UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
Commission File Number 0-22278
QUEENS COUNTY BANCORP, INC,
(Exact name of registrant as specified in its charter)
Delaware 06-1377322
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
38-25 Main Street, Flushing, New York 11354
(Address of principal executive offices)
(Registrant's telephone number, including area code) 718: 359-6400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
21,407,639
-------------------------------------
Number of shares outstanding at
August 9, 1999
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
FORM 10-Q
Three Months Ended June 30, 1999
INDEX Page No.
- ----- --------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition as of June 30, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Income and Comprehensive Income
for the Three and Six Months Ended June 30, 1999 and 1998
(unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibits 27
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands)
June 30, December 31,
1999 1998
Assets (unaudited)
------------- -------------
Cash and due from banks $ 16,079 $ 27,561
Money market investments 5,000 19,000
Securities held to maturity (estimated market value of
$151,714 and $152,055, respectively) 153,163 152,280
Mortgage-backed securities held to maturity (estimated market
value of $2,831 and $20,332, respectively) 2,791 19,680
Securities available for sale 19,002 4,656
Mortgage loans:
1-4 family 157,990 178,770
Multi-family 1,406,961 1,239,094
Commercial real estate 72,570 67,494
Construction 3,636 1,898
----------- -----------
Total mortgage loans 1,641,157 1,487,256
Other loans 9,154 9,750
Less: Unearned loan fees (1,853) (1,056)
Allowance for loan losses (7,431) (9,431)
----------- -----------
Loans, net 1,641,027 1,486,519
Premises and equipment, net 10,013 10,399
Deferred tax asset, net 5,278 5,917
Other assets 22,645 20,870
----------- -----------
Total assets $ 1,874,998 $ 1,746,882
=========== ===========
Liabilities and Stockholders' Equity
Deposits:
NOW and money market accounts $ 67,181 $ 70,423
Savings accounts 277,366 273,357
Certificates of deposit 724,977 722,985
Non-interest-bearing accounts 36,177 35,520
----------- -----------
Total deposits 1,105,701 1,102,285
----------- -----------
Official checks outstanding 36,448 34,487
FHLB advances 559,031 439,055
Mortgagors' escrow 21,474 13,084
Other liabilities 7,742 8,565
----------- -----------
Total liabilities 1,730,396 1,597,476
----------- -----------
Stockholders' equity:
Preferred stock at par $0.01 (5,000,000 shares
authorized; none issued) -- --
Common stock at par $0.01 (60,000,000 shares
authorized; 30,970,693 shares issued; 21,507,516
and 21,250,897 shares outstanding at June 30, 1999
and December 31, 1998, respectively) 310 310
Paid-in capital in excess of par 142,885 138,180
Retained earnings (substantially restricted) 148,073 165,383
Less: Treasury stock (9,463,177 and 9,719,796
shares, respectively) (130,459) (137,901)
Unallocated common stock held by ESOP (12,577) (12,767)
Common stock held by SERP (3,770) (3,770)
Unearned common stock held by RRPs (41) (63)
Accumulated other comprehensive income, net of tax effect 181 34
----------- -----------
Total stockholders' equity 144,602 149,406
----------- -----------
Total liabilities and stockholders' equity $ 1,874,998 $ 1,746,882
=========== ===========
See accompanying notes to financial statements.
1
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
-------- --------- -------- --------
Interest Income:
Mortgage and other loans $ 32,014 $ 30,560 $ 62,488 $ 60,568
Securities 2,302 1,820 4,599 3,425
Mortgage-backed securities 300 660 631 1,412
Money market investments 66 130 333 246
-------- -------- -------- --------
Total interest income 34,682 33,170 68,051 65,651
-------- -------- -------- --------
Interest Expense:
NOW and money market accounts 448 494 899 1,013
Savings accounts 1,588 1,539 3,129 3,115
Certificates of deposit 8,776 8,696 17,880 17,808
FHLB advances 6,373 4,957 12,074 9,682
Mortgagors' escrow 7 10 15 28
-------- -------- -------- --------
Total interest expense 17,192 15,696 33,997 31,646
-------- -------- -------- --------
Net interest income 17,490 17,474 34,054 34,005
Reversal of provision for loan losses -- -- (2,000) --
-------- -------- -------- --------
Net interest income after reversal of
provision for loan losses 17,490 17,474 36,054 34,005
-------- -------- -------- --------
Other Operating Income:
Fee income 452 786 933 1,191
Other 61 80 210 233
-------- -------- -------- --------
Total other operating income 513 866 1,143 1,424
-------- -------- -------- --------
Operating Expense:
Compensation and benefits(1) 3,915 4,865 7,590 9,580
Occupancy and equipment 553 605 1,171 1,277
General and administrative 1,215 1,144 2,454 2,308
Other 157 133 211 254
-------- -------- -------- --------
Total operating expense 5,840 6,747 11,426 13,419
-------- -------- -------- --------
Income before income taxes 12,163 11,593 25,771 22,010
Income tax expense(2) 4,714 4,970 10,085 9,132
-------- -------- -------- --------
Net income $ 7,449 $ 6,623 $ 15,686 $ 12,878
-------- -------- -------- --------
Comprehensive income, net of tax:
Unrealized gain on securities 418 141 147 210
-------- -------- -------- --------
Comprehensive income $ 7,867 $ 6,764 $ 15,833 $ 13,088
======== ======== ======== ========
Earnings per share $0.40 $0.34 (3) $0.84 $0.67 (3)
Diluted earnings per share $0.39 $0.32 (3) $0.82 $0.63 (3)
(1) Includes non-cash items of $0.695 million, $1.835 million, $1.323 million,
and $3.503 million, respectively.
(2) Includes non-cash items of $1.899 million, $1.491 million, $3.592 million,
and $4.627 million, respectively.
(3) Reflects shares issued as a result of a 3-for-2 stock split on September
29, 1998.
See accompanying notes to financial statements.
2
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Six Months Ended
(in thousands) June 30, 1999
- --------------------------------------------------------------------------------
Common Stock (Par Value: $0.01):
Balance at beginning of year $ 310
Shares issued --
---------
Balance at end of period 310
---------
Paid-in Capital in Excess of Par:
Balance at beginning of year 138,180
Tax benefit effect on stock plans 3,592
Allocation of ESOP stock 1,113
---------
Balance at end of period 142,885
---------
Retained Earnings:
Balance at beginning of year 165,383
Net income 15,686
Dividends paid on common stock (9,328)
Exercise of stock options (890,950 shares) (23,668)
---------
Balance at end of period 148,073
---------
Treasury Stock:
Balance of beginning of year (137,901)
Purchase of common stock (634,331 shares) (19,076)
Exercise of stock options (890,950 shares) 26,518
---------
Balance at end of period (130,459)
---------
Employee Stock Ownership Plan:
Balance at beginning of year (12,767)
Allocation of ESOP stock 190
---------
Balance at end of period (12,577)
---------
SERP Plan:
Balance at beginning of year (3,770)
Common stock acquired by SERP --
---------
Balance at end of period (3,770)
---------
Recognition and Retention Plans:
Balance at beginning of year (63)
Earned portion of RRPs 22
---------
Balance at end of period (41)
---------
Accumulated Comprehensive Income, Net of Tax:
Balance at beginning of year 34
Net unrealized appreciation in securities, net of tax 147
---------
Balance at end of year 181
---------
Total stockholders' equity $ 144,602
=========
See accompanying notes to financial statements.
3
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 15,686 $ 12,878
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 441 473
Reversal of provision for loan losses (2,000) --
Amortization of premiums, net 2 68
Amortization of net deferred loan origination
fees 797 109
Net gain on redemption of securities and
mortgage-backed securities (17) (74)
Net gain on sale of foreclosed real estate (116) (36)
Tax benefit effect on stock plans 3,592 4,627
Earned portion of RRPs 22 370
Earned portion of ESOP 1,303 2,384
Changes in assets and liabilities:
Decrease (increase) in deferred income taxes 639 (101)
Increase in other assets (1,775) (435)
Increase in official checks outstanding 1,961 13,191
(Decrease) increase in other liabilities (823) 10,096
--------- ---------
Total adjustments 4,026 30,672
--------- ---------
Net cash provided by operating activities 19,712 43,550
--------- ---------
Cash Flows from Investing Activities:
Proceeds from maturity of securities/
mortgage-backed securities 18,502 45,304
Purchase of securities held to maturity (16,550) (58,516)
Purchase of securities available for sale -- (971)
Net increase in loans (156,450) (74,103)
Proceeds from sale of loans and foreclosed
real estate 3,131 8,105
Purchase of premises and equipment, net (55) (104)
--------- ---------
Net cash used in investing activities (151,422) (80,285)
--------- ---------
Cash Flows from Financing Activities:
Net increase in mortgagors' escrow 8,390 9,033
Net increase (decrease) in deposits 3,416 (33,838)
Net increase in FHLB advances 119,976 114,295
Cash dividends paid and options exercised, net (32,996) (18,714)
Purchase of Treasury stock, net of stock options
exercised and shares acquired by SERP 7,442 (2,637)
--------- ---------
Net cash provided by financing activities 106,228 68,139
--------- ---------
Net (decrease) increase in cash and cash equivalents (25,482) 31,404
Cash and cash equivalents at beginning of period 46,561 22,733
--------- ---------
Cash and cash equivalents at end of period $ 21,079 $ 54,137
========= =========
Supplemental information:
Cash paid for:
Interest $33,979 $31,655
Income taxes 8,866 5,269
Transfers to foreclosed real estate from loans 519 772
Transfers to real estate held for investment from
foreclosed real estate 425 408
See accompanying notes to financial statements.
4
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Queens County Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Queens County Savings Bank (the "Bank").
The statements reflect all normal recurring adjustments which are, in the
opinion of management, necessary to present a fair statement of the Company's
results for the periods presented. The results of operations for the three and
six months ended June 30, 1999 are not necessarily indicative of the results of
operations that may be expected for all of 1999.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC").
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's 1998 Annual Report to Shareholders and SEC Form 10-K.
Note 2. 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 recognizes all derivatives as either assets or
liabilities in the statement of financial condition and measure said instruments
at fair value. In addition, the statement establishes criteria required to
designate a derivative instrument as a hedge and the accounting for changes in
fair value of a derivative, depending on its intended use. Under SFAS No. 133,
an entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. These methods must be consistent with the
entity's approach to managing risk.
The FASB originally determined that SFAS No. 133 would be effective for
financial statements issued for periods beginning after June 15, 1999. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133,"
which postponed the effective date to June 15, 2000, with adoption permitted.
The Company's June 30, 1999 financial statements reflect the adoption of SFAS
Nos. 133 and 137 on April 1, 1999. As a result, $14.2 million in mortgage-backed
securities held to maturity were reclassified as securities available for sale.
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.
5
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 Company does not expect the adoption of SFAS No. 134 to have an impact on
its financial condition or results of operations.
6
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Queens County Bancorp, Inc. (the "Company") is the holding company for Queens
County Savings Bank (the "Bank"), the first savings bank chartered by the State
of New York in the New York City Borough of Queens. The primary business of the
Bank is gathering deposits from its customers in Queens and Nassau County and
investing these funds in the origination of residential mortgage loans
throughout metropolitan New York.
The Company delivered a solid performance in the second quarter of 1999,
reporting earnings of $7.4 million, or $0.39 per share diluted, and cash
earnings of $10.8 million, equivalent to diluted earnings per share of $0.56.
The rise in earnings was driven by a record level of mortgage loan originations,
together with reductions in the levels of non-performing assets and operating
expense.
In the second quarter of 1999, the Bank received regulatory approval to open a
full-service branch office in Woodside and a customer service center in Corona
Heights. The benefit of these additions is expected to be reflected in the
Company's third quarter financial statements, with the Woodside branch having
opened its doors on July 31st and Corona Heights slated to open in the latter
part of August.
On July 28, 1999, the Company announced the completion of a share repurchase
program authorized on December 15, 1998. Under said authorization, the Company
repurchased 500,000 shares of common stock, bringing the total number
repurchased since 1994 to 12,161,933, at an average price of $15.37 per share.
On June 15, 1999, the Board of Directors authorized the repurchase of an
additional 500,000 shares. A total of 171,526 shares have been purchased to date
under such authorization.
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
The Company's second quarter 1999 performance is discussed in detail on the
following pages. Such discussion occasionally includes forward-looking
statements with regard to the Company's prospective performance and strategies.
These statements are based on management's current expectations regarding a
range of issues that could potentially impact the Company's performance in
future periods. Where such forward-looking statements appear in the text, they
are typically accompanied by cautionary language identifying the specific
factors that could adversely effect the Company's ability to fulfill its goals
or implement its strategies. These factors are also detailed in the Company's
1998 Annual Report to Shareholders and Annual Report on Form 10-K.
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.
7
Financial Condition
Balance Sheet Summary
At June 30, 1999, the Company recorded total assets of $1.9 billion, up $128.1
million, or 7.3%, from the level recorded at December 31, 1998. Fueled by the
origination of $313.3 million in mortgage loans during the six-month period,
including $188.3 million in the second quarter, the mortgage loan portfolio rose
to $1.6 billion, representing an increase of $153.9 million, or 10.3%.
Multi-family mortgage loans accounted for the majority of the increase, with a
total of $1.4 billion, which represented a $167.9 million, or 13.5%, rise since
year-end 1998. Of the $188.3 million in mortgage loans originated during the
second quarter, $170.2 million were within the Company's multi-family market
niche.
The quality of the Company's loans continued to be solid. In addition to the
continuing absence of any net charge-offs, the Company recorded reductions in
the levels of non-performing loans and assets, and maintained the
fully-performing status of the multi-family mortgage loan portfolio. At June 30,
1999, non-performing loans declined to $5.5 million, or 0.34% of loans, net,
from $6.2 million, or 0.42%, at December 31, 1998; non-performing assets
declined to $5.6 million, or 0.30% of total assets, from $6.6 million, or 0.38%,
at the corresponding dates.
Reflecting the reversal of $2.0 million in the first quarter, the allowance for
loan losses totaled $7.4 million at June 30, 1999. The $7.4 million was
equivalent to 135.13% of non-performing loans and 0.45% of loans, net, at this
date.
The Company's asset growth also stemmed from an $883,000 increase in securities
held to maturity to $153.2 million at June 30, 1999. During the quarter, the
Company reclassified $14.2 million in mortgage-backed securities held to
maturity as securities available for sale, in connection with the early adoption
of SFAS Nos. 133 and 137. As a result, the balance of mortgage-backed securities
held to maturity declined to $2.8 million from $19.7 million, while the balance
of securities available for sale rose to $19.0 million from $4.7 million. Money
market investments fell to $5.0 million from $19.0 million, while the balance of
other loans declined from $9.8 million to $9.2 million.
On the liability side of the balance sheet, the Company recorded a $3.4 million
increase in deposits to $1.1 billion, including a $2.0 million increase in
certificates of deposit ("CDs") to $725.0 million and a $4.0 million increase in
savings accounts to $277.4 million. Additional funding stemmed from Federal Home
Loan Bank of New York ("FHLB") advances, which rose $119.9 million to $559.0
million at June 30, 1999.
Supported by cash earnings of $22.0 million, stockholders' equity totaled $144.6
million at June 30, 1999, representing 7.71% of total assets and a book value of
$7.74 per share, based on 18,688,146 shares. In the first six months of 1999,
the Company allocated $19.1 million toward the repurchase of 634,331 shares of
Company stock.
At June 30, 1999, the Bank and the Company continued to exceed the minimum
capital levels required by the FDIC and the Federal Reserve Board, respectively.
The Bank recorded a leverage capital ratio of 9.42%, a Tier 1 risk-based capital
ratio of 14.45%, and a total risk-based capital ratio of 15.09%, well above the
minimum requirements for classification as a "well capitalized" institution.
Loans
The Company's reputation as a leading mortgage lender was further strengthened
in the second quarter of 1999. Mortgage loan originations totaled $188.3 million
for the quarter, boosting total production to $313.3 million for
8
the first six months of the year. By comparison, mortgage loan originations
totaled $241.3 million in the year-earlier six-month period, including $142.0
million in the second quarter of the year.
The balance of outstanding mortgage loans grew to $1.6 billion, representing
87.5% of total assets, up $153.9 million, or 10.3%, since December 31, 1998.
Included in the June 30, 1999 amount were $1.4 billion in loans secured by
multi-family buildings, representing 85.7% of mortgage loans outstanding, up
$167.9 million, or 13.5%, since year-end. The increase reflects year-to-date
originations of $285.7 million, including $170.2 million in the second quarter
of 1999.
The Company's multi-family mortgage loans typically feature a fixed rate of
interest for the first five years of the mortgage before adjusting to a point
over prime in each of years six through ten. At June 30, 1999, $144.5 million of
multi-family mortgage loans featured a rate of interest that steps up 50 basis
points in each of years two through five of the mortgage, regardless of the
direction of market interest rates. Specifically, the multi-family mortgage loan
portfolio includes $28.9 million, $32.7 million, $42.6 million, and $40.3
million in loans that are due to reprice upward over the next four quarters,
respectively.
The Company's loan growth was also fueled by the increased production of
commercial real estate and construction loans. Reflecting year-to-date
originations of $15.2 million, including $11.8 million in the second quarter,
the portfolio of commercial real estate loans rose $5.1 million to $72.6
million. Construction loans rose $1.7 million to $3.6 million, reflecting
year-to-date originations of $2.5 million, including second quarter originations
of $1.1 million. The Company also originated $9.8 million in one-to-four family
mortgage loans in the current six-month period, including $5.3 million in the
second quarter of the year. At June 30, 1999, the balance of one-to-four family
mortgage loans totaled $158.0 million, down from $178.8 million at December 31,
1998, primarily reflecting prepayments.
In addition to mortgage loans, the Company originates other loans, such as home
equity lines of credit, to address the needs of its customers in Queens and
Nassau Counties. At June 30, 1999, the portfolio of other loans totaled $9.2
million, down from $9.8 million at December 31, 1998.
With another $138.4 million in mortgage loans in the pipeline two weeks into the
third quarter of 1999, the Company is currently on track to exceed the volume of
loans produced in 1998. However, it should be noted that the Company's ability
to close these loans depends on several factors, including competition for
product and a change in the direction of market interest rates.
Asset Quality
The Company's record of asset quality was extended in the second quarter of
1999. In addition to the absence of any net charge-offs for the nineteenth
consecutive quarter, the Company reduced its levels of non-performing loans and
assets, and maintained the fully-performing status of its multi-family mortgage
loans.
At June 30, 1999, non-performing loans declined to $5.5 million, or 0.34% of
loans, net, from $5.6 million, or 0.37% of loans, net, at March 31, 1999 and
from $6.2 million, or 0.42% of loans, net, at December 31, 1998. Included in the
June 30, 1999 amount were 42 mortgage loans in foreclosure totaling $5.1
million, and 12 loans that were 90 days or more delinquent totaling $385,000.
Reflecting the sale of a residential property in the second quarter, foreclosed
real estate improved to $143,000, from $620,000 and $419,000 at March 31, 1999
and December 31, 1998, respectively. The June 1999 amount consists of three
residential properties that are currently being marketed for sale.
Non-performing assets thus declined to $5.6 million, or 0.30% of total assets,
from $6.2 million, or 0.35% of total assets, and from $6.6 million, or 0.38% of
total assets, at the corresponding dates.
9
In view of the ongoing quality of the Company's assets, the Company reversed
$2.0 million from the loan loss allowance in the first quarter of 1999.
Reflecting the reversal, and the continued absence of any net charge-offs or
provisions for loan losses in the second quarter, the loan loss allowance
totaled $7.4 million at June 30, 1999. In addition to being equivalent to
135.13% of non-performing loans and 0.45% of loans, net, the $7.4 million
represents 521.11% of accumulated net charge-offs since 1987.
From time to time, the Company rents properties that had 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 consolidated statements of condition. At June 30, 1999, the Company had 19
such investments totaling $2.1 million and generating an 8.1% rate of return to
the Bank.
For additional information, see the asset quality analysis that follows and the
discussion of the provision for loan losses on pages 18 and 22 of this report.
Asset Quality Analysis
At or For the At or For the
Six Months Ended Year Ended
June 30, December 31,
1999 1998
(dollars in thousands) (unaudited)
- --------------------------------------------------------------------------------
Allowance for Loan Losses:
Balance at beginning of period $ 9,431 $ 9,431
Reversal of provision for loan losses (2,000) --
------- -------
Balance at end of period $ 7,431 $ 9,431
======= =======
Non-performing Assets at Period-end:
Mortgage loans in foreclosure $ 5,114 $ 5,530
Loans 90 days or more delinquent 385 663
------- -------
Total non-performing loans 5,499 6,193
Foreclosed real estate 143 419
------- -------
Total non-performing assets $ 5,642 $ 6,612
======= =======
Ratios:
Non-performing loans to loans, net 0.34% 0.42%
Non-performing assets to total assets 0.30 0.38
Allowance for loan losses to
non-performing loans 135.13 152.28
Allowance for loan losses to loans, net 0.45 0.63
Allowance for loan losses to accumulated net
charge-offs since 1987 521.11 661.36
Securities Held to Maturity, Securities Available for Sale, and Money Market
Investments
In addition to investing in mortgage loan originations, the Company selectively
invests in securities. The Company's portfolio of securities held to maturity
consists of short-term securities in the form of U.S. Government agency
obligations, while its smaller portfolio of securities available for sale
consists of equity securities and mortgage-backed securities. Additional funds
are invested in money market investments, typically in the form of Federal funds
sold.
10
At June 30, 1999, the portfolio of securities held to maturity grew to $153.2
million from $152.3 million at December 31, 1998. U.S. Government agency
obligations comprised $125.3 million of the June 30, 1999 total, with FHLB stock
representing the remaining $27.9 million. The average maturity of securities
held to maturity at June 30, 1999 was 1.8 years. In comparison, U.S. Government
agencies comprised $122.9 million of the December 31, 1998 total, with U.S.
Treasuries and FHLB stock representing $7.0 million and $22.4 million,
respectively.
At June 30, 1999 and December 31, 1998, the respective market values of
securities held to maturity were $151.7 million and $152.1 million, equivalent
to 99.1% and 99.9%, respectively, of carrying value at the corresponding dates.
The portfolio of securities available for sale rose to $19.0 million at June 30,
1999 from $4.7 million at December 31, 1998. The increase primarily reflects the
early adoption of SFAS Nos. 133 and 137, upon which $14.2 million in
mortgage-backed securities were reclassified as securities available for sale.
Money market investments totaled $5.0 million at June 30, 1999, down from $19.0
million at year-end 1998.
Mortgage-backed Securities Held to Maturity
Partially reflecting the aforementioned reclassification of $14.2 million in
mortgage-backed securities as securities available for sale, the portfolio of
mortgage-backed securities held to maturity declined to $2.8 million at June 30,
1999 from $19.7 million at December 31, 1998. The reduction was also due to
prepayments and the absence of any new investments in mortgage-backed
securities since the first quarter of 1994.
At June 30, 1999 and December 31, 1998, the respective market values of the
portfolio were $2.8 million and $20.3 million, equivalent to 101.4% and 103.3%
of the carrying values at the corresponding dates. The average maturity of the
portfolio was under two years.
Sources of Funds
The Company's funding stems primarily from the deposits it gathers, together
with interest and principal payments on loans, and the interest on, and maturity
of, securities. During times of increased loan demand, additional funding is
derived from the Company's FHLB line of credit, which was $745.0 million at June
30, 1999. In the first six months of 1999, the Company produced a record level
of mortgage originations, funded in part by FHLB advances, the total of which
rose to $559.0 million from $439.1 million at December 31, 1998.
Deposits rose $3.4 million to $1.1 billion, reflecting increased levels of CDs,
savings accounts, and non-interest-bearing accounts. Rising $2.0 million to
$725.0 million (including $581.2 million that were due to mature within one
year), CDs represented 65.6% of total deposits at June 30, 1999. Savings
accounts rose $4.0 million to $277.4 million, representing 25.1% of the total,
while non-interest-bearing accounts rose $657,000 to $36.2 million, or 3.3% of
total deposits. These higher balances served to offset a $3.2 million decline in
the balance of NOW and money market accounts to $67.2 million, which represented
6.1% of total deposits at June 30, 1999.
The Company has taken several steps to attract new deposits, including the
aforementioned opening of two new locations in Queens. In the second quarter of
1999, the Company expanded its Mobile CSR program to include visits to the local
utility company. Under this program, customer service representatives from the
Bank have been opening accounts for students at a local college and for
employees of major businesses in Queens.
11
In addition, the online banking service initiated in the fourth quarter of 1998
will be enhanced in the third quarter of 1999. Within the next six weeks, it is
expected that customers will be able to purchase various savings products by
accessing QCSB Online.
Market Risk and Interest Rate Sensitivity
Given the extent to which changes in market interest rates may influence net
interest income, one of management's primary objectives is matching the interest
rate sensitivity of the Company's assets and liabilities in order to manage
interest rate risk.
The process of assessing and managing interest rate risk is governed by policies
established by senior management that are reviewed and approved by the Board of
Directors. Senior management meets periodically to evaluate the impact of
changes in market interest rates on assets and liabilities, net interest margin,
and capital and liquidity, as well as to evaluate its strategic plans. As part
of this process, management measures the sensitivity of net interest income to
changes in interest rates. This process involves making estimations, based on
certain assumptions that management believes to be reasonable. In addition to
considering the relative sensitivity of assets and liabilities to changes in
market interest rates, other factors considered include scheduled maturities,
repricing characteristics, deposit growth and retention, and estimated cash
flows.
The relative sensitivity of assets and liabilities is particularly important, as
the Bank's core deposits are not subject to the same degree of interest rate
sensitivity as its assets. Core deposit costs are internally controlled, and
generally exhibit less sensitivity to changes in interest rates than adjustable
rate assets, which feature yields based on external indices. Such yields tend to
change in concert with market interest rates.
It is management's objective to maintain a stable level of net interest income
under a range of probable rate scenarios. In order to accomplish this objective,
management has traditionally emphasized the origination of adjustable rate
mortgage loans on one-to-four family homes and multi-family buildings, and has
generally limited its other investments to short-term securities. On the
liability side of the balance sheet, management closely monitors the pricing of
its depository products and has profitably utilized its FHLB line of credit to
generate interest-earning asset growth.
At June 30, 1999, the Company's exposure to interest rate risk was comparable to
that discussed in the 1998 Annual Report to Shareholders.
Liquidity and Capital Position
Liquidity
As previously indicated, deposits and borrowings are the Company's primary
funding sources, with additional funding stemming from interest and principal
payments on loans, securities, and mortgage-backed securities. 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.
The Company primarily invests in mortgage loan originations and supplements such
investments with the purchase of short-term securities. The Company invested
$313.3 million in mortgage loan originations (resulting in a net increase in
loans of $156.5 million) and another $18.5 million in securities held to
maturity in the first six months of 1999. These activities were funded by
internal cash flows generated by the Bank's financing and operating activities.
In the first six months of 1999, the net cash provided by financing activities
totaled $106.2 million, while the net cash provided by operating activities
totaled $19.7 million.
12
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 combined total of $21.0 million at June 30, 1999, as
compared to $46.6 million at December 31, 1998. In addition, the Company had
securities available for sale of $19.0 million and $4.7 million at the
corresponding dates. Additional liquidity is available through the Bank's FHLB
line of credit and a $10.0 million line of credit with a money center bank.
Two weeks into the third quarter of 1999, the Bank had loans of $138.4 million
in the pipeline, which management anticipates having sufficient funds to
fulfill. In addition, CDs due to mature in one year or less from June 30, 1999
totaled $581.2 million. Based on its current rate of retention (81.20% of
maturing CDs in the twelve months ended June 30, 1999 were retained by the
Bank), management believes that a significant portion of such deposits will
remain with the Bank.
Capital Position
Supported by cash earnings of $22.0 million, stockholders' equity totaled $144.6
million at June 30, 1999, representing 7.71% of total assets and a book value of
$7.74 per share, based on 18,688,146 shares. At December 31, 1998, stockholders'
equity totaled $149.4 million, representing 8.55% of total assets and a book
value of $8.13 per share, based on 18,389,114 shares.
The Company paid $9.3 million in cash dividends in the first six months of 1999,
and allocated $19.1 million of its capital toward the repurchase of 634,331
shares of Company stock. On June 30, 1999, 514,729 shares remained available for
repurchase under the stock repurchase authorizations declared by the Board of
Directors on December 15, 1998 and June 15, 1999. On July 28, 1999, the Company
announced the completion of the December 1998 share repurchase.
Like the Company, the Bank has maintained a solid capital position, with
regulatory capital ratios that not only exceed the minimum levels required by
the FDIC but also qualify the Bank for classification as a "well capitalized"
institution. At June 30, 1999, the Bank's leverage capital totaled $168.9
million, or 9.42% of adjusted average assets, while its Tier 1 and total
risk-based capital amounted to $168.9 million and $176.3 million, or 14.45% and
15.09% of risk-weighted assets, respectively. The minimum Federal requirements
for leverage, Tier 1 risk-based, and total risk-based capital are, respectively,
3.00%, 4.00%, and 8.00%. 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.
13
Regulatory Capital Analysis (Bank Only)
At June 30, 1999
----------------
Risk-Based Capital
------------------
Leverage Capital Tier 1 Total
---------------- ------ -----
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total savings bank equity $168,874 9.42% $168,874 14.45% $176,305 15.09%
Regulatory capital
requirement 53,791 3.00 46,741 4.00 93,481 8.00
-------- ---- -------- ----- -------- -----
Excess $115,083 6.42% $122,133 10.45% $ 82,824 7.09%
======== ==== ======== ===== ======== ====
Comparison of the Three Months Ended June 30, 1999 and 1998
Earnings Summary
The Company recorded earnings of $7.4 million for the three months ended June
30, 1999, up from $6.6 million for the three months ended June 30, 1998. The
1999 amount was equivalent to diluted earnings per share of $0.39, representing
a 21.9% increase from $0.32 in the year-earlier quarter. In addition, the
Company's second quarter 1999 earnings provided a 1.66% return on average assets
("ROA") and a 21.82% return on average stockholders' equity ("ROE").
Cash earnings totaled $10.8 million, or $0.56 per share diluted, in the current
second quarter, as compared to $10.5 million, or $0.51 per share diluted, in the
second quarter of 1998. The 1999 amount provided a cash ROA of 2.40% and a cash
ROE of 31.52%.
The increase in earnings was fueled by a combination of factors, including a
$907,000 reduction in operating expense. Specifically, operating expense
declined to $5.8 million from $6.7 million, driven by a $950,000 reduction in
compensation and benefits to $3.9 million. The latter decrease primarily stemmed
from a $1.1 million reduction in plan-related expenses triggered by a change in
the Company's stock-related benefit plans that took effect on January 1, 1999.
Net interest income totaled $17.5 million, a modest $16,000 higher than the
year-earlier level, but $926,000 higher than the level recorded in the trailing
three-month period. Similarly, the Company's interest rate spread and net
interest margin improved from the trailing quarter levels, measuring 3.60% and
4.00%, respectively.
In addition to the reduction in operating expense and the increase in net
interest income, the Company's second quarter 1999 earnings were driven by a
$256,000 decrease in income tax expense. Reflecting a 38.8% effective tax rate,
income tax expense declined to $4.7 million from $5.0 million in the three
months ended June 30, 1998.
These favorable factors served to offset a $353,000 decline in other operating
income to $513,000, reflecting a $334,000 decrease in fee income to $452,000 and
a $19,000 decrease in other income to $61,000.
The provision for loan losses was suspended in the current second quarter,
continuing a practice initiated in the third quarter of 1995.
14
Cash Earnings Analysis
(in thousands, except per share data)
For the
Three Months Ended
June 30,
-------------------
1999 1998
------- -------
Net income $ 7,449 $ 6,623
Additional contributions to stockholders' equity:
Amortization and appreciation of stock-related
benefit plans 695 1,835
Associated tax benefits 1,899 1,491
Amortization of goodwill -- --
Other 715 505
------- -------
Cash earnings $10,758 $10,454
======= =======
Cash earnings per share $0.58 $0.54
Diluted cash earnings per share $0.56 $0.51
Interest Income
The level of interest income in any given period depends upon the average
balance and mix of the Company's interest-earning assets, the yield on said
assets, and the current level of market interest rates.
The Company recorded interest income of $34.7 million in the current second
quarter, up from $33.2 million in the second quarter of 1998. The $1.5 million,
or 4.6%, increase was the net result of a $166.1 million, or 10.5%, rise in the
average balance of interest-earning assets to $1.7 billion and a 46-basis point
reduction in the average yield to 7.93%.
Mortgage and other loans were the single largest source of interest income,
generating $32.0 million, or 92.3% of the three-month total, up from $30.6
million, or 92.1%, in the three months ended June 30, 1998. The increase was the
net effect of $155.1 million, or 10.9%, rise in the average balance of mortgage
and other loans to $1.6 billion, and a 48-basis point decline in the average
yield to 8.14%.
Securities generated interest income of $2.3 million, representing 6.6% of the
second quarter 1999 total, up from $1.8 million, or 5.5% of the total, in the
second quarter of 1998. The increase was the net result of a $39.7 million, or
35.2%, rise in the average balance to $152.5 million, and a 41-basis point
decline in the average yield to 6.04%.
Mortgage-backed securities provided interest income of $300,000, as compared to
$660,000 in the year-earlier three months. The reduction was the net effect of a
$24.8 million decrease in the average balance to $17.4 million and a 66-basis
point increase in the average yield to 6.92%.
Money market investments accounted for $66,000 of interest income, down from
$130,000 in the second quarter of 1998. The decline was due to a $3.9 million
reduction in the average balance to $5.8 million and a 79-basis point reduction
in the average yield to 4.59%.
15
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.
In the second quarter of 1999, interest expense totaled $17.2 million, up from
$15.7 million in the second quarter of 1998. The $1.5 million, or 9.5%, increase
stemmed from a $185.0 million rise in the average balance of interest-bearing
liabilities to $1.6 billion, which was tempered by a 15-basis point decline in
the average cost to 4.33%.
CDs were the single largest source of interest expense in the current second
quarter, generating $8.8 million, or 51.0% of the total, as compared to $8.7
million, or 55.4%, in the second quarter of 1998. The increase was the net
effect of a $65.5 million, or 9.9%, rise in the average balance to $725.2
million and a 44-basis point decline in the average cost to 4.85%.
FHLB advances contributed second quarter 1999 interest expense of $6.4 million,
representing 37.1% of the total, up from $5.0 million, or 31.6%, in the
year-earlier three months. The increase stemmed from a $114.0 million rise in
the average balance to $488.3 million, which was tempered by a seven-basis point
drop in the average cost to 5.24%.
Other funding (including savings, NOW and money market accounts, mortgagors'
escrow, and non-interest-bearing deposits) generated combined interest expense
of $2.0 million, reflecting an average balance of $415.4 million and an average
cost of 1.97% in the current three-month period. In the year-earlier quarter,
these funding sources produced combined interest expense of $2.0 million,
reflecting an average balance of $404.1 million and an average cost of 2.02%.
Non-interest-bearing deposits represented $37.4 million of the average balance
in the current second quarter and $31.5 million of the average balance in the
second quarter of 1998.
Savings accounts generated interest expense of $1.6 million in the current
second quarter, up $49,000 from the level recorded in the second quarter of
1998. The increase reflects a $7.3 million rise in the average balance to $276.5
million and an average cost of 2.30%, up one basis point. NOW and money market
accounts accounted for interest expense of $448,000, down $46,000 from $494,000
in the year-earlier three months. The decrease stemmed from a $4.6 million
decline in the average balance to $68.0 million and a nine-basis point decline
in the average yield to 2.64%. Mortgagors' escrow accounted for interest expense
of $7,000, down from $10,000 in the three months ended June 30, 1998. The
decrease was the net effect of a $2.8 million increase in the average balance to
$33.5 million and a five-basis point drop in the average cost to eight basis
points.
16
Net Interest Income Analysis
(dollars in thousands)
Three Months Ended June 30,
---------------------------
1999 1998
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Assets:
Interest-earnings assets:
Mortgage and other loans, net $1,572,785 $32,014 8.14% $1,417,693 $30,560 8.62%
Securities 152,490 2,302 6.04 112,798 1,820 6.45
Mortgage-backed securities 17,353 300 6.92 42,177 660 6.26
Money market investments 5,757 66 4.59 9,665 130 5.38
---------- ------- ------ ---------- ------- ------
Total interest-earning assets 1,748,385 34,682 7.93% 1,582,333 33,170 8.39%
Non-interest-earning assets 45,661 45,491
---------- ----------
Total assets $1,794,046 $1,627,824
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
NOW and money market accounts $ 68,044 $ 448 2.64% $ 72,656 $ 494 2.73%
Savings accounts 276,470 1,588 2.30 269,209 1,539 2.29
Certificates of deposit 725,175 8,776 4.85 659,641 8,696 5.29
FHLB advances 488,257 6,373 5.24 374,226 4,957 5.31
Mortgagors' escrow 33,465 7 0.08 30,697 10 0.13
---------- ------- ------ ---------- ------- ----
Total interest-bearing liabilities 1,591,411 17,192 4.33% 1,406,429 15,696 4.48%
------- -------
Non-interest-bearing deposits 37,390 31,518
Other liabilities 28,702 27,264
---------- ----------
Total liabilities 1,657,503 1,465,211
Stockholders' equity 136,543 162,613
---------- ----------
Total liabilities and stockholders' equity $1,794,046 $1,627,824
========== ==========
Net interest income/interest rate spread $17,490 3.60% $17,474 3.91%
======= ====== ======= ======
Net interest-earning assets/net interest
margin $ 156,974 4.00 $ 175,904 4.42
========== ====== ========== ======
Ratio of interest-earning assets to
to interest-bearing liabilities 109.86 112.51
====== ======
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, in turn, are influenced by the
pricing and mix of its interest-earning assets and funding sources, and by such
external factors as economic conditions, competition for loans and deposits, and
the monetary policy of the Federal Open Market Committee of the Federal Reserve
Board of Governors.
The Company recorded net interest income of $17.5 million in 1999's second
quarter, up a modest $16,000 from the year-earlier level, and up $926,000 from
the $16.6 million recorded in the trailing three-month period. Similarly, the
Company's interest rate spread and net interest margin improved from the
trailing quarter levels, while declining in comparison to the year-earlier
measures. The Company's spread and margin equaled 3.60%
17
and 4.00%, respectively, in the current second quarter, as compared to 3.46% and
3.93% in the trailing quarter, and to 3.91% and 4.42% in the second quarter of
1998.
The concurrent growth in spread and margin, as well as in net interest income,
stemmed from a combination of interest-earning asset growth fueled by
multi-family mortgage lending and the careful pricing of the Company's
interest-bearing liabilities.
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.
As indicated in the discussion and analysis on page nine, the Company extended
its record of asset quality in the current second quarter, with reductions in
both non-performing loans and foreclosed real estate. At June 30, 1999,
non-performing loans declined to $5.5 million, or 0.34% of loans, net, from $6.2
million, or 0.42% of loans, net, at December 31, 1998. Foreclosed real estate
declined to $143,000 from $419,000, resulting in a $1.0 million reduction in
non-performing assets to $5.6 million, or 0.30% of total assets, since year-end.
In addition, the Company marked its nineteenth consecutive quarter without any
net charge-offs being recorded. The Company has had a total of $1.4 million in
net charge-offs since 1987; the thirteen-year average thus amounts to $107,000
per year.
In view of the quality of the Company's assets and the coverage provided by the
loan loss allowance, the provision for loan losses was suspended in the second
quarter of 1999. Reflecting the suspension, and the absence of any net
charge-offs, the allowance for loan losses totaled $7.4 million at quarter's
end, equivalent to 135.13% of non-performing loans and 0.45% of loans, net.
Absent a change in the quality of the Company's assets or a downturn in the New
York City real estate market, management anticipates that it will maintain the
allowance for loan losses at the current level by suspending the provision for
loan losses for the remainder of the year.
For additional information about asset quality and the allowance for loan
losses, see the discussion and analysis beginning on page nine of this report.
Other Operating Income
The Company derives other operating income from service fees and fees charged on
loans and depository accounts.
Other operating income totaled $513,000 in the current second quarter, as
compared to $866,000 in the year-earlier three months. Included in the 1999
amount were fee income of $452,000 and other income of $61,000, down from
$786,000 and $80,000, respectively, in the second quarter of 1998. The higher
level of fee income in the year-earlier quarter reflects the higher level of
mortgage loan prepayments experienced during that period.
18
As indicated in the 1998 Annual Report to Shareholders, the Company has entered
into a contract under which the land adjoining its headquarters will be
profitably developed for commercial use. At this time, it appears that the
financial benefits of this transaction will begin to be reflected in the
Company's financial statements in the Year 2000.
Operating Expense
Operating expense consists of compensation and benefits, occupancy and
equipment, general and administrative ("G&A"), and other expenses. The Company's
ability to contain such costs is reflected in its ratio of operating expense to
average assets and to the sum of net interest income and other operating income
(the "efficiency ratio").
Included in compensation and benefits expense are expenses associated with the
amortization and appreciation of shares held in the Company's stock-related
benefit plans ("plan-related expenses"), which are added back to stockholders'
equity at the end of the period.
The rise in second quarter 1999 earnings was driven by a $907,000 decline in
operating expense to $5.8 million, or 1.30% of average assets, from $6.7
million, or 1.66% of average assets, in the second quarter of 1998. The 13.4%
reduction largely stemmed from a $950,000, or 19.5%, decline in compensation and
benefits expense to $3.9 million, which stemmed, in turn, from a $1.1 million
reduction in plan-related expenses to $695,000. The latter decline reflects a
change in the structure of the Company's stock-related benefit plans that took
effect on January 1, 1999.
The reduction in compensation and benefits expense combined with a $52,000
decline in occupancy and equipment to $553,000 to offset a $71,000 increase in
G&A expense to $1.2 million, and a $24,000 increase in other expense to
$157,000. Reflecting the reduction in total operating expense and the higher
level of net interest income, the Company's efficiency ratio improved to 32.44%
from 36.79% in the year-earlier quarter. On a cash earnings basis, the
efficiency ratio rose to 28.58% from 26.78%.
The Company had 281 full-time equivalent employees at June 30, 1999.
Income Tax Expense
Notwithstanding a $570,000 rise in pre-tax income to $12.2 million, income tax
expense declined $256,000 to $4.7 million in the second quarter of 1999. The
reduction stemmed from a decrease in the effective tax rate, to 38.8% from 42.9%
in the three months ended June 30, 1998. Included in second quarter 1999 income
tax expense was $1.9 million in non-cash items stemming from the Company's
stock-related benefit plans, up from $1.5 million in the year-earlier three
months.
Comparison of the Six Months Ended June 30, 1999 and 1998
Earnings Summary
The Company recorded a $2.8 million increase in year-to-date earnings to $15.7
million, representing a 1.78% ROA and a 22.87% ROE. The $15.7 million was
equivalent to diluted earnings per share of $0.82, up from $0.63 in the
year-earlier six months. Included in the 1999 amount was $1.1 million, or $0.05
per share, stemming from the reversal of $2.0 million from the allowance for
loan losses in the year's first quarter. Absent the net benefit of this
reversal, the Company's six-month 1999 core earnings amounted to $14.6 million,
representing a 22.2% increase in diluted earnings per share to $0.77.
19
Cash earnings totaled $22.0 million in the current six-month period, as compared
to $21.9 million in the year-earlier six months. The 1999 amount was equivalent
to diluted earnings per share of $1.15, up from $1.07 in 1998. The $22.0 million
represented a 2.50% cash return on average assets and a 32.12% cash return on
average stockholders' equity.
The growth in core earnings stemmed in part from a $2.0 million reduction in
operating expense to $11.4 million, which was driven, in turn, by a $2.0 million
decline in compensation and benefits expense to $7.6 million. Included in
compensation and benefits expense were plan-related expenses of $1.3 million,
down $2.2 million from the level recorded in the first six months of 1998.
Interest income was also fueled by a $49,000 increase in net interest income to
$34.1 million, despite declines in the spread and margin to 3.53% and 3.96%.
Interest income rose $2.4 million to $68.1 million, offsetting a $2.4 million
increase in interest expense to $34.0 million.
These favorable factors more than offset a $281,000 decline in other operating
income to $1.1 million, and a $953,000 increase in income tax expense to $10.1
million. The lower level of other operating income reflects respective declines
of $258,000 and $23,000 in fee income and other income, while the increase in
income tax expense stemmed from a $3.8 million increase in pre-tax income to
$25.8 million.
Cash Earnings Analysis
(in thousands, except per share data)
For the
Six Months Ended
June 30,
------------------
1999 1998
------- -------
Net income $15,686 $12,878
Additional contributions to stockholders' equity:
Amortization and appreciation of stock-related
benefit plans 1,323 3,503
Associated tax benefits 3,592 4,627
Amortization of goodwill -- --
Other 1,430 909
------- -------
Cash earnings $22,031 $21,917
======= =======
Cash earnings per share $1.18 $1.13
Diluted cash earnings per share $1.15 $1.07
Interest Income
The Company recorded interest income of $68.1 million in the first six months of
1999, up from $65.7 million in the first six months of 1998. The $2.4 million
increase was the net effect of a $146.6 million, or 9.3%, rise in the average
balance of interest-earning assets to $1.7 billion and a 44-basis point decline
in the average yield to 7.92%.
Mortgage and other loans contributed interest income of $62.5 million, up from
$60.6 million in the year-earlier six months. The $1.9 million increase reflects
a $122.4 million, or 8.7%, rise in the average balance to $1.5 billion,
offsetting a 43-basis point decline in the average yield to 8.16%. Loans
represented 89.2% of average interest-earning assets in the current six-month
period and generated 91.8% of interest income year-to-date.
20
Securities generated interest income of $4.6 million, up from $3.4 million in
the first six months of 1998. The $1.2 million increase reflects a $45.9 million
rise in the average balance to $152.9 million, which offset a 38-basis point
decline in the average yield to 6.02%. In the first six months of 1999,
securities represented 8.9% of average interest-earning assets and generated
6.8% of interest income year-to-date.
The interest income derived from mortgage-backed securities totaled $631,000,
down from $1.4 million in the year-earlier six months. The $781,000 reduction
was the net effect of a $27.0 million decline in the average balance to $18.1
million and a 71-basis point increase in the average yield to 6.98%.
The balance of interest income in the first six months of 1999 was provided by
money market investments. Reflecting a $5.2 million increase in the average
balance to $14.6 million and a 71-basis point reduction in the average yield to
4.61%, money market investments contributed interest income of $333,000, up from
$246,000 in the year-earlier period.
Interest Expense
Interest expense rose to $34.0 million in the first six months of 1999 from
$31.7 million in the first six months of 1998. The $2.3 million increase was the
net effect of a $167.3 million rise in the average balance of interest-bearing
liabilities to $1.6 billion and a 19-basis point reduction in the average cost
to 4.39%.
CDs generated $17.9 million in interest expense, representing 52.6% of the 1999
total, as compared to $17.8 million, or 56.3%, in the first six months of 1998.
The $72,000 increase stemmed from a $53.9 million rise in the average balance to
$728.1 million, which was tempered by a 38-basis point decline in the average
cost to 4.95%. CDs represented 46.6% of average interest-bearing liabilities in
the current six-month period, as compared to 48.3% in the year-earlier six
months.
FHLB advances generated interest expense of $12.1 million, or 35.5% of the
total, as compared to $9.7 million, or 30.6% of the total, in the year-earlier
six months. The increase reflects a $107.0 million rise in the average balance
to $463.9 million, tempered by a 22-basis point drop in the average cost to
5.25%. FHLB borrowings represented 29.7% and 25.6% of average interest-bearing
liabilities in the first six months of 1999 and 1998, respectively.
The average balance of other funding sources collectively rose $11.7 million to
$406.3 million, with an average cost of 1.99%, down 12 basis points. The
interest expense derived from such funding sources fell to $4.0 million in the
current six-month period from $4.2 million in the year-earlier six months.
Non-interest-bearing deposits represented $36.1 million of the average balance
in the first six months of 1999, up from $30.9 million in the first six months
of 1998.
Savings accounts generated interest expense of $3.1 million, up $14,000 from the
year-earlier amount. The increase was the net effect of a $5.2 million increase
in the average balance to $273.6 million and a three-basis point drop in the
average cost to 2.31%. Savings accounts represented 17.5% of average
interest-bearing liabilities in the period, and generated 9.2% of total interest
expense.
The interest expense derived from NOW and money market accounts declined
$114,000 to $899,000, the result of a $1.4 million decline in the average
balance to $68.5 million and a 27-basis point decline in the average cost to
2.65%. The balance of interest expense was produced by mortgagors' escrow. In
the first six months of 1999, mortgagors' escrow generated interest expense of
$15,000, the net effect of a $2.7 million rise in the average balance to $28.1
million and an 11-basis point decrease in the average cost to 11 basis points.
21
Net Interest Income Analysis
(dollars in thousands)
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Assets:
Interest-earnings assets:
Mortgage and other loans, net $1,532,376 $62,488 8.16% $1,409,997 $60,568 8.59%
Securities 152,897 4,599 6.02 106,990 3,425 6.40
Mortgage-backed securities 18,077 631 6.98 45,042 1,412 6.27
Money market investments 14,580 333 4.61 9,331 246 5.32
---------- ------- ------ ---------- ------- ------
Total interest-earning assets 1,717,930 68,051 7.92% 1,571,360 65,651 8.36%
Non-interest-earning assets 45,249 43,825
---------- ----------
Total assets $1,763,179 $1,615,185
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
NOW and money market accounts $ 68,493 $ 899 2.65% $ 69,905 $ 1,013 2.92%
Savings accounts 273,611 3,129 2.31 268,412 3,115 2.34
Certificates of deposit 728,115 17,880 4.95 674,208 17,808 5.33
FHLB advances 463,880 12,074 5.25 356,905 9,682 5.47
Mortgagors' escrow 28,080 15 0.11 25,406 28 0.22
---------- ------- ------ ---------- ------- ------
Total interest-bearing liabilities 1,562,179 33,997 4.39% 1,394,836 31,646 4.58%
------- -------
Non-interest-bearing deposits 36,088 30,870
Other liabilities 27,733 27,045
---------- ----------
Total liabilities 1,626,000 1,452,751
Stockholders' equity 137,179 162,434
---------- ----------
Total liabilities and stockholders' equity $1,763,179 $1,615,185
========== ==========
Net interest income/interest rate spread $34,054 3.53% $34,005 3.78%
======= ====== ======= ======
Net interest-earning assets/net interest
margin $ 155,751 3.96 $ 176,524 4.33
========== ====== ========== ======
Ratio of interest-earning assets to
to interest-bearing liabilities 109.97 112.66
====== ======
Net Interest Income
Bolstered by the 9.3% growth in interest-earning assets, the Company's net
interest income rose $49,000 to $34.1 million in the first six months of 1999.
The higher level of net interest income was achieved despite declines of 25 and
37 basis points in the Company's interest rate spread and net interest margin to
3.53% and 3.96%, respectively.
Provision for Loan Losses
Reflecting the quality of the Company's loans and the extent of coverage
provided, the Company reversed $2.0 million from the allowance for loan losses
in the first quarter of 1999. The net benefit of the reversal was $1.1 million,
or $0.05 per share.
22
In addition, the Company has suspended the provision for loan losses for
nineteen consecutive quarters, with the last provision having been set aside in
the second quarter of 1995.
For additional information regarding asset quality and the loan loss provision,
see the respective discussions on pages 9, 10, and 18 of this report.
Other Operating Income
The Company recorded other operating income of $1.1 million and $1.4 million,
respectively, in the first six months of 1999 and 1998. The $281,000 reduction
stemmed from a $258,000 decline in fee income to $933,000 and a $23,000 decline
in other income to $210,000. The higher level of fee income in the year-earlier
period primarily reflects prepayment penalties received during a time of
increased refinancing activity.
Operating Expense
Operating expense declined to $11.4 million, or 1.30% of average assets, in the
current six-month period from $13.4 million, or 1.66% of average assets, in the
first six months of 1998. The 14.9% reduction primarily stemmed from a $2.0
million decline in compensation and benefits expense to $7.6 million, reflecting
a $2.2 million reduction in plan-related expenses pursuant to the aforementioned
change in the Company's stock-related benefit plans. Specifically, the Company's
plan-related expenses totaled $1.3 million in the first six months of 1999, as
compared to $3.5 million in the first six months of 1998.
In addition, the Company recorded a $106,000 reduction in occupancy and
equipment to $1.2 million, and a $43,000 reduction in other operating expense to
$211,000. These improvements combined to offset a $146,000 increase in G&A
expense to $2.5 million.
Reflecting the reduction in operating expense, the Company's efficiency ratio
improved to 32.46% in the current six-month period from 37.88% in the
year-earlier six months. On the basis of cash earnings, the efficiency ratio was
28.70% and 27.99%, respectively, in the corresponding periods.
Income Tax Expense
Income tax expense rose to $10.1 million in the first six months of 1999 from
$9.1 million in the first six months of 1998. The increase reflects a $3.8
million increase in pre-tax income to $25.8 million and an effective tax rate of
39.1%. Non-cash items stemming from the Company's stock-related benefit plans
comprised $3.6 million of income tax expense in the current six-month period,
down from $4.6 million in the first six months of 1998.
The Year 2000 Issue
The approach of the millenium 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.
23
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 impacted are the software and hardware
utilized in its business, including those that are maintained for the Bank by
third party vendors who provide such services as data processing, information
systems management, maintenance, and credit bureau reports. If not addressed,
the Year 2000 issue could adversely impact the Bank's ability to provide
financial products and services competitively.
To ensure that the Bank is fully operational at the onset of the Year 2000, the
Bank has been actively engaged in preparations for this event. These
preparations are detailed in the Company's 1998 Annual Report to Shareholders,
and include the following:
o In 1997, all internal systems were modified or replaced with Year
2000-compliant systems;
o In 1998, the Bank completed its assessment of its external systems
and the development of contingency plans for each system used;
o Testing of the Bank's mission-critical loan and deposit systems was
initiated in the fourth quarter of 1998 and completed in the second
quarter of 1999.
o The Bank has received written assurances that these systems, and the
software it is licensed to use, will be Year 2000 compliant by the
third quarter of 1999. In the event that they are not, the Company's
primary service provider--a nationally recognized provider of data
processing services--has arranged for another third-party vendor to
provide the Bank with data processing services; such vendor has
already successfully completed its Year 2000 testing.
The costs involved in preparing for the Year 2000 have consistently been charged
against earnings as they have been incurred. The Company estimates that total
costs related to this project will not exceed $100,000. To date, more than half
of the estimated costs have already been expensed.
As a result of its efforts, and on the basis of current information, management
believes that all critical systems modifications and conversions will be
completed in a timely manner, thus reducing the Bank's exposure to risk
associated with the approaching millenium. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about the Company's market risk were
presented in the discussion and analysis of Market Risk and Interest Rate
Sensitivity that appear on pages 16 - 18 of the Company's 1998 Annual Report to
Shareholders, filed on March 19, 1999. As of June 30, 1999, there was no
material change in the Company's market risk profile since the 1998 Annual
Report was filed.
24
QUEENS COUNTY BANCORP, INC. AND SUBSIDIARY
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on April 21, 1999. The
results of the meeting were disclosed in the Company's Quarterly Report on Form
10-Q for the three months ended March 31, 1999.
Item 5. Other Information
On July 20, 1999 the Board of Directors declared a quarterly cash dividend of 25
cents per share, payable on August 16, 1999 to shareholders of record at the
close of business on August 2, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1: Certificate of Incorporation*
Exhibit 3.2: Bylaws**
Exhibit 11: Statement re: Computation of Per Share Earnings -
filed herewith
Exhibit 27: Financial Data Schedule - filed herewith
(b) Reports on Form 8-K
Not applicable.
* Incorporated by reference to the Exhibits filed with the Registration
Statement on Form S-1, as amended, Registration No. 33-65852.
** Incorporated by reference to the Exhibits filed with the Annual Report on
SEC Form 10K for the fiscal year ended December 31, 1998, File No.
0-22278.
25
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Queens County Bancorp, Inc.
DATE: August 10, 1999 BY: /s/ Joseph R. Ficalora
----------------------------------
Joseph R. Ficalora
Chairman, President, and
Chief Executive Officer
(Duly Authorized Officer)
BY: /s/ Robert Wann
----------------------------------
Robert Wann
Senior Vice President,
Comptroller, and
Chief Financial Officer
(Principal Financial Officer)
26