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 JUNE 30, 1998
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
14,767,719
-----------------------------------------
Number of shares outstanding at
August 12, 1998
2
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
THREE MONTHS ENDED JUNE 30, 1998
INDEX PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition as of June 30, 1998
(unaudited) and December 31, 1997 1
Consolidated Statements of Income and Comprehensive Income
for the Three and Six Months Ended June 30, 1998 and 1997
(unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 25
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 HOLDERS 26
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
(in thousands)
June 30, December 31,
1998 1997
(unaudited)
----------- ------------
ASSETS
Cash and due from banks $ 48,137 $ 16,733
Money market investments 6,000 6,000
Securities held to maturity (estimated market value of
$119,857 and $95,067, respectively) 119,913 94,936
Mortgage-backed securities held to maturity (estimated market
value of $38,785 and $50,619, respectively) 38,021 49,781
Securities available for sale 3,984 2,617
Mortgage loans:
1-4 family 202,131 224,287
Multi-family 1,197,367 1,107,374
Commercial real estate 60,260 61,740
Construction 1,251 1,538
----------- ------------
Total mortgage loans 1,461,009 1,394,939
Other loans 10,356 10,795
Less: Unearned loan fees (1,191) (1,300)
Allowance for loan losses (9,431) (9,431)
----------- ------------
Loans, net 1,460,743 1,395,003
Premises and equipment, net 10,413 10,782
Deferred tax asset, net 5,615 5,514
Other assets 22,338 21,903
----------- ------------
TOTAL ASSETS $ 1,715,164 $ 1,603,269
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market accounts $ 71,571 $ 67,894
Savings accounts 269,815 268,133
Certificates of deposit 662,910 703,948
Non-interest-bearing accounts 31,027 29,186
----------- ------------
Total deposits 1,035,323 1,069,161
----------- ------------
Official checks outstanding 42,631 29,440
FHLB borrowings 423,959 309,664
Accounts payable and accrued expenses 1,526 1,857
Mortgagors' escrow 19,723 10,690
Other liabilities 22,369 11,942
----------- ------------
Total liabilities 1,545,531 1,432,754
----------- ------------
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;
20,647,233 shares issued: 14,941,165 and 14,912,791 shares
outstanding at June 30, 1998 and December 31, 1997,
respectively) 206 206
Paid-in capital in excess of par 132,381 125,000
Retained earnings (substantially restricted) 160,394 166,230
Less: Treasury stock (5,706,068 and 5,734,442 shares,
respectively) (106,785) (104,148)
Unallocated common stock held by ESOP (13,146) (13,526)
Common stock held by SERP (3,242) (2,492)
Unearned common stock held by RRPs (442) (812)
Accumulated other comprehensive income, net of
tax effect 267 57
----------- ------------
Total stockholders' equity 169,633 170,515
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,715,164 $ 1,603,269
=========== ============
See accompanying notes to financial statements
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4
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------
INTEREST INCOME:
Mortgage and other loans $30,560 $26,250 $60,568 $51,039
Securities held to maturity 1,820 1,107 3,425 2,271
Mortgage-backed securities held to maturity 660 1,007 1,412 2,099
Money market investments 130 78 246 138
------- ------- ------- -------
Total interest income 33,170 28,442 65,651 55,547
------- ------- ------- -------
INTEREST EXPENSE:
NOW and money market accounts 494 447 1,013 917
Savings accounts 1,539 1,646 3,115 3,279
Certificates of deposit 8,696 8,778 17,808 17,396
FHLB borrowings 4,957 2,071 9,682 3,258
Mortgagors' escrow 10 10 28 20
------- ------- ------- -------
Total interest expense 15,696 12,952 31,646 24,870
------- ------- ------- -------
Net interest income 17,474 15,490 34,005 30,677
Provision for loan losses -- -- -- --
------- ------- ------- -------
Net interest income after
provision for loan losses 17,474 15,490 34,005 30,677
------- ------- ------- -------
OTHER OPERATING INCOME:
Fee income 786 301 1,191 580
Other 80 214 233 239
------- ------- ------- -------
Total other operating income 866 515 1,424 819
------- ------- ------- -------
OPERATING EXPENSE:
Compensation and benefits 4,865 4,685 9,580 9,233
Occupancy and equipment 605 631 1,277 1,300
General and administrative 1,144 1,183 2,308 2,322
Other 133 193 254 349
------- ------- ------- -------
Total operating expense 6,747 6,692 13,419 13,204
------- ------- ------- -------
Income before income taxes 11,593 9,313 22,010 18,292
Income tax expense 4,970 3,972 9,132 5,819
------- ------- ------- -------
NET INCOME $6,623 $5,341 $12,878 $12,473
------- ------- ------- -------
Comprehensive income, net of tax:
Unrealized gain on securities 141 -- 210 --
------- ------- ------- -------
Comprehensive income $ 6,764 $ 5,341 $13,088 $12,473
======= ======= ======= =======
EARNINGS PER SHARE $0.51 $0.40 $1.00 $0.88(1)
DILUTED EARNINGS PER SHARE $0.48 $0.38 $0.94 $0.83(1)
(1) Reflects shares issued as a result of a 3-for-2 stock split on
October 1, 1997.
See accompanying notes to financial statements
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QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED
JUNE 30, 1998
(in thousands) (UNAUDITED)
- --------------------------------------------------------------------------------
COMMON STOCK (PAR VALUE $0.01):
Balance at beginning of year $ 206
Shares issued --
----------
Balance at end of period 206
----------
PAID-IN CAPITAL IN EXCESS OF PAR:
Balance at beginning of year 125,000
Tax benefit effect on stock plans 4,627
Common stock acquired by SERP 750
Allocation of ESOP stock 2,004
----------
Balance at end of period 132,381
----------
RETAINED EARNINGS:
Balance at beginning of year 166,230
Net income 12,878
Dividends paid on common stock (5,809)
Exercise of stock options (729,877 shares) (12,905)
----------
Balance at end of period 160,394
----------
TREASURY STOCK:
Balance at beginning of year (104,148)
Purchase of common stock (451,568 shares) (18,303)
Common stock acquired by SERP 750
Exercise of stock options (729,877 shares) 14,916
----------
Balance at end of period (106,785)
----------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of year (13,526)
Allocation of ESOP stock 380
----------
Balance at end of period (13,146)
----------
SERP PLAN:
Balance at beginning of year (2,492)
Common stock acquired by SERP (750)
----------
Balance at end of period (3,242)
----------
RECOGNITION AND RETENTION PLANS:
Balance at beginning of year (812)
Earned portion of RRPs 370
----------
Balance at end of period (442)
----------
NET UNREALIZED APPRECIATION IN SECURITIES, NET OF TAX:
Balance at beginning of year 57
Net unrealized appreciation in securities, net of tax 210
----------
Balance at end of year 267
----------
Total Stockholders' Equity $ 169,633
==========
See accompanying notes to financial statements
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QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
1998 1997
(in thousands) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,878 $ 12,473
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 473 466
Amortization of premiums, net 68 100
Amortization of net deferred loan origination fees 109 320
Net gain on redemption of securities and mortgage-backed
securities (74) (1)
Net gain on sale of foreclosed real estate (36) (43)
Tax benefit effect on stock plans 4,627 1,240
Earned portion of RRPs 370 340
Earned portion of ESOP 2,384 2,354
Changes in assets and liabilities:
Increase in deferred income taxes (101) (2,445)
Increase in other assets (435) (2,183)
Decrease in accounts payable and accrued expenses (331) (239)
Increase (decrease) in official checks outstanding 13,191 (6,080)
Increase in other liabilities 10,427 1,363
--------- ----------
Total adjustments 30,672 (4,808)
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 43,550 7,665
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of mortgage-backed securities
held to maturity 31,304 20,995
Proceeds from maturity of securities held to maturity 14,000 30,000
Purchase of securities held to maturity (58,516) (23,570)
Purchase of securities available for sale (971) --
Net increase in loans (74,103) (126,632)
Proceeds from sale of loans and foreclosed real estate 8,105 1,104
Purchase of premises and equipment, net (104) (350)
--------- ----------
NET CASH USED IN INVESTING ACTIVITIES (80,285) (98,453)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in mortgagors' escrow 9,033 7,942
Net (decrease) increase in deposits (33,838) 7,189
Net increase in FHLB borrowings 114,295 135,617
Cash dividends paid and options exercised, net (18,714) (5,744)
Purchase of Treasury stock, net of stock options exercised
and shares acquired by SERP (2,637) (48,200)
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 68,139 96,804
--------- ----------
Net increase in cash and cash equivalents 31,404 6,016
Cash and cash equivalents at beginning of period 22,733 21,045
--------- ----------
Cash and cash equivalents at end of period $ 54,137 $ 27,061
========= ==========
Supplemental information:
Cash paid for:
Interest $ 31,655 $ 24,864
Income taxes 5,269 2,576
Transfers to foreclosed real estate from loans 772 --
Transfers to real estate held for investment from foreclosed
real estate 408 115
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 Company's
results for the periods presented. The results of operations for the three and
six months ended June 30, 1998 are not necessarily indicative of the results of
operations that may be expected for all of 1998.
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 1997 Annual Report to Shareholders and SEC Form 10-K.
NOTE 2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 established
standards for the way an enterprise reports information about operating segments
in annual financial reports issued to shareholders. SFAS No. 131 requires that a
public business enterprise report both financial and descriptive information
about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available and that are evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 requires a reconciliation of total segment revenues,
total segment profit or loss, total segment assets, and other amounts disclosed
for segments to the amounts in the enterprise's financial statements. SFAS No.
131 also requires an enterprise to report descriptive information about the way
the operating segments are determined, the products and services provided by the
operating segments, and any differences between the measurements used for
segment reporting and financial statement reporting. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997, with comparative information
for earlier years to be restated in the initial year of application.
Management is currently assessing the implication of implementing SFAS No. 131.
As SFAS No. 131 pertains to the disclosure of financial performance rather than
to financial performance itself, it is not expected to have an effect on the
Company.
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EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS
In February 1998, the FASB established SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits." This statement revises
employers' disclosures about pension and other post-retirement benefit plans; it
does not change the measurement or recognition of those plans. The statement
standardizes the disclosure requirements for pensions and other post-retirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
useful.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
The Company is currently evaluating the effect of SFAS No. 132 upon its
financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments and for hedging activities. The statement
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The statement also establishes criteria required to
designate a derivative instrument as a hedge and the accounting for changes in
fair value of a derivative, depending on its intended use. Under the statement,
an entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. These methods must be consistent with the
entity's approach to managing risk.
This statement amends FASB Statements No. 52, "Foreign Currency Translation" and
No. 107, "Disclosures about Fair Value of Financial Instruments." In addition,
SFAS No. 133 supersedes FASB Statements No. 80, "Accounting for Futures
Contracts"; No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk"; and No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments."
SFAS No. 133 is effective for financial statements issued for periods beginning
after June 15, 1999. The Company is currently evaluating the effects of SFAS No.
133.
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9
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.
Since converting to stock form in November 1993, the Bank has deepened its niche
in the multi-family mortgage market. Reflecting record levels of mortgage loan
production, such loans represented 82.0% of mortgage loans outstanding and 69.8%
of total assets at June 30, 1998. To fund its significant asset growth, the
Company has increasingly utilized Federal Home Loan Bank of New York ("FHLB")
borrowings. As a result, the Company has experienced a rise in net interest
income over each of the past seven quarters, contributing to a record of
fundamental strength.
BALANCE SHEET SUMMARY
Fueled by an 8.1% increase in multi-family mortgage loans since year-end 1997,
assets rose $111.9 million, or 7.0%, to $1.7 billion at June 30, 1998. Mortgage
loans outstanding rose $66.1 million, or 4.7%, to $1.5 billion, reflecting
year-to-date originations of $241.3 million, including $142.0 million in the
second quarter of the year. Multi-family mortgage loans comprised 82.0% of the
mortgage loan portfolio, having risen $90.0 million to $1.2 billion at quarter's
end. The increase in multi-family mortgage loans reflects year-to-date
originations of $224.8 million, including $129.9 million of originations in the
three months ended June 30, 1998.
In addition to multi-family mortgage loans, the Company's loan portfolio
consisted of $202.1 million in loans secured by one-to-four family homes at June
30, 1998 (as compared to $224.3 million at year-end 1997); $60.3 million in
commercial real estate loans (as compared to $61.7 million); and construction
loans of $1.3 million (as compared to $1.5 million).
Asset growth was also sparked by a $25.0 million rise in securities held to
maturity to $119.9 million, together with a $1.4 million increase in securities
available for sale to $4.0 million. These increases were partly offset by an
$11.8 million decline in mortgage-backed securities held to maturity to $38.0
million and, to a lesser extent, by a $439,000 drop in other loans to $10.4
million.
While the second quarter was notable for the level of mortgage loan production,
it was notable, too, for the level of asset quality maintained. In addition to
recording its twelfth consecutive quarter without any net charge-offs, the
Company recorded a reduction in non-performing assets at June 30, 1998, as
compared to the levels at March 31, 1998 and December 31, 1997. Specifically,
non-performing assets improved to $8.5 million, or 0.50% of total assets, and
included non-performing loans of $7.5 million and foreclosed real estate of $1.0
million. In the absence of any net charge-offs or provisions for loan losses,
the allowance for loan losses held steady at $9.4 million, representing 125.31%
of non-performing loans and 0.65% of loans, net, at June 30, 1998.
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Deposits totaled $1.0 billion at quarter's end, down $33.8 million from the
level at December 31,1997, while FHLB borrowings rose $114.3 million to $424.0
million.
Stockholders' equity totaled $169.6 million, versus $170.5 million at December
31, 1997, and was equivalent to 9.89% of total assets and a book value of $13.07
per share, based on 12,976,829 shares. The decline in stockholders' equity
reflects the allocation of $18.3 million toward the repurchase of 451,568 shares
during the first six months of 1998, including 179,847 in the second quarter of
the year. In addition, the 1998 amount reflects cash earnings of $21.9 million
($12.9 million in GAAP earnings plus $9.0 million in non-cash items that were
added back to capital), less dividends paid of $5.8 million. Both the Company
and the Bank continued to exceed the minimum regulatory capital requirements at
June 30, 1998.
LOANS
Despite heightened competition and a challenging interest rate environment, the
Company originated $142.0 million in mortgage loans in 1998's second quarter,
bringing year-to-date originations to $241.3 million. As a result, mortgage
loans outstanding rose $66.1 million, or 4.7%, to $1.5 billion from the level
recorded at December 31, 1997. The growth of the portfolio primarily reflects a
$90.0 million, or 8.1%, increase in multi-family loans to $1.2 billion, fueled
by $224.8 million in year-to-date originations, of which $129.9 million were
recorded in the second quarter of the year. Multi-family mortgage loans thus
represented 93.1% of originations in the first six months of 1998 and 82.0% of
mortgage loans outstanding at quarter's end.
Since 1996, the majority of the Company's multi-family mortgage loan
originations have featured a fixed rate of interest in the first five years of
the mortgage and an adjustable rate of interest in each of years six through
ten. Prior to 1996, however, the majority of the Company's multi-family mortgage
originations featured an annual rate increase of 50 basis points in the first
five years of the mortgage, regardless of the direction of market interest
rates. At June 30, 1998, $293.8 million, or 25.5% of the portfolio, featured
this step-up rate of interest, with $99.0 million, $74.1 million, $80.9 million,
and $39.8 million, respectively, scheduled to reprice upward over the next four
quarters.
In addition to multi-family mortgage loans, the Company's mortgage loan
portfolio consisted of $202.1 million in loans secured by one-to-four family
homes at June 30, 1998 (down $22.2 million from the level at December 31, 1997
after originations of $3.8 million); $60.3 million in commercial real estate
loans (down $1.5 million after originations of $12.1 million); and construction
loans of $1.3 million (down $287,000 after originations of $621,000). Including
multi-family mortgage loans, 92.8% of mortgage loans outstanding featured
adjustable rates.
While mortgage originations remain the Company's primary focus, the Bank also
originates a modest number of other loans. At June 30, 1998, such loans totaled
$10.4 million, down $439,000 from the level at December 31, 1997.
The Company's ability to continue the current pace of mortgage loan production
depends on a combination of market conditions and economic factors, including
competition for product and the direction of interest rates. While no guarantees
may therefore be made with regard to portfolio growth in the third quarter, the
Company closed the second quarter of 1998 with a pipeline of $101.1 million.
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ASSET QUALITY ANALYSIS
At or For the At or For the
Six Months Ended Year Ended
June 30, 1998 December 31,
(dollars in thousands) (unaudited) 1997
- ---------------------------------------------- ---------------- -------------
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $9,431 $9,359
Loan charge-offs -- --
Loan recoveries -- 72
------ ------
Net recoveries -- 72
------ ------
Provision for loan losses $9,431 $9,431
====== ======
NON-PERFORMING ASSETS AT PERIOD-END:
Mortgage loans in foreclosure 5,589 6,121
Loans 90 days or more delinquent 1,937 1,571
------ ------
Total non-performing loans 7,526 7,692
Foreclosed real estate 1,015 1,030
------ ------
Total non-performing assets $8,541 $8,722
====== ======
RATIOS:
Non-performing loans to loans, net 0.52% 0.55%
Non-performing assets to total assets 0.50 0.54
Allowance for loan losses to
non-performing loans 125.31 122.61
Allowance for loan losses to loans, net 0.65 0.68
Allowance for loan losses to accumulated
net charge-offs for the past 11 years 661.36 661.36
ASSET QUALITY
The integrity of the Company's assets was sustained in the second quarter, with
improvements in asset quality recorded at June 30, 1998. In addition to
achieving its twelfth consecutive quarter without any net charge-offs, the
Company recorded a reduction in non-performing assets as compared to the levels
at March 31, 1998 and December 31, 1997, and maintained the fully-performing
status of its multi-family mortgage loans.
Non-performing assets improved to $8.5 million, representing 0.50% of total
assets, from $8.9 million (or 0.55% of total assets) and $8.7 million (or 0.54%
of total assets), respectively, at the earlier dates. The improvement reflects a
decline in foreclosed real estate to $1.0 million from $1.8 million and $1.0
million, respectively, at March 31, 1998 and December 31, 1997. At June 30,
1998, foreclosed real estate consisted of one commercial real estate property
and three one-to-four family homes.
Non-performing loans totaled $7.5 million (representing 0.52% of loans, net) at
the close of the current quarter, as compared to $7.1 million (or 0.50% of
loans, net) and $7.7 million (0.55% of loans, net) at March 31, 1998 and
December 31, 1997. The June 30, 1998 amount consisted of 41 mortgage loans in
foreclosure totaling $5.6 million and 33 loans 90 days or more delinquent
totaling $1.9 million.
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The Company also has certain real estate investments that are included in "other
assets" on the balance sheet. At June 30, 1998, such real estate investments
consisted of 15 properties totaling $1.7 million. Each of these properties has
been profitably rented, with the portfolio currently providing a 7.8% rate of
return.
In the absence of any net charge-offs or provisions for loan losses, the loan
loss allowance held steady at $9.4 million, representing 125.31% of
non-performing loans and 0.65% of loans, net at June 30, 1998. In addition, the
loan loss allowance represented 661.36% of the Company's accumulated net
charge-offs since 1987.
For additional information, see the Asset Quality Analysis on the preceding page
and the discussion of the loan loss provision on page 18 of this report.
SECURITIES HELD TO MATURITY, SECURITIES AVAILABLE FOR SALE, AND MONEY MARKET
INVESTMENTS
In addition to investing in mortgage loan originations, the Company invests in
short-term securities in the form of U.S. Government agency obligations and
Treasuries, all of which are held to maturity. Since the fourth quarter of 1997,
the Company has also been investing in equity securities, all of which are
classified as "available for sale." In addition, the Company maintains a modest
portfolio of money market investments, typically in the form of Federal funds
sold.
At June 30, 1998, the Company recorded $119.9 million in securities held to
maturity, up $25.0 million, or 26.3%, from $94.9 million at December 31, 1997.
Included in the 1998 amount were U.S. government agency obligations of $91.8
million (up $27.4 million from the year-end 1997 level) and $7.0 million in U.S.
Treasuries (down $7.3 million). The balance of the portfolio consisted of FHLB
stock. The average maturity of the portfolio was 1.3 years. The market values of
securities held to maturity were $119.9 million and $95.1 million, respectively,
at June 30, 1998 and December 31, 1997, representing 99.95% and 100.1%, of
carrying value at the corresponding dates.
Securities available for sale rose $1.4 million to $4.0 million from $2.6
million at year-end 1997. Money market investments totaled $6.0 million at June
30, 1998, consistent with the level at December 31st.
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity totaled $38.0 million at June 30,
1998, down $11.8 million from the level recorded at year-end 1997. The
decrease reflects both prepayments and the absence of any new investments since
the first quarter of 1994. The Company holds all of its mortgage-backed
securities to maturity; the average maturity of the portfolio was 1.9 years at
quarter's end. At June 30, 1998 and December 31, 1997, the market values of the
Company's mortgage-backed securities held to maturity were $38.8 million and
$50.6 million, equivalent to 102.0% and 101.7% of carrying value at the
respective dates.
10
13
SOURCES OF FUNDS
The Company's funding primarily stems from the deposits its gathers, together
with loan interest and principal payments and the interest on and maturity of
securities. Since 1996, the Company has increasingly drawn on its FHLB line of
credit to provide additional funding for mortgage loan production. At June 30,
1998, the Company's FHLB line of credit totaled $514.6 million; borrowings at
that date were $424.0 million, as compared to $309.7 million at December 31,
1997.
Deposits totaled $1.0 billion at the close of the current quarter, down $33.8
million from the level recorded at year-end 1997. Included in the 1998 amount
were CDs of $662.9 million (representing 64.0% of total deposits), together with
$269.8 million in savings accounts (representing 26.1%), $71.6 million in NOW
and money market accounts (representing 6.9%), and $31.0 million in non-interest
bearing accounts (representing 3.0%). While the balance of CDs was down $41.0
million at June 30, 1998 from the year-end 1997 level, this decline was partly
tempered by increases of $1.7 million, $3.7 million, and $1.8 million,
respectively, in the balances of savings, NOW and money market, and
non-interest-bearing accounts.
To attract additional funding, the Company is exploring opportunities to expand
its "Mobile CSR" program, which was initiated at Queens College in the first
quarter of 1998. An ATM is scheduled to be installed at the College in late
August, and the Bank's customer service representatives will resume their campus
visits once the fall semester begins. The Bank has also made arrangements with
one of the County's major employers to bring the Mobile CSR program directly to
its employees. In addition, the Bank has agreed to absorb the Savings Bank Life
Insurance ("SBLI") operations of Long Island Savings Bank and Dime Savings Bank
of Williamsburgh in the third quarter.
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,
capital and liquidity, and to evaluate its strategic plans. As a part of this
process, management measures net interest income sensitivity and volatility to
interest rate changes, which involves a degree of estimation based on certain
assumptions that management believes to be reasonable. In addition to
considering the relative sensitivity of assets and liabilities to changes in
market interest rates, other factors considered include actual maturities,
estimated cash flows, repricing characteristics, and deposit growth and
retention. The relative sensitivity of assets and liabilities is particularly
important to consider as the Company's core deposit base is 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 the adjustable rate assets whose yields are based on
external indices and therefore change in concert with market interest rates. It
is management's objective to maintain a stable level of net interest income
under various probable rate scenarios.
11
14
In order to do so, management has traditionally emphasized the origination of
adjustable rate mortgage loans on multi-family and one-to-four family
properties, and has generally confined its other investments to short-term
securities. On the liability side of the balance sheet, management closely
monitors the pricing of its depository products and has profitably utilized its
FHLB line of credit to generate interest-earning asset growth.
LIQUIDITY AND CAPITAL POSITION
LIQUIDITY
As previously indicated, the Bank's primary sources of funds are deposits,
together with interest and principal payments on loans, mortgage-backed
securities, and securities. In addition, the Bank has access to funds through
its FHLB line of credit, which totaled $514.6 million at June 30, 1998. While
borrowings, together with maturities and scheduled amortizations of loans and
securities, are predictable funding sources, deposit flows and mortgage
prepayments are largely impacted by economic conditions, competition, and market
interest rates.
The primary investing activities of the Bank are residential mortgage loan
production and, to a lesser extent, the purchase of short-term securities. In
the six months ended June 30, 1998, mortgage originations totaled $241.3
million; purchases of securities held to maturity totaled $58.5 million, while
purchases of securities available for sale totaled $971,000. These activities
were primarily funded by internal cash flows generated by the Bank's operating,
financing, and investing activities, and by FHLB borrowings. In the six months
ended June 30, 1998, the net cash provided by operating activities totaled $43.6
million, as compared to $7.7 million in the six months ended June 30, 1997. The
net cash provided by financing activities totaled $68.1 million and $96.8
million, respectively, in the six months ended June 30, 1998 and 1997, primarily
reflecting a $33.8 million net decrease in deposits in the current six-month
period versus a $7.2 million increase in the year-earlier six months.
The liquidity position of the Company is monitored on a daily basis to ensure
that sufficient funds exist to meet outstanding loan commitments, withdrawals
from depository accounts, and other financial obligations. Together with cash
and due from banks, money market investments in the form of Federal funds sold
are the Company's most liquid assets, with a collective total of $54.1 million
and $22.7 million, respectively, at June 30, 1998 and December 31, 1997.
Additional liquidity is available through the FHLB line of credit, as noted, and
from a $10.0 million line of credit with a money center bank.
Outstanding loan commitments totaled $101.1 million at June 30, 1998, and
primarily consisted of commitments to originate multi-family mortgage loans.
Management anticipates that it will have sufficient funds available to meet
these loan commitments. Certificates of deposit due to mature in one year or
less from June 30, 1998 totaled $550.0 million. Based upon its historic rate of
retention and its current pricing, management believes that a significant
portion of such deposits will remain with the Bank.
12
15
CAPITAL
The Company's primary source of capital growth is cash earnings, which equaled
$21.9 million in the six months ended June 30, 1998 and was comprised of $12.9
million in GAAP earnings and $9.0 million in GAAP expenses or unrecognized
financial statement benefits which resulted in direct increases to capital, or
share value, for the period. These increases in capital were offset by
reductions of $5.8 million in dividends paid and $18.3 million allocated toward
the repurchase of 451,568 shares during the first six months of 1998, including
179,847 in the second quarter of the year. There were 447,319 shares remaining
available for repurchase at the end of the period.
The Company thus recorded stockholders' equity of $169.6 million at June 30,
1998, equivalent to 9.89% of total assets and a book value of $13.07 per share,
based on 12,976,829 shares, the number of shares outstanding less unallocated
ESOP shares. By comparison, the Company had recorded stockholders' equity of
$170.5 million at December 31, 1997, equivalent to 10.64% of total assets and a
book value of $13.23 per share, based on 12,891,389 shares.
The Company's capital strength is further reflected in the excess of its
regulatory capital ratios on a consolidated basis over the minimum levels
required by the FDIC. In addition, the Bank continued to exceed the minimum
requirements for leverage, Tier 1 risk-based, and total risk-based capital, as
well as the requirements for classification as a well capitalized institution.
As set forth by FDICIA, the minimum Federal requirements for leverage capital to
adjusted total assets, and of Tier 1 and total risk-based capital to
risk-weighted assets, are 3.00%, 4.00%, and 8.00%, respectively. Designation
as a well-capitalized institution requires that an institution have respective
ratios of 5.00%, 6.00%, and 10.00% or more. At June 30, 1998, the Bank's
leverage capital amounted to $153.6 million, or 9.44% of adjusted average
assets, while its Tier 1 and total risk-based capital amounted to $153.6
million and $163.0 million, representing 14.41% and 15.30%, respectively, of
risk-weighted assets.
REGULATORY CAPITAL ANALYSIS (BANK ONLY)
At June 30, 1998
--------------------------------------------------
Risk-Based Capital
--------------------------------
Leverage Capital Tier 1 Total
---------------- -------------- ---------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------- -------- ----- -------- ----- -------- -----
Total savings bank equity $153,555 9.44% $153,555 14.41% $162,986 15.30%
Regulatory capital
requirement 48,801 3.00 42,619 4.00 85,238 8.00
-------- ---- -------- ----- -------- -----
Excess $104,754 6.44% $110,936 10.41% $ 77,748 7.30%
======== ===== ======== ===== ======== =====
13
16
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
NET INCOME
Net income rose to $6.6 million in the second quarter of 1998 from $5.3 million
in the second quarter of 1997, representing a 26.3% increase in diluted earnings
per share to $0.48 from $0.38. In addition, the 1998 amount represented a return
on average assets ("ROA") of 1.63% and a return on average stockholders' equity
("ROE") of 16.29%, up from 1.54% and 12.67%, respectively, in the year-earlier
three months.
The Company experienced an even higher increase in its cash earnings. In the
second quarter of 1998, cash earnings rose to $10.5 million from $8.2 million,
representing a 31.0% increase in diluted cash earnings per share to $0.76 from
$0.58. The Company's cash ROA and cash ROE increased to 2.57% and 25.71% in the
current second quarter from 2.36% and 19.44% in the three months ended June 30,
1997. Cash earnings thus provided $3.8 million, or 57.8%, more equity growth
than GAAP earnings alone in the second quarter. Because the Company has no
goodwill, there is no regulatory reduction in its capital accounts for the
calculation of tangible equity. Therefore, all of the Company's cash earnings
represent an increase in stockholders' equity, as reflected in the table that
follows this discussion.
The growth in second quarter 1998 net income stemmed from several sources,
including a 12.8% increase in net interest income, the Company's primary income
source. Net interest income rose to $17.5 million from $15.5 million in the
second quarter of 1997, as a $4.7 million increase in interest income to $33.2
million exceeded a $2.7 million increase to $15.7 million in interest expense.
The Company's interest rate spread and net interest margin equaled 3.91% and
4.42%, respectively, in the current second quarter, down from the levels
recorded in the second quarter of 1997, but up from the levels recorded in the
first quarter of 1998.
Second quarter 1998 earnings also were fueled by a $351,000 rise in other
operating income to $866,000, as a $485,000 increase in fee income offset a
$134,000 drop in other sources of operating income. At the same time, the
Company aptly contained its operating expense, as a $180,000 increase in
compensation and benefits expense was mostly offset by a collective decline of
$125,000 in the remaining line items, resulting in a modest $55,000 increase in
operating expense to $6.7 million.
Reflecting a $2.3 million increase in pre-tax income to $11.6 million, income
tax expense rose $998,000 to $5.0 million in the second quarter of 1998. The
$5.0 million includes $1.5 million in non-cash items associated with the
Company's stock-related benefit plans, all of which was added back to capital at
June 30, 1998.
14
17
CASH EARNINGS ANALYSIS
(in thousands, except per share data)
For the
Three Months Ended
June 30,
------------------
1998 1997
------- ------
Net income $ 6,623 $5,341
Additional contributions to stockholders' equity:
Amortization and appreciation of stock-related
benefit plans 1,835 1,739
Associated tax benefits 1,491 823
Amortization of goodwill -- --
Other 505 295
------- ------
Cash earnings $10,454 $8,198
======= ======
Cash earnings per share $0.81 $0.61
Diluted cash earnings per share $0.76 $0.58
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 held to maturity,
mortgage-backed securities held to maturity, and money market investments. The
level of interest income is a function of the average balances of said assets
and of the yields they respectively provide.
The ability of the Company to generate interest income was underscored by its
performance in the three months ended June 30, 1998. Interest income rose $4.7
million, or 16.6%, to $33.2 million from the year-earlier level, the net effect
of a $234.3 million, or 17.4%, rise in the average balance of interest-earning
assets to $1.6 billion and a five-basis point drop in the average yield to
8.39%.
Mortgage and other loans produced interest income of $30.6 million in the
current second quarter, up $4.3 million from $26.3 million, the year-earlier
amount. The 16.4% increase was the net effect of a $212.8 million rise in the
average balance of loans to $1.4 billion and a nine-basis point drop in the
average yield to 8.62%. Mortgage and other loans generated 92.1% of total
interest income in the current second quarter and represented 89.6% of average
interest-earning assets.
Securities generated interest income of $1.8 million in 1998's second quarter,
as compared to $1.1 million in the second quarter of 1997. The 64.4% increase
reflects a $40.5 million, or 56.0%, rise in the average balance to $112.8
million, coupled with a 33-basis point rise in the average yield to 6.45%.
Securities generated 5.5% of total interest income and represented 7.1% of
average interest-earning assets in the second quarter of 1998.
Mortgage-backed securities contributed interest income of $660,000, down
$347,000 from $1.0 million in the year-earlier three months. The decrease
stemmed from a $22.8 million reduction in the average balance of said assets,
tempered by a six-basis point increase in the average yield to 6.26%.
15
18
Money market investments produced interest income of $130,000 in the current
second quarter, up from $78,000 in the second quarter of 1997. The increase
reflects a $3.8 million rise in the average balance to $9.7 million, and an
eight-basis point jump in the average yield to 5.38%.
INTEREST EXPENSE
The Company's interest expense stems primarily from the interest paid on its CDs
and other depository products, its FHLB borrowings, and, to a lesser extent, its
mortgagors' escrow accounts. The level of interest expense is a function of both
the average balances of these interest-bearing liabilities and their respective
costs of funds.
In the second quarter of 1998, the Company recorded interest expense of $15.7
million, up $2.7 million from the year-earlier amount. The 21.2% increase
stemmed from a $243.1 million rise in average interest-bearing liabilities to
$1.4 billion, supported by a one-basis point uptick to 4.48% in the average cost
of funds.
While CDs contributed the largest percentage of interest expense in the current
second quarter, the increase stemmed primarily from the growing balance of
borrowings. FHLB borrowings produced interest expense of $5.0 million, as
compared to $2.1 million in the year-earlier three months. The increase reflects
a $227.8 million rise in the average balance to $374.2 million, tempered by a
36-basis point decline to 5.31% in the average cost of funds. FHLB borrowings
thus represented 31.6% of interest expense in the current second quarter and
26.6% of average interest-bearing liabilities. In the year-earlier quarter, FHLB
borrowings represented 16.0% of interest expense and 12.6% of average
interest-bearing liabilities.
The interest expense derived from CDs totaled $8.7 million in the current second
quarter, down $82,000 from the level derived in the year-earlier three months.
The reduction was the net effect of a $9.0 million increase in the average
balance to $659.6 million and a 12-basis point drop in the average cost to
5.29%. CDs represented 55.4% of total interest expense in the current second
quarter and 46.9% of average interest-bearing liabilities. By comparison, CDs
accounted for 67.8% of interest expense in the second quarter of 1997 and 55.9%
of average interest-bearing liabilities.
Savings accounts contributed interest expense of $1.5 million in the current
second quarter, down $107,000 from the year-earlier amount. The decline reflects
a $6.7 million reduction in the average balance to $269.2 million, together with
a 10-basis point drop in the average cost to 2.29%. Savings accounts thus
represented 9.8% of interest expense in the current second quarter and 19.1% of
average interest-bearing liabilities.
NOW and money market accounts generated interest expense of $494,000, as
compared to $447,000 in the second quarter of 1997. The increase stemmed from a
$4.6 million rise in the average balance to $72.7 million, coupled with a
10-basis point rise in the average cost of funds to 2.73%.
The interest expense derived from mortgagors' escrow was $10,000 in the second
quarters of both 1998 and 1997; the 1998 amount reflects an average balance of
$30.7 million and an average cost of 0.13%, down 5 basis points.
The Company anticipates that it will continue to draw on its FHLB line of credit
to finance mortgage loan production, in view of the higher levels of net
interest income generated as a result of the growth in the mortgage loan
portfolio. The decision to utilize FHLB borrowings is based on the current
availability and pricing of this funding source and others, and the current
level of desirable loan demand.
16
19
NET INTEREST INCOME ANALYSIS
(dollars in thousands)
Three Months Ended June 30,
---------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- -------
Assets:
Interest-earning assets:
Mortgage and other loans, net $1,417,693 $30,560 8.62% $1,204,850 $26,250 8.71%
Securities held to maturity 112,798 1,820 6.45 72,311 1,107 6.12
Mortgage-backed securities held to maturity 42,177 660 6.26 64,997 1,007 6.20
Money market investments 9,665 130 5.38 5,883 78 5.30
---------- -------- ------- ---------- ------- -------
Total interest-earnings assets 1,582,333 33,170 8.39% 1,348,041 28,442 8.44%
Non-interest-earning assets 45,491 39,733
---------- ----------
Total assets $1,627,824 $1,387,774
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and money market accounts $ 72,656 $ 494 2.73% $ 68,076 $ 447 2.63%
Savings accounts 269,209 1,539 2.29 275,877 1,646 2.39
Certificates of deposit 659,641 8,696 5.29 650,636 8,778 5.41
FHLB borrowings 374,226 4,957 5.31 146,424 2,071 5.67
Mortgagers' escrow 30,697 10 0.13 22,281 10 0.18
---------- -------- ------- ---------- ------- -------
Total interest-bearing liabilities 1,406,429 15,696 4.48% 1,163,294 12,952 4.47%
-------- -------
Non-interest-bearing deposits 31,518 26,351
Other liabilities 27,264 29,468
---------- ----------
Total liabilities 1,465,211 1,219,113
Stockholders' equity 162,613 168,661
---------- ----------
Total liabilities and stockholders' equity $1,627,824 $1,387,774
========== ==========
Net interest income/interest rate spread $17,474 3.91% $15,490 3.97%
======== ======= ======= =======
Net interest-earning assets/net
interest margin $ 175,904 4.42 $ 184,747 4.60
========== ======= ========== =======
Ratio of interest-earning assets to
interest-bearing liabilities 112.51 115.88
======= =======
NET INTEREST INCOME
Net interest income is the Company's principal source of income. Its level is
significantly influenced 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.
Reflecting the substantial growth recorded in interest-earning assets, net
interest income rose to $17.5 million in the current second quarter from $16.5
million in the trailing quarter and from $15.5 million in the second quarter of
1997. The level of net interest income has, in fact, increased for seven
consecutive quarters, beginning in the fourth quarter of 1996.
17
20
In addition, while the increased use of FHLB borrowings contributed to a
narrower spread and margin on a year-over-year basis, these measures reflect
improvement when compared with the trailing three-month period. In the second
quarter of 1998, the Company's interest rate spread was 3.91%, as compared to
3.65% and 3.97%, respectively, in the trailing and year-ago quarters. Similarly,
its net interest margin was 4.42% in the current second quarter, as compared to
4.24% and 4.60%, respectively, in the earlier periods.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on management's periodic assessment of
the adequacy of the loan loss allowance which, in turn, is based on such
interrelated factors as the composition of the loan portfolio and its inherent
risk characteristics; the level of non-performing loans and charge-offs, both
current and historic; local economic conditions; the direction of real estate
values; and current trends in regulatory supervision.
Reflecting the quality of the loan portfolio and the level of coverage provided
by the allowance for loan losses, the Company has suspended the loan loss
provision since the third quarter of 1995.
The quality of the portfolio is reflected in the absence of any net charge-offs
for twelve consecutive quarters, as well as the level of non-performing loans at
quarter's end. Non-performing loans totaled $7.5 million at June 30, 1998,
equivalent to a modest 0.52% of loans, net.
At $9.4 million, the loan loss allowance was consistent with the allowance
recorded at year-end 1997, and represented 125.31% of non-performing loans and
0.65% of loan, net. In addition, the ratio of the allowance to accumulated net
charge-offs since 1987 was 661.36%.
Based on currently available information, management believes that the Company's
allowance for loan losses is sufficient, and does not anticipate making
additional provisions to the allowance in the short-term. At the same time, no
assurances can be given that a significant change in the quality of the
Company's assets or a significant downturn in the real estate market would not
result in additional loan loss provisions being made.
For additional information regarding asset quality and the allowance for loan
losses, see the discussion and analysis beginning on page 9 of this report.
OTHER OPERATING INCOME
Other operating income rose to $866,000 in the second quarter of 1998, up
$351,000, or 68.2%, from the level recorded in the second quarter of 1997. The
increase was the net result of a $485,000 increase in fee income to $786,000 and
a $134,000 drop in other operating income to $80,000. The rise in fee income
reflects fees derived from loan production and prepayments, as well as the
growing balance of fee-generating depository accounts.
18
21
OPERATING EXPENSE
Operating expense consists primarily of compensation and benefits expense,
together with occupancy and equipment and general and administrative ("G&A")
expense. The ability to contain such costs is one of the Company's hallmarks, as
reflected in the ratio of operating expense to average assets, and in the ratio
of operating expense to net interest income and operating income (the efficiency
ratio).
In the three months ended June 30, 1998, operating expense rose a modest $55,000
to $6.7 million from the level recorded in the three months ended June 30, 1997.
The increase was the net result of a $180,000 increase in compensation and
benefits expense to $4.9 million and a collective decline of $125,000 in the
remaining categories of operating expense. Specifically, occupancy and equipment
expense declined $26,000 to $605,000; G&A expense dropped $39,000 to $1.1
million; and other operating expense fell $60,000 to $133,000.
Included in second quarter 1998 compensation and benefits expense was $1.8
million relating to the amortization and appreciation of shares in the Company's
stock-related benefit plans, up from $1.7 million in the year-earlier three
months. Excluding these non-cash items, the Company's compensation and benefits
expense rose $84,000.
The successful containment of operating expense is further demonstrated by
improvements in both the ratio of operating expense to average assets and the
efficiency ratio. On the basis of GAAP earnings, the ratio of operating expense
to average assets improved to 1.66% from 1.93% in the year-earlier quarter; the
efficiency ratio improved to 36.79% from 41.81%. On the basis of cash earnings,
the ratio of operating expense to average assets improved to 1.21% from 1.34%,
while the cash efficiency ratio improved to 26.78% from 29.10%.
The number of full-time equivalent employees at June 30, 1998 was 285.
INCOME TAX EXPENSE
The Company recorded income tax expense of $5.0 million in the current second
quarter, as compared to $4.0 million in the year-earlier three months. The
$998,000 increase reflects a $2.3 million rise in pre-tax income to $11.6
million from the year-earlier $9.3 million, including a $668,000 increase in
non-cash items associated with the Company's stock-related benefit plans. Such
non-cash items totaled $1.5 million and $823,000, respectively, in the second
quarters of 1998 and 1997, all of which was added back to capital at the
respective quarter-ends.
While the effective tax rate was 42.9% in the current second quarter, the tax
rate is expected to approximate 41% in the third and fourth quarters of 1998.
19
22
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NET INCOME
The Company recorded earnings of $12.9 million for the six months ended June 30,
1998, equivalent to diluted earnings per share of $0.94. By comparison, the
Company earned $11.2 million in the six months ended June 30, 1997, representing
diluted earnings per share of $0.74. The six-month 1997 amounts have been
adjusted to exclude the recapture of $1.3 million in the first quarter that had
been recorded as a tax charge in the fourth quarter of 1996.
The Company's cash earnings totaled $21.9 million in the current six-month
period, as compared to $16.3 million in the six months ended June 30, 1997,
representing a 48.2% increase in diluted cash earnings per share to $1.60 from
$1.08. The 1997 amounts have also been adjusted to exclude the $1.3 million
recapture in the first quarter of the year. The Company's 1998 six-month cash
earnings contributed $9.0 million, or 70.2%, more to stockholders' equity than
its GAAP earnings alone, and represented a cash ROA and cash ROE of 2.71% and
26.99%, respectively.
CASH EARNINGS ANALYSIS
(in thousands, except per share data)
For the
Six Months Ended
June 30,
-----------------
1998 1997(1)
------- --------
Net income $12,878 $11,473
Additional contributions to stockholders'
equity:
Amortization and appreciation of stock-related
benefit plans 3,503 3,328
Associated tax benefits 4,627 1,239
Amortization of goodwill -- --
Other 909 241
------- --------
Cash earnings $21,917 $16,281
======= ========
Cash earnings per share $1.70 $1.15
Diluted cash earnings per share $1.60 $1.08
(1) Excludes the recapture of $1.3 million in the first quarter of 1997 than had
been recorded as a tax charge in the fourth quarter of 1996.
The growth in 1998 earnings year-to-date was primarily triggered by a $3.3
million, or 10.9%, increase in net interest income to $34.0 million, the net
result of a $10.1 million rise in interest income to $65.7 million and a $6.8
million increase in interest expense to $31.6 million. The increase in interest
income was triggered by a $242.5 million rise in the average balance of
interest-earning assets to $1.6 billion, largely reflecting the growth of the
mortgage loan portfolio. The higher level of interest expense reflects a $265.5
million increase in the average balance of interest-bearing liabilities to $1.4
billion, coupled with a 14-basis point increase in the average cost of funds.
20
23
In addition to the rise in net interest income, earnings growth was driven by a
$605,000 increase in other operating income to $1.4 million, offsetting a
$215,000 increase in operating expense to $13.4 million. Income tax expense rose
$3.3 million to $9.1 million from the year-earlier level, reflecting a $3.7
million increase in pre-tax income to $22.0 million and a $3.4 million increase
in non-cash items stemming from the Company's stock-related benefit plans. In
addition, the Company's 1997 income tax expense was reduced by the recapture of
$1.3 million in the first quarter that had been recorded as an income tax charge
in the fourth quarter of 1996.
INTEREST INCOME
Interest income rose to $65.6 million in the current six-month period from $55.5
million in the six months ended June 30, 1997. The $10.1 million, or 18.2%,
increase reflects a $242.5 million, or 18.3%, rise in the average balance of
interest-earning assets to $1.6 billion; the average yield on these assets was
8.36%, consistent with the level recorded in the year-earlier six months.
Mortgage and other loans provided much of the growth in interest income, as the
average balance of these assets rose $229.8 million to $1.4 billion,
representing 89.7% of average interest-earning assets year-to-date. The interest
income derived from loans rose $9.5 million, or 18.7%, to $60.6 million, as the
higher average balance mitigated a six-basis point drop in the average yield to
8.59%. The interest income derived from loans represented 92.2% of interest
income in the six months ended June 30, 1998.
The interest income derived from securities rose $1.2 million, or 50.8%, to $3.4
million, the result of a $31.8 million, or 42.2%, increase in the average
balance to $107.0 million and a 36-basis point increase in the average yield to
6.40%. Securities represented 6.8% of average interest-earning assets in the
current six-month period and provided 5.2% of interest income year-to-date.
Mortgage-backed securities generated $1.4 million in interest income, down
$687,000 from the level recorded in the first six months of 1997. The reduction
was the net effect of a $23.0 million decline in the average balance to $45.0
million and a 10-basis point increase in the average yield to 6.27%.
Mortgage-backed securities represented 2.9% of interest-earning assets and 2.2%
of interest income in the first six months of 1998.
The interest income provided by money market investments rose $108,000 to
$246,000, as the average balance of these assets increased $4.0 million to $9.3
million, accompanied by a 15-basis point increase in the average yield to 5.32%.
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INTEREST EXPENSE
The Company recorded interest expense of $31.6 million in the first six months
of 1998, as compared to $24.9 million in the first six months of 1997. The $6.8
million, or 27.3%, increase reflects a $265.5 million rise in the average
balance of interest-bearing liabilities and a 14-basis point rise in the average
cost of funds to 4.58%.
The higher level of interest expense was primarily triggered by the increased
use of FHLB borrowings during the current six-month period, and, to a lesser
extent, by a higher average balance of CDs. The average balance of FHLB
borrowings rose $240.2 million to $356.9 million, representing 25.6% of average
interest-bearing liabilities, as compared to 10.3% in the year-earlier six
months. The interest expense derived from FHLB borrowings rose $6.4 million to
$9.7 million, the net effect of the higher average balance and a 16-basis point
drop in the average cost to 5.47%. FHLB borrowings thus represented 30.6% of
interest expense in the current six-month period, as compared to 13.1% in the
year-earlier six months.
The average balance of CDs rose $24.3 million to $674.2 million, representing
48.3% of average interest-bearing liabilities in the current six-month period,
down from 57.6% in the six months ended June 30, 1997. CDs generated interest
expense of $17.8 million, up $412,000 from the year-earlier level, the net
effect of the higher average balance and a seven-basis point reduction in the
average cost of said funds to 5.33%. CDs thus generated 56.3% of interest
expense in the current six-month period, down from 69.9% in the six months ended
June 30, 1997.
Savings accounts generated $3.1 million in interest expense, down $164,000 from
the year-earlier level, reflecting a $7.1 million decline in the average balance
to $268.4 million and a six-basis point drop in the average cost to 2.34%.
Savings accounts thus represented 19.2% of average interest-bearing liabilities
in the current six-month period and 9.8% of year-to-date interest expense.
NOW and money market accounts generated interest expense of $1.0 million, up
$96,000 from the year-earlier amount. The increase reflects a $1.3 million rise
in the average balance to $69.9 million and a 23-basis point rise in the average
cost to 2.92%.
The interest expense generated by mortgagors' escrow rose $8,000 to $28,000,
reflecting a $6.8 million increase in the average balance to $25.4 million and
an average cost of 22 basis points, consistent with the cost recorded in the
year-earlier six months.
NET INTEREST INCOME
The Company recorded net interest income of $34.0 million in the current
six-month period, exceeding the year-earlier level by $3.3 million, or 10.9%.
The increase was the net effect of the $10.1 million increase in interest income
to $65.7 million and the $6.8 million increase in interest expense to $31.6
million.
While the Company's interest rate spread and net interest margin dropped to
3.78% and 4.33%, respectively, from 3.92% and 4.62% in the six months ended June
30, 1997, a comparison of the current year's first and second quarters reflects
the expansion of spreads and margins, as indicated in the second quarter
discussion beginning on page 17 of this report.
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NET INTEREST INCOME ANALYSIS
(dollars in thousands)
Six Months Ended June 30,
-------------------------------------------------------------------------
1998 1997
--------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- -------- -------- -------
Assets:
Interest-earning assets:
Mortgage and other loans, net $1,409,997 $60,568 8.59% $1,180.222 $51,039 8.65%
Securities held to maturity 106,990 3,425 6.40 75,217 2,271 6.04
Mortgage-backed securities held
to maturity 45,042 1,412 6.27 68,053 2,099 6.17
Money market investments 9,331 246 5.32 5,340 138 5.17
---------- ------- ---- ---------- ------- ----
Total interest-earning assets 1,571,360 65,651 8.36% 1,328,832 55,547 8.36%
Non-interest earning assets 43,825 38,335
---------- ----------
Total assets $1,615,185 $1,367,167
========== ==========
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
NOW and money market accounts $ 69,905 $ 1,013 2.92% $ 68,650 $ 917 2.69%
Savings accounts 268,412 3,115 2.34 275,500 3,279 2.40
Certificates of deposit 674,208 17,808 5.33 649,885 17,396 5.40
FHLB borrowings 356,905 9,682 5.47 116,683 3,258 5.63
Mortgagors' escrow 25,406 28 0.22 18,583 20 0.22
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities 1,394,836 31,646 4.58% 1,129,301 24,870 4.44%
------- -------
Non-interest-bearing deposits 30,870 25,543
Other liabilities 27,045 27,565
---------- ----------
Total liabilities 1,452,751 1,182,409
Stockholders' equity 162,434 184,758
---------- ----------
Total liabilities and
stockholders' equity $1,615,185 $1,367,167
========== ==========
Net interest income/interest
rate spread $34,005 3.78% $30,677 3.92%
======= ==== ======= ====
Net interest-earning assets/
net interest margin $ 176,524 4.33 $ 199,531 4.62
=========== ==== ========== ====
Ratio of interest-earning assets
to interest-bearing liabilities 112.66 117.67
====== ======
PROVISION FOR LOAN LOSSES
As discussed in the second quarter comparison, the Company has suspended the
provision for loan losses since the third quarter of 1995. For more information
regarding the loan loss provision and asset quality, see the respective
discussions on pages 18 and 9 of this report.
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OTHER OPERATING INCOME
The Company recorded other operating income of $1.4 million, up from $819,000 in
the six months ended June 30, 1997. The $605,000 increase reflects a $611,000
rise in fee income to $1.2 million and a $6,000 drop in other sources of
operating income to $233,000. The higher level of fee income includes fees
generated in connection with mortgage loan production and prepayments, and also
reflects an increase in fee-generating depository accounts.
OPERATING EXPENSE
Operating expense totaled $13.4 million and $13.2 million, respectively, in the
six months ended June 30, 1998 and 1997, equivalent to 1.66% and 1.93% of
average assets, respectively. Compensation and benefits expense totaled $9.6
million and $9.2 million in the corresponding periods, including $3.5 million
and $3.3 million, respectively, that stemmed from the amortization and
appreciation of shares in the Company's stock-related benefit plans.
The increase in compensation and benefits expense was partially offset by
across-the-board reductions in the remaining categories, as occupancy and
equipment declined $23,000 to $1.3 million, G&A expense dropped $14,000 to $2.3
million, and other operating expense fell $95,000 to $254,000.
The efficiency ratio improved to 37.88% from 41.92% in the six months ended June
30, 1997; on the basis of cash earnings, it improved to 27.99% from 29.77%.
INCOME TAX EXPENSE
Income tax expense rose to $9.1 million in the current six-month period from
$5.8 million in the first six months of 1997. The 1998 amount reflects an
increase in pre-tax income to $22.0 million from the year-earlier $18.3 million,
including an increase in non-cash items stemming from the Company's
stock-related benefit plans to $4.6 million from $1.2 million. Income tax
expense for the first six months of 1997 was reduced by the recapture of $1.3
million in the first quarter that had been recorded as a tax charge in the
fourth quarter of 1996.
YEAR 2000 COMPLIANCE
The Company continues to be actively engaged in preparing for the Year 2000.
While the Bank maintains an internal computer system for certain operating
functions (which is already Year 2000 compliant), the substantial majority of
its data processing is out-sourced to a third party vendor. Such vendor has
provided the Bank with written assurances that its systems and the software
which it is licensed to use will be Year 2000 compliant; the integration of the
system with its licensed software will be tested in the fourth quarter of 1998.
In the event that such vendor's system fails to be compliant by the third
quarter of 1999, said vendor has made arrangements with another vendor that is
Year 2000 compliant to provide the Bank with data processing services. However,
despite the Bank's efforts to ensure that it will be compliant by the Year 2000,
there can be no assurances that this will be the case.
In the event that such data processing vendor, or any of the Bank's other
significant vendors or suppliers, do not successfully achieve Year 2000
compliance in a timely manner, the Bank's business or operations would be
adversely affected. The Bank has therefore gathered information from each of its
vendors and suppliers regarding their Year 2000 compliance, and has prepared
contingency plans in the event that any of them fail to meet their operating
requirements.
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Expenses to date have been immaterial and it is currently management's
expectation that this will continue to be the case.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about the Company's market risk were
presented in the Interest Rate Sensitivity Analysis on page 13 of the 1997
Annual Report to Shareholders, filed on March 20, 1998.
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QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
PART 2 - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On July 21, 1998, the Board of Directors declared a quarterly cash dividend of
25 cents per share, payable on August 17, 1998 to shareholders of record at the
close of business on August 3, 1998.
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 Date Schedule - filed herewith
(b) Reports on Form 8-K
Not applicable.
*Incorporated by reference to the Exhibits filed with the Registration Statement
on Form S-1, as amended, Registration No. 33-65852.
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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: August 12, 1998 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)
27