1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission File Number 0-22278
QUEENS COUNTY BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1377322
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
38-25 Main Street, Flushing, New York 11354
(Address of principal executive offices)
(Registrant's telephone number, including area code) 718: 359-6400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
14,942,563
-----------------------------
Number of shares outstanding at
November 10, 1997
2
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
THREE MONTHS ENDED SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition as of
September 30, 1997 (unaudited) and December 31, 1996 1
Consolidated Statements of Income
for the Three and Nine Months Ended September 30, 1997
and 1996 (unaudited) 2
Consolidated Statement of Changes in
Stockholders' Equity for the Nine Months
Ended September 30, 1997 (unaudited) 3
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1997 and
1996 (unaudited) 4
Notes to Unaudited Consolidated Financial
Statements 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 26
Item 2. CHANGES IN SECURITIES 26
Item 3. DEFAULTS UPON SENIOR SECURITIES 26
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 26
HOLDERS
Item 5. OTHER INFORMATION 26
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
EXHIBITS 28
3
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
SEPTEMBER 30, DECEMBER 31,
1997 1996
(in thousands) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 13,919 $ 14,045
Money market investments 8,000 7,000
Securities held to maturity (estimated market value of
$76,638 and $86,483, respectively) 76,458 86,495
Mortgage-backed securities held to maturity (estimated market
value of $58,748 and $74,192, respectively) 57,788 73,732
Mortgage loans:
1-4 family 230,999 256,903
Multi-family 1,055,480 822,364
Commercial real estate 60,630 63,452
Construction 1,020 1,598
----------- -----------
Total mortgage loans 1,348,129 1,144,317
Other loans 11,073 12,276
Less: Unearned loan fees (1,578) (1,082)
Allowance for loan losses (9,431) (9,359)
----------- -----------
Loans, net 1,348,193 1,146,152
Premises and equipment, net 10,954 11,077
Deferred tax asset, net 5,832 3,312
Other assets 19,905 16,843
----------- -----------
Total assets $ 1,541,049 $ 1,358,656
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market accounts $ 65,677 $ 69,443
Savings accounts 268,762 277,783
Certificates of deposit 690,610 651,705
Non-interest-bearing accounts 26,458 24,999
----------- -----------
Total deposits 1,051,507 1,023,930
----------- -----------
Official checks outstanding 15,556 26,729
FHLB borrowings 277,287 81,393
Accounts payable and accrued expenses 1,380 1,169
Mortgagors' escrow 13,787 7,356
Other liabilities 8,685 6,650
----------- -----------
Total liabilities 1,368,202 1,147,227
----------- -----------
Stockholders' equity:
Preferred stock at par $0.01 (5,000,000 shares authorized;
none issued) -- --
Common stock at par $0.01 (30,000,000 shares authorized;
13,764,816 shares issued; 10,072,233 and 11,445,154 shares
outstanding at September 30, 1997 and December 31, 1996, respectively) 138 92
Paid-in capital in excess of par 122,208 116,607
Retained earnings (substantially restricted) 163,982 154,886
Less: Treasury stock (3,692,583 and 2,319,901 shares, respectively) (96,568) (42,397)
Unallocated common stock held by ESOP (13,850) (14,820)
Common stock held by SERP and Deferred Compensation Plans (2,055) (1,411)
Unearned common stock held by RRPs (1,008) (1,528)
----------- -----------
Total stockholders' equity 172,847 211,429
----------- -----------
Total liabilities and stockholders' equity $ 1,541,049 $ 1,358,656
=========== ===========
See accompanying notes to financial statements
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4
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in thousands, except per share data) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Mortgage and other loans $28,287 $23,564 $79,326 $ 67,874
Securities held to maturity 1,115 1,068 3,386 3,140
Mortgage-backed securities held to maturity 939 1,281 3,038 4,064
Money market investments 67 80 205 494
------- ------- ------- --------
Total interest income 30,408 25,993 85,955 75,572
------- ------- ------- --------
INTEREST EXPENSE:
NOW and money market accounts 472 497 1,389 1,551
Savings accounts 1,633 1,690 4,912 5,089
Certificates of deposit 9,233 8,403 26,629 23,643
FHLB borrowings 3,450 987 6,708 2,606
Mortgagors' escrow 9 10 30 25
------- ------- ------- --------
Total interest expense 14,797 11,587 39,668 32,914
------- ------- ------- --------
Net interest income 15,611 14,406 46,287 42,658
(Reversal of) provision for loan losses -- -- -- (2,000)
------- ------- ------- --------
Net interest income after reversal of
provision for loan losses 15,611 14,406 46,287 44,658
------- ------- ------- --------
OTHER OPERATING INCOME:
Fee income 308 500 888 1,273
Other 28 128 268 310
------- ------- ------- --------
Total other operating income 336 628 1,156 1,583
------- ------- ------- --------
OPERATING EXPENSE:
Compensation and benefits (a) 4,701 3,780 13,934 11,311
Occupancy and equipment 683 626 1,983 1,846
General and administrative 1,257 1,249 3,579 3,349
Other 144 78 492 217
------- ------- ------- --------
Total operating expense 6,785 5,733 19,988 16,723
------- ------- ------- --------
Income before income taxes 9,162 9,301 27,455 29,518
Income tax expense 3,767 3,699 9,586 12,391
------- ------- ------- --------
Net income $ 5,395 $ 5,602 $17,869 $ 17,127
======= ======= ======= ========
Net income per common share (b) $ 0.57 $ 0.52 $ 1.78 $ 1.52
(a)Includes non-cash expenses of $1.894 million, $1.102 million, $5.180 million,
and $3.148 million, respectively.
(b)Reflects shares issued as a result of a 3-for-2 stock split on April 10,
1997.
See accompanying notes to financial statements
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QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED
SEPTEMBER 30, 1997
(in thousands) (UNAUDITED)
- ----------------------------------------------------------------------
COMMON STOCK (PAR VALUE: $0.01):
Balance at beginning of period $ 92
Shares issued 46
---------
Balance at end of period 138
---------
PAID-IN CAPITAL IN EXCESS OF PAR:
Balance at beginning of period 116,607
Shares issued and fractional shares (51)
Tax benefit effect on stock plans 2,215
Common stock acquired by SERP 644
Allocation of ESOP stock 2,793
---------
Balance at end of period 122,208
---------
RETAINED EARNINGS:
Balance at beginning of period 154,886
Net income 17,869
Dividends paid on common stock (5,550)
Exercise of stock options (127,563 shares) (3,223)
---------
Balance at end of period 163,982
---------
TREASURY STOCK:
Balance at beginning of period (42,397)
Purchase of Treasury stock (1,535,938 shares) (60,548)
Common stock acquired by SERP 899
Exercise of stock options (127,563 shares) 5,478
---------
Balance at end of period (96,568)
---------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of period (14,820)
Allocation of ESOP stock 970
---------
Balance at end of period (13,850)
---------
SERP AND DEFERRED COMPENSATION PLANS:
Balance at beginning of year (1,411)
Common stock acquired by SERP (644)
---------
Balance at end of period (2,055)
---------
RECOGNITION AND RETENTION PLANS:
Balance at beginning of period (1,528)
Earned portion of RRPs 520
---------
Balance at end of period (1,008)
---------
Total stockholders' equity $ 172,847
=========
See accompanying notes to financial statements
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QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,869 $ 17,127
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 707 552
(Reversal of) provision for loan losses -- (2,000)
Amortization of premiums, net 116 409
Amortization (accretion) of net deferred loan origination fees 496 (261)
Net gain on redemption of securities and
mortgage-backed securities (1) (2)
Net (gain) loss on sale of foreclosed real estate (45) 2
Earned portion of RRPs 520 813
Earned portion of ESOP 3,763 2,997
Changes in assets and liabilities:
(Increase) decrease in other assets (3,062) 2,241
(Increase) decrease in deferred income taxes (2,520) 794
Increase (decrease) in accounts payable and accrued expenses 211 (478)
Decrease in official checks outstanding (11,173) (18,046)
Increase (decrease) in other liabilities 2,035 (1,661)
--------- ---------
Total adjustments (8,953) (14,640)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,916 2,487
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of mortgage-backed
securities held to maturity 24,935 12,649
Proceeds from maturity of securities held to maturity 42,000 67,000
Purchase of securities held to maturity (41,069) (66,893)
Net increase in loans (204,924) (118,425)
Proceeds from sale of loans and foreclosed real estate 2,426 781
Purchase of premises and equipment, net (584) (1,105)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (177,216) (105,993)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in mortgagors' escrow 6,431 3,932
Net increase in deposits 27,577 72,134
Net increase in FHLB borrowings 195,894 40,024
Cash dividends paid and options exercised, net (8,772) (5,930)
Purchase of Treasury stock, net of stock options exercised
and shares acquired by SERP (51,956) (25,922)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 169,174 84,238
Net increase (decrease) in cash and cash equivalents 874 (19,268)
Cash and cash equivalents at beginning of period 21,045 38,990
--------- ---------
Cash and cash equivalents at end of period $ 21,919 $ 19,722
========= =========
Supplemental information:
Cash paid for:
Interest $ 39,671 $ 32,909
Income taxes 9,343 12,481
Transfers to foreclosed real estate from loans -- 184
Transfers to real estate held for investment
from foreclosed real estate 115 598
See accompanying notes to financial statements
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QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Queens County Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Queens County Savings Bank (the "Bank").
The statements reflect all normal recurring adjustments which are, in the
opinion of management, necessary to present a fair statement of the results for
the periods presented. The results of operations for the three and nine months
ended September 30, 1997 are not necessarily indicative of the results of
operations that may be expected for all of 1997.
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 1996 Annual Report to Shareholders and SEC Form 10-K.
NOTE 2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 defines a fair value-based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value-based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain
with the accounting method prescribed in APB Opinion No. 25 must make a pro
forma disclosure of net income and, if presented, earnings per share, as if the
fair value-based method of accounting defined in this statement had been
applied.
SFAS No. 123 is effective for transactions entered into in fiscal years that
begin after December 15, 1995, though this statement may be adopted on issuance.
The disclosure requirements of this statement are effective for financial
statements for fiscal years beginning after December 15, 1995 or for an earlier
fiscal year for which this statement is initially adopted for recognizing
compensation cost. Pro forma disclosures required for entities that elect to
continue to measure compensation cost using APB Opinion No. 25 must include the
effects of all awards granted in fiscal years that begin after December 15,
1994.
5
8
In the first quarter of 1997, the Company initiated a stock option plan, which
meets the criteria of SFAS No. 123. The Bank is applying APB Opinion No. 25 and
related interpretations in its accounting for this plan; accordingly, no
compensation cost has been recognized. Pro forma disclosures of net income and
earnings per share reflecting the fair value-based method of accounting as
defined in SFAS No. 123 will be made in the Company's 1997 annual report.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities, based on consistent
application of a financial components approach focusing on control. Under this
approach, after a transfer of financial assets, an entity recognizes said assets
when control has been surrendered, and derecognizes liabilities when they have
been extinguished. In addition, SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
consist of secured borrowings.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." SFAS No. 127 delays the
effective date of certain provisions of SFAS No. 125 until after December 31,
1997.
SFAS No. 125, as amended by SFAS No. 127, is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
either December 31, 1996 or December 31, 1997, depending on the transaction, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. SFAS No. 125 has had no impact nor, as amended by SFAS No. 127, is it
expected to have an impact, on the Company's financial statements.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No.
128 simplifies the standards for computing earnings per share previously found
in APB Opinion No. 15, "Earnings per Share." It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that would then
share in the earnings of the entity.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods with earlier application not
permitted. SFAS No. 128 requires restatement of all prior-period EPS data
presented. The Company is currently evaluating the effects of SFAS No. 128.
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DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure," which establishes standards for disclosing information about
an entity's capital structure.
SFAS No. 129 is effective for financial statements issued for periods ending
after December 15, 1997 and will have no impact on the Company's financial
statements when it becomes effective.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose financial statements.
The statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
The Company is currently evaluating the effects of SFAS No. 130, which is
effective for financial statements issued for periods beginning after December
15, 1997.
BUSINESS SEGMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. The statement also established standards for related
disclosures about products and services, geographic areas, and major customers.
The Company is currently evaluating the effects of SFAS No. 131, which is
effective for financial statements issued for periods beginning after December
15, 1997.
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10
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Queens County Bancorp, Inc. (the "Company") is the holding company for Queens
County Savings Bank (the "Bank"), the first savings bank chartered by the State
of New York in the New York City Borough of Queens. The primary business of the
Bank is gathering deposits from its customers in Queens and Nassau County and
investing these funds in the origination of residential mortgage loans
throughout metropolitan New York.
On August 26, 1997, the Board of Directors declared a 3-for-2 stock split in the
form of a 50% stock dividend, payable on October 1, 1997. As a result of the
split, 5,035,969 additional shares were issued to shareholders of record,
bringing the number of shares outstanding to 15,108,202.
In the third quarter of 1997, the Company continued to repurchase its shares,
bringing the total number of shares repurchased year-to-date to 1,535,938. At
the end of the quarter, 627,319 shares remained available for repurchase; as
adjusted for the 3-for-2 stock split on October 1, 1997, this number increases
to 940,978.
In addition, on October 21st, the Board of Directors increased the quarterly
cash dividend to $0.20 per share, representing a 20% increase above the payment
made in the trailing quarter, as adjusted for the aforementioned stock split.
The dividend will be paid on November 14, 1997 to shareholders of record at the
close of business on November 3,1997.
BALANCE SHEET SUMMARY
At September 30, 1997, the Company's assets totaled $1.5 billion, up $182.4
million, or 13.4%, from the level recorded at December 31, 1996. The increase
was driven by a $203.8 million, or 17.8%, rise in mortgage loans outstanding to
$1.3 billion, reflecting year-to-date originations of $328.3 million, including
$128.8 million in the third quarter of the year. Multi-family mortgage loans
represented $1.1 billion, or 78.3%, of mortgage loans outstanding at the end of
September and $310.7 million, or 94.6%, of originations year-to-date. Of the
multi-family mortgage loans originated to date in 1997, $121.6 million were
originated in the third quarter of the year.
One-to-four family mortgage loans accounted for $231.0 million, or 17.1%, of
mortgage loans outstanding, while commercial real estate loans and construction
loans accounted for $60.6 million and $1.0 million, respectively. The balance
sheet also included securities held to maturity ("securities") of $76.5 million;
mortgage-backed securities held to maturity ("mortgage-backed securities") of
$57.8 million; and money market investments of $8.0 million.
8
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Due to the absence of any charge-offs in the quarter and recoveries of $72,000,
the allowance for loan losses rose to $9.4 million at September 30, 1997,
representing 102.92% of non-performing loans and 0.70% of loans, net, at that
date. Non-performing assets totaled $10.6 million, representing 0.69% of total
assets, and included $9.2 million in non-performing loans and $1.4 million in
foreclosed real estate.
Deposits totaled $1.1 billion at September 30, 1997, up $27.6 million from the
year-end 1996 amount. The increase primarily reflects a $38.9 million rise in
the balance of certificates of deposit ("CDs") to $690.6 million, representing
65.7% of total deposits at September 30, 1997. The balance of the Bank's
deposits consisted of $268.8 million in savings accounts; $65.7 million in NOW
and money market accounts, and $26.5 million in non-interest-bearing accounts.
These funding sources were supplemented by the Company's Federal Home Loan Bank
of New York ("FHLB") borrowings, which grew to $277.3 million from $81.4
million, the level at December 31, 1996.
Stockholders' equity amounted to $172.8 million, as compared to $211.4 million,
the year-end 1996 level, and represented 11.22% of total assets and a book value
of $19.89 per share (based on 8,692,386 shares). The difference stems primarily
from the year-to-date expenditure of $59.4 million toward the repurchase of
1,535,938 shares under the Company's Stock Repurchase Program. The impact of
this expenditure was partially offset by net income of $17.9 million plus $8.3
million in non-cash expenses that were added back to stockholders' equity, less
dividends paid and options exercised of $8.8 million. The Company's non-cash
expenses are entirely derived from the amortization and appreciation of
allocated shares in the Company's stock-related benefit plans and the associated
tax benefits.
As further indication of its capital strength, the Bank continued to exceed the
minimum regulatory capital requirements and to fulfill the requirements for
classification as a well-capitalized institution under the FDIC Improvement Act
("FDICIA").
LOANS
Mortgage loans totaled $1.3 billion at September 30, 1997, representing 87.5% of
total assets and a $203.8 million, or 17.8%, increase from the level at year-end
1996. Reflected in the 1997 amount are year-to-date originations of $328.3
million, including $128.8 million in the third quarter of the year.
Multi-family mortgage loans accounted for $1.1 billion, or 78.3%, of mortgage
loans outstanding and $310.7 million, or 94.6%, of originations year-to-date. Of
these, $121.6 million were originated in the three months ended September 30,
1997. The majority of the Company's multi-family mortgage loans are originated
for terms of ten years at a rate of interest that adjusts to a point over prime
in each of years six through ten. In years one through five, the loan may
feature either a fixed rate of interest or a rate that increases annually by 50
basis points. At September 30, 1997, 95.9% of multi-family mortgage loans
featured adjustable rates of interest, including $409.9 million in loans with
interest rates that are scheduled to step upward over the next twelve months.
Specifically, $142.5 million; $123.9 million; $74.9 million; and $68.6 million,
respectively, are scheduled to reprice upward over the next four quarters.
9
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While the Company's primary emphasis is on multi-family mortgage loan
production, it also originates one-to-four family, commercial real estate, and
construction loans. At September 30,1997, one-to-four family mortgage loans
totaled $231.0 million, representing 17.1% of mortgage loans outstanding and a
$25.9 million decrease from the year-end 1996 level after originations of $11.7
million. Commercial real estate loans totaled $60.6 million (down $2.8 million
after originations of $5.3 million) and construction loans totaled $1.0 million
(down $578,000 after originations of $572,000).
The Company's loan portfolio also includes a modest balance of consumer loans,
which totaled $11.1 million at September 30, 1997, down $1.2 million from the
level recorded at year-end 1996.
With $328.3 million in originations in the nine months ended September 30, 1997
and another $83.9 million in loans in the pipeline at that date, the Company is
on track to substantially exceed the $303.1 million in mortgage originations
recorded in the twelve months ended December 31, 1996. However, it should be
cautioned that the Company's ability to originate these and other types of loans
could be adversely impacted by such factors as a marked increase in interest
rates, a significant increase in competition, or a decline in loan demand.
ASSET QUALITY
The quality of the loan portfolio continued to be solid, as the Company extended
its record to nine consecutive quarters without any net charge-offs and without
a provision for loan losses being made. Due to recoveries of $72,000 in the nine
months ended September 30, 1997, the allowance for loan losses increased to $9.4
million, representing 102.92% of non-performing loans and 0.70% of loans, net,
at the current quarter's end. In addition, the allowance represented 661.37% of
net accumulated charge-offs for the ten years ended September 30, 1997.
Non-performing loans totaled $9.2 million, or 0.68% of loans, net, at September
30, 1997, as compared to $8.5 million (or 0.67% of loans, net) at June 30, 1997
and $9.7 million (or 0.84% of loans, net) at December 31, 1996. The September
30, 1997 amount consisted of 46 non-accrual mortgage loans totaling $6.8 million
and 34 loans 90 days or more delinquent and still accruing interest equaling
$2.4 million. Foreclosed real estate, consisting of four properties, totaled
$1.4 million, consistent with the level at the end of the trailing quarter, and
up from $627,000 at year-end 1996. As a result, non-performing assets totaled
$10.6 million, or 0.69% of total assets, at September 30, 1997, as compared to
$9.9 million and $10.3 million at June 30, 1997 and December 31, 1996,
representing 0.68% and 0.76% of total assets, respectively, at the corresponding
dates. Except for two commercial real estate parcels totaling $1.3 million, the
Company's non-performing assets at September 30, 1997 were all secured by
one-to-four family residences.
The Company's portfolio of real estate investments, consisting of 10 properties
totaling $1.0 million, was providing an 8.0% rate of return to the Bank at the
current quarter's end.
For additional information, see the Asset Quality Analysis that follows and the
discussion of the loan loss provision on page 19 of this report.
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ASSET QUALITY ANALYSIS
At or For the At or For the
Nine Months Ended Year Ended
September 30, December 31,
1997 1996
(dollars in thousands) (unaudited)
- --------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 9,359 $ 11,359
Loan recoveries 72 --
Reversal of loan losses -- (2,000)
------- --------
Balance at end of period $ 9,431 $ 9,359
======= ========
NON-PERFORMING ASSETS AT PERIOD-END:
Non-accrual mortgage loans $ 6,799 $ 6,861
Loans 90 days or more delinquent
and still accruing interest 2,364 2,798
------- --------
Total non-performing loans $ 9,163 $ 9,659
Foreclosed real estate 1,396 627
------- --------
Total non-performing assets $10,559 $ 10,286
======= ========
RATIOS:
Non-performing loans to loans, net 0.68% 0.84%
Non-performing assets to total assets 0.69 0.76
Allowance for loan losses to non-performing loans 102.92 96.90
Allowance for loan losses to loans, net 0.70 0.82
Allowance for loan losses to net accumulated
charge-offs for the past 10 years 661.37 625.00
SECURITIES HELD TO MATURITY AND MONEY MARKET INVESTMENTS
The Company limits its securities investments to short-term U.S. Treasuries and
agency obligations, and typically rolls over said securities upon maturity. The
balance of the portfolio consists of stock in the Federal Home Loan Bank.
The securities portfolio totaled $76.5 million at September 30, 1997, down $10.0
million from the level at December 31, 1996. Included in the 1997 amount were
$34.0 million in U.S. Treasuries and $28.6 million in agency obligations, with a
combined average maturity of one year. In addition, the market value of the
Company's securities equaled 100.2% and 100.0% of carrying value, respectively,
at September 30, 1997 and December 31, 1996.
Money market investments, meanwhile, rose $1.0 million to $8.0 million, and
consisted entirely of Federal funds sold.
11
14
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Reflecting prepayments and the absence of any new investments, the Company's
portfolio of mortgage-backed securities has steadily diminished since the second
quarter of 1994. At September 30, 1997, the balance equaled $57.8 million, down
from $73.7 million at December 31, 1996. The Company holds to maturity all
mortgage-backed securities; at quarter's end, the average maturity of the
portfolio was 2.4 years.
As a percentage of carrying value, the market value of the Company's
mortgage-backed securities was 101.7% at September 30, 1997 and 100.6% at
year-end 1996.
FUNDING SOURCES
The Company's funding has primarily stemmed from deposits, loan interest and
principal payments, and the interest and maturity of its securities and
mortgage-backed securities. To supplement these funding sources during a year of
record loan production, management has increasingly leveraged the balance sheet
with the use of FHLB borrowings
Deposits grew $27.6 million to $1.1 billion at September 30, 1997, primarily
reflecting a $38.9 million increase in total CDs to $690.6 million, representing
65.7% of total deposits at that date. The increase in CDs continues to reflect
the popularity of longer-term higher-yielding depository products during a
prolonged period of attractive and stable interest rates. In the twelve months
ended September 30, 1997, 88.8% of maturing CDs were retained by the Company
and, while no assurances can be made, it is management's expectation that a
majority of maturing CDs will continue to roll over with the Bank. The volume of
CDs due to mature within the next twelve months was $526.7 million.
The rise in total deposits also reflects a $1.5 million rise in
non-interest-bearing accounts to $26.5 million, representing 2.5% of total
deposits at September 30, 1997. The increase reflects the Company's ongoing
practice of opening branch offices at sites vacated by major commercial banking
institutions, such as the Murray Hill branch office opened in July 1997
following its vacancy by Chase Manhattan Bank.
Savings accounts, meanwhile, totaled $268.8 million, representing a $9.0 million
decline from the year-end 1996 level and 25.6% of total deposits at the current
quarter's end. Similarly, NOW and money market accounts totaled $65.7 million,
down $3.8 million from the year-end 1996 level, and representing 6.2% of total
deposits at September 30, 1997. These declines reflect the transfer of deposits
to longer-term and higher-yielding savings products, primarily with the Bank.
At September 30, 1997, the Company had access to a $462.3 million FHLB line of
credit; actual FHLB borrowings totaled $277.3 million, up from $81.4 million at
December 31, 1996. The higher costs associated with such borrowings have been
more than offset by the higher yields provided by the growing portfolio of
mortgage loans they have been used to fund. Management anticipates that it will
continue to access the Company's FHLB line of credit in the fourth quarter of
1997 to support the origination of additional multi-family mortgage loans.
12
15
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 managing the
Company's interest rate risk. This is achieved by matching the maturities and
repricing dates of the Company's interest-earning assets with the maturities and
repricing dates of its interest-bearing liabilities.
In order to enhance this match, management has traditionally emphasized the
origination of adjustable rate mortgage loans on multi-family properties and
one-to-four family houses, and has confined its other investments to short-term
securities with an average maturity of one year or less. On the liability side
of the balance sheet, management has closely monitored the pricing of its
depository products and has limited its use of FHLB borrowings to times when
market conditions have been particularly conducive to a high level of loan
origination activity.
While the majority of the Company's mortgage loans feature an annual rate
adjustment, the majority of multi-family mortgage originations over the past
five quarters have featured a fixed rate of interest for the first five years of
the loan. At the same time, the Company has increasingly utilized CDs and FHLB
borrowings as its primary sources of funding. As a result, the gap between the
Company's interest rate sensitive assets and interest rate sensitive liabilities
repricing within a one-year period was a negative 7.70% at September 30, 1997.
The presence of a negative gap indicates that more liabilities than assets will
be subject to repricing as a result of changes in interest rates.
LIQUIDITY AND CAPITAL POSITION
Liquidity
To ensure that its liquid resources are sufficient to fund its operations and
obligations, the Company maintains a portfolio of highly liquid money market
investments in the form of Federal funds sold, and invests in short-term
securities.
Federal funds sold, together with cash and due from banks, are the Company's
most liquid assets, and totaled $21.9 million, collectively, at September 30,
1997. Securities, as stated previously, totaled $76.5 million, including $34.0
million in U.S. Treasuries and $28.6 million in agency obligations, with a
combined average maturity of one year.
In addition to the funding that stems from its deposits, the Company derives
funding from principal and interest payments on loans and proceeds from maturing
securities and mortgage-backed securities. Still additional funding has been
provided through the Bank's FHLB line of credit, which totaled $462.3 million at
September 30, 1997. Another $10.0 million line of credit was available through a
money center bank.
The Bank's cash flows are derived from operating, investing, and financing
activities. In the nine months ended September 30, 1997, the net cash provided
by operating activities rose to $8.9 million from $2.5 million in the nine
months ended September 30, 1996. The higher amount in 1997 reflects a
combination of factors, including a $3.1 million increase in other assets versus
a $2.2 million decline in the year-earlier period; a $2.5 million increase in
deferred income taxes versus a $794,000 decrease; and an $11.2 million decrease
in official checks outstanding versus an $18.0 million decrease.
13
16
The net cash used in investing activities rose to $177.2 million from $106.0
million in the year-earlier period, primarily reflecting a $204.9 million net
increase in loans, up from $118.4 million in the first nine months of 1996. This
increase was partly offset by a $15.0 million reduction in the proceeds from
maturing securities to $42.0 million and a $25.8 million decline in funds
utilized to purchase securities to $41.1 million.
The net cash provided by financing activities also rose, to $169.2 million from
the year-earlier $84.2 million. The $84.9 million increase reflects a net
increase of $195.9 million in FHLB borrowings, versus $40.0 million in the
year-earlier period. In addition, the Company allocated $52.0 million toward the
purchase of Treasury stock, net of exercised stock options, as compared to $25.9
million in the year-earlier nine months. These increases were somewhat offset by
a net increase in deposits of $27.6 million, down from $72.1 million in the
first nine months of 1996.
Capital
Stockholders' equity totaled $172.8 million at September 30, 1997, or 11.22% of
total assets, as compared to $211.4 million, or 15.56% of total assets, at
December 31, 1996. The difference primarily reflects the Company's year-to-date
allocation of $59.4 million toward the repurchase of 1,535,938 shares under its
stock repurchase program. Of the shares authorized for repurchased in 1997,
627,319 shares remained available for repurchase at quarter's end. As adjusted
for the 3-for-2 stock split on October 1, 1997, this number increases to 940,978
shares.
The impact of the $59.4 million allocation was partly offset by net income of
$17.9 million (less dividends paid and options exercised of $8.8 million) and
$8.3 million in non-cash expenses that were added back to capital at September
30th. The non-cash expenses stemmed entirely from the amortization and
appreciation of allocated shares in the Company's stock-related benefit plans
and the associated tax benefits.
The Company's book value equaled $19.89 per share at September 30, 1997, based
on 8,692,386 shares, the number of shares outstanding after excluding 1,379,847
in unallocated ESOP shares. As adjusted for the stock split on October 1, 1997,
the Company's book value was equivalent to $13.26; the number of shares utilized
to calculate book value adjusts to 13,038,579.
The following regulatory capital analysis indicates the extent to which the
Bank's regulatory capital ratios exceeded the minimum Federal requirements at
September 30, 1997.
14
17
REGULATORY CAPITAL ANALYSIS (BANK ONLY)
At September 30, 1997
---------------------
Risk-Based Capital
------------------
(dollars in thousands) Leverage Capital Tier 1 Total
---------------- ------ -----
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total savings bank equity $151,278 10.22% $151,278 15.87% $160,709 16.87%
Regulatory capital
requirement 44,393 3.00 38,111 4.00 76,222 8.00
-------- ----- -------- ----- -------- -----
Excess $106,885 7.22% $113,167 11.87% $ 84,487 8.87%
======== ===== ======== ===== ======== =====
In addition, the Bank continued to exceed the requirements for classification as
a well-capitalized institution. As defined by FDICIA, said institution has a
ratio of leverage capital to adjusted total 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 10.0% or more.
The Company is also required to meet minimum regulatory capital requirements on
a consolidated basis, which are imposed by the Federal Reserve Board and are
similar to the requirements imposed on the Bank. At September 30, 1997, the
Company exceeded all applicable regulatory capital requirements on a
consolidated basis.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
EARNINGS SUMMARY
The Company recorded earnings of $5.4 million, or $0.57 per share, in the three
months ended September 30, 1997 and $5.6 million, or $0.52 per share, in the
three months ended September 30, 1996. Its cash earnings, meanwhile, rose 24.2%
to $8.6 million from $6.9 million, representing a 42.2% increase in cash
earnings per share to $0.91 from $0.64. The Company's third quarter 1996
earnings and cash earnings per share have been adjusted to reflect the 3-for-2
stock split on April 10, 1997.
Cash earnings are determined by adding back to reported earnings the non-cash
expenses related to the amortization and appreciation of allocated shares in the
Company's stock-related benefit plans and the associated tax benefits. Such
non-cash expenses totaled $3.2 million in the third quarter of 1997 and $1.3
million in the third quarter of 1996.
The significant difference between the Company's cash and reported earnings is
underscored when comparing the resultant returns on average assets and
stockholders' equity ("ROA" and "ROE"). On the basis of reported earnings, the
Company's ROA and ROE were 1.46% and 12.78%, respectively, in the third quarter
of 1997; on the basis of cash earnings, these performance measures improve to
2.33% and 20.44%, respectively. In addition, the Company's efficiency ratio,
which was 42.55% on the basis of reported earnings, improves to 30.67% when
based on cash earnings.
15
18
The Company's third quarter 1997 earnings were substantially driven by a $1.2
million, or 8.4%, rise in net interest income to $15.6 million, the net result
of a $4.4 million increase in interest income to $30.4 million and a $3.2
million increase in interest expense to $14.8 million. The rise in interest
income reflects the success of the Company's leveraging strategy, as FHLB
borrowings were increasingly used to finance loan production, generating an
increase in the Company's loan portfolio.
The growth in net interest income more than offset a $292,000 decline in other
operating income to $336,000 and a $68,000 rise in income tax expense to $3.8
million. Operating expense, meanwhile, totaled $6.8 million, or 1.83% of average
assets, as compared to the year-earlier $5.7 million, which represented 1.76%.
The higher amount in 1997 was primarily triggered by an increase in non-cash
expenses, to $1.9 million from the year-earlier $1.1 million, as reflected in
compensation and benefits expense of $4.7 million and $3.8 million,
respectively.
The provision for loan losses was not a factor in the Company's third quarter
1997 or 1996 earnings, having been suspended since the second quarter of 1995.
INTEREST INCOME
The Company derives interest income from its portfolio of interest-earning
assets, primarily comprised of mortgage and other loans. The balance of the
Company's interest-earning assets consists of securities, mortgage-backed
securities, and money market investments.
The Company recorded interest income of $30.4 million in the third quarter of
1997, up $4.4 million from $26.0 million in the third quarter of 1996. The 17.0%
increase was driven by a $172.9 million rise in the average balance of
interest-earning assets to $1.4 billion, in conjunction with a 24-basis point
rise in the average yield to 8.44%.
Average mortgage and other loans provided $28.3 million, or 93.0%, of total
interest income for the quarter, up from $23.6 million, or 90.7% of the total,
in the year-earlier three months. The $4.7 million, or 20.0%, increase stemmed
from a $200.1 million rise in the average balance of these interest-earning
assets to $1.3 billion and from a 13-basis point rise in the average yield to
8.67%. In the third quarter of 1997, average loans represented 90.6% of average
interest-earning assets, up from 87.1% in the year-earlier three months.
Average securities generated $1.1 million in interest income in the third
quarter of 1997, representing a $47,000 increase from the level recorded in the
third quarter of 1996. While the average balance of securities declined $3.9
million to $70.8 million, the reduction was offset by a 58-basis point increase
in the average yield on such assets to 6.30%. Average securities represented
4.9% of average interest-earning assets and provided 3.7% of total interest
income for the current three-month period.
Mortgage-backed securities contributed $939,000 to total interest income in the
current third quarter, down from $1.3 million in the year-earlier three months.
The decline was the net effect of a $22.3 million decrease in the average
balance to $60.2 million and a 3-basis point rise in the average yield to 6.24%.
Average mortgage-backed securities represented 4.2% of average interest-earning
assets in the third quarter of 1997 and provided 3.1% of interest income.
16
19
Average money market investments accounted for $67,000 of third quarter 1997
interest income, down $13,000 from the level in the year-earlier three months.
The reduction was the result of a $963,000 decline in the average balance to
$5.1 million and a 2-basis point drop in the average yield to 5.23%.
NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
-------------- ---------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- ------------ ------- ---------- ---------- -------
Assets:
Interest-earning assets:
Mortgage and other loans, net $1,304,354 $ 28,287 8.67% $1,104,247 $ 23,564 8.54%
Securities held to maturity 70,775 1,115 6.30 74,664 1,068 5.72
Mortgage-backed securities held to maturity 60,193 939 6.24 82,527 1,281 6.21
Money market investments 5,129 67 5.23 6,092 80 5.25
---------- ---------- ------ ---------- -------- ------
Total interest-earning assets 1,440,451 30,408 8.44% 1,267,530 25,993 8.20%
Non-interest-earning assets 40,512 36,963
---------- ----------
Total assets $1,480,963 $1,304,493
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and money market accounts $ 65,734 $ 472 2.88% $ 72,642 $ 497 2.71%
Savings accounts 270,502 1,633 2.42 280,998 1,690 2.39
Certificates of deposit 669,861 9,233 5.53 621,767 8,403 5.36
FHLB borrowings 241,882 3,450 5.72 67,538 987 5.80
Mortgagors' escrow 12,773 9 0.28 10,687 10 0.37
---------- ---------- ------ ---------- -------- ------
Total interest-bearing liabilities 1,260,752 14,797 4.71% 1,053,632 11,587 4.36%
---------- ------ --------
Non-interest-bearing deposits 27,058 23,356
Other liabilities 24,313 24,945
---------- ----------
Total liabilities 1,312,123 1,101,933
Stockholders' equity 168,840 202,560
---------- ----------
Total liabilities and stockholders' equity $1,480,963 $1,304,493
========== ==========
Net interest income/interest rate spread $ 15,611 3.73% $ 14,406 3.84%
========== ====== ======== ======
Net interest-earning assets/net
interest margin $ 179,699 4.34 $ 213,898 4.55
========== ====== ========== ======
Ratio of interest-earning assets
to interest-bearing liabilities 114.25 120.30
====== ======
17
20
INTEREST EXPENSE
The Company's interest expense stems primarily from the interest paid on its
depository products and, to a lesser extent, from the interest paid on its FHLB
borrowings and mortgagors' escrow accounts.
In the third quarter of 1997, interest expense rose, as expected, given the
increased use of FHLB borrowings to finance mortgage loan production as
management continued its leveraging strategy. At $14.8 million, interest expense
was $3.2 million higher than the year-earlier level, reflecting average
interest-bearing liabilities of $1.3 billion (up $207.1 million from the
year-earlier quarter) and an average cost of 4.71% (up 35 basis points).
FHLB borrowings represented $3.5 million, or 23.3%, of total interest expense,
in the current third quarter, up from $987,000, or 8.5%, in the year-earlier
three months. The increase stemmed from a $174.3 million rise in the average
balance to $241.9 million, which was partly offset by an 8-basis point drop in
the average cost to 5.72%. FHLB borrowings represented 19.2% of average
interest-bearing liabilities in the third quarter of 1997 as compared to 6.4% in
the third quarter of 1996.
CDs comprised 53.1% of interest-bearing liabilities in the current third quarter
and generated 62.4% of total interest expense. The interest expense that stemmed
from CDs rose $830,000 to $9.2 million, reflecting a $48.1 million increase in
the average balance to $669.9 million, and a 17-basis point rise in the average
cost to 5.53%. In the third quarter of 1996, CDs represented 59.0% of average
interest-bearing liabilities and generated 72.5% of interest expense.
The interest expense derived from savings accounts declined $57,000 to $1.6
million, the net effect of a $10.5 million reduction in the average balance to
$270.5 million and a 3-basis point rise in the average cost of these funds to
2.42%. Savings accounts represented 21.5% of interest-bearing liabilities and
11.0% of total interest expense in the current third quarter, as compared to
26.7% and 14.6% in the year-earlier three months.
NOW and money market accounts furnished $472,000 in interest expense in the
third quarter of 1997, down from $497,000 in the third quarter of 1996. The
reduction reflects a $6.9 million decrease in the average balance to $65.7
million, partly offset by a 17-basis point rise in the average cost to 2.88%.
NOW and money market accounts comprised 5.2% of average interest-bearing
liabilities and 3.2% of interest expense in the third quarter of 1997, down from
6.9% and 4.3%, respectively, in the third quarter of 1996.
Mortgagors' escrow, meanwhile, generated interest expense of $9,000, down $1,000
from the year-earlier amount. While the average balance rose $2.1 million to
$12.8 million, this was offset by a 9-basis point drop in the average cost to
0.28%.
NET INTEREST INCOME
Net interest income is the Company's principal source of income; its level is
influenced significantly by the volume of the Company's interest-earning assets
and interest-bearing liabilities, and by the spread between the yield on such
assets and the cost of such liabilities.
18
21
Net interest income contributed $15.6 million to third quarter 1997 earnings,
representing an 8.4% increase from $14.4 million in the third quarter of 1996.
While the Company's leveraging strategy resulted in a narrower interest rate
spread and net interest margin, as expected, it also produced a $4.4 million
rise in interest income, far outweighing the $3.2 million rise in interest
expense. At 3.73% and 4.34%, the Company's interest rate spread and net interest
margin continued to exceed the industry average, despite narrowing from the
year-earlier levels of 3.84% and 4.55%.
The Company anticipates that its net interest income will continue to rise,
given that its FHLB borrowings are being used to finance the growth in mortgage
loan production, resulting in a level of interest income that far exceeds the
level of interest expense. This said, it should be cautioned that the level of
net interest income could be adversely impacted by a more significant increase
in interest rates than is currently anticipated, and by factors that could
hamper the Company's ability to originate loans. Among these would be a downturn
in the real estate market and a substantial increase in competition for both
funding and loans.
PROVISION FOR LOAN LOSSES
The Company suspended its provision for loan losses for the ninth consecutive
quarter, reflecting the simultaneous absence of any net charge-offs, and the
level of coverage provided by the loan loss allowance relative to its net
charge-offs and non-performing loans. At September 30, 1997, the allowance for
loan losses totaled $9.4 million, representing 102.92% of non-performing loans
and 0.70% of loans, net. In addition, the allowance was equivalent to 661.37% of
accumulated net charge-offs for the ten years ended September 30, 1997.
Non-performing loans totaled $9.2 million at the close of the current third
quarter, as compared to $8.5 million at June 30, 1997 and $9.7 million at
December 31, 1996. The September 30, 1997 amount was equivalent to 0.68% of
loans, net, as compared to 0.67% and 0.84%, respectively, at such earlier dates.
The allowance for loan losses is reviewed on a regular basis. Such review
includes an analysis of several factors, including the level of coverage
provided given the current and prospective quality of the loan portfolio. Given
the current quality of its assets and the coverage provided by the loan loss
allowance, the Company will likely continue its suspension of the loan loss
provision in the quarter ahead. However, a significant change in the quality of
the Company's assets or a significant downturn in the real estate market could
result in loan loss provisions again being made.
For more information regarding asset quality and the allowance for loan losses,
see the discussion and analysis beginning on page 10 of this report.
OTHER OPERATING INCOME
The Company recorded other operating income of $336,000 in the third quarter of
1997, down $292,000 from the level recorded in the third quarter of 1996. The
difference reflects a $192,000 drop in fee income to $308,000 and a $100,000
decline in other income to $28,000.
OPERATING EXPENSE
Operating expense consists primarily of compensation and benefits expense,
together with occupancy and equipment and general and administrative ("G&A")
expenses.
19
22
In the third quarter of 1997, the Company recorded operating expense of $6.8
million (representing 1.83% of average assets), up from $5.7 million
(representing 1.76% of average assets) in the third quarter of 1996. The
increase was primarily triggered by the rise in non-cash expenses to $1.9
million from $1.1 million, as reflected in compensation and benefits expense of
$4.7 million and $3.8 million, respectively. The Company's non-cash expenses
stemmed entirely from the amortization and appreciation of shares in the
Company's stock-related benefit plans.
Also included in the Company's third quarter 1997 operating expense were
occupancy and equipment expense of $683,000 (up $57,000 from the year-earlier
level, primarily reflecting expansion of the branch network); G&A expense of
$1.3 million (up $8,000); and other operating expense of $144,000 (up $66,000).
Reflecting the increase in non-cash expenses, the Company's efficiency ratio
equaled 42.55% in the third quarter of 1997; excluding such expenses, i.e., on
the basis of cash earnings, the efficiency ratio improves to 30.67%.
The number of full-time equivalent employees at the close of the quarter was
279.
INCOME TAX EXPENSE
Income tax expense, including Federal, state, and local income taxes, rose to
$3.8 million in the third quarter of 1997 from $3.7 million in the third quarter
of 1996 notwithstanding a $139,000 decline in pre-tax income to $9.2 million.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
EARNINGS SUMMARY
The Company recorded earnings of $17.9 million, or $1.78 per share, in the nine
months ended September 30, 1997, as compared to $17.1 million, or $1.52 per
share, in the nine months ended September 30, 1996. The 1996 amount reflects the
reversal of $2.0 million from the allowance for loan losses and related tax
consequences.
The Company's 1997 and 1996 earnings year-to-date reflect non-cash expenses of
$8.3 million and $3.8 million, respectively, stemming from the amortization and
appreciation of shares held in its stock related benefit plans and the
associated tax benefits. Adding these back to reported earnings, the Company
recorded cash earnings of $26.2 million in the first nine months of 1997 and
$20.9 million in the first nine months of 1996. The Company's 1997 cash earnings
were equivalent to $2.60 per share, as compared to $1.86 per share in the
year-earlier period, signifying an increase of 39.8%. On the basis of cash
earnings, the Company's ROA increased to 2.48% from 2.20%, the year-earlier
level, while its ROE rose to 18.94% from 13.37%. The Company's 1996 earnings and
cash earnings per share have been adjusted to reflect the 3-for-2 stock split on
April 10, 1997.
The rise in earnings for the current nine months stemmed primarily from a $3.6
million increase in net interest income to $46.3 million and a $2.8 million
reduction in income tax expense to $9.6 million.
20
23
The rise in net interest income was the net effect of a $10.4 million rise in
interest income to $86.0 million and a $6.8 million rise in interest expense to
$39.7 million. The former increase was driven by the record level of mortgage
loan originations, while the latter increase reflects the increased use of FHLB
borrowings to fund the growth in loans. While the Company's net interest margin
was pressured by higher funding costs and the allocation of $59.4 million toward
the repurchase of shares under the Company's Stock Repurchase Program, the
interest rate spread was consistent with the year-earlier level of 3.87%.
The reduction in income tax expense reflects a $2.1 million decline in pre-tax
income to $27.5 million and the reversal of $1.3 million in income tax charges
in the first quarter of the year. Together, the decline in income tax expense
and the rise in net interest income exceeded a drop in other operating income
to $1.2 million from $1.6 million and a rise in operating expense to $20.0
million from $16.7 million. The rise in operating expense primarily reflects the
aforementioned increase in non-cash expenses, which contributed $5.2 million and
$3.1 million, respectively, to compensation and benefits expense of $13.9
million and $11.3 million.
The provision for loan losses was not a factor in 1997's year-to-date earnings,
due to its suspension since the second quarter of 1995.
INTEREST INCOME
The Company's interest income rose to $86.0 million in the first nine months of
1997 from $75.6 million in the first nine months of 1996. The $10.4 million, or
13.7%, increase was fueled by a $137.9 million rise in the average balance of
interest-earning assets to $1.4 billion and a 19-basis point rise in the average
yield to 8.39%.
The interest income derived from mortgage and other loans accounted for the
majority of the increase, as the average balance of these assets grew $166.4
million, or 15.8%, to $1.2 billion (representing 89.4% of average
interest-earning assets) and the yield grew 8 basis points to 8.65%. Average
mortgage and other loans generated $79.3 million in interest income in the first
nine months of 1997, representing an $11.5 million, or 16.9%, increase from the
year-earlier level, and accounting for 92.3% of total interest income
year-to-date.
The Company's interest income was also boosted by a rise in the interest income
provided by securities, the balance of which averaged $73.7 million in the
current nine-month period (up $227,000 from the year-earlier period) and
provided an average yield of 6.12% (up 42 basis points). Average securities
furnished $3.4 million in interest income, up $246,000 from the year-earlier
level, and represented 3.9% of interest income in the current period.
The interest income generated by mortgage and other loans and securities more
than offset declines in the interest income provided by mortgage-backed
securities and money market investments. In the nine months ended September 30,
1997, mortgage-backed securities contributed $3.0 million to total interest
income, down from $4.0 million in the year-earlier nine-months. The decrease
reflects a $21.5 million reduction in the average balance to $65.4 million and a
5-basis point decline in the average yield to 6.19%.
Money market investments, meanwhile, provided $205,000 in interest income, down
from $494,000 in the first nine months of 1996. The decline was the result of a
$7.3 million drop in the average balance to $5.3 million and a 4-basis point
drop in the average yield to 5.19%.
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INTEREST EXPENSE
The Company's interest expense in the first nine months of 1997 reflects the
substantial concentration of CDs in the mix of average interest-bearing
liabilities, and the increased use of FHLB borrowings to support the growth of
its mortgage loan portfolio. Interest expense rose to $39.7 million from the
year-earlier $32.9 million, as the average balance of interest-bearing
liabilities increased $158.3 million to $1.2 billion and the cost of these funds
rose 19 basis points to 4.52%.
In the nine months ended September 30, 1997 and 1996, the interest expense
derived from CDs was $26.6 million and $23.6 million, representing 67.1% and
71.8% of total interest expense in the respective nine-month periods. The dollar
increase was the net effect of a $76.7 million rise in the average balance to
$656.6 million and a 3-basis point drop in the average cost to 5.42%. Average
CDs represented 55.9% of average interest-bearing liabilities in the current
period, down from 57.1% in the year-earlier nine months.
FHLB borrowings accounted for $6.7 million, or 16.9%, of interest expense in the
first nine months of 1997, up from $2.6 million, representing 7.9% of total
interest expense, in the first nine months of 1996. The higher amount reflects a
$96.4 million rise in the average balance to $158.9 million, accompanied by a
7-basis point rise in the average cost to 5.65%. Average FHLB borrowings
represented 13.5% of average interest-bearing liabilities in the first nine
months of 1997, as compared to 6.1% in the year-earlier nine months.
Mortgagors' escrow added $30,000 to total interest expense in the current
nine-month period, up from $25,000 in the year-earlier nine months. The increase
stemmed from a $2.0 million rise in the average balance to $16.6 million
supported by a one-basis point rise in the average cost to 0.24%.
The interest expense derived from savings accounts, meanwhile, declined to $4.9
million from $5.1 million in the year-earlier nine months. The decrease reflects
the net effect of a $10.1 million reduction in the average balance to $273.8
million and a one-basis point rise in the average cost to 2.40%. Average savings
accounts represented 23.3% and 28.0% of average interest-bearing liabilities in
the current and year-earlier period and provided 12.4% and 15.5% of total
interest expense, respectively.
NOW & money market accounts generated interest expense of $1.4 million, down
$162,000 from the year-earlier amount. The decline stemmed from a $6.7 million
decrease in the average balance to $67.7 million and a 4-basis point drop in the
average cost to 2.74%. Average NOW and money market accounts represented 5.8% of
average interest-bearing liabilities in the first nine months of 1997 (down from
7.3%, the year-earlier level), and contributed 3.5% of total interest expense
(down from 4.7%).
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NET INTEREST INCOME ANALYSIS
(dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1997 1996
-------------- --------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ---------- -------- ----------- -------- --------
Assets:
Interest-earning assets:
Mortgage and other loans, net $1,222,055 $ 79,326 8.65% $1,055,606 $ 67,874 8.57%
Securities held to maturity 73,720 3,386 6.12 73,493 3,140 5.70
Mortgage-backed securities held to maturity 65,404 3,038 6.19 86,870 4,064 6.24
Money market investments 5,269 205 5.19 12,583 494 5.23
---------- ---------- ------ ---------- -------- ------
Total interest-earning assets 1,366,448 85,955 8.39% 1,228,552 75,572 8.20%
Non-interest-earning assets 39,069 39,433
---------- ----------
Total assets $1,405,517 $1,267,985
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and money market accounts $ 67,667 $ 1,389 2.74% $ 74,416 $ 1,551 2.78%
Savings accounts 273,816 4,912 2.40 283,892 5,089 2.39
Certificates of deposit 656,617 26,629 5.42 579,928 23,643 5.45
FHLB borrowings 158,874 6,708 5.65 62,431 2,606 5.58
Mortgagors' escrow 16,625 30 0.24 14,592 25 0.23
---------- ---------- ------ ---------- -------- -----
Total interest-bearing liabilities 1,173,599 39,668 4.52% 1,015,259 32,914 4.33%
---------- --------
Non-interest-bearing deposits 26,053 23,022
Other liabilities 21,640 20,905
---------- ----------
Total liabilities 1,221,292 1,059,186
Stockholders' equity 184,225 208,799
---------- ----------
Total liabilities and stockholders' equity $1,405,517 $1,267,985
========== ==========
Net interest income/interest rate spread $ 46,287 3.87% $ 42,658 3.87%
========== ====== ======== =====
Net interest-earning assets/net
interest margin $ 192,849 4.52 $213,293 4.63
========== ====== ======== =====
Ratio of interest-earning assets
to interest-bearing liabilities 116.43 121.01
====== ======
NET INTEREST INCOME
The Company's net interest income rose to $46.3 million in the nine months ended
September 30, 1997 from $42.7 million in the nine months ended September 30,
1996. The $3.6 million, or 8.5%, increase stemmed from the $10.4 million rise in
interest income, which exceeded the $6.8 million rise in interest expense. The
rise in interest income reflects the growing balance of mortgage loans and the
higher yields provided, while the rise in interest expense primarily reflects
the higher funding costs incurred through the use of FHLB borrowings. The
combination of higher funding costs and the allocation of $59.4 million toward
the repurchase of shares under the Company's Stock Repurchase Program resulted
in an 11-basis point drop in its net interest margin; however, the interest rate
spread remained stable at 3.87%.
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PROVISION FOR LOAN LOSSES
As indicated in the discussion of third quarter 1997 earnings, the provision for
loan losses has been suspended since the second quarter of 1995. In the first
nine months of 1996, the Bank also recovered $2.0 million from the loan loss
allowance, resulting in a $750,0000 contribution to net income in said period.
For a further discussion of the provision and allowance for loan losses, see the
discussions and analysis on pages 10 and 19 of this report.
OTHER OPERATING INCOME
Other operating income totaled $1.2 million in the first nine months of 1997,
down from $1.6 million in the first nine months of 1996. The $427,000 decrease
reflects a $385,000 reduction in fee income to $888,000 and a $42,000 decline in
other income to $268,000.
OPERATING EXPENSE
The Company recorded operating expense of $20.0 million and $16.7 million in the
first nine months of 1997 and 1996, respectively. The increase stemmed primarily
from a rise in non-cash expenses, triggered, in large part, by the appreciation
of the Company's share price. The Company's non-cash expenses totaled $5.2
million and $3.1 million in the nine months ended September 30, 1997 and 1996,
contributing to compensation and benefits expense of $13.9 million and $11.3
million, respectively, in the corresponding periods.
Also included in 1997 operating expense to date were occupancy and equipment
expense of $2.0 million (up $137,000 from the year-earlier level); G&A expense
of $3.6 million (up $230,000); and other operating expense of $492,000 (up
$275,000). The higher costs reflect a network-wide computer upgrade, the
addition of two new full-service branches, and the addition of a customer
service center in a 24-hour drug store.
Including the non-cash expenses, the Company's operating expense for the first
nine months of 1997 represented 1.90% of average assets and contributed to an
efficiency ratio of 42.13%. When the non-cash expenses are excluded, i.e., on
the basis of cash earnings, these ratios improve to 1.41% and 31.21%,
respectively.
INCOME TAX EXPENSE
The Company's nine-month 1997 earnings were boosted by a $2.8 million reduction
in income tax expense to $9.6 million from $12.4 million in the nine months
ended September 30, 1996. The reduction reflects a $2.1 million decline in
pre-tax income to $27.5 million and the reversal of $1.3 million in income tax
charges in the first quarter of the current year.
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27
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements that are based on
management's current expectations regarding economic, legislative, and
regulatory issues that may impact the Company's earnings in future periods.
Factors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions;
changes in interest rates, deposit flows, loan demand, real estate values, and
competition; changes in accounting principles, policies, or guidelines; changes
in legislation and regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting the Company's operations,
pricing, products, and services.
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QUEENS COUNTY BANCORP, INC.
PART 2 - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is sometimes involved in routine legal proceedings, none of which
management deems to be material to the financial condition of the Company.
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 21, 1997, the Board of Directors increased the quarterly cash
dividend to 20 cents per share, representing a 20% increase from the dividend
paid in the trailing quarter, as adjusted for the 3-for-2 stock split on October
1st. The dividend will be paid on November 14, 1997 to shareholders of record on
November 3rd.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 3 (i): Certificate of incorporation*
Exhibit No. 3 (ii): Bylaws*
Exhibit No.11: Statement re: Computation of Per Share
Earnings - filed herewith
Exhibit No. 27: Financial Data Schedule - filed herewith
*Incorporated by reference herein from the exhibits to the Form S-1
Registration Statement and any amendments thereto, initially
filed July 30, 1993, Registration File No. 33-66852.
(b) Form 8-K
The Company filed a Form 8-K on August 29, 1997 to report the Board
of Directors' declaration of a three-for-two stock split in the form of a 50%
stock dividend on August 26, 1997. The stock dividend was payable on October 1,
1997 to shareholders of record on September 10, 1997. Cash in lieu of fractional
shares was based on the average of the high and low bids on the date of record,
as adjusted for the split, and amounted to $35.92 per share.
26