<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission File Number 0-22278
QUEENS COUNTY BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1377322
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
38-25 Main Street, Flushing, New York 11354
(Address of principal executive offices)
(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, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes ___ No
21,275,212
Number of shares outstanding at
November 5, 1998
<PAGE> 2
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
THREE MONTHS ENDED SEPTEMBER 30, 1998
INDEX PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition as of September 30, 1998
(unaudited) and December 31, 1997 1
Consolidated Statements of Income and Comprehensive Income
for the Three and Nine Months Ended September 30, 1998 and 1997
(unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 24
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 25
Item 2. CHANGES IN SECURITIES 25
Item 3. DEFAULTS UPON SENIOR SECURITIES 25
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
Item 5. OTHER INFORMATION 25
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 27
EXHIBITS 28
<PAGE> 3
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(unaudited)
------------- ------------
<S> <C> <C>
Assets
Cash and due from banks $ 16,490 $ 16,733
Money market investments 6,000 6,000
Securities held to maturity (estimated market value of
$129,463 and $95,067, respectively) 129,158 94,936
Mortgage-backed securities held to maturity (estimated market
value of $29,670 and $50,619, respectively) 28,819 49,781
Securities available for sale 4,271 2,617
Mortgage loans:
1-4 family 188,795 224,287
Multi-family 1,230,532 1,107,374
Commercial real estate 61,588 61,740
Construction 1,695 1,538
---------- ----------
Total mortgage loans 1,482,610 1,394,939
Other loans 10,107 10,795
Less: Unearned loan fees (1,146) (1,300)
Allowance for loan losses (9,431) (9,431)
---------- ----------
Loans, net 1,482,140 1,395,003
Premises and equipment, net 10,266 10,782
Deferred tax asset, net 5,796 5,514
Other assets 23,643 21,903
---------- ----------
Total assets $1,706,583 $1,603,269
========== ==========
Liabilities and Stockholders' Equity
Deposits:
NOW and money market accounts $ 68,175 $ 67,894
Savings accounts 268,179 268,133
Certificates of deposit 707,272 703,948
Non-interest-bearing accounts 30,985 29,186
---------- ----------
Total deposits 1,074,611 1,069,161
---------- ----------
Official checks outstanding 13,469 29,440
FHLB borrowings 445,522 309,664
Accounts payable and accrued expenses 674 1,857
Mortgagor's escrow 15,153 10,690
Other liabilities 9,235 11,942
---------- ----------
Total liabilities 1,558,664 1,432,754
---------- ----------
Stockholders' equity:
Preferred stock at par $0.01 (5,000,000 shares
authorized; none issued) -- --
Common stock at par $0.01 (60,000,000 shares
authorized; 30,970,693 shares issued;
21,418,928 and 22,369,187 shares
outstanding at September 30, 1998 and
December 31, 1997, respectively) 310 206
Paid-in capital in excess of par 134,991 125,000
Retained earnings (substantially restricted) 162,914 166,230
Less: Treasury stock (9,551,765 and 8,601,663 shares,
respectively) (133,425) (104,148)
Unallocated common stock held by ESOP (12,957) (13,526)
Common stock held by SERP (3,488) (2,492)
Unearned common stock held by RRPs (256) (812)
Accumulated other comprehensive income, net of tax effect (170) 57
---------- ----------
Total stockholders' equity 147,919 170,515
---------- ----------
Total liabilities and stockholders' equity $1,706,583 $1,603,269
========== ==========
</TABLE>
See accompanying notes in financial statements
1
<PAGE> 4
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Mortgage and other loans $31,473 $28,287 $92,041 $79,326
Securities held to maturity 1,982 1,115 5,408 3,386
Mortgage-backed securities
held to maturity 530 939 1,942 3,038
Money market investments 137 67 383 205
------- ------ ------- ------
Total interest income 34,122 30,408 99,774 85,955
------- ------ ------- ------
INTEREST EXPENSE:
NOW and money market accounts 495 472 1,508 1,389
Savings accounts 1,550 1,633 4,665 4,912
Certificates of deposit 8,996 9,233 26,805 26,629
FHLB borrowings 5,774 3,450 15,456 6,708
Mortgagors' escrow 8 9 36 30
------ ----- ------ ------
Total interest expense 16,823 14,797 48,470 39,668
------ ------ ------ ------
Net interest income 17,299 15,611 51,304 46,287
Provision for loan losses -- -- -- --
------ ------ ------ ------
Net interest income after
provision for loan losses 17,299 15,611 51,304 46,287
OTHER OPERATING INCOME:
Fee income 476 308 1,667 888
Other 161 28 394 268
------ ------ ------ -----
Total other operating income 637 336 2,061 1,156
------ ------ ------ -----
OPERATING EXPENSE:
Compensation and benefits 4,604 4,701 14,184 13,934
Occupancy and equipment 660 683 1,937 1,983
General and administrative 1,183 1,257 3,491 3,579
Other 213 144 467 492
----- ----- ------ ------
Total operating expense 6,660 6,785 20,079 19,988
----- ----- ------ ------
Income before income taxes 11,276 9,162 33,286 27,455
Income tax expense 4,326 3,767 13,458 9,586
------ ----- ------ ------
NET INCOME $ 6,950 $ 5,395 $19,828 $17,869
-------- ------- ------- -------
Comprehensive income, net
of tax:
Unrealized gain on securities (437) -- (227) --
------- ------ ------ -------
Comprehensive income $ 6,513 $ 5,395 $19,601 $17,689
======== ======= ======= =======
EARNINGS PER SHARE(1) $0.36 $0.28 $1.02 $0.86
DILUTED EARNINGS PER SHARE(1) $0.34 $0.26 $0.97 $0.81
</TABLE>
(1) Data reflects shares issued as a result of 3-for-2 stock splits on
October 1, 1997 and September 29, 1998.
See accompanying notes to financial statements
2
<PAGE> 5
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
(in thousands) (UNAUDITED)
- ---------------------------------------------------------------------------
<S> <C>
COMMON STOCK (PAR VALUE: $0.01):
Balance at beginning of year $ 206
Stock splits 104
---------
Balance at end of period 310
---------
PAID-IN CAPITAL IN EXCESS OF PAR:
Balance at beginning of year 125,000
Stock splits (107)
Tax benefit effect on stock plans 6,150
Common Stock acquired by SERP 996
Allocation of ESOP stock 2,952
---------
Balance at end of period 134,991
---------
RETAINED EARNINGS:
Balance at beginning of year 166,230
Net income 19,828
Dividends paid on common stock (9,013)
Exercise of stock options (1,148,428 shares) (14,131)
---------
Balance at end of period 162,914
---------
TREASURY STOCK:
Balance at beginning of year (104,148)
Purchase of common stock (1,734,815 shares) (46,634)
Common stock acquired by SERP 996
Exercise of stock options (1,148,428 shares) 16,361
---------
Balance at end of period (133,425)
---------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of year (13,526)
Allocation of ESOP stock 569
---------
Balance at end of period (12,957)
---------
SERP PLAN:
Balance at beginning of year (2,492)
Common stock acquired by SERP (996)
---------
Balance at end of period (3,488)
---------
RECOGNITION AND RETENTION PLANS:
Balance at beginning of year (812)
Earned portion of RRPs 556
---------
Balance at end of period (256)
---------
NET UNREALIZED APPRECIATION IN SECURITIES, NET OF TAX:
Balance at beginning of year 57
Net unrealized appreciation in securities, net of tax (227)
---------
Balance at end of year (170)
---------
Total Stockholders' Equity $ 147,919
=========
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 6
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
(in thousands) (unaudited)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,828 $ 17,869
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 698 707
Amortization of premiums, net 93 116
Amortization of net deferred loan origination fees 153 496
Net gain on redemption of securities and mortgage-backed securities (81) (1)
Net gain on sale of foreclosed real estate (167) (45)
Tax benefit effect on stock plans 6,150 2,207
Earned portion of RRPs 556 520
Earned portion of ESOP 3,521 3,763
Changes in assets and liabilities:
Increase in deferred income taxes (282) (2,520)
Increase in other assets (1,740) (3,062)
(Decrease) increase in accounts payable and accrued expenses (1,183) 211
Decrease in official checks outstanding (15,971) (11,173)
(Decrease) increase in other liabilities (2,707) 2,035
--------- ---------
Total adjustments (10,960) (6,746)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,868 11,123
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of mortgage-backed securities held to maturity 76,565 24,935
Proceeds from maturity of securities held to maturity 14,000 42,000
Purchase of securities held to maturity (103,838) (41,069)
Purchase of securities available for sale (2,022) --
Net increase in loans (96,746) (204,924)
Proceeds from sale of loans and foreclosed real estate 9,763 2,426
Purchase of premises and equipment, net (183) (584)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (102,461) (177,216)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in mortgagors' escrow 4,463 6,431
Net increase in deposits 5,450 27,577
Net increase in FHLB borrowings 135,858 195,894
Cash dividends paid and options exercised, net (23,144) (8,772)
Purchase of Treasury stock, net of stock options exercised
and shares acquired by SERP (29,277) (49,749)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 93,350 171,381
--------- ---------
Net (decrease) increase in cash and cash equivalents (243) 874
Cash and cash equivalents at beginning of period 22,733 21,045
--------- ---------
Cash and cash equivalents at end of period $22,490 $21,919
========= =========
Supplemental information:
Cash paid for:
Interest $48,389 $39,671
Income taxes 8,374 9,343
Transfers to foreclosed real estate from loans 772 --
Transfers to real estate held for investment from foreclosed real estate 535 115
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 7
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Queens County Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Queens County Savings Bank (the "Bank").
The statements reflect all normal recurring adjustments which are, in the
opinion of management, necessary to present a fair statement of the Company's
results for the periods presented. The results of operations for the three and
nine months ended September 30, 1998 are not necessarily indicative of the
results of operations that may be expected for all of 1998.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's 1997 Annual Report on SEC Form 10-K.
NOTE 2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 established
standards for the way an enterprise reports information about operating segments
in annual 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 are 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 implication of implementing SFAS No. 131.
As SFAS No. 131 pertains to the disclosure of financial performance rather than
to financial performance itself, it is not expected to have an effect on the
Company.
5
<PAGE> 8
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS
In February 1998, the FASB established SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits." This statement revises
employers' disclosures about pension and other post-retirement benefit plans; it
does not change the measurement or recognition of those plans. The statement
standardizes the disclosure requirements for pensions and other post-retirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
useful.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. As
this statement pertains to the disclosure of information about pension and other
post-retirement benefits, it is not expected to have an impact on the Company's
financial performance.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments and for hedging activities. The statement
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The statement also establishes criteria required to
designate a derivative instrument as a hedge and the accounting for changes in
fair value of a derivative, depending on its intended use. Under the statement,
an entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. These methods must be consistent with the
entity's approach to managing risk.
This statement amends FASB Statements No. 52, "Foreign Currency Translation" and
No. 107, "Disclosures about Fair Value of Financial Instruments." In addition,
SFAS No. 133 supersedes FASB Statements No. 80, "Accounting for Futures
Contracts"; No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk"; and No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments."
SFAS No. 133 is effective for financial statements issued for periods beginning
after June 15, 1999 and is not expected to have an impact on the Company.
6
<PAGE> 9
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Queens County Bancorp, Inc. (the "Company") is the holding company for Queens
County Savings Bank (the "Bank"), the first savings bank chartered by the State
of New York in the New York City Borough of Queens. The primary business of the
Bank is gathering deposits from its customers in Queens and Nassau County and
investing these funds in the origination of residential mortgage loans
throughout metropolitan New York.
In the three months ended September 30, 1998, the Company continued to deepen
its niche in the multi-family real estate market, while maintaining a strong
record of asset quality. In addition, the Company recorded higher levels of net
interest income and other operating income, and succeeded in containing its
operating expense. As a result, the Company recorded a 22.3% increase in cash
earnings, strengthening its contribution to capital.
In addition to delivering a solid financial performance, the Company took a
series of actions designed to enhance the value of its shares. On August 18,
1998, the Board of Directors declared a three-for-two stock split in the form
of a 50% stock dividend, resulting in the distribution of 10,323,460 shares on
September 29, 1998. On September 3, 1998, the Board authorized the repurchase
of 750,000 shares of Queens County Bancorp, as adjusted for the 3-for-2 stock
split; including shares remaining from the prior authorization, 1.1 million
shares were repurchased during the three-month period. On October 20, 1998, the
Board declared a 20% increase in the quarterly cash dividend to $0.20 per
share, equivalent to $0.30 per share, pre-split.
BALANCE SHEET SUMMARY
The Company recorded a $103.3 million, or 6.4%, increase in total assets to $1.7
billion at September 30, 1998, as compared to $1.6 billion at December 31, 1997.
The growth in assets primarily stemmed from an $87.7 million, or 6.3%, rise in
outstanding mortgage loans to $1.5 billion, reflecting third-quarter and
year-to-date originations of $119.4 million and $360.8 million, respectively.
Multi-family mortgage loans accounted for $104.5 million and $329.3 million of
third-quarter and year-to-date originations, bringing the total multi-family
portfolio to $1.2 billion at September 30, 1998. In addition to multi-family
mortgage loans, the mortgage loan portfolio included $188.8 million in
one-to-four family loans, $61.6 million in commercial real estate loans, and
$1.7 million in construction loans, respectively, as compared to $224.3 million,
$61.7 million, and $1.5 million at year-end 1997.
Asset growth was also fueled by a $34.2 million, or 36.0%, increase in
securities held to maturity to $129.2 million, coupled with a $1.7 million
increase in securities available for sale to $4.3 million. These increases
served to offset a $21.0 million reduction in mortgage-backed securities held to
maturity to $28.8 million and a $688,000 reduction in the quarter-end balance of
other loans to $10.1 million.
Asset quality continued to be strong, as the Company recorded its thirteenth
consecutive quarter without any net charge-offs and enjoyed significant
reductions in non-performing assets and loans. Non-performing assets fell to
7
<PAGE> 10
$7.5 million, or 0.44% of total assets, at September 30, 1998, from $8.5 million
(or 0.50% of total assets) and $8.7 million (or 0.54% of total assets),
respectively, at June 30, 1998 and December 31, 1997. Included in the September
30, 1998 amount were non-performing loans of $6.5 million, representing 0.44% of
loans, net, and foreclosed real estate of $1.0 million. In the absence of any
net charge-offs or provisions for loan losses, the allowance for loan losses was
maintained at $9.4 million, representing 145.31% of non-performing loans and
0.64% of loans, net, at quarter's end.
Deposits rose $5.5 million to $1.1 billion, primarily reflecting a $3.3 million
increase in certificates of deposit ("CDs") to $707.3 million and
across-the-board increases in savings, NOW and money market, and
non-interest-bearing accounts. Additional funding stemmed from the Bank's
Federal Home Loan Bank ("FHLB") line of credit, as borrowings rose to $445.5
million from $309.7 million at December 31, 1997.
Cash earnings contributed $32.5 million to stockholders' equity at September 30,
1998, and consisted of $19.8 million in net income and $12.6 million in non-cash
items that were added back to capital at quarter's end. Net of $9.0 million in
dividends paid, stockholders' equity totaled $147.9 million (down from $170.5
million at year-end 1997), equivalent to 8.67% of total assets and a
split-adjusted book value of $7.99 per share, based on 18,514,561 shares. The
reduction in stockholders' equity reflects the allocation of $46.6 million
toward the repurchase of 1,734,815 shares of Company stock in the nine-month
period, including $28.3 million for the repurchase of 1,057,463 shares in the
third quarter of the year. Both the Company and the Bank continued to exceed the
minimum regulatory capital requirements at September 30, 1998.
LOANS
The Company originated $119.4 million in mortgage loans in the current third
quarter, bringing the total volume of originations to $360.8 million for the
nine months ended September 30, 1998. As a result, the mortgage loan portfolio
rose $87.7 million, or 6.3%, to $1.5 billion from the level recorded at December
31, 1997. Multi-family mortgage loans represented $104.5 million, or 87.5%, of
third-quarter loan production and $329.3 million, or 91.3%, of production for
the nine-month period. Multi-family mortgage loans thus represented $1.2
billion, or 83.0%, of mortgage loans outstanding at September 30, 1998, up from
$1.1 billion, or 79.4%, at year-end 1997.
Since 1996, the majority of the Company's multi-family mortgage loan
originations have featured a fixed rate of interest in the first five years of
the mortgage and an adjustable rate of interest in each of years six through
ten. Prior to 1996, however, the majority of the Company's multi-family mortgage
originations featured an annual rate increase of 50 basis points in the first
five years of the mortgage, regardless of the direction of market interest
rates. At September 30, 1998, $228.6 million, or 18.5% of the portfolio,
continued to feature this step-up rate of interest, with $86.4 million, $67.5
million, $42.4 million, and $32.3 million scheduled to reprice upward over the
next four quarters.
While the origination of multi-family mortgage loans clearly remains its primary
focus, the Company also originates one-to-four family, commercial real estate,
and construction loans. At September 30, 1998, the mortgage loan portfolio
included $188.8 million in one-to-four family mortgage loans (down $35.5 million
from the year-end 1997 amount after originations of $6.2 million); $61.6 million
in commercial real estate loans (down $152,000 after originations of $23.8
million); and $1.7 million in construction loans (up $157,000 after originations
of $1.4 million). Other loans totaled $10.1 million at the close of the third
quarter, down $688,000 from the level at year-end 1997.
8
<PAGE> 11
The pace of mortgage loan production is driven by several factors, including
competition, market interest rates, and corporate strategy. With $87.7 million
in outstanding loan commitments at September 30, the Company is currently on
target to reach its goal for 1998.
ASSET QUALITY ANALYSIS
<TABLE>
At or For the At or For the
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- -------------
(dollars in thousands) (unaudited)
- ------------------------------------------------------------------------------
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 9,431 $ 9,359
Provision for loan losses -- --
Loan charge-offs -- --
Loan recoveries -- 72
-------- ---------
Net recoveries -- 72
-------- ---------
Balance at end of period $ 9,431 $ 9,431
======== =========
NON-PERFORMING ASSETS AT PERIOD-END:
Mortgage loans in foreclosure $ 5,460 $ 6,121
Loans 90 days or more delinquent 1,030 1,571
-------- --------
Total non-performing loans 6,490 7,692
Foreclosed real estate 1,015 1,030
-------- --------
Total non-performing assets $ 7,505 $ 8,722
======== ========
</TABLE>
RATIOS:
Non-performing loans to loans, net 0.44% 0.55%
Non-performing assets to total assets 0.44 0.54
Allowance for loan losses to
non-performing loans 145.31 122.61
Allowance for loan losses to loans, net 0.64 0.68
Allowance for loan losses to
accumulated net charge-offs
for the past 11 years 661.37 661.37
ASSET QUALITY
In the third quarter of 1998, the Company's record of asset quality was
strengthened by further reductions in the balance of non-performing assets, as
the levels of non-performing loans and foreclosed real estate respectively
declined. Non-performing loans totaled $6.5 million (or 0.44% of loans, net) at
the close of the current third quarter, down from $7.5 million (or 0.52% of
loans, net) and $7.7 million (or 0.55% of loans, net) at June 30, 1998 and
December 31, 1997, respectively. Included in the 1998 amount were 42 mortgage
loans in foreclosure of $5.5 million and 18 loans 90 days or more delinquent of
$1.0 million. Foreclosed real estate, consisting of four properties, totaled
$1.0 million, consistent with the level at the close of the trailing quarter and
down $520,000 from the level recorded at year-end 1997. As a result,
non-performing assets fell to $7.5 million at
9
<PAGE> 12
September 30, 1998 from $8.5 million and $8.7 million, respectively, at June 30,
1998 and December 31, 1997, and represented 0.44% of total assets, as compared
to 0.50% and 0.54%, respectively, at the earlier dates.
In addition to the reductions in non-performing assets, the Company recorded its
thirteenth consecutive quarter without any net charge-offs and maintained the
fully-performing status of its multi-family mortgage loans. In the absence of
any net charge-offs or provisions for loan losses, the loan loss allowance was
unchanged at $9.4 million, representing 145.31% of non-performing loans and
0.64% of loans, net, at quarter's end. In addition, the $9.4 million represented
661.37% of accumulated net charge-offs for the 11 years ended September 30,
1998.
Investments in real estate, reflected in "other assets," totaled $1.8 million
and consisted of 16 residential properties at September 30, 1998. Each of these
has been profitably rented, with an average rate of return to the Bank of 7.74%.
For additional information, see the accompanying Asset Quality Analysis and the
discussion of the loan loss provision beginning on page 17 of this report.
SECURITIES HELD TO MATURITY, SECURITIES AVAILABLE FOR SALE, AND MONEY MARKET
INVESTMENTS
In addition to investing in mortgage loan originations, the Company invests in
short-term securities in the form of U.S. Government agency obligations and
Treasuries, all of which are held to maturity. Since the fourth quarter of 1997,
the Company has also been investing in equity securities, all of which are
classified as "available for sale." In addition, the Company maintains a modest
portfolio of money market investments, typically in the form of Federal funds
sold.
Securities held to maturity totaled $129.2 million at September 30, 1998, up
$34.2 million, or 36.0%, from $94.9 million at December 31, 1997. The increase
primarily reflects a $35.8 million rise in U.S. government agency obligations to
$99.8 million, which offset a $7.3 million decline in U.S. Treasuries to $7.0
million. The balance of the portfolio, which had an average maturity of 1.2
years at the close of the quarter, consisted of FHLB stock. The market values of
securities held to maturity were $129.5 million and $95.1 million, respectively,
at September 30, 1998 and December 31, 1997, representing 100.2% and 100.1% of
the carrying values at the corresponding dates.
Securities available for sale totaled $4.3 million, up $1.7 million from the
level at year-end 1997. Money market investments totaled $6.0 million at
September 30, 1998, consistent with the level at December 31, 1997.
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
At September 30, 1998, the balance of mortgage-backed securities held to
maturity totaled $28.8 million, down $21.0 million from $49.8 million at
December 31, 1997. The reduction reflects prepayments and the absence of any new
investments since the first quarter of 1994.
The Company holds all of its mortgage-backed securities to maturity; the average
maturity of the portfolio was under a year at quarter's end. At September 30,
1998 and December 31, 1997, the market values of the Company's mortgage-backed
securities held to maturity were $29.7 million and $50.6 million, respectively,
equivalent to 103.0% and 101.7% of the carrying values at the respective dates.
10
<PAGE> 13
SOURCES OF FUNDS
The Company's funding primarily stems from the deposits its gathers, together
with loan interest and principal payments and the interest on and maturity of
securities. Since 1996, the Company has increasingly drawn on its FHLB line of
credit to provide additional funding for mortgage loan production. At September
30, 1998, the Company's FHLB line of credit totaled $682.6 million; borrowings
at that date were $445.5 million, up from $424.0 million at the close of the
trailing quarter and from $309.7 million at December 31, 1997.
Deposits rose $5.5 million from the year-end 1997 level to $1.1 billion at
September 30, 1998. The increase was primarily driven by a $3.3 million rise in
the balance of CDs to $707.3 million, representing 65.8% of deposits at
quarter's end. In addition, the higher level of deposits was boosted by a $1.8
million increase in non-interest-bearing deposits to $31.0 million, together
with a $281,000 increase in the balance of NOW and money market accounts to
$68.2 million and a $46,000 increase in the balance of savings accounts to
$268.2 million. Non-interest-bearing deposits, NOW and money market accounts,
and savings accounts represented 2.9%, 6.3%, and 25.0% of total deposits,
respectively.
The growth in deposits was partially fueled by the Bank's Mobile CSR program at
Queens College, and by the extension of this program to other sites. To attract
additional deposits, the Bank has arranged to transport the Mobile CSR Program
to another of the Borough's major employers in November, and will introduce
on-line banking before year-end.
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
interest rate risk.
The process of assessing and managing interest rate risk is governed by policies
established by senior management that are reviewed and approved by the Board of
Directors. Senior management meets periodically to evaluate the impact of
changes in market interest rates on assets and liabilities, net interest margin,
capital and liquidity, and to evaluate its strategic plans. As part of this
process, management measures net interest income sensitivity and volatility to
interest rate changes, which involves a degree of estimation based on certain
assumptions that management believes to be reasonable. In addition to
considering the relative sensitivity of assets and liabilities to changes in
market interest rates, other factors considered include actual maturities,
estimated cash flows, repricing characteristics, and deposit growth and
retention.
The relative sensitivity of assets and liabilities is particularly important to
consider as the Company's core deposit base is not subject to the same degree of
interest rate sensitivity as its assets. Core deposit costs are internally
controlled and generally exhibit less sensitivity to changes in interest rates
than adjustable rate assets which feature yields that are based on external
indices and therefore change in concert with market interest rates. It is
management's objective to maintain a stable level of net interest income under
various probable rate scenarios.
In order to do so, management has traditionally emphasized the origination of
adjustable rate mortgage loans on multi-family and one-to-four family
properties, and has generally confined its other investments to short-term
securities. On the liability side of the balance sheet, management closely
monitors the pricing of its depository products and has profitably utilized its
FHLB line of credit to generate interest-earning asset growth.
11
<PAGE> 14
LIQUIDITY AND CAPITAL POSITION
LIQUIDITY
As previously indicated, the Bank's primary sources of funds are deposits and
FHLB borrowings, together with interest and principal payments on loans,
mortgage-backed securities, and securities. While borrowings, together with
maturities and scheduled amortization of loans and securities, are predictable
funding sources, deposit flows and mortgage prepayments are susceptible to
economic conditions, competition, and market interest rates.
The primary investing activities of the Bank are residential mortgage loan
production and, to a lesser extent, the purchase of short-term securities. In
the nine months ended September 30, 1998, mortgage originations totaled $360.8
million; purchases of securities held to maturity totaled $103.8 million, while
purchases of securities available for sale totaled $2.0 million. These
activities were funded by internal cash flows generated by the Bank's operating
and financing activities, including the utilization of FHLB borrowings. In the
nine months ended September 30, 1998, the net cash provided by operating
activities totaled $8.9 million, as compared to $11.1 million in the
year-earlier period. The net cash provided by financing activities totaled $93.4
million and $171.4 million, respectively, in the nine months ended September 30,
1998 and 1997, primarily reflecting a $135.9 million increase in FHLB borrowings
(versus $195.9 million in the nine months ended September 30, 1997).
The liquidity position of the Company is monitored daily to ensure that
sufficient funds exist to meet outstanding loan commitments, withdrawals from
depository accounts, and other financial obligations. Together with cash and due
from banks, money market investments in the form of Federal funds sold are the
Company's most liquid assets, with a collective total of $22.5 million and $22.7
million at September 30, 1998 and December 31, 1997, respectively. At the
corresponding dates, securities available for sale totaled $4.3 million and $2.6
million, while securities held to maturity totaled $129.2 million and $94.9
million, respectively. Additional liquidity is available through the Bank's FHLB
line of credit, which totaled $682.6 million at the end of September, and from a
$10.0 million line of credit with a money center bank.
The Bank had outstanding loan commitments of $87.7 million at September 30,
1998, which consisted primarily of commitments to originate multi-family
mortgage loans. Management anticipates that it will have sufficient funds
available to fulfill these loan commitments. Certificates of deposit due to
mature in one year or less from September 30, 1998 totaled $554.9 million. Based
upon the Bank's historic retention rate and current pricing, management believes
that a significant portion of such deposits will remain with the Bank.
CAPITAL
The Company's primary source of capital growth is cash earnings, which totaled
$32.5 million in the nine months ended September 30, 1998 and represented a
27.03% contribution to stockholders' equity. The $32.5 million consisted of
$19.8 million in year-to-date GAAP earnings and $12.6 million in GAAP expenses
or unrecognized financial statement benefits that resulted in direct increases
to capital, or share value, at the end of the period.
Net of $9.0 million in dividends paid, stockholders' equity totaled $147.9
million at the close of the quarter, equivalent to 8.67% of total assets and a
split-adjusted book value of $7.99 per share, based on 18,514,561 shares. At
December 31, 1997, stockholders' equity totaled $170.5 million, equivalent to
10.64% of total assets and a split-adjusted book value of $8.82 per share, based
on 19,337,083 shares. The 1998 amount reflects the
12
<PAGE> 15
allocation of $46.6 million toward the repurchase of 1,734,815 shares of company
stock in the nine-month period, including $28.3 million for the repurchase of
1,057,463 shares in the third quarter of the year. At September 30, 1998,
321,692 shares remained available for repurchase under the authorization
declared by the Board of Directors on September 3, 1998.
The Company and the Bank are subject to certain capital regulatory requirements
under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"). At
September 30, 1998, the Company's regulatory capital ratios continued to exceed
the minimum requirements on a consolidated basis, while the Bank's leverage,
Tier 1 risk-based, and total risk-based capital ratios continued to exceed both
the minimum requirements and the requirements for classification as a well
capitalized institution.
As set forth by FDICIA, the minimum Federal requirements for leverage capital to
adjusted total assets, and for Tier 1 and total risk-based capital to
risk-weighted assets, are 3.00%, 4.00%, and 8.00%, respectively. To be
classified a "well capitalized institution," a Bank is required to have ratios
of 5.00%, 6.00%, and 10.00% or more, respectively. At September 30, 1998, the
Bank's leverage capital amounted to $156.9 million, or 9.33% of adjusted average
assets, while its Tier 1 and total risk-based capital amounted to $156.9 million
and $166.3 million, representing 14.74% and 15.62%, respectively, of
risk-weighted assets.
REGULATORY CAPITAL ANALYSIS (BANK ONLY)
<TABLE>
<CAPTION>
At September 30, 1998
---------------------
Risk-Based Capital
------------------
Leverage Capital Tier 1 Total
---------------- ------ -----
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total savings bank equity $156,911 9.33% $156,911 14.74% $166,342 15.62%
Regulatory capital
requirement 50,466 3.00 42,584 4.00 85,168 8.00
-------- ---- -------- ----- -------- -----
Excess $106,445 6.33% $114,327 10.74% $ 81,174 7.62%
======== ==== ======== ===== ======== =====
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET INCOME
Net income rose to $7.0 million in the third quarter of 1998 from $5.4 million
in the third quarter of 1997, signifying a 30.8% increase in diluted earnings
per share to $0.34 from $0.26. The 1998 amount represented a return on average
assets ("ROA") of 1.65% and a return on average stockholders' equity ("ROE") of
17.86%, up from 1.46% and 12.78%, respectively, in the year-earlier three
months.
Similarly, the Company's cash earnings rose to $10.5 million from $8.6 million,
representing a 23.8% increase in diluted cash earnings per share to $0.52 from
$0.42. Cash earnings thus provided $3.6 million, or 51.8%, more equity growth
than GAAP earnings alone. In addition, the Company's cash ROA and cash ROE
increased to 2.51% and 27.10% in the quarter from 2.33% and 20.44% in the three
months ended September 30, 1997.
13
<PAGE> 16
Because the Company has no goodwill, there is no regulatory reduction in its
capital accounts for the calculation of tangible equity. Therefore, all of the
Company's cash earnings represent an increase in stockholders' equity, as
reflected in the table that follows this discussion.
In addition to a year-over-year increase in net interest income, the Company's
third quarter 1998 earnings were driven by a combination of higher other
operating income and lower operating expense. Net interest income rose $1.7
million, or 10.8%, to $17.3 million, the net effect of a $3.7 million increase
in interest income to $34.1 million and a $2.0 million increase in interest
expense to $16.8 million. The Company's interest rate spread rose five basis
points to 3.78% from the year-earlier level, while the net interest margin
dropped 12 basis points to 4.22%.
Other operating income rose $301,000 to $637,000, reflecting a $168,000 increase
in fee income to $476,000 and a $133,000 increase in other income to $161,000.
At the same time, operating expense declined $125,000 to $6.7 million, primarily
reflecting a $97,000 decrease in compensation and benefits expense to $4.6
million stemming from a reduction in plan-related expenses to $1.6 million from
$1.9 million. The improvements in operating expense and other operating income
contributed to an efficiency ratio of 37.13% in the current quarter and a cash
efficiency ratio of 28.38%.
Income tax expense rose $559,000 to $4.3 million, reflecting a $2.1 million
increase in pre-tax income to $11.3 million and a $555,000 increase in non-cash
items stemming from the Company's stock-related benefit plans to $1.5 million.
CASH EARNINGS ANALYSIS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 6,950 $5,395
Additional contributions to stockholders' equity:
Amortization and appreciation of stock-related benefit plans 1,570 1,894
Associated tax benefits 1,523 968
Amortization of goodwill -- --
Other 505 369
------- ------
Cash earnings $10,548 $8,626
======= ======
Cash earnings per share $0.55 $0.44
Diluted cash earnings per share $0.52 $0.42
</TABLE>
14
<PAGE> 17
NET INTEREST INCOME ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------
1998 1997
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- --------- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage and other loans, net $1,469,631 $31,473 8.57 % $1,304,354 $28,287 8.67 %
Securities held to maturity 125,694 1,982 6.31 70,775 1,115 6.30
Mortgage-backed securities held to maturity 33,549 530 6.32 60,193 939 6.24
Money market investments 10,155 137 5.35 5,129 67 5.23
---------- ------- ------ ---------- ------- ------
Total interest-earning assets 1,639,029 34,122 8.33 % 1,440,451 30,408 8.44 %
Non-interest-earning assets 44,260 40,512
---------- ----------
Total assets $1,683,289 $1,480,963
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and money market accounts $ 69,964 $ 495 2.81 % $ 65,734 $ 472 2.88 %
Savings accounts 268,022 1,550 2.29 270,502 1,633 2.42
Certificates of deposit 674,359 8,996 5.29 669,861 9,233 5.53
FHLB borrowings 436,410 5,774 5.25 241,882 3,450 5.72
Mortgagors' escrow 17,710 8 0.18 12,773 9 0.28
---------- ------- ------ ---------- ------- ------
Total interest-bearing liabilities 1,466,465 16,823 4.55 % 1,260,752 14,797 4.71 %
Non-interest-bearing deposits 32,203 ------- 27,058 -------
Other liabilities 28,938 24,313
---------- ----------
Total liabilities 1,527,606 1,312,123
Stockholders' equity 155,683 168,840
---------- ----------
Total liabilities and stockholders' equity $1,683,289 $1,480,963
========== ==========
Net interest income/interest rate spread $17,299 3.78 % $15,611 3.73 %
======= ====== ======= ======
Net interest-earning assets/net
interest margin $ 172,564 4.22 $ 179,699 4.34
========== ====== ========= ======
Ratio of interest-earning assets
to interest-bearing liabilities 111.77 114.25
====== ======
</TABLE>
INTEREST INCOME
The Company derives interest income from its portfolio of interest-earning
assets, primarily comprised of mortgage and other loans. The balance of the
Company's interest-earning assets consists of securities held to maturity,
mortgage-backed securities held to maturity, and money market investments. The
level of interest income is a function of the average balances of said assets
and the yields they respectively provide.
15
<PAGE> 18
In the third quarter of 1998, the Company recorded interest income of $34.1
million, up $3.7 million from $30.4 million in the year-earlier three months.
The 12.2% increase was the net effect of a $198.6 million rise in the average
balance of interest-earning assets to $1.6 billion and an 11-basis point drop in
the average yield to 8.33%.
Mortgage and other loans generated $31.5 million of the current quarter's
interest income, up $3.2 million, or 11.3%, from $28.3 million in the third
quarter of 1997. The increase reflects a $165.3 million rise in the average loan
balance to $1.5 billion, which offset a 10-basis point drop in the average yield
to 8.57%. Mortgage and other loans accounted for 89.7% of average
interest-earning assets and provided 92.2% of interest income in the current
three-month period.
Securities contributed $2.0 million to total interest income, as compared to
$1.1 million in the third quarter of 1997. The $867,000, or 77.8%, increase
reflects a $54.9 million, or 77.6%, rise in the average balance to $125.7
million, coupled with a one-basis point rise in the average yield to 6.31%.
Securities represented 7.7% of average interest-earning assets and generated
5.8% of interest income in three months ended September 30, 1998.
Mortgage-backed securities produced interest income of $530,000 in the quarter,
down $409,000 from $939,000 in the year-earlier three months. The reduction was
the net effect of a $26.6 million decline in the average balance to $33.5
million and an eight-basis point increase in the average yield to 6.32%.
Money market investments generated interest income of $137,000 in the quarter,
as compared to $67,000 in the third quarter of 1997. The increase stemmed from a
$5.0 million rise in the average balance to $10.2 million and a 12-basis point
rise in the average yield to 5.35%.
INTEREST EXPENSE
The Company's interest expense stems primarily from the interest paid on CDs and
other depository products, on FHLB borrowings, and, to a lesser extent, on
mortgagors' escrow accounts. The level of interest expense is a function of the
average balances of these interest-bearing liabilities and their respective
costs.
The Company recorded interest expense of $16.8 million in the current third
quarter, as compared to $14.8 million, the year-earlier amount. The 13.7%
increase was the net result of a $205.7 million rise in the average balance of
interest-bearing liabilities to $1.5 billion (primarily reflecting the increased
use of FHLB advances), and a 16-basis point decline in the average cost to 4.55%
(primarily reflecting the drop in short-term interest rates).
FHLB borrowings generated interest expense of $5.8 million, up from $3.5 million
in the third quarter of 1997. The increase was the net result a $194.5 million
rise in the average balance to $436.4 million and a 47-basis point reduction in
the average cost to 5.25%. FHLB borrowings represented 29.8% of average
interest-bearing liabilities and generated 34.3% of interest expense in the
current quarter; by comparison, FHLB borrowings represented 19.2% of average
interest-bearing liabilities and generated 23.3% of interest expense in the
year-earlier three months.
The interest expense produced by CDs declined to $9.0 million in the current
quarter from $9.2 million in the three months ended September 30, 1997. The
reduction was the net result of a $4.5 million increase in the average balance
to $674.4 million and a 24-basis point reduction in the average cost to 5.29%.
CDs represented
16
<PAGE> 19
46.0% of average interest-bearing liabilities in the current quarter and
produced 53.5% of interest expense. In the year-earlier three months, CDs
represented 53.1% of average interest-bearing liabilities and produced 62.4% of
interest expense.
Savings accounts generated interest expense of $1.6 million, down $83,000 from
the level recorded in the year-earlier three months. The decline stemmed from a
$2.5 million reduction in the average balance to $268.0 million and a 13-basis
point reduction in the average cost to 2.29%. Savings accounts thus represented
9.2% of interest expense in the current third quarter and 18.3% of average
interest-bearing liabilities.
The interest expense produced by NOW and money market accounts rose $23,000 to
$495,000, the net effect of a $4.2 million increase in the average balance to
$70.0 million and a seven-basis point drop in the average cost to 2.81%.
Mortgagors' escrow generated interest expense of $8,000 in the current third
quarter, down from $9,000 in the year-earlier three months. The decrease
reflects a $4.9 million rise in the average balance to $17.7 million, tempered
by a 10-basis point drop in the average cost to 18 basis points.
The Company anticipates that it will continue to draw on its FHLB line of credit
to finance mortgage loan production, in view of the higher levels of net
interest income generated by the growth in mortgage loans. The decision to
utilize FHLB borrowings is based on the current availability and pricing of this
and other sources of funding, and on the current level of loan demand.
NET INTEREST INCOME
Net interest income is the Company's principal source of income. Its level is
significantly influenced by the volume of the Company's interest-earning assets
and interest-bearing liabilities, and by the spread between the yield on such
assets and the cost of such liabilities.
In the third quarter of 1998, the Company's net interest income was sustained by
the growing balance of interest-earning assets, which was primarily funded by
FHLB borrowings. Despite intensifying pressure on its interest rate spread and
net interest margin, the Company recorded a 10.8% increase, year-over-year, in
net interest income, to $17.3 million from $15.6 million. On a trailing quarter
basis, net interest income declined for the first time in eight quarters, from
$17.5 million in the three months ended June 30, 1998. The reduction primarily
reflects the allocation of $28.3 million toward the repurchase of 1.1 million
Company shares in the quarter, as the Company took advantage of market
conditions to increase its share repurchases. The Company's spread and margin
were 3.78% and 4.22%, respectively, in the current third quarter, as compared to
3.91% and 4.42% in the trailing quarter and 3.73% and 4.34% in the year-earlier
three months.
PROVISION FOR LOAN LOSSES
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.
17
<PAGE> 20
In the three months ended September 30, 1998, the Company recorded its
thirteenth consecutive quarter without any net charge-offs, as well as a $1.0
million reduction in non-performing loans to $6.5 million from $7.5 million and
$7.7 million, respectively, at June 30, 1998 and December 31, 1997.
Non-performing loans represented 0.44% of loans, net, at the close of the
current quarter, as compared to 0.52% and 0.55% at the earlier dates.
Accordingly, the provision for loan losses was suspended for the thirteenth
consecutive quarter, maintaining the allowance for loan losses at $9.4 million,
equivalent to 145.31% of non-performing loans and 0.64% of loans, net at
September 30, 1998. By comparison, the allowance amounted to 125.31% of
non-performing loans and 0.65% of loans, net, at the close of the trailing
quarter, and 122.61% and 0.68%, respectively, at December 31, 1997.
Based on currently available information, management believes that the Company's
allowance for loan losses is sufficient, and does not anticipate making
additional provisions to the allowance in the short-term. At the same time, no
assurances can be given that a significant change in the quality of the
Company's assets or a significant downturn in the real estate market would not
result in additional loan loss provisions being made.
For additional information regarding asset quality and the allowance for loan
losses, see the discussion and analysis beginning on page nine of this report.
OTHER OPERATING INCOME
The Company recorded a $301,000 increase in other operating income to $637,000
in the third quarter of 1998 from $336,000 in the third quarter of 1997. The
89.6% increase stemmed from a $168,000 rise in fee income to $476,000 and a
$133,000 rise in other income to $161,000. The higher level of fee income
reflects fees derived from loan production and prepayments, as well as the
growing balance of fee-generating depository accounts.
OPERATING EXPENSE
Operating expense consists primarily of compensation and benefits expense,
together with occupancy and equipment and general and administrative ("G&A")
expense. The Company's ability to contain such costs is reflected both in its
ratio of operating expense to average assets and in its ratio of operating
expense to net interest income and operating income, referred to as the
"efficiency ratio."
In the third quarter of 1998, operating expense declined $125,000 to $6.7
million, primarily reflecting a $97,000 reduction in compensation and benefits
expense to $4.6 million. Included in the latter amount was $1.6 million stemming
from the amortization and appreciation of shares held in the Company's
stock-related benefit plans, all of which was added back to stockholders' equity
at quarter's end. In the third quarter of 1997, such plan-related expenses
represented $1.9 million. Excluding these non-cash items, the Company's
compensation and benefits expense rose $200,000 in the third quarter of 1998.
In addition to the reduction in compensation and benefits, the decline in third
quarter 1998 operating expense reflects a $23,000 reduction in occupancy and
equipment expense to $660,000 and a $74,000 reduction in G&A expense to $1.2
million. These reductions served to offset a $69,000 increase in other expense
to $213,000.
18
<PAGE> 21
On the basis of GAAP earnings, the ratio of operating expense to average assets
improved to 1.58% from 1.83% in the year-earlier quarter; the efficiency ratio
improved to 37.13% from 42.55%. On the basis of cash earnings, the ratio of
operating expense to average assets improved to 1.21% from 1.32% in the
year-earlier quarter, while the cash efficiency ratio improved to 28.38% from
30.67%.
INCOME TAX EXPENSE
Income tax expense rose to $4.3 million from $3.8 million in the year-earlier
quarter, reflecting both a $2.1 million, or 23.1%, increase in pre-tax income to
$11.3 million and a $555,000 increase to $1.5 million in non-cash items that
were subsequently added back to capital. In addition, the effective tax rate
dropped to 38.4% from 41.1% in the year-earlier quarter, as a decline in the
average market price of shares in the Company's ESOP necessitated an adjustment
to year-to-date tax accruals.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET INCOME
The Company recorded net income of $19.8 million and $16.5 million in the nine
months ended September 30, 1998 and 1997, signifying a 29.3% increase in diluted
earnings per share to $0.97 from $0.75. The nine-month 1997 amounts have been
adjusted to reflect the recapture of $1.3 million in the first quarter that had
been recorded as a tax charge in the fourth quarter of 1996.
In addition, the Company recorded nine-month cash earnings of $32.5 million and
$24.9 million in 1998 and 1997 (as adjusted to exclude the $1.3 million
recapture), representing a 40.7% increase in diluted cash earnings per share to
$1.59 from an adjusted $1.13. The Company's year-to-date cash earnings thus
contributed $12.6 million, or 63.7%, more equity growth than its year-to-date
GAAP earnings, and represented a cash ROA and cash ROE of 2.64% and 27.03%,
respectively.
Net interest income rose $5.0 million, or 10.8%, to $51.3 million, as a $13.8
million increase in interest income to $99.8 million outweighed an $8.8 million
increase in interest expense to $48.5 million. For the nine months ended
September 30, 1998, the Company's interest rate spread and net interest margin
measured 3.77% and 4.29%, respectively, as compared to 3.87% and 4.52% for the
year-earlier period.
The Company's nine-month 1998 earnings were also fueled by a $905,000 increase
in other operating income, offsetting a $91,000 increase in operating expense.
Specifically, other operating income rose to $2.1 million at September 30, 1998,
including fee income of $1.7 million and other income of $394,000. Operating
expense rose to $20.0 million, as a $250,000 increase in compensation and
benefits was tempered by reductions in occupancy and equipment, G&A, and other
expense. Reflecting the higher levels of net interest income and other operating
income, the efficiency ratio improved to 37.63% on the basis of GAAP earnings
and to 28.12% on a cash earnings basis.
Income tax expense rose to $13.5 million from $9.6 million, reflecting an
increase in pre-tax income to $33.3 million from $27.5 million. In addition,
income tax expense in 1997 was reduced by the recapture of $1.3 million in the
first quarter that had been recorded as a tax charge in the fourth quarter of
1996.
19
<PAGE> 22
CASH EARNINGS ANALYSIS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the
Nine Months Ended
September 30,
-------------------
1998 1997
------- -------
<S> <C> <C>
Net income $19,828 $17,869
Additional contributions to
stockholders' equity:
Amortization and appreciation of
stock-related benefit plans 5,073 5,180
Associated tax benefits 6,150 2,207
Amortization of goodwill -- --
Other 1,414 910
------- -------
Cash earnings $32,465 $26,166
======= =======
Cash earnings per share $1.68 $1.20
Diluted cash earnings per share $1.59 $1.13
</TABLE>
INTEREST INCOME
The Company recorded interest income of $99.8 million in the first nine months
of 1998, up $13.8 million, or 16.1%, from $86.0 million in the first nine months
of 1997. The increase stemmed from a $227.7 million rise in the average balance
of interest-earning assets to $1.6 billion, which offset a five-basis point drop
in the average yield to 8.34%.
Reflecting year-to-date originations of $360.8 million, the average balance of
mortgage and other loans rose $208.0 million, or 17.0%, to $1.4 billion,
offsetting a seven-basis drop in the average yield to 8.58%. As a result, the
interest income derived from loans rose $12.7 million, or 16.0%, to $92.0
million for the nine months ended September 30, 1998. Loans thus represented
89.7% of average interest-earning assets and generated 92.2% of interest income
year-to-date.
Securities generated $5.4 million in interest income in the current nine-month
period, up $2.0 million, or 59.7%, from $3.4 million in the first nine months of
1997. The increase reflects a $39.6 million rise in the average balance to
$113.3 million and a 24-basis point rise in the average yield to 6.36%.
Securities represented 7.1% of average interest-earning assets and produced 5.4%
of interest income in the nine months ended September 30, 1998.
Additional interest income was derived from the Company's portfolio of
mortgage-backed securities and its portfolio of money market investments.
Mortgage-backed securities produced interest income of $1.9 million, down $1.1
million from $3.0 million in the year-earlier period, reflecting a $24.2 million
reduction in the average balance to $41.2 million and a 10-basis point rise in
the average yield to 6.29%. Money market investments produced $383,000 in
interest income, up from $205,000, as the average balance rose $4.3 million to
$9.6 million and the average yield rose 14 basis points to 5.33%.
20
<PAGE> 23
INTEREST EXPENSE
In the first nine months of 1998, the Company recorded interest expense of $48.5
million, up $8.8 million, or 22.2%, from $39.7 million in the first nine months
of 1997. The increase stemmed from a $245.4 million rise in the average balance
of interest-bearing liabilities to $1.4 billion, coupled with a five-basis point
rise in the average cost of funds to 4.57%.
The higher level of interest expense primarily reflects the increased use of
FHLB borrowings to fund mortgage loan production and the interest expense
produced by this funding source. In the first nine months of 1998, average FHLB
borrowings totaled $383.7 million, representing 27.0% of average
interest-bearing liabilities, versus $158.9 million, representing 13.5%, in the
first nine months of 1997. While the $224.8 million increase in the average
balance was partly offset by a 26-point reduction in the average cost to 5.39%
in the current period, the interest expense derived from FHLB borrowings rose to
$15.5 million from $6.7 million. The 1998 amount represented 31.9% of total
interest expense, while the 1997 amount represented 16.9%.
The interest expense produced by CDs rose $176,000 to $26.8 million, the net
effect of a $17.6 million increase in the average balance to $674.3 million and
a 10-basis point drop in the average cost to 5.32%. CDs represented 47.5% and
55.9%, respectively, of average interest-bearing liabilities in 1998 and 1997,
and accounted for 55.3% and 67.1%, respectively, of interest expense.
Savings accounts generated an additional $4.7 million in interest expense, down
from $4.9 million in the year-earlier period, as the average balance of such
funds fell $5.5 million to $268.3 million and the average cost dropped eight
basis points to 2.32%. Savings accounts represented 18.9% and 23.3% of average
interest-bearing liabilities in the first nine months of 1998 and 1997, and
produced 9.6% and 12.4%, respectively, of interest expense.
The interest expense stemming from NOW and money market accounts rose $119,000
to $1.5 million, reflecting a $2.3 million rise in the average balance to $69.9
million and a 14-basis point rise in the average cost to 2.88%. Mortgagors'
escrow produced interest expense of $36,000, up $6,000, the net effect of a $6.2
million rise in the average balance to $22.8 million and a three-basis point
drop in the average cost to 21 basis points.
NET INTEREST INCOME
Net interest income rose to $51.3 million in the nine months ended September 30,
1998, up $5.0 million, or 10.8%, from $46.3 million in the nine months ended
September 30, 1997. While interest expense has increased primarily due to the
use of FHLB advances, the resultant growth in interest-earning assets has
boosted interest income to a greater extent.
Reflecting the use of borrowings, the Company's interest rate spread measured
3.77% in the current nine-month period, as compared to 3.87% in the year-earlier
nine months. Net interest margin declined to 4.29% from 4.52% in the
year-earlier period, reflecting the narrowing spread and the decline in excess
capital.
21
<PAGE> 24
NET INTEREST INCOME ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage and other loans, net $ 1,430,094 $92,041 8.58 % $ 1,222,055 $79,326 8.65 %
Securities held to maturity 113,293 5,408 6.36 73,720 3,386 6.12
Mortgage-backed securities held to maturity 41,169 1,942 6.29 65,404 3,038 6.19
Money market investments 9,608 383 5.33 5,269 205 5.19
---------- ------- ------ ----------- ------- ------
Total interest-earning assets 1,594,164 99,774 8.34 % 1,366,448 85,955 8.39 %
Non-interest-earning assets 43,972 39,069
------------ ------------
Total assets $ 1,638,136 $ 1,405,517
=========== ============
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and money market accounts $ 69,925 $ 1,508 2.88 % $ 67,667 $ 1,389 2.74 %
Savings accounts 268,280 4,665 2.32 273,816 4,912 2.40
Certificates of deposit 674,259 26,805 5.32 656,617 26,629 5.42
FHLB borrowings 383,698 15,456 5.39 158,874 6,708 5.65
Mortgagors' escrow 22,813 36 0.21 16,625 30 0.24
----------- -------- ------- ----------- ------- -------
Total interest-bearing liabilities 1,418,975 48,470 4.57 % 1,173,599 39,668 4.52 %
--------- -------
Non-interest-bearing deposits 31,319 26,053
Other liabilities 27,685 21,640
----------- -----------
Total liabilities 1,477,979 1,221,292
Stockholders' equity 160,157 184,225
----------- -----------
Total liabilities and stockholders' equity $ 1,638,136 $ 1,405,517
=========== ===========
Net interest income/interest rate spread $ 51,304 3.77 % $46,287 3.87 %
========= ======== ======== =======
Net interest-earning assets/net
interest margin $175,189 4.29 $192,849 4.52
========== ======== =========== =======
Ratio of interest-earning assets
to interest-bearing liabilities 112.35 116.43
========= ========
</TABLE>
PROVISION FOR LOAN LOSSES
As discussed in the third quarter comparison, the Company has suspended the
provision for loan losses since the third quarter of 1995. For more information
regarding asset quality and the loan loss provision, see the respective
discussions on pages 9 and 17 of this report.
22
<PAGE> 25
OTHER OPERATING INCOME
Other operating income rose $905,000 to $2.1 million in the nine months ended
September 30, 1998 from $1.2 million in the nine months ended September 30,
1997. The increase stemmed from a $779,000 rise in fee income to $1.7 million
and a $126,000 increase in other income to $394,000. As indicated in the third
quarter discussion, the higher level of fee income includes fees generated in
connection with mortgage loan production and prepayments, and also reflects an
increase in fee-generating depository accounts.
OPERATING EXPENSE
The Company recorded operating expense of $20.1 million in the current
nine-month period, up $91,000 from $20.0 million in the year-earlier nine
months. Compensation and benefits expense represented $14.2 million and $13.9
million, respectively, of the 1998 and 1997 totals, and included $5.1 million
and $5.2 million stemming from the amortization and appreciation of shares in
the Company's stock-related benefit plans, all of which was added back to
capital.
The $250,000 increase in compensation and benefits expense was tempered by
reductions in the remaining expense categories, as occupancy and equipment fell
$46,000 to $1.9 million, G&A fell $88,000 to $3.5 million, and other expense
fell $25,000 to $467,000.
Management's ability to contain costs is again reflected in the ratio of
operating expense to average assets and in the efficiency ratio for the
nine-month period. On the basis of GAAP earnings, the Company's ratio of
operating expense to average assets and efficiency ratio improved to 1.63% and
37.63%, respectively, from 1.90% and 42.13% in the year-earlier nine months. On
the basis of cash earnings, these ratios improved to 1.22% and 28.12%,
respectively, from 1.43% and 31.21%.
INCOME TAX EXPENSE
Income tax expense rose to $13.5 million in the nine months ended September 30,
1998 from $9.6 million in the year-earlier nine months. The increase stemmed
from a $5.8 million, or 21.2%, increase in pre-tax income to $33.3 million,
together with a $4.0 million increase in non-cash items associated with the
Company's stock related plans to $6.2 million. In addition, income tax expense
for the nine months ended September 30, 1997 was reduced by the recapture of
$1.3 million in the first quarter that had been recorded as a tax charge in the
fourth quarter of 1996.
YEAR 2000 COMPLIANCE
The Company continues to be actively engaged in preparing for the Year 2000.
While the Bank maintains an internal computer system (which is already Year 2000
compliant) for certain operating functions, the substantial majority of its data
processing is out-sourced to a third party vendor. Said vendor has provided the
Bank with written assurances that its systems and the software it is licensed to
use will be Year 2000 compliant; the integration of the system with its licensed
software will be tested in November 1998. In the event that such vendor's system
fails to be compliant by the third quarter of 1999, said vendor has made
arrangements with another third-party vendor that is Year 2000 compliant to
provide the Bank with data processing services.
23
<PAGE> 26
However, despite the Bank's efforts to ensure that it will be Year 2000
compliant, there can be no assurances that this will be the case.
In the event that such data processing vendor, or any of the Bank's other
significant vendors or suppliers, do not successfully achieve Year 2000
compliance in a timely manner, the Bank's business or operations would be
adversely affected. The Bank has therefore gathered information from each of its
vendors or suppliers regarding their Year 2000 compliance and has prepared
contingency plans in the event that any of them fail to meet their operating
requirements.
Expenses to date have been immaterial and it is currently management's
expectation that this will continue.
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
This report contains certain forward-looking statements that are based on
management's current expectations regarding economic, legislative, and
regulatory issues that may impact the Company's earnings in future periods.
Factors that could cause future results to vary from current management
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 other economic, competitive, governmental,
regulatory, and technological factors affecting the Company's operations,
pricing, products and services.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about the Company's market risk were
presented in the Interest Rate Sensitivity Analysis on page 13 of the 1997
Annual Report to Shareholders, filed on March 20, 1998. As of September 30,
1998, there has been no material change in the Company's market risk since the
1997 Annual Report to Shareholders was filed.
24
<PAGE> 27
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
PART 2 - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On August 18, 1998, the Board of Directors declared a three-for-two stock split
in the form of a 50% stock dividend, payable on September 29, 1998. Shareholders
received one additional share for every two shares held at September 15, 1998,
the date of record. Cash paid in lieu of fractional shares was based on the
average of the high and low bids on that date, as split-adjusted, or $27.34 per
share.
.
On September 3, 1998, the Board of Directors authorized the repurchase of up to
500,000 additional shares of Company stock, in conjunction with the completion
of the share repurchase authorization previously announced on July 16, 1997.
Pursuant to the three-for-two stock split on September 29th, the 500,000 shares
increased to 750,000 shares.
On October 20, 1998, the Board of Directors declared a quarterly cash dividend
of $0.20 per share, representing a 20% increase from the dividend paid in the
trailing quarter as adjusted for the three-for-two stock split on September 29,
1998. The increased dividend will be paid on November 16, 1998 to shareholders
of record at November 2nd.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 3(i) Certificate of Incorporation*
Exhibit No. 3(ii) Bylaws*
Exhibit No. 11 Statement re: Computation of Per Share Earnings
- filed herewith
Exhibit No. 27 Financial Data Schedule - filed herewith
25
<PAGE> 28
(b) Reports on Form 8-K
On August 19, 1998, the Company filed a Current Report on Form 8-K
regarding the three-for-two stock split declared on August 18, 1998.
*Incorporated by reference to the Exhibits filed with the Registration
Statement on Form S-1, as amended, Registration No. 33-65852.
26
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities and 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)
DATE: November 12, 1998 BY: /s/ Joseph R. Ficalora
------------------------------------
Joseph R. Ficalora
Chairman, President, and
Chief Executive Officer
(Duly Authorized Officer)
BY: /s/ Robert Wann
------------------------------------
Robert Wann
Senior Vice President,
Comptroller, and
Chief Financial Officer
(Principal Financial Officer)
27
<PAGE> 1
Reference Number 11
QUEENS COUNTY BANCORP, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS(1)(2)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1998 1997 1998 1997
- -------------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C>
Net income $6,950 $5,395 $19,828 $17,869
Weighted average common shares outstanding 19,079 19,268 19,292 20,778
Earnings per common share $0.36 $0.28 $1.02 $0.86
Weighted average common shares outstanding 19,079 19,268 19,292 20,778
======= ======= ======= =======
Additional dilutive shares using average market
value for the period when utilizing the
Treasury stock method regarding stock options 1,117 1,484 1,128 1,282
------- ------- ------- -------
Total shares for diluted earnings per share 20,196 20,752 20,420 22,060
======= ======= ======= =======
Diluted earnings per common share
and common share equivalents $0.34 $0.26 $0.97 $0.81
======= ======= ======= =======
</TABLE>
(1) Reflects shares issued as a result of 3-for-2 stock splits on October 1,
1997 and September 29, 1998.
(2) Reflects the adoption of Statement of Financial Accounting Standards No.
128, "Earnings Per Share."
28
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,490
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,271
<INVESTMENTS-CARRYING> 157,977
<INVESTMENTS-MARKET> 159,133
<LOANS> 1,491,571
<ALLOWANCE> 9,431
<TOTAL-ASSETS> 1,706,583
<DEPOSITS> 1,074,611
<SHORT-TERM> 445,522
<LIABILITIES-OTHER> 38,531
<LONG-TERM> 0
0
0
<COMMON> 310
<OTHER-SE> 147,609
<TOTAL-LIABILITIES-AND-EQUITY> 1,706,583
<INTEREST-LOAN> 92,041
<INTEREST-INVEST> 7,350
<INTEREST-OTHER> 383
<INTEREST-TOTAL> 99,774
<INTEREST-DEPOSIT> 33,014
<INTEREST-EXPENSE> 48,470
<INTEREST-INCOME-NET> 51,304
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 74
<EXPENSE-OTHER> 18,092
<INCOME-PRETAX> 33,286
<INCOME-PRE-EXTRAORDINARY> 19,828
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,826
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 0.97
<YIELD-ACTUAL> 8.34
<LOANS-NON> 5,460
<LOANS-PAST> 1,030
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,431
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 9,431
<ALLOWANCE-DOMESTIC> 9,431
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,431
</TABLE>
