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, 1999
Commission File Number 0-22278
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
38-25 Main Street, Flushing, New York 11354
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (718) 359-6400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not considered herein,
and will not be contained to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of the Form 10-K or any amendment to this Form 10-K. |X|
As of March 15, 2000, the aggregate market value of the shares of common stock
of the registrant outstanding was $350,445,175, excluding 2,963,336 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, 2000, which was $19.625 as reported in The Wall Street
Journal on March 16, 2000. The number of shares of the registrant's common stock
outstanding as of March 15, 2000, was 20,820,415 shares.
Documents Incorporated by Reference
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 19, 2000 and the 1999 Annual Report to
Shareholders are incorporated herein by reference - Parts I, II, and III.
<PAGE>
CROSS REFERENCE INDEX
PART I
Page
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Item 1. Business 1
Description of Business 1
Statistical Data:
Mortgage and Other 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
Queens County Bancorp, Inc. and Subsidiary:
Independent Auditors' Report 25
Consolidated Statements of Financial Condition 25
Consolidated Statements of Income 25
Consolidated Statements of Changes in Shareholders'
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 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, in 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 and other investment 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 shareholders, 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
nine stock repurchase authorizations and increased its Treasury stock, net of
options exercised, to 9,960,566, or 32% of the shares issued at its initial
public offering on November 23, 1993. At March 15, 2000, the total number of
shares outstanding was 20,820,415 as compared to 21,010,127 at December 31,
1999.
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 ten full-service branch offices and three
customer service centers in Queens and an eleventh 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 metropolitan New York 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 New York City metropolitan area has historically been home to a
significant number of corporations, including those within the manufacturing and
financial services industries.
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. Additionally, the Bank faces competition from other
non-traditional financial service companies and due to the advent of the
Internet, faces competition on a nationwide basis from companies that solicit
loans and deposits over the Internet.
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Competition is likely to increase as a result of recent regulatory actions and
legislative changes, most notably the enactment of the Gramm-Leach-Bliley Act of
1999. These changes have eased and likely will continue to ease restrictions on
interstate banking and the entrance into the financial services market by
non-traditional and non-depository financial services providers, including
insurance companies and securities brokerage and underwriting firms. The Bank
has recently faced increased competition for the origination of multi-family
loans, which comprised 83.72% of the Bank's loan portfolio at year-end 1999.
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.
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, 1999, the Bank's gross loan portfolio totaled
$1,610.5 million, of which $1,348.4 million, or 83.72%, were multi-family
mortgage loans, and $152.6 million, or 9.48%, were one-to-four family first
mortgage loans. Of the total mortgage loan portfolio at year-end 1999, 90.64%
were adjustable rate loans and 9.36% were fixed-rate loans. The Bank's mortgage
loan portfolio also included $96.0 million in commercial real estate loans and
$4.8 million in construction loans. In addition, the Bank had $4.9 million in
cooperative apartment loans, $1.3 million in home equity loans generally secured
by second liens on real property, and $2.5 million in other consumer loans at
December 31, 1999.
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, 1999, mortgage-backed securities
totaled $2.0 million, or 0.10% of total assets. The market value of such
securities was approximately $2.1 million at December 31, 1999. 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 to Savings Bank Life Insurance
("SBLI"), the Federal National Mortgage Association ("FNMA"), the State of New
York Mortgage Agency ("SONYMA"), and other secondary market purchasers. ARM
loans are retained for the Bank's portfolio. For the fiscal years December 31,
1999 and 1998, originations of new ARM loans totaled $563.9 million and $424.0
million, respectively, or 92.32% and 93.09%, of all mortgage loan originations.
Originations of fixed-rate loans totaled $46.9 million and $28.2 million,
respectively, for the same periods, while sales of ARM loans and fixed-rate
loans totaled $213.6 million and $8.8 million, respectively, for those periods.
The Bank generally sells all loans and retains the servicing rights of such
loans. As of December 31, 1999, the Bank was servicing $236.0 million in loans
for others. The Bank is generally paid a fee up to 0.25% for servicing loans
sold, except the loans serviced for FHLB-NY.
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
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metropolitan area. At December 31, 1999, the Bank's portfolio of multi-family
mortgage loans totaled $1,348.4 million, representing 83.72% of the total loan
portfolio. Of this total, $892.6 million, or 56%, were secured by rental
apartment buildings and $455.8 million, or 28%, were secured by underlying
mortgages on cooperative apartment buildings.
Such loans are generally 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
1999, 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 1999, 95% of the Bank's multi-family mortgage loans were adjustable
rate credits, including $1.281 billion that are due to adjust in 2000.
Properties securing multi-family mortgage loans are appraised either by
appraisers employed by the Bank or by independent appraisers approved by the
Bank.
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,
1999 consisted of 12 loans secured by 12 multi-family properties located in the
Bank's primary market area. These loans were made to several borrowers who are
deemed to be related for regulatory purposes. As of December 31, 1999, the
outstanding balance of these loans totaled $24.6 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.
Payments on loans secured by multi-family buildings are generally dependent on
the income produced by such properties which, in turn, is dependent on the
successful operation or management of the properties; accordingly, 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 1987, one loan
on a multi-family property located 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, 1999, $152.6 million, or 9.48% 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 1999 and 1998 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
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of interest on such loans. The Bank's $3.1 million in non-performing loans at
December 31, 1999 was comprised of one-to-four family loans. Since 1990, the
Bank has foreclosed on 51 one-to-four family residential properties; one
property with a carrying value of $66,000 remained in foreclosed real estate as
of December 31, 1999.
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 years ended December 31, 1999 and 1998, the
Bank originated $1.4 million and $365,000, respectively, in one-to-four family
ARM loans.
The volume and types of ARM loans originated by the Bank have been
affected by such market factors as the level of interest rates, competition,
consumer preferences, and availability of funds. During 1999, 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, 1999 and 1998, the Bank originated
$4.2 million and $3.4 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 one-to-four
family 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 generally retaining the servicing rights on all such loans
sold. In the twelve months ended December 31, 1999, the Bank sold loans totaling
$213.6 million, including $211.6 million of multi-family loans sold to the
FHLB-NY. As of December 31, 1999, the Bank's portfolio of loans serviced for
others totaled $236.0 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, 1999,
the Bank had loans secured by commercial real estate of $96.0 million,
comprising 5.96% 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
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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. At December 31, 1998, such loans totaled $67.5 million.
Loans secured by commercial real estate properties, like multi-family
loans, are generally larger and involve a greater degree of risk than
one-to-four family residential mortgage loans. Because payments on loans secured
by commercial real estate properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Bank seeks to minimize these risks through its lending policies
and underwriting standards, which restrict new originations of such loans to the
Bank's primary lending area and qualify such loans on the basis of the
property's net income and debt service ratio.
Construction Lending. The Bank's construction loans primarily have been
made to finance the construction of one-to-four family residential properties
and, to a lesser extent, multi-family properties. The Bank's policies provide
that construction loans may be made in amounts of up to 70% of the appraised
value of the project. The maximum loan amount is $3.0 million. The Bank
generally has provided construction loans only as an accommodation to existing
customers and does not actively solicit such loans. The Bank generally requires
personal guarantees and a permanent loan commitment. Construction loans are made
with adjustable rate terms of up to 18 months. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. Construction
loans are structured to be converted to permanent end loans originated by the
Bank at the end of the construction period or upon the borrower receiving
permanent financing from another financial institution. As of December 31, 1999,
the Bank had $4.8 million, or 0.30%, 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, 1999 totaled $8.7 million, or 0.54% of the
Bank's loan portfolio and included cooperative apartment loans of $4.9 million,
or 55.55%. 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, 1999 totaled $1.3 million, against total available
credit lines of $3.3 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, 1999, the Bank had 56 loans in excess of $3.0 million, with the
highest amount being $11.7 million.
In the case of full documentation 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. 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.
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Non-performing Loans and Foreclosed Assets. The Bank had $3.1 million in
loans 90 days or more delinquent at December 31, 1999, consisting of 33
one-to-four family mortgage loans with an average principal balance of
approximately $94,000. Management does not currently expect to incur significant
losses on its non-performing mortgage loans based on current market values.
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.
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, 1999, 1998,
and 1997, the amounts of additional interest income that would have been
recorded on mortgage loans in foreclosure, had they been current, totaled
$70,000, $150,000 and $161,000 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, 1999, 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,
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans in foreclosure $ 2,886 $ 5,530 $ 6,121 $ 6,861 $ 4,929
Loans 90 days or more delinquent
and still accruing interest 222 663 1,571 2,798 2,864
------- ------- ------- ------- -------
Total non-performing loans 3,108 6,193 7,692 9,659 7,793
------- ------- ------- ------- -------
Foreclosed real estate 66 419 1,030 627 774
------- ------- ------- ------- -------
Total non-performing assets $ 3,174 $ 6,612 $ 8,722 $10,286 $ 8,567
======= ======= ======= ======= =======
Total non-performing loans to
loans, net 0.19% 0.42% 0.55% 0.84% 0.78%
Total non-performing assets to
total assets 0.17 0.38 0.54 0.76 0.69
</TABLE>
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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, 1999, foreclosed real estate was comprised of one
residential property with an aggregate carrying value of $66,000. 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.
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 current market 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. While the Bank believes that
the level of its loan loss allowance is adequate and it utilizes a 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, 1999, the total allowance was $7.0 million, which amounted
to 226.22% of non-performing loans and 221.52% of non-performing assets. For the
years ended December 31, 1999 and 1998, 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, 1999,
mortgage-backed securities totaled $2.1 million, or 0.10% of total assets, and
were classified by the Bank as held to maturity. Because a majority of the
Bank's mortgage-backed securities are either adjustable rate or are FHLMC
five-year term securities, the Bank anticipates that all of its mortgage-backed
securities will prepay or reprice within five years. At December 31, 1999, the
mortgage-backed securities portfolio had a weighted average interest rate of
6.75% and a market value of approximately $2.1 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 Mortgage and Real Estate Committee and
the Investment Committee, together with 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 traditional
sources of funds for lending, investing, and other general purposes. In recent
years, FHLB advances have been increasingly utilized to fund increasing loan
demand.
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, 1999, $161.2 million, or 14.98% of the Bank's gross deposit balance,
consisted of CDs with a balance of $100,000 or more.
FHLB Advances. The Bank is a member of the FHLB-NY, and had a $762.7
million line of credit at December 31, 1999. To supplement its funding in a year
of increased lending, the Company drew on its line of credit with the FHLB in
1999. FHLB advances, which are used to finance loan production, totaled $636.4
million at December 31, 1999. A $10.0 million line of credit with a
correspondent financial institution is also available to the Bank. At December
31, 1999, the Bank also had an outstanding loan in the amount of $12.5 million
from the Company to fund the Employee Stock Ownership Plan ("ESOP") and $54.5
million in inter-company demand loans at a fixed rate of 6.0%.
Subsidiary Activities
Under its New York State leeway authority, the Bank has formed four
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. Queens County Capital Management, Inc. ("QCCM") sells
annuity products for the Bank.
Personnel
At December 31, 1999, the number of full-time equivalent employees was
280. The Bank's employees are not represented by a collective bargaining unit,
and the Bank considers its relationship with its employees to be good.
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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 shareholders 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 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.
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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,
unless the Company and the Bank own more than 20% of the stock of the
corporation distributing a dividend, in which case 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 1999.
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 shareholders. 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.
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.
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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 State 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.
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.
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
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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 average 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 at least 4%. 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, 1999:
GAAP Capital to Total Leverage Assets 8.63%
Total Capital to Risk-Weighted Assets 14.36%
Tier I Capital to Risk-Weighted Assets 13.80%
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 have 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 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 bank to establish and maintain
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written internal real estate lending standards that are consistent with safe and
sound banking practices and appropriate to the size of the bank 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. Savings banks 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.
Investment 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 adopted revisions to its regulations governing the procedures for
institutions seeking approval to engage in such activities or investments. These
revisions, among other things, streamline certain application procedures for
healthy banks and impose certain quantitative and qualitative restrictions on a
bank's dealings 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 an 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,
1999, the Bank had $11.3 million of such investments.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that Federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action
legislation. Among other things, the regulations define the relevant capital
measures for the five capital categories. An institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and is not subject to a regulatory order, agreement, or directive to
meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total risk-
based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater, and generally a leverage ratio of 4% or greater. An institution is
deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier 1 risk-based capital ratio of 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%.
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"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" institution within 270 days after
it obtains such status.
Transactions with Affiliates
Under current Federal law, transactions between depository institutions
and their affiliates are governed by Section 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions 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 terms 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 shareholders.
Under Section 22(h), loans to directors, executive officers, and shareholders
who control, directly or indirectly, 10% or more of voting securities of a
savings bank, and certain related interests of any of the foregoing, may not
exceed, together with all other outstanding loans to such persons and affiliated
entities, the savings bank's total capital and surplus. Section 22(h) also
prohibits loans above amounts prescribed by the appropriate Federal banking
agency to directors, executive officers, and shareholders who control 10% or
more of voting securities of a stock savings bank, and their respective related
interests, unless such loan is approved in advance by a majority of the board of
directors of the savings bank. Any "interested" director may not participate in
the voting. The loan amount (which includes all other outstanding loans to such
person) as to which such prior board of director approval is required, is the
greater of $25,000 or 5% of capital and surplus or any loans over $500,000.
Further, pursuant to Section 22(h), loans to directors, executive officers, and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions to other persons. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to executive officers over other employees. Section 22(g) of the
Federal Reserve Act places additional limitations on loans to executive
officers.
Enforcement
The FDIC has extensive enforcement authority over insured savings banks,
including the Bank. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease and desist orders, and
to remove directors and officers. In general, these enforcement actions may be
initiated in response to violations of laws and regulations and to unsafe or
unsound practices.
14
<PAGE>
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. Prior to January 1, 2000, BIF
members were assessed for FICO payments at approximately 20% of SAIF members.
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.
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 September 1999, was "satisfactory."
15
<PAGE>
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 June 1998, 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 $44.3 million or less (subject to adjustment by the Federal Reserve
Board), the reserve requirement is 3%; for accounts greater than $44.3 million,
the reserve requirement is $1.329 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 $44.3 million). The first $5.0 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, 1999
of $40.8 million. FHLB advances must be secured by specified types of collateral
and may be obtained primarily for the purpose of providing funds for residential
housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the fiscal
years ended December 31, 1999, 1998, and 1997, dividends from the FHLB-NY to the
Bank amounted to $2.0 million, $1.5 million, and $822,000, 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 is currently 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.
16
<PAGE>
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 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.
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
17
<PAGE>
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 management 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.
Recent Legislation
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that
meets specified conditions, including being "well capitalized" and "well
managed," to opt to become a "financial holding company" and thereby engage in a
broader array of financial activities than previously permitted. Such activities
can include insurance underwriting and investment banking. The
Gramm-Leach-Bliley Act also authorizes banks to engage through "financial
subsidiaries" in certain of the activities permitted for financial holding
companies. Financial subsidiaries are generally treated as affiliates for
purposes of restrictions on a bank's transactions with affiliates.
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 State 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:
<TABLE>
<CAPTION>
For the
Years Ended December 31,
------------------------
(dollars in thousands) 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period $1,487,256 $1,394,939 $1,144,317
Mortgage loans originated:
One-to-four family 26,338 7,473 22,914
Multi-family 603,347 409,800 418,869
Commercial real estate 42,708 32,826 10,248
Construction 4,433 2,091 1,089
---------- ---------- ----------
Total mortgage loans originated 676,826 452,190 453,120
Principal repayments 348,037 349,952 185,033
Mortgage loans sold 213,597 8,647 16,060
Mortgage loans transferred to foreclosed real estate 651 1,274 1,405
---------- ---------- ----------
At end of period 1,601,797 1,487,256 1,394,939
Other loans (gross):
At beginning of period 9,750 10,795 12,275
Other loans originated 2,039 2,008 1,375
Principal repayments 3,048 3,053 2,843
Student loans sold -- -- 12
---------- ---------- ----------
At end of period 8,741 9,750 10,795
---------- ---------- ----------
Total loans $1,610,538 $1,497,006 $1,405,734
========== ========== ==========
Mortgage-backed securities:
At beginning of period $ 19,680 $ 49,781 $ 73,732
Principal repayments 17,586 30,101 23,951
---------- ---------- ----------
At end of period $ 2,094 $ 19,680 $ 49,781
========== ========== ==========
</TABLE>
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, 1999. 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 $348.0 million for the twelve months ended December 31, 1999.
<TABLE>
<CAPTION>
Mortgage and Other Loans
at December 31, 1999
--------------------
1-4 Multi- Commercial Home Total
(dollars in thousands) Family Family Real Estate Construction Equity Other Loans
------------ ------------- -------------- --------------------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Amount due:
Within one year $85,687 $174,160 $11,116 $4,793 $1,347 $3,653 $ 280,756
After one year:
One to three years 30,449 232,354 19,308 -- -- 1,755 283,866
Three to five years 5,122 385,482 31,230 -- -- 643 422,477
Five to ten years 17,028 546,064 23,786 -- -- 985 587,863
Ten to twenty years 10,269 10,292 10,568 -- -- 244 31,373
Over twenty years 4,089 -- -- -- -- 114 4,203
-------- ---------- ------- ------ ------ ------ ----------
Total due or repricing
after one year 66,957 1,174,192 84,892 -- -- 3,741 1,329,782
-------- ---------- ------- ------ ------ ------ ----------
Total amounts due or
repricing, gross $152,644 $1,348,352 $96,008 $4,793 $1,347 $7,394 $1,610,538
======== ========== ======= ====== ====== ====== ==========
</TABLE>
The following table sets forth, at December 31, 1999, the dollar amount of all
loans due after December 31, 2000, and indicates whether such loans have fixed
or adjustable interest rates.
Due after December 31, 2000
-----------------------------------------
(dollars in thousands) Fixed Adjustable Total
------------ -------------- ------------
Mortgage loans:
One-to-four family $ 41,920 $ 25,037 $ 66,957
Multi-family 64,372 1,109,820 1,174,192
Commercial real estate 39,060 45,832 84,892
---------- ------------ -----------
Total mortgage loans $ 145,352 $ 1,180,689 $ 1,326,041
Other loans 1,860 1,881 3,741
---------- ------------ -----------
Total loans $ 147,212 $ 1,182,570 $ 1,329,782
========== ============ ===========
20
<PAGE>
C. Summary of the Allowance for Loan Losses
The allowance for loan losses at December 31, 1999, 1998, 1997 was allocated as
follows:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998 1997
---------------------- --------------------- ----------------------
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 $ 663 9.42% $1,341 14.22% $1,592 16.88%
Multi-family 4,927 70.08 6,686 70.89 6,521 69.14
Construction 64 0.91 28 0.30 23 0.24
Commercial real estate 1,202 17.10 1,181 12.52 1,080 11.45
Other loans 175 2.49 195 2.07 215 2.29
------ ------ ------ ------ ------ ------
Total loans $7,031 100.00% $9,431 100.00% $9,431 100.00%
====== ====== ====== ====== ====== ======
</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>
1999 1998 1997
----------------------- ----------------------- ----------------------
Percent Percent Percent
of of of
(dollars in thousands) Amount Total Amount Total Amount Total
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family $ 152,644 9.48% 178,770 11.94% 224,287 15.96%
Multi-family 1,348,351 83.72 1,239,094 82.77 1,107,343 78.78
Commercial real estate 96,008 5.96 67,494 4.51 61,740 4.39
Construction 4,793 0.30 1,898 0.13 1,538 0.10
--------- ------ --------- ------ --------- ------
Total mortgage loans 1,601,796 99.46 1,487,256 99.35 1,394,908 99.23
--------- ------ --------- ------ --------- ------
Other loans:
Cooperative apartment 4,856 0.30 4,802 0.32 5,041 0.36
Home equity 1,347 0.08 1,793 0.12 2,386 0.17
Student 8 0.00 8 0.00 8 0.00
Passbook savings 331 0.02 321 0.02 312 0.02
Other 2,200 0.14 2,826 0.19 3,048 0.22
--------- ------ --------- ------ --------- ------
Total other loans 8,742 0.54 9,750 0.65 10,795 0.77
--------- ------ --------- ------ --------- ------
Total loans 1,610,538 100.00% 1,497,006 100.00% 1,405,734 100.00%
--------- ====== --------- ====== --------- ======
Less:
Unearned discounts 24 22 19
Net deferred loan
origination fees 2,404 1,034 1,281
Allowance for loan losses 7,031 9,431 9,431
---------- ---------- ----------
Loans, net $1,601,079 $1,486,519 $1,395,003
========== ========== ==========
<CAPTION>
1996 1995
---------------------- ------------------------
Percent Percent
of of
(dollars in thousands) Amount Total Amount Total
------- -------- ---------- -------
<S> <C> <C> <C> <C>
Mortgage loans:
One-to-four family 256,904 22.21% $ 288,470 28.64%
Multi-family 822,364 71.10 641,564 63.70
Commercial real estate 63,452 5.49 62,003 6.16
Construction 1,598 0.14 1,205 0.12
---------- ------ --------- ------
Total mortgage loans 1,144,318 98.94 993,242 98.62
---------- ------ --------- ------
Other loans:
Cooperative apartment 5,764 0.50 6,684 0.66
Home equity 2,819 0.24 3,069 0.31
Student 24 0.00 116 0.01
Passbook savings 375 0.03 470 0.05
Other 3,293 0.29 3,522 0.35
---------- ------ --------- ------
Total other loans 12,275 1.06 13,861 1.38
---------- ------ --------- ------
Total loans 1,156,593 100.00% 1,007,103 100.00%
---------- ====== --------- ======
Less:
Unearned discounts 24 29
Net deferred loan
origination fees 1,058 912
Allowance for loan losses 9,359 11,359
---------- ----------
Loans, net $1,146,152 $ 994,803
========== ==========
</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,
1999 1998 1997
------------------- ------------------- -------------------
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 $140,325 $135,797 $129,893 $129,586 $ 78,279 $ 78,345
Equity securities 55,690 55,762 26,978 27,125 19,274 19,339
-------- ------- -------- -------- -------- --------
Total securities $196,015 191,559 $156,871 $156,711 $ 97,553 $ 97,684
======== ======= ======== ======== ======== ========
Money market investments:
Federal funds sold $ 6,000 $ 6,000 $ 19,000 $ 19,000 $ 6,000 $ 6,000
-------- ------- -------- -------- -------- --------
Total money market investments $ 6,000 $ 6,000 $ 19,000 $ 19,000 $ 6,000 $ 6,000
======== ======== ======== ======== ======== ========
Mortgage-backed securities:
GNMA $ 1,429 $ 1,429 $ 15,886 $ 16,403 $ 20,069 $ 20,789
FHLMC 2,094 2,135 3,794 3,929 29,712 29,830
-------- ------- -------- -------- -------- --------
Total mortgage-backed
securities $ 3,523 $ 3,564 $ 19,680 $ 20,332 $ 49,781 $ 50,619
======== ======== ======== ======== ======== ========
</TABLE>
23
<PAGE>
ITEM 2. PROPERTIES
The Bank conducts its business through eleven full-service offices, three
customer service centers and one mortgage 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>
Leased Date Lease Net Book Value
or Leased or Expiration at
Owned Acquired Date December 31, 1999
--------- --------- ---------- -----------------
<S> <C> <C> <C> <C>
Main Office(1) Owned 1911 -- $1,748,323
38-25 Main Street
Flushing, NY 11354
Corona Branch Owned 1923 -- 132,386
37-97 103rd Street
Corona, NY 11368
Little Neck Branch Owned 1946 -- 48,625
251-31 Northern Blvd.
Little Neck, NY 11363
Kew Gardens Hills Branch Owned 1948 -- 85,398
75-44 Main Street
Kew Gardens Hills, NY 11367
Jackson Heights Branch Leased 1974 2023 440,957
76-02 Northern Blvd.
Jackson Heights, NY 11372
Astoria Branch(2) Leased 1993 2018 101,702
31-42 Steinway Street
Astoria, NY 11103
Fresh Meadows Branch Leased 1995 2010 25,928
61-49 188th Street
Fresh Meadows, NY 11365
College Point Branch Leased 1996 2021 2,943
15-01 College Point Blvd.
College Point, NY 11356
Murray Hill Branch Leased 1997 2007 81,240
156-18 Northern Blvd.
Flushing, NY 11354
Plainview Branch Owned 1974 -- 299,018
1092 Old Country Road
Plainview, NY 11803
Woodside Branch Leased 1999 2009 49,088
60-10 Queens Boulevard
Woodside, NY 11377
Mortgage Service Center(3) Owned 1991 -- 4,444,562
158-14 Northern Blvd.
Flushing, NY 11358
Auburndale Customer Service Center Leased 1996 2006 3,392
193-10 Northern Blvd.
Flushing, NY 11358
Ditmars Service Center Leased 1996 2005 7,802
31-09 Ditmars Blvd.
Astoria, NY 11105
Corona Service Center Leased 1999 2007 64,693
51-13 108th Street
Corona, NY 11368
</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 $1.0
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
fiscal year 1999 appears on page 29 of the 1999 Annual Report to Shareholders
under the caption "Market Price of Common Stock and Dividends Paid per Common
Share" and is incorporated herein by this reference.
As of March 3, 2000 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
1999 Annual Report to Shareholders 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 1999
Annual Report to Shareholders 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 1999 Annual Report to Shareholders 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 52 of the 1999 Annual Report to Shareholders
and is incorporated herein by this reference.
s 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 5 through 8 of the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held April 19, 2000, 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 11 through
20 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held April 19, 2000, 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 pages 3 and 4 of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held April 19, 2000, under the caption "Security Ownership
of Certain Beneficial Owners" and is incorporated herein by this reference.
Information regarding security ownership of management appears on pages 5
through 8 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 19, 2000, 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 19, 2000 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, 1999 and are incorporated
herein by this reference:
- Consolidated Statements of Condition at December 31, 1999 and 1998;
- Consolidated Statements of Income and Comprehensive Income for each
of the years in the three-year period ended December 31, 1999;
- Consolidated Statements of Changes in Stockholders' Equity for each
of the years in the three-year period ended December 31, 1999;
- Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1999;
- Notes to Consolidated Financial Statements
- Management's Responsibility for Financial Reporting
- Independent Auditors' Report
26
<PAGE>
The remaining information appearing in the 1999 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 1999
On November 10, 1999, the Company filed a Current Report on Form 8-K
regarding the date of the Company's 2000 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.(1)
10.1 Form of Employment Agreement between Queens County Savings Bank and
Certain Officers (1)
10.2 Form of Employment Agreement between Queens County Bancorp, Inc. and
Certain Officers (1)
10.3 Form of Change in Control Agreements among the Company, the Bank,
and Certain Officers (1)
10.4 Form of Queens County Savings Bank Recognition and Retention Plan
for Outside Directors (1)
10.5 Form of Queens County Savings Bank Recognition and Retention Plan
for Officers (1)
10.6 Form of Queens County Bancorp, Inc. 1993 Incentive Stock Option Plan
(2)
10.7 Form of Queens County Bancorp, Inc. 1993 Incentive Stock Option Plan
for Outside Directors (2)
10.8 Form of Queens County Savings Bank Employee Severance Compensation
Plan (1)
10.9 Form of Queens County Savings Bank Outside Directors' Consultation
and Retirement Plan (1)
10.10 Form of Queens County Bancorp, Inc. Employee Stock Ownership Plan
and Trust (1)
10.11 ESOP Loan Documents (1)
10.12 Incentive Savings Plan of Queens County Savings Bank (3)
10.13 Retirement Plan of Queens County Savings Bank (1)
10.14 Supplemental Benefits Plan of Queens County Savings Bank (4)
10.15 Excess Retirement Benefits Plan of Queens County Savings Bank (1)
10.16 Queens County Savings Bank Directors' Deferred Fee Stock Unit Plan
(1)
10.17 Queens County Bancorp, Inc. 1997 Stock Option Plan (5)
11.0 Statement Re: Computation of Per Share Earnings
13.0 1999 Annual Report to Shareholders
21.0 Subsidiaries information incorporated herein by reference to Part I,
"Subsidiaries"
23.0 Consent of KPMG LLP, dated March 21, 2000
27.0 Financial Data Schedule
99.0 Proxy Statement for the Annual Meeting of Shareholders to be held on
April 19, 2000
(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 03/21/00
- -------------------------------------- ---------------
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:
/s/ Joseph R. Ficalora 03/21/00
- ----------------------------------- -------------
Joseph R. Ficalora
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer)
/s/ Harold E. Johnson 03/21/00
- ----------------------------------- -------------
Harold E. Johnson
Director
/s/ Max L. Kupferberg 03/21/00
- ----------------------------------- -------------
Max L. Kupferberg
Director
/s/ Howard C. Miller 03/21/00
- ----------------------------------- -------------
Howard C. Miller
Director
/s/ Richard H. O'Neill 03/21/00
- ----------------------------------- -------------
Richard H. O'Neill
Director
/s/ Robert Wann 03/21/00
- ----------------------------------- ------------
Robert Wann
Senior Vice President, Comptroller, and
Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ Donald M. Blake 03/21/00
- ----------------------------------- -----------
Donald M. Blake
Director
/s/ Henry E. Froebel 03/21/00
- ----------------------------------- -----------
Henry E. Froebel
Director
/s/ Dominick Ciampa 03/21/00
- ----------------------------------- -----------
Dominick Ciampa
Director
29
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 1
Financial HIGHLIGHTS
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
===============================================================
(dollars in thousands, except share data) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY
Net interest income $68,903 $68,522 $62,398 $57,520 $51,908
(Reversal of) provision for loan losses (2,400) -- -- (2,000) 150
Other operating income 2,523 2,554 2,305 2,445 3,033
Operating expense 21,390 25,953 27,084 23,271 22,871
Income tax expense 20,772 18,179 14,355 17,755 11,737
Net income(1) 31,664 26,944 23,264 20,939 20,183
Earnings per share(2) $1.71 $1.41 $1.14 $0.90 $0.81
Diluted earnings per share(2) 1.67 1.34 1.07 0.85 0.77
Dividends paid(2) 1.00 0.67 0.41 0.25 0.07
SELECTED RATIOS
Return on average assets 1.69% 1.62% 1.61% 1.63% 1.72%
Return on average stockholders' equity 22.99 17.32 12.95 10.10 9.70
Stockholders' equity to total assets 7.19 8.55 10.64 15.56 17.54
Interest rate spread 3.41 3.76 3.84 3.88 3.80
Net interest margin 3.79 4.24 4.45 4.63 4.58
Operating expense to average assets 1.14 1.57 1.88 1.82 1.95
Efficiency ratio 29.95 36.51 41.86 38.81 41.63
Average interest-earning assets to average
interest-bearing liabilities 1.09x 1.12x 1.16x 1.21x 1.22x
- ----------------------------------------------------------------------------------------------------------------------------
ACTUAL CONTRIBUTIONS TO
STOCKHOLDERS' EQUITY AND
RESULTANT CASH EARNINGS DATA(1)
Earnings $44,349 $43,758 $35,399 $27,458 $23,640
Earnings per share(2) $2.39 $2.29 $1.73 $1.18 $0.95
Diluted earnings per share(2) 2.34 2.17 1.62 1.12 0.91
Return on average assets 2.37% 2.64% 2.46% 2.14% 2.02%
Return on average stockholders' equity 32.21 28.13 19.71 13.24 11.36
Operating expense to average assets 1.01 1.16 1.37 1.39 1.66
Efficiency ratio 26.37 27.05 30.47 28.83 35.43
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET SUMMARY
Total assets $1,906,835 $1,746,882 $1,603,269 $1,358,656 $1,240,882
Loans, net 1,601,079 1,486,519 1,395,003 1,146,152 994,803
Allowance for loan losses 7,031 9,431 9,431 9,359 11,359
Securities held to maturity 184,637 152,280 94,936 86,495 78,016
Securities available for sale 12,806 4,656 2,617 -- --
Mortgage-backed securities held to maturity 2,094 19,680 49,781 73,732 92,868
Deposits 1,076,018 1,102,285 1,069,161 1,023,930 932,140
FHLB advances 636,378 439,055 309,664 81,393 46,077
Stockholders' equity 137,141 149,406 170,515 211,429 217,630
Book value per share(2)(3) $7.52 $8.13 $8.82 $9.43 $8.87
Common shares outstanding(2) 21,010,127 21,250,897 22,369,187 25,751,598 28,324,350
ASSET QUALITY RATIOS
Non-performing loans to loans, net 0.19% 0.42% 0.55% 0.84% 0.78%
Non-performing assets to total assets 0.17 0.38 0.54 0.76 0.69
Allowance for loan losses to non-performing loans 226.22 152.28 122.61 96.90 145.76
Allowance for loan losses to loans, net 0.44 0.63 0.68 0.82 1.14
Allowance for loan losses to accumulated
net charge-offs since 1987 493.06 661.36 661.36 625.00 759.00
ASSET QUALITY RATIOS (BANK ONLY)(4)
Leverage capital ratio 8.63% 9.40% 9.30% 9.65% 11.95%
Tier 1 risk-based capital ratio 13.80 15.23 14.32 16.19 21.95
Total risk-based capital ratio 14.36 16.12 15.26 17.38 23.20
==================================================================
</TABLE>
(1) The 1999 amount reflects a non-recurring curtailment gain of $1.6 million
and a non-recurring charge of $735,000, both of which were recorded in operating
expense. 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
1999, 1998, 1997, and 1996 reflect the transfer of $33.1 million, $17.8 million,
$16.0 million, and $38.0 million, respectively, from the Bank to the Company.
<PAGE>
10
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 14 locations,
including 11 full-service branch offices and three customer service centers, two
of which are located inside 24-hour stores. A 15th location houses the Bank's
mortgage service center, which serves as a source of assistance to its
borrowers. While deposits are substantially drawn from Queens and Nassau County,
the Bank's market for mortgage lending extends through much of metropolitan New
York. Customers are also served through the Company's web site, which delivers
around-the-clock access to a full range of online banking services.
Publicly traded since November 23, 1993 on the Nasdaq National Market,
the Company is widely regarded as one of the nation's top performing thrifts. In
1999, the Company generated a 32.21% cash return on average stockholders' equity
("ROE") and a 2.37% cash return on average assets ("ROA"), based on cash
earnings of $44.3 million, which exceeded its GAAP earnings by $12.7 million, or
40.1%. The Company's 1999 earnings stemmed from a three-pronged approach that
has served as the foundation for a solid record of earnings growth: the
production of multi-family mortgage loans; exceptional asset quality; and a
concentrated effort to contain operating expense.
In 1999, the Company far exceeded its 1998 loan production volume of
$452.2 million with the origination of $676.8 million in mortgage loans.
Multi-family mortgage loans accounted for $603.3 million of the 1999 total,
exceeding the prior-year level by 47.2%. Capitalizing on its capacity for
mortgage loan production, the Company arranged a loan participation late in the
fourth quarter, selling $211.6 million in multi-family mortgage loans to the
Federal Home Loan Bank of New York ("FHLB-NY") on December 29th. Absent this
sale, the Company's balance sheet would have reflected asset growth of $371.6
million, or 21.3%, on a year-over-year basis, and loan growth of $326.1 million,
or 21.9%.
The strength of the Company's 1999 mortgage loan production was paralleled
by the performance of its mortgage loan portfolio. In addition to recording its
21st consecutive quarter without any net charge-offs, the Company achieved a
52.0% reduction in non-performing assets and a 49.8% reduction in non-performing
loans. At December 31, 1999, the Company's non-performing assets improved to
0.17% of total assets, while non-performing loans improved to 0.19% of loans,
net.
Reflecting the stellar quality of the Company's assets, the Company
reversed $2.0 million of the allowance for loan losses in the first quarter of
1999; the net benefit of this reversal was $1.1 million, or $0.06 per share. In
the fourth quarter of the year, another $400,000 was reversed for the express
purpose of establishing a recourse reserve for the loans sold to the FHLB-NY.
Following these reversals, the allowance totaled $7.0 million, representing
226.22% of non-performing loans at year-end.
In 1999, the Company's performance was significantly supported by
management's continuing drive to contain operating expense. In the third quarter
of the year, the Company froze its defined benefit pension plan, resulting in a
one-time curtailment gain of $1.6 million, which offset a one-time charge of
$735,000 pursuant to the implementation of an early retirement window in the
fourth quarter of the year. The result of these actions was a net benefit to
earnings of $472,000, or $0.02 per share. In addition, the Company restructured
its Employee Stock Ownership Plan ("ESOP") and Supplemental Employee Retirement
Plan ("SERP") in the first quarter, providing additional savings of $4.1 million
in 1999. The benefit of these actions is reflected in the Company's cash ratio
of operating expense to average assets, which improved to 1.01%.
While maintaining its three-pronged approach to generating earnings, the
Company also maintained an aggressive approach to capital management. In
addition to distributing $18.6 million in cash dividends over the course of four
quarters, the Company repurchased 1.3 million shares of its stock in 1999. At
December 31st, 363,068 shares were still available for repurchase under the
authorization announced on November 25th.
The Company's 2000 financial performance will benefit from the strategic
loan participation arranged in 1999. Structured so that the Company retains the
interest income above the pass-through rate of interest, the transaction will
add to interest income, while supporting both the interest rate spread and net
interest margin. The Company's spread and margin will also be supported by the
use of the sale proceeds to reduce the year-end 1999 balance of FHLB advances
and the balance of certain high-cost CDs. The proceeds of the sale were also
used to invest $30.0 million in Bank-Owned Life Insurance, a tax-favored
product. In addition to reducing the Company's effective tax rate, this
investment will provide a steady stream of other operating income in 2000 and
beyond.
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
The Company's 1999 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 within the meaning of
Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. The Company intends for such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 11
Securities Litigation Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions.
The forward-looking statements contained within this report are based on
management's current expectations regarding a range of issues that could
potentially impact the Company's performance and strategies 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 performance 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 evaluating any forward-looking statements,
and undue reliance should not be placed upon them. The Company undertakes no
obligation to update these forward-looking statements.
Financial Condition
BALANCE SHEET SUMMARY
In 1999, the Company demonstrated its capacity for mortgage loan production with
the origination of $676.8 million in mortgage loans. Multi-family mortgage loans
represented $603.3 million, or 89.1%, of the year's production, exceeding the
year-earlier level by 47.2%.
Capitalizing on this capacity, and the stellar performance of its assets,
the Company sold $211.6 million in multi-family mortgage loans to the FHLB-NY on
December 29, 1999. The Company's 1999 balance sheet reflects the effects of this
transaction, absent which the Company would have recorded asset growth of $371.6
million, or 21.3%, over the twelve-month period, fueled by a $326.1 million, or
21.9%, rise in outstanding mortgage loans. Instead, the Company recorded total
assets of $1.9 billion on the 31st of December, up $160.0 million, or 9.2%, from
$1.7 billion at December 31, 1998. The increase reflects a $114.5 million, or
7.7%, rise in total mortgage loans to $1.6 billion, including a $109.3 million,
or 8.8%, rise in multi-family mortgage loans to $1.3 billion.
In addition to expanding its niche in the multi-family real estate market,
the Company increased its production of commercial real estate and construction
loans in 1999. Commercial real estate loans rose $28.5 million to $96.0 million,
while construction loans rose $2.9 million to $4.8 million at year-end 1999.
These increases more than offset a $26.1 million reduction in one-to-four family
mortgage loans to $152.6 million.
The strength of the Company's mortgage loan production continued to go
hand-in-hand with exceptional asset quality. In 1999, the Company recorded its
21st consecutive quarter without any net charge-offs, in addition to enjoying
substantial reductions in the levels of non-performing assets and loans. At
December 31st, non-performing assets declined to $3.2 million, or 0.17% of total
assets, from $6.6 million, or 0.38% of total assets, at December 31, 1998.
Included in the 1999 amount were non-performing loans of $3.1 million, or 0.19%
of loans, net, down from the year-earlier $6.2 million, and foreclosed real
estate of $66,000, down from $419,000 at the prior year-end. The Company's
multi-family mortgage loan portfolio continued to be fully performing, a feature
that worked in favor of the transaction with the FHLB-NY.
Reflecting the superior quality of the Company's assets, the allowance for
loan losses was reduced by $2.0 million in the first quarter of 1999. An
additional $400,000 was reversed from the loan loss allowance in the fourth
quarter, in connection with the sale of loans to the FHLB-NY. (The $400,000 was
subsequently utilized to establish a recourse liability, included in "other
liabilities" on the balance sheet.) As a result, the allowance for loan losses
totaled $7.0 million at December 31, 1999, representing 226.22% of
non-performing loans and 0.44% of loans, net. In addition, the allowance for
loan losses represented 493.06% of accumulated net charge-offs for the thirteen
years ended at that date.
In addition to the Company's record loan production, the Company's asset
growth reflects an increase in securities. Securities held to maturity,
consisting primarily of short-term U.S. Government and agency obligations, rose
to $184.6 million from $152.3 million, while securities available for sale rose
to $12.8 million from $4.7 million. The latter increase primarily reflects the
reclassification of certain mortgage-backed securities held to maturity in
connection with the early adoption of Statement of Financial Accounting
Standards ("SFAS") No. 133, effective April 1, 1999. As a result of this
reclassification, the balance of mortgage-backed securities declined to $2.1
million from $19.7 million at December 31, 1998. Money market investments
declined to $6.0 million from $19.0 million, while other loans, consisting
primarily of loans on cooperative apartment units, declined to $8.7 million from
$9.8 million. The Company's 1999 balance sheet also reflects a $30.0 million
investment in Bank-Owned Life Insurance on December 30th that helped boost other
assets to $53.4 million from $20.9 million.
The Company's liabilities also reflect the loan participation transaction,
as the proceeds were used to reduce the balance of Federal Home Loan Bank
("FHLB") advances, in addition to the balance of certain high-cost CDs. Deposits
totaled $1.1 billion at year-end 1999, down $26.3 million, the net effect of a
$64.7 million decline in CDs to $658.2 million and a $38.5 million increase in
core deposits to $417.8 million. The growth in core deposits primarily stemmed
from a $33.0 million increase in the balance of NOW and money market accounts to
$103.4 million, and
<PAGE>
12
was further supported by increases of $4.3 million and $1.1 million,
respectively, in the balances of non-interest-bearing accounts and savings
accounts. FHLB advances, meanwhile, rose $197.3 million to $636.4 million,
against a $762.7 million line of credit at year-end 1999.
The Company recorded stockholders' equity of $137.1 million at December
31, 1999, equivalent to 7.19% of total assets and a book value of $7.52 per
share, based on 18,233,153 shares. Supported by cash earnings of $44.3 million,
the Company distributed $18.6 million in cash dividends during the year, and
allocated $38.3 million toward the purchase of 1.3 million shares at an average
cost of $29.82 per share. Despite the aggressive use of its funds, the Company
maintained a solid capital position, with regulatory capital ratios that
continued to exceed the minimum requirements established by the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"). In addition, the Bank
continued to exceed the FDICIA requirements for classification as a "well
capitalized" institution.
LOANS
In 1999, the Company reinforced its status as a leading mortgage lender with the
origination of $676.8 million in mortgage loans. In 1998, mortgage originations
totaled $452.2 million, just shy of the Company's prior production record of
$453.1 million, set the year before. Multi-family mortgage loan originations
represented $603.3 million, or 89.1%, of the 1999 total, exceeding the
year-earlier level of $409.8 million by 47.2%.
Reflecting its proven ability to generate quality product, the Company
arranged a strategic loan participation late in the fourth quarter, selling
$211.6 million in multi-family mortgage loans to the FHLB-NY on December 29th.
Structured so that that Company retains the interest income above the
pass-through rate of interest, the transaction was designed to bolster interest
income, while supporting the Company's spread and margin.
Excluding the sale, the Company would have recorded a $320.9 million, or
25.9%, rise in multi-family mortgage loans outstanding, effectively boosting the
portfolio past the $1.5 billion mark. Reflecting the sale, the portfolio rose
$109.3 million, or 8.8%, to $1.3 billion, representing 84.2% of total mortgage
loans at year-end 1999. Similarly, the Company's mortgage loans would have grown
$326.1 million, or 21.9%, to $1.8 billion. With the sale, the portfolio rose
$114.5 million, or 7.7%, to $1.6 billion, representing 84.0% of total assets at
December 31st. While portfolio growth was clearly reduced by the sale of these
loans, the transaction will ultimately generate a higher return on average
assets, while at the same time enhancing the Company's leverage capital ratio.
The restructuring of the balance sheet thus supports a strategic
objective: generating greater earnings while managing asset growth. As opposed
to suggesting a shift away from multi-family mortgage lending, the sale of these
loans has enabled the Company to maintain its focus, given the potential for
future initiatives that capitalize on the Company's mortgage origination
capacity.
While the Company primarily originates one-to-four family mortgage loans
in Queens and Nassau County, its multi-family real estate market extends
throughout metropolitan New York. At December 31, 1999, 34.9% of the portfolio
was secured by multi-family buildings in Queens County; Manhattan and Brooklyn
accounted for 25.8% and 14.9%, respectively. The balance of the portfolio was
secured by properties in the remaining boroughs of New York City, as well as the
suburban counties of Nassau and Westchester.
The appeal of multi-family mortgage loans, as compared to other types of
credits, stems largely from their contribution to asset quality. The Company's
concentration on multi-family mortgage lending in metropolitan New York has been
rewarded by the absence of any charge-offs in this marketplace since 1987. In
addition, the approval process for such loans is highly efficient, typically
taking a period of four to six weeks. Multi-family mortgage loans are arranged
through a select group of mortgage brokers who are familiar with the Company's
underwriting procedures, as well as its reputation for responsiveness. As one of
the few banks in the marketplace to make such loans during the last recession,
the Company has been rewarded by a steady supply of product, despite the entry
of new competitors vying for borrowers.
Multi-family mortgage loans also differ in their structure, with a term of
ten years and occasionally less. Since 1996, the Company's multi-family mortgage
loans have featured a fixed rate of interest for the first five years of the
mortgage, before converting to an adjustable rate of one percentage point over
prime 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, 1999, the
balance of such step-up loans had declined to $140.2 million, representing 10.9%
of the multi-family mortgage loan portfolio at that date. Reflecting these
loans, as well as those originated on a first-five-year fixed rate basis, 95.0%
of the multi-family mortgage loan portfolio at year-end 1999 featured adjustable
rates.
Another feature of multi-family mortgage loans is a stringent prepayment
penalty schedule, designed to discourage prepayments while providing a
competitive advantage with regard to early refinancings. Penalties range from
five percentage points to two in years one through five of the mortgage,
depending on the remaining term at the time the loan is prepaid. In 1999,
prepayments declined from the year-earlier level, a consequence of the rise in
market interest rates.
With a pipeline of $130.0 million in multi-family mortgage loans two weeks
into 2000, management believes that the year's production will be substantial,
albeit below
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 13
the level produced in 1999. However, the ability to close these loans, and to
originate a like volume in future quarters, could be adversely impacted by an
increase in competition or by a more significant rise in market interest rates
than management currently expects.
While the Company's mix of mortgage loans favors multi-family lending,
9.5% of the portfolio consisted of one-to-four family mortgage loans at year-end
1999. One-to-four family mortgage loans totaled $152.6 million, down from $178.8
million, despite an increase in originations to $26.3 million from $7.5 million
in the prior year. The reduction in these assets primarily reflects an increase
in prepayments; the Company charges no penalties for the prepayment of
one-to-four family mortgage loans.
The Company originates one-to-four family mortgage loans at a rate that
adjusts on an annual basis and, less typically, at a rate that adjusts at two-
or three-year intervals. At December 31, 1999, 70.3% of the portfolio consisted
of adjustable rate credits; the remainder consisted primarily of seasoned loans
originated more than two decades ago. While fixed rate loans are also made to
address the demands of the market, such loans are sold by the Company with the
servicing rights retained.
Responding to customer demand, the majority of one-to-four family mortgage
loans are originated on a limited documentation basis. 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
compensate for the risk involved, limited documentation loans require a higher
down payment and are made at higher rates of interest than full documentation
loans.
The decline in one-to-four family mortgage loans was more than offset by
an increase in the portfolios of commercial real estate and construction loans.
Primarily secured by properties in Queens and Nassau Counties, commercial real
estate loans rose $28.5 million to $96.0 million, representing 6.0% of total
mortgage loans at year-end 1999. Originations rose 30.1% to $42.7 million from
$32.8 million in 1998. The Company's commercial real estate loans are structured
like its multi-family credits, and are also underwritten in the same way.
The growth in commercial real estate loans was coupled with an increase in
construction lending. At December 31, 1999, outstanding construction loans rose
$2.9 million to $4.8 million, after originations of $4.4 million, up from $2.1
million in 1998. While 58.9% of commercial real estate loans featured adjustable
rates of interest, 100% of construction loans featured adjustable rates.
Including the Company's one-to-four family loans and the loans secured by
multi-family buildings, the mortgage loan portfolio was 90.5% adjustable at
December 31, 1999.
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, 1999, the portfolio totaled $8.7 million, down from $9.8 million at December
31, 1998. Loans on cooperative apartment units represented $4.9 million of the
year-end 1999 total, up $54,000, while home equity loans represented $1.3
million, down $446,000 from the year-earlier amount.
LOAN PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
At December 31,
=========================================================================================
1999 1998 1997
-----------------------------------------------------------------------------------------
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 $ 152,644 9.48% $ 178,770 11.94% $ 224,287 15.96%
Multi-family 1,348,351 83.72 1,239,094 82.77 1,107,374 78.78
Commercial real estate 96,008 5.96 67,494 4.51 61,740 4.39
Construction 4,793 0.30 1,898 0.13 1,538 0.10
- -----------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 1,601,796 99.46 1,487,256 99.35 1,394,939 99.23
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER LOANS:
Cooperative apartment 4,856 0.30 4,802 0.32 5,041 0.36
Home equity 1,347 0.08 1,793 0.12 2,386 0.17
Passbook savings 331 0.02 321 0.02 312 0.02
Student 8 -- 8 -- 8 --
Other 2,200 0.14 2,826 0.19 3,048 0.22
- -----------------------------------------------------------------------------------------------------------------------------------
Total other loans 8,742 0.54 9,750 0.65 10,795 0.77
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 1,610,538 100.00% 1,497,006 100.00% 1,405,734 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Less: Unearned discounts 24 22 19
Net deferred loan origination fees 2,404 1,034 1,281
Allowance for loan losses 7,031 9,431 9,431
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, net $1,601,079 $1,486,519 $1,395,003
===================================================================================================================================
</TABLE>
<PAGE>
14
ASSET QUALITY
In 1999, the Company's financial performance continued to be distinguished by a
stellar record of asset quality.
In addition to recording its 21st consecutive quarter without any net
charge-offs, the Company recorded a year-over-year reduction of 52.0% in the
level of non-performing assets and a year-over-year reduction of 49.8% in
non-performing loans.
At December 31, 1999, non-performing assets declined to $3.2 million (or
0.17% of total assets) from $3.9 million (or 0.19% of total assets) at the close
of the trailing quarter and from $6.6 million (or 0.38% of total assets) at
December 31, 1998. Non-performing loans declined to $3.1 million (or 0.19% of
loans, net) from $3.8 million (or 0.22% of loans, net) and from $6.2 million (or
0.42% of loans, net) at the corresponding dates. Included in non-performing
loans at December 31, 1999 were 25 mortgage loans in foreclosure totaling $2.9
million and eight loans 90 days or more delinquent totaling $222,000. Foreclosed
real estate totaled $66,000 at December 31 and September 30, 1999, down from
$419,000 at December 31, 1998. The 1999 amount consisted of a single one-to-four
family residence which is presently under contract for sale. At year-end 1999,
all of the Company's multi-family mortgage, commercial real estate, and
construction loans were fully performing; the non-performers were all secured by
one-to-four family homes, primarily located in the Borough of Queens.
From time to time, properties that are classified as "foreclosed real
estate" are profitably rented by the Company. When this occurs, such properties
are reclassified as "real estate held for investment" and included in "other
assets" on the balance sheet. At December 31, 1999, the Company had 16 such
investments totaling $1.6 million and generating an 8.80% rate of return to the
Bank. Included in the year-end amount are loans of $457,000 that were
reclassified in 1999.
While the quality of the Company's loans partly reflects the strength of
the local real estate market, it also reflects the conservative underwriting
standards employed by the Bank. In the case of multi-family mortgage loans,
management looks at the appraised value of the property that collateralizes the
credit, with a particular focus on the consistency of the income stream
produced. The condition of the property is another critical factor: every
multi-family building is inspected from rooftop to basement by a member of the
Board of Directors' Mortgage and Real Estate Committee, together with the Bank's
senior mortgage officer. Commercial real estate loans, which are primarily
secured by office buildings, are appraised in the same way.
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 limits 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 buildings,
the average loan-to-value ratio on such credits is currently 53%. Similarly, the
Bank will lend up to 65% of appraised value on commercial real estate credits,
which have a current average loan-to-value ratio of 48%. The average
loan-to-value ratio on one-to-four family mortgage loans is 41%, despite the
Bank's willingness to lend up to 85% with private mortgage insurance, and up to
75% without PMI. At December 31, 1999, the principal balance remaining on
multi-family mortgage loans averaged $1.3 million; the largest loan in the
portfolio was $11.7 million at that date. For commercial real estate and
one-to-four family mortgage loans, the average principal balance remaining was
$698,200 and $67,600, respectively; the largest loans in these portfolios were
$5.0 million and $462,000.
In addition, the Company originates loans within a limited local market.
One-to-four family and commercial real estate loans are predominantly secured by
properties in Queens and Nassau County, while the Company's multi- family loans
are secured by buildings in metropolitan New York. In addition, the Company's
multi-family and commercial real estate loans are primarily made through
mortgage brokers whose relationship with the Company extends as far back as the
1970s.
While problem loans have been minimal, the Company follows specific
procedures to ensure that they are quickly identified and addressed. In the case
of multi-family and commercial real estate loans, the borrower is personally
contacted within 20 days of non-payment; in the case of one-to-four family
mortgage loans, the borrower is notified by mail within 20 days.
While every effort is consistently made to originate quality assets,
management cannot guarantee that problem loans will not arise. A borrower's
ability to fulfill his or her obligations may be impacted by a change in
personal circumstances, or by a decline in the local economy or real estate
values. To further minimize credit risk, the Company maintains coverage through
an allowance for loan losses that totaled $7.0 million at December 31, 1999. The
$7.0 million was equivalent to 226.22% of non-performing loans and 0.44% of
loans, net, at that date. In addition, the allowance represented 493.06% of
accumulated net charge-offs since 1987, when the last major downturn in the real
estate market began. The total volume of net charge-offs during those years was
a modest $1.4 million, equivalent to an average of $107,000 per year.
For more information regarding asset quality and 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 26 of this report.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 15
ASSET QUALITY ANALYSIS
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
==================================================
(dollars in thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $ 9,431 $9,431 $9,359 $11,359 $11,268
Loan charge-offs -- -- -- -- (59)
Loan recoveries -- -- 72 -- --
- --------------------------------------------------------------------------------------------------------
Net recoveries (charge-offs) -- -- 72 -- (59)
(Reversal of) provision for loan losses (2,400) -- -- (2,000) 150
- --------------------------------------------------------------------------------------------------------
Balance at end of year $ 7,031 $9,431 $9,431 $ 9,359 $11,359
========================================================================================================
NON-PERFORMING ASSETS:
Mortgage loans in foreclosure $2,886 $5,530 $6,121 $ 6,861 $4,929
Loans 90 days or more delinquent 222 663 1,571 2,798 2,864
- --------------------------------------------------------------------------------------------------------
Total non-performing loans 3,108 6,193 7,692 9,659 7,793
- --------------------------------------------------------------------------------------------------------
Foreclosed real estate 66 419 1,030 627 774
- --------------------------------------------------------------------------------------------------------
Total non-performing assets $3,174 $6,612 $8,722 $10,286 $8,567
========================================================================================================
RATIOS:
Non-performing loans to loans, net 0.19% 0.42% 0.55% 0.84% 0.78%
Non-performing assets to total assets 0.17 0.38 0.54 0.76 0.69
Allowance for loan losses to non-performing loans 226.22 152.28 122.61 96.90 145.76
Allowance for loan losses to loans, net 0.44 0.63 0.68 0.82 1.14
Allowance for loan losses to accumulated
net charge-offs since 1987 493.06 661.36 661.36 625.00 759.00
========================================================================================================
</TABLE>
SECURITIES AND MONEY MARKET INVESTMENTS
While mortgage loan production remained its primary focus, the Company enriched
its asset mix in 1999 by adding to its portfolios of securities held to maturity
and available for sale. At December 31st, securities held to maturity rose to
$184.6 million from $152.3 million, a 21.2% increase, while securities available
for sale rose to $12.8 million from $4.7 million. The market value of the
Company's portfolio of securities held to maturity was $180.2 million, or 97.6%
of carrying value at December 31, 1999, as compared to $152.1 million, or 99.9%
of carrying value, at December 31, 1998.
The higher balance of securities held to maturity primarily reflects a
$10.4 million increase in U.S. Government and agency obligations to $140.3
million and an $18.4 million increase in FHLB stock to $40.8 million. The higher
balance of securities available for sale primarily reflects the reclassification
of certain mortgage-backed securities held to maturity following the Company's
early adoption of SFAS No. 133. The remainder of the available for sale
portfolio consisted of equity investments.
At December 31, 1999, the balance of money market investments totaled $6.0
million, down from $19.0 million at the prior year-end. The Company's money
market investments consist entirely of Federal funds sold.
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Reflecting the reclassification of certain mortgage-backed securities as
securities available for sale at the start of the second quarter, the year-end
1999 balance of mortgage-backed securities held to maturity declined to $2.1
million from $19.7 million at December 31, 1998. In addition, the reduction
reflects prepayments, and the absence of any new investments in such assets
since the first quarter of 1994. The market value of the portfolio was $2.1
million and $20.3 million at December 31, 1999 and 1998, respectively,
representing 102.0% and 103.3% of carrying value at the corresponding dates.
In 2000, the Company anticipates that its portfolio of mortgage-backed
securities will continue to decline as it maintains its focus on multi-family
mortgage lending and investments in short-term securities.
SOURCES OF FUNDS
In 1999, the Company set a new mortgage loan production record, exceeding the
year-earlier level by 49.7%. To fund the growth in mortgage loans, as well as
other investments, the Company drew extensively on its line of credit with the
FHLB. At December 31, 1999, the Company had FHLB advances of $636.4 million,
against a line of credit that totaled $762.7 million at the corresponding date.
At December 31, 1998, FHLB advances totaled $439.1 million, against a line of
credit of $698.8 million. The Company's line of credit is a function of total
assets, equivalent to 40% thereof.
The Company's funding also stemmed from more traditional sources,
including deposits, interest payments on loans and other investments, loan
prepayments, and the maturities of securities and mortgage-backed securities.
Deposits totaled $1.1 billion at year-end 1999, representing
<PAGE>
16
a $26.3 million reduction from the year-earlier level, the net effect of a $64.7
million reduction in CDs to $658.2 million and a $38.5 million increase in core
deposits to $417.8 million. CDs represented 61.1% of total deposits at year-end
1999, down from 65.6% a year earlier, while core deposits rose to 38.8% from the
year-earlier 34.4%.
The growth in core deposits stemmed from each product category, but most
notably from an increase in NOW and money market accounts. NOW and money market
accounts totaled $103.4 million at year-end 1999, up $33.0 million from the
year-earlier balance, signifying an increase of 46.9%. Non-interest-bearing
deposits rose $4.3 million, or 12.2%, to $39.9 million, while savings accounts
rose $1.1 million to $274.5 million, representing 25.5% of total deposits at
year-end.
The growth in non-interest-bearing deposits partly reflects the ongoing
success of the Company's Mobile CSR program and the opening of a full-service
branch in Woodside, Queens at the end of July. Since 1998, the Company has been
sending customer service representatives, equipped with laptop computers, to
various community locations for the purpose of opening accounts. The most active
of these locations has been Flushing-based Queens College, which is visited on a
weekly basis during the school year by the Bank's CSRs. In opening the Woodside
branch, the Company continued its practice of opening offices at locations that
had previously been operated by a money center bank. The new branch is
strategically located in a high-traffic shopping center, which is adjacent to a
major housing complex.
The decline in CDs partly reflects the use of the loan participation
proceeds to reduce the balance of certain higher cost accounts. However, 89.9%
of maturing CDs were rolled over in the twelve months ended December 31, 1999,
exceeding the 88.4% retention rate in 1998.
The level of deposits depends on a combination of factors, including
market interest rates and competition with other banks. The Company has taken
various steps to attract and maintain deposits. In addition to the full-service
Woodside branch, the Company opened a customer service center in Corona in
October, and installed a second ATM on the campus of Queens College the month
before. The Company's online banking service was expanded in the fourth quarter
of the year to permit the online purchase of certain products. Accessed through
www.qcsb.com, the Company's web site, the service also enables customers to
query their account balances, monitor deposits and withdrawals, transfer funds
between accounts, and pay bills from their PCs. In the third quarter of the
year, the Bank expanded the hours of service at several of its full-service
branches; hours range from as early as 7:30 a.m. to as late as 10:00 p.m. on
weekdays and from 9:00 a.m. to 4:00 p.m. on Saturdays.
In the fourth quarter of 1999, the Company formed a subsidiary, Queens
County Capital Management ("QCCM"), Inc., to sell alternative investment
products, beginning with fixed annuities in the first quarter of 2000. In
addition to enhancing the product menu, the sale of these products represents a
potentially attractive source of fee income for the Company.
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. The Company also monitors its interest rate
exposure by analyzing, under a variety of interest rate scenarios, the estimated
changes in market value of both its assets and liabilities.
Interest rate sensitivity is determined by analyzing the difference
between the amount of interest-earning assets maturing or repricing within a
specific time frame and the amount of interest-bearing liabilities maturing or
repricing within 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 on 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 in a rising rate
environment. 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 an 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 liabilities side of the balance
sheet, management has closely monitored the pricing of its depository products,
and 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 typically
feature a fixed rate of interest for the first five years of the loan. At the
same time, the Company has increasingly utilized FHLB advances and CDs as its
primary sources of funding. As a result, the cumulative gap
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 17
between the Company's interest rate sensitive assets and interest rate sensitive
liabilities repricing within a one-year period was $835.9 million, representing
a negative gap of 43.84% at December 31, 1999. At the prior year-end, the
cumulative one-year gap between the Company's interest rate sensitive assets and
liabilities was $330.8 million, representing a negative gap of 18.94%. To reduce
the Company's interest rate risk in the current rising rate environment, the
Company arranged a loan participation in the fourth quarter of 1999, selling
$211.6 million in multi-family mortgage loans to the FHLB-NY on December 29th.
While the sale will result in a lower average balance of interest-earning
assets, interest income will likely be increased, as the loans were sold at a
pass-through rate below the loans' contractual interest rate.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999 which, based on
certain assumptions, are expected to reprice or mature in each of the time
periods shown. Except as stated, the amount of assets and liabilities shown to
reprice or mature within a particular time period was determined in accordance
with the earlier of (a) the term to repricing or (b) the contractual terms of
the asset or liability. The 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 nine years ended December 31, 1999,
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 the preparation of this table; therefore,
the assumptions used may not be indicative of future withdrawals of deposits or
prepayments of loans. Loan prepayments and scheduled principal amortization
totaled $135.1 million in the twelve months ended December 31, 1999.
As this analysis does not necessarily indicate the impact of changes in
market interest rates 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.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
At December 31, 1999
================================================================================
Three Four to More Than More Than More than More
Months Twelve One Year to Three Years Five Years than
(dollars in thousands) or Less Months Three Years to Five Years to 10 Years 10 Years
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage and other loans $ 76,867 $ 203,889 $ 283,866 $ 422,477 $587,863 $ 35,576
Securities 52,190 -- -- 140,325 -- 3,500
Mortgage-backed securities(2) 616 2,096 548 262 -- --
Money market
investments 6,000 -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 135,673 205,985 284,414 563,064 587,863 39,076
- ---------------------------------------------------------------------------------------------------------------------
Less: Unearned discounts
and deferred fees 1,011 1,030 100 85 148 54
- ---------------------------------------------------------------------------------------------------------------------
Net interest-earning assets 134,662 204,955 284,314 562,979 587,715 39,022
- ---------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 7,686 22,412 27,373 24,307 21,585 171,137
NOW and Super NOW accounts 1,379 3,907 4,340 3,375 2,624 9,175
Money market accounts 2,954 11,373 9,664 8,211 6,977 39,443
Certificates of deposit 240,716 283,695 107,307 26,521 -- --
FHLB advances 136,600 464,778 35,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 389,335 786,165 183,684 62,414 31,186 219,756
- ---------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap per period $(254,673) $(581,210) $ 100,630 $ 500,565 $556,529 $(180,734)
=====================================================================================================================
Cumulative interest sensitivity gap $(254,673) $(835,883) $(735,253) $(234,688) $321,841 $141,107
=====================================================================================================================
Cumulative interest sensitivity gap
as a percentage of total assets (13.36)% (43.84)% (38.56)% (12.31)% 16.88% 7.40%
Cumulative net interest-earning
assets as a percentage of net
interest-bearing liabilities 34.59 28.89 45.90 83.49 122.15 108.44
=====================================================================================================================
<CAPTION>
At December 31, 1999
========================
Fair
(dollars in thousands) Total Value(1)
- -------------------------------------------------------------
<S> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage and other loans $1,610,538 $1,605,911
Securities 196,015 191,558
Mortgage-backed securities(2) 3,522 3,564
Money market
investments 6,000 6,000
- -------------------------------------------------------------
Total interest-earning assets 1,816,075 1,807,033
- -------------------------------------------------------------
Less: Unearned discounts
and deferred fees 2,428 2,428
- -------------------------------------------------------------
Net interest-earning assets 1,813,647 1,804,605
- -------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 274,501 274,501
NOW and Super NOW accounts 24,800 24,800
Money market accounts 78,622 78,622
Certificates of deposit 658,238 658,987
FHLB advances 636,378 636,378
- -------------------------------------------------------------
Total interest-bearing liabilities 1,672,540 1,673,287
- -------------------------------------------------------------
Interest sensitivity gap per period $ 141,107 $ 131,318
=============================================================
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
=============================================================
</TABLE>
(1) Fair value of securities, including mortgage-backed securities, is based
on quoted market prices, where available. If quoted market prices are not
available, fair value is based on quoted market prices of comparable
instruments. 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.
<PAGE>
18
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 its 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 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 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 employed 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, the discount rates used were based on
market rates for new loans of similar type and purpose, and adjusted, when
necessary, for factors such as servicing cost, credit risk, and term. The
discount rates used for CDs and FHLB advances were based on rates that
approximate the rates offered by the Company for deposits and FHLB advances of
similar remaining maturities. The analysis calculates the NPV at a flat rate
scenario by computing the present value of the 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 a 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 Company's NPV at December 31, 1999, as calculated by the
Company, for instantaneous and sustained changes in interest rates relative to
the NPV in a changing 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 $46,870 $(21,527) (31.47)% (8.62)%
+100 54,662 (13,735) (20.08) (5.50)
-- 68,397 -- -- --
-100 69,535 1,138 1.66 0.46
-200 74,483 6,086 8.90 2.44
================================================================================
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 remain 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 schedule of specific assets and liabilities.
Assumptions within the model are also subjective in nature and involve
uncertainties, and therefore cannot be determined with precision. Thus, although
the NPV measurements may, in theory, provide an indication of the Company's
exposure to interest rate risk 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
therefore differ from actual results.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 19
LIQUIDITY AND CAPITAL POSITION
Liquidity
As previously noted, the Company's primary funding sources are deposits and FHLB
advances. Additional funding stems from interest and principal payments on
loans, securities, and mortgage-backed securities, and the sale of loans and
foreclosed real estate. While FHLB advances 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
1999, the net cash used in investing activities totaled $136.9 million,
primarily reflecting a $329.5 million net increase in loans, and the investment
of $48.0 million and $7.0 million, respectively, in securities held to maturity
and securities classified as available for sale. The net increase in loans
largely reflects the record level of mortgage loan originations ($676.8 million)
and the sale of $211.6 million in multi-family mortgage loans to the FHLB-NY.
The Company's investing activities were funded by internal cash flows generated
by operating and financing activities. In 1999, the net cash provided by
operating activities totaled $13.0 million; the net cash provided by financing
activities totaled $114.5 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. The
Company's most liquid assets are cash and due from banks and money market
investments, which collectively totaled $37.2 million at December 31, 1999 and
$46.6 million at December 31, 1998. The Company also had securities available
for sale of $12.8 million and $4.7 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.
At January 18, 2000, the Bank had loans totaling $130.0 million in the
pipeline, which management anticipates having the ability to fund. In addition,
CDs due to mature in one year or less from December 31, 1999 totaled $524.4
million; based upon its historic retention rate, as well as current pricing,
management believes that a significant portion of such deposits shall remain
with the Bank.
Capital Position
In 1999, the Company maintained an aggressive approach to capital management,
distributing $18.6 million in cash dividends over the course of four quarters,
and allocating $38.4 million toward the repurchase of 1,285,992 shares of
Company stock. Since 1994, when the first share repurchase was authorized by the
Board of Directors, the Company has allocated $206.2 million to buy back 12.8
million shares at an average price of $16.09 per share. At December 31, 1999,
363,068 shares remained available for repurchase, as authorized by the Board of
Directors on November 24th. The timing of any repurchases will depend on market
conditions, as well as the implementation of other value-enhancing strategies.
The extent of the Company's share repurchases is a strong indication of
management's confidence in the Company's capital strength. Fueled by cash
earnings of $44.3 million, stockholders' equity totaled $137.1 million, or 7.19%
of total assets, at December 31, 1999, equivalent to a book value of $7.52 per
share, based on 18,233,153 shares. The $44.3 million reflects net income of
$31.7 million and $12.6 million in plan-related items, as detailed in the cash
earnings analysis on page 21 of this report. 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. To calculate book value,
the Company subtracts the number of unallocated ESOP shares at the end of the
period from the number of shares outstanding at the same date. At December 31,
1999, the number of unallocated ESOP shares totaled 2,776,974; at December 31,
1998, there were 2,861,783 unallocated ESOP shares.
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 5.00% or more; a
ratio of Tier 1 risk-based capital to risk-weighted assets of 6.00% or more; and
a ratio of total risk-based capital to risk-weighted assets of 10.00% or more.
The minimum Federal requirements for leverage, Tier 1, and total risk-based
capital are, respectively, 3.00%, 4.00%, and 8.00%.
At December 31, 1999, the Bank's leverage capital totaled $174.8 million,
or 8.63% of adjusted average assets, while its Tier 1 and total risk-based
capital amounted to $174.8 million and $181.8 million, or 13.80% and 14.36% of
risk-weighted assets, respectively. At December 31, 1998, the Bank's leverage
capital totaled $161.4 million, or 9.40% of adjusted average assets; 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. The 1999
and 1998 amounts reflect the transfer of $33.1 million and $17.8 million in
capital from the Bank to the Company, respectively.
<PAGE>
20
Results of Operations
EARNINGS SUMMARY
1999 and 1998 Comparison:
The Company recorded core earnings of $30.1 million in the twelve months ended
December 31, 1999, up $3.2 million, or 11.8%, from $26.9 million in 1998. On a
diluted per share basis, the Company's core earnings rose to $1.59 from $1.34 in
the year-earlier period, representing an increase of 18.7%.
In 1999, the Company took certain steps that prompted an immediate
reduction in compensation and benefits expense. In the third quarter of the
year, the Company froze its defined benefit pension plan, which resulted in a
one-time gain of $1.6 million and offset a one-time charge of $735,000 following
the implementation of an early retirement window in the fourth quarter of the
year. The net benefit of these actions was a $472,000 increase in 1999 earnings,
equivalent to $0.02 per share.
In the first quarter of the year, the Company reversed $2.0 million from
the allowance for loan losses in recognition of the portfolio's stellar
performance and the level of coverage provided for its non-performing loans. The
net benefit of the reversal was $1.1 million, equivalent to $0.06 per share.
Reflecting these actions, the Company's 1999 earnings rose to $31.7
million, or $1.67 on a diluted per share basis, representing an ROA of 1.69% and
an ROE of 22.99%. Both measures compared favorably with the industry averages,
which were 0.86% and 8.14%, respectively.
The Company also reported 1999 cash earnings of $44.3 million, or $2.34 on
a diluted per share basis, representing a cash ROA of 2.37% and a cash ROE of
32.21%. The Company's 1999 cash earnings contributed $12.7 million, or 40.1%,
more to capital than its 1999 GAAP earnings alone.
The Company's 1999 earnings growth stemmed from an increase in net
interest income and a reduction in operating expense. Net interest income rose
to $68.9 million in 1999 from the year-earlier $68.5 million, despite declines
in the interest rate spread and net interest margin to 3.41% and 3.79%,
respectively. The increase in net interest income was the net effect of an $8.8
million rise in interest income and an $8.4 million increase in interest
expense. Interest income rose to $143.1 million, reflecting a $205.8 million
rise in the average balance of interest-earning assets to $1.8 billion and a
46-basis point decline in the average yield to 7.86%. The Company's
interest-earning asset growth was fueled by the record level of mortgage loan
originations, which totaled $676.8 million in the twelve months ended December
31, 1999.
The growth in interest-earning assets was paralleled by a rise in average
interest-bearing liabilities, as the Company increased its use of FHLB advances
to fund the production of mortgage loans. Fueled by a $223.4 million increase in
the average balance of interest-bearing liabilities to $1.7 billion, interest
expense rose to $74.2 million; the average cost of these funds fell 11 basis
points to 4.45%. FHLB advances represented $172.3 million of the increase in the
average balance, having risen to $570.1 million in 1999. Tempered by a
four-basis point drop in the average cost of such funds, FHLB advances generated
1999 interest expense of $30.3 million, up $9.0 million from the prior-year
amount. The sale of $211.6 million in multi-family mortgage loans to the FHLB-NY
late in the fourth quarter generated proceeds that were utilized to reduce the
year-end balance of these higher cost funds.
The Company's earnings also reflect a $4.6 million reduction in operating
expense to $21.4 million, or 1.14% of average assets, stemming in part from the
cost containment measures cited above. The reduction reflects a $5.0 million
decline in compensation and benefits expense to $13.5 million, including the
one-time curtailment gain of $1.6 million, as well as a $4.1 million decline in
non-cash items stemming from a change in the Company's stock-related benefit
plans. This reduction was partly offset by a $444,000 increase in other expense
to $872,000, reflecting the $400,000 recourse reserve established in connection
with the sale of loans to the FHLB-NY. Because the $400,000 was reversed from
the allowance for loan losses, the establishment of the recourse reserve had no
impact on net income in 1999.
Reflecting the reduction in operating expense and the rise in net interest
income, the Company's efficiency ratio improved to 29.95% from 36.51% on a GAAP
earnings basis and, on a cash earnings basis, to 26.37% from 27.05%. The Company
continued to rank among the thrift industry's most efficient institutions; in
1999, the average efficiency ratio was 60.52%.
The growth in earnings was tempered by a decline in other operating
income, as well as by an increase in income tax expense. Other operating income
totaled $2.5 million in 1999, down $31,000 from the year-earlier total, the net
effect of a $248,000 drop in fee income to $1.9 million and a $217,000 increase
in other income to $660,000. On December 30, 1999, the Company invested $30.0
million of the proceeds from its FHLB-NY loan participation in Bank-Owned Life
Insurance, an income-producing tax-favored product. Because this investment was
made toward the close of the fourth quarter, its contribution to other income
will begin to be reflected in the first quarter of 2000.
Reflecting a $7.3 million, or 16.2%, rise in pre- tax income to $52.4
million, income tax expense rose $2.6 million to $20.8 million in 1999. The
increase was partly tempered by an effective tax rate of 39.61% and an $802,000
reduction in non-cash items stemming from the Company's stock-related benefit
plans.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 21
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 included the recapture of $1.3
million in the first quarter that had been recorded as a tax charge in the
fourth quarter of 1996. The Company's 1998 earnings provided an ROE of 17.32%
and an ROA of 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.
In 1998, the Company's earnings growth was fueled by higher net interest
income and other operating income, together with 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. Fueled by 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 average balance served to offset an eight-basis point drop in the average
yield to 8.32%.
The concurrent rise 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 advances 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 3.84% and 4.45% 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. The Company also 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 plan-related
expenses, down from $7.4 million in the prior year.
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. 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 $37.6 million 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
reflected 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.
The provision for loan losses was suspended throughout 1998, as in 1997,
based on the level of coverage provided by the allowance for loan losses and the
consistently solid performance of the Company's loan portfolio.
CASH EARNINGS ANALYSIS
<TABLE>
<CAPTION>
For the Years Ended December 31,
================================================
(in thousands, except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $31,664 $26,944 $23,264
Additional contributions to stockholders' equity:
Amortization and appreciation of stock-related benefit plans 2,559 6,724 7,368
Associated tax benefits 7,269 8,071 3,416
Amortization of goodwill -- -- --
Other 2,857 2,019 1,351
- -----------------------------------------------------------------------------------------------------------------
Cash earnings $44,349 $43,758 $35,399
=================================================================================================================
Cash earnings per share $2.39 $2.29 $1.73
Diluted cash earnings per share 2.34 2.17 1.62
=================================================================================================================
</TABLE>
<PAGE>
22
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 yields on said
assets, and the current level of market interest rates. Such rates are
influenced by the Federal Open Market Committee ("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 one another), as it deems
necessary. In 1999, the Federal funds rate was maintained at 4.75% until June,
at which time it was raised 25 basis points to 5.00%. Two additional 25-basis
point increases followed in August and November, restoring the rate to 5.50%,
where it last had been in September 1998.
1999 and 1998 Comparison:
In 1999, the Company originated a record level of multi-family mortgage loans
and increased its commercial real estate lending while, at the same time,
increasing its investments in securities. These actions combined to produce a
$205.8 million, or 12.7%, rise in the average balance of interest-earning assets
to $1.8 billion, generating an $8.8 million rise in interest income
year-over-year. Specifically, interest income rose to $143.1 million from $134.3
million, the net effect of the higher average balance and a 46-basis point
decline in the average yield to 7.86%.
Loans generated 92.0% of total interest income and represented 89.6% of
average interest-earning assets in 1999. Specifically, the interest income
produced by mortgage and other loans rose $7.8 million to $131.6 million from
the year-earlier level, the net effect of a $186.1 million increase in the
average balance to $1.6 billion and a 50-basis point decline in the average
yield to 8.07%.
Securities generated 7.1% of total interest income and accounted for 9.2%
of average interest-earning assets in 1999. The interest income therein derived
rose $2.7 million to $10.2 million, the net effect of a $48.2 million increase
in the average balance to $166.7 million and a 19-basis point drop in the
average yield to 6.10%. While the Company increased its securities portfolio
during the year, the higher average balance also reflects the reclassification
of certain mortgage-backed securities as securities available for sale,
effective April 1, 1999.
Reflecting the reclassification, as well as scheduled repayments, the
average balance of mortgage-backed securities declined to $13.1 million from
$36.8 million in 1998. The interest income produced by mortgage-backed
securities fell to $893,000 from $2.3 million, the net effect of the lower
average balance and a 47-basis point rise in the average yield to 6.83%.
Money market investments generated interest income of $443,000, down from
$691,000 in the year-earlier twelve months. Reflecting management's focus on
mortgage lending, the average balance of money market investments declined to
$9.3 million from $14.1 million, in tandem with a 13-basis point drop in the
average yield to 4.76%.
The Company's sale of $211.6 million in multi-family mortgage loans on
December 29, 1999 will likely result in a lower average balance of
interest-earning assets in the first quarter of 2000. Because the Company
continues to earn interest on the loans that were sold, it is management's
expectation that the average yield will rise even as the average balance
declines. Accordingly, management would expect the level of interest income to
be supported by this transaction, while reminding the reader that the level of
interest income depends on a combination of factors, identified in the
introductory paragraph above. A significant change in any one of these factors
could adversely impact the level of interest income in future periods.
1998 and 1997 Comparison:
In 1998, interest income rose 14.1% to $134.3 million from $117.7 million in
1997. 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%.
Despite increased competition for product resulting from the
then-prevailing rate environment, the Company originated $452.2 million in
mortgage loans in 1998. 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 competition, the average yield on the Company's loans
declined 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. Securities
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 reflected 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 reduction in the interest income derived from
mortgage-backed securities to $2.3 million from $3.9 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%.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 23
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.
1999 and 1998 Comparison:
The Company's profitable asset growth was primarily funded by an increase in
FHLB advances, and supported by an increase in CDs and core deposits (savings
accounts, NOW and money market accounts, and non-interest-bearing accounts).
Interest expense rose $8.4 million year-over-year to $74.2 million, the net
effect of a $223.4 million increase in the average balance of interest-bearing
liabilities to $1.7 billion and an 11-basis point drop in the average cost to
4.45%.
While the balance of FHLB advances was significantly reduced at year-end
with the proceeds from the Company's loan participation transaction, the
reduction is not reflected in the average balance sheet for 1999. For the twelve
months ended December 31, 1999, FHLB advances generated interest expense of
$30.3 million, an increase of $9.0 million, the net effect of a $172.3 million
rise in the average balance to $570.1 million and a four-basis point drop in the
average cost to 5.31%. The benefit of the transaction will be reflected in the
Company's first quarter 2000 average balance sheet.
In 1999, CDs produced interest expense of $35.1 million, or 47.3% of the
total, down $1.1 million from the level recorded in 1998. The reduction was the
net effect of a 38-basis point decline in the average cost to 4.92% and a $30.1
million rise in the average balance to $714.5 million.
The average balance of core deposits, meanwhile, rose $26.7 million to
$419.6 million, producing a $600,000 rise in interest expense to $8.8 million.
Despite the increase in interest rates during the twelve-month period, the
average cost of core deposits was maintained at 2.10%. Savings accounts
generated interest expense of $6.3 million, up $105,000, the net effect of a
$5.8 million increase in the average balance to $274.4 million and a one-basis
point drop in the average cost to 2.31%. NOW and money market accounts produced
interest expense of $2.5 million, up $512,000, reflecting a $14.0 million rise
in the average balance to $83.9 million and a 15-basis point rise in the average
cost to 2.93%. The average balance of non-interest-bearing deposits rose $5.7
million, or 17.8%, to $37.6 million from $31.9 million in 1998.
Mortgagors' escrow generated interest expense of $29,000, down from
$46,000 in 1998. The decrease was the net effect of an eight-basis point drop in
the average cost to 0.12% and a $1.2 million rise in the average balance to
$23.7 million.
The Company manages interest expense by carefully monitoring the rates it
pays on deposits and adjusting them, as needed, while still maintaining a
profitable interest rate spread. While the cost of FHLB advances exceeds that of
deposits, they continue to be an attractive funding option, given the
flexibility they offer and the record of earnings growth resulting from their
use. The extent to which FHLB advances are relied upon for funding in 2000 will
depend on a combination of factors, including the availability of deposits and
the level of loan demand.
1998 and 1997 Comparison:
Interest expense rose to $65.8 million in 1998 from $55.3 million in 1997. The
rise in interest expense was driven by the need for additional funding to fuel
the Company's prolific loan growth. 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 generated 1998 interest expense of $36.3 million, up $74,000 from the
year-earlier level, 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.
While CDs remained the largest component of interest-bearing liabilities,
FHLB advances experienced the largest percentage growth. Specifically, FHLB
advances produced interest expense of $21.3 million, up $10.5 million from the
level recorded in the year-earlier twelve months. 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 advances 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 also reflects a $2.5 million rise in
the average balance of NOW and money market accounts to $69.9 million, in
concert with 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 mortgagors' 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%.
<PAGE>
24
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
For the Years Ended December 31,
======================================================================
1999 1998
- -------------------------------------------------------------------------------------------------------------
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 $1,631,168 $131,618 8.07% $1,445,028 $123,784 8.57%
Securities 166,761 10,169 6.10 118,594 7,464 6.29
Mortgage-backed securities 13,081 893 6.83 36,782 2,338 6.36
Money market investments 9,309 443 4.76 14,130 691 4.89
- -------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,820,319 $143,123 7.86% 1,614,534 $134,277 8.32%
Non-interest-earning assets 48,010 43,727
- -------------------------------------------------------------------------------------------------------------
Total assets $1,868,329 $1,658,261
=============================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing Liabilities:
NOW and money market
accounts $ 83,875 $ 2,456 2.93% $ 69,894 $ 1,944 2.78%
Savings accounts 274,402 6,329 2.31 268,558 6,224 2.32
Certificates of deposit 714,546 35,123 4.92 684,434 36,251 5.30
FHLB advances 570,077 30,283 5.31 397,815 21,290 5.35
Mortgagors' escrow 23,736 29 0.12 22,501 46 0.20
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,666,636 $ 74,220 4.45% 1,443,202 $ 65,755 4.56%
Non-interest-bearing
deposits 37,596 31,918
Other liabilities 26,390 27,559
- -------------------------------------------------------------------------------------------------------------
Total liabilities 1,730,622 1,502,679
Stockholders' equity 137,707 155,582
- -------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,868,329 $1,658,261
=============================================================================================================
Net interest income/interest
rate spread $ 68,903 3.41% $ 68,522 3.76%
Net interest-earning assets/
net interest margin $153,683 3.79% $171,332 4.24%
Ratio of interest-earning
assets to interest-bearing
liabilities 1.09x 1.12x
=============================================================================================================
<CAPTION>
For the Years Ended December 31,
===============================
1997
- ----------------------------------------------------------------------
Average
Average Yield/
(dollars in thousands) Balance Interest Cost
======================================================================
<S> <C> <C> <C>
ASSETS
Interest-earning Assets:
Mortgage and other
loans, net $1,257,632 $108,868 8.66%
Securities 76,208 4,737 6.22
Mortgage-backed securities 62,259 3,856 6.19
Money market investments 5,269 273 5.18
- ----------------------------------------------------------------------
Total interest-earning assets 1,401,368 $117,734 8.40%
Non-interest-earning assets 39,895
- ----------------------------------------------------------------------
Total assets $1,441,263
======================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing Liabilities:
NOW and money market
accounts $ 67,347 $ 1,844 2.74%
Savings accounts 272,043 6,523 2.40
Certificates of deposit 666,242 36,177 5.43
FHLB advances 189,136 10,751 5.68
Mortgagors' escrow 17,451 41 0.23
- ----------------------------------------------------------------------
Total interest-bearing
liabilities 1,212,219 $ 55,336 4.56%
Non-interest-bearing
deposits 26,622
Other liabilities 22,798
- ----------------------------------------------------------------------
Total liabilities 1,261,639
Stockholders' equity 179,624
- ----------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,441,263
======================================================================
Net interest income/interest
rate spread $ 62,398 3.84%
Net interest-earning assets/
net interest margin $189,149 4.45%
Ratio of interest-earning
assets to interest-bearing
liabilities 1.16x
======================================================================
</TABLE>
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 25
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) the changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) the changes attributable to changes in rate
(changes in rate multiplied by prior volume), and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Compared to Year Ended Compared to Year Ended
December 31, 1998 December 31, 1997
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 $15,021 $(7,187) $ 7,834 $16,060 $(1,144) $14,916
Securities 2,938 (233) 2,705 2,666 61 2,727
Mortgage-backed securities (1,619) 174 (1,445) (1,620) 102 (1,518)
Money market investments (229) (19) (248) 433 (15) 418
- --------------------------------------------------------------------------------------------------------------
Total 16,111 (7,265) 8,846 17,539 (996) 16,543
- --------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
NOW and money market accounts 410 102 512 71 29 100
Savings accounts 135 (30) 105 (81) (218) (299)
Certificates of deposit 1,482 (2,610) (1,128) 964 (890) 74
FHLB advances 9,147 (154) 8,993 11,164 (625) 10,539
Mortgagors' escrow 1 (18) (17) 10 (5) 5
- --------------------------------------------------------------------------------------------------------------
Total 11,175 (2,710) 8,465 12,129 (1,710) 10,419
- --------------------------------------------------------------------------------------------------------------
Net change in interest income $ 4,936 $(4,555) $ 381 $ 5,410 $ 714 $ 6,124
==============================================================================================================
<CAPTION>
Year Ended
December 31, 1997
Compared to Year Ended
December 31, 1996
Increase/(Decrease)
============================
Due to
- ----------------------------------------------------------------------
(in thousands) Volume Rate Net
======================================================================
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage and other loans, net $16,210 $641 $16,851
Securities 117 312 429
Mortgage-backed securities (1,373) (23) (1,396)
Money market investments (445) (9) (454)
- ----------------------------------------------------------------------
Total 14,509 921 15,430
- ----------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
NOW and money market accounts (172) (23) (195)
Savings accounts (241) 10 (231)
Certificates of deposit 3,708 (64) 3,644
FHLB advances 7,267 65 7,332
Mortgagors' escrow 5 (3) 2
- ----------------------------------------------------------------------
Total 10,567 (15) 10,552
- ----------------------------------------------------------------------
Net change in interest income $ 3,942 $936 $ 4,878
======================================================================
</TABLE>
NET INTEREST INCOME
Net interest income is the Company's primary 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 the Company's interest-earning assets and funding
sources, and by such external factors as competition, economic conditions, and
the monetary policy of the FOMC.
1999 and 1998 Comparison:
The Company recorded net interest income of $68.9 million in 1999, as compared
to $68.5 million in 1998. The $381,000 increase was achieved despite declines in
the Company's interest rate spread and net interest margin, to 3.41% and 3.79%
from 3.76% and 4.24%, respectively, in 1998. While the Company's spread and
margin were pressured by the increased use of FHLB advances, they continued to
exceed the averages for the thrift industry. In 1999, the average interest rate
spread was 2.87%, while the average net interest margin was 3.37%.
The sale of $211.6 million in multi-family mortgage loans late in the
fourth quarter enabled the Company to reduce its balance of FHLB advances and
certain higher cost CDs. While this transaction had no impact on the Company's
1999 spread or margin, the benefits are likely to be reflected in 2000. Barring
a more significant increase in market interest rates than management is
currently expecting, the Company's spread and margin are likely to stabilize or
modestly increase. The direction of the Company's net interest margin will also
depend on the extent of the Company's share repurchase program and the amount of
capital allocated toward this end.
It should also be re-emphasized that the level of net interest income is a
function of several factors. Among the factors that could result in the Company
recording lower net interest income are a reduction in the volume of mortgage
<PAGE>
26
originations, a substantial increase in mortgage prepayments, and a significant
change in market interest rates.
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.
Pressured by a flat yield curve and the use of higher cost funding
sources, the Company's interest rate spread declined eight basis points to
3.76%. Similarly, the Company recorded a net interest margin of 4.24%, down 21
basis points. In addition, the Company's margin reflected the allocation of
$52.5 million to repurchase shares of Company stock in 1998. Despite these
declines, the Company's 1998 spread and margin exceeded the industry averages by
96 and 89 basis points, respectively.
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.
1999 and 1998 Comparison:
In 1999, the Company's loan portfolio delivered a superior performance,
surpassing the solid performance delivered in 1998. At December 31, 1999,
non-performing loans declined 49.8% to $3.1 million (or 0.19% of loans, net)
from $6.2 million (or 0.42% of loans, net) at December 31, 1998. In addition,
the Company extended its record to 21 consecutive quarters without any net
charge-offs and maintained the fully performing status of its multi-family
mortgage loan portfolio. The Company, historically, has had a low level of net
charge-offs. At December 31, 1999, the total volume for the thirteen years since
1987 was $1.4 million, equivalent to a modest average of $107,000 per year.
Given the superior quality of the Company's assets, management extended
the suspension of the loan loss provision throughout 1999 and reversed $2.0
million from the allowance for loan losses in the first quarter of the year. The
impact of this reversal on the Company's 1999 earnings was an after-tax benefit
of $1.1 million, or $0.06 per share. In the fourth quarter of the year, an
additional $400,000 was reversed from the loan loss allowance and used to
establish a recourse reserve for the $211.6 million in multi-family mortgage
loans that were sold to the FHLB-NY. The $400,000 is included in "other expense"
for 1999, and had no impact on earnings, as it was reversed from the loan loss
allowance.
The allowance for loan losses thus declined to $7.0 million, or 0.44% of
loans, net, and 226.22% of non-performing loans, at December 31, 1999.
Reflecting the historic strength of the Company's assets, the $7.0 million also
represented 493.06% of accumulated net charge-offs for the 13 years ended
December 31, 1999.
Based on the quality of the Company's loans and the level of coverage
provided, management expects to extend the suspension of the loan loss provision
throughout 2000. This said, it should be cautioned that this practice could be
discontinued in the event of a significant downturn in the local real estate
market and/or a significant change in the quality of the mortgage loan
portfolio.
For more information about the loan portfolio's 1999 performance, see the
discussion and analysis of asset quality beginning on page 14 of this report.
1998 and 1997 Comparison:
In 1998, the Company's loans delivered another strong performance, improving on
their 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 17
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, as it was in 1997. 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.
OTHER OPERATING INCOME
The interest 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.
1999 and 1998 Comparison:
Other operating income totaled $2.5 million in 1999, down $31,000 from the level
recorded in 1998. The reduction was the net effect of a $248,000 decline in fee
income to $1.9 million and a $217,000 increase in other income to $660,000. In
1998, fee income was bolstered by penalties paid during an extended period of
mortgage loan prepayment activity.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 27
In the fourth quarter of 1999, management took certain actions that will
generate an increase in other operating income in 2000 and beyond. On December
30, 1999, the Company invested $30.0 million in Bank-Owned Life Insurance, which
will produce approximately $1.9 million in other income in the year ahead. In
addition, the Company formed a subsidiary, QCCM, Inc., which will sell
alternative investment products through the branch network. Besides expanding
the Bank's product menu, the sale of such products will provide additional fee
income for the Company.
1998 and 1997 Comparison:
The Company generated other operating income of $2.6 million in 1998, 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 and a $575,000 decrease in other
income to $443,000.
The higher level of fee income in 1998 reflected a general increase in
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 to another financial institution in the
fourth quarter of the year.
OPERATING EXPENSE
Among the Company's distinguishing characteristics is a demonstrated ability to
contain operating expense. Consisting of compensation and benefits, occupancy
and equipment, general and administrative ("G&A"), and other expenses, the
Company's operating expense typically represents a below-average percentage of
average assets and contributes to 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.
1999 and 1998 Comparison:
The Company's focus on cost containment was aptly demonstrated in 1999.
Operating expense declined 17.6% to $21.4 million, or 1.14% of average assets,
from $26.0 million, or 1.57% of average assets, in 1998. The $4.6 million
reduction primarily stemmed from a 27.4% decline in compensation and benefits
expense to $13.5 million, from $18.5 million in the year-earlier twelve months.
The $5.0 million savings included the one-time gain of $1.6 million pursuant to
the freezing of the Bank's defined benefit pension plan at September 30th, which
more than offset a one-time charge of $735,000 pursuant to the implementation of
an early retirement window in the fourth quarter of the year. The reduction in
compensation and benefits also reflects a $4.1 million decline in plan-related
expenses to $2.6 million, pursuant to a change in the amortization period for
the Company's ESOP to sixty years from thirty at January 1, 1999. While recorded
as a charge against earnings, the $2.6 million (which represented 19.0% of
compensation and benefits expense and 11.9% of total operating expense in the
current 12-month period) was added back to stockholders' equity at December 31,
1999.
The Company's 1999 operating expense also reflects a $157,000 decline in
occupancy and equipment expense to $2.3 million, despite the Company's
successful Y2K preparations and the opening of two banking offices in the second
half of the year. This decline, and the decrease in compensation and benefits
expense, substantially offset increases of $221,000 and $444,000 in G&A expense
and other expense to $4.8 million and $872,000, respectively. The increase in
other expense primarily stemmed from the establishment of the $400,000 recourse
reserve in connection with the fourth quarter sale of $211.6 million in
multi-family mortgage loans to the FHLB-NY. As the $400,000 was reversed from
the allowance for loan losses, this action had no impact on the Company's 1999
earnings.
Reflecting the reduction in operating expense and the growth in net
interest income, the Company's efficiency ratio improved to 29.95% from 36.51%
on the basis of GAAP earnings and, on the basis of cash earnings, to 26.37% from
27.05%.
The actions taken by management to reduce expenses in 1999 will continue
to benefit earnings in 2000.
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 1997. The $1.1 million decline reflected 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 expense 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
reflects the extension of the amortization period for the ESOP to thirty years
from twenty as of January 1, 1998.
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.
<PAGE>
28
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 its
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 the
period.
1999 and 1998 Comparison:
Reflecting a $7.3 million, or 16.2%, rise in pre-tax income to $52.4 million,
the Company recorded 1999 income tax expense of $20.8 million, as compared to
$18.2 million in 1998. The increase in pre-tax income was partly offset by a
decline in the effective tax rate to 39.61% from 40.29% in the year-earlier
period, and by a decline in non-cash items to $7.3 million from $8.1 million.
The $7.3 million was added back to stockholders' equity at December 31, 1999.
In the fourth quarter of 1999, the Company invested $30.0 million in
Bank-Owned Life Insurance, a tax-favored investment, which will benefit earnings
in 2000 by producing other income and lowering the effective tax rate to
approximately 39%.
1998 and 1997 Comparison:
The Company recorded income tax expense of $18.2 million in 1998, up from $14.4
million in 1997. The increase reflected a $7.5 million rise in pre-tax income to
$45.1 million, and included a $4.7 million rise in non-cash items stemming from
the Company's stock-related benefit plans 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.
The Year 2000 Issue
The approach of the year 2000 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 were 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.
The Company was quick to prepare for the millenium's arrival, having
established a committee to address this issue in 1996. Internal systems were
upgraded in 1997, and a thorough assessment of all external systems was
conducted in 1998. By June 30, 1999, the Company had completed the testing of
its mission critical systems, and had developed a detailed business resumption
plan.
As a result of these efforts, and the efforts of its primary vendors, the
Company was well-prepared to serve its customers at the start of the New Year,
surviving the century date change without any interruption in service.
Because the costs involved in the Company's Y2K preparations were
consistently charged against earnings as incurred, the impact on its 1999
performance was minimal. As indicated in the 1998 Annual Report to Shareholders,
the Company had estimated that total costs would not exceed $100,000. The actual
expenditures fell well below this amount.
Impact of Accounting Pronouncements
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments and
for hedging activities. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure 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. As a
result of this action, $14.1 million in mortgage-backed securities held to
maturity were reclassified as securities available for sale in the second
quarter of the year.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 29
Market Price of Common Stock and Dividends Paid per Common Share
Shares of Queens County Bancorp, Inc. are traded on the Nasdaq National Market
under the symbol "QCSB." At December 31, 1999, the number of outstanding shares
totaled 21,010,127.
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 1999 and
1998.
<TABLE>
<CAPTION>
Market Price
High Low Close
Dividends Declared -------------------------------------------------------------------------------------
per Common Share(1) Pre-Split(2) Post-Split Pre-Split(2) Post-Split Pre-Split(2) Post-Split
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
1999
1st Quarter $0.2500 $215.582 $31.938 $178.875 $26.500 $182.250 $27.000
2nd Quarter 0.2500 243.844 36.125 181.406 26.875 218.531 32.375
3rd Quarter 0.2500 223.594 33.125 175.500 26.000 186.469 27.625
4th Quarter 0.2500 221.906 32.875 173.813 25.750 183.094 27.125
===========================================================================================================================
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
===========================================================================================================================
</TABLE>
(1) 1998 dividends have been restated to reflect the 3-for-2 stock split on
September 29, 1998.
(2) 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.
<PAGE>
30
Consolidated STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
==============================
(in thousands, except share data) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 31,224 $ 27,561
Money market investments 6,000 19,000
Securities held to maturity (estimated market value of $180,181 and
$152,055, respectively) (note 3) 184,637 152,280
Mortgage-backed securities held to maturity (estimated market value of
$2,135 and $20,332, respectively) (note 4) 2,094 19,680
Securities available for sale 12,806 4,656
Mortgage loans 1,599,392 1,486,222
Other loans 8,718 9,728
Less: Allowance for loan losses (7,031) (9,431)
- -----------------------------------------------------------------------------------------------------------
Loans, net (notes 5 and 6) 1,601,079 1,486,519
Premises and equipment, net 10,060 10,399
Deferred tax asset, net (note 10) 5,496 5,917
Other assets (notes 7 and 12) 53,439 20,870
- -----------------------------------------------------------------------------------------------------------
Total assets $1,906,835 $1,746,882
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 8):
NOW and money market accounts $ 103,422 $ 70,423
Savings accounts 274,501 273,357
Certificates of deposit 658,238 722,985
Non-interest-bearing accounts 39,857 35,520
- -----------------------------------------------------------------------------------------------------------
Total deposits 1,076,018 1,102,285
- -----------------------------------------------------------------------------------------------------------
Official checks outstanding 31,189 34,487
FHLB advances (note 9) 636,378 439,055
Mortgagors' escrow 10,288 13,084
Other liabilities (note 12) 15,821 8,565
- -----------------------------------------------------------------------------------------------------------
Total liabilities 1,769,694 1,597,476
- -----------------------------------------------------------------------------------------------------------
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; 21,010,127 and 21,250,897 shares outstanding at
December 31, 1999 and 1998, respectively) 310 310
Paid-in capital in excess of par 147,607 138,180
Retained earnings (substantially restricted) (note 15) 150,545 165,383
Less: Treasury stock (9,960,566 and 9,719,796 shares, respectively) (145,122) (137,901)
Unallocated common stock held by ESOP (note 13) (12,388) (12,767)
Common stock held by SERP and Deferred Compensation Plans
(notes 12 and 13) (3,770) (3,770)
Unearned common stock held by RRPs (note 13) (41) (63)
Accumulated other comprehensive income, net of tax effect -- 34
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 137,141 149,406
- -----------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 11)
Total liabilities and stockholders' equity $1,906,835 $1,746,882
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 31
Consolidated STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
===========================================
(in thousands, except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Mortgage and other loans (note 5) $131,618 $123,784 $108,868
Securities held to maturity 10,169 7,464 4,737
Mortgage-backed securities held to maturity 893 2,338 3,856
Money market investments 443 691 273
- -----------------------------------------------------------------------------------------------------------------
Total interest income 143,123 134,277 117,734
- -----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW and money market accounts 2,456 1,944 1,844
Savings accounts 6,329 6,224 6,523
Certificates of deposit 35,123 36,251 36,177
FHLB advances (note 9) 30,283 21,290 10,751
Mortgagors' escrow 29 46 41
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 74,220 65,755 55,336
- -----------------------------------------------------------------------------------------------------------------
Net interest income 68,903 68,522 62,398
- -----------------------------------------------------------------------------------------------------------------
Reversal of provision for loan losses (note 6) 2,400 -- --
- -----------------------------------------------------------------------------------------------------------------
Net interest income after reversal of provision for loan losses 71,303 68,522 62,398
- -----------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Fee income 1,863 2,111 1,287
Other (note 5) 660 443 1,018
- -----------------------------------------------------------------------------------------------------------------
Total other operating income 2,523 2,554 2,305
- -----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Compensation and benefits (notes 12 and 13) 13,458 18,529 18,872
Occupancy and equipment (note 11) 2,289 2,446 2,641
General and administrative 4,771 4,550 4,872
Other 872 428 699
- -----------------------------------------------------------------------------------------------------------------
Total operating expense 21,390 25,953 27,084
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 52,436 45,123 37,619
Income tax expense (note 10) 20,772 18,179 14,355
- -----------------------------------------------------------------------------------------------------------------
Net income $ 31,664 $ 26,944 $ 23,264
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income, net of tax:
Unrealized gain on securities (34) (23) 57
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income $ 31,630 $ 26,921 $ 23,321
=================================================================================================================
Earnings per share $1.71 $1.41 $1.14
Diluted earnings per share $1.67 $1.34 $1.07
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
32
Consolidated STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
=============================================
(in thousands, except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK (Par Value: $0.01):
Balance at beginning of year $ 310 $ 206 $ 92
Stock splits (0; 10,323,460; and 17,205,794 shares) -- 104 114
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 310 310 206
- -----------------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL IN EXCESS OF PAR:
Balance at beginning of year 138,180 125,000 116,607
Tax benefit effect on stock plans 7,269 8,071 3,416
Common stock acquired by SERP and Deferred Compensation Plans -- 1,278 1,081
Allocation of ESOP stock 2,158 3,938 4,021
Stock splits (0; 10,323,460; and 17,205,794 shares) -- (104) (114)
Cash paid in lieu of fractional shares -- (3) (11)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 147,607 138,180 125,000
- -----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 165,383 166,230 154,886
Net income 31,664 26,944 23,264
Dividends paid on common stock (18,563) (12,636) (8,135)
Exercise of stock options (1,045,223; 784,740; and 327,610 shares) (27,939) (15,155) (3,785)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 150,545 165,383 166,230
- -----------------------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (137,901) (104,148) (42,397)
Purchase of common stock (1,285,992; 1,957,530; and 3,820,989 shares) (38,352) (52,533) (68,086)
Common stock acquired by SERP -- 1,278 1,337
Exercise of stock options (1,045,223; 784,740; and 327,610 shares) 31,131 17,502 4,998
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year (145,122) (137,901) (104,148)
- -----------------------------------------------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of year (12,767) (13,526) (14,820)
Allocation of ESOP stock 379 759 1,294
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year (12,388) (12,767) (13,526)
- -----------------------------------------------------------------------------------------------------------------------
SERP AND DEFERRED COMPENSATION PLANS:
Balance at beginning of year (3,770) (2,492) (1,411)
Common stock acquired by SERP and Deferred Compensation Plans -- (1,278) (1,081)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year (3,770) (3,770) (2,492)
- -----------------------------------------------------------------------------------------------------------------------
RECOGNITION AND RETENTION PLANS:
Balance at beginning of year (63) (812) (1,528)
Earned portion of RRPs 22 749 716
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year (41) (63) (812)
- -----------------------------------------------------------------------------------------------------------------------
ACCUMULATED COMPREHENSIVE INCOME, NET OF TAX:
Balance at beginning of year 34 57 --
Net unrealized (depreciation) appreciation in securities, net of tax (34) (23) 57
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year -- 34 57
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 137,141 $ 149,406 $ 170,515
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 33
Consolidated STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
=============================================
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,664 $ 26,944 $ 23,264
- -------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 923 921 948
Reversal of provision for loan losses (2,400) -- --
Amortization of premiums, net 2 106 147
Amortization of net deferred loan origination fees 1,372 244 217
Net loss on redemption of securities and
mortgage-backed securities (91) (91) (20)
Net gain on sale of foreclosed real estate and loans (126) (167) (556)
Tax benefit effect on stock plans 7,269 8,071 3,416
Earned portion of RRPs 22 749 716
Earned portion of ESOP 2,537 4,697 5,315
Changes in assets and liabilities:
Decrease (increase) in deferred income taxes 421 (403) (2,202)
(Increase) decrease in other assets (32,569) 1,033 (5,060)
(Decrease) increase in official checks outstanding (3,298) 5,047 2,711
Increase (decrease) in other liabilities 7,256 (5,234) 5,980
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments (18,682) 14,973 11,612
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,982 41,917 34,876
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of securities and mortgage-backed
securities held to maturity 17,380 168,529 94,939
Proceeds from redemption of securities available for sale 14,534 -- 1,519
Purchase of securities held to maturity (48,041) (195,788) (79,575)
Purchase of securities available for sale (6,794) (2,081) (4,009)
Net increase in loans (329,480) (101,934) (265,152)
Proceeds from sale of loans and foreclosed real estate 216,129 10,358 16,578
Purchase of premises and equipment, net (584) (538) (653)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (136,856) (121,454) (236,353)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in mortgagors' escrow (2,796) 2,394 3,334
Net (decrease) increase in deposits (26,267) 33,124 45,231
Net increase in FHLB advances 197,323 129,391 228,271
Cash dividends and stock options exercised (46,502) (27,791) (11,920)
Purchase of Treasury stock, net of stock options exercised and
shares acquired by SERP (7,221) (33,753) (61,751)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 114,537 103,365 203,165
- -------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (9,337) 23,828 1,688
Cash and cash equivalents at beginning of period 46,561 22,733 21,045
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 37,224 $ 46,561 $ 22,733
===============================================================================================================================
Supplemental information:
Cash paid for:
Interest $74,177 $65,767 $55,335
Income taxes 14,582 10,489 12,443
- -------------------------------------------------------------------------------------------------------------------------------
Transfers to foreclosed real estate from loans 223 772 1,758
- -------------------------------------------------------------------------------------------------------------------------------
Transfers to real estate held for investment from foreclosed real estate 457 535 533
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
34
Notes to the 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 inter-company accounts
and transactions are eliminated in consolidation. Certain reclassifications have
been made to prior-year financial statements to conform to the 1999
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.
The Company applies Statement of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan/Income Recognition
and Disclosures" 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 allowance for loan losses is increased by the provision for loan
losses charged to operations and reduced by charge-offs, net of recoveries, or
by reversals. The allowance is based on management's periodic evaluation of its
adequacy, 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 to the allowance 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 current 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 the interest on loans over the life of
the loan, using the interest method. Adjustable rate mortgages that have 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 classified as "in foreclosure," and the accrual of interest and
amortization of origination fees is discontinued, when management considers
collection to be doubtful.
Premises and Equipment
Premises, furniture and fixtures, and equipment are carried at cost less the
accumulated depreciation computed on a straight-line basis over the estimated
useful lives of the respective assets. Leasehold improvements are carried at
cost less the accumulated amortization computed on a
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 35
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, 1999, 1998, and 1997 amounted to $923,000,
$921,000, and $948,000, respectively.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, foreclosure are to be
sold or rented, 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 is carried at the lower
of carrying amount or fair value, less the 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 that are 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 is provided for
that portion of the asset for which the allowance 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
SFAS No. 123, "Accounting for Stock-based Compensation" 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 by 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
beginning after December 31, 1995. Pro forma disclosures required 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 beginning after
December 15, 1994.
The Company had three stock option plans at December 31, 1999. 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
$14.8 million, or $0.78 per share, in 1999; $7.1 million, or $0.35 per share, in
1998; and $3.4 million, or $0.16 per share, in 1997.
Retirement Plans
The Company has a pension plan covering substantially all employees who had
attained minimum service requirements at September 30, 1999, when the plan was
frozen. 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 simplified the standards for computing earnings per share previously found
in APB Opinion No. 15, "Earnings per Share." It replaced 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.
For the years ended December 31, 1999, 1998, and 1997, the weighted
average number of common shares outstanding used in the computation of Basic EPS
was 18,526,890; 19,091,705; and 20,454,621, respectively. The weighted average
number of common shares outstanding used in the computation of Diluted EPS was
18,939,867; 20,181,013; and 21,824,183 for the years ended December 31, 1999,
1998, and 1997, 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.
<PAGE>
36
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 at
December 31, 1999 was 21,010,127.
NOTE 3:
SECURITIES INVESTMENTS
Securities held to maturity at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1999
========================================================================
Gross Gross Estimated
(in thousands) Cost Unrealized Gain Unrealized Loss Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agencies $140,325 $-- $(4,528) $135,797
- ---------------------------------------------------------------------------------------------------------
Capital trust notes 3,500 -- -- 3,500
- ---------------------------------------------------------------------------------------------------------
FHLB stock 40,810 -- -- 40,810
FNMA stock 2 72 -- 74
- ---------------------------------------------------------------------------------------------------------
Total stock 40,812 72 -- 40,884
- ---------------------------------------------------------------------------------------------------------
Total securities $184,637 $72 $(4,528) $180,181
=========================================================================================================
<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>
The following is a summary of the amortized cost and estimated market
value of securities held to maturity at December 31, 1999 by remaining term to
maturity:
=============================================================
U.S. Government Capital Trust Estimated
(in thousands) and Agencies Note Market Value
- --------------------------------------------------------------------------------
3 to 5 years $140,325 $ -- $135,797
Up to 30 years -- 3,500 3,500
================================================================================
Because the sale of Federal Home Loan Bank ("FHLB") and Federal National
Mortgage Association ("FNMA") stock is restricted by the respective governmental
agencies, these securities are not considered marketable equity securities. FHLB
and FNMA stock are carried at cost, which approximates value at redemption.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 37
Securities available for sale at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1999
=======================================================================
Gross Gross Estimated
(in thousands) Cost Unrealized Gain Unrealized Loss Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity $12,805 $364 $(363) $12,806
=========================================================================================
<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
=========================================================================================
</TABLE>
On April 1, 1999, $14.1 million in mortgage-backed securities held to
maturity were reclassified as securities available for sale, reflecting the
early adoption of SFAS Nos. 133 and 137.
NOTE 4:
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity at December 31, 1999 and 1998 are
summarized as follows:
December 31, 1999
======================
(in thousands) FHLMC
- -------------------------------------------------------------------------------
Principal balance $2,097
Unamortized discount 3
- -------------------------------------------------------------------------------
Mortgage-backed securities, net 2,094
Gross unrealized gains 41
- -------------------------------------------------------------------------------
Estimated market value $2,135
================================================================================
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
================================================================================
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, 1999
by remaining term to maturity:
December 31, 1999
============================
Estimated
(in thousands) FHLMC Market Value
- --------------------------------------------------------------------------------
1 year or less $ 942 $ 960
Over 1 year to 5 years 1,152 1,175
- --------------------------------------------------------------------------------
Mortgage-backed securities, net $2,094 $2,135
================================================================================
There were no sales of mortgage-backed securities held to maturity during
the years ended December 31, 1999, 1998, or 1997. On April 1, 1999, the Company
reclassified $14.1 million in mortgage-backed securities held to maturity as
securities available for sale, reflecting the early adoption of SFAS Nos. 133
and 137.
<PAGE>
38
NOTE 5:
LOANS
The composition of the loan portfolio as of December 31, 1999 and 1998 is
summarized as follows:
December 31,
==============================
(in thousands) 1999 1998
- -------------------------------------------------------------------------------
MORTGAGE LOANS:
1-4 family $ 152,644 $ 178,770
Multi-family 1,348,351 1,239,094
Commercial real estate 96,008 67,494
Construction 4,793 1,898
- -------------------------------------------------------------------------------
Total mortgage loans 1,601,796 1,487,256
Less: Net deferred loan origination fees 2,404 1,034
- -------------------------------------------------------------------------------
Mortgage loans, net 1,599,392 1,486,222
- -------------------------------------------------------------------------------
OTHER LOANS:
Cooperative apartment 4,856 4,802
Home equity 1,347 1,793
Passbook savings 331 321
Other 2,208 2,834
- -------------------------------------------------------------------------------
Total other loans 8,742 9,750
Less: Unearned discounts 24 22
- -------------------------------------------------------------------------------
Other loans, net 8,718 9,728
Less: Allowance for loan losses 7,031 9,431
- -------------------------------------------------------------------------------
Loans, net $1,601,079 $1,486,519
===============================================================================
The Bank has a diversified loan portfolio as to type and borrower
concentration. At December 31, 1999 and 1998, approximately $1.6 billion and
$1.5 billion, respectively, of the Bank's mortgage loans were secured by
properties located in New York State. Accordingly, the ability of its borrowers
to honor their contracts, and the market value of the real estate
collateralizing such loans, may be significantly impacted by economic conditions
in the state.
The Bank holds all adjustable rate one-to-four family mortgage loans that
it originates and generally sells any fixed rate one-to-four family mortgage
loans it originates to Savings Bank Life Insurance ("SBLI"), while retaining the
servicing rights. One-to-four family mortgage loans sold to SBLI during the
years ended December 31, 1999, 1998, and 1997 amounted to $2.0 million, $1.6
million, and $3.2 million, respectively. In December 1999, the Bank repurchased
$10.8 million in one-to-four family mortgage loans from SBLI.
On December 29, 1999, the Bank sold a $211.6 million interest in
multi-family mortgage loans from its portfolio to the Federal Home Loan Bank of
New York ("FHLB-NY") while retaining the servicing rights. In connection with
this transaction, the Bank provided additional collateral of $75.8 million in
loans to the FHLB-NY. In 1998 and 1997, the Bank originated and sold $7.1
million and $13.6 million in multi-family mortgage loans to another financial
institution, with the servicing rights retained.
In 1997, the Bank also sold $12,000 in student loans, representing a
substantial portion of the portfolio, to Nellie Mae. Included in other income
for the year ended December 31, 1997 was $2,000 stemming from the sale of said
loans. No student loans were sold in 1999 or 1998.
The Bank services mortgage loans for various third parties, including the
FHLB-NY, SBLI, FNMA, and the State of New York Mortgage Agency ("SONYMA"). The
unpaid principal balance of serviced loans amounted to $224.8 million, $18.8
million, and $18.0 million at December 31, 1999, 1998, and 1997, respectively.
Custodial escrow balances maintained in connection with such loans amounted to
$1.9 million, $60,000, and $56,000 at the corresponding dates.
Commitments to originate first mortgage loans at December 31, 1999 and
1998 amounted to approximately $72.9 million and $82.8 million, respectively.
Substantially all of the commitments at December 31, 1999 were expected to close
within 90 days and were made at interest rates that float or adjust at periodic
intervals.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 39
NOTE 6:
ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended December 31, 1999,
1998, and 1997 is summarized as follows:
December 31,
====================================
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Balance, beginning of year $9,431 $9,431 $9,359
Reversal of provision for loan losses (2,400) -- --
Net recoveries -- -- 72
- --------------------------------------------------------------------------------
Balance, end of year $7,031 $9,431 $9,431
================================================================================
The Company reversed $2.0 million from the allowance for loan losses in
the first quarter of 1999 and, in the fourth quarter, reversed an additional
$400,000 in connection with the $211.6 million in loans sold to the FHLB-NY on
December 29th.
Mortgage loans in foreclosure amounted to approximately $2.9 million, $5.5
million, and $6.1 million at December 31, 1999, 1998, and 1997, respectively.
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, 1999, 1998, and 1997, are summarized below:
December 31,
===============================
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Interest income that would have been recorded $641 $1,079 $1,040
Interest income recognized (70) (150) (149)
- --------------------------------------------------------------------------------
Interest income foregone $571 $ 929 $ 891
================================================================================
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 that it is received in cash. There were no impaired loans in 1999,
1998, or 1997.
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, 1999 and 1998:
December 31,
=======================
(in thousands) 1999 1998
- -----------------------------------------------------------------------------
Balance, beginning of year $ 419 $ 1,030
Transfers in 520 772
Sales (841) (1,383)
Transfers to real estate held for investment (32) --
- -----------------------------------------------------------------------------
Balance, end of year $ 66 $ 419
=============================================================================
Foreclosed real estate is carried at fair market value; there were no
valuation allowances at December 31, 1999 or 1998, and no provisions for the
years ended December 31, 1999, 1998, or 1997.
<PAGE>
40
NOTE 8:
DEPOSITS
The following is a summary of weighted average interest rates at December 31,
1999 and 1998 for each type of deposit:
<TABLE>
<CAPTION>
December 31,
===========================================================================================
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
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 $ 39,857 3.70% 0.00% $ 35,520 3.22% 0.00%
NOW and Super NOW Accounts 24,800 2.31 2.41 26,297 2.39 2.43
Money market accounts 78,622 7.31 3.38 44,126 4.00 2.80
Savings accounts 274,501 25.51 2.30 273,357 24.80 2.30
Certificates of deposit 658,238 61.17 4.93 722,985 65.59 5.11
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits $1,076,018 100.00% 3.91% $1,102,285 100.00% 4.09%
==================================================================================================================================
</TABLE>
The following is a summary of certificates of deposit at December 31, 1999
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% $ 34,843 $ -- $ -- $ -- $ 34,843
3.00% to 3.99% 5,019 -- -- -- 5,019
4.00% to 4.99% 318,462 3,267 731 162 322,622
5.00% to 6.99% 165,025 65,054 36,177 26,358 292,614
7.00% and above 1,063 98 1,979 -- 3,104
- ----------------------------------------------------------------------------------------------------
Total maturities $524,412 $68,419 $38,887 $26,520 $658,238
====================================================================================================
</TABLE>
At December 31, 1999 and 1998, the aggregate amount of certificates of
deposit of $100,000 or more was approximately $161.2 million and $180.4 million,
respectively.
NOTE 9:
FHLB ADVANCES
The Company maintains a line of credit with the FHLB which totaled $762.7
million and $698.8 million at December 31, 1999 and 1998, respectively. The
credit line is collateralized by stock in the FHLB and by certain mortgage loans
under a blanket pledge agreement. At December 31, 1999, the outstanding balance
of FHLB advances was $636.4 million, with an average weighted interest rate of
5.27%. At December 31, 1998, the outstanding balance was $439.1 million, with a
weighted average interest rate of 5.22%. The Company's FHLB advances have
scheduled maturities that fall within the next nine years. For the twelve months
ended December 31, 1999, the weighted average balance was $570.1 million with a
weighted average interest rate of 5.31%; in the year-earlier period, the
weighted average balance was $397.8 million, with a weighted average interest
rate of 5.35%. The maximum amount of FHLB advances outstanding at any month-end
during the year ended December 31, 1999 was $732.0 million; in 1998, the maximum
month-end amount was $445.5 million. The Company also maintains a $10.0 million
line of credit with a money center bank, which had not been drawn upon at
December 31, 1999.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 41
NOTE 10:
FEDERAL, STATE, AND LOCAL TAXES
The components of the net deferred tax asset at December 31, 1999 and 1998 are
summarized as follows:
December 31,
========================
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Financial statement loan loss allowance $ 3,493 $ 4,433
Accrual for post-retirement benefits 2,079 1,999
Deferred directors' fees 320 364
Accrual for directors' retirement benefits 354 326
Non-accrual interest 74 74
Basis difference of GNMAs 90 (345)
Basis difference of premises and equipment 227 105
Other 2,191 2,045
- --------------------------------------------------------------------------------
Total deferred tax assets 8,828 9,001
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Tax reserve in excess of base year reserve (1,727) (2,159)
Pre-paid pension cost (1,605) (925)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (3,332) (3,084)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 5,496 $ 5,917
================================================================================
The net deferred tax asset at December 31, 1999 and 1998 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, 1999, 1998, and 1997
is summarized as follows:
December 31,
=========================================
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Federal--current $ 16,792 $ 15,465 $ 12,673
State and local--current 3,559 3,117 3,884
- --------------------------------------------------------------------------------
Total current 20,351 18,582 16,557
Federal--deferred 82 92 (340)
State and local--deferred 339 (495) (1,862)
- --------------------------------------------------------------------------------
Total deferred 421 (403) (2,202)
Total income tax expense $20,772 $18,179 $14,355
================================================================================
The following is a reconciliation of statutory Federal income tax expense
to combined effective income tax expense for the years ended December 31, 1999,
1998, and 1997:
<TABLE>
<CAPTION>
December 31,
=======================================
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal income tax expense $18,352 $15,793 $13,167
State and local income taxes, net of Federal income tax benefit 5,805 4,998 1,314
Other, net (3,385) (2,612) (126)
- ---------------------------------------------------------------------------------------------------------
Total income tax expense $20,772 $18,179 $14,355
=========================================================================================================
</TABLE>
<PAGE>
42
Federal Income Taxes
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 required the Bank to recapture its
post-1987 net additions to its tax bad debt reserves. The Bank has previously
provided for this liability in the financial statements.
Pursuant to SFAS No. 109, "Accounting for Income Taxes," the Bank
generally is 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. At December 31, 1999, such deferred tax liability amounted to $1.7
million.
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, 1999, 1998, and 1997.
Both New York State and New York City adopted legislation to retain the
franchise taxation of thrift reserves for loan losses. The legislation applied
to taxable years beginning after December 31, 1995 and, among other things,
adopted the reserve method for bad debt deductions. As a result, the New York
State and City bad debt deduction is no longer predicated on the Federal
deduction.
As a Delaware business corporation, the Company is required to file annual
returns and to 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, 1999, the Company was obligated under ten 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, 1999, 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
- ------------------------------------------- ------------------------------------
2000 $ 1,026 $ 550
2001 1,036 563
2002 1,047 572
2003 1,059 587
2004 1,070 601
2005 and thereafter 5,479 4,182
- ------------------------------------------- ------------------------------------
Total minimum future rentals $10,717 $7,055
================================================================================
Rental expense under these leases, included in occupancy and equipment
expense, was approximately $485,000, $446,000, and $399,000 for the years ended
December 31, 1999, 1998, and 1997, respectively. Rental income on Bank-owned
properties, netted in occupancy and equipment expense, was approximately $1.3
million, $1.2 million, and $1.0 million for the years ended December 31, 1999,
1998, and 1997, respectively.
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.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 43
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 who had at least
five years of service through September 30, 1999. 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.
At September 30, 1999, the Company's defined benefit pension plan was
frozen and, in connection with this action, an early retirement window was
offered to certain qualified employees in the fourth quarter of the year. As a
result, the Company recorded a $1.6 million curtailment gain in the third
quarter of 1999, which offset a one-time charge of $735,000 in the fourth
quarter pursuant to the implementation of the early retirement plan. The
combined impact of these actions was a net pre-tax benefit of $891,000.
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits." SFAS No. 132
standardized the disclosures for pension and other post-retirement benefits by
requiring additional information that facilitates financial analysis, and by
eliminating certain disclosures that were no longer considered useful.
Accordingly, SFAS No. 132 superseded 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) 1999 1998
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $15,231 $13,769
Service cost 641 580
Interest cost 1,024 990
Actuarial loss (889) 659
Benefits paid (2,345) (767)
- --------------------------------------------------------------------------------
Benefit obligation at end of year $13,662 $15,231
================================================================================
CHANGE IN PLAN ASSETS:
Fair value of assets at beginning of year $15,128 $14,756
Actual return on plan assets 1,760 543
Employer contribution 460 596
Benefits paid (898) (767)
- --------------------------------------------------------------------------------
Fair value of assets at end of year $16,450 $15,128
================================================================================
FUNDED STATUS:
Funded status $1,968 $1,926
Unrecognized prior service cost 906 (417)
Unrecognized net actuarial loss 542 459
- --------------------------------------------------------------------------------
Prepaid benefit cost $3,416 $1,968
================================================================================
Years Ended December 31,
=================================
1999 1998 1997
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate 7.75% 6.75% 7.25%
Expected rate of return on plan assets 8.00 8.00 8.00
Rate of compensation increase 5.50 4.00 5.00
================================================================================
Years Ended December 31,
=====================================
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 641 $ 580 $ 492
Interest cost 1,024 990 940
Expected return on plan assets (1,203) (1,172) (2,248)
Amortization of prior service cost (1,906) 19 1,777
- --------------------------------------------------------------------------------
Net periodic benefit cost $(1,444) $ 417 $ 361
================================================================================
<PAGE>
44
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 having
attained 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, 1999, 1998, or 1997.
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.
Deferred Compensation Plan
The Bank maintains a deferred compensation plan for directors who are neither
officers nor employees of the Bank. The remaining balances of $682,000 and
$693,000 at December 31, 1999 and 1998, respectively, are unfunded and, as such,
are reflected in "other liabilities" in the Company's Consolidated Statements of
Financial Condition.
Post-Retirement Health Care Benefits
The Bank offers post-retirement benefits to its retired employees. The plan
provides comprehensive medical coverage through a major insurance company,
subject to an annual deductible co-payment percentage and an offset against
other insurance available to the retiree. The plan covers most medical expenses,
including hospital services, doctors' visits, x-rays, and prescription drugs.
Effective for those retiring after January 1, 1994, retired employees are
required to share costs of the plan with the Bank, based upon a formula which
takes into account age and years of service.
The Bank accrues the cost of such benefits during the years an employee
renders the necessary service. The following tables set forth the disclosures
required under SFAS No. 132, as described on page 43 of this report:
Post-retirement Benefits
(in thousands) 1999 1998
==========================
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $3,110 $3,376
Service cost 89 78
Interest cost 205 200
Actuarial gain (83) (417)
Benefits paid (135) (127)
- --------------------------------------------------------------------------------
Benefit obligation at end of year $3,186 $3,110
================================================================================
CHANGE IN PLAN ASSETS:
Fair value of assets at beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contribution -- 127
Benefits paid (170) (127)
- --------------------------------------------------------------------------------
Fair value of assets at end of year $(170) $ --
================================================================================
FUNDED STATUS:
Accrued post-retirement benefit cost $(4,252) $(4,252)
Employer contribution -- 127
Total net periodic benefit cost (170) (127)
- --------------------------------------------------------------------------------
Accrued post-retirement benefit cost $(4,422) $(4,252)
================================================================================
Years Ended December 31,
==============================
1999 1998 1997
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate 7.75% 6.75% 7.25%
Current medical trend rate 6.50 6.50 7.00
Rate of compensation increase 5.50 4.00 5.00
================================================================================
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 45
Years Ended December 31,
================================
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 89 $ 78 $101
Interest cost 205 200 241
Expected return on plan assets (61) (86) (24)
Amortization of prior service cost (63) (64) (64)
- --------------------------------------------------------------------------------
Net periodic benefit cost $170 $128 $254
================================================================================
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 vested in whole or in part over 3 to 5 years
from the date of issuance. 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 1999, 757,683 options granted under the 1993 Stock
Option Plan were exercised; 485,302 options were exercised in 1998; and 143,520
options were exercised in 1997. The Bank primarily utilizes common stock held in
Treasury to satisfy the exercise of options. 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 1999, 1998, or 1997. The number of vested options exercisable
at December 31, 1999 was 367,527.
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 with Limited Rights at an exercise price equal to
$3.71 per share, which is the initial public offering price as adjusted to
reflect the stock splits. 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, 1999, 1998, and 1997,
respectively, 174,770; 59,825; and 175,499 options were exercised. The Bank
primarily utilizes common stock held in Treasury to satisfy the exercise of
options. 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 1999, 1998, or 1997. The number of vested options exercisable at
December 31, 1999 was 426,793.
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 plan participants. The estimated fair value of
the options granted was $9.22 per share at the date of grant. The maximum number
of shares available for grant under
<PAGE>
46
this plan was 1,181,250 (as adjusted). Each option was exercisable on July 21,
1997 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. On January 21, 1999, 654,816 options were exercised and another
654,816 options were automatically granted under the reload feature of the plan,
at an exercise price of $30.34 per share. The estimated fair value of the
options granted at this date was $0.00 per share. At December 31, 1999, 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 60 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 shares held in the
unallocated stock account. At December 31, 1999, the loan had an outstanding
balance of $12.5 million and a fixed interest rate of 6.0%. Interest expense for
the obligation was $766,000 for the year ended December 31, 1999. 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 $1.0 million for the year ended
December 31, 1999. Dividends and investment income received on ESOP shares used
for debt service amounted to $1.0 million. Benefits vest on a seven-year basis,
starting with 20% in the third year of employment 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 are 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 the Trustee has received from
participants regarding the allocated stock. Shares allocated to participants
totaled 84,793 and 170,343, respectively, for the years ended December 31, 1999
and 1998. At December 31, 1999, there were 2,776,974 shares remaining for future
allocation, with a market value of $75.3 million. The Bank recognizes
compensation expense for the ESOP 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 of $2.5 million, $4.7 million, and $5.2
million for the years ended December 31, 1999, 1998, and 1997, respectively.
In 1993, the Bank also established a SERP, which provided additional
unfunded, non-qualified benefits to certain participants in the ESOP in the form
of common stock. In 1999, the Company froze the SERP. The plan maintained $3.8
million of trust-held assets at both December 31, 1999 and 1998, 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 shares at both December 31, 1999
and 1998. 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 $0; $1.3
million; and $1.1 million for the years ended December 31, 1999, 1998 and 1997,
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 vested at a rate of 20% per year for officers and
employees, commencing on January 1, 1995. Awards become 100% vested upon
termination of employment due to death, disability, or normal retirement, or
following a change in control of the Bank or the Company. Pursuant to the RRPs,
1,463,470 shares of common stock were vested at December 31, 1999. 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
$22,000; $749,000; and $716,000 for the years ended December 31, 1999, 1998, and
1997, respectively.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 47
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, 1999 and
1998:
<TABLE>
<CAPTION>
December 31,
===============================================================
1999 1998
---------------------------------------------------------------
(in thousands) Value Fair Value Value Fair Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 37,224 $ 37,224 $ 46,561 $ 46,561
Securities held to maturity 184,637 180,181 152,280 152,055
Mortgage-backed securities held to maturity 2,094 2,135 19,680 20,332
Securities available for sale 12,806 12,806 4,656 4,656
Loans, net 1,601,079 1,603,483 1,486,519 1,549,540
FINANCIAL LIABILITIES:
Deposits $1,076,018 $1,076,767 $1,102,285 $1,106,754
FHLB advances 636,378 636,378 439,055 439,055
Mortgagors' escrow 10,288 10,288 13,084 13,084
=========================================================================================================================
</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 due from banks 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 other 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
real estate 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.
<PAGE>
48
FHLB Advances
The carrying value of FHLB advances approximates fair value in the financial
statements; as these instruments are callable, they are considered short-term.
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, 1999 or 1998.
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 local taxes. In 1999, the Bank declared
dividends to its parent aggregating $33.1 million, which did not exceed net
profits for 1999.
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) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Cash $ 3,075 $ 1,526
Money market investments 57 57
Investment in and advances to Queens County Savings Bank 105,392 131,854
- --------------------------------------------------------------------------------
Total assets $108,524 $133,437
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity $108,524 $133,437
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $108,524 $133,437
================================================================================
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
=========================================
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income from Queens County Savings Bank $ -- $ 340 $ 2,358
Other interest income 78 39 17
Dividends from Queens County Savings Bank 33,100 17,800 16,000
- -------------------------------------------------------------------------------------------------------------------------
Total income 33,178 18,179 18,375
Interest expense to Queens County Savings Bank 1,683 -- --
Operating expense 301 229 256
- -------------------------------------------------------------------------------------------------------------------------
Income before income tax and equity in undistributed earnings 31,194 17,950 18,119
Income tax expense 150 150 151
- -------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of Queens County Savings Bank 31,044 17,800 17,968
Equity in undistributed earnings of Queens County Savings Bank 620 9,144 5,296
- -------------------------------------------------------------------------------------------------------------------------
Net income $31,664 $26,944 $23,264
=========================================================================================================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
===========================================
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,664 $ 26,944 $ 23,264
Equity in undistributed earnings of the Bank not provided for (620) (9,144) (5,296)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,044 17,800 17,968
================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for investments in and advances to subsidiaries (36,277) (17,021) (17,831)
Repayment from investments in and advances to subsidiaries 60,505 62,812 75,284
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 24,228 45,791 57,453
================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Treasury stock (38,352) (52,533) (68,086)
Dividends paid (18,563) (12,636) (8,135)
Exercise of stock options 3,192 2,347 1,213
- ----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (53,723) (62,822) (75,008)
- ----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,549 769 413
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1,583 814 401
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,132 $ 1,583 $ 814
================================================================================================================
</TABLE>
<PAGE>
49
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"), which
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 assessment. 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 of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to average assets (as defined). At December 31, 1999, the
Bank met all capital adequacy requirements to which it was subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain certain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage capital ratios. In the opinion of management, no conditions or events
have transpired since said notification that have changed the institution's
category.
The following table presents the Bank's actual capital amounts and ratios
as well as the minimum amounts and ratios required for capital adequacy purposes
and for categorization as a well capitalized institution:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1999 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) $181,809 14.36% $101,321 >8.0% $126,651 >10.0%
- -
Tier 1 capital (to risk-weighted assets) 174,778 13.80 50,660 >4.0 75,990 >6.0
- -
Tier 1 leverage capital (to average assets) 174,778 8.63 60,734 >3.0 101,233 >5.0
- -
======================================================================================================================
</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
- -
======================================================================================================================
</TABLE>
Under this framework, and based upon the Bank's capital levels, no prior
approval from the Regulators is necessary to accept brokered deposits.
<PAGE>
QUEENS COUNTY BANCORP, INC.
1999 ANNUAL REPORT 50
NOTE 18:
QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the fiscal years ended December 31, 1999
and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
=============================================================================
(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 after reversal
of loan loss provision $17,694 $17,557 $17,490 $18,564 $17,219 $17,299 $17,474 $16,531
Other operating income 798 581 513 630 493 637 866 557
Operating expense 6,420 3,544 5,840 5,586 5,875 6,660 6,747 6,672
- ---------------------------------------------------------------------------------------------------------------------
Income before income
tax expense 12,072 14,594 12,163 13,608 11,837 11,276 11,593 10,416
Income tax expense 4,868 5,819 4,714 5,371 4,721 4,326 4,970 4,161
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 7,204 $ 8,775 $ 7,449 $ 8,237 $ 7,116 $ 6,950 $ 6,623 $ 6,255
=====================================================================================================================
Diluted earnings per
common share(1) $0.39 $0.46 $0.39 $0.43 $0.37 $0.34 $0.32 $0.31
=====================================================================================================================
Cash dividends declared
per common share(1) 0.25 0.25 0.25 0.25 0.20 0.17 0.17 0.13
=====================================================================================================================
Average common shares and
equivalents outstanding(1) 18,715 18,982 19,212 19,108 19,472 20,196 20,582 20,536
=====================================================================================================================
Stock price per common share(1):
High $32.44 $32.37 $35.69 $31.69 $30.56 $30.00 $31.42 $29.33
Low 25.75 26.94 27.00 27.00 22.88 23.58 27.25 23.50
Close 27.13 27.63 32.38 27.00 29.75 26.75 29.08 29.33
=====================================================================================================================
</TABLE>
(1) 1998 data reflects shares issued as a result of a 3-for-2 stock split on
September 29, 1998.
<PAGE>
51
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 controls
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 1999, this system
of internal controls 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 they
are each discharging their responsibilities properly. 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 18, 2000
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, 1999 and 1998 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, 1999. 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, 1999 and 1998, and the
results of their operations and cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
January 18, 2000
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended
December 31,(1)
------------
(in thousands, except per share amount) 1999 1998
------- -------
Net income $31,664 $26,944
------- -------
Weighted average common shares outstanding 18,527 19,092
Earnings per common share $ 1.71 $ 1.41
======= =======
Total weighted average common shares outstanding 18,527 19,092
Additional dilutive shares using ending
period market value versus average market
value for the period when utilizing the Treasury
stock method regarding stock options 413 1,089
------- -------
Total shares for fully diluted earnings per share 18,940 20,181
------- -------
Fully diluted earnings per common share and
common share equivalents $ 1.67 $ 1.34
======= =======
(1) Reflects shares issued as a result of a 3-for-2 stock split on September
29, 1998.
28
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 31,224
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,806
<INVESTMENTS-CARRYING> 186,731
<INVESTMENTS-MARKET> 182,316
<LOANS> 1,608,110
<ALLOWANCE> 7,031
<TOTAL-ASSETS> 1,906,835
<DEPOSITS> 1,076,018
<SHORT-TERM> 636,378
<LIABILITIES-OTHER> 57,298
<LONG-TERM> 0
0
0
<COMMON> 137,141
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,906,835
<INTEREST-LOAN> 131,618
<INTEREST-INVEST> 0
<INTEREST-OTHER> 11,505
<INTEREST-TOTAL> 143,123
<INTEREST-DEPOSIT> 43,937
<INTEREST-EXPENSE> 30,283
<INTEREST-INCOME-NET> 68,903
<LOAN-LOSSES> (2,400)
<SECURITIES-GAINS> 91
<EXPENSE-OTHER> 18,958
<INCOME-PRETAX> 52,436
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,664
<EPS-BASIC> 1.71
<EPS-DILUTED> 1.67
<YIELD-ACTUAL> 0.08
<LOANS-NON> 2,886
<LOANS-PAST> 222
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,431
<CHARGE-OFFS> 0
<RECOVERIES> (2,400)
<ALLOWANCE-CLOSE> 7,031
<ALLOWANCE-DOMESTIC> 7,031
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
