<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1996 Commission File Number 0-22278
----------------- -------
QUEENS COUNTY BANCORP INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1377322
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
38-25 Main Street, Flushing, New York 11354
-------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (718) 359-6400
-----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not considered herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of the Form 10-K of any amendment to this Form 10-K. X
As of March 18, 1997, the aggregate market value of the shares of common stock
of the registrant outstanding was $389,265,364, excluding 710,424 shares held by
all directors and executive officers of the registrant. This figure is based on
the closing price by the NASDAQ National Market for a share of the registrant's
common stock on March 18, 1997, which was $57.25 as reported in The Wall Street
Journal on March 19, 1997. The number of shares of the registrant's common stock
outstanding as of March 18, 1997 was 7,509,819 shares.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 16, 1997 and the 1996 Annual Report to
Shareholders are incorporated herein by reference - Parts I, II, and III.
<PAGE> 2
CROSS REFERENCE INDEX
PART I
Page
Item 1. Business
Description of Business.......................................... 1
Statistical Data:
Lending Activities........................................ 19
Loan Maturity and Repricing............................... 20
Summary of Allowance for Loan Losses...................... 21
Composition of Mortgage and Other Loan Portfolio.......... 21
Securities and Mortgage-Backed Securities Portfolio....... 22
Item 2. Properties....................................................... 23
Item 3. Legal Proceedings................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.............. 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 24
Item 6. Selected Financial Data......................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation 24
Item 8. Financial Statements and Supplementary Data..................... 24
Queens County Bancorp, Inc. and Subsidiary:
Independent Auditors' Report............................. 24
Consolidated Statements of Financial Condition........... 24
Consolidated Statements of Income........................ 24
Consolidated Statements of Stockholders' Equity.......... 24
Consolidated Statement of Cash Flows..................... 24
Notes to Consolidated Financial Statements............... 24
Management's Responsibility for Financial Reporting...... 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 25
Item 11. Executive Compensation.......................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 25
Item 13. Certain Relationships and Related Transactions.................. 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 25
Signatures................................................................ 28
<PAGE> 3
PART I
Item 1. Business
Queens County Bancorp, Inc. (the "Company") was incorporated in the
State of Delaware on July 20, 1993 to serve as the holding company for Queens
County Savings Bank (the "Bank"). The Company acquired all of the stock of the
Bank upon its conversion from a New York State-chartered mutual savings bank to
a New York State-chartered stock savings bank on November 23, 1993. The
information and consolidated financial statements in this Form 10-K report
relate principally to the Company's wholly-owned subsidiary, Queens County
Savings Bank, through which the Company conducts its principal business
activity.
Queens County Savings Bank was organized in April 14, 1859 as a New York
State-chartered mutual savings bank and was the first savings bank chartered in
the Borough of Queens, City of New York. The Bank is subject to regulation by
the New York State Banking Department ("Banking Department") and its deposits
are insured by the Bank Insurance Fund ("BIF"), as administered by the Federal
Deposit Insurance Corporation ("FDIC").
General
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations, into the origination of mortgage loans on multi-family properties
and one-to-four family homes. To a lesser extent, the Bank also originates loans
on commercial real estate, construction loans, home equity loans, and other
consumer loans. In addition, the Bank invests in U.S. Treasury and Government
agency securities. The Bank's revenues are derived primarily from interest on
its mortgages and other loans, its mortgage-backed securities portfolio, and
interest and dividends earned on its securities. The Bank's primary sources of
funds are deposits, amortization and prepayments of loans, and amortization,
prepayments, and maturities of mortgage-backed and investment securities. In
addition, the Company draws on its $406 million line of credit with the Federal
Home Loan Bank of New York ("FHLB-NY") in times of above-average loan demand.
The Company's objective of enhancing the value of its shares has been
accomplished through the implementation of stock repurchase programs, two stock
splits, and the payment of quarterly cash dividends to stockholders, and by
maintaining a high level of asset quality, and a strong capital position through
the generation of stable earnings. Since October 1994, the Company has announced
four stock repurchase authorizations and increased its Treasury stock, net of
options exercised, to 1,546,601, or 16.85% of the shares issued at its initial
public offering on November 23, 1993. At March 18, 1997, the total number of
shares outstanding was 7,509,819 as compared to 7,630,103 at December 31, 1996.
Market Area and Competition
The Bank is a community-oriented financial institution offering a wide
variety of financial products and services to meet the needs of the communities
it serves. Headquartered in the heart of Flushing, New York, in the Borough of
Queens, the Bank currently operates eight branch offices and three customer
service centers in Queens and a ninth branch office in Nassau County. The Bank's
deposit gathering base is concentrated in the communities surrounding its
offices, while its primary lending area extends throughout the greater New York
metropolitan area. Most of the Bank's mortgage loans are secured by properties
located in the New York City Boroughs of Queens, Brooklyn, and Manhattan, and in
Nassau County.
The metropolitan area has historically been home to a significant number
of corporations, including those within the manufacturing and financial services
industries. Despite the ongoing trend toward corporate downsizing and bank
consolidation, and the slow path of economic growth within the region as
compared to the rest of the country, the Bank has managed to maintain a
consistently high level of asset quality.
The Bank faces significant competition both in making loans and in
attracting deposits. Its market area has a high density of financial
institutions, many of which have greater financial resources than the Bank, and
all of which are competitors of the Bank to varying degrees. The Bank's
competition for loans comes principally from commercial banks, savings banks,
credit unions, savings and loan associations, mortgage banking companies and
insurance companies. The Bank has recently faced increased competition for the
origination of multi-family loans, which comprised 71.10% of the Bank's loan
portfolio at year-end 1996. Management anticipates that competition for both
multi-family and one-to-four family loans will continue to increase in the
future. Thus, no assurances can be made that the Bank will be able to maintain
its current level of such loans.
1
<PAGE> 4
The Bank's most direct competition for deposits has historically come from
savings and loan associations, savings banks, commercial banks, and credit
unions. The Bank faces additional competition for deposits from short-term money
market funds and other corporate and government securities funds and from other
financial institutions such as brokerage firms and insurance companies.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions.
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Composition. The Bank's
loan portfolio consists primarily of multi-family loans on both rental and
cooperative apartment buildings, and conventional first mortgage loans secured
by one-to-four family homes. To a lesser extent, the Bank also originates
commercial real estate loans, construction loans, and home equity and other
consumer loans. At December 31, 1996, the Bank's gross loan portfolio totaled
$1,156.6 million, of which $822.4 million, or 71.10%, were multi-family mortgage
loans, and $256.9 million, or 22.21%, were one-to-four family first mortgage
loans. Of the total mortgage loan portfolio outstanding at year-end 1996, 91.49%
were adjustable or step-up loans and 8.51% were fixed rate mortgage loans. The
Bank's loan portfolio also included $63.5 million in commercial real estate
loans, $1.6 million in construction loans, $5.8 million in cooperative apartment
loans, $2.8 million in home equity loans generally secured by second liens on
real property, and $3.7 million in other consumer loans.
The types of loans originated by the Bank are subject to Federal and
State laws and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans, the supply of money available
for lending purposes, and the rates offered by its competitors. These factors
are, in turn, affected by general economic conditions, the monetary policy of
the Board of Governors of the Federal Reserve System ("Federal Reserve Board"),
legislative tax policies, and governmental budgetary matters.
The Bank has invested in a variety of mortgage-backed securities,
substantially all of which are directly or indirectly insured or guaranteed by
the Federal Home Loan Mortgage Corporation ("FHLMC") or the Government National
Mortgage Association ("GNMA"). At December 31,1996, mortgage-backed securities
totaled $73.7 million, or 5.43% of total assets. The market value of such
securities was approximately $74.2 million at December 31, 1996. At December 31,
1996, all of the Bank's $73.7 million in mortgage-backed securities were held to
maturity.
Loan Originations, Purchases, Sales, and Servicing. The Bank originates
both adjustable rate mortgage ("ARM") loans and fixed rate loans, the amounts of
which are dependent upon customer demand and market rates of interest.
Generally, the Bank does not purchase whole mortgage loans or loan
participations. It is the Bank's current policy to sell all newly originated
fixed rate one-to-four family mortgage loans into the secondary market to
Savings Bank Life Insurance ("SBLI"), the Federal National Mortgage Association
("FNMA"), the State of New York Mortgage Agency ("SONYMA"), and other secondary
market purchasers. ARM loans are retained for the Bank's portfolio. For the
fiscal year December 31, 1996 and 1995, originations of ARM loans totaled $295.3
million and $132.0 million, respectively, or 99.83% and 90.53%, of all
one-to-four family mortgage loan originations. Originations of fixed rate loans
totaled $7.9 million and $13.8 million, respectively, for the same periods,
while sales of fixed rate loans totaled $350,000 and $508,000, respectively, for
those periods. The Bank generally sells all loans without recourse and retains
the servicing rights of such loans sold. As of December 31, 1996, the Bank was
servicing $16.1 million in loans for others. The Bank is generally paid a fee of
0.25% for servicing loans sold.
Multi-Family Lending. The Bank originates multi-family loans (defined as
loans on properties with five or more units) which are secured by rental or
cooperative apartment buildings located primarily in the greater New York
metropolitan area. At December 31, 1996, the Bank's portfolio of multi-family
mortgage loans totaled $822.4 million, representing 71.10% of the total loan
portfolio. Of these, $446.5 million, or 54.30%, were secured by rental apartment
buildings and $375.9 million, or 45.70%, were secured by underlying mortgages on
cooperative apartment buildings.
Such loans are originated for terms of 10 years at a rate that adjusts
to the prime rate of interest, as reported in The New York Times, plus a margin
of 100 basis points, in each of years six through ten. In 1996, the majority of
the Bank's multi-family mortgage loan originations featured a fixed rate for
the first five years of the credit; the balance were originated at rates that
are due to step-up in each of years two through five, regardless of the
direction of market interest rates. The interest rate on step-up loans may not
fall below the rate charged in the third year of the credit, and prepayment
penalties range from five points to one over the first five years of the loan.
At year-end 1996, 97.5% of the Bank's multi-family mortgage loans were
adjustable rate credits, including $425.6 million that are due to step upward in
1997. Properties securing multi-family mortgage loans are appraised either by
appraisers employed by the Bank or by independent appraisers approved by the
Bank.
2
<PAGE> 5
The Mortgage and Real Estate Committee of the Board of Directors (the
"Mortgage and Real Estate Committee") is authorized to approve loans with higher
loan-to-value ratios based upon the particular circumstances of the individual
property. Any loans in excess of $3.0 million must be approved by the Executive
Committee of the Board of Directors (the "Executive Committee").
In originating such loans, the Bank bases its underwriting decisions
primarily on the net operating income generated by the property in relation to
the debt service. The Bank also considers the financial resources of the
borrower, the borrower's experience in owning or managing similar property, the
market value of the property, and the Bank's lending experience with the
borrower. The Bank generally requires minimum debt service ratios of 120% on
multi-family properties. In addition, the Bank requires a security interest in
the personal property at the premises, and an assignment of rents.
The Bank's largest concentration of loans to one borrower at December
31, 1996 consisted of 12 loans secured by 12 multi-family properties located in
the Bank's primary market area. These loans were made to several borrowers who
are deemed to be related for regulatory purposes. As of December 31, 1996, the
outstanding balance of these loans totaled $17.8 million and, as of such date,
all such loans were performing in accordance with their terms. The Bank's
concentration of such loans did not exceed its "loans-to-one-borrower"
limitation of $19.2 million at December 31, 1996. See "Loans to One Borrower
Limitations."
Loans secured by multi-family properties are generally larger and
involve a greater degree of risk than one-to-four family residential mortgage
loans. Because payments on loans secured by multi-family buildings are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to a greater extent to adverse conditions in the
real estate market or the local economy. The Bank seeks to minimize these risks
through its underwriting policies, which restrict new originations of such loans
to the Bank's primary lending area and require such loans to be qualified on the
basis of the property's net income and debt service ratio. Since 1988, one loan
on a multi-family property outside of the primary lending area was foreclosed
upon and subsequently sold.
One-to-Four Family Mortgage Lending. The Bank offers first mortgage
loans secured primarily by owner-occupied, one-to-four family residences,
including condominium loans, located in its primary lending area. The Bank
offers both fixed rate and ARM loans with maturities of up to 30 years, to a
maximum amount of $500,000. The Bank's one-to-four family mortgage loan
originations are generally made to existing or past customers and members of the
local community, and through referrals from local attorneys, realtors, and
independent mortgage brokers. With the exception of limited documentation loans,
one-to-four family residential mortgage loans are generally underwritten to FNMA
and other agency guidelines. At December 31, 1996, $256.9 million, or 22.21% of
the Bank's loan portfolio, consisted of one-to-four family mortgage loans.
Since 1985, the Bank has originated one-to-four family loans without
verification of the borrower's level of income and, in many instances, without
verification of financial assets, basing approval on a credit report and
property appraisal alone. The Bank originates such limited documentation loans
with full asset verification on properties located within its Community
Reinvestment Act ("CRA") market area with loan-to-value ratios of up to 75% of
the lower of the appraised value or the sales price of the property. All other
limited documentation loans are originated with loan-to-value ratios of up to
70% of the lower of the appraised value or sales price of the property. Full
documentation mortgage loans are offered in amounts up to 75% of the lower of
the appraised value or sales price of the property, or up to 85% with private
mortgage insurance. A substantial majority of the Bank's one-to-four family loan
originations during 1996 and 1995 were limited documentation loans. These loans
involve a higher degree of risk of default as compared to full documentation
one-to-four family mortgage loans. In recognition of this risk, the Bank is
stringent in its review and verification of the borrower's credit. In addition,
it primarily utilizes staff appraisers to perform real estate appraisals and
charges a higher rate of interest on such loans. Of the Bank's $9.7 million in
non-performing loans at December 31, 1996, one-to-four family loans comprised
$8.5 million. Since 1990, the Bank has foreclosed on 42 one-to-four family
residential properties; four of these properties remained in foreclosed real
estate as of December 31, 1996, with a carrying value of $627,000.
The Bank currently offers ARM loans secured by one-to-four family
residential properties that adjust every one, two, or three years. The interest
rate on ARM loans fluctuates based upon a spread above either the Federal
Housing Finance Board rate or the average yield on U. S. Treasury securities,
adjusted to a constant maturity which corresponds to the adjustment period of
the loan (the "U.S. Treasury constant maturity index") as published weekly by
the Federal Reserve Board. Rates on ARM loans are generally subject to
limitations on interest rate increases of a 2% to 3% adjustment per period and
an aggregate adjustment of 6% over the life of the loan. Accordingly, increases
in interest rates and the resulting cost of
3
<PAGE> 6
funds in a rapidly rising interest rate environment could exceed the cap levels
on these loans and negatively impact net interest income. In the year ended
December 31, 1996 and 1995, the Bank originated $8.5 million and $14.3 million,
respectively, in one-to-four family residential ARM loans.
The volume and types of ARM loans originated by the Bank have been
affected by such market factors as the level of interest rates, competition,
consumer preferences, and availability of funds. During 1996, demand for ARM
loans was impacted by the low interest rate environment and consumer preference
for fixed rate loans. Accordingly, although the Bank will continue to offer ARM
loans, there can be no assurance that the Bank will be able to originate a
sufficient volume of ARM loans to increase or maintain the proportion that these
loans bear to total loans in the future.
The retention of ARM loans in the Bank's loan portfolio, as opposed to
fixed rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, ARM loans generally pose credit risks
different from the risks inherent in fixed rate loans, primarily because, as
interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for default. At the same time, the marketability of the
underlying property may be adversely affected. In order to minimize risk,
borrowers of ARM loans are qualified at the Bank's current offering rate for
fixed rate loans, but not less than 7.0%. The Bank has not originated in the
past, nor does it currently originate, ARM loans that provide for negative
amortization.
The Bank currently offers fixed rate mortgage loans with terms of 15 to
30 years secured by one-to-four family residences. Interest rates charged on
fixed rate loans are competitively priced, based on market conditions. The Bank
originates fixed rate loans for sale in amounts of up to 75% of the lower of the
appraised value or the sales price of the property, with private mortgage
insurance required for loans in excess of 80%. Fixed rate loans are made in
amounts up to the maximum amount permitted by FNMA, FHLMC, and SONYMA
guidelines. For the years ended December 31, 1996 and 1995, the Bank originated
$1.6 million and $1.9 million, respectively, in fixed rate one-to-four family
residential mortgage loans.
An origination fee of up to 2% may be charged on one-to-four family
mortgage loans. Mortgage loans in the Bank's portfolio generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event that the borrower transfers
ownership of the property without the Bank's consent. It is the Bank's policy to
enforce due-on-sale provisions within the applicable regulations and guidelines
imposed by New York law and secondary market purchasers.
The Bank generally sells its newly originated conforming fixed rate
mortgage loans in the secondary market to such Federal and State agencies as
FNMA, SONYMA, and other secondary market purchasers, while retaining the
servicing rights on all such loans sold. For the twelve months ended December
31, 1996, the Bank sold loans totaling $350,000. As of December 31, 1996, the
Bank's portfolio of loans serviced for others totaled $16.1 million. The Bank
intends to continue to sell all of its newly originated fixed rate one-to-four
family mortgage loans as a means of managing its interest rate risk. No
assurances can be made, however, that the Bank will be able to do so.
Commercial Real Estate Lending. The Bank offers commercial real estate
loans that are typically secured by office buildings, retail stores, medical
offices, warehouses, and other non-residential buildings. At December 31, 1996,
the Bank had loans secured by commercial real estate of $63.5 million,
comprising 5.49% of the Bank's total loan portfolio. Commercial real estate
loans may be originated in amounts of up to 65% of the appraised value of the
mortgaged property. Such loans are typically made for terms of ten years with
interest rates charged in the same manner as the Company's step-up loans. To
originate commercial real estate loans, the Bank requires one or more of the
following: personal guarantees of the principals, a security interest in the
personal property, and an assignment of rents and/or leases. Properties securing
the loan are appraised by either appraisers employed by the Bank or by
independent appraisers approved by the Bank. Of the Bank's commercial real
estate portfolio at December 31, 1996, only two loans in the amount of $1.2
million were delinquent 90 days or more. Since 1988, the Bank has foreclosed on
two commercial real estate loans. In recent years, the Bank has de-emphasized
its origination of commercial real estate loans. At December 31, 1996 and 1995,
such loans totaled $63.5 million and $62.0 million, respectively.
Loans secured by commercial real estate properties, like multi-family
loans, are generally larger and involve a greater degree of risk than
one-to-four family residential mortgage loans. Because payments on loans secured
by commercial real estate properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Bank seeks to minimize
4
<PAGE> 7
these risks through its lending policies and underwriting standards, which
restrict new originations of such loans to the Bank's primary lending area and
qualify such loans on the basis of the property's net income and debt service
ratio.
Construction Lending. The Bank's construction loans primarily have been
made to finance the construction of one-to-four family residential properties
and, to a lesser extent, multi-family properties. The Bank's policies provide
that construction loans may be made in amounts of up to 70% of the appraised
value of the project. The maximum loan amount is $3.0 million. The Bank
generally has provided construction loans only as an accommodation to existing
customers and does not actively solicit such loans. The Bank generally requires
personal guarantees and a permanent loan commitment. Construction loans are made
with adjustable rate terms of up to 18 months. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. Construction
loans are structured to be converted to permanent end loans originated by the
Bank at the end of the construction period or upon the borrower receiving
permanent financing from another financial institution. As of December 31, 1996,
the Bank had $1.6 million, or 0.14%, of its total loan portfolio invested in
construction loans. The Bank does not currently intend to increase the level or
ratio of its construction loans to total loans.
Other Lending. The Bank also offers other full documentation loans,
primarily cooperative apartment, home equity, student, and passbook loans. Other
loans outstanding at December 31, 1996 totaled $12.3 million, or 1.06% of the
Bank's loan portfolio. Of total other loans, cooperative apartment loans
represented $5.8 million, or 47.15%. The Bank's home equity loan extends a line
of credit ranging from a minimum of $10,000 to a maximum of $400,000. The credit
line, when combined with the balance of the first mortgage lien, may not exceed
70% of the appraised value of the property at the time of the loan commitment.
Home equity loans outstanding at December 31, 1996 totaled $2.8 million, against
total available credit lines of $3.6 million.
Loan Approval Authority and Underwriting. The Board of Directors
establishes lending authority for individual officers for its various loan
products. For one-to-four family mortgage loans, including cooperative apartment
and condominium loans, the Senior Vice President, Mortgages has the authority to
approve loans in amounts of up to $300,000. Any two executive officers have the
authority to issue commitments on one-to-four family loans in amounts up to
$400,000. Any one-to-four family loan in excess of $400,000 must be approved by
the Mortgage and Real Estate Committee. For multi-family and commercial real
estate loans, the Mortgage and Real Estate Committee must approve all loans. A
loan in excess of $3.0 million must be approved by the Executive Committee; as
of December 31, 1996, the Bank had eight loans in excess of $3.0 million limit,
with the highest amount being $4.4 million.
For one-to-four family mortgage loans originated by the Bank, upon
receipt of a completed loan application from a prospective borrower, a credit
report is requested, and the borrower's income, assets, and certain other
information are verified for full documentation loans; if necessary, additional
financial information is requested. An appraisal of the real estate intended to
secure the proposed loan is required, and currently is performed by staff or
independent certified appraisers designated and approved by the Board of
Directors. It is the Bank's policy to obtain appropriate insurance protection,
including title insurance, on all real estate mortgage loans. Borrowers must
also obtain hazard insurance prior to closing. Borrowers generally are required
to advance funds for certain items such as real estate taxes, flood insurance,
and private mortgage insurance, when applicable. Limited documentation loans are
underwritten according to the same guidelines, except that no income and, in
many instances, no financial asset verification is performed. The Bank has
originated limited documentation loans in response to the characteristics and
demands of its primary market area. The majority of such loans have been
originated within the primary market area served by the Bank.
Delinquent Loans and Foreclosed Assets. The Bank had $9.7 million in
loans delinquent 90 days or more at December 31, 1996, consisting of 89
one-to-four family mortgage loans with an average principal balance of
approximately $95,500, and two loans on commercial real estate property in the
amount of $1.2 million. Management does not expect to incur significant losses
on its delinquent mortgage loans.
Management reviews delinquent loans on a regular basis and reports
monthly to both the Mortgage and Real Estate Committee and the Executive
Committee regarding delinquent loans. The Bank hires outside counsel experienced
in foreclosure and bankruptcy to institute foreclosure and other proceedings on
the Bank's delinquent loans.
With respect to one-to-four family mortgage loans, the Bank's collection
procedures include sending a past due notice when the regular monthly payment is
17 days past due. In the event that payment is not received following
notification, another notice is sent after the loan becomes 30 days delinquent.
If payment is not received after the second notice is sent, personal contact
with the borrower is attempted through additional letters and telephone calls.
If a loan becomes 90 days delinquent,
5
<PAGE> 8
the Bank then issues a demand note and sends an inspector to the property. When
contact is made with the borrower at any time prior to foreclosure, the Bank
attempts to obtain full payment or to work out a repayment schedule with the
borrower to avoid foreclosure. If a satisfactory repayment schedule is not
worked out with the borrower, foreclosure actions are generally initiated prior
to the loan becoming 120 days past due.
With respect to multi-family and commercial real estate loans, any loans
that become 20 days delinquent are reported to the Senior Vice President,
Mortgages. The Bank then attempts to contact such borrowers by telephone. Before
a loan becomes 30 days past due, the Bank conducts a physical inspection of the
property. Once contact is made with the borrower, the Bank attempts to obtain
full payment or to work out a repayment schedule. If the Bank determines that
successful repayment is unlikely, the Bank initiates foreclosure proceedings,
typically before the loan becomes 60 days delinquent.
The Bank's policies provide that management reports monthly to the
Mortgage and Real Estate Committee and Executive Committee regarding classified
assets. The Bank reviews the problem loans in its portfolio on a monthly basis
to determine whether any loans require classification in accordance with
applicable regulatory guidelines and believes its classification policies are
consistent with regulatory policies. All classified assets of the Bank are
included in non-performing loans delinquent 90 days or more or foreclosed real
estate.
The Bank generally continues to accrue interest on all delinquent
secured loans until foreclosure proceedings have been commenced and continues to
accrue interest on all delinquent unsecured loans until the loan is 90 days past
due. The Bank typically reverses any accrued interest upon instituting
foreclosure proceedings.
The following table sets forth information regarding all non-accrual
loans, loans which are 90 days or more delinquent, commercial real estate
pending foreclosure, and foreclosed real estate at the dates indicated. During
the years ended December 31, 1996, 1995, and 1994, the amounts of additional
interest income that would have been recorded on non-accrual loans, had they
been current, totaled $978,000, $822,000 and $801,000 respectively. These
amounts were not included in the Bank's interest income for the respective
periods. At December 31, 1996, the Bank had no restructured loans within the
meaning of Statement of Financial Accounting Standards ("SFAS") No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings" as
amended by SFAS No. 114.
At December 31,
---------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
Non-accrual mortgage loans...... $6,861 $4,929 $ 5,437 $ 7,417 $ 8,653
Loans 90 days or more delinquent
and still accruing interest.... 2,798 2,864 1,674 2,329 8,106
Commercial real estate loans
pending foreclosure............ -- -- -- 2,009 2,806
------ ------ ------ ------- -------
Total non-performing loans 9,659 7,793 7,111 11,755 19,565
------ ------ ------ ------- -------
Foreclosed real estate.......... 627 774 975 884 1,647
------ ------ ------ ------- -------
Total non-performing assets..... $10,286 $8,567 $8,086 $12,639 $21,212
======= ====== ====== ======= =======
Total non-performing loans to
loans, net...................... 0.84% 0.78% 0.76% 1.51% 2.84%
Total non-performing assets to
total assets.................... 0.76 0.69 0.69 1.16 2.23
Non-performing loans totaled $9.7 million as of December 31, 1996.
Management monitors such loans and, when deemed appropriate, writes down such
loans to their current appraised values, less transaction costs. There can be no
assurances that further write-downs will not occur with respect to such loans.
At December 31, 1996, foreclosed real estate was comprised of four
residential properties located within the Bank's primary lending area, with an
aggregate carrying value of $627,000. The Bank generally conducts appraisals on
all properties securing non-accrual mortgage loans, commercial real estate loans
pending foreclosure, and foreclosed real estate as deemed
6
<PAGE> 9
appropriate and, if necessary, charges off any declines in value at such times.
Based upon management's estimates as to the timing of, and expected proceeds
from, the disposition of these loans, no material loss is currently expected to
be incurred.
Once a loan is placed into foreclosure, the Bank performs an appraisal
of the property. In the event that the carrying balance of the loan exceeds the
appraisal amount less transaction costs, a charge-off is recognized. It is the
Bank's general policy to dispose of properties acquired through foreclosure or
by deed in lieu thereof as quickly and as prudently as possible, in
consideration of market conditions and the condition of such property.
Foreclosed real estate is titled in the name of the Bank's wholly-owned
subsidiary, Main Omni Realty Corp., which manages the property while it is
offered for sale.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in its loan
portfolio and the regional and national economies. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers, among other matters, the fair value of the
underlying collateral, economic conditions, historical loan loss experience, and
other factors that warrant recognition in providing for an adequate loan loss
allowance. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses and the valuation of foreclosed real estate. In recent periods,
regulatory authorities have applied a greater level of scrutiny to the loan
portfolios of financial institutions and more conservative criteria in
evaluating real estate market values, which the Bank believes has resulted in
significantly increased provisions for loan losses for financial institutions
generally. While the Bank considers this conservative approach when evaluating
the adequacy of its loan loss allowance, such authorities may require the Bank
to recognize additions to the allowance based on their judgment about
information available to them at the time of their examinations.
When the Bank determines that an asset should be classified, it
generally does not establish a specific allowance for such asset unless it
determines that such asset may result in a loss. The Bank may, however, increase
its general valuation allowance in an amount deemed prudent. General valuation
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowances are subject to review by the FDIC and the Banking
Department, which can order the establishment of additional general or specific
loss allowances.
In 1996, the Bank reversed $2 million from its allowance for loan
losses. At December 31, 1996, the total allowance was $9.4 million (versus $11.4
million at year-end 1995), which amounted to 96.90% of non-performing loans and
90.99% of non-performing assets. For the years ended December 31, 1996 and 1995,
the Bank had net charge-offs of $0 and $59,000, respectively, against this
allowance. The level of the allowance reflects management's assessment of the
risks inherent in its loan portfolio, including those risks associated with the
Bank's increased emphasis on multi-family mortgage loans on rental and
cooperative apartment buildings, which are considered to be at greater risk of
default than one-to-four family loans. In determining the provision for loan
losses, the Bank also considers the greater risks associated with its sizeable
portfolio of limited documentation loans, and local and national economic
conditions. The Bank will continue to monitor and modify the level of its
allowance for loan losses in order to maintain such allowance at a level which
management considers adequate. See Statistical Data-A, B, C, and D for
components of the Bank's mortgage loan portfolio, maturity and repricing, and
for a summary of the allowance for loan losses.
Mortgage-Backed Securities
All of the Bank's mortgage-backed securities are directly or indirectly
insured or guaranteed by the FHLMC or GNMA. At December 31, 1996,
mortgage-backed securities totaled $73.7 million, or 5.43% of total assets, and
were classified by the Bank as held to maturity. Because a majority of the
Bank's mortgage-backed securities are either adjustable rate or are FHLMC
five-year term securities, the Bank anticipates that all of its mortgage-backed
securities will prepay or reprice within five years. At December 31, 1996, the
mortgage-backed securities portfolio had a weighted average interest rate of
6.14% and a market value of approximately $74.2 million. See Statistical Data-E
for components of the mortgage-backed securities portfolio.
7
<PAGE> 10
Investment Activities
General. The investment policy of the Bank, which is established by the
Board of Directors and implemented by the Real Estate and Mortgage Committee and
the Investment Committee and certain executive officers of the Bank, is designed
primarily to provide and maintain liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk, and to
complement the Bank's lending activities. The Bank's current securities
investment policy permits investments in various types of liquid assets,
including U.S. Treasury securities, obligations of various Federal agencies,
bankers' acceptances of other Board approved financial institutions, investment
grade corporate securities, commercial paper, certificates of deposit, and
Federal funds. The Bank currently does not participate in hedging programs or
interest rate swaps and does not invest in non-investment grade bonds or high
risk mortgage derivatives.
To improve the quality of the Bank's securities portfolio and the Bank's
liquidity and regulatory capital position, management has restructured the
securities portfolio in recent years by shifting its investments primarily to
short- and medium-term U.S. Treasury securities from corporate debt securities
as the latter securities matured or were redeemed. As a result, at December 31,
1996, U.S. investment securities totaled $76.1 million and Government agency
securities totaled $10.4 million, as compared to $68.1 million and $9.9 million
at December 31, 1995, respectively. The Bank's aggregate securities portfolio
totaled $86.5 million at December 31, 1996. See Statistical Data-E, "Securities,
Money Market, and Mortgage-Backed Securities."
Sources of Funds
General. Deposits, repayments of loans and mortgage-backed securities,
and maturities and redemptions of investment securities are the Bank's primary
sources of funds for lending, investing, and other general purposes. Borrowings
from the FHLB in times of heavy loan demand complement these sources of
fundings.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits principally consist of
certificates of deposit ("CDs") and savings accounts, together with money market
accounts, demand deposits, and NOW accounts. The flow of deposits is influenced
significantly by general economic conditions, the restructuring of the banking
industry, changes in money market and prevailing interest rates, and competition
with other financial institutions. The Bank's deposits are typically obtained
from the area in which its offices are located. The Bank relies primarily on
long-standing relationships with customers to retain these deposits. At December
31, 1996, $108.4 million, or 10.59% of the Bank's gross deposit balance,
consisted of CDs with a balance of $100,000 or more.
Borrowings. The Bank is a member of the FHLB-NY, and had a $323 million
line of credit at December 31, 1996, which was increased to $406 million in
March 1997. To supplement its funding source in a year of increased lending, the
Company drew on its line of credit with the FHLB in 1996. Borrowings, which are
exclusively used to finance loan production, totaled $81.4 million at December
31, 1996. A Federal Reserve Bank of New York collateralized line of credit of
$8.8 million and a $10.0 million line of credit with a correspondent financial
institution are also available to the Bank. At December 31, 1996, the Bank also
had an outstanding loan in the amount of $14.3 million from the Company to fund
the Employee Stock Ownership Plan ("ESOP") and $67.9 million in inter-company
demand loans at a fixed rate of 6%.
Subsidiary Activities
Under its New York State leeway authority, the Bank has formed two
wholly-owned subsidiary corporations. M.F.O. Holding Corp. ("MFO") holds title
to banking premises, while Main Omni Realty Corp's purpose is to hold, operate,
and maintain real estate acquired by the Bank as a result of foreclosure or by
deed in lieu.
Savings Bank Life Insurance
As an issuing bank, the Bank offers Savings Bank Life Insurance ("SBLI")
to its customers up to the legal maximum of $50,000 per insured individual and,
as a trustee bank, offers an additional $350,000 in group coverage per insured
under SBLI's Financial Institution Group Life Insurance policy. The SBLI
Department's activities are separate from the Bank's and, while they do not
materially affect the Bank's earnings, management believes that offering SBLI is
beneficial to the Bank's relationship with its depositors and the general
public. The SBLI Department pays its own expenses and reimburses the Bank for
expenses incurred on its behalf.
8
<PAGE> 11
Personnel
At December 31, 1996, the number of full-time equivalent employees was
291. The Bank's employees are not represented by a collective bargaining unit,
and the Bank considers its relationship with its employees to be good.
FEDERAL, STATE, AND LOCAL TAXATION
Federal Taxation
General. The Company and the Bank report their income on a consolidated
basis using a calendar year on the accrual method of accounting, and are subject
to Federal income taxation in the same manner as other corporations with some
exceptions, including, particularly, the Bank's addition to its reserve for bad
debts, as discussed below. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Bank or the Company.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the
"1996 Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Internal Revenue Code of 1986 ("Code") relating to a savings
institution's use of bad debt reserves for Federal income tax purposes and
requires such institutions to recapture (i.e. take into income) certain portions
of their accumulated bad debt reserves. The effect of the 1996 Act on the Bank
is discussed below. Prior to the enactment of the 1996 Act, the Bank was
permitted to establish tax reserves for bad debts and to make annual additions
thereto, which additions, within specified formula limits, were deducted in
arriving at the Bank's taxable income. The Bank's deduction with respect to
"qualifying loans," which are generally loans secured by certain interests in
real property could be computed using an amount based on a six-year moving
average of the Bank's actual loss experience (the "Experience Method"), or a
percentage equal to 8% of the Bank's taxable income (the "PTI Method"), computed
without regard to this deduction and with additional modifications, and reduced
by the amount of any permitted addition to the non-qualifying reserve.
The 1996 Act. Under the 1996 Act, for its current and future taxable
years, the Bank is not permitted to make additions to its tax bad debt reserves.
In addition, the Bank is required to recapture (i.e. take into income) over a
six-year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987. The
amount subject to recapture is approximately $7.4 million.
Distributions. To the extent that (i) the Bank's reserve for losses on
qualifying real property loans exceeds the amount that would have been allowed
under the experience method and (ii) the Bank makes "non-dividend distributions"
to stockholders that are considered to result in distributions from the excess
bad debt reserve, i.e., that portion, if any, of the balance of the reserve for
qualifying real property loans attributable to certain deductions under the
percentage of taxable income method, or the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the distribution will be
included in the Bank's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for Federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserves. Thus any dividends to the Company that would reduce amounts
appropriated to the Bank's bad debt reserves and deducted for Federal income tax
purposes would create a tax liability for the Bank.
The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, the additional taxable
income would be an amount equal to approximately one and one-half times the
amount of the Excess Distribution, assuming a 35% corporate income tax rate
(exclusive of state taxes). See "Regulation and Supervision" for limits on the
payment of dividends by the Bank. The Bank does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on Alternative
Minimum Taxable Income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. Only 90% of AMTI can be
offset by net operating loss carryovers. The adjustment to AMTI based on book
income is an amount equal to 75% of the amount by which a corporation's adjusted
current earnings exceeds its AMTI
9
<PAGE> 12
(determined without regard to this preference and prior to reduction for net
operating losses). In addition, for taxable years beginning after December 31,
1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of
AMTI (with certain modifications) over $2.0 million is imposed on corporations,
including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid.
The Bank does not expect to be subject to the AMT. The Bank was subject to an
environmental tax liability for the year ended December 31, 1996 which was not
material.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20% of the stock of the
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
State and Local Taxation
The Bank is subject to the New York State Franchise Tax on Banking
Corporations in an annual amount equal to the greater of (i) 9% of the Bank's
"entire net income" allocable to New York State during the taxable year, or (ii)
the applicable alternative minimum tax. The alternative minimum tax is generally
the greatest of (a) 0.01% of the value of the Bank's assets allocable to New
York State with certain modifications, (b) 3% of the Bank's "alternative entire
net income" allocable to New York State, or (c) $250. Entire net income is
similar to Federal taxable income, subject to certain modifications (including
the fact that net operating losses cannot be carried back or carried forward)
and alternative entire net income is equal to entire net income without certain
deductions. The Bank is also subject to a similarly calculated New York City tax
of 9% on income allocated to New York City and similar alternative taxes.
A temporary Metropolitan Transportation Business Tax Surcharge on
banking corporations doing business in the metropolitan district has been
applied since 1982. The Bank does all of its business within this District and
is subject to this surcharge rate of 17.00%. In addition, a 2.50% tax surcharge
on the Bank's New York State Franchise Tax is imposed on the Bank.
Delaware State Taxation. As a Delaware business corporation, the Company
is required to file annual returns and pay annual fees and an annual franchise
tax to the State of Delaware. These taxes and fees were not material in 1996.
REGULATION AND SUPERVISION
General
The Bank is a New York State-chartered stock form savings bank and its
deposit accounts are insured under the BIF up to applicable limits by the FDIC.
The Bank is subject to extensive regulation and supervision by the New York
State Banking Department ("Banking Department"), as its chartering agency, and
by the FDIC, as the deposit insurer. The Bank must file reports with the Banking
Department and the FDIC concerning its activities and financial condition, in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other depository
institutions. There are periodic examinations by the Banking Department and the
FDIC to assess the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings bank can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss allowances for regulatory purposes. Any change in such regulation, whether
by the Banking Department, the FDIC, or through legislation, could have a
material adverse impact on the Company and the Bank and their operations, and
the Company's stockholders. The Company is required to file certain reports, and
otherwise comply with the rules and regulations of the Federal Reserve Board and
the Banking Department and of the Securities and Exchange Commission ("SEC")
under Federal securities laws. Certain of the regulatory requirements applicable
to the Bank and to the Company are referred to below or elsewhere herein.
10
<PAGE> 13
New York Law
The Bank derives its lending, investment, and other authority primarily
from the applicable provisions of Banking Law and the regulations of the Banking
Department, as limited by FDIC regulations. See "Restrictions on Certain
Activities." Under these laws and regulations, savings banks, including the
Bank, may invest in real estate mortgages, consumer and commercial loans,
certain types of debt securities (including certain corporate debt securities
and obligations of Federal, state, and local governments and agencies), certain
types of corporate equity securities and certain other assets. Under the
statutory authority for investing in equity securities, a savings bank may
invest up to 7.5% of its assets in corporate stock, with an overall limit of 5%
of its assets invested in common stock. Investment in the stock of a single
corporation is limited to the lesser of 2% of the outstanding stock of such
corporation or 1% of the savings bank's assets, except as set forth below. Such
equity securities must meet certain earnings ratios and other tests of financial
performance. A savings bank's lending powers are not subject to percentage of
asset limitations, although there are limits applicable to single borrowers. A
savings bank may also, pursuant to the "leeway" power, make investments not
otherwise permitted under the New York State Banking Law. This power permits
investments in otherwise impermissible investments of up to 1% of assets in any
single investment, subject to certain restrictions and to an aggregate limit for
all such investments of up to 5% of assets. Additionally, savings banks are
authorized to elect to invest under a "prudent person" standard in a wide range
of debt and equity securities in lieu of investing in such securities in
accordance with and reliance upon the specific investment authority set forth in
the New York State Banking Law. Although the "prudent person" standard may
expand a savings bank's authority, in the event a savings bank elects to utilize
the "prudent person" standard, it will be unable to avail itself of the other
provisions of the New York State Banking law and regulations which set forth
specific investment authority. A savings bank may also exercise trust powers
upon approval of the Banking Department.
New York savings banks may also invest in subsidiaries under a service
corporation power. A savings bank may use this power to invest in corporations
that engage in various activities authorized for savings banks, plus any
additional activities which may be authorized by the Banking Department.
Investment by a savings bank in the stock, capital notes, and debentures of its
service corporations is limited to 3% of the savings bank's assets, and such
investments, together with the savings bank's loans to its service corporations,
may not exceed 10% of the savings bank's assets.
The exercise by an FDIC-insured savings bank of the lending and
investment powers of a savings bank under the New York Banking Law is limited by
FDIC regulations and other Federal law and regulations. In particular, the
applicable provisions of New York State Banking law and regulations governing
the investment authority and activities of an FDIC-insured state-chartered
savings bank have been effectively limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued
pursuant thereto. See "Restrictions on Certain Activities."
With certain limited exceptions, a New York State chartered savings bank
may not make loans or extend credit for commercial, corporate, or business
purposes (including lease financing) to a single borrower, the aggregate amount
of which would be in excess of 15% of the bank's net worth. The Bank currently
complies with all applicable loans-to-one-borrower limitations.
Under New York State Banking Law, a New York State chartered stock
savings bank may declare and pay dividends out of its net profits, unless there
is an impairment of capital, but approval of the Superintendent is required if
the total of all dividends declared in a calendar year would exceed the total of
its net profits for that year combined with its retained net profits of the
preceding two years, subject to certain adjustments.
Under New York State Banking Law, the Superintendent of Banks may issue
an order to a New York State-chartered banking institution to appear and explain
an apparent violation of law, to discontinue unauthorized or unsafe practices,
and to keep prescribed books and accounts. Upon a finding by the Banking
Department that any director, trustee, or officer of any banking organization
has violated any law, or has continued unauthorized or unsafe practices in
conducting the business of the banking organization after having been notified
by the Superintendent to discontinue such practices, such director, trustee, or
officer may be removed from office after notice and an opportunity to be heard.
The Bank does not know of any past or current practice, condition, or violation
that might lead to any proceeding by the Superintendent or the Banking
Department against the Bank or any of its Directors or officers.
11
<PAGE> 14
FDIC Regulations
Capital Requirements. The FDIC has adopted risk-based capital guidelines
to which the Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. The Bank is required
to maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. The ratio of such regulatory capital to regulatory
risk-weighted assets is referred to as the Bank's "risk-based capital ratio."
Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet items to four risk-weighted categories ranging from 0% to
100%, with higher levels of capital being required for the categories perceived
as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The
first tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Savings banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels.
The following is a summary of the Bank's regulatory capital at December
31, 1996:
GAAP Capital to Total Leverage Assets................ 9.65%
Total Capital to Risk-Weighted Assets................ 17.38%
Tier I to Risk-Weighted Assets....................... 16.19%
In August 1995, the FDIC, along with the other Federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate risk
in assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies
recently issued a joint policy statement providing guidance on interest rate
risk management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
The agencies have determined not to proceed with a previously issued proposal to
develop s supervisory framework for measuring interest rate risk and an explicit
capital component for interest rate risk.
Standards for Safety and Soundness. Federal law requires each Federal
banking agency to prescribe for depository institutions under its jurisdiction
standards relating to, among other things, internal controls; information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; compensation; fees and benefits; and such
other operational and managerial standards as the agency deems appropriate. The
Federal banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the Federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings and compensation; fees and
benefits. If the appropriate Federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require
12
<PAGE> 15
the institutions to submit to the agency an acceptable plan to achieve
compliance with the standard, as required by the Federal Deposit Insurance Act,
as amended, ("FDI Act"). The final regulation establishes deadlines for the
submission and review of such safety and soundness compliance plans.
Real Estate Lending Standards. The FDIC and the other Federal banking
agencies have adopted regulations that prescribe standards for extensions of
credit that (I) are secured by real estate or (ii) are made for the purpose of
financing the construction or improvements on real estate. The FDIC regulations
require each savings association to establish and maintain written internal real
estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards also must be
consistent with accompanying FDIC Guidelines, which include loan-to-value
limitations for the different types of real estate loans. Associations are also
permitted to make a limited amount of loans that do not conform to the proposed
loan-to-value limitations so long as such exceptions are reviewed and justified
appropriately. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value standard are justified.
Dividend Limitations. The FDIC has authority to use its enforcement
powers to prohibit a savings bank from paying dividends, if in its opinion, the
payment of dividends would constitute an unsafe or unsound practice. Federal law
prohibits the payment of dividends by a bank that will result in the bank
failing to meet applicable capital requirements on a pro forma basis. The Plan
of Conversion also restricts the Bank's payment of dividends in the event the
dividend would impair the liquidation account established in connection with the
Conversion. The Bank is also subject to dividend declaration restrictions
imposed by New York law.
Investments and Activities
Since the enactment of FDICIA, all state-chartered financial
institutions, including savings banks and their subsidiaries, have generally
been limited to activities as principal and equity investments of the type and
in the amount authorized for national banks, notwithstanding state law, FDICIA
and the FDIC regulations thereunder permit certain exceptions to these
limitations. For example, certain state chartered banks, such as the Bank, may,
with FDIC approval, continue to exercise state authority to invest in common or
preferred stocks listed on a national securities exchange or the National Market
System of NASDAQ and in the shares of an investment company registered under the
Investment Company Act of 1940, as amended. Such banks may also continue to sell
savings bank life insurance. In addition, the FDIC is authorized to permit such
institutions to engage in state authorized activities or investments that do not
meet this standard (other than non-subsidiary equity investments) for
institutions that meet all applicable capital requirements if it is determined
that such activities or investments do not pose a significant risk to the BIF.
All non-subsidiary equity investments, unless otherwise authorized or approved
by the FDIC, must be divested by December 19, 1996, pursuant to a FDIC-approved
divestiture plan unless such investments were grandfathered by the FDIC. The
Bank received grandfathering authority from the FDIC in February 1993 to invest
in listed stock and/or registered shares subject to the maximum permissible
investments of 100% of Tier 1 Capital, as specified by the FDIC's regulations,
or the maximum amount permitted by New York State Banking Law, whichever is
less. Such grandfathering authority is subject to termination upon the FDIC's
determination that such investments pose a safety and soundness risk to the Bank
or in the event the Bank converts its charter or undergoes a change in control.
As of December 31, 1996, the Bank had no such investment.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that Federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective
action legislation. Among other things, the regulations define the relevant
capital measures for the five capital categories. An institution is deemed to be
"well capitalized" if it has a total risk-based capital ratio of 10% or greater,
a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5%
or greater, and is not subject to a regulatory order, agreement, or directive to
meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of
4% or greater, and generally a leverage ratio of 4% or greater. An institution
is deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a
leverage ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio
13
<PAGE> 16
of less than 3%. An institution is deemed to be "critically undercapitalized" if
it has a ratio of tangible equity (as defined in the regulations) to total
assets that is equal to or less than 2%.
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institutions. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
are subject to one or more of a number of additional restrictions, including but
not limited to an order by the FDIC to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cease receipt of
deposits from correspondent banks or dismiss directors or officers, and
restrictions on interest rates paid on deposits, compensation of executive
officers and capital distributions by the parent holding company. "Critically
undercapitalized" institutions also may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any material transaction outside the ordinary course of business. In
addition, "critically undercapitalized" institutions are subject to appointment
of a receiver or conservator. Generally, subject to a narrow exception, the
appointment of a receiver or conservator is required for a "critically
undercapitalized" institutions within 270 days after it obtains such status.
Transactions with Affiliates
Under current Federal law, transactions between depository institutions
and their affiliates are governed by Section 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transaction with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on term substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings
bank with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
Federal banking agency to directors, executive officers, and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers, and principal shareholders must be made on terms
substantially the same as offered in comparable transactions to other persons.
Recent legislation created an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to executive officers over other
employees. Section 22(g) of the Federal Reserve Act places additional
limitations on loans to executive officers.
Enforcement
The FDIC has extensive enforcement authority over insured savings banks,
including the Bank. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease and desist orders, and
to remove directors and officers. In general, these enforcement actions may be
initiated in response to violations of laws and regulations and to unsafe or
unsound practices.
14
<PAGE> 17
The FDIC has authority under Federal law to appoint a conservator or
receiver for an insured savings bank under certain circumstances. The FDIC is
required, with certain exceptions, to appoint a receiver or conservator for an
insured state savings bank if that savings bank was "critically
undercapitalized" on average during the calendar quarter beginning 270 days
after the date on which the savings bank became "critically undercapitalized."
For this purpose, "critically undercapitalized" means having a ratio of tangible
capital to total assets of less than 2%. See "--Prompt Corrective Regulatory
Action." The FDIC may also appoint a conservator or receiver for a state savings
bank on the basis of the institution's financial condition or upon the
occurrence of certain events, including: (i) insolvency (whereby the assets of
the savings bank are less than its liabilities to depositors and others); (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business; (iv) likelihood that the savings bank will be unable to
meet the demands of its depositors or to pay its obligations in the normal
course of business; and (v) insufficient capital, or the incurring or likely
incurring of losses that will deplete substantially all of the institution's
capital with no reasonable prospect of replenishment of capital without Federal
assistance.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized, or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on the supervisory evaluation provided to the
FDIC by the institution's primary Federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for BIF deposits currently range from 0 basis points
to 27 basis points. The FDIC is authorized to raise the assessment rates in
certain circumstances, including to maintain or achieve the designated reserve
ration of 1.25%, which requirement the BIF currently meets. The FDIC has
exercised its authority to raise rates in the past and may raise insurance
premiums in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Bank. On September 30, 1996, the President
signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which,
among other things, imposed a special one-time assessment of Savings Association
Insurance Fund member institutions to recapitalize SAIF. The Funds Act also
spreads the obligations for payment of the Financing Corporation ("FICO") bonds
across all SAIF and BIF members. As of January 1, 1997, BIF deposits are
assessed for FICO payments at a rate of 20% of the rate assessed on SAIF
deposits. Based on current estimates by the FDIC, BIF deposits will be assessed
a FICO payment of 1.3 basis points, while SAIF deposits will pay an estimated
6.4 basis points on the FICO bonds. Full pro rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or the
date BIF and SAIF are merged. The Funds Act specifies that BIF and SAIF will be
merged on January 1, 1999 provided no savings associations remain at that time.
See "Risk Factors--Payment of Financing Corporation Bonds."
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition, or violation
that might lead to the termination of deposit insurance.
Loans-to-One-Borrower Limitations
With certain limited exceptions, a New York State chartered savings bank
may not make loans or extend credit for commercial, corporate, or business
purposes (including lease financing) to a single borrower, the aggregate amount
of which would be in excess of 15% of the bank's capital. The Bank currently
complies with all applicable loans-to-one-borrower limitations.
Community Reinvestment Act
Federal Regulation. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. CRA does not establish specific lending requirements or programs
for financial institutions nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
its particular community, consistent with CRA. CRA requires the FDIC, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its
15
<PAGE> 18
community and to take such record into account in its evaluation of certain
applications by such institution. CRA requires public disclosure of an
institution's CRA rating and to require the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system. The Bank's latest CRA rating, received from the FDIC in February 1995,
was "satisfactory."
New York Regulation. The Bank is also subject to provisions of the New
York Banking Law which impose continuing and affirmative obligations upon
banking institutions organized in New York to serve the credit needs of its
local community ("NYCRA"), which are substantially similar to those imposed by
the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA report and
copies of all Federal CRA reports with the Banking Department. The NYCRA
requires the Banking Department to make an annual written assessment of a bank's
compliance with the NYCRA, utilizing a four-tiered rating system, and make such
assessment available to the public. The NYCRA also requires the Superintendent
to consider a bank's NYCRA rating when reviewing a bank's application to engage
in certain transactions, including mergers, asset purchases, and the
establishment of branch offices or ATMs, and provides that such assessment
may serve as a basis for the denial of any such application. The Bank's latest
NYCRA rating, received from the Banking Department in March 1995, was a "2" or
"satisfactory."
Federal Reserve System
Under Federal Reserve Board ("FRB") regulations, the Bank is required to
maintain non-interest-earning reserves against its transaction accounts
(primarily NOW and regular checking accounts). Effective December 19, 1995, the
FRB regulations generally require that reserves of 3% must be maintained against
aggregate transaction accounts of $52.0 million or less (subject to adjustment
by the FRB) and an initial reserve of $1.56 million plus 10% (subject to
adjustment by the FRB between 8% and 14%) against that portion of total
transaction accounts in excess of $52.0 million. The first $4.3 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. At December 31, 1996, the
Bank was in compliance with the foregoing requirements. Because required
reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the FRB, the effect of this reserve requirement is to
reduce the Bank's interest-earning assets.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB-NY, is required to acquire and
hold shares of capital stock in that FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB-NY, whichever is greater. The Bank was in compliance
with this requirement, with an investment in FHLB-NY stock at December 31, 1996
of $10.4 million. FHLB advances must be secured by specified types of collateral
and may be obtained primarily for the purpose of providing funds for residential
housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the fiscal
years ended December 31, 1996, 1995, and 1994, dividends from the FHLB-NY to the
Bank amounted to $665,000, $740,000 and $620,000, respectively. If dividends
were reduced, or interest on future FHLB advances increased, the Bank's net
interest income might also be reduced.
Holding Company Regulation
Federal Regulation. The Company currently is subject to examination,
regulation, and periodic reporting under the Bank Holding Company Act ("BHCA"),
as administered by the FRB. The FRB has adopted capital adequacy guidelines for
bank holding companies (on a consolidated basis) substantially similar to those
maintained by the FDIC for the Bank.
The Company is required to obtain the prior approval of the FRB to
acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior FRB approval will be required for the Company to acquire direct
or indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company. In addition to the approval of the FRB, before any
bank acquisition can be completed, prior approval thereof may
16
<PAGE> 19
also be required to be obtained from other agencies having supervisory
jurisdiction over the bank to be acquired, including the Banking Department.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting securities of
any company engaged in non-banking activities. One of the principal exceptions
to this prohibition is for activities found by the FRB to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities that the FRB has determined by regulation to be
so closely related to banking are: (i) making or servicing loans; (ii)
performing certain data processing services; (iii) providing discount brokerage
services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing
personal or real property; (vi) making investments in corporations or projects
designed primarily to promote community welfare; and (vii) acquiring a savings
and loan association.
The FRB has adopted capital adequacy guidelines for bank holding companies (on a
consolidated basis) substantially similar to those of the FDIC for the Bank. See
"Capital Maintenance." The Company's total and Tier 1 capital exceed these
requirements.
Bank holding companies are generally required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the Company's
consolidated net worth. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe and unsound practice,
or would violate any law, regulation, FRB order or directive, or any condition
imposed by, or written agreement with, the FRB. The FRB has now adopted an
exception to this approval requirement for well-capitalized bank holding
companies that meet certain other conditions.
The FRB has issued a policy statement regarding the payment of dividends
by bank holding companies. In general, the FRB's policies provide that dividends
should be paid only out of current earnings and only if the prospective rate of
earnings retention by the bank holding company appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
The FRB's policies also require that a bank holding company serve as a source of
financial strength to its subsidiary banks by standing ready to use available
resources to provide adequate capital funds to those banks during periods of
financial stress or adversity and by maintaining the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks where necessary. These regulatory policies could affect the
ability of the Company to pay dividends or otherwise engage in capital
distribution.
The status of the Company as a registered bank holding company under the
BHCA does not exempt it from certain Federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the Federal securities laws.
Under the FDI Act, depository institutions are liable to the FDIC for
losses suffered or anticipated by the FDIC in connection with the default of a
commonly controlled depository institution or any assistance provided by the
FDIC to such an institution in danger of default. This law would have potential
applicability if the Company ever acquired as a separate subsidiary a depository
institution in addition to the Bank.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or issuance of letters
of credit on behalf of, the bank holding company or its subsidiaries, and on the
investment in or acceptance of stocks or securities of such holding company or
its subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors, and principal shareholders of the Bank, the
Company, any subsidiary of the Company, and related interests of such persons.
Moreover, subsidiaries of bank holding companies are prohibited from engaging in
certain tie-in arrangements (with the Holding Company or any of its
subsidiaries) in connection with any extension of credit, lease, or sale of
property or furnishing of services.
The Company and its subsidiary, the Bank, will be affected by the
monetary and fiscal policies of various agencies of the United States
Government, including the Federal Reserve System. In view of changing conditions
in the national
17
<PAGE> 20
economy and in the money markets, it is impossible for the management of the
Company to accurately predict future changes in monetary policy or the effect of
such changes on the business or financial condition of the Company or the Bank.
Acquisition of the Holding Company
Federal Restrictions. Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the FRB if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's shares of Common Stock outstanding, unless the FRB has found that the
acquisition will not result in a change in control of the Company. Under the
CIBCA, the FRB has 60 days within which to act on such notices, taking into
consideration certain factors, including the financial and managerial resources
of the acquirer, the convenience and needs of the communities served by the
Company and the Bank, and the anti-trust effects of the acquisition. Under the
BHCA, any company would be required to obtain prior approval from the FRB before
it may obtain "control" of the Company within the meaning of the BHCA. Control
generally is defined to mean the ownership or power to vote 25 percent or more
of any class of voting securities of the Company or the ability to control in
any manner the election of a majority of the Company's directors.
An existing bank holding company would be required to obtain the FRB's
prior approval under the BHCA before acquiring more than 5% of the Company's
voting stock. See "Holding Company Regulation." Approval of the Banking
Department may also be required for acquisition of the Company.
New York Change in Control Restrictions. In addition to the CIBCA and
the BHCA, the New York Banking Law generally requires prior approval of the New
York Banking Board before any action is taken that causes any company to acquire
direct or indirect control of a banking institution which is organized in New
York.
Federal Securities Laws
The Company's common stock is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information and proxy solicitation requirements, insider trading
restrictions, and other requirements under the Exchange Act.
Registration of the shares of the Common Stock that were issued in the
Bank's conversion from mutual to stock form under the Securities Act of 1933, as
amended (the "Securities Act"), does not cover the resale of such shares. Shares
of the common stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed in any three-month period the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
18
<PAGE> 21
STATISTICAL DATA
The detailed statistical data that follows is being presented in accordance with
Guide 3, prescribed by the Securities and Exchange Commission. This data should
be read in conjunction with the financial statements and related notes and the
discussion included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations that are indexed on the Form 10-K Cross
Reference Index.
A. Mortgage and Other Lending Activities
The following table sets forth the Bank's loan originations and mortgage-backed
securities, including purchases, sales, and principal repayments, for the
periods indicated:
For the
Years Ended December 31,
------------------------
(dollars in thousands) 1996 1995 1994
---- ---- ----
Mortgage loans (gross):
At beginning of period ................... $ 993,242 $ 936,716 $774,405
Mortgage loans originated:
One-to-four family ...................... 11,150 14,754 66,348
Multi-family ............................ 273,421 124,289 182,576
Commercial real estate .................. 17,438 5,796 3,278
Construction ............................ 1,214 915 1,220
-------- ---------- --------
Total mortgage loans originated ............ 303,223 145,754 253,422
Principal repayments ....................... 151,391 87,974 87,331
Mortgage loans sold (fixed rate)............ 350 508 2,322
Mortgage loans transferred to
foreclosed real estate.................... 406 746 1,458
---------- ---------- --------
At end of period ........................... 1,144,318 993,242 936,716
---------- ---------- --------
Other loans (gross):
At beginning of period ..................... 13,861 13,693 16,241
Other loans originated ..................... 1,471 3,069 3,397
Principal repayments* ...................... 2,975 2,703 3,493
Student loans sold ......................... 82 198 2,452
---------- ---------- --------
At end of period ........................... 12,275 13,861 13,693
---------- ---------- --------
Total loans ................................ $1,156,593 $1,007,103 $950,409
========== ========== ========
Mortgage-backed securities:
At beginning of period.................... $ 92,868 $ 107,451 $129,230
Principal repayments...................... 19,136 14,583 21,779
---------- ---------- --------
At end of period.......................... $ 73,732 $ 92,868 $107,451
========== ========== ========
*Includes a loan on a co-operative apartment in the amount of $64,000
transferred to foreclosed real estate in 1995.
19
<PAGE> 22
B: Loan Maturity and Repricing
The following table shows the maturity or period to repricing of the Bank's loan
portfolio at December 31, 1996. Loans that have adjustable rates are shown as
being due in the period during which the interest rates are next subject to
change. The table does not include prepayments or scheduled principal
amortization. Prepayments and scheduled principal amortization on mortgage loans
totaled $88.0 million for the twelve months ended December 31, 1996.
Mortgage and Other Loans
------------------------
At December 31, 1996
--------------------
<TABLE>
<CAPTION>
1 - 4 Multi- Commercial Home Total
(dollars in thousands) Family Family Real Estate Construction Equity Other Loans
- ---------------------- ------ ------ ----------- ------------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year .................... $184,744 $430,773 $43,104 $1,598 $2,819 $5,499 $ 668,537
After one year:
One to three years ................ 36,736 22,012 6,837 -- -- 2,218 67,803
Three to five years ............... 7,048 343,276 11,671 -- -- 746 362,741
Five to ten years ................. 9,127 2,591 655 -- -- 981 13,354
Ten to twenty years ............... 18,068 23,599 1,185 -- 12 42,864
Over twenty years ................. 1,181 113 -- -- -- -- 1,294
-------- -------- ------ ------- ------ ------ ----------
Total due or repricing
after one year .................. 72,160 391,591 20,348 -- -- 3,957 488,056
-------- -------- ------ ------- ------ ------ ----------
Total amounts due or
repricing, gross ............... $256,904 $822,364 $63,452 $1,598 $2,819 $9,456 $1,156,593
======== ======== ======= ======= ====== ====== ==========
</TABLE>
The following table sets forth, at December 31, 1996, the dollar amount of all
loans due after December 31, 1997, and indicates whether such loans have fixed
or adjustable interest rates.
Due after December 31, 1997
---------------------------
(dollars in thousands) Fixed Adjustable Total
----- ---------- -----
Mortgage loans:
One-to-four family .................. $28,929 $ 43,231 $ 72,160
Multi-family ........................ 11,113 380,478 391,591
Commercial real estate .............. 11,327 9,021 20,348
------- -------- --------
Total mortgage loans ................ $51,369 $432,730 $484,099
Other loans ........................... 2,829 1,128 3,957
------- -------- --------
Total loans ......................... $54,198 $433,858 $488,056
======= ======== ========
20
<PAGE> 23
C: Summary of the Allowance for Loan Losses
The allowance for loan losses at December 31, 1996, 1995, and 1994 was allocated
as follows:
At December 31,
---------------
1996 1995 1994
---- ---- ----
Percent Percent Percent
of of of
Loans in Loans in Loans in
Category Category Category
to Total to Total to Total
(dollars in thousands) Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
Mortgage loans:
One-to-four family ........ $ 1,812 19.36% $ 2,914 28.64% $ 3,091 32.20%
Multi-family .............. 6,168 65.90 6,519 63.70 6,207 59.09
Construction .............. 24 .26 30 .12 6 .26
Commercial real estate .... 1,110 11.86 1,550 6.16 1,565 7.01
Other loans ............... 245 2.62 346 1.38 342 1.44
------- ------ ------- ------ ------- ------
Total loans ............. $ 9,359 100.00% $11,359 100.00% $11,268 100.00%
======= ====== ======= ====== ======= ======
The allocation above is based upon an estimate at a given point in time, based
on various factors, including local economic conditions. A different allocation
methodology may be deemed to be more appropriate in the future.
D: Composition of Mortgage and Other Loan Portfolio
The following table sets forth the composition of the Bank's portfolio of
mortgage and other loans in dollar amounts and in percentages at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995 1994 1993
---- ---- ---- ----
Percent Percent Percent Percent
of of of of
(dollars in thousands) Amount Total Amount Total Amount Total Amount Total
- ---------------------- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family ....... $ 256,904 22.21% $ 288,470 28.64% $ 306,028 32.20% $ 276,442 34.96%
Multi-family ............. 822,364 71.10 641,564 63.70 561,589 59.09 428,746 54.23
Commercial real estate ... 63,452 0.14 62,003 6.16 66,609 7.01 67,467 8.53
Construction ............. 1,598 5.49 1,205 0.12 2,490 0.26 1,750 0.22
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total mortgage loans .... 1,144,318 98.94 993,242 98.62 936,716 98.56 774,405 97.95
---------- ------ ---------- ------ ---------- ------ ---------- ------
Other loans:
Cooperative apartment .... 5,764 0.50 6,684 0.66 7,238 0.76 7,429 0.94
Home equity .............. 2,819 0.24 3,069 0.31 3,352 0.35 3,338 0.42
Student .................. 24 0.00 116 0.01 241 0.03 3,011 0.38
Passbook savings ......... 375 0.03 470 0.05 691 0.07 989 0.13
Other .................... 3,293 0.29 3,522 0.35 2,171 0.23 1,474 0.19
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other loans ....... 12,275 1.06 13,861 1.38 13,693 1.44 16,241 2.05
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans ............. 1,156,593 100.00% 1,007,103 100.00% 950,409 100.00% 790,646 100.00%
---------- ====== ---------- ====== ---------- ====== ---------- ======
Less:
Unearned discounts ....... 24 29 42 63
Net deferred loan
origination fees ........ 1,058 912 1,549 1,249
Allowance for loan losses. 9,359 11,359 11,268 10,320
---------- ---------- ---------- ----------
Loans, net ............... $1,146,152 $ 994,803 $ 937,550 $ 779,014
========== ========== ========== ==========
</TABLE>
At December 31,
---------------
1992
----
Percent
of
(dollars in thousands) Amount Total
- ---------------------- ------ -----
Mortgage loans:
One-to-four family ....... $ 264,755 38.24%
Multi-family ............. 339,047 48.97
Commercial real estate ... 69,289 10.01
Construction ............. 1,476 0.21
---------- ------
Total mortgage loans .... 674,567 97.43
---------- ------
Other loans:
Cooperative apartment .... 8,230 1.19
Home equity .............. 3,633 0.52
Student .................. 3,111 0.45
Passbook savings ......... 1,449 0.21
Other .................... 1,422 0.20
---------- ------
Total other loans ....... 17,845 2.57
---------- ------
Total loans ............. 692,412 100.00%
---------- ======
Less:
Unearned discounts ....... 91
Net deferred loan
origination fees ........ 998
Allowance for loan losses. 6,062
----------
Loans, net ............... $ 685,261
==========
21
<PAGE> 24
E: Securities, Money Market Investments, and Mortgage-Backed Securities
The following table sets forth certain information regarding the carrying and
market values of the Bank's securities, money market investments, and
mortgage-backed securities portfolios at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995 1994
---- ---- ----
Carrying Market Carrying Market Carrying Market
(dollars in thousands) Value Value Value Value Value Value
----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Securities:
U.S.Government and
agency obligations ................... $76,121 $76,064 $68,126 $68,226 $ 68,538 $68,075
Corporate securities .................. -- -- -- -- 2,023 2,016
Equity securities ..................... 10,374 10,419 9,890 9,925 8,456 8,476
------- ------- ------- ------- -------- -------
Total securities ....................... $86,495 $86,483 $78,016 $78,151 $ 79,017 $78,567
======= ======= ======= ======= ======== =======
Money market investments:
Federal funds sold .................... $ 7,000 $ 7,000 $13,650 $13,650 $ 6,309 $ 6,309
------- ------- ------- ------- -------- -------
Total money market
investments ......................... $ 7,000 $ 7,000 $13,650 $13,650 $ 6,309 $ 6,309
======= ======= ======= ======= ======== =======
Mortgage-backed securities:
GNMA .................................. $23,569 $23,962 $27,914 $28,562 $ 31,626 $28,241
FHLMC ................................. 50,163 50,230 64,954 64,912 75,825 71,407
------- ------- ------- ------- -------- -------
Total mortgage-backed
securities .......................... $73,732 $74,192 $92,868 $93,474 $107,451 $99,648
======= ======= ======= ======= ======== =======
</TABLE>
22
<PAGE> 25
Item 2. PROPERTIES
The Bank conducts its business through nine full-service offices, and three
customer service centers, one of which is also a mortgage service center. The
Bank's main office is located at 38-25 Main Street, Flushing, New York. The Bank
believes that its current facilities are adequate to meet the present and
immediately foreseeable needs of the Bank and the Company.
Date Lease
Leased or Leased or Expiration Net Book Value at
Owned Acquired Date December 31, 1996
----- -------- ---- -----------------
Main Office(1) .............. Owned 1911 -- $1,754,879
38-25 Main Street
Flushing, NY 11354
Corona Branch ............... Owned 1923 -- 104,533
37-97 103rd Street
Corona, NY 11368
Little Neck Branch .......... Owned 1946 -- 63,803
251-31 Northern Blvd
Little Neck, NY 11363
Kew Gardens Hills Branch..... Owned 1948 -- 143,166
75-44 Main Street
Kew Gardens Hills, NY 11367
Jackson Heights Branch ...... Leased 1974 2023 502,342
76-02 Northern Blvd
Jackson Heights, NY 11372
Astoria Branch(2) ........... Leased 1993 2018 165,820
31-42 Steinway Street
Astoria, NY 11103
Fresh Meadows Branch ........ Leased 1995 2010 117,091
61-49 188th Street
Fresh Meadows, NY 11365
College Point Branch ........ Leased 1996 2021 6,399
15-01 College Point Blvd
College Point, NY 11356
Plainview Branch ............ Owned 1974 -- 307,988
1092 Old Country Road
Plainview, NY 11803
Customer/Mortgage Service
Center(3) ................... Owned 1991 -- 4,768,140
158-14 Northern Blvd
Flushing, NY 11354
Auburndale Customer Service
Center ..................... Leased 1996 2006 9,877
193-01 Northern Blvd
Flushing, NY 11358
Ditmars Service Center ...... Leased 1996 2005 20,013
31-09 Ditmars Blvd
Astoria, NY 11105
- -------------------
23
<PAGE> 26
(1) The Bank commenced operations in 1859 at a location near its current
headquarters which it has occupied since approximately 1911. The Bank
owns additional office space adjacent to its main office which is used
for administrative operations, the net book value of which is included
in the amount shown.
(2) This branch office replaced another branch office, formerly located at
31-02 Steinway Street, Astoria, which was closed as of June 28, 1993.
The vacated space, which is owned by the Bank, has a net book value of
$1.3 million and has subsequently been leased.
(3) The Bank currently leases to unrelated tenants a majority of the office
space at this location.
Item 3. LEGAL PROCEEDINGS
The Bank is involved in various legal actions arising in the ordinary
course of its business. All such actions, in the aggregate, involve amounts
which are believed by management to be immaterial to the financial condition and
results of operations of the Bank.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ Stock Market and quoted under
the symbol "QCSB".
Information regarding the Company's common stock and its price for the 1996
fiscal year appears on page 24 of the 1996 Annual Report under the caption
"Market Price of Common Stock and Dividends Declared per Common Share" and is
incorporated herein by this reference.
As of March 7, 1997 the Company had approximately 700 shareholders of record,
not including the number of persons or entities holding stock in nominee or
street name through various brokers and banks.
ITEM 6. SELECTED FINANCIAL DATA
Information regarding selected financial data appears on page 1 of the 1996
Annual Report under the caption "Financial Highlights" and is incorporated
herein by this reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 9 through 24 of the 1996
Annual Report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
this reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information regarding the financial statements and the Independent Auditors'
Report appears on pages 25 through 47 of the 1996 Annual Report and is
incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
24
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors and executive officers of the Registrant
appears on pages 4 through 7 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held April 16, 1997, under the caption
"Information with Respect to Nominees and Continuing Directors" and is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears on page 15 of the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held April 16,
1997, and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners appears on
page 3 of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 16, 1997, under the caption "Security Ownership of Certain
Beneficial Owners" and is incorporated herein by this reference.
Information regarding security ownership of management appears on pages 5
through 7 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 16, 1997, under the caption "Information with
Respect to the Nominees, Continuing Directors, and Executive Officers" and is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions appears on
page 18 of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on April 16, 1997 under the caption "Transactions with Certain
Related Persons" and is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are included in the Company's Annual
Report to Shareholders for the year ended December 31, 1996 and are incorporated
by this reference:
- Consolidated Statements of Condition at December 31,1996 and
1995;
- Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1996;
- Consolidated Statements of Changes in Stockholders' Equity for
each of the years in the three-year period ended December 31,
1996;
- Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 1996;
- Notes to Consolidated Financial Statements
- Management's Responsibility for Financial Reporting
- Independent Auditors' Report
The remaining information appearing in the Annual Report to Stockholders
is not deemed to be filed as a part of this report, except as expressly provided
herein.
25
<PAGE> 28
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1996
On November 13, 1996, the Company filed a Current Report on Form 8-K
regarding the date of the Company's 1997 Annual Meeting of Shareholders and the
related date of record.
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
-------
3.1 Certificate of Incorporation of Queens County Bancorp, Inc.(1)
3.2 Bylaws of Queens County Bancorp, Inc.(1)
10.1 Form of Employment Agreement between Queens County Savings Bank
and Certain Officers (1)
10.2 Form of Employment Agreement between Queens County Bancorp, Inc.
and Certain Officers (1)
10.3 Form of Change in Control Agreements among the Company, the Bank,
and Certain Officers (1)
10.4 Form of Queens County Savings Bank Recognition and Retention Plan
for Outside Directors (1)
10.5 Form of Queens County Savings Bank Recognition and Retention Plan
for Officers (1)
10.6 Form of Queens County Bancorp, Inc. 1993 Incentive Stock Option
Plan (2)
10.7 Form of Queens County Bancorp, Inc. 1993 Incentive Stock Option
Plan for Outside Directors (2)
10.8 Form of Queens County Savings Bank Employee Severance
Compensation Plan (1)
10.9 Form of Queens County Savings Bank Outside Directors'
Consultation and Retirement Plan (1)
10.10 Form of Queens County Bancorp, Inc. Employee Stock Ownership
Plan and Trust (1)
10.11 ESOP Loan Documents (1)
10.12 Incentive Savings Plan of Queens County Savings Bank (3)
10.13 Retirement Plan of Queens County Savings Bank (1)
10.14 Supplemental Benefits Plan of Queens County Savings Bank (4)
10.15 Excess Retirement Benefits Plan of Queens County Savings Bank
(1)
10.16 Queens County Savings Bank Deferred Compensation Plan for Fees
of Directors (4)
11.0 Statement Re: Computation of Per Share Earnings
13.0 1996 Annual Report to Shareholders
21.0 Subsidiaries information incorporated herein by reference to Part
I Subsidiaries
23.0 Consent of KPMG Peat Marwick, LLP, dated March 18, 1997
99.0 Proxy Statement for the Annual Meeting of Shareholders to be held
on April 16, 1997 (4)
(1) Incorporated by reference to Exhibits filed with the Registration Statement
on Form S-1, Registration No. 33-66852
(2) Incorporated herein by reference into this document from the Exhibits to
Form S-8, Registration Statement, filed on October 27, 1994, Registration
No. 33-85684.
(3) Incorporated herein by reference into this document from the Exhibits to
Form S-8, Registration Statement, filed on October 27, 1994, Registration
No. 33-85682.
(4) Incorporated by reference to Exhibits filed with the 1997 Proxy Statement
for the Annual Meeting of Shareholders to be held April 16, 1997.
26
<PAGE> 29
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
Queens County Bancorp, Inc.
---------------------------
(Registrant)
/s/ Joseph R. Ficalora 03/18/97
---------------------------- --------
Joseph R. Ficalora
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
/s/ Joseph R. Ficalora 03/18/97 /s/ Robert Wann 03/18/97
- ---------------------- -------- --------------- --------
Joseph R. Ficalora Robert Wann
Chairman, President, and Senior Vice President, Comptroller, and
Chief Executive Officer Chief Financial Officer (Principal
(Principal Executive Officer) Financial and Accounting Officer)
/s/ Harold E. Johnson 03/18/97 /s/ Donald M. Blake 03/18/97
- --------------------- -------- ------------------- --------
Harold E. Johnson Donald M. Blake
Director Director
/s/ Daniel C. Maher 03/18/97 /s/ Luke D. Lynch 03/18/97
- ------------------- -------- ----------------- --------
Daniel C. Maher Luke D. Lynch
Director Director
/s/ Max L. Kupferberg 03/18/97 /s/ Henry E. Froebel 03/18/97
- --------------------- -------- -------------------- --------
Max L. Kupferberg Henry E.Froebel
Director Director
/s/ Howard C. Miller 03/18/97 /s/ Joseph G. Chisholm 03/18/97
- -------------------- -------- ---------------------- --------
Howard C. Miller Joseph G. Chisholm
Director Director
/s/ Dominick Ciampa 03/18/97 /s/ Richard H O'Neill 03/18/97
- ------------------- -------- --------------------- --------
Dominick Ciampa Richard H. O'Neill
Director Director
28
<PAGE> 30
EXHIBIT INDEX
Exhibit
No. Description
------- -------------
3.1 Certificate of Incorporation of Queens County Bancorp, Inc.(1)
3.2 Bylaws of Queens County Bancorp, Inc.(1)
10.1 Form of Employment Agreement between Queens County Savings Bank
and Certain Officers (1)
10.2 Form of Employment Agreement between Queens County Bancorp, Inc.
and Certain Officers (1)
10.3 Form of Change in Control Agreements among the Company, the Bank,
and Certain Officers (1)
10.4 Form of Queens County Savings Bank Recognition and Retention Plan
for Outside Directors (1)
10.5 Form of Queens County Savings Bank Recognition and Retention Plan
for Officers (1)
10.6 Form of Queens County Bancorp, Inc. 1993 Incentive Stock Option
Plan (2)
10.7 Form of Queens County Bancorp, Inc. 1993 Incentive Stock Option
Plan for Outside Directors (2)
10.8 Form of Queens County Savings Bank Employee Severance
Compensation Plan (1)
10.9 Form of Queens County Savings Bank Outside Directors'
Consultation and Retirement Plan (1)
10.10 Form of Queens County Bancorp, Inc. Employee Stock Ownership
Plan and Trust (1)
10.11 ESOP Loan Documents (1)
10.12 Incentive Savings Plan of Queens County Savings Bank (3)
10.13 Retirement Plan of Queens County Savings Bank (1)
10.14 Supplemental Benefits Plan of Queens County Savings Bank (4)
10.15 Excess Retirement Benefits Plan of Queens County Savings Bank
(1)
10.16 Queens County Savings Bank Deferred Compensation Plan for Fees
of Directors (4)
11.0 Statement Re: Computation of Per Share Earnings
13.0 1996 Annual Report to Shareholders
21.0 Subsidiaries information incorporated herein by reference to Part
I Subsidiaries
23.0 Consent of KPMG Peat Marwick, LLP, dated March 18, 1997
99.0 Proxy Statement for the Annual Meeting of Shareholders to be held
on April 16, 1997 (4)
(1) Incorporated by reference to Exhibits filed with the Registration Statement
on Form S-1, Registration No. 33-66852
(2) Incorporated herein by reference into this document from the Exhibits to
Form S-8, Registration Statement, filed on October 27, 1994, Registration
No. 33-85684.
(3) Incorporated herein by reference into this document from the Exhibits to
Form S-8, Registration Statement, filed on October 27, 1994, Registration
No. 33-85682.
(4) Incorporated by reference to Exhibits filed with the 1997 Proxy Statement
for the Annual Meeting of Shareholders to be held April 16, 1997.
<PAGE> 1
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended
December 31,
------------
(in thousands, except per share amount)
1996(1) 1995
---- ----
Net income $20,939 $20,183
------- -------
Weighted average common shares
outstanding 6,879 7,403
Common stock equivalents due to
dilutive effect of stock options 517 428
------- -------
Total weighted average common shares
and equivalents outstanding 7,396 7,831
------- -------
Earnings per common and common share
equivalents $2.83 $2.58
===== =====
Total weighted average common shares
and equivalents outstanding 7,396 7,831
Additional dilutive shares using ending
period market value versus average market
value for the period when utilizing
the Treasury stock method regarding stock
options 59 64
------- -------
Total shares for fully diluted earnings
per share 7,455 7,895
------- -------
Fully diluted earnings per common and
common share equivalents $2.81 $2.56
===== =====
(1) Reflects shares issued as a result of a four-for-three stock split on August
22, 1996.
27
<PAGE> 1
EXHIBIT 13
Financial Highlights
<TABLE>
<CAPTION>
====================================================================================================================================
(dollars in thousands, except share data) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31
Net interest income $ 57,520 $ 51,908 $ 54,615 $ 46,391 $ 38,835
(Reversal of) provision for loan losses (2,000) 150 1,200 4,700 3,158
Other operating income 2,445 3,033 1,971 1,884 2,038
Operating expense 23,271 22,871 23,047 21,417 18,014
Income tax expense 17,755 11,737 13,589 10,035 8,294
Net income 20,939 20,183 18,750 12,123 10,451
Net income (adjusted) (1) 22,739 N.A. N.A. N.A. N.A.
Net income per share (2) (3) $2.83 $2.58 $2.27 $0.17(4) N.A.
Net income per share (adjusted) (1) $3.07 N.A. N.A. N.A. N.A.
Dividends paid (3) 0.84 0.23 0.08 N.A. N.A.
AT DECEMBER 31
Total assets $ 1,358,656 $ 1,240,882 $ 1,166,024 $ 1,089,686 $ 951,374
Loans, net 1,146,152 994,803 937,550 781,023 688,067
Allowance for loan losses 9,359 11,359 11,268 10,320 6,062
Mortgage-backed securities held to maturity 73,732 92,868 107,451 129,230 105,127
Securities held to maturity 86,495 78,016 79,017 94,330 104,059
Deposits 1,023,930 932,140 840,220 827,240 824,349
FHLB borrowings 81,393 46,077 83,304 -- --
Stockholders' equity 211,429 217,630 205,279 192,831 92,371
Common shares outstanding (2) (3) 7,630,103 8,392,400 8,789,919 9,177,000 N.A.
Book value per share (2) (3) (5) $31.81 $29.93 $27.14 $24.30 N.A.
SELECTED FINANCIAL RATIOS
Return on average assets 1.63% 1.72% 1.71% 1.24% 1.12%
Return on average assets (adjusted) (1) 1.77 N.A. N.A. N.A. N.A.
Return on average stockholders' equity 10.10 9.70 9.40 11.25 11.99
Return on average stockholders' equity (adjusted) (1) 10.97 N.A. N.A. N.A. N.A.
Stockholders' equity to total assets 15.56 17.54 17.61 17.70 9.71
Interest rate spread 3.88 3.80 4.49 4.49 3.82
Net interest margin 4.63 4.58 5.13 4.92 4.27
Operating expense to average assets 1.82 1.95 2.10 2.19 1.93
Efficiency ratio 38.81 41.63 40.73 44.36 44.07
Average interest-earning assets to average interest-bearing
liabilities 1.21x 1.22x 1.24x 1.14x 1.11x
ACTUAL CONTRIBUTIONS TO STOCKHOLDERS'
EQUITY AND RESULTANT CASH EARNINGS DATA (1)
Earnings $29,258 $23,640 $21,990 $13,261 $10,451
Earnings per share $3.96 $3.02 $2.65 $0.29 N.A.
Return on average assets 2.28% 2.02% 2.00% 1.36% 1.12%
Return on average stockholders' equity 14.11 11.36 11.03 12.31 11.99
Efficiency ratio 28.83 35.43 35.00 42.01 44.07
ASSET QUALITY RATIOS
Non-performing loans to loans, net 0.84% 0.78% 0.76% 1.51% 2.84%
Non-performing assets to total assets 0.76 0.69 0.69 1.16 2.23
Allowance for loan losses to non-performing loans 96.90 145.76 158.46 87.79 30.98
Allowance for loan losses to loans, net 0.82 1.14 1.20 1.32 0.88
Allowance for loan losses to net accumulated
charge-offs for the past 10 years 625.00 759.00 783.04 869.42 813.69
REGULATORY CAPITAL RATIOS (BANK ONLY) (6)
Leverage capital ratio 9.65% 11.95% 10.66% 14.42% 9.90%
Tier 1 risk-based capital ratio 16.19 21.95 22.74 29.03 16.17
Total risk-based capital ratio 17.38 23.20 23.99 30.28 17.23
====================================================================================================================================
</TABLE>
(1) Absent a non-recurring tax charge of $1.8 million which is expected to be
reversed.
(2) The Bank converted to stock form on November 23, 1993; prior periods are
not applicable.
(3) Reflects shares issued as a result of a three-for-two stock split on
September 30, 1994, a four-for-three stock split on August 22, 1996, and
shares repurchased since October 1994.
(4) Represents net income per common share for the period from the conversion
on November 23, 1993 to December 31, 1993, as adjusted for a three-for-two
stock split on September 30, 1994 and a four-for-three stock split on
August 22, 1996.
(5) Excludes unallocated ESOP shares.
(6) Capital ratios for 1996 and 1994 reflect the transfer of $38.0 million and
$34.0 million, respectively, from the Bank to the Company.
1
<PAGE> 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Queens County Bancorp, Inc. (the "Company") was incorporated on July 20, 1993 to
serve as the holding company for Queens County Savings Bank (the "Bank").
FDIC-insured through the Bank Insurance Fund, the Bank was the first savings
bank to be chartered by the State of New York in Queens County, with a history
of service dating back to April 14, 1859.
Headquartered in the heart of Flushing, New York--the largest community in
Queens County--the Bank gathers deposits through a steadily growing branch
network, and invests these funds in the origination of residential mortgage
loans. While the Bank maintains a single branch in adjoining Nassau County, its
presence in Queens has grown to eleven locations, with the addition of three new
facilities in the past twelve months. The marketplace for the Bank's mortgage
loans extends beyond Queens into Brooklyn and Manhattan, two neighboring
boroughs of the City of New York.
On November 23, 1996, the Company marked its third year as a stock-form
institution. In the three years since public trading began on the Nasdaq
National Market, the Company has taken several actions to enhance the value of
its shares. Dividend payments were introduced in 1994's third quarter and have
since increased from $0.0375 to $0.25 per share. On August 22, 1996, the
Company's stock was split for the second time since its conversion to stock form
and a 33-1/3% stock dividend issued to shareholders at that date. The Company
has also maintained a proactive stock repurchase program, with the repurchase of
1,546,601 shares, net of exercised options, between October 1994 and year-end
1996. On January 22, 1997, the Board of Directors announced its single largest
share repurchase authorization: one million shares, or 13.1% of the 7,630,103
shares outstanding at December 31st. Shares will be repurchased in open market
or negotiated transactions, based on market conditions and the implementation of
other corporate strategies.
Besides the active management of its capital resources, the Company has
enhanced its value with solid financial results. Reflecting both its financial
strength and the effectiveness of its value enhancements, the closing price of a
share of Company stock rose to $47.375 at the end of December, reflecting
appreciation of 59.7% since year-end 1995.
The Company's 1996 financial results are discussed in detail in the pages
that follow, and are occasionally accompanied by forward-looking statements with
regard to the Company's prospective goals and strategies. Such forward-looking
statements are based on management's current expectations regarding a range of
issues that may impact the Company's performance in future periods. Factors that
could cause future results to vary from current expectations include, but are
not limited to, general economic conditions; changes in interest rates, deposit
flows, loan demand, real estate values, and competition; changes in accounting
principles, policies, or guidelines; changes in legislation and regulation; and
various other economic, competitive, governmental, regulatory, and technological
issues affecting the Company's operations, pricing, products, and services.
Financial Condition
Balance Sheet Summary
The Company recorded total assets of $1.4 billion at December 31, 1996, up
$117.8 million, or 9.5%, from the level recorded at December 31, 1995. Asset
growth was driven by a $151.1 million, or 15.2%, rise in outstanding mortgage
loans to $1.1 billion, reflecting $303.2 million in originations over the
twelve-month period. The volume of mortgage loan originations in 1996 was more
than double the year-earlier volume of $145.8 million, and included $273.4
million in new multi-family mortgage loans. As a result, the multi-family
mortgage loan portfolio grew to $822.4 million, representing a year-to-year
increase of $180.8 million, or 28.2%.
While strengthening its market niche in multi-family mortgage lending, the
Company also maintains a portfolio of other mortgage loans. At December 31,
1996, one-to-four family mortgage loans totaled $256.9 million (down $31.6
million from the year-earlier level), while commercial and construction loans
rose modestly to $63.5 million and $1.6 million, respectively, at that date.
Reflecting management's focus on interest rate sensitive assets, 91.5% of the
mortgage loan portfolio at year-end featured adjustable rates.
Non-performing assets totaled $10.3 million, or 0.76% of total assets, as
a $147,000 reduction in foreclosed real estate to $627,000 softened the impact
of a $1.9 million increase in non-performing mortgage loans to $9.7 million.
Despite the increase, the Company's asset quality remained comfortably solid; no
charge-offs were recorded over the year's four quarters, and multi-family
mortgage loans continued to perform exceptionally well. On the basis of its
historic results, and the current status of its credits, the Company reversed
$2.0 million from the allowance for loan losses in the second quarter of 1996.
At $9.4 million, the loan loss allowance represented 625.0% of net accumulated
charge-offs for the ten years ended December 31, 1996 and 96.90% of
non-performing loans at that date.
Also included in total assets at year-end were $12.3 million in other
loans (down $1.6 million from the year-earlier level); securities held to
maturity ("securities") of $86.5 million (up $8.5 million); mortgage-backed
securities held to maturity ("mortgage-backed securities") of $73.7 million
(down $19.1 million); and Federal funds sold of $7.0 million (down $6.7
million). The declines in other loans, mortgage-backed securities, and Federal
funds sold reflect management's ongoing practice of deploying most of its funds
into higher yielding multi-family mortgage loans.
9
<PAGE> 3
The Company's loan growth was funded by a substantial rise in deposits and
the increased utilization of Federal Home Loan Bank of New York ("FHLB")
borrowings. At year-end 1996, total deposits rose $91.8 million, or 9.8%, to
$1.0 billion, fueled by a $105.9 million rise in certificates of deposit ("CDs")
to $651.7 million. FHLB borrowings, meanwhile, totaled $81.4 million, signifying
an increase of $35.3 million from the year-earlier amount. To enhance its access
to funding in times of increased loan production, the Company boosted its FHLB
line of credit to $323.3 million in 1996.
Stockholders' equity totaled $211.4 million, or 15.56% of total assets, as
compared to $217.6 million, or 17.54%, at year-end 1995. The reduction reflects
the allocation of $28.8 million toward the repurchase of 844,360 shares under
the Company's Stock Repurchase Program, which was partly offset by a $13.9
million increase in retained earnings and the addition of $6.5 million relating
to the amortization and appreciation of allocated shares in the Company's
stock-related benefit plans. Reflecting the share repurchases, book value rose
to $31.81 per share at year-end 1996 from $29.93 at year end 1995.
In the fourth quarter of 1996, the Bank transferred $38.0 million in
excess capital to the Company to facilitate the implementation of various
value-enhancing strategies. The transfer is reflected in the Bank's year-end
regulatory capital levels, which continued to qualify the Bank for
categorization as a well classified institution under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA").
Loans
The Company's asset and earnings growth have been mutually fostered by the
steady evolution of the Bank's mortgage loan portfolio. At year-end 1996, the
balance of outstanding mortgage loans grew $151.1 million to $1.1 billion,
representing a 15.2% increase from the $993.2 million recorded at year-end 1995.
The increase was driven by originations of $303.2 million, more than double the
$145.8 million originated in the prior year.
The origination of mortgage loans is the Bank's primary business, and the
interest income such loans provide, its primary earnings source. As proof of
point, mortgage loans represented 84.2% of total assets at the end of December,
and generated better than 89% of interest income during 1996.
The majority of the Bank's loans are secured by multi-family buildings
which are located in a market that extends beyond Queens and Nassau into two
neighboring boroughs of New York. At year-end 1996, 47.4% of its multi-family
mortgage loans were secured by properties in Queens County, while Manhattan and
Brooklyn were home to 20.8% and 17.2%, respectively.
In 1996, the Bank's established niche in the multi-family mortgage market
was significantly augmented with originations totaling $273.4 million. As a
result, the multi-family mortgage loan portfolio rose $180.8 million, or 28.2%,
to $822.4 million, representing 71.9% of mortgage loans outstanding at December
31st.
Management's increasing emphasis on multi-family mortgage loan origination
reflects both the stellar quality of these credits and the higher yields they
provide as compared to other loans. At year-end 1996, the portfolio of
multi-family mortgage loans was 100% performing. With regard to pricing, the
Bank's multi-family mortgage loans are primarily ten-year credits, with a rate
that adjusts annually to a point over prime in each of years six through ten. In
1996, the majority of the Bank's multi-family loan originations featured a fixed
rate for the first five years of the credit; the balance were originated at
rates that are due to step up in each of years two through five. The interest
rate on step-up loans may not fall below the rate charged in the third year of
the credit, and prepayment penalties range from five points to one over the
first five years of the loan.
By offering loans with higher fixed yields and loans that start low but
step upward, the Bank addresses the pricing demands of a competitive real estate
market while providing a steadily rising income stream for the coming year. At
December 31, 1996, 95.7% of its multi-family mortgage loans were adjustable rate
credits, including $425.8 million that are due to step up, regardless of the
direction of interest rates, over the next twelve months. Specifically, $148.1
million, $88.0 million, $75.8 million, and $113.9 million in multi-family
mortgage loans are scheduled to reprice upward over the four quarters of 1997.
While multi-family mortgage loans thus remain its primary focus, the Bank
also originates one-to-four family mortgage loans. At year-end 1996, one-to-four
family mortgage loans represented $256.9 million, or 22.5%, of mortgage loans
outstanding, as compared to $288.5 million, or 29.0%, at year-end 1995. The
decline in this portfolio reflects amortization and prepayments, tempered by
$11.2 million in 1996 originations.
The majority of the Bank's one-to-four family mortgage loans are
originated on a limited documentation basis, in keeping with the preference of
its customer base. Such borrowers' applications are approved on the basis of a
credit report, a thorough property appraisal, and, when furnished, verification
of financial assets. Limited documentation loans are made at higher rates of
interest than those providing full documentation and require a higher down
payment, thus reducing credit risk.
To minimize interest rate risk, one-to-four family mortgage loan
originations are made at rates that adjust at regularly scheduled intervals of
one, two, or three years. At year-end 1996, 81.5% of the portfolio was comprised
of adjustable rate credits; the balance represents seasoned loans that were made
in the 1970s. While the Bank occasionally originates fixed rate loans to address
the demands of its market, such loans have been sold into the secondary market
and the servicing rights retained as a source of fee income.
In addition to loans secured by multi-family properties and one-to-four
family homes, the Bank originates a modest number of commercial real estate and
construction loans. In 1996, the Bank recorded $17.4 million in commercial real
estate mortgage originations and $1.2 million in new construction loans. As a
result, the portfolios of commercial and construction loans rose to $63.5
million and $1.6 million, representing increases of $1.4 million and $393,000,
respectively, from the year-earlier amounts. In support of management's emphasis
on interest rate sensitive assets, all of the Bank's commercial and construction
loans feature adjustable rates.
10
<PAGE> 4
As a service to its customers, the Bank also offers a range of consumer
lending products, reflected on the balance sheet as "other loans." At year-end
1996, such loans amounted to $12.3 million, down $1.6 million from the year-end
1995 level after originations of $638,000. The majority of the Bank's other
loans consist of loans on individual cooperative apartment units and home equity
loans, totaling $5.8 million and $2.8 million, respectively.
In 1997, the Company's earnings will again be driven by mortgage loan
production, and particularly by the origination of multi-family mortgage loans.
While outstanding loan commitments at year-end 1996 totaled $32.4 million, it is
the Company's expectation that 1997 originations will outpace the 1996 level,
based upon capacity and existing loan demand. This said, it should be noted that
the actual volume of loans originated may be adversely impacted by a change in
market interest rates, an increase in competition, or a change in the level of
loan demand.
<TABLE>
<CAPTION>
=============================================================================================================
LOAN PORTFOLIO ANALYSIS
At December 31,
------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------
Percent Percent Percent
(dollars in thousands) Amount of Total Amount of Total Amount of Total
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
1-4 family $ 256,904 22.21% $ 288,470 28.64% $306,028 32.20%
Multi-family 822,364 71.10 641,564 63.70 561,589 59.09
Commercial real estate 63,452 5.49 62,003 6.16 66,609 7.01
Construction 1,598 0.14 1,205 0.12 2,490 0.26
- -------------------------------------------------------------------------------------------------------------
Total mortgage loans 1,144,318 98.94 993,242 98.62 936,716 98.56
- -------------------------------------------------------------------------------------------------------------
OTHER LOANS:
Cooperative apartment 5,764 0.50 6,684 0.66 7,238 0.76
Home equity 2,819 0.24 3,069 0.31 3,352 0.35
Passbook savings 375 0.03 470 0.05 691 0.07
Student 24 -- 116 0.01 241 0.03
Other 3,293 0.29 3,522 0.35 2,171 0.23
- -------------------------------------------------------------------------------------------------------------
Total other loans 12,275 1.06 13,861 1.38 13,693 1.44
- -------------------------------------------------------------------------------------------------------------
Total loans 1,156,593 100.00% 1,007,103 100.00% 950,409 100.00%
- -------------------------------------------------------------------------------------------------------------
Less: Unearned discounts 24 29 42
Net deferred loan
origination fees 1,058 912 1,549
Allowance for loan losses 9,359 11,359 11,268
- -------------------------------------------------------------------------------------------------------------
Loans, net $1,146,152 $ 994,803 $937,550
=============================================================================================================
</TABLE>
Mortgage-Backed Securities Held to Maturity
Underscoring management's policy of deploying the majority of the Company's
funds into mortgage loan originations, the balance of mortgage-backed securities
declined to $73.7 million at December 31, 1996 from $92.9 million at year-end
1995. The reduction in the portfolio reflects both scheduled repayments and the
absence of any new investments in such securities since the first quarter of
1994.
Comprised of securities that are directly or indirectly insured or
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC") or the
Government National Mortgage Association ("GNMA"), the Company's portfolio of
mortgage-backed securities had an average maturity of 2.1 years at year-end
1996, as compared to 2.8 years at the prior year-end. In accordance with the
Company's long-standing policy, all of its mortgage-backed securities are held
to maturity.
At December 31, 1996, the market value of the Company's mortgage-backed
securities equaled $74.2 million, or 100.6% of carrying value, as compared to
$93.5 million, or 100.7%, at December 31, 1995.
Securities Held to Maturity and Federal Funds Sold
The Company's asset mix is enhanced by a portfolio of short-term securities and
Federal funds sold, designed to maintain liquidity and minimize exposure to
interest rate risk. As a matter of policy, all of the Company's securities are
classified as "held to maturity;" maturity averaged seven months at year-end
1996.
At December 31, 1996, securities rose to $86.5 million from $78.0 million
at December 31, 1995. Included in the 1996 amount were $67.1 million in U.S.
Treasury securities (as compared to $68.1 million, the prior-year level) and
$9.0 million in Federal National Mortgage Association ("FNMA") securities. In
addition, the Company's securities portfolio held $10.4 million in FHLB stock
and $2,000 in FNMA stock. At year-end 1996, the market value of the Company's
securities
11
<PAGE> 5
equaled $86.5 million, or 100.0% of carrying value, as compared to $78.2
million, or 100.2% of carrying value, at year-end 1995.
Federal funds sold totaled $7.0 million, representing a $6.7 million
decline from the $13.7 million recorded at the prior year-end.
Sources of Funds
In 1996, funding stemmed primarily from a growing base of deposits, reflecting
the expansion of the Bank's branch network and its enhancement through the
addition of in-store customer service centers and automated teller machines
("ATMs").
At December 31, 1996, total deposits rose to $1.0 billion from the
year-earlier $932.1 million, representing an increase of $91.8 million or 9.8%.
The increase was substantially fueled by a $105.9 million rise in CDs to $651.7
million, representing 63.6% of total deposits and a 19.4% increase from year-end
1995. The growth in CDs reflects a variety of factors, including the stability
of market interest rates over the twelve-month period (which encouraged
long-term depositors to transfer funds from low-cost savings accounts into
higher cost savings products) and the infusion of funds from new customers
attracted by added convenience and an extensive media campaign.
In 1996, the Bank opened a full-service branch in College Point, northwest
of Flushing, at a site that had been vacated by a money center bank. In addition
to this traditional branch, which was quickly accretive to earnings, the Bank
opened two in-store customer service centers within its local marketplace. Each
of these sites is located inside a 24-hour Genovese drug store, offering the
convenience of ATM transactions and the ability to conduct more complex
transactions with the help of customer service personnel.
Another benefit of the Bank's expansion has been a rise in
non-interest-bearing deposits. By opening branch offices at sites vacated by
commercial banking institutions, the Bank has been able to attract such deposits
from local retailers and others who otherwise might not have thought to maintain
their checking accounts with a savings bank. Non-interest-bearing deposits thus
rose to $25.0 million at the end of this December, representing an increase of
$2.2 million, or 9.7%, from the prior year-end.
The increases in CDs and non-interest-bearing deposits far exceeded
reductions in the year-end balances of savings accounts and NOW and money market
accounts. At December 31, 1996, savings accounts totaled $277.8 million,
representing a $9.8 million, or 3.4%, decline from the year-earlier level, and
27.1% of deposits overall. NOW and money market accounts, meanwhile, totaled
$69.4 million, down $6.6 million, or 8.6%, from the level at year-end 1995.
To enhance its access to funding in times of heightened loan production,
the Bank increased its FHLB line of credit to $323.3 million from $197.8 million
at year-end 1995. FHLB borrowings rose to $81.4 million from the year-earlier
$46.1 million, corresponding to the significant increase in mortgage loan
activity.
To promote a further infusion of funds, the Bank plans more enhancements
to the franchise over the next twelve months. Besides installing ATMs at its
main branch in Flushing, the Bank is exploring alternative means of facilitating
transactions, including 24-hour banking by phone and via PC. Also being
considered is the introduction of alternative investment products, the
availability of which would promote income from customer service fees.
Management also continues to actively assess opportunities for expansion through
the acquisition of other banks or branch offices.
Interest Rate Sensitivity
Given the extent to which changes in market interest rates may influence net
interest income, one of management's primary objectives is to manage the
Company's interest rate risk by matching the interest rate sensitivity of its
assets and liabilities. Interest rate sensitivity is determined by analyzing the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within that same period of time. This difference, or
"gap," provides an indication of the extent to which the Company's net interest
income may be affected by future changes in market interest rates.
A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities; it is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets.
In order to enhance the match between the maturities and repricing dates
of its interest-earning assets with the maturities and repricing dates of its
interest-bearing liabilities, management has emphasized the origination of
adjustable rate multi-family and one-to-four family mortgage loans, and has
confined its other investments to short-term securities with an average maturity
of under one year. On the liability side, management has closely monitored the
pricing of its depository products and limited its use of borrowings except when
market conditions have been particularly conducive to loan production, as they
were in 1996.
While the majority of multi-family mortgage loans originated in 1996
featured a fixed rate in the first five years of the credit, more than half of
the portfolio as a whole features rates that are scheduled to reprice upward in
1997, regardless of the direction of interest rates. Thus, despite the increased
use of borrowings and the continuing popularity of higher cost deposits, the
cumulative gap between the Bank's interest rate sensitive assets and its
interest rate sensitive liabilities repricing within a one-year period was a
positive 7.82% at December 31, 1996.
The accompanying table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at year-end 1996 which, based on
certain assumptions, are expected to reprice or mature in each of the time
periods shown. Except as stated, the amount of assets and liabilities shown to
reprice or mature within a particular time period was determined in accordance
with the earlier of (a) the term to repricing or (b) the contractual terms of
the asset or liability.
The Company's interest rate sensitivity analysis, which utilizes the
format and assumptions for disclosure
12
<PAGE> 6
for an interest rate sensitivity gap table required by the FDIC and the New York
State Banking Department, is based on its historical experience during the six
years ending December 31, 1996, and reflects the following decay rates: 11.95%
for savings accounts; 14.45% for money market accounts; and 24.50% for NOW
accounts. No decay rate has been applied for CD accounts. In addition,
management has assumed no prepayments of the Bank's loans. Prepayments and
scheduled principal amortization on mortgage loans totaled $151.4 million in the
twelve months ended December 31, 1996.
As the analysis does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest income, certain assets and
liabilities indicated as repricing within a stated period may, in fact, reprice
at different times and rate levels.
<TABLE>
<CAPTION>
====================================================================================================================================
INTEREST RATE SENSITIVITY ANALYSIS
At December 31, 1996
--------------------------------------------------------------------------------------------
Three Four to More Than More Than More Than More
Months Twelve One Year to Three Years Five Years Than
(dollars in thousands) or Less Months Three Years to Five Years to 10 Years 10 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage and other loans $ 196,515 $472,022 $ 67,803 $362,741 $ 13,354 $ 44,158 $1,156,593
Securities 35,409 46,003 5,083 -- -- -- 86,495
Mortgage-backed securities(1) 3,848 30,721 39,163 -- -- -- 73,732
Federal funds sold 7,000 -- -- -- -- -- 7,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 242,772 548,746 112,049 362,741 13,354 44,158 1,323,820
- ------------------------------------------------------------------------------------------------------------------------------------
Less: Unearned discounts and
deferred fees 448 569 65 -- -- -- 1,082
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets 242,324 548,177 111,984 362,741 13,354 44,158 1,322,738
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 8,299 24,153 29,317 25,814 22,729 167,472 277,784
NOW and Super NOW accounts 1,116 3,142 3,420 2,582 1,949 6,007 18,216
Money market accounts 1,851 7,135 6,104 5,222 4,467 26,448 51,227
Certificates of deposit 221,206 335,935 74,198 11,299 9,023 44 651,705
FHLB borrowings 46,393 35,000 -- -- -- -- 81,393
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 278,865 405,365 113,039 44,917 38,168 199,971 1,080,325
- ------------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap per period $ (36,541) $142,812 $ (1,055) $317,824 $ (24,814) $(155,813) $ 242,413
====================================================================================================================================
Cumulative interest sensitivity gap $ (36,541) $106,271 $ 105,216 $423,040 $ 398,226 $ 242,413
====================================================================================================================================
Cumulative interest sensitivity gap
as a percentage of total assets (2.69)% 7.82% 7.74% 31.14% 29.31% 17.84%
Cumulative net interest-earning
assets as a percentage of net
interest-bearing liabilities 86.90 115.53 113.20 150.23 145.23 122.44
====================================================================================================================================
</TABLE>
(1) Based upon historical repayment experience.
Asset Quality
The Company's reputation as a quality institution stems, in part, from the
caliber of its loan portfolio. In 1996, that reputation was maintained with the
absence of any charge-offs (extending a record that began in 1995's third
quarter) and the stellar performance of the Company's multi-family mortgage
loans despite three years of dramatic growth.
With the exception of two commercial real estate loans, the Company's
non-performing loans were secured by one-to-four family homes, primarily located
within the borough of Queens. Non-performing loans totaled $9.7 million, or
0.84% of loans, net, at the end of December, as compared to $8.5 million, or
0.77%, at the close of the trailing quarter and $7.8 million, or 0.78%, at
year-end 1995. Included in the current year-end amount were 42 non-accrual loans
totaling $6.9 million and 49 loans delinquent 90 days or more of $2.8 million.
The increase in non-performing loans was tempered by a decline in
foreclosed real estate to $627,000, from $972,000 and $774,000, respectively, at
September 30, 1996 and December 31, 1995. Included in the year-end 1996 amount
were four residential properties, all of which are being actively marketed for
sale by the Bank.
At year-end 1996, non-performing assets thus totaled $10.3 million,
representing 0.76% of total assets at that date. By comparison, non-performing
assets equaled $9.5 million, or 0.72% of total assets, at the close of the
trailing quarter and $8.6 million, or 0.69% of total assets, at the previous
year-end.
13
<PAGE> 7
The Company also recorded $909,000 in real estate held for investment
(reflected in "other assets"), consisting of nine residential properties at
year-end 1996. Each of these properties has been profitably rented, generating
an average rate of return of 8.00% to the Bank.
While the dollar amounts and ratios reflect an increase in non-performers,
the Company's actual loss experience underscores the portfolio's basic strength.
In the six months preceding the eighteen-month run without a single charge-off,
the Company recorded charge-offs of only $59,000, net. In the ten years ending
December 31, 1996, net charge-offs totaled $1.4 million, representing an average
of $140,000 per year.
The Company's consistent ability to sustain such a record stems from the
conservative underwriting standards it maintains. The decision to approve a loan
is based on several factors that extend beyond the quality of the borrower's
credit report. In the case of multi-family mortgage loans, management looks at
the appraised value of the property that collateralizes the credit, as well as
the property's ability to provide a consistent income stream. The condition of
the property is yet another key component; each multi-family building is
inspected from rooftop to basement by a member of the Board of Director's Real
Estate and Mortgage Committee, together with a member of the senior management
team. In the case of limited documentation loans on one-to-four family homes,
approval depends on a thorough property appraisal and the verification of
financial assets, when available.
Credit risk is also addressed by placing limitations on the amount of
credit granted to a borrower. While the Bank will lend up to 75% of appraised
value on multi-family properties and one-to-four family homes, the more typical
loan-to-value ratio is 50% to 60%. Exposure to risk is further reduced by making
loans within its local market, primarily through brokers with whom the Bank has
an established rapport.
The careful attention given a loan throughout the approval process is
replicated in the attention given once a loan has closed. While problem loans
have been minimal, the Bank has set procedures to ensure that problems, when
they occur, are quickly identified and addressed. In the case of multi-family
mortgage loans, personal contact is made with the borrower within 20 days of
non-payment; in the case of one-to-four family mortgage loans, contact is made
within 30 days.
Regardless of the efforts made to originate quality credits, there are no
guarantees that the portfolio's current performance can be indefinitely
sustained. Changes in the economy and local real estate values, as well as
personal circumstances, can impact a borrower's ability to pay. To further
minimize credit risk, the Company has established an allowance for loan losses
that represented 96.90% of non-performing loans at year-end 1996. For further
details regarding the extensive coverage provided, see the asset quality
analysis that follows and the discussion of the loan loss provision that begins
on page 20.
<TABLE>
<CAPTION>
=============================================================================================================
ASSET QUALITY ANALYSIS
At or For the Year Ended December 31,
--------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $ 11,359 $ 11,268 $ 10,320 $ 6,062 $ 3,362
Loan charge-offs -- (59) (438) (442) (458)
Loan recoveries -- -- 186 -- --
- -------------------------------------------------------------------------------------------------------------
Net charge-offs -- (59) (252) (442) (458)
(Reversal of) provision for loan losses (2,000) 150 1,200 4,700 3,158
- -------------------------------------------------------------------------------------------------------------
Balance at end of year $ 9,359 $ 11,359 $ 11,268 $ 10,320 $ 6,062
=============================================================================================================
NON-PERFORMING ASSETS AT YEAR-END:
Non-accrual mortgage loans $ 6,861 $ 4,929 $ 5,437 $ 7,417 $ 8,653
Loans 90 days or more delinquent and
still accruing interest 2,798 2,864 1,674 2,329 8,106
Commercial real estate loans pending foreclosure -- -- -- 2,009 2,806
- -------------------------------------------------------------------------------------------------------------
Total non-performing loans 9,659 7,793 7,111 11,755 19,565
- -------------------------------------------------------------------------------------------------------------
Foreclosed real estate 627 774 975 884 1,647
- -------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 10,286 $ 8,567 $ 8,086 $ 12,639 $ 21,212
=============================================================================================================
RATIOS:
Non-performing loans to loans, net 0.84% 0.78% 0.76% 1.51% 2.84%
Non-performing assets to total assets 0.76 0.69 0.69 1.16 2.23
Allowance for loan losses to non-performing loans 96.90 145.76 158.46 87.79 30.98
Allowance for loan losses to loans, net 0.82 1.14 1.20 1.32 0.88
Allowance for loan losses to net accumulated
charge-offs for the past 10 years 625.00 759.00 783.04 869.42 813.69
=============================================================================================================
</TABLE>
14
<PAGE> 8
Liquidity and Capital Position
Liquidity
To ensure that its liquid resources are sufficient to fund its operations and
obligations, and while fulfilling the minimum requirements of the Federal
Reserve Board, the Company maintains a portfolio of highly liquid money market
investments in the form of Federal funds sold and short-term securities in the
form of U.S. Treasury and FNMA securities.
Federal funds sold, together with cash and due from banks, are the
Company's most liquid assets, and collectively totaled $21.0 million at December
31, 1996. The combined balance exceeded the minimum Federal liquidity
requirements, despite a decline from $39.0 million at year-end 1995. In
addition, U.S. Treasury and FNMA securities totaled $76.1 million; at year-end
1995, by comparison, the Company had $68.1 million in U.S. Treasuries.
The level of liquid assets is a function of the Bank's operating,
financing, and investing activities, and may also be impacted by such external
factors as general economic conditions, the current interest rate environment,
competition for loans and deposits, and mortgage loan demand.
In the years ending December 31, 1996 and 1995, the net cash provided by
operating activities totaled $28.8 million and $29.9 million, respectively.
Included in the 1996 amount was a $1.1 million decrease in official checks
outstanding (versus a year-earlier increase of $10.6 million) and a $3.0 million
decrease in other assets (versus a $6.2 million increase).
The net cash used in investing activities rose to $140.8 million in 1996
from $43.5 million in 1995. The $97.3 million difference stemmed from a $150.6
million net increase in loans outstanding (as compared to a net increase of
$60.5 million in the year-earlier period) and from a $38.5 million increase in
the amount of funds invested in the purchase of securities to $96.0 million from
$57.5 million.
The net cash provided by financing activities, meanwhile, rose to $94.1
million from $40.6 million in 1995. The $53.5 million increase primarily
reflects a $35.3 million net increase in FHLB borrowings (versus a net decrease
of $37.2 million in the year-earlier period) and the allocation of $25.6
million, substantially for the repurchase of Company stock (as compared to $9.4
million in the prior year).
In the twelve months ended December 31, 1996, funding for the Company's
investments stemmed primarily from deposits and, secondarily, from advances
against its $323.3 million line of credit with the FHLB. Funds were also
available through two additional lines of credit, including an $8.8 million line
with the Federal Reserve Bank of New York and a $10.0 million line with a money
center bank. Still additional funding was derived from loan principal and
interest payments and proceeds from maturing U.S. Treasury securities and
mortgage-backed securities totaling $257.5 million. In 1997, the total amount of
funds from these additional sources is expected to equal approximately $450.0
million.
The funding provided to the Bank by its base of deposits partly reflects
its success in retaining maturing CDs. In 1996, 88.3% of maturing CDs were, in
fact, rolled over, consistent with the Bank's recent history. It is management's
expectation that a comparable percentage of the $557.1 million in CDs scheduled
to mature in 1997 will once again be retained by the Bank. Thus, the Company's
cash flows and funding sources are believed to be more than sufficient to
support its continued asset growth.
Capital Position
The Company's capacity to grow its assets and earnings stems, in part, from the
significance of its capital strength. At December 31, 1996, stockholders' equity
totaled $211.4 million, representing 15.56% of total assets and a book value of
$31.81 per share. By comparison, stockholders' equity at December 31, 1995
totaled $217.6 million, or 17.54% of total assets, equivalent to a book value of
$29.93. The 1996 and 1995 book value calculations are based on 6,645,716 shares
and 7,271,561 shares, respectively, reflecting the exclusion of 984,387 and
1,120,839 in unallocated ESOP shares from 7,630,103 and 8,392,400 shares
outstanding at year-end 1996 and 1995.
To enhance the value of its shares, the Company has productively managed
its capital resources by authorizing a series of stock repurchases since October
1994. In 1996, the Company allocated $28.8 million for the repurchase of 844,360
shares on the open market or in negotiated transactions, contributing to the
decrease in stockholders' equity at year-end 1996. The impact of this allocation
was partially offset by a $13.9 million increase in retained earnings to $154.9
million (based on net income of $20.9 million less $7.0 million in dividends
paid and options exercised), and by the addition of $6.5 million stemming from
the amortization and appreciation of allocated shares in the Company's Employee
Stock Ownership Plan ("ESOP") and Recognition and Retention Plans ("RRPs"). The
$6.5 million add-back to capital, which contributed $0.98 to 1996 book value, is
more fully explained in the operating expense discussion which begins on page 21
of this report.
To further support the Company's goal of enhancing shareholder value, the
Bank transferred $38.0 million of its excess capital to the Company in the
fourth quarter of 1996. While the transfer resulted in a reduction in year-end
1996 regulatory capital levels, the Bank's capital strength is such that it
continued to qualify for classification as a well capitalized institution and to
significantly exceed the minimum Federal capital requirements.
As defined under FDICIA, a well capitalized institution has a ratio of
leverage capital to adjusted total assets of 5.00% or more; a ratio of Tier 1
risk-based capital to risk-weighted assets of 6.00% or more; and a ratio of
total risk-based capital to risk-weighted assets of 10.00% or more. The minimum
Federal requirements for leverage, Tier 1 risk-based, and total risk-based
capital are 3.00%, 4.00%, and 8.00%, respectively.
At December 31, 1996, the Bank's leverage capital totaled $127.7 million,
or 9.65% of adjusted average assets, while its Tier 1 and total risk-based
capital equaled $127.7 million and $137.0 million, or 16.19% and 17.38% of
risk-weighted assets, respectively. At December 31, 1995, the Bank's leverage
capital amounted to $141.5 million, or 11.95% of adjusted average assets, while
its Tier 1 and total
15
<PAGE> 9
risk-based capital equaled $141.5 million and $149.5 million, representing
21.95% and 23.20% of risk-weighted assets, respectively.
Results of Operations
Earnings Summary
1996 and 1995 Comparison:
In 1996, the Company recorded earnings of $20.9 million, or $2.83 per share,
including a non-recurring income tax charge of $1.8 million. Absent this charge,
which is expected to be reversed, the Company's adjusted 1996 earnings equaled
$22.7 million, or $3.07 per share, as compared to earnings of $20.2 million, or
$2.58 per share, in 1995. In addition to a 19.0% increase in earnings per share,
the comparison of 1996 adjusted earnings and 1995 reported earnings reflects a
5-basis point increase in ROA to 1.77% and a 127-basis point improvement in ROE
to 10.97%. On the basis of reported earnings, the Company's 1996 ROA and ROE
amounted to 1.63% and 10.10%.
Absent the non-recurring charge, the Company's 1996 adjusted earnings
reflect a significant rise in net interest income, driven by a dramatic increase
in mortgage loan production and the higher yields provided by a growing loan
portfolio. Net interest income rose to $57.5 million from the year-earlier $51.9
million, as the Company's interest rate spread and net interest margin widened
to 3.88% and 4.63%, respectively.
Earnings were further boosted by the year-long suspension of the provision
for loan losses and the reversal of $2.0 million from the loan loss allowance in
the second quarter of the year. Together, the $5.6 million rise in net interest
income and the $2.0 million reversal exceeded the impact of a $588,000 reduction
in other operating income, a $400,000 increase in operating expense, and a $6.0
million increase in income tax expense.
Specifically, other operating income declined to $2.4 million, reflecting
the Company's recognition of $1.3 million in interest earned on Federal income
tax recoveries in the prior year. The reduction in this line item was partly
offset by the recovery of $420,000 from the reserve for possible
Nationar-related losses and a $176,000 increase in customer service fees to $1.6
million in 1996.
Operating expense, meanwhile, totaled $23.3 million, as compared to $22.9
million in 1995. The modest increase reflects a $998,000 reduction in the FDIC
insurance premium and a $1.5 million decline in other operating expense, offset
by increases in the remaining components of operating expense. Primary among
these was a $2.5 million rise in compensation and benefits expense to $16.2
million, largely reflecting the normal amortization of expense connected with
the Company's RRP and ESOP, and the 59.7% price appreciation of allocated shares
held in such plans in 1996. The expense generated by this appreciation, together
with the normal amortization, equaled $5.4 million; when added to $1.1 million
in related tax benefits, these charges represented actual cash earnings of $6.5
million, equivalent to $0.89 in cash earnings per share for the year.
Reflecting the $1.8 million tax charge, income tax expense rose to $17.8
million in 1996 from $11.7 million in 1995. In addition to the non-recurring
charge, the increase includes $830,000 in expense stemming from the elimination
of the percentage-of-income tax bad-debt deduction for Federal income tax
purposes, and an increase in pre-tax income to $38.7 million from $31.9 million
in 1995.
1995 and 1994 Comparison:
In 1995, net income rose to $20.2 million from $18.8 million, the year-earlier
level, representing a 13.5% increase in earnings per share to $2.58 from $2.27.
These increases were accompanied by a rise in ROA to 1.72% from 1.71% in the
prior twelve-month period, and a rise in ROE to 9.70% from 9.40%.
The growth in 1995 earnings was achieved despite the impact of the
Nationar seizure, which resulted in the Company charging $1.3 million against
earnings in 1995 and sacrificing an estimated $384,000 in foregone income for
the year. The uncommon expense created by Nationar was offset by the recognition
of $1.3 million in Federal income tax recoveries in 1995's second quarter, which
boosted other operating income to $3.0 million from the $2.0 million recorded in
1994.
1995 earnings were also fueled by a $1.1 million decline in the provision
for loan losses, reflecting both the quality of the Company's assets and the
coverage provided by its loan loss allowance over the course of the year. With
additions to the provision at first reduced and, in later quarters, suspended,
the 1995 provision fell to $150,000 from $1.2 million in 1994.
Despite the rise in operating expense that stemmed from the
Nationar-related charges, total operating expense declined $176,000 to $22.9
million, or 1.95% of average assets, from $23.0 million, or 2.10% of average
assets, in 1994. The decrease in operating expense primarily stemmed from a
$946,000 reduction in the FDIC insurance premium, reflecting the FDIC's decision
to cut the premium rate to $0.04 per $100 of deposits, effective October 1,
1995.
These improvements were accompanied by a $1.9 million reduction in income
tax expense to $11.7 million, resulting from a decline in pre-tax income, tax
refunds not previously received or recognized, and the Company's maximal usage
of the tax bad-debt reserve benefit in accordance with then-current tax laws.
Net interest income continued to be the primary source of earnings,
totaling $51.9 million in 1995 and $54.6 million in 1994. While higher
short-term interest rates resulted in narrower spreads and margins during the
year's first three quarters, this negative trend was reversed in the fourth
quarter of the year.
Interest Income
The Company's interest income is generated by a steadily growing portfolio of
high-quality interest-earning assets, primarily comprised of multi-family
mortgage loans with scheduled rate adjustments, and, to a lesser extent, of
adjustable rate mortgage loans on one-to-four family homes. Additional interest
income stems from the
16
<PAGE> 10
Company's portfolios of commercial real estate and construction loans,
short-term securities and Federal funds sold, and mortgage-backed securities.
The level of interest income in any given period depends upon several
factors, including the composition and respective dollar amounts of the
Company's interest-earning assets, the yields on said assets, and the current
level of market interest rates.
1996 and 1995 Comparison:
In 1996, interest income rose $10.8 million, or 11.8%, to $102.3 million,
reflecting a $110.6 million, or 9.8%, rise in average interest-earning assets to
$1.2 billion, and a 15-basis point rise in the yield on these assets to 8.23%.
These increases were substantially buoyed by a 108.0% increase in mortgage loan
originations to $303.2 million and the higher yields provided by the Company's
loan portfolio.
Specifically, the average balance of mortgage and other loans rose $120.9
million to $1.1 billion (equivalent to 86.1% of average interest-earning
assets), while the yield on said assets grew 17 basis points to 8.60%. As a
result, the interest income provided by mortgage and other loans climbed to
$92.0 million, representing a $12.0 million, or 14.9%, increase from the 1995
level, and a significant 89.9% of total interest income for the year.
The substantial interest income provided by these interest-earning assets
was supplemented by the interest income generated by the Company's investments
in securities, Federal funds sold, and mortgage-backed securities.
Securities generated $4.3 million in interest income, down $508,000 from
the prior-year level, reflecting a $1.2 million reduction in the average balance
to $74.3 million and a 57-basis point drop in the average yield to 5.80%. At
$74.3 million, average securities represented 6.0% of average interest-earning
assets and generated 4.2% of total interest income in 1996.
Mortgage-backed securities furnished $5.3 million in 1996 interest income,
down from $6.3 million in the prior year. The 16.3% decrease stemmed from a
$16.4 million reduction in the average balance to $84.4 million, accompanied by
a one-basis point decline in the average yield to 6.22%. The average balance of
mortgage-backed securities represented 6.8% of 1996 average interest-earning
assets and contributed 5.1% of interest income for the year.
The balance of the Company's interest income was provided by Federal funds
sold, which averaged $13.9 million in 1996 and $6.6 million in 1995. The $7.3
million increase offset a 58-basis point drop in the average yield to 5.25% to
produce $727,000 in 1996 interest income, up $344,000 from the prior-year
amount.
1995 and 1994 Comparison:
In 1995, interest income rose 10.2% to $91.5 million, from $83.1 million in
1994. The $8.5 million increase was driven by a $68.9 million rise in average
interest-earning assets to $1.1 billion, and by a 27-basis point increase in the
yield on these assets to 8.08%.
In 1995, as in 1994, the interest income derived from mortgage and other
loans was the primary source of interest income, representing 87.5% and 85.5% of
the total, respectively, during the two years. The interest income derived from
loans totaled $80.1 million, representing a $9.1 million, or 12.7%, rise from
$71.0 million in 1994. This increase stemmed primarily from a $97.4 million, or
11.4%, jump in the average balance of mortgage and other loans to $949.6 million
and a 9-basis point rise in the yield on these assets to 8.43%. In 1995, average
mortgage and other loans represented 83.9% of average interest-earning assets,
up from 80.1% in the prior year.
Securities contributed $4.8 million to 1995 interest income, up $413,000,
or 9.4%, from $4.4 million in 1994. The increase reflects a 56-basis point rise
in the average yield to 6.37% from the year-earlier level, offsetting a $228,000
decline in the average balance to $75.6 million. Average securities represented
6.7% of average interest-earning assets, down from 7.1%, the year-earlier
percentage, and 5.3% of interest income, consistent with the prior year.
Mortgage-backed securities generated $6.3 million in interest income,
representing 6.9% of the 1995 total and a $658,000, or 9.5%, decrease from the
level recorded in 1994. The decline was the net result of a $16.3 million, or
13.9%, reduction in the average balance to $100.8 million, and a 31-basis point
increase in the yield to 6.23%. In 1995, mortgage-backed securities represented
8.9% of average interest-earning assets, down from 11.0% in the prior year.
Average Federal funds sold provided a modest level of interest income,
declining $319,000 to $383,000 in 1995. The reduction stemmed from a $12.0
million drop in the average balance to $6.6 million, which tempered a 205-basis
point increase in their yield to 5.83%.
Interest Expense
The Company's interest expense stems primarily from interest-bearing deposits,
substantially comprised of CDs and savings accounts, and, to a lesser extent,
from NOW and money market accounts. Additional interest expense stems from the
Company's FHLB borrowings, the level of which may vary depending upon loan
demand and production, and from mortgagors' escrow accounts.
The level of interest expense depends on a combination of factors,
including the composition, pricing, and the respective dollar amounts of the
Company's interest-bearing liabilities; competition for deposits; and market
interest rates. In pricing deposits, management strikes a balance between the
need to maintain and attract such sources of funding, and the desire to limit
the Company's exposure to interest rate risk.
17
<PAGE> 11
1996 and 1995 Comparison:
In 1996, the Company recorded interest expense of $44.8 million, as compared to
$39.6 million in 1995. The $5.2 million increase stemmed from a $103.7 million
rise in average interest-bearing liabilities to $1.0 billion, accompanied by a
7-basis point rise in the average cost to 4.35%. The interest rate environment
in 1996 was relatively stable, with only one adjustment made by the Federal
Reserve Board, early in the year. In January 1996, the Federal Reserve Board
reduced the Federal Funds rate 25 basis points to 5.25%--where it still remains
at this writing--a level that maintained the popularity of higher cost savings
products and the appeal of FHLB borrowings as a supplemental funding source.
CDs generated $32.5 million in interest expense in the twelve-month
period, up $4.9 million, or 17.8%, from the level recorded in 1995. The increase
reflects a $98.7 million, or 19.8%, rise in the average balance to $598.0
million, tempered by a 9-basis point drop in the average cost to 5.44%. In 1996,
average CDs represented 58.0% of average interest-bearing liabilities, and
generated 72.6% of the year's interest expense.
The increasing concentration of CDs in the mix of interest-bearing
deposits reflects the continuation of a trend that began when short-term rates
started rising in 1995. In addition to new deposits attracted through the Bank's
expanded franchise, the growth in CDs reflects the transfer of funds from its
long-term customers' savings accounts. In 1996, savings accounts contributed
$6.8 million in interest expense, down $564,000 from the prior-year level, as
the average balance fell $13.4 million to $282.1 million, accompanied by a
9-basis point drop in the average cost to 2.39%. The average balance of savings
accounts represented 27.4% of average interest-bearing liabilities in the
current twelve-month period and generated 15.1% of interest expense.
NOW and money market accounts provided $2.0 million in interest expense,
down $302,000 from the prior-year level, reflecting a $4.5 million drop in the
average balance to $73.6 million, and a 22-basis point decline in the average
cost to 2.77%. Average NOW and money market accounts represented 7.1% of average
interest-bearing liabilities and contributed 4.6% of total interest expense in
1996.
To supplement the funding provided by its growing base of deposits, the
Company accessed its line of credit with the FHLB throughout the year. In 1996,
FHLB borrowings averaged $61.2 million, representing a $25.2 million increase
from the year-earlier level and 5.9% of average interest-bearing liabilities.
While the higher average balance was somewhat offset by a 63-basis point
reduction in the average cost of these funds to 5.59%, the interest expense
derived from FHLB borrowings rose $1.2 million to $3.4 million, representing
7.6% of interest expense for the year.
In 1996, mortgagors' escrow generated interest expense of $39,000, down
from $115,000 in 1995. The decrease reflects a $2.3 million decline in the
average balance to $15.3 million, supported by a 0.40-basis point drop in the
average cost to 0.26%.
1995 and 1994 Comparison:
The Company recorded 1995 interest expense of $39.6 million, up $11.1 million
from $28.5 million in 1994. The 39.3% increase stemmed from a $69.4 million rise
in average interest-bearing liabilities to $926.4 million and a 96-basis point
increase in the cost of these funds to 4.28%.
These increases stemmed, in turn, from a $126.5 million rise in the
average balance of CDs to $499.3 million and a 124-basis point increase in their
average cost to 5.53%. As a result, the interest expense derived from CDs rose
$11.6 million, or 72.8%, to $27.6 million, representing 69.7% of total interest
expense in 1995, up from 56.2% in 1994. The average balance of CDs represented
53.9% of average interest-bearing liabilities in 1995, as compared to 43.5% in
the prior year.
The average balance of savings accounts diminished as the Bank's medium-
and long-term CDs gained in popularity. The interest expense produced by average
savings accounts declined $720,000 to $7.3 million, representing 18.5% of total
interest expense incurred in 1995, down from $8.0 million, or 28.3%, in 1994.
This decline was the net result of a $44.8 million, or 13.2%, decrease in
average savings accounts to $295.4 million and a 12-basis point increase in
their average cost to 2.48%.
NOW and money market accounts contributed $2.3 million to total interest
expense, down $225,000, or 9.8%, from $2.6 million in 1994. This decline was the
consequence of a $16.3 million, or 17.2%, drop in the average balance, which
offset a 24-basis point rise in the average cost to 2.99%. Average NOW and money
market accounts represented 8.4% of 1995 interest-bearing liabilities, down from
11.0% in the prior year. Similarly, the interest expense produced by NOW and
money market accounts declined to 5.9% of the 1995 total, as compared to 9.1% in
1994.
Average FHLB borrowings contributed $2.2 million to interest expense, or
5.6% of the total, having risen $499,000, or 28.7%, from $1.7 million in 1994.
The rise in interest expense derived from FHLB advances reflects a $2.3 million
increase in their average balance to $36.0 million and a 105-basis point
increase in their average cost to 6.22%. Average borrowings represented 3.9% of
average interest-bearing liabilities in both 1995 and 1994.
Mortgagors' escrow produced a modest $115,000 in interest expense, up a
nominal $14,000 from the level in 1994. The rise in interest expense provided by
mortgagors' escrow stemmed from a $1.7 million, or 10.4%, rise in the average
balance to $17.5 million and an increase of two basis points in the average cost
to 0.66%.
18
<PAGE> 12
<TABLE>
<CAPTION>
====================================================================================================================================
NET INTEREST INCOME ANALYSIS
For the Years Ended December 31,
----------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning Assets:
Mortgage and
other loans, net $1,070,454 $ 92,017 8.60% $ 949,585 $80,067 8.43% $ 852,172 $71,032 8.34%
Securities 74,328 4,308 5.80 75,558 4,816 6.37 75,786 4,403 5.81
Mortgage-backed
securities 84,438 5,252 6.22 100,806 6,276 6.23 117,060 6,934 5.92
Federal funds sold 13,851 727 5.25 6,569 383 5.83 18,576 702 3.78
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets 1,243,071 102,304 8.23% 1,132,518 91,542 8.08% 1,063,594 83,071 7.81%
Non-interest-
earning assets 38,980 40,070 35,994
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,282,051 $102,304 $1,172,588 $91,542 $1,099,588 $83,071
====================================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing Liabilities:
NOW and money
market accounts $ 73,641 $ 2,039 2.77% $ 78,170 $ 2,341 2.99% $ 94,459 $ 2,596 2.75%
Savings accounts 282,064 6,754 2.39 295,422 7,318 2.48 340,225 8,038 2.36
Certificates of deposit 597,963 32,533 5.44 499,308 27,624 5.53 372,831 15,984 4.29
FHLB borrowings 61,191 3,419 5.59 35,965 2,236 6.22 33,630 1,737 5.17
Mortgagors' escrow 15,256 39 0.26 17,545 115 0.66 15,893 101 0.64
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,030,115 44,784 4.35% 926,410 39,634 4.28% 857,038 28,456 3.32%
Non-interest-bearing
deposits 23,215 20,275 17,823
Other liabilities 21,361 17,841 25,335
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,074,691 964,526 900,196
Stockholders' equity 207,360 208,062 199,392
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,282,051 $1,172,588 $1,099,588
====================================================================================================================================
Net interest income/
interest rate spread $ 57,520 3.88% $51,908 3.80% $54,615 4.49%
Net interest-earning
assets/net interest
margin $ 212,956 4.63 $ 206,108 4.58 $ 206,556 5.13
Ratio of interest-
earning assets to
interest-bearing
liabilities 1.21x 1.22x 1.24x
===================================================================================================================================
</TABLE>
19
<PAGE> 13
================================================================================
RATE/VOLUME ANALYSIS
The following table presents changes in interest and dividend income, and in
interest expense, attributable to (i) changes in volume (change in average
balance or volume multiplied by prior-year rate); (ii) changes in rate (change
in average rate multiplied by prior-year volume); and (iii) the combined effect
of changes in average rate and in average volume.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
Compared to Compared to Compared to
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
----------------------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
----------------------------------------------------------------------------------------------------
Due Due Due
(in thousands) Volume to Rate Net Volume to Rate Net Volume to Rate Net
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage and
other loans, net $10,395 $ 1,555 $11,950 $ 8,212 $ 823 $ 9,035 $12,816 $(3,317) $ 9,499
Securities (71) (437) (508) (15) 428 413 (1,402) 60 (1,342)
Mortgage-backed securities (1,018) (6) (1,024) (1,013) 355 (658) 655 (458) 197
Federal funds sold 382 (38) 344 (700) 381 (319) (789) 368 (421)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 9,688 1,074 10,762 6,484 1,987 8,471 11,280 (3,347) 7,933
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
NOW and money
market accounts (125) (177) (302) (487) 232 (255) (344) (114) (458)
Savings accounts (319) (245) (564) (1,111) 391 (720) (147) (1,234) (1,381)
Certificates of deposit 5,367 (458) 4,909 6,994 4,646 11,640 492 (678) (186)
FHLB borrowings 1,410 (227) 1,183 145 354 499 1,739 (2) 1,737
Mortgagors' escrow (6) (70) (76) 11 3 14 12 (15) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 6,327 (1,177) 5,150 5,552 5,626 11,178 1,752 (2,043) (291)
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in interest income $ 3,361 $ 2,251 $ 5,612 $ 932 $(3,639) $(2,707) $ 9,528 $(1,304) $ 8,224
====================================================================================================================================
</TABLE>
Net Interest Income
Net interest income is the Company's principal source of income. Its level is
affected significantly by the volume of the Company's interest-earning assets
and interest-bearing liabilities, and by the spread between the yield on such
assets and the cost of such liabilities. These factors are, in turn, affected by
the concentration and pricing of the Company's interest rate sensitive assets,
the composition and pricing of its deposits, current economic conditions, and
the monetary policy of the Federal Reserve Board.
1996 and 1995 Comparison:
Fueled by the growing average balance of interest-earning assets, and by the
year-long increase in their average yield, net interest income rose $5.6
million, or 10.8%, to $57.5 million in 1996 from $51.9 million in 1995.
While asset growth was substantially funded by CDs and FHLB borrowings,
the volume of mortgage loan originations more than offset the impact of the
higher costs involved. As a result, the Company recorded improvements in both
its interest rate spread and net interest margin: in 1996, the Company's
interest rate spread rose 8 basis points to 3.88% from the year-earlier level,
while its net interest margin rose 5 basis points to 4.63%.
Looking forward, the Company anticipates that net interest income will
continue to trend upward, driven by the origination of higher yielding
multi-family mortgage loans. However, the Bank's ability to generate mortgage
loans could be compromised by a change in market interest rates or increased
competition, either of which could adversely affect the level of loan demand. In
addition, a rise in market interest rates or competition for deposits could
impact the Company's cost of funds. While higher cost liabilities would likely
pressure spreads and margins, management believes that the degree of compression
would be tempered by the benefit of growing the mortgage loan portfolio.
1995 and 1994 Comparison:
In 1995, the Company recorded net interest income of $51.9 million, as compared
to $54.6 million in 1994. The reduction stemmed from a 69-basis point drop in
the interest rate spread to 3.80% from 4.49%, the year-earlier level, reflecting
the higher short-term interest rates that prevailed from January through
November 1995. Net interest margin similarly declined, as compared to the
prior-year level, to 4.58% from 5.13%. The pressure imposed by higher short-term
rates began to wane in the fourth quarter, when the Federal funds rate was
reduced by 25 basis points to 5.50%.
Provision for Loan Losses
The provision for loan losses is based on management's periodic assessment of
the allowance for loan losses which, in turn, is based on such interrelated
factors as the composition of the loan portfolio and its inherent risk
character-
20
<PAGE> 14
istics; the level of non-performing loans and charge-offs, both current and
historic; local economic conditions; the direction of real estate values; and
current trends in regulatory supervision.
1996 and 1995 Comparison:
In 1996, the Company reversed $2.0 million from the allowance for loan losses
and suspended the provision for loan losses in each quarter of the year. In the
absence of any charge-offs, the reversal reduced the loan loss allowance to $9.4
million, representing 96.90% of non-performing loans of $9.7 million, and 0.82%
of loans, net, at December 31st. In 1995, the Company recorded loan loss
provisions of $150,000, contributing to an allowance for loan losses of $11.4
million at year-end. The 1995 allowance was net of charge-offs of $59,000, and
represented 145.76% of non-performing loans totaling $7.8 million and 1.14% of
loans, net.
The 1996 reversal and the suspension of the loan loss provision reflect
the fundamental soundness of the Company's loan portfolio. While non-performing
loans were up from the year-earlier level, the increase was overshadowed by the
absence of any charge-offs for six consecutive quarters and the fully performing
status of the multi-family mortgage loan portfolio at December 31st.
The extent of the coverage provided by the current loan loss allowance is
especially substantial when viewed against the level of actual losses sustained
since year-end 1986. In the ten years ended December 31, 1996, accumulated net
charge-offs totaled $1.4 million, averaging a nominal $140,000 per year. The
ratio of the $9.4 million allowance for loan losses to these accumulated net
charge-offs equates to 625.0%.
Given the relationship between the allowance and actual losses, and the
growing concentration of multi-family mortgage loans within the asset mix, it is
likely that the suspension of the loan loss provision will be extended in the
current year. However, the renewal of provisions could be triggered by a
substantial reversal in the portfolio's performance, and by such external
factors as a change in local real estate values or the economy.
For additional information about asset quality and the allowance for loan
losses, see the discussion beginning on page 13 of this report.
1995 and 1994 Comparison:
The provision for loan losses declined to $150,000 in 1995 from $1.2 million in
1994, reflecting a reduction in the provision in each of the first two quarters,
followed by its suspension in the third and fourth quarters of the year. The
dramatic decline was based upon the quality of the Company's assets and the
coverage provided by the loan loss allowance during the twelve-month period.
Non-performing assets totaled $8.6 million at year-end 1995, representing
0.69% of total assets, and $8.1 million, or 0.69%, at year-end 1994. The 1995
amount was comprised of non-accrual mortgage loans of $4.9 million, loans 90
days or more delinquent of $2.9 million, and foreclosed real estate (formerly
referred to as "other real estate owned") of $774,000. By comparison, the 1994
amount consisted of non-accrual mortgage loans of $5.4 million, loans 90 days or
more delinquent of $1.7 million, and $975,000 of foreclosed real estate.
At December 31, 1995, the allowance for loan losses equaled $11.4 million,
net of charge-offs of $59,000, equivalent to 145.76% of non-performing loans,
and 1.14% of loans, net. By comparison, the loan loss allowance at year-end 1994
equaled $11.3 million, net of charge-offs of $252,000, representing 158.46% and
1.20%, respectively, of non-performing loans and loans, net.
Other Operating Income
The Company's net interest income is supplemented by other operating income,
which is primarily derived from service charges and fees on loans and, to a
lesser extent, on depository accounts. Additional fee income stems from safe
deposit rentals.
1996 and 1995 Comparison:
Other operating income totaled $2.4 million in 1996, as compared to $3.0 million
in 1995. The 1996 amount included $1.6 million in customer service fees (up
$176,000 from $1.4 million in the year-earlier period) and $862,000 in other
income (down $764,000 from $1.6 million in the prior year). The rise in customer
service fees (formerly referred to as "fee income") corresponds to the
significant increase in mortgage loan originations to $303.2 million in 1996
from $145.8 million in 1995. The decline in other income reflects the
recognition of $1.3 million in interest earned on Federal income tax recoveries
in the year-earlier period, tempered by the recovery of $420,000 from the
reserve for possible Nationar-related losses in 1996.
1995 and 1994 Comparison:
Reflecting the recognition of $1.3 million in interest earned on Federal income
tax recoveries in the second quarter, other operating income rose 53.9% to $3.0
million in 1995. The recovery boosted other income to $1.6 million from
$159,000, the year-earlier level, substantially offsetting a $405,000 decline in
customer service fees to $1.4 million in 1995. The reduction in customer service
fees stemmed primarily from a decline in mortgage loan originations which
totaled $145.8 million and $253.4 million, respectively, in 1995 and 1994.
Operating Expense
Operating expense primarily consists of compensation and benefits expense,
together with occupancy and equipment expense, general and administrative
("G&A") expense, and the FDIC insurance premium.
1996 and 1995 Comparison:
Operating expense totaled $23.3 million, or 1.82% of average assets, in 1996, as
compared to $22.9 million, or 1.95% of average assets, in 1995. The modest rise
reflects reductions in other operating expense and the FDIC insurance premium,
offset by increases in the remaining components of operating expense.
21
<PAGE> 15
Other operating expense improved to $185,000 in 1996 from $1.7 million in
1995. In addition to a net gain of $124,000 on the sale of foreclosed real
estate in the fourth quarter, the $1.5 million reduction relates to the
prior-year seizure of Nationar. Pursuant to this event, the Company had recorded
a one-time charge against earnings of $349,000 and established a $1.0 million
reserve for possible Nationar-related losses. In the fourth quarter of 1996, the
Company received payment of all pending claims, except for the original
investment. Accordingly, the Company reflected the conclusion of its financial
exposure to Nationar by realizing a net recovery of $420,000, recorded in other
operating income, as discussed.
The FDIC insurance premium, meanwhile, declined to $2,000 from $1.0
million in 1995. On January 1, 1996, the premium was entirely eliminated, and
replaced by a per-quarter assessment of $500, resulting in the year-to-year
savings of $998,000.
In 1996, occupancy and equipment expense rose $80,000 to $2.5 million,
reflecting the addition of three new Queens-based locations, the installation of
ATMs at each of these locations, and a Bank-wide computer systems upgrade. G&A
expense rose $293,000 to $4.4 million, partly reflecting higher advertising
expenses as the Bank complemented its out-of-home and print advertising programs
with a series of radio commercials and a 30-second spot on Cable TV.
Compensation and benefits expense rose to $16.2 million in 1996 from the
year-earlier $13.7 million, primarily driven by the normal amortization of
expense related to the Company's ESOP and the 59.7% price appreciation of
allocated shares in the ESOP and other stock-related benefit plans. Accounting
requirements necessitated that the amortization and appreciation of such shares
be recorded as a $5.4 million charge against earnings, which was added back,
dollar-for-dollar, to stockholders' equity. When combined with $1.1 million in
related tax benefits, the combined $6.5 million in stock benefit plan-related
expenses represented a $0.98 addition to book value at year-end 1996.
The Company's drive to control operating expense is additionally reflected
in the continuing improvement of its efficiency ratio. In 1996, the Company's
efficiency ratio was reduced to 38.81% from 41.63%, the year-earlier level; on a
cash earnings basis, the efficiency ratio improved to 28.83% from 35.43%.
1995 and 1994 Comparison:
In 1995, operating expense improved to $22.9 million, or 1.95% of average
assets, from $23.0 million, or 2.10% of average assets, in 1994. The $176,000
reduction was attributed to a $946,000, or 48.6%, decline in the FDIC insurance
premium to $1.0 million, following a reduction in the premium rate to 4 cents
per $100 of deposits that resulted in a one-time refund of $555,000 in the third
quarter of 1995.
The decline in the FDIC insurance premium was accompanied by a $208,000
decrease in occupancy and equipment expense to $2.4 million and a $617,000
reduction in G&A expense to $4.1 million from the levels recorded in 1994.
Collectively, these decreases offset a $657,000 increase in compensation and
benefits expense to $13.7 million and a $938,000 increase in other operating
expense to $1.7 million. The 5.04% increase in compensation and benefits expense
reflected the normal amortization of expense relating to shares in the Company's
ESOP and the impact of significant stock price appreciation on allocated shares
held in this and other stock-related benefit plans. The substantial rise in
other operating expense stemmed from the $1.3 million in expenses recorded
pursuant to the first quarter 1995 seizure of Nationar.
Income Tax Expense
Income tax expense includes both current Federal, state, and local income taxes
and deferred income taxes.
1996 and 1995 Comparison:
Income tax expense equaled $17.8 million in 1996 and $11.7 million in 1995. The
$6.0 million increase primarily reflects the $1.8 million charge stemming from
the disqualification of all city tax deductions relating to the
percentage-of-income tax bad-debt reserve since 1987, in the wake of changes to
the Federal tax code which were enacted in August 1996. While the City of New
York is expected to enact legislation to de-couple its treatment of the tax
bad-debt reserve from the Federal tax code, thus conforming to changes to the
New York State code, it had not done so at the time the Company's 1996 earnings
were reported on January 21st. Once such legislation is enacted, the $1.8
million charge is expected to be reversed.
In addition to the non-recurring charge, the increase in 1996 income tax
expense includes $830,000 stemming from the elimination of the
percentage-of-income tax bad-debt deduction for Federal income tax purposes, and
a $6.8 million increase in pre-tax income to $38.7 million.
Reflecting the changes in the Federal tax code, the Company's effective
tax rate is expected to approximate 47% in 1997, as compared to 45.9% in 1996.
Of the 47%, approximately 4% will relate to unrecognized tax expense deductions
stemming from the Company's stock-related benefit plans, all of which will be
added back to capital.
1995 and 1994 Comparison:
In 1995, the Company recorded income tax expense of $11.7 million, down $1.9
million from the $13.6 million recorded in 1994. The 13.6% reduction reflected a
$419,000 decrease in pre-tax income to $31.9 million, tax refunds not previously
received or recognized, and the Company's maximal use of the tax bad-debt
reserve, in accordance with then-current tax laws. As a result, the Company's
effective tax rate for the year was 36.77% of pre-tax income, as compared to
42.02% in 1994.
Impact of Accounting
Pronouncements
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 defines a fair value-based method of
accounting for an employee stock
22
<PAGE> 16
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting method prescribed
in APB Opinion No. 25 must make a pro forma disclosure of net income and, if
presented, earnings per share, as if the fair value-based method of accounting
defined in this statement had been applied.
SFAS No. 123 is effective for transactions entered into in fiscal years
that begin after December 15, 1995, though this statement may be adopted on
issuance. The disclosure requirements of this statement are effective for
financial statements for fiscal years beginning after December 15, 1995, or for
an earlier fiscal year for which this statement is initially adopted for
recognizing compensation cost. Pro forma disclosures required for entities that
elect to continue to measure compensation cost using APB Opinion No. 25 must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994.
The Company had two stock option plans at December 31, 1996. All stock
options related to these plans were originally granted concurrent with the
Bank's conversion to stock form in November 1993. In its accounting for these
plans, the Bank applies APB Opinion No. 25 and the related interpretations.
Accordingly, no compensation cost has been recognized.
Accounting for Transfers and Servicing
of Financial Assets and Extinguishments
of Liabilities
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities, based on consistent
application of a financial components approach focusing on control. Under this
approach, after a transfer of financial assets, an entity recognizes said assets
when control has been surrendered, and derecognizes liabilities when they have
been extinguished. In addition, SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
consist of secured borrowings.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127 delays the
effective date of certain provisions of SFAS No. 125 until after December 31,
1997.
SFAS No. 125, as amended by SFAS No. 127, is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
either December 31, 1996 or December 31, 1997, depending on the transaction, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. SFAS No. 125 will have no impact on the Company's financial
statements when it becomes effective.
Impact of Inflation
and Changing Prices
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchase power
of money due to inflation.
Most of the Company's assets and liabilities are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or at the same magnitude as the prices of goods and
services.
Market Price of Common Stock
and Dividends Declared per
Common Share
Queens County Bancorp trades on the Nasdaq National Market under the symbol
"QCSB." At December 31, 1996, the Company had 7,630,103 shares outstanding,
reflecting the four-for-three stock split on August 22nd and the repurchase of
844,360 shares during the year under the Company's Stock Repurchase Program.
23
<PAGE> 17
The following table sets forth the high/low price range and closing prices, as
reported by Nasdaq, and the cash dividends declared per common share for each of
the four quarters in 1996 and 1995.
<TABLE>
<CAPTION>
====================================================================================================================================
MARKET PRICE AND DIVIDENDS DECLARED PER COMMON SHARE
Market Price
---------------------------------------------------------------------------------------------------------
High Low Close
---------------------------------------------------------------------------------------------------------
Dividends
Declared per
Common Share Pre-Split* Post-Split Pre-Split* Post-Split Pre-Split* Post-Split
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
1996
1st Quarter $0.150** $66.75 $33.38 $57.75 $28.88 $66.00 $33.00
2nd Quarter 0.188** 73.50 36.75 63.75 31.88 73.50 36.75
3rd Quarter 0.250** 76.50 38.25 70.12 35.06 74.50 37.25
4th Quarter 0.250 101.50 50.75 73.75 36.88 94.75 47.38
- ------------------------------------------------------------------------------------------------------------------------------------
1995
1st Quarter $0.038** $45.75 $22.88 $36.38 $18.19 $42.38 $21.19
2nd Quarter 0.038** 49.88 24.94 41.25 20.63 47.63 23.81
3rd Quarter 0.038** 60.38 30.19 47.06 23.54 59.81 29.91
4th Quarter 0.113** 64.50 32.25 57.38 28.69 59.34 29.67
====================================================================================================================================
</TABLE>
* Reflects what the price per share would have been had the Company not split
its stock 3-for-2 on September 30, 1994 and 4-for-3 on August 22, 1996.
** Dividends have been restated to reflect the 4-for-3 stock split on August 22,
1996.
At December 31, 1996, the Company had approximately 700 shareholders of record.
This figure does not include those investors whose shares were being held for
them in street name by a broker or other nominee at that date.
24
<PAGE> 18
Consolidated Statements of Condition
<TABLE>
<CAPTION>
====================================================================================================
December 31,
--------------------------
(in thousands, except share data) 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,045 $ 25,340
Federal funds sold 7,000 13,650
Securities held to maturity (estimated market value of
$86,483 and $78,151, respectively) (notes 3 and 9) 86,495 78,016
Mortgage-backed securities held to maturity (estimated market
value of $74,192 and $93,474, respectively) (notes 4 and 9) 73,732 92,868
Mortgage loans 1,143,260 992,330
Other loans 12,251 13,832
Less: Allowance for loan losses (9,359) (11,359)
- ----------------------------------------------------------------------------------------------------
Loans, net (notes 5, 6, and 9) 1,146,152 994,803
Premises and equipment, net 11,077 10,526
Deferred tax asset, net (note 10) 3,312 5,822
Other assets (notes 7, 8, and 12) 16,843 19,857
- ----------------------------------------------------------------------------------------------------
Total assets $ 1,358,656 $ 1,240,882
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 8):
NOW and money market accounts $ 69,443 $ 75,997
Savings accounts 277,783 287,577
Certificates of deposit 651,705 545,771
Non-interest-bearing accounts 24,999 22,795
- ----------------------------------------------------------------------------------------------------
Total deposits 1,023,930 932,140
- ----------------------------------------------------------------------------------------------------
Official checks outstanding 26,729 27,846
FHLB borrowings (note 9) 81,393 46,077
Accounts payable and accrued expenses 1,169 1,994
Mortgagors' escrow 7,356 7,804
Other liabilities (note 12) 6,650 7,391
- ----------------------------------------------------------------------------------------------------
Total liabilities 1,147,227 1,023,252
- ----------------------------------------------------------------------------------------------------
Stockholders' equity (note 2):
Preferred stock at par $0.01 (5,000,000 shares authorized; none issued) -- --
Common stock at par $0.01 (30,000,000 shares authorized; 9,176,704
shares issued; 7,630,103 and 8,392,400 outstanding at
December 31, 1996 and 1995, respectively) 92 69
Paid-in capital in excess of par 116,607 112,441
Retained earnings (substantially restricted) (note 15) 154,886 140,969
Less: Treasury stock (1,546,601 and 784,454 shares, respectively) (42,397) (16,843)
Unallocated common stock held by ESOP (note 13) (14,820) (16,065)
Common stock held by SERP and Deferred Compensation
Plans (notes 12 and 13) (1,411) (330)
Unearned common stock held by RRPs (note 13) (1,528) (2,611)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 211,429 217,630
- ----------------------------------------------------------------------------------------------------
Commitments and contingencies (note 11)
- ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,358,656 $ 1,240,882
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 19
Consolidated Statements of Income
================================================================================
Years Ended December 31,
----------------------------
(in thousands, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------
INTEREST INCOME:
Mortgage and other loans (note 6) $ 92,017 $80,067 $71,032
Securities held to maturity 4,308 4,816 4,403
Mortgage-backed securities held to maturity 5,252 6,276 6,934
Federal funds sold 727 383 702
- --------------------------------------------------------------------------------
Total interest income 102,304 91,542 83,071
- --------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW and money market accounts 2,039 2,341 2,596
Savings accounts 6,754 7,318 8,038
Certificates of deposit 32,533 27,624 15,984
FHLB borrowings (note 9) 3,419 2,236 1,737
Mortgagors' escrow 39 115 101
- --------------------------------------------------------------------------------
Total interest expense 44,784 39,634 28,456
- --------------------------------------------------------------------------------
Net interest income 57,520 51,908 54,615
- --------------------------------------------------------------------------------
(Reversal of) provision for loan losses (note 6) (2,000) 150 1,200
- --------------------------------------------------------------------------------
Net interest income after (reversal of)
provision for loan losses 59,520 51,758 53,415
- --------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Customer service fees 1,583 1,407 1,812
Other (note 5) 862 1,626 159
- --------------------------------------------------------------------------------
Total other operating income 2,445 3,033 1,971
- --------------------------------------------------------------------------------
OPERATING EXPENSE:
Compensation and benefits (notes 12 and 13) 16,185 13,694 13,037
Occupancy and equipment (note 11) 2,479 2,399 2,607
General and administrative 4,420 4,127 4,744
FDIC insurance premium 2 1,000 1,946
Other (note 8) 185 1,651 713
- --------------------------------------------------------------------------------
Total operating expense 23,271 22,871 23,047
- --------------------------------------------------------------------------------
Income before income taxes 38,694 31,920 32,339
Income tax expense (note 10) 17,755 11,737 13,589
- --------------------------------------------------------------------------------
Net income $ 20,939 $20,183 $18,750
================================================================================
Net income per common share(1) $2.83 $2.58 $2.27
================================================================================
(1) Reflects shares issued as a result of a four-for-three stock split on August
22, 1996.
See accompanying notes to consolidated financial statements.
26
<PAGE> 20
Consolidated Statements of
Changes in Stockholders' Equity
<TABLE>
<CAPTION>
====================================================================================================
Years Ended December 31,
---------------------------------
(in thousands, except share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK (PAR VALUE: $0.01):
Balance at beginning of year $ 69 $ 69 $ 46
Stock splits (2,294,063 and 2,294,141 shares) 23 -- 23
- ----------------------------------------------------------------------------------------------------
Balance at end of year 92 69 69
- ----------------------------------------------------------------------------------------------------
PAID-IN CAPITAL IN EXCESS OF PAR:
Balance at beginning of year 112,441 111,407 110,844
Tax benefit effect on stock plans 1,111 -- --
Common stock acquired by SERP and Deferred Compensation Plans 1,081 32 70
Allocation of ESOP Stock 2,002 1,002 521
Stock splits (2,294,063 and 2,294,141 shares) (23) -- (23)
Cash paid in lieu of fractional shares (5) -- (5)
- ----------------------------------------------------------------------------------------------------
Balance at end of year 116,607 112,441 111,407
- ----------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 140,969 122,644 104,494
Net income 20,939 20,183 18,750
Dividends paid on common stock (5,669) (1,632) (598)
Exercise of stock options (67,021; 24,496; and 397 shares) (1,353) (226) (2)
- ----------------------------------------------------------------------------------------------------
Balance at end of year 154,886 140,969 122,644
- ----------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (16,843) (7,444) --
Purchase of common stock (844,360; 422,015; and 387,333 shares) (28,825) (9,963) (7,451)
Common stock acquired by SERP 1,081 32 --
Exercise of stock options (67,021; 24,496; and 397 shares) 2,190 532 7
- ----------------------------------------------------------------------------------------------------
Balance at end of year (42,397) (16,843) (7,444)
- ----------------------------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of year (16,065) (17,343) (17,150)
Common stock acquired by ESOP -- -- (1,423)
Allocation of ESOP stock 1,245 1,278 1,230
- ----------------------------------------------------------------------------------------------------
Balance at end of year (14,820) (16,065) (17,343)
- ----------------------------------------------------------------------------------------------------
SERP AND DEFERRED COMPENSATION PLANS:
Balance at beginning of year (330) (298) (228)
Common stock acquired by SERP and Deferred Compensation Plans (1,081) (32) (70)
- ----------------------------------------------------------------------------------------------------
Balance at end of year (1,411) (330) (298)
- ----------------------------------------------------------------------------------------------------
RECOGNITION AND RETENTION PLANS:
Balance at beginning of year (2,611) (3,756) (5,175)
Earned portion of RRPs 1,083 1,145 1,419
- ----------------------------------------------------------------------------------------------------
Balance at end of year (1,528) (2,611) (3,756)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity $ 211,429 $ 217,630 $ 205,279
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 21
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
===================================================================================================================
Years Ended December 31,
--------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,939 $ 20,183 $ 18,750
- -------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization 772 738 723
(Reversal of ) provision for loan losses (2,000) 150 1,200
Deferred income taxes 2,510 (481) (1,557)
Amortization of premiums (discounts), net 537 (506) 679
Amortization of net deferred loan origination fees 141 650 (279)
Net (loss) gain on redemption of securities and mortgage-backed securities (2) (6) 9
Net loss (gain) on sale of foreclosed real estate and loans 123 (12) (1)
Write-off of investment in Nationar -- 349 --
Provision for Nationar investment losses -- 1,000 --
Earned portion of RRPs 1,083 1,145 1,419
Earned portion of ESOP 3,247 2,280 1,751
Changes in assets and liabilities:
Decrease (increase) in other assets 3,014 (6,209) (1,151)
Increase (decrease) in accounts payable and accrued expenses 286 (254) 546
(Decrease) increase in official checks outstanding (1,117) 10,556 (30,456)
(Decrease) increase in other liabilities (741) 350 1,958
- -------------------------------------------------------------------------------------------------------------------
Total adjustments 7,853 9,750 (25,159)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 28,792 29,933 (6,409)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemptions of mortgage-backed securities held to maturity 19,132 14,584 21,767
Proceeds from maturities of securities held to maturity 87,000 59,000 82,139
Purchase of securities (96,010) (57,488) (67,502)
Net increase in loans (150,619) (60,523) (162,502)
Proceeds from sales of loans and foreclosed real estate 1,006 1,318 4,774
Purchase of premises and equipment, net (1,323) (422) (139)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (140,814) (43,531) (121,463)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to stock plans -- -- (1,423)
Net decrease in mortgagors' escrow (448) (2,838) (177)
Net increase in deposits 91,790 91,920 12,980
Net increase (decrease) from FHLB borrowings 35,316 (37,227) 81,576
Cash dividends, cash paid in lieu of fractional shares, and options exercised (7,027) (1,858) (605)
Purchase of Treasury stock, net of stock options exercised and shares
acquired by SERP (25,554) (9,399) (7,444)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 94,077 40,598 84,907
- -------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (17,945) 27,000 (42,965)
Cash and cash equivalents at beginning of year 38,990 11,990 54,955
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 21,045 $ 38,990 $ 11,990
===================================================================================================================
Supplemental information:
Cash paid for:
Interest $ 44,810 $ 39,622 $ 28,608
Income taxes 14,775 12,858 12,747
- -------------------------------------------------------------------------------------------------------------------
Transfers to foreclosed real estate from loans 730 810 1,458
- -------------------------------------------------------------------------------------------------------------------
Transfers to real estate held for investment from foreclosed real estate 222 687 --
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 22
Notes to Consolidated Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As more fully described in Note 2, Queens County Savings Bank (the "Bank" or the
"Subsidiary") converted from a mutual savings bank to the capital stock form of
ownership on November 23, 1993. In anticipation of the conversion, Queens County
Bancorp, Inc. (the "Company" or the "Parent") was formed on July 20, 1993. The
following is a description of the significant accounting and reporting policies
that the Company and its wholly-owned subsidiary follow in preparing and
presenting their consolidated financial statements, which conform to generally
accepted accounting principles and to general practices within the banking
industry. The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany accounts
and transactions are eliminated in consolidation. Certain reclassifications have
been made to prior-year financial statements to conform to the 1996
presentation.
Securities and Mortgage-Backed Securities Held to Maturity
Securities and mortgage-backed securities, which the Company has the positive
intent and ability to hold until maturity, are carried at cost, adjusted for
amortization of premiums and accretion of discounts on a level-yield method over
the remaining period to contractual maturity, adjusted, in the case of
mortgage-backed securities, for actual prepayments. Securities and
mortgage-backed securities to be held for indefinite periods of time and not
intended to be held to maturity are classified as "available for sale"
securities and are recorded at fair value, with unrealized appreciation and
depreciation, net of tax, reported as a separate component of stockholders'
equity. Gains and losses on sales of securities and mortgage-backed securities
are computed on the specific identification method.
Loans
Loans are carried at unpaid principal balances, less unearned discounts, net of
deferred loan origination fees and the allowance for loan losses.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures." SFAS No. 114 applies to all loans
except smaller balance homogenous consumer loans (including 1-4 family mortgage
loans), loans carried at fair value or the lower of cost or fair value, debt
securities, and leases. SFAS No. 114 requires the creation of a valuation
allowance for impaired loans based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral. Under SFAS No. 114, a loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the loan's
contractual terms. SFAS No. 114 also provides that in-substance foreclosed loans
should not be included in foreclosed real estate for financial reporting
purposes but, rather, in the loan portfolio. The adoption of SFAS No. 114, as
amended by SFAS No. 118, did not have any impact on the Company's 1996 results
of operations nor on its financial position, including the level of the reserve
for possible credit losses.
The allowance for loan losses is increased by the provision for loan
losses charged to operations and is reduced by charge-offs, net of recoveries.
The allowance is based on management's periodic evaluation of the adequacy of
the allowance, taking into consideration known and inherent risks in the
portfolio, the Bank's past loan loss experience, adverse situations which may
affect the borrower's ability to repay, overall portfolio quality, and current
and prospective economic conditions. While management uses available information
to recognize losses on loans, future additions may be necessary, based on
changes in economic conditions beyond management's control. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Accordingly, the Bank
may be required to take certain charge-offs and/or recognize additions to the
allowance based on regulators' judgments concerning information available to
them during their examination. Based upon all relevant and available
information, management believes that the allowance for loan losses is adequate.
Fees are charged for originating mortgage loans at the time the loan is
granted. Loan origination fees, partially offset by certain expenses associated
with loans originated, are amortized to interest on loans over the life of the
loan using the interest method. Adjustable rate mortgages ("ARMs") with a lower
rate during the introductory period (usually one year) will reflect the
amortization of a substantial portion of the net deferred fee as a yield
adjustment during the introductory period.
29
<PAGE> 23
Loans are placed on a non-accrual basis, and the accrual of interest
and amortization of origination fees discontinued, when principal or interest
payments are in arrears 90 days or more, or sooner, if management considers
collection to be doubtful. When foreclosure proceedings commence for
non-accrual loans, previously accrued but unpaid interest is reversed and
charged against current income. Interest is subsequently recognized on
non-accrual loans only to the extent that cash is received. Loans are returned
to accrual status when management deems that collection is reasonable.
PREMISES AND EQUIPMENT
Premises, furniture and fixtures, and equipment are carried at cost less
accumulated depreciation computed on a straight-line basis over the estimated
useful lives of the respective assets. Leasehold improvements are carried at
cost less accumulated amortization computed on a straight-line basis over the
shorter of the related lease term or the estimated useful life of the
improvement.
Depreciation and amortization included in occupancy and equipment
expense for the years ended December 31, 1996, 1995, and 1994 amounted to
$772,000, $738,000, and $723,000 respectively.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, foreclosure are to be
sold and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate carried at the lower of carrying
amount or fair value less estimated selling costs. Revenue and expenses from
operations and changes in the valuation allowance are included in other
operating expense.
INCOME TAXES
Income tax expense consists of income taxes currently payable and deferred
income taxes. Deferred income tax expense (benefit) is determined by
recognizing deferred tax assets and liabilities for future tax consequences,
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. The realization
of deferred tax assets is assessed and a valuation allowance provided for the
portion of the asset for which it is more likely than not that it will not be
realized. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled.
STOCK OPTION PLANS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation." SFAS No. 123 defines a fair value-based method of accounting for
an employee stock option or similar equity instrument. It also allows an entity
to continue to measure compensation cost for those plans using the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting method prescribed in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value-based method of accounting had been applied. SFAS No. 123 is
effective for transactions entered into in fiscal years that begin after
December 31, 1995. Pro forma disclosures required for entities that elect to
continue to measure compensation cost using APB Opinion No. 25 must include the
effects of all awards granted in fiscal years that begin after December 15,
1994.
The Company had two stock option plans at December 31, 1996. All
stock options related to these plans were originally granted concurrent with
the Bank's conversion from mutual to stock form in 1993. The Bank applies APB
Opinion No. 25 and the related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for these plans.
RETIREMENT PLANS
The Company has pension plans covering substantially all employees who have
attained minimum service requirements. Post-retirement benefits are recorded on
an accrual basis with an annual provision that recognizes the expense over the
service life of the employee, determined on an actuarial basis.
CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents are defined to
include cash and due from banks and Federal funds sold.
EARNINGS PER COMMON SHARE
Earnings per common share and common stock equivalents are computed by dividing
net income by the average number of common shares outstanding (including all
allocated shares of the Employee Stock Ownership Plan or "ESOP") and the
additional dilutive effect of common stock equivalents (stock options)
outstanding during the respective period. The dilutive effect of stock options
is computed using the average market price of the Parent's common stock for the
period.
Earnings per common share, assuming full dilution, are computed based
on the average number of common shares outstanding during the period (including
all allocated shares of the ESOP) and the additional dilutive effect of work
options outstanding during the period. The dilutive effect of the outstanding
stock options is computed using the greater of the closing market price or the
average market price of the Parent's common stock for the period.
30
<PAGE> 24
NOTE 2 -- CONVERSION TO STOCK FORM OF OWNERSHIP
On July 13, 1993, the Board of Trustees of the Bank (now the Board of Directors
of the Company) adopted a Plan of Conversion to convert the Bank from a
state-chartered mutual savings bank to a state-chartered capital stock form
savings bank. In connection with the conversion, the Company was organized under
Delaware law for the purpose of acquiring all of the capital stock of the Bank.
On November 23, 1993, the Company became a public company and issued its
initial offering of 4,588,500 shares of common stock (par value $0.01 per share)
at a price of $25.00 per share, resulting in net proceeds of $110.6 million.
Concurrent with the issuance of the common stock, 50 percent of the net proceeds
were used to purchase all of the outstanding capital stock of the Bank. Parent
company-only financial information is presented in Note 16.
On August 16, 1994, the Board of Directors declared a three-for-two stock
split which resulted in the issuance of an additional 2,294,141 shares on
September 30th of that year. A four-for-three stock split was declared on July
9, 1996, pursuant to which another 2,294,063 shares were issued on August 22nd.
As a result of the two splits, the initial offering price was adjusted to $12.50
per share.
NOTE 3 -- SECURITIES HELD TO MATURITY
Securities held to maturity at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
========================================================================================================
December 31, 1996
-------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) Amortized cost unrealized gain unrealized loss market value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $76,121 $25 $(82) $76,064
- --------------------------------------------------------------------------------------------------------
FHLB stock 10,372 -- -- 10,372
FNMA stock 2 45 -- 47
- --------------------------------------------------------------------------------------------------------
Total stock 10,374 45 -- 10,419
- --------------------------------------------------------------------------------------------------------
Total securities $86,495 $70 $(82) $86,483
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
========================================================================================================
December 31, 1995
-------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) Amortized cost unrealized gain unrealized loss market value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $68,126 $105 $(5) $68,226
- --------------------------------------------------------------------------------------------------------
FHLB stock 9,888 -- -- 9,888
FNMA stock 2 35 -- 37
- --------------------------------------------------------------------------------------------------------
Total stock 9,890 35 -- 9,925
- --------------------------------------------------------------------------------------------------------
Total securities $78,016 $140 $(5) $78,151
========================================================================================================
</TABLE>
The following is a summary of the amortized cost and estimated market value of
securities held to maturity at December 31, 1996 by remaining term to maturity:
================================================================================
December 31, 1996
-------------------------------------------------
U.S. Government Estimated
(in thousands) and agencies market value
- --------------------------------------------------------------------------------
1 year or less $71,038 $70,997
Over 1 year to 5 years 5,083 5,067
- --------------------------------------------------------------------------------
Total $76,121 $76,064
================================================================================
Federal Home Loan Bank ("FHLB") and Federal National Mortgage Association
("FNMA") stock are securities for which sale is restricted by the respective
governmental agencies and therefore are not considered marketable equity
securities. FHLB and FNMA stock are carried at cost, which approximates value at
redemption. There were no sales of securities held to maturity during the years
ended December 31, 1996, 1995, or 1994.
<PAGE> 25
NOTE 4 -- MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity at December 31, 1996 and 1995 are
summarized as follows:
================================================================================
December 31, 1996
---------------------------------------
(in thousands) GNMA FHLMC Total
- --------------------------------------------------------------------------------
Principal balance $23,517 $50,207 $73,724
Unamortized premium 52 -- 52
Unamortized discount -- (44) (44)
- --------------------------------------------------------------------------------
Mortgage-backed securities, net 23,569 50,163 73,732
Gross unrealized gains 405 351 756
Gross unrealized losses (12) (284) (296)
- --------------------------------------------------------------------------------
Estimated market value $23,962 $50,230 $74,192
================================================================================
================================================================================
December 31, 1995
---------------------------------------
(in thousands) GNMA FHLMC Total
- --------------------------------------------------------------------------------
Principal balance $27,821 $65,034 $92,855
Unamortized premium 94 2 96
Unamortized discount (1) (82) (83)
- --------------------------------------------------------------------------------
Mortgage-backed securities, net 27,914 64,954 92,868
Gross unrealized gains 648 399 1,047
Gross unrealized losses -- (441) (441)
- --------------------------------------------------------------------------------
Estimated market value $28,562 $64,912 $93,474
================================================================================
The amortized cost and estimated market values of mortgage-backed securities
held to maturity, all of which have prepayment provisions, are distributed to a
maturity category based on the estimated average life of said securities, as
shown below. Principal prepayments are not scheduled over the life of the
investment, but are reflected as adjustments to the final maturity distribution.
The following is a summary of the amortized cost and estimated market value of
mortgage-backed securities held to maturity at December 31, 1996 by remaining
term to maturity:
<TABLE>
<CAPTION>
==============================================================================================
Estimated
(in thousands) GNMA FHLMC Total Market Value
- ----------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1 year or less $ 3,669 $11,422 $15,091 $15,185
Over 1 year to 5 years 19,900 38,741 58,641 59,007
- ----------------------------------------------------------------------------------------------
Total mortgage-backed securities, net $23,569 $50,163 $73,732 $74,192
==============================================================================================
</TABLE>
There were no sales of mortgage-backed securities held to maturity during the
years ended December 31, 1996, 1995, or 1994.
32
<PAGE> 26
NOTE 5 -- LOANS
The composition of the loan portfolio as of December 31, 1996 and 1995 is
summarized as follows:
================================================================================
December 31,
------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
MORTGAGE LOANS:
1-4 family $ 256,904 $288,470
Multi-family 822,364 641,564
Commercial real estate 63,452 62,003
Construction 1,598 1,205
- --------------------------------------------------------------------------------
Total 1,144,318 993,242
Less: Net deferred loan origination fees 1,058 912
- --------------------------------------------------------------------------------
Mortgage loans, net 1,143,260 992,330
- --------------------------------------------------------------------------------
OTHER LOANS:
Cooperative apartment 5,764 6,684
Home equity 2,819 3,069
Passbook savings 375 470
Student 24 116
Other 3,293 3,522
- --------------------------------------------------------------------------------
Total other 12,275 13,861
Less: Unearned discounts 24 29
- --------------------------------------------------------------------------------
Other loans, net 12,251 13,832
Less: Allowance for loan losses 9,359 11,359
- --------------------------------------------------------------------------------
Loans, net $1,146,152 $994,803
================================================================================
The Bank has a diversified loan portfolio as to type and borrower concentration.
At December 31, 1996 and 1995, approximately $1,106 million and $945 million,
respectively, of the Bank's mortgage loans were secured by properties located in
New York State. Accordingly, a substantial portion of both its borrowers'
ability to honor their contracts and increases or decreases in the market value
of the real estate collateralizing such loans may be significantly affected by
the state's economic condition. Loans in other states are diversified in their
locations and are underwritten utilizing criteria similar to those used for
loans in New York State.
The Bank holds all adjustable rate mortgages that it originates. Fixed
rate mortgages originated are generally sold to the Bank's Savings Bank Life
Insurance Department ("SBLI"), FNMA, or the State of New York Mortgage Agency
("SONYMA"), and the servicing rights retained. Loans sold to SBLI during the
years ended December 31, 1996, 1995, and 1994 amounted to $300,000, $400,000,
and $300,000, respectively. Loans sold to FNMA in the years ended December 31,
1996, 1995, and 1994 amounted to $0, $100,000, and $1.6 million, respectively.
Loans sold to SONYMA during the years ended December 31, 1996, 1995, and 1994
amounted to $45,000, $0, and $400,000, respectively. During 1996, 1995, and
1994, the Bank also sold approximately $82,000, $200,000, and $2.5 million,
respectively, in student loans, a substantial portion of said portfolio, to
Nellie Mae. Included in other income for the years ended December 31, 1996,
1995, and 1994 were $1,000, $23,000, and ($36,000), respectively, related to the
net gain (loss) on the sale of these loans.
The Bank services mortgage loans for third parties, primarily SBLI, FNMA,
and SONYMA. The unpaid principal balance of such serviced loans amounted to
$16.1 million, $17.4 million, and $17.9 million, at December 31, 1996, 1995, and
1994, respectively. Custodial escrow balances maintained in connection with such
loans amounted to $49,000, $115,000, and $147,000, at the corresponding dates.
Commitments to originate first mortgage loans at December 31, 1996 and
1995 amounted to approximately $32.4 million and $46.5 million, respectively,
all representing variable rate first mortgage loans. Substantially all of the
commitments at December 31, 1996 were expected to close within 90 days and were
made at interest rates which float or adjust at periodic intervals.
33
<PAGE> 27
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended December 31, 1996,
1995, and 1994 is summarized as follows:
================================================================================
December 31,
-------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Balance, beginning of year $ 11,359 $ 11,268 $ 10,320
Provisions charged to operations -- 150 1,200
Reversal of provisions (2,000) -- --
Charge-offs, net of recoveries -- (59) (252)
- --------------------------------------------------------------------------------
Balance, end of year $ 9,359 $ 11,359 $ 11,268
================================================================================
There were approximately $186,000 in recoveries to the allowance for loan losses
during the year ended December 31, 1994. No recoveries were realized during 1996
or 1995.
Non-accrual mortgage loans amounted to approximately $7.0 million, $4.9
million, and $5.4 million at December 31, 1996, 1995, and 1994, respectively.
Included in non-accrual mortgage loans were loans that have been restructured of
approximately $24,000, $359,000, and $1.7 million, respectively, at the
corresponding dates. The interest income that would have been recorded under the
original terms of such loans and the interest income actually recognized for the
years ended December 31, 1996, 1995, and 1994 are summarized below:
================================================================================
December 31,
----------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Interest income that would have been recorded $ 1,062 $ 869 $ 967
Interest income recognized (144) (47) (166)
- --------------------------------------------------------------------------------
Interest income foregone $ 918 $ 822 $ 801
================================================================================
The Company defines impaired loans as those non-accrual loans which are not 1-4
family mortgage loans. Impaired loans for which the discounted cash flows,
collateral value, or market price equals or exceeds the carrying value of the
loan do not require an allowance. The allowance for impaired loans for which the
discounted cash flows, collateral value, or market price is less than the
carrying value of the loan is included in the Bank's overall allowance for loan
losses. The Bank generally recognizes interest income on these loans to the
extent it is received in cash. At December 31, 1996, there were no impaired
loans with an allowance; impaired loans without an allowance totaled $1.2
million. The average balance of impaired loans during 1996 was $1.2 million,
consisting entirely of loans secured by commercial real estate. The interest
income recognized on impaired loans during 1996 was $0. The Company had no
impaired loans during 1995.
NOTE 7 -- FORECLOSED REAL ESTATE
The following table summarizes transactions in foreclosed real estate, which is
included in other assets for the years ended December 31, 1996 and 1995:
================================================================================
December 31,
-------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
Balance, beginning of year $ 774 $ 975
Transfers in 730 810
Sales (655) (324)
Transfers to real estate held for investment (222) (687)
- --------------------------------------------------------------------------------
Balance, end of year $ 627 $ 774
================================================================================
Foreclosed real estate is carried at fair market value; there were no valuation
allowances at December 31, 1996 or 1995, and no provisions for the years ended
December 31, 1996, 1995, or 1994.
34
<PAGE> 28
NOTE 8 -- DEPOSITS
The following is a summary of weighted average interest rates at December 31,
1996 and 1995 for each type of deposit:
================================================================================
December 31, 1996
--------------------------------------
Percent Weighted
(in thousands) Amount of Total Average Rate
- --------------------------------------------------------------------------------
Non-interest-bearing demand accounts $ 24,999 2.44% 0.00%
NOW and Super NOW accounts 18,216 1.78 2.46
Money market accounts 51,227 5.00 2.84
Savings accounts 277,783 27.13 2.42
Certificates of deposit 651,705 63.65 5.40
- --------------------------------------------------------------------------------
Total deposits $1,023,930 100.00% 4.28%
================================================================================
================================================================================
December 31, 1995
--------------------------------------
Percent Weighted
(in thousands) Amount of Total Average Rate
- --------------------------------------------------------------------------------
Non-interest-bearing demand accounts $ 22,795 2.45% 0.00%
NOW and Super NOW accounts 17,152 1.84 2.59
Money market accounts 58,845 6.31 3.06
Savings accounts 287,577 30.85 2.50
Certificates of deposit 545,771 58.55 5.71
- --------------------------------------------------------------------------------
Total deposits $932,140 100.00% 4.36%
================================================================================
The following is a summary of certificates of deposit at December 31, 1996 by
remaining term to maturity and by range of stated interest rates:
<TABLE>
<CAPTION>
=====================================================================================================
Amounts at December 31, 1996 Maturing
---------------------------------------------------------------------
Within Within Within After
(in thousands) One Year Two Years Three Years Three Years Total
- -----------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
CERTIFICATES OF DEPOSIT:
2.00% to 2.99% $ 26,405 $ -- $ -- $ -- $ 26,405
3.00% to 3.99% 2,979 -- -- -- 2,979
4.00% to 4.99% 43,989 771 26 -- 44,786
5.00% to 6.99% 465,626 55,705 15,630 17,619 554,580
7.00% and above 18,137 948 1,121 2,749 22,955
- -----------------------------------------------------------------------------------------------------
Total maturities $557,136 $57,424 $16,777 $20,368 $651,705
=====================================================================================================
</TABLE>
At December 31, 1996 and 1995, the aggregate amount of certificates of deposit
of $100,000 or more was approximately $108.4 million and $61.0 million,
respectively.
In June 1995, the Bank acquired a branch office located in Fresh Meadows,
Queens. The acquisition substantially comprised the assumption of the deposit
base of the branch, totaling $31.4 million, for which a premium was paid. The
premium, included in other assets as core deposit intangibles, is being
amortized over fifteen years. The operations of the acquired branch are included
in the Company's operations from the acquisition date forward.
35
<PAGE> 29
NOTE 9 -- BORROWINGS
In 1996 and 1995, the Company drew upon its line of credit with the Federal Home
Loan Bank of New York ("FHLB"), which totaled $323.3 million and $197.8 million
at the respective year-ends. At December 31, 1996 and 1995, the outstanding
balance was approximately $81.4 million and $46.1 million, with scheduled
maturity dates within the next 12 months. The weighted average interest rate for
borrowings was 5.49% and 5.57% at the corresponding dates. For the years ended
December 31, 1996 and 1995, the weighted average outstanding balance was
approximately $61.2 million and $36.0 million, with a weighted average interest
rate of 5.59% and 6.22%. The maximum amount of borrowings outstanding at any
month-end during the year ending December 31, 1996 was $88.8 million; in the
previous twelve-month period, the maximum month-end amount was $93.3 million.
The credit line is collateralized by stock in the FHLB and certain mortgage
loans under a blanket pledge agreement.
The Company also has an $8.8 million collateralized line of credit with
the Federal Reserve Bank of New York and a $10.0 million line of credit with a
money center bank, neither of which had been drawn upon at December 31, 1996.
The line of credit with the Federal Reserve Bank is collateralized by 90% of the
market value of the Company's fixed rate GNMA mortgage-backed securities.
NOTE 10 -- FEDERAL, STATE, AND LOCAL TAXES
Federal Income Taxes
The components of the net deferred tax asset at December 31, 1996 and 1995 are
summarized as follows:
================================================================================
December 31,
-------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Financial statement loan loss allowance $ 4,489 $ 5,393
Accrual for post-retirement benefits 1,953 1,780
Deferred directors' fees 357 377
Accrual for directors' retirement benefit 380 380
Deferred origination fees 503 433
Non-accrual interest 203 173
Organization costs 705 1,090
Allowance for doubtful account--Nationar -- 475
Others 782 764
- --------------------------------------------------------------------------------
Total deferred tax assets 9,372 10,865
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Tax reserve in excess of base year reserve (4,815) (3,593)
Basis difference of GNMAs (608) (772)
Pre-paid pension cost (606) (610)
Basis difference of premises and equipment (31) (68)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (6,060) (5,043)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 3,312 $ 5,822
================================================================================
The net deferred tax asset at December 31, 1996 and 1995 represents the
anticipated Federal, state, and local tax benefits expected to be realized in
future years upon the utilization of the underlying tax attributes comprising
this balance. The Company has paid income taxes in the years prior to December
31, 1996. Management believes it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets. Accordingly, no valuation allowance was deemed necessary
for the net deferred tax asset at December 31, 1996 or 1995.
36
<PAGE> 30
Income tax expense (benefit) for the years ended December 31, 1996, 1995, and
1994 is summarized as follows:
================================================================================
December 31,
-----------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Federal--current $10,471 $ 8,500 $ 8,352
State and local--current 4,774 3,718 6,794
- --------------------------------------------------------------------------------
Total current 15,245 12,218 15,146
- --------------------------------------------------------------------------------
Federal--deferred 690 (274) (887)
State and local--deferred 1,820 (207) (670)
- --------------------------------------------------------------------------------
Total deferred 2,510 (481) (1,557)
- --------------------------------------------------------------------------------
Total income tax expense $17,755 $11,737 $13,589
================================================================================
The following is a reconciliation of statutory Federal income tax expense to
combined effective income tax expense for the years ended December 31, 1996,
1995, and 1994:
===============================================================================
December 31,
------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Statutory Federal income tax expense $13,543 $11,172 $11,319
State and local income taxes, net of
Federal income tax benefit 4,286 2,282 3,981
Prior-period tax refunds -- (723) (320)
Other, net (74) (994) (1,391)
- -------------------------------------------------------------------------------
Total income tax expense $17,755 $11,737 $13,589
===============================================================================
Prior to January 1, 1996, under Section 593 of the Internal Revenue Code of 1986
as amended (the "Code"), institutions such as the Company which met certain
definitional tests (primarily relating to their assets and the nature of their
business) were permitted to establish a tax reserve for bad debts. Such
institutions were also permitted to make annual additions to the reserve, to be
deducted in arriving at their taxable income within specified limitations. The
Company's deduction was computed using an amount based on the Bank's actual loss
experience (the "experience method"), or a percentage equal to 8% of the Bank's
taxable income (the "PTI method"). Similar deductions for additions to the
Bank's bad-debt reserve were also permitted under the New York State Bank
Franchise Tax and the New York City Banking Corporation Tax; however, for
purposes of these taxes, the effective allowable percentage under the PTI method
was 32% rather than 8%.
Under the Small Business Job Protection Act of 1996 (the "1996 Act"),
signed into law in August 1996, Section 593 of the Code was amended. As a
result, the Company will be unable to make additions to the tax bad-debt
reserves but will be permitted to deduct bad debts as they occur. Additionally,
the 1996 Act required institutions to recapture (that is, include in taxable
income) the excess of the balance of its bad-debt reserves as of December 31,
1995 over the balance of such reserves as of December 31, 1987 (the "base
year"). The Company's Federal tax bad-debt reserves at December 31, 1995
exceeded its base year reserves by $26.0 million, which will be recaptured into
taxable income ratably over a six-year period. This recapture will be frozen for
1997 since the Company satisfies specified mortgage origination tests. The base
year reserves will be subject to recapture, and the Company could be required to
recognize a tax liability, if (i) the Company fails to qualify as a "bank" for
Federal income tax purposes; (ii) certain distributions are made with respect to
the stock of the Company; (iii) the Company uses the bad-debt reserves for any
purpose other than to absorb bad-debt losses; and (iv) there is a change in
Federal tax law. Management is not aware of the occurrence of any such event.
State and Local Taxes
The Company files New York State franchise tax and New York City financial
corporation tax returns on a calendar-year basis. The Company's annual tax
liability for each year is the greater of a tax on income or an alternative tax
based on a specified formula. Operating losses cannot be carried back or carried
forward for New York State or New York City tax purposes. The Company has
provided for New York State and New York City taxes based on taxable income for
the years ended December 31, 1996, 1995, and 1994.
In response to the Federal legislation, the New York State tax law has
been amended to retain existing tax bad-debt reserves and to allow for the
continued use of the PTI method to determine the bad-debt deduction in computing
the New York State tax liability. As of December 31, 1996, no such amendments
had been made with respect to the New York City tax law.
As a Delaware business corporation, the Company is required to file annual
returns and pay annual fees and an annual franchise tax to the State of
Delaware. Such taxes and fees, which are not material, are included in income
tax expense in the Consolidated Statements of Income.
37
<PAGE> 31
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
Lease Commitments
At December 31, 1996, the Company was obligated under seven non-cancellable
operating lease agreements with renewal options on properties used principally
for branch operations. The Company expects to renew such agreements at
expiration in the normal course of business. The leases contain escalation
clauses commencing at various times during the lives of the leases. Such clauses
provide for increases in the annual rental, based on increases in the consumer
price index.
At December 31, 1996, the Company had entered into several non-cancellable
operating lease agreements for rental of bank-owned properties. The leases
contain escalation clauses that provide for periodic increases in the annual
rental, again based on increases in the consumer price index.
As of December 31, 1996, the projected minimum annual rental commitments
under these leases, exclusive of taxes and other charges, are summarized as
follows:
================================================================================
(in thousands) Rental income Rental expense
- --------------------------------------------------------------------------------
1997 $ 864 $ 359
1998 726 360
1999 716 365
2000 674 349
2001 580 308
2002 and thereafter 2,286 3,214
- --------------------------------------------------------------------------------
Total minimum future rentals $5,846 $4,955
================================================================================
Rental expense under these leases, included in occupancy and equipment expense,
was approximately $333,000, $264,000, and $237,000 for the years ended December
31, 1996, 1995, and 1994, respectively. Rental income on bank-owned properties,
netted in occupancy and equipment expense, was approximately $947,000, $910,000,
and $716,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
Legal Proceedings
In the normal course of the Company's business, there are various outstanding
legal proceedings. In the opinion of management, after consultation with legal
counsel, the financial position of the Company will not be affected materially
as a result of the outcome of such legal proceedings.
NOTE 12 -- EMPLOYEE BENEFITS
Retirement Plan
The Bank has a qualified non-contributory defined benefit pension plan which
covers substantially all of the full-time employees of the Bank. The plan is
subject to the provisions of the Employee Retirement Income Security Act of 1974
("ERISA"), as amended. The benefits are an annual amount equal to 2% of the
average highest annual three years' earnings during the final ten years of
service, multiplied by the years of creditable service for the first 30 years
and then by 1% until 40 years of service, subject to certain limitations. The
Bank's policy is to fund pension costs in accordance with the minimum funding
requirement of ERISA and to provide the plan with sufficient assets with which
to pay pension benefits to plan participants.
The Bank performs its pension valuation to coincide with the year-end of
the pension plan (September 30th). The Bank estimates that its pension status
was not materially different at December 31, 1996 and 1995. The components of
net pension expense as determined by the Plan's actuary at the most recent
September 30th valuation dates are as follows:
<TABLE>
<CAPTION>
============================================================================================
September 30,
---------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 504 $ 429 $ 462
Interest cost on projected benefit obligation 926 904 877
Amortization of unrecognized past service liability 19 19 43
Amortization of unrecognized loss 37 77 57
Actual return on plan assets (975) (824) (902)
Amortization of unrecognized transition asset (95) (95) (95)
- --------------------------------------------------------------------------------------------
Net pension expense $ 416 $ 510 $ 442
============================================================================================
</TABLE>
38
<PAGE> 32
A comparison of accumulated plan benefit obligation and plan net assets as of
the most recent actuarial valuation follows:
<TABLE>
<CAPTION>
======================================================================================================
September 30,
-------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Accumulated Benefit Obligation (ABO):
Vested $ (9,990) $(10,195)
Non-vested (264) (408)
- ------------------------------------------------------------------------------------------------------
Total ABO $(10,254) $(10,603)
======================================================================================================
Projected benefit obligation $(12,473) $(12,726)
Plan assets at fair value (primarily investment trust funds) 12,875 12,146
- ------------------------------------------------------------------------------------------------------
Excess (deficiency) of plan assets under projected benefit obligation 402 (580)
Unrecognized transition asset being amortized over 10.46 years (64) (159)
Amount contributed during fourth quarter -- 524
Unrecognized loss 849 1,388
Unrecognized past service liability 93 112
- ------------------------------------------------------------------------------------------------------
Pre-paid pension cost $ 1,280 $ 1,285
======================================================================================================
</TABLE>
The discount rate used in determining the actuarial value of the projected
benefit obligation for the Bank's plan was 7.75% and 7.50% for 1996 and 1995,
respectively. The rate of increase in future compensation levels and the
expected long-term rate of return on assets were 5.5% and 8.0% for 1996 and
1995.
Thrift Incentive Plan
The Bank maintains a defined contribution Thrift Incentive Plan in which all
regular salaried employees may participate after one year of service and age 21.
Under provisions of the plan, the Bank would normally match 50% of a
participant's personal contributions up to 6% of the employee's annual
compensation for the first five years of plan participation. After five years of
plan participation, the Bank would match 100% of a participant's contributions
up to 6% of annual compensation.
Pursuant to the Bank's conversion from mutual to stock form in 1993 and
the adoption of the ESOP, the Bank temporarily suspended all matching
contributions to the Thrift Incentive Plan, in order to comply with the
limitations set forth by the Internal Revenue Code. Accordingly, there were no
Company contributions for the years ended December 31, 1996, 1995, or 1994.
Other Compensation Plans
The Bank maintains an unfunded non-qualified plan to provide retirement benefits
to directors who are neither officers nor employees of the Bank, to ensure that
the Bank will have their continued service and assistance in the conduct of its
business in the future. These directors have provided, and will continue to
provide, expertise that enables the Bank to experience successful growth and
development.
Deferred Compensation Plan
The Bank maintains a deferred compensation plan for directors who are neither
officers nor employees of the Bank. At December 31, 1996 and 1995, this plan
maintained $1.0 million and $1.1 million, respectively, of trust-held assets.
Trust-held assets at December 31, 1996 and 1995 included $228,000, at cost, of
the Company's common stock, representing 18,261 shares. The cost of such shares
is reflected as contra-equity and additional paid-in capital in the accompanying
Consolidated Statements of Financial Condition. The remaining balances in the
deferred compensation plan at December 31, 1996 and 1995 of $752,000 and
$794,000, respectively, are unfunded and, as such, are reflected in other
liabilities in the Company's Consolidated Statements of Financial Condition.
Post-Retirement Health Care Benefits
The Bank offers post-retirement benefits to its retired employees. The plan
provides comprehensive medical coverage through a major insurance company,
subject to an annual deductible co-payment percentage and an offset against
other insurance available to the retiree. The plan covers most medical expenses,
including hospital services, doctors' visits, x-rays, and prescription drugs.
Effective for those retiring after January 1, 1994, retired employees are
required to share costs of the plan with the Bank, based upon a formula which
takes into account age and years of service.
The Bank accrues the cost of such benefits during the years an employee
renders the necessary service. The table at the top of page 40 sets forth the
plan's funded status and amounts recognized in the Bank's consolidated financial
statements at December 31, 1996 and 1995.
39
<PAGE> 33
================================================================================
ACCUMULATED POST-RETIREMENT BENEFIT OBLIGATION (APBO)
December 31,
-------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
Retirees and spouses $(3,546) $(2,841)
Actives fully eligible to retire (79) (137)
Actives not yet fully eligible to retire (1,000) (624)
- --------------------------------------------------------------------------------
Total APBO (4,625) (3,602)
- --------------------------------------------------------------------------------
Funded status (4,625) (3,602)
Unrecognized net loss 887 292
Unrecognized prior service cost (376) (440)
- --------------------------------------------------------------------------------
Accrued post-retirement benefit cost $(4,114) $(3,750)
================================================================================
The net periodic post-retirement cost for the years ended December 31, 1996 and
1995 was as follows:
================================================================================
December 31,
----------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
Service cost $110 $ 46
Interest cost 333 265
Net amortization of prior service cost (4) (64)
- --------------------------------------------------------------------------------
Total expense $439 $247
================================================================================
The health care trend assumptions follow the conventional assumption that there
is an upper limit to the relative levels of national health care expenditures,
and that a shift to lower levels of inflation will be experienced gradually over
the next several years. The cost increase factors equate to an assumption that
U.S. health care costs will reach a limit of approximately 16.5% of Gross
National Product by the end of this century, and will remain at that level in
the future.
To estimate the December 31, 1996 accumulated post-retirement benefit
obligation, health care costs were assumed to increase by approximately 10.0%
from 1995 to 1996 and then decrease 0.5% each year thereafter until they reach
5.5%. The weighted-average discount rate and salary increase assumptions were
7.75% and 7.5%, respectively.
To calculate the 1996 net periodic post-retirement benefit cost, the same
assumptions used to calculate the accumulated post-retirement benefit obligation
were used.
The following table sets forth the Bank's accumulated post-retirement
benefit obligation, assuming a one percent increase in the aforementioned
assumed health care cost trend at December 31, 1996:
================================================================================
ACCUMULATED POST-RETIREMENT BENEFIT OBLIGATION (APBO)
(in thousands)
- --------------------------------------------------------------------------------
Retirees and spouses $(3,666)
Actives fully eligible to retire (81)
Actives not yet fully eligible to retire (1,033)
- --------------------------------------------------------------------------------
Total APBO (4,780)
- --------------------------------------------------------------------------------
Funded status (4,780)
Unrecognized net loss 887
Unrecognized prior service cost (376)
- --------------------------------------------------------------------------------
Accrued post-retirement benefit cost $(4,269)
================================================================================
40
<PAGE> 34
The net periodic post-retirement cost, assuming a one percent increase in the
aforementioned assumed health care cost trend for the year ended December 31,
1996, would have been as follows:
================================================================================
(in thousands)
- --------------------------------------------------------------------------------
Service cost $ 111
Interest cost 364
Net amortization of prior service cost (24)
- --------------------------------------------------------------------------------
Total expense $ 451
================================================================================
NOTE 13 -- STOCK PLANS
Option Plans
The Board of Directors of the Company adopted the following stock option plans
which became effective upon the conversion of the Bank from mutual to stock
form:
Stock Option Plan
Under the Stock Option Plan, 568,100 stock options (as adjusted for the two
stock splits) which expire ten years from the date of grant, November 23, 1993,
have been granted to the executive officers and employees of the Company and its
affiliate, the Bank. Each option entitles the holder to purchase one share of
the Company's common stock at an exercise price equal to $12.50 per share, which
is the initial public offering price as adjusted for the two splits. Options
vest in whole or in part over 3 to 5 years from the date of issuance. However,
all options become 100% exercisable in the event that the employee terminates
his employment due to death, disability, normal retirement, or in the event of a
change in control of the Bank or the Company. Simultaneous with the grant of
these options, the Compensation Committee of the Board of Directors granted
"Limited Rights" with respect to the shares covered by the options. Limited
Rights granted are subject to terms and conditions and can be exercised only in
the event of a change in control of the Company. Upon exercise of a Limited
Right, the holder shall receive from the Company a cash payment equal to the
difference between the exercise price of the option ($12.50) and the fair market
value of the underlying shares of common stock. In 1996, 31,456 options granted
under the Stock Option Plan were exercised; 4,675 options were exercised in
1995; and 397 options were exercised in 1994. The Bank primarily utilizes common
stock held in Treasury to satisfy options exercised. The difference between the
average cost of Treasury shares and the exercise price is recorded as an
adjustment to retained earnings on the date of exercise. The number of vested
options exercisable at December 31, 1996 was 438,104.
Stock Option Plan for Outside Directors
("Directors' Option Plan")
Each member of the Board of Directors who is not an officer or employee of the
Company or the Bank was granted non-statutory options to purchase shares of the
Company's common stock based upon length of service. In addition, active
Directors Emeritus were each granted non-statutory options to purchase shares of
the common stock. In the aggregate, members of the Board of Directors and active
Directors Emeritus of the Company were granted options to purchase 305,900
shares (as adjusted for the two stock splits) of the common stock of the Company
at an exercise price equal to $12.50 per share, which is the initial public
offering price as adjusted to reflect the splits, with Limited Rights. All
options granted under the Directors' Option Plan, including Limited Rights
attached thereto, expire upon the earlier of 10 years following the date of
grant or one year following the date the optionee ceases to be a director. For
the years ended December 31, 1996, 1995, and 1994, respectively, 35,565, 19,821,
and 0 options were exercised. The Bank primarily utilizes common stock held in
Treasury to satisfy options exercised. The difference between the average cost
of Treasury shares and the exercise price is recorded as an adjustment to
retained earnings on the date of exercise. All of the options granted under the
Directors' Option Plan were exercisable one year after grant.
Stock Plans
Effective upon the conversion, the Bank established the following stock plans
for eligible employees who have at least 12 consecutive months of credited
service:
Employee Stock Ownership Plan
("ESOP") and Supplemental Employee
Retirement Plan ("SERP")
In connection with the conversion, the Company lent $19.4 million to the ESOP to
purchase 1,376,551 shares (as adjusted for the two stock splits). The loan will
be repaid, principally from the Bank's discretionary contributions to the ESOP,
over a period of time not to exceed 20 years. The Bank's obligation to make such
contributions is reduced to the extent of any investment earnings realized on
such contributions and any dividends paid by the Company on stock held in the
unallocated stock account. At December 31, 1996, the loan had an outstanding
balance of $14.3 million and a fixed interest rate of 6.0%. Interest expense for
the obligation was $1.0 million for the year ended December 31, 1996. Shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is paid. Contributions to the ESOP and shares
released from the suspense account are allocated among participants on the basis
of compensation,
41
<PAGE> 35
as described in the plan, in the year of allocation. Contributions to the ESOP
were approximately $1.9 million for the year ended December 31, 1996. Dividends
and investment income received on ESOP shares used for debt service amounted to
$959,000. Benefits will vest on a seven-year basis, starting with 20% in year
three and continuing each year thereafter. However, in the event of a change in
control, as defined in the plan, any unvested portion of benefits shall vest
immediately.
Forfeitures will be reallocated among participating employees, in the same
proportion as contributions. Benefits are payable upon death, retirement,
disability, or separation from service and may be payable in cash or stock.
The ESOP Trustee must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. Unallocated
shares and shares held in the suspense account are voted in a manner calculated
to most accurately reflect the instructions it has received from participants
regarding the allocated stock. Shares allocated to participants were 136,452 and
104,091 for the periods ended December 31, 1996 and 1995, respectively. At
December 31, 1996, there were 984,387 shares remaining for future allocation,
with a market value of $46.6 million. The Bank recognizes compensation expense
based on the average market price during the year at the date of allocation of
the common stock for the ESOP Plan. The Company recorded compensation expense
for the ESOP Plan of $3.2 million, $2.3 million, and $1.8 million for the years
ended December 31, 1996, 1995, and 1994, respectively.
The Bank also established a Supplemental Employee Retirement Plan
("SERP"), which provides additional unfunded, non-qualified benefits to certain
participants of the ESOP in the form of common stock. At December 31, 1996,
1995, and 1994, this plan maintained $1.2 million, $102,000 and $70,000,
respectively, of trust-held assets, based upon the cost of assets at the time of
purchase. Trust-held assets consist entirely of Company common stock, which
represented 23,593 and 5,423 shares at December 31, 1996 and 1995, respectively.
The cost of such shares is reflected as contra-equity and additional paid-in
capital in the accompanying Consolidated Statements of Financial Condition. The
Company recorded compensation expense for the SERP of $1.1 million, $32,000, and
$70,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
Recognition and Retention Plans
and Trusts ("RRPs")
The purpose of the RRPs is to provide employees, officers, and directors of the
Bank with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Bank. The Bank contributed a total of
$5.5 million to the RRPs to enable them to acquire an aggregate of 437,000
shares (as adjusted for the two stock splits) of the common stock in the
conversion, substantially all of which have been awarded. Such amount represents
deferred compensation and has been accounted for as a reduction of stockholders'
equity. Awards vested at a rate of 33 1/3% per year for directors, commencing on
November 23, 1994, and vest at a rate of 20% per year for officers and
employees, commencing on January 1, 1995. Awards become 100% vested upon
termination of employment due to death, disability, or normal retirement, or
following a change in control of the Bank or the Company. Pursuant to the RRPs,
312,909 shares of common stock were vested at December 31, 1996. The Bank
recognizes expense based on the original cost of the common stock at the date of
vesting for the RRP. The Company recorded compensation expense for the RRP Plan
of $1.1 million, $1.1 million, and $1.4 million for the years ended December 31,
1996, 1995, and 1994, respectively.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying values and estimated fair values of
the Company's on-balance-sheet financial instruments at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
=================================================================================================================
December 31,
--------------------------------------------------------------
1996 1995
---------------------------- ---------------------------
Carrying Estimated Carrying Estimated
(in thousands) Value Fair Value Value Fair Value
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 21,045 $ 21,045 $ 38,990 $ 38,990
Securities held to maturity 86,495 86,483 78,016 78,151
Mortgage-backed securities held to maturity 73,732 74,192 92,868 93,474
Loans, net 1,146,152 1,185,853 994,803 1,029,509
FINANCIAL LIABILITIES:
Deposits $1,023,930 $1,028,386 $932,140 $ 933,271
FHLB borrowings 81,393 81,393 46,077 46,077
Mortgagors' escrow 7,356 7,356 7,804 7,804
=================================================================================================================
</TABLE>
42
<PAGE> 36
The methods and significant assumptions used to estimate fair values pertaining
to the Company's financial instruments are as follows:
Cash and Cash Equivalents
Cash and cash equivalents include cash and Federal funds sold. The estimated
fair values of cash and cash equivalents are assumed to equal their carrying
values, as these financial instruments are either due on demand or mature
overnight.
Securities and Mortgage-Backed Securities Held to Maturity
Estimated fair values are based principally on market prices or dealer quotes.
Certain fair values are estimated using market prices of similar securities.
Loans
The loan portfolio is segregated into various components for valuation purposes
in order to group loans based on their significant financial characteristics,
such as loan type (mortgages or other) and payment status (performing or
non-performing). Fair values are estimated for each component using a valuation
method selected by management.
The estimated fair values of performing residential mortgage loans,
commercial real estate loans, and consumer loans are computed by discounting the
anticipated cash flows from the respective portfolios. The discount rates
reflect current market rates for loans with similar terms to borrowers of
similar credit quality.
The estimated fair values of non-performing residential and commercial
mortgage loans are based on recent collateral appraisals or management's
analysis of estimated cash flows, discounted at rates commensurate with the
credit risk involved.
The above technique of estimating fair value is extremely sensitive to the
assumptions and estimates used. While management has attempted to use
assumptions and estimates which are the most reflective of the Company's loan
portfolio and the current market, a greater degree of subjectivity is inherent
in these values than those determined in formal trading marketplaces. As such,
readers are cautioned in using this information for purposes of evaluating the
financial condition and/or value of the Company in and of itself or in
comparison with any other company.
Deposits
The fair values of deposit liabilities with no stated maturity (NOW, money
market, savings accounts, and non-interest-bearing accounts) are equal to the
carrying amounts payable on demand. The fair values of certificates of deposit
represent contractual cash flows, discounted using interest rates currently
offered on deposits with similar characteristics and remaining maturities.
These estimated fair values do not include the intangible value of core
deposit relationships which comprise a significant portion of the Bank's deposit
base. Management believes that the Bank's core deposit relationships provide a
relatively stable, low-cost funding source which has a substantial intangible
value separate from the value of the deposit balances.
FHLB Borrowings
The carrying value of borrowings approximates fair value in the financial
statements, as these instruments are short-term.
Other Receivables and Payables
The estimated fair values are estimated to equal the carrying values of
short-term receivables and payables.
Off-Balance-Sheet Financial Instruments
The fair values of commitments to extend credit and unadvanced lines of credit
are estimated based on an analysis of the interest rates and fees currently
charged to enter into similar transactions, considering the remaining terms of
the commitments and the creditworthiness of the potential borrowers. The
estimated fair values of these off-balance-sheet financial instruments resulted
in no unrealized gain or loss at December 31, 1996 or 1995.
NOTE 15 -- RESTRICTIONS ON THE BANK
Various legal restrictions limit the extent to which the Bank can supply funds
to the parent company and its non-bank subsidiaries. As a converted stock form
savings bank, the approval of the Superintendent of the New York State Banking
Department is required if dividends declared in any calendar year exceed the
total of its net profits for that year combined with its retained net profits
for the preceding two calendar years, less any required transfer to paid-in
capital. "Net profits" is defined as the remainder of all earnings from current
operations plus actual recoveries on loans and investments and other assets,
after deducting from the total thereof all current operating expenses, actual
losses, if any, and all Federal and state taxes. In 1996, the Bank declared
dividends to its parent aggregating $38.0 million, which did not exceed net
profits for 1994 through 1996.
43
<PAGE> 37
NOTE 16 -- PARENT COMPANY-ONLY FINANCIAL INFORMATION
Queens County Bancorp, Inc. operates a wholly-owned subsidiary, Queens County
Savings Bank. The earnings of the Bank are recognized by the Company using the
equity method of accounting. Accordingly, earnings of the Bank are recorded as
an increase in the Company's investment in the Bank.
Following are the condensed financial statements for Queens County
Bancorp, Inc. (parent company-only):
================================================================================
CONDENSED STATEMENTS OF CONDITION
December 31,
--------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
ASSETS
Cash $ 339 $ 155
Money market investments 62 62
Investment in and advances to Queens County Savings Bank 211,028 217,413
- -------------------------------------------------------------------------------
Total assets $211,429 $217,630
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ -- $ --
Stockholders' equity 211,429 217,630
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $211,429 $217,630
===============================================================================
<TABLE>
<CAPTION>
==============================================================================================================
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income from Queens County Savings Bank $ 3,786 $ 5,273 $ 2,731
Other interest income 8 3 476
Dividends from Queens County Savings Bank 38,000 -- 34,000
- --------------------------------------------------------------------------------------------------------------
Total income 41,794 5,276 37,207
Operating expense 273 233 226
- --------------------------------------------------------------------------------------------------------------
Income before income tax and equity in undistributed earnings 41,521 5,043 36,981
Income tax expense 150 163 150
- --------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of
Queens County Savings Bank 41,371 4,880 36,831
Equity in undistributed earnings of Queens County Savings Bank (20,432) 15,303 (18,081)
- --------------------------------------------------------------------------------------------------------------
Net income $ 20,939 $20,183 $ 18,750
==============================================================================================================
</TABLE>
44
<PAGE> 38
<TABLE>
<CAPTION>
===============================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,939 $ 20,183 $ 18,750
Equity in undistributed earnings of the Bank not provided for 20,432 (15,303) 18,081
Increase in other liabilities -- (73) 73
Increase in other assets -- -- 327
Amortization of premium -- -- 102
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,371 4,807 37,333
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of held-to-maturity securities -- -- 19,000
Payments for investments in and advances to subsidiaries (42,761) (11,362) (66,682)
Repayment from investments in and advances to subsidiaries 35,231 17,921 3,161
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (7,530) 6,559 (44,521)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Treasury stock (28,825) (9,963) (7,235)
Dividends paid (5,669) (1,632) (603)
Exercise of stock options 837 306 5
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (33,657) (11,289) (7,833)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 184 77 (15,021)
Cash and cash equivalents at beginning of year 217 140 15,161
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 401 $ 217 $ 140
===============================================================================================================
</TABLE>
NOTE 17 -- REGULATORY MATTERS
The Bank is subject to regulation, examination, and supervision by the New York
State Banking Department and the Federal Deposit Insurance Corporation (the
"Regulators"). The Bank is also governed by numerous Federal and State laws and
regulations, including the FDIC Improvement Act of 1991 ("FDICIA"). Among other
matters, FDICIA established five capital categories ranging from well
capitalized to critically undercapitalized. Such classifications are used by the
FDIC to determine various matters, including prompt corrective action and each
institution's semi-annual FDIC deposit insurance premium assessments. The Bank's
capital amounts and classification are also subject to qualitative judgments by
the Regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
at the top of page 46) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes that, as of
December 31, 1996, the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage capital ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table on the following page.
45
<PAGE> 39
<TABLE>
<CAPTION>
===============================================================================================================================
As of December 31, 1996
----------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $137,044 17.4% $ 63,091 =>8.0% $ 78,868 =>10.0%
Tier 1 capital (to risk-weighted assets) 127,685 16.2 31,545 =>4.0 47,318 => 6.0
Tier 1 leverage capital (to average assets) 127,685 9.7 39,681 =>3.0 66,135 => 5.0
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================================================
As of December 31, 1995
----------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $149,490 23.2% $ 51,441 =>8.0% $ 64,302 =>10.0%
Tier 1 capital (to risk-weighted assets) 141,452 22.0 25,721 =>4.0 38,581 => 6.0
Tier 1 leverage capital (to average assets) 141,452 12.0 35,497 =>3.0 59,161 => 5.0
===============================================================================================================================
</TABLE>
Under this framework, and based upon the Bank's capital levels, no prior
approval from the Regulators is necessary to accept brokered deposits.
NOTE 18 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the fiscal years ended December 31, 1996
and 1995 follows:
<TABLE>
<CAPTION>
===============================================================================================================================
1996 1995
------------------------------------------ ----------------------------------------
(in thousands, except per share data) 4th 3rd 2nd 1st 4th 3rd 2nd 1st
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $14,863 $14,406 $14,443 $13,808 $13,141 $12,743 $12,842 $13,182
(Reversal of) provision
for loan losses -- -- (2,000) -- -- -- 75 75
Other operating income 861 628 470 486 481 412 1,646 494
Operating expense 6,547 5,733 5,533 5,457 5,333 5,187 6,511 5,841
- -------------------------------------------------------------------------------------------------------------------------------
Income before income
tax expense 9,177 9,301 11,380 8,837 8,289 7,968 7,902 7,760
Income tax expense 5,364 3,699 5,115 3,578 2,994 2,753 2,942 3,048
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,813 $ 5,602 $ 6,265 $ 5,259 $ 5,295 $ 5,215 $ 4,960 $ 4,712
===============================================================================================================================
Net income per
common share(a) $0.54 $0.78 $0.83 $0.68 $0.68 $0.68 $0.64 $0.60
===============================================================================================================================
Cash dividends declared
per common share(a) 0.25 0.25 0.20 0.14 0.11 0.04 0.04 0.04
===============================================================================================================================
Average common shares
and equivalents
outstanding(a) 6,999 7,226 7,571 7,699 7,763 7,701 7,816 7,896
===============================================================================================================================
Stock price per
common share(a):
High $49.38 $38.06 $36.75 $33.00 $32.25 $30.19 $24.94 $22.88
Low 36.88 35.16 32.25 29.25 28.69 23.54 20.63 18.19
Close 47.38 37.25 36.75 33.00 29.67 29.91 23.81 21.19
===============================================================================================================================
</TABLE>
(a) Reflects shares issued as a result of a four-for-three stock split on August
22, 1996.
46
<PAGE> 40
Management's Responsibility for Financial Reporting
Queens County Bancorp, Inc., 38-25 Main Street, Flushing, New York 11354
To Our Shareholders:
Management has prepared, and is responsible for, the consolidated financial
statements and related financial information included in this annual report. The
consolidated financial statements were prepared in accordance with generally
accepted accounting principles and reflect management's judgments and estimates
with respect to certain events and transactions. Financial information included
elsewhere in this annual report is consistent with the consolidated financial
statements.
Management is responsible for maintaining a system of internal control and has
established such a system to provide reasonable assurance that transactions are
recorded properly to permit preparation of financial statements, that they are
executed in accordance with management's authorizations, and that assets are
safeguarded from significant loss or unauthorized use. Management believes that
during fiscal year 1996, this system of internal control was adequate to
accomplish the intended objectives.
The Audit Committee of the Board of Directors, composed of non-management
directors, meets periodically with the Company's independent certified public
accountants, its internal auditors, and management to discuss auditing, internal
accounting controls, and financial reporting matters, and to ensure that each is
properly discharging its responsibilities. Both the independent certified public
accountants and the internal auditors have free access to the Committee without
management being present.
/s/ Joseph R. Ficalora
Joseph R. Ficalora
Chairman, President, and Chief Executive Officer
January 21, 1997
Independent Auditors' Report
To the Board of Directors
Queens County Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Queens
County Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995 and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Queens County
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
January 21, 1997
<PAGE> 1
EXHIBIT 23.0
[Letterhead of KPMG Peat Marwick LLP]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Queens County Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-85684) on Form S-8 of Queens County Bancorp, Inc. of our report dated January
21, 1997, related to the consolidated statements of condition of Queens County
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996
which report is incorporated by reference in the December 31, 1996 annual report
on Form 10-K of Queens County Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
New York, New York
March l8, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000910073
<NAME> QUEENS COUNTY BANCORP INC.
<MULTIPLIER> 1
<CURRENCY> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 14,045
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 160,227
<INVESTMENTS-MARKET> 160,675
<LOANS> 1,155,511
<ALLOWANCE> (9,359)
<TOTAL-ASSETS> 1,358,656
<DEPOSITS> 1,023,930
<SHORT-TERM> 81,393
<LIABILITIES-OTHER> 41,904
<LONG-TERM> 0
92
0
<COMMON> 0
<OTHER-SE> 211,337
<TOTAL-LIABILITIES-AND-EQUITY> 1,358,656
<INTEREST-LOAN> 92,017
<INTEREST-INVEST> 9,560
<INTEREST-OTHER> 727
<INTEREST-TOTAL> 102,304
<INTEREST-DEPOSIT> 41,365
<INTEREST-EXPENSE> 44,784
<INTEREST-INCOME-NET> 57,520
<LOAN-LOSSES> (2,000)
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 20,828
<INCOME-PRETAX> 38,694
<INCOME-PRE-EXTRAORDINARY> 20,939
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,939
<EPS-PRIMARY> 2.83
<EPS-DILUTED> 2.81
<YIELD-ACTUAL> 8.23
<LOANS-NON> 6,861
<LOANS-PAST> 2,798
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,359
<CHARGE-OFFS> 0
<RECOVERIES> 2,000
<ALLOWANCE-CLOSE> 9,359
<ALLOWANCE-DOMESTIC> 9,359
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
