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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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, 1997 Commission File Number 0-22278
QUEENS COUNTY BANCORP INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1377322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
38-25 Main Street, Flushing, New York 11354
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(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
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(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 17, 1998, the aggregate market value of the shares of common stock
of the registrant outstanding was $541,592,113, excluding 1,620,337 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 17, 1998, which was $40.75 as reported in The
Wall Street Journal on March 18, 1998. The number of shares of the registrant's
common stock outstanding as of March 17, 1998 was 14,910,941 shares.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 22, 1998 and the 1997 Annual Report to
Shareholders are incorporated herein by reference - Parts I, II and III.
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CROSS REFERENCE INDEX
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PART I
Page
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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 7A. Quantitative and Qualitative Disclosures About Market Risk ....... 24
Item 8. Financial Statements and Supplementary Data ...................... 24
Queens County Bancorp, Inc. and Subsidiary: .................... 24
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
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................ 25
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
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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 the
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 $481 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, four 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
six stock repurchase authorizations and increased its Treasury stock, net of
options exercised, to 5,734,442, or 27.77% of the shares issued at its initial
public offering on November 23, 1993. At March 17, 1998, the total number of
shares outstanding was 14,910,941, as compared to 14,912,791 at December 31,
1997.
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 nine branch offices and three customer
service centers in Queens and a tenth 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 78.78% of the Bank's loan
portfolio at year-end 1997. 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.
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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, 1997, the Bank's gross loan portfolio totaled
$1,405.7 million, of which $1,107.4 million, or 78.78%, were multi-family
mortgage loans, and $224.3 million, or 15.96%, were one-to-four family first
mortgage loans. Of the total mortgage loan portfolio at year-end 1997, 92.80%
were adjustable rate loans and 7.20% were fixed rate loans. The Bank's loan
portfolio also included $61.7 million in commercial real estate loans, $1.5
million in construction loans, $5.0 million in cooperative apartment loans, $2.4
million in home equity loans generally secured by second liens on real property,
and $3.4 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 31,1997, mortgage-backed securities
totaled $49.8 million, or 3.10% of total assets. The market value of such
securities was approximately $50.6 million at December 31, 1997. At December 31,
1997, all of the Bank's $49.8 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 years December 31, 1997 and 1996, originations of new ARM loans totaled
$388.7 million and $295.3 million, respectively, or 95.53% and 99.83%, of all
mortgage loan originations. Originations of fixed rate loans totaled $6.8
million and $7.9 million, respectively, for the same periods, while sales of ARM
loans of $12.9 million and fixed rate loans totaled $3.2 million and $350,000,
respectively, for those periods. The Bank generally sells all loans without
recourse and retains the servicing rights of such loans. As of December 31,
1997, the Bank was servicing $30.8 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, 1997, the Bank's portfolio of multi-family
mortgage loans totaled $1,107.4 million, representing 78.78% of the total loan
portfolio. Of these, $631.6 million, or 44.93%, were secured by rental apartment
buildings and $475.8 million, or 33.85%, were secured by underlying mortgages on
cooperative apartment buildings.
Such loans are typically 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 1997, the
majority of the Bank's multi-family mortgage loan originations featured a fixed
rate for the first five years of the credit; prepayment penalties range from
five points to one over the first five years of the loan. At year-end 1997,
96.2% of the Bank's multi-family mortgage loans were adjustable rate credits,
including $369.1 million that are due to step upward in 1998. Properties
securing multi-family mortgage loans are appraised either by appraisers employed
by the Bank or by independent appraisers approved by the Bank.
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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,
1997 consisted of 15 loans secured by 15 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, 1997, the
outstanding balance of these loans totaled $16.1 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. 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, 1997, $224.3 million, or 15.96% of the Bank's loan
portfolio, consisted of one-to-four family mortgage loans.
Since 1985, 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. 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. A majority of the Bank's one-to-four family loan
originations during 1997 and 1996 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. The Bank's $7.7 million in
non-performing loans at December 31, 1997, was comprised of one-to-four family
loans. Since 1990, the Bank has foreclosed on 45 one-to-four family residential
properties; three of these properties remained in foreclosed real estate as of
December 31, 1997, with a carrying value of $435,000. The Bank also has one
commercial property in foreclosed real estate with a carrying value of $595,000.
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
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and an aggregate adjustment of 6% over the life of the loan. Accordingly,
increases in interest rates and the resulting cost of 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, 1997 and
1996, the Bank originated $2.6 million and $8.5 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 1997, 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, 1997 and 1996, the Bank originated
$1.5 million and $1.6 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, 1997, the Bank sold loans totaling $3.2 million. As of December 31, 1997,
the Bank's portfolio of loans serviced for others totaled $30.8 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 in the
future.
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, 1997,
the Bank had loans secured by commercial real estate of $61.7 million,
comprising 4.39% 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 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 either by appraisers employed by the Bank or by independent
appraisers approved by the Bank. In recent years, the Bank has de-emphasized its
origination of commercial real estate loans. At December 31, 1997 and 1996, such
loans totaled $61.7 million and $63.5 million, respectively.
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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 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 $1.5 million, or 0.10%, 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, 1997 totaled $10.8 million, or 0.77% of the
Bank's loan portfolio and included cooperative apartment loans of $5.0 million,
or 46.30%. 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, 1997 totaled $2.4 million, against total available
credit lines of $3.8 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, 1997, the Bank had twenty-six loans in excess of $3.0 million,
with the highest amount being $7.5 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.
Non-performing Loans and Foreclosed Assets. The Bank had $7.7 million in
loans delinquent 90 days or more at December 31, 1997, consisting of 68
one-to-four family mortgage loans with an average principal balance of
approximately $113,200. Management does not expect to incur significant losses
on its non-performing mortgage loans.
Management reviews non-performing 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.
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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, 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.
Loans are designated as "in foreclosure", and beginning in 1997, the
accrual of interest and amortization of origination fees continues up to net
realizable value less transaction cost of disposition. During the years ended
December 31, 1997, 1996, and 1995, the amounts of additional interest income
that would have been recorded on mortgage loans in foreclosure, had they been
current, totaled $161,000, $891,000, and $822,000 respectively. These amounts
were not included in the Bank's interest income for the respective periods.
The following table sets forth information regarding all mortgage loans in
foreclosure, loans which are 90 days or more delinquent, commercial real estate
pending foreclosure, and foreclosed real estate at the dates indicated. At
December 31, 1997, 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.
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At December 31,
---------------
1997 1996 1995 1994 1993
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(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans in foreclosure .. $6,121 $ 6,861 $4,929 $5,437 $ 7,417
Loans 90 days or more delinquent
and still accruing interest .. 1,571 2,798 2,864 1,674 2,329
Commercial real estate loans
pending foreclosure ......... -- -- -- -- 2,009
------ ------- ------ ------ -------
Total non-performing loans ..... 7,692 9,659 7,793 7,111 11,755
------ ------- ------ ------ -------
Foreclosed real estate ....... 1,030 627 774 975 884
------ ------- ------ ------ -------
Total non-performing assets .... $8,722 $10,286 $8,567 $8,086 $12,639
====== ======= ====== ====== =======
Total non-performing loans to
loans, net ................... 0.55% 0.84% 0.78% 0.76% 1.51%
Total non-performing assets to
total assets ................ 0.54 0.76 0.69 0.69 1.16
</TABLE>
Non-performing loans totaled $7.7 million as of December 31, 1997.
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.
6
<PAGE> 9
At December 31, 1997, foreclosed real estate was comprised of three
residential properties and one commercial real estate parcel located within the
Bank's primary lending area, with an aggregate carrying value of $1 million. 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 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.
At December 31, 1997, the total allowance was $9.4 million, which amounted
to 122.61% of non-performing loans and 108.13% of non-performing assets. For the
years ended December 31, 1997 and 1996, the Bank had no net charge-offs 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, 1997,
mortgage-backed securities totaled $49.8 million, or 3.10% 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, 1997, the
mortgage-backed securities portfolio had a weighted average interest rate of
6.14% and a market value of approximately $50.6 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
medium-term Government agency securities from U.S. Treasury securities as the
latter securities matured or were redeemed. As a result, at December 31, 1997,
Government agency securities totaled $84.9 million and U.S. Treasury securities
totaled $14.0 million, as compared to $10.4 million and $76.1 million at
December 31, 1996, respectively. The Bank's aggregate securities portfolio
totaled $94.9 million at December 31, 1997. See Statistical Data-E, "Securities,
Money Market Investments, 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 funds.
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, 1997, $139.7 million, or 13.07% 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 $481.0 million
line of credit at December 31, 1997. To supplement its funding source in a year
of increased lending, the Company drew on its line of credit with the FHLB in
1997. Borrowings, which are used to finance loan production, totaled $309.7
million at December 31, 1997. A $10.0 million line of credit with a
correspondent financial institution is also available to the Bank. At December
31, 1997, the Bank also had an outstanding loan in the amount of $13.3 million
from the Company to fund the Employee Stock Ownership Plan ("ESOP") and $9.5
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 three
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, and Queens Realty Trust, Inc. holds a pool of qualifying mortgage
loans for investment purposes.
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, 1997, the number of full-time equivalent employees was
275. 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 (the "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 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%. Only 90% of AMTI can be offset
by net operating loss carryovers. The adjustment to AMTI based on adjusted
current earnings is an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (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
9
<PAGE> 12
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, 1995 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%.
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
directly invest up to 7.5% of its assets in certain corporate stock, and may
also invest up to 7.5% of its assets in certain mutual fund securities.
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 capital ratio (Tier I capital to adjusted total assets as
specified in the regulations). These regulations provide for a minimum Tier I
leverage capital 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 capital 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, 1997:
<TABLE>
<S> <C>
GAAP Capital to Total Leverage Assets ........... 9.30%
Total Capital to Risk-Weighted Assets ........... 15.26%
Tier I Capital to Risk-Weighted Assets .......... 14.32%
</TABLE>
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 a 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
12
<PAGE> 15
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require 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 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.
The FDIC has recently proposed revisions to its regulations governing the
procedures for institutions seeking approval to engage in such activities or
investments. These proposed revisions would, among other things, streamline
certain application procedures for healthy banks and impose certain quantitative
and qualitative restrictions on a bank's dealing with its subsidiaries engaged
in activities not permitted for national bank subsidiaries. All non-subsidiary
equity investments, unless otherwise authorized or approved by the FDIC, must
have been 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, 1997, the Bank had $2.7 million of such investments.
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
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<PAGE> 16
less than 4%, or generally a leverage capital 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 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 institution in an
amount equal to the lesser of 5.0% of the bank's total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately
capitalized. 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. The Federal Reserve Board
("FRB") has proposed regulations that would treat as an affiliate any subsidiary
of a savings bank that engages in activities not permissible for the parent
savings bank to engage in directly. 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.
14
<PAGE> 17
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.
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, and the FDIC has determined to retain such range of
assessment rates for the first half of 1998. The FDIC is authorized to raise the
assessment rates in certain circumstances, including to maintain or achieve the
designated reserve ratio 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 that no savings associations
remain at that time.
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.
15
<PAGE> 18
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 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 July 1997, 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 NYBD has adopted,
effective December 3, 1997, new regulations to implement the NYCRA. The NYBD
replaced its process-focused regulations with performance-focused regulations
that are intended to parallel current CRA regulations of federal banking
agencies and to promote consistency in CRA evaluations by considering more
objective criteria. The new regulations require a biennial assessment of a
bank's compliance with the NYCRA, utilizing a four-tiered rating system, and
require the NYBD to make available to the public such rating and a written
summary of the results. The Bank's latest NYCRA rating, received from the
Banking Department in May 1997, 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). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $49.3 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $49.3
million, the reserve requirements is $1.5 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14% against that portion
of total transaction accounts in excess of $49.3 million. Effective December 16,
1997, the Federal Reserve Board has reduced the amount of transaction accounts
subject to the 3% ratio from $49.3 million to $47.8 million and increased from
$4.4 million to $4.7 million the amount of reserve liabilities that is exempted
from reserve requirements. The Bank is 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 Federal Reserve Board, the effect of this
reserve requirement is to reduce the Bank's interest-earning assets. FHLB System
members are also authorized to borrow from the Federal Reserve "discount
window," but Federal Reserve Board regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
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, 1997
of $16.6 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.
16
<PAGE> 19
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, 1997, 1996, and 1995, dividends from the FHLB-NY to the
Bank amounted to $822,000, $665,000 and $740,000, 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 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.
17
<PAGE> 20
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 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.
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<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:
<TABLE>
<CAPTION>
For the
Years Ended December 31,
------------------------
(dollars in thousands) .... 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period ...... $1,144,317 $ 993,242 $ 936,716
Mortgage loans originated:
One-to-four family .......... 22,914 11,150 14,754
Multi-family ................ 418,869 273,421 124,289
Commercial real estate ...... 10,248 17,438 5,796
Construction ................ 1,089 1,214 915
---------- ---------- ----------
Total mortgage loans originated 453,120 303,223 145,754
Principal repayments .......... 185,033 151,391 87,974
Mortgage loans sold ........... 16,060 350 508
Mortgage loans transferred to
foreclosed real estate ...... 1,405 406 746
---------- ---------- ----------
At end of period .............. 1,394,939 1,144,318 993,242
---------- ---------- ----------
Other loans (gross):
At beginning of period ........ 12,275 13,861 13,693
Other loans originated ........ 1,375 1,471 3,069
Principal repayments* ......... 2,843 2,975 2,703
Student loans sold ............ 12 82 198
---------- ---------- ----------
At end of period .............. 10,795 12,275 13,861
---------- ---------- ----------
Total loans ................... $1,405,734 $1,156,593 $1,007,103
========== ========== ==========
Mortgage-backed securities:
At beginning of period ...... $ 73,732 $ 92,868 $ 107,451
Principal repayments ........ 23,951 19,136 14,583
---------- ---------- ----------
At end of period ............ $ 49,781 $ 73,732 $ 92,868
========== ========== ==========
</TABLE>
*Includes a loan on a co-operative apartment in the amount of $64,000
transferred to foreclosed real estate in 1995.
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<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, 1997. 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, 1997.
Mortgage and Other Loans
At December 31, 1997
<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 ....... $148,534 $ 405,638 $30,427 $1,538 $2,386 $ 4,850 $ 593,373
After one year:
One to three years ... 41,858 115,962 13,502 -- -- 1,937 173,259
Three to five years .. 8,718 463,036 15,794 -- -- 730 488,278
Five to ten years .... 18,691 117,895 1,760 -- -- 836 139,182
Ten to twenty years .. 5,157 4,843 257 -- 31 10,288
Over twenty years .... 1,329 -- -- -- -- 25 1,354
-------- ---------- ------- ------ ------ ------- ----------
Total due or repricing
after one year ..... 75,753 701,736 31,313 -- -- 3,559 812,361
-------- ---------- ------- ------ ------ ------- ----------
Total amounts due or
repricing, gross .. $224,287 $1,107,374 $61,740 $1,538 $2,386 $ 8,409 $1,405,734
======== ========== ======= ====== ====== ======= ==========
</TABLE>
The following table sets forth, at December 31, 1997, the dollar amount of all
loans due after December 31, 1998, and indicates whether such loans have fixed
or adjustable interest rates.
<TABLE>
<CAPTION>
Due after December 31, 1998
---------------------------
(dollars in thousands) Fixed Adjustable Total
------- -------- --------
<S> <C> <C> <C>
Mortgage loans:
One-to-four family ... $39,386 $ 36,367 $ 75,753
Multi-family ......... 38,935 662,801 701,736
Commercial real estate 13,624 17,689 31,313
------- -------- --------
Total mortgage loans . $91,945 $716,857 $808,802
Other loans ............ 2,558 1,001 3,559
------- -------- --------
Total loans .......... $94,503 $717,858 $812,361
======= ======== ========
</TABLE>
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<PAGE> 23
C: SUMMARY OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at December 31, 1997, 1996, and 1995 was allocated
as follows:
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1996 1995
---- ---- ----
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
------ ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family ..... $1,592 16.88% $ 1,812 19.36% $ 2,914 28.64%
Multi-family ........... 6,521 69.14 6,168 65.90 6,519 63.70
Construction ........... 23 0.24 24 0.26 30 0.12
Commercial real estate . 1,080 11.45 1,110 11.86 1,550 6.16
Other loans ............ 215 2.29 245 2.62 346 1.38
------ ------ ------- ------ ------- ------
Total loans .......... $9,431 100.00% $ 9,359 100.00% $11,359 100.00%
====== ====== ======= ====== ======= ======
</TABLE>
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,
---------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of of of of of
(dollars in thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family ..... $ 224,287 15.96% $ 256,904 22.21% $ 288,470 28.64% $ 306,028 32.20% $276,442 34.96%
Multi-family ........... 1,107,343 78.78 822,364 71.10 641,564 63.70 561,589 59.09 428,746 54.23
Commercial real estate . 61,740 4.39 63,452 5.49 62,003 6.16 66,609 7.01 67,467 8.53
Construction ........... 1,538 0.11 1,598 0.14 1,205 0.12 2,490 0.26 1,750 0.22
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Total mortgage loans . 1,394,939 99.23 1,144,318 98.94 993,242 98.62 936,716 98.56 774,405 97.95
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Other loans:
Cooperative apartment .. 5,041 0.36 5,764 0.50 6,684 0.66 7,238 0.76 7,429 0.94
Home equity ............ 2,386 0.17 2,819 0.24 3,069 0.31 3,352 0.35 3,338 0.42
Student ................ 8 0.00 24 0.00 116 0.01 241 0.03 3,011 0.38
Passbook savings ....... 312 0.02 375 0.03 470 0.05 691 0.07 989 0.13
Other .................. 3,048 0.22 3,293 0.29 3,522 0.35 2,171 0.23 1,474 0.19
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Total other loans ..... 10,795 0.77 12,275 1.06 13,861 1.38 13,693 1.44 16,241 2.05
---------- ------ ---------- ------ ---------- ------ ---------- ------ -------- ------
Total loans ........... 1,405,734 100.00% 1,156,593 100.00% 1,007,103 100.00% 950,409 100.00% 790,646 100.00%
========== ====== ========== ====== ========== ====== ========== ====== ======== ======
Less:
Unearned discounts ...... 19 24 29 42 63
Net deferred loan
origination fees ....... 1,281 1,058 912 1,549 1,249
Allowance for loan losses 9,431 9,359 11,359 11,268 10,320
---------- ---------- ---------- ---------- --------
Loans, net .............. $1,395,003 $1,146,152 $ 994,803 $937,550 $779,014
========== ========== ========== ========== ========
</TABLE>
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,
---------------
1997 1996 1995
---- ---- ----
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 ...... $78,279 $78,345 $76,121 $76,064 $68,126 $68,226
Equity securities ........ 19,274 19,339 10,374 10,419 9,890 9,925
------- ------- ------- ------- ------- -------
Total securities ......... $97,553 $97,684 $86,495 $86,483 $78,016 $78,151
======= ======= ======= ======= ======= =======
Money market investments:
Federal funds sold ....... $ 6,000 $ 6,000 $ 7,000 $ 7,000 $13,650 $13,650
------- ------- ------- ------- ------- -------
Total money market
investments ............ $ 6,000 $ 6,000 $ 7,000 $ 7,000 $13,650 $13,650
======= ======= ======= ======= ======= =======
Mortgage-backed securities:
GNMA ..................... $20,069 $20,789 $23,569 $23,962 $27,914 $28,562
FHLMC .................... 29,712 29,830 50,163 50,230 64,954 64,912
------- ------- ------- ------- ------- -------
Total mortgage-backed
securities .............. $49,781 $50,619 $73,732 $74,192 $92,868 $93,474
======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE> 25
ITEM 2. PROPERTIES
The Bank conducts its business through ten full-service offices, and two
customer service centers and one 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.
<TABLE>
<CAPTION>
Date Lease
Leased or Leased or Expiration Net Book Value at
Owned Acquired Date December 31, 1997
----- -------- ---- -----------------
<S> <C> <C> <C> <C>
Main Office(1)................................ Owned 1911 -- $1,820,675
38-25 Main Street
Flushing, NY 11354
Corona Branch................................. Owned 1923 -- 163,722
37-97 103rd Street
Corona, NY 11368
Little Neck Branch............................ Owned 1946 -- 53,108
251-31 Northern Blvd.
Little Neck, NY 11363
Kew Gardens Hills Branch...................... Owned 1948 -- 125,425
75-44 Main Street
Kew Gardens Hills, NY 11367
Jackson Heights Branch........................ Leased 1974 2023 480,202
76-02 Northern Blvd.
Jackson Heights, NY 11372
Astoria Branch(2)............................. Leased 1993 2018 134,854
31-42 Steinway Street
Astoria, NY 11103
Fresh Meadows Branch.......................... Leased 1995 2010 84,894
61-49 188th Street
Fresh Meadows, NY 11365
College Point Branch.......................... Leased 1996 2021 6,501
15-01 College Point Blvd.
College Point, NY 11356
Murray Hill Branch............................ Leased 1997 2007 31,590
156-18 Northern Blvd.
Flushing, NY 11354
Plainview Branch.............................. Owned 1974 -- 306,603
1092 Old Country Road
Plainview, NY 11803
Mortgage Service Center(3).................... Owned 1991 -- 4,636,475
158-14 Northern Blvd.
Flushing, NY 11354
Auburndale Customer Service Center............ Leased 1996 2006 7,463
193-01 Northern Blvd.
Flushing, NY 11358
Ditmars Service Center........................ Leased 1996 2005 15,943
31-09 Ditmars Blvd.
Astoria, NY 11105
</TABLE>
---------------
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
1997 fiscal year appears on page 24 of the 1997 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 6, 1998 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
1997 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 7 through 23 of the 1997
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about
market risk appears on pages 12 through 13 of the 1997 Annual Report under the
caption "Interest Rate Sensitivity" 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 48 of the 1997 Annual Report and is
incorporated herein by this reference.
24
<PAGE> 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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 22, 1998, 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 16 of the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held April 22,
1998, 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 22, 1998, 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 8 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 22, 1998, 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 20 of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on April 22, 1998 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, 1997 and are incorporated
by this reference:
- Consolidated Statements of Condition at December 31,1997 and 1996;
- Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1997;
- Consolidated Statements of Changes in Stockholders' Equity for each
of the years in the three-year period ended December 31, 1997;
- Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1997;
- Notes to Consolidated Financial Statements
- Management's Responsibility for Financial Reporting
- Independent Auditors' Report
25
<PAGE> 28
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.
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 1997
On November 20, 1997, the Company filed a Current Report on Form 8-K
regarding the date of the Company's 1998 Annual Meeting of Shareholders and the
related date of record.
(c) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
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 Directors' Deferred Fee Stock Unit Plan
10.17 Queens County Bancorp, Inc. 1997 Stock Option Plan (5)
11.0 Statement Re: Computation of Per Share Earnings
13.0 1997 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 17, 1998
99.0 Proxy Statement for the Annual Meeting of Shareholders to be held on
April 22, 1998
</TABLE>
(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 1995 Proxy Statement
for the Annual Meeting of Shareholders to be held April 19, 1995.
(5) Incorporated by reference to Exhibit filed with the 1997 Proxy Statement
for the Annual Meeting of Shareholders 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 03/17/98
---------------------------- --------
Joseph R. Ficalora
Chairman, President and
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:
<TABLE>
<S> <C> <C> <C>
/s/ Joseph R. Ficalora 03/17/98 /s/ Robert Wann 03/17/98
- ----------------------------------- -------- -------------------------------------------- --------
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 03/17/98 /s/ Donald M. Blake 03/17/98
- ----------------------------------- -------- -------------------------------------------- --------
Harold E. Johnson Donald M. Blake
Director Director
/s/ Luke D. Lynch 03/17/98 /s/ Max L. Kupferberg 03/17/98
- ----------------------------------- -------- -------------------------------------------- --------
Luke D. Lynch Max L. Kupferberg
Director Director
/s/ Henry E. Froebel 03/17/98 /s/ Howard C. Miller 03/17/98
- ----------------------------------- -------- -------------------------------------------- --------
Henry E. Froebel Howard C. Miller
Director Director
/s/ Joseph G. Chisholm 03/17/98 /s/ Dominick Ciampa 03/17/98
- ----------------------------------- -------- -------------------------------------------- --------
Joseph G. Chisholm Dominick Ciampa
Director Director
/s/ Richard H O'Neill 03/17/98
- ----------------------------------- --------
Richard H. O'Neill
Director
</TABLE>
27
<PAGE> 30
EXHIBIT INEDX
--------------
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 Directors' Deferred Fee Stock Unit Plan
10.17 Queens County Bancorp, Inc. 1997 Stock Option Plan (5)
11.0 Statement Re: Computation of Per Share Earnings
13.0 1997 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 17, 1998
99.0 Proxy Statement for the Annual Meeting of Shareholders to be held on
April 22, 1998
(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 1995 Proxy Statement
for the Annual Meeting of Shareholders to be held April 19, 1995.
(5) Incorporated by reference to Exhibit filed with the 1997 Proxy Statement
for the Annual Meeting of Shareholders held April 16, 1997.
<PAGE> 1
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended
December 31, (1) (2)
------------
(in thousands, except per share amount)
1997 1996
------- -------
<S> <C> <C>
Net income $23,264 $20,939
------- -------
Weighted average common shares
outstanding 13,636 15,477
Earnings per common share $ 1.71 $ 1.35
======= =======
Total weighted average common shares outstanding 13,636 15,477
Additional dilutive shares using ending
period market value versus average market
value for the period when utilizing the
Treasury stock method regarding stock
options 913 834
------- -------
Total shares for fully diluted earnings
per share 14,549 16,311
------- -------
Fully diluted earnings per common share and
common share equivalents $ 1.60 $ 1.28
======= =======
</TABLE>
1) Reflects shares issued as a result of two 3-for-2 stock splits on both
April 10, 1997 and October 1, 1997.
2) Reflects the adoption of Statement of Financial Accounting Standards No.
128, "Earnings Per Share."
<PAGE> 1
Financial Highlights
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except share data) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31
Net interest income $62,398 $57,520 $51,908 $54,615 $46,391
(Reversal of) provision for loan losses -- (2,000) 150 1,200 4,700
Other operating income 2,305 2,445 3,033 1,971 1,884
Operating expense 27,084 23,271 22,871 23,047 21,417
Income tax expense 14,355 17,755 11,737 13,589 10,035
Net income(1) 23,264 20,939 20,183 18,750 12,123
Earnings per share(2)(3) $1.71 $1.35 $1.21 $1.05 $0.72(4)
Diluted earnings per share(2)(3) 1.60 1.28 1.16 1.02 0.72(4)
Dividends paid(2) 0.61 0.37 0.10 0.04 N.A.
AT DECEMBER 31
Total assets $1,603,269 $1,358,656 $1,240,882 $1,166,024 $1,089,686
Loans, net 1,395,003 1,146,152 994,803 937,550 781,023
Allowance for loan losses 9,431 9,359 11,359 11,268 10,320
Securities held to maturity 94,936 86,495 78,016 79,017 94,330
Mortgage-backed securities held to maturity 49,781 73,732 92,868 107,451 129,230
Deposits 1,069,161 1,023,930 932,140 840,220 827,240
FHLB borrowings 309,664 81,393 46,077 83,304 --
Stockholders' equity 170,515 211,429 217,630 205,279 192,831
Book value per share(2)(5) $13.23 $14.14 $13.30 $12.06 $10.80
Common shares outstanding(2) 14,912,791 17,167,732 18,882,900 19,777,318 20,648,250
SELECTED FINANCIAL RATIOS
Return on average assets 1.61% 1.63% 1.72% 1.71% 1.24%
Return on average stockholders' equity 12.95 10.10 9.70 9.40 11.25
Stockholders' equity to total assets 10.64 15.56 17.54 17.61 17.70
Interest rate spread 3.84 3.88 3.80 4.49 4.49
Net interest margin 4.45 4.63 4.58 5.13 4.92
Operating expense to average assets 1.88 1.82 1.95 2.10 2.19
Efficiency ratio 41.86 38.81 41.63 40.73 44.36
Average interest-earning assets to average
interest-bearing liabilities 1.16x 1.21x 1.22x 1.24x 1.14x
ACTUAL CONTRIBUTIONS TO STOCKHOLDERS'
EQUITY AND RESULTANT CASH EARNINGS DATA(1)
Earnings $35,399 $27,458 $23,640 $21,990 $13,261
Earnings per share(2)(3) $2.60 $1.77 $1.42 $1.23 $0.79(4)
Diluted earnings per share(2)(3) 2.43 1.68 1.36 1.20 0.79(4)
Return on average assets 2.46% 2.14% 2.02% 2.00% 1.36%
Return on average stockholders' equity 19.71 13.24 11.36 11.03 12.31
Operating expense to average assets 1.37 1.39 1.66 1.80 2.08
Efficiency ratio 30.47 28.83 35.43 35.00 42.01
ASSET QUALITY RATIOS
Non-performing loans to loans, net 0.55% 0.84% 0.78% 0.76% 1.51%
Non-performing assets to total assets 0.54 0.76 0.69 0.69 1.16
Allowance for loan losses to non-performing loans 122.61 96.90 145.76 158.46 87.79
Allowance for loan losses to loans, net 0.68 0.82 1.14 1.20 1.32
Allowance for loan losses to net accumulated
charge-offs for the past 10 years 661.36 625.00 759.00 783.04 869.42
REGULATORY CAPITAL RATIOS (BANK ONLY)(6)
Leverage capital ratio 9.30% 9.65% 11.95% 10.66% 14.42%
Tier 1 risk-based capital ratio 14.32 16.19 21.95 22.74 29.03
Total risk-based capital ratio 15.26 17.38 23.20 23.99 30.28
================================================================================================================================
</TABLE>
(1) The 1996 amount includes a non-recurring tax charge of $1.8 million, of
which $1.3 million was reversed in 1997.
(2) Reflects shares issued as a result of a 3-for-2 stock split on September
30, 1994, a 4-for-3 stock split on August 22, 1996, and 3-for-2 stock
splits on April 10, 1997 and October 1, 1997.
(3) Reflects the adoption of Statement of Financial Accounting Standards No.
128, "Earnings Per Share."
(4) Represents net income per common share for the period from the conversion
on November 23, 1993 to December 31, 1993, as adjusted for the stock
splits listed in footnote 2.
(5) Excludes unallocated ESOP shares.
(6) Capital ratios for 1997, 1996, and 1994 reflect the transfer of $16.0
million, $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"), the
first savings bank to be chartered by the State of New York in the New York City
Borough of Queens. Headquartered in Flushing, New York, the Bank has a lengthy
tradition of service, dating back to April 14, 1859.
Today, the Bank serves its depositors through a network of twelve
locations, including ten full-service branch offices and two customer service
centers that are located inside 24-hour stores. The latter two sites were opened
in 1996, along with one full-service branch office; all three were accretive to
earnings in 1997. In recent years, the Company has also made a practice of
opening branches at sites that were previously operated by commercial banking
institutions. This practice was continued in 1997 with the relocation and
transition of a third customer service center into a full-service branch in the
Murray Hill section of Queens. Of the Bank's locations, one is in Nassau County
and the remainder are in Queens.
The funds provided by the Bank's deposits are invested, together with
funds from other sources, into the origination of residential mortgage loans. In
1997, the Bank reinforced its position as a leading mortgage lender with
originations of $453.1 million, boosting mortgage loans outstanding to $1.4
billion at year-end. The market for the Company's loans extends into the
neighboring boroughs of New York City, with Manhattan and Brooklyn accounting
for the largest loan balances after Queens. The majority of the Company's loans
are secured by multi-family buildings; at December 31, 1997, such loans
accounted for 79.4% of the total mortgage loan portfolio.
While achieving new levels of mortgage loan production, the Company has
sustained its record of asset quality. In 1997, the Company recorded its tenth
consecutive quarter without any net charge-offs and experienced reductions in
the level of non-performing loans. In addition, the multi-family mortgage loan
portfolio remained fully performing at December 31st.
The combination of asset quality and volume loan production contributed to
a year of solid earnings growth. In 1997, the Company reported an 11.1% rise in
net income to $23.3 million and a 28.9% rise in cash earnings to $35.4 million
from the levels recorded in 1996. Cash earnings represent the contribution made
to capital by the Company's operations; the extent of this contribution is
reflected in its 1997 cash return on average assets and cash return on average
stockholders' equity, which equaled 2.46% and 19.71%, respectively.
The value generated by the Company's fundamental performance has been
enhanced by the value created through its capital management strategies. In
1997, two 3-for-2 stock splits were declared by the Board of Directors,
resulting in the issuance of two 50% stock dividends, on April 10th and October
1st. The cash dividend was also raised by the Board in 1997, with an 80%
increase recorded over the course of the year. In addition, the Board of
Directors conveyed its confidence in the Company's future performance by
expanding the Company's authorization to repurchase shares. The Company bought
back 2,547,326 shares in 1997, bringing to 6,268,169 the total number
repurchased since the fourth quarter of 1994.
While trading activity tends to reflect both external and internal
factors, the Company's capital management strategies and fundamental performance
were rewarded by a 92.3% increase in the value of the Company's shares year over
year. At December 31, 1997, shares of Queens County Bancorp closed at a record
high of $40.50, as compared to $21.06 at December 31, 1996.
The Company's 1997 financial results are discussed in detail on the
following pages 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 that could affect the
Company's operations, pricing, products, and services.
Financial Condition
Balance Sheet Summary
The Company recorded total assets of $1.6 billion at December 31, 1997,
representing a $244.6 million, or 18.0%, increase from the level recorded at
December 31, 1996. The primary source of asset growth was a $250.4 million, or
21.9%, rise in mortgage loans outstanding to $1.4 billion, sparked by $453.1
million in originations, which exceeded the 1996 level by 49.4%. Of the $453.1
million in loans originated in 1997, $418.9 million, or 92.4%, were secured by
multi-family properties. Buoyed by the record level of originations, the
portfolio of multi-family mortgage loans rose 34.7% to $1.1 billion at December
31, 1997, representing 79.4% of outstanding mortgage loans.
The balance of the Company's mortgage loan portfolio consisted of $224.3
million in loans secured by one-to-four family homes, down $32.6 million from
the year-earlier level; $61.7 million in loans secured by commercial real
estate, down $1.7 million; and construction loans of $1.5 million, down $60,000.
At December 31, 1997, 92.8% of the Company's mortgage loan portfolio featured
adjustable rates, including $1.1 billion, or 96.2%, of multi-family mortgage
loans.
7
<PAGE> 3
While achieving a record level of mortgage loan originations, the Company
also extended its record of asset quality. In addition to recording its tenth
consecutive quarter without any net charge-offs, the Company achieved reductions
in non-performing loans and assets and maintained the fully performing status of
its multi-family mortgage loan portfolio. Non-performing loans declined to $7.7
million, or 0.55% of loans, net, at December 31, 1997, from $9.2 million (or
0.68% of loans, net) and $9.7 million (or 0.84% of loans, net), respectively, at
September 30, 1997 and December 31, 1996. Foreclosed real estate totaled $1.0
million, as compared to $1.4 million and $627,000, respectively, at the earlier
dates. As a result, non-performing assets declined to $8.7 million, or 0.54% of
total assets, at December 31, 1997, from $10.6 million, or 0.69% of total
assets, at September 30, 1997 and from $10.3 million, or 0.76% of total assets,
at December 31, 1996.
In view of the quality of the Company's loan portfolio, the loan loss
provision was suspended for the tenth consecutive quarter, maintaining the
allowance for loan losses at $9.4 million after recoveries of $72,000 were
recorded in the second quarter of the year. The allowance represented 122.61% of
non-performing loans at December 31, 1997, and 0.68% of loans, net, at that
date. More significantly, the ratio of the allowance for loan losses to net
accumulated charge-offs over the past decade equaled 661.36%.
To supplement its portfolio of mortgage loans, the Company makes various
other investments. At December 31, 1997, these included $10.8 million in other
loans, down $1.5 million from the year-earlier level; $94.9 million in
securities held to maturity, up $8.4 million; $49.8 million in mortgage-backed
securities held to maturity ("mortgage-backed securities"), down $24.0 million,
and $6.0 million in money market investments, down $1.0 million. In addition,
the Company had $2.6 million in securities available for sale at year-end 1997.
Deposits rose $45.2 million to $1.1 billion, primarily reflecting a $52.2
million increase in certificates of deposit ("CDs") to $703.9 million, as well
as a $4.2 million increase in non-interest-bearing accounts to $29.2 million.
These increases offset a reduction of $9.7 million in the year-end balance of
savings accounts to $268.1 million and a decline of $1.5 million in the balance
of NOW and money market accounts to $67.9 million. To fund the high volume of
mortgage loan originations in 1997, the Company increasingly utilized its line
of credit with the Federal Home Loan Bank of New York ("FHLB"). FHLB borrowings
rose to $309.7 million at December 31, 1997 from $81.4 million at December 31,
1996.
Stockholders' equity totaled $170.5 million at December 31, 1997 and
$211.4 million at December 31, 1996, representing 10.64% and 15.56%,
respectively, of total assets at said dates. The difference primarily reflects
the allocation of $68.1 million in 1997 toward the repurchase of 2,547,326
shares at an average price of $26.73 per share. Also reflected in the 1997
amount are net income of $23.3 million and $12.1 million in non-cash expenses
that were added back to capital (resulting in cash earnings of $35.4 million),
less dividends paid and options exercised of $11.3 million. Book value was
$13.23 per share at December 31, 1997, based on 12,891,389 shares.
The Company's capital strength is further reflected in the excess of the
Bank's regulatory capital ratios over the minimum levels required by the Federal
government. At December 31, 1997, the Bank's leverage capital amounted to $143.9
million, or 9.30% of adjusted average assets, while its Tier 1 and total
risk-based capital amounted to $143.9 million and $153.3 million, representing
14.32% and 15.26% of risk-weighted assets, respectively.
Loans
In 1997, the Company reinforced its position as one of the region's leading
mortgage lenders with the origination of $453.1 million in mortgage loans.
Exceeding the year-earlier level by $150.1 million, the Company's 1997
originations boosted the portfolio of mortgage loans to $1.4 billion,
representing a 21.9% increase from the level recorded at December 31, 1996. The
significance of the portfolio is readily apparent: mortgage loans represented
87.0% of total assets at year-end 1997, and generated more than 92% of interest
income for the year.
The origination of mortgage loans is the Company's primary business and
the multi-family market, increasingly, its primary niche. Of the $1.4 billion in
loans outstanding at year-end, $1.1 billion were secured by multi-family
buildings, reflecting 1997 originations of $418.9 million, or 92.4% of
originations in the twelve-month period. In 1996, when multi-family mortgage
loan originations totaled $273.4 million, the Company was identified by National
Mortgage News as one of the top ten multi-family mortgage lenders in the United
States.
The emphasis on multi-family mortgage loans is based on two considered
factors: their contribution to earnings and to asset quality. The yields on
multi-family mortgage loans tend to be higher than the yields on one-to-four
family mortgages, and the quality of such mortgages has been exceptional to
date. In fact, the portfolio of multi-family mortgage loans was fully performing
at both December 31, 1997 and 1996.
Originated in a market that extends beyond Queens into the neighboring
boroughs of New York City, multi-family mortgage loans are secured by two types
of buildings: cooperative apartment buildings and rental properties. By
definition, a multi-family building has five or more units; as an indication of
the scope of this market, there are more than 311,000 such buildings in Queens
County alone. At December 31, 1997, 48.9% of the Company's multi-family mortgage
loans were secured by properties in Queens County; another 21.6% and 17.4% were
secured by properties in Manhattan and Brooklyn, respectively. The remainder of
the portfolio is secured by properties scattered throughout the remaining
boroughs and the suburban counties of Nassau, Suffolk, and Westchester. The
average loan in the portfolio at year-end 1997 was for $1.2 million; the average
loan-to-value ratio was 53%.
8 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
<PAGE> 4
================================================================================
Loan Portfolio Analysis
<TABLE>
<CAPTION>
At December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Percent Percent Percent
(dollars in thousands) Amount of Total Amount of Total Amount of Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
1-4 family $ 224,287 15.96% $ 256,904 22.21% $ 288,470 28.64%
Multi-family 1,107,374 78.78 822,364 71.10 641,564 63.70
Commercial real estate 61,740 4.39 63,452 5.49 62,003 6.16
Construction 1,538 0.10 1,598 0.14 1,205 0.12
- -------------------------------------------------------------------------------------------------------------------
Total mortgage loans 1,394,939 99.23 1,144,318 98.94 993,242 98.62
- -------------------------------------------------------------------------------------------------------------------
OTHER LOANS:
Cooperative apartment 5,041 0.36 5,764 0.50 6,684 0.66
Home equity 2,386 0.17 2,819 0.24 3,069 0.31
Passbook savings 312 0.02 375 0.03 470 0.05
Student 8 -- 24 -- 116 0.01
Other 3,048 0.22 3,293 0.29 3,522 0.35
- -------------------------------------------------------------------------------------------------------------------
Total other loans 10,795 0.77 12,275 1.06 13,861 1.38
- -------------------------------------------------------------------------------------------------------------------
Total loans 1,405,734 100.00% 1,156,593 100.00% 1,007,103 100.00%
- -------------------------------------------------------------------------------------------------------------------
Less: Unearned discounts 19 24 29
Net deferred loan
origination fees 1,281 1,058 912
Allowance for loan
losses 9,431 9,359 11,359
- -------------------------------------------------------------------------------------------------------------------
Loans, net $1,395,003 $1,146,152 $ 994,803
===================================================================================================================
</TABLE>
In support of management's emphasis on interest rate sensitive assets,
96.20% of the multi-family mortgage loan portfolio featured adjustable rates at
year-end 1997. The Company's multi-family mortgage loans are typically
originated for a term of ten years at a rate of interest that adjusts annually
in each of years six through ten, but either steps up annually or is fixed in
years one through five. While the majority of loans originated prior to 1996
featured the step-up rate of interest, the majority of loans originated since
then have featured the first-five-year fixed rate. Still, in the four quarters
of 1998, $125.0 million, $84.7 million, $60.8 million, and $98.6 million,
respectively, in multi-family mortgage loans are scheduled to reprice upward,
for a total of $369.1 million over the next twelve months. While the current
interest rate environment has fostered an industry-wide increase in mortgage
prepayments, the Company has, to date, experienced fewer pre-payments than might
be expected, due to the penalties embedded in the terms of its multi-family
mortgage loans. Such prepayment penalties range from five points to two in the
first five years of the mortgage and apply to both the step-up and
first-five-year fixed rate loan.
In 1997, as a means of further enhancing earnings, the Company initiated
the sale of multi-family mortgage loans to a third party, with servicing
retained as a means of bolstering fee income in future periods. Included in the
$418.9 million in multi-family mortgage loans originated in 1997 were $13.6
million in loans sold in the fourth quarter of the year. Although the extent of
this program has not yet been determined, management anticipates that the sale
of loans will continue in 1998.
While the Company's primary focus is on the multi-family real estate
market, it also maintains a portfolio of one-to-four family mortgage loans. At
December 31, 1997, one-to-four family mortgage loans represented $224.3 million,
or 16.1%, of mortgage loans outstanding, down $32.6 million from the year-end
1996 level after originations of $22.9 million. The majority of the Company's
one-to-four family mortgage loans are secured by properties in Queens and Nassau
County, and 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.
The majority of the Company's one-to-four family mortgage loans are made
at rates that adjust on an annual basis, with a smaller number adjusting at two-
or three-year intervals. At December 31, 1997, 80.9% of the one-to-four family
portfolio consisted of loans originated on an adjustable basis; the balance
consists of seasoned loans originated more than 20 years ago. While the Bank
also originates one-to-four family fixed rate loans to address the demands of
its market, such loans are sold into the secondary market and the servicing
retained as a source of fee income.
In addition to residential mortgage loans, the Company originates a modest
number of commercial real estate mortgages and an even more modest number of
construction loans. At December 31, 1997, commercial real estate loans totaled
$61.7
9
<PAGE> 5
million, down $1.7 million after originations of $10.2 million. Similarly,
construction loans declined $60,000 to $1.5 million after originations of $1.1
million. The commercial real estate mortgage portfolio was 75.3% adjustable at
December 31, 1997, while 100% of construction loans were made at adjustable
rates. All told, the percentage of total mortgage loans featuring adjustable
rates at December 31, 1997 was 92.8%.
As a service to its depositors, the Bank also provides a range of consumer
lending products, reflected on the balance sheet as "other loans." At December
31, 1997, the portfolio totaled $10.8 million, down from $12.3 million at
December 31, 1996. Loans on individual cooperative apartment units accounted for
46.7% of other loans at year-end 1997, while home equity loans accounted for
22.1%.
At December 31, 1997, the Company had $102.3 million in outstanding
mortgage loan commitments, setting the stage for a strong first quarter of 1998.
This said, it should be noted that the Bank's ability to close these loans--and
to originate a like volume of loans in future quarters--may be adversely
influenced by heightened competition, a change in the interest rate envi-
ronment, and the impact of these factors on the level of loan demand.
Asset Quality
The Company's emphasis on mortgage loan origination is coupled with an emphasis
on asset quality. In 1997, this focus was rewarded with reductions in the level
of non-performing loans and assets and the continued flawless performance of the
multi-family mortgage loan portfolio. In addition, the Company recorded ten
consecutive quarters without any net charge-offs, bringing the average for the
past decade to a mere $140,000 per year.
Non-performing loans declined to $7.7 million, or 0.55%, of loans, net, at
December 31, 1997, from $9.2 million (or 0.68% of loans, net) and $9.7 million,
(or 0.84% of loans, net) at September 30, 1997 and December 31, 1996,
respectively. Included in the December 31, 1997 amount were 40 mortgage loans in
foreclosure totaling $6.1 million (down from $6.8 million and $6.9 million,
respectively, at the earlier dates) and 28 mortgage loans 90 days or more
delinquent of $1.6 million (down from $2.4 million and $2.8 million,
respectively). All of these loans are secured by one-to-four family residences,
primarily located in the borough of Queens.
Foreclosed real estate totaled $1.0 million at December 31, 1997, as
compared to $1.4 million and $627,000, respectively, at September 30, 1997 and
December 31, 1996. The 1997 amount consisted of three one-to-four family
residences and one commercial real estate parcel; all of these properties are
currently being marketed for sale. Non-performing assets thus declined to $8.7
million, or 0.54% of total assets, at December 31, 1997, from $10.6 million (or
0.69% of total assets) and $10.3 million (or 0.76% of total assets) at the
earlier dates.
The Company also maintains a portfolio of real estate held for investment,
which is included in "other assets" on the balance sheet. At December 31, 1997,
the portfolio consisted of 13 one-to-four family properties totaling $1.4
million; all of these properties have been profitably rented and are generating
an average rate of return to the Bank of 8.17%.
The consistency and quality of the portfolio's performance is rooted in
the conservative underwriting standards the Company maintains. The decision to
approve a loan is based on several factors, extending 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 another essential factor: 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 further reduced by placing limitations on the amount of
credit granted to a borrower. While the Bank will lend up to 75% of appraised
value on one-to-four family homes and multi-family properties, the loan-to-value
ratio on its loans is more typically in the range of 50% to 55%. In addition,
the Company tends to originate loans within its local market, primarily through
brokers with whom the Bank has an established relationship.
The care with which each loan is underwritten is mirrored in the attention
provided once a loan has closed. While problem loans have been minimal, the Bank
has set procedures to ensure that problems, when they do 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.
Notwithstanding the efforts made to originate quality assets, management
cannot guarantee that problems will not occur. A borrower's ability to fulfill
his obligations may be impacted by personal circumstances, or by changes in real
estate values or the local economy. Accordingly, the Company has established a
$9.4 million allowance for loan losses that represented 122.61% of
non-performing loans and 0.68% of loans, net, at December 31, 1997. For more
information regarding the coverage provided, see the asset quality analysis that
follows and the discussion of the loan loss provision on page 21 of this report.
10 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
<PAGE> 6
================================================================================
Asset Quality Analysis
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $9,359 $11,359 $11,268 $10,320 $ 6,062
Loan charge-offs -- -- (59) (438) (442)
Loan recoveries 72 -- -- 186 --
- ------------------------------------------------------------------------------------------------------------------
Net recoveries (charge-offs) 72 -- (59) (252) (442)
(Reversal of) provision for loan losses -- (2,000) 150 1,200 4,700
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year $9,431 $ 9,359 $11,359 $11,268 $10,320
==================================================================================================================
NON-PERFORMING ASSETS AT YEAR-END:
Mortgage loans in foreclosure $6,121 $ 6,861 $ 4,929 $ 5,437 $ 7,417
Loans 90 days or more delinquent 1,571 2,798 2,864 1,674 2,329
Commercial real estate loans pending foreclosure -- -- -- -- 2,009
- ------------------------------------------------------------------------------------------------------------------
Total non-performing loans 7,692 9,659 7,793 7,111 11,755
- ------------------------------------------------------------------------------------------------------------------
Foreclosed real estate 1,030 627 774 975 884
- ------------------------------------------------------------------------------------------------------------------
Total non-performing assets $8,722 $10,286 $ 8,567 $ 8,086 $12,639
==================================================================================================================
RATIOS:
Non-performing loans to loans, net 0.55% 0.84% 0.78% 0.76% 1.51%
Non-performing assets to total assets 0.54 0.76 0.69 0.69 1.16
Allowance for loan losses to non-performing loans 122.61 96.90 145.76 158.46 87.79
Allowance for loan losses to loans, net 0.68 0.82 1.14 1.20 1.32
Allowance for loan losses to net accumulated
charge-offs for the past 10 years 661.36 625.00 759.00 783.04 869.42
==================================================================================================================
</TABLE>
Securities and Money Market Investments
At December 31, 1997, the Company recorded securities held to maturity of $94.9
million, up from $86.5 million at December 31, 1996. The average maturity of the
portfolio was one year at December 31, 1997 and seven months at the year-earlier
date.
In addition to $16.7 million in FHLB stock, the 1997 portfolio included
U.S. Treasuries of $14.3 million and U.S. Government agency obligations of $64.0
million, as compared to $67.1 million and $9.0 million, respectively, at
December 31, 1996. The shift in emphasis from U.S. Treasuries to agency
obligations was due to the more attractive yields provided by the latter
securities during 1997. The market value of the Company's securities held to
maturity was 100.1% and 100.0%, respectively, of carrying value at December 31,
1997 and 1996.
While, in recent years, the Company has held all securities to maturity,
an additional $2.6 million in securities, in the form of equities, were
designated as available for sale in the fourth quarter of the year. The
flexibility provided by this action will enable the Company to take advantage of
favorable market conditions to enhance net income in future periods.
Money market investments, consisting entirely of Federal funds sold,
totaled $6.0 million at December 31, 1997, down from $7.0 million at December
31, 1996.
Mortgage-Backed Securities Held to Maturity
Reflecting prepayments and the absence of any new investments, the Company's
portfolio of mortgage-backed securities has steadily diminished since the second
quarter of 1994. At December 31, 1997, the balance of this portfolio was $49.8
million, down from $73.7 million at December 31, 1996. The Company has
historically held its mortgage-backed securities to maturity; at year-end 1997,
the average maturity of the portfolio was 2.4 years.
The market value of the Company's mortgage-backed securities rose to
101.7% of carrying value at December 31, 1997 from 100.6% at December 31, 1996.
Sources of Funds
The Company has traditionally drawn its funding from a solid base of deposits
attracted through a growing network of branch offices. At year-end 1997, the
network included ten full-service offices and two customer service centers,
reflecting the relocation and transition of a third customer service center to a
full-service location previously operated by Chase Manhattan Bank. The new
Murray Hill branch is the fourth branch in four years to have been opened at a
site previously tenanted by a money center institution. With each move, the Bank
has attracted new deposits and boosted its balance of non-interest-bearing
checking accounts.
11
<PAGE> 7
At December 31, 1997, deposits totaled $1.1 billion, up $45.2 million from
the level recorded at December 31, 1996. Included in the 1997 amount were CDs of
$703.9 million (up $52.2 million from the year-end 1996 level) and
non-interest-bearing accounts of $29.2 million (up $4.2 million). CDs
represented 65.8% of total deposits at year-end 1997, as compared to 63.6% at
year-end 1996. The increased balance reflects the continued popularity of
longer-term, higher-yielding savings products during a period of relative
stability in market interest rates. Even with the decline in interest rates that
occurred in the fourth quarter, depositor interest in CDs continued, albeit for
certificates with shorter maturities. Thus, in the twelve months ended December
31, 1997, 87.8% of maturing CDs were rolled over, consistent with the Bank's
retention rate over the past few years. While no assurances may be made,
management would expect a like percentage of CDs to be rolled over in the new
year; the volume of CDs due to mature in 1998 is $553.4 million.
The higher balances of CDs and non-interest-bearing accounts served to
offset reductions in the year-end 1997 balances of savings accounts and NOW and
money market accounts. At December 31, 1997, savings accounts totaled $268.1
million, representing 25.1% of total deposits, while NOW and money market
accounts totaled $67.9 million, representing 6.4%. At December 31, 1996, savings
accounts totaled $277.8 million, representing 27.1% of total deposits, while NOW
and money market accounts totaled $69.4 million, or 6.8%.
In 1997, a year of record loan production, additional funding was drawn
from the Company's FHLB line of credit, which totaled $481.0 million at December
31st. FHLB borrowings rose to $309.7 million at year-end from the year-earlier
$81.4 million, as the Company recorded $453.1 million in mortgage loan
originations, up from $303.2 million in 1996. While the cost of borrowed funds
exceeds that of deposits, the income generated through the use of such funding
more than offset the higher costs involved. Accordingly, management anticipates
that it will continue to access the Company's FHLB line of credit to support the
origination of multi-family mortgage loans in 1998.
To attract additional deposits, the Company has taken steps to enhance its
locations, as well as its menu of financial services. In 1997, the Company
introduced the VISA Check Card, which also serves as a source of fee income, and
expanded its telephone banking service into a 24-hour operation, available seven
days a week.
In support of its goal of expanding the franchise, management continues to
explore opportunities to acquire another bank. Absent such event, the Company
remains open to acquiring individual branches and to opening branches at sites
vacated by other banks.
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 matching the interest
rate sensitivity of the Company's assets and liabilities in order to manage its
interest rate risk.
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, and negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest rate sensitive assets.
In order to enhance the match between its interest-earning assets and
interest-bearing liabilities, management has traditionally emphasized the
origination of adjustable rate mortgage loans on one-to-four family homes and
multi-family buildings, and has confined its other investments to short-term
securities with an average maturity of one year or less. On the liability side
of the balance sheet, management has closely monitored the pricing of its
depository products and has limited its use of FHLB borrowings except when
market conditions have been especially conducive to loan production, as they
were in 1997.
While a significant portion of the loan portfolio still features annual
rate adjustments, the majority of multi-family mortgage originations in 1996 and
1997 have featured a fixed rate of interest for the first five years of the
loan. At the same time, the Company has increasingly utilized higher cost CDs
and FHLB borrowings as its primary sources of funding. As a result, the
cumulative gap between the Company's interest rate sensitive assets and interest
rate sensitive liabilities repricing within a one-year period was a negative
11.93% at December 31, 1997.
The table on page 13 sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1997, 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 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 seven years ended December 31, 1997, and
reflects the following decay rates: 11.20% for savings accounts; 15.03% for
money market accounts; and 22.24% for NOW and Super NOW accounts. No decay rate
has been applied for CD accounts. In addition, management has assumed no
prepayments of the Bank's loans in preparing this table. Prepayments and
scheduled principal amortization on mortgage loans totaled $185.0 million in the
twelve months ended December 31, 1997.
As this 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 rate levels and times.
12 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
<PAGE> 8
================================================================================
Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
At December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Three Four to More Than More Than More Than More
(dollars in thousands) Months Twelve One Year to Three Years Five Years Than Fair
or Less Months Three Years to Five Years to 10 Years 10 Years Total Value(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage and other loans $ 169,209 $ 424,164 $ 173,259 $488,278 $139,182 $ 11,642 $1,405,734 $1,485,896
Securities 39,486 46,010 9,063 2,994 -- -- 97,553 97,684
Mortgage-backed securities(2) 9,140 21,472 19,169 -- -- -- 49,781 50,619
Money market investments 6,000 -- -- -- -- -- 6,000 6,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 223,835 491,646 201,491 491,272 139,182 11,642 1,559,068 1,640,199
- ------------------------------------------------------------------------------------------------------------------------------------
Less: Unearned discounts
and deferred fees 557 740 3 -- -- -- 1,300 1,300
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets 223,278 490,906 201,488 491,272 139,182 11,642 1,557,768 1,638,899
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Savings accounts 7,508 21,893 26,738 23,743 21,084 167,167 268,133 268,133
NOW and Super NOW
accounts 1,195 3,384 3,760 2,924 2,273 7,949 21,485 21,485
Money market accounts 1,744 6,713 5,704 4,847 4,118 23,283 46,409 46,409
Certificates of deposit 275,391 278,020 122,143 28,394 -- -- 703,948 706,525
FHLB borrowings 286,664 23,000 -- -- -- -- 309,664 309,664
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 572,502 333,010 158,345 59,908 27,475 198,399 1,349,639 1,352,216
- ------------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap
per period $(349,224) $ 157,896 $ 43,143 $431,364 $111,707 $(186,757) $ 208,129 $ 286,683
====================================================================================================================================
Cumulative interest
sensitivity gap $(349,224) $(191,328) $(148,185) $283,179 $394,886 $ 208,129
====================================================================================================================================
Cumulative interest
sensitivity gap as a
percentage of total assets (2.78)% (11.93)% (9.24)% 17.66% 24.63% 12.98%
Cumulative net
interest-earning
assets as a percentage of
net interest-bearing
liabilities 39.00 78.87 86.07 125.20 134.30 115.42
====================================================================================================================================
</TABLE>
(1) Fair value of securities, including mortgage-backed securities, is based
on quoted market prices, where available. If quoted market prices are not
available, fair value is based on quoted market prices of comparable
instruments. Fair value of loans, depending on the type of loan, is based
on carrying values or estimates based on discounted cash flow analyses.
Fair values of deposit liabilities are either based on carrying amounts or
estimates based on a discounted cash flow calculation. Fair values for
FHLB advances are estimated using a discounted cash flow analysis that
applies interest rates concurrently being offered on advances to a
schedule of aggregated expected monthly maturities on FHLB advances.
(2) Based upon historical repayment experience.
13
<PAGE> 9
Liquidity and Capital Position
Liquidity
To ensure that its liquid resources are sufficient to fund its operations and
obligations, the Company maintains a portfolio of highly liquid money market
investments and another of securities held to maturity with an average maturity
of one year or less. These portfolios were supplemented by the classification of
another $2.6 million in securities as available for sale at December 31, 1997.
Money market investments, consisting entirely of Federal funds sold,
totaled $6.0 million at year-end 1997, down from $7.0 million at year-end 1996.
Together with cash and due from banks, money market investments are the
Company's most liquid assets; at December 31, 1997, the combined total was $22.7
million, up from $21.0 million at the earlier year-end.
Securities held to maturity totaled $94.9 million at year-end 1997, as
compared to $86.5 million at year-end 1996. Included in the 1997 amount were
$64.0 million in U.S. Government agency obligations and $14.0 million in U.S.
Treasuries with a combined average maturity of one year.
The level of liquid assets is a function of the Bank's operating,
investing, and financing activities and may also be impacted by such external
factors as economic conditions, the current interest rate environment,
competition for loans and deposits, and mortgage loan demand. In 1997, the net
cash provided by operating activities rose to $34.9 million from $29.9 million
in 1996. The $5.0 million difference reflects a combination of factors,
including a $5.1 million increase in other assets, as compared to a $3.0 million
decrease in the year-earlier period; a $2.2 million increase in deferred income
taxes, as compared to a $2.5 million decline; a $5.3 million increase in other
liabilities, in contrast to a $741,000 decrease; and a $2.7 million increase in
official checks outstanding, versus a $1.1 million decline. In addition, the
Company reversed $2.0 million from the allowance for loan losses in 1996.
In 1997, the net cash used in investing activities rose to $236.3 million
from $141.9 million in 1996. The $94.4 million increase primarily stemmed from a
$265.1 million net increase in loans outstanding, as compared to a $151.7
million net increase in 1996. In addition, the 1997 amount reflects a $16.4
million decline in funds utilized to purchase securities to $79.6 million; a
$15.6 million increase in proceeds from sales of loans and foreclosed real
estate to $16.6 million; a $13.8 million increase in proceeds from the
redemption of mortgage-backed securities to $32.9 million; and a $23.5 million
reduction in the proceeds from maturities and sales of securities to $63.5
million.
The net cash provided by financing activities rose to $203.1 million in
1997 from $94.1 million in 1996. The $109.1 million increase was triggered by a
$228.3 million net increase in FHLB borrowings, as compared to a $35.3 million
net increase in the year-earlier period. In addition, the 1997 amount reflects a
$45.2 million net increase in deposits, as compared to the year-earlier $91.8
million net increase, and a $36.2 million net increase in funds utilized to
purchase Treasury stock. In 1997, the Company allocated $61.8 million to
repurchase shares, net of exercised stock options, as compared to $25.6 million
in 1996.
The Company's liquidity is enhanced by the influx of deposits, and by the
additional funding provided through the FHLB. At December 31, 1997, the Company
had access to $481.0 million through its FHLB line of credit, and another $10.0
million through a line of credit with a money center bank. Additional liquidity
is provided by the flow of funds derived from loan principal and interest
payments and the proceeds from maturing securities and mortgage-backed
securities. In 1997, the additional funding from these sources amounted to
$281.0 million; in 1998, the total amount of funds provided by these sources is
expected to approximate $401.0 million. For additional information about the
Company's sources of funding, see the discussion that begins on page 11 of this
report.
Capital Position
The foundation for the Company's success, and its springboard to the future, is
its significant capacity to manage capital. In 1997, that foundation was
reinforced by a $35.4 million contribution from cash earnings, reflecting net
income of $23.3 million and $12.1 million in non-cash expenses that were added
back to capital at December 31st. In 1996, by comparison, the Company recorded
cash earnings of $27.5 million, including net income of $20.9 million and
non-cash expenses of $6.5 million.
The significant level of capital strength provided by the Company's cash
earnings has enabled it to engage in an active share repurchase program since
the fourth quarter of 1994. The Company repurchased 2,547,326 shares at an
average price of $27.73 in 1997, bringing the total number of shares repurchased
to 6,268,169. In all, the Company allocated $68.1 million toward share buybacks
in the twelve months ended December 31, 1997, substantially boosting share
value, while contributing to a reduction in stockholders' equity.
Specifically, stockholders' equity totaled $170.5 million at December 31,
1997, equivalent to 10.64% of total assets and a book value of $13.23 per share.
At December 31, 1996, stockholders' equity totaled $211.4 million, equivalent to
15.56% of total assets and a book value of $14.14 per share. In addition to the
allocation of $68.1 million for the repurchase of Company shares, and cash
earnings of $35.4 million, the 1997 amount reflects $11.9 million in dividends
paid and options exercised. The 1997 and 1996 book value calculations are based
on 12,891,389 and 14,952,861 shares, respectively, reflecting the exclusion of
unallocated ESOP shares from the number of shares outstanding at December 31,
1997 and 1996.
14 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
<PAGE> 10
At December 31, 1997, 745,411 shares remained available for repurchase
under the Stock Repurchase Program; the timing of such repurchases will depend
on market conditions as well as the implementation of other value-enhancing
strategies.
While stockholders' equity was reduced by the share repurchase allocation,
its level remained sufficient to significantly exceed the minimum Federal
requirements for a bank holding company. Similarly, the Bank's capital strength
was such that it continued to qualify for classification as a well capitalized
institution and to exceed, by a significant margin, the minimum requirements
under the FDIC Improvement Act ("FDICIA"). As defined by FDICIA, a well
capitalized institution is one that has a ratio of leverage capital to adjusted
total assets of 4.00% 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, respectively,
3.00%, 4.00%, and 8.00%.
At December 31, 1997, the Bank's leverage capital totaled $143.9 million,
or 9.30% of adjusted average assets, while its Tier 1 and total risk-based
capital amounted to $143.9 million and $153.3 million, representing 14.32% and
15.26% of risk-weighted assets, respectively. At December 31, 1996, the Bank's
leverage capital totaled $127.7 million, representing 9.65% of total assets,
while its Tier 1 and total risk-based capital equaled $127.7 million and $137.0
million, representing 16.19% and 17.38% of risk-weighted assets, respectively.
The 1997 amounts reflect the transfer of $16.0 million in capital from the Bank
to the Company in the fourth quarter of the year.
Results of Operations
Earnings Summary
1997 and 1996 Comparison:
The Company recorded earnings of $23.3 million in 1997, equivalent to earnings
per share of $1.71 and diluted earnings per share of $1.60. By comparison, the
Company recorded 1996 earnings of $20.9 million, equivalent to earnings per
share of $1.35 and diluted earnings per share of $1.28. The Company's earnings
represented a return on average assets ("ROA") and return on average
stockholders' equity ("ROE") of 1.61% and 12.95% in 1997, and 1.63% and 10.10%,
respectively, in 1996.
While the Company's 1997 earnings were 11.1% higher than its 1996
earnings, the difference between its 1997 and 1996 cash earnings better reflects
the extent of its earnings growth. In 1997, the Company's cash earnings rose
$7.9 million, or 28.9%, to $35.4 million, representing a 46.9% increase in cash
earnings per share to $2.60 from $1.77 and a 44.6% increase in diluted cash
earnings per share to $2.43 from $1.68.
The Company's cash earnings represent the contribution made to capital
from operations and are determined by adding back to reported earnings the
non-cash expenses stemming from the amortization and appreciation of shares in
its stock-related benefit plans and the associated tax benefits. In 1997, the
Company's non-cash expenses rose to $12.1 million from the year-earlier $6.5
million, as the value of its shares rose 92.3% over the twelve-month period. The
Company's cash earnings represented an ROA and ROE of 2.46% and 19.71% in 1997,
as compared to 2.14% and 13.24% in 1996.
The Company's 1997 earnings were fueled by the record level of mortgage
loan originations and the quality performance of its mortgage loan portfolio.
Net interest income rose $4.9 million, or 8.5%, to $62.4 million, despite
declines in interest rate spread and net interest margin triggered by the use of
FHLB borrowings to fund mortgage loan production, and by the flattening of the
yield curve in the fourth quarter of the year.
In addition, earnings were boosted by a $3.4 million reduction in income
tax expense to $14.4 million, reflecting a $1.1 million decline in pre-tax
income to $37.6 million. The difference also reflects the net effect of a $1.8
million tax charge in the prior year's fourth quarter and the reversal of $1.3
million of that charge in the first quarter of 1997.
The combination of lower income tax expense and higher net interest income
offset a $140,000 reduction in other operating income to $2.3 million and a $3.8
million increase in operating expense to $27.1 million. In the fourth quarter of
1997, the Company took steps to enhance its other operating income by selling
$13.6 million in multi-family mortgage loans to a third party, with servicing
rights retained.
The increase in operating expense stemmed primarily from a $2.7 million
rise in compensation and benefits to $18.9 million, largely reflecting a $2.0
million increase in non-cash expenses to $7.4 million related to the
amortization and appreciation of shares in the Company's stock-related benefit
plans. Also reflected in 1997 operating expense were respective increases of
$162,000, $452,000, and $512,000 in occupancy and equipment, general and
administrative ("G&A"), and other operating expenses. Notably, the Company
continued to make progress toward achieving Year 2000 compliance without
incurring any material expense in 1997; testing has been scheduled with the
Company's external data systems providers for the third quarter of 1998.
The Company's 1997 earnings also reflect the suspension of the provision
for loan losses, continuing a practice that was initiated in the third quarter
of 1995. In 1996, management recovered $2.0 million from the loan loss
allowance, with a net benefit of $750,000 recognized.
1996 and 1995 Comparison:
In 1996, the Company recorded earnings of $20.9 million, including a
non-recurring income tax charge of $1.8 million. Absent this charge, $1.3
million of which was reversed in the first quarter of 1997, the Company's
adjusted 1996 earnings equaled $22.7 million, as compared to $20.2 million in
1995. As adjusted for the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 128, the Company presented 1996 earnings per share of
$1.35 and diluted earnings per share of $1.28, as compared to $1.21 and $1.16,
respectively, in the prior year. On the basis of reported earnings, the
Company's 1996 ROA and ROE amounted to 1.63% and 10.10%, respectively; absent
the $1.8 million tax charge, these measures improved to 1.77% and 10.97%. By
comparison, the Company recorded an ROA and ROE of 1.72% and 9.70% in 1995.
15
<PAGE> 11
The Company's 1996 earnings reflected 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, from
3.80% and 4.58%.
In 1996, 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. In 1995, the loan loss provision
totaled a modest $150,000, as a result of having been suspended in the third and
fourth quarters of the year.
Collectively, the $5.6 million rise in net interest income and the $2.0
million reversal of the allowance for loan losses 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.
Other operating income declined to $2.4 million from $3.0 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 a $176,000 increase in customer services fees to $1.6
million and by the recovery of $420,000 from a reserve for possible losses that
had been established pursuant to the seizure of Nationar, the Company's
check-processing agent, by the New York State Banking Department in 1995.
Operating expense totaled $23.3 million in 1996, as compared to $22.9
million in the prior year. The modest increase reflected a $998,000 reduction in
the FDIC insurance premium (included in G&A expense) and a $1.5 million decline
in other operating expense to $185,000, offset by increases in the remaining
components of operating expense. Primary among these was a $2.5 million increase
in compensation and benefits expense to $16.2 million, including $5.4 million
stemming from the amortization and appreciation of allocated shares held in the
Company's stock-related benefit plans. The Company's share price appreciated
59.7% in the twelve months ended December 31, 1996.
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 included $830,000 in expenses 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 the prior year.
================================================================================
Cash Earnings Analysis
<TABLE>
<CAPTION>
For the Years Ended December 31,
- --------------------------------------------------------------------------------
(in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $23,264 $20,939 $20,183
Add back non-cash expenses related to:
Stock-related benefits plans 8,719 5,408 3,457
Associated tax benefits 3,416 1,111 --
- --------------------------------------------------------------------------------
Cash earnings $35,399 $27,458 $23,640
================================================================================
Cash earnings per share $2.60 $1.77 $1.42
Diluted cash earnings per share 2.43 1.68 1.36
================================================================================
</TABLE>
16 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
<PAGE> 12
Interest Income
1997 and 1996 Comparison:
The level of interest income in any given period depends upon the average
balance and composition of the Company's interest-earning assets, the yield on
said assets, and the current level of market interest rates. In 1997, the
Company recorded $453.1 million in mortgage loan originations, boosting the
concentration of mortgage loans within the mix of interest-earning assets, and
contributing to the generation of higher yields throughout the year. While
competition for loan product increased, especially in the fourth quarter, the
Company was undeterred in its drive to generate income through interest-earning
asset growth.
Average interest-earning assets rose $158.3 million, or 12.7%, to $1.4
billion in 1997, supported by a 17-basis point rise in the average yield to
8.40%. These increases combined to produce total interest income of $117.7
million in 1997, up 15.1% from $102.3 million in 1996.
The bulk of this increase was generated by the Company's growing loan
portfolio, which represented 89.7% of average interest-earning assets in 1997,
up from 86.1% in the prior year. Specifically, the average balance of mortgage
and other loans grew $187.2 million to $1.3 billion in 1997, accompanied by an
average yield of 8.66%, up six basis points. As a result, the interest income
derived from the Company's loans rose 18.3% to $108.9 million in 1997 from $92.0
million in 1996. The 1997 amount represented 92.5% of total interest income; the
1996 amount reflected 89.9%.
While mortgage and other loans are the Company's primary source of
interest income, additional interest income is derived from money market
investments, securities, and mortgage-backed securities. In 1997, the interest
income derived from securities rose $429,000, or 10.0%, to $4.7 million,
representing 4.0% of interest income for the year. The increase reflects a
42-basis point rise in the average yield to 6.22%, together with a $1.9 million
rise in the average balance to $76.2 million. In 1997, securities represented
5.4% of average interest-earning assets, down from 6.0% in 1996.
Mortgage-backed securities generated $3.9 million in interest income,
representing a $1.4 million, or 26.6%, decline from the year-earlier amount. The
decrease reflects a $22.2 million decline in the average balance to $62.3
million, accompanied by a three-basis point drop in the average yield to 6.19%.
Mortgage-backed securities represented 4.4% of average interest-earning assets
in 1997, producing 3.3% of interest income for the year. By comparison,
mortgage-backed securities represented 6.8% of average interest-earning assets
and 5.1% of interest income in 1996.
Money market investments provided interest income of $273,000 in 1997,
down $454,000 from the 1996 amount. The decline reflects an $8.6 million
reduction in the average balance to $5.3 million, together with a seven-basis
point drop in the average yield to 5.18%.
1996 and 1995 Comparison:
In 1996, the Company's interest income rose $10.8 million to $102.3 million from
$91.5 million in 1995. The 11.8% increase reflected 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 average yield on these assets to 8.23% from 8.08%. These increases
were substantially buoyed by a 108.0% increase in mortgage loan originations to
$303.2 million from the year-earlier $145.8 million, and the higher yields
provided by the Company's growing loan portfolio.
The interest income provided by mortgage and other loans climbed to $92.0
million, representing a 14.9% increase from $80.1 million, the level in 1995.
The increase reflected both a $120.9 million rise in the average balance of
mortgage and other loans to $1.1 billion, and a 17-basis point rise in the
average yield on said assets to 8.60% from 8.43%. Mortgage and other loans
represented 86.1% and 83.9%, respectively, of average interest-earning assets in
1996 and 1995, and 89.9% and 87.5%, respectively, of total interest income in
the corresponding years.
Securities generated $4.3 million in interest income in 1996, down from
$4.8 million in 1995. The $508,000 reduction reflected a decline in the average
balance to $74.3 million from $75.6 million, and a decrease in the average yield
on said assets to 5.80% from 6.37%. Securities accounted for 6.0% and 6.7%,
respectively, of average interest-earning assets, and 4.2% and 5.3%,
respectively, of interest income in 1996 and 1995.
Mortgage-backed securities furnished $5.3 million in 1996 interest income,
down from $6.3 million in 1995. The 16.3% decrease stemmed from a reduction in
the average balance to $84.4 million from $100.8 million, and a one-basis point
drop in the average yield to 6.22%. The average balance of mortgage-backed
securities represented 6.8% of average interest-earning assets in 1996, down
from 8.9% in 1995. Similarly, said assets furnished 5.1% of 1996 interest
income, down from 6.9% in the prior year.
Money market investments generated $727,000 in 1996 interest income, as
compared to $383,000 in 1995. The increase reflected a $7.3 million rise in the
average balance to $13.9 million from $6.6 million, offsetting a 58-basis point
drop in the average yield to 5.25% from 5.83%.
Interest Expense
1997 and 1996 Comparison:
The level of interest expense is driven by the average balance and composition
of the Company's interest-bearing liabilities and by the respective costs of the
funding sources found within this mix. These factors are influenced, in turn, by
market competition and the current level of interest rates.
In 1997, the Company increasingly relied on FHLB borrowings as a source of
funding for mortgage originations while, at the same time, experiencing an
increase in the balance of CDs. As a result, the average balance of
interest-bearing liabilities rose $182.1 million to $1.2 billion, accompanied by
a 21-basis point rise in the average cost of these funds to 4.56%. These
increases combined to produce interest expense of $55.3 million, representing a
23.6% increase from $44.8 million in 1996.
17
<PAGE> 13
FHLB borrowings generated $10.8 million, or 19.4%, of interest expense in
1997, as compared to $3.4 million, or 7.6%, in 1996. The average balance more
than tripled to $189.1 million in 1997, representing 15.6% of average
interest-bearing liabilities for the year. By comparison, in 1996, FHLB
borrowings totaled $61.2 million, accounting for 5.9% of average
interest-bearing liabilities. The rise in interest expense derived from FHLB
borrowings was further supported by a nine-basis point rise in the average cost
to 5.68%.
CDs generated $36.2 million in interest expense, representing 65.4% of the
1997 total, as compared to $32.5 million in 1996, which represented 72.6% of
total interest expense. The increase stemmed from a $68.3 million rise in the
average balance to $666.2 million, with an average cost of 5.43%, down one basis
point. Despite the 11.3% increase in the average balance, CDs represented 55.0%
of average interest-bearing liabilities in 1997, down from 58.0% in 1996.
The flattening of the yield curve in the fourth quarter of 1997 did not
appear to dampen the appeal of CDs. As compared to the third quarter of the
year, when CDs averaged $669.9 million, the average balance rose to $694.8
million in the fourth. The change in market interest rates is, however,
reflected in a nine-basis point reduction in the cost of such funds from the one
quarter to the next.
Mortgagors' escrow added $41,000 to interest expense in 1997, up from
$39,000 in the prior year. The increase was the net result of a $2.2 million
rise in the average balance to $17.5 million and a three-basis point drop in the
average cost to 0.23%.
The increase in interest expense generated by these funding sources was
partly offset by declines in the interest expense derived from the Company's
savings, NOW, and money market accounts. In 1997, savings accounts produced
interest expense of $6.5 million, down $231,000 from $6.8 million in 1996. The
decline reflects a $10.0 million drop in the average balance to $272.0 million
and an average cost of 2.40%, up one basis point. Savings accounts represented
22.4% of average interest-bearing liabilities and 11.8% of interest expense in
1997, as compared to 27.4% and 15.1%, respectively, in 1996.
NOW and money market accounts accounted for interest expense of $1.8
million, down $195,000 from the level recorded in the prior year. The decrease
stemmed from a $6.3 million reduction in the average balance to $67.3 million
and a three-basis point drop in the average cost to 2.74%. Average NOW and money
market accounts represented 5.6% of average-interest bearing liabilities and
3.3% of interest expense in 1997, and 7.1% and 4.6%, respectively, in 1996.
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, supported by a
seven-basis point rise in the average cost to 4.35%.
Throughout the year, the interest rate environment was relatively stable,
with a single adjustment made to the Federal Funds rate early in the year. In
January 1996, the Federal Funds rate was reduced 25 basis points to 5.25%, 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 1996, up $4.9 million
from $27.6 million in 1995. The 17.8% increase reflected a $98.7 million rise in
the average balance of CDs to $598.0 million from $499.3 million, tempered by a
nine-basis point drop in the average cost to 5.44% from 5.53%. In 1996 and 1995,
average CDs represented 58.0% and 53.9%, respectively, of average
interest-bearing liabilities and generated 72.6% and 69.7%, respectively, of
total interest expense.
The increasing concentration of CDs in the mix of interest-bearing
deposits reflected 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 in 1996 reflected the transfer of funds
from the savings accounts of long-term customers. Savings accounts generated
$6.8 million in interest expense in 1996, down from the year-earlier $7.3
million, as the average balance fell to $282.1 million from $295.4 million in
1995. Simultaneously, the average cost of these funds dropped to 2.39% from
2.48% in the year-earlier twelve months. The average balance of savings accounts
represented 27.4% and 31.9% of average interest-bearing liabilities in 1996 and
1995, respectively, and generated 15.1% and 18.5%, respectively, of total
interest expense.
In 1996, NOW and money market accounts contributed $2.0 million in
interest expense, down from $2.3 million in 1995. The decrease reflected a $4.5
million drop in the average balance to $73.6 million from $78.2 million and a
22-basis point decline in the average cost to 2.77% from 2.99%. Average NOW and
money market accounts represented 7.1% and 8.4% of average interest-bearing
liabilities and contributed 4.6% and 5.9%, respectively, of total interest
expense in 1996 and 1995.
To supplement the funding provided by its deposits, the Company accessed
its FHLB line of credit throughout the year. In 1996, such borrowings averaged
$61.2 million, up $25.2 million from $36.0 million in 1995. While the higher
average balance was somewhat offset by a reduction in the average cost of these
funds to 5.59% from 6.22%, the 1995 level, the interest expense derived from
FHLB borrowings rose to $3.4 million from $2.2 million, representing 7.6% and
5.6%, respectively, of total interest expense.
Mortgagors' escrow generated interest expense of $39,000 in 1996, down
from $115,000 in 1995. The decrease stemmed from a decline in the average
balance to $15.3 million from the year-earlier $17.5 million, and a drop in the
average cost to 0.26% from 0.66%.
18 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
<PAGE> 14
================================================================================
Net Interest Income Analysis
<TABLE>
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
(dollars in thousands) Average Yield/ Average Yield/ Average Yield/
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 $1,257,632 $108,868 8.66% $1,070,454 $92,017 8.60% $949,585 $80,067 8.43%
Securities 76,208 4,737 6.22 74,328 4,308 5.80 75,558 4,816 6.37
Mortgage-backed
securities 62,259 3,856 6.19 84,438 5,252 6.22 100,806 6,276 6.23
Money market
investments 5,269 273 5.18 13,851 727 5.25 6,569 383 5.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets 1,401,368 117,734 8.40% 1,243,071 102,304 8.23% 1,132,518 91,542 8.08%
Non-interest-
earning assets 39,895 38,980 40,070
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,441,263 $117,734 $1,282,051 $102,304 $1,172,588 $91,542
====================================================================================================================================
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Interest-Bearing
Liabilities:
NOW and money
market accounts $ 67,347 $ 1,844 2.74% $ 73,641 $ 2,039 2.77% $ 78,170 $ 2,341 2.99%
Savings accounts 272,043 6,523 2.40 282,064 6,754 2.39 295,422 7,318 2.48
Certificates of deposit 666,242 36,177 5.43 597,963 32,533 5.44 499,308 27,624 5.53
FHLB borrowings 189,136 10,751 5.68 61,191 3,419 5.59 35,965 2,236 6.22
Mortgagors' escrow 17,451 41 0.23 15,256 39 0.26 17,545 115 0.66
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,212,219 55,336 4.56% 1,030,115 44,784 4.35% 926,410 39,634 4.28%
Non-interest-bearing
deposits 26,622 23,215 20,275
Other liabilities 22,798 21,361 17,841
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,261,639 1,074,691 964,526
Stockholders' equity 179,624 207,360 208,062
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,441,263 $1,282,051 $1,172,588
====================================================================================================================================
Net interest income/
interest rate spread $62,398 3.84% $57,520 3.88% $51,908 3.80%
Net interest-earning
assets/net interest
margin $189,149 4.45 $212,956 4.63 $206,108 4.58
Ratio of interest-
earning assets to
interest-bearing
liabilities 1.16x 1.21x 1.22x
====================================================================================================================================
</TABLE>
19
<PAGE> 15
================================================================================
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, 1997 December 31, 1996 December 31, 1995
Compared to Year Ended Compared to Year Ended Compared to Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
Due to Due to Due to
(in thousands) Volume Rate Net Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage and
other loans, net $16,210 $641 $16,851 $10,395 $1,555 $11,950 $8,212 $823 $ 9,035
Securities 117 312 429 (71) (437) (508) (15) 428 413
Mortgage-backed securities (1,373) (23) (1,396) (1,018) (6) (1,024) (1,013) 355 (658)
Money market investments (445) (9) (454) 382 (38) 344 (700) 381 (319)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 14,509 921 15,430 9,688 1,074 10,762 6,484 1,987 8,471
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
NOW and money
market accounts (172) (23) (195) (125) (177) (302) (487) 232 (255)
Savings accounts (241) 10 (231) (319) (245) (564) (1,111) 391 (720)
Certificates of deposit 3,708 (64) 3,644 5,367 (458) 4,909 6,994 4,646 11,640
FHLB borrowings 7,267 65 7,332 1,410 (227) 1,183 145 354 499
Mortgagors' escrow 5 (3) 2 (6) (70) (76) 11 3 14
- ------------------------------------------------------------------------------------------------------------------------------------
Total 10,567 (15) 10,552 6,327 (1,177) 5,150 5,552 5,626 11,178
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in interest
income $ 3,942 $936 $ 4,878 $ 3,361 $2,251 $ 5,612 $ 932 $(3,639) $(2,707)
====================================================================================================================================
</TABLE>
Net Interest Income
1997 and 1996 Comparison:
Net interest income is the Company's principal source of income. Its level is a
function of the average balance of interest-earning assets, the average balance
of interest-bearing liabilities, and the spread between the yield on said assets
and the cost of said liabilities. These factors are impacted, in turn, by the
pricing and mix of the Company's interest-earning assets and its funding
sources, and by such external factors as competition, economic conditions, and
the monetary policy of the Federal Reserve Board of Governors.
Fueled by the record level of mortgage loan originations, the average balance
of interest-earning assets rose to $1.4 billion in 1997, supported by a 17-basis
point rise in the average yield. While the funding for these increases largely
stemmed from higher-cost sources, the growing volume of mortgage loans
outstanding was sufficient to generate a $4.9 million, or 8.5%, rise in net
interest income to $62.4 million for the year.
Despite the increased use of FHLB borrowings and the flattening of the yield
curve, the Company's interest rate spread equaled 3.84% in 1997, representing a
modest four-basis point decline from the level recorded in 1996. The Company's
net interest margin declined 18 basis points to 4.45% from the year-earlier
level; the extent of this decline reflects the Company's allocation of $68.1
million that might otherwise have been invested into interest-earning assets
into the repurchase of Company shares.
1996 and 1995 Comparison:
In 1996, the Company's net interest income rose $5.6 million, or 10.8%, to $57.5
million from $51.9 million in 1995. The increase was fueled by the growing
average balance of interest-earning assets and a year-long increase in the
average yield.
While asset growth was largely funded by CDs and FHLB borrowings, the
volume of mortgage loans originated more than offset the impact of the higher
costs involved. The Company recorded improvements in both its interest rate
spread and net interest margin, with the interest rate spread rising 8 basis
points to 3.88% in 1996 from 3.80%, the year-earlier level, and the net interest
margin rising to 4.63% from 4.58%.
20 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
<PAGE> 16
Provision for Loan Losses
1997 and 1996 Comparison:
In 1997, the Company suspended the provision for loan losses, continuing a
practice that was initiated in the third quarter of 1995. In 1996, the Company
also reversed $2.0 million from the allowance for loan losses, resulting in the
recognition of a $750,000 net benefit for the year.
The provision for loan losses is based on management's periodic assessment
of the adequacy of the loan loss allowance which, in turn, is based on such
interrelated factors as the composition of the loan portfolio and its inherent
risk characteristics; 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.
Management's decision to suspend the loan loss provision throughout 1997
reflects the level of coverage provided by the Company's allowance for loan
losses and the strong performance of its loan portfolio. In addition to
recording its tenth consecutive quarter without any net charge-offs, the Company
achieved significant reductions in the level of non-performing assets and
maintained the fully-performing status of its multi-family mortgage loans. At
December 31, 1997, non-performing assets declined to $8.7 million, or 0.54% of
total assets, from $10.3 million (or 0.84%) at December 31, 1996. Included in
these amounts were non-performing loans of $7.7 million (representing 0.55% of
loans, net) and $9.7 million (representing 0.84% of loans, net), respectively.
Reflecting the absence of any net charge-offs and recoveries of $72,000,
the allowance for loan losses rose to $9.4 million at December 31, 1997. This
amount was equivalent to 122.61% of non-performing loans and 0.68% of loans,
net, at that date. More significantly, the ratio of the allowance for loan
losses to net accumulated charge-offs in the ten years ended December 31, 1997
was 661.36%.
For more information about the Company's asset quality, see the discussion
and analysis beginning on page 10 of this report.
1996 and 1995 Comparison:
In addition to suspending the provision for loan losses, the Company reversed
$2.0 million from the loan loss allowance in 1996. In the absence of any net
charge-offs, the reversal reduced the loan loss allowance to $9.4 million,
representing 96.90% of non-performing loans and 0.82% of loans, net, at December
31st. In 1995, the Company recorded loan loss provisions of $150,000 and net
charge-offs of $59,000, contributing to a loan loss allowance of $11.4 million,
representing 145.76% of non-performing loans and 1.14% of loans, net, at
year-end.
The reversal of the allowance and the suspension of the loan loss
provision reflected the fundamental soundness of the Company's loan portfolio
throughout 1996. While non-performing loans rose to $9.7 million at December
31st from the year-earlier $7.8 million, the increase was overshadowed by the
absence of any net charge-offs for six consecutive quarters and the fully
performing status of the multi-family mortgage loan portfolio. In addition, the
loan loss allowance, at $9.4 million, equaled 625.0% of accumulated net
charge-offs for the ten years ended December 31, 1996.
Other Operating Income
1997 and 1996 Comparison:
The Company recorded other operating income of $2.3 million in 1997 and $2.4
million in 1996. The $140,000 decline was the net effect of a $296,000 reduction
in fee income to $1.3 million and a $156,000 rise in other income to $1.0
million.
The Company has traditionally derived other operating income from service
fees and charges on loans and depository accounts. In 1997, these sources of
other operating income were supplemented by gains on the sale of multi-family
mortgage loans to a third party, with the servicing retained as a means of
generating additional income in future periods. Transacted in the fourth
quarter, such sales totaled $13.6 million; management anticipates that the
Company will selectively expand on this program in 1998.
Additional fee income was also produced by the introduction of the VISA
Check Card, which was promoted through a direct mail campaign in the third
quarter of the year. The Company is exploring other means of increasing fee
income through the addition of other financial services in 1998.
1996 and 1995 Comparison:
Other operating income totaled $2.4 million in 1996 and $3.0 million in 1995.
The 1996 amount included $1.6 million in fee income (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 fee income corresponded to the
significant increase in mortgage loan originations to $303.2 million from $145.8
million in 1995. The decline in other income reflected 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.
Operating Expense
1997 and 1996 Comparison:
The Company recorded operating expense of $27.1 million in 1997 and $23.3
million in 1996, equivalent to 1.88% and 1.82% of average assets, respectively.
The increase was primarily due to a $2.7 million rise in compensation and
benefits expense to $18.9 million, largely reflecting a rise in non-cash
expenses stemming from the amortization and appreciation of shares held in the
Company's stock-related benefit plans during the year. Such non-cash expenses
accounted for $7.4 million, or 39.1%, of compensation and benefits expense in
1997, as compared to $5.4 million, or 33.4% of the total, in 1996. The value of
the Company's shares rose 92.3% in the twelve months ended December 31, 1997,
and 59.7% in the preceding twelve-month period.
The remaining components of operating expense experienced more modest
increases, with occupancy and equipment expense rising $162,000 to $2.6 million,
G&A expense rising $450,000 to $4.9 million, and other operating expenses rising
$514,000 to $699,000. The higher level of G&A expense primarily reflects the
expansion of the Company's advertising program.
21
<PAGE> 17
The rise in occupancy and equipment expense reflects the full-year
operation of three locations that were added to the franchise in the prior
twelve-month period, and the relocation of a customer service center to a
full-service branch office in July. Also included in occupancy and equipment
expense are the costs associated with the Company's Year 2000 compliance, which
is discussed in greater detail elsewhere on this page.
The Company's efficiency ratio was 41.86% in 1997 and 38.81% in 1996. On
the basis of cash earnings, these ratios improve to 30.47% and 28.83%,
respectively.
1996 and 1995 Comparison:
Operating expense totaled $23.3 million in 1996 and $22.9 million in 1995,
representing 1.82% and 1.95% of average assets in the respective periods. The
1996 amount reflected declines in G&A expense and other operating expenses which
were modestly offset by higher levels of compensation and benefits and occupancy
and equipment expense.
G&A expense was reduced to $4.4 million from $5.1 million, primarily
reflecting a decline in the FDIC insurance premium 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 $500.00. Absent the decline in the premium, the
Company's 1996 G&A expense rose $293,000, partly reflecting higher advertising
expenses stemming from the initiation of a radio and cable TV promotional
campaign.
Other operating expense improved to $185,000 in 1996 from $1.7 million in
the year-earlier period, reflecting a net gain of $124,000 on the sale of
foreclosed real estate and a $1.5 million reduction related 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 1996, the Company received payment of all
pending claims except for its original investment. Accordingly, the Company
concluded its financial exposure to Nationar by realizing a net recovery of
$420,000, recorded as other income as previously discussed.
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 that was
implemented as part of the Company's preparation for the Year 2000.
Compensation and benefits expense rose to $16.2 million from the
year-earlier $13.7 million, primarily reflecting $5.4 million in charges related
to the amortization and appreciation of shares held in the Company's
stock-related benefit plans over the course of the year. In the year-earlier
period, such non-cash expenses totaled $2.3 million.
In 1996, the Company 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%.
Income Tax Expense
1997 and 1996 Comparison:
The Company recorded income tax expense of $14.4 million in 1997 and $17.8
million in 1996. In addition to a $1.1 million decline in pre-tax income to
$37.6 million, the $3.4 million reduction reflects the net effect of a $1.8
million tax charge against earnings in the prior year's fourth quarter and the
reversal of $1.3 million of that charge in the first quarter of 1997. The tax
charge was recorded pursuant to a delay in the enactment of legislation to
de-couple the New York City tax code from that of the Federal tax code with
regard to its treatment of the tax bad-debt reserve.
In addition to current and deferred Federal, state, and local income
taxes, the Company's income tax expense includes certain non-cash expenses that
are related to the amortization and appreciation of shares held in the Company's
stock-related benefit plans. Such non-cash expenses totaled $3.4 million in 1997
and $1.1 million in 1996.
In 1998, management expects the effective tax rate to be stabilized at
approximately 45.0%.
1996 and 1995 Comparison:
Income tax expense equaled $17.8 million in 1996 and $11.7 million in 1995. The
$6.1 million increase reflected a $6.8 million rise in pre-tax income to $38.7
million and a $1.8 million tax 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 enacted in August
1996. (The City of New York enacted legislation to de-couple its treatment of
the tax bad-debt reserve from the Federal tax code in the first quarter of 1997,
resulting in the reversal of $1.3 million during said quarter, as noted in the
1997 and 1996 comparison above.)
In addition, the increase in 1996 income tax expense reflected $830,000
stemming from the elimination of the percentage-of-income tax bad-debt deduction
for Federal income tax purposes, and $1.1 million in non-cash expenses related
to the amortization and appreciation of shares held in the Company's
stock-related benefit plans.
Year 2000 Compliance
The Company has been actively involved in the process of integrating its
internal and external computer systems to ensure their Year 2000 compliance and
has scheduled testing with its external data processing providers for the third
quarter of 1998.
It is management's current expectation that the additional costs incurred
in this process will be minimal. However, it should be cautioned that the
majority of the Company's data systems are provided by external vendors. While
written assurances have been provided by its primary vendors, the Company's
readiness for the Year 2000 will depend in large part on its vendors' ability to
fulfill the necessary compliance requirements.
22 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
<PAGE> 18
Impact of Accounting Pronouncements
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 established standards
for reporting and displaying comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. SFAS No. 130 requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 also requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997, with reclassification of prior periods required. Management is currently
assessing the financial implications of implementing SFAS No. 130 and believes
that its adoption will not have a material adverse effect on the Company.
Disclosure about Segments of an Enterprise
and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way an enterprise reports information about operating segments in annual
financial statements and requires that enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
SFAS No. 131 requires that a public business enterprise report both financial
and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available and that are evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 requires a reconciliation of total segment revenues,
total segment profit or loss, total segment assets, and other amounts disclosed
for segments to the amounts in the enterprise's financial statements. SFAS No.
131 also requires an enterprise to report descriptive information about the way
the operating segments were determined, the products and services provided by
the operating segments, and any differences between the measurements used for
segment reporting and financial statement reporting. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997, with comparative information
for earlier years to be restated in the initial year of application. Management
is currently assessing the financial implication of implementing SFAS No. 131
and believes that its adoption will not have a material adverse effect on the
Company.
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 that
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.
The Company's assets and liabilities are primarily monetary in nature. As
a result, interest rates have a greater impact on the Company's performance than
do 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, 1997, the Company had 14,912,791 shares outstanding,
reflecting the three-for-two stock splits on April 10, 1997 and October 1, 1997
and the repurchase of 2,547,326 shares during the year.
The table on page 24 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 of 1997 and 1996.
23
<PAGE> 19
================================================================================
Market Price and Dividends Declared per Common Share
<TABLE>
<CAPTION>
Market Price
High Low Close
- --------------------------------------------------------------------------------------------------------------
Dividends Declared
per Common Share Pre-Split* Post-Split Pre-Split* Post-Split Pre-Split* Post-Split
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
1st Quarter $0.111** $119.00 $26.45 $90.50 $20.11 $109.76 $24.39
2nd Quarter 0.133** 144.00 32.00 107.01 23.78 136.49 30.33
3rd Quarter 0.167** 162.77 36.17 133.52 29.67 155.43 34.54
4th Quarter 0.200 182.25 40.50 156.38 34.75 182.25 40.50
- --------------------------------------------------------------------------------------------------------------
1996
1st Quarter $0.067** $66.02 $14.67 $58.50 $13.00 $66.00 $14.67
2nd Quarter 0.083** 73.50 16.33 64.49 14.33 73.50 16.33
3rd Quarter 0.111** 76.14 16.92 70.34 15.63 74.50 16.56
4th Quarter 0.111** 98.78 21.95 73.75 16.39 94.75 21.06
==============================================================================================================
</TABLE>
* States the price per share as if the Company had not split its stock
3-for-2 on September 30, 1994, 4-for-3 on August 22, 1996, and 3-for-2 on
April 10, 1997 and October 1, 1997.
** Dividends have been restated to reflect the 4-for-3 stock split on August
22, 1996 and the 3-for-2 stock splits on April 10, 1997 and October 1,
1997.
At December 31, 1997, 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 QUEENS COUNTY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
<PAGE> 20
Consolidated Statements of Condition
================================================================================
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $16,733 $14,045
Money market investments 6,000 7,000
Securities held to maturity (estimated market value of
$95,067 and $86,483, respectively) (notes 3 and 9) 94,936 86,495
Mortgage-backed securities held to maturity (estimated market
value of $50,619 and $74,192, respectively) (notes 4 and 9) 49,781 73,732
Securities available for sale 2,617 --
Mortgage loans 1,393,658 1,143,260
Other loans 10,776 12,251
Less: Allowance for loan losses (9,431) (9,359)
- ------------------------------------------------------------------------------------------------------------------
Loans, net (notes 5, 6, and 9) 1,395,003 1,146,152
Premises and equipment, net 10,782 11,077
Deferred tax asset, net (note 10) 5,514 3,312
Other assets (notes 7 and 12) 21,903 16,843
- ------------------------------------------------------------------------------------------------------------------
Total assets $1,603,269 $1,358,656
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 8):
NOW and money market accounts $67,894 $69,443
Savings accounts 268,133 277,783
Certificates of deposit 703,948 651,705
Non-interest-bearing accounts 29,186 24,999
- ------------------------------------------------------------------------------------------------------------------
Total deposits 1,069,161 1,023,930
- ------------------------------------------------------------------------------------------------------------------
Official checks outstanding 29,440 26,729
FHLB borrowings (note 9) 309,664 81,393
Accounts payable and accrued expenses 1,857 1,169
Mortgagors' escrow 10,690 7,356
Other liabilities (note 12) 11,942 6,650
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 1,432,754 1,147,227
- ------------------------------------------------------------------------------------------------------------------
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; 20,647,233 shares issued;
14,912,791 and 17,167,732 outstanding at December 31, 1997 and 1996, respectively) 206 92
Paid-in capital in excess of par 125,000 116,607
Retained earnings (substantially restricted) (note 15) 166,230 154,886
Less: Treasury stock (5,734,442 and 3,479,852 shares, respectively) (104,148) (42,397)
Unallocated common stock held by ESOP (note 13) (13,526) (14,820)
Common stock held by SERP and Deferred Compensation Plans (notes 12 and 13) (2,492) (1,411)
Unearned common stock held by RRPs (note 13) (812) (1,528)
Net unrealized appreciation in securities, net of tax 57 --
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 170,515 211,429
- ------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 11)
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,603,269 $1,358,656
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 21
Consolidated Statements of Income
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Mortgage and other loans (note 6) $108,868 $92,017 $80,067
Securities held to maturity 4,737 4,308 4,816
Mortgage-backed securities held to maturity 3,856 5,252 6,276
Money market investments 273 727 383
- ------------------------------------------------------------------------------------------------------------
Total interest income 117,734 102,304 91,542
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW and money market accounts 1,844 2,039 2,341
Savings accounts 6,523 6,754 7,318
Certificates of deposit 36,177 32,533 27,624
FHLB borrowings (note 9) 10,751 3,419 2,236
Mortgagors' escrow 41 39 115
- ------------------------------------------------------------------------------------------------------------
Total interest expense 55,336 44,784 39,634
- ------------------------------------------------------------------------------------------------------------
Net interest income 62,398 57,520 51,908
- ------------------------------------------------------------------------------------------------------------
(Reversal of) provision for loan losses (note 6) -- (2,000) 150
- ------------------------------------------------------------------------------------------------------------
Net interest income after (reversal of) provision for loan losses 62,398 59,520 51,758
- ------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Fee income 1,287 1,583 1,407
Other (note 5) 1,018 862 1,626
- ------------------------------------------------------------------------------------------------------------
Total other operating income 2,305 2,445 3,033
- ------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Compensation and benefits (notes 12 and 13)(1) 18,872 16,185 13,694
Occupancy and equipment (note 11) 2,641 2,479 2,399
General and administrative 4,872 4,422 5,127
Other 699 185 1,651
- ------------------------------------------------------------------------------------------------------------
Total operating expense 27,084 23,271 22,871
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 37,619 38,694 31,920
Income tax expense (note 10)(2) 14,355 17,755 11,737
- ------------------------------------------------------------------------------------------------------------
Net income $23,264 $20,939 $20,183
============================================================================================================
Earnings per share(3) $1.71 $1.35 $1.21
Diluted earnings per share(3) 1.60 1.28 1.16
============================================================================================================
</TABLE>
(1) Includes non-cash expenses of $7.368 million, $5.411 million and $3.457
million, respectively.
(2) Includes non-cash expenses of $3.416 million, $1.111 million and $0,
respectively.
(3) Reflects shares issued as a result of a 4-for-3 stock split on August 22,
1996 and 3-for-2 stock splits on April 10, 1997 and October 1, 1997.
See accompanying notes to consolidated financial statements.
26 QUEENS COUNTY BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 22
Consolidated Statements of Changes in Stockholders' Equity
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
(in thousands, except share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock (Par Value: $0.01):
Balance at beginning of year $ 92 $ 69 $ 69
Stock splits (11,470,529 and 2,294,063 shares) 114 23 --
- ----------------------------------------------------------------------------------------------------------
Balance at end of year 206 92 69
- ----------------------------------------------------------------------------------------------------------
Paid-In Capital in Excess of Par:
Balance at beginning of year 116,607 112,441 111,407
Tax benefit effect on stock plans 3,416 1,111 --
Common stock acquired by SERP and Deferred Compensation Plans 1,081 1,081 32
Allocation of ESOP Stock 4,021 2,002 1,002
Stock splits (11,470,529 and 2,294,063 shares) (114) (23) --
Cash paid in lieu of fractional shares (11) (5) --
- ----------------------------------------------------------------------------------------------------------
Balance at end of year 125,000 116,607 112,441
- ----------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 154,886 140,969 122,644
Net income 23,264 20,939 20,183
Dividends paid on common stock (8,135) (5,669) (1,632)
Exercise of stock options (218,407; 150,797; and 55,116 shares) (3,785) (1,353) (226)
- ----------------------------------------------------------------------------------------------------------
Balance at end of year 166,230 154,886 140,969
- ----------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (42,397) (16,843) (7,444)
Purchase of common stock (2,547,326; 844,360; and 422,015 shares) (68,086) (28,825) (9,963)
Common stock acquired by SERP 1,337 1,081 32
Exercise of stock options (218,407; 150,797; and 55,116 shares) 4,998 2,190 532
- ----------------------------------------------------------------------------------------------------------
Balance at end of year (104,148) (42,397) (16,843)
- ----------------------------------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of year (14,820) (16,065) (17,343)
Allocation of ESOP stock 1,294 1,245 1,278
- ----------------------------------------------------------------------------------------------------------
Balance at end of year (13,526) (14,820) (16,065)
- ----------------------------------------------------------------------------------------------------------
SERP AND DEFERRED COMPENSATION PLANS:
Balance at beginning of year (1,411) (330) (298)
Common stock acquired by SERP and Deferred Compensation Plans (1,081) (1,081) (32)
- ----------------------------------------------------------------------------------------------------------
Balance at end of year (2,492) (1,411) (330)
- ----------------------------------------------------------------------------------------------------------
RECOGNITION AND RETENTION PLANS:
Balance at beginning of year (1,528) (2,611) (3,756)
Earned portion of RRPs 716 1,083 1,145
- ----------------------------------------------------------------------------------------------------------
Balance at end of year (812) (1,528) (2,611)
- ----------------------------------------------------------------------------------------------------------
Net unrealized appreciation in securities, net of tax:
Balance at beginning of year -- -- --
Net unrealized appreciation in securities, net of tax 57 -- --
- ----------------------------------------------------------------------------------------------------------
Balance at end of year 57 -- --
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity $170,515 $211,429 $217,630
==========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 23
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 23,264 $ 20,939 $ 20,183
- ------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 948 772 738
(Reversal of) provision for loan losses -- (2,000) 150
(Increase) decrease in deferred income taxes (2,202) 2,510 (481)
Amortization of premiums (discounts), net 147 537 (506)
Amortization of net deferred loan origination fees 217 141 650
Net loss on redemption of securities and mortgage-backed securities (20) (2) (6)
Net (gain) loss on sale of foreclosed real estate and loans (556) 123 (12)
Write-off of investment in Nationar -- -- 349
Provision for Nationar investment losses -- -- 1,000
Tax benefit effect on stock plans 3,416 1,111 --
Earned portion of RRPs 716 1,083 1,145
Earned portion of ESOP 5,315 3,247 2,280
Changes in assets and liabilities:
(Increase) decrease in other assets (5,060) 3,014 (6,209)
Increase (decrease) in accounts payable and accrued expenses 688 286 (254)
Increase (decrease) in official checks outstanding 2,711 (1,117) 10,556
Increase (decrease) in other liabilities 5,292 (741) 350
- ------------------------------------------------------------------------------------------------------------
Total adjustments 11,612 8,964 9,750
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 34,876 29,903 29,933
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from redemptions of mortgage-backed securities held to maturity 32,939 19,132 14,584
Proceeds from maturities and sales of investment securities 62,000 87,000 59,000
Proceeds from redemption of securities available for sale 1,519 -- --
Purchase of securities (79,575) (96,010) (57,488)
Purchase of securities available for sale (4,009) -- --
Net increase in loans (265,152) (151,730) (60,523)
Proceeds from sales of loans and foreclosed real estate 16,578 1,006 1,318
Purchase of premises and equipment, net (653) (1,323) (422)
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (236,353) (141,925) (43,531)
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase (decrease) in mortgagors' escrow 3,334 (448) (2,838)
Net increase in deposits 45,231 91,790 91,920
Net increase (decrease) from FHLB borrowings 228,271 35,316 (37,227)
Cash dividends, cash paid in lieu of fractional shares, and
options exercised (11,920) (7,027) (1,858)
Purchase of Treasury stock, net of stock options exercised and
shares acquired by SERP (61,751) (25,554) (9,399)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 203,165 94,077 40,598
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,688 (17,945) 27,000
Cash and cash equivalents at beginning of year 21,045 38,990 11,990
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 22,733 $ 21,045 $ 38,990
============================================================================================================
Supplemental information:
Cash paid for:
Interest $ 55,335 $ 44,810 $ 39,622
Income taxes 12,443 14,775 12,858
- ------------------------------------------------------------------------------------------------------------
Transfers to foreclosed real estate from loans 1,758 730 810
- ------------------------------------------------------------------------------------------------------------
Transfers to real estate held for investment from foreclosed real estate 533 222 687
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
28 QUEENS COUNTY BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 24
Notes to Consolidated Financial Statements
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 1997
presentation.
Securities Held to Maturity, Mortgage-Backed Securities Held to Maturity, and
Securities Available For Sale
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
Standards ("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 1997 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.
29
<PAGE> 25
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.
Loans are designated "in foreclosure," 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 loans in foreclosure 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, 1997, 1996, and 1995 amounted to $948,000,
$772,000, and $738,000, respectively.
Year 2000
In January 1997, the Company developed a plan to deal with the Year 2000 issue
and began converting its computer systems to be Year 2000 compliant. The plan
provides for the conversion efforts to be completed by the end of 1998. The Year
2000 issue is the result of computer programs having been written using two
digits rather than four to define the applicable year. The Company is expensing
all costs associated with these systems changes as the costs are incurred.
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 that 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 Financial Accounting Standards Board (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 three stock option plans at December 31, 1997. Stock
options related to two of these plans were originally granted concurrent with
the Bank's conversion from mutual to stock form in 1993. Additional stock
options were granted on February 18, 1997. The Bank applies APB Opinion No. 25
and the related interpretations in accounting for its plans and, accordingly, no
compensation cost has been recognized for said 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.
30 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 26
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 Share (Basic and Diluted)
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No.
128 simplifies the standards for computing earnings per share previously found
in APB Opinion No. 15, "Earnings per Share." It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that would then
share in the earnings of the entity.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods, with earlier
application not permitted. SFAS No. 128 requires restatement of all prior-period
EPS data presented.
The weighted average number of common shares outstanding used in the
computation of Basic EPS was 13,636,414, 15,477,422, and 16,680,165 for the
years ended 1997, 1996, and 1995, respectively. The weighted average number of
common shares outstanding used in the computation of Diluted EPS was 14,549,455,
16,311,685, and 17,399,138 for the years ended 1997, 1996, and 1995,
respectively. The differential in the weighted average number of common shares
outstanding used in the computation of Basic and Diluted EPS represents the
average common stock equivalents of stock options.
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.
As a result of four stock splits (a 3-for-2 stock split on September 30,
1994, a 4-for-3 stock split on August 22, 1996, and 3-for-2 stock splits on
April 10, 1997 and October 1, 1997), the initial offering price was adjusted to
$5.56 per share and the number of shares outstanding was 14,912,791 at December
31, 1997.
31
<PAGE> 27
3 Securities Investments
Securities held to maturity at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) Cost unrealized gain unrealized loss market value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $78,279 $117 $(51) $78,345
- -----------------------------------------------------------------------------------------------
FHLB stock 16,655 -- -- 16,655
FNMA stock 2 65 -- 67
- -----------------------------------------------------------------------------------------------
Total stock 16,657 65 -- 16,722
- -----------------------------------------------------------------------------------------------
Total securities $94,936 $182 $(51) $95,067
===============================================================================================
<CAPTION>
December 31, 1996
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) 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>
The following is a summary of the amortized cost and estimated market value of
securities held to maturity at December 31, 1997 by remaining term to maturity:
December 31, 1997
- --------------------------------------------------------------------------------
U.S. Government Estimated
(in thousands) and agencies market value
- --------------------------------------------------------------------------------
1 year or less $66,222 $66,199
Over 1 year to 5 years 12,057 12,146
- --------------------------------------------------------------------------------
Total $78,279 $78,345
================================================================================
Because Federal Home Loan Bank ("FHLB") and Federal National Mortgage
Association ("FNMA") stock are securities for which sale is restricted by the
respective governmental agencies, they are not considered marketable equity
securities. FHLB and FNMA stock are carried at cost, which approximates value at
redemption.
Securities available for sale at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) Cost unrealized gain unrealized loss market value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity $2,509 $108 $-- $2,617
===============================================================================================
</TABLE>
There were no securities available for sale as of December 31, 1996.
32 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 28
4 Mortgage-Backed Securities Held to Maturity
Mortgage-backed securities held to maturity at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------
(in thousands) GNMA FHLMC Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Principal balance $20,050 $ 29,733 $ 49,783
Unamortized premium 19 -- 19
Unamortized discount -- (21) (21)
- --------------------------------------------------------------------------------
Mortgage-backed securities, net 20,069 29,712 49,781
Gross unrealized gains 720 258 978
Gross unrealized losses -- (140) (140)
- --------------------------------------------------------------------------------
Estimated market value $20,789 $ 29,830 $ 50,619
================================================================================
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
================================================================================
</TABLE>
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, 1997 by remaining
term to maturity:
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------
Estimated
(in thousands) GNMA FHLMC Total Market Value
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1 year or less $ 2,981 $12,112 $15,093 $15,348
Over 1 year to 5 years 17,088 17,600 34,688 35,271
- --------------------------------------------------------------------------------
Total mortgage-backed securities, net $20,069 $29,712 $49,781 $50,619
================================================================================
</TABLE>
There were no sales of mortgage-backed securities held to maturity during the
years ended December 31, 1997, 1996, or 1995.
33
<PAGE> 29
5 Loans
The composition of the loan portfolio as of December 31, 1997 and 1996 is
summarized as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage Loans:
1-4 family $ 224,287 $ 256,904
Multi-family 1,107,374 822,364
Commercial real estate 61,740 63,452
Construction 1,538 1,598
- --------------------------------------------------------------------------------
Total mortgage loans 1,394,939 1,144,318
Less: Net deferred loan origination fees 1,281 1,058
- --------------------------------------------------------------------------------
Mortgage loans, net 1,393,658 1,143,260
- --------------------------------------------------------------------------------
Other Loans:
Cooperative apartment 5,041 5,764
Home equity 2,386 2,819
Passbook savings 312 375
Other 3,056 3,317
- --------------------------------------------------------------------------------
Total other loans 10,795 12,275
Less: Unearned discounts 19 24
- --------------------------------------------------------------------------------
Other loans, net 10,776 12,251
Less: Allowance for loan losses 9,431 9,359
- --------------------------------------------------------------------------------
Loans, net $1,395,003 $1,146,152
================================================================================
</TABLE>
The Bank has a diversified loan portfolio as to type and borrower concentration.
At December 31, 1997 and 1996, approximately $1.355 billion and $1.106 billion,
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 one-to-four family mortgage loans that
it originates. Originated fixed rate one-to-four family mortgage loans 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, 1997,
1996, and 1995 amounted to $3.2 million, $300,000, and $400,000, respectively.
No loans were sold to FNMA in the years ended December 31, 1997 and 1996; in
1995, loans sold to FNMA amounted to $100,000. No loans were sold to SONYMA
during the years ended December 31, 1997 and 1995; in 1996, loans sold to SONYMA
totaled $45,000.
In 1997, the Bank also originated and sold $13.6 million in multi-family
mortgage loans, with the servicing rights retained. In 1996 and 1995, all
multi-family mortgage loans originated by the Bank were retained in portfolio.
During 1997, 1996, and 1995, the Bank also sold approximately $12,000,
$82,000, and $200,000, respectively, in student loans, a substantial portion of
said portfolio, to Nellie Mae. Included in other income for the years ended
December 31, 1997, 1996, and 1995 were $512,000, $1,000, and $23,000,
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
$18.0 million, $16.1 million, and $17.4 million, at December 31, 1997, 1996, and
1995, respectively. Custodial escrow balances maintained in connection with such
loans amounted to $56,000, $49,000, and $115,000 at the corresponding dates.
Commitments to originate first mortgage loans at December 31, 1997 and
1996 amounted to approximately $102.3 million and $32.4 million, respectively,
all representing variable rate first mortgage loans. Substantially all of the
commitments at December 31, 1997 were expected to close within 90 days and were
made at interest rates that float or adjust at periodic intervals.
34 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 30
6 Allowance for Loan Losses
Activity in the allowance for loan losses for the years ended December 31, 1997,
1996, and 1995 is summarized as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $9,359 $ 11,359 $ 11,268
Provisions charged to operations -- -- 150
Reversal of provisions -- (2,000) --
Net recoveries (charge-offs) 72 -- (59)
- --------------------------------------------------------------------------------
Balance, end of year $9,431 $ 9,359 $ 11,359
================================================================================
</TABLE>
There were $72,000 in recoveries to the allowance for loan losses during the
year ended December 31, 1997. No recoveries were realized during 1996 or 1995.
Mortgage loans in foreclosure amounted to approximately $6.1 million, $7.0
million, and $4.9 million at December 31, 1997, 1996, and 1995, respectively,
and included loans that have been restructured of approximately $0, $24,000, and
$359,000, 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, 1997, 1996, and 1995
are summarized below:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recorded $ 1,040 $ 1,062 $ 869
Interest income recognized (149) (144) (47)
- --------------------------------------------------------------------------------
Interest income foregone $ 891 $ 918 $ 822
================================================================================
</TABLE>
The Company defines impaired loans as those loans in foreclosure that are not
one-to-four 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. There were no impaired loans in 1997; in 1996,
the average balance of impaired loans was $1.2 million. There was no interest
income recognized on impaired loans during 1996.
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, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 627 $ 774
Transfers in 1,758 730
Sales (1,240) (655)
Transfers to real estate held for investment (115) (222)
- --------------------------------------------------------------------------------
Balance, end of year $ 1,030 $ 627
================================================================================
</TABLE>
Foreclosed real estate is carried at fair market value. There were no valuation
allowances at December 31, 1997 or 1996, and no provisions for the years ended
December 31, 1997, 1996, or 1995.
35
<PAGE> 31
8 Deposits
The following is a summary of weighted average interest rates at December 31,
1997 and 1996 for each type of deposit:
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------
Percent Weighted
(in thousands) Amount of Total Average Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest-bearing demand accounts $ 29,186 2.73% 0.00%
NOW and Super NOW accounts 21,485 2.01 2.43
Money market accounts 46,409 4.34 2.83
Savings accounts 268,133 25.08 2.40
Certificates of deposit 703,948 65.84 5.50
- --------------------------------------------------------------------------------
Total deposits $1,069,161 100.00% 4.39%
================================================================================
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%
================================================================================
</TABLE>
The following is a summary of certificates of deposit at December 31, 1997 by
remaining term to maturity and by range of stated interest rates:
<TABLE>
<CAPTION>
December 31, 1997 Amounts Maturing
- --------------------------------------------------------------------------------
Within Within Within After
(in thousands) One Year Two Years Three Years Three Years Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Certificates of Deposit:
2.00% to 2.99% $ 46,165 $-- $-- $-- $ 46,165
3.00% to 3.99% -- -- -- -- --
4.00% to 4.99% 52,123 442 -- -- 52,565
5.00% to 6.99% 465,951 94,923 24,697 14,692 600,263
7.00% and above 980 1,143 938 1,894 4,955
- --------------------------------------------------------------------------------
Total maturities $565,219 $96,508 $25,635 $16,586 $703,948
================================================================================
</TABLE>
At December 31, 1997 and 1996, the aggregate amount of certificates of deposit
of $100,000 or more was approximately $139.7 million and $108.4 million,
respectively.
36 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 32
9 Borrowings
In 1997 and 1996, the Company drew upon its line of credit with the Federal Home
Loan Bank of New York ("FHLB"), which totaled $481.0 million and $323.3 million
at the respective year-ends. At December 31, 1997 and 1996, the outstanding
balance was approximately $309.7 million and $81.4 million, with scheduled
maturity dates within the next 12 months. The weighted average interest rate for
borrowings was 5.76% and 5.49% at the corresponding dates. For the years ended
December 31, 1997 and 1996, the weighted average outstanding balance was
approximately $189.1 million and $61.2 million, with a weighted average interest
rate of 5.68% and 5.59%. The maximum amount of borrowings outstanding at any
month-end during the year ending December 31, 1997 was $309.7 million; in the
previous twelve-month period, the maximum month-end amount was $88.8 million.
The credit line is collateralized by stock in the FHLB and certain mortgage
loans under a blanket pledge agreement.
The Company also has a $10.0 million line of credit with a money center
bank, which had not been drawn upon at December 31, 1997.
10 Federal, State, and Local Taxes
Federal Income Taxes
The components of the net deferred tax asset at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Financial statement loan loss allowance $ 4,452 $ 4,489
Accrual for post-retirement benefits 1,942 1,953
Deferred directors' fees 375 357
Accrual for directors' retirement benefit 358 380
Deferred origination fees 605 503
Non-accrual interest 74 203
Organization costs 319 705
Others 1,339 782
- --------------------------------------------------------------------------------
Total deferred tax assets 9,464 9,372
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
Tax reserve in excess of base year reserve (2,591) (4,815)
Basis difference of GNMAs (424) (608)
Pre-paid pension cost (909) (606)
Basis difference of premises and equipment (26) (31)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (3,950) (6,060)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 5,514 $ 3,312
================================================================================
</TABLE>
The net deferred tax asset at December 31, 1997 and 1996 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. Based upon current facts, management believes that 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,
1997 or 1996. However, there can be no assurances about the level of future
earnings.
37
<PAGE> 33
Income tax expense (benefit) for the years ended December 31, 1997, 1996, and
1995 is summarized as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal--current $ 12,673 $10,471 $ 8,500
State and local--current 3,884 4,774 3,718
- --------------------------------------------------------------------------------
Total current 16,557 15,245 12,218
- --------------------------------------------------------------------------------
Federal--deferred (340) 690 (274)
State and local--deferred (1,862) 1,820 (207)
- --------------------------------------------------------------------------------
Total deferred (2,202) 2,510 (481)
- --------------------------------------------------------------------------------
Total income tax expense $ 14,355 $17,755 $ 11,737
================================================================================
</TABLE>
The following is a reconciliation of statutory Federal income tax expense to
combined effective income tax expense for the years ended December 31, 1997,
1996, and 1995:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal income tax expense $ 13,167 $ 13,543 $ 11,172
State and local income taxes, net of
Federal income tax benefit 1,314 4,286 2,282
Prior-period tax refunds -- -- (723)
Other, net (126) (74) (994)
- --------------------------------------------------------------------------------
Total income tax expense $ 14,355 $ 17,755 $ 11,737
================================================================================
</TABLE>
Under Federal tax law that existed prior to 1996, the Bank was generally allowed
a special bad debt deduction in determining income for tax purposes. The
deduction was based on either a specified experience formula or a percentage of
taxable income before such deduction ("reserve method"). The reserve method was
used in preparing the income tax returns for 1995 and 1994. Legislation was
enacted in August 1996 which repealed the reserve method for tax purposes. As a
result, the Bank has instead had to use the direct charge-off method to compute
its bad debt deduction. The legislation also requires the Bank to recapture its
post-1987 net additions to its tax bad debt reserves. The Bank has previously
provided for this liability in the financial statements.
Pursuant to SFAS No. 109, the Bank is generally not required to provide
deferred taxes for the difference between book and tax bad debt expense taken in
years prior to, or ending at, December 31, 1987. The tax bad debt expense
deducted in those years (net of charge-offs and recoveries) created an
approximate $7.4 million tax loan loss reserve which could be recognized as
taxable income and create a current and/or deferred tax liability of up to $2.6
million, under current income tax rates, if one of the following occurs: (a) the
Bank's retained earnings represented by this reserve are used for purposes other
than to absorb losses from bad debts, including excess dividends or
distributions in liquidation; (b) the Bank redeems its stock; (c) the Bank fails
to meet the definition provided by the Code for a Bank; or (d) there is a change
in the Federal tax law.
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, 1997, 1996, and 1995.
Both New York State and New York City have adopted legislation to retain
the franchise taxation of thrift reserves for loan losses. The legislation
applies to taxable years beginning after December 31, 1995 and, among other
things, adopts the reserve method for bad debt deductions. The New York State
and City bad debt deduction is therefore no longer predicated on the Federal
deduction.
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.
38 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 34
11 Commitments and Contingencies
Lease Commitments
At December 31, 1997, the Company was obligated under eight 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, 1997, 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, 1997, the projected minimum annual rental commitments
under these leases, exclusive of taxes and other charges, are summarized as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) Rental income Rental expense
- --------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 864 $ 434
1999 716 440
2000 736 431
2001 661 397
2002 467 356
2003 and thereafter 1,835 3,418
- --------------------------------------------------------------------------------
Total minimum future rentals $5,279 $5,476
================================================================================
</TABLE>
Rental expense under these leases, included in occupancy and equipment expense,
was approximately $399,000, $333,000, and $264,000 for the years ended December
31, 1997, 1996, and 1995, respectively. Rental income on bank-owned properties,
netted in occupancy and equipment expense, was approximately $1.026 million,
$947,000, and $910,000, for the years ended December 31, 1997, 1996, and 1995,
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.
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, 1997 or 1996. 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) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 492 $ 504 $ 429
Interest cost on projected benefit obligation 940 926 904
Actual return on plan assets (2,248) (1,380) (1,900)
Net amortization and deferral 1,177 366 1,077
- --------------------------------------------------------------------------------
Net pension expense $ 361 $ 416 $ 510
================================================================================
</TABLE>
39
<PAGE> 35
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) 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligation:
Accumulated Benefit Obligation (ABO):
Vested $(11,327) $ (9,990)
Non-vested (141) (264)
- ------------------------------------------------------------------------------------
Total ABO $(11,468) $(10,254)
====================================================================================
Projected benefit obligation $(13,769) $(12,473)
Plan assets at fair value (primarily investment trust funds) 14,756 12,875
- ------------------------------------------------------------------------------------
Excess of plan assets under projected benefit obligation 987 402
Unrecognized transition asset being amortized over 10.46 years -- (64)
Amount contributed during fourth quarter 596 --
Unrecognized loss 268 849
Unrecognized past service liability 75 93
- ------------------------------------------------------------------------------------
Pre-paid pension cost $ 1,926 $ 1,280
====================================================================================
</TABLE>
The discount rate used in determining the actuarial value of the projected
benefit obligation for the Bank's plan was 7.25% and 7.75% for 1997 and 1996,
respectively. The rate of increase in future compensation levels was 5.0% and
5.5% for 1997 and 1996; the expected long-term rate of return on assets was 8.0%
for both years.
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, 1997, 1996, or 1995.
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, 1997 and 1996, this plan
maintained $0 and $1.0 million, respectively, of trust-held assets. The
remaining balances in the deferred compensation plan at December 31, 1997 and
1996 of $758,000 and $752,000, 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 following table sets forth the plan's funded
status and amounts recognized in the Bank's consolidated financial statements at
December 31, 1997 and 1996.
40 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 36
================================================================================
Accumulated Post-Retirement Benefit Obligation (APBO)
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Retirees and spouses $(2,350) $(3,546)
Actives fully eligible to retire (126) (79)
Actives not yet fully eligible to retire (678) (1,000)
- --------------------------------------------------------------------------------
Total APBO (3,154) (4,625)
- --------------------------------------------------------------------------------
Funded status (3,154) (4,625)
Unrecognized net loss (648) 887
Unrecognized prior service cost (312) (376)
- --------------------------------------------------------------------------------
Accrued post-retirement benefit cost $(4,114) $(4,114)
================================================================================
</TABLE>
The net periodic post-retirement cost for the years ended December 31, 1997 and
1996 was as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 74 $ 110
Interest cost 217 333
Net amortization of prior service cost (119) (4)
- --------------------------------------------------------------------------------
Total expense $ 172 $ 439
================================================================================
</TABLE>
For measurement purposes, an 8% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1997; the rate was assumed to
decrease gradually to 5% for 2002 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
1% in each year would increase the accumulated post-retirement benefit
obligation as of December 31, 1997 by $253,000 and the aggregate of the service
and interest cost components of net periodic post-retirement benefit cost for
the fiscal year ending December 31, 1997 by $29,000.
The discount rate used in determining the accumulated post-retirement
benefit obligation was 7.25% as of December 31, 1997 and 7.75% as of December
31, 1996. The rate of increase in future compensation levels was 5.0% and 5.5%
as of December 31, 1997 and 1996, respectively.
13 Stock-related Plans
Option Plans
The Board of Directors of the Company adopted the following stock option plans:
Stock Option Plan
Under the Stock Option Plan, 1,278,225 stock options (as adjusted for the four
stock splits discussed in Note 2) 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
$5.56 per share, which is the initial public offering price, as adjusted for the
four 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
41
<PAGE> 37
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 ($5.56) and the fair market value of the underlying
shares of common stock. In 1997, 95,680 options granted under the Stock Option
Plan were exercised; 70,776 options were exercised in 1996; and 10,519 options
were exercised in 1995. 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, 1997 was 824,832.
Stock Option Plan for Outside Directors
("Directors' Option Plan")
Each member of the Board of Directors who was not an officer or employee of the
Company or the Bank was granted non-statutory options on November 23, 1993 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 688,275 shares (as adjusted for the four stock splits) of the common
stock of the Company at an exercise price equal to $5.56 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, 1997, 1996, and 1995, respectively, 116,999,
80,021, and 44,597 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.
1997 Stock Option Plan
On February 18, 1997, the Bank established the 1997 Stock Option Plan under
which options to purchase 465,750 shares were granted on that date to
participants. The maximum number of shares available for grants under this plan
is 787,500. Each option entitles the holder to purchase one share of the
Company's common stock at an exercise price equal to $23.45 per share, as
adjusted for the two stock splits in 1997. There were no options exercised
during 1997 under the 1997 Stock Option Plan. The number of vested options
exercisable at December 31, 1997 was 465,750.
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 3,097,240 shares (as adjusted for the four 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, 1997, the loan had an outstanding
balance of $13.3 million and a fixed interest rate of 6.0%. Interest expense for
the obligation was $900 thousand for the year ended December 31, 1997. 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, as described in the plan, in the year of allocation.
Contributions to the ESOP were approximately $1.8 million for the year ended
December 31, 1997. Dividends and investment income received on ESOP shares used
for debt service amounted to $1.4 million. 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 193,470 and
307,017 for the periods ended December 31, 1997 and 1996, respectively. At
December 31, 1997, there were 2,021,401 shares remaining for future allocation,
with a market value of $81.9 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, 1997, 1996, and 1995, respectively.
42 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 38
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, 1997,
1996, and 1995, this plan maintained $1.3 million, $1.2 million, and $102,000,
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 and
represented 136,025, 53,084, and 12,202 shares at December 31, 1997, 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
$1.3 million, $1.1 million, and $32,000 for the years ended December 31, 1997,
1996, and 1995, 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 983,250
shares (as adjusted for the four 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,
837,181 shares of common stock were vested at December 31, 1997. 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 $716,000, $1.1 million, and $1.1 million for the years ended December 31,
1997, 1996, and 1995, respectively.
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, 1997 and
1996:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------
(in thousands) Value Fair Value Value Fair Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 22,733 $ 22,733 $ 21,045 $ 21,045
Securities held to maturity 94,936 95,067 86,495 86,483
Mortgage-backed securities held to maturity 49,781 50,619 73,732 74,192
Securities available for sale 2,617 2,617 -- --
Loans, net 1,395,003 1,485,896 1,146,152 1,185,853
Financial Liabilities:
Deposits $1,069,161 $1,071,738 $1,023,930 $1,028,386
FHLB borrowings 309,664 309,664 81,393 81,393
Mortgagors' escrow 10,690 10,690 7,356 7,356
=============================================================================================
</TABLE>
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 Held to Maturity, Mortgage-Backed Securities Held to Maturity, and
Securities Available for Sale
Estimated fair values are based principally on market prices or dealer quotes.
Certain fair values are estimated using market prices of similar securities.
43
<PAGE> 39
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 that 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 in 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 that 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, 1997 or 1996.
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 1997, the Bank declared
dividends to its parent aggregating $16.0 million, which did not exceed net
profits for 1996 through 1997.
44 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 40
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
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 757 $ 339
Money market investments 57 62
Investment in and advances to Queens County Savings Bank 169,701 211,028
- --------------------------------------------------------------------------------
Total assets 170,515 $211,429
================================================================================
Liabilities and Stockholders' Equity
Stockholders' equity $170,515 $211,429
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $170,515 $211,429
================================================================================
</TABLE>
================================================================================
Condensed Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income from Queens County Savings Bank $ 2,358 $ 3,786 $ 5,273
Other interest income 17 8 3
Dividends from Queens County Savings Bank 16,000 38,000 --
- -------------------------------------------------------------------------------------------
Total income 18,375 41,794 5,276
Operating expense 256 273 233
- -------------------------------------------------------------------------------------------
Income before income tax and equity in undistributed earnings 18,119 41,521 5,043
Income tax expense 151 150 163
- -------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of
Queens County Savings Bank 17,968 41,371 4,880
Equity in undistributed earnings of Queens County Savings Bank 5,296 (20,432) 15,303
- -------------------------------------------------------------------------------------------
Net income $23,264 $ 20,939 $20,183
===========================================================================================
</TABLE>
45
<PAGE> 41
================================================================================
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 23,264 $ 20,939 $ 20,183
Equity in undistributed earnings of the Bank not provided for (5,296) 20,432 (15,303)
Increase in other liabilities -- -- (73)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,968 41,371 4,807
================================================================================================
Cash Flows From Investing Activities:
Payments for investments in and advances to subsidiaries (17,831) (42,761) (11,362)
Repayment from investments in and advances to subsidiaries 75,284 35,231 17,921
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 57,453 (7,530) 6,559
================================================================================================
Cash Flows From Financing Activities:
Purchase of Treasury stock (68,086) (28,825) (9,963)
Dividends paid (8,135) (5,669) (1,632)
Exercise of stock options 1,213 837 306
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (75,008) (33,657) (11,289)
- ------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 413 184 77
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 401 217 140
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 814 $ 401 $ 217
================================================================================================
</TABLE>
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 47) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 leverage
capital (as defined) to average assets (as defined). Management believes that,
as of December 31, 1997, the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997, 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.
46 QUEENS COUNTY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 42
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1997 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) $153,357 15.26% $80,392 (>/-)8.0% $100,490 (>/-)10.0%
Tier 1 capital (to risk-weighted assets) 143,926 14.32 40,196 (>/-)4.0 60,294 (>/-)6.0
Tier 1 leverage capital (to average assets) 143,926 9.30 46,416 (>/-)3.0 77,360 (>/-)5.0
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1996 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 17.38% $63,091 (>/-)8.0% $78,868 (>/-)10.0%
Tier 1 capital (to risk-weighted assets) 127,685 16.19 31,545 (>/-)4.0 47,318 (>/-)6.0
Tier 1 leverage capital (to average assets) 127,685 9.65 39,681 (>/-)3.0 66,135 (>/-)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.
18 Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the fiscal years ended December 31, 1997
and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
(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 $16,110 $15,611 $15,490 $15,187 $14,863 $14,406 $14,443 $13,808
(Reversal of) provision
for loan losses -- -- -- -- -- -- (2,000) --
Other operating income 1,149 336 515 304 861 628 470 486
Operating expense 7,095 6,785 6,692 6,512 6,547 5,733 5,533 5,457
- -------------------------------------------------------------------------------------------------------------------------------
Income before income
tax expense 10,164 9,162 9,313 8,979 9,177 9,301 11,380 8,837
Income tax expense 4,769 3,767 3,972 1,847 5,364 3,699 5,115 3,578
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 5,395 $ 5,395 $ 5,341 $ 7,132 $ 3,813 $ 5,602 $ 6,265 $ 5,259
===============================================================================================================================
Diluted earnings per
common share(1) $0.39 $0.39 $0.38 $0.45 $0.25 $0.35 $0.38 $0.31
===============================================================================================================================
Cash dividends declared
per common share(1) 0.20 0.17 0.13 0.11 0.11 0.11 0.083 0.067
===============================================================================================================================
Average common shares
and equivalents
outstanding(1) 13,895 14,004 14,129 15,712 15,389 15,927 16,649 16,942
===============================================================================================================================
Stock price per
common share(1):
High $40.50 $36.17 $32.00 $26.45 $21.95 $16.92 $16.33 $14.67
Low 34.75 29.67 23.78 20.11 16.39 15.63 14.33 13.00
Close 40.50 34.54 30.33 24.39 21.06 16.56 16.33 14.67
===============================================================================================================================
</TABLE>
(1) Reflects shares issued as a result of a 4-for-3 stock split on August 22,
1996 and 3-for-2 stock splits on April 10, 1997 and October 1, 1997.
47
<PAGE> 43
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 1997, 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 20, 1998
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, 1997 and 1996 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,
1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
January 20, 1998
48 QUEENS COUNTY BANCORP, INC. 1997 ANNUAL REPORT
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Queens County Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statements (Nos.
33-85684 and 33-85682) on Form S-8 of Queens County Bancorp, Inc. of our report
dated January 20, 1998, related to the consolidated statements of condition of
the Queens County Bancorp, Inc. and subsidiary as of December 31, 1997 and
1996, 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, 1997, which report appears in the December 31, 1997
Annual Report on Form 10-K of Queens County Bancorp, Inc.
New York, New York
March 17, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,733
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,617
<INVESTMENTS-CARRYING> 144,717
<INVESTMENTS-MARKET> 145,686
<LOANS> 1,404,434
<ALLOWANCE> 9,431
<TOTAL-ASSETS> 1,603,269
<DEPOSITS> 1,069,161
<SHORT-TERM> 309,664
<LIABILITIES-OTHER> 53,929
<LONG-TERM> 0
0
0
<COMMON> 206
<OTHER-SE> 170,309
<TOTAL-LIABILITIES-AND-EQUITY> 1,603,269
<INTEREST-LOAN> 108,868
<INTEREST-INVEST> 8,593
<INTEREST-OTHER> 273
<INTEREST-TOTAL> 117,734
<INTEREST-DEPOSIT> 44,585
<INTEREST-EXPENSE> 55,336
<INTEREST-INCOME-NET> 62,398
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 24,761
<INCOME-PRETAX> 37,619
<INCOME-PRE-EXTRAORDINARY> 23,264
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,264
<EPS-PRIMARY> 1.71
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 8.40
<LOANS-NON> 6,121
<LOANS-PAST> 1,571
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,359
<CHARGE-OFFS> 0
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 9,431
<ALLOWANCE-DOMESTIC> 9,431
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,431
</TABLE>
