UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1998 Commission File Number 0-22278
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QUEENS COUNTY BANCORP, INC.
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(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
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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 15, 1999, the aggregate market value of the shares of common stock
of the registrant outstanding was $557,500,924, excluding 2,969,632 shares held
by all directors and executive officers of the registrant. This figure is based
on the closing price by The Nasdaq Stock Market for a share of the registrant's
common stock on March 15, 1999, which was $29.96875 as reported in The Wall
Street Journal on March 16, 1999. The number of shares of the registrant's
common stock outstanding as of March 15, 1999, was 21,572,374 shares.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 21, 1999 and the 1998 Annual Report to
Shareholders are incorporated herein by reference - Parts I, II, and III.
<PAGE>
CROSS REFERENCE INDEX
PART I
Item 1. Business Page
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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 22
Securities and Mortgage-Backed Securities Portfolio 23
Item 2. Properties 24
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 25
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Queens County Bancorp, Inc. and Subsidiary:
Independent Auditors' Report 25
Consolidated Statements of Financial Condition 25
Consolidated Statements of Income 25
Consolidated Statements of Stockholders' Equity 25
Consolidated Statements of Cash Flows 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26
Signatures
<PAGE>
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 on 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
commercial real estate loans, 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 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, five stock
splits, 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
seven stock repurchase authorizations and increased its Treasury stock, net of
options exercised, to 9,719,796, or 31.38% of the shares issued at its initial
public offering on November 23, 1993. At March 15, 1999, the total number of
shares outstanding was 21,572,374 as compared to 21,250,897 at December 31,
1998.
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 82.8% of the Bank's loan
portfolio at year-end 1998. 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 lending activity.
1
<PAGE>
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 mortgage 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, 1998, the Bank's gross loan portfolio totaled
$1,497.0 million, of which $1,239.1 million, or 82.8%, were multi-family
mortgage loans, and $178.8 million, or 11.9%, were one-to-four family first
mortgage loans. Of the total mortgage loan portfolio at year-end 1998, 92.0%
were adjustable rate loans and 8.0% were fixed rate loans. The Bank's mortgage
loan portfolio also included $67.5 million in commercial real estate loans, $1.9
million in construction loans. In addition, the bank has $4.8 million in
cooperative apartment loans, $1.8 million in home equity loans generally secured
by second liens on real property, and $2.8 million in other consumer loans at
December 31, 1998.
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, 1998, mortgage-backed securities
totaled $19.7 million, or 1.1% of total assets. The market value of such
securities was approximately $20.3 million at December 31, 1998. All 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 its
Savings Bank Life Insurance Department ("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, 1998 and 1997, originations of new
ARM loans totaled $424.0 million and $388.7 million, respectively, or 93.09% and
95.53%, of all mortgage loan originations. Originations of fixed rate loans
totaled $28.2 million and $6.8 million, respectively, for the same periods,
while sales of ARM loans and fixed rate loans totaled $8.8 million and $3.2
million, respectively, for those periods. The Bank generally sells all loans
without recourse and retains the servicing rights of such loans. As of December
31, 1998, the Bank was servicing $38.7 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, 1998, the Bank's portfolio of multi-family
mortgage loans totaled $1,239.1 million, representing 82.8% of the total loan
portfolio. Of the multi-family loan portfolio $751.6 million, or 60.6%, were
secured by rental apartment buildings and $487.5 million, or 39.4%, were secured
by underlying mortgages on cooperative apartment buildings.
Such loans are typically originated for terms of 10 years at a rate of
interest 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
1998, 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 two over the first five years of the loan.
At year-end 1998, 95.3% of the Bank's multi-family mortgage loans were
adjustable rate credits, including $195.9 million that are due to step upward in
1999. Properties securing multi-family mortgage loans are appraised either by
appraisers employed by the Bank or by independent appraisers approved by the
Bank.
2
<PAGE>
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,
1998 consisted of 17 loans secured by 17 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, 1998, the
outstanding balance of these loans totaled $20.5 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, 1998, $178.8 million, or 11.9% of the Bank's loan
portfolio, consisted of one-to-four family mortgage loans.
Since 1985, full documentation mortgage loans have been 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 1998 and 1997 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 $6.2 million in
non-performing loans at December 31, 1998, was comprised of one-to-four family
loans. Since 1990, the Bank has foreclosed on 46 one-to-four family residential
properties; three of these properties with a carrying value of $419,000,
remained in foreclosed real estate as of December 31, 1998.
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 such 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 to a 2% to 3% adjustment per period and
an aggregate adjustment of 6% over the life of the loan. Accordingly, increases
in interest rates and the resulting cost of 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, 1998 and 1997, the
Bank originated $365,000 and $2.6 million, respectively, in one-to-four family
ARM loans.
3
<PAGE>
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 1998, 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, 1998 and 1997, the Bank originated
$3.4 million and $1.5 million, respectively, in fixed rate one-to-four family
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 SBLI and 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, 1998, the Bank sold loans totaling $8.8 million. As of December 31,
1998, the Bank's portfolio of loans serviced for others totaled $38.7 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;
however, no assurances can be made, 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, 1998,
the Bank had loans secured by commercial real estate of $67.5 million,
comprising 4.5% 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, 1998 and 1997, such
loans totaled $67.5 million and $61.7 million, respectively.
Loans secured by commercial real estate properties, like multi-family
loans, are generally larger and involve a greater degree of risk than
one-to-four family residential mortgage loans. Because payments on loans secured
by commercial real estate properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Bank seeks to minimize 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.
4
<PAGE>
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, 1998,
the Bank had $1.9 million, or 0.13%, 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, 1998 totaled $9.8 million, or 0.66% of the
Bank's loan portfolio and included cooperative apartment loans of $4.8 million,
or 51.02%. 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, 1998 totaled $1.8 million, against total available
credit lines of $3.6 million.
Loan Approval Authority and Underwriting. The Board of Directors
establishes lending authority for individual officers for its various loan
products. For one-to-four family mortgage loans, including cooperative apartment
and condominium loans, the Senior Vice President, Mortgages has the authority to
approve loans in amounts of up to $300,000. Any two executive officers have the
authority to issue commitments on one-to-four family loans in amounts up to
$400,000. Any one-to-four family loan in excess of $400,000 must be approved by
the Mortgage and Real Estate Committee. For multi-family and commercial real
estate loans, the Mortgage and Real Estate Committee must approve all loans. A
loan in excess of $3.0 million must be approved by the Executive Committee; as
of December 31, 1998, the Bank had forty-seven loans in excess of $3.0 million,
with the highest amount being $7.2 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 $6.2 million in
loans 90 days or more delinquent at December 31, 1998, consisting of 56
one-to-four family mortgage loans with an average principal balance of
approximately $111,127. 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.
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.
5
<PAGE>
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 90 days or more delinquent or foreclosed real
estate.
When loans are designated as "in foreclosure", the accrual of interest and
amortization of origination fees continues up to net realizable value less the
transaction cost of disposition. During the years ended December 31, 1998, 1997,
and 1996, the amounts of additional interest income that would have been
recorded on mortgage loans in foreclosure, had they been current, totaled
$150,000, $161,000, and $891,000 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, and foreclosed real
estate at the dates indicated. At December 31, 1998, 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.
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
------ ------ ------- ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans in foreclosure $5,530 $6,121 $ 6,861 $4,929 $5,437
Loans 90 days or more delinquent
and still accruing interest 663 1,571 2,798 2,864 1,674
------ ------ ------- ------ ------
Total non-performing loans 6,193 7,692 9,659 7,793 7,111
------ ------ ------- ------ ------
Foreclosed real estate 419 1,030 627 774 975
------ ------ ------- ------ ------
Total non-performing assets $6,612 $8,722 $10,286 $8,567 $8,086
====== ====== ======= ====== ======
Total non-performing loans to
loans, net 0.42% 0.55% 0.84% 0.78% 0.76%
Total non-performing assets to
total assets 0.38 0.54 0.76 0.69 0.69
</TABLE>
Management monitors non-performing loans and, when deemed appropriate,
writes down such loans to their current appraised values, less transaction
costs. There can be no assurances that further write-downs will not occur with
respect to such loans.
At December 31, 1998, foreclosed real estate was comprised of three
residential properties with an aggregate carrying value of $419,000. The Bank
generally conducts appraisals on all properties securing mortgage loans in
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.
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Once a loan is placed in 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, 1998, the total allowance remained at $9.4 million, which
amounted to 152.28% of non-performing loans and 142.63% of non-performing
assets. For the years ended December 31, 1998 and 1997, the Bank had no net
charge-offs against this allowance. 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, 1998,
mortgage-backed securities totaled $19.7 million, or 1.1% 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, 1998, the
mortgage-backed securities portfolio had a weighted average interest rate of
7.38% and a market value of approximately $20.3 million. See Statistical Data-E
for components of the mortgage-backed securities portfolio.
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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. 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, 1998, $180.4 million, or 16.4% 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 $698.8 million
line of credit at December 31, 1998. To supplement its funding source in a year
of increased lending, the Company drew on its line of credit with the FHLB in
1998. Borrowings, which are used to finance loan production, totaled $439.1
million at December 31, 1998. A $10.0 million line of credit with a
correspondent financial institution is also available to the Bank. At December
31, 1998, the Bank also had an outstanding loan in the amount of $12.8 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; 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.
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Personnel
At December 31, 1998, the number of full-time equivalent employees was
278. 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
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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.
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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.
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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, 1998:
GAAP Capital to Total Leverage Assets 9.40%
Total Capital to Risk-Weighted Assets 16.12%
Tier I Capital to Risk-Weighted Assets 15.23%
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
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banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution 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, 1998, the Bank had $4.7 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%
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or greater, a Tier 1 risk-based capital ratio of 4% or greater, and generally a
leverage ratio of 4% or greater. An institution is deemed to be
"undercapitalized" if it has a total risk-based capital ratio of less than 8%, a
Tier 1 risk-based capital ratio of less than 4%, or generally a leverage 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>
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
equity 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 are determined semiannually by the
FDIC and currently range from 0 basis points to 27 basis points. The FDIC is
authorized to raise the assessment rates in certain circumstances, including to
maintain or achieve the designated reserve ratio of 1.25%, which requirement the
BIF currently meets. On September 30, 1996, the President signed into law the
Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things,
spreads the obligations for payment of the financing Corporation ("FICO") bonds
across all SAIF and BIF members. 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.
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>
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
further requires 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 Banking Department
has adopted, effective December 3, 1997, new regulations to implement the NYCRA.
The Banking Department 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 Banking Department 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 March 1999, 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 $47.8 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $47.8
million, the reserve requirements is $1.43 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 $47.8 million. The first $4.7 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the 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, 1998
of $22.4 million. FHLB advances must be secured by specified types of collateral
and may be obtained primarily for the purpose of providing funds for residential
housing finance.
16
<PAGE>
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, 1998, 1997, and 1996, dividends from the FHLB-NY to the
Bank amounted to $1.5 million, $822,000 and $665,000, 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 of 1956,
as amended ("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
distributions.
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>
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 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% or more of any
class of voting securities of the Company or the ability to control in any
manner the election of a majority of the Company's directors. An existing bank
holding company would be required to obtain the FRB's prior approval under the
BHCA before acquiring more than 5% of the Company's voting stock. See "Holding
Company Regulation." Approval of the Banking Department may also be required for
acquisition of the Company.
New York Change in Control Restrictions. In addition to the CIBCA and the
BHCA, the New York Banking Law generally requires prior approval of the New York
Banking Board before any action is taken that causes any company to acquire
direct or indirect control of a banking institution which is organized in New
York.
Federal Securities Laws
The Company's common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the information and proxy solicitation requirements, insider trading
restrictions, and other requirements under the Exchange Act.
Registration of the shares of the Common Stock that were issued in the
Bank's conversion from mutual to stock form under the Securities Act of 1933, as
amended (the "Securities Act"), does not cover the resale of such shares. Shares
of the common stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed in any three-month period the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
18
<PAGE>
STATISTICAL DATA
The detailed statistical data that follows is being presented in accordance with
Guide 3, prescribed by the Securities and Exchange Commission. This data should
be read in conjunction with the financial statements and related notes and the
discussion included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations that are indexed on the Form 10-K Cross
Reference Index.
A. Mortgage and Other Lending Activities
The following table sets forth the Bank's loan originations and mortgage-backed
securities, including purchases, sales, and principal repayments, for the
periods indicated:
For the
Years Ended December 31,
------------------------
(dollars in thousands) 1998 1997 1996
---------- ---------- ----------
Mortgage loans (gross):
At beginning of period $1,394,939 $1,144,317 $ 993,242
Mortgage loans originated:
One-to-four family 7,473 22,914 11,150
Multi-family 409,800 418,869 273,421
Commercial real estate 32,826 10,248 17,438
Construction 2,091 1,089 1,214
---------- ---------- ----------
Total mortgage loans originated 452,190 453,120 303,223
Principal repayments 349,952 185,033 151,391
Mortgage loans sold 8,647 16,060 350
Mortgage loans transferred to
foreclosed real estate 1,274 1,405 406
---------- ---------- ----------
At end of period 1,487,256 1,394,939 1,144,318
Other loans (gross):
At beginning of period 10,795 12,275 13,861
Other loans originated 2,008 1,375 1,471
Principal repayments 3,053 2,843 2,975
Student loans sold -- 12 82
---------- ---------- ----------
At end of period 9,750 10,795 12,275
---------- ---------- ----------
Total loans $1,497,006 $1,405,734 $1,156,593
========== ========== ==========
Mortgage-backed securities:
At beginning of period $ 49,781 $ 73,732 $ 92,868
Principal repayments 30,101 23,951 19,136
---------- ---------- ----------
At end of period $ 19,680 $ 49,781 $ 73,732
========== ========== ==========
19
<PAGE>
B. Loan Maturity and Repricing
The following table shows the maturity or period to repricing of the Bank's loan
portfolio at December 31, 1998. 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 $147.0 million for the twelve months ended December 31, 1998.
<TABLE>
<CAPTION>
Mortgage and Other Loans
at December 31, 1998
--------------------
1-4 Multi- Commerical Home Total
(dollars in thousands) Family Family Real Estate Construction Equity Other Loans
-------- ---------- ----------- ------------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Amount due:
Within one year $124,026 $ 213,636 $23,845 $1,898 $1,793 $4,908 $ 370,106
After one year:
One to three years 25,161 307,473 13,775 -- -- 1,441 347,850
Three to five years 7,042 374,742 16,227 -- -- 764 398,775
Five to ten years 15,393 339,700 9,005 -- -- 706 364,804
Ten to twenty years 4,985 3,543 4,642 -- -- 71 13,241
Over twenty years 2,163 -- -- -- -- 67 2,230
-------- ---------- ------- ------ ------ ------ ----------
Total due or repricing
after one year 54,744 1,025,458 43,649 -- -- 3,049 1,126,900
-------- ---------- ------- ------ ------ ------ ----------
Total amounts due or
repricing, gross $178,770 $1,239,094 $67,494 $1,898 $1,793 $7,957 $1,497,006
======== ========== ======= ====== ====== ====== ==========
</TABLE>
The following table sets forth, at December 31, 1998, the dollar amount of all
loans due after December 31, 1999, and indicates whether such loans have fixed
or adjustable interest rates.
Due after December 31, 1999
------------------------------------------
(dollars in thousands) Fixed Adjustable Total
-------- ---------- ----------
Mortgage loans:
One-to-four family $ 33,168 $ 21,576 $ 54,744
Multi-family 55,829 969,629 1,025,458
Commercial real estate 21,794 21,855 43,649
-------- ---------- ----------
Total mortgage loans $110,791 $1,013,060 $1,123,851
Other loans 2,322 727 3,049
-------- ---------- ----------
Total loans $113,113 $1,013,787 $1,126,900
======== ========== ==========
20
<PAGE>
C. Summary of the Allowance for Loan Losses
The allowance for loan losses at December 31, 1998, 1997, and 1996 was allocated
as follows:
<TABLE>
<CAPTION>
At December 31,
-------------------
1998 1997 1996
------------------- ------------------- -------------------
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 $1,341 14.22% $1,592 16.88% $1,812 19.36%
Multi-family 6,686 70.89 6,521 69.14 6,168 65.90
Construction 28 0.30 23 0.24 24 0.26
Commercial real estate 1,181 12.52 1,080 11.45 1,110 11.86
Other loans 195 2.07 215 2.29 245 2.62
------ ------ ------ ------ ------ ------
Total loans $9,431 100.00% $9,431 100.00% $9,359 100.00%
====== ====== ====== ====== ====== ======
</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.
21
<PAGE>
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,
1998 1997 1996 1995 1994
------------------- ------------------- ------------------- ------------------- -------------------
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 $ 178,770 11.94% $ 224,287 15.96% $ 256,904 22.21% $ 288,470 28.64% $ 306,028 32.20%
Multi-family 1,239,094 82.77 1,107,343 78.78 822,364 71.10 641,564 63.70 561,589 59.09
Commercial real estate 67,494 4.51 61,740 4.39 63,452 5.49 62,003 6.16 66,609 7.01
Construction 1,898 0.13 1,538 0.10 1,598 0.14 1,205 0.12 2,490 0.26
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total mortgage loans 1,487,256 99.35 1,394,939 99.23 1,144,318 98.94 993,242 98.62 936,716 98.56
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Other loans:
Cooperative apartment 4,802 0.32 5,041 0.36 5,764 0.50 6,684 0.66 7,238 0.76
Home equity 1,793 0.12 2,386 0.17 2,819 0.24 3,069 0.31 3,352 0.35
Student 8 0.00 8 0.00 24 0.00 116 0.01 241 0.03
Passbook savings 321 0.02 312 0.02 375 0.03 470 0.05 691 0.07
Other 2,826 0.19 3,048 0.22 3,293 0.29 3,522 0.35 2,171 0.23
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other loans 9,750 0.65 10,795 0.77 12,275 1.06 13,861 1.38 13,693 1.44
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans 1,497,006 100.00% 1,405,734 100.00% 1,156,593 100.00% 1,007,103 100.00% 950,409 100.00%
---------- ====== ---------- ====== ---------- ====== ---------- ====== ---------- ======
Less:
Unearned discounts 22 19 24 29 42
Net deferred loan
origination fee 1,034 1,281 1,058 912 1,549
Allowance for loan losses 9,431 9,431 9,359 11,359 11,268
---------- ---------- ---------- ---------- ----------
Loans, net $1,486,519 $1,395,003 $1,146,152 $ 994,803 $ 937,550
========== ========== ========== ========== ==========
</TABLE>
22
<PAGE>
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,
1998 1997 1996
---------------------- --------------------- ----------------------
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 $129,893 $129,586 $ 78,279 $ 78,345 $ 68,126 $ 68,226
Equity securities 26,978 27,125 19,274 19,339 9,890 9,925
-------- -------- -------- -------- -------- --------
Total securities $156,871 $156,711 $ 97,553 $ 97,684 $ 78,016 $ 78,151
======== ======== ======== ======== ======== ========
Money market investments:
Federal funds sold $ 19,000 $ 19,000 $ 6,000 $ 6,000 $ 13,650 $ 13,650
-------- -------- -------- -------- -------- --------
Total money market
investments $ 19,000 $ 19,000 $ 6,000 $ 6,000 $ 13,650 $ 13,650
======== ======== ======== ======== ======== ========
Mortgage-backed securities:
GNMA $ 15,886 $ 16,403 $ 20,069 $ 20,789 $ 27,914 $ 28,562
FHLMC 3,794 3,929 29,712 29,830 64,954 64,912
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities $ 19,680 $ 20,332 $ 49,781 $ 50,619 $ 92,868 $ 93,474
======== ======== ======== ======== ======== ========
</TABLE>
23
<PAGE>
Item 2. PROPERTIES
The Bank conducts its business through ten full-service offices, 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, 1998
---------- --------- ----------- -----------------
<S> <C> <C> <C> <C>
Main Office(1) Owned 1911 -- $1,766,089
38-25 Main Street
Flushing, NY 11354
Corona Branch Owned 1923 -- 148,274
37-97 103rd Street
Corona, NY 11368
Little Neck Branch Owned 1946 -- 54,600
251-31 Northern Blvd.
Little Neck, NY 11363
Kew Gardens Hills Branch Owned 1948 -- 101,462
75-44 Main Street
Kew Gardens Hills, NY 11367
Jackson Heights Branch Leased 1974 2023 458,346
76-02 Northern Blvd.
Jackson Heights, NY 11372
Astoria Branch(2) Leased 1993 2018 114,305
31-42 Steinway Street
Astoria, NY 11103
Fresh Meadows Branch Leased 1995 2010 59,604
61-49 188th Street
Fresh Meadows, NY 11365
College Point Branch Leased 1996 2021 4,722
15-01 College Point Blvd.
College Point, NY 11356
Murray Hill Branch Leased 1997 2007 26,948
156-18 Northern Blvd.
Flushing, NY 11354
Plainview Branch Owned 1974 -- 312,267
1092 Old Country Road
Plainview, NY 11803
Mortgage Service Center(3) Owned 1991 -- 4,574,470
158-14 Northern Blvd.
Flushing, NY 11358
Auburndale Customer Service Leased 1996 2006 5,427
Center
193-01 Northern Blvd.
Flushing, NY 11358
Ditmars Service Center Leased 1996 2005 11,872
31-09 Ditmars Blvd.
Astoria, NY 11105
</TABLE>
- ----------
24
<PAGE>
(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 $1.2
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 during 1998
fiscal year appears on page 29 of the 1998 Annual Report under the caption
"Market Price and Dividends Paid per Common Share" and is incorporated herein by
this reference.
As of March 5, 1999 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
1998 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 10 through 29 of the 1998
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 16 through 18 of the 1998 Annual Report under the
caption "Market Risk and 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 30 through 51 of the 1998 Annual Report and is
incorporated herein by this reference.
25
<PAGE>
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 21, 1999, 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 pages 10 through
19 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held April 21, 1999, 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 21, 1999, 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 4
through 7 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 21, 1999, 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 21, 1999 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, 1998 and are incorporated
by this reference:
- Consolidated Statements of Condition at December 31,1998 and 1997;
- Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1998;
- Consolidated Statements of Changes in Stockholders' Equity for each
of the years in the three-year period ended December 31, 1998;
- Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1998;
- Notes to Consolidated Financial Statements
- Management's Responsibility for Financial Reporting
- Independent Auditors' Report
26
<PAGE>
The remaining information appearing in the 1998 Annual Report to
Shareholders 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 1998
On November 20, 1998, the Company filed a Current Report on Form 8-K
regarding the date of the Company's 1999 Annual Meeting of Shareholders and the
related voting record date.
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
------
3.1 Certificate of Incorporation of Queens County Bancorp, Inc.(1)
3.2 Bylaws of Queens County Bancorp, Inc.
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 (1)
10.17 Queens County Bancorp, Inc. 1997 Stock Option Plan (5)
11.0 Statement Re: Computation of Per Share Earnings
13.0 1998 Annual Report to Shareholders
21.0 Subsidiaries information incorporated herein by reference to
Part I, "Subsidiaries"
23.0 Consent of KPMG LLP, dated March 17, 1999
99.0 Proxy Statement for the Annual Meeting of Shareholders to be
held on April 21, 1999
(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 held on April 19, 1995.
(5) Incorporated by reference to Exhibit filed with the 1997 Proxy Statement
for the Annual Meeting of Shareholders held on April 16, 1997.
27
<PAGE>
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 03/16/99
----------------------------- --------
Joseph R. Ficalora
Chairman, President, and
Chief Executive Officer
(Principal 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 03/16/99 /s/ Robert Wann 03/16/99
- ---------------------------- ---------- ----------------------------- ----------
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 03/16/99 /s/ Donald M. Blake 03/16/99
- ---------------------------- ---------- ----------------------------- ---------
Harold E. Johnson Donald M. Blake
Director Director
/s/ Luke D. Lynch 03/16/99 /s/ Max L. Kupferberg 03/16/99
- ---------------------------- ---------- ----------------------------- ---------
Luke D. Lynch Max L. Kupferberg
Director Director
/s/ Henry E. Froebel 03/16/99 /s/ Howard C. Miller 03/16/99
- ---------------------------- ---------- ----------------------------- ---------
Henry E. Froebel Howard C. Miller
Director Director
/s/ Joseph G. Chisholm 03/16/99 /s/ Dominick Ciampa 03/16/99
- ---------------------------- ---------- ----------------------------- ---------
Joseph G. Chisholm Dominick Ciampa
Director Director
/s/ Richard H O'Neill 03/16/99
- ---------------------------- ----------
Richard H. O'Neill
Director
</TABLE>
29
QUEENS COUNTY BANCORP, INC.
BYLAWS
ADOPTED: JULY 20, 1993
AMENDED: OCTOBER 19, 1993
AMENDED: OCTOBER 17, 1995
AMENDED: DECEMBER 15, 1998
<PAGE>
QUEENS COUNTY BANCORP, INC.
BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of Directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution adopted by
a majority of the Whole Board. The term "Whole Board" shall mean the total
number of Directors which the Corporation would have if there were no vacancies
on the Board of Directors (hereinafter the "Whole Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law.
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority of all of
the shares of the stock entitled to vote at the meeting, present in person or by
proxy (after giving effect to the provisions of Article FOURTH of the
Corporation's Certificate of Incorporation), shall constitute a quorum for all
purposes, unless or except to the extent that the presence of a larger number
may be required by law. Where a separate vote by a class or classes is required,
a majority of the
1
<PAGE>
shares of such class or classes present in person or represented by proxy (after
giving effect to the provisions of Article FOURTH of the Corporation's
Certificate of Incorporation) shall constitute a quorum entitled to take action
with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the Chief Executive Officer
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
Section 5. Organization.
The Chairman of the Board of the Corporation or, in his or her absence,
the President of the Corporation, or in his absence such person as the Board of
Directors may have designated or, in the absence of such a person, such person
as may be chosen by the holders of a majority of the shares entitled to vote who
are present, in person or by proxy, shall call to order any meeting of the
stockholders and preside over of the meeting. In the absence of the Secretary of
the Corporation, the secretary of the meeting shall be such person as the
Chairman of the Board appoints.
Section 6. Conduct of Business.
(a) The Chairman of any meeting of stockholders shall determine the
order of business and the procedures at the meeting, including such regulation
of the manner of voting and the conduct of discussion as seem to him or her in
order. The date and time of the opening and closing of the polls for each matter
upon which the stockholders will vote at the meeting shall be announced at the
meeting.
(b) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed to
and received at the principal executive office of the Corporation not less than
ninety (90) days prior to the date of the annual meeting; provided, however,
that in the event that less than one hundred (100) days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be received not later than the close of
business on the 10th day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the Secretary shall set forth as to each matter such
stockholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the Corporation's capital
stock that are beneficially owned by such stockholder and (iv) any material
interest of such stockholder in such business.
2
<PAGE>
Notwithstanding anything in these Bylaws to the contrary, no business shall be
brought before or conducted at an annual meeting except in accordance with the
provisions of this Section 6(b). The Chairman of the Board or other person
presiding over the annual meeting shall, if the facts so warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 6(b) and, if he should so
determine, he shall so declare to the meeting and any such business so
determined to be not properly brought before the meeting shall not be
transacted.
At any special meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting by or at the
direction of a majority of the Whole Board of Directors.
(c) Only persons who are nominated in accordance with the procedures
set forth in these Bylaws shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders at which directors are to be elected
only (i) by or at the direction of the Board of Directors or (ii) by any
stockholder of the Corporation entitled to vote for the election of Directors at
the meeting who complies with the notice procedures set forth in this Section
6(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal executive office of the Corporation not
less than ninety (90) days prior to the date of the meeting; provided, however,
that in the event that less than one hundred (100) days' notice or prior
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth (i) as to each person whom such stockholder proposes to
nominate for election or re-election as a Director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a Director if elected); and (ii) as to the stockholder giving
the notice (x) the name and address, as they appear on the Corporation's books,
of such stockholder and (y) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such stockholder. At the request of
the Board of Directors any person nominated by the Board of Directors for
election as a Director shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
Director of the Corporation unless nominated in accordance with the provisions
of this Section 6(c). The Chairman of the Board of the Corporation or other
person presiding at the meeting shall, if the facts so warrant, determine that a
nomination was not made in accordance with such provisions and, if he or she
shall so determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 7. Proxies and Voting.
3
<PAGE>
At any meeting of the stockholders, every stockholder entitled to vote may
vote in person or by proxy authorized by an instrument in writing filed in
accordance with the procedure established for the meeting. Any facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
All voting, including the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be made by a voice vote; provided, however, that upon demand therefore by a
stockholder entitled to vote or his or her proxy, a stock vote shall be taken.
Every stock vote shall be taken by ballot, each of which shall state the name of
the stockholder or proxy voting and such other information as may be required
under the procedures established for the meeting. The Board of Directors shall,
in advance of any meeting of stockholders, appoint one or more inspectors to act
at the meeting and make a written report thereof. The Board of Directors may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at a meeting of
stockholders, the Chairman of the Board, or in his absence such person presiding
at the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector with strict impartiality
and according to the best of his ability.
All elections for Directors shall be determined by a plurality of the
votes cast, and except as otherwise required by law, the Certificate of
Incorporation or these Bylaws, all other matters shall be determined by a
majority of the votes cast affirmatively or negatively.
Section 8. Stock List.
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and showing
the address of each such stockholder and the number of shares registered in his
or her name, shall be open to the examination of any such stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
4
<PAGE>
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class of series of preferred
stock of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be under the direction
of its Board of Directors. The number of Directors who shall constitute the
Whole Board shall be such number as the majority of the Whole Board shall from
time to time have designated except in the absence of such designation shall be
10. The Board of Directors shall annually elect a Chairman of the Board from
among its members who shall, when present, preside at meetings of the Board of
Directors.
The Directors, other than those who may be elected by the holders of any
class or series of Preferred Stock, shall be divided, with respect to the time
for which they severally hold office, into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter, with each
Director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders, Directors elected to
succeed those Directors whose terms then expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election, with each Director to hold office until his or her successor
shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of Preferred
Stock, and unless the Board of Directors otherwise determines, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the Directors then in office, though less than a
quorum, and Directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires and until such Director's successor shall have
been duly elected and qualified. No decrease in the number of authorized
directors constituting the Board shall shorten the term of any incumbent
Director.
5
<PAGE>
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all Directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the Directors then in office (rounded up to the nearest whole number),
or by the Chairman of the Board and shall be held at such place, on such date,
and at such time as they, or he or she, shall fix. Notice of the place, date,
and time of each such special meeting shall be given each Director by whom it is
not waived by mailing written notice not less than five (5) days before the
meeting or by telegraphing or telexing or by facsimile transmission of the same
not less than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the Whole Board
shall constitute a quorum for all purposes. If a quorum shall fail to attend any
meeting, a majority of those present may adjourn the meeting to another place,
date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board or the Chairman of the Board may from time to
time determine, and all matters shall be determined by the vote of a majority of
the Directors present, except as otherwise provided herein or required by law.
Action may be taken by the Board of Directors without a meeting if all members
thereof consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
6
<PAGE>
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges
on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary
in connection therewith;
(4) To remove any Officer of the Corporation with or without cause, and
from time to time to devolve the powers and duties of any Officer
upon any other person for the time being;
(5) To confer upon any Officer of the Corporation the power to appoint,
remove and suspend subordinate Officers, employees and agents;
(6) To adopt from time to time such stock option, stock purchase, bonus
or other compensation plans for Directors, Officers, employees and
agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for Directors, Officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with these
Bylaws, for the management of the Corporation's business and
affairs.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as Directors,
including, without limitation, their services as members of committees of the
Board of Directors.
Section 10. Retirement of Directors
No person may be elected, appointed or nominated as a Director of the
Corporation after December 31 of the year in which such person attains the age
of 80. Vacancies on the Board of Directors created by operation of this
provision may be filled in accordance with these Bylaws. However, such person
may complete the term in which they attain the age of 80.
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Whole Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of a majority of the Whole Board and shall, for these committees and
any others provided for herein, elect a Director or Directors to serve as the
member or members, designating, if it desires, other Directors as alternate
members who may replace any absent or disqualified member at any meeting of the
committee. The Board of Directors, by a resolution adopted by a majority of the
Whole Board may terminate any
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committee previously established. Any committee so designated by resolution
adopted by a majority of the Whole Board may exercise the power and authority of
the Board of Directors to declare a dividend, to authorize the issuance of stock
or to adopt a certificate of ownership and merger pursuant to Section 253 of the
Delaware General Corporation Law if the resolution which designates the
committee or a supplemental resolution of the Board of Directors shall so
provide. In the absence or disqualification of any member of any committee and
any alternate member in his or her place, the member or members of the committee
present at the meeting and not disqualified from voting, whether or not he or
she or they constitute a quorum, may by unanimous vote appoint another member of
the Board of Directors to act at the meeting in the place of the absent or
disqualified member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law or the Board of Directors. Adequate
provision shall be made for notice to members of all meetings; a majority of the
members shall constitute a quorum unless the committee shall consist of one (1)
or two (2) members, in which event one (1) member shall constitute a quorum; and
all matters shall be determined by a majority vote of the members present.
Action may be taken by any committee without a meeting if all members thereof
consent thereto in writing, and the writing or writings are filed with the
minutes of the proceedings of such committee.
Section 3. Nominating Committee
The Board of Directors, by resolution adopted by a majority of the Whole
Board, shall appoint a Nominating Committee of the Board, consisting of not less
than three (3) members of the Board of Directors, one of which shall be the
Chairman of the Board. The Nominating Committee shall have authority (a) to
review any nominations for election to the Board of Directors made by a
stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of
these Bylaws in order to determine compliance with such Bylaw and (b) to
recommend to the Whole Board nominees for election to the Board of Directors to
replace those Directors whose terms expire at the annual meeting of stockholders
next ensuing.
ARTICLE IV - OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after the
annual meeting of stockholders shall choose a Chairman of the Board, who shall
be the Chief Executive Officer, and a President, one or more Vice Presidents,
and a Secretary and from time to time may choose such other officers as it may
deem proper. The Chairman of the Board shall be chosen from among the directors.
Any number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the next
annual election of Officers and until their respective successors are chosen but
any Officer may be removed from
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office at any time by the affirmative vote of a majority of the authorized
number of Directors then constituting the Board of Directors or the Chairman of
the Board.
(c) All Officers chosen by the Board of Directors or the Chairman of
the Board shall each have such powers and duties as generally pertain to their
respective Offices, subject to the specific provisions of this ARTICLE IV. Such
officers shall also have such powers and duties as from time to time may be
conferred by the Board of Directors or by any committee thereof.
Section 2. Chief Executive Officer and President
The Chairman of the Board shall be the Chief Executive Officer and,
subject to the provisions of these Bylaws and to the direction of the Board of
Directors, shall serve in a general executive capacity and, when present, shall
preside at all meetings of the stockholders of the Corporation. The Chairman of
the Board shall perform all duties and have all powers which are commonly
incident to the office of the Chairman of the Board which are delegated to him
or her by the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized.
As the Chief Executive Officer and President, he shall have general
responsibility for the management and control of the business and affairs of the
Corporation, shall perform all duties and have all powers which are commonly
incident to the office of President and Chief Executive Officer or which are
delegated to him or her by the Board of Directors and shall preside over all
meetings of the Board of Directors, if present. Subject to the direction of the
Board of Directors, he shall have general supervision of all of the other
Officers, employees and agents of the Corporation.
Section 3. Vice President.
The Vice Presidents shall perform the duties and exercise the powers
usually incident to their respective offices and/or such other duties and powers
as may be properly assigned to them by the Board of Directors. A Vice President
or Vice Presidents may be designated as Executive Vice President or Senior Vice
President.
Section 4. Secretary.
The Secretary or Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate books,
shall perform such other duties and exercise such other powers as are usually
incident to such office and/or such other duties and powers as are properly
assigned thereto by the Board of Directors. Subject to the direction of the
Board of Directors, the Secretary shall have the power to sign all stock
certificates.
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Section 5. Chief Financial Officer.
The Chief Financial Officer of the Corporation shall have the
responsibility for maintaining the financial records of the Corporation. He or
she shall make such disbursements of the funds of the Corporation as are
authorized and shall render from time to time an account of all such
transactions and of the financial condition of the Corporation. The Chief
Financial Officer shall also perform such other duties as the Board of Directors
may from time to time prescribe.
Section 6. Assistant Secretaries and Other Officers.
The Board of Directors or the Chairman of the Board may appoint one or
more Assistant Secretaries and such other Officers who shall have such powers
and shall perform such duties as are provided in these Bylaws or as may be
assigned to them by the Board of Directors.
Section 7. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the Chairman of the
Board or any Officer of the Corporation authorized by the Chief Executive
Officer shall have power to vote and otherwise act on behalf of the Corporation,
in person or by proxy, at any meeting of stockholders of or with respect to any
action of stockholders of any other corporation in which this Corporation may
hold securities and otherwise to exercise any and all rights and powers which
this Corporation may possess by reason of its ownership of securities in such
other corporation.
ARTICLE V - STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the Chairman of the Board, and by the Secretary or
an Assistant Secretary, or any Treasurer or Assistant Treasurer, certifying the
number of shares owned by him or her. Any or all of the signatures on the
certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these Bylaws,
an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
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<PAGE>
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) days nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the next day preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment or rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI - NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, Director, Officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram or mailgram or other
courier. Any such notice shall be addressed to such stockholder, Director,
Officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received, if hand
delivered, or dispatched, if delivered through the mails or by telegram or
mailgram or other courier, shall be the time of the
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giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, Director,
Officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, Director, Officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any Officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof designated by the Board.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and when
so directed by the Board of Directors or a designated committee thereof,
duplicates of the seal may be kept and used by the Chief Financial Officer or by
an Assistant Secretary or an assistant to the Chief Financial Officer.
Section 3. Reliance Upon Books, Reports and Records.
Each Director, each member of any committee designated by the Board of
Directors, and each Officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its Officers or
employees, or committees of the Board of Directors so designated, or by lawyers,
accountants, agents or any other person as to matters which such Director or
committee member or officer reasonably believes are within such other person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
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Section 5. Time Periods.
In applying any provision of these Bylaws which requires that an act be done or
not be done a specified number of days prior to an event or that an act be done
during a period of a specified number of days prior to an event, calendar days
shall be used, the day of the doing of the act shall be excluded, and the day of
the event shall be included.
ARTICLE VIII - AMENDMENTS
The Board of Directors by a resolution adopted by a majority of the Whole
Board, may amend, alter or repeal these Bylaws at any meeting of the Board,
provided notice of the proposed change was given not less than two days prior to
the meeting. The stockholder shall also have power to amend, alter or repeal
these Bylaws at any meeting of stockholders provided notice of the proposed
change was given in the notice of the meeting; provided, however, that,
notwithstanding any other provisions of the Bylaws or any provision of law which
might otherwise permit a lesser vote or no vote, but in addition to any
affirmative vote of the holders of any particular class or series of the voting
stock required by law, the Certificate of Incorporation, any Preferred Stock
Designation or these Bylaws, the affirmative votes of the holders of at least
80% of the voting power (taking into account the provisions of Article FOURTH of
the Certificate of Incorporation) of all the then-outstanding shares of the
Voting Stock voting together as a single class, shall be required to alter,
amend or repeal any provisions of these Bylaws.
The above Bylaws are effective as of July 16, 1993, the date of
incorporation of Queens County Bancorp, Inc.
13
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended
December 31, (1)(2)
------------
(in thousands, except
per share amount)
1998 1997
------- -------
Net income $26,944 $23,264
------- -------
Weighted average common shares outstanding 19,092 20,455
Earnings per common share $1.41 $1.14
======= =======
Total weighted average common shares 19,092 20,455
outstanding
Additional dilutive shares using ending
period market value versus average market
value for the period when utilizing the
Treasury stock method regarding stock options 1,089 1.369
------- -------
Total shares for fully diluted earnings per
share 20,181 21,824
------- -------
Fully diluted earnings per common share and
common share equivalents $1.34 $1.07
======= =======
(1) Reflects shares issued as a result of a 3-for-2 stock split on September
29, 1998.
(2) Reflects the adoption of Statement of Financial Accounting Standards No.
128, "Earnings Per Share."
28
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
-------------------------------------------------------------------------------------
(dollars in thousands, except share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY
Net interest income $68,522 $62,398 $57,520 $51,908 $54,615
(Reversal of) provision for loan losses -- -- (2,000) 150 1,200
Other operating income 2,554 2,305 2,445 3,033 1,971
Operating expense 25,953 27,084 23,271 22,871 23,047
Income tax expense 18,179 14,355 17,755 11,737 13,589
Net income(1) 26,944 23,264 20,939 20,183 18,750
Earnings per share(2) $1.41 $1.14 $0.90 $0.81 $0.70
Diluted earnings per share(2) 1.34 1.07 0.85 0.77 0.68
Dividends paid(2) 0.67 0.41 0.25 0.07 0.03
SELECTED RATIOS
Return on average assets 1.62% 1.61% 1.63% 1.72% 1.71%
Return on average stockholders' equity 17.32 12.95 10.10 9.70 9.40
Stockholders' equity to total assets 8.55 10.64 15.56 17.54 17.61
Interest rate spread 3.76 3.84 3.88 3.80 4.49
Net interest margin 4.24 4.45 4.63 4.58 5.13
Operating expense to average assets 1.57 1.88 1.82 1.95 2.10
Efficiency ratio 36.51 41.86 38.81 41.63 40.73
Average interest-earning assets to average
interest-bearing liabilities 1.12x 1.16x 1.21x 1.22x 1.24x
- ------------------------------------------------------------------------------------------------------------------------------------
ACTUAL CONTRIBUTIONS TO STOCKHOLDERS' EQUITY
AND RESULTANT CASH EARNINGS DATA(1)
Earnings $43,758 $35,399 $27,458 $23,640 $21,990
Earnings per share(2) $2.29 $1.73 $1.18 $0.95 $0.82
Diluted earnings per share(2) 2.17 1.62 1.12 0.91 0.80
Return on average assets 2.64% 2.46% 2.14% 2.02% 2.00%
Return on average stockholders' equity 28.13 19.71 13.24 11.36 11.03
Operating expense to average assets 1.16 1.37 1.39 1.66 1.80
Efficiency ratio 27.05 30.47 28.83 35.43 35.00
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET SUMMARY
Total assets $1,746,882 $1,603,269 $1,358,656 $1,240,882 $1,166,024
Loans, net 1,486,519 1,395,003 1,146,152 994,803 937,550
Allowance for loan losses 9,431 9,431 9,359 11,359 11,268
Securities held to maturity 152,280 94,936 86,495 78,016 79,017
Mortgage-backed securities held
to maturity 19,680 49,781 73,732 92,868 107,451
Deposits 1,102,285 1,069,161 1,023,930 932,140 840,220
FHLB borrowings 439,055 309,664 81,393 46,077 83,304
Stockholders' equity 149,406 170,515 211,429 217,630 205,279
Book value per share(2)(3) $8.13 $8.82 $9.43 $8.87 $8.04
Common shares outstanding(2) 21,250,897 22,369,187 25,751,598 28,324,350 29,665,977
ASSET QUALITY RATIOS
Non-performing loans to loans, net 0.42% 0.55% 0.84% 0.78% 0.76%
Non-performing assets to total assets 0.38 0.54 0.76 0.69 0.69
Allowance for loan losses to non-performing
loans 152.28 122.61 96.90 145.76 158.46
Allowance for loan losses to loans, net 0.63 0.68 0.82 1.14 1.20
Allowance for loan losses to accumulated
net charge-offs since 1987 661.36 661.36 625.00 759.00 783.04
REGULATORY CAPITAL RATIOS (BANK ONLY)(4)
Leverage capital ratio 9.40% 9.30% 9.65% 11.95% 10.66%
Tier 1 risk-based capital ratio 15.23 14.32 16.19 21.95 22.74
Total risk-based capital ratio 16.12 15.26 17.38 23.20 23.99
- ------------------------------------------------------------------------------------------------------------------------------------
</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 and October 1, 1997, and September 29, 1998.
(3) Excludes unallocated ESOP shares.
(4) Capital ratios for 1998, 1997, 1996, and 1994 reflect the transfer of
$17.8 million, $16.0 million, $38.0 million, and $34.0 million,
respectively, from the Bank to the Company.
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QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Queens County Bancorp, Inc. was incorporated on July 20, 1993 to serve as the
holding company for Queens County Savings Bank, the first savings bank chartered
by the State of New York in the New York City Borough of Queens. Headquartered
in Flushing, New York, the Bank has a long 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 located inside 24-hour stores. With the exception of a full-service
branch in adjoining Nassau County, all of the Bank's offices are located in
Queens.
The Bank's longevity--and success--stem from several factors, including
its ability to keep pace with a changing industry. For example, the Company has
taken advantage of the consolidation in its market by opening branches at sites
that were formerly run by large commercial banks. The Company was also among the
first in Queens to offer online banking, a convenience for customers seeking to
bank or pay bills from their home or office PC. Another example of its
progressive approach lies in the "Mobile CSR" program, a service introduced by
the Bank in 1998. Named for the customer service representatives who open
accounts for depositors at their college or place of business, the Mobile CSR
has succeeded in attracting new depositors to the Bank.
Together with its other sources of funds, including Federal Home Loan Bank
of New York ("FHLB") borrowings, the Company's deposits are primarily invested
in the origination of residential mortgage loans. In 1998, mortgage originations
totaled $452.2 million, bringing the balance of outstanding mortgage loans to
$1.5 billion at December 31st. Ranked 13th in the nation on the basis of its
1997 production, the Company originated $409.8 million in multi-family mortgage
loans in 1998. Multi-family mortgage loans thus rose to $1.2 billion,
representing 83.3% of outstanding mortgage loans at year-end. The quality of the
Company's multi-family mortgage loans has been consistently solid; the portfolio
was fully performing through all of 1998.
The Company's attention to quality is also reflected in the absence of any
net charge-offs since the third quarter of 1995. Furthermore, in 1998, the
Company recorded a $2.1 million reduction, year-over-year, in non-performing
assets, reflecting improvements in non-performing loans and foreclosed real
estate. Non-performing assets equaled 0.38% of total assets at December 31,
1998, while non-performing loans equaled 0.42% of loans, net, at that date.
The quality of the Company's assets, combined with its efficiency of
operation, produced record earnings in 1998. The Company's cash earnings rose
23.6% to $43.8 million, representing a return on average assets of 2.64% and a
return on average stockholders' equity of 28.13%. The source of capital growth,
cash earnings are determined by adding back to net income certain items that are
required to be charged against it, even though these items do not represent an
actual expenditure of funds. These non-cash items consist of the amortization
and appreciation of shares held in the Company's stock-related benefit plans and
the associated tax benefits, all of which are returned to stockholders' equity
at the end of the period. The increase in 1998 cash earnings thus stemmed from a
15.8% increase in net income to $26.9 million and a 38.6% increase in non-cash
items to $16.9 million.
Confident in its capacity to generate solid cash earnings, the Company
actively managed its capital in 1998. The quarterly cash dividend was raised by
the Board of Directors both in April and October (and, more recently, was
increased in January 1999). The Board also declared a three-for-two stock split
in August, pursuant to which shareholders received a 50% stock dividend on
September 29th. In addition, the Company allocated $52.5 million in capital over
the course of four quarters to repurchase 1,957,530 shares of Company stock. At
December 31, 1998, there were 598,977 shares still remaining under the
repurchase authorization declared by the Board of Directors on December 16th.
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
The Company's 1998 performance is discussed in detail on the following pages.
Such discussion occasionally includes forward-looking statements with regard to
the Company's prospective performance and strategies. These forward-looking
statements are based on management's current expectations regarding a range of
issues that could
10
<PAGE>
potentially impact the Company's performance in future periods. Where such
forward-looking statements appear in the text, they are accompanied by
cautionary language identifying the specific factors that could adversely effect
the Company's ability to fulfill its goals or implement its strategies.
In general, 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
At December 31, 1998, the Company recorded total assets of $1.7 billion,
representing a $143.6 million, or 9.0%, increase from the level recorded at
December 31, 1997. As in previous years, asset growth was largely attributable
to the Company's mortgage loan production. In 1998, the Company recorded
originations of $452.2 million, boosting the level of mortgage loans outstanding
to $1.5 billion at December 31st. Multi-family mortgage loans represented $409.8
million, or 90.6%, of 1998 originations and $1.2 billion, or 83.3%, of
outstanding mortgage loans at year-end 1998.
In addition to the increase in multi-family mortgage loans outstanding,
the Company recorded a $5.8 million increase in commercial real estate to $67.5
million and a $360,000 increase in construction loans to $1.9 million. The
portfolio of one-to-four family mortgage loans declined $45.5 million to $178.8
million at December 31, 1998.
The strength of the Company's 1998 mortgage loan production was paralleled
by continued improvement in its asset quality. At December 31, 1998, the level
of non-performing loans improved to $6.2 million from $7.7 million at December
31, 1997, or to 0.42% of loans, net, from 0.55%. Reflecting the reduction in
non-performing loans and a $611,000 decline in foreclosed real estate to
$419,000, the level of non-performing assets improved to $6.6 million, or 0.38%
of total assets, from $8.7 million, or 0.54% of total assets, at December 31,
1997. In addition, the Company extended its record to fourteen consecutive
quarters without any net charge-offs and sustained the fully-performing status
of its multi-family mortgage loan portfolio.
In view of this performance, and the coverage provided by the allowance
for loan losses, management suspended the loan loss provision for the fourteenth
consecutive quarter, maintaining the loan loss allowance at $9.4 million at
December 31, 1998. The $9.4 million was equivalent to 152.28% of non-performing
loans and 0.63% of loans, net, at that date.
While mortgage loans remained the Company's primary investment, the
Company increased its investments in securities during 1998. At December 31st,
securities held to maturity rose to $152.3 million from the year-earlier $94.9
million, while securities available for sale rose to $4.7 million from $2.6
million. These increases were accompanied by a rise in the portfolio of money
market investments to $19.0 million from $6.0 million, collectively offsetting a
$30.0 million decline in the balance of mortgage-backed securities to $19.7
million.
Deposits rose $33.1 million to $1.1 billion, reflecting increases in every
category. The greatest percentage increase was in non-interest-bearing deposits,
which grew $6.3 million, or 21.7%, to $35.5 million at December 31, 1998. CDs
represented $723.0 million of year-end 1998 deposits, up $19.0 million from the
year-earlier balance, while savings accounts grew $5.2 million to $273.4 million
and NOW and money market accounts grew $2.5 million to $70.4 million. Additional
funding was provided by FHLB advances, which totaled $439.1 million, as compared
to $309.7 million at the prior year-end.
Stockholders' equity totaled $149.4 million at December 31, 1998, as
compared to $170.5 million at December 31, 1997. With stockholders' equity
strengthened by a contribution of $43.8 million from 1998 cash earnings, the
Company was able to allocate $52.5 million toward the repurchase of 1,957,530
shares during the year.
At December 31, 1998, both the Company and the Bank continued to enjoy a
solid capital position, with regulatory capital ratios that continued to exceed
the minimum requirements established by the FDIC Improvement Act ("FDICIA"). In
addition, the Bank continued to exceed the requirements for classification as a
well-capitalized institution.
Loans
Queens County Bancorp has been a prolific mortgage lender since its conversion
from mutual to stock form in 1993. In the five years ended December 31, 1998,
the Company recorded a 92.1% increase in mortgage loans outstanding to $1.5
billion, reflecting originations of $1.6 billion during the five-year period.
Included in this amount were 1998 mortgage originations of $452.2 million,
nearly matching the $453.1 million recorded in the prior year.
The substantial growth in mortgage loans reflects the Company's steady
focus on the origination of multi-family mortgage loans. Multi-family mortgage
loans represented $409.8 million, or 90.6%, of 1998 originations and $1.2
billion, or 83.3%, of total mortgage loans at December 31st. In the prior year,
the Company recorded $418.9 million in multi-family mortgage loan originations,
11
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
ranking 13th among multi-family mortgage lenders, nationwide. According to
National Mortgage News, which draws its information from Home Mortgage
Disclosure Act filings, the Company also ranked 2nd in New York City and third
in New York State. In 1998, the average multi-family mortgage loan in the
portfolio equaled $1.2 million; the largest loan equaled $7.2 million.
At December 31, 1998, 47.0% of the Company's multi-family mortgage loans
were secured by buildings in Queens County, with another 23.7% and 18.4% secured
by properties in Manhattan and Brooklyn, respectively. The balance of the
portfolio was secured by properties in the remaining boroughs of New York City
and the suburban counties of Nassau and Westchester. By definition, multi-family
mortgage loans are secured by rental properties or cooperative apartment
buildings with five or more units. With 311,000 such buildings in Queens alone,
and 1.2 million more, collectively, in Brooklyn and Manhattan, the New York
market remains fertile ground for the origination of multi-family mortgage
loans.
The appeal of multi-family mortgage loans lies in their contribution to
earnings. First, the yields on multi-family loans tend to be higher than the
yields derived in one-to-four family lending. Second, the underwriting process
is more efficient than that employed with one-to-four family mortgage loans.
Third, the quality of the Company's multi-family mortgage loans has been
consistently solid. The portfolio was fully performing in the twelve months
ended December 31, 1998, as it was in the prior year.
Multi-family mortgage loans also tend to differ in the way that they are
structured, with a term that typically extends for ten years, and occasionally
less. Since 1996, the majority of new multi-family mortgage loans have featured
a fixed rate of interest in the first five years of the mortgage, before
converting to an adjustable rate in each of years six through ten. Prior to
1996, the majority of multi-family mortgage loans featured a step-up rate of
interest that increased 50 basis points in each of years two through five. At
December 31, 1998, the volume of multi-family mortgage loans that were due to
reprice upward over the next four quarters was $85.6 million, $39.6 million,
$24.7 million, and $46.0 million, respectively, for a total of $195.9 million in
1999. Reflecting these loans, as well as those originated on a first-five-year
fixed rate basis, 95.3% of the multi-family mortgage loan portfolio was
adjustable at December 31, 1998.
In recent years, the market for multi-family mortgage loans has witnessed
an increase in competition, fueled by newcomers offering below-market teaser
rates. The Company's success in producing loans despite such competition speaks
to the reputation it has earned over the past two decades. Unlike one-to-four
family loans, multi-family mortgage loans are typically arranged through
mortgage brokers, familiar with the Company's underwriting procedures and its
responsiveness to their clients' needs. As one of the few banks in the
marketplace to continue making multi-family mortgage loans during the last
recession, the Company has been rewarded with a steady flow of business to date.
While 1998 originations thus exceeded $409 million, loan growth was
nonetheless tempered by an increase in prepayments, particularly in the last
quarter of the year. Prepayment penalties range from five percentage points to
two, depending on the remaining term of the multi-family mortgage, and have
traditionally helped to discourage a significant level of prepayment activity.
In 1999 to date, such activity has subsided and it is currently management's
expectation that this will continue to be the case. However, further reductions
in interest rates by the Federal Open Market Committee ("FOMC") or by newcomers
vying for product, could potentially trigger another increase in prepayment
activity.
In addition to loans secured by multi-family buildings, the Company's
mortgage loan portfolio includes loans secured by one-to-four family homes. At
December 31, 1998, one-to-four family mortgage loans totaled $178.8 million,
representing 12.0% of mortgage loans outstanding, down from $224.3 million, or
16.1% of outstanding mortgage loans, at December 31, 1997. The reduction
reflects both an increase in prepayments and the Company's continuing emphasis
on the origination of multi-family loans. In 1998, the Company recorded
one-to-four family mortgage originations of $7.5 million, as compared to $22.9
million in the year-earlier twelve months.
The Company's one-to-four family mortgage loans are primarily secured by
properties in Queens and Nassau County and are originated on a limited
documentation basis, in keeping with customer demand. Applications for such
loans are approved on the basis of a credit report and a thorough property
appraisal; when furnished, the customer's financial assets are also verified. To
minimize risk, limited documentation loans require a higher down payment and are
made at higher rates of interest than full documentation loans.
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-
and three-year intervals. At December 31, 1998, 79.7% of the portfolio consisted
of adjustable rate credits; the balance consisted of seasoned loans originated
more than 20 years ago. While fixed rate loans are also made to address the
demands of the market, such loans are sold by the Company, with servicing rights
retained.
While residential mortgage lending remains the Company's primary business,
the balance of commercial real estate and construction loans rose $5.8 million
and $360,000, respectively, from the levels recorded at December 31, 1997. At
December 31, 1998, commercial
12
<PAGE>
real estate loans totaled $67.5 million, reflecting originations of $32.8
million; construction loans totaled $1.9 million, reflecting originations of
$2.1 million. While 63.2% of commercial real estate loans featured adjustable
rates of interest, 100% of construction loans featured adjustable rates.
Including loans secured by one-to-four family homes and multi-family buildings,
the Company's mortgage loan portfolio was 92.0% adjustable at December 31, 1998.
As a service to its depositors, the Bank also offers a menu of consumer
lending products, reflected on the balance sheet as "other loans." At December
31, 1998, the portfolio totaled $9.8 million, as compared to $10.8 million at
December 31, 1997. Loans on individual cooperative apartment units represented
$4.8 million, or 49.3%, of the year-end 1998 total, while home equity loans
represented $1.8 million, or 18.4%, of other loans.
With a pipeline of $101.1 million at the start of the new year, the
Company anticipates solid loan growth in the first quarter of 1999. However, the
ability of the Company to close these loans--and to originate a like volume in
future quarters--may be adversely impacted by a further increase in competition
or by a significant change in market interest rates.
Loan Portfolio Analysis
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------
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 $ 178,770 11.94% $ 224,287 15.96% $ 256,904 22.21%
Multi-family 1,239,094 82.77 1,107,374 78.78 822,364 71.10
Commercial real estate 67,494 4.51 61,740 4.39 63,452 5.49
Construction 1,898 0.13 1,538 0.10 1,598 0.14
- ------------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 1,487,256 99.35 1,394,939 99.23 1,144,318 98.94
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER LOANS:
Cooperative apartment 4,802 0.32 5,041 0.36 5,764 0.50
Home equity 1,793 0.12 2,386 0.17 2,819 0.24
Passbook savings 321 0.02 312 0.02 375 0.03
Student 8 -- 8 -- 24 --
Other 2,826 0.19 3,048 0.22 3,293 0.29
- ------------------------------------------------------------------------------------------------------------------------------------
Total other loans 9,750 0.65 10,795 0.77 12,275 1.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 1,497,006 100.00% 1,405,734 100.00% 1,156,593 100.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Less: Unearned discounts 22 19 24
Net deferred loan
origination fees 1,034 1,281 1,058
Allowance for
loan losses 9,431 9,431 9,359
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net $ 1,486,519 $ 1,395,003 $ 1,146,152
====================================================================================================================================
</TABLE>
Asset Quality
In 1998, the strength of the Company's mortgage loan production was paralleled
by the solid performance of its loan portfolio. In addition to reducing the
balance of non-performing loans and assets, the Company extended its record to
fourteen consecutive quarters without any net charge-offs and maintained the
fully-performing status of its multi-family mortgage loans.
At December 31, 1998, non-performing assets declined to $6.6 million, or
0.38% of total assets, from $7.5 million, or 0.44%, at the close of the trailing
quarter, and from $8.7 million, or 0.54%, at December 31, 1997. The improvement
stemmed from reductions in both non-performing loans and foreclosed real estate.
Specifically, the level of non-performing loans declined to $6.2 million, from
$6.5 million and $7.7 million, respectively, at September 30, 1998 and December
31, 1997, or to 0.42% of loans, net, from 0.44% and 0.55% of loans, net,
respectively. Included in the December 31, 1998 amount were 45 mortgage loans in
foreclosure totaling $5.5 million and eleven loans 90 days or more delinquent
totaling $663,000. At September 30, 1998 and December 31, 1997, mortgage loans
in foreclosure totaled, respectively, $5.5 million and $6.1 million, while loans
90 days or more delinquent totaled $1.0 million and $1.6 million, respectively.
All of the Company's non-performing loans are secured by residential properties,
primarily located in the Borough of Queens.
Reflecting the sale of a commercial real estate property in the fourth
quarter, foreclosed real estate improved to $419,000 at December 31, 1998 from
$1.0 million at both September 30, 1998 and December 31, 1997. Included in the
year-end 1998 amount were three residential properties that are currently being
marketed for sale.
13
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
From time to time, the Company rents properties that have been
non-performing, drawing income from them as a result. When this occurs, such
properties are reclassified as "investments in real estate" and included in
"other assets" on the balance sheet. At December 31, 1998, such investments
totaled $1.8 million and consisted of sixteen residential properties. All of
these properties have been profitably rented and were generating an average rate
of return of 7.6%.
At the heart of the portfolio's consistently solid performance are the
conservative underwriting standards the Company maintains. Loans are approved on
the basis of 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 critical factor: each multi-family building is inspected
from rooftop to cellar by a member of the Board of Directors' Real Estate and
Mortgage Committee, together with a member of the senior management team. In the
case of one-to-four family mortgage loans, which are typically made on a limited
documentation basis, approval depends on a thorough property appraisal and the
verification of financial assets, when furnished, in addition to a careful
review of the borrower's credit history.
To further minimize credit risk, the Company places a limit on the amount
of credit granted to any one borrower, and requires a minimum debt coverage
ratio of 120%. While the Bank will lend up to 75% of appraised value on
multi-family and one-to-four family residences, the average loan-to-value ratio
on such credits was 53% and 44%, respectively, at December 31, 1998. In
addition, the Company tends to originate loans within its local market,
primarily through brokers with whom it has an established relationship.
The care with which each loan is underwritten is mirrored in the attention
provided during the life of the loan. While problem loans have been minimal, the
Company has established procedures to ensure that problems, when they do arise,
are quickly 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.
While every effort is made to originate quality assets, management cannot
guarantee that problem loans will not occur. A borrower's ability to fulfill his
obligations may be impacted by a change in personal circumstances or by a
decline in real estate values or the economy. To further minimize credit risk,
the Company has provided coverage through a $9.4 million loan loss allowance,
which represented 152.28% of non-performing loans and 0.63% of loans, net, at
December 31, 1998. In addition, the $9.4 million represented 661.36% of
accumulated net charge-offs for the twelve years ended on that date. In the
absence of any net charge-offs for fourteen consecutive quarters, as noted, the
twelve-year average is a modest $116,000 per year.
For more information regarding the coverage provided by the loan loss
allowance, see the asset quality analysis that follows and the discussion of the
loan loss provision on page 25 of this report.
Asset Quality Analysis
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
-------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $ 9,431 $ 9,359 $ 11,359 $ 11,268 $ 10,320
Loan charge-offs -- -- -- (59) (438)
Loan recoveries -- 72 -- -- 186
- --------------------------------------------------------------------------------------------------------------
Net recoveries (charge-offs) -- 72 -- (59) (252)
(Recovery of) provision
for loan losses -- -- (2,000) 150 1,200
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $ 9,431 $ 9,431 $ 9,359 $ 11,359 $ 11,268
==============================================================================================================
NON-PERFORMING ASSETS:
Mortgage loans in foreclosure $ 5,530 $ 6,121 $ 6,861 $ 4,929 $ 5,437
Loans 90 days or more delinquent 663 1,571 2,798 2,864 1,674
- --------------------------------------------------------------------------------------------------------------
Total non-performing loans 6,193 7,692 9,659 7,793 7,111
- --------------------------------------------------------------------------------------------------------------
Foreclosed real estate 419 1,030 627 774 975
- --------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 6,612 $ 8,722 $ 10,286 $ 8,567 $ 8,086
==============================================================================================================
RATIOS:
Non-performing loans to
loans, net 0.42% 0.55% 0.84% 0.78% 0.76%
Non-performing assets to
total assets 0.38 0.54 0.76 0.69 0.69
Allowance for loan losses
to non-performing loans 152.28 122.61 96.90 145.76 158.46
Allowance for loan losses
to loans, net 0.63 0.68 0.82 1.14 1.20
Allowance for loan losses
to accumulated net charge-offs
since 1987 661.36 661.36 625.00 759.00 783.04
==============================================================================================================
</TABLE>
14
<PAGE>
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.
At December 31, 1998, the portfolio of securities held to maturity totaled
$152.3 million, up $57.3 million from $94.9 million at December 31, 1997. The
60.4% increase primarily reflects a $58.6 million rise in U.S. Government agency
obligations to $122.9 million, offsetting a $7.0 million decrease in U.S.
Treasuries to $7.0 million. The balance of the portfolio consisted of FHLB
stock. The market values of the portfolio were $152.1 million and $95.1 million
at December 31, 1998 and 1997, respectively, representing 99.9% and 100.1% of
the carrying values at the corresponding dates.
Securities available for sale totaled $4.7 million, up $2.0 million, or
77.9%, from the level recorded at December 31, 1997. Money market investments
totaled $19.0 million, up $13.0 million from $6.0 million at the year-earlier
date.
Mortgage-backed Securities Held to Maturity
At December 31, 1998, the balance of mortgage-backed securities totaled $19.7
million, down from $49.7 million at December 31, 1997. In addition to
prepayments, the $30.0 million reduction reflects the absence of any new
investments since the first quarter of 1994. At December 31, 1998 and 1997, the
market values of the portfolio were $20.3 million and $50.6 million,
respectively, representing 103.3% and 101.7% of carrying value at the
corresponding dates.
As a matter of policy, the Company has held all of its mortgage-backed
securities to maturity. At December 31, 1998, the average maturity of the
portfolio was under two years.
Sources of Funds
The Company's funding primarily stems from the deposits it gathers, together
with loan interest and principal payments and the interest on and maturity of
securities. Since 1996, the Company has added fuel to its mortgage loan
production by additionally drawing on its line of credit with the FHLB. At
December 31, 1998, said line of credit totaled $698.8 million; borrowings at
that date were $439.1 million, up from $309.7 million at December 31, 1997.
Deposits, meanwhile, rose $33.1 million to $1.1 billion, with increases
recorded in every category of depository account. Reflecting the drop in
interest rates over the course of the fourth quarter, the Company noted a subtle
shift in the mix of deposits as the percentage growth in non-interest-bearing
deposits exceeded the percentage growth in CDs. Core deposits, including savings
accounts, NOW and money market accounts, and non-interest-bearing deposits, rose
3.9% to $379.3 million, representing 34.4% of total deposits, while CDs rose
2.7% to $723.0 million, representing 65.6% of total deposits, at December 31,
1998. At the prior year-end, core deposits totaled $365.2 million, or 34.2% of
total deposits, while CDs totaled $703.9 million, or 65.8%.
The greatest percentage increase was in non-interest-bearing deposits,
which grew 21.7% to $35.5 million from $29.2 million at December 31, 1997.
Savings accounts grew $5.2 million, or 1.9%, to $273.4 million, while NOW and
money market accounts rose $2.5 million, or 3.7%, to $70.4 million.
The $19.0 million rise in CDs was substantially less than the year-earlier
increase of $52.2 million, further reflecting the preference for short-term
products during a time of comparatively low interest rates. Nonetheless, in the
twelve months ended December 31, 1998, 88.4% of maturing CDs were rolled over,
consistent with the Bank's historic retention rate. While no assurances can be
made, management would expect a like percentage of CDs to be rolled over going
forward, based on current pricing and experience. At December 31, 1998, the
volume of CDs due to mature in 1999 was $576.4 million.
Deposit growth depends on several factors, including market interest rates
and competition with other banks. To compete, the Bank places an emphasis on
service and convenience, while offering attractive rates on a variety of
depository accounts. Seven of the Bank's locations feature 24-hour banking, and
its in-store service centers are both open until 9 o'clock at night. Two of the
Bank's busiest offices offer early-bird hours and all are open on Saturdays for
added convenience.
In 1998, the Company initiated a "Mobile CSR" program as an additional
means of attracting new depositors to the Bank. In the first quarter of the
year, arrangements were made with Queens College for a branch manager and
customer service representative to visit the campus for the purpose of opening
new accounts. In addition, an ATM was installed at the College to facilitate
bank transactions for students and faculty. Based on the success of the Mobile
CSR's visits to Queens College, the program was expanded to encompass local
businesses with large numbers of employees.
To attract new deposits, the Company also expanded its product menu in the
fourth quarter with the introduction of an online banking service, "QCSB
Online." Accessed through the Company's web site, the service enables customers
to transfer funds between accounts, query their account balances, monitor their
account activity, and pay bills from their PCs.
15
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
To further enhance the franchise, management continues to consider
acquisitions of other financial institutions and, in the absence of such action,
of individual branch offices. The Bank has also made a practice of opening
branches at locations vacated by money center banks, which has contributed to
the increase in non-interest-bearing accounts mentioned previously. As the trend
toward consolidation of financial institutions continues, additional
opportunities for expansion will be created within the Company's marketplace.
In the meantime, the Company's FHLB line of credit has proved a profitable
source of asset growth. In 1998, the Company parlayed its FHLB advances into
mortgage loan originations of $452.2 million, boosting interest-earning assets
and net income as a result. Accordingly, management anticipates extending its
leveraging program, drawing on its FHLB borrowings as needed to fulfill loan
demand.
Market Risk and Interest Rate Sensitivity
Given the extent to which changes in market interest rates may influence net
interest income, interest rate volatility represents the Company's primary
market risk. In order to manage its interest rate risk, the Company strives to
match the interest rate sensitivity of its assets with the interest rate
sensitivity of its liabilities. In addition, the Company monitors its interest
rate exposure by analyzing the estimated changes in market value of both its
assets and funding sources under a variety of interest rate scenarios.
Interest rate sensitivity is determined by analyzing the difference
between the amount of interest-earning assets maturing or repricing within a
specific time frame and the amount of interest-bearing liabilities maturing or
repricing with that same period of time. This difference, or "gap," suggests 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 a rising
rate environment, a company with a negative gap would generally be expected,
absent the impact of other factors, to experience a greater increase in the cost
of its liabilities relative to the yields of its assets, resulting in a
reduction in the company's net interest income. A company with a positive gap
would generally be expected to experience the opposite result. Conversely,
during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would have the
opposite adverse effect.
In order to enhance the match between its interest-earning assets and its
interest-bearing liabilities, management has traditionally invested in
adjustable rate mortgage loan originations and supplemented these assets with
investments in short-term securities. On the liability side of the balance
sheet, management has closely monitored the pricing of its depository products
and has drawn on its FHLB line of credit when doing so served to enhance
profitability.
While the Company's one-to-four family mortgage loans typically feature
annual rate adjustments, its multi-family mortgage loans more typically feature
a fixed rate of interest during the first five years of the loan. At the same
time, the Company has increasingly utilized 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 $330.8 million, representing a negative
gap of 18.94% at December 31, 1998. At the prior year-end, the cumulative
one-year gap between the Company's interest rate sensitive assets and
liabilities was $191.3 million, representing a negative gap of 11.93%.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 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. This interest rate sensitivity analysis 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 and, based on the
Bank's historical experience during the eight years ended December 31, 1998,
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 Company's loans in preparing this table; thus the assumptions
used may not be indicative of future withdrawals of deposits or prepayments of
loans. Loan prepayments and scheduled principal amortization totaled $147.0
million in the twelve months ended December 31, 1998.
As this analysis does not necessarily indicate the impact of general
interest rate movements on the Company's net interest income, certain assets and
liabilities indicated as repricing within a stated period or at a stated rate of
interest may, in fact, reprice at a different time or interest rate.
16
<PAGE>
Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
At December 31, 1998
----------------------------------------------------------------------------------
Three Four to More than More than More than More
Months Twelve One Year to Three Years Five Years than
or Less Months Three Years to Five Years to 10 Years 10 Years
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage and other
loans $ 126,096 $ 244,010 $ 347,850 $ 398,775 $ 364,804 $ 15,471
Securities 4,656 152,280 -- -- -- --
Mortgage-backed
securities(2) 370 14,778 4,532 -- -- --
Money market investments 19,000 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 150,122 411,068 352,382 398,775 364,804 15,471
- -------------------------------------------------------------------------------------------------------------------
Less: Unearned discounts and
deferred fees 956 100 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net interest-earning assets 149,166 410,968 352,382 398,775 364,804 15,471
- -------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 7,654 22,319 27,259 24,206 21,495 170,424
NOW and Super NOW accounts 1,462 4,142 4,602 3,578 2,783 9,729
Money market accounts 1,658 6,383 5,424 4,609 3,916 22,137
Certificates of deposit 227,399 333,364 101,399 60,823 -- --
FHLB borrowings 246,555 40,000 152,500 -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 484,728 406,208 291,184 93,216 28,194 202,290
- -------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap
per period $ (335,562) $ 4,760 $ 61,198 $ 305,559 $ 336,610 $ (186,819)
===================================================================================================================
Cumulative interest
sensitivity gap $ (335,562) $ (330,802) $ (269,604) $ 35,955 $ 372,565 $ 185,746
===================================================================================================================
Cumulative interest
sensitivity gap as a
percentage of total
assets (19.21)% (18.94)% (15.43)% 2.06% 21.33% 10.63%
Cumulative net interest-
earning assets as a
percentage of net
interest-bearing
liabilities 30.77 62.87 77.19 102.82 128.58 112.34
===================================================================================================================
</TABLE>
At December 31, 1998
-------------------------
Fair
Total Value(1)
- ----------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage and other
loans $1,497,006 $1,549,540
Securities 156,936 156,711
Mortgage-backed
securities(2) 19,680 20,332
Money market investments 19,000 19,000
- ----------------------------------------------------------
Total interest-earning assets 1,692,622 1,745,583
- ----------------------------------------------------------
Less: Unearned discounts and
deferred fees 1,056 1,056
- ----------------------------------------------------------
Net interest-earning assets 1,691,566 1,744,527
- ----------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 273,357 273,357
NOW and Super NOW accounts 26,296 26,296
Money market accounts 44,127 44,127
Certificates of deposit 722,985 727,454
FHLB borrowings 439,055 439,055
- ----------------------------------------------------------
Total interest-bearing
liabilities 1,505,820 1,510,289
- ----------------------------------------------------------
Interest sensitivity gap
per period $ 185,746 $ 234,238
==========================================================
Cumulative interest
sensitivity gap
==========================================================
Cumulative interest
sensitivity gap as a
percentage of total
assets
Cumulative net interest-
earning assets as a
percentage of net
interest-bearing
liabilities
==========================================================
(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. Depending on the type of loan, fair value of loans is based
on carrying values or is estimated based on discounted cash flow analyses.
Fair value of deposit liabilities is either based on carrying amounts or
is estimated based on a discounted cash flow calculation. Fair value for
FHLB advances is estimated using a discounted cash flow analysis that
applies interest rates currently being offered on advances to a schedule
of aggregated expected monthly maturities of FHLB advances.
(2) Based on historical repayment experience.
Management also monitors the Company's interest rate sensitivity through
an analysis of the change in net portfolio value ("NPV"), which is defined as
the net present value of the expected future cash flows of an entity's assets
and liabilities. Hypothetically, NPV represents the market value of an
institution's net worth.
Increases in the market value of a company's assets will increase the NPV,
whereas declines in the market value of its assets will reduce the NPV.
Conversely, increases in the market value of a company's liabilities will reduce
the NPV, whereas declines in the market value of liabilities will increase the
NPV. Changes in the market value of assets and liabilities due to changes in
interest rates reflect the interest rate sensitivity of those assets and
liabilities, since their values are derived from the rate characteristics (e.g.,
fixed or adjustable, cap or floor) of
17
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
the asset or liability relative to the interest rate environment. For example,
in a rising interest rate environment, the market value of a fixed rate asset
will certainly decline, whereas the market value of an adjustable rate asset,
depending on its repricing characteristics, may not necessarily decline.
The NPV ratio, under any interest rate scenario, is defined as the NPV in
said scenario divided by the market value of assets in the same scenario. This
ratio, referred to in the following NPV analysis, initially measures percentage
changes from the value of the projected NPV in a given rate scenario, and then
measures interest rate sensitivity by the change in the NPV ratio over a range
of interest rate scenarios. For the purpose of the following NPV analysis,
deposit decay rates similar to those used in the Interest Rate Sensitivity
Analysis were used. The NPV analysis is based on simulations that utilize
institution-specific assumptions with regard to future cash flows, including
customer options such as period and lifetime caps, and deposit withdrawal
estimates. The NPV analysis uses discount rates derived from various sources,
primarily including, but not limited to, Treasury yield curves.
Specifically, for mortgage loans receivable, the discount rates used were
based on market rates for new loans of similar type and purpose, adjusted, when
necessary, for factors such as servicing cost, credit risk, and term. The
discount rates used for CDs and borrowings were based on rates that approximate
the rates offered by the Company for deposits and borrowings of similar
remaining maturities. The analysis calculates the NPV at a flat rate scenario by
computing the present value of cash flows of interest-earning assets less the
present value of interest-bearing liabilities. Certain assets, including fixed
assets and real estate held for investment, are assumed to remain at book value
(net of valuation allowance) regardless of the interest rate scenario. Other
non-interest-earning assets and non-interest-bearing liabilities such as
deferred fees, unamortized premiums, and accrued expenses and other liabilities
are excluded from the NPV calculation. The following analysis sets forth the
Bank's NPV at December 31, 1998, as calculated by the Bank, for instantaneous
and sustained changes in interest rates relative to the NPV in an unchanging
interest rate environment.
Net Portfolio Value Analysis
- --------------------------------------------------------------------------------
Market Value
of Portfolio
Change in Net Projected Projected
Interest Rates Interest Net % Change % Change
(in basis points) Income Change to Base to Base
- --------------------------------------------------------------------------------
+200 $55,250 $(14,170) (20.41)% (21.19)%
+100 66,517 (2,903) (4.18) (10.46)
-- 69,420 -- -- --
-100 82,481 13,061 18.81 15.05
-200 89,732 20,312 29.26 29.41
================================================================================
As with the Interest Rate Sensitivity Analysis, certain shortcomings are
inherent in the methodology used in the above interest rate risk measurements.
In order to model changes in NPV, certain assumptions must be made which may or
may not reflect the manner in which actual yields and costs respond to changes
in market interest rates. In this regard, the NPV model assumes that the
composition of the Company's interest rate sensitive assets and liabilities at
the beginning of a period remains constant over the period being measured. In
addition, the model assumes that a particular change in interest rates is
immediate and is reflected uniformly across the yield curve, regardless of the
duration to maturity or repricing of specific assets and liabilities. In
addition, assumptions within the model are subjective in nature, involve
uncertainties, and therefore cannot be determined with precision. Thus, although
the NPV measurements may, in theory, provide an indication of the Company's
interest rate risk exposure at a particular point in time, such measurements are
not intended to, and do not, provide a precise forecast of the effect of changes
in market interest rates on the Company's net portfolio value, and will differ
from actual results.
Liquidity and Capital Position
Liquidity
As indicated in the earlier discussion, deposits and borrowings are the
Company's primary funding sources. Additional funding stems from interest and
principal payments on loans, securities, and mortgage-backed securities, and, to
a lesser extent, from the sale of loans and foreclosed real estate. While
borrowings and scheduled amortization of loans and securities are more
predictable funding sources, deposit flows and mortgage prepayments are subject
to such external factors as economic conditions, competition, and market
interest rates.
18
<PAGE>
The Company primarily invests in mortgage loan originations and
supplements such investments with the purchase of short-term securities. In
1998, the Company invested $452.2 million in mortgage loan originations and
another $195.8 million in securities held to maturity. In addition, the Company
invested $2.1 million in equity securities which were classified as available
for sale. These activities were funded by internal cash flows generated by the
Bank's operating and financial activities. In 1998, the net cash provided by
operating activities totaled $41.9 million; the net cash provided by financing
activities totaled $103.4 million.
The Company monitors its liquidity position on a daily basis to ensure
that sufficient funds are available to meet its financial obligations, including
outstanding loan commitments and withdrawals from depository accounts. Together
with cash and due from banks, money market investments are the Company's most
liquid assets, with a collective total of $46.6 million at December 31, 1998 and
$22.7 million at December 31, 1997. In addition, the Company had securities
available for sale of $4.7 million and $2.6 million at the corresponding dates.
Additional liquidity is available through the Bank's FHLB line of credit and a
$10.0 million line of credit with a money center bank.
Entering 1999, the Bank had loans of $101.1 million in the pipeline, which
management anticipates having sufficient funds to fulfill. In addition, CDs due
to mature in one year or less from December 31, 1998 totaled $576.4 million;
based upon its traditional retention rate, as well as current pricing,
management believes that a significant portion of such deposits will remain with
the Bank.
Capital Position
The Company's success is rooted in its capacity for capital generation. In 1998,
this capacity was demonstrated by the generation of $43.8 million in cash
earnings, up $8.4 million, or 23.6%, from $35.4 million in the year-earlier
twelve months. Included in the 1998 amount were net income of $26.9 million and
$16.9 million in non-cash expenses that were added back to capital at December
31st. In 1997, net income totaled $23.3 million, while non-cash expenses totaled
$12.1 million.
Confident in the strength provided by its cash earnings, the Company
maintained an aggressive approach towards capital management throughout 1998. In
addition to paying $12.6 million in dividends over the course of four quarters,
the Company repurchased 1,957,530 shares of stock at an average price of $26.84
per share. Including the 1998 allocation of $52.5 million, the Company has
allocated a total of $165.8 million for share repurchases since October 1994. A
total of 11.3 million shares have thus been repurchased, at an average per-share
price of $14.66. At December 31, 1998, some 598,977 shares were still available
for repurchase; the timing of such repurchases will depend on market conditions,
as well as the implementation of other corporate strategies.
Stockholders' equity totaled $149.4 million and $170.5 million at December
31, 1998 and 1997, representing 8.55% and 10.64% of total assets, respectively,
at the corresponding dates. The Company's book value was $8.13 per share and
$8.82 per share, at year-end 1998 and 1997, based on 18,389,114 shares and
19,337,084 shares, respectively. To calculate book value, the Company subtracted
the number of unallocated ESOP shares at December 31, 1998 and 1997,
respectively, from the number of shares outstanding at the corresponding dates.
Despite the reduction in stockholders' equity resulting from the share
repurchase allocation, its level was more than sufficient to exceed the minimum
Federal requirements for a bank holding company. Similarly, the Bank's capital
strength was such that it continued to exceed not only the minimum levels
required but to qualify the Bank for classification as a "well capitalized"
institution under FDICIA. As defined by FDICIA, a well-capitalized institution
has a ratio of leverage capital to adjusted average 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, 1998, the Bank's leverage capital totaled $161.4 million,
or 9.40% of adjusted average assets, while its Tier 1 and total risk-based
capital amounted to $161.4 million and $170.9 million, representing 15.23% and
16.12% of risk-weighted assets, respectively. At the prior year-end, the
Company's leverage capital totaled $143.9 million, or 9.30% of adjusted average
assets; 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. The 1998 amounts reflect the transfer of $11.3 million and $6.5
million in capital from the Bank to the Company in the second and third quarters
of the year, respectively.
Results of Operations
Earnings Summary
1998 and 1997 Comparison:
The Company recorded 1998 earnings of $26.9 million, representing a 15.8%
increase from $23.3 million in 1997, and a 25.2% increase in diluted earnings
per share to $1.34 from $1.07. The 1997 amounts include the recapture of $1.3
million in the first quarter that had been recorded as a tax charge in the
fourth quarter of 1996. At $26.9 million, the Company's 1998 earnings provided a
return on average stockholders' equity ("ROE") of 17.32% and a return on average
assets ("ROA") of
19
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
1.62%, up from 12.95% and 1.61%, respectively, in the year-earlier twelve
months.
In addition, the Company recorded 1998 cash earnings of $43.8 million,
representing a 23.6% increase from 1997 cash earnings of $35.4 million and a
34.0% increase in diluted cash earnings per share to $2.17 from $1.62. The
Company's 1998 cash earnings thus contributed 62.4% more to equity growth than
its 1998 GAAP earnings, and generated a cash ROE and cash ROA of 28.13% and
2.64%, respectively.
Cash Earnings Analysis
For the Years Ended December 31,
--------------------------------
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income $26,944 $23,264 $20,939
Additional contributions to stockholders'
equity:
Amortization and appreciation
of stock-related benefit plans 6,724 7,368 5,408
Associated tax benefits 8,071 3,416 1,111
Amortization of goodwill -- -- --
Other 2,019 1,351 --
- --------------------------------------------------------------------------------
Cash earnings $43,758 $35,399 $27,458
================================================================================
Cash earnings per share $2.29 $1.73 $1.18
Diluted cash earnings per share 2.17 1.62 1.12
================================================================================
The Company's earnings growth was fueled by higher net interest income and
other operating income, as well as a reduction in operating expense. As the
provision for loan losses was suspended in all four quarters, the growth in
earnings was tempered only by an increase in income tax expense.
Net interest income rose $6.1 million, or 9.8%, to $68.5 million, the net
result of a $16.5 million increase in interest income to $134.3 million and a
$10.4 million increase in interest expense to $65.8 million. As in previous
years, the growth in interest income was driven by volume mortgage loan
production. In 1998, the Company recorded originations of $452.2 million,
including $409.8 million in multi-family mortgage loans. Reflecting a $187.4
million increase in average loans to $1.4 billion, the average balance of
interest-earning assets rose $213.2 million, or 15.2%, to $1.6 billion. The
higher balance served to offset an eight-basis point drop in the average yield
to 8.32%.
The concurrent growth in interest expense was fueled by the funding needed
to support the Company's profitable interest-earning asset growth. While the
average cost of funds was maintained at 4.56%, the average balance of
interest-bearing liabilities rose $231.0 million to $1.4 billion, driven by a
$208.7 million increase in average FHLB borrowings to $397.8 million.
In addition, the Company recorded an interest rate spread of 3.76% and a
net interest margin of 4.24%, both well above the industry averages, despite
reductions of eight and 21 basis points, respectively, from the measures
recorded in 1997.
In addition to the increase in net interest income, the Company's 1998
performance was fueled by a $249,000 rise in other operating income to $2.6
million, the net effect of an $824,000 increase in fee income to $2.1 million
and a $575,000 decline in other income to $443,000. In addition, the Company
recorded a $1.1 million reduction in operating expense to $26.0 million,
primarily reflecting a $343,000 decline in compensation and benefits expense to
$18.5 million. Included in the latter amount was $6.7 million in non-cash
expenses, down from $7.4 million in the prior year. While recorded as a charge
against earnings, the $6.7 million represented a contribution to stockholders'
equity at December 31, 1998.
Reflecting the drop in operating expense and the higher levels of net
interest income and other operating income, the Company's efficiency ratio
improved to 36.51% in 1998 from 41.86% in 1997; on the basis of cash earnings,
the efficiency ratio improved to 27.05% from 30.47%.
The combination of reduced operating expense and higher net interest
income and other operating income produced pre-tax income of $45.1 million, up
$7.5 million, or 20.0%, from the level recorded in 1997. The increase
contributed to a $3.8 million rise in income tax expense to $18.2 million from
$14.4 million in the prior year. In addition, the higher level of income tax
expense in 1998 reflects a $4.7 million rise in non-cash items to $8.1 million.
Furthermore, the Company's 1997 income tax expense was reduced by the recapture
of $1.3 million that had been recorded as a tax charge in the fourth quarter of
1996.
20
<PAGE>
The provision for loan losses was suspended throughout 1998, as it was in
1997, based on the level of coverage provided by the allowance for loan losses
and the consistently solid performance of the loan portfolio. In addition to the
absence of any net charge-offs for fourteen consecutive quarters, the Company
enjoyed a reduction in non-performing loans and assets, and extended the
flawless performance record of its multi-family mortgage loans.
1997 and 1996 Comparison:
The Company recorded earnings of $23.3 million in 1997, equivalent to earnings
per share of $1.14 and diluted earnings per share of $1.07, as adjusted for the
three-for-two stock split on September 29, 1998. By comparison, the Company
recorded 1996 earnings of $20.9 million, equivalent to split-adjusted earnings
per share of $0.90 and diluted earnings per share of $0.85. The Company's 1997
earnings represented an ROA and ROE of 1.61% and 12.95%, respectively, up from
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 further
underscored its earnings strength. In 1997, the Company's cash earnings rose
$7.9 million, or 28.9%, to $35.4 million, representing a 46.9% increase in
diluted cash earnings per share to $1.62 from $1.12 as adjusted for the split.
The Company's 1997 cash earnings thus contributed 52.2% more to capital than its
GAAP earnings; in 1996, its cash earnings contributed 31.1% more to capital than
GAAP earnings alone. On a cash earnings basis, the Company's 1997 ROA and ROE
improved to 2.46% and 19.71%, respectively, from 2.14% and 13.24%, respectively,
in 1996.
The growth in 1997 earnings was generated by the record level of mortgage
loan originations and by the solid performance of the 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 that were triggered by the use
of FHLB borrowings to fund loan production and by the flattening of the yield
curve in the fourth quarter of the year.
In addition, 1997 earnings were boosted by a $3.4 million reduction in
income tax expense to $14.4 million, partially 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 related to the amortization and
appreciation of shares in the Company's stock-related benefit plans. In
addition, 1997 operating expense reflected increases of $162,000, $450,000, and
$514,000, respectively, in occupancy and equipment, general and administrative
("G&A"), and other operating expense.
The Company's 1997 earnings further reflected the suspension of the
provision for loan losses, continuing a practice that was initiated in the third
quarter of 1995. In 1996, management also recovered $2.0 million from the loan
loss allowance, with a net benefit of $750,000 recognized.
Interest Income
The level of interest income in any given period depends upon the average
balance and mix of the Company's interest-earning assets, the yield on said
assets, and the current level of market interest rates. Such rates are
influenced by the FOMC of the Federal Reserve Board of Governors, which reduces,
maintains, or increases the Federal funds rate (the rate at which banks borrow
funds from the Federal Reserve Bank), as it deems necessary. In 1998, the
Federal funds rate was maintained at 5.50% until the 29th of September, at which
time it was lowered 25 basis points to 5.25%. An additional 25-basis point
reduction followed in October, and in November, the rate was lowered to 4.75%.
1998 and 1997 Comparison:
In 1998, interest income rose 14.1% to $134.3 million from $117.7 million in the
year-earlier twelve months. The growth in interest income was the net result of
a $213.2 million, or 15.2%, rise in the average balance of interest-earning
assets to $1.6 billion and an eight-basis point reduction in the average yield
to 8.32%.
21
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Despite increased competition for product resulting from the rate
environment, the Company originated $452.2 million in mortgage loans over the
twelve-month period. As a result, the average balance of loans rose $187.4
million, or 14.9%, to $1.4 billion and the interest income generated by loans
rose $14.9 million, or 13.7%, to $123.8 million. Notwithstanding the pressure to
lower rates induced by the competition, the average yield on the Company's loans
declined a modest nine basis points to 8.57%. In 1998, loans represented 89.5%
of average interest-earning assets and generated 92.2% of interest income, as
compared to 89.7% and 92.5%, respectively, in the prior twelve-month period.
The interest income provided by loans was complemented by the interest
income generated by the Company's growing portfolio of securities held to
maturity. Securities held to maturity generated interest income of $7.5 million
in 1998, up 57.6% from $4.7 million in the prior year. The $2.7 million increase
stemmed from a $42.4 million, or 55.6%, rise in the average balance to $118.6
million, and was supported by a seven-basis point rise in the average yield to
6.29%. In 1998, securities represented 7.3% of average interest-earning assets,
up from 5.4% in 1997, and generated 5.6% of interest income, up from 4.0%.
The rise in interest income also stemmed from the Company's money market
investments, which generated $691,000 in interest income in 1998, as compared to
$273,000 in 1997. The 1998 level reflects an $8.9 million increase in the
average balance to $14.1 million, which offset a 29-basis point reduction in the
average yield to 4.89%.
The higher level of interest income stemming from each of these assets
combined to offset a $1.5 million reduction in the interest income derived from
mortgage-backed securities to $2.3 million. The lower level in 1998 was the net
effect of a $25.5 million decrease in the average balance to $36.8 million and a
17-basis point rise in the average yield to 6.36%.
1997 and 1996 Comparison:
Interest income rose to $117.7 million in 1997 from $102.3 million in 1996. The
15.1% increase stemmed from a $158.3 million, or 12.7%, rise in average
interest-earning assets to $1.4 billion and a 17-basis point rise in the average
yield to 8.40%. These increases were driven, in turn, by record loan production,
which boosted the concentration of higher-yielding assets within the
interest-earning asset mix.
Average mortgage and other loans generated $108.9 million in interest
income, up 18.3% from $92.0 million in 1996. The increase reflected a $187.2
million rise in the average balance to $1.3 billion and a six-basis point rise
in the average yield to 8.66%. Loans thus represented 89.7% of average
interest-earning assets and generated 92.5% of total interest expense in 1997,
as compared to 86.1% and 89.9%, respectively, in 1996.
The interest income derived from securities rose 10.0% to $4.7 million in
1997 from $4.3 million in the year-earlier twelve months. The $429,000 increase
reflected 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. Securities thus
represented 5.4% of average interest-earning assets in 1997 and generated 4.0%
of interest income for the year. In 1996, securities represented 6.0% of average
interest-earning assets and generated 4.2% of interest income for the year.
Mortgage-backed securities generated $3.9 million in interest income in
1997, representing a 26.6% reduction from $5.3 million in 1996. The $1.4 million
decrease reflected a $22.2 million decline in the average balance to $62.3
million coupled with 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 and produced 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 $727,000 in the prior year. The reduction reflected an $8.6
million decline in the average balance to $5.3 million, accompanied by a
seven-basis point drop in the average yield to 5.18%.
Interest Expense
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
competition for deposits and by the level of market interest rates.
1998 and 1997 Comparison:
In 1998, interest expense rose to $65.8 million from $55.3 million in the
year-earlier twelve months. The higher level of interest expense was driven by
the need for additional funding to fuel the Company's profitable growth in
mortgage loans. Accordingly, the average balance of interest-bearing liabilities
rose $231.0 million to $1.4 billion, while the average cost remained unchanged
at 4.56%.
CDs continued to represent the largest component of interest-bearing
liabilities, while FHLB borrowings represented the largest percentage growth.
Specifically, CDs generated interest expense of $36.3 million, $74,000
22
<PAGE>
higher than the level produced in the prior year. The increase was the net
result of an $18.2 million rise in the average balance to $684.4 million and a
13-basis point drop in the average cost to 5.30%. Reflecting a shift in the
Company's mix of funding sources, CDs represented 47.4% and 55.0% of average
interest-bearing liabilities in 1998 and 1997, and generated 55.1% and 65.4%,
respectively, of interest expense.
FHLB borrowings produced interest expense of $21.3 million, up $10.5
million from the level recorded in the prior year. The increase was the net
result of a $208.7 million rise in the average balance to $397.8 million and a
33-basis point decline in the average cost to 5.35%. FHLB borrowings thus
represented 27.6% of average interest-bearing liabilities in 1998 (as compared
to 15.6% in 1997) and generated 32.4% of interest expense (as compared to
19.4%).
The higher level of interest expense further reflects a $2.5 million rise
in the average balance of NOW and money market accounts to $69.9 million,
supported by a four-basis point rise in the average cost to 2.78%. As a result,
NOW and money market accounts generated interest expense of $1.9 million, up
$100,000, or 5.4%, from the year-earlier amount. In addition, the interest
expense stemming from mortgage escrow accounts rose $5,000 to $46,000, the net
effect of a $5.1 million increase in the average balance to $22.5 million and a
three-basis point reduction in the average cost to 0.20%.
The interest expense produced by savings accounts fell $299,000 to $6.2
million, reflecting a $3.5 million decline in the average balance to $268.6
million and an eight-basis point drop in the average cost to 2.32%. Savings
accounts represented 18.6% of average interest-bearing liabilities in 1998,
versus 22.4% in 1997, and generated 9.5% of interest expense, versus 11.8%.
The Company manages interest expense by carefully monitoring the rates it
pays on its deposits and adjusting them, as needed, while still maintaining a
profitable interest rate spread. While the cost of FHLB borrowings exceeds that
of deposits, they continue to be an attractive funding option, given the record
of earnings growth resulting from their use. While management continues to seek
deposit growth through expansion of the franchise, the Company will continue to
access its FHLB line of credit in 1999. The extent to which FHLB borrowings are
relied upon for funding will depend on a combination of factors, including the
availability of deposits and the level of loan demand.
1997 and 1996 Comparison:
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 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.
FHLB borrowings generated $10.8 million, or 19.4% of interest expense, in
1997, as compared to $3.4 million, or 7.6%, in the year-earlier twelve months.
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 averaged $61.2 million, representing 5.9% of average
interest-bearing liabilities. The higher level of interest expense derived from
FHLB borrowings was 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, or 72.6% of total interest expense, in
1996. 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.
Mortgagors' escrow contributed $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 the prior
year. The decline reflected 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 generated
11.8% of interest expense in 1997, as compared to 27.4% and 15.1%, respectively,
in 1996.
NOW and money market accounts generated interest expense of $1.8 million
in 1997, down $195,000 from $2.0 million 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
produced 3.3% of interest expense in 1997, and 7.1% and 4.6%, respectively, in
1996.
23
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Net Interest Income Analysis
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning Assets:
Mortgage and other
loans, net $1,445,028 $ 123,784 8.57% $1,257,632 $108,868 8.66%
Securities 118,594 7,464 6.29 76,208 4,737 6.22
Mortgage-backed securities 36,782 2,338 6.36 62,259 3,856 6.19
Money market investments 14,130 691 4.89 5,269 273 5.18
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,614,534 134,277 8.32% 1,401,368 117,734 8.40%
Non-interest-earning assets 43,727 39,895
- -----------------------------------------------------------------------------------------------------------------
Total assets $1,658,261 $1,441,263
=================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
Liabilities:
NOW and money market
accounts $ 69,894 $ 1,944 2.78% $ 67,347 $ 1,844 2.74%
Savings accounts 268,558 6,224 2.32 272,043 6,523 2.40
Certificates of deposit 684,434 36,251 5.30 666,242 36,177 5.43
FHLB borrowings 397,815 21,290 5.35 189,136 10,751 5.68
Mortgagors' escrow 22,501 46 0.20 17,451 41 0.23
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,443,202 65,755 4.56% 1,212,219 55,336 4.56%
Non-interest-bearing
deposits 31,918 26,622
Other liabilities 27,559 22,798
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,502,679 1,261,639
Stockholders' equity 155,582 179,624
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,658,261 $1,441,263
=================================================================================================================
Net interest income/
interest rate spread $ 68,522 3.76% $ 62,398 3.84%
Net interest-earning
assets/net interest
margin $ 171,332 4.24 $189,149 4.45
Ratio of interest-earning
assets to interest-
bearing liabilities 1.12x 1.16x
=================================================================================================================
</TABLE>
For the Years Ended December 31,
-----------------------------------
1996
-----------------------------------
Average
Average Yield/
(dollars in thousands) Balance Interest Cost
- ----------------------------------------------------------------------
ASSETS
Interest-earning Assets:
Mortgage and other
loans, net $1,070,454 $ 92,017 8.60%
Securities 74,328 4,308 5.80
Mortgage-backed securities 84,438 5,252 6.22
Money market investments 13,851 727 5.25
- ----------------------------------------------------------------------
Total interest-earning assets 1,243,071 102,304 8.23%
Non-interest-earning assets 38,980
- ----------------------------------------------------------------------
Total assets $1,282,051
- ----------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
Liabilities:
NOW and money market
accounts $ 73,641 $ 2,039 2.77%
Savings accounts 282,064 6,754 2.39
Certificates of deposit 597,963 32,533 5.44
FHLB borrowings 61,191 3,419 5.59
Mortgagors' escrow 15,256 39 0.26
- ----------------------------------------------------------------------
Total interest-bearing
liabilities 1,030,115 44,784 4.35%
Non-interest-bearing
deposits 23,215
Other liabilities 21,361
- ----------------------------------------------------------------------
Total liabilities 1,074,691
Stockholders' equity 207,360
- ----------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,282,051
======================================================================
Net interest income/
interest rate spread $ 57,520 3.88%
Net interest-earning
assets/net interest
margin $ 212,956 4.63
Ratio of interest-earning
assets to interest-
bearing liabilities 1.21x
======================================================================
Rate/Volume Analysis
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
Compared to Year Ended Compared to Year Ended
December 31, 1997 December 31, 1996
Increase/(Decrease) Increase/(Decrease)
- -------------------------------------------------------------------------------------------------------------------------
Due to Due to
(in thousands) Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage and other loans, net $ 16,060 $ (1,144) $ 14,916 $ 16,210 $ 641 $ 16,851
Securities 2,666 61 2,727 117 312 429
Mortgage-backed securities (1,620) 102 (1,518) (1,373) (23) (1,396)
Money market investments 433 (15) 418 (445) (9) (454)
- -------------------------------------------------------------------------------------------------------------------------
Total 17,539 (996) 16,543 14,509 921 15,430
- -------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
NOW and money market accounts 71 29 100 (172) (23) (195)
Savings accounts (81) (218) (299) (241) 10 (231)
Certificates of deposit 964 (890) 74 3,708 (64) 3,644
FHLB borrowings 11,164 (625) 10,539 7,267 65 7,332
Mortgagors' escrow 10 (5) 5 5 (3) 2
- -------------------------------------------------------------------------------------------------------------------------
Total 12,129 (1,710) 10,419 10,567 (15) 10,552
- -------------------------------------------------------------------------------------------------------------------------
Net change in interest income $ 5,410 $ 714 $ 6,124 $ 3,942 $ 936 $ 4,878
=========================================================================================================================
</TABLE>
Year Ended
December 31, 1996
Compared to Year Ended
December 31, 1995
Increase/(Decrease)
- ---------------------------------------------------------------------------
Due to
(in thousands) Volume Rate Net
- ---------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage and other loans, net $ 10,395 $ 1,555 $ 11,950
Securities (71) (437) (508)
Mortgage-backed securities (1,018) (6) (1,024)
Money market investments 382 (38) 344
- ---------------------------------------------------------------------------
Total 9,688 1,074 10,762
- ---------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
NOW and money market accounts (125) (177) (302)
Savings accounts (319) (245) (564)
Certificates of deposit 5,367 (458) 4,909
FHLB borrowings 1,410 (227) 1,183
Mortgagors' escrow (6) (70) (76)
- ---------------------------------------------------------------------------
Total 6,327 (1,177) 5,150
- ---------------------------------------------------------------------------
Net change in interest income $ 3,361 $ 2,251 $ 5,612
===========================================================================
24
<PAGE>
Net Interest Income
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 influenced, in turn, by the
pricing and mix of interest-earning assets and funding sources, and by such
external factors as competition, economic conditions, and the monetary policy of
the FOMC.
1998 and 1997 Comparison:
Driven by the significant growth in average interest-earning assets, the
Company's net interest income rose 9.8% to $68.5 million from $62.4 million in
1997. The increase was the net effect of a $16.5 million, or 14.1%, rise in
interest income and a $10.4 million, or 18.8%, rise in interest expense.
Reflecting the flattened yield curve and the use of higher-cost funding
sources, the rise in net interest income was accompanied by a modest decline in
interest rate spread to 3.76%. Notwithstanding a drop of eight basis points from
the year-earlier measure, the Company's spread exceeded the thrift industry
average by 96 basis points. Similarly, the Company recorded a net interest
margin of 4.24%, down 21 basis points from the year-earlier measure, yet 89
basis points above the industry average for 1998. In addition, the Company's
1998 margin reflects the allocation of $52.5 million to repurchase shares of
Company stock over the twelve-month period.
Given the increase in earnings supported by such funding, management
anticipates that FHLB borrowings will continue to be an important source of
funds. At the same time, based on current interest rates and its knowledge of
the local market, management anticipates that loan growth will match or exceed
the level achieved in 1998. Accordingly, it is expected that the trend in net
interest income will continue to be upward, while the interest rate spread is
expected to stabilize. The direction of the Company's net interest margin will
more so depend on the Company's share repurchase program and the amount of
capital allocated toward this end.
This said, it should be repeated that the level of net interest income is
a function of several factors, and subject to changes in market interest rates.
Among the factors that could result in the Company recording lower net interest
income are a reduction in the volume of mortgage originations or a substantial
increase in mortgage prepayments. Either of these scenarios could result from a
substantial increase in competition, or from a significant change in market
interest rates.
1997 and 1996 Comparison:
Net interest income rose 8.5% to $62.4 million in 1997 from $57.5 million in
1996. The increase was the net effect of a $15.4 million, or 15.1%, rise in
interest income to $117.7 million and a $10.6 million, or 23.6%, rise in
interest expense to $55.3 million. The higher level of interest income was
fueled by record mortgage loan production, which boosted the average balance of
interest-earning assets by $158.3 million and the average yield by 17 basis
points. The higher level of interest expense reflected the increased use of FHLB
borrowings as a source of funding, boosting average interest-bearing liabilities
by $182.1 million and the average cost of funds by 21 basis points.
Despite the increased use of FHLB borrowings in 1997, the interest rate
spread dropped a modest four basis points to 3.84% from 3.88% in 1996.
Correspondingly, the Company's net interest margin fell to 4.45% from 4.63%; the
extent of this reduction primarily reflects the allocation of $68.1 million
toward the repurchase of Company shares over the twelve-month period.
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.
1998 and 1997 Comparison:
In 1998, the Company's loan portfolio delivered another strong performance,
improving on its solid performance in the prior year. Non-performing loans
declined to $6.2 million at December 31, 1998 from $7.7 million at December 31,
1997, or to 0.42% of loans, net, from 0.55%. In addition, the Company extended
its record to 14 consecutive quarters without any net charge-offs and maintained
the fully-performing status of its multi-family mortgage loan portfolio.
Reflecting these achievements, and the level of coverage provided by the
loan loss allowance, the provision for loan losses was suspended throughout
1998. The fourth quarter of 1998 was the fourteenth consecutive quarter without
any provisions being added, continuing a practice initiated in the third quarter
of 1995.
In the absence of any net charge-offs or provisions for loan losses, the
loan loss allowance was maintained at $9.4 million, equivalent to 152.28% of
non-performing loans and 0.63% of loans, net, at December 31, 1998.
25
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Of greater significance is the ratio of the allowance to the sum of the
Company's net charge-offs since 1987. In the twelve years ended December 31,
1998, the Company recorded $1.4 million in net charge-offs; at $9.4 million, the
loan loss allowance was 661.36 times this amount.
For more information about the Company's asset quality, see the discussion
and analysis beginning on page 13 of this report.
1997 and 1996 Comparison:
In 1997 and 1996, the Company suspended the provision for loan losses,
continuing a practice initiated in the third quarter of 1995. In 1996, the
Company also reversed $2.0 million from the loan loss allowance, resulting in
the recognition of a $750,000 net benefit for the year.
As in 1998, the decision to suspend the provision for loan losses in 1996
and 1997 was driven by the level of coverage provided by the loan loss allowance
and by the performance of the Company's mortgage loan portfolio. In addition to
the absence of any net charge-offs, the Company enjoyed a significant reduction
in the level of non-performing assets at December 31, 1997 as compared to the
level recorded at December 31, 1996. Specifically, non-performing assets
declined to $8.7 million, or 0.54% of total assets, from $10.3 million, or 0.76%
of total assets. Included in the respective amounts were non-performing loans of
$7.7 million and $9.7 million, representing 0.55% and 0.84% of loans, net.
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,
equivalent to 122.61% of non-performing loans and 0.68% of loans, net.
Other Operating Income
The income generated by the Company's interest-earning assets is complemented by
other operating income derived from service fees and fees charged on loans and
depository accounts.
1998 and 1997 Comparison:
While other operating income is a less significant source of Company earnings
than net interest income, management took steps to enhance its level in 1998. As
a result, the Company generated other operating income of $2.6 million, up
$249,000 from $2.3 million in 1997. The 10.8% increase was the net effect of an
$824,000 rise in fee income to $2.1 million from $1.3 million and a $575,000
decline in other income to $443,000 from $1.0 million.
The higher level of fee income in 1998 reflects a general increase in
financial service fees and charges, together with an increase in prepayment
penalties. In 1997, the higher level of other income reflected a gain on the
sale of $13.6 million in multi-family mortgage loans in the fourth quarter of
the year.
The Company continues to look at additional means of generating fee
income. In the fourth quarter of 1998, the Company introduced "QCSB Online," an
online banking service, to enable its depositors to bank directly via their PCs.
In addition to paying bills and accessing account balance information, customers
can utilize QCSB Online to transfer funds between their accounts. While
currently offered to customers without charge, QCSB Online is expected to
generate additional fee income in 1999. The Company is also reviewing proposals
to introduce the sale of alternative investment products such as annuities and
mutual funds.
1997 and 1996 Comparison:
Other operating income totaled $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 increase in other income to $1.0 million. In the
second half of 1997, the Company took steps to enhance its fee income, by adding
the VISA Check Card to its menu of financial products and by selling
multi-family mortgage loans to a third party, with servicing rights retained as
a means of generating additional income in future periods.
Operating Expense
Among the Company's distinguishing characteristics is its demonstrated ability
to contain operating expense. Consisting of compensation and benefits, occupancy
and equipment, G&A, and other expenses, the Company's operating expense
typically represents a below-average percentage of average assets and an
efficiency ratio that ranks among the thrift industry's best. Included in
compensation and benefits expense are expenses associated with the amortization
and appreciation of shares held in the Company's stock-related benefit plans
("plan-related expenses"), which are added to stockholders' equity at the end of
the period.
1998 and 1997 Comparison:
The Company recorded 1998 operating expense of $26.0 million, or 1.57% of
average assets, an improvement from $27.1 million, or 1.88% of average assets,
in the prior year. The $1.1 million decline reflects reductions in all four
expense categories, including a $343,000 decrease in compensation and benefits
expense to $18.5 million; a $322,000 decrease in G&A expense to $4.6 million; a
$195,000 decrease in occupancy and equipment to $2.4 million, and a $271,000
decrease in other operating expense to $428,000.
Plan-related expenses totaled $6.7 million, representing 36.3% of
compensation and benefits expense and 25.9% of total operating expense in 1998.
In the prior year, the Company recorded plan-related expenses of $7.4 million,
representing 39.0% and 27.2%, respectively, of compensation and benefits expense
and total operating expense. The decline in plan-related expenses partly
26
<PAGE>
reflects the extension of the amortization period for the ESOP to thirty years
from twenty as of January 1, 1998. In January 1999, the Recognition and
Retention Plan was largely completed; as a result, plan-related expenses will be
somewhat reduced for the year.
Also reflected in 1998 G&A expense are costs associated with the Company's
efforts to prepare for the millennium. The Company has been recording all such
expenses as incurred since steps began to prepare for the Year 2000; this
process is discussed in greater detail under "The Year 2000 Issue," elsewhere on
this page.
Reflecting the decline in operating expense and the higher levels of net
interest income and other operating income, the Company's efficiency ratio
improved to 36.51% in 1998 from 41.86% in 1997. Excluding the $6.7 million in
plan-related expenses, i.e., on a cash earnings basis, the efficiency ratio
improved to 27.05% from 30.47% in the year-earlier twelve months.
1997 and 1996 Comparison:
Operating expense totaled $27.1 million and $23.3 million in 1997 and 1996,
respectively, equivalent to 1.88% and 1.82% of average assets in the
corresponding years. The $3.8 million increase primarily stemmed from a $2.7
million rise in compensation and benefits expense to $18.9 million, largely
reflecting a $2.0 million increase in non-cash expenses stemming from the
amortization and appreciation of shares held in the Company's stock-related
benefit plans. At $7.4 million, such plan-related expenses accounted for 39.1%
of compensation and benefits expense in 1997, as compared to $5.4 million, or
33.4%, in 1996. Thus, while the Company's efficiency ratio was 41.86% and 38.81%
in 1997 and 1996 on the basis of GAAP earnings, its cash efficiency ratio
improved to 30.47% and 28.83%.
The balance of the increase in 1997 operating expense stemmed from a
$162,000 rise in occupancy and equipment expense to $2.6 million, a $450,000
increase in G&A expense to $4.9 million (primarily reflecting the expansion of
the Bank's advertising program) and a $514,000 increase in other operating
expense to $699,000. The higher level of occupancy and equipment expense
reflected 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 in mid-1997. Also included in occupancy
and equipment expense were costs associated with the Company's Year 2000
compliance, which were expensed as incurred.
Income Tax Expense
Income tax expense includes Federal, New York State, and New York City income
taxes. In addition, the Company's income tax expense reflects certain non-cash
items stemming from the amortization and appreciation of shares held in the
Company's stock-related benefit plans. While these non-cash items are recorded
as a charge against earnings, they are added back to stockholders' equity at the
end of each period.
1998 and 1997 Comparison:
The Company recorded income tax expense of $18.2 million in 1998, up from $14.4
million in the twelve months ended December 31, 1997. The increase reflects a
$7.5 million rise in pre-tax income to $45.1 million, and includes a $4.7
million rise in non-cash items to $8.1 million stemming from the Company's
stock-related benefit plans. Furthermore, the Company's 1997 income tax expense
was reduced by the recapture of $1.3 million that had been recorded as a tax
charge in the fourth quarter of 1996. Based on currently available information,
management expects that the effective tax rate will approximate 41% in 1999.
1997 and 1996 Comparison:
Income tax expense totaled $14.4 million in 1997, down $3.4 million from $17.8
million in 1996. In addition to a $1.1 million decline in pre-tax income to
$37.6 million, the reduction reflected 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 had
been 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.
Also reflected in 1997 and 1996 income tax expense were $3.4 million and
$1.1 million, respectively, in non-cash items stemming from the amortization and
appreciation of shares held in the Company's stock-related benefit plans. These
amounts were restored to stockholders' equity at the respective period-ends.
The Year 2000 Issue
The approach of the millennium has triggered an intense review, analysis, and,
where needed, modification of the internal and external computer programs and
systems utilized in the day-to-day operation of companies across all industries.
These actions have been necessitated by the fact that the majority of computer
programs and systems were originally programmed using two digits, rather than
four, to indicate the calendar year. Thus, in the absence of modification,
computers would fail to recognize the year 2000, taking the digits "00" to mean
the year 1900 instead.
Like most financial institutions, Queens County Savings Bank may be
significantly impacted by the Year 2000, due to the nature of the information it
generates and employs. Likely to be affected are the software, hardware, and
other equipment with which the Bank interfaces electronically or operationally,
including those that are
27
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
maintained on its behalf by third party vendors who provide such services as
data processing, information systems management, maintenance, and credit bureau
reports.
If computer systems are inadequately modified to identify the Year 2000,
numerous computer applications could fail or generate erroneous results. As a
result, many calculations, such as interest, payments, or due dates that require
date field information could be dramatically misstated. The Bank could
experience a temporary inability to process transactions, send invoices, or
engage in similarly normal business activities. In addition, under certain
circumstances, failure to adequately address the Year 2000 issue could adversely
affect the viability of the Bank's suppliers and creditors and the
creditworthiness of its borrowers. If not addressed, the Year 2000 issue could
adversely impact the Bank's ability to provide financial products and services
competitively.
In view of its significance, management formed a committee to study and
address the Year 2000 issue in the latter part of 1996. The Committee is chaired
by the Senior Vice President, Comptroller, and Chief Financial Officer. By the
first quarter of 1997, all internal systems had been modified or replaced with
Year 2000-compliant systems. The Committee's next step was to assess the Year
2000-readiness of its external systems; it began holding frequent meetings
toward this end in the fourth quarter of 1997. In the second quarter of 1998,
the Committee completed its assessment of the Year 2000 issue, which included a
thorough review of the action plans of each third party service provider and
supplier of the Bank. In the third quarter of the year, the Committee completed
the development of contingency plans for each external vendor and supplier, to
be implemented in the event that any of them should fail to meet their operating
requirements.
In the fourth quarter of 1998, the Bank initiated testing on its loan and
deposit systems in collaboration with its primary third party vendor, a
nationally recognized provider of data processing services. 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; testing of the integration of
such systems with the licensed software is expected to be completed by the
second quarter of 1999. In the event that such system fails to be compliant by
the third quarter of this year, the vendor has made arrangements with another
service provider that has successfully completed its Year 2000 testing to
provide the Bank with data processing services.
As a result of these efforts, and on the basis of currently available
information, management believes that all critical systems modifications and
conversions will be completed in a timely manner, thus reducing the Bank's
exposure to the risks associated with the approaching millennium. However, if
such modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 issue could have a material adverse impact upon the
Bank.
The costs involved in monitoring and managing preparations for the Year
2000 have consistently been charged against earnings as they have been incurred.
Going forward, such costs may include charges by third party software vendors
for product enhancements, costs involved in testing software products for Year
2000 compliance, and costs for implementing contingency plans for critical
software products that have not been enhanced. Potential indirect costs would
consist primarily of the time devoted by employees to monitor the progress of
software vendors, to test enhanced software products, and to implement any
necessary contingency plans. The Company estimates that total costs related to
the Year 2000 will not exceed $100,000. To date, more than one-third of the
estimated costs have already been expensed.
Impact of Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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 said instruments
at fair value. In addition, the statement 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 SFAS No. 133,
an entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. These methods must be consistent with the
entity's approach to managing risk.
SFAS No. 133 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.
28
<PAGE>
Accounting for Mortgage-backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise, an amendment of SFAS No. 65." SFAS No. 134 amends
the accounting treatment of mortgage-backed securities retained. After the
securitization of a mortgage loan held for sale, any retained mortgage-backed
securities shall be classified in accordance with the entity's ability and
intent to sell or hold those securities. However, a mortgage banking enterprise
must classify as "trading" securities any retained mortgage-backed securities
that it commits to sell before or during the securitization process.
SFAS No. 134 is effective for the first quarter beginning after December
15, 1998, and enterprises may reclassify mortgage-backed securities and other
beneficial interests retained after the securitization of mortgage loans held
for sale from the trading category, except for those with sales commitments in
place. The reclassification is to be implemented when SFAS No. 134 is initially
applied.
The Bank does not expect the adoption of SFAS No. 134 to have an impact on
its financial condition or results of operations.
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
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Market Price of Common Stock and Dividends Paid per Common Share
Queens County Bancorp trades on the Nasdaq National Market under the symbol
"QCSB." At December 31, 1998, the Company had 21,250,897 shares outstanding,
reflecting the three-for-two stock split on September 29, 1998.
The table below sets forth the intra-day high/low price range and closing
prices for the Company stock, as reported by The Nasdaq Stock Market, and the
cash dividends paid per common share for each of the four quarters of 1998 and
1997.
Market Price and Dividends Paid 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>
1998
1st Quarter $0.1333 $199.125 $29.500 $156.377 $23.167 $197.998 $29.333
2nd Quarter 0.1667 213.752 31.667 179.435 26.583 196.310 29.083
3rd Quarter 0.1667 205.315 30.417 154.123 22.833 180.563 26.750
4th Quarter 0.2000 210.094 31.125 153.563 22.750 200.813 29.750
- ---------------------------------------------------------------------------------------------------------------------
1997
1st Quarter $0.0740 $119.000 $17.630 $ 90.500 $13.407 $109.750 $16.259
2nd Quarter 0.0890 144.000 21.333 107.000 15.852 136.500 20.222
3rd Quarter 0.1110 163.500 24.222 133.500 19.778 155.440 23.028
4th Quarter 0.1333 182.250 27.000 154.872 22.944 182.250 27.000
=====================================================================================================================
</TABLE>
* Dividends have been restated to reflect the 3-for-2 stock splits on April
10 and October 1, 1997, and September 29, 1998.
** 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 and October 1, 1997, and September 29, 1998.
At December 31, 1998, 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.
29
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Consolidated Statements of Condition
<TABLE>
<CAPTION>
December 31,
-----------------------------
(in thousands, except share data) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 27,561 $ 16,733
Money market investments 19,000 6,000
Securities held to maturity (estimated market value of
$152,055 and $95,067, respectively) (note 3) 152,280 94,936
Mortgage-backed securities held to maturity (estimated
market value of $20,332 and $50,619, respectively)
(note 4) 19,680 49,781
Securities available for sale 4,656 2,617
Mortgage loans 1,486,222 1,393,658
Other loans 9,728 10,776
Less: Allowance for loan losses (9,431) (9,431)
- ---------------------------------------------------------------------------------------
Loans, net (notes 5 and 6) 1,486,519 1,395,003
Premises and equipment, net 10,399 10,782
Deferred tax asset, net (note 10) 5,917 5,514
Other assets (notes 7 and 12) 20,870 21,903
- ---------------------------------------------------------------------------------------
Total assets $ 1,746,882 $ 1,603,269
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 8):
NOW and money market accounts $ 70,423 $ 67,894
Savings accounts 273,357 268,133
Certificates of deposit 722,985 703,948
Non-interest-bearing accounts 35,520 29,186
- ---------------------------------------------------------------------------------------
Total deposits 1,102,285 1,069,161
- ---------------------------------------------------------------------------------------
Official checks outstanding 34,487 29,440
FHLB borrowings (note 9) 439,055 309,664
Accounts payable and accrued expenses 1,552 1,857
Mortgagors' escrow 13,084 10,690
Other liabilities (note 12) 7,013 11,942
- ---------------------------------------------------------------------------------------
Total liabilities 1,597,476 1,432,754
- ---------------------------------------------------------------------------------------
Stockholders' equity (note 2):
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;
21,250,897 and 22,369,187 shares outstanding
at December 31, 1998 and 1997, respectively) 310 206
Paid-in capital in excess of par 138,180 125,000
Retained earnings (substantially restricted)
(note 15) 165,383 166,230
Less: Treasury stock (9,719,796 and 8,601,663
shares, respectively) (137,901) (104,148)
Unallocated common stock held by ESOP
(note 13) (12,767) (13,526)
Common stock held by SERP and Deferred
Compensation Plans (notes 12 and 13) (3,770) (2,492)
Unearned common stock held by RRPs (note 13) (63) (812)
Accumulated other comprehensive income, net
of tax effect 34 57
- ---------------------------------------------------------------------------------------
Total stockholders' equity 149,406 170,515
- ---------------------------------------------------------------------------------------
Commitments and contingencies (note 11)
- ---------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,746,882 $ 1,603,269
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
(in thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Mortgage and other loans (note 5) $ 123,784 $ 108,868 $ 92,017
Securities held to maturity 7,464 4,737 4,308
Mortgage-backed securities held to maturity 2,338 3,856 5,252
Money market investments 691 273 727
- -----------------------------------------------------------------------------------------------
Total interest income 134,277 117,734 102,304
- -----------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW and money market accounts 1,944 1,844 2,039
Savings accounts 6,224 6,523 6,754
Certificates of deposit 36,251 36,177 32,533
FHLB borrowings (note 9) 21,290 10,751 3,419
Mortgagors' escrow 46 41 39
- -----------------------------------------------------------------------------------------------
Total interest expense 65,755 55,336 44,784
- -----------------------------------------------------------------------------------------------
Net interest income 68,522 62,398 57,520
- -----------------------------------------------------------------------------------------------
Reversal of provision for loan losses (note 6) -- -- (2,000)
- -----------------------------------------------------------------------------------------------
Net interest income after reversal of
provision for loan losses 68,522 62,398 59,520
- -----------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Fee income 2,111 1,287 1,583
Other (note 5) 443 1,018 862
- -----------------------------------------------------------------------------------------------
Total other operating income 2,554 2,305 2,445
- -----------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Compensation and benefits (notes 12 and 13)(1) 18,529 18,872 16,185
Occupancy and equipment (note 11) 2,446 2,641 2,479
General and administrative 4,550 4,872 4,422
Other 428 699 185
- -----------------------------------------------------------------------------------------------
Total operating expense 25,953 27,084 23,271
- -----------------------------------------------------------------------------------------------
Income before income taxes 45,123 37,619 38,694
Income tax expense (note 10)(2) 18,179 14,355 17,755
Net income $ 26,944 $ 23,264 $ 20,939
- -----------------------------------------------------------------------------------------------
Comprehensive income, net of tax:
Unrealized gain on securities (23) 57 --
- -----------------------------------------------------------------------------------------------
Comprehensive income $ 26,921 $ 23,321 $ 20,939
===============================================================================================
Earnings per share(3) $1.41 $1.14 $0.90
Diluted earnings per share(3) $1.34 $1.07 $0.85
===============================================================================================
</TABLE>
(1) Includes non-cash expenses of $6.724 million, $7.368 million, and $5.411
million, respectively.
(2) Includes non-cash expenses of $8.071 million, $3.416 million, and $1.111
million, respectively.
(3) Reflects shares issued as a result of 3-for-2 stock splits on April 10 and
October 1, 1997, and September 29, 1998.
See accompanying notes to consolidated financial statements.
31
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
(in thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK (Par Value: $0.01)
Balance at beginning of year $ 206 $ 92 $ 69
Stock splits (10,323,460; 17,205,794;
and 3,441,095 shares) 104 114 23
- -----------------------------------------------------------------------------------------------
Balance at end of year 310 206 92
- -----------------------------------------------------------------------------------------------
PAID-IN CAPITAL IN EXCESS OF PAR:
Balance at beginning of year 125,000 116,607 112,441
Tax benefit effect on stock plans 8,071 3,416 1,111
Common stock acquired by SERP and Deferred
Compensation Plans 1,278 1,081 1,081
Allocation of ESOP stock 3,938 4,021 2,002
Stock splits (10,323,460; 17,205,794;
and 3,441,095 shares) (104) (114) (23)
Cash paid in lieu of fractional shares (3) (11) (5)
- -----------------------------------------------------------------------------------------------
Balance at end of year 138,180 125,000 116,607
- -----------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 166,230 154,886 140,969
Net income 26,944 23,264 20,939
Dividends paid on common stock (12,636) (8,135) (5,669)
Exercise of stock options (784,740; 327,610;
and 226,196 shares) (15,155) (3,785) (1,353)
- -----------------------------------------------------------------------------------------------
Balance at end of year 165,383 166,230 154,886
- -----------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (104,148) (42,397) (16,843)
Purchase of common stock (1,957,530;
3,820,989; and 1,266,540 shares) (52,533) (68,086) (28,825)
Common stock acquired by SERP 1,278 1,337 1,081
Exercise of stock options (784,740; 327,610;
and 226,196 shares) 17,502 4,998 2,190
- -----------------------------------------------------------------------------------------------
Balance at end of year (137,901) (104,148) (42,397)
- -----------------------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of year (13,526) (14,820) (16,065)
Allocation of ESOP stock 759 1,294 1,245
- -----------------------------------------------------------------------------------------------
Balance at end of year (12,767) (13,526) (14,820)
- -----------------------------------------------------------------------------------------------
SERP AND DEFERRED COMPENSATION PLANS:
Balance at beginning of year (2,492) (1,411) (330)
Common stock acquired by SERP and
Deferred Compensation Plans (1,278) (1,081) (1,081)
- -----------------------------------------------------------------------------------------------
Balance at end of year (3,770) (2,492) (1,411)
- -----------------------------------------------------------------------------------------------
RECOGNITION AND RETENTION PLANS:
Balance at beginning of year (812) (1,528) (2,611)
Earned portion of RRPs 749 716 1,083
- -----------------------------------------------------------------------------------------------
Balance at end of year (63) (812) (1,528)
- -----------------------------------------------------------------------------------------------
ACCUMULATED COMPREHENSIVE INCOME, NET OF TAX:
Balance at beginning of year 57 -- --
Net unrealized (depreciation) appreciation
in securities, net of tax (23) 57 --
- -----------------------------------------------------------------------------------------------
Balance at end of year 34 57 --
- -----------------------------------------------------------------------------------------------
Total stockholders' equity $ 149,406 $ 170,515 $ 211,429
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,944 $ 23,264 $ 20,939
- -------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 921 948 772
Reversal of provision for loan losses -- -- (2,000)
(Increase) decrease in deferred
income taxes (403) (2,202) 2,510
Amortization of premiums, net 106 147 537
Amortization of net deferred
loan origination fees 244 217 141
Net loss on redemption of securities
and mortgage-backed securities (91) (20) (2)
Net (gain) loss on sale of foreclosed
real estate and loans (167) (556) 123
Tax benefit effect on stock plans 8,071 3,416 1,111
Earned portion of RRPs 749 716 1,083
Earned portion of ESOP 4,697 5,315 3,247
Changes in assets and liabilities:
Decrease (increase) in other assets 1,033 (5,060) 3,014
(Decrease) increase in accounts
payable and accrued expenses (305) 688 286
Increase (decrease) in official
checks outstanding 5,047 2,711 (1,117)
(Decrease) increase in other liabilities (4,929) 5,292 (741)
- -------------------------------------------------------------------------------------------------
Total adjustments 14,973 11,612 8,964
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,917 34,876 29,903
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of securities
and mortgage-backed securities held
to maturity 168,529 94,939 106,132
Proceeds from redemption of securities
available for sale -- 1,519 --
Purchase of securities held to maturity (195,788) (79,575) (96,010)
Purchase of securities available for sale (2,081) (4,009) --
Net increase in loans (101,934) (265,152) (151,730)
Proceeds from sale of loans and foreclosed
real estate 10,358 16,578 1,006
Purchase of premises and equipment, net (538) (653) (1,323)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (121,454) (236,353) (141,925)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in mortgagors' escrow 2,394 3,334 (448)
Net increase in deposits 33,124 45,231 91,790
Net increase in FHLB borrowings 129,391 228,271 35,316
Cash dividends and stock options exercised (27,791) (11,920) (7,027)
Purchase of Treasury stock, net of stock
options exercised and shares acquired
by SERP (33,753) (61,751) (25,554)
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 103,365 203,165 94,077
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 23,828 1,688 (17,945)
Cash and cash equivalents at beginning of period 22,733 21,045 38,990
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 46,561 $ 22,733 $ 21,045
=================================================================================================
Supplemental information:
Cash paid for:
Interest $ 65,767 $ 55,335 $ 44,810
Income taxes 10,489 12,443 14,775
- -------------------------------------------------------------------------------------------------
Transfers to foreclosed real estate from loans 772 1,758 730
- -------------------------------------------------------------------------------------------------
Transfers to real estate held for investment
from foreclosed real estate 535 533 222
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Notes to Consolidated Financial Statements
NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As more fully described in Note 2, Queens County Savings Bank (the "Bank" or the
"Subsidiary") converted from a mutual savings bank to the capital stock form of
ownership on November 23, 1993. In anticipation of the conversion, Queens County
Bancorp, Inc. (the "Company" or the "Parent") was formed on July 20, 1993. The
following is a description of the significant accounting and reporting policies
that the Company and its wholly-owned subsidiary follow in preparing and
presenting their consolidated financial statements, which conform to generally
accepted accounting principles and to general practices within the banking
industry. The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany accounts
and transactions are eliminated in consolidation. Certain reclassifications have
been made to prior-year financial statements to conform to the 1998
presentation.
Securities and 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, and 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 using the specific identification method.
Loans
Loans are carried at unpaid principal balances, less unearned discounts, net of
deferred loan origination fees and the allowance for loan losses.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures." SFAS No. 114 applies to all loans
except smaller balance homogenous consumer loans (including one-to-four 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 1998 results
of operations nor on its financial position, including the level of the
allowance for loan losses.
34
<PAGE>
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 its borrowers' ability to repay, overall portfolio quality, and current
and prospective economic conditions. While management uses available information
to recognize losses on loans, future additions may be necessary, based on
changes in economic conditions beyond management's control. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Accordingly, the Bank
may be required to take certain charge-offs and/or recognize additions to the
allowance based on regulators' judgments concerning information available to
them during their examination. Based upon all relevant and available
information, management believes that the allowance for loan losses is adequate.
Fees are charged for originating mortgage loans at the time the loan is
granted. Loan origination fees, partially offset by certain expenses associated
with loans originated, are amortized to interest on loans over the life of the
loan using the interest method. Adjustable rate mortgages ("ARMs") with a lower
rate during the introductory period (usually one year) will reflect the
amortization of a substantial portion of the net deferred fee as a yield
adjustment during the introductory period.
Loans are designated as "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, 1998, 1997, and 1996 amounted to $921,000,
$948,000, and $772,000, respectively.
The Year 2000 Issue
In January 1997, the Company developed a plan to address the Year 2000 issue and
began converting its computer systems to be Year 2000 compliant. The plan
provides for the conversion to be completed by June 30, 1999. 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 they 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 bases. 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 to be realized. Deferred tax assets
and liabilities are measured using enacted tax rates that are 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
35
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
for entities that elect to continue measuring 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, 1998. 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, with an annual reload feature, 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.
Had compensation expense for the Company's stock option plans been
determined based upon the fair value at grant date for awards under these plans,
consistent with the methodology prescribed under SFAS No. 123, the Company's net
income and diluted earnings per share would have been reduced by approximately
$7.1 million, or $0.35 per share, in 1998; $3.4 million, or $0.16 per share, in
1997; and $216,000, or $0.01 per share, in 1996.
Retirement Plans
The Company has a pension plan covering substantially all employees who have
attained minimum service requirements. Post-retirement benefits are recorded on
an accrual basis with an annual provision that recognizes the expense over the
service life of the employee, determined on an actuarial basis.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents are defined to
include cash and due from banks and Federal funds sold.
Earnings Per 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.
For the years ended December 31, 1998, 1997, and 1996, respectively, the
weighted average number of common shares outstanding used in the computation of
Basic EPS was 19,091,705; 20,454,621; and 23,216,133, respectively. The weighted
average number of common shares outstanding used in the computation of Diluted
EPS was 20,181,013; 21,824,183; and 24,467,528 for the years ended December 31,
1998, 1997, and 1996, 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 employee stock options.
NOTE 2:
CONVERSION TO STOCK FORM OF OWNERSHIP
On July 13, 1993, the Board of Trustees of the Bank (now the Board of Directors
of the Company) adopted a Plan of Conversion to convert the Bank from a
state-chartered mutual savings bank to a state-chartered capital stock form
savings bank. In connection with the conversion, the Company was organized under
Delaware law for the purpose of acquiring all of the capital stock of the Bank.
On November 23, 1993, the Company became a public company and issued its
initial offering of 4,588,500 shares of common stock (par value $0.01 per share)
at a price of $25.00 per share, resulting in net proceeds of $110.6 million.
Concurrent with the issuance of the common stock, 50 percent of the net proceeds
were used to purchase all of the outstanding capital stock of the Bank. Parent
company-only financial information is presented in Note 16.
As a result of five 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 and October 1, 1997, and September 29, 1998), the initial offering
price was adjusted to $3.71 per share. The number of shares outstanding was
21,250,897 at December 31, 1998.
36
<PAGE>
NOTE 3:
SECURITIES INVESTMENTS
Securities held to maturity at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) Cost Unrealized Gain Unrealized Loss Market Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $129,893 $ 142 $ (449) $129,586
- ----------------------------------------------------------------------------------------------------------------------
FHLB stock 22,385 -- -- 22,385
FNMA stock 2 82 -- 84
- ----------------------------------------------------------------------------------------------------------------------
Total stock 22,387 82 -- 22,469
- ----------------------------------------------------------------------------------------------------------------------
Total securities $152,280 $ 224 $ (449) $152,055
======================================================================================================================
</TABLE>
<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
======================================================================================================================
</TABLE>
The following is a summary of the amortized cost and estimated market
value of securities held to maturity at December 31, 1998 by remaining term to
maturity:
December 31, 1998
----------------------------------------
U.S. Government Estimated
(in thousands) and Agencies Market Value
- --------------------------------------------------------------------------------
1 year or less $129,893 $129,586
================================================================================
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, 1998 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) Cost Unrealized Gain Unrealized Loss Market Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity $ 4,591 $ 82 $ (17) $ 4,656
======================================================================================================================
<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>
37
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
NOTE 4:
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity at December 31, 1998 and 1997 are
summarized as follows:
December 31, 1998
--------------------------------
(in thousands) GNMA FHLMC Total
- --------------------------------------------------------------------------------
Principal balance $15,886 $ 3,802 $19,688
Unamortized discount -- 8 8
- --------------------------------------------------------------------------------
Mortgage-backed securities, net 15,886 3,794 19,680
Gross unrealized gains 517 135 652
- --------------------------------------------------------------------------------
Estimated market value $16,403 $ 3,929 $20,332
================================================================================
December 31, 1997
-----------------------------------
(in thousands) GNMA FHLMC Total
- --------------------------------------------------------------------------------
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
================================================================================
The amortized cost and estimated market value 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, 1998
by remaining term to maturity:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------
Estimated
(in thousands) GNMA FHLMC Total Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year or less $ 3,311 $ 1,400 $ 4,711 $ 4,867
Over 1 year to 5 years 12,575 2,394 14,969 15,465
- ---------------------------------------------------------------------------------------------------
Mortgage-backed securities, net $15,886 $ 3,794 $19,680 $20,332
===================================================================================================
</TABLE>
There were no sales of mortgage-backed securities held to maturity during
the years ended December 31, 1998, 1997, or 1996.
38
<PAGE>
NOTE 5:
LOANS
The composition of the loan portfolio as of December 31, 1998 and 1997 is
summarized as follows:
December 31,
---------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
MORTGAGE LOANS:
1-4 family $ 178,770 $ 224,287
Multi-family 1,239,094 1,107,374
Commercial real estate 67,494 61,740
Construction 1,898 1,538
- --------------------------------------------------------------------------------
Total mortgage loans 1,487,256 1,394,939
Less: Net deferred loan origination fees 1,034 1,281
- --------------------------------------------------------------------------------
Mortgage loans, net 1,486,222 1,393,658
- --------------------------------------------------------------------------------
OTHER LOANS:
Cooperative apartment 4,802 5,041
Home equity 1,793 2,386
Passbook savings 321 312
Other 2,834 3,056
- --------------------------------------------------------------------------------
Total other loans 9,750 10,795
Less: Unearned discounts 22 19
- --------------------------------------------------------------------------------
Other loans, net 9,728 10,776
Less: Allowance for loan losses 9,431 9,431
- --------------------------------------------------------------------------------
Loans, net $1,486,519 $1,395,003
================================================================================
The Bank has a diversified loan portfolio as to type and borrower
concentration. At December 31, 1998 and 1997, approximately $1.46 billion and
$1.36 billion, respectively, of the Bank's mortgage loans were secured by
properties located in New York State. Accordingly, 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") or
the State of New York Mortgage Agency ("SONYMA"), and the servicing rights
retained. One-to-four family loans sold to SBLI during the years ended December
31, 1998, 1997, and 1996 amounted to $1.6 million, $3.2 million, and $300,000,
respectively. No loans were sold to SONYMA in 1998 or 1997; in 1996, loans sold
to SONYMA amounted to $45,000. In 1998 and 1997, the Bank also originated and
sold $7.1 million and $13.6 million in multi-family mortgage loans, with the
servicing rights retained. In 1996, all multi-family mortgage loans originated
by the Bank were retained in portfolio. During 1997 and 1996, the Bank also sold
approximately $12,000 and $82,000, respectively, in student loans, a substantial
portion of said portfolio, to Nellie Mae; no student loans were sold to Nellie
Mae in 1998.
The Bank services mortgage loans for third parties, primarily SBLI, FNMA,
and SONYMA. The unpaid principal balance of such serviced loans amounted to
$18.8 million, $18.0 million, and $16.1 million at December 31, 1998, 1997, and
1996, respectively. Custodial escrow balances maintained in connection with such
loans amounted to $60,000, $56,000, and $49,000 at the corresponding dates.
Commitments to originate first mortgage loans at December 31, 1998 and
1997 amounted to approximately $82.8 million and $102.3 million, respectively,
all representing variable rate first mortgage loans. Substantially all of the
commitments at December 31, 1998 were expected to close within 90 days and were
made at interest rates that float or adjust at periodic intervals.
39
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
NOTE 6:
ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended December 31, 1998,
1997, and 1996 is summarized as follows:
December 31,
-------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance, beginning of year $ 9,431 $ 9,359 $ 11,359
Reversal of provisions -- -- (2,000)
Net recoveries -- 72 --
- --------------------------------------------------------------------------------
Balance, end of year $ 9,431 $ 9,431 $ 9,359
================================================================================
Mortgage loans in foreclosure amounted to approximately $5.5 million, $6.1
million, and $6.9 million at December 31, 1998, 1997, and 1996, respectively.
The 1996 amount included loans that had been restructured of approximately
$24,000. 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, 1998, 1997, and 1996 are summarized below:
December 31,
------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest income that would have
been recorded $ 1,079 $ 1,040 $ 1,062
Interest income recognized (150) (149) (144)
- --------------------------------------------------------------------------------
Interest income foregone $ 929 $ 891 $ 918
================================================================================
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 1998, 1997,
or 1996.
NOTE 7:
FORECLOSED REAL ESTATE
The following table summarizes transactions in foreclosed real estate, which is
included in "other assets" for the years ended December 31, 1998 and 1997:
December 31,
-----------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Balance, beginning of year $ 1,030 $ 627
Transfers in 772 1,758
Sales (1,383) (1,240)
Transfers to real estate held for investment -- (115)
- --------------------------------------------------------------------------------
Balance, end of year $ 419 $ 1,030
================================================================================
Foreclosed real estate is carried at fair market value; there were no
valuation allowances at December 31, 1998 or 1997, and no provisions for the
years ended December 31, 1998, 1997, or 1996.
40
<PAGE>
NOTE 8:
DEPOSITS
The following is a summary of weighted average interest rates at December 31,
1998 and 1997 for each type of deposit:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------
Percent Weighted Percent Weighted
(in thousands) Amount of Total Average Rate Amount of Total Average Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand accounts $ 35,520 3.22% 0.00% $ 29,186 2.73% 0.00%
NOW and Super NOW accounts 26,297 2.39 2.43 21,485 2.01 2.43
Money market accounts 44,126 4.00 2.80 46,409 4.34 2.83
Savings accounts 273,357 24.80 2.30 268,133 25.08 2.40
Certificates of deposit 722,985 65.59 5.11 703,948 65.84 5.50
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $1,102,285 100.00% 4.09% $1,069,161 100.00% 4.39%
====================================================================================================================================
</TABLE>
The following is a summary of certificates of deposit at December 31, 1998
by remaining term to maturity and by range of stated interest rates:
<TABLE>
<CAPTION>
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% $ 28,351 $ -- $ -- $ -- $ 28,351
3.00% to 3.99% 5,934 -- -- -- 5,934
4.00% to 4.99% 149,065 26,156 72 16 175,309
5.00% to 6.99% 391,891 55,283 18,807 43,217 509,198
7.00% and above 1,214 990 91 1,898 4,193
- ----------------------------------------------------------------------------------------------
Total maturities $576,455 $ 82,429 $ 18,970 $ 45,131 $722,985
==============================================================================================
</TABLE>
At December 31, 1998 and 1997, the aggregate amount of certificates of
deposit of $100,000 or more was approximately $180.4 million and $139.7 million,
respectively.
NOTE 9:
BORROWINGS
In 1998 and 1997, the Company drew upon its line of credit with the Federal Home
Loan Bank of New York ("FHLB"), which totaled $698.7 million and $481.0 million
at the respective year-ends. At December 31, 1998 and 1997, the outstanding
balance was approximately $445.5 million and $309.7 million, with scheduled
maturity dates within the next nine years. The weighted average interest rate
for borrowings was 5.22% and 5.76% at the corresponding dates. For the years
ended December 31, 1998 and 1997, the weighted average outstanding balance was
approximately $397.8 million and $189.1 million, with a weighted average
interest rate of 5.35% and 5.68%. The maximum amount of borrowings outstanding
at any month-end during the year ending December 31, 1998 was $445.5 million; in
the previous twelve-month period, the maximum month-end amount was $309.7
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, 1998.
41
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
NOTE 10:
FEDERAL, STATE, AND LOCAL TAXES
Federal Income Taxes
The components of the net deferred tax asset at December 31, 1998 and 1997 are
summarized as follows:
December 31,
------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Financial statement loan loss allowance $ 4,433 $ 4,452
Accrual for post-retirement benefits 1,999 1,942
Deferred directors' fees 364 375
Accrual for directors' retirement benefits 326 358
Deferred origination fees -- 605
Non-accrual interest 74 74
Organization costs -- 319
Basis difference of premises and equipment 105 (26)
Other 2,045 1,339
- --------------------------------------------------------------------------------
Total deferred tax assets 9,346 9,438
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Tax reserve in excess of base year reserve (2,159) (2,591)
Basis difference of GNMAs (345) (424)
Pre-paid pension cost (925) (909)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (3,429) (3,924)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 5,917 $ 5,514
================================================================================
The net deferred tax asset at December 31, 1998 and 1997 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 it is more likely
than not that the results of future operations will generate sufficient taxable
income to realize the deferred tax assets. However, there can be no assurances
about the level of future earnings.
Income tax expense for the years ended December 31, 1998, 1997, and 1996
is summarized as follows:
December 31,
-----------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Federal--current $ 15,465 $ 12,673 $ 10,471
State and local--current 3,117 3,884 4,774
- --------------------------------------------------------------------------------
Total current 18,582 16,557 15,245
- --------------------------------------------------------------------------------
Federal--deferred 92 (340) 690
State and local--deferred (495) (1,862) 1,820
- --------------------------------------------------------------------------------
Total deferred (403) (2,202) 2,510
- --------------------------------------------------------------------------------
Total income tax expense $ 18,179 $ 14,355 $ 17,755
================================================================================
The following is a reconciliation of statutory Federal income tax expense
to combined effective income tax expense for the years ended December 31, 1998,
1997, and 1996:
December 31,
---------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Statutory Federal income tax expense $ 15,793 $ 13,167 $ 13,543
State and local income taxes,
net of Federal income tax benefit 4,998 1,314 4,286
Other, net (2,612) (126) (74)
- --------------------------------------------------------------------------------
Total income tax expense $ 18,179 $ 14,355 $ 17,755
================================================================================
42
<PAGE>
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 (the "reserve method"). 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 109, "Accounting for Income Taxes," 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 a tax loan loss reserve of approximately $7.4 million which could be
recognized as taxable income and create a current and/or deferred tax liability
of up to $2.2 million, under current income tax rates, if one of the following
were to occur: (a) the Bank's retained earnings represented by this reserve were
used for purposes other than to absorb losses from bad debts, including excess
dividends or distributions in liquidation; (b) the Bank were to redeem its
stock; (c) the Bank were to fail to meet the definition provided by the Internal
Revenue Code for a Bank; or (d) there was 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, 1998, 1997, and 1996.
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 and Comprehensive Income.
NOTE 11:
COMMITMENTS AND CONTINGENCIES
Lease Commitments
At December 31, 1998, the Company was obligated under eight non-cancelable
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, 1998, the Company had entered into several non-cancelable
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.
- --------------------------------------------------------------------------------
The projected minimum annual rental commitments under these leases,
exclusive of taxes and other charges, are summarized as follows:
---------------------------------------
(in thousands) Rental Income Rental Expense
- --------------------------------------------------------------------------------
1999 $ 1,050 $ 447
2000 1,060 460
2001 1,071 471
2002 1,082 477
2003 1,093 489
2004 and thereafter 5,622 4,193
- --------------------------------------------------------------------------------
Total minimum future rentals $10,978 $ 6,537
================================================================================
Rental expense under these leases, included in occupancy and equipment
expense, was approximately $446,000, $399,000, and $333,000 for the years ended
December 31, 1998, 1997, and 1996, respectively. Rental income on Bank-owned
properties, netted in occupancy and equipment expense, was approximately $1.20
million, $1.03 million, and $947,000 for the years ended December 31, 1998,
1997, and 1996, respectively.
43
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Legal Proceedings
In the normal course of the Company's business, there are various outstanding
legal proceedings. In the opinion of management, based on consultation with
legal counsel, the financial position of the Company will not be affected
materially as a result of the outcome of such legal proceedings.
NOTE 12:
EMPLOYEE BENEFITS
Retirement Plan
The Bank has a qualified non-contributory defined benefit pension plan which
covers substantially all of the full-time employees of the Bank. The plan is
subject to the provisions of the Employee Retirement Income Security Act of 1974
("ERISA"), as amended. The benefits are an annual amount equal to 2% of the
average highest annual three years' earnings during the final ten years of
service, multiplied by the years of creditable service for the first 30 years
and then by 1% until 40 years of service, subject to certain limitations. The
Bank's policy is to fund pension costs in accordance with the minimum funding
requirement of ERISA and to provide the plan with sufficient assets with which
to pay pension benefits to plan participants.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Post-retirement Benefits." SFAS No. 132 standardizes
the disclosures for pension and other post-retirement benefits by requiring
additional information that will facilitate financial analysis, and by
eliminating certain disclosures that are no longer considered useful.
Accordingly, SFAS No. 132 supersedes the disclosure requirements in SFAS Nos.
87, 88, and 106. The following tables set forth the disclosures required under
SFAS No. 132:
Pension Benefits
------------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 13,769 $ 12,473
Service cost 580 492
Interest cost 990 940
Actuarial loss 659 642
Benefits paid (767) (778)
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 15,231 $ 13,769
================================================================================
CHANGE IN PLAN ASSETS:
Fair value of assets at beginning of year $ 14,756 $ 12,875
Actual return on plan assets 543 2,248
Employer contribution 596 411
Benefits paid (767) (778)
- --------------------------------------------------------------------------------
Fair value of assets at end of year $ 15,128 $ 14,756
================================================================================
FUNDED STATUS:
Funded status $ 1,926 $ 1,280
Unrecognized prior service cost (417) (361)
Unrecognized net actuarial loss 459 1,007
- --------------------------------------------------------------------------------
Prepaid benefit cost $ 1,968 $ 1,926
================================================================================
Years Ended December 31,
-----------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.75% 7.25% 7.75%
Expected rate of return on plan assets 8.00 8.00 8.00
Rate of compensation increase 4.00 5.00 5.50
================================================================================
Years Ended December 31,
-------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 580 $ 492 $ 504
Interest cost 990 940 926
Expected return on plan assets (1,172) (2,248) (1,380)
Amortization of prior service cost 19 1,177 366
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 417 $ 361 $ 416
================================================================================
44
<PAGE>
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 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, 1998, 1997, or 1996.
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. The remaining balances in the deferred
compensation plan at December 31, 1998 and 1997 of $693,000 and $758,000,
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. In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures About Pensions and Other Post-retirement Benefits." As
previously indicated, SFAS No. 132 standardizes the disclosures for pension and
other post-retirement benefits by requiring additional information that will
facilitate financial analysis, and by eliminating certain disclosures that are
no longer considered useful. Accordingly, SFAS No. 132 supersedes the disclosure
requirements in SFAS Nos. 87, 88, and 106. The following tables set forth the
disclosures required under SFAS No. 132:
Post-retirement Benefits
-------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 3,376 $ 4,625
Service cost 78 101
Interest cost 200 241
Actuarial gain (417) (1,475)
Benefits paid (127) (116)
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 3,110 $ 3,376
================================================================================
CHANGE IN PLAN ASSETS:
Fair value of assets at beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contribution 127 116
Benefits paid (127) (116)
- --------------------------------------------------------------------------------
Fair value of assets at end of year $ -- $ --
================================================================================
FUNDED STATUS:
Accrued post-retirement benefit cost $(4,252) $(4,114)
Employer contribution 127 116
Total net periodic benefit cost (127) (254)
- --------------------------------------------------------------------------------
Accrued post-retirement benefit cost $(4,252) $(4,252)
================================================================================
45
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Years Ended December 31,
-----------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.75% 7.25% 7.75%
Current medical trend rate 6.50 7.00 8.00
Rate of compensation increase 4.00 5.00 5.50
================================================================================
Years Ended December 31,
-------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 78 $ 101 $ 110
Interest cost 200 241 333
Expected return on plan assets (86) (24) (22)
Amortization of prior service (cost) credit (64) (64) 63
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 128 $ 254 $ 484
================================================================================
NOTE 13:
STOCK-RELATED BENEFIT PLANS
Option Plans
The Board of Directors of the Company has adopted the following stock option
plans:
1993 Stock Option Plan
Under the 1993 Stock Option Plan, 1,917,338 stock options (as adjusted for the
five 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 subsidiary, the Bank. Each option entitles the
holder to purchase one share of the Company's common stock at an exercise price
equal to $3.71 per share, which is the initial public offering price as adjusted
for the five stock splits. Options vest in whole or in part over 3 to 5 years
from the date of issuance. However, all options become 100% exercisable in the
event that the employee terminates his employment due to death, disability,
normal retirement, or in the event of a change in control of the Bank or the
Company. Simultaneous with the grant of these options, the Compensation
Committee of the Board of Directors granted "Limited Rights" with respect to the
shares covered by the options. Limited Rights granted are subject to terms and
conditions and can be exercised only in the event of a change in control of the
Company. Upon exercise of a Limited Right, the holder shall receive from the
Company a cash payment equal to the difference between the exercise price of the
option ($3.71) and the fair market value of the underlying shares of common
stock. In 1998, 485,302 options granted under the 1993 Stock Option Plan were
exercised; 143,520 options were exercised in 1997; and 106,164 options were
exercised in 1996. 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. No additional options were granted under this plan in
1998, 1997, or 1996. The number of vested options exercisable at December 31,
1998 was 1,192,235.
1993 Stock Option Plan for Outside Directors
("Directors' Option Plan")
On November 23, 1993, each member of the Board of Directors who was not then an
officer or employee of the Company or the Bank was granted non-statutory options
to purchase shares of the Company's common stock, based upon length of service.
In addition, active Directors Emeritus were each granted non-statutory options
to purchase shares of the common stock. In the aggregate, members of the Board
of Directors and active Directors Emeritus of the Company were granted options
to purchase 1,032,413 shares (as adjusted for the five stock splits) of the
common stock of the Company at an exercise price equal to $3.71 per share, which
is the initial public offering price as adjusted to reflect the stock 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. In the years ended December 31, 1998, 1997, and 1996,
respectively, 59,825; 175,499; and 120,032 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. No additional options were granted under this plan in 1998,
1997, or 1996. The number of vested options exercisable at December 31, 1998 was
601,563.
46
<PAGE>
1997 Stock Option Plan
On February 18, 1997, the Bank established the 1997 Stock Option Plan and
granted stock options to purchase 698,625 shares (as adjusted for the stock
splits in 1997 and 1998) to the participants. The estimated fair value of the
options granted was $9.32 per share at the date of grant. The maximum number of
shares available for grant under this plan is 1,181,250 (as adjusted). Each
option was exercisable on July 21, 1998 and entitled the holder to purchase one
share of the Company's common stock at an exercise price equal to $15.63 per
share (as adjusted). On January 21, 1998, 645,884 options were exercised and
another 645,884 options automatically granted under the reload feature of the
plan, at an exercise price of $24.85 per share. The estimated fair value of the
options granted on this date was $5.76 per share. At December 31, 1998, the
number of vested options exercisable under the 1997 Stock Option Plan was
671,625.
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 4,645,860 shares (as adjusted for the five 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 30 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, 1998, the loan had an outstanding
balance of $12.8 million and a fixed interest rate of 6.0%. Interest expense for
the obligation was $797,000 for the year ended December 31, 1998. 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 $1.3 million for the year ended
December 31, 1998. Dividends and investment income received on ESOP shares used
for debt service amounted to $1.3 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 totaled 170,343
and 290,205 for the periods ended December 31, 1998 and 1997, respectively. At
December 31, 1998, there were 2,681,767 shares remaining for future allocation,
with a market value of $85.1 million. The Bank recognizes compensation expense
for the ESOP Plan based on the average market price of the common stock during
the year at the date of allocation. The Company recorded compensation expense
for the ESOP Plan of $4.7 million, $5.2 million, and $3.2 million for the years
ended December 31, 1998, 1997, and 1996, respectively.
The Bank also established a Supplemental Employee Retirement Plan
("SERP"), which provides additional unfunded, non-qualified benefits to certain
participants in the ESOP in the form of common stock. At December 31, 1998,
1997, and 1996, this plan maintained $1.3 million, $1.3 million, and $1.1
million, respectively, of trust-held assets, based upon the cost of said assets
at the time of purchase. Trust-held assets consist entirely of Company common
stock and amounted to 258,690 and 204,037 shares at December 31, 1998 and 1997,
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 $1.1 million for the years ended December 31,
1998, 1997, and 1996, 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 1,474,875
shares (as adjusted for the five 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 in stockholders'
equity. Awards vested at a rate of 331/3% 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
47
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
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,
1,457,938 shares of common stock were vested at December 31, 1998. 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 RRPs of
$749,000, $716,000, and $1.1 million for the years ended December 31, 1998,
1997, and 1996, respectively.
NOTE 14:
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying values and estimated fair values of
the Company's on-balance-sheet financial instruments at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1998 1997
------------------------------------------------------------
(in thousands) Value Fair Value Value Fair Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 46,561 $ 46,561 $ 22,733 $ 22,733
Securities held to maturity 152,280 152,055 94,936 95,067
Mortgage-backed securities held to maturity 19,680 20,332 49,781 50,619
Securities available for sale 4,656 4,656 2,617 2,617
Loans, net 1,486,519 1,549,540 1,395,003 1,485,896
FINANCIAL LIABILITIES:
Deposits $1,102,285 $1,106,754 $1,069,161 $1,071,738
FHLB borrowings 439,055 439,055 309,664 309,664
Mortgagors' escrow 13,084 13,084 10,690 10,690
================================================================================================================
</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 and 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.
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.
Accordingly, 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.
48
<PAGE>
FHLB Borrowings
The carrying value of borrowings approximates fair value in the financial
statements, as these instruments are considered short-term in view of their
callable features.
Other Receivables and Payables
The 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, 1998 or 1997.
NOTE 15:
RESTRICTIONS ON THE BANK
Various legal restrictions limit the extent to which the Bank can supply funds
to the parent company and its non-bank subsidiaries. As a converted stock form
savings bank, the approval of the Superintendent of the New York State Banking
Department is required if dividends declared in any calendar year exceed the
total of its net profits for that year combined with its retained net profits
for the preceding two calendar years, less any required transfer to paid-in
capital. "Net profits" is defined as the remainder of all earnings from current
operations plus actual recoveries on loans and investments and other assets,
after deducting from the total thereof all current operating expenses, actual
losses, if any, and all Federal and state taxes. In 1998, the Bank declared
dividends to its parent aggregating $25.1 million, which did not exceed net
profits for 1997 through 1998.
NOTE 16:
PARENT COMPANY-ONLY FINANCIAL INFORMATION
Queens County Bancorp, Inc. operates a wholly-owned subsidiary, Queens County
Savings Bank. The earnings of the Bank are recognized by the Company using the
equity method of accounting. Accordingly, the earnings of the Bank are recorded
as an increase in the Company's investment in the Bank.
Following are the condensed financial statements for Queens County
Bancorp, Inc. (parent company-only):
CONDENSED STATEMENTS OF CONDITION
December 31,
---------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Cash $ 1,526 $ 757
Money market investments 57 57
Investment in and advances to Queens County Savings Bank 131,854 169,701
- --------------------------------------------------------------------------------
Total assets $133,437 $170,515
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity $133,437 $170,515
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $133,437 $170,515
================================================================================
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income from Queens County Savings Bank $ 340 $ 2,358 $ 3,786
Other interest income 39 17 8
Dividends from Queens County Savings Bank 17,800 16,000 38,000
- --------------------------------------------------------------------------------------------------------
Total income 18,179 18,375 41,794
Operating expense 229 256 273
- --------------------------------------------------------------------------------------------------------
Income before income tax and equity in undistributed earnings 17,950 18,119 41,521
Income tax expense 150 151 150
- --------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings
of Queens County Savings Bank 17,800 17,968 41,371
Equity in undistributed earnings of Queens County Savings Bank 9,144 5,296 (20,432)
- --------------------------------------------------------------------------------------------------------
Net income $ 26,944 $ 23,264 $ 20,939
========================================================================================================
</TABLE>
49
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,944 $ 23,264 $ 20,939
Equity in undistributed earnings of the Bank not provided for (9,144) (5,296) 20,432
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,800 17,968 41,371
=============================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for investments in and advances to subsidiaries (17,021) (17,831) (42,761)
Repayment from investments in and advances to subsidiaries 62,812 75,284 35,231
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 45,791 57,453 (7,530)
=============================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Treasury stock (52,533) (68,086) (28,825)
Dividends paid (12,636) (8,135) (5,669)
Exercise of stock options 2,347 1,213 837
- -------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (62,822) (75,008) (33,657)
- -------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 769 413 184
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 814 401 217
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,583 $ 814 $ 401
=============================================================================================================
</TABLE>
NOTE 17:
REGULATORY MATTERS
The Bank is subject to regulation, examination, and supervision by the New York
State Banking Department and the Federal Deposit Insurance Corporation (the
"Regulators"). The Bank is also governed by numerous Federal and state laws and
regulations, including the FDIC Improvement Act of 1991 ("FDICIA"). Among other
matters, FDICIA established five capital categories ranging from well
capitalized to critically undercapitalized. Such classifications are used by the
FDIC to determine various matters, including prompt corrective action and each
institution's semi-annual FDIC deposit insurance premium assessments. The Bank's
capital amounts and classification are also subject to qualitative judgments by
the Regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
at the top of page 51) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). At December 31, 1998, the Bank met all
capital adequacy requirements to which it was subject.
As of December 31, 1998, 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 said notification that management believes have
changed the institution's category.
50
<PAGE>
The Bank's actual capital amounts and ratios are also presented in the
following table:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1998 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) $170,850 16.12% $84,804 >/=8.0% $106,005 >/=10.0%
Tier 1 capital (to risk-weighted assets) 161,419 15.23 42,402 >/=4.0 63,603 >/=6.0
Tier 1 leverage capital (to average assets) 161,419 9.40 51,508 >/=3.0 85,846 >/=5.0
- ------------------------------------------------------------------------------------------------------------------------------------
<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>
Under this framework, and based upon the Bank's capital levels, no prior
approval from the Regulators is necessary to accept brokered deposits.
NOTE 18:
QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the fiscal years ended December 31, 1998
and 1997 follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------------------------
(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 $17,219 $17,299 $17,474 $16,531 $16,110 $15,611 $15,490 $15,187
Other operating income 493 637 866 557 1,149 336 515 304
Operating expense 5,875 6,660 6,747 6,672 7,095 6,785 6,692 6,512
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 11,837 11,276 11,593 10,416 10,164 9,162 9,313 8,979
Income tax expense 4,721 4,326 4,970 4,161 4,769 3,767 3,972 1,847
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 7,116 $ 6,950 $ 6,623 $ 6,255 $ 5,395 $ 5,395 $ 5,341 $ 7,132
====================================================================================================================================
Diluted earnings per common share(1) $0.37 $0.34 $0.32 $0.31 $0.26 $0.26 $0.25 $0.30
====================================================================================================================================
Cash dividends declared
per common share(1) 0.20 0.17 0.17 0.13 0.13 0.11 0.09 0.07
====================================================================================================================================
Average common shares and
equivalents outstanding(1) 19,472 20,196 20,582 20,536 20,843 21,006 21,194 23,568
====================================================================================================================================
Stock price per common share(l):
High $30.56 $30.00 $31.42 $29.33 $27.00 $24.11 $21.33 $17.63
Low 22.88 23.58 27.25 23.50 23.17 19.78 15.85 13.41
Close 29.75 26.75 29.08 29.33 27.00 23.03 20.22 16.26
====================================================================================================================================
</TABLE>
(1) Reflects shares issued as a result of 3-for-2 stock splits on April 10 and
October 1, 1997, and September 29, 1998.
51
<PAGE>
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
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 1998, 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 of
them is properly discharging their 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, 1999
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, 1998 and 1997 and the
related consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
January 20, 1999
52
Independent Auditors' Consent
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, 1999, related to the consolidated statements of condition of
the Queens County Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of income and comprehensive income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998 Annual Report on Form 10-K of Queens County Bancorp, Inc.
New York, New York
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,651
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,656
<INVESTMENTS-CARRYING> 171,960
<INVESTMENTS-MARKET> 172,387
<LOANS> 1,495,950
<ALLOWANCE> 9,431
<TOTAL-ASSETS> 1,746,882
<DEPOSITS> 1,102,285
<SHORT-TERM> 439,055
<LIABILITIES-OTHER> 56,136
<LONG-TERM> 0
0
0
<COMMON> 149,406
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,746,882
<INTEREST-LOAN> 123,784
<INTEREST-INVEST> 0
<INTEREST-OTHER> 10,493
<INTEREST-TOTAL> 134,277
<INTEREST-DEPOSIT> 44,465
<INTEREST-EXPENSE> 21,290
<INTEREST-INCOME-NET> 68,522
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 91
<EXPENSE-OTHER> 23,308
<INCOME-PRETAX> 45,214
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,944
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 8.32
<LOANS-NON> 5,530
<LOANS-PAST> 663
<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> 0
</TABLE>
