UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
Commission File Number 0-22278
QUEENS COUNTY BANCORP, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1377322
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
38-25 Main Street, Flushing, New York 11354
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(Address of principal executive offices)
(Registrant's telephone number, including area code) 718: 359-6400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
20,122,640
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Number of shares outstanding at
November 3, 2000
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
Three Months Ended September 30, 2000
INDEX Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition as of September 30, 2000
(unaudited) and December 31, 1999 1
Consolidated Statements of Income and Comprehensive Income
for the Three and Nine Months Ended September 30, 2000 and 1999
(unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2000 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibits 26
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
----------- -----------
<S> <C> <C>
Assets
Cash and due from banks $ 28,473 $ 31,224
Money market investments 6,000 6,000
Securities held to maturity (estimated market value of
$198,797 and $180,181, respectively) 202,428 184,637
Mortgage-backed securities held to maturity (estimated market
value of $2,016 and $2,135, respectively) 1,978 2,094
Securities available for sale 15,095 12,806
Mortgage loans:
1-4 family 136,718 152,644
Multi-family 1,573,206 1,348,352
Commercial real estate 110,696 96,008
Construction 6,178 4,793
----------- -----------
1,826,798 1,601,797
Total mortgage loans
Other loans 9,826 8,741
Less: Unearned loan fees (1,485) (2,428)
Allowance for loan losses (7,031) (7,031)
----------- -----------
Loans, net 1,828,108 1,601,079
Premises and equipment, net 9,412 10,060
Deferred tax asset, net 6,119 5,496
Other assets 63,201 53,439
----------- -----------
Total assets $ 2,160,814 $ 1,906,835
=========== ===========
Liabilities and Stockholders' Equity
Deposits:
NOW and money market accounts $ 107,970 $ 103,422
Savings accounts 277,474 274,501
Certificates of deposit 682,185 658,238
Non-interest-bearing accounts 44,969 39,857
----------- -----------
Total deposits 1,112,598 1,076,018
----------- -----------
Official checks outstanding 18,322 31,189
Borrowings 877,961 636,378
Mortgagors' escrow 16,075 10,288
Other liabilities 13,179 15,821
----------- -----------
Total liabilities 2,038,135 1,769,694
----------- -----------
Stockholders' equity:
Preferred stock at par $0.01 (5,000,000 shares authorized;
none issued) -- --
Common stock at par $0.01 (60,000,000 shares authorized;
30,970,693 shares issued; 20,120,453 and 21,010,127 shares
outstanding at September 30, 2000 and December 31, 1999,
respectively) 310 310
Paid-in capital in excess of par 151,863 147,607
Retained earnings (substantially restricted) 151,742 150,545
Less: Treasury stock (10,850,240 and 9,960,566 shares,
respectively) (165,882) (145,122)
Unallocated common stock held by ESOP (12,108) (12,388)
Common stock held by SERP (3,770) (3,770)
Unearned common stock held by RRPs (41) (41)
Accumulated other comprehensive gain, net of tax effect 565 --
----------- -----------
Total stockholders' equity 122,679 137,141
----------- -----------
Total liabilities and stockholders' equity $ 2,160,814 $ 1,906,835
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income:
Mortgage and other loans $ 36,663 $ 33,936 $104,392 $ 96,424
Securities 3,757 2,631 10,106 7,230
Mortgage-backed securities 58 199 180 830
Money market investments 145 54 274 387
-------- -------- -------- --------
Total interest income 40,623 36,820 114,952 104,871
-------- -------- -------- --------
Interest Expense:
NOW and money market accounts 893 763 2,533 1,663
Savings accounts 1,442 1,600 4,636 4,729
Certificates of deposit 9,320 8,610 25,372 26,490
Borrowings 12,684 8,284 33,352 20,358
Mortgagors' escrow 6 6 19 21
-------- -------- -------- --------
Total interest expense 24,345 19,263 65,912 53,261
-------- -------- -------- --------
Net interest income 16,278 17,557 49,040 51,610
Reversal of provision for loan losses -- -- -- (2,000)
-------- -------- -------- --------
Net interest income after reversal of
provision for loan losses 16,278 17,557 49,040 53,610
-------- -------- -------- --------
Other Operating Income:
Fee income 545 469 1,536 1,402
Other 719 112 2,088 322
-------- -------- -------- --------
Total other operating income 1,264 581 3,624 1,724
-------- -------- -------- --------
Operating Expense:
Compensation and benefits 3,500 1,734 10,419 9,324
Occupancy and equipment 768 453 2,192 1,624
General and administrative 1,238 1,227 3,702 3,681
Other 178 130 530 341
-------- -------- -------- --------
Total operating expense 5,684 3,544 16,843 14,970
-------- -------- -------- --------
Income before income taxes 11,858 14,594 35,821 40,364
Income tax expense 4,073 5,819 12,672 15,904
-------- -------- -------- --------
Net income $ 7,785 $ 8,775 $ 23,149 $ 24,460
-------- -------- -------- --------
Comprehensive income, net of tax:
Unrealized gain (loss) on securities 634 (107) 565 41
-------- -------- -------- --------
Comprehensive income $ 8,419 $ 8,668 $ 23,714 $ 24,501
======== ======== ======== ========
Earnings per share $0.45 $0.47 $1.30 $1.31
Diluted earnings per share $0.45 $0.46 $1.29 $1.28
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended
September 30, 2000
(unaudited)
(in thousands)
--------------------------------------------------------------------------------
Common Stock (Par Value: $0.01):
Balance at beginning of year $ 310
Shares issued --
---------
Balance at end of period 310
---------
Paid-in Capital in Excess of Par:
Balance at beginning of year 147,607
Tax benefit effect on stock plans 3,156
Allocation of ESOP stock 1,100
---------
Balance at end of period 151,863
---------
Retained Earnings:
Balance at beginning of year 150,545
Net income 23,149
Dividends paid on common stock (13,510)
Exercise of stock options (403,910 shares) (8,442)
---------
Balance at end of period 151,742
---------
Treasury Stock:
Balance at beginning of year (145,12)
Purchase of common stock (1,293,584 shares) (29,724)
Exercise of stock options (403,910 shares) 8,964
---------
Balance at end of period (165,882)
---------
Employee Stock Ownership Plan:
Balance at beginning of year (12,388)
Allocation of ESOP stock 280
---------
Balance at end of period (12,108)
---------
Recognition and Retention Plans:
Balance at beginning of year (41)
Common stock acquired by RRPs --
---------
Balance at end of period (41)
---------
SERP Plan:
Balance at beginning of year (3,770)
Common stock acquired by SERP --
---------
Balance at end of period (3,770)
---------
Accumulated Comprehensive Gain, Net of Tax:
Balance at beginning of year --
Net unrealized appreciation in securities, net of tax 565
---------
Balance at end of period 565
---------
Total stockholders' equity $ 122,679
=========
See accompanying notes to consolidated financial statements.
3
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
(in thousands) (unaudited)
--------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 23,149 $ 24,460
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization of premises and equipment 756 666
Reversal of provision for loan losses -- (2,000)
Amortization of premiums, net 4 3
Amortization of net deferred loan origination fees 943 1,318
Net gain on redemption of securities and mortgage-backed
securities -- (90)
Net gain on sale of foreclosed real estate (113) (116)
Tax benefit effect on stock plans 3,156 5,747
Earned portion of RRPs -- 22
Earned portion of ESOP 1,380 1,930
Changes in assets and liabilities:
(Increase) decrease in deferred income taxes (623) 603
Increase in other assets (9,762) (6,327)
Decrease in official checks outstanding (12,867) (4,317)
(Decrease) increase in other liabilities (2,642) 777
--------- ---------
Total adjustments (19,768) (1,784)
--------- ---------
Net cash provided by operating activities 3,381 22,676
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturity of securities and mortgage-backed
securities 385 16,917
Proceeds from redemption of securities available for sale -- 14,452
Purchase of securities held to maturity (17,798) (38,550)
Purchase of securities available for sale (2,289) (5,000)
Net increase in loans (305,268) (277,452)
Proceeds from sale of loans and foreclosed real estate 77,708 3,176
Purchase of premises and equipment, net (108) (303)
--------- ---------
Net cash used in investing activities (247,370) (286,760)
--------- ---------
Cash Flows from Financing Activities:
Net increase in mortgagors' escrow 5,787 1,925
Net increase in deposits 36,580 31,093
Net increase in borrowings 241,583 260,255
Cash dividends paid and options exercised, net (21,952) (40,490)
Purchase of Treasury stock, net of stock options exercised (20,760) (645)
--------- ---------
Net cash provided by financing activities 241,238 252,138
--------- ---------
Net decrease in cash and cash equivalents (2,751) (11,946)
Cash and cash equivalents at beginning of period 37,224 46,561
--------- ---------
Cash and cash equivalents at end of period $ 34,473 $ 34,615
========= =========
Supplemental information:
Cash paid for:
Interest $65,912 $53,222
Income taxes 10,618 11,000
Transfers to foreclosed real estate from loans -- 519
Transfers to real estate held for investment from foreclosed real
estate -- 457
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Queens County Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Queens County Savings Bank (the "Bank").
The statements reflect all normal recurring adjustments which, in the opinion of
management, are necessary to present a fair statement of the results for the
periods presented. The results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results of operations
that may be expected for all of 2000.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's 1999 Annual Report to Shareholders and incorporated by reference
into the Company's 1999 Annual Report on Form 10-K.
Note 2. Impact of Accounting Pronouncements
Accounting for Certain Derivative Instruments and Certain Hedging Activities
In June 2000, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Standards ("SFAS") No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," an amendment of SFAS No.
133. SFAS No. 138 is effective for fiscal years beginning after June 15, 2000.
SFAS No. 138 amends the accounting and reporting standards of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In addition,
SFAS No. 138 also amends SFAS No. 133 for decisions made by FASB relating to the
Derivatives Implementation Group (DIG) process. Certain decisions arising from
the DIG process that required specific amendments to SFAS No. 133 are
incorporated in SFAS No. 138. The Company is in the process of completing its
evaluation of the effect that the adoption of SFAS NO. 133 will have upon its
financial statements.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
On September 29, 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No.
140 replaces SFAS No. 125, which was issued in June 1996, and addresses
implementation issues that were identified in applying SFAS No. 125. SFAS No.
140 is effective for transfers of financial assets (including securitizations)
occurring after March 31, 2001. However, the provisions of SFAS No. 140 related
to the recognition and reclassification of collateral in financial statements
and disclosures related to securitization transactions and collateral are
effective for fiscal years ending after December 15, 2000. The Company does not
expect the adoption of SFAS No. 140 to have a material effect upon its financial
statements.
5
<PAGE>
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Queens County Bancorp, Inc. (the "Company") is the holding company for Queens
County Savings Bank (the "Bank"), the first savings bank chartered by the State
of New York in the New York City Borough of Queens. The primary business of the
Bank is gathering deposits from its customers in Queens and Nassau counties and
investing these funds in the origination of multi-family mortgage loans
throughout metropolitan New York.
In the third quarter of 2000, the Company took steps to prepare for its pending
acquisition of Haven Bancorp, Inc., which is expected to be completed by
year-end. A joint proxy statement/prospectus was issued to shareholders of both
companies in October, and both companies have scheduled a Special Meeting of
Shareholders for 10:00 a.m. on November 20.
The transaction, valued at approximately $196.0 million (based on the per-share
value of the Company's common stock on June 27, 2000), will be accounted for
using the purchase method of accounting. The merger agreement calls for
shareholders of Haven Bancorp to receive 1.04 shares of Queens County Bancorp,
Inc. for each share of Haven Bancorp, Inc. held. In connection with the
acquisition, the Company allocated $18.6 million toward the purchase of Company
shares and shares of Haven Bancorp during the third quarter. Funding for these
purchases stemmed from an increase in short-term, higher-cost liabilities and
the issuance of $25.0 million in Trust Preferred Securities.
While the near-term impact was a reduction in the Company's spread and margin
and return on average assets, these actions are ultimately expected to
contribute to a more productive balance sheet restructuring, and the enhancement
of these performance measures after the merger takes place.
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
This filing contains certain forward-looking statements with regard to the
Company's prospective performance, strategies, and pending merger with Haven
Bancorp, Inc. 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 such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and is including this
statement for purposes of said safe harbor provisions.
The forward-looking statements contained within this filing are based on
information currently available to management and on management's current
expectations regarding a range of issues that could potentially impact the
Company's performance and strategies in future periods. Actual results may
differ materially from anticipated future results.
Forward-looking statements may be identified by their reference to future
periods and include, without limitation, those statements relating to the
anticipated effects of the pending merger with Haven Bancorp, Inc. The following
factors, among others, could cause the actual results of the merger to differ
materially from the expectations stated in this filing: the ability of the
companies to obtain the required shareholder or regulatory approvals of the
merger; the ability of the companies to consummate the merger; the ability to
successfully integrate the companies following the merger; a materially adverse
change in the financial condition of either
6
<PAGE>
company; the ability to fully realize the expected cost savings and revenues;
and the ability to realize the expected cost savings and revenues on a timely
basis.
In addition, factors that could cause future results to vary from current
expectations include, but are not limited to, a change in 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.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this filing. The Company
undertakes no obligation to update these forward-looking statements to reflect
events or circumstances that occur after the date on which such statements have
been made.
Financial Condition
Balance Sheet Summary
The Company experienced asset growth of 13.3% in the nine months ended September
30, 2000, as total assets rose to $2.2 billion from $1.9 billion at December 31,
1999. The $254.0 million increase was driven by a $225.0 million, or 14.0%, rise
in mortgage loans outstanding to $1.8 billion, representing 84.5% of total
assets at quarter's end. The growth in outstanding mortgage loans was fueled by
originations of $467.0 million, including $435.6 million in loans secured by
multi-family properties. At September 30, 2000, multi-family mortgage loans
totaled $1.6 billion, representing 86.1% of the mortgage loan portfolio.
The growth in loans also reflects a $14.7 million rise in commercial real estate
loans to $110.7 million and a $1.4 million rise in construction loans to $6.2
million. These increases combined to offset a $15.9 million decline in
one-to-four family mortgage loans outstanding to $136.7 million.
Non-performing loans declined to $2.8 million, or 0.15% of loans, net, at
September 30, 2000, from $3.1 million, or 0.19%, of loans, net, at year-end
1999. In the absence of any foreclosed real estate, non-performing assets
likewise totaled $2.8 million at September 30, 2000, representing 0.13% of total
assets at that date. At year-end 1999, non-performing assets totaled $3.2
million, or 0.17% of total assets, and included foreclosed real estate of
$66,000.
Additionally, the Company marked its 24th consecutive quarter without any net
charge-offs being recorded. In the absence of any net charge-offs or provisions
for loan losses, the allowance for loan losses was maintained at $7.0 million,
representing 248.18% of non-performing loans and 0.38% of loans, net, at
September 30, 2000. In addition, the $7.0 million represented 493.06% of
accumulated net charge-offs for the thirteen years ended at that date.
In addition to the increase in mortgage loans outstanding, the Company's asset
growth was boosted by growth in its portfolios of securities and other loans.
The balance of other loans rose $1.1 million to $9.8 million at September 30,
2000, while the balance of securities held to maturity rose $17.8 million to
$202.4 million, and the balance of securities available for sale rose $2.3
million to $15.1 million.
Total deposits rose $36.6 million from the year-end 1999 amount to $1.1 billion
at September 30, 2000, reflecting a $12.6 million increase in core deposits to
$430.4 million and a $23.9 million increase in CDs to $682.2 million. Additional
funding stemmed from an increase in borrowings to $878.0 million from $636.4
million. Included in the September 30, 2000 amount were Federal Home Loan Bank
of New York ("FHLB") advances of $853.0 million, and $25.0 million in Trust
Preferred Securities issued by the Company in the third quarter of the year.
7
<PAGE>
Stockholders' equity totaled $122.7 million at the close of the third quarter,
representing 5.68% of total assets and a book value of $7.05 per share, based on
17,406,175 shares. The Company distributed dividends totaling $13.5 million in
the first nine months of 2000 and allocated $29.7 million toward the repurchase
of 1,293,584 Company shares.
The Company's capital ratios continued to exceed the minimum levels required by
the FDIC. In addition, the Bank recorded a leverage capital ratio of 7.08%, a
Tier 1 risk-based capital ratio of 10.78%, and a total risk-based capital ratio
of 11.29%, at September 30, 2000.
Loans
The Company recorded total mortgage loans of $1.8 billion at September 30, 2000,
up $225.0 million from $1.6 billion at December 31, 1999. The 14.0% increase was
fueled by a $224.9 million, or 16.7%, rise in multi-family mortgage loans to
$1.6 billion, representing 86.1% of the mortgage loan portfolio at the current
quarter's end. The Company originated $467.0 million in mortgage loans during
the nine-month period, including multi-family mortgage loans of $435.6 million;
third-quarter mortgage originations totaled $209.2 million, and included $196.8
million in multi-family mortgage loans. The increase in multi-family mortgage
loans was consistent with the Company's long-term strategic focus on expanding
its multi-family market niche. At September 30, 2000, the average multi-family
mortgage loan had a principal balance of $1.5 million and a loan-to-value ratio
of 57.1%.
The growth in loans also reflects a $14.7 million rise in commercial real estate
loans to $110.7 million and a $1.4 million rise in construction loans to $6.2
million. The Company originated commercial real estate loans totaling $20.9
million and construction loans totaling $5.0 million in the current nine-month
period, with third-quarter originations representing $9.9 million and $1.2
million, respectively, of the year-to-date amounts. The balance of one-to-four
family mortgage loans declined $15.9 million to $136.7 million, after
year-to-date originations of $5.6 million, including $1.4 million in the third
quarter of 2000.
Other loans rose to $9.8 million at September 30, 2000, up $1.1 million from
$8.7 million at December 31, 1999.
Entering the fourth quarter, the Company had loans of $64.1 million in the
pipeline, primarily consisting of multi-family mortgage loans. While the
acquisition of Haven Bancorp will initially result in a higher concentration of
one-to-four family mortgage loans within the loan portfolio, it is management's
intention to restructure its loan mix and to maintain its focus on the
origination of multi-family mortgage loans.
Asset Quality
At September 30, 2000, the Company recorded non-performing loans of $2.8 million
(or 0.15% of loans, net), an improvement from $3.0 million (or 0.17% of loans,
net) at June 30, 2000 and from $3.1 million (or 0.19% of loans, net) at December
31, 1999. Included in the September 30, 2000 amount were 19 loans in foreclosure
totaling $2.0 million and eleven loans 90 days or more delinquent totaling
$786,000, as compared to $2.7 million and $287,000, respectively, at the close
of the trailing quarter and $2.9 million and $222,000, respectively, at year-end
1999. The decline in loans in foreclosure was the result of loans having been
satisfied or brought current, while the increase in loans 90 days or more
delinquent reflects an increase in the amounts of the loans so classified.
8
<PAGE>
The Company had no foreclosed real estate at September 30 or June 30, 2000, as
compared to $66,000 at December 31, 1999. Accordingly, non-performing assets
totaled $2.8 million (or 0.13% of total assets) at September 30, 2000, down from
$3.0 million (or 0.15% of total assets) at June 30, 2000 and from $3.2 million
(or 0.17% of total assets) at year-end 1999.
In addition, the Company marked its 24th consecutive quarter without any net
charge-offs being recorded. In the absence of any net charge-offs or additions
to the provision for loan losses, the loan loss allowance was maintained at $7.0
million, representing 248.18% of non-performing loans and 0.38% of loans, net,
at September 30, 2000. In addition, the $7.0 million represents 493.06% of
accumulated net charge-offs for the thirteen years ended at that date.
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 pay, overall portfolio quality, and current and
prospective economic conditions.
The policy of the Bank is to segment the allowance to correspond to the various
types of loans in the loan portfolio. These loan categories are assessed with
specific emphasis on the underlying collateral, which corresponds to their
respective levels of quantified and inherent risk. The initial focus takes into
consideration non-performing loans and the valuations of the collateral
supporting each loan. Non-performing loans are risk-weighted based upon an
aging schedule which typically depicts either (1) delinquency, a situation in
which repayment obligations are at least 90 days in arrears, or (2) serious
delinquency, a situation in which legal foreclosure action has been initiated.
Based upon this analysis, a quantified risk factor is assigned to each type of
non-performing loan based upon an aging schedule, which measures delinquency
status. This results in an allocation to the overall allowance for the
corresponding type and severity of each non-performing loan category.
Performing loans are also reviewed by collateral type, with similar risk factors
being assigned. These risk factors take into consideration, among other things,
the borrower's ability to pay and the Bank's past loan loss experience with the
respective loan types. The performing loan categories are also assigned
quantified risk factors, which result in allocations of the allowance
corresponding to the individual types of loans in the portfolio.
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.
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. In the third quarter of 2000, the Company sold one piece
of real estate held for investment, reducing the number of such properties to
twelve at September 30 from thirteen at the trailing quarter's end. The twelve
properties totaled $1.2 million and yielded an average rate of return of 9.16%.
9
<PAGE>
Asset Quality Analysis
<TABLE>
<CAPTION>
At or For the At or For the
Nine Months Ended Year Ended
September 30, December 31,
2000 1999
(dollars in thousands) (unaudited)
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for Loan Losses:
Balance at beginning of period $ 7,031 $ 9,431
Reversal of provision for loan losses -- (2,400)
------- -------
Balance at end of period $ 7,031 $ 7,031
======= =======
Non-performing Assets at Period-end:
Mortgage loans in foreclosure $ 2,047 $ 2,886
Loans 90 days or more delinquent 786 222
------- -------
Total non-performing loans $ 2,833 $ 3,108
Foreclosed real estate -- 66
------- -------
Total non-performing assets $ 2,833 $ 3,174
======= =======
Ratios:
Non-performing loans to loans, net 0.15% 0.19%
Non-performing assets to total assets 0.13 0.17
Allowance for loan losses to non-performing loans 248.18 226.22
Allowance for loan losses to loans, net 0.38 0.44
Allowance for loan losses to accumulated net
charge-offs since 1987 493.06 493.06
</TABLE>
Securities and Money Market Investments
While mortgage loan production remains the Company's primary focus, its asset
mix is enriched by a portfolio of short-term securities held to maturity and
securities available for sale. The balance of securities held to maturity rose
$17.8 million, or 9.6%, from the year-end 1999 amount to $202.4 million at
September 30, 2000, while the balance of securities available for sale rose $2.3
million, or 17.9%, to $15.1 million. At September 30, 2000, the balance of money
market investments was $6.0 million, consistent with the level recorded at
December 31, 1999.
The Company's securities held to maturity consist primarily of U.S. Government
and agency obligations, Trust Preferred Securities, and FHLB stock. At September
30, 2000, U.S. Government and agency obligations represented $140.3 million of
the $202.4 million total, with Trust Preferred Securities and FHLB stock
representing $19.7 million and $42.4 million, respectively.
At September 30, 2000 and December 31, 1999, the market values of securities
held to maturity were, respectively, $198.8 million and $180.2 million,
equivalent to 98.2% and 97.6% of carrying value at the respective dates.
10
<PAGE>
Mortgage-backed Securities Held to Maturity
Reflecting prepayments and the absence of any new investments in such assets,
the portfolio of mortgage-backed securities declined $116,000 to $2.0 million at
September 30, 2000 from $2.1 million at December 31, 1999. The market value of
the portfolio was $2.0 million, or 101.9% of carrying value, at the close of the
current quarter, as compared to $2.1 million, or 102.0% of carrying value, at
year-end.
Sources of Funds
Funding for the Company's mortgage loan production stems primarily from deposits
and from its line of credit with the FHLB. Additional funding stems from
interest and principal payments on loans and the interest on, and maturity of,
securities. In the third quarter of 2000, the Company issued $25.0 million in
Trust Preferred Securities to fund the repurchase of Company shares in
anticipation of the acquisition of Haven Bancorp, Inc. The $25.0 million is
included in the balance of borrowings.
Deposits rose $36.6 million to $1.1 billion, reflecting an across-the-board
increase in all types of accounts. Core deposits rose $12.6 million to $430.4
million, representing 38.7% of total deposits, and included a $4.5 million rise
in NOW and money market accounts to $108.0 million, a $3.0 million rise in
savings accounts to $277.5 million, and a $5.1 million rise in
non-interest-bearing accounts to $45.0 million. The balance of CDs rose $23.9
million to $682.2 million, representing 61.3% of total deposits at September 30,
2000.
Additional funding stemmed from an increase in borrowings to $878.0 million,
including FHLB advances of $853.0 million. At year-end 1999, the Company's
borrowings consisted entirely of FHLB advances and totaled $636.4 million.
Market Risk and Interest Rate Sensitivity
Given the extent to which changes in market interest rates may influence net
interest income, one of management's primary objectives is matching the interest
rate sensitivity of the Company's assets and liabilities in order to manage
interest rate risk.
The process of assessing and managing interest rate risk is governed by policies
established by senior management that are reviewed and approved by the Board of
Directors. Senior management meets periodically to evaluate the impact of
changes in market interest rates on assets and liabilities, net interest margin,
liquidity, and capital, as well as to evaluate its strategies. As part of this
process, management measures the sensitivity of net interest income to changes
in interest rates. This process involves making estimations, based on certain
assumptions that management believes to be reasonable. In addition to
considering the relative sensitivity of assets and liabilities to market
interest rate fluctuations, management considers such factors as scheduled
maturities, repricing characteristics, deposit growth and retention, and
estimated cash flows.
The relative sensitivity of assets and liabilities is particularly important, as
the Bank's core deposits are not subject to the same degree of interest rate
sensitivity as its assets. Core deposit costs are internally controlled, and
generally exhibit less sensitivity to changes in interest rates than adjustable
rate assets, which feature yields based on external indices.
It is management's objective to maintain a stable level of net interest income
under a range of probable rate scenarios. In order to accomplish this objective,
management has emphasized the origination of adjustable rate mortgage loans on
one-to-four-family homes and multi-family buildings, and has generally limited
its other
11
<PAGE>
investments to short-term securities. On the liability side of the balance
sheet, management closely monitors the pricing of its depository products and
has profitably utilized its FHLB line of credit to generate interest-earning
asset growth.
In connection with the pending acquisition of Haven Bancorp, borrowings were
utilized during the third quarter of 2000 to fund the repurchase of Company
shares. As it is management's intent to restructure the balance sheet following
the merger, reducing the balance of borrowings, the level of interest expense
associated with such funding is expected to decline.
At September 30, 2000, the Company's exposure to interest rate risk was
comparable to that discussed in the 1999 Annual Report to Shareholders, despite
the 100-basis point rise in market interest rates in the first nine months of
this year.
Liquidity and Capital Position
Liquidity
As previously indicated, 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 occasional sale of
loans and foreclosed real estate. While borrowings and scheduled amortization of
loans and securities are predictable funding sources, deposit flows and mortgage
prepayments are less so, being subject to such external factors as economic
conditions, competition, and market interest rates.
The Company primarily invests in mortgage loan originations and supplements such
investments with the purchase of short-term securities. In the first nine months
of 2000, the net cash used in investing activities totaled $247.4 million,
primarily reflecting a $305.3 million net increase in loans after nine-month
originations of $467.0 million. The Company's investing activities were funded
by cash flows generated by financing activities. In the first nine months of
2000, the net cash provided by financing activities totaled $241.2 million,
primarily reflecting a $241.6 million net increase in borrowings, including
$25.0 million in proceeds from its Trust Preferred Securities offering.
Simultaneously, the net cash provided by operating activities totaled $3.4
million.
The Company monitors its liquidity 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 $34.5 million at September 30, 2000 and $37.2 million at
December 31, 1999. The Company also had securities available for sale of $15.1
million and $12.8 million at the corresponding dates. Additional liquidity is
available through the Bank's FHLB line of credit and an additional $10.0 million
line of credit with a money center bank.
At October 12, 2000, the Bank had loans in the pipeline of $64.1 million, which
management anticipates having the ability to fund. In addition, CDs due to
mature in one year or less from September 30, 2000 totaled $547.3 million; based
on the Bank's historic retention rate, as well as current pricing, management
believes that a significant portion of such deposits will remain with the Bank.
Capital Position
Supported by cash earnings of $29.8 million in the first nine months of 2000,
stockholders' equity totaled $122.7 million at September 30, representing 5.68%
of total assets and a book value of $7.05 per share, based on 17,406,175 shares.
By comparison, stockholders' equity totaled $137.1 million at December 31, 1999,
representing 7.19% of total assets and a book value of $7.52, based on
18,233,153 shares.
12
<PAGE>
In addition to distributing cash dividends of $13.5 million in the current
nine-month period, the Company allocated $29.8 million toward the repurchase of
1,293,584 Company shares, including $17.1 million for the repurchase of 696,422
shares in the third quarter of the year. Of this number, 265,906 were
repurchased under the Board of Directors' April 11, 2000 share repurchase
authorization.
In connection with the Company's acquisition of Haven Bancorp, the Company will
buy back up to two million shares of its stock or a combination of its stock and
Haven Bancorp stock, as authorized by a resolution of the Board of Directors
dated as of June 27, 2000. Approximately 500,000 shares had been acquired at
September 30, 2000.
The capital position of the Bank continues to exceed the levels required by the
FDIC for classification as a well-capitalized bank. At September 30, 2000, the
Bank's leverage capital totaled $148.6 million, or 7.08% of adjusted average
assets, while its Tier 1 and total risk-based capital amounted to $148.6 million
and $155.6 million, or 10.78% and 11.29% of risk-weighted assets, respectively.
The minimum FDIC requirements for leverage, Tier 1, and total risk-based capital
are 3.00%, 4.00%, and 8.00%, respectively; for classification as a well
capitalized bank, the minimum FDIC requirements are 5.00%, 6.00%, and 10.00%,
respectively. The Bank's regulatory capital levels and ratios reflect the
transfer of $57.8 million in capital from the Bank to the Company during the
current nine-month period.
Regulatory Capital Analysis (Bank Only)
<TABLE>
<CAPTION>
At September 30, 2000
-----------------------------------------------------------
Risk-Based Capital
-------------------------------------
Leverage Capital Tier 1 Total
---------------- ---------------- ----------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Total savings bank equity $148,575 7.08% $148,575 10.78% $155,606 11.29%
Regulatory capital
requirement 62,956 3.00 55,130 4.00 110,260 8.00
-------- ----- -------- ----- -------- -----
Excess $ 85,619 4.08% $ 93,445 6.78% $ 45,346 3.29%
======== ===== ======== ===== ======== =====
</TABLE>
Comparison of the Three Months Ended September 30, 2000 and 1999
Earnings Summary
The Company recorded net income of $7.8 million, or $0.45 per diluted share, for
the third quarter of 2000, providing a return on average assets ("ROA") of 1.48%
and a return on average stockholders' equity ("ROE") of 23.83%.
In the year-earlier quarter, the Company recorded net income of $8.8 million, or
$0.46 per diluted share, reflecting a net benefit of $862,000, or $0.04 per
share, stemming from the freezing of the Company's defined benefit pension plan
at September 30. Absent this gain, the Company's core earnings totaled $7.9
million, or $0.42 per diluted share for the third quarter of 1999.
The Company's cash earnings totaled $9.5 million, or $0.54 per diluted share, in
the third quarter of 2000, providing a cash ROA and ROE of 1.81% and 28.99%,
respectively, and contributing 21.6% more to capital than its GAAP earnings
alone.
During the current third quarter, the Company took certain strategic actions to
prepare for the acquisition of Haven Bancorp, Inc. In addition to allocating
$18.6 million to purchase shares of the Company and Haven Bancorp, the Company
accumulated certain short-term, higher cost liabilities and issued $25.0 million
in Trust
13
<PAGE>
Preferred Securities. While the immediate result was a year-over-year reduction
in ROA, as well as net interest income, interest rate spread, and net interest
margin, these actions were deliberately taken to facilitate the post-merger
restructuring of the balance sheet. Following the acquisition, the addition of
deposits from Haven Bancorp and the anticipated sale of certain assets will be
used to reduce the level of borrowings, fostering an improvement in these key
performance measures, and enhancing the Company's asset and earnings growth.
Specifically, net interest income declined $1.3 million from the year-earlier
amount to $16.3 million, accompanied by a 43-basis point reduction in interest
rate spread to 2.98% and a 52-basis point reduction in net interest margin to
3.23%. The decline in third quarter 2000 net interest income was the net effect
of a $3.8 million increase in interest income to $40.6 million (the result of a
$142.2 million rise in the average balance of interest-earning assets to $2.0
billion and a 20-basis point rise in the average yield to 8.06%) and a $5.1
million increase in interest expense to $24.3 million (the result of a $182.4
million rise in the average balance of interest-bearing liabilities to $1.9
billion and a 63-basis point rise in the average cost of funds to 5.08%).
The decline in net interest income was partly offset by a $683,000 increase in
other income to $1.3 million, primarily reflecting a $607,000 rise in other
income to $719,000. In the fourth quarter of 1999, the Company invested $30.0
million in Bank-owned Life Insurance ("BOLI"), which has provided other income
of approximately $492,000 per quarter in 2000.
Operating expense totaled $5.7 million in the current third quarter, and
included $3.5 million in compensation and benefits expense. Excluding a $1.6
million gain stemming from the freezing of the Bank's defined benefit pension
plan, core operating expense totaled $5.2 million in the year-earlier quarter,
and included $3.4 million in core compensation and benefits expense.
The provision for loan losses was suspended for the 21st consecutive quarter,
continuing a practice initiated in the third quarter of 1995.
Income tax expense declined $1.7 million to $4.1 million, reducing the effective
tax rate to 34.3% from 39.9%.
Cash Earnings Analysis
(in thousands, except per share data)
For the
Three Months Ended
September 30,
-------------------
2000 1999(1)
------- -------
Net income $ 7,785 $ 8,775
Additional contributions to stockholders' equity:
Amortization and appreciation of
stock-related benefit plans 541 627
Associated tax benefits 450 2,155
Amortization of goodwill -- --
Other 694 715
------- -------
Cash earnings $ 9,470 $12,272
======= =======
Cash earnings per share $0.55 $0.66
Diluted cash earnings per share $0.54 $0.65
----------
(1) Includes an after-tax curtailment gain of $862,000, or $0.04 per share,
pursuant to the freezing of the Bank's defined benefit pension plan at
September 30.
14
<PAGE>
Interest Income
The level of interest income in any given period depends upon the average
balance and mix of the Company's interest-earning assets, the yield on said
assets, and the current level of market interest rates.
The Company recorded interest income of $40.6 million in the third quarter of
2000, up 10.3% from $36.8 million in the third quarter of 1999. The increase
reflects a $142.2 million, or 7.6%, rise in the average balance of
interest-earning assets to $2.0 billion and a 20-basis point rise in the average
yield to 8.06%.
Mortgage and other loans contributed $36.7 million to total interest income, up
$2.7 million from $33.9 million in the year-earlier three months. The 8.0%
increase stemmed from a $110.4 million, or 6.6%, rise in the average balance of
loans to $1.8 billion, together with an 11-basis point rise in the average yield
to 8.17%. Loans represented 89.1% of average interest-earning assets in the
current third quarter and contributed 90.3% of total interest income.
Securities accounted for $3.8 million of total interest income, up from $2.6
million in the third quarter of 1999. The 42.8% increase reflects a $36.1
million, or 21.1%, rise in the average balance of securities to $207.6 million
and a 110-basis point rise in the average yield to 7.24%. Securities represented
10.3% of total interest-earning assets in the current third quarter and
generated 9.2% of total interest income.
Additional interest income stemmed from the Company's portfolios of
mortgage-backed securities held to maturity and money market investments. The
interest income provided by mortgage-backed securities declined $141,000 to
$58,000, the net effect of a $9.4 million reduction in the average balance to
$3.2 million and a 98-basis point increase in the average yield to 7.32%. The
lower average balance is a function of prepayments and the absence of any new
investments in such securities. Money market investments provided interest
income of $145,000, up $91,000, the result of a $5.1 million rise in the average
balance to $9.3 million and a 110-basis point rise in the average yield to
6.19%.
Interest Expense
The level of interest expense is driven by the average balance and composition
of the Company's interest-bearing liabilities and by the respective costs of the
funding sources found within this mix. These factors are influenced, in turn, by
competition for deposits and by the level of market interest rates.
The Company recorded interest expense of $24.3 million in the third quarter of
2000, up $5.0 million from $19.3 million in the year-earlier three months. The
increase reflects a $182.4 million, or 10.6%, rise in the average balance of
interest-bearing liabilities to $1.9 billion and a 63-basis point rise in the
average cost of funds to 5.08%.
Borrowings represented $12.7 million of total interest expense, up from $8.3
million, reflecting a $209.1 million rise in the average balance of borrowings
to $830.8 million and a 77-basis point rise in the average cost to 6.06%. During
the quarter, borrowings were utilized to fund the Company's substantial mortgage
loan production and to repurchase approximately 700,000 shares of Company stock.
CDs contributed third quarter 2000 interest expense of $9.3 million, up from
$8.6 million in the third quarter of 1999. The increase was the net effect of a
74-basis point rise in the average cost of CDs to 5.55% and a $43.9 million
reduction in the average balance to $666.4 million. The higher cost reflects the
rise in market interest rates over the twelve-month period, as well as the
introduction of selective CD products with competitive rates.
15
<PAGE>
Other funding (NOW and money market accounts, savings accounts, and mortgagors'
escrow) generated combined interest expense of $2.3 million, down $28,000 from
the third quarter 1999 amount. The decline was the net effect of a 15-basis
point drop in the average cost to 2.09% and a $24.0 million increase in the
average balance to $447.8 million. The higher average balance includes a $6.8
million rise in non-interest-bearing deposits to $44.7 million.
NOW and money market accounts, specifically, contributed interest expense of
$893,000, up $130,000, the result of a $15.2 million increase in the average
balance to $107.8 million and an increase of two basis points in the average
cost to 3.29%.
Savings accounts generated interest expense of $1.4 million, down $158,000 from
the year-earlier amount. The reduction was the net effect of a 24-basis point
drop in the average cost to 2.06% and a $2.7 million rise in the average balance
to $278.2 million.
Mortgagors' escrow generated interest expense of $6,000, consistent with the
year-earlier level, the net effect of a $719,000 decline in the average balance
to $17.1 million and an uptick of one basis point in the average cost to 0.14%.
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 by the pricing
and mix of the Company's interest-earning assets and interest-bearing
liabilities which, in turn, may be impacted by such external factors as economic
conditions, competition for loans and deposits, and the monetary policy of the
Federal Open Market Committee ("FOMC") of the Federal Reserve Board of
Governors.
The Company recorded net interest income of $16.3 million in the third quarter
of 2000, down $1.3 million from the year-earlier level, and within $41,000 of
the level recorded in the trailing three months. Similarly, the Company recorded
an interest rate spread and net interest margin of 2.98% and 3.23% in the
current third quarter, down 43 and 52 basis points, respectively, from the
year-earlier measures, but a more modest 13 and 19 basis points below the
measures recorded in the trailing three months.
In addition to the 125-basis point rise in short-term interest rates over the
twelve-month period, the reductions in net interest income, spread, and margin
reflect the aforementioned allocation of $18.6 million toward the purchase of
Company and Haven Bancorp shares, the higher cost of short-term liabilities
acquired during the quarter, and the ongoing effect of shifting the earnings on
the Company's $30.0 million investment in BOLI from interest income into other
income.
16
<PAGE>
Net Interest Income Analysis
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earnings assets:
Mortgage and other loans, net $1,794,739 $36,663 8.17% $1,684,350 $33,936 8.06%
Securities 207,601 3,757 7.24 171,495 2,631 6.14
Mortgage-backed securities 3,170 58 7.32 12,547 199 6.34
Money market investments 9,298 145 6.19 4,212 54 5.09
---------- ------- ------- ---------- ------- -------
Total interest-earning assets $2,014,808 $40,623 8.06% $1,872,604 $36,820 7.86%
Non-interest-earning assets 83,805 45,470
---------- ----------
Total assets $2,098,613 $1,918,074
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
NOW and money market accounts $ 107,794 $ 893 3.29% $ 92,574 $ 763 3.27%
Savings accounts 278,193 1,442 2.06 275,454 1,600 2.30
Certificates of deposit 666,355 9,320 5.55 710,285 8,610 4.81
Borrowings 830,768 12,684 6.06 621,718 8,284 5.29
Mortgagors' escrow 17,059 6 0.14 17,778 6 0.13
---------- ------- ------- ---------- ------- -------
Total interest-bearing liabilities $1,900,169 $24,345 5.08% $1,717,809 $19,263 4.45%
Non-interest-bearing deposits 44,731 37,924
Other liabilities 23,030 27,590
---------- ----------
Total liabilities 1,967,930 1,783,323
Stockholders' equity 130,683 134,751
---------- ----------
Total liabilities and stockholders' equity $2,098,613 $1,918,074
========== ==========
Net interest income/interest rate spread $16,278 2.98% $17,557 3.41%
======= ==== ======= ====
Net interest-earning assets/net
interest margin $114,639 3.23% $154,795 3.75%
======== ==== ======== ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.06x 1.09x
==== ====
</TABLE>
Provision for Loan Losses
The provision for loan losses is based on management's periodic assessment of
the adequacy of the loan loss allowance. This, 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; current and prospective economic conditions; the direction
of real estate values; and current trends in regulatory supervision.
The provision for loan losses was suspended in the third quarter of 2000. The
reasons for this action lie in the level of coverage provided by the current
allowance for loan losses, and in the historic and current quality of the
Company's loan portfolio. In addition to recording no net charge-offs, the
Company recorded a $153,000 reduction in non-performing loans since September
30, 2000, and a $275,000 reduction since December 31, 1999. As a result,
non-performing loans totaled $2.8 million at September 30, 2000, representing
0.15% of loans, net.
17
<PAGE>
In the absence of any net charge-offs or provisions for loan losses, the
allowance for loan losses was maintained at $7.0 million at the current
quarter's end. The $7.0 million represented 248.18% of non-performing loans at
September 30, 2000 and 493.06% of accumulated net charge-offs for the thirteen
years ended at that date.
For additional information about the allowance for loan losses, see the
discussion of asset quality beginning on page 8 of this report.
Other Operating Income
The Company has traditionally derived other operating income from service fees
and fees charged on loans and depository accounts. In the fourth quarter of
1999, the Company invested $30.0 million in BOLI, which is expected to provide
other operating income of approximately $1.9 million over the course of 2000.
For the three months ended September 30, 2000, other operating income totaled
$1.3 million, up $683,000 from $581,000 in the three months ended September 30,
1999. The increase stemmed from a $607,000 rise in other income to $719,000 and
a $76,000 rise in fee income to $545,000.
The growth in other income primarily stemmed from the BOLI investment. Had the
tax-equivalent income of $900,000 from this investment been included in net
interest income, the Company's third quarter spread and margin would have
expanded to 3.05% and 3.37%, respectively, from the 2.98% and 3.23% recorded.
Operating Expense
Operating expense consists of compensation and benefits, occupancy and
equipment, general and administrative ("G&A"), and other expenses. The Company's
ability to contain such expenses is one of its distinguishing characteristics,
and is reflected in its ratio of operating expense to average assets and to the
sum of net interest income and other operating income (the "efficiency ratio").
Included in compensation and benefits expense are expenses associated with the
amortization and appreciation of shares held in the Company's stock-related
benefit plans ("plan-related expenses"), which are added back to stockholders'
equity at the end of the period.
For the third quarter of 2000, operating expense totaled $5.7 million,
representing 1.08% of average assets and contributing to an efficiency ratio of
32.40%. On a cash earnings basis, operating expense represented 0.98% of average
assets and contributed to an efficiency ratio of 29.32%.
Operating expense for the third quarter of 1999 benefited from a pre-tax
curtailment gain of $1.6 million stemming from the freezing of the Bank's
defined benefit pension plan at September 30. Absent this gain, the Company's
core operating expense totaled $5.2 million, including core compensation and
benefits expense of $3.4 million. By comparison, the Company recorded
compensation and benefits expense of $3.5 million in the third quarter of 2000.
The $100,000 increase was partly tempered by an $86,000 reduction in
plan-related expenses to $541,000.
The Company's third quarter 2000 operating expense also reflects a $315,000
increase in occupancy and equipment expense to $768,000, an $11,000 increase in
G&A expense to $1.2 million, and a $48,000 increase in other operating expense
to $178,000.
On a consolidated basis, the number of full-time equivalent employees at
September 30, 2000 was 294.
18
<PAGE>
Income Tax Expense
The Company recorded income tax expense of $4.1 million in the third quarter of
2000, down from $5.8 million in the third quarter of 1999. As a result, the
effective tax rate declined to 34.3% in the current quarter from 39.9% in the
year-earlier three months.
In addition to the aforementioned investment in BOLI, the decline reflects a
$1.7 million reduction in the income tax benefit stemming from the Company's
stock-related plans. In the third quarter of 2000, the plan-related benefit
totaled $450,000, as compared to $2.2 million in the third quarter of 1999.
Comparison of the Nine Months Ended September 30, 2000 and 1999
Earnings Summary
The Company recorded net income of $23.1 million, or $1.29 per diluted share,
for the first nine months of 2000, providing an ROA of 1.54% and an ROE of
23.50%. For the year-earlier nine months, the Company recorded net income of
$24.5 million, or $1.28 per diluted share, including a net benefit of $1.1
million, or $0.06 per share, stemming from the reversal of $2.0 million from the
allowance for loan losses and a net benefit of $862,000, or $0.04 per share,
stemming from the freezing of the Bank's defined benefit pension plan. Excluding
these non-recurring items, core earnings for the first nine months of 1999
totaled $22.5 million, or $1.18 per diluted share.
Cash earnings for the first nine months of 2000 totaled $29.8 million, or $1.65
per diluted share, representing a cash ROA and ROE of 1.98% and 30.22%,
respectively. The Company's nine-month cash earnings thus contributed 28.6% more
to capital than its GAAP earnings alone.
Interest income rose $10.1 million to $115.0 million, reflecting a $151.6
million rise in the average balance of interest-earning assets to $1.9 billion
and an eight-basis point rise in the average yield to 7.98%. Interest expense
rose $12.7 million to $65.9 million, the result of a $189.4 million rise in the
average balance of interest-bearing liabilities to $1.8 billion and a 47-basis
point rise in the average cost to 4.88%.
As a result, net interest income declined to $49.0 million from $51.6 million in
the year-earlier nine months. Pressured by rising market interest rates and the
increased use of borrowings to fund the accelerated share buyback, the Company's
interest rate spread and net interest margin declined to 3.10% and 3.40%,
respectively, from the year-earlier 3.49% and 3.89%.
The Company's nine-month 2000 earnings also reflect the suspension of the
provision for loan losses; in the year-earlier period, the Company reversed $2.0
million from the allowance for loan losses, which resulted in the $1.1 million,
or $0.06 per share, net gain mentioned in the first paragraph of this section.
Year-to-date earnings were boosted by a $1.9 million increase in other operating
income to $3.6 million, reflecting a $1.8 million rise in other income to $2.1
million and a $134,000 rise in fee income to $1.5 million. The increase in other
income primarily stemmed from the Company's BOLI investment.
Operating expense for the current nine months totaled $16.8 million, as compared
to $15.0 million for the first nine months of 1999. The 1999 figure includes a
pre-tax curtailment gain of $1.6 million stemming from the freezing of the
Company's defined benefit pension plan in the third quarter of the year. Absent
this gain, the Company's 1999 core operating expense totaled $16.6 million,
including core compensation benefits expense of $11.0 million. By comparison,
the Company recorded compensation and benefits expense of $10.4 million in the
first nine months of 2000.
19
<PAGE>
Income tax expense declined to $12.7 million from $15.9 million in the first
nine months of 1999, reducing the effective tax rate to 35.4% from 39.4%.
Cash Earnings Analysis
(in thousands, except per share data)
For the
Nine Months Ended
September 30,
-------------------
2000 1999(1)
------- -------
Net income $23,149 $24,460
Additional contributions to stockholders' equity:
Amortization and appreciation of
stock-related benefit plans 1,383 1,950
Associated tax benefits 3,156 5,747
Amortization of goodwill -- --
Other 2,082 2,145
------- -------
Cash earnings $29,770 $34,302
======= =======
Cash earnings per share $1.67 $1.84
Diluted cash earnings per share $1.65 $1.80
----------
(1) Includes an $862,000, or $0.04 per share, curtailment gain pursuant to the
freezing of the Bank's defined benefit pension plan at September 30, and a
net benefit of $1.1 million, or $0.06 per share, stemming from the
reversal of $2.0 million from the allowance for loan losses in the first
quarter.
Interest Income
The Company recorded interest income of $115.0 million in the first nine months
of 2000, representing a 9.6% increase from $104.9 million in the first nine
months of 1999. The increase reflects a $151.6 million, or 8.6%, rise in the
average balance of interest-earning assets to $1.9 billion and an eight-basis
point rise in the average yield to 7.98%.
Mortgage and other loans generated interest income of $104.4 million, exceeding
the year-earlier level of $96.4 million by 8.3%. The increase stemmed from a
$128.5 million rise in the average balance of loans to $1.7 billion, together
with a one-basis point rise in the average yield to 8.13%. Loans represented
89.1% of average interest-earning assets and generated 90.8% of interest income
year-to-date.
Securities contributed interest income of $10.1 million, up $2.9 million, or
39.8%, from the year-earlier amount. The increase reflects a $41.0 million, or
25.8%, rise in the average balance to $200.2 million and a 67-basis point rise
in the average yield to 6.73%, reflecting higher market interest rates.
Securities represented 10.4% of average interest-earning assets and produced
8.8% of interest income in the current nine-month period.
Mortgage-backed securities provided interest income of $180,000, down from
$830,000 in the year-earlier nine months. The decrease was the net effect of a
$12.9 million decline in the average balance to $3.3 million and a 42-basis
point rise in the average yield to 7.25%.
The interest income derived from money market investments fell $113,000 to
$274,000, the net effect of a $5.0 million decline in the average balance to
$6.1 million and a 131-basis point increase in the average yield to 5.98%,
reflecting higher market interest rates.
20
<PAGE>
Had the income from the Company's BOLI investment been accounted for as interest
income, the contribution to interest income would have been $2.7 million, with a
tax-equivalent yield of 9.06%.
Interest Expense
Interest expense totaled $65.9 million in the current nine-month period, as
compared to $53.3 million in the first nine months of 1999. The increase
reflects a $189.4 million, or 11.7%, rise in the average balance of
interest-bearing liabilities to $1.8 billion, coupled with a 47-basis point rise
in the average cost to 4.88%.
Borrowings generated $33.4 million of total interest expense, an increase of
$13.0 million, reflecting both a $237.0 million rise in the average balance of
borrowings to $754.0 million and a 65-basis point rise in the average cost to
5.91%. The significant increase corresponds to the level of mortgage loan
originations during the nine-month period and the acceleration of the Company's
share repurchase program in the third quarter of the year. While borrowings
represented 41.8% of interest-bearing liabilities and generated 50.6% of
interest expense in the current nine-month period, these levels are expected to
decline following the anticipated restructuring of the balance sheet.
CDs generated interest expense of $25.4 million, down $1.1 million from $26.5
million in the year-earlier nine months. The reduction was the net effect of an
$80.8 million decline in the average balance of CDs to $641.3 million and a
39-basis point increase in the average cost to 5.29%, primarily reflecting the
rise in market interest rates. CDs represented 35.5% of interest-bearing
liabilities and generated 38.5% of interest expense in the current nine-month
period.
Other funding produced combined interest expense of $7.2 million, up from $6.4
million in the first nine months of 1999. The increase stemmed from a $40.3
million rise in the average balance to $452.4 million and a five-basis point
rise in the average cost to 2.12%. The higher average balance included a $7.1
million rise in non-interest bearing deposits to $43.8 million.
NOW and money market accounts produced interest expense of $2.5 million, up
$870,000 from the year-earlier amount. The increase reflects a $30.9 million
rise in the average balance to $107.5 million and a 25-basis point rise in the
average cost to 3.15%.
Savings accounts generated interest expense of $4.6 million, down $93,000, the
net effect of an eight-basis point drop in the average cost to 2.23% and a $3.3
million rise in the average balance to $277.6 million.
The interest expense derived from mortgagors' escrow accounts declined $2,000 to
$19,000, as the average balance declined $954,000 to $23.7 million and the
average cost held steady at 0.11%.
Net Interest Income
The Company recorded net interest income of $49.0 million for the first nine
months of 2000, as compared to $51.6 million for the first nine months of 1999.
Pressured by rising market interest rates and the increased use of borrowings to
fund the accelerated share buyback, the Company's interest rate spread and net
interest margin declined, to 3.10% and 3.40%, respectively, from 3.49% and 3.89%
in the year-earlier nine months. Had the Company's BOLI income been recorded as
interest income in the current nine-month period, the Company's third quarter
2000 spread and margin would have been 3.16% and 3.54%.
21
<PAGE>
Net Interest Income Analysis
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earnings assets:
Mortgage and other loans, net $1,712,045 $104,392 8.13% $1,583,591 $ 96,424 8.12%
Securities 200,210 10,106 6.73 159,165 7,230 6.06
Mortgage-backed securities 3,312 180 7.25 16,213 830 6.83
Money market investments 6,130 274 5.98 11,086 387 4.67
---------- -------- ---- ---------- -------- ----
Total interest-earning assets $1,921,697 $114,952 7.98% $1,770,055 $104,871 7.90%
Non-interest-earning assets 80,845 45,324
---------- ----------
Total assets $2,002,542 $1,815,379
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
NOW and money market accounts $ 107,482 $ 2,533 3.15% $ 76,608 $ 1,663 2.90%
Savings accounts 277,550 4,636 2.23 274,233 4,729 2.31
Certificates of deposit 641,285 25,372 5.29 722,107 26,490 4.90
Borrowings 754,028 33,352 5.91 517,071 20,358 5.26
Mortgagors' escrow 23,654 19 0.11 24,608 21 0.11
---------- ------- ---- ---------- -------- ----
Total interest-bearing liabilities $1,803,999 $65,912 4.88% $1,614,627 $ 53,261 4.41%
Non-interest-bearing deposits 43,762 36,707
Other liabilities 23,429 27,425
---------- ----------
Total liabilities 1,871,190 1,678,759
Stockholders' equity 131,352 136,620
---------- ----------
Total liabilities and stockholders' equity $2,002,542 $1,815,379
========== ==========
Net interest income/interest rate spread $49,040 3.10% $ 51,610 3.49%
======= ==== ======== ====
Net interest-earning assets/net
interest margin $ 117,698 3.40% $ 155,428 3.89%
========== ==== ========== ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.07x 1.10x
==== ====
</TABLE>
Provision for Loan Losses
While the provision for loan losses was suspended in the first nine months of
2000, as it was in the year-earlier nine-month period, the Company also
recovered $2.0 million from the allowance for loan losses in the nine months
ended September 30, 1999. The impact of this action was a net benefit of $1.1
million, or $0.06 per share.
For additional information about the provision for loan losses, see the
discussion that begins on page 17 of this report, and the discussion of asset
quality beginning on page 8.
22
<PAGE>
Other Operating Income
The Company's nine-month 2000 earnings were boosted by a $1.9 million increase
in other operating income to $3.6 million, reflecting a $1.8 million rise in
other income to $2.1 million and a $134,000 rise in fee income to $1.5 million.
The increase in other income stemmed primarily from the Company's BOLI
investment.
Operating Expense
Operating expense totaled $16.8 million for the nine months ended September 30,
2000, representing 1.12% of average assets and contributing to an efficiency
ratio of 31.98%. On a cash earnings basis, the Company's nine-month 2000
operating expense represented 1.03% of average assets and contributed to a cash
efficiency ratio of 29.36%.
The Company's nine-month 1999 core operating expense totaled $16.6 million,
including core compensation and benefits expense of $11.0 million. By
comparison, the Company recorded compensation and benefits expense of $10.4
million in the first nine months of 2000. The $600,000 decline primarily stemmed
from a $567,000 reduction in stock benefit-plan related expenses to $1.4
million, reflecting a decline in the value of Company shares. Core operating
expense and core compensation and benefits expense exclude the pre-tax
curtailment gain of $1.6 million that stemmed from the freezing of the Company's
defined benefit plan at September 30, 1999.
The Company's nine-month 2000 operating expense also reflects a $568,000 rise in
occupancy and equipment expense to $2.2 million, a $21,000 rise in G&A expense
to $3.7 million, and a $189,000 rise in other expense to $530,000.
Income Tax Expense
Income tax expense declined to $12.7 million for the first nine months of 2000
from $15.9 million for the first nine months of 1999, reducing the effective tax
rate to 35.4% from 39.4%. In addition to the benefit of the Company's fourth
quarter 1999 BOLI investment, the reduction reflects a decline in the stock
plan-related tax benefit to $3.2 million from $5.7 million.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about the Company's market risk were
presented in the discussion and analysis of Market Risk and Interest Rate
Sensitivity that appear on pages 16 - 18 of the Company's 1999 Annual Report to
Shareholders, filed on March 29, 2000. As of September 30, 2000, there was no
material change in the Company's market risk profile since the 1999 Annual
Report was filed.
23
<PAGE>
QUEENS COUNTY BANCORP, INC.
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be immaterial
to the Company's financial condition, results of operations, and cash flows.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
On October 13, 2000, the Company filed a Registration Statement on Form S-4 with
the U.S. Securities and Exchange Commission in connection with its pending
merger with Haven Bancorp, Inc. The joint proxy/prospectus describes the matters
to be considered and voted upon at the Special Meeting of Shareholders to be
held on November 20, 2000, the proposed merger of Queens and Haven, the
documents related to the merger, and other related matters.
On October 17, 2000, the Board of Directors declared a quarterly cash dividend
of $0.25 per share, payable on November 15, 2000 to shareholders of record at
the close of business on November 1, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1: Certificate of Incorporation*
Exhibit 3.2: Bylaws**
Exhibit 11: Statement re: Computation of Per Share Earnings - filed
herewith
Exhibit 27: Financial Data Schedule - filed herewith
* Incorporated by reference to the Exhibits filed with the
Registration Statement on Form S-1, as amended, Registration No.
33-65852.
** Incorporated by reference to the Exhibits filed with the Annual
Report on Form 10-K for the fiscal year ended December 31, 1999,
File No. 0-22278.
(b) Reports on Form 8-K
On October 12, 2000, the Company filed a Current Report on Form 8-K
in connection with the issuance of its third quarter earnings
release for the three and nine months ended September 30, 2000.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Queens County Bancorp, Inc.
(Registrant)
DATE: November 13, 2000 BY: /s/ Joseph R. Ficalora
------------------------------------
Joseph R. Ficalora
Chairman, President, and
Chief Executive Officer
(Duly Authorized Officer)
BY: /s/ Robert Wann
------------------------------------
Robert Wann
Senior Vice President,
Comptroller, and
Chief Financial Officer
(Principal Financial Officer)
25
