UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
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Commission File Number 0-22278
------------------------------
QUEENS COUNTY BANCORP, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1377322
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
38-25 Main Street, Flushing, New York 11354
-------------------------------------------
(Address of principal executive offices)
(Registrant's telephone number, including area code) 718: 359-6400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
21,184,675
-------------------------------
Number of shares outstanding at
November 5, 1999
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
Three Months Ended September 30, 1999
INDEX Page No.
- ----- --------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition as of September 30, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Income and Comprehensive Income
for the Three and Nine Months Ended September 30, 1999 and 1998
(unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 (unaudited) 4
Notes to Unaudited Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibits 26
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
----------- -----------
<S> <C> <C>
Assets
Cash and due from banks $ 28,615 $ 27,561
Money market investments 6,000 19,000
Securities held to maturity (estimated market value of
$172,181 and $152,055, respectively) 175,160 152,280
Mortgage-backed securities held to maturity (estimated market
value of $2,560 and $20,332, respectively) 2,556 19,680
Securities available for sale 11,245 4,656
Mortgage loans:
1-4 family 148,224 178,770
Multi-family 1,519,275 1,239,094
Commercial real estate 91,302 67,494
Construction 3,703 1,898
----------- -----------
Total mortgage loans 1,762,504 1,487,256
Other loans 8,859 9,750
Less: Unearned loan fees (2,374) (1,056)
Allowance for loan losses (7,431) (9,431)
----------- -----------
Loans, net 1,761,558 1,486,519
Premises and equipment, net 10,036 10,399
Deferred tax asset, net 5,314 5,917
Other assets 27,197 20,870
----------- -----------
Total assets $ 2,027,681 $ 1,746,882
=========== ===========
Liabilities and Stockholders' Equity
Deposits:
NOW and money market accounts $ 103,513 $ 70,423
Savings accounts 275,103 273,357
Certificates of deposit 717,555 722,985
Non-interest-bearing accounts 37,207 35,520
----------- -----------
Total deposits 1,133,378 1,102,285
----------- -----------
Official checks outstanding 30,170 34,487
FHLB advances 699,310 439,055
Mortgagors' escrow 15,009 13,084
Other liabilities 9,342 8,565
----------- -----------
Total liabilities 1,887,209 1,597,476
----------- -----------
Stockholders' equity:
Preferred stock at par $0.01 (5,000,000 shares authorized; none issued) -- --
Common stock at par $0.01 (60,000,000 shares authorized;
30,970,693 shares issued; 21,237,774 and 21,250,897 shares
outstanding at September 30, 1999 and December 31, 1998, respectively) 310 310
Paid-in capital in excess of par 145,573 138,180
Retained earnings (substantially restricted) 149,354 165,383
Less: Treasury stock (9,732,919 and 9,719,796 shares, respectively) (138,546) (137,901)
Unallocated common stock held by ESOP (12,483) (12,767)
Common stock held by SERP (3,770) (3,770)
Unearned common stock held by RRPs (41) (63)
Accumulated other comprehensive income, net of tax effect 75 34
----------- -----------
Total stockholders' equity 140,472 149,406
----------- -----------
Total liabilities and stockholders' equity $ 2,027,681 $ 1,746,882
=========== ===========
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest Income:
Mortgage and other loans $ 33,936 $ 31,473 $ 96,424 $ 92,041
Securities 2,631 1,982 7,230 5,408
Mortgage-backed securities 199 530 830 1,942
Money market investments 54 137 387 383
--------- --------- --------- ---------
Total interest income 36,820 34,122 104,871 99,774
--------- --------- --------- ---------
Interest Expense:
NOW and money market accounts 763 495 1,663 1,508
Savings accounts 1,600 1,550 4,729 4,665
Certificates of deposit 8,610 8,996 26,490 26,805
FHLB advances 8,284 5,774 20,358 15,456
Mortgagors' escrow 6 8 21 36
--------- --------- --------- ---------
Total interest expense 19,263 16,823 53,261 48,470
--------- --------- --------- ---------
Net interest income 17,557 17,299 51,610 51,304
Reversal of provision for loan losses -- -- (2,000) --
--------- --------- --------- ---------
Net interest income after reversal of
provision for loan losses 17,557 17,299 53,610 51,304
Other Operating Income:
Fee income 469 476 1,402 1,667
Other 112 161 322 394
--------- --------- --------- ---------
Total other operating income 581 637 1,724 2,061
--------- --------- --------- ---------
Operating Expense:
Compensation and benefits(1) 1,734 4,604 9,324 14,184
Occupancy and equipment 453 660 1,624 1,937
General and administrative 1,227 1,183 3,681 3,491
Other 130 213 341 467
--------- --------- --------- ---------
Total operating expense 3,544 6,660 14,970 20,079
--------- --------- --------- ---------
Income before income taxes 14,594 11,276 40,364 33,286
Income tax expense(2) 5,819 4,326 15,904 13,458
--------- --------- --------- ---------
Net Income $ 8,775 $ 6,950 $ 24,460 $ 19,828
--------- --------- --------- ---------
Comprehensive income, net of tax:
Unrealized gain on securities (107) (437) 41 (227)
--------- --------- --------- ---------
Comprehensive income $ 8,668 $ 6,513 $ 24,501 $ 19,601
========= ========= ========= =========
Earnings per share $ 0.47 $ 0.36 $ 1.31 $ 1.02
Diluted earnings per share $ 0.46 $ 0.34 $ 1.28 $ 0.97
</TABLE>
(1) Includes non-cash items of $0.627 million, $1.570 million, $1.950 million,
and $5.073 million, respectively.
(2) Includes non-cash items of $2.155 million, $1.523 million, $5.747 million,
and $6.150 million, respectively.
See accompanying notes to financial statements.
2
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Nine Months Ended
(in thousands) September 30, 1999
- --------------------------------------------------------------------------------
Common Stock (Par Value: $0.01):
Balance at beginning of year $ 310
Shares issued --
---------
Balance at end of period 310
---------
Paid-in Capital in Excess of Par:
Balance at beginning of year 138,180
Tax benefit effect on stock plans 5,747
Allocation of ESOP stock 1,646
---------
Balance at end of period 145,573
---------
Retained Earnings:
Balance at beginning of year 165,383
Net income 24,460
Dividends paid on common stock (13,981)
Exercise of stock options (992,963 shares) (26,508)
---------
Balance at end of period 149,354
---------
Treasury Stock:
Balance at beginning of year (137,901)
Purchase of common stock (1,006,086 shares) (30,232)
Exercise of stock options (992,963 shares) 29,587
---------
Balance at end of period (138,546)
---------
Employee Stock Ownership Plan:
Balance at beginning of year (12,767)
Allocation of ESOP stock 284
---------
Balance at end of period (12,483)
---------
SERP Plan:
Balance at beginning of year (3,770)
Common stock acquired by SERP --
---------
Balance at end of period (3,770)
---------
Recognition and Retention Plans:
Balance at beginning of year (63)
Earned portion of RRPs 22
---------
Balance at end of period (41)
---------
Accumulated Comprehensive Income, Net of Tax:
Balance at beginning of year 34
Net unrealized appreciation in securities, net of tax 41
---------
Balance at end of year 75
---------
Total stockholders' equity $ 140,472
=========
See accompanying notes to financial statements.
3
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 24,460 $ 19,828
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 666 698
Reversal of provision for loan losses (2,000) --
Amortization of premiums, net 3 93
Amortization of net deferred loan origination fees 1,318 153
Net gain on redemption of securities and mortgage-backed securities (90) (81)
Net gain on sale of foreclosed real estate (116) (167)
Tax benefit effect on stock plans 5,747 6,150
Earned portion of RRPs 22 556
Earned portion of ESOP 1,930 3,521
Changes in assets and liabilities:
Decrease (increase) in deferred income taxes 603 (282)
Increase in other assets (6,327) (1,740)
Decrease in official checks outstanding (4,317) (15,971)
Increase (decrease) in other liabilities 777 (3,890)
--------- ---------
Total adjustments (1,784) (10,960)
--------- ---------
Net cash provided by operating activities 22,676 8,868
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturity of securities/mortgage-backed
securities held to maturity 16,917 87,548
Proceeds from redemption of securities available for sale 14,452 3,017
Purchase of securities held to maturity (38,550) (103,838)
Purchase of securities available for sale (5,000) (2,022)
Net increase in loans (277,452) (96,746)
Proceeds from sale of loans and foreclosed real estate 3,176 9,763
Purchase of premises and equipment, net (303) (183)
--------- ---------
Net cash used in investing activities (286,760) (102,461)
--------- ---------
Cash Flows from Financing Activities:
Net increase in mortgagors' escrow 1,925 4,463
Net increase in deposits 31,093 5,450
Net increase in FHLB advances 260,255 135,858
Cash dividends paid and options exercised, net (40,490) (23,144)
Purchase of Treasury stock, net of stock options exercised
and shares acquired by SERP (645) (29,277)
--------- ---------
Net cash provided by financing activities 252,138 93,350
--------- ---------
Net decrease in cash and cash equivalents (11,946) (243)
Cash and cash equivalents at beginning of period 46,561 22,733
--------- ---------
Cash and cash equivalents at end of period $ 34,615 $ 22,490
========= =========
Supplemental information:
Cash paid for:
Interest $ 53,222 $ 48,389
Income taxes 11,000 8,374
Transfers to foreclosed real estate from loans 519 772
Transfers to real estate held for investment from foreclosed real estate 457 535
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Queens County Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Queens County Savings Bank (the "Bank").
The statements reflect all normal recurring adjustments which are, in the
opinion of management, necessary to present a fair statement of the Company's
results for the periods presented. The results of operations for the three and
nine months ended September 30, 1999 are not necessarily indicative of the
results of operations that may be expected for all of 1999.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC").
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's 1998 Annual Report to Shareholders and Annual Report on SEC Form
10-K.
Note 2. 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.
The FASB originally determined that SFAS No. 133 would be effective for
financial statements issued for periods beginning after June 15, 1999. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
which postponed the effective date to June 15, 2000, with early adoption
permitted. The Company adopted SFAS Nos. 133 and 137 on April 1, 1999.
5
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Queens County Bancorp, Inc. (the "Company") is the holding company for Queens
County Savings Bank (the "Bank"), the first savings bank chartered by the State
of New York in the New York City Borough of Queens. The Bank gathers deposits
from its customers in Queens and Nassau County and invests these funds in the
origination of residential mortgage loans throughout metropolitan New York.
In the third quarter of 1999, the Company reported earnings of $8.8 million,
including an $862,000 after-tax curtailment gain stemming from the freezing of
its defined benefit pension plan at September 30th. The one-time gain
contributed $0.04 to diluted earnings per share of $0.46 in the current
three-month period. Absent this gain, the Company's third quarter 1999 earnings
were equivalent to $7.9 million, signifying a 23.5% increase in diluted earnings
per share to $0.42.
The Company's earnings continued to stem from two primary factors: record loan
production and expense control. The Company originated $226.2 million in
mortgage loans during the current third quarter, bringing the average balance of
interest-earning assets to $1.9 billion, an increase of 14.3% year-over-year.
Supported by the growth in interest-earning assets, net interest income rose to
$17.6 million, despite declines in interest rate spread and net interest margin.
The Company also reported a 46.8% decline in operating expense to $3.5 million,
primarily reflecting the curtailment of the defined benefit pension plan.
Reflecting the reduction in operating expense and the rise in net interest
income, the Company's efficiency ratio improved to 19.54% in the third quarter
of 1999.
Another highlight of the quarter was the July 31st opening of a full-service
branch in Woodside, which partially contributed to a $31.1 million increase in
total deposits at quarter's end. The majority of the increase stemmed from
low-cost deposits, primarily in the form of NOW and money market accounts. On
October 22, 1999, the Company opened its third customer service center, in
Corona Heights, bringing the total number of Queens County Savings Bank offices
to 14.
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions.
Forward-looking statements contained within this report with regard to the
Company's prospective performance and strategies are based on management's
current expectations regarding a range of issues that could potentially impact
the Company's performance in future periods. Where such forward-looking
statements appear in the text, they are typically accompanied by cautionary
language identifying the specific factors that could adversely affect 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. These risks and
uncertainties should be considered in
6
<PAGE>
evaluating forward-looking statements and undue reliance should not be placed on
such statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, are included in the Company's filings with the SEC.
The Company does not undertake--and specifically disclaims any obligation--to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Financial Condition
Balance Sheet Summary
Sparked by the record level of mortgage loan originations, the Company's assets
grew $280.8 million, or 16.1%, to $2.0 billion in the first nine months of 1999.
Mortgage loans represented $1.8 billion, or 86.9%, of total assets at September
30, up from $1.5 billion, or 85.1%, at December 31, 1998.
The $275.2 million, or 18.5%, increase in mortgage loans outstanding reflects
year-to-date originations of $539.5 million, including $226.2 million in the
three months ended September 30, 1999. Multi-family mortgage loans accounted for
$488.0 million of year-to-date loan production, including $202.3 million in the
third quarter of the year. At quarter's end, multi-family mortgage loans totaled
$1.5 billion, up $280.1 million, or 22.6%, from $1.2 billion at December 31,
1998. The rise in outstanding mortgage loans at September 30 was also boosted by
growth in the portfolios of commercial real estate and construction loans.
Typically considered one of its primary features, the Company's asset quality
continued to improve in the third quarter of 1999. At September 30,
non-performing assets declined to $3.9 million, or 0.19% of total assets,
reflecting significant reductions in the levels of non-performing loans and
foreclosed real estate. Non-performing loans declined to $3.8 million, or 0.22%
of loans, net, while foreclosed real estate declined to $66,000. In addition,
the Company recorded its 20th consecutive quarter without any net charge-offs
and maintained the fully performing status of its multi-family mortgage loan
portfolio.
Reflecting the reversal of $2.0 million in the first quarter, the allowance for
loan losses totaled $7.4 million at September 30, 1999. The $7.4 million was
equivalent to 193.56% of non-performing loans and 0.42% of loans, net at this
date.
In addition to the substantial rise in mortgage loans outstanding, the growth in
total assets was supported by an increase in securities. At September 30, 1999,
the balance of securities held to maturity rose to $175.2 million, up $22.9
million since year-end 1998. Reflecting the second quarter 1999 reclassification
of certain mortgage-backed securities held to maturity as securities available
for sale, the balance of the former declined to $2.6 million from $19.7 million,
while the balance of the latter rose to $11.2 million from $4.6 million. Money
market investments declined to $6.0 million from $19.0 million, while other
loans declined to $8.9 million from $9.8 million.
Deposits rose $31.1 million to $1.1 billion, primarily reflecting a $33.1
million rise in NOW and money market accounts to $103.5 million. Savings
accounts and non-interest-bearing accounts each rose $1.7 million, while CDs
declined $5.4 million to $717.6 million at September 30, 1999. The increase in
deposits partly reflects the opening of a full-service branch during the third
quarter, as mentioned. Additional funding stemmed from the Company's Federal
Home Loan Bank of New York ("FHLB") line of credit, with FHLB advances rising to
$699.3 million from $439.1 million at year-end 1998.
Supported by cash earnings of $34.3 million, stockholders' equity totaled $140.5
million, or 6.93% of total assets, at September 30, 1999, representing a book
value of $7.62 per share, based on 18,439,602 shares. In the first nine months
of 1999, $30.2 million was allocated toward the repurchase of 1,006,086 shares
of Company stock.
7
<PAGE>
In addition, the Bank and the Company continued to exceed the minimum capital
levels required by the FDIC and the Federal Reserve Board, respectively. The
Bank recorded a leverage capital ratio of 9.11%, a Tier 1 risk-based capital
ratio of 13.45%, and a total risk-based capital ratio of 13.96%, well above the
minimum requirements for classification as a "well capitalized" institution.
Loans
In the third quarter of 1999, the Company exceeded its prior loan production
record with the origination of $226.2 million in mortgage loans. As a result,
mortgage production for the year to date rose to $539.5 million, exceeding
1998's twelve-month production by 19.3%. Multi-family mortgage loans accounted
for $488.0 million, or 90.5%, of year-to-date loan production and $202.3
million, or 89.4%, of originations in the current three-month period.
Reflecting the significant rise in originations, the balance of mortgage loans
rose $275.2 million, or 18.5%, to $1.8 billion, representing 86.9% of total
assets at September 30, 1999. Multi-family mortgage loans represented $1.5
billion, or 86.2%, of mortgage loans outstanding, having risen $280.1 million,
or 22.6%, from $1.2 billion at December 31, 1998.
The majority of the Company's multi-family mortgage loans feature a fixed rate
of interest for the first five years of the mortgage before adjusting to a point
over prime in each of years six through ten. Also included in the portfolio are
a smaller number of loans featuring a rate of interest that steps up 50 basis
points in each of years two through five of the mortgage, regardless of the
direction of market interest rates. At September 30, 1999, such "step-up" loans
totaled $165.4 million, with loans of $66.7 million, $42.5 million, $38.8
million, and $17.4 million due to reprice upward over the next four quarters,
respectively.
The Company's loan growth also stemmed from a $23.8 million increase in
commercial real estate loans to $91.3 million and a $1.8 million increase in
construction loans to $3.7 million. The higher balance of commercial real estate
loans reflects third quarter and nine-month originations of $19.4 million and
$34.6 million, respectively, while the higher balance of construction loans
reflects originations of $517,000 and $3.0 million in the corresponding periods.
The balance of one-to-four family mortgage loans declined $30.5 million to
$148.2 million despite nine-month originations of $13.9 million, including $4.0
million in the third quarter of the year.
In addition to mortgage loans, the Company originates other loans, such as home
equity lines of credit, to address the needs of its customers in Queens and
Nassau Counties. At September 30, 1999, the portfolio of other loans totaled
$8.9 million, down from $9.8 million at December 31, 1998.
With a pipeline of $100.0 million two weeks into the fourth quarter, the Company
is currently on track to exceed the volume of loans produced in 1998 by better
than 40%. However, it should be noted that the Company's ability to close these
loans depends on several factors, including competition for product and a change
in market interest rates.
In addition, the Company is currently exploring ways of capitalizing on its
capacity for mortgage loan production by offering participations to other banks.
The Company anticipates that its review of available options will be completed
in the fourth quarter, and that a participation program will be initiated in the
first half of the year 2000.
Asset Quality
The Company maintained the high quality of its assets in the third quarter of
1999. At September 30, non-performing assets declined to $3.9 million, or 0.19%
of total assets, from $5.6 million, or 0.30%, at the end of the trailing
quarter, and from $6.6 million, or 0.38%, at December 31, 1998. In addition, the
Company recorded its 20th consecutive quarter without any net charge-offs,
reducing the average to $107,000 per year since 1987.
8
<PAGE>
The improvement in asset quality stemmed from significant reductions in the
levels of non-performing loans and foreclosed real estate. Specifically,
non-performing loans declined to $3.8 million, or 0.22% of loans, net, at the
close of the current quarter, from $5.5 million, or 0.34%, at June 30, 1999, and
from $6.2 million, or 0.42%, at year-end 1998. Similarly, foreclosed real estate
declined to $66,000 from $143,000 and $419,000 at the corresponding dates. The
decline in foreclosed real estate reflected the sale of two properties in the
third quarter, leaving one residential property to be marketed for sale.
At September 30, 1999, non-performing loans consisted of 28 mortgage loans in
foreclosure totaling $3.7 million and eight loans 90 days or more delinquent
totaling $185,000. All but one of the Company's non-performing loans were
secured by one-to-four family homes; the Company has no non-performing
construction or multi-family mortgage loans.
In view of the quality of the Company's assets, the allowance for loan losses
has been maintained at $7.4 million since the reversal of $2.0 million in the
first quarter of 1999. In addition to representing 193.56% of non-performing
loans and 0.42% of loans, net, at September 30, 1999, the $7.4 million is
equivalent to 521.11% of accumulated net charge-offs for the thirteen years
ended at that date.
From time to time, properties that are classified as "non-performing" are
profitably rented by the Company. When this occurs, such properties are
reclassified as "investments in real estate" and included in "other assets" on
the balance sheet. At September 30, 1999, the Company had 20 such investments,
totaling $2.1 million and generating an 8.0% rate of return to the Bank.
For additional information, see the asset quality analysis that follows and the
discussion of the provision for loan losses on pages 16 and 21 of this report.
Asset Quality Analysis
At or For the At or For the
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
(dollars in thousands) (unaudited)
- --------------------------------------------------------------------------------
Allowance for Loan Losses:
Balance at beginning of period $ 9,431 $ 9,431
Reversal of provision for loan losses (2,000) --
------- -------
Balance at end of period $ 7,431 $ 9,431
======= =======
Non-performing Assets at Period-end:
Mortgage loans in foreclosure $ 3,654 $ 5,530
Loans 90 days or more delinquent 185 663
------- -------
Total non-performing loans 3,839 6,193
Foreclosed real estate 66 419
------- -------
Total non-performing assets $ 3,905 $ 6,612
======= =======
Ratios:
Non-performing loans to loans, net 0.22% 0.42%
Non-performing assets to total assets 0.19 0.38
Allowance for loan losses to non-performing loans 193.56 152.28
Allowance for loan losses to loans, net 0.42 0.63
Allowance for loan losses to accumulated net
charge-offs since 1987 521.11 661.36
9
<PAGE>
Securities Held to Maturity, Securities Available for Sale, and Money Market
Investments
In addition to investing in mortgage loan originations, the Company invests
selectively in securities. The Company's portfolio of securities held to
maturity consists of short-term securities in the form of U.S. Government and
agency obligations, while its smaller portfolio of securities available for sale
consists of equity securities and mortgage-backed securities. Additional funds
are invested in money market investments, typically in the form of Federal funds
sold.
At September 30, 1999, the balance of securities held to maturity rose 15.0% to
$175.2 million from $152.3 million at December 31, 1998. U.S. Government and
agency obligations comprised $140.3 million of the September 30, 1999 total,
with FHLB stock representing $34.8 million. At year-end 1998, U.S. Government
and agency obligations comprised $122.9 million of the total balance, with U.S.
Treasuries and FHLB stock representing $7.0 million and $22.4 million,
respectively. The average maturity of securities held to maturity at September
30, 1999 was 2.5 years.
At September 30, 1999 and December 31, 1998, the respective market values of
securities held to maturity were $172.2 million and $152.1 million, equivalent
to 98.3% and 99.9% of carrying value at the respective dates.
The portfolio of securities available for sale rose to $11.2 million at
September 30, 1999 from $4.7 million at December 31, 1998. Upon the early
adoption of SFAS Nos. 133 and 137, $14.2 million in mortgage-backed securities
were reclassified as securities available for sale in the second quarter of
1999.
Money market investments totaled $6.0 million at September 30, 1999, down from
$19.0 million at year-end 1998.
Mortgage-backed Securities Held to Maturity
Partially reflecting the reclassification of $14.2 million in mortgage-backed
securities as securities available for sale in the second quarter, the portfolio
of mortgage-backed securities held to maturity declined to $2.6 million at
September 30, 1999 from $19.7 million at December 31, 1998. The reduction was
also due to prepayments and the absence of any new investments in
mortgage-backed securities since the first quarter of 1994.
At September 30, 1999 and December 31, 1998, the respective market values of the
portfolio were $2.6 million and $20.3 million, equivalent to 100.2% and 103.3%
of carrying value at the corresponding dates. The average maturity of the
portfolio at September 30, 1999 was 1.5 years.
Sources of Funds
The Company's funding stems primarily from the deposits it gathers, together
with interest and principal payments on loans, and the interest on, and maturity
of, securities. During times of increased loan demand, additional funding is
derived from the Company's FHLB line of credit, which totaled $811.1 million at
September 30, 1999. With a record $539.5 million in mortgage loans originated
during the current nine-month period, FHLB advances rose to $699.3 million from
$439.1 million at December 31, 1998.
Fueled by a $33.1 million rise in NOW and money market accounts to $103.5
million, total deposits rose $31.1 million to $1.1 billion at September 30,
1999. Savings accounts and non-interest-bearing accounts each rose $1.7 million
to $275.1 million and $37.2 million, respectively, helping to offset a $5.4
million decline in CDs to $717.6 million.
The higher balance of deposits stemmed, in part, from the opening of a
full-service branch office in Woodside, Queens on July 31st. More recently, the
Bank opened a customer service center in Corona Heights, on October 22nd. To
attract additional deposits, the Company's online banking service has been
expanded to enable customers to purchase CDs online.
10
<PAGE>
Market Risk and Interest Rate Sensitivity
Given the extent to which changes in market interest rates may influence net
interest income, one of management's primary objectives is matching the interest
rate sensitivity of the Company's assets and liabilities in order to manage
interest rate risk.
The process of assessing and managing interest rate risk is governed by policies
established by senior management that are reviewed and approved by the Board of
Directors. Senior management meets periodically to evaluate the impact of
changes in market interest rates on assets and liabilities, net interest margin,
and capital and liquidity, as well as to evaluate its strategic plans. As part
of this process, management measures the sensitivity of net interest income to
changes in interest rates; this process involves making estimations, based on
certain assumptions that management believes to be reasonable. In addition to
considering the relative sensitivity of assets and liabilities to changes in
market interest rates, other factors considered include scheduled maturities,
repricing characteristics, deposit growth and retention, and estimated cash
flows.
The relative sensitivity of assets and liabilities is particularly important, as
the Bank's core deposits are not subject to the same degree of interest rate
sensitivity as its assets. Core deposit costs are internally controlled, and
generally exhibit less sensitivity to changes in interest rates than adjustable
rate assets, which feature yields based on external indices; consequently, said
yields tend to change in concert with market interest rates.
It is management's objective to maintain a stable level of net interest income
under a range of probable rate scenarios. In order to accomplish this objective,
management has traditionally emphasized the origination of adjustable rate
mortgage loans on one-to-four family homes and multi-family buildings, and has
generally limited its other investments to short-term securities. On the
liability side of the balance sheet, management closely monitors the pricing of
its depository products and has profitably utilized its FHLB line of credit to
generate interest-earning asset growth.
At September 30, 1999, the Company's exposure to interest rate risk was
comparable to that discussed in the 1998 Annual Report to Shareholders.
Liquidity and Capital Position
Liquidity
As previously indicated, deposits and borrowings are the Company's primary
funding sources, with additional funding stemming from interest and principal
payments on loans, securities, and mortgage-backed securities. 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.
The Company primarily invests in mortgage loan originations and supplements such
investments with the purchase of short-term securities. In the first nine months
of 1999, the Company invested $539.5 million in mortgage loan originations
(resulting in a net increase in loans of $277.5 million), $38.6 million in
securities held to maturity, and $5.0 million in securities available for sale.
These activities were funded by internal cash flows generated by the Bank's
financing and operating activities. In the first nine months of 1999, the net
cash provided by financing activities totaled $252.1 million, while the net cash
provided by operating activities totaled $22.7 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 combined total of $34.6 million at September 30, 1999, as
compared to $46.6 million at December 31, 1998. In addition, the Company had
securities available for sale of $11.2 million and $4.7 million at the
corresponding
11
<PAGE>
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.
Two weeks into the fourth quarter of 1999, the Bank had loans of $100.0 million
in the pipeline, which management anticipates having sufficient funds to
fulfill. In addition, CDs due to mature in one year or less from September 30,
1999 totaled $552.5 million; based on its current rate of retention, management
believes that the Bank will retain a significant portion of such deposits. In
the twelve months ended September 30, 1999, 90.5% of maturing CDs were, in fact,
retained by the Bank.
Capital Position
Reflecting cash earnings of $34.3 million, stockholders' equity totaled $140.5
million, or 6.93% of total assets, at September 30, 1999, which was equivalent
to a book value of $7.62 per share, based on 18,439,602 shares. At December 31,
1998, stockholders' equity totaled $149.4 million, or 8.55% of total assets,
equivalent to a book value of $8.13 per share, based on 18,389,114 shares.
In the first nine months of 1999, the Company distributed $13.9 million in cash
dividends and allocated $30.2 million toward the repurchase of 1,006,086 shares
of Company stock. Under the stock repurchase program authorized by the Board of
Directors on June 15, 1999, the number of shares still available for repurchase
at quarter's end was 142,974.
Like the Company, the Bank has maintained a solid capital position, with
regulatory capital ratios that not only exceed the minimum levels required by
the FDIC but also qualify the Bank for classification as a "well capitalized"
institution. At September 30, 1999, the Bank's leverage capital totaled $174.7
million, or 9.11% of adjusted average assets, while its Tier 1 and total
risk-based capital amounted to $174.7 million and $181.3 million, or 13.45% and
13.96% of risk-weighted assets, respectively. The minimum Federal requirements
for leverage, Tier 1 risk-based, and total risk-based capital are, respectively,
3.00%, 4.00%, and 8.00%. 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.
Regulatory Capital Analysis (Bank Only)
<TABLE>
<CAPTION>
At September 30, 1999
--------------------------
Risk-Based Capital
------------------------
Leverage Capital Tier 1 Total
---------------------- -------- -------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------------ -------- ------------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Total savings bank equity $ 174,679 9.11% $ 174,679 13.45% $ 181,313 13.96%
Regulatory capital
requirement 57,512 3.00 51,950 4.00 103,900 8.00
---------- ---- --------- ---- --------- ----
Excess $ 117,167 6.11% $ 122,729 9.45% $ 77,413 5.96%
========== ===== ========= ==== ========= ====
</TABLE>
Comparison of the Three Months Ended September 30, 1999 and 1998
Earnings Summary
The Company recorded third quarter 1999 earnings of $8.8 million, or $0.46 on a
diluted per share basis, an increase of $1.8 million from $7.0 million, or $0.34
diluted per share, for the third quarter of 1998. Included in the 1999 amount
was an $862,000, or $0.04 per share, after-tax curtailment gain stemming from
the freezing of the Bank's defined benefit pension plan. Absent this gain, the
Company's third quarter 1999 core earnings rose
12
<PAGE>
to $7.9 million, representing a 23.5% increase in diluted core earnings per
share to $0.42. The $7.9 million was equivalent to a return on average assets of
1.65% and a return on average stockholders' equity of 23.49%.
In addition, the Company's third quarter 1999 cash earnings rose to $12.3
million, or $0.65 on a diluted per share basis, representing a cash ROA and ROE
of 2.56% and 36.43%. In the year-earlier quarter, the Company recorded cash
earnings of $10.5 million, or $0.52 diluted per share, representing a cash ROA
and ROE of 2.51% and 27.10%. Included in the 1999 cash EPS, ROA, and ROE figures
is the benefit of the one-time curtailment gain mentioned above.
The Company's third quarter 1999 earnings were driven by two primary factors: a
dramatic increase in mortgage loan production and a significant reduction in
operating expense. Reflecting loan originations of $226.2 million during the
quarter, the Company recorded a 14.3% increase in average interest-earning
assets to $1.9 billion, which supported a year-over-year increase in interest
income of $2.7 million to $36.8 million. The growth in interest income offset a
$2.5 million rise in interest expense to $19.3 million, resulting in a $258,000
increase in net interest income, year-over-year. Despite the contraction of its
spread and margin to 3.41% and 3.75%, respectively, the Company recorded net
interest income of $17.6 million, as compared to $17.3 million in the
year-earlier three months.
In addition to the rise in net interest income, the Company's current third
quarter earnings were fueled by a $3.1 million, or 46.8%, reduction in operating
expense to $3.5 million. This decrease was primarily due to a $2.9 million
decline in compensation and benefits, including $1.6 million stemming from the
freezing of the Bank's defined benefit pension plan. Reflecting the reduction in
operating expense and the growth in net interest income, the efficiency ratio
improved to 19.54% in the current third quarter and, on a cash earnings basis,
to 16.08%.
The reduction in operating expense more than offset a $56,000 decline in other
operating income to $581,000 and a $1.5 million increase in income tax expense
to $5.8 million.
The provision for loan losses was suspended in the current third quarter, making
this the 20th consecutive quarter without a provision having been made.
Cash Earnings Analysis
(in thousands, except per share data)
For the
Three Months Ended
September 30,
-----------------
1999 1998
------- -------
Net income $ 8,775 $ 6,950
Additional contributions to stockholders' equity:
Amortization and appreciation of stock-related
benefit plans 627 1,570
Associated tax benefits 2,155 1,523
Amortization of goodwill -- --
Other 715 505
------- -------
Cash earnings $12,272 $10,548
======= =======
Cash earnings per share $ 0.66 $ 0.55
Diluted cash earnings per share $ 0.65 $ 0.52
13
<PAGE>
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.
In the third quarter of 1999, interest income rose to $36.8 million from $34.1
million in the third quarter of 1998. The 7.9% increase stemmed from a $233.6
million, or 14.3%, rise in average interest-earning assets to $1.9 billion,
which offset a 47-basis point decline in the average yield to 7.86%.
The growth in interest-earning assets was primarily fueled by a $214.7 million
rise in the average balance of mortgage and other loans to $1.7 billion,
offsetting a 51-basis point decline in the average yield to 8.06%. As a result,
the interest income generated by loans rose $2.5 million, or 7.8%, to $33.9
million, representing 92.2% of total interest income in the current three-month
period (unchanged from the percentage in the third quarter of 1998). The
concentration of loans within the mix of interest-earning assets was virtually
constant, equaling 89.9% and 89.7%, respectively, in the current and
year-earlier three-month periods.
Interest income was further boosted by a $45.8 million rise in the average
balance of securities to $171.5 million, offsetting a 17-basis point decline in
the average yield to 6.14%. As a result, the interest income derived from
securities rose $649,000 to $2.6 million, representing 7.2% of interest income
in the current quarter, as compared to 5.8% in the year-earlier three months.
Securities represented 9.2% of average interest-earning assets in the current
quarter, up from 7.7% in the third quarter of 1998.
Money market investments generated interest income of $54,000, down $83,000 from
$137,000 in the third quarter of 1998. The decrease reflects a $5.9 million
decline in the average balance to $4.2 million and a 26-basis point drop in the
average yield to 5.09%.
Mortgage-backed securities contributed $199,000 to total interest income, down
$331,000 from the level contributed in the year-earlier three months. The
reduction was the net result of a $21.0 million decline in the average balance
to $12.5 million and a two-basis point rise in the average yield to 6.34%.
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.
The Company recorded third quarter 1999 interest expense of $19.3 million,
representing a 14.5% increase from $16.8 million in the third quarter of 1998.
The $2.5 million rise was the net result of a $251.3 million, or 17.1%, increase
in average interest-bearing liabilities to $1.7 billion and a 10-basis point
reduction in the average cost to 4.45%.
The growth in average interest-bearing liabilities stemmed from a $185.3 million
rise in the average balance of FHLB advances to $621.7 million and a combined
increase of $66.0 million in the average balance of interest-bearing deposits to
$1.1 billion. Coupled with a four-basis point rise in the average cost to 5.29%,
the higher average balance of FHLB advances generated interest expense of $8.3
million, up $2.5 million from the year-earlier amount. FHLB advances represented
36.2% of average interest-bearing liabilities in the current third quarter and
accounted for 43.0% of total interest expense. In the year-earlier quarter, the
respective percentages were 29.8% and 34.3%.
CDs represented $35.9 million of the increase in average interest-bearing
deposits, with an average balance of $710.3 million. Tempered by a 48-basis
point decline in the average cost to 4.81%, CDs generated interest expense of
$8.6 million in the current third quarter, down $386,000 from the year-earlier
amount. CDs thus represented 41.3% and 46.0% of average interest-bearing
liabilities in the current and year-ago third quarters, and accounted for 44.7%
and 53.5%, respectively, of total interest expense.
14
<PAGE>
Other funding (including savings, NOW and money market accounts,
non-interest-bearing accounts, and mortgagors' escrow) rose $35.8 million to
$423.7 million, producing combined interest expense of $2.4 million, as compared
to $2.1 million in the year-earlier three months. The average cost of these
funds was 2.24% in the current quarter, up 12 basis points.
Savings accounts generated $1.6 million in interest expense in the current
three-month period, up $50,000 from the level recorded in the third quarter of
1998. The increase was the result of a $7.4 million increase in the average
balance to $275.5 million and a one-basis point jump in the average cost to
2.30%. Savings accounts represented 16.0% of average interest-bearing
liabilities in the current third quarter and generated 8.3% of total interest
expense.
NOW and money market accounts generated interest expense of $763,000, up
$268,000 from the year-earlier amount. The increase stemmed from a $22.6 million
rise in the average balance to $92.6 million and a 46-basis point rise in the
average cost to 3.27%. NOW and money market accounts represented 5.4% of average
interest-bearing liabilities in the current third quarter and accounted for 4.0%
of total interest expense.
The interest expense produced by mortgagors' escrow accounts dropped $2,000 to
$6,000, the net effect of a $68,000 rise in the average balance to $17.8 million
and a five-basis point decline in the average cost to 0.13%.
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, in turn, are influenced by the
pricing and mix of the Company's interest-earning assets and funding sources,
and by such external factors as economic conditions, competition for loans and
deposits, and the monetary policy of the Federal Open Market Committee of the
Federal Reserve Board of Governors.
Supported by the growth in interest-earning assets, net interest income totaled
$17.6 million in the current third quarter, up $67,000 from $17.5 million in the
trailing quarter, and up $258,000 from $17.3 million in the third quarter of
1998. At the same time, the Company's interest rate spread and net interest
margin were affected by both external rates and a significant change in the
yields on the Company's assets, which reflected $1.0 billion in rate changes
year-to-date. The Company's spread and margin declined to 3.41% and 3.75%,
respectively, in the current third quarter, from 3.60% and 4.00% in the trailing
quarter and from 3.78% and 4.22% in the third quarter of 1998.
Reflecting the current rate environment, and the pricing of the Company's recent
originations, management anticipates that the contraction of spreads and margins
will continue in the fourth quarter, although to a lesser extent than that
experienced in the third quarter of 1999. However, it is cautioned that the
direction of spreads and margins may at any time be impacted by the factors
identified in the first paragraph, above.
15
<PAGE>
Net Interest Income Analysis
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage and other loans, net $1,684,350 $ 33,936 8.06% $1,469,631 $ 31,473 8.57%
Securities 171,495 2,631 6.14 125,694 1,982 6.31
Mortgage-backed securities 12,547 199 6.34 33,549 530 6.32
Money market investments 4,212 54 5.09 10,155 137 5.35
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 1,872,604 36,820 7.86% 1,639,029 34,122 8.33%
Non-interest-earning assets 45,470 44,260
---------- ----------
Total assets $1,918,074 $1,683,289
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
NOW and money market accounts $ 92,574 $ 763 3.27% $ 69,964 $ 495 2.81%
Savings accounts 275,454 1,600 2.30 268,022 1,550 2.29
Certificates of deposit 710,285 8,610 4.81 674,359 8,996 5.29
FHLB advances 621,718 8,284 5.29 436,410 5,774 5.25
Mortgagors' escrow 17,778 6 0.13 17,710 8 0.18
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,717,809 19,263 4.45% 1,466,465 16,823 4.55%
---------- ----------
Non-interest-bearing deposits 37,924 32,203
Other liabilities 27,590 28,938
---------- ----------
Total liabilities 1,783,323 1,527,606
Stockholders' equity 134,751 155,683
---------- ----------
Total liabilities and stockholders' equity $1,918,074 $1,683,289
========== ==========
Net interest income/interest rate spread $ 17,557 3.41% $ 17,299 3.78%
========== ========== ========== ==========
Net interest-earning assets/net interest
margin $ 154,795 3.75 $ 172,564 4.22
========== ========== ========== ==========
Ratio of interest-earning assets to
interest-bearing liabilities 109.01 111.77
========== ==========
</TABLE>
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.
The integrity of the Company's loan portfolio was maintained in the third
quarter, supporting the Company's record of stellar asset quality. In addition
to recording its 20th consecutive quarter without any net charge-offs, the
Company maintained the fully performing status of its $1.5 billion portfolio of
multi-family mortgage loans. Furthermore, the Company recorded significant
declines in the levels of non-performing loans and foreclosed real estate,
resulting in a $2.7 million reduction in non-performing assets, to $3.9 million,
since year-end 1998. Non-performing loans declined to $3.8 million, or 0.22% of
loans, net, at September 30, 1999, from $6.2 million, or 0.42% of loans, net, at
December 31st. Foreclosed real estate declined to $66,000 from $419,000 at the
corresponding dates.
16
<PAGE>
Consequently, the provision for loan losses was suspended for the 20th
consecutive quarter, maintaining the allowance for loan losses at $7.4 million,
or 193.56% of non-performing loans and 0.42% of loans, net. Reflecting the
historic strength of the Company's assets, the $7.4 million allowance represents
521.11% of accumulated net charge-offs for the past thirteen years.
Absent a change in the quality of the Company's assets or a downturn in the New
York City real estate market, management anticipates that it will maintain the
allowance for loan losses at the current level by suspending the provision for
loan losses for the remainder of the year.
For additional information about asset quality and the allowance for loan
losses, see the discussion and analysis on page 9 of this report.
Other Operating Income
The Company derives other operating income from service fees and fees charged on
loans and depository accounts.
In the third quarter of 1999, other operating income totaled $581,000, as
compared to $637,000 in the year-earlier three months. The $56,000 decline
stemmed from a $7,000 drop in fee income to $469,000 and a $49,000 decline in
other income to $112,000.
As a means of enhancing other operating income, the Company is reviewing
proposals from various firms that offer alternative investment products.
Beginning next year, such products will be sold through the Company's branch
network, generating fee income as a result.
As reported in the Company's 1998 Annual Report to Shareholders, the Company
entered into a contract under which the land adjoining its headquarters will be
profitably developed for commercial use. At this time, it appears that the
financial benefits of this transaction will begin to be reflected in the
Company's financial statements in the year 2000.
Operating Expense
Operating expense consists of compensation and benefits, occupancy and
equipment, general and administrative ("G&A"), and other expenses. The Company's
ability to contain such costs is reflected in its ratio of operating expense to
average assets and to the sum of net interest income and other operating income
(the "efficiency ratio").
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 back to stockholders'
equity at the end of the period.
The Company's third quarter 1999 earnings were substantially fueled by a 46.8%
reduction in operating expense to $3.5 million, or 0.74% of average assets, from
$6.7 million, or 1.58% of average assets, in the third quarter of 1998. Included
in the $3.1 million decline was a $2.9 million reduction in compensation and
benefits expense to $1.7 million, of which $1.6 million stemmed from the
freezing of the Bank's defined benefit pension plan at quarter's end. Also
included in third quarter 1999 compensation and benefits expense was $627,000
stemming from the amortization and appreciation of shares held in the Company's
stock-related benefit plans, down from $1.6 million in the year-earlier three
months.
Third quarter 1999 operating expense also benefited from a $207,000 reduction in
occupancy and equipment expense to $453,000 and an $83,000 reduction in other
operating expense to $130,000. These reductions more than offset a $44,000 rise
in G&A expense to $1.2 million.
17
<PAGE>
Reflecting the reduction in operating expense and the growth in net interest
income, the Company recorded an efficiency ratio of 19.54%, in the current third
quarter, as compared to 37.13% in the third quarter of 1998. On a cash earnings
basis, the comparison is more dramatic, with the Company recording a cash
efficiency ratio of 16.08% in the current third quarter versus 28.38% in the
year-earlier three months.
The Company had 293 full-time equivalent employees at September 30, 1999.
Income Tax Expense
Income tax expense rose to $5.8 million in the third quarter of 1999 from $4.3
million in the third quarter of 1998. The $1.5 million increase stemmed from a
$3.3 million rise in pre-tax income to $14.6 million and a 150-basis point
uptick in the effective tax rate to 39.9%. Also reflected in third quarter 1999
income tax expense were $2.2 million in plan-related items, as compared to $1.5
million in the year-earlier three months. While these items represent a charge
against GAAP earnings, they were added back to stockholders' equity at September
30th.
Comparison of the Nine Months Ended September 30, 1999 and 1998
Earnings Summary
The Company's earnings rose to $24.5 million, or $1.28 on a diluted per share
basis, in the first nine months of 1999 from $19.8 million, or $0.97 diluted per
share, in the first nine months of 1998. In addition to the one-time curtailment
gain in the third quarter, the nine-month 1999 amount includes a net benefit of
$1.1 million, or $0.06 per share, stemming from the reversal of $2.0 million
from the allowance for loan losses in the first quarter of the year. Absent the
net benefit of the reversal and the curtailment gain, the Company's core
nine-month earnings rose to $22.5 million, representing a 21.6% increase in
diluted core earnings per share to $1.18. The $22.5 million provided returns on
average assets and average stockholders' equity of 1.66% and 22.00%,
respectively.
The Company's cash earnings rose to $34.3 million, or $1.80 diluted per share,
in the current nine-month period from $32.5 million, or $1.59 diluted per share,
in the year-earlier nine months. The $34.3 million provided a cash return on
average assets of 2.52% and a cash return on average stockholders' equity of
33.48%.
The increase in nine-month earnings, like the increase in the third quarter,
stemmed from dramatic loan growth and expense control. Reflecting the
origination of $539.5 million in loans during the nine-month period, interest
income rose $5.1 million to $104.9 million, offsetting a $4.8 million increase
in interest expense to $53.3 million. Despite the narrowing of its spread and
margin, the Company recorded a $306,000 increase in net interest income to $51.6
million for the nine months ended September 30, 1999.
Earnings were also fueled by a 25.4% reduction in operating expense to $15.0
million, from $20.1 million in the year-earlier nine months. The $5.1 million
decline primarily stemmed from a $4.9 million reduction in compensation and
benefits expense to $9.3 million, including a savings of $1.6 million pursuant
to the freezing of the Company's defined benefit pension plan. Reflecting the
higher level of net interest income and the reduction in operating expense, the
efficiency ratio improved to 28.07%.
These favorable factors served to offset a $337,000 decline in other operating
income to $1.7 million and a $2.4 million increase in income tax expense to
$15.9 million. The decline in other operating income was the combined result of
a $265,000 reduction in fee income and a $72,000 reduction in other income from
the year-earlier amounts. The higher level of income tax expense primarily
reflects a $7.1 million rise in pre-tax income to $40.4 million.
18
<PAGE>
Cash Earnings Analysis
(in thousands, except per share data)
For the
Nine Months Ended
September 30,
1999 1998
------- -------
Net income $24,460 $19,828
Additional contributions to stockholders' equity:
Amortization and appreciation of stock-related
benefit plans 1,950 5,073
Associated tax benefits 5,747 6,150
Amortization of goodwill -- --
Other 2,145 1,414
------- -------
Cash earnings $34,302 $32,465
======= =======
Cash earnings per share $ 1.84 $ 1.68
Diluted cash earnings per share $ 1.80 $ 1.59
Interest Income
The Company recorded interest income of $104.9 million in the first nine months
of 1999, up $5.1 million from $99.8 million in the first nine months of 1998.
The increase was the net result of a $175.9 million rise in the average balance
of interest-earning assets to $1.8 billion and a 44-basis point decline in the
average yield to 7.90%.
The higher level of interest-earning assets was triggered by the record level of
mortgage loan originations, which boosted the average balance of mortgage and
other loans to $1.6 billion, a year-over-year increase of $153.5 million, or
10.7%. Offsetting a 46-basis point decline in the average yield to 8.12%, the
higher average balance of loans generated interest income of $96.4 million, up
$4.4 million from the year-earlier amount. Mortgage and other loans represented
89.5% of average interest-earning assets and provided 91.9% of interest income
in the current nine-month period.
The growth in interest income was further fueled by a $1.8 million increase in
the interest income provided by securities to $7.2 million, the net effect of a
$45.9 million rise in the average balance to $159.2 million and a 30-basis point
reduction in the average yield to 6.06%. Securities thus represented 9.0% of
average interest-earning assets and generated 6.9% of interest income
year-to-date.
Mortgage-backed securities generated interest income of $830,000 in the current
nine-month period, as compared to $1.9 million in the year-earlier nine months.
The $1.1 million decline was the net result of a $25.0 million reduction in the
average balance to $16.2 million, and a 54-basis point increase in the average
yield to 6.83%.
Money market investments contributed $387,000 to interest income in the current
nine-month period, up a nominal $4,000 from the year-earlier amount. The
increase was the net effect of a $1.5 million rise in the average balance to
$11.1 million and a 66-basis point reduction in the average yield to 4.67%.
Interest Expense
Interest expense rose to $53.3 million in the first nine months of 1999 from
$48.5 million in the first nine months of 1998. The $4.8 million increase was
the net effect of a $195.7 million rise in the average balance of
interest-bearing liabilities to $1.6 billion and a 16-basis point reduction in
the average cost to 4.41%.
The growth in interest-bearing liabilities primarily stemmed from a $133.4
million rise in the average balance of FHLB advances to $517.1 million and a
$62.3 million increase in the combined average balance of interest-
19
<PAGE>
bearing deposits to $1.1 billion. Tempered by a 13-basis point drop in the
average cost to 5.26%, the higher average balance of FHLB advances produced
interest expense of $20.4 million, up $4.9 million from the year-earlier amount.
FHLB advances represented 32.0% of average interest-bearing liabilities in the
current nine-month period and generated 38.2% of total interest expense. The
concentrations were lower in the prior nine-month period, amounting to 27.0% and
31.9%, respectively.
CDs produced interest expense of $26.5 million, down $315,000 from the
year-earlier level, the net effect of a $47.8 million increase in the average
balance to $722.1 million and a 42-basis point reduction in the average cost to
4.90%. CDs represented 44.7% of interest-bearing liabilities and produced 49.7%
of interest expense in the current nine-month period, down from 47.5% and 55.3%,
respectively, in the year-earlier nine months.
Other funding (savings accounts, NOW and money market accounts,
non-interest-bearing accounts, and mortgagors' escrow) generated interest
expense of $6.4 million, up $204,000, the net result of a $19.8 million increase
in the average balance and a four-basis point reduction in the average cost of
such funds to 2.07%. Specifically, savings accounts generated interest expense
of $4.7 million, up $64,000 from the level recorded in the first nine months of
1998. The increase was the net effect of a $6.0 million increase in the average
balance to $274.2 million and a one-basis point drop in the average cost to
2.31%.
NOW and money market accounts generated interest expense of $1.7 million, up
$155,000 from the year-earlier amount. The increase was the result of a $6.7
million rise in the average balance to $76.6 million and a two-basis point rise
in the average cost to 2.90%.
Mortgagors' escrow generated interest expense of $21,000, as compared to $36,000
in the year-earlier nine months. The decrease was the net effect of a $1.8
million increase in the average balance to $24.6 million and a 10-basis point
drop in the average cost to 0.11%.
Net Interest Income
Net interest income rose to $51.6 million for the first nine months of 1999 from
$51.3 million for the first nine months of 1998. The $306,000 increase was
supported by the $175.9 million, or 11.0%, rise in the average balance of
interest-earning assets to $1.8 billion, which helped to counteract reductions
of 28 and 40 basis points, respectively, in the Company's interest rate spread
and net interest margin to 3.49% and 3.89%.
20
<PAGE>
Net Interest Income Analysis
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage and other loans, net $1,583,591 $ 96,424 8.12% $1,430,094 $ 92,041 8.58%
Securities 159,165 7,230 6.06 113,293 5,408 6.36
Mortgage-backed securities 16,213 830 6.83 41,169 1,942 6.29
Money market investments 11,086 387 4.67 9,608 383 5.33
---------- ---------- ----- ---------- ---------- ----
Total interest-earning assets 1,770,055 104,871 7.90% 1,594,164 99,774 8.34%
Non-interest-earning assets 45,324 43,972
---------- ----------
Total assets $1,815,379 $1,638,136
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
NOW and money market accounts $ 76,608 $ 1,663 2.90% $ 69,925 $ 1,508 2.88%
Savings accounts 274,233 4,729 2.31 268,280 4,665 2.32
Certificates of deposit 722,107 26,490 4.90 674,259 26,805 5.32
FHLB advances 517,071 20,358 5.26 383,698 15,456 5.39
Mortgagors' escrow 24,608 21 0.11 22,813 36 0.21
---------- ---------- ------ ---------- ---------- ----
Total interest-bearing liabilities 1,614,627 53,261 4.41% 1,418,975 48,470 4.57%
---------- ----------
Non-interest-bearing deposits 36,707 31,319
Other liabilities 27,425 27,685
---------- ----------
Total liabilities 1,678,759 1,477,979
Stockholders' equity 136,620 160,157
---------- ----------
Total liabilities and stockholders' equity $1,815,379 $1,638,136
========== ==========
Net interest income/interest rate spread $ 51,610 3.49% $ 51,304 3.77%
========== ====== ========== ======
Net interest-earning assets/net interest
margin $ 155,428 3.89 $ 175,189 4.29
========== ====== ========== ======
Ratio of interest-earning assets to
interest-bearing liabilities 109.63 112.35
====== ======
</TABLE>
Provision for Loan Losses
Reflecting the quality of the Company's loans and the extent of coverage
provided, the Company reversed $2.0 million from the allowance for loan losses
in the first quarter of 1999. The net benefit of the reversal was $1.1 million,
or $0.06 per share.
In addition, the Company has suspended the provision for loan losses for twenty
consecutive quarters, having last set aside a provision in the third quarter of
1995.
For additional information regarding asset quality and the provision for loan
losses, see the respective discussions on pages 9 and 16 of this report.
21
<PAGE>
Other Operating Income
Other operating income totaled $1.7 million in the first nine months of 1999,
down from $2.1 million in the first nine months of 1998. The $337,000 decline
was the result of a $265,000 decrease in fee income to $1.4 million and a
$72,000 decrease in other income to $322,000. The higher level of fee income in
1998 primarily stemmed from prepayment penalties during a time of heightened
refinancing activity.
Operating Expense
The Company's nine-month 1999 earnings were substantially fueled by a 25.4%
reduction in operating expense to $15.0 million, or 1.10% of average assets,
from $20.1 million, or 1.63% of average assets, in the nine months ended
September 30, 1998.
The $5.1 million decline in operating expense primarily stemmed from a $4.9
million, or 34.3%, reduction in compensation and benefits expense to $9.3
million, including a savings of $1.6 million pursuant to the freezing of the
Company's defined benefit pension plan in the third quarter of the year. In
addition, compensation and benefits expense reflects a year-to-date reduction of
$3.1 million pursuant to a change in the Company's stock-related benefit plans
that was initiated in the first quarter of 1999. This change will continue to
benefit compensation and benefits expense in future periods.
The decline in operating expense also reflects a $313,000 decrease in occupancy
and equipment expense to $1.6 million and a $126,000 drop in other operating
expense to $341,000. These improvements more than offset a $190,000 increase in
G&A expense to $3.7 million.
Reflecting the reduction in operating expense and the higher level of net
interest income, the Company's efficiency ratio improved to 28.07% in the
current nine-month period from 37.63% in the year-earlier nine months. On the
basis of cash earnings, the efficiency ratio improved to 24.41% from 28.12%.
Income Tax Expense
Income tax expense rose $2.4 million to $15.9 million in the first nine months
of 1999, reflecting a $7.1 million increase in pre-tax income to $40.4 million.
Included in year-to-date income tax expense was $5.7 million in plan-related
items, as compared to $6.2 million in the first nine months of 1998. The
effective tax rate was 39.4% in the current nine-month period, and 40.4% in the
year-earlier nine months.
The Year 2000 Issue
The approach of the millenium 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 impacted are the software and hardware
utilized in its business, including those that are maintained for the Bank by
third party vendors who provide such services as data processing, information
systems management, maintenance, and credit bureau reports. If not addressed,
the Year 2000 issue could adversely impact the Bank's ability to provide
financial products and services competitively.
22
<PAGE>
To ensure that the Bank is fully operational at the onset of the Year 2000, the
Bank has been actively engaged in preparations for this event. These
preparations, which are discussed in the Company's 1998 Annual Report to
Shareholders, include the following:
. In 1997, all internal systems were modified or replaced with Year
2000-compliant systems;
. In 1998, the Bank completed its assessment of its external systems
and the development of contingency plans for each system used;
. Testing of the Bank's mission-critical loan and deposit systems was
initiated in the fourth quarter of 1998 and completed in the second
quarter of 1999;
. The Bank has received written assurances that these systems, and the
software it is licensed to use, will be Year 2000 compliant by the
third quarter of 1999. In the event that they are not, the Company's
primary service provider--a nationally recognized provider of data
processing services--has arranged for another third-party vendor,
which has successfully completed its Year 2000 testing, to provide
the Bank with data processing services;
. The Bank completed its Business Resumption Plan in accordance with
Federal and State regulatory guidelines in the second quarter of
1999.
The costs involved in preparing for the Year 2000 have consistently been charged
against earnings as they have been incurred. The Company estimates that total
costs related to this project will not exceed $100,000. To date, approximately
three-quarters of the estimated costs have already been expensed.
As a result of its efforts, and on the basis of current information, management
believes that all critical systems modifications and conversions will be
completed in a timely manner, thus reducing the Bank's exposure to risk
associated with the approaching millenium. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about the Company's market risk were
presented in the discussion and analysis of Market Risk and Interest Rate
Sensitivity that appear on pages 16 - 18 of the Company's 1998 Annual Report to
Shareholders, filed on March 19, 1999. As of September 30, 1999, there was no
material change in the Company's market risk profile since the 1998 Annual
Report was filed.
23
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be immaterial
to the Company's financial condition, results of operations, or cash flows.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
On October 19, 1999, the Board of Directors declared a quarterly cash dividend
of 25 cents per share, payable on November 15, 1999 to shareholders of record at
the close of business on November 1, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1: Certificate of Incorporation*
Exhibit 3.2: Bylaws**
Exhibit 11: Statement re: Computation of Per Share Earnings
- filed herewith
Exhibit 27: Financial Data Schedule - filed herewith
(b) Reports on Form 8-K
Not applicable.
* Incorporated by reference to the Exhibits filed with the Registration
Statement on Form S-1, as amended, Registration No. 33-65852.
** Incorporated by reference to the Exhibits filed with the Annual Report on
SEC Form 10K for the fiscal year ended December 31, 1998, File No.
0-22278.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Queens County Bancorp, Inc.
DATE: November 9, 1999 BY: /s/ Joseph R. Ficalora
---------------- ----------------------
Joseph R. Ficalora
Chairman, President, and
Chief Executive Officer
(Duly Authorized Officer)
BY: /s/ Robert Wann
-----------------------------
Robert Wann
Senior Vice President,
Comptroller, and
Chief Financial Officer
(Principal Financial Officer)
25
QUEENS COUNTY BANCORP, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 8,775 $ 6,950 $24,460 $19,828
Weighted average common shares outstanding 18,531 19,079 18,603 19,292
Earnings per common share $ 0.47 $ 0.36 $ 1.31 $ 1.02
Weighted average common shares outstanding 18,531 19,079 18,603 19,292
Additional dilutive shares using average market
value for the period when utilizing the
Treasury stock method regarding stock options 451 1,117 452 1,128
------- ------- ------- -------
Total shares for diluted earnings per share 18,982 20,196 19,055 20,420
======= ======= ======= =======
Diluted earnings per common share and common
share equivalents $ 0.46 $ 0.34 $ 1.28 $ 0.97
======= ======= ======= =======
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 28,615
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,245
<INVESTMENTS-CARRYING> 177,716
<INVESTMENTS-MARKET> 174,741
<LOANS> 1,768,989
<ALLOWANCE> 7,431
<TOTAL-ASSETS> 2,027,681
<DEPOSITS> 1,133,378
<SHORT-TERM> 699,310
<LIABILITIES-OTHER> 54,521
<LONG-TERM> 0
0
0
<COMMON> 140,472
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 2,027,681
<INTEREST-LOAN> 96,424
<INTEREST-INVEST> 0
<INTEREST-OTHER> 8,447
<INTEREST-TOTAL> 104,871
<INTEREST-DEPOSIT> 32,903
<INTEREST-EXPENSE> 20,358
<INTEREST-INCOME-NET> 51,610
<LOAN-LOSSES> (2,000)
<SECURITIES-GAINS> 89
<EXPENSE-OTHER> 13,335
<INCOME-PRETAX> 40,364
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,460
<EPS-BASIC> 1.31
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 0.08
<LOANS-NON> 3,654
<LOANS-PAST> 185
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,431
<CHARGE-OFFS> 0
<RECOVERIES> (2,000)
<ALLOWANCE-CLOSE> 7,431
<ALLOWANCE-DOMESTIC> 7,431
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
