649 351,312 8.12% 7,070,981 291,423 8.31% Money Market Investments 78,492 2,495 6.39% 124,586 3,491 5.65% ---------------------------- ---------------------------- Total Interest Earning Assets 13,697,022 532,128 7.81% 12,142,552 455,768 7.57% ---------------------------- ---------------------------- NON INTEREST EARNING ASSETS: Cash and Due from Banks 231,784 179,417 Other Assets (2) 476,775 444,217 ------------ ------------ Total Assets $ 14,405,581 $ 12,766,186 ============ ============ INTEREST BEARING LIABILITIES: Savings, NOW and Money Market Deposits $ 4,033,564 $ 38,818 1.94% $ 3,620,192 $ 32,995 1.84% Time Deposits 2,919,717 71,354 4.91% 2,701,817 64,881 4.84% ---------------------------- ---------------------------- Total Savings and Time Deposits 6,953,281 110,172 3.19% 6,322,009 97,876 3.12% Federal Funds Purchased and Securities Sold Under Agreements to Repurchase 2,458,626 72,307 5.91% 3,160,658 85,818 5.48% Other Borrowings 1,657,060 50,535 6.13% 291,933 7,782 5.38% ---------------------------- ---------------------------- Total Borrowings 4,115,686 122,842 6.00% 3,452,591 93,600 5.47% ---------------------------- ---------------------------- Total Interest Bearing Liabilities 11,068,967 233,014 4.23% 9,774,600 191,476 3.95% ---------------------------- ---------------------------- Rate Spread 3.58% 3.62% NON-INTEREST BEARING LIABILITIES Demand Deposits 1,706,386 1,342,285 Other Liabilities 162,815 221,575 ------------ ------------ Total Liabilities 12,938,168 11,338,460 Capital Securities 232,254 199,296 Stockholders' Equity 1,235,159 1,228,430 ------------ ------------ Total Liabilities and Stockholders' Equity $ 14,405,581 $ 12,766,186 ============ ============ Net Interest Income & Net Interest Margin 299,114 4.39% 264,292 4.39% Less: Tax Equivalent Adjustment (6,818) (3,220) ------------ ------------ Net Interest Income $ 292,296 $ 261,072 ============ ============
(1) Non-accrual loans are included in average loans, net of unearned income. (2) Unrealized gains/(losses) on available-for-sale securities are recorded in other assets. (3) Interest income on a tax equivalent basis includes the additional amount of income that would have been earned if the Company's investment in tax exempt money market investments and securities, state and municipal obligations, non-taxable loans, equity securities, and U.S. Treasuries had been made in securities and loans subject to Federal, State, and Local income taxes yielding the same after tax income. The tax equivalent amount for $1.00 of those aforementioned categories was $1.75, $1.58, $1.55, $1.43, and $1.03 for the six months ended June 30, 2000; $N/A, $1.58, $1.56, $1.43, and $1.03 for the six months ended June 30, 1999, respectively. NON-INTEREST INCOME Non-interest income, exclusive of gains recognized on the sale of certain securities and branch facilities, increased $5.2 million, or 33.0%, to $20.8 million in the 2000 second quarter, when compared to $15.6 million in the comparable prior year quarter. The improvement in non-interest income was achieved through a $2.5 million, or 36.0%, increase in fees and service charges on deposit accounts to $9.6 million; a $2.2 million, or 65.0%, increase in other operating income, to $5.6 million and a $.4 million, or 10.0%, increase in investment management, commissions and trust fees to $4.6 million. The increase in fees and service charges on deposit accounts was attributable to increased levels of demand deposits, revisions to deposit fee structures, and the acquisitions of JSB and Reliance. Contributing to the growth in other operating income was fee income generated by the Company's recently acquired check cashing subsidiary, CBMC, Inc. (d/b/a "The Money Centers") and the introduction of additional fee based services. The Money Centers operate through five Manhattan locations and was acquired in the Reliance transaction. Investment management, commissions and trust fees grew at a modest pace and should continue to improve as these products and services are offered to the former JSB and Reliance customer base. 17 18 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) NON-INTEREST INCOME (CONTINUED) Net securities gains recognized during the most recent quarter were $11.1 million, as compared to $7.0 million during the 1999 second quarter. These gains resulted primarily from the sale of equity positions in certain publicly traded companies. Additionally, during the most recent quarter, the Company recognized a gain of $10.4 million in connection with the sale of certain branch facilities. NON-INTEREST EXPENSE Non-interest expense, exclusive of Dime related acquisition expenses, increased $7.2 million, or 14.1%, to $58.4 million during the most recent quarter, as compared to $51.1 million during the comparable prior year period. The increase in non-interest expense is attributable to a $3.6 million increase in amortization of intangible assets, a $2.4 million increase in compensation and employee benefits, a $.9 million increase in capital securities costs, and a $.4 million increase in occupancy and equipment costs. The increase in the amortization of intangible assets is principally due to the increase in goodwill recorded in connection with the Reliance acquisition. The increase in compensation and employee benefits expense is due primarily to the Company's recent acquisition of Reliance, the expanded use of incentive compensation plans to achieve its objective of growing demand deposits and generating fee income, annual merit increases, increased costs associated with employee benefits, and costs associated with expanding its presence in the New York City market area. The increase in capital securities costs resulted the assumption of $45 million in capital securities previously issued by Reliance in April 1998. During the quarter, the Company incurred $2.3 million in expenses related to its proposed acquisition of Dime Bancorp, Inc. To date, the Company has incurred $8.3 million in connection with its effort to acquire Dime Bancorp, Inc. Expenses incurred consisted principally of legal fees, professional fees, and shareholder notifications and mailings. The Company's core efficiency ratio, which represents the ratio of non-interest expense, net of other real estate costs and other non-recurring charges, to net interest income on a tax equivalent basis and non-interest income, net of securities gains and losses and other non-recurring income, was 32.96% in the 2000 second quarter, as compared with 34.62% for the comparable prior year period. The core efficiency ratio demonstrates management's ability to maintain a disciplined approach to monitoring its operating structure and controlling related costs. INCOME TAXES The effective tax rate for the six months ended June 30, 2000, exclusive of the merger and related restructuring costs and other special items, was 35%, as compared to 36% for the second quarter of 1999. Management anticipates that the effective tax rate for the remainder of 2000 will be approximately 35%. LOAN PORTFOLIO The following table represents the components of the loan portfolio for the periods indicated:
---------------------------------------------------------------------------- JUNE 30, % OF DECEMBER 31, % OF JUNE 30, % OF (dollars in thousands) 2000 TOTAL 1999 TOTAL 1999 TOTAL ---------------------------------------------------------------------------- Mortgage Loans-Multi-Family $3,283,083 36% $2,827,272 36% $2,715,201 37% Mortgage Loans-Residential 2,640,017 29% 2,221,779 28% 2,059,705 28% Mortgage Loans-Commercial 1,456,321 16% 1,327,001 17% 1,280,225 18% Commercial and Industrial 885,486 10% 697,763 8% 553,760 8% Consumer Loans and Leases 722,029 8% 752,256 10% 601,308 8% Construction and Land Loans 113,606 1% 87,257 1% 61,820 1% ---------------------------------------------------------------------------- $9,100,542 100% $7,913,328 100% $7,272,019 100% ============================================================================
The loan portfolio is concentrated primarily in loans secured by real estate in the New York metropolitan area. The risk inherent in the portfolio is dependent not only upon regional and general economic stability, which affects property values, but also the financial well being and creditworthiness of the borrowers. 18 19 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) LOAN PORTFOLIO (CONTINUED) Loans outstanding at June 30, 2000 increased $1.8 billion, or 25.1%, to $9.1 billion, as compared to $7.3 billion at June 30, 1999. The growth experienced during the past year has resulted from both originations and the Reliance purchase acquisition. The absolute level of growth has been tempered by the level of prepayment activity experienced during most of 1999 and management's decision to periodically sell certain loans, which it believes would not have performed as well in a weak economy. Reliance provided the Company with approximately $1.0 billion in loans, principally multi-family and residential mortgages, and consumer loans. The composition of the Company's loan portfolio at June 30, 2000 has remained approximately the same when compared to pre-merger and acquisition levels. Multi-Family and residential loans represented 65% of the portfolio while pre-merger and acquisition represented 58% of the portfolio at December 31, 1999. The Company continues to experience strong internally generated loan growth. Core loan growth was approximately $214.3 million, or 9.6%, on an annualized basis during the most recent quarter. Contributing to this increase has been the success experienced by the Company through its recently formed subsidiary, All Points Capital Corp., which originates lease financing transactions to existing customers of North Fork and through a national distribution network. All Points, during its first seven months of operations, has originated $135.4 million in loans. Prepayment activity during most of 1999 was due in large measure to the interest rate environment and aggressive pricing levels offered by competitors, principally thrift companies and Wall Street conduits. Prepayment activity over the last several months has slowed dramatically due to increases in market interest rates. To minimize the credit risk related to the portfolio's real estate concentration, management utilizes prudent underwriting standards as well as diversifying the type and locations of loan placements. The multi-family lending business includes loans on various types and geographically diverse apartment complexes. Multi-family mortgages are dependent largely on sufficient income to cover operating expenses and may be affected by government regulation, such as rent control regulations, which could impact the future cash flows of the property. Most multi-family mortgages do not fully amortize. Therefore, the principal outstanding is not significantly reduced prior to contractual maturity. The residential mortgage portfolio is comprised primarily of first mortgage loans on owner occupied 1-4 family residences located in the New York metropolitan area. The commercial mortgage portfolio contains loans secured by professional office buildings, retail stores, shopping centers and industrial developments. Commercial loans consist primarily of loans to small and medium size businesses. Consumer loans represent credit to individuals for household, family, and other personal expenditures and consist primarily of loans to finance new and used automobiles. The consumer loan portfolio does not contain higher risk credit card and sub prime loans. Land loans are used to finance the acquisition of vacant land for future residential and commercial development. Construction loans finance the construction of industrial developments and single-family subdivisions. The construction and land development portfolios do not contain any AD&C loans The Company's real estate underwriting standards include various limits on the loan-to-value ratios based on the type of property, and management considers, among other things, the creditworthiness of the borrower, the location of the real estate, the condition and value of the security property, the quality of the organization managing the property, and the viability of the project including occupancy rates, tenants and lease terms. Additionally, the underwriting standards require appraisals and periodic inspections of the properties as well as ongoing monitoring of operating results. ASSET QUALITY The components of non-performing assets and restructured, accruing loans are detailed in the table below:
--------------------------------- JUNE 30, DECEMBER 31, JUNE 30, (in thousands) 2000 1999 1999 --------------------------------- Loans Ninety Days Past Due and Still Accruing $ 4,692 $ 6,131 $ 4,798 Non-Accrual Loans 9,189 8,997 9,563 --------------------------------- Non-Performing Loans 13,881 15,128 14,361 Other Real Estate 913 787 835 --------------------------------- Non-Performing Assets $14,794 $15,915 $15,196 --------------------------------- Restructured, Accruing Loans -- -- $ 557 =================================
19 20 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) ASSET QUALITY (CONTINUED) At June 30, 2000, non-performing assets declined by $1.1 million, or 7.0%, when compared to $15.9 million at December 31, 1999. Non-performing assets at June 30, 2000 declined by $.4 million, when compared to $15.2 million at June 30, 1999. The declining trend in non-performing assets over the past five years is a result of the effectiveness of the Company's loan administration and workout procedures, as well as a strong local economy. The decline in non-performing assets during the most recent period when compared to year ago levels was achieved despite the Company acquiring approximately $7.1 million in non-performing assets from Reliance. Non-performing loans at June 30, 2000 consisted of $4.6 million in consumer loans and leases, $5.3 million in residential mortgages, $1.8 million in commercial mortgages, and $2.2 million in commercial loans. The following table represents a summary of the changes in the allowance for loan losses for the six months ended June 30:
------------------------ 2000 1999 ------------------------ (dollars in thousands) Balance at Beginning of Year .............................. $ 74,525 $ 77,683 Provision for Loan Losses ................................. 11,250 2,512 Recoveries ................................................ 3,463 2,166 ------------------------ 89,238 82,361 Charge-offs ............................................... (10,297) (7,028) Additional Allowance Acquired ............................. 9,069 -- ------------------------ Balance at End of Period .................................. $ 88,010 $ 75,333 ======================== Ratio of Net Charge-offs to Average Loans ................. 0.16% 0.14% Ratio of Allowance for Loan Losses to Period End Loans, net 0.97% 1.04% Ratio of Allowance for Loan Losses to Non-performing Loans 634% 525%
The provision for loan losses during the most recent quarter increased to $2.3 million, as compared to $1.3 million for the comparable prior year period. The six month results reflect a special provision of $6.8 million recognized by management in order to conform the provisioning policies of the acquired institutions to that of the Company and to restore the Company's post-merger reserve coverage ratios to approximate pre-merger levels. The determination of the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management. The evaluation process is undertaken on a quarterly basis but may increase in frequency should conditions arise that would require management's prompt attention. Conditions giving rise to such action are business combinations, opportunities to dispose of non-performing and marginally performing loans by bulk sale or any development, which may indicate an adverse trend. The methodology employed for assessing the appropriateness of the allowance consists of the following criteria: - The establishment of reserve amounts for all specifically identified criticized loans, including those arising from business combinations, that have been designated as requiring attention by management's internal loan review program, bank regulatory examinations or the Company's external auditors. - An average one year loss factor is applied to smaller balance homogenous types of loans not subject to specific review. These loans include residential 1-4 family properties and consumer loans. - An allocation to the remaining loans giving effect to historical loss experience over several years and linked to cyclical trends. Recognition is also given to the changed risk profile brought about from previous business combinations, customer knowledge, the results of the ongoing credit-quality monitoring processes and the cyclical nature of economic and business conditions. An important consideration in applying these methodologies is the concentration of real estate related loans located in the New York metropolitan area. Since many of the loans depend upon the sufficiency of collateral, any adverse trend in the real estate markets could seriously affect underlying values available to protect the Company from loss. This condition existed in the early 1990's when the Company experienced sizable real estate loan losses. Other evidence used to support the amount of the allowance and its components are as follows: - Regulatory examinations - The amount and trend of criticized loans - Actual losses - Peer comparisons with other financial institutions - Economic data associated with the real estate market in the Company's market area - Opportunities to dispose of marginally performing loans for cash consideration Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, management considers the allowance for loan losses to be adequate at June 30, 2000. 20 21 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) SECURITIES PORTFOLIO The composition of and the amortized cost and estimated fair values of available-for-sale and held-to-maturity securities portfolios were as follows:
JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 1999 -------------------------------------------------------------------------------- AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR (in thousands) COST VALUE COST VALUE COST VALUE -------------------------------------------------------------------------------- AVAILABLE-FOR-SALE U.S. Treasury Securities ............ $ 20,038 $ 19,947 $ 20,046 $ 19,978 $ 19,948 $ 20,047 U.S. Government Agencies' Obligations 131,348 129,731 88,709 86,210 118,109 118,356 Mortgage-Backed Securities .......... 656,018 638,613 895,855 869,882 831,069 816,474 CMO's Agency Issuance ............... 506,035 491,969 489,151 463,087 462,655 445,928 CMO's Private Issuance .............. 1,611,360 1,586,993 1,781,288 1,724,183 1,752,151 1,715,758 Equity Securities ................... 269,372 278,485 273,701 336,554 231,173 307,707 Other Securities .................... 327,796 303,535 198,861 182,316 193,635 188,540 -------------------------------------------------------------------------------- $3,521,967 $3,449,273 $3,747,611 $3,682,210 $3,608,740 $3,612,810 ================================================================================ HELD-TO-MATURITY U.S. Government Agencies' Obligations $ 38 $ 38 $ 20,051 $ 20,047 $ 100,000 $ 99,963 State & Municipal Obligations ....... 78,659 76,788 76,173 74,171 68,921 68,466 Mortgage-Backed Securities .......... 405,381 388,533 447,209 427,895 494,178 482,611 CMO's Agency Issuance ............... 86,817 85,781 115,027 113,470 139,206 138,542 CMO's Private Issuance .............. 631,000 600,987 674,072 645,700 737,821 719,546 Other Securities .................... 17,549 17,294 18,972 18,313 21,891 21,470 -------------------------------------------------------------------------------- $1,219,444 $1,169,421 $1,351,504 $1,299,596 $1,562,017 $1,530,598 ================================================================================
(1) Amortized cost and fair value includes $197.4 million, $170.7 million, and $138.3 million in Federal Home Loan Bank stock at June 30, 2000, December 31, 1999, and June 30, 1999, respectively. Management's strategy is to invest in securities with short-weighted average lives minimizing exposure to future increases in interest rates. These are principally mortgage-backed securities ("MBS") that provide stable cash flows, which may be reinvested at current market interest rates. The combined weighted average life of the held-to-maturity and available-for-sale securities portfolios at June 30, 2000 was 5.8 years. Collateralized mortgage obligations ("CMO") are collateralized by either U.S. Government Agency MBS's or whole loans, which are principally AAA rated conservative current pay sequentials or planned amortization class ("PAC") structures, with a current weighted average life of approximately 4.4 years. Prepayments on MBS's, including CMO's, are monitored as part of the portfolio management function. Management typically invests in MBS's with stable cash flows and relatively short duration, thereby limiting the impact of interest rate fluctuations on the portfolio. Management regularly performs simulation testing to assess the impact that interest and market rate changes would have on the MBS portfolio. Equity securities maintained in the available-for-sale portfolio were comprised of FHLB common stock and common and preferred stock of certain publicly traded companies. Other securities maintained in the available-for-sale portfolio consist of capital securities of certain financial institutions and corporate bonds. At June 30, 2000, securities carried at $3.4 billion were pledged to secure securities sold under agreements to repurchase, other borrowings, and for other purposes as required by law. CAPITAL The Company and its bank subsidiaries are subject to the risk based capital guidelines administered by the banking regulatory agencies. The risk based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk weighted assets and off-balance sheet items. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk based capital to total risk weighted assets of 8%, including a minimum ratio of Tier I capital to total risk weighted assets of 4% and a Tier I capital to average assets of 4% ("Leverage Ratio"). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators, that, if undertaken, could have a direct material effect on the Company's financial statements. As of June 30, 2000, the most recent notification from the various banking regulators categorized the Company and its bank subsidiaries as well capitalized under the regulatory framework for prompt corrective action. Under the capital adequacy guidelines, a well capitalized institution must maintain a minimum total risk based capital to total risk weighted assets ratio of at least 10%, a minimum Tier I capital to total risk weighted assets ratio of at least 6%, a minimum leverage ratio of at least 5% and not be subject to any written order, agreement or directive. There are no conditions or events since such notification that management believes have changed this classification. 21 22 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) CAPITAL (CONTINUED) The following table sets forth the Company's regulatory capital at June 30, 2000 and 1999, under the rules applicable at such date. Management believes that the Company meets all capital adequacy requirements to which it is subject.
JUNE 30, 2000 JUNE 30, 1999 ---------------------------------------------------------- (dollars in thousands ) AMOUNT RATIO AMOUNT RATIO ---------------------------------------------------------- Tier 1 Capital ............ $1,275,716 14.71% $1,294,670 16.43% Regulatory Requirement .... 346,862 4.00% 315,156 4.00% ---------------------------------------------------------- Excess .................... $ 928,854 10.71% $ 979,514 12.43% ========================================================== Total Risk Adjusted Capital $1,367,827 15.77% $1,404,444 17.83% Regulatory Requirement .... 693,725 8.00% 630,311 8.00% ---------------------------------------------------------- Excess .................... $ 674,102 7.77% $ 774,133 9.83% ========================================================== Risk Weighted Assets ...... $8,671,559 $7,878,893 ========== ==========
The Company's Leverage Ratio at June 30, 2000 was 8.87%. The Tier 1, Total Risk-Based and Leverage Capital Ratios of North Fork were 11.99%, 13.09%, and 7.22%, respectively, at June 30, 2000. On June 27, 2000, the Board of Directors declared a regular quarterly cash dividend of $.18 per common share. The dividend is payable August 15, 2000 to shareholders of record at the close of business July 27, 2000. In February 2000, the Company's shareholders approved a resolution to amend the Company's certificate of incorporation to increase the number of authorized shares of common stock from 200 million to 500 million and to reduce the par value of its common stock from $2.50 per share to $.01 per share. All periods reported have been retroactively adjusted to reflect the change in par value. ASSET/LIABILITY MANAGEMENT The Company's primary earnings source is the net interest margin, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of assets and liabilities, and the credit quality of the loan portfolio. Management's asset/liability objectives are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks and to maintain adequate liquidity. The risk assessment program includes a coordinated approach to the management of liquidity, capital and interest rate risk. This risk assessment process is governed by policies and limits established by senior management which are reviewed and approved by the Asset/Liability Committee of the Board of Directors ("ALCO"). ALCO, comprised of members of senior management and the Board, meets periodically to evaluate the impact of changes in market interest rates on interest earning assets and interest bearing liabilities, net interest margin, capital and liquidity, and to evaluate the Company's strategic plans. The balance sheet structure is primarily short-term with most assets and liabilities repricing or maturing in less than five years. Management monitors the sensitivity of net interest income by utilizing a dynamic simulation model complemented by a traditional gap analysis. This model measures net interest income sensitivity and volatility to interest rate changes. It involves a degree of estimation based on certain assumptions that management believes to be reasonable. Factors considered include actual maturities, estimated cash flows, repricing characteristics, deposit growth/retention and, primarily, the relative sensitivity of assets and liabilities to changes in market interest rates. Utilizing this process, management can estimate and project the impact of changes in interest rates on net interest income. This relative sensitivity is important to consider since the Company's core deposit base is not subject to the same degree of interest rate sensitivity as its assets. Core deposit costs are internally controlled and generally exhibit less sensitivity to changes in interest rates than the adjustable rate assets whose yields are based on external indices and change in concert with market interest rates. Management has established certain limits for the potential volatility of net interest income, assuming certain levels of change in market interest rates with the objective of maintaining a stable level of net interest income under various probable rate scenarios. Management may choose to extend the maturity of its funding source and/or reduce the repricing mismatches of its assets or liabilities by using interest rate swaps. Additionally, management may use interest rate collars, interest rate floors, and interest rate cap agreements to assist in insulating it from volatile interest rate changes. Based upon the aforementioned factors regarding the simulation model, projected net interest income for the next twelve months was modeled based on both an immediate rise and fall in interest rates as well as gradual movements in interest rates over the twelve-month period. Based on the information and assumptions in effect at June 30, 2000, management believes that a 100 basis point gradual increase in interest rates over the next twelve months would decrease net interest income by $15.6 million, or 2.60%, while a gradual decrease in interest rates would increase net interest income by $16.0 million, or 2.65%. 22 23 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) ASSET/LIABILITY MANAGEMENT (CONTINUED) Management utilizes the traditional gap analysis to complement its income simulation modeling, primarily focusing on the longer term structure of the balance sheet, since the gap analysis does not assess the relative sensitivity of assets and liabilities to changes in interest rates. The gap analysis is prepared based on the maturity and repricing characteristics of interest earning assets and interest bearing liabilities for selected time periods. The mismatch between repricings or maturities within a time period is commonly referred to as the "gap" for that period. A positive gap (asset sensitive), where interest-rate sensitive assets exceed interest-rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. However, the gap analysis is static in nature; therefore, the maturity and repricing characteristics of interest earning assets and interest bearing liabilities can change considerably with changes in interest rates. LIQUIDITY The objective of liquidity management is to ensure the availability of sufficient resources to meet all financial commitments and to capitalize on opportunities for business expansion. Liquidity management addresses the ability to meet deposit withdrawals either on demand or at contractual maturity, to repay other borrowings as they mature and to make new loans and investments as opportunities arise. Sources of liquidity include dividends from its subsidiaries, borrowings, the sale of securities from the available-for-sale portfolio, and funds available through the capital markets. Dividends from the Company's primary subsidiary, North Fork, are limited by New York State Banking Department regulations to the current year's earnings plus the prior two years' retained net profits. Pursuant to this regulation, North Fork had $92.5 million of retained earnings available for dividends as of July 1, 2000. The bank subsidiaries have numerous sources of liquidity including loan and security principal repayments and maturities, lines-of-credit with other financial institutions, the ability to borrow under repurchase agreements and Federal Home Loan Bank advances utilizing unpledged securities and mortgage related loan portfolios, respectively, the sale of securities from their available-for-sale portfolios, the securitization of loans, whole loan sales, and growth in their core deposit base. The bank subsidiaries currently have the ability to borrow an additional $4.0 billion on a secured basis, utilizing mortgage related loans and securities as collateral. At June 30, 2000, the Company had $3.1 billion in outstanding borrowings with the FHLB. The Company and its banking subsidiaries' liquidity positions are monitored daily to ensure the maintenance of an optimum level and efficient use of available funds. Management believes that the Company and its banking subsidiaries have sufficient liquidity to meet their operating requirements. 23 24 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 2000 /s/ Daniel M. Healy ------------------------ Daniel M. Healy Executive Vice President & Chief Financial Officer 24