Financial Highlights
- --------------------------------------------------------------------------------
At or For the Years Ended December 31,
-------------------------------------------------------------------------------------
(dollars in thousands, except share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Net interest income $68,522 $62,398 $57,520 $51,908 $54,615
(Reversal of) provision for loan losses -- -- (2,000) 150 1,200
Other operating income 2,554 2,305 2,445 3,033 1,971
Operating expense 25,953 27,084 23,271 22,871 23,047
Income tax expense 18,179 14,355 17,755 11,737 13,589
Net income(1) 26,944 23,264 20,939 20,183 18,750
Earnings per share(2) $1.41 $1.14 $0.90 $0.81 $0.70
Diluted earnings per share(2) 1.34 1.07 0.85 0.77 0.68
Dividends paid(2) 0.67 0.41 0.25 0.07 0.03
SELECTED RATIOS
Return on average assets 1.62% 1.61% 1.63% 1.72% 1.71%
Return on average stockholders' equity 17.32 12.95 10.10 9.70 9.40
Stockholders' equity to total assets 8.55 10.64 15.56 17.54 17.61
Interest rate spread 3.76 3.84 3.88 3.80 4.49
Net interest margin 4.24 4.45 4.63 4.58 5.13
Operating expense to average assets 1.57 1.88 1.82 1.95 2.10
Efficiency ratio 36.51 41.86 38.81 41.63 40.73
Average interest-earning assets to average
interest-bearing liabilities 1.12x 1.16x 1.21x 1.22x 1.24x
- ------------------------------------------------------------------------------------------------------------------------------------
ACTUAL CONTRIBUTIONS TO STOCKHOLDERS' EQUITY
AND RESULTANT CASH EARNINGS DATA(1)
Earnings $43,758 $35,399 $27,458 $23,640 $21,990
Earnings per share(2) $2.29 $1.73 $1.18 $0.95 $0.82
Diluted earnings per share(2) 2.17 1.62 1.12 0.91 0.80
Return on average assets 2.64% 2.46% 2.14% 2.02% 2.00%
Return on average stockholders' equity 28.13 19.71 13.24 11.36 11.03
Operating expense to average assets 1.16 1.37 1.39 1.66 1.80
Efficiency ratio 27.05 30.47 28.83 35.43 35.00
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET SUMMARY
Total assets $1,746,882 $1,603,269 $1,358,656 $1,240,882 $1,166,024
Loans, net 1,486,519 1,395,003 1,146,152 994,803 937,550
Allowance for loan losses 9,431 9,431 9,359 11,359 11,268
Securities held to maturity 152,280 94,936 86,495 78,016 79,017
Mortgage-backed securities held
to maturity 19,680 49,781 73,732 92,868 107,451
Deposits 1,102,285 1,069,161 1,023,930 932,140 840,220
FHLB borrowings 439,055 309,664 81,393 46,077 83,304
Stockholders' equity 149,406 170,515 211,429 217,630 205,279
Book value per share(2)(3) $8.13 $8.82 $9.43 $8.87 $8.04
Common shares outstanding(2) 21,250,897 22,369,187 25,751,598 28,324,350 29,665,977
ASSET QUALITY RATIOS
Non-performing loans to loans, net 0.42% 0.55% 0.84% 0.78% 0.76%
Non-performing assets to total assets 0.38 0.54 0.76 0.69 0.69
Allowance for loan losses to non-performing
loans 152.28 122.61 96.90 145.76 158.46
Allowance for loan losses to loans, net 0.63 0.68 0.82 1.14 1.20
Allowance for loan losses to accumulated
net charge-offs since 1987 661.36 661.36 625.00 759.00 783.04
REGULATORY CAPITAL RATIOS (BANK ONLY)(4)
Leverage capital ratio 9.40% 9.30% 9.65% 11.95% 10.66%
Tier 1 risk-based capital ratio 15.23 14.32 16.19 21.95 22.74
Total risk-based capital ratio 16.12 15.26 17.38 23.20 23.99
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The 1996 amount includes a non-recurring tax charge of $1.8 million, of
which $1.3 million was reversed in 1997.
(2) Reflects shares issued as a result of a 3-for-2 stock split on September
30, 1994, a 4-for-3 stock split on August 22, 1996, and 3-for-2 stock
splits on April 10 and October 1, 1997, and September 29, 1998.
(3) Excludes unallocated ESOP shares.
(4) Capital ratios for 1998, 1997, 1996, and 1994 reflect the transfer of
$17.8 million, $16.0 million, $38.0 million, and $34.0 million,
respectively, from the Bank to the Company.
1
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Queens County Bancorp, Inc. was incorporated on July 20, 1993 to serve as the
holding company for Queens County Savings Bank, the first savings bank chartered
by the State of New York in the New York City Borough of Queens. Headquartered
in Flushing, New York, the Bank has a long tradition of service, dating back to
April 14, 1859.
Today, the Bank serves its depositors through a network of twelve
locations, including ten full-service branch offices and two customer service
centers located inside 24-hour stores. With the exception of a full-service
branch in adjoining Nassau County, all of the Bank's offices are located in
Queens.
The Bank's longevity--and success--stem from several factors, including
its ability to keep pace with a changing industry. For example, the Company has
taken advantage of the consolidation in its market by opening branches at sites
that were formerly run by large commercial banks. The Company was also among the
first in Queens to offer online banking, a convenience for customers seeking to
bank or pay bills from their home or office PC. Another example of its
progressive approach lies in the "Mobile CSR" program, a service introduced by
the Bank in 1998. Named for the customer service representatives who open
accounts for depositors at their college or place of business, the Mobile CSR
has succeeded in attracting new depositors to the Bank.
Together with its other sources of funds, including Federal Home Loan Bank
of New York ("FHLB") borrowings, the Company's deposits are primarily invested
in the origination of residential mortgage loans. In 1998, mortgage originations
totaled $452.2 million, bringing the balance of outstanding mortgage loans to
$1.5 billion at December 31st. Ranked 13th in the nation on the basis of its
1997 production, the Company originated $409.8 million in multi-family mortgage
loans in 1998. Multi-family mortgage loans thus rose to $1.2 billion,
representing 83.3% of outstanding mortgage loans at year-end. The quality of the
Company's multi-family mortgage loans has been consistently solid; the portfolio
was fully performing through all of 1998.
The Company's attention to quality is also reflected in the absence of any
net charge-offs since the third quarter of 1995. Furthermore, in 1998, the
Company recorded a $2.1 million reduction, year-over-year, in non-performing
assets, reflecting improvements in non-performing loans and foreclosed real
estate. Non-performing assets equaled 0.38% of total assets at December 31,
1998, while non-performing loans equaled 0.42% of loans, net, at that date.
The quality of the Company's assets, combined with its efficiency of
operation, produced record earnings in 1998. The Company's cash earnings rose
23.6% to $43.8 million, representing a return on average assets of 2.64% and a
return on average stockholders' equity of 28.13%. The source of capital growth,
cash earnings are determined by adding back to net income certain items that are
required to be charged against it, even though these items do not represent an
actual expenditure of funds. These non-cash items consist of the amortization
and appreciation of shares held in the Company's stock-related benefit plans and
the associated tax benefits, all of which are returned to stockholders' equity
at the end of the period. The increase in 1998 cash earnings thus stemmed from a
15.8% increase in net income to $26.9 million and a 38.6% increase in non-cash
items to $16.9 million.
Confident in its capacity to generate solid cash earnings, the Company
actively managed its capital in 1998. The quarterly cash dividend was raised by
the Board of Directors both in April and October (and, more recently, was
increased in January 1999). The Board also declared a three-for-two stock split
in August, pursuant to which shareholders received a 50% stock dividend on
September 29th. In addition, the Company allocated $52.5 million in capital over
the course of four quarters to repurchase 1,957,530 shares of Company stock. At
December 31, 1998, there were 598,977 shares still remaining under the
repurchase authorization declared by the Board of Directors on December 16th.
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
The Company's 1998 performance is discussed in detail on the following pages.
Such discussion occasionally includes forward-looking statements with regard to
the Company's prospective performance and strategies. These forward-looking
statements are based on management's current expectations regarding a range of
issues that could
10
potentially impact the Company's performance in future periods. Where such
forward-looking statements appear in the text, they are accompanied by
cautionary language identifying the specific factors that could adversely effect
the Company's ability to fulfill its goals or implement its strategies.
In general, factors that could cause future results to vary from current
expectations include, but are not limited to, general economic conditions;
changes in interest rates, deposit flows, loan demand, real estate values, and
competition; changes in accounting principles, policies, or guidelines; changes
in legislation and regulation; and various other economic, competitive,
governmental, regulatory, and technological issues that could affect the
Company's operations, pricing, products, and services.
Financial Condition
Balance Sheet Summary
At December 31, 1998, the Company recorded total assets of $1.7 billion,
representing a $143.6 million, or 9.0%, increase from the level recorded at
December 31, 1997. As in previous years, asset growth was largely attributable
to the Company's mortgage loan production. In 1998, the Company recorded
originations of $452.2 million, boosting the level of mortgage loans outstanding
to $1.5 billion at December 31st. Multi-family mortgage loans represented $409.8
million, or 90.6%, of 1998 originations and $1.2 billion, or 83.3%, of
outstanding mortgage loans at year-end 1998.
In addition to the increase in multi-family mortgage loans outstanding,
the Company recorded a $5.8 million increase in commercial real estate to $67.5
million and a $360,000 increase in construction loans to $1.9 million. The
portfolio of one-to-four family mortgage loans declined $45.5 million to $178.8
million at December 31, 1998.
The strength of the Company's 1998 mortgage loan production was paralleled
by continued improvement in its asset quality. At December 31, 1998, the level
of non-performing loans improved to $6.2 million from $7.7 million at December
31, 1997, or to 0.42% of loans, net, from 0.55%. Reflecting the reduction in
non-performing loans and a $611,000 decline in foreclosed real estate to
$419,000, the level of non-performing assets improved to $6.6 million, or 0.38%
of total assets, from $8.7 million, or 0.54% of total assets, at December 31,
1997. In addition, the Company extended its record to fourteen consecutive
quarters without any net charge-offs and sustained the fully-performing status
of its multi-family mortgage loan portfolio.
In view of this performance, and the coverage provided by the allowance
for loan losses, management suspended the loan loss provision for the fourteenth
consecutive quarter, maintaining the loan loss allowance at $9.4 million at
December 31, 1998. The $9.4 million was equivalent to 152.28% of non-performing
loans and 0.63% of loans, net, at that date.
While mortgage loans remained the Company's primary investment, the
Company increased its investments in securities during 1998. At December 31st,
securities held to maturity rose to $152.3 million from the year-earlier $94.9
million, while securities available for sale rose to $4.7 million from $2.6
million. These increases were accompanied by a rise in the portfolio of money
market investments to $19.0 million from $6.0 million, collectively offsetting a
$30.0 million decline in the balance of mortgage-backed securities to $19.7
million.
Deposits rose $33.1 million to $1.1 billion, reflecting increases in every
category. The greatest percentage increase was in non-interest-bearing deposits,
which grew $6.3 million, or 21.7%, to $35.5 million at December 31, 1998. CDs
represented $723.0 million of year-end 1998 deposits, up $19.0 million from the
year-earlier balance, while savings accounts grew $5.2 million to $273.4 million
and NOW and money market accounts grew $2.5 million to $70.4 million. Additional
funding was provided by FHLB advances, which totaled $439.1 million, as compared
to $309.7 million at the prior year-end.
Stockholders' equity totaled $149.4 million at December 31, 1998, as
compared to $170.5 million at December 31, 1997. With stockholders' equity
strengthened by a contribution of $43.8 million from 1998 cash earnings, the
Company was able to allocate $52.5 million toward the repurchase of 1,957,530
shares during the year.
At December 31, 1998, both the Company and the Bank continued to enjoy a
solid capital position, with regulatory capital ratios that continued to exceed
the minimum requirements established by the FDIC Improvement Act ("FDICIA"). In
addition, the Bank continued to exceed the requirements for classification as a
well-capitalized institution.
Loans
Queens County Bancorp has been a prolific mortgage lender since its conversion
from mutual to stock form in 1993. In the five years ended December 31, 1998,
the Company recorded a 92.1% increase in mortgage loans outstanding to $1.5
billion, reflecting originations of $1.6 billion during the five-year period.
Included in this amount were 1998 mortgage originations of $452.2 million,
nearly matching the $453.1 million recorded in the prior year.
The substantial growth in mortgage loans reflects the Company's steady
focus on the origination of multi-family mortgage loans. Multi-family mortgage
loans represented $409.8 million, or 90.6%, of 1998 originations and $1.2
billion, or 83.3%, of total mortgage loans at December 31st. In the prior year,
the Company recorded $418.9 million in multi-family mortgage loan originations,
11
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
ranking 13th among multi-family mortgage lenders, nationwide. According to
National Mortgage News, which draws its information from Home Mortgage
Disclosure Act filings, the Company also ranked 2nd in New York City and third
in New York State. In 1998, the average multi-family mortgage loan in the
portfolio equaled $1.2 million; the largest loan equaled $7.2 million.
At December 31, 1998, 47.0% of the Company's multi-family mortgage loans
were secured by buildings in Queens County, with another 23.7% and 18.4% secured
by properties in Manhattan and Brooklyn, respectively. The balance of the
portfolio was secured by properties in the remaining boroughs of New York City
and the suburban counties of Nassau and Westchester. By definition, multi-family
mortgage loans are secured by rental properties or cooperative apartment
buildings with five or more units. With 311,000 such buildings in Queens alone,
and 1.2 million more, collectively, in Brooklyn and Manhattan, the New York
market remains fertile ground for the origination of multi-family mortgage
loans.
The appeal of multi-family mortgage loans lies in their contribution to
earnings. First, the yields on multi-family loans tend to be higher than the
yields derived in one-to-four family lending. Second, the underwriting process
is more efficient than that employed with one-to-four family mortgage loans.
Third, the quality of the Company's multi-family mortgage loans has been
consistently solid. The portfolio was fully performing in the twelve months
ended December 31, 1998, as it was in the prior year.
Multi-family mortgage loans also tend to differ in the way that they are
structured, with a term that typically extends for ten years, and occasionally
less. Since 1996, the majority of new multi-family mortgage loans have featured
a fixed rate of interest in the first five years of the mortgage, before
converting to an adjustable rate in each of years six through ten. Prior to
1996, the majority of multi-family mortgage loans featured a step-up rate of
interest that increased 50 basis points in each of years two through five. At
December 31, 1998, the volume of multi-family mortgage loans that were due to
reprice upward over the next four quarters was $85.6 million, $39.6 million,
$24.7 million, and $46.0 million, respectively, for a total of $195.9 million in
1999. Reflecting these loans, as well as those originated on a first-five-year
fixed rate basis, 95.3% of the multi-family mortgage loan portfolio was
adjustable at December 31, 1998.
In recent years, the market for multi-family mortgage loans has witnessed
an increase in competition, fueled by newcomers offering below-market teaser
rates. The Company's success in producing loans despite such competition speaks
to the reputation it has earned over the past two decades. Unlike one-to-four
family loans, multi-family mortgage loans are typically arranged through
mortgage brokers, familiar with the Company's underwriting procedures and its
responsiveness to their clients' needs. As one of the few banks in the
marketplace to continue making multi-family mortgage loans during the last
recession, the Company has been rewarded with a steady flow of business to date.
While 1998 originations thus exceeded $409 million, loan growth was
nonetheless tempered by an increase in prepayments, particularly in the last
quarter of the year. Prepayment penalties range from five percentage points to
two, depending on the remaining term of the multi-family mortgage, and have
traditionally helped to discourage a significant level of prepayment activity.
In 1999 to date, such activity has subsided and it is currently management's
expectation that this will continue to be the case. However, further reductions
in interest rates by the Federal Open Market Committee ("FOMC") or by newcomers
vying for product, could potentially trigger another increase in prepayment
activity.
In addition to loans secured by multi-family buildings, the Company's
mortgage loan portfolio includes loans secured by one-to-four family homes. At
December 31, 1998, one-to-four family mortgage loans totaled $178.8 million,
representing 12.0% of mortgage loans outstanding, down from $224.3 million, or
16.1% of outstanding mortgage loans, at December 31, 1997. The reduction
reflects both an increase in prepayments and the Company's continuing emphasis
on the origination of multi-family loans. In 1998, the Company recorded
one-to-four family mortgage originations of $7.5 million, as compared to $22.9
million in the year-earlier twelve months.
The Company's one-to-four family mortgage loans are primarily secured by
properties in Queens and Nassau County and are originated on a limited
documentation basis, in keeping with customer demand. Applications for such
loans are approved on the basis of a credit report and a thorough property
appraisal; when furnished, the customer's financial assets are also verified. To
minimize risk, limited documentation loans require a higher down payment and are
made at higher rates of interest than full documentation loans.
The majority of the Company's one-to-four family mortgage loans are made
at rates that adjust on an annual basis, with a smaller number adjusting at two-
and three-year intervals. At December 31, 1998, 79.7% of the portfolio consisted
of adjustable rate credits; the balance consisted of seasoned loans originated
more than 20 years ago. While fixed rate loans are also made to address the
demands of the market, such loans are sold by the Company, with servicing rights
retained.
While residential mortgage lending remains the Company's primary business,
the balance of commercial real estate and construction loans rose $5.8 million
and $360,000, respectively, from the levels recorded at December 31, 1997. At
December 31, 1998, commercial
12
real estate loans totaled $67.5 million, reflecting originations of $32.8
million; construction loans totaled $1.9 million, reflecting originations of
$2.1 million. While 63.2% of commercial real estate loans featured adjustable
rates of interest, 100% of construction loans featured adjustable rates.
Including loans secured by one-to-four family homes and multi-family buildings,
the Company's mortgage loan portfolio was 92.0% adjustable at December 31, 1998.
As a service to its depositors, the Bank also offers a menu of consumer
lending products, reflected on the balance sheet as "other loans." At December
31, 1998, the portfolio totaled $9.8 million, as compared to $10.8 million at
December 31, 1997. Loans on individual cooperative apartment units represented
$4.8 million, or 49.3%, of the year-end 1998 total, while home equity loans
represented $1.8 million, or 18.4%, of other loans.
With a pipeline of $101.1 million at the start of the new year, the
Company anticipates solid loan growth in the first quarter of 1999. However, the
ability of the Company to close these loans--and to originate a like volume in
future quarters--may be adversely impacted by a further increase in competition
or by a significant change in market interest rates.
Loan Portfolio Analysis
At December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------
Percent Percent Percent
(dollars in thousands) Amount of Total Amount of Total Amount of Total
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS:
1-4 family $ 178,770 11.94% $ 224,287 15.96% $ 256,904 22.21%
Multi-family 1,239,094 82.77 1,107,374 78.78 822,364 71.10
Commercial real estate 67,494 4.51 61,740 4.39 63,452 5.49
Construction 1,898 0.13 1,538 0.10 1,598 0.14
- ------------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 1,487,256 99.35 1,394,939 99.23 1,144,318 98.94
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER LOANS:
Cooperative apartment 4,802 0.32 5,041 0.36 5,764 0.50
Home equity 1,793 0.12 2,386 0.17 2,819 0.24
Passbook savings 321 0.02 312 0.02 375 0.03
Student 8 -- 8 -- 24 --
Other 2,826 0.19 3,048 0.22 3,293 0.29
- ------------------------------------------------------------------------------------------------------------------------------------
Total other loans 9,750 0.65 10,795 0.77 12,275 1.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 1,497,006 100.00% 1,405,734 100.00% 1,156,593 100.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Less: Unearned discounts 22 19 24
Net deferred loan
origination fees 1,034 1,281 1,058
Allowance for
loan losses 9,431 9,431 9,359
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net $ 1,486,519 $ 1,395,003 $ 1,146,152
====================================================================================================================================
Asset Quality
In 1998, the strength of the Company's mortgage loan production was paralleled
by the solid performance of its loan portfolio. In addition to reducing the
balance of non-performing loans and assets, the Company extended its record to
fourteen consecutive quarters without any net charge-offs and maintained the
fully-performing status of its multi-family mortgage loans.
At December 31, 1998, non-performing assets declined to $6.6 million, or
0.38% of total assets, from $7.5 million, or 0.44%, at the close of the trailing
quarter, and from $8.7 million, or 0.54%, at December 31, 1997. The improvement
stemmed from reductions in both non-performing loans and foreclosed real estate.
Specifically, the level of non-performing loans declined to $6.2 million, from
$6.5 million and $7.7 million, respectively, at September 30, 1998 and December
31, 1997, or to 0.42% of loans, net, from 0.44% and 0.55% of loans, net,
respectively. Included in the December 31, 1998 amount were 45 mortgage loans in
foreclosure totaling $5.5 million and eleven loans 90 days or more delinquent
totaling $663,000. At September 30, 1998 and December 31, 1997, mortgage loans
in foreclosure totaled, respectively, $5.5 million and $6.1 million, while loans
90 days or more delinquent totaled $1.0 million and $1.6 million, respectively.
All of the Company's non-performing loans are secured by residential properties,
primarily located in the Borough of Queens.
Reflecting the sale of a commercial real estate property in the fourth
quarter, foreclosed real estate improved to $419,000 at December 31, 1998 from
$1.0 million at both September 30, 1998 and December 31, 1997. Included in the
year-end 1998 amount were three residential properties that are currently being
marketed for sale.
13
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
From time to time, the Company rents properties that have been
non-performing, drawing income from them as a result. When this occurs, such
properties are reclassified as "investments in real estate" and included in
"other assets" on the balance sheet. At December 31, 1998, such investments
totaled $1.8 million and consisted of sixteen residential properties. All of
these properties have been profitably rented and were generating an average rate
of return of 7.6%.
At the heart of the portfolio's consistently solid performance are the
conservative underwriting standards the Company maintains. Loans are approved on
the basis of several factors, extending beyond the quality of the borrower's
credit report. In the case of multi-family mortgage loans, management looks at
the appraised value of the property that collateralizes the credit, as well as
the property's ability to provide a consistent income stream. The condition of
the property is another critical factor: each multi-family building is inspected
from rooftop to cellar by a member of the Board of Directors' Real Estate and
Mortgage Committee, together with a member of the senior management team. In the
case of one-to-four family mortgage loans, which are typically made on a limited
documentation basis, approval depends on a thorough property appraisal and the
verification of financial assets, when furnished, in addition to a careful
review of the borrower's credit history.
To further minimize credit risk, the Company places a limit on the amount
of credit granted to any one borrower, and requires a minimum debt coverage
ratio of 120%. While the Bank will lend up to 75% of appraised value on
multi-family and one-to-four family residences, the average loan-to-value ratio
on such credits was 53% and 44%, respectively, at December 31, 1998. In
addition, the Company tends to originate loans within its local market,
primarily through brokers with whom it has an established relationship.
The care with which each loan is underwritten is mirrored in the attention
provided during the life of the loan. While problem loans have been minimal, the
Company has established procedures to ensure that problems, when they do arise,
are quickly addressed. In the case of multi-family mortgage loans, personal
contact is made with the borrower within 20 days of non-payment; in the case of
one-to-four family mortgage loans, contact is made within 30 days.
While every effort is made to originate quality assets, management cannot
guarantee that problem loans will not occur. A borrower's ability to fulfill his
obligations may be impacted by a change in personal circumstances or by a
decline in real estate values or the economy. To further minimize credit risk,
the Company has provided coverage through a $9.4 million loan loss allowance,
which represented 152.28% of non-performing loans and 0.63% of loans, net, at
December 31, 1998. In addition, the $9.4 million represented 661.36% of
accumulated net charge-offs for the twelve years ended on that date. In the
absence of any net charge-offs for fourteen consecutive quarters, as noted, the
twelve-year average is a modest $116,000 per year.
For more information regarding the coverage provided by the loan loss
allowance, see the asset quality analysis that follows and the discussion of the
loan loss provision on page 25 of this report.
Asset Quality Analysis
At or For the Years Ended December 31,
-------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $ 9,431 $ 9,359 $ 11,359 $ 11,268 $ 10,320
Loan charge-offs -- -- -- (59) (438)
Loan recoveries -- 72 -- -- 186
- --------------------------------------------------------------------------------------------------------------
Net recoveries (charge-offs) -- 72 -- (59) (252)
(Recovery of) provision
for loan losses -- -- (2,000) 150 1,200
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $ 9,431 $ 9,431 $ 9,359 $ 11,359 $ 11,268
==============================================================================================================
NON-PERFORMING ASSETS:
Mortgage loans in foreclosure $ 5,530 $ 6,121 $ 6,861 $ 4,929 $ 5,437
Loans 90 days or more delinquent 663 1,571 2,798 2,864 1,674
- --------------------------------------------------------------------------------------------------------------
Total non-performing loans 6,193 7,692 9,659 7,793 7,111
- --------------------------------------------------------------------------------------------------------------
Foreclosed real estate 419 1,030 627 774 975
- --------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 6,612 $ 8,722 $ 10,286 $ 8,567 $ 8,086
==============================================================================================================
RATIOS:
Non-performing loans to
loans, net 0.42% 0.55% 0.84% 0.78% 0.76%
Non-performing assets to
total assets 0.38 0.54 0.76 0.69 0.69
Allowance for loan losses
to non-performing loans 152.28 122.61 96.90 145.76 158.46
Allowance for loan losses
to loans, net 0.63 0.68 0.82 1.14 1.20
Allowance for loan losses
to accumulated net charge-offs
since 1987 661.36 661.36 625.00 759.00 783.04
==============================================================================================================
14
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 December 31, 1998, the portfolio of securities held to maturity totaled
$152.3 million, up $57.3 million from $94.9 million at December 31, 1997. The
60.4% increase primarily reflects a $58.6 million rise in U.S. Government agency
obligations to $122.9 million, offsetting a $7.0 million decrease in U.S.
Treasuries to $7.0 million. The balance of the portfolio consisted of FHLB
stock. The market values of the portfolio were $152.1 million and $95.1 million
at December 31, 1998 and 1997, respectively, representing 99.9% and 100.1% of
the carrying values at the corresponding dates.
Securities available for sale totaled $4.7 million, up $2.0 million, or
77.9%, from the level recorded at December 31, 1997. Money market investments
totaled $19.0 million, up $13.0 million from $6.0 million at the year-earlier
date.
Mortgage-backed Securities Held to Maturity
At December 31, 1998, the balance of mortgage-backed securities totaled $19.7
million, down from $49.7 million at December 31, 1997. In addition to
prepayments, the $30.0 million reduction reflects the absence of any new
investments since the first quarter of 1994. At December 31, 1998 and 1997, the
market values of the portfolio were $20.3 million and $50.6 million,
respectively, representing 103.3% and 101.7% of carrying value at the
corresponding dates.
As a matter of policy, the Company has held all of its mortgage-backed
securities to maturity. At December 31, 1998, the average maturity of the
portfolio was under two years.
Sources of Funds
The Company's funding primarily stems from the deposits it gathers, together
with loan interest and principal payments and the interest on and maturity of
securities. Since 1996, the Company has added fuel to its mortgage loan
production by additionally drawing on its line of credit with the FHLB. At
December 31, 1998, said line of credit totaled $698.8 million; borrowings at
that date were $439.1 million, up from $309.7 million at December 31, 1997.
Deposits, meanwhile, rose $33.1 million to $1.1 billion, with increases
recorded in every category of depository account. Reflecting the drop in
interest rates over the course of the fourth quarter, the Company noted a subtle
shift in the mix of deposits as the percentage growth in non-interest-bearing
deposits exceeded the percentage growth in CDs. Core deposits, including savings
accounts, NOW and money market accounts, and non-interest-bearing deposits, rose
3.9% to $379.3 million, representing 34.4% of total deposits, while CDs rose
2.7% to $723.0 million, representing 65.6% of total deposits, at December 31,
1998. At the prior year-end, core deposits totaled $365.2 million, or 34.2% of
total deposits, while CDs totaled $703.9 million, or 65.8%.
The greatest percentage increase was in non-interest-bearing deposits,
which grew 21.7% to $35.5 million from $29.2 million at December 31, 1997.
Savings accounts grew $5.2 million, or 1.9%, to $273.4 million, while NOW and
money market accounts rose $2.5 million, or 3.7%, to $70.4 million.
The $19.0 million rise in CDs was substantially less than the year-earlier
increase of $52.2 million, further reflecting the preference for short-term
products during a time of comparatively low interest rates. Nonetheless, in the
twelve months ended December 31, 1998, 88.4% of maturing CDs were rolled over,
consistent with the Bank's historic retention rate. While no assurances can be
made, management would expect a like percentage of CDs to be rolled over going
forward, based on current pricing and experience. At December 31, 1998, the
volume of CDs due to mature in 1999 was $576.4 million.
Deposit growth depends on several factors, including market interest rates
and competition with other banks. To compete, the Bank places an emphasis on
service and convenience, while offering attractive rates on a variety of
depository accounts. Seven of the Bank's locations feature 24-hour banking, and
its in-store service centers are both open until 9 o'clock at night. Two of the
Bank's busiest offices offer early-bird hours and all are open on Saturdays for
added convenience.
In 1998, the Company initiated a "Mobile CSR" program as an additional
means of attracting new depositors to the Bank. In the first quarter of the
year, arrangements were made with Queens College for a branch manager and
customer service representative to visit the campus for the purpose of opening
new accounts. In addition, an ATM was installed at the College to facilitate
bank transactions for students and faculty. Based on the success of the Mobile
CSR's visits to Queens College, the program was expanded to encompass local
businesses with large numbers of employees.
To attract new deposits, the Company also expanded its product menu in the
fourth quarter with the introduction of an online banking service, "QCSB
Online." Accessed through the Company's web site, the service enables customers
to transfer funds between accounts, query their account balances, monitor their
account activity, and pay bills from their PCs.
15
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
To further enhance the franchise, management continues to consider
acquisitions of other financial institutions and, in the absence of such action,
of individual branch offices. The Bank has also made a practice of opening
branches at locations vacated by money center banks, which has contributed to
the increase in non-interest-bearing accounts mentioned previously. As the trend
toward consolidation of financial institutions continues, additional
opportunities for expansion will be created within the Company's marketplace.
In the meantime, the Company's FHLB line of credit has proved a profitable
source of asset growth. In 1998, the Company parlayed its FHLB advances into
mortgage loan originations of $452.2 million, boosting interest-earning assets
and net income as a result. Accordingly, management anticipates extending its
leveraging program, drawing on its FHLB borrowings as needed to fulfill loan
demand.
Market Risk and Interest Rate Sensitivity
Given the extent to which changes in market interest rates may influence net
interest income, interest rate volatility represents the Company's primary
market risk. In order to manage its interest rate risk, the Company strives to
match the interest rate sensitivity of its assets with the interest rate
sensitivity of its liabilities. In addition, the Company monitors its interest
rate exposure by analyzing the estimated changes in market value of both its
assets and funding sources under a variety of interest rate scenarios.
Interest rate sensitivity is determined by analyzing the difference
between the amount of interest-earning assets maturing or repricing within a
specific time frame and the amount of interest-bearing liabilities maturing or
repricing with that same period of time. This difference, or "gap," suggests the
extent to which the Company's net interest income may be affected by future
changes in market interest rates. A gap is considered "positive" when the amount
of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities, and "negative" when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. In a rising
rate environment, a company with a negative gap would generally be expected,
absent the impact of other factors, to experience a greater increase in the cost
of its liabilities relative to the yields of its assets, resulting in a
reduction in the company's net interest income. A company with a positive gap
would generally be expected to experience the opposite result. Conversely,
during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would have the
opposite adverse effect.
In order to enhance the match between its interest-earning assets and its
interest-bearing liabilities, management has traditionally invested in
adjustable rate mortgage loan originations and supplemented these assets with
investments in short-term securities. On the liability side of the balance
sheet, management has closely monitored the pricing of its depository products
and has drawn on its FHLB line of credit when doing so served to enhance
profitability.
While the Company's one-to-four family mortgage loans typically feature
annual rate adjustments, its multi-family mortgage loans more typically feature
a fixed rate of interest during 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 cumulative gap between the
Company's interest rate sensitive assets and interest rate sensitive liabilities
repricing within a one-year period was $330.8 million, representing a negative
gap of 18.94% at December 31, 1998. At the prior year-end, the cumulative
one-year gap between the Company's interest rate sensitive assets and
liabilities was $191.3 million, representing a negative gap of 11.93%.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 which, based on
certain assumptions, are expected to reprice or mature in each of the time
periods shown. Except as stated, the amount of assets and liabilities shown to
reprice or mature within a particular time period was determined in accordance
with the earlier of (a) the term to repricing or (b) the contractual terms of
the asset or liability. This interest rate sensitivity analysis utilizes the
format and assumptions for disclosure for an interest rate sensitivity gap table
required by the FDIC and the New York State Banking Department and, based on the
Bank's historical experience during the eight years ended December 31, 1998,
reflects the following decay rates: 11.20% for savings accounts; 15.03% for
money market accounts; and 22.24% for NOW and Super NOW accounts. No decay rate
has been applied for CD accounts. In addition, management has assumed no
prepayments of the Company's loans in preparing this table; thus the assumptions
used may not be indicative of future withdrawals of deposits or prepayments of
loans. Loan prepayments and scheduled principal amortization totaled $147.0
million in the twelve months ended December 31, 1998.
As this analysis does not necessarily indicate the impact of general
interest rate movements on the Company's net interest income, certain assets and
liabilities indicated as repricing within a stated period or at a stated rate of
interest may, in fact, reprice at a different time or interest rate.
16
Interest Rate Sensitivity Analysis
At December 31, 1998
----------------------------------------------------------------------------------
Three Four to More than More than More than More
Months Twelve One Year to Three Years Five Years than
or Less Months Three Years to Five Years to 10 Years 10 Years
- -------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage and other
loans $ 126,096 $ 244,010 $ 347,850 $ 398,775 $ 364,804 $ 15,471
Securities 4,656 152,280 -- -- -- --
Mortgage-backed
securities(2) 370 14,778 4,532 -- -- --
Money market investments 19,000 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 150,122 411,068 352,382 398,775 364,804 15,471
- -------------------------------------------------------------------------------------------------------------------
Less: Unearned discounts and
deferred fees 956 100 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net interest-earning assets 149,166 410,968 352,382 398,775 364,804 15,471
- -------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 7,654 22,319 27,259 24,206 21,495 170,424
NOW and Super NOW accounts 1,462 4,142 4,602 3,578 2,783 9,729
Money market accounts 1,658 6,383 5,424 4,609 3,916 22,137
Certificates of deposit 227,399 333,364 101,399 60,823 -- --
FHLB borrowings 246,555 40,000 152,500 -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 484,728 406,208 291,184 93,216 28,194 202,290
- -------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap
per period $ (335,562) $ 4,760 $ 61,198 $ 305,559 $ 336,610 $ (186,819)
===================================================================================================================
Cumulative interest
sensitivity gap $ (335,562) $ (330,802) $ (269,604) $ 35,955 $ 372,565 $ 185,746
===================================================================================================================
Cumulative interest
sensitivity gap as a
percentage of total
assets (19.21)% (18.94)% (15.43)% 2.06% 21.33% 10.63%
Cumulative net interest-
earning assets as a
percentage of net
interest-bearing
liabilities 30.77 62.87 77.19 102.82 128.58 112.34
===================================================================================================================
At December 31, 1998
-------------------------
Fair
Total Value(1)
- ----------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage and other
loans $1,497,006 $1,549,540
Securities 156,936 156,711
Mortgage-backed
securities(2) 19,680 20,332
Money market investments 19,000 19,000
- ----------------------------------------------------------
Total interest-earning assets 1,692,622 1,745,583
- ----------------------------------------------------------
Less: Unearned discounts and
deferred fees 1,056 1,056
- ----------------------------------------------------------
Net interest-earning assets 1,691,566 1,744,527
- ----------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts 273,357 273,357
NOW and Super NOW accounts 26,296 26,296
Money market accounts 44,127 44,127
Certificates of deposit 722,985 727,454
FHLB borrowings 439,055 439,055
- ----------------------------------------------------------
Total interest-bearing
liabilities 1,505,820 1,510,289
- ----------------------------------------------------------
Interest sensitivity gap
per period $ 185,746 $ 234,238
==========================================================
Cumulative interest
sensitivity gap
==========================================================
Cumulative interest
sensitivity gap as a
percentage of total
assets
Cumulative net interest-
earning assets as a
percentage of net
interest-bearing
liabilities
==========================================================
(1) Fair value of securities, including mortgage-backed securities, is based
on quoted market prices, where available. If quoted market prices are not
available, fair value is based on quoted market prices of comparable
instruments. Depending on the type of loan, fair value of loans is based
on carrying values or is estimated based on discounted cash flow analyses.
Fair value of deposit liabilities is either based on carrying amounts or
is estimated based on a discounted cash flow calculation. Fair value for
FHLB advances is estimated using a discounted cash flow analysis that
applies interest rates currently being offered on advances to a schedule
of aggregated expected monthly maturities of FHLB advances.
(2) Based on historical repayment experience.
Management also monitors the Company's interest rate sensitivity through
an analysis of the change in net portfolio value ("NPV"), which is defined as
the net present value of the expected future cash flows of an entity's assets
and liabilities. Hypothetically, NPV represents the market value of an
institution's net worth.
Increases in the market value of a company's assets will increase the NPV,
whereas declines in the market value of its assets will reduce the NPV.
Conversely, increases in the market value of a company's liabilities will reduce
the NPV, whereas declines in the market value of liabilities will increase the
NPV. Changes in the market value of assets and liabilities due to changes in
interest rates reflect the interest rate sensitivity of those assets and
liabilities, since their values are derived from the rate characteristics (e.g.,
fixed or adjustable, cap or floor) of
17
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
the asset or liability relative to the interest rate environment. For example,
in a rising interest rate environment, the market value of a fixed rate asset
will certainly decline, whereas the market value of an adjustable rate asset,
depending on its repricing characteristics, may not necessarily decline.
The NPV ratio, under any interest rate scenario, is defined as the NPV in
said scenario divided by the market value of assets in the same scenario. This
ratio, referred to in the following NPV analysis, initially measures percentage
changes from the value of the projected NPV in a given rate scenario, and then
measures interest rate sensitivity by the change in the NPV ratio over a range
of interest rate scenarios. For the purpose of the following NPV analysis,
deposit decay rates similar to those used in the Interest Rate Sensitivity
Analysis were used. The NPV analysis is based on simulations that utilize
institution-specific assumptions with regard to future cash flows, including
customer options such as period and lifetime caps, and deposit withdrawal
estimates. The NPV analysis uses discount rates derived from various sources,
primarily including, but not limited to, Treasury yield curves.
Specifically, for mortgage loans receivable, the discount rates used were
based on market rates for new loans of similar type and purpose, adjusted, when
necessary, for factors such as servicing cost, credit risk, and term. The
discount rates used for CDs and borrowings were based on rates that approximate
the rates offered by the Company for deposits and borrowings of similar
remaining maturities. The analysis calculates the NPV at a flat rate scenario by
computing the present value of cash flows of interest-earning assets less the
present value of interest-bearing liabilities. Certain assets, including fixed
assets and real estate held for investment, are assumed to remain at book value
(net of valuation allowance) regardless of the interest rate scenario. Other
non-interest-earning assets and non-interest-bearing liabilities such as
deferred fees, unamortized premiums, and accrued expenses and other liabilities
are excluded from the NPV calculation. The following analysis sets forth the
Bank's NPV at December 31, 1998, as calculated by the Bank, for instantaneous
and sustained changes in interest rates relative to the NPV in an unchanging
interest rate environment.
Net Portfolio Value Analysis
- --------------------------------------------------------------------------------
Market Value
of Portfolio
Change in Net Projected Projected
Interest Rates Interest Net % Change % Change
(in basis points) Income Change to Base to Base
- --------------------------------------------------------------------------------
+200 $55,250 $(14,170) (20.41)% (21.19)%
+100 66,517 (2,903) (4.18) (10.46)
-- 69,420 -- -- --
-100 82,481 13,061 18.81 15.05
-200 89,732 20,312 29.26 29.41
================================================================================
As with the Interest Rate Sensitivity Analysis, certain shortcomings are
inherent in the methodology used in the above interest rate risk measurements.
In order to model changes in NPV, certain assumptions must be made which may or
may not reflect the manner in which actual yields and costs respond to changes
in market interest rates. In this regard, the NPV model assumes that the
composition of the Company's interest rate sensitive assets and liabilities at
the beginning of a period remains constant over the period being measured. In
addition, the model assumes that a particular change in interest rates is
immediate and is reflected uniformly across the yield curve, regardless of the
duration to maturity or repricing of specific assets and liabilities. In
addition, assumptions within the model are subjective in nature, involve
uncertainties, and therefore cannot be determined with precision. Thus, although
the NPV measurements may, in theory, provide an indication of the Company's
interest rate risk exposure at a particular point in time, such measurements are
not intended to, and do not, provide a precise forecast of the effect of changes
in market interest rates on the Company's net portfolio value, and will differ
from actual results.
Liquidity and Capital Position
Liquidity
As indicated in the earlier discussion, deposits and borrowings are the
Company's primary funding sources. Additional funding stems from interest and
principal payments on loans, securities, and mortgage-backed securities, and, to
a lesser extent, from the sale of loans and foreclosed real estate. While
borrowings and scheduled amortization of loans and securities are more
predictable funding sources, deposit flows and mortgage prepayments are subject
to such external factors as economic conditions, competition, and market
interest rates.
18
The Company primarily invests in mortgage loan originations and
supplements such investments with the purchase of short-term securities. In
1998, the Company invested $452.2 million in mortgage loan originations and
another $195.8 million in securities held to maturity. In addition, the Company
invested $2.1 million in equity securities which were classified as available
for sale. These activities were funded by internal cash flows generated by the
Bank's operating and financial activities. In 1998, the net cash provided by
operating activities totaled $41.9 million; the net cash provided by financing
activities totaled $103.4 million.
The Company monitors its liquidity position on a daily basis to ensure
that sufficient funds are available to meet its financial obligations, including
outstanding loan commitments and withdrawals from depository accounts. Together
with cash and due from banks, money market investments are the Company's most
liquid assets, with a collective total of $46.6 million at December 31, 1998 and
$22.7 million at December 31, 1997. In addition, the Company had securities
available for sale of $4.7 million and $2.6 million at the corresponding dates.
Additional liquidity is available through the Bank's FHLB line of credit and a
$10.0 million line of credit with a money center bank.
Entering 1999, the Bank had loans of $101.1 million in the pipeline, which
management anticipates having sufficient funds to fulfill. In addition, CDs due
to mature in one year or less from December 31, 1998 totaled $576.4 million;
based upon its traditional retention rate, as well as current pricing,
management believes that a significant portion of such deposits will remain with
the Bank.
Capital Position
The Company's success is rooted in its capacity for capital generation. In 1998,
this capacity was demonstrated by the generation of $43.8 million in cash
earnings, up $8.4 million, or 23.6%, from $35.4 million in the year-earlier
twelve months. Included in the 1998 amount were net income of $26.9 million and
$16.9 million in non-cash expenses that were added back to capital at December
31st. In 1997, net income totaled $23.3 million, while non-cash expenses totaled
$12.1 million.
Confident in the strength provided by its cash earnings, the Company
maintained an aggressive approach towards capital management throughout 1998. In
addition to paying $12.6 million in dividends over the course of four quarters,
the Company repurchased 1,957,530 shares of stock at an average price of $26.84
per share. Including the 1998 allocation of $52.5 million, the Company has
allocated a total of $165.8 million for share repurchases since October 1994. A
total of 11.3 million shares have thus been repurchased, at an average per-share
price of $14.66. At December 31, 1998, some 598,977 shares were still available
for repurchase; the timing of such repurchases will depend on market conditions,
as well as the implementation of other corporate strategies.
Stockholders' equity totaled $149.4 million and $170.5 million at December
31, 1998 and 1997, representing 8.55% and 10.64% of total assets, respectively,
at the corresponding dates. The Company's book value was $8.13 per share and
$8.82 per share, at year-end 1998 and 1997, based on 18,389,114 shares and
19,337,084 shares, respectively. To calculate book value, the Company subtracted
the number of unallocated ESOP shares at December 31, 1998 and 1997,
respectively, from the number of shares outstanding at the corresponding dates.
Despite the reduction in stockholders' equity resulting from the share
repurchase allocation, its level was more than sufficient to exceed the minimum
Federal requirements for a bank holding company. Similarly, the Bank's capital
strength was such that it continued to exceed not only the minimum levels
required but to qualify the Bank for classification as a "well capitalized"
institution under FDICIA. As defined by FDICIA, a well-capitalized institution
has a ratio of leverage capital to adjusted average assets of 4.00% or more; a
ratio of Tier 1 risk-based capital to risk-weighted assets of 6.00% or more, and
a ratio of total risk-based capital to risk-weighted assets of 10.00% or more.
The minimum Federal requirements for leverage, Tier 1 risk-based, and total
risk-based capital are, respectively, 3.00%, 4.00%, and 8.00%.
At December 31, 1998, the Bank's leverage capital totaled $161.4 million,
or 9.40% of adjusted average assets, while its Tier 1 and total risk-based
capital amounted to $161.4 million and $170.9 million, representing 15.23% and
16.12% of risk-weighted assets, respectively. At the prior year-end, the
Company's leverage capital totaled $143.9 million, or 9.30% of adjusted average
assets; its Tier 1 and total risk-based capital amounted to $143.9 million and
$153.3 million, representing 14.32% and 15.26% of risk-weighted assets,
respectively. The 1998 amounts reflect the transfer of $11.3 million and $6.5
million in capital from the Bank to the Company in the second and third quarters
of the year, respectively.
Results of Operations
Earnings Summary
1998 and 1997 Comparison:
The Company recorded 1998 earnings of $26.9 million, representing a 15.8%
increase from $23.3 million in 1997, and a 25.2% increase in diluted earnings
per share to $1.34 from $1.07. The 1997 amounts include the recapture of $1.3
million in the first quarter that had been recorded as a tax charge in the
fourth quarter of 1996. At $26.9 million, the Company's 1998 earnings provided a
return on average stockholders' equity ("ROE") of 17.32% and a return on average
assets ("ROA") of
19
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
1.62%, up from 12.95% and 1.61%, respectively, in the year-earlier twelve
months.
In addition, the Company recorded 1998 cash earnings of $43.8 million,
representing a 23.6% increase from 1997 cash earnings of $35.4 million and a
34.0% increase in diluted cash earnings per share to $2.17 from $1.62. The
Company's 1998 cash earnings thus contributed 62.4% more to equity growth than
its 1998 GAAP earnings, and generated a cash ROE and cash ROA of 28.13% and
2.64%, respectively.
Cash Earnings Analysis
For the Years Ended December 31,
--------------------------------
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income $26,944 $23,264 $20,939
Additional contributions to stockholders'
equity:
Amortization and appreciation
of stock-related benefit plans 6,724 7,368 5,408
Associated tax benefits 8,071 3,416 1,111
Amortization of goodwill -- -- --
Other 2,019 1,351 --
- --------------------------------------------------------------------------------
Cash earnings $43,758 $35,399 $27,458
================================================================================
Cash earnings per share $2.29 $1.73 $1.18
Diluted cash earnings per share 2.17 1.62 1.12
================================================================================
The Company's earnings growth was fueled by higher net interest income and
other operating income, as well as a reduction in operating expense. As the
provision for loan losses was suspended in all four quarters, the growth in
earnings was tempered only by an increase in income tax expense.
Net interest income rose $6.1 million, or 9.8%, to $68.5 million, the net
result of a $16.5 million increase in interest income to $134.3 million and a
$10.4 million increase in interest expense to $65.8 million. As in previous
years, the growth in interest income was driven by volume mortgage loan
production. In 1998, the Company recorded originations of $452.2 million,
including $409.8 million in multi-family mortgage loans. Reflecting a $187.4
million increase in average loans to $1.4 billion, the average balance of
interest-earning assets rose $213.2 million, or 15.2%, to $1.6 billion. The
higher balance served to offset an eight-basis point drop in the average yield
to 8.32%.
The concurrent growth in interest expense was fueled by the funding needed
to support the Company's profitable interest-earning asset growth. While the
average cost of funds was maintained at 4.56%, the average balance of
interest-bearing liabilities rose $231.0 million to $1.4 billion, driven by a
$208.7 million increase in average FHLB borrowings to $397.8 million.
In addition, the Company recorded an interest rate spread of 3.76% and a
net interest margin of 4.24%, both well above the industry averages, despite
reductions of eight and 21 basis points, respectively, from the measures
recorded in 1997.
In addition to the increase in net interest income, the Company's 1998
performance was fueled by a $249,000 rise in other operating income to $2.6
million, the net effect of an $824,000 increase in fee income to $2.1 million
and a $575,000 decline in other income to $443,000. In addition, the Company
recorded a $1.1 million reduction in operating expense to $26.0 million,
primarily reflecting a $343,000 decline in compensation and benefits expense to
$18.5 million. Included in the latter amount was $6.7 million in non-cash
expenses, down from $7.4 million in the prior year. While recorded as a charge
against earnings, the $6.7 million represented a contribution to stockholders'
equity at December 31, 1998.
Reflecting the drop in operating expense and the higher levels of net
interest income and other operating income, the Company's efficiency ratio
improved to 36.51% in 1998 from 41.86% in 1997; on the basis of cash earnings,
the efficiency ratio improved to 27.05% from 30.47%.
The combination of reduced operating expense and higher net interest
income and other operating income produced pre-tax income of $45.1 million, up
$7.5 million, or 20.0%, from the level recorded in 1997. The increase
contributed to a $3.8 million rise in income tax expense to $18.2 million from
$14.4 million in the prior year. In addition, the higher level of income tax
expense in 1998 reflects a $4.7 million rise in non-cash items to $8.1 million.
Furthermore, the Company's 1997 income tax expense was reduced by the recapture
of $1.3 million that had been recorded as a tax charge in the fourth quarter of
1996.
20
The provision for loan losses was suspended throughout 1998, as it was in
1997, based on the level of coverage provided by the allowance for loan losses
and the consistently solid performance of the loan portfolio. In addition to the
absence of any net charge-offs for fourteen consecutive quarters, the Company
enjoyed a reduction in non-performing loans and assets, and extended the
flawless performance record of its multi-family mortgage loans.
1997 and 1996 Comparison:
The Company recorded earnings of $23.3 million in 1997, equivalent to earnings
per share of $1.14 and diluted earnings per share of $1.07, as adjusted for the
three-for-two stock split on September 29, 1998. By comparison, the Company
recorded 1996 earnings of $20.9 million, equivalent to split-adjusted earnings
per share of $0.90 and diluted earnings per share of $0.85. The Company's 1997
earnings represented an ROA and ROE of 1.61% and 12.95%, respectively, up from
1.63% and 10.10%, respectively, in 1996.
While the Company's 1997 earnings were 11.1% higher than its 1996
earnings, the difference between its 1997 and 1996 cash earnings further
underscored its earnings strength. In 1997, the Company's cash earnings rose
$7.9 million, or 28.9%, to $35.4 million, representing a 46.9% increase in
diluted cash earnings per share to $1.62 from $1.12 as adjusted for the split.
The Company's 1997 cash earnings thus contributed 52.2% more to capital than its
GAAP earnings; in 1996, its cash earnings contributed 31.1% more to capital than
GAAP earnings alone. On a cash earnings basis, the Company's 1997 ROA and ROE
improved to 2.46% and 19.71%, respectively, from 2.14% and 13.24%, respectively,
in 1996.
The growth in 1997 earnings was generated by the record level of mortgage
loan originations and by the solid performance of the loan portfolio. Net
interest income rose $4.9 million, or 8.5%, to $62.4 million, despite declines
in interest rate spread and net interest margin that were triggered by the use
of FHLB borrowings to fund loan production and by the flattening of the yield
curve in the fourth quarter of the year.
In addition, 1997 earnings were boosted by a $3.4 million reduction in
income tax expense to $14.4 million, partially reflecting a $1.1 million decline
in pre-tax income to $37.6 million. The difference also reflects the net effect
of a $1.8 million tax charge in the prior year's fourth quarter and the reversal
of $1.3 million of that charge in the first quarter of 1997.
The combination of lower income tax expense and higher net interest income
offset a $140,000 reduction in other operating income to $2.3 million and a $3.8
million increase in operating expense to $27.1 million. In the fourth quarter of
1997, the Company took steps to enhance its other operating income by selling
$13.6 million in multi-family mortgage loans to a third party with servicing
rights retained.
The increase in operating expense stemmed primarily from a $2.7 million
rise in compensation and benefits to $18.9 million, largely reflecting a $2.0
million increase in non-cash expenses related to the amortization and
appreciation of shares in the Company's stock-related benefit plans. In
addition, 1997 operating expense reflected increases of $162,000, $450,000, and
$514,000, respectively, in occupancy and equipment, general and administrative
("G&A"), and other operating expense.
The Company's 1997 earnings further reflected the suspension of the
provision for loan losses, continuing a practice that was initiated in the third
quarter of 1995. In 1996, management also recovered $2.0 million from the loan
loss allowance, with a net benefit of $750,000 recognized.
Interest Income
The level of interest income in any given period depends upon the average
balance and mix of the Company's interest-earning assets, the yield on said
assets, and the current level of market interest rates. Such rates are
influenced by the FOMC of the Federal Reserve Board of Governors, which reduces,
maintains, or increases the Federal funds rate (the rate at which banks borrow
funds from the Federal Reserve Bank), as it deems necessary. In 1998, the
Federal funds rate was maintained at 5.50% until the 29th of September, at which
time it was lowered 25 basis points to 5.25%. An additional 25-basis point
reduction followed in October, and in November, the rate was lowered to 4.75%.
1998 and 1997 Comparison:
In 1998, interest income rose 14.1% to $134.3 million from $117.7 million in the
year-earlier twelve months. The growth in interest income was the net result of
a $213.2 million, or 15.2%, rise in the average balance of interest-earning
assets to $1.6 billion and an eight-basis point reduction in the average yield
to 8.32%.
21
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Despite increased competition for product resulting from the rate
environment, the Company originated $452.2 million in mortgage loans over the
twelve-month period. As a result, the average balance of loans rose $187.4
million, or 14.9%, to $1.4 billion and the interest income generated by loans
rose $14.9 million, or 13.7%, to $123.8 million. Notwithstanding the pressure to
lower rates induced by the competition, the average yield on the Company's loans
declined a modest nine basis points to 8.57%. In 1998, loans represented 89.5%
of average interest-earning assets and generated 92.2% of interest income, as
compared to 89.7% and 92.5%, respectively, in the prior twelve-month period.
The interest income provided by loans was complemented by the interest
income generated by the Company's growing portfolio of securities held to
maturity. Securities held to maturity generated interest income of $7.5 million
in 1998, up 57.6% from $4.7 million in the prior year. The $2.7 million increase
stemmed from a $42.4 million, or 55.6%, rise in the average balance to $118.6
million, and was supported by a seven-basis point rise in the average yield to
6.29%. In 1998, securities represented 7.3% of average interest-earning assets,
up from 5.4% in 1997, and generated 5.6% of interest income, up from 4.0%.
The rise in interest income also stemmed from the Company's money market
investments, which generated $691,000 in interest income in 1998, as compared to
$273,000 in 1997. The 1998 level reflects an $8.9 million increase in the
average balance to $14.1 million, which offset a 29-basis point reduction in the
average yield to 4.89%.
The higher level of interest income stemming from each of these assets
combined to offset a $1.5 million reduction in the interest income derived from
mortgage-backed securities to $2.3 million. The lower level in 1998 was the net
effect of a $25.5 million decrease in the average balance to $36.8 million and a
17-basis point rise in the average yield to 6.36%.
1997 and 1996 Comparison:
Interest income rose to $117.7 million in 1997 from $102.3 million in 1996. The
15.1% increase stemmed from a $158.3 million, or 12.7%, rise in average
interest-earning assets to $1.4 billion and a 17-basis point rise in the average
yield to 8.40%. These increases were driven, in turn, by record loan production,
which boosted the concentration of higher-yielding assets within the
interest-earning asset mix.
Average mortgage and other loans generated $108.9 million in interest
income, up 18.3% from $92.0 million in 1996. The increase reflected a $187.2
million rise in the average balance to $1.3 billion and a six-basis point rise
in the average yield to 8.66%. Loans thus represented 89.7% of average
interest-earning assets and generated 92.5% of total interest expense in 1997,
as compared to 86.1% and 89.9%, respectively, in 1996.
The interest income derived from securities rose 10.0% to $4.7 million in
1997 from $4.3 million in the year-earlier twelve months. The $429,000 increase
reflected a 42-basis point rise in the average yield to 6.22%, together with a
$1.9 million rise in the average balance to $76.2 million. Securities thus
represented 5.4% of average interest-earning assets in 1997 and generated 4.0%
of interest income for the year. In 1996, securities represented 6.0% of average
interest-earning assets and generated 4.2% of interest income for the year.
Mortgage-backed securities generated $3.9 million in interest income in
1997, representing a 26.6% reduction from $5.3 million in 1996. The $1.4 million
decrease reflected a $22.2 million decline in the average balance to $62.3
million coupled with a three-basis point drop in the average yield to 6.19%.
Mortgage-backed securities represented 4.4% of average interest-earning assets
in 1997 and produced 3.3% of interest income for the year. By comparison,
mortgage-backed securities represented 6.8% of average interest-earning assets
and 5.1% of interest income in 1996.
Money market investments provided interest income of $273,000 in 1997,
down $454,000 from $727,000 in the prior year. The reduction reflected an $8.6
million decline in the average balance to $5.3 million, accompanied by a
seven-basis point drop in the average yield to 5.18%.
Interest Expense
The level of interest expense is driven by the average balance and composition
of the Company's interest-bearing liabilities and by the respective costs of the
funding sources found within this mix. These factors are influenced, in turn, by
competition for deposits and by the level of market interest rates.
1998 and 1997 Comparison:
In 1998, interest expense rose to $65.8 million from $55.3 million in the
year-earlier twelve months. The higher level of interest expense was driven by
the need for additional funding to fuel the Company's profitable growth in
mortgage loans. Accordingly, the average balance of interest-bearing liabilities
rose $231.0 million to $1.4 billion, while the average cost remained unchanged
at 4.56%.
CDs continued to represent the largest component of interest-bearing
liabilities, while FHLB borrowings represented the largest percentage growth.
Specifically, CDs generated interest expense of $36.3 million, $74,000
22
higher than the level produced in the prior year. The increase was the net
result of an $18.2 million rise in the average balance to $684.4 million and a
13-basis point drop in the average cost to 5.30%. Reflecting a shift in the
Company's mix of funding sources, CDs represented 47.4% and 55.0% of average
interest-bearing liabilities in 1998 and 1997, and generated 55.1% and 65.4%,
respectively, of interest expense.
FHLB borrowings produced interest expense of $21.3 million, up $10.5
million from the level recorded in the prior year. The increase was the net
result of a $208.7 million rise in the average balance to $397.8 million and a
33-basis point decline in the average cost to 5.35%. FHLB borrowings thus
represented 27.6% of average interest-bearing liabilities in 1998 (as compared
to 15.6% in 1997) and generated 32.4% of interest expense (as compared to
19.4%).
The higher level of interest expense further reflects a $2.5 million rise
in the average balance of NOW and money market accounts to $69.9 million,
supported by a four-basis point rise in the average cost to 2.78%. As a result,
NOW and money market accounts generated interest expense of $1.9 million, up
$100,000, or 5.4%, from the year-earlier amount. In addition, the interest
expense stemming from mortgage escrow accounts rose $5,000 to $46,000, the net
effect of a $5.1 million increase in the average balance to $22.5 million and a
three-basis point reduction in the average cost to 0.20%.
The interest expense produced by savings accounts fell $299,000 to $6.2
million, reflecting a $3.5 million decline in the average balance to $268.6
million and an eight-basis point drop in the average cost to 2.32%. Savings
accounts represented 18.6% of average interest-bearing liabilities in 1998,
versus 22.4% in 1997, and generated 9.5% of interest expense, versus 11.8%.
The Company manages interest expense by carefully monitoring the rates it
pays on its deposits and adjusting them, as needed, while still maintaining a
profitable interest rate spread. While the cost of FHLB borrowings exceeds that
of deposits, they continue to be an attractive funding option, given the record
of earnings growth resulting from their use. While management continues to seek
deposit growth through expansion of the franchise, the Company will continue to
access its FHLB line of credit in 1999. The extent to which FHLB borrowings are
relied upon for funding will depend on a combination of factors, including the
availability of deposits and the level of loan demand.
1997 and 1996 Comparison:
In 1997, the Company increasingly relied on FHLB borrowings as a source of
funding for mortgage originations while, at the same time, experiencing an
increase in the balance of CDs. As a result, the average balance of
interest-bearing liabilities rose $182.1 million to $1.2 billion, accompanied by
a 21-basis point rise in the average cost of funds to 4.56%. These increases
combined to produce interest expense of $55.3 million, representing a 23.6%
increase from $44.8 million in 1996.
FHLB borrowings generated $10.8 million, or 19.4% of interest expense, in
1997, as compared to $3.4 million, or 7.6%, in the year-earlier twelve months.
The average balance more than tripled to $189.1 million in 1997, representing
15.6% of average interest-bearing liabilities for the year. By comparison, in
1996, FHLB borrowings averaged $61.2 million, representing 5.9% of average
interest-bearing liabilities. The higher level of interest expense derived from
FHLB borrowings was supported by a nine-basis point rise in the average cost to
5.68%.
CDs generated $36.2 million in interest expense, representing 65.4% of the
1997 total, as compared to $32.5 million, or 72.6% of total interest expense, in
1996. The increase stemmed from a $68.3 million rise in the average balance to
$666.2 million, with an average cost of 5.43%, down one basis point. Despite the
11.3% increase in the average balance, CDs represented 55.0% of average
interest-bearing liabilities in 1997, down from 58.0% in 1996.
Mortgagors' escrow contributed $41,000 to interest expense in 1997, up
from $39,000 in the prior year. The increase was the net result of a $2.2
million rise in the average balance to $17.5 million and a three-basis point
drop in the average cost to 0.23%.
The increase in interest expense generated by these funding sources was
partly offset by declines in the interest expense derived from the Company's
savings, NOW, and money market accounts. In 1997, savings accounts produced
interest expense of $6.5 million, down $231,000 from $6.8 million in the prior
year. The decline reflected a $10.0 million drop in the average balance to
$272.0 million, and an average cost of 2.40%, up one basis point. Savings
accounts represented 22.4% of average interest-bearing liabilities and generated
11.8% of interest expense in 1997, as compared to 27.4% and 15.1%, respectively,
in 1996.
NOW and money market accounts generated interest expense of $1.8 million
in 1997, down $195,000 from $2.0 million in the prior year. The decrease stemmed
from a $6.3 million reduction in the average balance to $67.3 million and a
three-basis point drop in the average cost to 2.74%. Average NOW and money
market accounts represented 5.6% of average-interest bearing liabilities and
produced 3.3% of interest expense in 1997, and 7.1% and 4.6%, respectively, in
1996.
23
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Net Interest Income Analysis
For the Years Ended December 31,
------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning Assets:
Mortgage and other
loans, net $1,445,028 $ 123,784 8.57% $1,257,632 $108,868 8.66%
Securities 118,594 7,464 6.29 76,208 4,737 6.22
Mortgage-backed securities 36,782 2,338 6.36 62,259 3,856 6.19
Money market investments 14,130 691 4.89 5,269 273 5.18
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,614,534 134,277 8.32% 1,401,368 117,734 8.40%
Non-interest-earning assets 43,727 39,895
- -----------------------------------------------------------------------------------------------------------------
Total assets $1,658,261 $1,441,263
=================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
Liabilities:
NOW and money market
accounts $ 69,894 $ 1,944 2.78% $ 67,347 $ 1,844 2.74%
Savings accounts 268,558 6,224 2.32 272,043 6,523 2.40
Certificates of deposit 684,434 36,251 5.30 666,242 36,177 5.43
FHLB borrowings 397,815 21,290 5.35 189,136 10,751 5.68
Mortgagors' escrow 22,501 46 0.20 17,451 41 0.23
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,443,202 65,755 4.56% 1,212,219 55,336 4.56%
Non-interest-bearing
deposits 31,918 26,622
Other liabilities 27,559 22,798
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,502,679 1,261,639
Stockholders' equity 155,582 179,624
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,658,261 $1,441,263
=================================================================================================================
Net interest income/
interest rate spread $ 68,522 3.76% $ 62,398 3.84%
Net interest-earning
assets/net interest
margin $ 171,332 4.24 $189,149 4.45
Ratio of interest-earning
assets to interest-
bearing liabilities 1.12x 1.16x
=================================================================================================================
For the Years Ended December 31,
-----------------------------------
1996
-----------------------------------
Average
Average Yield/
(dollars in thousands) Balance Interest Cost
- ----------------------------------------------------------------------
ASSETS
Interest-earning Assets:
Mortgage and other
loans, net $1,070,454 $ 92,017 8.60%
Securities 74,328 4,308 5.80
Mortgage-backed securities 84,438 5,252 6.22
Money market investments 13,851 727 5.25
- ----------------------------------------------------------------------
Total interest-earning assets 1,243,071 102,304 8.23%
Non-interest-earning assets 38,980
- ----------------------------------------------------------------------
Total assets $1,282,051
- ----------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
Liabilities:
NOW and money market
accounts $ 73,641 $ 2,039 2.77%
Savings accounts 282,064 6,754 2.39
Certificates of deposit 597,963 32,533 5.44
FHLB borrowings 61,191 3,419 5.59
Mortgagors' escrow 15,256 39 0.26
- ----------------------------------------------------------------------
Total interest-bearing
liabilities 1,030,115 44,784 4.35%
Non-interest-bearing
deposits 23,215
Other liabilities 21,361
- ----------------------------------------------------------------------
Total liabilities 1,074,691
Stockholders' equity 207,360
- ----------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,282,051
======================================================================
Net interest income/
interest rate spread $ 57,520 3.88%
Net interest-earning
assets/net interest
margin $ 212,956 4.63
Ratio of interest-earning
assets to interest-
bearing liabilities 1.21x
======================================================================
Rate/Volume Analysis
Year Ended Year Ended
December 31, 1998 December 31, 1997
Compared to Year Ended Compared to Year Ended
December 31, 1997 December 31, 1996
Increase/(Decrease) Increase/(Decrease)
- -------------------------------------------------------------------------------------------------------------------------
Due to Due to
(in thousands) Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage and other loans, net $ 16,060 $ (1,144) $ 14,916 $ 16,210 $ 641 $ 16,851
Securities 2,666 61 2,727 117 312 429
Mortgage-backed securities (1,620) 102 (1,518) (1,373) (23) (1,396)
Money market investments 433 (15) 418 (445) (9) (454)
- -------------------------------------------------------------------------------------------------------------------------
Total 17,539 (996) 16,543 14,509 921 15,430
- -------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
NOW and money market accounts 71 29 100 (172) (23) (195)
Savings accounts (81) (218) (299) (241) 10 (231)
Certificates of deposit 964 (890) 74 3,708 (64) 3,644
FHLB borrowings 11,164 (625) 10,539 7,267 65 7,332
Mortgagors' escrow 10 (5) 5 5 (3) 2
- -------------------------------------------------------------------------------------------------------------------------
Total 12,129 (1,710) 10,419 10,567 (15) 10,552
- -------------------------------------------------------------------------------------------------------------------------
Net change in interest income $ 5,410 $ 714 $ 6,124 $ 3,942 $ 936 $ 4,878
=========================================================================================================================
Year Ended
December 31, 1996
Compared to Year Ended
December 31, 1995
Increase/(Decrease)
- ---------------------------------------------------------------------------
Due to
(in thousands) Volume Rate Net
- ---------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage and other loans, net $ 10,395 $ 1,555 $ 11,950
Securities (71) (437) (508)
Mortgage-backed securities (1,018) (6) (1,024)
Money market investments 382 (38) 344
- ---------------------------------------------------------------------------
Total 9,688 1,074 10,762
- ---------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
NOW and money market accounts (125) (177) (302)
Savings accounts (319) (245) (564)
Certificates of deposit 5,367 (458) 4,909
FHLB borrowings 1,410 (227) 1,183
Mortgagors' escrow (6) (70) (76)
- ---------------------------------------------------------------------------
Total 6,327 (1,177) 5,150
- ---------------------------------------------------------------------------
Net change in interest income $ 3,361 $ 2,251 $ 5,612
===========================================================================
24
Net Interest Income
Net interest income is the Company's principal source of income. Its level is a
function of the average balance of interest-earning assets, the average balance
of interest-bearing liabilities, and the spread between the yield on said assets
and the cost of said liabilities. These factors are influenced, in turn, by the
pricing and mix of interest-earning assets and funding sources, and by such
external factors as competition, economic conditions, and the monetary policy of
the FOMC.
1998 and 1997 Comparison:
Driven by the significant growth in average interest-earning assets, the
Company's net interest income rose 9.8% to $68.5 million from $62.4 million in
1997. The increase was the net effect of a $16.5 million, or 14.1%, rise in
interest income and a $10.4 million, or 18.8%, rise in interest expense.
Reflecting the flattened yield curve and the use of higher-cost funding
sources, the rise in net interest income was accompanied by a modest decline in
interest rate spread to 3.76%. Notwithstanding a drop of eight basis points from
the year-earlier measure, the Company's spread exceeded the thrift industry
average by 96 basis points. Similarly, the Company recorded a net interest
margin of 4.24%, down 21 basis points from the year-earlier measure, yet 89
basis points above the industry average for 1998. In addition, the Company's
1998 margin reflects the allocation of $52.5 million to repurchase shares of
Company stock over the twelve-month period.
Given the increase in earnings supported by such funding, management
anticipates that FHLB borrowings will continue to be an important source of
funds. At the same time, based on current interest rates and its knowledge of
the local market, management anticipates that loan growth will match or exceed
the level achieved in 1998. Accordingly, it is expected that the trend in net
interest income will continue to be upward, while the interest rate spread is
expected to stabilize. The direction of the Company's net interest margin will
more so depend on the Company's share repurchase program and the amount of
capital allocated toward this end.
This said, it should be repeated that the level of net interest income is
a function of several factors, and subject to changes in market interest rates.
Among the factors that could result in the Company recording lower net interest
income are a reduction in the volume of mortgage originations or a substantial
increase in mortgage prepayments. Either of these scenarios could result from a
substantial increase in competition, or from a significant change in market
interest rates.
1997 and 1996 Comparison:
Net interest income rose 8.5% to $62.4 million in 1997 from $57.5 million in
1996. The increase was the net effect of a $15.4 million, or 15.1%, rise in
interest income to $117.7 million and a $10.6 million, or 23.6%, rise in
interest expense to $55.3 million. The higher level of interest income was
fueled by record mortgage loan production, which boosted the average balance of
interest-earning assets by $158.3 million and the average yield by 17 basis
points. The higher level of interest expense reflected the increased use of FHLB
borrowings as a source of funding, boosting average interest-bearing liabilities
by $182.1 million and the average cost of funds by 21 basis points.
Despite the increased use of FHLB borrowings in 1997, the interest rate
spread dropped a modest four basis points to 3.84% from 3.88% in 1996.
Correspondingly, the Company's net interest margin fell to 4.45% from 4.63%; the
extent of this reduction primarily reflects the allocation of $68.1 million
toward the repurchase of Company shares over the twelve-month period.
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.
1998 and 1997 Comparison:
In 1998, the Company's loan portfolio delivered another strong performance,
improving on its solid performance in the prior year. Non-performing loans
declined to $6.2 million at December 31, 1998 from $7.7 million at December 31,
1997, or to 0.42% of loans, net, from 0.55%. In addition, the Company extended
its record to 14 consecutive quarters without any net charge-offs and maintained
the fully-performing status of its multi-family mortgage loan portfolio.
Reflecting these achievements, and the level of coverage provided by the
loan loss allowance, the provision for loan losses was suspended throughout
1998. The fourth quarter of 1998 was the fourteenth consecutive quarter without
any provisions being added, continuing a practice initiated in the third quarter
of 1995.
In the absence of any net charge-offs or provisions for loan losses, the
loan loss allowance was maintained at $9.4 million, equivalent to 152.28% of
non-performing loans and 0.63% of loans, net, at December 31, 1998.
25
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Of greater significance is the ratio of the allowance to the sum of the
Company's net charge-offs since 1987. In the twelve years ended December 31,
1998, the Company recorded $1.4 million in net charge-offs; at $9.4 million, the
loan loss allowance was 661.36 times this amount.
For more information about the Company's asset quality, see the discussion
and analysis beginning on page 13 of this report.
1997 and 1996 Comparison:
In 1997 and 1996, the Company suspended the provision for loan losses,
continuing a practice initiated in the third quarter of 1995. In 1996, the
Company also reversed $2.0 million from the loan loss allowance, resulting in
the recognition of a $750,000 net benefit for the year.
As in 1998, the decision to suspend the provision for loan losses in 1996
and 1997 was driven by the level of coverage provided by the loan loss allowance
and by the performance of the Company's mortgage loan portfolio. In addition to
the absence of any net charge-offs, the Company enjoyed a significant reduction
in the level of non-performing assets at December 31, 1997 as compared to the
level recorded at December 31, 1996. Specifically, non-performing assets
declined to $8.7 million, or 0.54% of total assets, from $10.3 million, or 0.76%
of total assets. Included in the respective amounts were non-performing loans of
$7.7 million and $9.7 million, representing 0.55% and 0.84% of loans, net.
Reflecting the absence of any net charge-offs and recoveries of $72,000,
the allowance for loan losses rose to $9.4 million at December 31, 1997,
equivalent to 122.61% of non-performing loans and 0.68% of loans, net.
Other Operating Income
The income generated by the Company's interest-earning assets is complemented by
other operating income derived from service fees and fees charged on loans and
depository accounts.
1998 and 1997 Comparison:
While other operating income is a less significant source of Company earnings
than net interest income, management took steps to enhance its level in 1998. As
a result, the Company generated other operating income of $2.6 million, up
$249,000 from $2.3 million in 1997. The 10.8% increase was the net effect of an
$824,000 rise in fee income to $2.1 million from $1.3 million and a $575,000
decline in other income to $443,000 from $1.0 million.
The higher level of fee income in 1998 reflects a general increase in
financial service fees and charges, together with an increase in prepayment
penalties. In 1997, the higher level of other income reflected a gain on the
sale of $13.6 million in multi-family mortgage loans in the fourth quarter of
the year.
The Company continues to look at additional means of generating fee
income. In the fourth quarter of 1998, the Company introduced "QCSB Online," an
online banking service, to enable its depositors to bank directly via their PCs.
In addition to paying bills and accessing account balance information, customers
can utilize QCSB Online to transfer funds between their accounts. While
currently offered to customers without charge, QCSB Online is expected to
generate additional fee income in 1999. The Company is also reviewing proposals
to introduce the sale of alternative investment products such as annuities and
mutual funds.
1997 and 1996 Comparison:
Other operating income totaled $2.3 million in 1997 and $2.4 million in 1996.
The $140,000 decline was the net effect of a $296,000 reduction in fee income to
$1.3 million and a $156,000 increase in other income to $1.0 million. In the
second half of 1997, the Company took steps to enhance its fee income, by adding
the VISA Check Card to its menu of financial products and by selling
multi-family mortgage loans to a third party, with servicing rights retained as
a means of generating additional income in future periods.
Operating Expense
Among the Company's distinguishing characteristics is its demonstrated ability
to contain operating expense. Consisting of compensation and benefits, occupancy
and equipment, G&A, and other expenses, the Company's operating expense
typically represents a below-average percentage of average assets and an
efficiency ratio that ranks among the thrift industry's best. Included in
compensation and benefits expense are expenses associated with the amortization
and appreciation of shares held in the Company's stock-related benefit plans
("plan-related expenses"), which are added to stockholders' equity at the end of
the period.
1998 and 1997 Comparison:
The Company recorded 1998 operating expense of $26.0 million, or 1.57% of
average assets, an improvement from $27.1 million, or 1.88% of average assets,
in the prior year. The $1.1 million decline reflects reductions in all four
expense categories, including a $343,000 decrease in compensation and benefits
expense to $18.5 million; a $322,000 decrease in G&A expense to $4.6 million; a
$195,000 decrease in occupancy and equipment to $2.4 million, and a $271,000
decrease in other operating expense to $428,000.
Plan-related expenses totaled $6.7 million, representing 36.3% of
compensation and benefits expense and 25.9% of total operating expense in 1998.
In the prior year, the Company recorded plan-related expenses of $7.4 million,
representing 39.0% and 27.2%, respectively, of compensation and benefits expense
and total operating expense. The decline in plan-related expenses partly
26
reflects the extension of the amortization period for the ESOP to thirty years
from twenty as of January 1, 1998. In January 1999, the Recognition and
Retention Plan was largely completed; as a result, plan-related expenses will be
somewhat reduced for the year.
Also reflected in 1998 G&A expense are costs associated with the Company's
efforts to prepare for the millennium. The Company has been recording all such
expenses as incurred since steps began to prepare for the Year 2000; this
process is discussed in greater detail under "The Year 2000 Issue," elsewhere on
this page.
Reflecting the decline in operating expense and the higher levels of net
interest income and other operating income, the Company's efficiency ratio
improved to 36.51% in 1998 from 41.86% in 1997. Excluding the $6.7 million in
plan-related expenses, i.e., on a cash earnings basis, the efficiency ratio
improved to 27.05% from 30.47% in the year-earlier twelve months.
1997 and 1996 Comparison:
Operating expense totaled $27.1 million and $23.3 million in 1997 and 1996,
respectively, equivalent to 1.88% and 1.82% of average assets in the
corresponding years. The $3.8 million increase primarily stemmed from a $2.7
million rise in compensation and benefits expense to $18.9 million, largely
reflecting a $2.0 million increase in non-cash expenses stemming from the
amortization and appreciation of shares held in the Company's stock-related
benefit plans. At $7.4 million, such plan-related expenses accounted for 39.1%
of compensation and benefits expense in 1997, as compared to $5.4 million, or
33.4%, in 1996. Thus, while the Company's efficiency ratio was 41.86% and 38.81%
in 1997 and 1996 on the basis of GAAP earnings, its cash efficiency ratio
improved to 30.47% and 28.83%.
The balance of the increase in 1997 operating expense stemmed from a
$162,000 rise in occupancy and equipment expense to $2.6 million, a $450,000
increase in G&A expense to $4.9 million (primarily reflecting the expansion of
the Bank's advertising program) and a $514,000 increase in other operating
expense to $699,000. The higher level of occupancy and equipment expense
reflected the full-year operation of three locations that were added to the
franchise in the prior twelve-month period and the relocation of a customer
service center to a full-service branch in mid-1997. Also included in occupancy
and equipment expense were costs associated with the Company's Year 2000
compliance, which were expensed as incurred.
Income Tax Expense
Income tax expense includes Federal, New York State, and New York City income
taxes. In addition, the Company's income tax expense reflects certain non-cash
items stemming from the amortization and appreciation of shares held in the
Company's stock-related benefit plans. While these non-cash items are recorded
as a charge against earnings, they are added back to stockholders' equity at the
end of each period.
1998 and 1997 Comparison:
The Company recorded income tax expense of $18.2 million in 1998, up from $14.4
million in the twelve months ended December 31, 1997. The increase reflects a
$7.5 million rise in pre-tax income to $45.1 million, and includes a $4.7
million rise in non-cash items to $8.1 million stemming from the Company's
stock-related benefit plans. Furthermore, the Company's 1997 income tax expense
was reduced by the recapture of $1.3 million that had been recorded as a tax
charge in the fourth quarter of 1996. Based on currently available information,
management expects that the effective tax rate will approximate 41% in 1999.
1997 and 1996 Comparison:
Income tax expense totaled $14.4 million in 1997, down $3.4 million from $17.8
million in 1996. In addition to a $1.1 million decline in pre-tax income to
$37.6 million, the reduction reflected the net effect of a $1.8 million tax
charge against earnings in the prior year's fourth quarter and the reversal of
$1.3 million of that charge in the first quarter of 1997. The tax charge had
been recorded pursuant to a delay in the enactment of legislation to de-couple
the New York City tax code from that of the Federal tax code with regard to its
treatment of the tax bad debt reserve.
Also reflected in 1997 and 1996 income tax expense were $3.4 million and
$1.1 million, respectively, in non-cash items stemming from the amortization and
appreciation of shares held in the Company's stock-related benefit plans. These
amounts were restored to stockholders' equity at the respective period-ends.
The Year 2000 Issue
The approach of the millennium has triggered an intense review, analysis, and,
where needed, modification of the internal and external computer programs and
systems utilized in the day-to-day operation of companies across all industries.
These actions have been necessitated by the fact that the majority of computer
programs and systems were originally programmed using two digits, rather than
four, to indicate the calendar year. Thus, in the absence of modification,
computers would fail to recognize the year 2000, taking the digits "00" to mean
the year 1900 instead.
Like most financial institutions, Queens County Savings Bank may be
significantly impacted by the Year 2000, due to the nature of the information it
generates and employs. Likely to be affected are the software, hardware, and
other equipment with which the Bank interfaces electronically or operationally,
including those that are
27
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
maintained on its behalf by third party vendors who provide such services as
data processing, information systems management, maintenance, and credit bureau
reports.
If computer systems are inadequately modified to identify the Year 2000,
numerous computer applications could fail or generate erroneous results. As a
result, many calculations, such as interest, payments, or due dates that require
date field information could be dramatically misstated. The Bank could
experience a temporary inability to process transactions, send invoices, or
engage in similarly normal business activities. In addition, under certain
circumstances, failure to adequately address the Year 2000 issue could adversely
affect the viability of the Bank's suppliers and creditors and the
creditworthiness of its borrowers. If not addressed, the Year 2000 issue could
adversely impact the Bank's ability to provide financial products and services
competitively.
In view of its significance, management formed a committee to study and
address the Year 2000 issue in the latter part of 1996. The Committee is chaired
by the Senior Vice President, Comptroller, and Chief Financial Officer. By the
first quarter of 1997, all internal systems had been modified or replaced with
Year 2000-compliant systems. The Committee's next step was to assess the Year
2000-readiness of its external systems; it began holding frequent meetings
toward this end in the fourth quarter of 1997. In the second quarter of 1998,
the Committee completed its assessment of the Year 2000 issue, which included a
thorough review of the action plans of each third party service provider and
supplier of the Bank. In the third quarter of the year, the Committee completed
the development of contingency plans for each external vendor and supplier, to
be implemented in the event that any of them should fail to meet their operating
requirements.
In the fourth quarter of 1998, the Bank initiated testing on its loan and
deposit systems in collaboration with its primary third party vendor, a
nationally recognized provider of data processing services. Said vendor has
provided the Bank with written assurances that its systems and the software it
is licensed to use will be Year 2000-compliant; testing of the integration of
such systems with the licensed software is expected to be completed by the
second quarter of 1999. In the event that such system fails to be compliant by
the third quarter of this year, the vendor has made arrangements with another
service provider that has successfully completed its Year 2000 testing to
provide the Bank with data processing services.
As a result of these efforts, and on the basis of currently available
information, management believes that all critical systems modifications and
conversions will be completed in a timely manner, thus reducing the Bank's
exposure to the risks associated with the approaching millennium. However, if
such modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 issue could have a material adverse impact upon the
Bank.
The costs involved in monitoring and managing preparations for the Year
2000 have consistently been charged against earnings as they have been incurred.
Going forward, such costs may include charges by third party software vendors
for product enhancements, costs involved in testing software products for Year
2000 compliance, and costs for implementing contingency plans for critical
software products that have not been enhanced. Potential indirect costs would
consist primarily of the time devoted by employees to monitor the progress of
software vendors, to test enhanced software products, and to implement any
necessary contingency plans. The Company estimates that total costs related to
the Year 2000 will not exceed $100,000. To date, more than one-third of the
estimated costs have already been expensed.
Impact of Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which established accounting and
reporting standards for derivative instruments and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure said instruments
at fair value. In addition, the statement establishes criteria required to
designate a derivative instrument as a hedge and the accounting for changes in
fair value of a derivative, depending on its intended use. Under SFAS No. 133,
an entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. These methods must be consistent with the
entity's approach to managing risk.
SFAS No. 133 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 and is not expected to have an impact on the
Company.
28
Accounting for Mortgage-backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise, an amendment of SFAS No. 65." SFAS No. 134 amends
the accounting treatment of mortgage-backed securities retained. After the
securitization of a mortgage loan held for sale, any retained mortgage-backed
securities shall be classified in accordance with the entity's ability and
intent to sell or hold those securities. However, a mortgage banking enterprise
must classify as "trading" securities any retained mortgage-backed securities
that it commits to sell before or during the securitization process.
SFAS No. 134 is effective for the first quarter beginning after December
15, 1998, and enterprises may reclassify mortgage-backed securities and other
beneficial interests retained after the securitization of mortgage loans held
for sale from the trading category, except for those with sales commitments in
place. The reclassification is to be implemented when SFAS No. 134 is initially
applied.
The Bank does not expect the adoption of SFAS No. 134 to have an impact on
its financial condition or results of operations.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles that
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchase power of
money due to inflation.
The Company's assets and liabilities are primarily monetary in nature. As
a result, interest rates have a greater impact on the Company's performance than
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Market Price of Common Stock and Dividends Paid per Common Share
Queens County Bancorp trades on the Nasdaq National Market under the symbol
"QCSB." At December 31, 1998, the Company had 21,250,897 shares outstanding,
reflecting the three-for-two stock split on September 29, 1998.
The table below sets forth the intra-day high/low price range and closing
prices for the Company stock, as reported by The Nasdaq Stock Market, and the
cash dividends paid per common share for each of the four quarters of 1998 and
1997.
Market Price and Dividends Paid per Common Share
Market Price
High Low Close
Dividends Declared ------------------------------------------------------------------------------------
per Common Share* Pre-Split** Post-Split Pre-Split** Post-Split Pre-Split** Post-Split
- ---------------------------------------------------------------------------------------------------------------------
1998
1st Quarter $0.1333 $199.125 $29.500 $156.377 $23.167 $197.998 $29.333
2nd Quarter 0.1667 213.752 31.667 179.435 26.583 196.310 29.083
3rd Quarter 0.1667 205.315 30.417 154.123 22.833 180.563 26.750
4th Quarter 0.2000 210.094 31.125 153.563 22.750 200.813 29.750
- ---------------------------------------------------------------------------------------------------------------------
1997
1st Quarter $0.0740 $119.000 $17.630 $ 90.500 $13.407 $109.750 $16.259
2nd Quarter 0.0890 144.000 21.333 107.000 15.852 136.500 20.222
3rd Quarter 0.1110 163.500 24.222 133.500 19.778 155.440 23.028
4th Quarter 0.1333 182.250 27.000 154.872 22.944 182.250 27.000
=====================================================================================================================
* Dividends have been restated to reflect the 3-for-2 stock splits on April
10 and October 1, 1997, and September 29, 1998.
** States the price per share as if the Company had not split its stock
3-for-2 on September 30, 1994, 4-for-3 on August 22, 1996, and 3-for-2 on
April 10 and October 1, 1997, and September 29, 1998.
At December 31, 1998, the Company had approximately 700 shareholders of
record. This figure does not include those investors whose shares were being
held for them in street name by a broker or other nominee at that date.
29
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Consolidated Statements of Condition
December 31,
-----------------------------
(in thousands, except share data) 1998 1997
- ---------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 27,561 $ 16,733
Money market investments 19,000 6,000
Securities held to maturity (estimated market value of
$152,055 and $95,067, respectively) (note 3) 152,280 94,936
Mortgage-backed securities held to maturity (estimated
market value of $20,332 and $50,619, respectively)
(note 4) 19,680 49,781
Securities available for sale 4,656 2,617
Mortgage loans 1,486,222 1,393,658
Other loans 9,728 10,776
Less: Allowance for loan losses (9,431) (9,431)
- ---------------------------------------------------------------------------------------
Loans, net (notes 5 and 6) 1,486,519 1,395,003
Premises and equipment, net 10,399 10,782
Deferred tax asset, net (note 10) 5,917 5,514
Other assets (notes 7 and 12) 20,870 21,903
- ---------------------------------------------------------------------------------------
Total assets $ 1,746,882 $ 1,603,269
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 8):
NOW and money market accounts $ 70,423 $ 67,894
Savings accounts 273,357 268,133
Certificates of deposit 722,985 703,948
Non-interest-bearing accounts 35,520 29,186
- ---------------------------------------------------------------------------------------
Total deposits 1,102,285 1,069,161
- ---------------------------------------------------------------------------------------
Official checks outstanding 34,487 29,440
FHLB borrowings (note 9) 439,055 309,664
Accounts payable and accrued expenses 1,552 1,857
Mortgagors' escrow 13,084 10,690
Other liabilities (note 12) 7,013 11,942
- ---------------------------------------------------------------------------------------
Total liabilities 1,597,476 1,432,754
- ---------------------------------------------------------------------------------------
Stockholders' equity (note 2):
Preferred stock at par $0.01 (5,000,000 shares
authorized; none issued) -- --
Common stock at par $0.01 (60,000,000 shares
authorized; 30,970,693 shares issued;
21,250,897 and 22,369,187 shares outstanding
at December 31, 1998 and 1997, respectively) 310 206
Paid-in capital in excess of par 138,180 125,000
Retained earnings (substantially restricted)
(note 15) 165,383 166,230
Less: Treasury stock (9,719,796 and 8,601,663
shares, respectively) (137,901) (104,148)
Unallocated common stock held by ESOP
(note 13) (12,767) (13,526)
Common stock held by SERP and Deferred
Compensation Plans (notes 12 and 13) (3,770) (2,492)
Unearned common stock held by RRPs (note 13) (63) (812)
Accumulated other comprehensive income, net
of tax effect 34 57
- ---------------------------------------------------------------------------------------
Total stockholders' equity 149,406 170,515
- ---------------------------------------------------------------------------------------
Commitments and contingencies (note 11)
- ---------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,746,882 $ 1,603,269
=======================================================================================
See accompanying notes to consolidated financial statements.
30
Consolidated Statements of Income and Comprehensive Income
Years Ended December 31,
-----------------------------------------
(in thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
INTEREST INCOME:
Mortgage and other loans (note 5) $ 123,784 $ 108,868 $ 92,017
Securities held to maturity 7,464 4,737 4,308
Mortgage-backed securities held to maturity 2,338 3,856 5,252
Money market investments 691 273 727
- -----------------------------------------------------------------------------------------------
Total interest income 134,277 117,734 102,304
- -----------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW and money market accounts 1,944 1,844 2,039
Savings accounts 6,224 6,523 6,754
Certificates of deposit 36,251 36,177 32,533
FHLB borrowings (note 9) 21,290 10,751 3,419
Mortgagors' escrow 46 41 39
- -----------------------------------------------------------------------------------------------
Total interest expense 65,755 55,336 44,784
- -----------------------------------------------------------------------------------------------
Net interest income 68,522 62,398 57,520
- -----------------------------------------------------------------------------------------------
Reversal of provision for loan losses (note 6) -- -- (2,000)
- -----------------------------------------------------------------------------------------------
Net interest income after reversal of
provision for loan losses 68,522 62,398 59,520
- -----------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Fee income 2,111 1,287 1,583
Other (note 5) 443 1,018 862
- -----------------------------------------------------------------------------------------------
Total other operating income 2,554 2,305 2,445
- -----------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Compensation and benefits (notes 12 and 13)(1) 18,529 18,872 16,185
Occupancy and equipment (note 11) 2,446 2,641 2,479
General and administrative 4,550 4,872 4,422
Other 428 699 185
- -----------------------------------------------------------------------------------------------
Total operating expense 25,953 27,084 23,271
- -----------------------------------------------------------------------------------------------
Income before income taxes 45,123 37,619 38,694
Income tax expense (note 10)(2) 18,179 14,355 17,755
Net income $ 26,944 $ 23,264 $ 20,939
- -----------------------------------------------------------------------------------------------
Comprehensive income, net of tax:
Unrealized gain on securities (23) 57 --
- -----------------------------------------------------------------------------------------------
Comprehensive income $ 26,921 $ 23,321 $ 20,939
===============================================================================================
Earnings per share(3) $1.41 $1.14 $0.90
Diluted earnings per share(3) $1.34 $1.07 $0.85
===============================================================================================
(1) Includes non-cash expenses of $6.724 million, $7.368 million, and $5.411
million, respectively.
(2) Includes non-cash expenses of $8.071 million, $3.416 million, and $1.111
million, respectively.
(3) Reflects shares issued as a result of 3-for-2 stock splits on April 10 and
October 1, 1997, and September 29, 1998.
See accompanying notes to consolidated financial statements.
31
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31,
-------------------------------------------
(in thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
COMMON STOCK (Par Value: $0.01)
Balance at beginning of year $ 206 $ 92 $ 69
Stock splits (10,323,460; 17,205,794;
and 3,441,095 shares) 104 114 23
- -----------------------------------------------------------------------------------------------
Balance at end of year 310 206 92
- -----------------------------------------------------------------------------------------------
PAID-IN CAPITAL IN EXCESS OF PAR:
Balance at beginning of year 125,000 116,607 112,441
Tax benefit effect on stock plans 8,071 3,416 1,111
Common stock acquired by SERP and Deferred
Compensation Plans 1,278 1,081 1,081
Allocation of ESOP stock 3,938 4,021 2,002
Stock splits (10,323,460; 17,205,794;
and 3,441,095 shares) (104) (114) (23)
Cash paid in lieu of fractional shares (3) (11) (5)
- -----------------------------------------------------------------------------------------------
Balance at end of year 138,180 125,000 116,607
- -----------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 166,230 154,886 140,969
Net income 26,944 23,264 20,939
Dividends paid on common stock (12,636) (8,135) (5,669)
Exercise of stock options (784,740; 327,610;
and 226,196 shares) (15,155) (3,785) (1,353)
- -----------------------------------------------------------------------------------------------
Balance at end of year 165,383 166,230 154,886
- -----------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (104,148) (42,397) (16,843)
Purchase of common stock (1,957,530;
3,820,989; and 1,266,540 shares) (52,533) (68,086) (28,825)
Common stock acquired by SERP 1,278 1,337 1,081
Exercise of stock options (784,740; 327,610;
and 226,196 shares) 17,502 4,998 2,190
- -----------------------------------------------------------------------------------------------
Balance at end of year (137,901) (104,148) (42,397)
- -----------------------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN:
Balance at beginning of year (13,526) (14,820) (16,065)
Allocation of ESOP stock 759 1,294 1,245
- -----------------------------------------------------------------------------------------------
Balance at end of year (12,767) (13,526) (14,820)
- -----------------------------------------------------------------------------------------------
SERP AND DEFERRED COMPENSATION PLANS:
Balance at beginning of year (2,492) (1,411) (330)
Common stock acquired by SERP and
Deferred Compensation Plans (1,278) (1,081) (1,081)
- -----------------------------------------------------------------------------------------------
Balance at end of year (3,770) (2,492) (1,411)
- -----------------------------------------------------------------------------------------------
RECOGNITION AND RETENTION PLANS:
Balance at beginning of year (812) (1,528) (2,611)
Earned portion of RRPs 749 716 1,083
- -----------------------------------------------------------------------------------------------
Balance at end of year (63) (812) (1,528)
- -----------------------------------------------------------------------------------------------
ACCUMULATED COMPREHENSIVE INCOME, NET OF TAX:
Balance at beginning of year 57 -- --
Net unrealized (depreciation) appreciation
in securities, net of tax (23) 57 --
- -----------------------------------------------------------------------------------------------
Balance at end of year 34 57 --
- -----------------------------------------------------------------------------------------------
Total stockholders' equity $ 149,406 $ 170,515 $ 211,429
===============================================================================================
See accompanying notes to consolidated financial statements.
32
Consolidated Statements of Cash Flows
Years Ended December 31,
-------------------------------------------
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,944 $ 23,264 $ 20,939
- -------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 921 948 772
Reversal of provision for loan losses -- -- (2,000)
(Increase) decrease in deferred
income taxes (403) (2,202) 2,510
Amortization of premiums, net 106 147 537
Amortization of net deferred
loan origination fees 244 217 141
Net loss on redemption of securities
and mortgage-backed securities (91) (20) (2)
Net (gain) loss on sale of foreclosed
real estate and loans (167) (556) 123
Tax benefit effect on stock plans 8,071 3,416 1,111
Earned portion of RRPs 749 716 1,083
Earned portion of ESOP 4,697 5,315 3,247
Changes in assets and liabilities:
Decrease (increase) in other assets 1,033 (5,060) 3,014
(Decrease) increase in accounts
payable and accrued expenses (305) 688 286
Increase (decrease) in official
checks outstanding 5,047 2,711 (1,117)
(Decrease) increase in other liabilities (4,929) 5,292 (741)
- -------------------------------------------------------------------------------------------------
Total adjustments 14,973 11,612 8,964
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,917 34,876 29,903
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of securities
and mortgage-backed securities held
to maturity 168,529 94,939 106,132
Proceeds from redemption of securities
available for sale -- 1,519 --
Purchase of securities held to maturity (195,788) (79,575) (96,010)
Purchase of securities available for sale (2,081) (4,009) --
Net increase in loans (101,934) (265,152) (151,730)
Proceeds from sale of loans and foreclosed
real estate 10,358 16,578 1,006
Purchase of premises and equipment, net (538) (653) (1,323)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (121,454) (236,353) (141,925)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in mortgagors' escrow 2,394 3,334 (448)
Net increase in deposits 33,124 45,231 91,790
Net increase in FHLB borrowings 129,391 228,271 35,316
Cash dividends and stock options exercised (27,791) (11,920) (7,027)
Purchase of Treasury stock, net of stock
options exercised and shares acquired
by SERP (33,753) (61,751) (25,554)
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 103,365 203,165 94,077
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 23,828 1,688 (17,945)
Cash and cash equivalents at beginning of period 22,733 21,045 38,990
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 46,561 $ 22,733 $ 21,045
=================================================================================================
Supplemental information:
Cash paid for:
Interest $ 65,767 $ 55,335 $ 44,810
Income taxes 10,489 12,443 14,775
- -------------------------------------------------------------------------------------------------
Transfers to foreclosed real estate from loans 772 1,758 730
- -------------------------------------------------------------------------------------------------
Transfers to real estate held for investment
from foreclosed real estate 535 533 222
=================================================================================================
See accompanying notes to consolidated financial statements.
33
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Notes to Consolidated Financial Statements
NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As more fully described in Note 2, Queens County Savings Bank (the "Bank" or the
"Subsidiary") converted from a mutual savings bank to the capital stock form of
ownership on November 23, 1993. In anticipation of the conversion, Queens County
Bancorp, Inc. (the "Company" or the "Parent") was formed on July 20, 1993. The
following is a description of the significant accounting and reporting policies
that the Company and its wholly-owned subsidiary follow in preparing and
presenting their consolidated financial statements, which conform to generally
accepted accounting principles and to general practices within the banking
industry. The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany accounts
and transactions are eliminated in consolidation. Certain reclassifications have
been made to prior-year financial statements to conform to the 1998
presentation.
Securities and Mortgage-Backed Securities Held to Maturity and Securities
Available for Sale
Securities and mortgage-backed securities, which the Company has the positive
intent and ability to hold until maturity, are carried at cost, adjusted for
amortization of premiums and accretion of discounts on a level-yield method over
the remaining period to contractual maturity, and adjusted, in the case of
mortgage-backed securities, for actual prepayments. Securities and
mortgage-backed securities to be held for indefinite periods of time and not
intended to be held to maturity are classified as "available for sale"
securities and are recorded at fair value, with unrealized appreciation and
depreciation, net of tax, reported as a separate component of stockholders'
equity. Gains and losses on sales of securities and mortgage-backed securities
are computed using the specific identification method.
Loans
Loans are carried at unpaid principal balances, less unearned discounts, net of
deferred loan origination fees and the allowance for loan losses.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures." SFAS No. 114 applies to all loans
except smaller balance homogenous consumer loans (including one-to-four family
mortgage loans), loans carried at fair value or the lower of cost or fair value,
debt securities, and leases. SFAS No. 114 requires the creation of a valuation
allowance for impaired loans based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral. Under SFAS No. 114, a loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the loan's
contractual terms. SFAS No. 114 also provides that in-substance foreclosed loans
should not be included in foreclosed real estate for financial reporting
purposes but, rather, in the loan portfolio. The adoption of SFAS No. 114, as
amended by SFAS No. 118, did not have any impact on the Company's 1998 results
of operations nor on its financial position, including the level of the
allowance for loan losses.
34
The allowance for loan losses is increased by the provision for loan
losses charged to operations and is reduced by charge-offs, net of recoveries.
The allowance is based on management's periodic evaluation of the adequacy of
the allowance, taking into consideration known and inherent risks in the
portfolio, the Bank's past loan loss experience, adverse situations which may
affect its borrowers' ability to repay, overall portfolio quality, and current
and prospective economic conditions. While management uses available information
to recognize losses on loans, future additions may be necessary, based on
changes in economic conditions beyond management's control. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Accordingly, the Bank
may be required to take certain charge-offs and/or recognize additions to the
allowance based on regulators' judgments concerning information available to
them during their examination. Based upon all relevant and available
information, management believes that the allowance for loan losses is adequate.
Fees are charged for originating mortgage loans at the time the loan is
granted. Loan origination fees, partially offset by certain expenses associated
with loans originated, are amortized to interest on loans over the life of the
loan using the interest method. Adjustable rate mortgages ("ARMs") with a lower
rate during the introductory period (usually one year) will reflect the
amortization of a substantial portion of the net deferred fee as a yield
adjustment during the introductory period.
Loans are designated as "in foreclosure," and the accrual of interest and
amortization of origination fees discontinued, when principal or interest
payments are in arrears 90 days or more, or sooner, if management considers
collection to be doubtful. When foreclosure proceedings commence for non-accrual
loans, previously accrued but unpaid interest is reversed and charged against
current income. Interest is subsequently recognized on loans in foreclosure only
to the extent that cash is received. Loans are returned to accrual status when
management deems that collection is reasonable.
Premises and Equipment
Premises, furniture and fixtures, and equipment are carried at cost less
accumulated depreciation computed on a straight-line basis over the estimated
useful lives of the respective assets. Leasehold improvements are carried at
cost less accumulated amortization computed on a straight-line basis over the
shorter of the related lease term or the estimated useful life of the
improvement.
Depreciation and amortization included in occupancy and equipment expense
for the years ended December 31, 1998, 1997, and 1996 amounted to $921,000,
$948,000, and $772,000, respectively.
The Year 2000 Issue
In January 1997, the Company developed a plan to address the Year 2000 issue and
began converting its computer systems to be Year 2000 compliant. The plan
provides for the conversion to be completed by June 30, 1999. The Year 2000
issue is the result of computer programs having been written using two digits,
rather than four, to define the applicable year. The Company is expensing all
costs associated with these systems changes as they are incurred.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, foreclosure are to be
sold, and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate carried at the lower of carrying
amount or fair value less estimated selling costs. Revenue and expenses from
operations and changes in the valuation allowance are included in other
operating expense.
Income Taxes
Income tax expense consists of income taxes currently payable and deferred
income taxes. Deferred income tax expense (benefit) is determined by recognizing
deferred tax assets and liabilities for future tax consequences, attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The realization of deferred tax
assets is assessed and a valuation allowance provided for that portion of the
asset for which it is more likely than not to be realized. Deferred tax assets
and liabilities are measured using enacted tax rates that are expected to apply
to taxable income in years in which those temporary differences are expected to
be recovered or settled.
Stock Option Plans
In October 1995, the Financial Accounting Standards Board (the "FASB") issued
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. 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 pro forma disclosures of net
income and earnings per share as if the fair value-based method of accounting
had been applied. SFAS No. 123 is effective for transactions entered into in
fiscal years that begin after December 31, 1995. Pro forma disclosures required
35
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
for entities that elect to continue measuring compensation cost using APB
Opinion No. 25 must include the effects of all awards granted in fiscal years
that begin after December 15, 1994.
The Company had three stock option plans at December 31, 1998. Stock
options related to two of these plans were originally granted concurrent with
the Bank's conversion from mutual to stock form in 1993. Additional stock
options, with an annual reload feature, were granted on February 18, 1997. The
Bank applies APB Opinion No. 25 and the related interpretations in accounting
for its plans and, accordingly, no compensation cost has been recognized.
Had compensation expense for the Company's stock option plans been
determined based upon the fair value at grant date for awards under these plans,
consistent with the methodology prescribed under SFAS No. 123, the Company's net
income and diluted earnings per share would have been reduced by approximately
$7.1 million, or $0.35 per share, in 1998; $3.4 million, or $0.16 per share, in
1997; and $216,000, or $0.01 per share, in 1996.
Retirement Plans
The Company has a pension plan covering substantially all employees who have
attained minimum service requirements. Post-retirement benefits are recorded on
an accrual basis with an annual provision that recognizes the expense over the
service life of the employee, determined on an actuarial basis.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents are defined to
include cash and due from banks and Federal funds sold.
Earnings Per Share (Basic and Diluted)
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No.
128 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.
For the years ended December 31, 1998, 1997, and 1996, respectively, the
weighted average number of common shares outstanding used in the computation of
Basic EPS was 19,091,705; 20,454,621; and 23,216,133, respectively. The weighted
average number of common shares outstanding used in the computation of Diluted
EPS was 20,181,013; 21,824,183; and 24,467,528 for the years ended December 31,
1998, 1997, and 1996, respectively. The differential in the weighted average
number of common shares outstanding used in the computation of Basic and Diluted
EPS represents the average common stock equivalents of employee stock options.
NOTE 2:
CONVERSION TO STOCK FORM OF OWNERSHIP
On July 13, 1993, the Board of Trustees of the Bank (now the Board of Directors
of the Company) adopted a Plan of Conversion to convert the Bank from a
state-chartered mutual savings bank to a state-chartered capital stock form
savings bank. In connection with the conversion, the Company was organized under
Delaware law for the purpose of acquiring all of the capital stock of the Bank.
On November 23, 1993, the Company became a public company and issued its
initial offering of 4,588,500 shares of common stock (par value $0.01 per share)
at a price of $25.00 per share, resulting in net proceeds of $110.6 million.
Concurrent with the issuance of the common stock, 50 percent of the net proceeds
were used to purchase all of the outstanding capital stock of the Bank. Parent
company-only financial information is presented in Note 16.
As a result of five stock splits (a 3-for-2 stock split on September 30,
1994; a 4-for-3 stock split on August 22, 1996; and 3-for-2 stock splits on
April 10 and October 1, 1997, and September 29, 1998), the initial offering
price was adjusted to $3.71 per share. The number of shares outstanding was
21,250,897 at December 31, 1998.
36
NOTE 3:
SECURITIES INVESTMENTS
Securities held to maturity at December 31, 1998 and 1997 are summarized as
follows:
December 31, 1998
---------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) Cost Unrealized Gain Unrealized Loss Market Value
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government and agencies $129,893 $ 142 $ (449) $129,586
- ----------------------------------------------------------------------------------------------------------------------
FHLB stock 22,385 -- -- 22,385
FNMA stock 2 82 -- 84
- ----------------------------------------------------------------------------------------------------------------------
Total stock 22,387 82 -- 22,469
- ----------------------------------------------------------------------------------------------------------------------
Total securities $152,280 $ 224 $ (449) $152,055
======================================================================================================================
December 31, 1997
---------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) Cost Unrealized Gain Unrealized Loss Market Value
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government and agencies $78,279 $ 117 $ (51) $ 78,345
- ----------------------------------------------------------------------------------------------------------------------
FHLB stock 16,655 -- -- 16,655
FNMA stock 2 65 -- 67
- ----------------------------------------------------------------------------------------------------------------------
Total stock 16,657 65 -- 16,722
- ----------------------------------------------------------------------------------------------------------------------
Total securities $94,936 $ 182 $ (51) $ 95,067
======================================================================================================================
The following is a summary of the amortized cost and estimated market
value of securities held to maturity at December 31, 1998 by remaining term to
maturity:
December 31, 1998
----------------------------------------
U.S. Government Estimated
(in thousands) and Agencies Market Value
- --------------------------------------------------------------------------------
1 year or less $129,893 $129,586
================================================================================
Because Federal Home Loan Bank ("FHLB") and Federal National Mortgage
Association ("FNMA") stock are securities for which sale is restricted by the
respective governmental agencies, they are not considered marketable equity
securities. FHLB and FNMA stock are carried at cost, which approximates value at
redemption.
Securities available for sale at December 31, 1998 and 1997 are summarized
as follows:
December 31, 1998
---------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) Cost Unrealized Gain Unrealized Loss Market Value
- ----------------------------------------------------------------------------------------------------------------------
Equity $ 4,591 $ 82 $ (17) $ 4,656
======================================================================================================================
December 31, 1997
---------------------------------------------------------------------------
Gross Gross Estimated
(in thousands) Cost Unrealized Gain Unrealized Loss Market Value
- ----------------------------------------------------------------------------------------------------------------------
Equity $ 2,509 $ 108 $ -- $ 2,617
======================================================================================================================
37
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
NOTE 4:
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity at December 31, 1998 and 1997 are
summarized as follows:
December 31, 1998
--------------------------------
(in thousands) GNMA FHLMC Total
- --------------------------------------------------------------------------------
Principal balance $15,886 $ 3,802 $19,688
Unamortized discount -- 8 8
- --------------------------------------------------------------------------------
Mortgage-backed securities, net 15,886 3,794 19,680
Gross unrealized gains 517 135 652
- --------------------------------------------------------------------------------
Estimated market value $16,403 $ 3,929 $20,332
================================================================================
December 31, 1997
-----------------------------------
(in thousands) GNMA FHLMC Total
- --------------------------------------------------------------------------------
Principal balance $ 20,050 $ 29,733 $ 49,783
Unamortized premium 19 -- 19
Unamortized discount -- (21) (21)
- --------------------------------------------------------------------------------
Mortgage-backed securities, net 20,069 29,712 49,781
Gross unrealized gains 720 258 978
Gross unrealized losses -- (140) (140)
- --------------------------------------------------------------------------------
Estimated market value $ 20,789 $ 29,830 $ 50,619
================================================================================
The amortized cost and estimated market value of mortgage-backed
securities held to maturity, all of which have prepayment provisions, are
distributed to a maturity category based on the estimated average life of said
securities, as shown below. Principal prepayments are not scheduled over the
life of the investment, but are reflected as adjustments to the final maturity
distribution. The following is a summary of the amortized cost and estimated
market value of mortgage-backed securities held to maturity at December 31, 1998
by remaining term to maturity:
December 31, 1998
-----------------------------------------------------------
Estimated
(in thousands) GNMA FHLMC Total Market Value
- ---------------------------------------------------------------------------------------------------
1 year or less $ 3,311 $ 1,400 $ 4,711 $ 4,867
Over 1 year to 5 years 12,575 2,394 14,969 15,465
- ---------------------------------------------------------------------------------------------------
Mortgage-backed securities, net $15,886 $ 3,794 $19,680 $20,332
===================================================================================================
There were no sales of mortgage-backed securities held to maturity during
the years ended December 31, 1998, 1997, or 1996.
38
NOTE 5:
LOANS
The composition of the loan portfolio as of December 31, 1998 and 1997 is
summarized as follows:
December 31,
---------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
MORTGAGE LOANS:
1-4 family $ 178,770 $ 224,287
Multi-family 1,239,094 1,107,374
Commercial real estate 67,494 61,740
Construction 1,898 1,538
- --------------------------------------------------------------------------------
Total mortgage loans 1,487,256 1,394,939
Less: Net deferred loan origination fees 1,034 1,281
- --------------------------------------------------------------------------------
Mortgage loans, net 1,486,222 1,393,658
- --------------------------------------------------------------------------------
OTHER LOANS:
Cooperative apartment 4,802 5,041
Home equity 1,793 2,386
Passbook savings 321 312
Other 2,834 3,056
- --------------------------------------------------------------------------------
Total other loans 9,750 10,795
Less: Unearned discounts 22 19
- --------------------------------------------------------------------------------
Other loans, net 9,728 10,776
Less: Allowance for loan losses 9,431 9,431
- --------------------------------------------------------------------------------
Loans, net $1,486,519 $1,395,003
================================================================================
The Bank has a diversified loan portfolio as to type and borrower
concentration. At December 31, 1998 and 1997, approximately $1.46 billion and
$1.36 billion, respectively, of the Bank's mortgage loans were secured by
properties located in New York State. Accordingly, both its borrowers' ability
to honor their contracts and increases or decreases in the market value of the
real estate collateralizing such loans may be significantly affected by the
state's economic condition. Loans in other states are diversified in their
locations and are underwritten utilizing criteria similar to those used for
loans in New York State.
The Bank holds all adjustable rate one-to-four family mortgage loans that
it originates. Originated fixed rate one-to-four family mortgage loans are
generally sold to the Bank's Savings Bank Life Insurance Department ("SBLI") or
the State of New York Mortgage Agency ("SONYMA"), and the servicing rights
retained. One-to-four family loans sold to SBLI during the years ended December
31, 1998, 1997, and 1996 amounted to $1.6 million, $3.2 million, and $300,000,
respectively. No loans were sold to SONYMA in 1998 or 1997; in 1996, loans sold
to SONYMA amounted to $45,000. In 1998 and 1997, the Bank also originated and
sold $7.1 million and $13.6 million in multi-family mortgage loans, with the
servicing rights retained. In 1996, all multi-family mortgage loans originated
by the Bank were retained in portfolio. During 1997 and 1996, the Bank also sold
approximately $12,000 and $82,000, respectively, in student loans, a substantial
portion of said portfolio, to Nellie Mae; no student loans were sold to Nellie
Mae in 1998.
The Bank services mortgage loans for third parties, primarily SBLI, FNMA,
and SONYMA. The unpaid principal balance of such serviced loans amounted to
$18.8 million, $18.0 million, and $16.1 million at December 31, 1998, 1997, and
1996, respectively. Custodial escrow balances maintained in connection with such
loans amounted to $60,000, $56,000, and $49,000 at the corresponding dates.
Commitments to originate first mortgage loans at December 31, 1998 and
1997 amounted to approximately $82.8 million and $102.3 million, respectively,
all representing variable rate first mortgage loans. Substantially all of the
commitments at December 31, 1998 were expected to close within 90 days and were
made at interest rates that float or adjust at periodic intervals.
39
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
NOTE 6:
ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended December 31, 1998,
1997, and 1996 is summarized as follows:
December 31,
-------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance, beginning of year $ 9,431 $ 9,359 $ 11,359
Reversal of provisions -- -- (2,000)
Net recoveries -- 72 --
- --------------------------------------------------------------------------------
Balance, end of year $ 9,431 $ 9,431 $ 9,359
================================================================================
Mortgage loans in foreclosure amounted to approximately $5.5 million, $6.1
million, and $6.9 million at December 31, 1998, 1997, and 1996, respectively.
The 1996 amount included loans that had been restructured of approximately
$24,000. The interest income that would have been recorded under the original
terms of such loans and the interest income actually recognized for the years
ended December 31, 1998, 1997, and 1996 are summarized below:
December 31,
------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest income that would have
been recorded $ 1,079 $ 1,040 $ 1,062
Interest income recognized (150) (149) (144)
- --------------------------------------------------------------------------------
Interest income foregone $ 929 $ 891 $ 918
================================================================================
The Company defines impaired loans as those loans in foreclosure that are
not one-to-four family mortgage loans. Impaired loans for which the discounted
cash flows, collateral value, or market price equals or exceeds the carrying
value of the loan do not require an allowance. The allowance for impaired loans
for which the discounted cash flows, collateral value, or market price is less
than the carrying value of the loan is included in the Bank's overall allowance
for loan losses. The Bank generally recognizes interest income on these loans to
the extent it is received in cash. There were no impaired loans in 1998, 1997,
or 1996.
NOTE 7:
FORECLOSED REAL ESTATE
The following table summarizes transactions in foreclosed real estate, which is
included in "other assets" for the years ended December 31, 1998 and 1997:
December 31,
-----------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Balance, beginning of year $ 1,030 $ 627
Transfers in 772 1,758
Sales (1,383) (1,240)
Transfers to real estate held for investment -- (115)
- --------------------------------------------------------------------------------
Balance, end of year $ 419 $ 1,030
================================================================================
Foreclosed real estate is carried at fair market value; there were no
valuation allowances at December 31, 1998 or 1997, and no provisions for the
years ended December 31, 1998, 1997, or 1996.
40
NOTE 8:
DEPOSITS
The following is a summary of weighted average interest rates at December 31,
1998 and 1997 for each type of deposit:
December 31,
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------
Percent Weighted Percent Weighted
(in thousands) Amount of Total Average Rate Amount of Total Average Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing demand accounts $ 35,520 3.22% 0.00% $ 29,186 2.73% 0.00%
NOW and Super NOW accounts 26,297 2.39 2.43 21,485 2.01 2.43
Money market accounts 44,126 4.00 2.80 46,409 4.34 2.83
Savings accounts 273,357 24.80 2.30 268,133 25.08 2.40
Certificates of deposit 722,985 65.59 5.11 703,948 65.84 5.50
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $1,102,285 100.00% 4.09% $1,069,161 100.00% 4.39%
====================================================================================================================================
The following is a summary of certificates of deposit at December 31, 1998
by remaining term to maturity and by range of stated interest rates:
Amounts Maturing
----------------------------------------------------------------
Within Within Within After
(in thousands) One Year Two Years Three Years Three Years Total
- ----------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT:
2.00% to 2.99% $ 28,351 $ -- $ -- $ -- $ 28,351
3.00% to 3.99% 5,934 -- -- -- 5,934
4.00% to 4.99% 149,065 26,156 72 16 175,309
5.00% to 6.99% 391,891 55,283 18,807 43,217 509,198
7.00% and above 1,214 990 91 1,898 4,193
- ----------------------------------------------------------------------------------------------
Total maturities $576,455 $ 82,429 $ 18,970 $ 45,131 $722,985
==============================================================================================
At December 31, 1998 and 1997, the aggregate amount of certificates of
deposit of $100,000 or more was approximately $180.4 million and $139.7 million,
respectively.
NOTE 9:
BORROWINGS
In 1998 and 1997, the Company drew upon its line of credit with the Federal Home
Loan Bank of New York ("FHLB"), which totaled $698.7 million and $481.0 million
at the respective year-ends. At December 31, 1998 and 1997, the outstanding
balance was approximately $445.5 million and $309.7 million, with scheduled
maturity dates within the next nine years. The weighted average interest rate
for borrowings was 5.22% and 5.76% at the corresponding dates. For the years
ended December 31, 1998 and 1997, the weighted average outstanding balance was
approximately $397.8 million and $189.1 million, with a weighted average
interest rate of 5.35% and 5.68%. The maximum amount of borrowings outstanding
at any month-end during the year ending December 31, 1998 was $445.5 million; in
the previous twelve-month period, the maximum month-end amount was $309.7
million. The credit line is collateralized by stock in the FHLB and certain
mortgage loans under a blanket pledge agreement.
The Company also has a $10.0 million line of credit with a money center
bank, which had not been drawn upon at December 31, 1998.
41
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
NOTE 10:
FEDERAL, STATE, AND LOCAL TAXES
Federal Income Taxes
The components of the net deferred tax asset at December 31, 1998 and 1997 are
summarized as follows:
December 31,
------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Financial statement loan loss allowance $ 4,433 $ 4,452
Accrual for post-retirement benefits 1,999 1,942
Deferred directors' fees 364 375
Accrual for directors' retirement benefits 326 358
Deferred origination fees -- 605
Non-accrual interest 74 74
Organization costs -- 319
Basis difference of premises and equipment 105 (26)
Other 2,045 1,339
- --------------------------------------------------------------------------------
Total deferred tax assets 9,346 9,438
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Tax reserve in excess of base year reserve (2,159) (2,591)
Basis difference of GNMAs (345) (424)
Pre-paid pension cost (925) (909)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (3,429) (3,924)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 5,917 $ 5,514
================================================================================
The net deferred tax asset at December 31, 1998 and 1997 represents the
anticipated Federal, state, and local tax benefits expected to be realized in
future years upon the utilization of the underlying tax attributes comprising
this balance. Based upon current facts, management believes it is more likely
than not that the results of future operations will generate sufficient taxable
income to realize the deferred tax assets. However, there can be no assurances
about the level of future earnings.
Income tax expense for the years ended December 31, 1998, 1997, and 1996
is summarized as follows:
December 31,
-----------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Federal--current $ 15,465 $ 12,673 $ 10,471
State and local--current 3,117 3,884 4,774
- --------------------------------------------------------------------------------
Total current 18,582 16,557 15,245
- --------------------------------------------------------------------------------
Federal--deferred 92 (340) 690
State and local--deferred (495) (1,862) 1,820
- --------------------------------------------------------------------------------
Total deferred (403) (2,202) 2,510
- --------------------------------------------------------------------------------
Total income tax expense $ 18,179 $ 14,355 $ 17,755
================================================================================
The following is a reconciliation of statutory Federal income tax expense
to combined effective income tax expense for the years ended December 31, 1998,
1997, and 1996:
December 31,
---------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Statutory Federal income tax expense $ 15,793 $ 13,167 $ 13,543
State and local income taxes,
net of Federal income tax benefit 4,998 1,314 4,286
Other, net (2,612) (126) (74)
- --------------------------------------------------------------------------------
Total income tax expense $ 18,179 $ 14,355 $ 17,755
================================================================================
42
Under Federal tax law that existed prior to 1996, the Bank was generally
allowed a special bad debt deduction in determining income for tax purposes. The
deduction was based on either a specified experience formula or a percentage of
taxable income before such deduction (the "reserve method"). Legislation was
enacted in August 1996 which repealed the reserve method for tax purposes. As a
result, the Bank has instead had to use the direct charge-off method to compute
its bad debt deduction. The legislation also requires the Bank to recapture its
post-1987 net additions to its tax bad debt reserves. The Bank has previously
provided for this liability in the financial statements.
Pursuant to SFAS 109, "Accounting for Income Taxes," the Bank is generally
not required to provide deferred taxes for the difference between book and tax
bad debt expense taken in years prior to, or ending at, December 31, 1987. The
tax bad debt expense deducted in those years (net of charge-offs and recoveries)
created a tax loan loss reserve of approximately $7.4 million which could be
recognized as taxable income and create a current and/or deferred tax liability
of up to $2.2 million, under current income tax rates, if one of the following
were to occur: (a) the Bank's retained earnings represented by this reserve were
used for purposes other than to absorb losses from bad debts, including excess
dividends or distributions in liquidation; (b) the Bank were to redeem its
stock; (c) the Bank were to fail to meet the definition provided by the Internal
Revenue Code for a Bank; or (d) there was a change in the Federal tax law.
State and Local Taxes
The Company files New York State franchise tax and New York City financial
corporation tax returns on a calendar-year basis. The Company's annual tax
liability for each year is the greater of a tax on income or an alternative tax
based on a specified formula. Operating losses cannot be carried back or carried
forward for New York State or New York City tax purposes. The Company has
provided for New York State and New York City taxes based on taxable income for
the years ended December 31, 1998, 1997, and 1996.
Both New York State and New York City have adopted legislation to retain
the franchise taxation of thrift reserves for loan losses. The legislation
applies to taxable years beginning after December 31, 1995 and, among other
things, adopts the reserve method for bad debt deductions. The New York State
and City bad debt deduction is therefore no longer predicated on the Federal
deduction.
As a Delaware business corporation, the Company is required to file annual
returns and pay annual fees and an annual franchise tax to the State of
Delaware. Such taxes and fees, which are not material, are included in income
tax expense in the Consolidated Statements of Income and Comprehensive Income.
NOTE 11:
COMMITMENTS AND CONTINGENCIES
Lease Commitments
At December 31, 1998, the Company was obligated under eight non-cancelable
operating lease agreements with renewal options on properties used principally
for branch operations. The Company expects to renew such agreements at
expiration in the normal course of business. The leases contain escalation
clauses commencing at various times during the lives of the leases. Such clauses
provide for increases in the annual rental, based on increases in the consumer
price index.
At December 31, 1998, the Company had entered into several non-cancelable
operating lease agreements for rental of Bank-owned properties. The leases
contain escalation clauses that provide for periodic increases in the annual
rental, again based on increases in the consumer price index.
- --------------------------------------------------------------------------------
The projected minimum annual rental commitments under these leases,
exclusive of taxes and other charges, are summarized as follows:
---------------------------------------
(in thousands) Rental Income Rental Expense
- --------------------------------------------------------------------------------
1999 $ 1,050 $ 447
2000 1,060 460
2001 1,071 471
2002 1,082 477
2003 1,093 489
2004 and thereafter 5,622 4,193
- --------------------------------------------------------------------------------
Total minimum future rentals $10,978 $ 6,537
================================================================================
Rental expense under these leases, included in occupancy and equipment
expense, was approximately $446,000, $399,000, and $333,000 for the years ended
December 31, 1998, 1997, and 1996, respectively. Rental income on Bank-owned
properties, netted in occupancy and equipment expense, was approximately $1.20
million, $1.03 million, and $947,000 for the years ended December 31, 1998,
1997, and 1996, respectively.
43
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Legal Proceedings
In the normal course of the Company's business, there are various outstanding
legal proceedings. In the opinion of management, based on consultation with
legal counsel, the financial position of the Company will not be affected
materially as a result of the outcome of such legal proceedings.
NOTE 12:
EMPLOYEE BENEFITS
Retirement Plan
The Bank has a qualified non-contributory defined benefit pension plan which
covers substantially all of the full-time employees of the Bank. The plan is
subject to the provisions of the Employee Retirement Income Security Act of 1974
("ERISA"), as amended. The benefits are an annual amount equal to 2% of the
average highest annual three years' earnings during the final ten years of
service, multiplied by the years of creditable service for the first 30 years
and then by 1% until 40 years of service, subject to certain limitations. The
Bank's policy is to fund pension costs in accordance with the minimum funding
requirement of ERISA and to provide the plan with sufficient assets with which
to pay pension benefits to plan participants.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Post-retirement Benefits." SFAS No. 132 standardizes
the disclosures for pension and other post-retirement benefits by requiring
additional information that will facilitate financial analysis, and by
eliminating certain disclosures that are no longer considered useful.
Accordingly, SFAS No. 132 supersedes the disclosure requirements in SFAS Nos.
87, 88, and 106. The following tables set forth the disclosures required under
SFAS No. 132:
Pension Benefits
------------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 13,769 $ 12,473
Service cost 580 492
Interest cost 990 940
Actuarial loss 659 642
Benefits paid (767) (778)
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 15,231 $ 13,769
================================================================================
CHANGE IN PLAN ASSETS:
Fair value of assets at beginning of year $ 14,756 $ 12,875
Actual return on plan assets 543 2,248
Employer contribution 596 411
Benefits paid (767) (778)
- --------------------------------------------------------------------------------
Fair value of assets at end of year $ 15,128 $ 14,756
================================================================================
FUNDED STATUS:
Funded status $ 1,926 $ 1,280
Unrecognized prior service cost (417) (361)
Unrecognized net actuarial loss 459 1,007
- --------------------------------------------------------------------------------
Prepaid benefit cost $ 1,968 $ 1,926
================================================================================
Years Ended December 31,
-----------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.75% 7.25% 7.75%
Expected rate of return on plan assets 8.00 8.00 8.00
Rate of compensation increase 4.00 5.00 5.50
================================================================================
Years Ended December 31,
-------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 580 $ 492 $ 504
Interest cost 990 940 926
Expected return on plan assets (1,172) (2,248) (1,380)
Amortization of prior service cost 19 1,177 366
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 417 $ 361 $ 416
================================================================================
44
Thrift Incentive Plan
The Bank maintains a defined contribution Thrift Incentive Plan in which all
regular salaried employees may participate after one year of service and age 21.
Under provisions of the plan, the Bank would normally match 50% of a
participant's personal contributions up to 6% of the employee's annual
compensation for the first five years of plan participation. After five years of
plan participation, the Bank would match 100% of a participant's contributions
up to 6% of annual compensation.
Pursuant to the Bank's conversion from mutual to stock form in 1993 and
the adoption of the ESOP, the Bank suspended all matching contributions to the
Thrift Incentive Plan, in order to comply with the limitations set forth by the
Internal Revenue Code. Accordingly, there were no Company contributions for the
years ended December 31, 1998, 1997, or 1996.
Other Compensation Plans
The Bank maintains an unfunded non-qualified plan to provide retirement benefits
to directors who are neither officers nor employees of the Bank, to ensure that
the Bank will have their continued service and assistance in the conduct of its
business in the future. These directors have provided, and will continue to
provide, expertise that enables the Bank to experience successful growth and
development.
Deferred Compensation Plan
The Bank maintains a deferred compensation plan for directors who are neither
officers nor employees of the Bank. The remaining balances in the deferred
compensation plan at December 31, 1998 and 1997 of $693,000 and $758,000,
respectively, are unfunded and, as such, are reflected in "other liabilities" in
the Company's Consolidated Statements of Financial Condition.
Post-Retirement Health Care Benefits
The Bank offers post-retirement benefits to its retired employees. The plan
provides comprehensive medical coverage through a major insurance company,
subject to an annual deductible co-payment percentage and an offset against
other insurance available to the retiree. The plan covers most medical expenses,
including hospital services, doctors' visits, x-rays, and prescription drugs.
Effective for those retiring after January 1, 1994, retired employees are
required to share costs of the plan with the Bank, based upon a formula which
takes into account age and years of service.
The Bank accrues the cost of such benefits during the years an employee
renders the necessary service. In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures About Pensions and Other Post-retirement Benefits." As
previously indicated, SFAS No. 132 standardizes the disclosures for pension and
other post-retirement benefits by requiring additional information that will
facilitate financial analysis, and by eliminating certain disclosures that are
no longer considered useful. Accordingly, SFAS No. 132 supersedes the disclosure
requirements in SFAS Nos. 87, 88, and 106. The following tables set forth the
disclosures required under SFAS No. 132:
Post-retirement Benefits
-------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 3,376 $ 4,625
Service cost 78 101
Interest cost 200 241
Actuarial gain (417) (1,475)
Benefits paid (127) (116)
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 3,110 $ 3,376
================================================================================
CHANGE IN PLAN ASSETS:
Fair value of assets at beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contribution 127 116
Benefits paid (127) (116)
- --------------------------------------------------------------------------------
Fair value of assets at end of year $ -- $ --
================================================================================
FUNDED STATUS:
Accrued post-retirement benefit cost $(4,252) $(4,114)
Employer contribution 127 116
Total net periodic benefit cost (127) (254)
- --------------------------------------------------------------------------------
Accrued post-retirement benefit cost $(4,252) $(4,252)
================================================================================
45
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Years Ended December 31,
-----------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.75% 7.25% 7.75%
Current medical trend rate 6.50 7.00 8.00
Rate of compensation increase 4.00 5.00 5.50
================================================================================
Years Ended December 31,
-------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 78 $ 101 $ 110
Interest cost 200 241 333
Expected return on plan assets (86) (24) (22)
Amortization of prior service (cost) credit (64) (64) 63
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 128 $ 254 $ 484
================================================================================
NOTE 13:
STOCK-RELATED BENEFIT PLANS
Option Plans
The Board of Directors of the Company has adopted the following stock option
plans:
1993 Stock Option Plan
Under the 1993 Stock Option Plan, 1,917,338 stock options (as adjusted for the
five stock splits discussed in Note 2) which expire ten years from the date of
grant, November 23, 1993, have been granted to the executive officers and
employees of the Company and its subsidiary, the Bank. Each option entitles the
holder to purchase one share of the Company's common stock at an exercise price
equal to $3.71 per share, which is the initial public offering price as adjusted
for the five stock splits. Options vest in whole or in part over 3 to 5 years
from the date of issuance. However, all options become 100% exercisable in the
event that the employee terminates his employment due to death, disability,
normal retirement, or in the event of a change in control of the Bank or the
Company. Simultaneous with the grant of these options, the Compensation
Committee of the Board of Directors granted "Limited Rights" with respect to the
shares covered by the options. Limited Rights granted are subject to terms and
conditions and can be exercised only in the event of a change in control of the
Company. Upon exercise of a Limited Right, the holder shall receive from the
Company a cash payment equal to the difference between the exercise price of the
option ($3.71) and the fair market value of the underlying shares of common
stock. In 1998, 485,302 options granted under the 1993 Stock Option Plan were
exercised; 143,520 options were exercised in 1997; and 106,164 options were
exercised in 1996. The Bank primarily utilizes common stock held in Treasury to
satisfy options exercised. The difference between the average cost of Treasury
shares and the exercise price is recorded as an adjustment to retained earnings
on the date of exercise. No additional options were granted under this plan in
1998, 1997, or 1996. The number of vested options exercisable at December 31,
1998 was 1,192,235.
1993 Stock Option Plan for Outside Directors
("Directors' Option Plan")
On November 23, 1993, each member of the Board of Directors who was not then an
officer or employee of the Company or the Bank was granted non-statutory options
to purchase shares of the Company's common stock, based upon length of service.
In addition, active Directors Emeritus were each granted non-statutory options
to purchase shares of the common stock. In the aggregate, members of the Board
of Directors and active Directors Emeritus of the Company were granted options
to purchase 1,032,413 shares (as adjusted for the five stock splits) of the
common stock of the Company at an exercise price equal to $3.71 per share, which
is the initial public offering price as adjusted to reflect the stock splits,
with Limited Rights. All options granted under the Directors' Option Plan,
including Limited Rights attached thereto, expire upon the earlier of 10 years
following the date of grant or one year following the date the optionee ceases
to be a director. In the years ended December 31, 1998, 1997, and 1996,
respectively, 59,825; 175,499; and 120,032 options were exercised. The Bank
primarily utilizes common stock held in Treasury to satisfy options exercised.
The difference between the average cost of Treasury shares and the exercise
price is recorded as an adjustment to retained earnings on the date of exercise.
All of the options granted under the Directors' Option Plan were exercisable one
year after grant. No additional options were granted under this plan in 1998,
1997, or 1996. The number of vested options exercisable at December 31, 1998 was
601,563.
46
1997 Stock Option Plan
On February 18, 1997, the Bank established the 1997 Stock Option Plan and
granted stock options to purchase 698,625 shares (as adjusted for the stock
splits in 1997 and 1998) to the participants. The estimated fair value of the
options granted was $9.32 per share at the date of grant. The maximum number of
shares available for grant under this plan is 1,181,250 (as adjusted). Each
option was exercisable on July 21, 1998 and entitled the holder to purchase one
share of the Company's common stock at an exercise price equal to $15.63 per
share (as adjusted). On January 21, 1998, 645,884 options were exercised and
another 645,884 options automatically granted under the reload feature of the
plan, at an exercise price of $24.85 per share. The estimated fair value of the
options granted on this date was $5.76 per share. At December 31, 1998, the
number of vested options exercisable under the 1997 Stock Option Plan was
671,625.
Stock Plans
Effective upon the conversion, the Bank established the following stock plans
for eligible employees who have at least 12 consecutive months of credited
service:
Employee Stock Ownership Plan
("ESOP") and Supplemental Employee Retirement Plan ("SERP")
In connection with the conversion, the Company lent $19.4 million to the ESOP to
purchase 4,645,860 shares (as adjusted for the five stock splits). The loan will
be repaid, principally from the Bank's discretionary contributions to the ESOP,
over a period of time not to exceed 30 years. The Bank's obligation to make such
contributions is reduced to the extent of any investment earnings realized on
such contributions and any dividends paid by the Company on stock held in the
unallocated stock account. At December 31, 1998, the loan had an outstanding
balance of $12.8 million and a fixed interest rate of 6.0%. Interest expense for
the obligation was $797,000 for the year ended December 31, 1998. Shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is paid. Contributions to the ESOP and shares
released from the suspense account are allocated among participants on the basis
of compensation, as described in the plan, in the year of allocation.
Contributions to the ESOP were approximately $1.3 million for the year ended
December 31, 1998. Dividends and investment income received on ESOP shares used
for debt service amounted to $1.3 million. Benefits will vest on a seven-year
basis, starting with 20% in year three and continuing each year thereafter.
However, in the event of a change in control, as defined in the plan, any
unvested portion of benefits shall vest immediately.
Forfeitures will be reallocated among participating employees in the same
proportion as contributions. Benefits are payable upon death, retirement,
disability, or separation from service and may be payable in cash or stock.
The ESOP Trustee must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. Unallocated
shares and shares held in the suspense account are voted in a manner calculated
to most accurately reflect the instructions it has received from participants
regarding the allocated stock. Shares allocated to participants totaled 170,343
and 290,205 for the periods ended December 31, 1998 and 1997, respectively. At
December 31, 1998, there were 2,681,767 shares remaining for future allocation,
with a market value of $85.1 million. The Bank recognizes compensation expense
for the ESOP Plan based on the average market price of the common stock during
the year at the date of allocation. The Company recorded compensation expense
for the ESOP Plan of $4.7 million, $5.2 million, and $3.2 million for the years
ended December 31, 1998, 1997, and 1996, respectively.
The Bank also established a Supplemental Employee Retirement Plan
("SERP"), which provides additional unfunded, non-qualified benefits to certain
participants in the ESOP in the form of common stock. At December 31, 1998,
1997, and 1996, this plan maintained $1.3 million, $1.3 million, and $1.1
million, respectively, of trust-held assets, based upon the cost of said assets
at the time of purchase. Trust-held assets consist entirely of Company common
stock and amounted to 258,690 and 204,037 shares at December 31, 1998 and 1997,
respectively. The cost of such shares is reflected as contra-equity and
additional paid-in capital in the accompanying Consolidated Statements of
Financial Condition. The Company recorded compensation expense for the SERP of
$1.3 million, $1.1 million, and $1.1 million for the years ended December 31,
1998, 1997, and 1996, respectively.
Recognition and Retention Plans and Trusts ("RRPs")
The purpose of the RRPs is to provide employees, officers, and directors of the
Bank with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Bank. The Bank contributed a total of
$5.5 million to the RRPs to enable them to acquire an aggregate of 1,474,875
shares (as adjusted for the five stock splits) of the common stock in the
conversion, substantially all of which have been awarded. Such amount represents
deferred compensation and has been accounted for as a reduction in stockholders'
equity. Awards vested at a rate of 331/3% per year for directors, commencing on
November 23, 1994, and vest at a rate of 20% per year for officers and
employees, commencing on January 1, 1995. Awards become 100% vested upon
47
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
termination of employment due to death, disability, or normal retirement, or
following a change in control of the Bank or the Company. Pursuant to the RRPs,
1,457,938 shares of common stock were vested at December 31, 1998. The Bank
recognizes expense based on the original cost of the common stock at the date of
vesting for the RRP. The Company recorded compensation expense for the RRPs of
$749,000, $716,000, and $1.1 million for the years ended December 31, 1998,
1997, and 1996, respectively.
NOTE 14:
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying values and estimated fair values of
the Company's on-balance-sheet financial instruments at December 31, 1998 and
1997:
December 31,
------------------------------------------------------------
1998 1997
------------------------------------------------------------
(in thousands) Value Fair Value Value Fair Value
- ---------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 46,561 $ 46,561 $ 22,733 $ 22,733
Securities held to maturity 152,280 152,055 94,936 95,067
Mortgage-backed securities held to maturity 19,680 20,332 49,781 50,619
Securities available for sale 4,656 4,656 2,617 2,617
Loans, net 1,486,519 1,549,540 1,395,003 1,485,896
FINANCIAL LIABILITIES:
Deposits $1,102,285 $1,106,754 $1,069,161 $1,071,738
FHLB borrowings 439,055 439,055 309,664 309,664
Mortgagors' escrow 13,084 13,084 10,690 10,690
================================================================================================================
The methods and significant assumptions used to estimate fair values
pertaining to the Company's financial instruments are as follows:
Cash and Cash Equivalents
Cash and cash equivalents include cash and Federal funds sold. The estimated
fair values of cash and cash equivalents are assumed to equal their carrying
values, as these financial instruments are either due on demand or mature
overnight.
Securities and Mortgage-Backed Securities Held to Maturity and Securities
Available for Sale
Estimated fair values are based principally on market prices or dealer quotes.
Certain fair values are estimated using market prices of similar securities.
Loans
The loan portfolio is segregated into various components for valuation purposes
in order to group loans based on their significant financial characteristics,
such as loan type (mortgages or other) and payment status (performing or
non-performing). Fair values are estimated for each component using a valuation
method selected by management.
The estimated fair values of performing residential mortgage loans,
commercial real estate loans, and consumer loans are computed by discounting the
anticipated cash flows from the respective portfolios. The discount rates
reflect current market rates for loans with similar terms to borrowers of
similar credit quality.
The estimated fair values of non-performing residential and commercial
mortgage loans are based on recent collateral appraisals or management's
analysis of estimated cash flows, discounted at rates commensurate with the
credit risk involved.
The above technique of estimating fair value is extremely sensitive to the
assumptions and estimates used. While management has attempted to use
assumptions and estimates that are the most reflective of the Company's loan
portfolio and the current market, a greater degree of subjectivity is inherent
in these values than in those determined in formal trading marketplaces.
Accordingly, readers are cautioned in using this information for purposes of
evaluating the financial condition and/or value of the Company in and of itself
or in comparison with any other company.
Deposits
The fair values of deposit liabilities with no stated maturity (NOW, money
market, savings accounts, and non-interest-bearing accounts) are equal to the
carrying amounts payable on demand. The fair values of certificates of deposit
represent contractual cash flows, discounted using interest rates currently
offered on deposits with similar characteristics and remaining maturities. These
estimated fair values do not include the intangible value of core deposit
relationships, which comprise a significant portion of the Bank's deposit base.
Management believes that the Bank's core deposit relationships provide a
relatively stable, low-cost funding source that has a substantial intangible
value separate from the value of the deposit balances.
48
FHLB Borrowings
The carrying value of borrowings approximates fair value in the financial
statements, as these instruments are considered short-term in view of their
callable features.
Other Receivables and Payables
The fair values are estimated to equal the carrying values of short-term
receivables and payables.
Off-Balance-Sheet Financial Instruments
The fair values of commitments to extend credit and unadvanced lines of credit
are estimated based on an analysis of the interest rates and fees currently
charged to enter into similar transactions, considering the remaining terms of
the commitments and the creditworthiness of the potential borrowers. The
estimated fair values of these off-balance-sheet financial instruments resulted
in no unrealized gain or loss at December 31, 1998 or 1997.
NOTE 15:
RESTRICTIONS ON THE BANK
Various legal restrictions limit the extent to which the Bank can supply funds
to the parent company and its non-bank subsidiaries. As a converted stock form
savings bank, the approval of the Superintendent of the New York State Banking
Department is required if dividends declared in any calendar year exceed the
total of its net profits for that year combined with its retained net profits
for the preceding two calendar years, less any required transfer to paid-in
capital. "Net profits" is defined as the remainder of all earnings from current
operations plus actual recoveries on loans and investments and other assets,
after deducting from the total thereof all current operating expenses, actual
losses, if any, and all Federal and state taxes. In 1998, the Bank declared
dividends to its parent aggregating $25.1 million, which did not exceed net
profits for 1997 through 1998.
NOTE 16:
PARENT COMPANY-ONLY FINANCIAL INFORMATION
Queens County Bancorp, Inc. operates a wholly-owned subsidiary, Queens County
Savings Bank. The earnings of the Bank are recognized by the Company using the
equity method of accounting. Accordingly, the earnings of the Bank are recorded
as an increase in the Company's investment in the Bank.
Following are the condensed financial statements for Queens County
Bancorp, Inc. (parent company-only):
CONDENSED STATEMENTS OF CONDITION
December 31,
---------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Cash $ 1,526 $ 757
Money market investments 57 57
Investment in and advances to Queens County Savings Bank 131,854 169,701
- --------------------------------------------------------------------------------
Total assets $133,437 $170,515
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity $133,437 $170,515
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $133,437 $170,515
================================================================================
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Interest income from Queens County Savings Bank $ 340 $ 2,358 $ 3,786
Other interest income 39 17 8
Dividends from Queens County Savings Bank 17,800 16,000 38,000
- --------------------------------------------------------------------------------------------------------
Total income 18,179 18,375 41,794
Operating expense 229 256 273
- --------------------------------------------------------------------------------------------------------
Income before income tax and equity in undistributed earnings 17,950 18,119 41,521
Income tax expense 150 151 150
- --------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings
of Queens County Savings Bank 17,800 17,968 41,371
Equity in undistributed earnings of Queens County Savings Bank 9,144 5,296 (20,432)
- --------------------------------------------------------------------------------------------------------
Net income $ 26,944 $ 23,264 $ 20,939
========================================================================================================
49
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------------
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,944 $ 23,264 $ 20,939
Equity in undistributed earnings of the Bank not provided for (9,144) (5,296) 20,432
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,800 17,968 41,371
=============================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for investments in and advances to subsidiaries (17,021) (17,831) (42,761)
Repayment from investments in and advances to subsidiaries 62,812 75,284 35,231
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 45,791 57,453 (7,530)
=============================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Treasury stock (52,533) (68,086) (28,825)
Dividends paid (12,636) (8,135) (5,669)
Exercise of stock options 2,347 1,213 837
- -------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (62,822) (75,008) (33,657)
- -------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 769 413 184
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 814 401 217
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,583 $ 814 $ 401
=============================================================================================================
NOTE 17:
REGULATORY MATTERS
The Bank is subject to regulation, examination, and supervision by the New York
State Banking Department and the Federal Deposit Insurance Corporation (the
"Regulators"). The Bank is also governed by numerous Federal and state laws and
regulations, including the FDIC Improvement Act of 1991 ("FDICIA"). Among other
matters, FDICIA established five capital categories ranging from well
capitalized to critically undercapitalized. Such classifications are used by the
FDIC to determine various matters, including prompt corrective action and each
institution's semi-annual FDIC deposit insurance premium assessments. The Bank's
capital amounts and classification are also subject to qualitative judgments by
the Regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
at the top of page 51) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). At December 31, 1998, the Bank met all
capital adequacy requirements to which it was subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage capital ratios as set forth in the table. There are no
conditions or events since said notification that management believes have
changed the institution's category.
50
The Bank's actual capital amounts and ratios are also presented in the
following table:
-----------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1998 Actual Adequacy Purposes Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets) $170,850 16.12% $84,804 >/=8.0% $106,005 >/=10.0%
Tier 1 capital (to risk-weighted assets) 161,419 15.23 42,402 >/=4.0 63,603 >/=6.0
Tier 1 leverage capital (to average assets) 161,419 9.40 51,508 >/=3.0 85,846 >/=5.0
- ------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1997 Actual Adequacy Purposes Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets) $153,357 15.26% $80,392 >/=8.0% $100,490 >/=10.0%
Tier 1 capital (to risk-weighted assets) 143,926 14.32 40,196 >/=4.0 60,294 >/=6.0
Tier 1 leverage capital (to average assets) 143,926 9.30 46,416 >/=3.0 77,360 >/=5.0
- ------------------------------------------------------------------------------------------------------------------------------------
Under this framework, and based upon the Bank's capital levels, no prior
approval from the Regulators is necessary to accept brokered deposits.
NOTE 18:
QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the fiscal years ended December 31, 1998
and 1997 follows:
----------------------------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------------------------
(in thousands, except per share data) 4th 3rd 2nd 1st 4th 3rd 2nd 1st
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $17,219 $17,299 $17,474 $16,531 $16,110 $15,611 $15,490 $15,187
Other operating income 493 637 866 557 1,149 336 515 304
Operating expense 5,875 6,660 6,747 6,672 7,095 6,785 6,692 6,512
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 11,837 11,276 11,593 10,416 10,164 9,162 9,313 8,979
Income tax expense 4,721 4,326 4,970 4,161 4,769 3,767 3,972 1,847
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 7,116 $ 6,950 $ 6,623 $ 6,255 $ 5,395 $ 5,395 $ 5,341 $ 7,132
====================================================================================================================================
Diluted earnings per common share(1) $0.37 $0.34 $0.32 $0.31 $0.26 $0.26 $0.25 $0.30
====================================================================================================================================
Cash dividends declared
per common share(1) 0.20 0.17 0.17 0.13 0.13 0.11 0.09 0.07
====================================================================================================================================
Average common shares and
equivalents outstanding(1) 19,472 20,196 20,582 20,536 20,843 21,006 21,194 23,568
====================================================================================================================================
Stock price per common share(l):
High $30.56 $30.00 $31.42 $29.33 $27.00 $24.11 $21.33 $17.63
Low 22.88 23.58 27.25 23.50 23.17 19.78 15.85 13.41
Close 29.75 26.75 29.08 29.33 27.00 23.03 20.22 16.26
====================================================================================================================================
(1) Reflects shares issued as a result of 3-for-2 stock splits on April 10 and
October 1, 1997, and September 29, 1998.
51
QUEENS COUNTY BANCORP, INC. 1998 ANNUAL REPORT
Management's Responsibility for Financial Reporting
Queens County Bancorp, Inc.
38-25 Main Street, Flushing, New York 11354
To Our Shareholders:
Management has prepared, and is responsible for, the consolidated financial
statements and related financial information included in this annual report. The
consolidated financial statements were prepared in accordance with generally
accepted accounting principles and reflect management's judgments and estimates
with respect to certain events and transactions. Financial information included
elsewhere in this annual report is consistent with the consolidated financial
statements.
Management is responsible for maintaining a system of internal control and
has established such a system to provide reasonable assurance that transactions
are recorded properly to permit preparation of financial statements, that they
are executed in accordance with management's authorizations, and that assets are
safeguarded from significant loss or unauthorized use. Management believes that
during fiscal year 1998, this system of internal control was adequate to
accomplish the intended objectives.
The Audit Committee of the Board of Directors, composed of non-management
directors, meets periodically with the Company's independent certified public
accountants, its internal auditors, and management to discuss auditing, internal
accounting controls, and financial reporting matters, and to ensure that each of
them is properly discharging their responsibilities. Both the independent
certified public accountants and the internal auditors have free access to the
Committee without management being present.
/s/ Joseph R. Ficalora
Joseph R. Ficalora
Chairman, President, and
Chief Executive Officer
January 20, 1999
Independent Auditors' Report
To the Board of Directors
Queens County Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Queens
County Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997 and the
related consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Queens
County Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
January 20, 1999
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